R.K. Panda, Accountant Member - ITA No.1448/PN/2011 filed by the assessee and ITA No.1456/PN/2011 filed by the Revenue are cross appeals and are directed against the order dated 31-01-2011 of the CIT(A)-III, Pune relating to Assessment year 2007-08. ITA No.582/PN/2012 filed by the assessee and ITA No823/PN/2012 filed by the Revenue are cross appeals and are directed against the order dated 31-01-2012 of the CIT(A)-III, Pune relating to Assessment Year 2008-09. ITA No.718/PN/2013 filed by the assessee is directed against the order dated 16-11-2012 of the CIT(A)-III relating to Assessment Year 2009-10. For the sake of convenience, all these appeals were heard together and are being disposed of by this common order.
ITA No.1448/PN/2011 (By Assessee) (A.Y. 2007-08) :
2. Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, observed from the computation of total income that the assessee has claimed expenditure u/s.35 of the IT. Act, amounting to Rs.2,75,21,629/-. According to the Assessing Officer, though the assessee was called upon to furnish the relevant supporting details such as the nature of the expenditure in detail, evidence for purchase of raw material, stock register of raw material consumed etc., the assessee failed to furnish such details. It is also highlighted by the Assessing Officer that in the e-return filed by the assessee, no claims have been made in the ESR Schedule relating to deduction u/s.35. The Assessing Officer also noted that the expenditure in respect of raw-material on account of. R&D was over and above the total expenditure claimed on raw material reported in the statutory audit report. In the absence of the relevant supporting details, the Assessing Officer came to conclusion that the assessee has not established that this expenditure was actually incurred over and above the expenditure on raw material already debited in the audited and profit & loss a/c and therefore, the claim could not be accepted. Accordingly, the expenditure claimed on this account amounting to Rs.2,75,21,629/- was disallowed by him.
3. Before the CIT(A) it was submitted that proper explanation in respect of this expenditure was furnished before the Assessing Officer, which apart from the explanations about the activities of the company, included bills for purchases, Cenvat records giving the quantitative particulars, the ledger extracts, the Cenvat and VAT returns. Therefore, the Assessing Officer should not have commented that the assessee has failed to produce the records. So far as the disallowance of expenditure u/s.35 was concerned, the assessee submitted that the expenditure claimed u/s.35 is over and above the expenditure debited to the profit and loss account and the claim u/s.35 infact represents the value of the closing stock accounted for in the balance sheet. It was submitted that the Assessing Officer could not understand the difference between the consumption of raw material on account of regular manufacturing activity as against raw material purchases for the purpose of research and development. While former is expenditure allowable u/s.37 the latter is a claim allowable to the assessee u/s.35. The assessee accordingly has claimed the deduction u/s.35 which is a provision for the benefit of the assessee and the Revenue should not deprive the assessee of the benefit of the deduction even if the asset is not put to use in that year. Relying on various decisions it was submitted that the assessee has correctly claimed the deduction u/s.35 on an outlay basis which should be allowed.
4. However, the Ld.CIT(A) was not satisfied with the explanation given by the assessee and upheld the disallowance made by the Assessing Officer by observing as under :
'6.3 The contentions raised by the appellant are carefully examined with reference to the provisions of sec. 35 as applicable to the year under appeal and the material placed on record. To resolve the issue, it is necessary to refer to the relevant provisions of sec. 35, which read as under:
"Expenditure on scientific research: (1) In respect of expenditure on scientific research, the following deductions shall be allowed -
(i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business.
Explanation: Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of any salary (as defined in Explanation 2 below sub-section (5) of section 40A, to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or expended within the three years immediately preceding the commencement of the business shall, to the extent it is certified by the prescribed authority to have been laid out or expended on such scientific research, be deemed to have been laid out or expended in the previous year in which the business is commenced;
From a bare reading of the above provisions of sec. 35(1)(i), it is clear that a deduction is admissible in respect of any expenditure, not being in the nature of capital expenditure, laid out or expended on scientific research related to the business of the assessee. In the present case, in so far as the expenditure debited to the profit & loss a/c by way of actual consumption of raw material used in the scientific research during the year is concerned there is no controversy and the deduction to that extent was allowed by the A.O. The dispute is only in respect of the deduction claimed by the appellant under sec. 35(1)(i) in the computation of total income over and above the expenditure debited to the profit and loss account and this excess expenditure of Rs. 2,75,21,629/- represents the value of the closing stock of raw material accounted for in the balance sheet. It is argued by the appellant is that when a material is purchased for research and development purpose it is immaterial whether the material is consumed during the year or held as closing stock and the entire expenditure incurred on raw material for the purpose of research and development qualifies for deduction u/s.35, irrespective of the accounting treatment of the same in the books of account of the appellant. According to the appellant, whether the asset is put to use or not, as long as it is for the purpose of Research & Development, the same should be allowed as expenditure and deduction under the section. It is also argued by the Ld. Counsel that when it comes to Research & Development, the principle of matching incomes with expenditures for the year is not applicable as the expenditure in connection with Research & Development is allowed u/s.35 which is a separate code in itself and the appellant submits that any expenditure laid out for the purpose of Research & Development should be allowed on "outlay basis" rather than on consumption basis. The contentions of the appellant are not legally sustainable. In the first place, it is to be mentioned that in notes forming part of accounts (Schedule 19) of the annual accounts, it is clearly stated in note (F) that the revenue expenditure on research and development is charged to profit and loss account in the year in which it is incurred. This note clearly indicates that whatever revenue expenditure is incurred on research and development in a particular year, the same is charged to the P & L account of that year. The claim of the appellant is that in addition to this expenditure debited to the profit and loss account, purchases of raw material made during the year and meant for R&.D which remained in the closing stock without consumption should also be allowed as deduction under sec. 35 on 'outlay basis'. But, unless such raw material is actually used in scientific research during the year, it cannot be said that the expenditure on purchase of raw material for R & D was laid out or expended on scientific research related to the business. This view is supported by the expression, 'on the purchase of materials used in such scientific research' employed in the Explanation to sec. 35(1)(i). Though this clause in the Explanation is applicable in case of such expenditure laid out or expended before the commencement of the business, the intention of the legislature is very clear that even after the commencement of business, in case of purchases of material meant for the purpose of R & D, the expenditure is admissible as deduction only when the material is actually used or consumed in scientific research during the year. In its submissions dated 27.12.2010, the appellant conveniently ignored the expression used in the Explanation while referring to the Explanation. The actual user or consumption of material for scientific research during the year is a condition precedent for allowing such expenditure on materials as deduction under sec. 35(1)(i). This position is also in line with the method of accounting being followed by the appellant in respect of revenue expenditure on R & D. In the case of the appellant, admittedly the material involved was not used during the year and remaining as closing stock in the accounts of the appellant company and therefore the expenditure on purchases of material to that extent is not an allowable deduction under sec. 35(1)(i). If the contention of the appellant that deduction is allowable on 'outlay basis' irrespective of user of the material for R & D were to be accepted, even the advances made for purchases of raw material meant for R & D have to be allowed as deduction even if the material is not supplied or received during the year, which is not the intention of the legislature in providing for such deduction.
