TMI Blog2014 (11) TMI 445X X X X Extracts X X X X X X X X Extracts X X X X ..... involved capital expenditure in the form of acquiring any land or building – the expenses is sought to be excluded u/s. 43(4)(ii) of the Act is an expenditure which the assessee incurs in acquiring rights in or arising out of scientific research already done by somebody - It is possible that the assessee without carrying out the scientific research, acquires rights in scientific research, acquires rights arising out of scientific research done by somebody else and claims cost of acquisition of such rights as expenditure on scientific research - The idea behind the exclusion clause in section 43(4)(ii) appears to be that expenditure on scientific research should be on the research actually carried out by the assessee in-house and it should not merely spent money in acquiring rights in or arising out of scientific research carried out by some other person - This aspect has been clearly overlooked by the revenue authorities - this interpretation is also a possible interpretation - A perusal of the audit report shows that major part of expenses are towards salary, equipments, materials consumed, consultancy fees and other routine expenses - claim of deduction u/s 35(2AB) of the Act has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the exempt dividend income - The shares which yielded dividend income were purchased in the year 1997- 98 - It cannot be said that any expenses whatsoever would have been incurred by the assessee to earn this dividend income - the revenue authorities ought to have exercised their discretion in not making a disallowance u/s. 14A of the Act – Decided in favour of assessee. - IT APPEAL NOS. 514 & 1578 (BANG.) OF 2013 - - - Dated:- 31-10-2014 - N.V. VASUDEVAN AND ABRAHAM P. GEORGE, JJ. For The Appellant : Cherian K. Baby, FCA For The Respondent : P. Dhivahar, Jt. CIT(DR) ORDER Per N.V. Vasudevan, Judicial Member ITA 514/B/13 is an appeal by the assessee against the order dated 23.1.2013 relating to A.Y. 2009-10 and ITA 1578/B/13 is also an appeal by the assessee against the order dated 18.9.2013 relating to A.Y. 2010-11 of the CIT(Appeals)-III, Bangalore. ITA 514/B/13 2. Ground No. I reads as follows:- GROUND I. Disallowance of sales commission accrued but not due ₹ 47,86,285. 1. The Commissioner of Income Tax (Appeals) has upheld the disallowance of sales commission accrued but not due made by the Assessing Officer on the contention t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, commission was payable only on realization of sale proceeds. Since the amounts were not realized by the assessee from the parties to whom sales were made, commission accrued to the third party, but was not due till realization by the assessee and therefore provisions of section 40(a)(ia) of the Act was not applicable. The assessee further reiterated that in the books, liability was recognized as ascertained liability, though due date for payment of commission fell in the subsequent financial year. 6. The CIT(Appeals) was not convinced with the aforesaid explanation offered by the assessee. He proceeded on the basis that the amount shown as director s commission is actually commission payable to third parties. He was of the view that once the assessee acknowledges the liability to pay commission in the books of account, it becomes mandatory for the assessee to deduct tax at source, as required u/s. 194H of the Act. In this regard, the CIT(A) observed that u/s. 194H, obligation to deduct tax at source is either at the time of credit of such income to the account of the payee, or at the time of payment of such income in cash, cheque or other modes, whichever is earlier. The CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed. 10. Ground No.II raised by the assessee reads as follows:- Disallowance of entire claim u/s 35(2AB) amounting to ₹ 1,32,44,186/- on Inhouse R D facility approved by the Ministry of Science and Technology 3. Your appellant is recognised for In house R D by the Ministry of Science and Technology, Government of India and is certified by DSIR. Accordingly, a sum of Rs.l,32,44,186/- was claimed as deduction u/s 35(2AB). 4. The contention of the Assessing Officer is that the appellant company has acquired substantial rights consequent to the expenditure and hence restrictions of Section 43(4)(ii) were applicable and thus disallowed the claim for the entire expenditure on R D. 5. The Assessing Authority and the CIT (A) have failed to point out which item of expenditure is hit by the provisions of Section 43(4)(ii) of the Act and has instead disallowed the entire claim, though it is clear that expenditure incurred for acquisition of rights in or arising out of scientific research such as application fee for patent and other legal expenses connected therewith have not been included in your appellants claim and hence no disallowance ought to have been made. 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires- (4)(i) scientific research means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries; (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; 12. The AO called upon the assessee to show as to how the expenses incurred on inhouse scie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above description of the Scientific Research carried out by the Assessee in the report can only mean that the Assessee has acquired rights in or arising out of Scientific Research. The AO also referred to the fact that the Assessee has applied for the following Patents, under the Patents Act, 1970. Sl. No. Patent No. Type of Patent Title Date of Filing 1. 