Electronics Corporation of India Ltd, Hyderabad V. DCIT, Circle-2(2), Hyderabad

ITA 1307/HYD/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1397 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 07-06-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 11-07-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKARA RAO
• Assessee Lawyers: V SIVA KUMAR; C S SUBRAMANYAM
• Keywords: Depreciation; Opportunity of being heard; Unabsorbed depreciation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SMT. ASHA VIJAYARAGHAVAN, J.M. AND SHRI B.R.BASKARAN, A.M. ITA NO.1257/HYD/2011 : ASSESSMENT YEAR 2002-03 ITA NO.1258/HYD/2011 : ASSESSMENT YEAR 2004-05 ASSTT . COMMISSIONER OF INCOME - TAX CIRCLE 2(2), HYDERABAD V/S. M/S. ECIL LTD., HYDERABAD ( PAN - AAACE 4809 L ) (APPELLANT) (RESPONDENT) ITA NO.1307/HYD/2011 : ASSESSMENT YEAR 2004-05 M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD ( PAN - AAACE 4809 L ) V/S. ASSTT. COMMISSIONER OF INCOME - TAX CIRCLE 2(2), HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY : S HRI C.S. SUBRAMANYAM & SHRI V.SIVAKUMAR DEPARTMENT BY : SHRI D.SUDHAKARA RAO, CIT-DR DATE OF HEARING 26.12 .2012 DATE OF PRONOUNCEMENT 04.01.2013 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: ALL THE THREE APPEALS ARE DIRECTED AGAINST T HE ORDERS PASSED BY LEARNED CIT(A)-III, HYDERABAD. THE REVENUES APPE ALS RELATE TO THE ASSESSMENT YEARS 2002-03 AND 2004-05. THE APPEAL FILED BY THE ASSESSEE RELATES TO THE ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 2 ASSESSMENT YEAR 2004-05. ALL THESE APPEALS WERE HE ARD TOGETHER AND HENCE THEY ARE DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2. WE SHALL FIRST TAKE UP THE APPEAL FILED B Y THE REVENUE FOR THE ASSESSMENT YEAR 2002-03. THE REVENUE IS ASSAILING THE DECISION OF LEARNED CIT(A) IN HOLDING THAT THE UNABSORBED DEPRECIATION RELATING TO THE ASSESSMENT YEARS 1990-91 TO 1992-93 CAN BE SET OFF AGAINST THE INCOME RELATING TO THE ASSESSMENT YEAR 2002-03, EVEN THOUGH THE PERIOD OF EIGHT YEARS ALLOWED FOR CARRY FORWARD OF UNABSORBED DEPRECIATION HAS EXPIRED. 3. THE FACTS RELATING THERETO ARE SET OUT IN BRIEF. DURING THE ASSESSMENT YEAR 2002-03, THE ASSESSEE CLAIMED SET O FF OF THE FOLLOWING AMOUNTS OF UNABSORBED DEPRECIATION PERTAINING TO THE ASSESS MENT YEARS 1990-91 TO 1992- 93. ASSESSMENT YEAR UNABSORBED DEPRECIATION 1990-91 RS.2,27,94,320/- 1991-92 RS.7,12,16,003/- 1992-93 RS.9,68,19,884/- _________________________________________ ______ THE ASSESSING OFFICER NOTICED THAT THE