6.3.1 Turning to the decisions relied upon by the appellant, in the case of Gujarat Aluminium Extrusions Pvt. Ltd. (263 ITR 453), the Gujarat High court observed that the Tribunal was right in holding that deduction under section 35(2) is allowable on capital expenditure for building which is under construction and is not put to use for research and development purpose. It was observed that when the Legislature has not expected the assessee to put the asset to actual use, it will not be open to the revenue to deprive the assessee of the benefit of deduction under the provisions of section 35, if the asset is not used in the previous year in which the capital expenditure is incurred. It was also observed that the deduction is given not on the count of user. In the case of, CIT v. H.M.T. Ltd. 203 ITR 811(Kar) and 199 ITR 235 (Kar), following the decision of High Court in Ravi Machine Tools (P.) Ltd v. CIT 114 ITR 459, the Karnataka High Court held that the Tribunal was right in allowing the assessee's claim for deduction under section 35(1)(iv) in respect of the value of capital work-in-progress, machinery and equipment in transit and under erection at the assessee's research and development division. All these decisions were rendered in the context of deduction of capital expenditure claimed under clause (iv) of sec. 35(1), which does not contain the similar expression "purchase of materials used' as in the case of Explanation to clause (i). Therefore, in my humble opinion, the ratio of these decisions cannot be applied in case of revenue expenditure claimed as deduction under clause (i) of sec. 35(1).
6.3.2 The other argument canvassed by the Ld. Counsel is that the provisions of sec. 35, intended to encourage indigenous scientific research should be interpreted in a liberal way so as to advance the object for which the beneficial legislation is introduced in the statute. This contention of appellant also cannot be accepted. It is true that such provisions should be liberally construed but it does not mean that such liberal construction should be made doing violence to the plain meaning of such provision. When the admissibility of deduction under sec 35(1)(i) is circumscribed by certain conditions including user of material purchased during the year, it cannot be said that the deduction should be allowed by liberal construction or interpretation of such provisions even when basic conditions for deduction are not fulfilled. In this connection, reference can be made to the decision of the Apex Court in the case of Patel Engineering Construction (P) Ltd. v.CBDT reported in 175 ITR 523 wherein it is observed as under:
" .... It is true that an exemption provision should be liberally construed but this does not mean that such liberal construction should be made doing violence to the plain meaning of such exemption provision. Liberal construction will be made whenever it is possible to be made without impairing the legislative requirement and the spirit of the provision. ... "
Further, this is not a case where the appellant is permanently deprived of the benefit available under sec. 35. The purchases of material not used during the year for scientific research and lying in the closing stock are carried forward to next year as opening stock in the books of a/c and deduction is admissible in the next year if the material is used for the purpose of R&D.
6.3.3 For the foregoing reasons, I am of the considered view that the appellant is not entitled to deduction u/s.35(1)(i) claimed in the computation of total income in respect of purchases of material meant for R&D, but which were lying as closing stock and not actually used during the year for scientific research and development. Accordingly, the disallowance of Rs. 2,75,21,629/- made by the AO on this ground is upheld'.
