Asst. Comm. of Income-tax, ciecle-1,, Solapur v. M/s. Balaji Amines Pvt. Ltd.,, Solapur

ITA 1456/PUN/2011 | 2007-2008
Pronouncement Date: 30-04-2014 | Result: Dismissed

Appeal Details

RSA Number 145624514 RSA 2011
Assessee PAN AABCB1049E
Bench Pune
Appeal Number ITA 1456/PUN/2011
Duration Of Justice 2 year(s) 5 month(s) 8 day(s)
Appellant Asst. Comm. of Income-tax, ciecle-1,, Solapur
Respondent M/s. Balaji Amines Pvt. Ltd.,, Solapur
Appeal Type Income Tax Appeal
Pronouncement Date 30-04-2014
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 30-04-2014
Date Of Final Hearing 10-12-2013
Next Hearing Date 10-12-2013
Assessment Year 2007-2008
Appeal Filed On 21-11-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV JUDICIAL MEMBER AND SHRI R.K. PANDA ACCOUNTANT MEMBER ITA NO.1448/PN/2011 (ASSESSMENT YEAR : 2007-08) BALAJI AMINES LIMITED BALAJI BHAVAN 165A RAILWAY LINES SOLAPUR-413001 MAHARASHTRA PAN NO.AABCB1049E .. APPELLANT VS. ADDL.CIT RANGE-1 SOLAPUR .. RESPONDENT ITA NO.1456/PN/2011 (ASSESSMENT YEAR : 2007-08) ACIT CIRCLE-1 SOLAPUR .. APPELLANT VS. M/S. BALAJI AMINES PVT. LTD. 165A RAILWAY LINES SOLAPUR-413001 PAN NO. AABCB1049E .. APPELLANT ITA NO.582/PN/2012 (ASSESSMENT YEAR : 2008-09) M/S. BALAJI AMINES LTD. 164A RAILWAY LINES SOLAPUR PAN NO. AABCB1049E .. APPELLANT VS. JCIT RANGE-1 SOLAPUR .. RESPONDENT ITA NO.823/PN/2012 (ASSESSMENT YEAR : 2008-09) ACIT CIRCLE-1 SOLAPUR .. APPELLANT VS. M/S. BALAJI AMINES PVT. LTD. 165A RAILWAY LINES SOLAPUR-413001 PAN NO. AABCB1049E .. RESPONDENT 2 ITA NO.718/PN/2013 (ASSESSMENT YEAR : 2009-10) M/S. BALAJI AMINES PVT. LTD. 165A RAILWAY LINES SOLAPUR-413001 PAN NO. AABCB1049E .. APPELLANT VS. JCIT RANGE-1 SOLAPUR .. RESPONDENT ASSESSEE BY : SHRI VEMULAPATI SRIDHAR REVENUE BY : SHRI P.L. PATHDE DATE OF HEARING : 25-03-2014 DATE OF PRONOUNCEMENT : 30-04-2014 ORDER PER R.K. PANDA AM : ITA NO.1448/PN/2011 FILED BY THE ASSESSEE AND ITA N O.1456/PN/2011 FILED BY THE REVENUE ARE CROSS APPEALS AND ARE DIRE CTED AGAINST THE ORDER DATED 31-01-2011 OF THE CIT(A)-III PUNE RELATING TO ASSE SSMENT YEAR 2007-08. ITA NO.582/PN/2012 FILED BY THE ASSESSEE AND ITA NO 823/PN/2012 FILED BY THE REVENUE ARE CROSS APPEALS AND ARE DIRECTED AGAI NST THE ORDER DATED 31-01- 2012 OF THE CIT(A)-III PUNE RELATING TO ASSESSMENT YEAR 2008-09. ITA NO.718/PN/2013 FILED BY THE ASSESSEE IS DIRECTED AG AINST THE ORDER DATED 16- 11-2012 OF THE CIT(A)-III RELATING TO ASSESSMENT YE AR 2009-10. FOR THE SAKE OF CONVENIENCE ALL THESE APPEALS WERE HEARD TOGETH ER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO.1448/PN/2011 (BY ASSESSEE) (A.Y. 2007-08) : 2. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESS ING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED FROM THE COMPUTATION OF TOTAL INCOME THAT THE ASSESSEE HAS CLAIMED EXPENDITURE U/ S.35 OF THE IT. ACT 3 AMOUNTING TO RS.2 75 21 629/-. ACCORDING TO THE ASS ESSING OFFICER THOUGH THE ASSESSEE WAS CALLED UPON TO FURNISH THE RELEVAN T SUPPORTING DETAILS SUCH AS THE NATURE OF THE EXPENDITURE IN DETAIL EVIDENCE F OR PURCHASE OF RAW MATERIAL STOCK REGISTER OF RAW MATERIAL CONSUMED ETC. THE A SSESSEE FAILED TO FURNISH SUCH DETAILS. IT IS ALSO HIGHLIGHTED BY THE ASSESSI NG OFFICER THAT IN THE E-RETURN FILED BY THE ASSESSEE NO CLAIMS HAVE BEEN MADE IN THE ESR SCHEDULE RELATING TO DEDUCTION U/S.35. THE ASSESSING OFFICER ALSO NOT ED THAT THE EXPENDITURE IN RESPECT OF RAW-MATERIAL ON ACCOUNT OF. R&D WAS OVER AND ABOVE THE TOTAL EXPENDITURE CLAIMED ON RAW MATERIAL REPORTED IN THE STATUTORY AUDIT REPORT. IN THE ABSENCE OF THE RELEVANT SUPPORTING DETAILS THE ASSESSING OFFICER CAME TO CONCLUSION THAT THE ASSESSEE HAS NOT ESTABLISHED TH AT THIS EXPENDITURE WAS ACTUALLY INCURRED OVER AND ABOVE THE EXPENDITURE ON RAW MATERIAL ALREADY DEBITED IN THE AUDITED AND PROFIT & LOSS A/C AND TH EREFORE THE CLAIM COULD NOT BE ACCEPTED. ACCORDINGLY THE EXPENDITURE CLAIMED O N THIS ACCOUNT AMOUNTING TO RS.2 75 21 629/- WAS DISALLOWED BY HIM. 3. BEFORE THE CIT(A) IT WAS SUBMITTED THAT PROPER E XPLANATION IN RESPECT OF THIS EXPENDITURE WAS FURNISHED BEFORE THE ASSESS ING OFFICER WHICH APART FROM THE EXPLANATIONS ABOUT THE ACTIVITIES OF THE C OMPANY INCLUDED BILLS FOR PURCHASES CENVAT RECORDS GIVING THE QUANTITATIVE P ARTICULARS THE LEDGER EXTRACTS THE CENVAT AND VAT RETURNS. THEREFORE T HE ASSESSING OFFICER SHOULD NOT HAVE COMMENTED THAT THE ASSESSEE HAS FAI LED TO PRODUCE THE RECORDS. SO FAR AS THE DISALLOWANCE OF EXPENDITURE U/S.35 WAS CONCERNED THE ASSESSEE SUBMITTED THAT THE EXPENDITURE CLAIMED U/ S.35 IS OVER AND ABOVE THE EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT AND THE CLAIM U/S.35 INFACT REPRESENTS THE VALUE OF THE CLOSING STOCK ACCOUNTED FOR IN THE BALANCE SHEET. IT WAS SUBMITTED THAT THE ASSESSING OFFICER COULD NOT UNDERSTAND THE DIFFERENCE 4 BETWEEN THE CONSUMPTION OF RAW MATERIAL ON ACCOUNT OF REGULAR MANUFACTURING ACTIVITY AS AGAINST RAW MATERIAL PURCHASES FOR THE PURPOSE OF RESEARCH AND DEVELOPMENT. WHILE FORMER IS EXPENDITURE ALLOWABLE U/S.37 THE LATTER IS A CLAIM ALLOWABLE TO THE ASSESSEE U/S.35. THE ASSESS EE ACCORDINGLY HAS CLAIMED THE DEDUCTION U/S.35 WHICH IS A PROVISION FOR THE B ENEFIT OF THE ASSESSEE AND THE REVENUE SHOULD NOT DEPRIVE THE ASSESSEE OF THE BENEFIT OF THE DEDUCTION EVEN IF THE ASSET IS NOT PUT TO USE IN THAT YEAR. RELYING ON VARIOUS DECISIONS IT WAS SUBMITTED THAT THE ASSESSEE HAS CORRECTLY CLAIM ED THE DEDUCTION U/S.35 ON AN OUTLAY BASIS WHICH SHOULD BE ALLOWED. 4. HOWEVER THE LD.CIT(A) WAS NOT SATISFIED WITH TH E EXPLANATION GIVEN BY THE ASSESSEE AND UPHELD THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER : 6.3 THE CONTENTIONS RAISED BY THE APPELLANT ARE CARE FULLY EXAMINED WITH REFERENCE TO THE PROVISIONS OF SEC. 35 AS APPLICABLE TO THE YEAR UNDER APPEAL AND THE MATERIAL PLACED ON RECORD. TO RESOLVE THE ISSU E IT IS NECESSARY TO REFER TO THE RELEVANT PROVISIONS OF SEC. 35 WHICH READ AS UN DER: 'EXPENDITURE ON SCIENTIFIC RESEARCH: (1) IN RESPECT OF EXPENDITURE ON SCIENTIFIC RESEARCH THE FOLLOWING DEDUCTIONS SHALL BE ALLOWED (I) ANY EXPENDITURE (NOT BEING IN THE NATURE OF CAP ITAL EXPENDITURE) LAID OUT OR EXPENDED ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS. EXPLANATION: WHERE ANY SUCH EXPENDITURE HAS BEEN LAID OUT OR EXPENDED BEFORE THE COMMENCEMENT OF THE BUSINESS (NOT BEING EXP ENDITURE LAID OUT OR EXPENDED BEFORE THE 1ST DAY OF APRIL 1973) O N 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 AGGREGAT E OF THE EXPENDITURE SO LAID OUT OR EXPENDED WITHIN THE THREE YEARS IMMEDIATELY PRECEDING THE COMMENCEMENT OF THE BUSINESS SHALL TO T HE EXTENT IT IS CERTIFIED BY THE PRESCRIBED AUTHORITY TO HAVE BEEN L AID OUT OR EXPENDED ON SUCH SCIENTIFIC RESEARCH BE DEEMED TO HAVE BEEN LA ID OUT OR EXPENDED IN THE PREVIOUS YEAR IN WHICH THE BUSINESS IS C OMMENCED; FROM A BARE READING OF THE ABOVE PROVISIONS OF SEC. 35 (1)(I) IT IS CLEAR THAT A DEDUCTION IS ADMISSIBLE IN RESPECT OF ANY EXPENDITURE NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE LAID OUT OR EXPENDED ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS OF THE ASSESSEE. IN THE PRESENT CA SE IN SO FAR AS THE EXPENDITURE DEBITED TO