FINANCE (N O.2) ACT, 1996 HAD BROUGHT AN AMENDMENT IN S. 32(2) OF THE ACT WITH EFFECT FROM 1 .4.1997, ACCORDING TO WHICH THE PERIOD OF CARRY FORWARD OF UNABSORBED DEPRECIAT ION WAS RESTRICTED TO EIGHT YEARS. HOWEVER, THE SAID RESTRICTION WAS REMOVED W ITH EFFECT FROM 1.4.2002. THE ASSESSING OFFICER, BY PLACING RELIANCE ON THE AMEND MENT CARRIED OUT BY FINANCE (NO.2) ACT, 1996 AND ON NOTICING THAT THE PERIOD OF EIGHT YEARS HAS EXPIRED FOR THE UNABSORBED DEPRECIATION RELATING TO THE ASSESSMENT YEARS CITED ABOVE, HELD THAT THE ASSESSEE IS NOT ENTITLED TO CLAIM SET OFF OF TH E ABOVE SAID AMOUNTS AGAINST THE ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 3 PROFIT DECLARED FOR THE ASSESSMENT YEAR 2002-03. I N THE APPEAL FILED BY THE ASSESSEE, THE LD CIT(A) ALLOWED THE CLAIM OF THE AS SESSEE BY FOLLOWING THE CIRCULAR NO.762 DATED 18-02-1998 ISSUED BY CBDT REP ORTED IN 230 ITR (ST.) 12. AGGRIEVED BY THE ORDER OF LD CIT(A) ON THIS ISSUE, THE REVENUE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND C AREFULLY PERUSED THE RECORD. AS PER THE PROVISIONS OF S.32(2) OF THE AC T, THEN EXISTING PRIOR TO THE AMENDMENT CARRIED OUT BY FINANCE (NO.2) ACT, 1996, THE UNABSORBED DEPRECIATION OF A YEAR SHALL BE ADDED TO THE AMOUNT OF CURRENT DEPRECIATION OF THE SUCCEEDING YEAR. THEREAFTER THE FINANCE (NO.2) ACT , 1996 BROUGHT THE AMENDMENT IN S. 32(2) PROVIDING A RESTRICTION OF 8 YEARS FOR CARRY FORWARD OF THE UNABSORBED DEPRECIATION. THE CBDT HAS CLARIFIED TH E LEGAL EFFECT OF AMENDMENT BROUGHT IN BY THE ABOVE SAID ACT AS UNDER IN PARA 2 3.5 OF THE CIRCULAR (REFERRED SUPRA).:- SUB SECTION (2) OF SECTION 32, AS IT EXISTED UPTO ASSESSMENT YEAR 1996-97, PROVIDED THAT THE UNABSORBED DEPRECIATION OF A YEAR SHALL BE ADDED TO THE AMOUNT OF THE ALLOWANCE FOR DEPRECI ATION OF THE FOLLOWING PREVIOUS YEAR AND DEEMED TO BE PART OF TH AT ALLOWANCE. THEREFORE, THE UNABSORBED DEPRECIATION ALLOWANCE, I F ANY, OF THE ASSESSMENT YEAR 1996-97 SHALL BE ADDED TO THE AMOUN T OF ALLOWANCE FOR DEPRECIATION OF ASSESSMENT YEAR 1997-98 AND DEE MED TO BE PART OF THE ALLOWANCE FOR THIS YEAR. IN OTHER WORDS, THE UNABSORBED DEPRECIATION ALLOWANCE OF ASSESSMENT YEAR 1996-97 S HALL BE ADDED TO THE ALLOWANCE OF 1997-98 AND WILL BE DEEME D TO BE THE ALLOWANCE OF THAT YEAR. THE LIMITATION OF E IGHT YEARS SHALL START FROM THE ASSESSMENT YEAR 1997-98. ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 4 5. THE LEARNED CIT(A), BY PLACING RELIANCE ON THE ABOVE CITED CIRCULAR, HAS HELD THAT THE UNABSORBED DEPRECIATION RELATING TO THE ASSESSMENT YEARS 1990- 91 TO 1992-93, BY CASCADING EFFECT, SHALL BECOME PA RT OF THE ALLOWANCE OF THE ASSESSMENT YEAR 1997-98. SINCE THE INSTANT ASSESSM ENT YEAR OF 2002-03 FALLS WITHIN THE PERIOD OF EIGHT YEARS FROM THE ASSESSMEN T YEAR 1997-98, THE LD CIT(A) HELD THAT THE UNABSORBED DEPRECIATION, REFERRED SUP RA, SHALL BE ELIGIBLE FOR SET OFF AGAINST THE PROFITS PERTAINING TO THE ASSESSMENT YE AR 2002-03. THERE SHOULD NOT BE ANY DISPUTE THAT THE CIRCULARS ISSUED BY CBDT AR E BINDING ON TAX AUTHORITIES. 6. IN THE FOLLOWING CASES ALSO, THE DECISION HAS BEEN TAKEN IN ACCORDANCE WITH THE VIEW EXPRESSED BY THE CBDT IN I TS CIRCULAR REFERRED ABOVE. (A) DCIT V/S. ANDHRA PETROCHEMICALS LTD 123 ITD 89 (VIZAG) (B) DCIT V/S. TIME GUARANTY LTD (40 SOT 14)(MUM)( SB) (C) GENERAL MOTORS INDIA LTD V/S. DCIT (25 TAXMAN .COM 364)(GUJ). 7. THUS THE VIEW TAKEN BY LEARNED CIT(A) IS S UPPORTED BY THE CIRCULAR ISSUED BY THE CBDT AND ALSO THE DECISIONS REFERRED SUPRA. UNDER THESE CIRCUMSTANCES, WE DO NOT FIND ANY REASON TO INTERFE RE WITH HIS DECISION ON THIS ISSUE. 8. WE SHALL NOW TAKE UP THE APPEALS FILED BY BOTH THE PARTIES FOR THE ASSESSMENT YEAR 2004-05. THE ISSUE URGED IN BOTH T HE APPEALS RELATE TO THE TREATMENT OF GRANTS-IN-AID RECEIVED BY THE ASSESS EE FROM GOVERNMENT OF INDIA. 9. THE FACTS RELATING TO THE SAME ARE STATED IN BRIEF. THE ASSESSEE CARRIED OUT RESEARCH AND DEVELOPMENT ACTIVITIES AND CLAIMED WEIGHTED DEDUCTION UNDER S.35(2AB) OF THE ACT AT 150% OF THE EXPENDITU RE TO THE TUNE OF RS.69.72 CRORES. THE ASSESSING OFFICER NOTICED THAT THE ASS ESSEE HAS RECEIVED A SUM OF ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 5 RS.7.10 CRORES FROM GOVERNMENT OF INDIA TOWARDS CER TAIN PROJECTS. IT WAS SEEN THAT THE ASSESSEE DID NOT CREDIT THE SAID AMOUNT TO ITS PROFIT AND LOSS ACCOUNT. THE ASSESSEE EXPLAINED THAT THE GRANTS IN AID RECEI VED FROM GOVERNMENT OF INDIA AND THE EXPENDITURE RELATING THERETO ARE KEPT IN A SEPARATE ACCOUNT AND THE BALANCE AMOUNT OF GRANTS IN AID IS SHOWN AS CURREN T LIABILITY. ACCORDINGLY IT WAS SUBMITTED THAT THE GRANTS IN AID IS NOT TREATED AS ITS INCOME AND THE EXPENDITURE RELATING THERETO IS ALSO NOT CLAIMED AS EXPENDITURE . THE AO, HOWEVER, TOOK THE VIEW THAT THE GRANT IN AID IS A REVENUE RECEIPT AND HENCE IT PARTAKES THE CHARACTER OF INCOME. HE FURTHER OPINED THAT THE RESEARCH AN D DEVELOPMENT EXPENDITURE INCURRED BY THE ASSESSEE OUT OF GRANT IN AID IS N OT ELIGIBLE FOR WEIGHTED DEDUCTION, I.E., THE ASSESSING OFFICER TOOK THE VIE W THAT THE WEIGHTED DEDUCTION IS PERMISSIBLE ONLY IN RESPECT OF THE AMOUNT SPENT OUT OF ASSESSEES OWN MONEY. ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED THE WEIGHTED DEDUCTION RELATABLE TO RS.7.10 CRORES, I.E., 150% OF RS.7.10 CRORES AMOUNTI NG TO RS.10.65 CRORES. 10. BEFORE LEARNED CIT(A), IT WAS SUBMITTED T HAT THE ASSESSEE RECEIVED A SUM OF RS.11.75 CRORES AS GRANT IN AID FROM GOVERNM ENT OF INDIA, OUT OF WHICH RS.6.00 CRORES RELATE TO THE GRANT GIVEN TO PAY VR S COMPENSATION TO THE RETIRED EMPLOYEES. ACCORDINGLY, IT WAS SUBMITTED THAT THE AMOUNT OF GRANT IN AID RECEIVED TOWARDS R & D ACTIVITIES WAS ONLY RS.5.75 CRORES. THE LEARNED CIT(A) ACCEPTED THE SAID SUBMISSIONS AND ACCORDINGLY DIREC TED THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO 150% OF RS.5.75 CRORES , I.E., RS.8.63 CRORES AND ACCORDINGLY GRANTED PARTIAL RELIEF. IN EFFECT, THE LD CIT(A) HELD THAT THE ASSESSEE DID NOT PROVE THAT THE EXPENDITURE INCURRED ON R & D, ON WHICH DEDUCTION U/S 35(2AB) WAS CLAIMED, HAS NOT BEEN MADE OUT OF THE G RANT IN AID RECEIVED FROM GOVERNMENT OF INDIA. 11. AGGRIEVED BY THE DECISION RENDERED BY LEARNE D CIT(A) ON THE ABOVE SAID ISSUE, BOTH THE PARTIES ARE IN APPEAL BEFORE US. T HE REVENUE IS CONTENDING THAT ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 6 THE GRANT IN AID RELATING TO RESEARCH AND DEVELOPME NT SHOULD NOT HAVE BEEN REDUCED TO RS.5.75 CRORES AS AGAINST RS.7.10 CRORES ADOPTED BY LEARNED CIT(A). THE ASSESSEE IS ASSAILING THE DECISION OF LEARNED CIT(A) BY CONTENDING THAT THE FIRST APPELLATE AUTHORITY HAS CONFIRMED THE DISALLO WANCE PARTIALLY WITHOUT APPRECIATING THE NATURE OF GRANT IN AID AND ALSO TH E METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE ASSESSEE. 12. WE SHALL TAKE UP THE APPEAL FILED BY THE REVENUE. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE FIRS T APPELLATE AUTHORITY HAS ADOPTED THE AMOUNT OF GRANT IN AID AS RS.5.75 CRORE S IN THE PLACE OF RS.7.10 CRORES, WITHOUT CONDUCTING ANY VERIFICATION THROUGH THE ASSESSING OFFICER. ON THE CONTRARY, THE LEARNED AUTHORISED REPRESENTATIVE SU BMITTED THAT THE DETAILS OF GRANT IN AID RECEIVED DURING THE YEAR ARE GIVEN IN THE ANNUAL REPORT OF THE ASSESSEE COMPANY, MORE PARTICULARLY IN NOTE NO.8 OF SCHEDULE P ATTACHED TO THE ANNUAL REPORT. 