5. Aggrieved with such order of the CIT(A) the assessee is in appeal before us with the following grounds :
| "1. |
The appellant submits that the learned Commissioner of Income Tax (Appeals) erred in sustaining the addition made by the assessing officer on account of R &D Materials. |
2. |
The appellant submits that the learned Commissioner of Income Tax (Appeals) ought to have allowed the claim of the appellant on account of R&D materials under section 35 of the Income Tax Act, 1961. |
3. |
The appellant prays to submit that the learned Commissioner of Income Tax (Appeals) misinterpreted the provisions of section 35, a section extending benefit of R&D expenditure to an assessee and as such should have taken a liberal interpretation beneficial to the appellant. |
4. |
The appellant submits that the learned Commissioner of Income Tax (Appeals) failed to distinguish the difference between expenditure allowable under section 37 of the Income Tax Act vis-a-vis the expenditure allowable under section 35 of the Act. |
5. |
On the basis of the above and any additional grounds that may be permitted to be raised in the course of the appellate proceedings the appellant prays that the claim of appellant of Rs.2,75,21,629/- being expenditure on R&D, under section 35 of the Act, be allowed." |
6. The Ld. Counsel for the assessee reiterated the same arguments as made before the CIT(A). He submitted that the assessee company is engaged in the business of manufacture and sale of speciality chemicals and intermediates. The assessee company purchased certain raw materials for carrying out research and development work and debited to the profit and loss account the amount of raw material consumed out of the said purchases and remaining amounts were shown as stock of raw materials on hand under the head 'inventories' in the balance sheet. The assessee claimed deduction u/s.35 in the computation of total income with proper explanation in respect of this stock on hand relating to R&D materials. Undisputedly, the deduction of Rs.2,75,21,629/- represents the value of stock of materials relating to raw materials shown as 'current assets' in the balance sheet. However, there was no opening stock of raw materials used for the purpose of R&D for the year under consideration. He submitted that the assessee follows the method of accounting according to which the expenditure pertaining to R&D activity is allowable on outflow or laid out basis u/s.35 of the I.T. Act as against the Mercantile/Accrual method of accounting regularly employed in arriving at the profits of the business for the year.
6.1 He submitted that the closing stock claimed u/s.35 for the year ended 31-03-2007 forms part of the opening stock for the subsequent year, i.e. A.Y. 2008-09 in accordance with the regular method of accounting employed by the assessee and consequently gets deducted from the profits of the subsequent year. Therefore, the said amount becomes double deduction once u/s.35 in computation of total income for the year ended 31-03-2007 and again for the year ended 31-03-2008 on account of its inclusion in the opening stock. To set off this double deduction the assessee added back the claim made in 2007, ie. 2007-08 to the total income of the subsequent year, i.e. A.Y. 2008-09 and this method is being followed consistently. He submitted that section 35 is a section intended to give a boost to R&D activity and to encourage company from taking up R&D activities to their business and develop indigenous technology. This intension of the legislature is clearly stated and explained in CBDT Circulars issued explaining the provisions/amendments made u/s.35 from time to time.
6.2 Referring to the decision of the Hon'ble Karnataka High Court in the case of CIT v. HMT Ltd. [1993] 199 ITR 235/65 Taxman 292 he submitted that the Hon'ble High Court in the said decision, following its decision in the case of Ravi Machine Tools (P.) Ltd. v. CIT [1978] 114 ITR 459 (Kar.) has held that even when machinery and equipment meant for R&D including machinery in transit and capital represented by work in progress (not put to use) in assessee's research are to be allowed as deduction u/s.35 of the Income Tax Act.
6.3 Referring to the decision of the Hon'ble Karnataka High Court in the case of CIT v. HMT Ltd. [1993] 203 ITR 811/[1994] 77 Taxman 380 he submitted that the Hon'ble High Court in the said decision has held that the Tribunal was right in law in allowing the assessee's claim for deduction u/s.35(1)(iv) of the I.T. Act in respect of the value of the capital work in progress, machinery and equipment in transit and under erection at the assessee's R&D Division.
6.4 Referring to the decision of the Hon'ble Gujarat High Court in the case of CIT v. Gujarat Aluminum Extrusions (P.) Ltd. [2003] 263 ITR 453/133 Taxman 542 he submitted that the Hon'ble High Court in the said decision has held that capital expenditure for building under construction not put to use for R&D purpose was allowable u/s.35.
6.5 Referring to the decision of the Mumbai Bench of the Tribunal in the case of Hindustan Construction Co. Ltd. v. Dy. CIT [2013] 140 ITD 642/29 taxmann.com 82 he submitted that the Tribunal in the said decision has held that capital expenditure even though not capitalised in the books of account and even though not put to use is an allowable expenditure u/s.35. Referring to the decision of the Hon'ble Delhi High Court in the case of CIT v. Panacea Biotech Ltd. [2010] 324 ITR 311/[2009] 183 Taxmann 212 he drew the attention of the Bench to the following observation of the Hon'ble High Court :
"It was not disputed by the revenue that the books of accounts were maintained by the assessee on mercantile basis, this was also the concurrent finding of the lower authorities. In the mercantile method of accounting incurring of expenditure is not based on payment but on the liability to pay. Once the goods had been purchased, the invoices raised and the purchase consideration accounted for in the books of the assessee, the expenditure could be said to have been incurred as per the method of accounting followed by the assessee. Hence, the Tribunal was justified in allowing the expenditure".
6.6 In view of the above decisions he submitted that the provisions of section 35 should be given liberal interpretation in tune with the intension of the legislature behind the provision. He submitted that although the above decisions are in connection with the capital expenditure relating to R&D of an assessee, however, the same ratio should be applied to the revenue expenditure also. He submitted that the purchases of raw materials intended for R&D use carried out by the assessee should be allowed in the year in which such purchases were made. The closing stock remaining from the purchases, if any, being the opening stock in the subsequent year would not be allowable in that year. He submitted that merely because the assessee has shown the part of the material used for research and development activities in the inventory should not be the basis to disallow the claim of deduction u/s.35 of the Act and the assessee should be given the deduction on account of expenditure on purchase of materials used in the R&D. He accordingly submitted that the claim of deduction made by the assessee should be allowed in full.
7. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A).
8. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cite before us. There is no dispute relating to the genuineness of the purchase of raw materials for research and development activities. The only dispute is regarding allowability of the claim of deduction u/s.35 in the computation of income of the R&D material included in the stock of material.
