TMI Blog2012 (9) TMI 264X X X X Extracts X X X X X X X X Extracts X X X X ..... r any asset is or was being used for scientific research. The decision of the prescribed authority on such a question would be final, thus the AO not having obtained such a decision of the prescribed authority though a serious question in the present case had arisen, was not justified in rejecting the assessee's claim for deduction of expenditure incurred for scientific research. Thus rejection of reopening of the entire issue as the Commissioner held that a substantial portion of such expenditure was in any case of revenue nature and in respect of the provision of section 37(1) of the Act, the assessee was entitled to claim full deduction thereof - in favour of assessee. - TAX APPEAL NOs. 242, 243 AND 263 OF 2000 - - - Dated:- 21-8-2012 - AKIL KURESHI AND ms . HARSHA DEVANI, JJ. JUDGMENT 1. These three tax appeals involve the same assessee and give rise to similar questions of law. We have heard them together and propose to dispose them off by this common judgment. 2. While admitting these appeals by common order dated 22-11-2000, the court framed following two substantial questions of law:- A. Whether, the Appellate Tribunal is right in law and on facts i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Expenditure incurred in developing such product should be held allowable deduction under section 35(1) of the Act. The assessee also raised an alternative contention before the Commissioner that substantial portion of this expenditure of Rs. 31,58,882/- was a revenue expenditure. The same, therefore, in any case, was allowable deduction under section 37(1) of the Act. 6. Commissioner (Appeals) considered the contentions. The Commissioner was of the opinion that the assessee was not entitled to deduction under section 35 of the Act since no scientific research was done and no new product was developed. It was a case of simple modifications of an existing software program. He, however, upheld the assessee's contention that a sum of Rs. 31,58,882/- was revenue expenditure. 7. Revenue carried the matter in appeal before the Tribunal since the assessee was granted benefit under section 37 of the Act. The assessee also carried a separate appeal contending that the Commissioner erred in holding that in absence of any scientific research, deduction under section 35 of the Act was not allowable. 8. The Tribunal disposed of both the appeals by a common judgment dated 25- 11-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any case, the expenditure was revenue in nature. 10. Against such judgment of the Tribunal, revenue filed two appeals before this court being Tax Appeal No.243/2000 and 251/2000. Tax Appeal No.243/2000 came to be admitted by an order dated 22-11-2000 framing the above noted two questions. Tax Appeal No.251/2000 was not entertained by a separate order also passed on 22-11-2000. A perusal of the appeal memo reveals that here also, the revenue had proposed a question regarding the assessee's claim for deduction under section 35(1) of the Act read with section 43(4). Presumably, however, this appeal was filed with an intention of questioning the assessee's stand that the expenditure was in any case revenue in nature. Be that as it may, this appeal has not been admitted by the court and the issue rests there. 11. For subsequent two assessment years namely, 1993-94 and assessment year 1994-95, facts are very similar. The assessee had raised similar claims of deduction under section 35 of the Act both on revenue as well as capital expenditures for development of product MAMIS. Here also, the Assessing Officer disallowed such claim. In assessee's appeal, the Commissioner adoptin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eering Innovation Ltd. reported in 327 ITR Page 392 wherein the Himachal Pradesh High Court referring to section 35(3) of the Act observed that the said section only empowers the Board to refer the matter to the prescribed authority. Under the Act, the Assessing Officer or the Commissioner (Appeals) or the Tribunal has no power to directly refer the matter to the Board. It was recorded that the counsel for the revenue failed to bring to the notice of the court any provision under the Act or the Rules which empowers the Assessing Officer or other tax authorities to refer the matter to the Board. It was concluded that once the matter was before the Assessing Officer, he must decide the same. (2) In case of M/s. Bishwanath Prasad Radhey Shyam v. Hindustan Metal Industries reported in (1979) 2 SCC Page 511 wherein the Apex Court in the context of the question whether an invention is patentable under the Patents and Designs Act, 1911 observed that grant of patent is for manner of new manufacture and the invention must involve inventive step having novelty and utility. 16. On the other hand, learned counsel Shri Bandish Soparkar for the respondent assessee opposed the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tific research, the Assessing Officer would be duty bound to strictly comply with the statutory provisions. 16.5 Our attention was also drawn to the decision of Delhi High Court in the case of Commissioner of Income-Tax v. Deltron Ltd. reported in 297 ITR 426 wherein referring to section 35(3) of the Act, it was held that the prescribed authority was not the Assessing Officer and he could not determine whether the machinery used by the petitioner was for research and development purpose or not. Further, noticing that the Commissioner (Appeals) had passed an order to the effect that the Assessing Officer was not competent to decide whether the machinery was being used for research and development purpose or for manufacturing activity, the court observed that soon thereafter, the revenue could have made an attempt to find out the actual use of the machine but it did not do so. Under such circumstances, the court rejected the prayer of the revenue to remand the matter for a fresh determination. 