THE PROFIT & LOSS A/C BY WAY OF ACTUAL CONSUMPTION OF RAW MATERIAL USED IN THE SCIENTIFIC RESEARCH DURING TH E YEAR IS CONCERNED THERE IS NO CONTROVERSY AND THE DEDUCTION TO THAT EXT ENT WAS ALLOWED BY THE A.O. THE DISPUTE IS ONLY IN RESPECT OF THE DEDUCTION C LAIMED BY THE APPELLANT UNDER SEC. 35(1)(I) IN THE COMPUTATION OF TOTAL INCO ME OVER AND ABOVE THE EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT A ND THIS EXCESS 5 EXPENDITURE OF RS.2 75 21 629/- REPRESENTS THE VALUE O F THE CLOSING STOCK OF RAW MATERIAL ACCOUNTED FOR IN THE BALANCE SHEET. IT IS ARGUED BY THE APPELLANT IS THAT WHEN A MATERIAL IS PURCHASED FOR RESEARCH AND D EVELOPMENT PURPOSE IT IS IMMATERIAL WHETHER THE MATERIAL IS CONSUMED DUR ING THE YEAR OR HELD AS CLOSING STOCK AND THE ENTIRE EXPENDITURE INCURRED ON RAW MATERIAL FOR THE PURPOSE OF RESEARCH AND DEVELOPMENT QUALIFIES FOR DEDU CTION U/S.35 IRRESPECTIVE OF THE ACCOUNTING TREATMENT OF THE SAME IN THE BOOKS OF ACCOUNT OF THE APPELLANT. ACCORDING TO THE APPELLANT WHETH ER THE ASSET IS PUT TO USE OR NOT AS LONG AS IT IS FOR THE PURPOSE OF RESEARCH & D EVELOPMENT THE SAME SHOULD BE ALLOWED AS EXPENDITURE AND DEDUCTION UNDER THE SECTION. IT IS ALSO ARGUED BY THE LD. COUNSEL THAT WHEN IT COMES TO RESEAR CH & DEVELOPMENT THE PRINCIPLE OF MATCHING INCOMES WITH EXPENDITURES F OR THE YEAR IS NOT APPLICABLE AS THE EXPENDITURE IN CONNECTION WITH RESE ARCH & DEVELOPMENT IS ALLOWED U/S.35 WHICH IS A SEPARATE CODE IN ITSELF AND THE APPELLANT SUBMITS THAT ANY EXPENDITURE LAID OUT FOR THE PURPOSE OF RESE ARCH & DEVELOPMENT SHOULD BE ALLOWED ON 'OUTLAY BASIS' RATHER THAN ON CON SUMPTION BASIS. THE CONTENTIONS OF THE APPELLANT ARE NOT LEGALLY SUSTAINAB LE. IN THE FIRST PLACE IT IS TO BE MENTIONED THAT IN NOTES FORMING PART OF ACCOUN TS (SCHEDULE 19) OF THE ANNUAL ACCOUNTS IT IS CLEARLY STATED IN NOTE (F) THAT THE REVENUE EXPENDITURE ON RESEARCH AND DEVELOPMENT IS CHARGED TO PROFIT AND LOSS ACCOUNT IN THE YEAR IN WHICH IT IS INCURRED. THIS NOTE CLEARLY INDIC ATES THAT WHATEVER REVENUE EXPENDITURE IS INCURRED ON RESEARCH AND DEVEL OPMENT IN A PARTICULAR YEAR THE SAME IS CHARGED TO THE P & L ACC OUNT OF THAT YEAR. THE CLAIM OF THE APPELLANT IS THAT IN ADDITION TO THIS EX PENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT PURCHASES OF RAW MATERIAL MADE DURING THE YEAR AND MEANT FOR R&.D WHICH REMAINED IN THE CLOSING STOCK WI THOUT CONSUMPTION SHOULD ALSO BE ALLOWED AS DEDUCTION UNDER SEC. 35 ON ' OUTLAY BASIS'. BUT UNLESS SUCH RAW MATERIAL IS ACTUALLY USED IN SCIENTIFIC R ESEARCH DURING THE YEAR IT CANNOT BE SAID THAT THE EXPENDITURE ON PURC HASE OF RAW MATERIAL FOR R & D WAS LAID OUT OR EXPENDED ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS. THIS VIEW IS SUPPORTED BY THE EXPRESSION ON THE PURCHASE OF MATERIALS USED IN SUCH SCIENTIFIC RESEARCH' EMPLOYED IN THE EXPLANATION TO SEC. 35(1)(I). THOUGH THIS CLAUSE IN THE EXPLANATION I S APPLICABLE IN CASE OF SUCH EXPENDITURE LAID OUT OR EXPENDED BEFORE THE COM MENCEMENT OF THE BUSINESS THE INTENTION OF THE LEGISLATURE IS VERY CLEAR THAT EVEN AFTER THE COMMENCEMENT OF BUSINESS IN CASE OF PURCHASES OF MATERIA L MEANT FOR THE PURPOSE OF R & D THE EXPENDITURE IS ADMISSIBLE AS DEDUC TION ONLY WHEN THE MATERIAL IS ACTUALLY USED OR CONSUMED IN SCIENTIFIC RESE ARCH DURING THE YEAR. IN ITS SUBMISSIONS DATED 27.12.2010 THE APPELLANT CONVE NIENTLY IGNORED THE EXPRESSION USED IN THE EXPLANATION WHILE REFERRING TO THE EXPLANATION. THE ACTUAL USER OR CONSUMPTION OF MATERIAL FOR SCIENTIFIC RESEARCH DURING THE YEAR IS A CONDITION PRECEDENT FOR ALLOWING SUCH EXPEN DITURE ON MATERIALS AS DEDUCTION UNDER SEC. 35(1)(I). THIS POSITION IS ALSO IN LINE WITH THE METHOD OF ACCOUNTING BEING FOLLOWED BY THE APPELLANT IN RESPEC T OF REVENUE EXPENDITURE ON R & D. IN THE CASE OF THE APPELLANT ADMITTEDLY THE MATERIAL INVOLVED WAS NOT USED DURING THE YEAR AND REMAINING A S CLOSING STOCK IN THE ACCOUNTS OF THE APPELLANT COMPANY AND THEREFORE THE EXPENDITURE ON PURCHASES OF MATERIAL TO THAT EXTENT IS NOT AN ALLOWA BLE DEDUCTION UNDER SEC. 35(1)(I). IF THE CONTENTION OF THE APPELLANT THAT D EDUCTION IS ALLOWABLE ON 'OUTLAY BASIS' IRRESPECTIVE OF USER OF THE MATERIAL FOR R & D WERE TO BE ACCEPTED EVEN THE ADVANCES MADE FOR PURCHASES OF RAW MATERIAL MEANT FOR R & D HAVE TO BE ALLOWED AS DEDUCTION EVEN IF THE MA TERIAL IS NOT SUPPLIED OR RECEIVED DURING THE YEAR WHICH IS NOT THE INTENTION OF THE LEGISLATURE IN PROVIDING FOR SUCH DEDUCTION. 6.3.1 TURNING TO THE DECISIONS RELIED UPON BY THE APP ELLANT IN THE CASE OF GUJARAT ALUMINIUM EXTRUSIONS PVT. LTD. (263 ITR 453) THE GUJARAT HIGH COURT OBSERVED THAT THE TRIBUNAL WAS RIGHT IN HOLDING THAT DEDUCTION UNDER SECTION 35(2) IS ALLOWABLE ON CAPITAL EXPENDITURE FOR BUILDI NG WHICH IS UNDER CONSTRUCTION AND IS NOT PUT TO USE FOR RESEARCH AND DEV ELOPMENT PURPOSE. IT WAS OBSERVED THAT WHEN THE LEGISLATURE HAS NOT EXPECTE D THE ASSESSEE TO PUT 6 THE ASSET TO ACTUAL USE IT WILL NOT BE OPEN TO THE RE VENUE TO DEPRIVE THE ASSESSEE OF THE BENEFIT OF DEDUCTION UNDER THE PROVISION S OF SECTION 35 IF THE ASSET IS NOT USED IN THE PREVIOUS YEAR IN WHICH THE CAP ITAL EXPENDITURE IS INCURRED. IT WAS ALSO OBSERVED THAT THE DEDUCTION IS GI VEN NOT ON THE COUNT OF USER. IN THE CASE OF CIT VS. H.M.T. LTD. 203 ITR 811( KAR) AND 199 ITR 235 (KAR) FOLLOWING THE DECISION OF HIGH COURT IN RAVI MACHINE TOOLS (P.) LTD V. CIT 114 ITR 459 THE KARNATAKA HIGH COURT HELD THAT THE TRIBUNAL WAS RIGHT IN ALLOWING THE ASSESSEE'S CLAIM FOR DEDUCTION UNDER SECTION 35(1)(IV) IN RESPECT OF THE VALUE OF CAPITAL WORK-IN-PROGRESS MACHINERY A ND EQUIPMENT IN TRANSIT AND UNDER ERECTION AT THE ASSESSEE'S RESEARCH AND DEVELOP MENT DIVISION. ALL THESE DECISIONS WERE RENDERED IN THE CONTEXT OF DEDUC TION OF CAPITAL EXPENDITURE CLAIMED UNDER CLAUSE (IV) OF SEC. 35(1) WHICH DOES NOT CONTAIN THE SIMILAR EXPRESSION 'PURCHASE OF MATERIALS USED' AS IN THE CASE OF EXPLANATION TO CLAUSE (I). THEREFORE IN MY HUMBLE O PINION THE RATIO OF THESE DECISIONS CANNOT BE APPLIED IN CASE OF REVENUE EXPENDI TURE CLAIMED AS DEDUCTION UNDER CLAUSE (I) OF SEC. 35(1). 