8.1 It is the case of the assessee that whatever material purchased during the year for research and development activities, although not put to use during the year, has to be allowed as deduction/s.35. It is the case of the Revenue that the assessee is not entitled to deduction u/s.35(1) on account of purchase of raw material meant for R&D which were not actually used for scientific research and development but were lying as closing stock.
8.2 We find the Hon'ble Karnataka High Court in the case of H.M.T. Ltd. No.1 (supra) has observed as under :
'Re : Question No. 5:
The sum of Rs. 44,10,303, admittedly, is the value of capital assets relating to scientific research. While working out the deduction under section 80J of the Act in respect of the watch factory of the assessee, this was sought to be excluded by the Revenue on the ground that the term actual cost" used in section 80J(1A)(II)(ii) has to be understood in the manner stated in section 43(1) and for this purpose Explanation 1 to section 43(1) also will have to be considered. This Explanation in turn refers to section 32(1)(ii) which provides for depreciation on buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business, etc. According to the Revenue, when an asset is used in the business after it ceases to be used for scientific research related to that business the actual cost of the asset to the assessee, when the said asset is used in the business thereafter, will be the value derived after deducting the depreciation granted to the said asset when it was used for scientific research.
Section 35 provides for the expenditure on scientific research and as per sub clause (iv) of section 35(1), in respect of expenditure on scientific research, any expenditure of a capital nature on scientific research is allowed when it is related to the business carried on by the assessee and sub section (2) provides for the computation of the deduction. When an assessee uses the assets for scientific research and avails of such deductions, according to the Revenue, the value of the asset would get reduced to the extent of the deductions by the time the asset is diverted for user in the main business of the assessee.
This contention was not accepted by the Appellate Tribunal. The Tribunal observes that, "it is not denied that the assets are still being used for scientific research" and, therefore, these assets are not entitled to any depreciation at all but for a deduction under section 35(1)(iv). The Tribunal further observed that, for the purpose of section 80J, the meaning of the term "actual cost" stated in section 43(1) without reference to Explanation 1 has to be applied. The Tribunal also has noted that it was not the case of the Revenue that the assets in question are not used for the business of the industrial undertaking ; since these assets are also used for the business of the assessee, they cannot be excluded from the capital of the company. This was the view taken by the Commissioner (Appeals), as well as by the Appellate Tribunal and the question before us was argued on the basis that this assumption is factually correct.
Section 80J provides for deduction in respect of profits and gains from newly established industrial undertakings, etc. For this purpose, the capital employed in the industrial undertaking of the assessee will have to be computed in the manner specified in sub section (1A). This again takes us to sub clause (ii) of section 80J(1A)(11). According to this, the value of the assets shall be ascertained thus : "in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee". Explanation 1 states that, "In this clause, 'actual cost' has the same meaning as in clause (1) of section 43". There is no dispute that these provisions govern the instant case and, therefore, the only question actually that would survive for consideration will be the scope of the Explanation pertaining to the term "actual cost" which takes us to section 43. Section 43, to the extent it is relevant for our purpose, reads thus :
"43. In sections 28 to 41 and in this section, unless the context otherwise requires (1) 'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority :
Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, but before the 1st day of March, 1975, and is used otherwise than in business of running it on hire for tourists, exceeds twenty five thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twenty five thousand rupees.
Explanation 1. Where an asset is used in the business, after it ceases to be used for scientific research related to that business and deduction has to be made under clause (ii) of sub section (1) of section 32 in respect of that asset, the actual cost of the asset to the assessee shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under clause (iv) of sub section (1) of section 35 or under any corresponding provision of the Indian Income tax Act, 1922 (11 of 1922). "
The main provisions of section 43(1) are quite clear when it says that the actual cost is that which is incurred by the assessee. To the extent any portion of the cost is met directly or indirectly by any other person or authority, to that extent the actual cost of the assessee gets reduced. A deduction granted under section 35 cannot be equated to a situation where a portion of the cost is being met by a third party because section 35 provides only a statutory deduction under certain circumstances. Learned counsel for the Revenue, however, sought to rely on Explanation 1. According to learned counsel, when the assets ceased to be used for scientific research and a deduction is to be made under section 32(1)(ii), the actual cost of the asset to the assessee would get reduced by the amount of deduction allowed under section 35(1)(iv) and according to learned counsel, that is the situation involved here.
The above contention ignores the scope of this Explanation. Explanation 1 is attracted only when a deduction has to be made under section 321 (1)(ii). The applicability of the Explanation is confined to the particular situation stated therein. It nowhere extends to other situations wherein actual cost will have to be computed for any other purpose. Hence, it is not possible for us to accept the contention of learned counsel. Therefore, question No. 5 is answered in the affirmative and in favour of the assessee.'
8.3 We find the Hon'ble Gujarat High Court in the case of Gujarat Aluminum Extrusions (P.) Ltd. (supra) has observed as under :
'We have heard the learned advocates at length and have considered the judgments cited before this court.
The object behind the enactment of section 35 of the Act is to encourage research and development activities by the assessee. As an incentive, the Legislature has given this benefit by way of deduction in respect of the capital expenditure incurred by the assessee. This is a provision for the benefit of the assessee and if the assessee incurs capital expenditure for the purpose of research and development during the relevant previous year, in our opinion, the Revenue should not deprive the assessee of the benefit of deduction under the provisions of section 35 of the Act even if the asset is not put to use for research and development. It is a settled legal position that the provision for exemption or relief should be construed liberally and in favour of the assessee. If the section is interpreted in the manner suggested by standing counsel for the Revenue, in our opinion, we would be depriving the assessee of the benefit which the Legislature desires to give to the assessee.
