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Banyan Networks Pvt. Ltd. Versus The Assistant Commissioner of Income Tax Company Circle I (2) Chennai

2015 (8) TMI 467 - MADRAS HIGH COURT

Disallowance of deferred revenue expenditure in the aggregate incurred towards the product development - Held that:- On a plain reading of section 35 of the Act, we are unable to accept the plea of the learned counsel for the assessee that deferred revenue expenditure could be allowed by way of carry forward. There is no provision under the Income-tax Act which provides for such a method of claiming deferred research and development expenditure. Moreover, the Assessing Officer has allowed the ex .....

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sessee is based on the decision of the Supreme Court in Madras Industrial Investment Corporation Ltd. v. CIT [1997 (4) TMI 5 - SUPREME Court]. However, we find that the said decision relates to the issue of discount on debentures and the said decision does not apply to the facts of the present case. - Decided against assessee. - T.C.(A).No.318 of 2008 - Dated:- 6-4-2015 - MR. R.SUDHAKAR AND MS. K.B.K.VASUKI, JJ. For the Appellant : Mr. K. Magesh For the Respondent : Mr. T. Ravi Kumar Sr. Standin .....

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urred by the assessee towards the product development is not allowable ? (ii) Whether the Tribunal was right in holding that the deferred revenue expenditure claimed by the assessee is not allowable in terms of the Explanation to section 35 of the Income-tax Act ? (iii) Whether the Tribunal was right in holding that the assessee is not entitled to the deduction of the prior year's expenditure forming part of the deferred revenue expenditure even though, such a claim is allowable in law as pe .....

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ction 143(1) of the Act and, subsequently, the case was selected for scrutiny and notice under section 143(2) of the Act was issued. In response to the said notice, the assessee's representative appeared in person and furnished various details as sought for during the course of scrutiny : 2.2. It is not in dispute that the business of the assessee commenced even prior to the financial year 1999-2000. The claim of the assessee under the head deferred research and development expenses is set o .....

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e total expenditure during the year was to the tune of ₹ 1,35,56,259. The assessee carried forward the expenditure to the next financial year 2001-02 (assessment year 2002-03) and claimed the expenditure to the tune of ₹ 2,27,43,213, of which only a sum of ₹ 34,44,649 was allowed by the Assessing Officer, while completing the assessment under section 143(3) of the Act by an order dated February 25, 2005. The Assessing Officer disallowed the claim of expenditure relating to S .....

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developed and what is its utility and the market potentiality. However, there is no explanation as to why the expenses were written off in one year and as to why the research and development expenses which fall under the purview of section 35 have been deferred. In the formal discussion it was, however, stated that since new technologies are being developed in their field the product technology has become obsolete and, therefore, it was decided to write off the whole expenses. A careful study of .....

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oduct and the necessary field trials of the product were completed. This very revelation indicate that the expenses made by the assessee were made for research and developments, they, therefore, very much fall under the purview of section 35. As per the submissions made by the assessee, the assessee has written off ₹ 18,89,182 for the financial year 2000-01 relevant to the assessment year 2001-02. The balance is treated as deferred scientific expenditure. There is no concept like deferred .....

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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 .....

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provisions of the Act if at all it was an expenditure on research and development the same ought to have been claimed in the year in which it was actually incurred. The assessee has not done so. As the assessee-company itself has admitted these expenses as expenses on research and development and there is no concept of deferred expenses under section 35 only those expenses which relate to the year under consideration can be allowed to the assessee. I accordingly restrict the assessee's clai .....

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y the assessee on research and development falls within the purview of section 35 of the Act and since the business of the assessee has already commenced, the expenditure shall be allowed only in the year in which it was incurred. 2.5. Aggrieved by the said order, the assessee appealed to the Tribunal. The Tribunal observed that since the business of the assessee had already commenced, the assessee cannot come within the purview of the Explanation to section 35 of the Act. It was also observed t .....

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tions of law referred to supra. 3. We have heard Mr. K. Magesh, learned counsel for the appellant and Mr. T. Ravi Kumar, learned senior standing counsel appearing for the revenue and perused the orders passed by the Tribunal and the authorities below. 4. Before adverting to the merits of the case, it would be apposite to refer to section 35(1)(i) of the Act and the Explanation thereto, which are as under : "35. Expenditure on scientific research.-(1) In respect of expenditure on scientific .....

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uch 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." (emphasis supplied) 5. With regard to th .....

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