6.3.2 THE OTHER ARGUMENT CANVASSED BY THE LD. COUNSEL IS THAT THE PROVISIONS OF SEC. 35 INTENDED TO ENCOURAGE INDIGENOUS SCIENTIF IC RESEARCH SHOULD BE INTERPRETED IN A LIBERAL WAY SO AS TO ADVANCE THE OBJ ECT FOR WHICH THE BENEFICIAL LEGISLATION IS INTRODUCED IN THE STATUTE. T HIS CONTENTION OF APPELLANT ALSO CANNOT BE ACCEPTED. IT IS TRUE THAT SUCH PROVISION S SHOULD BE LIBERALLY CONSTRUED BUT IT DOES NOT MEAN THAT SUCH LIBERAL CONSTR UCTION SHOULD BE MADE DOING VIOLENCE TO THE PLAIN MEANING OF SUCH PROVISION . WHEN THE ADMISSIBILITY OF DEDUCTION UNDER SEC 35(1)(I) IS CIRCUMSCRIBED BY C ERTAIN CONDITIONS INCLUDING USER OF MATERIAL PURCHASED DURING THE YEAR IT CANNOT BE SAID THAT THE DEDUCTION SHOULD BE ALLOWED BY LIBERAL CONSTRUCTI ON OR INTERPRETATION OF SUCH PROVISIONS EVEN WHEN BASIC CONDITIONS FOR DEDUCTIO N ARE NOT FULFILLED. IN THIS CONNECTION REFERENCE CAN BE MADE TO THE DECISIO N OF THE APEX COURT IN THE CASE OF PATEL ENGINEERING CONSTRUCTION (P) LTD. V S. CBDT REPORTED IN 175 ITR 523 WHEREIN IT IS OBSERVED AS UNDER:- ' .... IT IS TRUE THAT AN EXEMPTION PROVISION SHOULD BE LI BERALLY CONSTRUED BUT THIS DOES NOT MEAN THAT SUCH LIBERAL CONSTRUCTION SHOULD BE MADE DOING VIOLENCE TO THE PLAIN MEANING OF SUCH EXEMPTION PROVISION. LIBERAL CONSTRUCTION WILL BE MADE WHENEVER IT IS POSSIBLE TO BE MADE WITHOUT IMPAIRIN G THE LEGISLATIVE REQUIREMENT AND THE SPIRIT OF THE PROVISION. ... ' FURTHER THIS IS NOT A CASE WHERE THE APPELLANT IS PERM ANENTLY DEPRIVED OF THE BENEFIT AVAILABLE UNDER SEC. 35. THE PURCHASES OF MATE RIAL NOT USED DURING THE YEAR FOR SCIENTIFIC RESEARCH AND LYING IN THE CLOSING STOCK ARE CARRIED FORWARD TO NEXT YEAR AS OPENING STOCK IN THE BOOKS OF A/C AND DEDUCTION IS ADMISSIBLE IN THE NEXT YEAR IF THE MATERIAL IS USED FOR THE PURP OSE OF R&D. 6.3.3 FOR THE FOREGOING REASONS I AM OF THE CONSIDERE D VIEW THAT THE APPELLANT IS NOT ENTITLED TO DEDUCTION U/S.35(1)(I) C LAIMED IN THE COMPUTATION OF TOTAL INCOME IN RESPECT OF PURCHASES OF MATERIAL ME ANT FOR R&D BUT WHICH WERE LYING AS CLOSING STOCK AND NOT ACTUALLY USED DURI NG THE YEAR FOR SCIENTIFIC RESEARCH AND DEVELOPMENT. ACCORDINGLY THE DISALLOWA NCE OF RS.2 75 21 629/- MADE BY THE AO ON THIS GROUND IS UPHELD. 5. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSE SSEE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 1. THE APPELLANT SUBMITS THAT THE LEARNED COMMISSIONE R OF INCOME TAX (APPEALS) ERRED IN SUSTAINING THE ADDITION MADE BY TH E ASSESSING OFFICER ON ACCOUNT OF R &D MATERIALS. 7 2. THE APPELLANT SUBMITS THAT THE LEARNED COMMISSIONE R OF INCOME TAX (APPEALS) OUGHT TO HAVE ALLOWED THE CLAIM OF THE APP ELLANT ON ACCOUNT OF R&D MATERIALS UNDER SECTION 35 OF THE INCOME TAX ACT 1961. 3. THE APPELLANT PRAYS TO SUBMIT THAT THE LEARNED CO MMISSIONER OF INCOME TAX (APPEALS) MISINTERPRETED THE PROVISIONS OF SECTION 3 5 A SECTION EXTENDING BENEFIT OF R&D EXPENDITURE TO AN ASSESSEE AND AS SUCH SHOULD HAVE TAKEN A LIBERAL INTERPRETATION BENEFICIAL TO T HE APPELLANT. 4. THE APPELLANT SUBMITS THAT THE LEARNED COMMISSIONE R OF INCOME TAX (APPEALS) FAILED TO DISTINGUISH THE DIFFERENCE BETWEEN EXPENDITURE ALLOWABLE UNDER SECTION 37 OF THE INCOME TAX ACT VIS -A-VIS THE EXPENDITURE ALLOWABLE UNDER SECTION 35 OF THE ACT. 5. ON THE BASIS OF THE ABOVE AND ANY ADDITIONAL GRO UNDS THAT MAY BE PERMITTED TO BE RAISED IN THE COURSE OF THE APPELLATE PROCEEDINGS THE APPELLANT PRAYS THAT THE CLAIM OF APPELLANT OF RS.2 7 5 21 629/- BEING EXPENDITURE ON R&D UNDER SECTION 35 OF THE ACT BE ALLOWED. 6. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SAME ARGUMENTS AS MADE BEFORE THE CIT(A). HE SUBMITTED THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF SPECIALITY CHEM ICALS AND INTERMEDIATES. THE ASSESSEE COMPANY PURCHASED CERTAIN RAW MATERIAL S FOR CARRYING OUT RESEARCH AND DEVELOPMENT WORK AND DEBITED TO THE PR OFIT AND LOSS ACCOUNT THE AMOUNT OF RAW MATERIAL CONSUMED OUT OF THE SAID PUR CHASES AND REMAINING AMOUNTS WERE SHOWN AS STOCK OF RAW MATERIALS ON HAN D UNDER THE HEAD INVENTORIES IN THE BALANCE SHEET. THE ASSESSEE C LAIMED DEDUCTION U/S.35 IN THE COMPUTATION OF TOTAL INCOME WITH PROPER EXPLANA TION IN RESPECT OF THIS STOCK ON HAND RELATING TO R&D MATERIALS. UNDISPUTE DLY THE DEDUCTION OF RS.2 75 21 629/- REPRESENTS THE VALUE OF STOCK OF M ATERIALS RELATING TO RAW MATERIALS SHOWN AS CURRENT ASSETS IN THE BALANCE SHEET. HOWEVER THERE WAS NO OPENING STOCK OF RAW MATERIALS USED FOR THE PURP OSE OF R&D FOR THE YEAR UNDER CONSIDERATION. HE SUBMITTED THAT THE ASSESSE E FOLLOWS THE METHOD OF ACCOUNTING ACCORDING TO WHICH THE EXPENDITURE PERTA INING TO R&D ACTIVITY IS ALLOWABLE ON OUTFLOW OR LAID OUT BASIS U/S.35 OF TH E I.T. ACT AS AGAINST THE MERCANTILE/ACCRUAL METHOD OF ACCOUNTING REGULARLY E MPLOYED IN ARRIVING AT THE PROFITS OF THE BUSINESS FOR THE YEAR. 8 6.1 HE SUBMITTED THAT THE CLOSING STOCK CLAIMED U/S .35 FOR THE YEAR ENDED 31-03-2007 FORMS PART OF THE OPENING STOCK FOR THE SUBSEQUENT YEAR I.E. A.Y. 2008-09 IN ACCORDANCE WITH THE REGULAR METHOD OF AC COUNTING EMPLOYED BY THE ASSESSEE AND CONSEQUENTLY GETS DEDUCTED FROM TH E PROFITS OF THE SUBSEQUENT YEAR. THEREFORE THE SAID AMOUNT BECOMES DOUBLE DEDUCTION ONCE U/S.35 IN COMPUTATION OF TOTAL INCOME FOR THE YEAR ENDED 31-03-2007 AND AGAIN FOR THE YEAR ENDED 31-03-2008 ON ACCOUNT OF I TS INCLUSION IN THE OPENING STOCK. TO SET OFF THIS DOUBLE DEDUCTION THE ASSESS EE ADDED BACK THE CLAIM MADE IN 2007 IE. 2007-08 TO THE TOTAL INCOME OF TH E SUBSEQUENT YEAR I.E. A.Y. 2008-09 AND THIS METHOD IS BEING FOLLOWED CONSISTEN TLY. HE SUBMITTED THAT SECTION 35 IS A SECTION INTENDED TO GIVE A BOOST TO R&D ACTIVITY AND TO ENCOURAGE COMPANY FROM TAKING UP R&D ACTIVITIES TO THEIR BUSINESS AND DEVELOP INDIGENOUS TECHNOLOGY. THIS INTENSION OF T HE LEGISLATURE IS CLEARLY STATED AND EXPLAINED IN CBDT CIRCULARS ISSUED EXPLA INING THE PROVISIONS/AMENDMENTS MADE U/S.35 FROM TIME TO TIME . 6.2 REFERRING TO THE DECISION OF THE HONBLE KARNAT AKA HIGH COURT IN THE CASE OF CIT VS. HMT LTD. REPORTED IN 199 ITR 235 HE SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DECISION FOLLOWING ITS DECISION IN THE CASE OF RAVI MACHINE TOOLS PVT. LTD. VS. CIT REPORTED IN 11 4 ITR 459 HAS HELD THAT EVEN WHEN MACHINERY AND EQUIPMENT MEANT FOR R&D INC LUDING MACHINERY IN TRANSIT AND CAPITAL REPRESENTED BY WORK IN PROGRESS (NOT PUT TO USE) IN ASSESSEES RESEARCH ARE TO BE ALLOWED AS DEDUCTION U/S.35 OF THE INCOME TAX ACT. 6.3 REFERRING TO THE DECISION OF THE HONBLE KARNAT AKA HIGH COURT IN THE CASE OF CIT VS.HMT LTD. (1) REPORTED IN 203 ITR 811 HE SUBMITTED THAT THE 9 HONBLE HIGH COURT IN THE SAID DECISION HAS HELD TH AT THE TRIBUNAL WAS RIGHT IN LAW IN ALLOWING THE ASSESSEES CLAIM FOR DEDUCTION U/S.35(1)(IV) OF THE I.T. ACT IN RESPECT OF THE VALUE OF THE CAPITAL WORK IN PROG RESS MACHINERY AND EQUIPMENT IN TRANSIT AND UNDER ERECTION AT THE ASSE SSEES R&D DIVISION. 6.4 REFERRING TO THE DECISION OF THE HONBLE GUJARA T HIGH COURT IN THE CASE OF CIT VS. GUJARAT ALUMINUM EXTRUSIONS PVT. LTD. RE PORTED IN 263 ITR 453 HE SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAI D DECISION HAS HELD THAT CAPITAL EXPENDITURE FOR BUILDING UNDER CONSTRUCTION NOT PUT TO USE FOR R&D PURPOSE WAS ALLOWABLE U/S.35. 6.5 REFERRING TO THE DECISION OF THE MUMBAI BENCH O F THE TRIBUNAL IN THE CASE OF HINDUSTAN CONSTRUCTION COMPANY LTD. VS. DCI T REPORTED IN 140 ITD 642 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECI SION HAS HELD THAT CAPITAL EXPENDITURE EVEN THOUGH NOT CAPITALISED IN THE BOOK S OF ACCOUNT AND EVEN THOUGH NOT PUT TO USE IS AN ALLOWABLE EXPENDITURE U /S.35. REFERRING TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF CIT VS. PANACIA BIOTECH LTD. REPORTED IN 183 TAXMANN 212 (DELHI) H E DREW THE ATTENTION OF THE BENCH TO THE FOLLOWING OBSERVATION OF THE HONB LE HIGH COURT : IT WAS NOT DISPUTED BY THE REVENUE THAT THE BOOKS OF ACCOUNTS WERE MAINTAINED BY THE ASSESSEE ON MERCANTILE BASIS THIS WA S ALSO THE CONCURRENT FINDING OF THE LOWER AUTHORITIES. IN THE MERCANTILE METHOD OF ACCOUNTING INCURRING OF EXPENDITURE IS NOT BASED ON PAYMENT BUT ON THE LIABILITY TO PAY. ONCE THE GOODS HAD BEEN PURCHASED THE INVOICES RAISED AND THE PURCHASE CONSIDERATION ACCOUNTED FOR IN THE BOOKS OF THE ASSESSEE THE EXPENDITURE COULD BE SAID TO HAVE BEEN INCURRED AS PER THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. HENCE THE TRIBUNAL WAS JUSTIFIED IN A LLOWING THE EXPENDITURE. 