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TMI Blog2016 (4) TMI 1406X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income assessee had through its computation statement deducted a sum of Rs. 570,61,55,000/-, which was credited in its P & L account under the head "Grants received from Government for R & D". Assessee was required to explain why corresponding expenditure incurred for the R & D was not added back. Explanation of the assessee was that the grants received from the Government were for the R & D activities. As per the assessee, expenditure incurred against such grants were revenue in nature and there was no necessity to reduce it from total expenditure. Break-up of such expenditure given by the assessee read as under Light combat aircrafts ('LCA' in short) related to development of Combat aircrafts, ARDC expenditure at Lucknow related to accessories, KORWA, RWRDC and SLDRC related to Hyderabad division. 05. AO put the assessee on notice to explain as to why expenditure relatable to R & D grants should not be considered as capital outgo and disallowed. Explanation of the assessee could be summarised as under : i) Funds received from the Government as grants was for conducting defence related research ultimately helping the assessee to acquire capital asset in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred by the assessee for development of new combat aircrafts, helicopter and fighters ought to have been shown as work-in-progress till such time it could become marketable commodity. Relying on the decision of Hon'ble Apex Court in M/s. J. K. Industries Ltd and Another v. Union of India [297 ITR 176], AO was of the opinion that Rs. 570,61,55,000/- being the grant received from the Government should be reduced from expenditure also. Such reduction resulted in an addition of the same sum to the total income returned by the assessee. 08. Aggrieved assessee moved in appeal before the CIT (A). Apart from reiterating the contentions taken before the AO, assessee made the following further submissions before the CIT (A) : i) Capital receipts by itself did not mean that expenditure incurred therefrom was capital expenditure. ii) Expenditure incurred against grant of Rs. 570,61,55,000/- was for the purpose of recreating existing technology and developing new technology. Even if the expenditure was considered as capital in nature by virtue of Section 35(1)(iv) of the Act, it was allowable. iii) Expenditure incurred by the assessee was only for scientific research within the meanin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2011, which incidentally was a sister concern of the assessee, held that without filing a revised return, such a claim could not be admitted. As per the CIT (A) assessee had never claimed such a deduction either in the return of income or during the pendency of the proceedings before the AO. Though the CIT (A) did not admit the additional ground, he gave a finding that such ground itself reflected assessee's predicament regarding the nature of expenditure. According to the CIT (A), if it was sure that expenditure was scientific in nature, it ought have claimed a deduction u/s.35(1)(iv) of the Act, in the return of income , or at least through a revised return. Further according to him, Section 35(1)(iv) and Section 43(4) of the Act used the term 'scientific research' and not R & D. As per the CIT (A) claim of the assessee was under the head R & D and not under scientific research. Thus he did not accept the alternate claim of the assessee for deduction u/s.35(1)(iv) of the Act. 12. Now before us, Ld. AR strongly assailing the orders of the authorities below submitted that assessee had reduced the grants amount of Rs. 570,61,55,000/- from its total income through the computation s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 570,65,61,000/- as grant from the central government. It had deducted the said sum while computing its total income for the tax purposes. In other words, assessee itself had treated it as capital receipts. We find that such treatment given by the assessee is in accordance with a decision given by this Tribunal in assessee's own case for A Y. 1995-96 in ITA No.763/Bang/1998, dt.22.02.2002, placed at paper book page nos.207 to 230. In the said decision a reference has been made to the Memorandum of Understanding between the assessee and Aeronautical Development Agency of Government of India. It seems in the said Memorandum of Understanding, one of the conditions agreed by the assessee was that there would be no charge of depreciation on capital assets funded by the government. Relevant observations of the Tribunal at para 23 & 24 is reproduced hereunder : "23. Neither party has put before us the memorandum of undertaking between the assessee and Government agency releasing the grants. Hence it is difficult for us to give any finding on the basis of its reference in order u/s.263 for assessment year 1994-95. The same has not been discussed by the authorities below. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of indigenous self-reliant technology for manufacture of combat aircrafts and helicopter. As noted by the lower authorities such expenditure would be a part of the capital workin- progress, and could not have been claimed by the assessee as revenue outgo. Before the AO, assessee itself has stated that once the LCA was developed and certified, it would be commercially produced and at that time revenue would be offered to tax. Thus there is an indirect admission by the assessee that expenditure incurred out of the grant resulted in acquisition of a capital asset. Once it is considered so, in our opinion, assessee could not claim such expenditure as revenue out go. 18. Now coming to the claim of the assessee that expenditure should be considered as eligible for deduction u/s.35(1)(iv) of the Act, CIT(A) had not admitted it considering it to be a fresh one. Section 35(1) (iv) of the Act is reproduced hereunder : Section 35 (1) In respect of expenditure on scientific research, the following deductions shall be allowed- (i)--- (ii)--- (iii)--- (iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed not be equal to the grant amount received by the assessee. It could be either more or less. This aspect, in our opinion, requires a fresh look by the lower authorities. Thus, though assessee's claim that expenditure against government grant were wholly allowable as Revenue outgo is incorrect, it cannot be denied deduction available to it under section 35(1)(iv) of the Act, if it can show that other conditions set out therein are satisfied. Thus we uphold the order of the lower authorities, in so far as disallowance of expenditure is considered. However, vis-a-vis claim of the assessee it ought have been given deduction u/s.35(1)(iv) of the Act, to the extent it was eligible, we set aside the orders of the lower authorities and remit it back to the file of AO for consideration afresh in accordance with law. Ground 2 of the assessee is dismissed, whereas ground 3 is allowed for statistical purpose. 21. Vide its ground 4, grievance raised by the assessee is that disallowance of Rs. 15,18,810/- made by the AO u/s.14A of the Act, was sustained by the CIT (A). 22. Facts apropos are that assessee had claimed dividends of Rs. 62.18 lakhs as exempt u/s.10(34) of the Act. As per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisfaction thereon. As against this, in the given case before us, it is an accepted position that there was substantial change in the investments held by the assessee as at the beginning of the year and at the ending of the year. Dividend income of Rs. 62.18 lakhs claimed was not an insignificant sum. Therefore, in our opinion, decision of the coordinate bench in the case of Subramanya Constructions & Development Co. Ltd, would not come to the aid of the assessee. For the assessee to say that no expenditure was incurred even when it was holding substantial investments was prima facie incorrect. What we note is that AO had made disallowance under Rule 8D(2)(iii) of the IT Rules, only for indirect expenditure. Argument of the assessee that the investments were for strategic purpose has not been substantiated and even if true, it cannot be disputed that it had earned substantial dividend of Rs. 62.18 lakhs during the relevant year. We are alive to the judgment of the Hon'ble Delhi High Court in the case of Maxopp Investments Ltd (supra), where it was held that AO necessarily had to express his dissatisfaction on the inadequacy of the expenditure disallowed suo motu, by the assessee be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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