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TMI Blog2014 (11) TMI 445X X X X Extracts X X X X X X X X Extracts X X X X ..... arising out of scientific research - Held that:- The expenditure incurred by the assessee could not be disallowed as it involved capital expenditure in the form of acquiring any land or building – the expenses is sought to be excluded u/s. 43(4)(ii) of the Act is an expenditure which the assessee incurs in acquiring rights in or arising out of scientific research already done by somebody - It is possible that the assessee without carrying out the scientific research, acquires rights in scientific research, acquires rights arising out of scientific research done by somebody else and claims cost of acquisition of such rights as expenditure on scientific research - The idea behind the exclusion clause in section 43(4)(ii) appears to be that expenditure on scientific research should be on the research actually carried out by the assessee in-house and it should not merely spent money in acquiring rights in or arising out of scientific research carried out by some other person - This aspect has been clearly overlooked by the revenue authorities - this interpretation is also a possible interpretation - A perusal of the audit report shows that major part of expenses are towards salary, equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need not be applied blindly. One has to look at the probable expenses that assessee would have incurred in earning the exempt dividend income - The shares which yielded dividend income were purchased in the year 1997- 98 - It cannot be said that any expenses whatsoever would have been incurred by the assessee to earn this dividend income - the revenue authorities ought to have exercised their discretion in not making a disallowance u/s. 14A of the Act – Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... n accrued to the third party, but was not due till realization by the assessee and therefore provisions of section 40(a)(ia) of the Act was not applicable. The assessee further reiterated that in the books, liability was recognized as ascertained liability, though due date for payment of commission fell in the subsequent financial year. 6. The CIT(Appeals) was not convinced with the aforesaid explanation offered by the assessee. He proceeded on the basis that the amount shown as director's commission is actually commission payable to third parties. He was of the view that once the assessee acknowledges the liability to pay commission in the books of account, it becomes mandatory for the assessee to deduct tax at source, as required u/s. 194H of the Act. In this regard, the CIT(A) observed that u/s. 194H, obligation to deduct tax at source is either at the time of credit of such income to the account of the payee, or at the time of payment of such income in cash, cheque or other modes, whichever is earlier. The CIT(Appeals) found that the assessee had claimed the aforesaid sum as deduction, which means that the amounts are shown as payable by credit to the account of the payee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Ministry of Science and Technology 3. Your appellant is recognised for In house R&D by the Ministry of Science and Technology, Government of India and is certified by DSIR. Accordingly, a sum of Rs.l,32,44,186/- was claimed as deduction u/s 35(2AB). 4. The contention of the Assessing Officer is that the appellant company has acquired substantial rights consequent to the expenditure and hence restrictions of Section 43(4)(ii) were applicable and thus disallowed the claim for the entire expenditure on R&D. 5. The Assessing Authority and the CIT (A) have failed to point out which item of expenditure is hit by the provisions of Section 43(4)(ii) of the Act and has instead disallowed the entire claim, though it is clear that expenditure incurred for acquisition of rights in or arising out of scientific research such as application fee for patent and other legal expenses connected therewith have not been included in your appellants claim and hence no disallowance ought to have been made." 11. As we have already seen, the assessee is engaged in manufacture and trading in specialty silicon formulations. The assessee claimed as a deduction a sum of ₹ 1,32,44,186 being expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quot;scientific research" means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries; (ii) references to expenditure incurred on scientific research include all expenditure incurred for the prosecution, or the provision of facilities for the prosecution, of scientific research, but do not include any expenditure incurred in the acquisition of rights in, or arising out of, scientific research; (iii) references to scientific research related to a business or class of business include-- (a) any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all businesses of that class; (b) any scientific research of a medical nature which has a special relation to the welfare of workers employed in that business or, as the case may be, all businesses of that class;" 12. The AO called upon the assessee to show as to how the expenses incurred on inhouse scientific research did not create acquisition of rights in or arising out of scientific research. It is not in dispute that the expenditure in question was certified by the Prescribed Authority [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied for the following Patents, under the Patents Act, 1970. Sl. No. Patent No. Type of Patent Title Date of Filing 1. 