6.6 IN VIEW OF THE ABOVE DECISIONS HE SUBMITTED TH AT THE PROVISIONS OF SECTION 35 SHOULD BE GIVEN LIBERAL INTERPRETATION I N TUNE WITH THE INTENSION OF THE LEGISLATURE BEHIND THE PROVISION. HE SUBMITTED THAT ALTHOUGH THE ABOVE 10 DECISIONS ARE IN CONNECTION WITH THE CAPITAL EXPEND ITURE RELATING TO R&D OF AN ASSESSEE HOWEVER THE SAME RATIO SHOULD BE APPLIED TO THE REVENUE EXPENDITURE ALSO. HE SUBMITTED THAT THE PURCHASES O F RAW MATERIALS INTENDED FOR R&D USE CARRIED OUT BY THE ASSESSEE SHOULD BE A LLOWED IN THE YEAR IN WHICH SUCH PURCHASES WERE MADE. THE CLOSING STOCK REMAINING FROM THE PURCHASES IF ANY BEING THE OPENING STOCK IN THE S UBSEQUENT YEAR WOULD NOT BE ALLOWABLE IN THAT YEAR. HE SUBMITTED THAT MERELY B ECAUSE THE ASSESSEE HAS SHOWN THE PART OF THE MATERIAL USED FOR RESEARCH AN D DEVELOPMENT ACTIVITIES IN THE INVENTORY SHOULD NOT BE THE BASIS TO DISALLOW T HE CLAIM OF DEDUCTION U/S.35 OF THE ACT AND THE ASSESSEE SHOULD BE GIVEN THE DED UCTION ON ACCOUNT OF EXPENDITURE ON PURCHASE OF MATERIALS USED IN THE R& D. HE ACCORDINGLY SUBMITTED THAT THE CLAIM OF DEDUCTION MADE BY THE A SSESSEE SHOULD BE ALLOWED IN FULL. 7. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITE BEFORE US. THERE IS NO DISPUTE RELA TING TO THE GENUINENESS OF THE PURCHASE OF RAW MATERIALS FOR RESEARCH AND DEVELOPM ENT ACTIVITIES. THE ONLY DISPUTE IS REGARDING ALLOWABILITY OF THE CLAIM OF D EDUCTION U/S.35 IN THE COMPUTATION OF INCOME OF THE R&D MATERIAL INCLUDED IN THE STOCK OF MATERIAL. 8.1 IT IS THE CASE OF THE ASSESSEE THAT WHATEVER MA TERIAL PURCHASED DURING THE YEAR FOR RESEARCH AND DEVELOPMENT ACTIVITIES A LTHOUGH NOT PUT TO USE DURING THE YEAR HAS TO BE ALLOWED AS DEDUCTION/S.3 5. IT IS THE CASE OF THE 11 REVENUE THAT THE ASSESSEE IS NOT ENTITLED TO DEDUCT ION U/S.35(1) ON ACCOUNT OF PURCHASE OF RAW MATERIAL MEANT FOR R&D WHICH WERE N OT ACTUALLY USED FOR SCIENTIFIC RESEARCH AND DEVELOPMENT BUT WERE LYING AS CLOSING STOCK. 8.2 WE FIND THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. H.M.T. LTD. NO.1 (SUPRA) HAS OBSERVED AS UNDER : RE : QUESTION NO. 5: THE SUM OF RS. 44 10 303 ADMITTEDLY IS THE VALUE OF CAPITAL ASSETS RELATING TO SCIENTIFIC RESEARCH. WHILE WORKING OUT THE DEDUCTION UNDER SECTION 80J OF THE ACT IN RESPECT OF THE WATCH FACTORY OF THE ASSESSEE THI S WAS SOUGHT TO BE EXCLUDED BY THE REVENUE ON THE GROUND THAT THE TERM ACTUAL COST' USED IN SECTION 80J(1A)(II)(II) HAS TO BE UNDERSTOOD IN THE MA NNER STATED IN SECTION 43(1) AND FOR THIS PURPOSE EXPLANATION 1 TO SECTION 43 (1) ALSO WILL HAVE TO BE CONSIDERED. THIS EXPLANATION IN TURN REFERS TO SECTION 32(1)(II) WHICH PROVIDES FOR DEPRECIATION ON BUILDINGS MACHINERY PLANT OR F URNITURE OWNED BY THE ASSESSEE AND USED FOR THE PURPOSES OF THE BUSINESS ETC. ACCO RDING TO THE REVENUE WHEN AN ASSET IS USED IN THE BUSINESS AFTER IT CE ASES TO BE USED FOR SCIENTIFIC RESEARCH RELATED TO THAT BUSINESS THE ACTUAL COST OF THE ASSET TO THE ASSESSEE WHEN THE SAID ASSET IS USED IN THE BUSINESS THEREAFTE R WILL BE THE VALUE DERIVED AFTER DEDUCTING THE DEPRECIATION GRAN TED TO THE SAID ASSET WHEN IT WAS USED FOR SCIENTIFIC RESEARCH. SECTION 35 PROVIDES FOR THE EXPENDITURE ON SCIENTIFIC RESEARCH AND AS PER SUB CLAUSE (IV) OF SECTION 35(1) IN RESPECT OF EXPENDITUR E ON SCIENTIFIC RESEARCH ANY EXPENDITURE OF A CAPITAL NATURE ON SCIENTIFIC RE SEARCH IS ALLOWED WHEN IT IS RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE AND SU B SECTION (2) PROVIDES FOR THE COMPUTATION OF THE DEDUCTION. WHEN AN ASSESSEE USES THE ASSETS FOR SCIENTIFIC RESEARCH AND AVAILS OF SUCH DEDUCTIONS ACCOR DING TO THE REVENUE THE VALUE OF THE ASSET WOULD GET REDUCED TO THE EXTENT OF THE DEDUCTIONS BY THE TIME THE ASSET IS DIVERTED FOR USER IN THE MAIN BUSINESS O F THE ASSESSEE. THIS CONTENTION WAS NOT ACCEPTED BY THE APPELLATE TRI BUNAL. THE TRIBUNAL OBSERVES THAT 'IT IS NOT DENIED THAT THE ASSETS ARE STILL BEING USED FOR SCIENTIFIC RESEARCH' AND THEREFORE THESE ASSETS ARE NOT ENTITLED TO ANY DEPRECIATION AT ALL BUT FOR A DEDUCTION UNDER SECTION 35(1)(IV). THE TRI BUNAL FURTHER OBSERVED THAT FOR THE PURPOSE OF SECTION 80J THE MEANING OF THE TERM 'ACTUAL COST' STATED IN SECTION 43(1) WITHOUT REFERENCE TO EXPLANAT ION 1 HAS TO BE APPLIED. THE TRIBUNAL ALSO HAS NOTED THAT IT WAS NOT THE CASE OF THE REVENUE THAT THE ASSETS IN QUESTION ARE NOT USED FOR THE BUSINESS OF THE IN DUSTRIAL UNDERTAKING ; SINCE THESE ASSETS ARE ALSO USED FOR THE BUSINESS OF THE ASSESSEE THEY CANNOT BE EXCLUDED FROM THE CAPITAL OF THE COMPANY. THIS WAS TH E VIEW TAKEN BY THE COMMISSIONER (APPEALS) AS WELL AS BY THE APPELLATE TRIB UNAL AND THE QUESTION BEFORE US WAS ARGUED ON THE BASIS THAT THIS ASSUMPTION IS FACTUALLY CORRECT. SECTION 80J PROVIDES FOR DEDUCTION IN RESPECT OF PROF ITS AND GAINS FROM NEWLY ESTABLISHED INDUSTRIAL UNDERTAKINGS ETC. FOR THIS PURPO SE THE CAPITAL EMPLOYED IN THE INDUSTRIAL UNDERTAKING OF THE ASSESSEE WILL HAVE TO BE COMPUTED IN THE MANNER SPECIFIED IN SUB SECTION (1A). THIS AGAIN TAKES U S TO SUB CLAUSE (II) OF SECTION 80J(1A)(11). ACCORDING TO THIS THE VALUE OF THE ASSETS SHALL BE ASCERTAINED THUS : 'IN THE CASE OF ASSETS ACQUIRED BY PUR CHASE AND NOT ENTITLED TO DEPRECIATION THEIR ACTUAL COST TO THE ASSESSEE'. EX PLANATION 1 STATES THAT 'IN THIS CLAUSE 'ACTUAL COST' HAS THE SAME MEANING AS IN CLA USE (1) OF SECTION 43'. THERE IS NO DISPUTE THAT THESE PROVISIONS GOVERN THE IN STANT CASE AND THEREFORE THE ONLY QUESTION ACTUALLY THAT WOULD SURV IVE FOR CONSIDERATION WILL 12 BE THE SCOPE OF THE EXPLANATION PERTAINING TO THE TE RM 'ACTUAL COST' WHICH TAKES US TO SECTION 43. SECTION 43 TO THE EXTENT IT I S RELEVANT FOR OUR PURPOSE READS THUS : '43. IN SECTIONS 28 TO 41 AND IN THIS SECTION UNLESS THE CONTEXT OTHERWISE REQUIRES (1) 'ACTUAL COST' MEANS THE ACTUAL COST OF TH E ASSETS TO THE ASSESSEE REDUCED BY THAT PORTION OF THE COST THEREOF IF ANY AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY : PROVIDED THAT WHERE THE ACTUAL COST OF AN ASSET BEIN G A MOTOR CAR WHICH IS ACQUIRED BY THE ASSESSEE AFTER THE 31ST DAY OF MARCH 19 67 BUT BEFORE THE 1ST DAY OF MARCH 1975 AND IS USED OTHERWISE THAN IN BUSIN ESS OF RUNNING IT ON HIRE FOR TOURISTS EXCEEDS TWENTY FIVE THOUSAND RUPEES THE EXCESS OF THE ACTUAL COST OVER SUCH AMOUNT SHALL BE IGNORED AND THE ACTUA L COST THEREOF SHALL BE TAKEN TO BE TWENTY FIVE THOUSAND RUPEES. EXPLANATION 1. WHERE AN ASSET IS USED IN THE BUSINESS AF TER IT CEASES TO BE USED FOR SCIENTIFIC RESEARCH RELATED TO THAT BUSINESS AND DEDUCTION HAS TO BE MADE UNDER CLAUSE (II) OF SUB SECTION (1) OF SECTION 32 IN RESPECT OF THAT ASSET THE ACTUAL COST OF THE ASSET TO THE ASSESSEE SHALL BE THE ACTUAL COST TO THE ASSESSEE AS REDUCED BY THE AMOUNT OF ANY DEDUCTION ALLO WED UNDER CLAUSE (IV) OF SUB SECTION (1) OF SECTION 35 OR UNDER ANY CORRESPON DING PROVISION OF THE INDIAN INCOME TAX ACT 1922 (11 OF 1922). ' THE MAIN PROVISIONS OF SECTION 43(1) ARE QUITE CLEAR W HEN IT SAYS THAT THE