2661/CHE/2010 Provision Silane Quaternary ammonium Compounds and Composition thereof 11/10/2011 2. 416/CHE/2011 Provisional High Viscous Aqueous Softener Based on Amino modified Siloxane 14/02/2011 3. 1430/CHE/2011 Provisional A Composition for fading fabric 25/04/2011 4. 1463/CHE/2011 Provisional A method for synthesis of Colloidal Silver 27/04/2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sub-clause (ii) is the expenditure incurred on legal expenses, registration charges etc. for obtaining patents which will be arising out of scientific research as that would not be an expenditure for prosecution of scientific research. It was argued that by no stretch of imagination, one can interpret the provisions of Sec.43(4)(ii) otherwise as this will discourage the Indian companies from taking a patent on the successful scientific research which has already been carried out. The reasonable interpretation of this section will necessarily have to be that the exclusion is of expenditure incurred in the acquisition of rights in or arising out of scientific research which is the cost of taking out the patent such as legal fees, registration fees and other incidental expenses on advertisement etc, which may be required for registering the patent thereby acquiring rights therein or arising out of scientific research. It does not apply to the expenditure incurred on prosecution or provision on facilities for the prosecution of scientific research which are expressly intended to be allowed. It was also pointed out that the deduction u/s.35(2AB) is to be allowed in full on the capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the ld. CIT(A), it is very clear that he has accepted the submission of the assessee that the expenditure in question incurred by the assessee could not be disallowed as it involved capital expenditure in the form of acquiring any land or building. The only basis on which the CIT(A) sustained the disallowance is that the expenditure resulted in acquisition of rights in or arising out of scientific research. The ld. CIT(A) has proceeded on the basis that if the assessee does scientific research and is able to obtain intellectual property rights on such research, then he was free to commercially use such intellectual property rights and this is the reason why there is a prohibition u/s. 43(4)(ii) of the Act so as to exclude expenditure incurred in the acquisition of rights in or arising out of scientific research. In our view, the aforesaid approach of the revenue authorities is incorrect. The expenditure that is sought to be excluded u/s. 43(4)(ii) of the Act is an expenditure which the assessee incurs in acquiring rights in or arising out of scientific research already done by somebody. It is possible that the assessee without carrying out the scientific research, acquires ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rights in or arising out of scientific research. We have also perused the audit report and its annexures for the claim of deduction u/s. 35(2AB) of the Act. A perusal of the audit report shows that major part of expenses are towards salary, equipments, materials consumed, consultancy fees and other routine expenses. In the given facts and circumstances of the case, we are of the view that claim of deduction u/s. 35(2AB) of the Act has to be allowed. The conclusions drawn by the revenue authorities on disallowance of aforesaid claim of the assessee are incorrect and cannot be sustained. Ground No.II raised by the assessee is accordingly allowed. 19. Ground No.III raised by the assessee reads as follows:- Disallowance amounting to ₹ 13,12,500/- as deduction towards Research and Development Expenses u/s 35 (2AA) and u/s 35 (i) (ii). 6. The CIT(A) has upheld the disallowance made by the Assessing officer claiming these are incurred in connection with acquisition of rights and therefore capital in nature. These payments were made to institutions approved by the prescribed authority for this purpose and the assessing authority cannot go beyond that and disallow the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproved as a National Laboratory by the prescribed authority in such manner as may be prescribed ; (b) University shall have the same meaning as in Explanation to clause (ix) of section 47 ; (c) Indian Institute of Technology shall have the same meaning as that of Institute in clause (g) of section 34 of the Institutes of Technology Act, 1961 (59 of 1961)]; (d) specified person means such person as is approved by the prescribed authority. 35 Expenditure on scientific research. 