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TMI Blog2018 (5) TMI 1683X X X X Extracts X X X X X X X X Extracts X X X X ..... ital expenditure. - thus respectfully following the decision of the Hon'ble Karnataka High Court in the case of CIT Vs.Talisma Corpn (P) Ltd. [2013 (12) TMI 1419 - KARNATAKA HIGH COURT] AO is directed to allow the deduction claimed by the assessee under Section 35(1)(iv) - Decided in favor of assessee. Disallowance of interest expenditure u/s 14A incurred on earning exempt income - Held that:- Taking into consideration the fact that the assessee had earned exempt dividend income of ₹ 7,13,70,554, the disallowance as computed under Rule 8D(2)(ii) at ₹ 52,53,500; which works out to approx. 7.36% thereof is reasonable in the facts and circumstances of the case in the year under consideration and is therefore upheld - thus AO is directed to delete disallowance under Rule 8D(2)(ii) sustained by the learned CIT(A) and uphold the disallowance made by the authorities below under Rule 8D(2)(iii) - partly allowed in favor of assessee. - I.T. A. No.877/Bang/2014 - - - Dated:- 20-4-2018 - SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER For The Appellant : Shri Percy Pardiwala, Senior Counsel For The Respondent : Shri C. H. Sundar Rao ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Tribunal in its order in ITA No.667/Bang/2014 dt.23.9.2015 allowing the Revenue partial relief. 3.2 Therefore, what is before us is the assessee's appeal for Assessment Year 2008-09, wherein it has raised the following grounds :- 1. That the Learned Commissioner of Income Tax (Appeals), III (CIT-A) erred in confirming the disallowance made by the Assessing Officer (AO) in respect of Appellant's claim u/s 35(l)(iv) read with Sec 35(2)(ia) in a sum of ₹ 2,91,97,333/- incurred towards purchase of Tangible Assets for. Research and Development purposes. 2. That both the learned CIT(A) and AO erred in holding that the expenditure on acquisition of tangible capital assets of ₹ 2,91,97,333/- for Research and Development purposes leads to acquisition of rights as contemplated in exclusions contained in second limb of Sec 43(4)(ii). 3. Having regard to the facts in Appellant's case, both the learned CIT(A) and AO ought to have held that the expenditure of ₹ 2,91,97,333/- incurred in acquisition of capital assets is covered within the first limb of Sec 43(4)(ii). Viz; expenditure incurred on scientific research includes all expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round Nos.1 to 5 : Disallowance of claim u/s.35(1)(iv) Purchase of Research Development Assets. 4.1 The Ground Nos.1 to 5 (supra), raised by the assessee challenge the impugned order of the learned CIT (Appeals) in upholding the disallowance / rejection of the assessee's claim under Section 35(1)(iv) r.w.s. 35(2)(ia) of the Act for deduction of an amount of ₹ 2,91,97,333 incurred towards purchase of tangible assets for research and development purposes of its in-house R D facility. 4.2.1 The facts of the matter, as emerge from the record, are that in the course of assessment proceedings the Assessing Officer observed that the assessee had claimed deduction of an amount of ₹ 2,91,97,333 on account of purchase of assets for its in-house R D facility. The Assessing Officer, while examining the issue, personally visited and inspected the manufacturing and R D facilities of the assessee at Jamshedpur in Jharkhand for verifying the assessee's claim for deduction under Section 35(1)(iv) r.w.s. 35(2)(ia) of the Act in accordance with report submitted to the DSIR, New Delhi. The assessee was required to substantiate that its activities were r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uraging scientific research among Indian companies, Sec 35 r.w.s. 43(4)(ii) envisages denial of deduction only to such expenses as are incurred for registration, legal charges, incidental expenses of advertisement etc. which would not be directly related to the prosecution of scientific research. 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. Encouraging of scientific research and commercial usage of the rights acquired over the products/processes are two separate issues involved in this appeal. The appellant has not pointed out how the provisions of Sec 43(4)(ii) do not apply to it, once it is pointed out that the research leads to the acquisition of rights over products, processes and patents. The use of the words rights in, or arising out of, scientific research in the Section are clear and unequivocal. The mere fact that tangible assets have resulted out of the R D process does not mean that there is no acquisition of rights. In para 10.9 of the order, AO has pointed out that assessee has applied for a patent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in or arising out of scientific research, is factually erroneous as can be seen from the details thereof furnished at page 3 of the paper book which show that they are for upgrading and development of new versions of equipment manufactured by the assessee in the course of its business and not for any other purpose. It was therefore contended that the entire expenditure incurred for its in-house R D facility is towards scientific research and qualifies for deduction. 4.3.3 It was also submitted that even if the R D expenditure is to be considered to be capital expenditure, it should be eligible for deduction under Section 35(1)(iv) of the Act. In support of this proportion, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench in the case of (i) Tejas Networks India Pvt. Ltd. (2015) 55 taxmann.com 55 (Bangalore Trib) and (ii) Resil Chemicals (P) Ltd. Vs. CIT (2014) 51 taxmann.com 250 (Bangalore Trib); which orders, it was submitted, were rendered on almost similar facts and issues of the allowability of expenditure on R D in scientific research under Section 35(1)(iv) of the Act even though the expenditure incurred is held to be capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P) Ltd. (2013) 40 taxmann.com 400 (Kar). In that order, in the case of Tejas Networks Ltd. (supra), to which one of us is party, the co-ordinate bench at paras 5.7.1 to 5.7.5 thereof has held as under :- 5.7.