ACTUAL COST IS THAT WHICH IS INCURRED BY THE ASSESSEE. TO THE EXTENT ANY PORTION OF THE COST IS MET DIRECTLY OR INDIRECTLY BY ANY OTHE R PERSON OR AUTHORITY TO THAT EXTENT THE ACTUAL COST OF THE ASSESSEE GETS REDUCED. A D EDUCTION GRANTED UNDER SECTION 35 CANNOT BE EQUATED TO A SITUATION WHERE A P ORTION OF THE COST IS BEING MET BY A THIRD PARTY BECAUSE SECTION 35 PROVIDES ONLY A STATUTORY DEDUCTION UNDER CERTAIN CIRCUMSTANCES. LEARNED COUNSEL FOR THE REVENUE HOWEVER SOUGHT TO RELY ON EXPLANATION 1. ACCORDING TO LEARNE D COUNSEL WHEN THE ASSETS CEASED TO BE USED FOR SCIENTIFIC RESEARCH AND A DEDUCTI ON IS TO BE MADE UNDER SECTION 32(1)(II) THE ACTUAL COST OF THE ASSET TO THE ASSESSEE WOULD GET REDUCED BY THE AMOUNT OF DEDUCTION ALLOWED UNDER SECTION 35( 1)(IV) AND ACCORDING TO LEARNED COUNSEL THAT IS THE SITUATION INVOLVED HERE. THE ABOVE CONTENTION IGNORES THE SCOPE OF THIS EXPLANA TION. EXPLANATION 1 IS ATTRACTED ONLY WHEN A DEDUCTION HAS TO BE MADE UNDER SECTION 321 (1)(II). THE APPLICABILITY OF THE EXPLANATION IS CONFINED TO THE PARTICULAR SITUATION STATED THEREIN. IT NOWHERE EXTENDS TO OTHER SITUATIONS WHERE IN ACTUAL COST WILL HAVE TO BE COMPUTED FOR ANY OTHER PURPOSE. HENCE IT IS NOT P OSSIBLE FOR US TO ACCEPT THE CONTENTION OF LEARNED COUNSEL. THEREFORE QUESTIO N NO. 5 IS ANSWERED IN THE AFFIRMATIVE AND IN FAVOUR OF THE ASSESSEE. 8.3 WE FIND THE HONBLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. GUJARAT ALUMINUM EXTRUSIONS PVT. LTD. (SUPRA) HAS OBSERVED AS UNDER : WE HAVE HEARD THE LEARNED ADVOCATES AT LENGTH AND H AVE CONSIDERED THE JUDGMENTS CITED BEFORE THIS COURT. THE OBJECT BEHIND THE ENACTMENT OF SECTION 35 OF TH E ACT IS TO ENCOURAGE RESEARCH AND DEVELOPMENT ACTIVITIES BY THE ASSESSEE. AS AN INCENTIVE THE LEGISLATURE HAS GIVEN THIS BENEFIT BY WAY OF DEDUCTION IN RESPECT OF THE CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE. THIS IS A PROVISION FOR THE BENEFIT OF THE ASSESSEE AND IF THE ASSESSEE INCURS CAPITAL EXPENDITURE FOR THE PURPOSE OF RESEARCH AND DEVELOPMENT DURING THE RELEVANT PREVIOU S YEAR IN OUR OPINION THE REVENUE SHOULD NOT DEPRIVE THE ASSESSEE OF THE BENEF IT OF DEDUCTION UNDER 13 THE PROVISIONS OF SECTION 35 OF THE ACT EVEN IF THE ASSE T IS NOT PUT TO USE FOR RESEARCH AND DEVELOPMENT. IT IS A SETTLED LEGAL POSITIO N THAT THE PROVISION FOR EXEMPTION OR RELIEF SHOULD BE CONSTRUED LIBERALLY AND IN FAVOUR OF THE ASSESSEE. IF THE SECTION IS INTERPRETED IN THE MANNER SUGGESTED B Y STANDING COUNSEL FOR THE REVENUE IN OUR OPINION WE WOULD BE DEPRIVING THE ASSESSEE OF THE BENEFIT WHICH THE LEGISLATURE DESIRES TO GIVE TO THE ASSESSEE. IT IS ALSO PERTINENT TO REFER TO CIRCULAR NO. 5-P (L XXVI-63) OF 1967 DATED OCTOBER 9 1967 ISSUED BY THE DEPARTMENT. THE RELEVA NT EXTRACT OF THE SAID CIRCULAR READS AS UNDER : '(II) THE AMOUNT OF CAPITAL EXPENDITURE INCURRED B Y AN ASSESSEE AFTER MARCH 31 1967 ON SCIENTIFIC RESEARCH RELATED TO HIS BUSINE SS WILL BE ALLOWED TO BE DEDUCTED IN FULL IN COMPUTING HIS BUSINESS PROFITS OF T HE YEAR IN WHICH SUCH EXPENDITURE IS INCURRED.' FROM THE PROVISIONS OF THE ABOVE REFERRED TO CIRCULAR ALSO THE INTENTION OF THE REVENUE IS PATENT. THE INTENTION IS TO GIVE BENEFIT T O THE ASSESSEE WHO INCURS EXPENDITURE ON SCIENTIFIC RESEARCH RELATED TO HIS BUSIN ESS. EVEN THE CIRCULAR ISSUED BY THE DEPARTMENT DOES NOT MAKE USE OF THE CAPIT AL ASSET A CONDITION PRECEDENT FOR CLAIMING DEDUCTION UNDER THE PROVISION S OF SECTION 35 OF THE ACT. IN OUR OPINION BOTH THE APPELLATE AUTHORITIES HAVE RIGHTLY CONSIDERED THE SPIRIT WITH WHICH SECTION 35 OF THE ACT HAS BEEN ENAC TED BY THE LEGISLATURE AND THE CIRCULAR REFERRED TO HEREINABOVE WHILE ALLOWING DEDUCTION TO THE ASSESSEE UNDER THE PROVISIONS OF SECTION 35 OF THE ACT. WE ARE OF THE VIEW THAT WHEN THE LEGISLATURE HAS NOT EXPECTED THE ASSESSEE TO PUT THE ASSET TO ACTUAL USE IT WOULD NOT BE OPEN TO T HE REVENUE TO DEPRIVE THE ASSESSEE OF THE BENEFIT OF DEDUCTION UNDER THE PROVISION S OF SECTION 35 OF THE ACT IF THE ASSET IS NOT USED IN THE PREVIOUS YEAR IN WH ICH THE CAPITAL EXPENDITURE IS INCURRED. IT IS ALSO RELEVANT TO NOTE THAT THE DEDUCTION IS GI VEN NOT ON THE COUNT OF USER. HAD IT BEEN SO THE ASSESSEE WOULD HAVE BEEN GIVEN BENE FIT IN THE NATURE OF DEPRECIATION. IT CANNOT BE DISPUTED THAT DEPRECIATIO N IS ALLOWED WHEN THE ASSET IS USED BY THE ASSESSEE AND WHEN HE SUFFERS LOSS ON ACCOUNT OF WEAR AND TEAR OF THE ASSET. HAD THE INTENTION OF THE LEGISLATURE BEEN T O GRANT ADDITIONAL DEPRECIATION WE WOULD HAVE AGREED WITH THE SUBMISSION S MADE BY STANDING COUNSEL APPEARING FOR THE REVENUE BUT THE POSITION IS DIFFERENT IN THE INSTANT CASE. HERE THE LEGISLATURE WANTS THE ASSESSEE TO SPEND M ORE AMOUNT FOR SCIENTIFIC RESEARCH AND IT ALSO WANTS THE ASSESSEE TO GET T HE BENEFIT IMMEDIATELY IN THE YEAR IN WHICH HE INCURS THE EXPENDITURE IN TH E NATURE OF REVENUE OR CAPITAL FOR SCIENTIFIC RESEARCH AND THEREFORE THE LEG ISLATURE REFERS TO INCURRING OF THE EXPENDITURE AND NOT THE USING OF THE ASSET. ONCE IT IS ESTABLISHED THAT THE EXPENDITURE WAS INCURRE D FOR THE PURPOSE OF SCIENTIFIC RESEARCH AND THE CONDITIONS INCORPORATED IN SECTION 35 OF THE ACT ARE FULFILLED IN OUR OPINION THE REVENUE CANNOT EXPEC T THE ASSESSEE TO START USING THE ASSET IMMEDIATELY. IN A GIVEN CASE THE ASSESSEE MIGHT HAVE TO GO ON INCURRING EXPENDITURE FOR SEVERAL YEARS BEFORE PUTTIN G THE ASSET TO ACTUAL USE. IF THE INTERPRETATION ADVANCED BY STANDING COUNSEL FOR T HE REVENUE IS ACCEPTED WE ARE AFRAID THE ASSESSEE WOULD NOT BE IN A POSITION T O AVAIL OF THE DEDUCTION UNDER SECTION 35 OF THE ACT TO THE EXTENT TO WHICH T HE LEGISLATURE INTENDS TO GIVE TO THE ASSESSEE. IT IS ALSO PERTINENT TO NOTE THAT THE DEDUCTION UNDER THE PROVISIONS OF SECTION 35 OF THE ACT IS GIVEN ONLY DURING THE PREVIOUS YEA R IN WHICH THE EXPENDITURE IS INCURRED. IF THE ASSESSEE HAS TAKEN SEVERAL YEARS TO CONST RUCT OR ACQUIRE A PARTICULAR ASSET THE ASSESSEE WOULD BE DEPRIVED OF THE BENEFIT OF SECTION 35 OF THE ACT BECAUSE HE CAN PUT THE ASSET TO USE ONLY WHEN C ONSTRUCTION OF THE ASSET 14 IS COMPLETED AND IT WOULD NOT BE OPEN TO HIM TO CLAI M DEDUCTION IN RESPECT OF THE EXPENDITURE INCURRED DURING THE EARLIER PREVIOU S YEARS BECAUSE LOOKING TO THE PROVISIONS OF SECTION 35 OF THE ACT THE ASSESSEE CAN AVAIL OF THE BENEFIT OF DEDUCTION OF THE AMOUNT OF EXPENDITURE INCURRED ONL Y DURING THE PREVIOUS YEAR AND NOT FOR THE EARLIER PERIOD UNLESS HIS CASE IS COVERE D UNDER THE PROVISIONS OF AN EXCEPTION TO SECTION 35(2)(IA) OF THE ACT. FOR THE REASONS STATED HEREINABOVE IN OUR OPINION T HE TRIBUNAL WAS RIGHT WHEN IT CONFIRMED THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) WHO HAD DELETED THE DISALLOWANCE. FOR THE AFRO STATED REASONS WE ANSWER THE QUESTION IN THE AFFIRMATIVE I.E. IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE REFERENCE STANDS DISPOSED OF WITH NO ORDER AS TO COSTS. 