It is also pertinent to refer to Circular No. 5-P (LXXVI-63) of 1967 dated October 9, 1967, issued by the Department. The relevant extract of the said circular reads as under :
"(ii) The amount of capital expenditure incurred by an assessee after March 31, 1967, on scientific research related to his business will be allowed to be deducted in full in computing his business profits of the year in which such expenditure is incurred."
From the provisions of the above referred to circular also, the intention of the Revenue is patent. The intention is to give benefit to the assessee who incurs expenditure on scientific research related to his business. Even the circular issued by the Department does not make use of the capital asset a condition precedent for claiming deduction under the provisions of section 35 of the Act.
In our opinion, both the appellate authorities have rightly considered the spirit with which section 35 of the Act has been enacted by the Legislature and the circular referred to hereinabove while allowing deduction to the assessee under the provisions of section 35 of the Act.
We are of the view that when the Legislature has not expected the assessee to put the asset to actual use, it would not be open to the Revenue to deprive the assessee of the benefit of deduction under the provisions of section 35 of the Act if the asset is not used in the previous year in which the capital expenditure is incurred.
It is also relevant to note that the deduction is given not on the count of user. Had it been so, the assessee would have been given benefit in the nature of depreciation. It cannot be disputed that depreciation is allowed when the asset is used by the assessee and when he suffers loss on account of wear and tear of the asset. Had the intention of the Legislature been to grant additional depreciation, we would have agreed with the submissions made by standing counsel appearing for the Revenue but the position is different in the instant case. Here, the Legislature wants the assessee to spend more amount for scientific research and it also wants the assessee to get the benefit immediately in the year in which he incurs the expenditure in the nature of revenue or capital for scientific research and therefore the Legislature refers to incurring of the expenditure and not the using of the asset.
Once it is established that the expenditure was incurred for the purpose of scientific research and the conditions incorporated in section 35 of the Act are fulfilled, in our opinion, the Revenue cannot expect the assessee to start using the asset immediately. In a given case the assessee might have to go on incurring expenditure for several years before putting the asset to actual use. If the interpretation advanced by standing counsel for the Revenue is accepted, we are afraid, the assessee would not be in a position to avail of the deduction under section 35 of the Act to the extent to which the Legislature intends to give to the assessee.
It is also pertinent to note that the deduction under the provisions of section 35 of the Act is given only during the previous year in which the expenditure is incurred. If the assessee has taken several years to construct or acquire a particular asset, the assessee would be deprived of the benefit of section 35 of the Act because he can put the asset to use only when construction of the asset is completed and it would not be open to him to claim deduction in respect of the expenditure incurred during the earlier previous years because looking to the provisions of section 35 of the Act, the assessee can avail of the benefit of deduction of the amount of expenditure incurred only during the previous year and not for the earlier period unless his case is covered under the provisions of an exception to section 35(2)(ia) of the Act.
For the reasons stated hereinabove, in our opinion, the Tribunal was right when it confirmed the order passed by the Commissioner of Income-tax (Appeals) who had deleted the disallowance.
For the afro stated reasons, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.
The reference stands disposed of with no order as to costs.'
9. No doubt the above decisions are in respect of capital expenditure. However, we find merit in the submission of the Ld. Counsel for the assessee that the principle should be applied even for Revenue expenditure also. Therefore, in the light of the above decisions we find merit in the arguments advanced by the Ld. Counsel for the assessee that when a material is purchased for research and development purpose, it is immaterial whether the material is consumed during the year or held as closing stock and the entire expenditure incurred on raw material for the purpose of research and development qualifies for deduction u/s.35 of the Act irrespective of the accounting treatment of the same in the books of account. Therefore, in our opinion, whenever any material is purchased for research & development, the same should be allowed as deduction u/s.35 of the I.T. Act and it is immaterial whether the asset is put to use or not. We, therefore, set-aside the order of the Ld.CIT(A) on this issue and direct the Assessing Officer to allow the deduction claimed u/s.35. At the same time we also direct the Assessing Officer to ensure that the assessee does not get double benefit of the same item, i.e. in the subsequent year on account of such material which was shown as closing stock but got benefit u/s.35 of the I.T. Act. We hold and direct accordingly. The ground by the assessee is accordingly allowed.
ITA No.1456/PN/2011 (By Revenue) (A.Y. 2007-08) :
10. Grounds of appeal No.1 by the Revenue reads as under :
"On the facts and circumstances of the case, the Hon'ble CIT(A)-III, Pune has erred in deleting the addition on account of non-payment of T.D.S. of Rs.6,57,422/-."
10.1 Facts of the case, in brief are that the Assessing Officer during the course of assessment proceedings observed that assessee has debited an amount of Rs.43,63,556/- on account of sales return. On being asked by the Assessing Officer to explain as to how the goods so received back are accounted for in the books the assessee submitted as under:
"As regards sales returns we submit that the goods as and when returned are entered in a separate register and the sales of these items when effected are also recorded therein. The quantitative particulars furnished before are inclusive of these items. The sales return actually should have been deducted from the gross sales turnover of the company. The same have instead been shown on the expenditure side of the profit and loss account. However, the same does not have any impact on the profit of the company."
10.2 Since the assessee did not produce anything other than the above to show that sales of the goods have actually taken place out of the material which have received back from parties as sales return and since the goods which have been received back were not shown as part of the closing stock of finished/damaged goods and in absence of details like sales bills, stock register for goods, returns etc. the Assessing Officer rejected the explanation of the assessee that goods returned were sold during the year and accounted for in the total sales of the assessee. He accordingly disallowed the debit of Rs.43,63,546/- on account of sales return and added the same to the total income of the assessee.