13. WE HAVE HEARD THE PARTIES ON THIS ISSUE. THE QUESTION IS ABOUT THE QUANTUM OF AMOUNT RECEIVED BY THE ASSESSEE DURING T HE YEAR UNDER CONSIDERATION BY WAY OF GRANT IN AID TOWARDS RESEARCH AND DEVEL OPMENT ACTIVITY. WHILE THE AO HAS ADOPTED A FIGURE OF RS.7.10 CRORES, THE LEAR NED CIT(A) HAS TAKEN IT AS RS.5.75 CRORES. BEFORE US, THE ASSESSEE PLACED REL IANCE ON NOTE NO.8 OF SCHEDULE-P OF THE ANNUAL REPORT TO SUBMIT THAT IT H AD RECEIVED AN AGGREGATE AMOUNT OF GRANT IN AID OF RS.11.75 CRORES DURING TH E YEAR UNDER CONSIDERATION, WHICH CONSISTED OF RS.5.75 CRORES TOWARDS RESEARCH AND DEVELOPMENT ACTIVITY AND RS.6.00 CRORES TOWARDS VRS COMPENSATION PAYMENT S. HOWEVER, AS CONTENDED BY LEARNED DEPARTMENTAL REPRESENTATIVE, T HE LEARNED CIT(A) HAS ACCEPTED THE SUBMISSIONS OF THE ASSESSEE AND THE AS SESSING OFFICER WAS NOT CONFRONTED WITH THE SAID SUBMISSIONS. IN ANY CASE, THIS ISSUE REVOLVES AROUND FACTUAL ASPECTS AND HENCE IT REQUIRES ONLY VERIFICA TION OF BOOKS OF ACCOUNTS. MERE ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 7 VERIFICATION OF BOOKS OF ACCOUNTS TO ASCERTAIN CORR ECT FACTS WOULD NOT CAUSE PREJUDICE TO ANYBODY. ACCORDINGLY, THIS ISSUE OF AS CERTAINING THE CORRECT AMOUNT OF GRANT IN AID PERTAINING TO RESEARCH AND DEVELOPMENT ACTIVITY IS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER IN ORDER TO ENABLE HI M TO SATISFY HIMSELF ABOUT IT AFTER CARRYING OUT DUE VERIFICATION THAT MAY BE FOUND NEC ESSARY. 14. WE SHALL NOW TAKE UP THE APPEAL FILED BY T HE ASSESSEE. THE CONTENTION OF THE ASSESSEE, AS STATED EARLIER, IS T HAT THE LEARNED CIT(A) HAS PARTIALLY CONFIRMED THE DISALLOWANCE WITHOUT APPREC IATING THE FACTS PERTAINING TO THE ISSUE. THE LEARNED COUNSEL FOR THE ASSESSEE SU BMITTED THAT THE ASSESSEE IS CARRYING OUT TWO TYPES OF RESEARCH ACTIVITIES VIZ., (A) IN HOUSE R & D ACTIVITIES (B) R & D ACTIVITIES CARRIED UNDER GRANT IN AID RE CEIVED FROM GOVERNMENT OF INDIA. THE LEARNED COUNSEL SUBMITTED THAT THE GRANT IN AID RECEIVED FROM THE GOVERNMENT IS TREATED AS TIED UP GRANTS BY THE AS SESSEE AND ACCORDINGLY IT HAS BEEN TREATED AS CURRENT LIABILITY IN THE BOOKS OF ACCOUNT. OUT OF THE TOTAL R & D EXPENSES, THE ASSESSEE ASCERTAINED THE EXPENSES PE RTAINING TO TIED UP GRANTS AND TRANSFERRED THE SAME TO THE GRANT IN AID ACCO UNT BY REDUCING THE SAME FROM R & D EXPENSES ACCOUNT. IN THIS REGARD, THE LD A .R INVITED OUR ATTENTION TO SCHEDULE J, NOTE NO.8 OF SCHEDULE P AND SCHEDULE M- 2 OF THE ANNUAL REPORT. 