9. NO DOUBT THE ABOVE DECISIONS ARE IN RESPECT OF C APITAL EXPENDITURE. HOWEVER WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE PRINCIPLE SHOULD BE APPLIED EVEN FOR REVEN UE EXPENDITURE ALSO. THEREFORE IN THE LIGHT OF THE ABOVE DECISIONS WE F IND MERIT IN THE ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE THAT W HEN A MATERIAL IS PURCHASED FOR RESEARCH AND DEVELOPMENT PURPOSE IT IS IMMATERIAL WHETHER THE MATERIAL IS CONSUMED DURING THE YEAR OR HELD AS CLO SING STOCK AND THE ENTIRE EXPENDITURE INCURRED ON RAW MATERIAL FOR THE PURPOS E OF RESEARCH AND DEVELOPMENT QUALIFIES FOR DEDUCTION U/S.35 OF THE A CT IRRESPECTIVE OF THE ACCOUNTING TREATMENT OF THE SAME IN THE BOOKS OF AC COUNT. THEREFORE IN OUR OPINION WHENEVER ANY MATERIAL IS PURCHASED FOR RES EARCH & DEVELOPMENT THE SAME SHOULD BE ALLOWED AS DEDUCTION U/S.35 OF THE I .T. ACT AND IT IS IMMATERIAL WHETHER THE ASSET IS PUT TO USE OR NOT. WE THEREF ORE SET-ASIDE THE ORDER OF THE LD.CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING OF FICER TO ALLOW THE DEDUCTION CLAIMED U/S.35. AT THE SAME TIME WE ALSO DIRECT THE ASSESSING OFFICER TO ENSURE THAT THE ASSESSEE DOES NOT GET DO UBLE BENEFIT OF THE SAME ITEM I.E. IN THE SUBSEQUENT YEAR ON ACCOUNT OF SUC H MATERIAL WHICH WAS SHOWN AS CLOSING STOCK BUT GOT BENEFIT U/S.35 OF THE I.T. ACT. WE HOLD AND DIRECT ACCORDINGLY. THE GROUND BY THE ASSESSEE IS ACCORDI NGLY ALLOWED. 15 ITA NO.1456/PN/2011 (BY REVENUE) (A.Y. 2007-08) : 10. GROUNDS OF APPEAL NO.1 BY THE REVENUE READS AS UNDER : ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE HONBL E CIT(A)-III PUNE HAS ERRED IN DELETING THE ADDITION ON ACCOUNT OF NON-PA YMENT OF T.D.S. OF RS.6 57 422/-. 10.1 FACTS OF THE CASE IN BRIEF ARE THAT THE ASSES SING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT ASSE SSEE HAS DEBITED AN AMOUNT OF RS.43 63 556/- ON ACCOUNT OF SALES RETURN . ON BEING ASKED BY THE ASSESSING OFFICER TO EXPLAIN AS TO HOW THE GOODS SO RECEIVED BACK ARE ACCOUNTED FOR IN THE BOOKS THE ASSESSEE SUBMITTED A S UNDER : 'AS REGARDS SALES RETURNS WE SUBMIT THAT THE GOODS AS AND WHEN RETURNED ARE ENTERED IN A SEPARATE REGISTER AND THE SALES OF THESE ITEMS WHEN EFFECTED ARE ALSO RECORDED THEREIN. THE QUANTI TATIVE PARTICULARS FURNISHED BEFORE ARE INCLUSIVE OF THESE ITEMS. THE SALES RETURN ACTUALLY SHOULD HAVE BEEN DEDUCTED FROM THE GROSS SALES TURN OVER OF THE COMPANY. THE SAME HAVE INSTEAD BEEN SHOWN ON THE EX PENDITURE SIDE OF THE PROFIT AND LOSS ACCOUNT. HOWEVER THE SAME DOES NOT HAVE ANY IMPACT ON THE PROFIT OF THE COMPANY.' 10.2 SINCE THE ASSESSEE DID NOT PRODUCE ANYTHING OT HER THAN THE ABOVE TO SHOW THAT SALES OF THE GOODS HAVE ACTUALLY TAKEN PL ACE OUT OF THE MATERIAL WHICH HAVE RECEIVED BACK FROM PARTIES AS SALES RETU RN AND SINCE THE GOODS WHICH HAVE BEEN RECEIVED BACK WERE NOT SHOWN AS PAR T OF THE CLOSING STOCK OF FINISHED/DAMAGED GOODS AND IN ABSENCE OF DETAILS LI KE SALES BILLS STOCK REGISTER FOR GOODS RETURNS ETC. THE ASSESSING OFFI CER REJECTED THE EXPLANATION OF THE ASSESSEE THAT GOODS RETURNED WERE SOLD DURIN G THE YEAR AND ACCOUNTED FOR IN THE TOTAL SALES OF THE ASSESSEE. HE ACCORDI NGLY DISALLOWED THE DEBIT OF RS.43 63 546/- ON ACCOUNT OF SALES RETURN AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 16 11. BEFORE THE CIT(A) IT WAS SUBMITTED THAT ALL THE PARTICULARS IN RESPECT OF THE SALES RETURNS INCLUDING THE QUANTITATIVE CENVAT RECORDS ITEMIZED PARTICULARS AND THE LEDGER EXTRACTS HAVE BEEN PRODU CED BEFORE THE ASSESSING OFFICER AND VERIFIED BY HIM AND THEREFORE THE ASSE SSING OFFICER HAS NO BASIS AND IS INCORRECT IN STATING THAT THE SALES RETURNS ARE NOT ACCOUNTED PROPERLY BY THE ASSESSEE. IT WAS ARGUED THAT THE ASSESSING OF FICER HAVING VERIFIED THE EXCISE RECORDS AND ALSO THE CENVAT RETURNS AND VAT RETURNS SHOULD NOT HAVE MADE THE DISALLOWANCE OF THE SALES RETURNS AND SHOULD NOT HAVE COMMENTED THAT THE GOODS WHICH HAVE BEEN RECEIVED B ACK ARE NOT SHOWN AS PART OF CLOSING STOCK OF FINISHED GOODS. IT WAS SUB MITTED THAT IT IS THE FUNDAMENTAL ACCOUNTING PRINCIPLE THAT GOODS RETURNE D ARE TO BE TAKEN BACK AS CLOSING STOCK WHICH HAD BEEN CORRECTLY DONE BY THE ASSESSEE AND EVIDENCED BY THE CENVAT RECORDS AND HAVING PROPERLY BEEN ACCOUNT ED FOR WHETHER THE SAME ARE SOLD OR NOT IS OF NO CONSEQUENCE AND THE A O WAS NOT JUSTIFIED IN MAKING THE ADDITION. IT WAS ACCORDINGLY ARGUED THA T THE ADDITION SHOULD BE DELETED. 12. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED THE ADDITION BY OBSERVING AS UNDER : 7.3 THE SUBMISSIONS OF THE APPELLANT ARE CAREFULLY EXA MINED WITH REFERENCE TO MATERIAL PLACED ON RECORD. UNDER THE ACCOUNTING STAN DARDS AND SCHEDULE VI TO THE COMPANIES ACT THE SALES RETURNS ARE NORMALLY REDUC ED FROM GROSS TURNOVER. BUT IN THE CASE OF THE APPELLANT INSTEAD OF REDUCING THE SALES RETURNS FROM THE GROSS SALES THE SAME WAS SHOWN ON THE DEBIT SIDE OF THE PROFIT AND LOSS A/C AND SUCH TREATMENT DOES NOT HAVE ANY IMPACT ON THE NET PROFIT SHOWN IN THE PROFIT AND LOSS ACCOUNT. THE CASE OF THE ASSESSING OFFICER IS THAT THE GOODS WHICH HAVE BEEN RECEIVED BACK ARE NEITHER SHOWN AS P ART OF CLOSING STOCK OF FINISHED GOODS NOR WAS IT POSSIBLE TO ACCEPT THE CLAIM OF THE APPELLANT THAT THE GOODS WHICH WERE RETURNED HAVE BEEN SOLD DURING THE Y EAR AND ACCOUNTED FOR IN THE TOTAL SALES. DURING THE PRESENT PROCEEDINGS THE APPELLANT EXPLAINED IN DETAIL THE SYSTEM OF RECORDING SALES AND SALES RETURNS IN ITS BOOKS OF A/C AND CENTRAL EXCISE REGISTERS AND ALSO PRODUCED DOCUMENTS EVI DENCING THE RECORD OF THE SALES AND SALES RETURN DURING THE YEAR. IT IS DULY C ERTIFIED BY THE APPELLANT THAT ALL THESE DETAILS' WERE PRODUCED BEFORE THE ASSESSIN G OFFICER AT THE TIME OF ASSESSMENT PROCEEDINGS. AS PER THE DETAILS FURNISHED WHEN EVER A SALE IS EFFECTED THE CUSTOMERS A/C IS DEBITED AND SALES ACCOUNT IS CREDITED IN THE BOOKS 17 OF A/C WITH A CORRESPONDING QUANTITATIVE ENTRY IN IT S STOCK RECORDS MAINTAINED UNDER CENVAT RULES. IN THE EVENT OF RETURN BY THE CU STOMER OF THE GOODS SOLD THE SAME ARE ENTERED IN SEPARATE FORM-IV REGISTER DUL Y MENTIONING THE ORIGINAL INVOICE NUMBER DESCRIPTION OF QUANTITY OF GOODS RETU RNED AS THEY ARE DUTY PAID GOODS UNDER CENVAT RULES. SIMULTANEOUSLY REVERSAL ENTR IES WERE MADE IN THE CUSTOMER LEDGER A/C UPON THE RETURN OF GOODS FROM THE CUSTOMER. WHEN SUCH RETURNED GOODS ARE RESOLD NEW SALE INVOICES WERE RAI SED AND THE SAME ARE RECORDED IN THE SAME FORM IV REGISTER INDICATING TH E NEW INVOICE NUMBER UNDER THE COLUMN 'DETAILS OF INVOICE OF RE-CLEARANCE '. IN THE BOOKS OF ACCOUNT THE RESALE OF RETURNED GOODS IS CREDITED TO THE SALES AC COUNT AND DEBITED TO PARTY'S A/C TO WHOM RETURNED GOODS ARE RESOLD WHO CO ULD BE EITHER OLD CUSTOMER OR NEW CUSTOMER. FOR INSTANCE VIDE SALE INVOI CE NO: 4581 DATED 02/03/2006 GOODS OF THE VALUE OF RS 56 555/- INCLUDI NG DUTY WERE SOLD TO CENTAURUS LIFE SCIENCES (P) LIMITED WHICH WERE DULY CREDITED IN THE SALES LEDGER ACCOUNT OF THE PRODUCT 'METHYLAMINES' AND DEB ITED TO PARTY'S ACCOUNT. THE GOODS WERE REJECTED BY THE PARTY VIDE INVOICE NO . 