11. Before the CIT(A) it was submitted that all the particulars in respect of the sales returns including the quantitative CENVAT records, itemized particulars and the ledger extracts have been produced before the Assessing Officer and verified by him and therefore, the Assessing Officer has no basis and is incorrect in stating that the sales returns are not accounted properly by the assessee. It was argued that the Assessing Officer having verified the excise records and also the CENVAT returns and VAT returns, should not have made the disallowance of the sales returns and should not have commented that the goods which have been received back are not shown as part of closing stock of finished goods. It was submitted that it is the fundamental accounting principle that goods returned are to be taken back as closing stock which had been correctly done by the assessee and evidenced by the CENVAT records and having properly been accounted for, whether the same are sold or not is of no consequence and the AO was not justified in making the addition. It was accordingly argued that the addition should be deleted.
12. Based on the arguments advanced by the assessee the Ld.CIT(A) deleted the addition by observing as under :
"7.3 The submissions of the appellant are carefully examined with reference to material placed on record. Under the Accounting standards and Schedule VI to the Companies Act, the sales returns are normally reduced from gross turnover. But in the case of the appellant, instead of reducing the sales returns from the gross sales, the same was shown on the debit side of the profit and loss a/c and such treatment does not have any impact on the net profit shown in the profit and loss account. The case of the Assessing Officer is that the goods which have been received back are neither shown as part of closing stock of finished goods nor was it possible to accept the claim of the appellant that the goods which were returned have been sold during the year and accounted for in the total sales. During the present proceedings, the appellant explained in detail the system of recording sales and sales returns in its books of a/c and Central Excise registers and also produced documents evidencing the record of the sales and sales return during the year. It is duly certified by the appellant that all these details' were produced before the assessing officer at the time of assessment proceedings. As per the details furnished, whenever a sale is effected, the customers a/c is debited and sales account is credited in the books of a/c with a corresponding quantitative entry in its stock records maintained under CENVAT rules. In the event of return by the customer of the goods sold, the same are entered in separate Form-IV register duly mentioning the original invoice number, description of quantity of goods returned as they are duty paid goods under CENVAT rules. Simultaneously, reversal entries were made in the customer ledger a/c upon the return of goods from the customer. When such returned goods are resold, new sale invoices were raised and the same are recorded in the , same Form IV register indicating the new invoice number under the column 'Details of Invoice of re-clearance'. In the books of account, the resale of returned goods is credited to the sales account and debited to party's a/c to whom returned goods are resold, who could be either old customer or new customer. For instance, vide sale invoice No: 4581 dated 02/03/2006, goods of the value of Rs 56,555/- including duty were sold to Centaurus Life Sciences (P) Limited which were duly credited in the sales ledger account of the product 'Methylamines' and debited to party's account. The goods were rejected by the party vide invoice No. 1 dated 11/04/2006 and an entry to this effect was made in Annexure IV register. A reversal entry was also passed in the ledger a/c of the party by crediting the bill amount to the party's account. Subsequently, when the goods were resold vide invoice No. 159 dated 12/04/2006 to a different customer namely Porus Drugs & Intermediaries (P) Limited, the bill amount was debited to this party's account and credited to sales account. The entries to this effect were also made in the same Annexure IV register as items of re-clearance. For immediate reference, an abstract of the Annexure-IV register prepared by the appellant is appended herewith as Exhibit-A. In this system of accounting, the balance in the Annexure IV register on any day i.e. to the extent goods are not resold represents the closing stock of returned goods at that point of time and the closing stock of returned goods that remained as on 31st March is included in the closing stock of finished goods in the annual accounts. In fact, in the details of closing stock filed before the Assessing Officer, the last item shows the 'stock in Annexure IV register' at Rs. 1,86,360/- (APB 267). Thus, to the extent returned goods were not resold as on 31.03.2007, the same have been included in the closing stock which stood at Rs.5,79,00,491/-. To the extent goods were resold the same are included in the turnover declared for the year. Therefore, the observation of the A.O. that the returned goods were not included either in the turnover or in the closing stock of finished goods is contrary to the facts placed on record. From the records and details filed by the appellant, it is evident that the sales returns of Rs. 43,63,556/- were reflected either in the turnover or in the closing stock as on 31.03.2007. In such a situation, I am of the considered opinion that the A.O. is not justified in rejecting the claim of the appellant on the sole ground that the details like sale bills, stock register etc. were not produced for verification. Accordingly, the addition of Rs.43,63,556/- made to the total income on this ground is deleted".
12.1 Aggrieved with such order of the CIT(A) the Revenue is in appeal before us.
13. We have considered the rival arguments made by both the sides. The Ld. Departmental Representative could not controvert the findings given by the Ld.CIT(A) that returned goods to the extent of not re-sold as on 31-03-2007 have been included in the closing stock, which stood at Rs.5,79,00,491/- and to the extent goods were resold, the same are included in the turnover declared for the year. The finding given by Ld.CIT(A) that the sales returns of Rs.43,63,556/- were reflected either in the turnover or in the closing stock as on 31-03-2007 and therefore the observation of the Assessing Officer that the returns goods were not included either in the turnover or in the closing stock of finished goods is contrary to the facts placed on record also could not be controverted by the Ld. Departmental Representative. In view of the above and in view of the detailed reasoning given by the Ld.CIT(A) we find no infirmity in his order. Accordingly, the same is upheld and the ground raised by the Revenue is dismissed.