15. THE LEARNED AUTHORISED REPRESENTATIVE EXPL AINED THE NATURE OF GRANT IN AID RECEIVED FROM THE GOVERNMENT AS UNDER:- 4. BEFORE PROCEEDING TO ASSESS THE MERITS OF THE D ISALLOWANCE MADE, IT WOULD BE APPROPRIATE TO UNDERSTAND THE NAT URE OF THE R&D GRANT GIVEN BY THE DEPT. OF ATOMIC ENERGY, OBLI GATIONS OF THE ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 8 ECIL TOWARDS UTILIZATION OF THE SAID GRANT AND THE ACCOUNTING POLICY FOLLOWED BY THE ECIL IN ACCOUNTING THE GRANT S AND THE ATTRIBUTABLE EXPENDITURE. ORIGIN/NATURE OF THE GRANT 5. ECIL WORKS WITH 14 DEPARTMENTS ENGAGED EITHER IN ELECTRONICS OR ELECT6RONIC RELATED ACTIVITIES. ECIL EITHER THROUGH ITS INITIATIVE OR ON THE DIRECTION OF THE DAE MAKES OUT A CASE IN RESPECT OF THE PROPOSED R&D PROJECTS. THE SAID PROJ ECT MAY NOT BE DIRECTLY RELATED TO BUSINESS OF THE ECIL. THIS S AID PROPOSAL OF THE R&D PROJECT IS SUBMITTED TO DAE. AFTER A SERIES OF VERIFICATION AND REVIEW, DAE APPROVES A PROJECT AND THE RELATED GRANT. OBLIGATIONS OF ECIL. 6. ECIL IS UNDER AN OBLIGATION TO UTILISE THE AMOUN T UNDER THE SPECIFIED SUB-HEADS RELATED TO R&D PROJECTS AS APPR OVED BY DAE. ECIL IS UNDER AN OBLIGATION TO PROVIDE AN ACCOUNT O F UTILISATION, PROVIDE DETAILED RESULTS OF THE PROJECTS AND TO REF UND ANY SURPLUS REMAINING UNUTILIZED OUT OF THE GRANTS RECEIVED. TH E SUBSTANCE OF THE TERMS UNDERLYING THE GRANTS CLEARLY ESTABLISHES ECIL AS A TRUSTEE TO THE FUNDS BESTOWED ON IT BY DAE. R&D EXPENDITURE 7. THE ABOVE TWO PARAGRAPHS DESCRIBE THE ROLE OF EC IL IN RESPECT OF R&D PROJECTS CARRIED OUT WITH THE APPROV AL AND GRANTS FROM DAE. APART FROM THE ABOVE, ECIL CARRIES ON IN- HOUSE R&D PROJECTS THE COST OF WHICH IS BORNE OUT OF ITS REVE NUES. 8. HENCE IT IS PARAMOUNT IMPORTANCE TO REALIZE THAT THERE ARE TWO KINDS OF R&D EXPENDITURE INCURRED BY ECIL. 1. IN HOUSE R&D EXPENDITURE 2. TIED-UP GRANT R&D EXPENDITURE. .. 16. THE LEARNED AUTHORISED REPRESENTATIVE SUBM ITTED THAT THE ASSESSEE HAS CLAIMED WEIGHTED DEDUCTION UNDER S.35(2AB) OF T HE ACT @ 150% OF THE EXPENSES INCURRED ON R & D ACTIVITIES, BOTH ON IN HOUSE R&D ACTIVITIES AND ALSO ON R & D ACTIVITIES RELATING TO GRANT IN AID. HE SUBMITTED THAT THE ASSESSEE IS TREATING THE GRANT IN AID AS TIED UP GRANT AND HE NCE THERE IS A POSSIBILITY TO TAKE ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 9 A VIEW THAT THE ASSESSEE MAY NOT BE ENTITLED TO CLA IM WEIGHTED DEDUCTION ON THE R & D EXPENSES RELATING TO THE GRANT IN AID. IF T HE SAID VIEW IS TAKEN, THEN THE DISALLOWANCE IS REQUIRED TO BE RESTRICTED TO RS.244 .14 LAKHS, THE DETAILS OF WHICH IS GIVEN IN PAGE 6 OF THE WRITTEN SUBMISSION AS UNDER: - SL. NO. ITEM OF DISALLOWANCE AMOUNT RS. IN LAKHS 1. R&D GRANTS RECEIVED DURING THE YEAR (REFLECTED AS PART OF NOTE NO.8 OF SCHEDULE P TO THE FINANCIAL STATEMENTS ) NOT