1 DATED 11/04/2006 AND AN ENTRY TO THIS EFFECT WAS MADE IN ANNEXURE IV REGIST ER. A REVERSAL ENTRY WAS ALSO PASSED IN THE LEDGER A/C OF THE PARTY BY CREDITIN G THE BILL AMOUNT TO THE PARTY'S ACCOUNT. SUBSEQUENTLY WHEN THE GOODS WERE RESO LD VIDE INVOICE NO. 159 DATED 12/04/2006 TO A DIFFERENT CUSTOMER NAMELY PORUS DRUGS & INTERMEDIARIES (P) LIMITED THE BILL AMOUNT WAS DEBIT ED TO THIS PARTY'S ACCOUNT AND CREDITED TO SALES ACCOUNT. THE ENTRIES TO THIS EFFE CT WERE ALSO MADE IN THE SAME ANNEXURE IV REGISTER AS ITEMS OF RE-CLEARANCE. FOR IMMEDIATE REFERENCE AN ABSTRACT OF THE ANNEXURE-IV REGISTER PREPARED BY T HE APPELLANT IS APPENDED HEREWITH AS EXHIBIT-A. IN THIS SYSTEM OF ACCOUNTING TH E BALANCE IN THE ANNEXURE IV REGISTER ON ANY DAY I.E. TO THE EXTENT G OODS ARE NOT RESOLD REPRESENTS THE CLOSING STOCK OF RETURNED GOODS AT THAT P OINT OF TIME AND THE CLOSING STOCK OF RETURNED GOODS THAT REMAINED AS ON 31 ST MARCH IS INCLUDED IN THE CLOSING STOCK OF FINISHED GOODS IN THE ANNUAL ACCOU NTS. IN FACT IN THE DETAILS OF CLOSING STOCK FILED BEFORE THE ASSESSING OFFICER THE LAST ITEM SHOWS THE 'STOCK IN ANNEXURE IV REGISTER' AT RS. 1 86 360/- (APB 267). THUS TO THE EXTENT RETURNED GOODS WERE NOT RESOLD AS ON 31.03.2007 THE SA ME HAVE BEEN INCLUDED IN THE CLOSING STOCK WHICH STOOD AT RS.5 79 00 491/-. T O THE EXTENT GOODS WERE RESOLD THE SAME ARE INCLUDED IN THE TURNOVER DECLARED FOR THE YEAR. THEREFORE THE OBSERVATION OF THE A.O. THAT THE RETURNED GOODS W ERE NOT INCLUDED EITHER IN THE TURNOVER OR IN THE CLOSING STOCK OF FINISHED GOODS IS CONTRARY TO THE FACTS PLACED ON RECORD. FROM THE RECORDS AND DETAILS FILED BY THE APPELLANT IT IS EVIDENT THAT THE SALES RETURNS OF RS. 43 63 556/- WERE REFLECTED EITHER IN THE TURNOVER OR IN THE CLOSING STOCK AS ON 31.03.2007. IN SUCH A SITUATION I AM OF THE CONSIDERED OPINION THAT THE A.O. IS NOT JUSTIFIED IN REJECTING THE CLAIM OF THE APPELLANT ON THE SOLE GROUND THAT THE DETAILS LIKE SAL E BILLS STOCK REGISTER ETC. WERE NOT PRODUCED FOR VERIFICATION. ACCORDINGLY THE ADDITION OF RS. 43 63 556/- MADE TO THE TOTAL INCOME ON THIS GROUND IS DELETED. 12.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE RE VENUE IS IN APPEAL BEFORE US. 13. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES. THE LD. DEPARTMENTAL REPRESENTATIVE COULD NOT CONTROVER T THE FINDINGS GIVEN BY THE LD.CIT(A) THAT RETURNED GOODS TO THE EXTENT OF NOT RE-SOLD AS ON 31-03- 2007 HAVE BEEN INCLUDED IN THE CLOSING STOCK WHICH STOOD AT RS.5 79 00 491/- AND TO THE EXTENT GOODS WERE RESOLD THE SAME ARE I NCLUDED IN THE TURNOVER 18 DECLARED FOR THE YEAR. THE FINDING GIVEN BY LD.CIT (A) THAT THE SALES RETURNS OF RS.43 63 556/- WERE REFLECTED EITHER IN THE TURN OVER OR IN THE CLOSING STOCK AS ON 31-03-2007 AND THEREFORE THE OBSERVATION OF T HE ASSESSING OFFICER THAT THE RETURNS GOODS WERE NOT INCLUDED EITHER IN THE T URNOVER OR IN THE CLOSING STOCK OF FINISHED GOODS IS CONTRARY TO THE FACTS PL ACED ON RECORD ALSO COULD NOT BE CONTROVERTED BY THE LD. DEPARTMENTAL REPRESENTAT IVE. IN VIEW OF THE ABOVE AND IN VIEW OF THE DETAILED REASONING GIVEN BY THE LD.CIT(A) WE FIND NO INFIRMITY IN HIS ORDER. ACCORDINGLY THE SAME IS U PHELD AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 14. GROUNDS OF APPEAL NO.2 BY THE REVENUE READS AS UNDER : ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE HONBL E CIT(A)-III PUNE HAS ERRED IN DELETING THE ADDITION ON ACCOUNT OF NON-PA YMENT OF T.D.S. OF RS.12 43 533/- IN THE CASE OF GUJRATH AGRO CHEM LTD. 14.1 FACTS OF THE CASE IN BRIEF ARE THAT THE ASS ESSING OFFICER DISALLOWED AN AMOUNT OF RS.31 71 720/- BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) SINCE THE ASSESSEE FAILED TO DEDUCT DUE TAX AND DEPOSIT T HE SAME TO THE CREDIT OF GOVERNMENT ACCOUNT AS PER PROVISIONS OF CHAPTER XVI IB THE DETAILS OF WHICH ARE AS UNDER : SL.NO. NAME OF THE PARTY NATURE OF PAYMENT DATE AMOUNT (RS.) 1 KSOCO CHEMICALS COMMISSION 04/05/2006 49 523/- 2 GHAZI BROTHERS COMMISSION 26/05/2006 57 019/- 3 S.V. ENGINEERS SUB-CONTRACT 15/06/2006 4 70 968/- 4 SEVAK PUBLICATION ADVERTISEMENT 13/05/2006 2 38 032/- 5 SATOOR EXHIBITOR ADVERTISEMENT 22/07/2006 1 03 423/- 6 COMMISSION ON SALES PROMOTIONS COMMISSION 31/03/2007 10 09 222/- 7 GUJARAT AGROCHEM LTD. LEGAL & PROF CHARGES 31/03/2007 12 43 533/- TOTAL 31 71 720/- 19 15. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE ASSESSING OFFICER ACTED AGAINST THE FACTS OF THE CASE IN MAKING THE DISALLO WANCE BY INVOKING THE PROVISIONS OF SEC. 40(A)(IA). IT WAS SUBMITTED THA T OUT OF THE SEVEN INSTANCES NOTED BY THE ASSESSING OFFICER TAX HAS NOT BEEN DE DUCTED ONLY IN TWO INSTANCES I.E. (A) RS.57 019/- BEING PAYMENT OF SELLING COMMI SSION MADE IN FOREIGN CURRENCY TO M/S. GHAZI BROTHERS AND RS.2 38 032/- BEING PAYMENT FOR ADVERTISEMENT MADE TO M/S. SEVAK PUBLICATIONS. IT WAS SUBMITTED THAT THE PAYMENT TO M/S. GHAZI BROTHERS IS SALES COMMISSION TO FOREIGN SALES PROMOTER AND IS PAID IN FOREIGN CURRENCY AND AS SUC H THE PROVISIONS OF SEC. 195 DO NOT APPLY TO THE SAID PAYMENT AND CONSEQUENT LY PROVISIONS OF SEC.40(A)(IA) ARE ALSO NOT APPLICABLE. IT WAS ARGUED THAT IN THIS RESPECT THE LEDGER EXTRACT AND THE PROOF OF PAYMENT IN FOREIGN CURRENCY IN RESPECT OF THIS PAYMENT WAS PRODUCED BEFORE THE ASSESSING OFFICER A ND VERIFIED BY HIM AND AS SUCH HE SHOULD NOT HAVE COMMENTED THAT NO EVIDEN CE WAS PRODUCED IN RESPECT OF THE SAME AND SHOULD NOT HAVE DISALLOWED THE SAME. IN RESPECT OF THE BALANCE FIVE PAYMENTS IT WAS SUBMITTED THAT TH E PROOF OF DEDUCTION OF TAX AT SOURCE AND THE PROOF OF PAYMENT OF THE SAME TO THE CREDIT OF THE CENTRAL GOVERNMENT ALONG WITH TDS RETURNS HAD BEEN PRODUCED BEFORE THE ASSESSING OFFICER AND VERIFIED BY HIM. THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN COMMENTING THAT THE ASSESSEE FAILED TO MAKE TDS UNDER CHAPTER XVIIB DESPITE PRODUCING ALL THE RELEVANT DETAILS BEFORE THE ASSESSING OFFICER. IT WAS ALTERNATIVELY ARGUED THAT IF AT ALL A DISALLOWANCE IS CALLED FOR BY INVOKING THE PROVISIO NS OF SEC.40(A)(IA) IT SHOULD BE RESTRICTED TO EXPENDITURE ON ACCOUNT OF P AYMENT FOR ADVERTISEMENT TO M/S. SEVAK PUBLICATIONS AND NOT THE ENTIRE AMOUN T. 20 16. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) SUSTAINED AN AMOUNT OF RS.11 67 342/- AND DELETED T HE AMOUNT OF RS.20 04 378/- ON ACCOUNT OF THE FOLLOWING ITEMS : SL.NO. NAME OF THE PARTY NATURE OF PAYMENT AMOUNT (RS.) 1 KSOCO CHEMICALS COMMISSION 49 523/- DELETED 2 GHAZI BROTHERS COMMISSION 57 019/- DELETED 3 SATOOR EXHIBITOR ADVERTISEMENT 1 03 423/- DELETED 4 CHEMAT ENTERPRISES CO LTD. (PAYMENT IN USD ON 10-05-2007) COMMISSION 5 50 880/- DELETED 5 GUJARAT AGROCHEM LTD. LEGAL & PROF CHARGES 12 43 533/- DELETED TOTAL 20 04 378/- 16.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE RE VENUE IS IN APPEAL BEFORE US FOR THE DELETION OF RS.12 43 533/- ON ACC OUNT OF PAYMENT TO GUJARAT AGRO CHEM. LTD. ONLY 17. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. 