35. (1) In respect of expenditure on scientific research, the following deductions shall be allowed (ii) an amount equal to one and three-fourth times of any sum paid to a research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research : Provided that such association, university, college or other institution for the purposes of this clause (A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed; and (B) such association, university, college or other institution is specified as such, by no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 11,45,829/- 7. A sum of ₹ 11,45,829/- was disallowed on the contention that as the judgment of Kolkata High Court in the case of Exide Industries Ltd vs. UOI 292 ITR 470 allowing such provisioning has been stayed by the Hon. Supreme Court, it cannot be relied upon. It should be noted that a mere order of stay does not make the decision as not operational since there is no finality yet on this matter. The Hon ble High Court of Kerala in the case of CIT v/s Hindustan Latex (ITA No.64/2012) and the Hon. ITAT, Bangalore Bench in the case of Krishna Grameena Bank Vs ACIT (ITA 232/Bang/2012) have held such provisions to be allowed. Under any circumstances, the provisions of Sec. 43B(f) are applicable to provision for leave encashment amount that has become payable and not that accrued but not yet become payable. 25. The assessee claimed as a deduction a sum of ₹ 11,45,829 towards provision for leave encashment. The AO was of the view that any amount claimed as a deduction should have been actually incurred by the assessee or should have accrued as a liability to the assessee. Since the claim of the assessee was by way of provision, which has neither accrued nor act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt staying the operation of the judgment of the Hon ble Calcutta High Court in the case of Exide Industries (supra), the provisions of section 43B(f) of the Act will have to be considered. In light of the provisions of section 43B(f) of the Act, the assessee cannot claim the deduction in question, without actual payment and on the basis of a provision. We, therefore, confirm the order of the CIT(Appeals) and dismiss ground No.IV raised by the assessee. 29. Ground No.V reads as follows:- Disallowance of ₹ 29,35,6081- paid towards lease rentals of vehicles on operating lease allotted to various executives 8. The CIT(A) in his order has treated this as capital expenditure on the contention that this is a finance lease and allowed depreciation to be claimed as per prescribed rates. The arrangement, being an operating lease, is clearly revenue in nature and was debited to Profit / Loss account in line with Accounting Standard 19 Leases, which is a mandatory accounting standard applicable to all companies as notified under the Companies Accounting Standards (Rules) 2006. Hence, this expenditure ought to have been allowed as a deduction. 30. The assessee claimed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee as lease rentals, out of which ₹ 1,01,782 has been paid towards recovery towards cost and ₹ 91,742 towards recovery towards lease rentals. The period of lease as between the Assessee and LPIN in respect of this car is 60 months from 19.2.2007. 32. On the above facts the AO was of the view that since the payment of lease rent by the Assessee was a composite payment comprising of recovery towards cost and recovery towards rentals and since the vehicle registration stands in the name of the Assessee as per Article 2.2 (iii) of the Master Agreement, the arrangement between the Assessee and LPIN was purely a finance arrangement whereby LPIN financed the purchase of the vehicle and the Assessee was it s owner. The Assessee was repaying the loan borrowed from LPIN in the form of lease rentals. Since the Assessee is the owner of the vehicle and the lease is only a finance lease, the AO was of the view that the Assessee can only claim depreciation on the value of the vehicle owned by it and cannot claim lease rentals as revenue expenditure. He was of the view that the expenditure was capital expenditure. He was also of the view that the Assessee will not be enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - and Added Back to the Total Income of the Assessee Company. Thus, the Addition under this Head is ₹ 26,21,184/-. 34. On appeal by the assessee, the ld. CIT(A) confirmed the order of the AO. The CIT(A) however held that the Assessee should be given the benefit of deduction on account of depreciation as the use by the employees of the Assessee is also use by the Assessee for the purpose of business of the Assessee. Aggrieved by the order of the CIT(A) the Assessee has raised Ground No.V before the Tribunal. 35. We have heard the rival submissions. The ld. counsel for the assessee submitted that the AO has wrongly disallowed an amount of ₹ 26,21,184/- claimed, being amounts paid as lease rent for motor vehicles. These vehicles were allotted to various executives of the company for their official use. The contentions of the Assessing Officer, which was upheld by the CIT(A) is, firstly, that the owner of the vehicle is the individual employee and not the lessor and, secondly, that the lease is a finance lease, rendering the expenditure claimed as capital expenditure. He submitted that the AO erred in rejecting the claim on the ground that the ownership of the veh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enance of the vehicle including attending to breakdown services. 38. It was further submitted that Article 3.1 provides for early termination of the lease. On the occurrence of either early termination or on expiry of period, the client is required to return the vehicle to the lessor along with the various documents as mentioned therein. 