2661/CHE/2010 Provision Silane Quaternary ammonium Compounds and Composition thereof 11/10/2011 2. 416/CHE/2011 Provisional High Viscous Aqueous Softener Based on Amino modified Siloxane 14/02/2011 3. 1430/CHE/2011 Provisional A Composition for fading fabric 25/04/2011 4. 1463/CHE/2011 Provisional A method for synthesis of Colloidal Silver 27/04/2011 5. 2694/CHE/2011 Provisional Non-Toxic Advanced Sixth Generation Disinfectant Cleaner 06/08/2011 According to the AO, the above fact will also go to show that the Scientific Research carried out by the Assessee has resulted in the Assessee "acquiring rights in or arising out of Scientific Research". 14. The AO also observed that approval by the prescribed authority will not mean that deduction claimed by the assessee has to be allowed without any further enquiry. The AO also observed that assessee has not been able to substantiate that the expenditure claimed did not include cost of any land or building. The AO also observed that the aforesaid expenditure is not allowab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich may be required for registering the patent thereby acquiring rights therein or arising out of scientific research. It does not apply to the expenditure incurred on prosecution or provision on facilities for the prosecution of scientific research which are expressly intended to be allowed. It was also pointed out that the deduction u/s.35(2AB) is to be allowed in full on the capital and revenue expenditure incurred for prosecuting scientific research (excluding cost of land or building) , irrespective of whether that scientific research has later resulted in acquisition of a patent although the incremental expenditure incurred for acquisition of the patent itself will not be allowed as scientific research expenditure as it is not incurred on scientific research, but only to acquire a right therein. 16. The CIT(A), however, did not accept the aforesaid argument for the following reasons:- "11.5. The arguments of the appellant and the contentions of the AO are considered. I find that the appellant has in his argument skirted the issue of whether the research actually yielded the acquisition of rights or not. Whereas the AO has mentioned the items in detail to come to his findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search. In our view, the aforesaid approach of the revenue authorities is incorrect. The expenditure that is sought to be excluded u/s. 43(4)(ii) of the Act is an expenditure which the assessee incurs in acquiring rights in or arising out of scientific research already done by somebody. It is possible that the assessee without carrying out the scientific research, acquires rights in scientific research, acquires rights arising out of scientific research done by somebody else and claims cost of acquisition of such rights as expenditure on scientific research. It is this kind of expenditure that is sought to be excluded u/s. 43(4)(ii) in its exclusion clause as "expenditure incurred in acquiring rights in or arising out of scientific research". It is such type of expenditure carried out by somebody else and such right is acquired by the assessee, such expenditure is sought to be disallowed. The idea behind the exclusion clause in section 43(4)(ii) appears to be that expenditure on scientific research should be on the research actually carried out by the assessee in-house and it should not merely spent money in acquiring rights in or arising out of scientific research carried out by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 35 (2AA) and u/s 35 (i) (ii). 6. The CIT(A) has upheld the disallowance made by the Assessing officer claiming these are incurred in connection with acquisition of rights and therefore capital in nature. These payments were made to institutions approved by the prescribed authority for this purpose and the assessing authority cannot go beyond that and disallow the payments on contention that rights have been acquired by your appellant." 20. The assessee claimed deduction of a sum of ₹ 13,12,500 comprising of a deduction of ₹ 8,75,000 u/s. 35(2AA) and a sum of ₹ 4,37,500 u/s. 35(1)(ii) of the Act. The amount of ₹ 8,75,000 was paid by the assessee to IIT, New Delhi and ₹ 4,37,500 was paid to International Advanced Research Centre for Power Metallurgy & New Materials, Hyderabad. The provisions of sections 35(2AA) and 35(1)(ii) of the Act are as follows:- "35 Expenditure on scientific research. 35. (2AA) Where the assessee pays any sum to a National Laboratory or a University or an Indian Institute of Technology or a specified person with a specific direction that the said sum shall be used for scientific research undertaken under a programme approved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided that such association, university, college or other institution for the purposes of this clause-- (A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed; and (B) such association, university, college or other institution is specified as such, by notification58 in the Official Gazette, by the Central Government;" 21. Under section 35(2AA) of the Act, if an assessee pays any sum to IIT or a specific person with a specific direction that the said sum shall be used for scientific research under the programme approved in this behalf by the prescribed authority, then deduction of One-one third times of the sum so paid shall be allowed as a deduction. U/s. 35(1)(ii), if any sum is paid to research association, which has as its objects, the undertaking of scientific research, the amount equal to One-one fourth times of the sum so paid will be allowed as a deduction. 22. It is not in dispute that both the institutions to which the assessee made the contribution were approved for the purposes mentioned in sections 35(2AA) and 35(1)(ii) of the Act. The AO disallowed the claim of the assessee for deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of ₹ 11,45,829 towards provision for leave encashment. The AO was of the view that any amount claimed as a deduction should have been actually incurred by the assessee or should have accrued as a liability to the assessee. Since the claim of the assessee was by way of provision, which has neither accrued nor actually paid, the same cannot be allowed as a deduction. Accordingly, a sum of ₹ 11,45,829 for provision towards leave encashment was disallowed and added to the total income of the assessee. 26. On appeal by the assessee, the ld. CIT(A) confirmed the order of the AO. The CIT(A) found that as per the provisions of section 43B(f) of the Act introduced by the Finance Act, 2011 w.e.f. 1.4.2002, any sum payable by an assessee as an employer in relation to any leave at the credit of his employee, will be allowed as a deduction, only when the same is actually paid. The CIT(A) also made a reference to the fact that the aforesaid provisions were introduced to overcome the decision of the Hon'ble Supreme Court rendered in the case of BEML, 245 ITR 428 (SC). The CIT(A) also found that the aforesaid provisions were held to be unconstitutional by the Calcutta High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bited to Profit / Loss account in line with Accounting Standard 19 -- Leases, which is a mandatory accounting standard applicable to all companies as notified under the Companies Accounting Standards (Rules) 2006. Hence, this expenditure ought to have been allowed as a deduction." 30. The assessee claimed as a deduction a sum of ₹ 26,21,184 under the head payment towards vehicle maintenance and hire charges. On enquiry by the AO, the assessee furnished a copy of the tripartite agreement called "Master Agreement" between the assessee, Lease Plan India Ltd. ("LPIN") and Lease Plan Fleet Management India Pvt. Ltd. ("LPFMI"). The Assessee is referred to as "Client" in this agreement. LPIN performs the role of acquiring vehicles and giving them on lease. LPFMI performs the role of fleet management of vehicles. As per terms of the agreement, LPIN agreed to give vehicles on hire as and when required by the assessee. LPFMI agreed to render fleet management services in respect of the vehicles leased. Article 1 of the Agreement says that at the request of the assessee from time to time, LPIN will acquire and grant on lease vehicles on the terms & conditions contained in the agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a finance lease, the AO was of the view that the Assessee can only claim depreciation on the value of the vehicle owned by it and cannot claim lease rentals as revenue expenditure. He was of the view that the expenditure was capital expenditure. He was also of the view that the Assessee will not be entitled to depreciation also because the vehicles were not used by the Assessee for its business but were given to employees for their use. 33. The Assessee submitted before the AO that lease rents were revenue expenditure and that the Assesse had deducted Tax at Source, which is in accordance to CBDT Circular No.2/2001 dated 9th February, 2001 and also placed Reliance in the case of Rajshree Roadways vs Union of India [2003] 263 ITR 206 [Raj]. The AO however did not accept the contention of the Assessee and held that mere Deduction of Tax Source cannot establish the genuineness of the transaction. He also observed that the decision of the Hon'ble Rajasthan High Court in the case of Rajshree Roadways (supra) and the Circular state that under Leasing transaction the Owner of the Asset is entitled to Depreciation which is determined by the Tenor of Contract between the Lessor and the Les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , firstly, that the owner of the vehicle is the individual employee and not the lessor and, secondly, that the lease is a finance lease, rendering the expenditure claimed as capital expenditure. He submitted that the AO erred in rejecting the claim on the ground that the ownership of the vehicle is not reflected in accordance with the Motor Vehicle Act, 1988 and Accounting Standard 19. In this connection, our attention was drawn to the provisions of Motor Vehicles Act, 1988 - Sec.2(30) wherein the word 'owner' is defined which reads as under: "owner' means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and in relation to a motor vehicle which is the subject of a hire purchase, agreement, or an agreement of lease or an agreement of hypothecation, the person in possession of the vehicle under that agreement;" 36. Therefore, for the purposes of the Motor Vehicles Act, where the motor vehicle is under an agreement of lease, the person in possession of the vehicle under the said agreement is treated as the owner. This would be irrespective of the actual owner. This implies that, under the provisions of that Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and ought to be allowed as an expense even though the name of assessee is entered as the owner in the R.C. book due to the special provisions of the Motor Vehicles Act. 40. It was further submitted that the computation of profit of a company has to be done in accordance with the mandatory Accounting Standards and cannot be done in a manner different from the provisions of the Accounting Standards, unless