17.1 WE FIND THE LD.CIT(A) WHILE DELETING THE AMOUN T OF RS.12 43 533/- BEING PAYMENT TO GUJARAT AGRO CHEM LTD. HAS OBSERVE D AS UNDER : IN CASE OF THIS PAYMENT TOWARDS PROFESSIONAL CHARG ES IT WAS NOTICED FROM THE LEDGER ACCOUNT OF LEGAL AND PROFESSIONAL C HARGES FURNISHED BY THE APPELLANT FOR THE PERIOD 01/01/2007 TO 31/03/2007 T HE AMOUNT WAS DEBITED TO THE ACCOUNT ON 31/03/2007 WITH THE N ARRATION 'CREDITED TO A/C TOWARDS LIAISON AND NEGOTIATION CHARGES' AND THE EN TRY WAS REVERSED ON THE SAME DAY I.E. 31/03/2007 WITH THE NARRATION 'ENTRY REVERSED DUE TO CANCELLATION OF CREDIT NOTE'. IT IS ALSO NOTICED THA T THE LEGAL AND PROFESSION CHARGES DEBITED TO THE PROFIT & LOSS ACCOUNT OF RS.57 02 564/- DOES NOT INCLUDE THE CREDIT NOTE OF RS.12 43 533/-. A SCANNED COPY OF THE LEDGER ACCOUNT OF GUJARAT AGRO- CHEM LTD. WHERE THE REVERSAL ENTRY IS MADE IS REPRODUCED HEREUNDER: - BALANI AMINES LTD. BALAJI BHAVAN 165-A RAILWAY LINES SOLAPUR GUJARAT AGROCHEM LTD. CRS LEDGER ACCOUNT 1-APRI-2006 TO 31-MAR-2007 21 DATE PARTICULARS VCH TYPE VCH NO. REF.NO. DEBIT CREDIT BALANCE 01-04-2006 BY OPENING BALANCE -- -- -- -- -- -- 31-03-2007 BY LEGAL & PROFESSIONAL CHARGES CREDIT NOTE BEING THE AMT. CREDITED TO A/C TWDS. LIAISON AND NEGOTIATION CHARGES DETAILS AS PER CREDIT NOTE NO.337 DT.31-03- 07 341 337 DT.31- 03-07 12 43 533.00 12 43 533.00 TO LEGAL & PROFESSIONAL CHARGES JOURNAL BEING THE ENTRY REVERSED DUE TO CANCELLATION OF CREDIT NOTE NO.337/2006-07 TO 31-03-2007 ISSUED TO GUJARAT AGROCHEM LTD. 342 12 43 533.00 12 43 533.00 12 43 533.00 WHEN THE EXPENDITURE IS NOT EVEN DEBITED TO THE P&L A/C. OF THE YEAR THE QUESTION OF DISALLOWANCE OF SUCH EXPENDITURE BY INVOKING THE PROVISIONS OF SEC.40(A)(IA) DOES NOT ARISE. ACCORD INGLY THE DISALLOWANCE OF RS.12 43 533/- MADE BY THE A.O. DOE S NOT SURVIVE AND IS ACCORDINGLY DELETED. 18. THE LD. DEPARTMENTAL REPRESENTATIVE COULD NOT C ONTROVERT THE ABOVE FACTUAL FINDINGS GIVEN BY THE LD.CIT(A) REGARDING N ON-APPLICABILITY OF PROVISIONS OF SECTION 40(A)(IA) WHEN THE SAME HAS N OT BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT. UNDER THESE CIRCUMSTANCES WE FIND NO INFIRMITY IN THE ORDER OF THE LD.CIT(A). ACCORDINGLY THE SAME IS UPHELD AND THE GROUNDS RAISED BY THE REVENUE IS DISMISSED. ITA NO.582/PN/2012 (BY ASSESSEE) (A.Y. 2008-09) : 19. GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER : 1. THE APPELLANT SUBMITS THAT THE LEARNED COMMISSIONE R OF INCOME TAX (APPEALS) ERRED IN SUSTAINING THE ADDITION MADE BY T HE ASSESSING OFFICER ON ACCOUNT OF R & D MATERIALS. 2. THE APPELLANT SUBMITS THAT THE LEARNED COMMISSI ONER OF INCOME TAX (APPEALS) OUGHT TO HAVE ALLOWED THE CLAIM OF THE APPELLANT ON ACCOUNT OF R & D MATERIALS UNDER SECTION 35 OF THE INCOME TAX ACT 1961. 3. THE APPELLANT PRAYS TO SUBMIT THAT THE LEARNED C OMMISSIONER OF INCOME TAX (APPEALS) MISINTERPRETED THE PROVISIONS OF SECTI ON 35 A SECTION EXTENDING BENEFIT OF R & D EXPENDITURE TO AN ASSESSEE AND AS SUCH SHOULD HAVE TAKEN A LIBERAL INTERPRETATION BENEFICIAL TO THE APPELLANT. 22 4. THE APPELLANT SUBMITS THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO DISTINGUISH THE DIFFERENCE BETWE EN EXPENDITURE ALLOWABLE UNDER SECTION 37 OF THE INCOME TAX ACT VIS-A-VIS TH E EXPENDITURE ALLOWABLE UNDER SECTION 35 OF THE ACT. 5. ON THE BASIS OF THE ABOVE AND ANY ADDITIONAL G ROUNDS THAT MAY BE PERMITTED TO BE RAISED IN THE COURSE OF THE APPELLATE PROCEEDINGS THE APPELLANT PRAYS THAT THE CLAIM OF APPELLANT OF RS.1 63 23 232/- BEING EXPEND ITURE ON R & D UNDER SECTION 35 OF THE ACT BE ALLOWED. 20. AFTER HEARING BOTH THE SIDES WE FIND THE ABOVE GROUNDS ARE IDENTICAL TO GROUNDS OF APPEAL IN ITA NO.1448/PN/2011. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUNDS RAISED BY THE ASSESSEE HAVE B EEN ALLOWED. FOLLOWING THE SAME RATIO THE ABOVE GROUNDS BY THE ASSESSEE A RE ALLOWED. ITA NO.823/PN/2012 (BY REVENUE (A.Y. 2008-09) : 21. GROUNDS RAISED BY THE REVENUE ARE AS UNDER : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE CIT (A)-III PUNE HAS ERRED IN DELETING THE ADDITION MADE BY THE ASSESSING OF FICER ON ACCOUNT OF SALES RETURN TO THE TUNE OF RS.62 24 016/-. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE HON BLE CIT(A)-III PUNE HAS ERRED IN ADMITTING ADDITIONAL EVIDENCE IN VIOLAT ION OF RULE 46A WITHOUT GIVING OPPORTUNITY OF BEING HEARD TO THE ASSESSING OFFI CER. 3. THE ORDER OF CIT(A) BE VACATED AND THAT OF THE A SSESSING OFFICER BE RESTORED. 22. AFTER HEARING BOTH THE SIDES WE FIND THE ASSESS ING OFFICER DISALLOWED AN AMOUNT OF RS.62 24 016/- DEBITED BY THE ASSESSEE IN ITS BOOKS ON ACCOUNT OF SALES RETURN. REJECTING THE VARIOUS EXPLANATION S GIVEN BY THE ASSESSEE AND FOLLOWING THE ORDER OF HIS PREDECESSOR FOR A.Y. 200 7-08 THE ASSESSING OFFICER MADE ADDITION OF RS.62 24 016/- TO THE TOTAL INCOME OF THE ASSESSEE ON THE GROUND THAT SUCH RETURNED GOODS WERE NEITHER SHOWN IN THE SALES NOR SHOWN IN THE CLOSING STOCK. IN APPEAL THE LD.CIT(A) DELETED THE DISALLOWANCE BY HOLDING THAT ALL THE RETURNED GOODS WERE RE-CLEARED AND INCLUDED IN THE TURNOVER AND THEREFORE THE OBSERVATION OF THE ASSES SING OFFICER THAT THE RETURNED GOODS WERE NOT INCLUDED EITHER IN THE TURN OVER OR IN THE CLOSING STOCK 23 OF FINISHED GOODS IS CONTRARY TO FACTS. HE FURTHER GAVE A FINDING THAT THE SALES RETURNS OF RS.62 24 016/- WERE REFLECTED IN THE TUR NOVER AS ON 31-03-2008. 22.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE RE VENUE IS IN APPEAL BEFORE US. 23. AFTER HEARING BOTH THE SIDES WE FIND IDENTICAL GROUNDS WERE TAKEN BY THE REVENUE FOR A.Y. 2007-08 VIDE ITA NO.1456/PN/20 11. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUNDS RAISED BY THE REV ENUE HAVE BEEN DISMISSED. FOLLOWING THE SAME RATIO THE GROUNDS BY THE REVENU E ARE DISMISSED. ITA NO.718/PN/2013 (BY ASSESSEE) (A.Y. 2009-10) : 24. GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER : 1. THE APPELLANT SUBMITS THAT THE LEARNED COMMISSION ER OF INCOME TAX (APPEALS) ERRED IN LAW IN SUSTAINING THE ADDITION MA DE BY THE ASSESSING OFFICER ON ACCOUNT OF R & D MATERIALS. 2. THE APPELLANT SUBMITS THAT THE LEARNED COMMIS SIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE ALLOWED THE CLAIM OF THE AP PELLANT ON ACCOUNT OF R & D MATERIALS UNDER SECTION 35 OF THE INCOME TAX ACT 1 961. 3. THE APPELLANT PRAYS TO SUBMIT THAT THE LEARNE D COMMISSIONER OF INCOME TAX (APPEALS) MISINTERPRETED THE PROVISIONS OF SECTION 35 A SECTION EXTENDING BENEFIT OF R & D EXPENDITURE TO THE ASSESSEE AND AS SUCH SHOULD HAVE TAKEN A LIBERAL INTERPRETATION BENEFICIAL TO THE APPELLANT. 4. THE APPELLANT SUBMITS THAT THE LEARNED COMMIS SIONER OF INCOME TAX (APPEALS) FAILED TO DISTINGUISH THE DIFFERENCE BETW EEN EXPENDITURE ALLOWABLE UNDER SECTION 37 OF THE INCOME TAX ACT VIS-A-VIS THE EXPE NDITURE ALLOWABLE UNDER SECTION 35 OF THE ACT. 5. ON THE BASIS OF THE ABOVE AND ANY ADDITIONAL GROUNDS THAT MAY BE PERMITTED TO BE RAISED IN THE COURSE OF THE APPELLATE PROCEED INGS THE APPELLANT PRAYS THAT THE CLAIM OF APPELLANT OF RS. 1 19 04 059/- BEING EXPEN DITURE ON R & D UNDER SECTION 35 OF THE ACT BE ALLOWED. 25. AFTER HEARING BOTH THE SIDES WE FIND THE ABOVE GROUNDS ARE IDENTICAL TO GROUNDS OF APPEAL IN ITA NO.1448/PN/2011 FOR A.Y. 2 007-08. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUNDS RAISED BY THE ASSESSEE HAVE BEEN ALLOWED. FOLLOWING THE SAME RATIO THE ABOVE GROUN DS BY THE ASSESSEE ARE ALLOWED. 24 26. IN THE RESULT ALL THE APPEALS FILED BY THE ASS ESSEE ARE ALLOWED AND THE APPEALS FILED BY THE REVENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 30-04-2014. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED 30 TH APRIL 2014 SATISH COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-III PUNE 4. THE CIT-III PUNE 5. D.R. A BENCH PUNE 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE