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2016 (4) TMI 1406 - ITAT BANGALOREExpenditure relatable to R & D grants - nature of expenditure - revenue or capital expenditure - contention of the assessee was that its expenditure relatable to the grant received was incurred for design and development of weaponary for aircraft, combat aircrafts, avionics for combat aircrafts, development of light utility helicopter and for developing a fifth generation fighter aircraft to replace the aging jaguar and MIG 29 - alternate pleading of the assessee that it had to have been allowed deduction under Section 35(1)(iv) - HELD THAT:- As admitted by the assessee that expenditure incurred out of the grants received from the government would result in acquisition by the assessee of a capital asset in the form of indigenous and self-reliant technology for the manufacture of LCH / LCA, which were required for the defence of the country. Conditions of the Grant required the assessee to utilise it for the R & D of the LCA and LCH and related technology. Thus the expenditure incurred by the assessee using such grant which were debited to its profit and loss account were such that it would result in acquisition of a capital asset in the nature 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. Eligibility for deduction u/s.35(1)(iv) - Assessee having claimed the expenditure as part of revenue outgo through its P & L account, when the AO found that such claim was not allowable considering it to be a capital out go, in our opinion, he ought have allowed a deduction as mandated u/s.35(1) of the Act. Section says assessee which satisfies the conditions set out therein shall be allowed and there is no condition therein which disentitles an assessee from getting this benefit for want of a specific claim. Nevertheless we find that CIT (A) has given a finding that assessee was not doing any scientific research, but only R & D. We are unable to appreciate this finding of the CIT (A). Development of avionics for modern LC air-craft and helicopter, radar systems for fighter aircrafts, requires considerable scientific research and cannot be considered as mere R & D expenditure. As question as to what could be the amount of scientific research expenditure on which assessee is eligible for claim of deduction u/s.35(1) of the Act, require verification since it need 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, Disallowance u/s 14A r.w.r. 8D - HELD THAT:- 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 during the relevant year. We are alive to the judgment of the Hon’ble Delhi High Court in the case of Maxopp Investments Ltd [2011 (11) TMI 267 - DELHI HIGH COURT] where it was held that AO necessarily had to express his dissatisfaction on the inadequacy of the expenditure disallowed suo motu, by the assessee before invoking Section 14A of the Act. However this judgment cannot be stretched to include in its fold cases where no expenditure was claimed to have been incurred despite substantial holdings in investment, despite substantial change in investments and despite earning of substantial dividend income. We are therefore of the opinion that disallowance of 0.5% the average investments made under Rule 8D(2)(iii) of the Rules, was justified.
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