39. It was submitted on behalf of the assessee that as per the provisions of the lease agreement as mentioned above, it will be clear that a substantial part of the risks and rewards incidental to the ownership of the asset vests with the lessor who is the de facto owner and not with the assessee (lessee), who is only a de-jure owner for the limited purpose of Motor Vehicles Act. Hence, under the accounting principles prescribed by the mandatory Accounting Standard 19, this is an operating lease and not a finance lease. The lease rentals are treated as being revenue in nature and ought to be allowed as an expense even though the name of assessee is entered as the owner in the R.C. book due to the special provisions of the Motor Vehicles Act. 40. It was further submitted that the computation of profit of a company has to be done in accordan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g down the law in this regard. The facts of the said case and the decision rendered would therefore be of great importance to render a decision in the present case. The facts of the said case were that M/S. Sundaram Finance Ltd.,(hereinafter called company ) was a company carrying on business of financing purchases of motor vehicles on the security of those vehicles. The manner in which transactions were effected was that a customer desirous of purchasing a motor-vehicle, but unable to pay the price to the dealer, agrees to purchase the vehicle and makes part payment of the price to the dealer. He then approaches the company and requests that a loan be advanced to him. On the company agreeing to grant a loan, the customer executes nine documents. The principal documents are a sale letter and H.P. agreement. Under the sale letter, the customer states that on the date of his making application for loan the vehicle is deemed to have been sold to the company. The other terms of H.P. agreement is also identical with the terms which we have set out in the case of the Assessee in the present appeal one of which is a term (clause- 6) that on fulfillment of conditions stipulated in the H.P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orated as to what is a hire purchase agreement in the following words:- A hire-purchase agreement is normally one under which an owner hires goods to another party called the hirer and further agrees that the hirer shall have an option to purchase the chattel when he has paid a certain sum, or when the hire-rental payments have reached the hire-purchase price stipulated in the agreement. But there are variations when a financier is interposed between the owner of the goods and the customer. The agreement, ignoring variations of detail, broadly takes one or the other of two forms : (1) when the owner is unwilling to look to the purchaser of goods to recover the balance of the price, and the financier who pays the balance undertakes the recovery. In this form, goods are purchased by the financier from the dealer, and the financier obtains a hire-purchase agreement from the customer under which the latter becomes the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The decision of this Court in K. L. Johar Company v. Deputy Commercial Tax Officer ([1965] 2 S.C.R. 112.) dealt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d conditions set out in the agreement, and the option to purchase exercisable by the customer on payment of all the instalments of hire arises when the instalments are paid and not before. In such a hire-purchase agreement there is no agreement to buy goods; the hirer being under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hirepurchase agreements must be distinguished from transactions in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire-purchase agreement with the financier, but in substance evidences a loan transaction, subject to a hiring agreement under which the lender is given the licence to seize the goods. 43. We shall examine the facts of the present case in the light of the law laid down by the Hon ble Supreme Court. In the present case LPIN finances purchase of the vehicle. The vehicle is purchased as and when the Assessee (client) makes a demand for hiring of vehicle. The ownership of the vehicle is registered in the name of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed a sum of ₹ 5,213 as expenditure incurred in earning dividend income by the assessee by invoking the provisions of section 14A of the Act r.w. Rule 8D(iii) of the Rules. The ld. CIT(A) confirmed the order of the AO. 47. Before us, the ld. counsel for the assessee submitted that no expenditure whatsoever was incurred in earning the exempt dividend income. In this regard, the assessee pointed out that investment which yielded the dividend income was a very old investment in the shares of Catholic Syrian Bank. It was submitted that the revenue authorities have blindly applied Rule 8D(iii) of the Rules, without rejecting the claim of the assessee that no expenses were incurred in earning the exempt income. The ld. DR relied on the orders of the revenue authorities. 48. We have considered the rival submissions. Rule 8D(iii) need not be applied blindly. One has to look at the probable expenses that assessee would have incurred in earning the exempt dividend income. The shares in question which yielded dividend income were purchased in the year 1997- 98. It cannot be said that any expenses whatsoever would have been incurred by the assessee to earn this dividend income. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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