14. Grounds of appeal No.2 by the Revenue reads as under :
"On the facts and circumstances of the case, the Hon'ble CIT(A)-III, Pune has erred in deleting the addition on account of non-payment of T.D.S. of Rs.12,43,533/- in the case of Gujrath Agro Chem Ltd."
14.1 Facts of the case, in brief, are that the Assessing Officer disallowed an amount of Rs.31,71,720/- by invoking the provisions of section 40(a)(ia) since the assessee failed to deduct due tax and deposit the same to the credit of Government Account as per provisions of Chapter XVIIB, the details of which are as under :
| Sl.No. |
Name of the party |
Nature of payment |
Date |
Amount (Rs.) |
1 |
Ksoco Chemicals |
Commission |
04/05/2006 |
49,523/- |
2 |
Ghazi Brothers |
Commission |
26/05/2006 |
57,019/- |
3 |
S.V. Engineers |
Sub-contract |
15/06/2006 |
4,70,968/- |
4 |
Sevak Publication |
Advertisement |
13/05/2006 |
2,38,032/- |
5 |
Satoor Exhibitor |
Advertisement |
22/07/2006 |
1,03,423/- |
6 |
Commission on sales promotions |
Commission |
31/03/2007 |
10,09,222/- |
7 |
Gujarat Agrochem Ltd. |
Legal & Prof, charges |
31/03/2007 |
12,43, 533/- |
|
Total |
|
|
31,71,720/- |
15. Before the CIT(A) it was submitted that the Assessing Officer acted against the facts of the case in making the disallowance by invoking the provisions of Sec. 40(a)(ia). It was submitted that out of the seven instances noted by the Assessing Officer, tax has not been deducted only in two instances, i.e. (a) Rs.57,019/- being payment of selling commission made in foreign currency to M/s. Ghazi Brothers and Rs.2,38,032/- being payment for advertisement made to M/s. Sevak Publications. It was submitted that the payment to M/s. Ghazi Brothers is sales commission to foreign sales promoter and is paid in foreign currency and as such the provisions of Sec. 195 do not apply to the said payment and consequently provisions of Sec.40(a)(ia) are also not applicable. It was argued that in this respect, the ledger extract and the proof of payment in foreign currency in respect of this payment was produced before the Assessing Officer and verified by him and as such he should not have commented that no evidence was produced in respect of the same and should not have disallowed the same. In respect of the balance five payments, it was submitted that the proof of deduction of tax at source and the proof of payment of the same to the credit of the central government, along with TDS returns had been produced before the Assessing Officer and verified by him. The assessee submitted that the Assessing Officer was not justified in commenting that the assessee failed to make TDS under Chapter XVIIB despite producing all the relevant details before the Assessing Officer. It was alternatively argued that if at all a disallowance is called for by invoking the provisions of sec.40(a)(ia), it should be restricted to expenditure on account of payment for advertisement to M/s. Sevak Publications and not the entire amount.
16. Based on the arguments advanced by the assessee the Ld.CIT(A) sustained an amount of Rs.11,67,342/- and deleted the amount of Rs.20,04,378/- on account of the following items :
| Sl.No |
Name of the party |
Nature of payment |
Amount (Rs.) |
|
1 |
Ksoco Chemicals |
Commission |
49,523/- |
Deleted |
2 |
Ghazi Brothers |
Commission |
57,019/- |
Deleted |
3 |
Satoor Exhibitor |
Advertisement |
1,03,423/- |
Deleted |
4 |
Chemat Enterprises Co Ltd. (Payment in USD on 10-05-2007) |
Commission |
5,50,880/- |
Deleted |
5 |
Gujarat Agrochem Ltd. |
Legal & Prof, |
12,43, 533/- |
Deleted |
|
TOTAL charges |
20,04,378/- |
|
16.1 Aggrieved with such order of the CIT(A) the Revenue is in appeal before us for the deletion of Rs.12,43,533/- on account of payment to Gujarat Agro Chem. Ltd. only
17. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee.
17.1 We find the Ld.CIT(A) while deleting the amount of Rs.12,43,533/-being payment to Gujarat Agro Chem Ltd. has observed as under :
"In case of this payment towards professional charges, it was noticed from the ledger account of legal and professional charges furnished by the appellant for the period 01/01/2007 to 31/03/2007, the amount was debited to the account on 31/03/2007 with the narration "credited to a/c towards liaison and negotiation charges' and the entry was reversed on the same day i.e. 31/03/2007 with the narration "entry reversed due to cancellation of credit note'. It is also noticed that the legal and profession charges debited to the profit & loss account of Rs.57,02,564/- does not include the credit note of Rs.12,43,533/-. A scanned copy of the ledger account of Gujarat Agro-chem Ltd. where the reversal entry is made is reproduced hereunder:-
Balani Amines Ltd.,
Balaji Bhavan, 165-A, Railway Lines, Solapur
Gujarat Agrochem Ltd. CRS
Ledger Account 1-Apri-2006 to 31-Mar-2007
| Date |
Particulars |
Vch Type |
Vch No. |
Ref. No. |
Debit |
Credit |
Balance |
01-04-2006 |
By Opening Balance |
-- |
-- |
-- |
-- |
-- |
-- |
31-03-2007 |
By Legal & Professional Charges Credit Note Being the amt. credited to A/c twds. Liaison and negotiation charges details as per credit note No.337, dt.31-03-07 |
|
341 |
337 dt.31-03-07 |
|
12,43,533.00 |
12,43,533.00 |
|
To Legal & Professional charges journal being the entry reversed due to cancellation of credit note No.337/2006-07 to 31-03-2007 issued to Gujarat Agrochem Ltd. |
|
342 |
|
12,43,533.00 |
|
|
|
|
|
|
|
12,43,533.00 |
12,43,533.00 |
|
When the expenditure is not even debited to the P&L A/c. of the year, the question of disallowance of such expenditure by invoking the provisions of sec.40(a)(ia) does not arise. Accordingly, the disallowance of Rs.12,43,533/- made by the A.O. does not survive and is accordingly deleted".
