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TMI Blog2006 (6) TMI 415X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 4518/Del/2005 (assessment year 2002-03) "(1) That the Ld. CIT(A) has erred in law and on facts in allowing the deductions under section 80-O of the Income-tax Act, 1961 amounting Rs. 52,85,620 to the assessee company without appreciating the fact that the patents were in the name of Shri Rakesh Goel and not in the name of the company i.e., M/s. S.K. Dynamics Pvt. Ltd. (2) The order of Ld. CIT(A) be set aside and that of the Assessing Officer be restored." 2. Common grounds have been raised by the assessee with regard to decline of deduction under section 80-O of the Act, in both the assessment years 1999-2000 and 2002-03. Rival contentions have been heard and record perused. The brief facts of the case are that the assessee M/s. S.K. Dynamics Pvt. Ltd. was deriving income from research, development of patents and design, proto type manufacturing and production of electro mechanical systems. The Assessing, Officer found that the assessee had following two patents only : (i) US patent : Control system for permanent magnet Synchronous motor (ii) US patent : Gate driver and hysteresis circuit. 3. The assessee has shown the following patents as pending for approval: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncidental or ancillary to the attainment of the main object, it is stipulated a under: "To sell and to receive royalty on embedded software in any form developed by the company which does not employ any manufacturing process." Hence, as per Assessing Officer, since the inception of the assessee company not only a clear separate identity was conceptualized but also it was resolved that the assessee company would sale and receive royalty on embedded software in any form developed by the company. Hence, in view of the above noted facts, and the legal position in respect of the company being a separate person, it was held by the Assessing Officer that the identity of the company can not be coalesced with that of Shri Rakesh Goyal individual, notwithstanding the fact that Shri Rakesh Goyal was the Managing Director of the company. 5. The Assessing Officer also observed that the term of appointment and the powers to be exercised by the Managing Director as well as the terms of remuneration to be paid to the Managing Director, were explicitly stipulated in the memorandum of association and article of the association of the assessee company. As regards the assessee's condition that "A g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80-O of the Act. With regard to the quantum of deduction to be allowed out of the receipt in convertible foreign exchange, the CIT (Appeals) directed the Assessing Officer to take the net receipts after reducing 15 per cent of the total resources utilized for earning the receipt, while allowing deduction under section 80-O of the Act. 9. Aggrieved by the above order of the CIT (Appeals), the revenue is in appeal before us. 10. It was contended by the learned DR Shri B.P. Mishra that patents were in respect of the invention made by Shri Rakesh Goyal and the assignee of the same was ADI, therefore, Rakesh Goyal was entitled to have the benefit of deduction under section 80-O of the Act and not the assessee company. He further placed reliance on the order of the Assessing Officer. 11. On the other hand, learned AR Shri K.P. Garg submitted that assessee company was set up in the year 1992 for pursuing research and developed (R&D) projects in the area of electro mechanical engineering digital signal processing, power electronics and systems engineering. It was duly recognized by the Department of Scientific and Industrial Research, Ministry of Science & Technology, Government of Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as for and on behalf of the assessee-company. The assessee company has paid to Shri Rakesh Goyal for the services rendered by him, during the process of search, invention, physical resources of the assessee company like laboratory and equipments were used. There was an agreement between the assessee company and Shri Rakesh Goyal, according to which assessee company alone was the beneficial owner of the patents so developed by Shri Rakesh Goyal. Since the assessee company was an artificially created entity, only human being can become an inventor and not any company. A detailed finding has been recorded by the CIT (Appeals), which is as per material on record, to the effect that beneficial ownership of the patents and designs vested with the assessee-company and not with Shri Rakesh Goyal. As per provisions of section 80-O for claiming deduction, the Income should be derived by the assessee including a company who is a resident in India end such income should be received from government of a foreign study or a foreign enterprises, as a consideration for use outside India of any patent, invention, design or registered trade mark. Such income should be in convertible foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reopen the completed assessment, when the primary facts necessary for assessment were fully and truly disclosed. For this proposition, he relied on the decision of Hon'ble Supreme Court in the case of CIT v. Dinesh Chandra H. Shah [1971] 82 ITR 367 and CIT v. Simon Carves Ltd. [1976] 105 ITR 212 and Swedish East Asia Co. Ltd. v. IAC [1989] (Cal.). Learned AR further submitted that in the instant case, the Assessing Officer has reopened the completed assessment just to re-examine and review the completed assessment to find out some more facts to enable the Assessing Officer to determine whether any income has escaped assessment, whereas section 147 authorises the Assessing Officer to reassess any income which has escaped assessment on the basis of positive material. As per learned AR, it does not authorize him to review and re-examine the case, even if a different view has been taken in any subsequent years or as per subsequent information with the Assessing Officer. Under the provisions of section 147, the Assessing Officer is not authorized to rectify every mistake committed by the predecessor or himself while making assessment for earlier years. In support of his contention relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee regarding validity of reopening has become infructuous. 19. In the result, the cross-objection filed by the assessee is being infructuous, disposed off accordingly. I.T.A. No. 1700/Delhi/2005 20. In the appeal filed by the revenue bearing IT Appeal. No. 1700/Del/05 relates to assessment year 2001-02, wherein following grounds of appeal have been raised : "(1) That the Ld. CIT(A) has erred in law and on the facts of the case in treating the capital expenditure to be of Revenue nature appreciating the fact that neither the projects, except Analog Devices, were complete nor there was any nexus between the amount of expenditure incurred and the profits to be earned in subsequent years, if any. (2) That the Ld. CIT(A) has erred in law and on facts of the case in ignoring the provisions of section 35(1)(iv) of the Income-tax Act, 1961 which state that the expenditure of capital nature can be allowed as deduction, only if it is related to business. (3) That the Ld. CIT(A) has erred in law and on facts of the case in not appreciating the fact that the assessee had itself admitted that only 8 per cent of the total expenditure was spent towards the project namely Analog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious other products, receipts in foreign currency in the form of royalty, interest income, etc. The assessee has been working on a number of projects during the year, but receipts in foreign currency is only from one project, namely, Analog Devices Inc.(ADI)." Further, the Assessing Officer remarks at para 4.1 of the order at page 6 "the reply of the assessee has been considered. The assessee itself admitted that remaining expenditure i.e., 92 per cent was spent towards sales as per Profit and Loss account. and ongoing R&D work for which the patents were pending or R&D work had not furnished." 22. Before the Assessing Officer, the assessee has furnished copy of audit report under section 44AB, wherein clause 8(a) specifies the nature of the assessee's business. Explanation on the nature of business was also filed vide letter dated 27-11-2002 and copy of certificate of approval as R&D Company under section 80-IB of the Act was also filed. On the basis of these documents, the Assessing Officer has duly accepted the facts that the assessee is an R&D Company. As an R&D Company, its nature of activity is not just material to the facts of the present case, but most important and relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on scientific research related to the business of the assessee should be allowed as a deduction. Explanation found below section 35(1)(i) further provides for allowing even the expenditure on payment of salary or purchase of materials for use in scientific research, even if incurred prior to commencement of business. The provision allows for deduction of a scientific research expenditure even if the assessee is not entirely engaged in the business of scientific research but carries out such research in connection with its business. However, in the instant case, the assessee company was solely engaged in the business of scientific research. Therefore, any business expenditure that it incurred, would be expenditure on scientific research related to its business hence allowable under section 35(1) of the Act. Even if the Assessing Officer takes the stand of treating the said expenditure as capital expenditure, even then section 35(2)(ia) allows for deduction of said capital expenditure against business income of the assessee. Hon'ble Karnataka High Court in the case of CIT v. H.M.T. Ltd. [1993] 199 ITR 235 has held that "deduction under section 35(1)(iv) read with section 35(2) is a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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