specific provisions in the computation sections 28 to 34 of the IT Act requires doing so. Accounting Standard 19 is a mandatory accounting standard applicable to all companies as notified under the Companies Accounting Standards (Rules) 2006. The term lease is defined in Para 3.2 and 3.3 of the said standard stating what is 'finance lease' and an 'operating lease'. A finance lease is defined as a lease that transfers substantially all the risks and rewards incidental to ownership of an asset while the operating lease is a lease other than a finance lease. Accordingly, the assessee has consistently charged off the lease payments as an expense and the same is to be allowed in full on the basis of the sound accounting principles, which is required to be mandatorily followed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emed to have been sold to the company. The other terms of H.P. agreement is also identical with the terms which we have set out in the case of the Assessee in the present appeal one of which is a term (clause- 6) that on fulfillment of conditions stipulated in the H.P. agreement and discharge of all monies payable thereunder, the ownership of the asset will stand vested with the customer. The Vehicle stands registered in the name of the customer but the fact that the vehicle is subject to a Hire Purchase agreement is duly recorded in the registration certificate of the vehicle. According to the sales-tax authorities, between the date on which the customer agreed to purchase a vehicle and the date on which he became full owner of the vehicle without any encumbrance, three sale transactions were interposed : a sale by the dealer to the customer; a sale by the customer to the company under the "sale letter" referred to earlier; and a sale by virtue of cl. 6 of the hire-purchase agreement. It was common ground that the first transaction is taxable under the appropriate Sales Tax Act. On behalf of the State of Kerala, it was conceded that the second transaction is not taxable, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er under which the latter becomes the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The decision of this Court in K. L. Johar & Company v. Deputy Commercial Tax Officer ([1965] 2 S.C.R. 112.) dealt with a transaction of this character. (2) In the other form of transactions, goods are purchased by the customer, who in consideration of executing a hire-purchase agreement and allied documents remains in possession of the goods, subject to liability to pay the amount paid by the financier on his behalf to the owner or dealer, and the financier obtains a hire-purchase agreement which gives him a licence to seize the goods in the event of failure by the customer to abide by the conditions of the hire-purchase agreement." The Court thereafter emphasized the need to judge the true effect of a transaction from the terms of the agreement considered in the light of the surrounding circumstances. The court held as follows:- "In each case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case in the light of the law laid down by the Hon'ble Supreme Court. In the present case LPIN finances purchase of the vehicle. The vehicle is purchased as and when the Assessee (client) makes a demand for hiring of vehicle. The ownership of the vehicle is registered in the name of the client only for the purpose of passing the risk of ownership in law on the client. Article 2.2(iii) of the lease deed which has been set out in the earlier part of this order clearly spells out the above purpose and reiterates that LPIN is the owner of the vehicle and that the client is only a lessee. The bifurcation of the monthly payment as partly towards recovery of cost and partly towards interest is only for accounting purposes. It can decide the character of the transaction. Article 3.1 provides for early termination of the lease. On the occurrence of either early termination or on expiry of period, the client is required to return the vehicle to the lessor along with the various documents as mentioned therein. Thus the de facto ownership and control of the vehicle is always with LPIN. The Assessee (Client) has a right to use the vehicle subject to payment of the hire installments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat assessee would have incurred in earning the exempt dividend income. The shares in question which yielded dividend income were purchased in the year 1997- 98. It cannot be said that any expenses whatsoever would have been incurred by the assessee to earn this dividend income. Considering the smallness of the quantum of the dividend and expenditure disallowed, we are of the view that the revenue authorities ought to have exercised their discretion in not making a disallowance u/s. 14A of the Act. We hold accordingly and delete the addition made. Ground No. I is allowed. 49. Grounds No.II, III & IV raised by the assessee are identical to grounds No.II, III & IV raised in the A.Y. 2009-10 respectively. For the reasons given while deciding the aforesaid grounds in A.Y. 2009-10, we allow grounds No.II, III, IV. We may also mention that the facts and circumstances and the basis on which the revenue authorities passed the impugned orders for A.Y. 2010-11 are identical as in A.Y. 2009-10. The appeal is accordingly allowed. 50. In the result, ITA No. 514/Bang/2013 is partly allowed, while ITA No.1578/Bang/2013 is allowed. Pronounced in the open court on this 31st day of October, 2014. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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