18. The Ld. Departmental Representative could not controvert the above factual findings given by the Ld.CIT(A) regarding non-applicability of provisions of section 40(a)(ia) when the same has not been debited to the profit and loss account. Under these circumstances, we find no infirmity in the order of the Ld.CIT(A). Accordingly, the same is upheld and the grounds raised by the Revenue is dismissed.
ITA No.582/PN/2012 (By Assessee) (A.Y. 2008-09) :
19. Grounds raised by the assessee are as under :
| "1. |
The appellant submits that the learned Commissioner of Income Tax (Appeals) erred in sustaining the addition made by the assessing officer on account of R & D Materials. |
2. |
The appellant submits that the learned Commissioner of Income Tax (Appeals) ought to have allowed the claim of the appellant on account of R & D materials under section 35 of the Income Tax Act, 1961. |
3. |
The appellant prays to submit that the learned Commissioner of Income Tax (Appeals) misinterpreted the provisions of section 35, a section extending benefit of R & D expenditure to an assessee and as such should have taken a liberal interpretation beneficial to the appellant. |
4. |
The appellant submits that the learned Commissioner of Income Tax (Appeals) failed to distinguish the difference between expenditure allowable under section 37 of the Income Tax Act vis-a-vis the expenditure allowable under section 35 of the Act. |
5. |
On the basis of the above and any additional grounds that may be permitted to be raised in the course of the appellate proceedings the appellant prays that the claim of appellant of Rs.1,63,23,232/- being expenditure on R & D, under section 35 of the Act, be allowed." |
20. After hearing both the sides, we find the above grounds are identical to grounds of appeal in ITA No.1448/PN/2011. We have already decided the issue and the grounds raised by the assessee have been allowed. Following the same ratio, the above grounds by the assessee are allowed.
ITA No.823/PN/2012 (By Revenue (A.Y. 2008-09) :
21. Grounds raised by the Revenue are as under :
| "1. |
On the facts and circumstances of the case, the CIT(A)-III, Pune has erred in deleting the addition made by the Assessing Officer on account of sales return to the tune of Rs.62,24,016/-. |
2. |
On the facts and circumstances of the case, the Hon'ble CIT(A)-III, Pune has erred in admitting additional evidence in violation of Rule 46A without giving opportunity of being heard to the Assessing Officer. |
3. |
The order of CIT(A) be vacated and that of the Assessing Officer be restored". |
22. After hearing both the sides we find the Assessing Officer disallowed an amount of Rs.62,24,016/- debited by the assessee in its books on account of sales return. Rejecting the various explanations given by the assessee and following the order of his predecessor for A.Y. 2007-08 the Assessing Officer made addition of Rs.62,24,016/- to the total income of the assessee on the ground that such returned goods were neither shown in the sales nor shown in the closing stock. In appeal the Ld.CIT(A) deleted the disallowance by holding that all the returned goods were re-cleared and included in the turnover and therefore the observation of the Assessing Officer that the returned goods were not included either in the turnover or in the closing stock of finished goods is contrary to facts. He further gave a finding that the sales returns of Rs.62,24,016/- were reflected in the turnover as on 31-03-2008.
22.1 Aggrieved with such order of the CIT(A) the Revenue is in appeal before us.
23. After hearing both the sides, we find identical grounds were taken by the Revenue for A.Y. 2007-08 vide ITA No.1456/PN/2011. We have already decided the issue and the grounds raised by the Revenue have been dismissed. Following the same ratio, the grounds by the Revenue are dismissed.
ITA No.718/PN/2013 (By Assessee) (A.Y. 2009-10) :
24. Grounds raised by the assessee are as under :
| "1. |
The appellant submits that the learned Commissioner of Income Tax (Appeals) erred in law in sustaining the addition made by the assessing officer on account of R & D Materials. |
2. |
The appellant submits that the learned Commissioner of Income Tax (Appeals) ought to have allowed the claim of the appellant on account of R & D materials under section 35 of the Income Tax Act, 1961. |
3. |
The appellant prays to submit that the learned Commissioner of Income Tax (Appeals) misinterpreted the provisions of section 35, a section extending benefit of R & D expenditure to the assessee and as such should have taken a liberal interpretation beneficial to the appellant. |
4. |
The appellant submits that the learned Commissioner of Income Tax (Appeals) failed to distinguish the difference between expenditure allowable under section 37 of the Income Tax Act vis-a-vis the expenditure allowable under section 35 of the Act. |
5. |
On the basis of the above and any additional grounds that may be permitted to be raised in the course of the appellate proceedings the appellant prays that the claim of appellant of Rs. 1,19,04,059/- being expenditure on R & D, under section 35 of the Act, be allowed." |
25. After hearing both the sides we find the above grounds are identical to grounds of appeal in ITA No.1448/PN/2011 for A.Y. 2007-08. We have already decided the issue and the grounds raised by the assessee have been allowed. Following the same ratio, the above grounds by the assessee are allowed.
26. In the result, all the appeals filed by the assessee are allowed and the appeals filed by the Revenue are dismissed.