17. In order to decide the questions, we may first notice the statutory provisions. Section 35 of the Act pertains to expenditure on scientific research. Sub-section (1) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eries;] ( ii ) references to expenditure incurred on scientific research include all expenditure incurred for the prosecution, or the provision of facilities for the prosecution, of scientific research, but do not include any expenditure incurred in the acquisition of rights in, or arising out of, scientific research; ( iii ) references to scientific research related to a business or class of business include - ( a ) any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all businesses of that class; ( b ) any scientific research of a medical nature which has a special relation to the welfare of workers employed in that business or, as the case may be, all businesses of that class; 20. From the above statutory provisions, it can be seen that deduction as provided under section 35(1) of the Act is made available on expenditure on scientific research whether the nature of such expenditure is revenue or capital in character. The question whether a particular expenditure was, therefore, incurred for the purpose of expenditure on scientific research, would as in the present case, become important. Sub-section (3) of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce including agriculture, animal husbandry or fisheries. Thus, scientific research need not be equated with a scientific invention. Even the term 'invention' as defined in the Patent Act is wider than understood in pure science where distinction is made between invention and discovery. The Patent Act thus recognises not only the product pattern where a new product has been invented through scientific research, but also recognises a process pattern where an existing product may be manufactured through an innovative process which was hitherto unknown. 25. It can thus be seen that the term scientific research in the context of the deduction allowable under section 35(1) of the Act would include wide variety of activities. It can also be appreciated that every scientific research need not necessarily result into the ultimate goal with which it may have been undertaken. Often times in the field of research and invention, the efforts undertaken may or may not yield fruitful results. What is to be ascertained is whether any scientific research was undertaken and not whether such scientific research resulted into the ultimate aim for which such research was undertaken. It can be easily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whether and if so to what extent, any activity constitutes or constituted or any asset is or was being used for scientific research. The decision of the prescribed authority on such a question would be final. In our opinion, therefore, whenever any such question arises, the Assessing Officer cannot decide the issue but must place the issue before the Board who, in terms of section 35(3) of the Act, would refer the question to the prescribed authority. The decision of the prescribed authority would govern the parties. Therefore, if an assessee puts forth a claim of deduction under section 35(1) for expenditure incurred on scientific research and if the Assessing Officer is not inclined to accept such a claim, the question can be stated to have arisen. In such a situation, the Assessing Officer cannot take a decision but must seek the opinion of the prescribed authority, We may hasten to add that only when such a question arises that the reference would be competent. For example, if in a given case, the assessee lodges a claim without any supporting material, it cannot be stated that the question has arisen which would require a reference by the Board. Similarly, if the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g obtained such a decision of the prescribed authority though a serious question in the present case had arisen, in our opinion, was not justified in rejecting the assessee's claim for deduction of expenditure incurred for scientific research. The Tribunal in this regard, in our view, came to a correct conclusion. 31. The last question that survives is whether at this stage should we permit the revenue to seek such a reference and the opinion of the prescribed authority. In the facts of the present case, we are not inclined to accept any such request for the following reasons. Firstly, at no stage, right up to the Tribunal and even during the pendency of these appeals before the High Court, any such attempt was made by the revenue. Secondly, in the meantime, more than 20 years have passed since the assessee incurred the expenditure. Expecting the assessee to now produce minute details of the research activity undertaken would be unreasonable. Thirdly, that the Commissioner held that a substantial portion of such expenditure was in any case of revenue nature and in respect of the provision of section 37(1) of the Act, the assessee was entitled to claim full deduction thereof. We ..... X X X X Extracts X X X X X X X X Extracts X X X X
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