Himachal Pradesh H.C : the definition of scientific research given in s. 43(4) is not relevant to claim of expenditure under s. 35

High Court Of Himachal Pradesh

CIT vs. Engineering Innovation Ltd.

Section 35(1)(i), 35(1)(iv), 35(3), 43(4)

Asst. Year 1992-93

Deepak Gupta & V.K. Ahuja, JJ.

IT Appeal No. 2 of 2003

4th August, 2008

Counsel Appeared :

Vinay Kuthiala, for the Petitioner : R.L. Sood with Vikas Rajput, for the Respondent

JUDGMENT

DEEPAK GUPTA, J. :

This appeal has been admitted on the following substantial questions of law :

“(i) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the definition of scientific research given in s. 43(4) is not relevant to claim of expenditure under s. 35 ?

(ii) Whether on the facts and in the circumstances of the case the Tribunal was correct in holding that the expenditure of a capital nature was admissible as deduction when the expenditure was not incurred for existing business ?”

This appeal relates to the asst. yr. 1992-93. The undisputed facts of the case are that the assessee was carrying on the business of manufacture and sale of precision sheet metal components. In the assessment year under reference, the assessee decided to manufacture and market automatic coffee machine named Vendomate. The case of the assessee was that before manufacturing and marketing such a machine, the assessee had imported an automatic coffee machine from abroad at a cost of Rs. 3,62,014. It had also engaged the services of an engineer Shri H.O. Verma, for indigenizing and copying the machine in such a fashion so as to make it suitable for Indian conditions. A sum of Rs. 1,70,500 was paid to engineer H.O. Verma as retainership.

According to the assessee, the imported machine was dismantled into various parts and, therefore, the engineer developed a new machine and a prototype machine was manufactured on the basis of the research done by the engineer. On these factual aspects, the assessee claimed deduction of the aforesaid two amounts as well as some other smaller amounts incurred for travelling expenses, marketing, etc. The amount of deduction was claimed as expenditure on scientific research. The AO came to the conclusion that the assessee had not incurred this expenditure on research work and disallowed the entire claim. The assessee filed an appeal. The CIT(A) partly accepted the appeal of the assessee and allowed deduction to the extent of Rs. 5,32,514 i.e. the amount spent for importing the machine and paid to engineer H.O. Verma but did not allow the claim on other counts.

The Revenue filed an appeal before the Tribunal which rejected the claim of the Revenue and dismissed the appeal. The Tribunal came to the conclusion that the definition of the phrase “scientific research” under s. 43(4) has no connection with the deduction claimed under s. 35 and rejected the case of the Revenue. Hence the present appeal by the Revenue. To appreciate the rival contentions of the parties, it would be appropriate to quote s. 35(1)(i) and (iv) of the IT Act (for short : the Act) which reads as under : “35(1) In respect of expenditure on scientific research, the following deductions shall be allowed— (i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. (ii)……….. (iii)………. (iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-s. (2) :” Sec. 35(3) of the Act which also reads as under : “(3) If any question arises under this section as 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 Board shall refer the question to the prescribed authority, whose decision shall be final.” Relevant portion of s. 43(4) of the Act, reads as follows : “(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)……….. (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;”

6. The main contention raised by Shri Vinay Kuthiala on behalf of the Revenue is that no scientific research has been carried out as defined in s. 35(1)(iv) and no deduction could have been deducted. He also urges that the definition of scientific research in s. 35 is relevant to decide whether the deduction for scientific research should be allowed under s. 35. It was further contended that this expenditure was not in relation to the business. It was lastly contended that the matter should have been referred to the prescribed authority under s. 35(3) of the Act.

7. Sec. 43(4) defines the scientific research. In sub-cl. (i), scientific research has been defined to mean any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. It is contended on behalf of the Revenue that this is the sole definition of scientific research and sub- cl. (iii) cannot be read in isolation of sub-cl. (i). This argument cannot be accepted. Sec. 43(4) in totality defines scientific research. The definition is comprehensive but the use of the word “include” in every clause of the section clearly implies that the definition is inclusive and not comprehensive. The section in fact gives an example of activities which could be included in scientific research and does not limit the definition of the phrase “scientific research” to any particular item. Therefore, the contention of Shri Vinay Kuthiala that scientific research must be in the fields of natural or applied science, cannot be accepted especially in view of the wording of cl. (iii) of the section wherein legislature in its wisdom has in no uncertain terms stated that references to scientific research related to business shall include any scientific research which may lead to or facilitate an extension of that business.

