TMI Blog2016 (4) TMI 1406X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A 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. - I.T.A No. 309/Bang/2013 - - - Dated:- 22-4-2016 - Shri. Abraham P. George, Accountant Member And Shri. Vijaypal Rao, Judicial Member For the Assessee : Shri. Praveen Kumar Prasad, ITP. For the Revenue : Shri. Sanjay Kumar, CIT-III. ORDER Per Abraham P. George, Accountant Member : In this appeal filed by the assessee against an order dt.24.12.2012 of CIT (A)-I, Bengaluru, it has altogether raised six grounds of which grounds 1 and 6 are general and ground 5 is consequential in nature needing no specific adjudication. 02. Grounds 2 and 3 are reproduced hereunder : 03. Facts relating to the above grounds are that assessee a public sector undertaking involved in designing, developing, manufacturing and doing works related to repair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ajor partner. 06. In sum and substance, 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. Assessee also pointed out that a coordinate bench of this Tribunal had held such grants from the Government to be capital receipt for A. Ys. 1994-95 to 1997-98. As per the assessee, expenditure incurred using such grant made it possible to design and develop new fighter aircraft and helicopters which were of vital importance to the security of the country. 07. AO agreed with the contention of the assessee that receipts of grant were capital in nature. However according to him, matching principles required expenditure which were relatable to such grant to be excluded from the total expenditure debited in the P L account. As per the AO expenditure incurred out of capital receipts for specific R D could be treated only as capital expenditure. AO also noted that assessee in its letter dt.14.11.2011 itself cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in relation to development of prototypes was prima facie revenue in nature, considering the ultimate result which was the creation of a capital asset in the form of new prototype design, it was required to be capitalised. (vi) Assessee had taken out the grants while computing its total income the corresponding capital outgo was not reduced from the expenditure. 10. CIT (A) after considering the submissions of the assessee and the remand report of the AO was of the opinion that funds received by the assessee from the government as grants were for acquiring advanced technical knowhow for manufacture of advanced combat aircraft equipments. As per the Ld. CIT (A), grants given by GOI were appropriated out of the capital budget of Ministry of Defence. CIT (A) held that action of the assessee of excluding only the capital receipt from the net profit without corresponding reduction of expenditure resulted in under-statement of profits. Further according to him expenditure incurred by the assessee resulted in creation of new capital assets in the form of prototypes and designs. He rejected the contention of the assessee that the expenditure incurred was for recreating the existing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to have given eligible deduction u/s.35(1)(iv) of the Act. Assessee had no chance for raising such a claim before the AO since it had claimed the whole of the expenditure as revenue in nature. When a disallowance of the expenditure was made, assessee had preferred such a claim before the CIT (A). As per the Ld. AR, CIT (A) refused to entertain the claim, relying on a judgment of Hon'ble jurisdictional High Court in the case of M/s.BEAHAL Software Ltd, (supra), which was on a different set of facts. 13. Per contra, Ld. DR submitted that assessee having admitted to have incurred expenditure against the grant, for development of prototypes of new aircrafts and new technologies, which were yet to be commercialized, ought to have shown it as work-in-progress and ought not have charged it to the P L account. Having not done so, that as per the Ld. DR, lower authorities were justified in disallowing the relatable expenditure. 14. In so far as the alternate pleading of the assessee that it had to have been allowed deduction under Section 35(1)(iv) of the Act, Ld. DR submitted that there was no way the AO could have allowed it, without a claim from the assessee. Relying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24. We therefore, hold that the grants received by the assessee though credited to P L account is capital receipt and hence not income u/s.5 chargeable to tax. This ground is therefore, allowed. 15. A clear observation has been made by the Tribunal that by utilising the grants, assessee was developing technologies or design for manufacture which would be a capital asset. This was the reason why Tribunal accepted the claim of the assessee that grants received were capital in nature. 16. In assessment proceedings for A. Y. 2003-04 also there was an issue regarding nature of the grant received from the Central Government. Assessee had during the course of hearing for said year addressed a letter to the ACIT, dt.29.12.2005, giving a background of its claim regarding the grant. Copy of this has been placed at paper book pages 231 to 258. Relevant paras appearing therein is reproduced hereunder : 17. At para 4.1.6 above it is 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Definition of scientific research as given in Section 43(4) of the Act, brings within its fold any activity for the extension of knowledge in the field of natural or applied science. To say that research that goes into development of modern LCA or helicopter is not an activity for the expansion of knowledge of applied science is, in our opinion, will be incorrect and far from truth. Thus assessee had every right to say that it was engaged in scientific research and deduction u/s.35(1)(iv) of the Act, was available to it. CIT (A) in our opinion, erred in considering it to be a fresh claim which required filing of a revised return. Judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see were strategic in nature and in group companies. However CIT (A) was not impressed. According to him, AO could invoke Rule 8D, even where assessee claimed no expenditure to have been incurred in relation to the exempt income. He upheld the disallowance. 24 Now before us, Ld. AR strongly assailing the orders of lower authorities submitted that AO without expressing satisfaction which was necessary to be reached with regard to assessee's claim that no expenditure was incurred for earning the exempt income, had proceeded to automatically apply the Rule. Relying on the decision of coordinate bench in the case of DCIT v. Subramanya Constructions Development Co. Ltd [ITA No.404/Bang/2015 CO .89/Bang/2013, dt.20.02.2015], Ld. AR submitted that AO was bound to make a verification even when there was a claim by the assessee when there was no expenditure incurred by invoking Section 14A and Rule 8D. 25. Per contra, Ld. DR supported the orders of the lower authorities. 26. We have perused the orders and heard the rival contentions. Reliance placed by the assessee is on a decision of coordinate bench in the case of Subramanya Constructions Development Co. Ltd (supra). In ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