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited. The primary issue for consideration/adjudication before us is the interpretation of the definition of scienitific research as per the provisions of section 43(4)(ii) of the Act; and particularly the exclusion to the definition given in clause (ii) to sub-section (4) of section 43 of the Act which states that scientific research expenditure excludes ...any expenditure incurred in the acquisition of rights in, or arising out of, scientific research. The stand of the Revenue seems to be that the expenditure incurred on inhouse R D also needs to be excluded from the definition of scientific research if it leads to any intellectual property rights. Per contra, the stand of the assessee is that the expenditure incurred on in-house R D does not fall under the exclusion clause provided in section 43(4)(ii) of the Act. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal have held. Accordingly, we answer the substantial questions of law in favour of the assessee and against the Revenue. 5.7.3 In the case of Talisma Corpn. (P) Ltd. ( supra ) cited above, the tax payer had acquired Intellectual Property Rights (IPR) which were capitalised in the Books of Accounts. The tax payer spent further amounts in developing and improving the same. The expenditure incurred on improvement were also capitalised in the books of account. While the amount spent on acquiring the IPR were not allowed as deduction u/s. 35 of the Act, the expenditure incurred in-house for improvement of the same was allowed as deduction u/s.35 (1)(iv) of the Act, even though it was capitalised in the Books of Account. 5.7.4 Section 43(4) of the Act defines scientific Research for the purposes of the Act and the definition reads as follows :- '43(4)(i) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... type of expenditure carried out by somebody else and such right is acquired by the assessee, that is sought to be disallowed. The objective behind the exclusion clause in section 43(4)(ii) of the Act 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 spend money in acquiring rights in OR arising out of scientific research carried out by some other person. If the interpretation sought to be placed by revenue / authorities below is to be accepted, then the benefit sought to be conferred by the provisions of section 35(1)(iv) of the Act would be virtually denied in all cases by invoking the exclusion clause in section 43(4)(ii) of the Act. Such a consequence would never have been intended by the Legislature. As already stated, the object behind the provisions of section 35 of the Act is to encourage scientific research so that the benefit of such research would be available to all. In the given facts and circumstances of the case as discussed above, we are of the view that the claim of deduction under section 35(1)(iv) of the Act is to be allowed. In any event, there is no distinction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,57,021 is attributable towards interest expenditure incurred on earning exempt income under Rule 8D(2)(ii) since the entire investments were made out of own funds. It is further contended that while working out the disallowance u/R 8D (2)(iii), the learned CIT (Appeals) erred in adopting the average value of investments at ₹ 1,331.05 Crores whereas the average value of investments ought to be only 105.07 Crores. It was prayed that the disallowance thereunder should be restricted to ₹ 73,976 as computed by the assessee and not ₹ 52,53,500 as upheld by the learned CIT (Appeals). 5.2.1 We have heard the rival contentions of both the learned Authorised Representative for the assessee and the learned Departmental Representative for Revenue and perused and carefully considered the material on record. The facts of the matter, as emerge from the record is that in the course of assessment proceedings, the Assessing Officer observed that the assessee had earned exempt dividend income of ₹ 7,13,70,554 in the year under consideration and in this regard had suo moto disallowed an amount of ₹ 73,976 as administrative expenditure incurred for earning the aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly taken the figure of average investment of the assessee at ₹ 1331.05 Crores; whereas the average figure ought to be ₹ 105.07 Crores (i.e. ₹ 157.05 + ₹ 53.09 divided by 2). It was contended that the assessee had suo moto disallowed administrative expenditure of ₹ 73,976 under Rule 8D(2)(iii) and that no further disallowance was called for thereunder. Apart from raising this contention, the assessee was not able to establish before us why the disallowance of administrative expenses be restricted to ₹ 73,976 and not be retained at %, the average investments as mandated under Rule 8D(2)(iii) which works out to ₹ 52,53,500. In our view, taking into consideration the fact that the assessee had earned exempt dividend income of ₹ 7,13,70,554, the disallowance as computed under Rule 8D(2)(ii) at ₹ 52,53,500; which works out to approx. 7.36% thereof is reasonable in the facts and circumstances of the case in the year under consideration and is therefore upheld. 5.2.4 In the factual matrix of the case as discussed above, we direct the Assessing Officer to delete disallowance under Rule 8D(2)(ii) of an amount of ₹ 36,57,621 sust ..... 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