8. The Andhra Pradesh High Court in CIT vs. Yamuna Digital Electronics (P) Ltd. (1999) 238 ITR 717 (AP) has held as follows : “From a reading of the section, it is clear that it does not say that the expenditure should be wholly and exclusively used for research and development. In the absence of the words ‘wholly and exclusively used for research and development’, in the section contention of the Revenue cannot be accepted. Hence, the expenditure which is of a capital nature as long as it is used for scientific research relating to the business carried on by the assessee, the assessee is entitled for the deduction of the claim.”

9. The word “scientific” has been defined in the Oxford Dictionary as (i) relating to or based on science, (ii) systematic or methodical. The word ‘research’ has been defined in the same dictionary as ‘the systematic investigation into and study of materials and sources in order to establish facts and reach new conclusions’.

10. On a combined reading of the meanings of the aforesaid two words, it is obvious that any methodical or systematic investigation based on science into the study of any materials and sources, is a scientific research. The dismantling of the imported coffee machine with a view to decipher how the said machine functions and also with a view to develop a new model of the machine with the intention of making the said machine suitable to Indian conditions is an investigation based on science and included in the definition of scientific research.

11. When the term scientific research is used in relation to business, it does not have to be a research only in the fields of natural or applied sciences. Clause (iii) of s. 43(4) itself makes it clear that any scientific research which may lead to or facilitate an extension of business is included in the definition of scientific research. Therefore, the investigation done by the assessee to improvise, indigenize and improve the imported machine to suit the Indian market would have resulted in expanding and extending its business and therefore falls within the meaning of the term ‘scientific research’ as defined in s. 43(4)(iii) of the Act. As such, the assessee was entitled for deduction in terms of s. 35(4) wherein any expenditure of capital nature on scientific research is covered. In fact question No. 2 as framed is not proper. We, therefore, answer the question No. 1 in favour of the Revenue by holding that the definition of scientific research in s. 43(4) is relevant to decide the claim under s. 35. However, after holding so, we hold that the activity of the assessee amounted to scientific research and therefore the assessee was entitled to claim deduction of the said amount under ss. 35(1)(i) and (iv).

12. The last contention of Shri Vinay Kuthiala is that only the prescribed authority under s. 35(3) can decide the question as to what activity constitutes scientific research. In support of his contention, he has relied upon a judgment of the Allahabad High Court in J.K. Synthetics Ltd. vs. O.S. Bajpai, ITO & Anr. 1975 CTR (All) 256 : (1976) 105 ITR 864 (All). At the outset, we may note that this contention was neither raised before any of the IT authorities nor was raised in the grounds of appeal and for the first time it was raised at the time of hearing of the matter. We are, therefore, of the view that at this stage the Revenue cannot be permitted to raise this ground. However, we have also considered that aspect of the matter in detail. After referring to s. 35, the Allahabad High Court held as follows : “It is apparent that if the ITO does not accept the claim of the assessee under s. 35, he has to refer the matter to the CBDT and the Board in turn will make a reference to the prescribed authority. The decision of the prescribed authority shall be final. This shows very clearly that neither the ITO nor the Board is competent to take a decision on any such controversy. The controversy has to be referred to the prescribed authority which alone is competent to give a decision. Now, in the instant case, the claim of the assessee was referred to the Board and the Board referred the same to the prescribed authority. Admittedly, the prescribed authority had not given its decision before the impugned assessment order was passed.”

It is apparent from the observations made by the Allahabad High Court that the claim of the assessee had already been referred to the Board and the Board in turn had referred the matter to the prescribed authority. In the present case neither the assessee nor the Revenue ever thought it fit to have the matter referred to the Board. Sec. 35(3) only empowers the Board to refer the matter to the prescribed authority. Under the Act, the AO or the CIT(A) or the Tribunal has no power to directly refer the matter to the Board. How the matter is to be referred to the Board by the IT authorities has not been pointed out to this Court. Shri Vinay Kuthiala, learned counsel for the Revenue has failed to bring to our notice any provision of the Act or the Rules which empowers the AO or other IT authorities to refer the matter to the Board. Once the matter is before the AO, he must decide the same since the Revenue has failed to show us any provision of law vesting the assessing authority with the power to refer the matter to the Board, the assessing authority must decide the matter himself and cannot refer it to the Board.

In our view s. 35(2B)(iii) has no applicability to the facts of the case. This section applies only when the matter goes before the Board and then the Board is bound to refer the matter to the prescribed authority. No such limitation has been placed on the powers of the assessing authority. In our opinion, the assessing authority is the authority to decide the question as to whether the amount claimed as deduction for scientific research is an amount spent for scientific research or not.

In view of the above discussion, the appeal filed by the Revenue is rejected.

[Citation : 327 ITR 392]