CONSIDERED AS INCOME 575.50 2. LESS: EXPENDITURE ON R&D PROJECTS OUT OF THE GRANTS NOT CLAIMED AS EXPENDITURE 488.28 3. BALANCE TO BE CARRIED FORWARDED TO BE UTILIZED IN FUTU5RE YEAR REFLECTED AS CURRENT LIABILITY IN TH E FINANCIAL STATEMENTS 87.22 4. WEIGHTED DE D U C TION OF 150% U/S. 35(2AB) ON R&D EXPENSES (RS.488.28 LAKHS X 50%) - CLAIMED AS DEDUCTION IN THE COMPUTATION OF INCOME 244.14 17. ON THE CONTRARY, THE LEARNED DEPARTMENTA L REPRESENTATIVE SUBMITTED THAT THE SUBMISSIONS MADE LEARNED AUTHORI SED REPRESENTATIVE WERE NOT AT ALL CONSIDERED BY THE ASSESSING OFFICER DURING T HE COURSE OF ASSESSMENT PROCEEDING. 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. ACCORDING TO LEARNED AUTHORISED REPRESENTATIVE, THE ASSESSEE HAS NOT TREATED BOTH THE GRANT IN AID AND THE RELATED R & D EXPE NSES AS REVENUE ITEMS AND ACCORDINGLY, BOTH THE ITEMS HAVE NOT BEEN TAKEN TO THE PROFIT AND LOSS ACCOUNT. ON THE CONTRARY, THE TAX AUTHORITIES HAVE TAKEN THE VIEW THAT THE GRANT IN AID HAS TO BE CONSIDERED AS REVENUE RECEIPT. HOWEVER , THE TAX AUTHORITIES HAVE DISALLOWED THE 150% OF THE GRANT IN AID AMOUNT, UNDE R THE IMPRESSION THAT THE ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 10 ASSESSEE IS NOT ENTITLED TO CLAIM THE EXPENSES THAT WERE INCURRED OUT OF GRANT IN AID. THE SAID ACTION OF THE TAX AUTHORITIES IS CON TRADICTORY TO THEIR STAND VIZ., (A) IF THE GRANT IN AID IS CONSIDERED AS REVENUE R ECEIPT, THEN THERE SHOULD NOT BE ANY REASON TO TREAT THE EXPENSES INCURRED OU T OF SUCH GRANT IN AID AS NOT ALLOWABLE. (B) WE FIND THAT SEC. 35(2AB) DOES NOT LINK THE R ESEARCH AND DEVELOPMENT EXPENSES TO THE SOURCES OF FUNDS. (C) IF THE GRANT IN AID IS CONSIDERED AS REVENUE RECEIPT, THEN IT BECOMES THE ASSESSEES OWN MONEY AND HENCE THE STAND TAKEN BY THE TAX AUTHORITIES TO TREAT THE GRANT IN AID AS SPONSORED MONEY IS CONTRADICTORY TO THEIR OWN STAND. 19. WE FURTHER NOTICE THAT THE WEIGHTED DEDUC TION U/S 35(2AB) IS ALLOWED WITH REFERENCE TO THE EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT. HOWEVER, THE TAX AUTHORITIES HAVE DIS ALLOWED THE EXPENSES @ 150% OF THE GRANT IN AID AMOUNT, WITHOUT MATCHING TH E EXPENSES WITH THE GRANT IN AID AMOUNT. IN ANY CASE, WE HAVE ALREADY NOTICED THAT THE DECISION TAKEN BY THE TAX AUTHORITIES TO MAKE THE SAID DISALLOWANCE I S CONTRADICTORY TO THEIR OWN STAND. 20. THE ASSESSEES CASE IS THAT THE SAID GRANT I N AID IS A TIED UP GRANT. HOWEVER, THIS STAND HAS NOT BEEN EXAMINED BY THE AS SESSING OFFICER. 21. ALL THESE DISCUSSIONS WOULD SHOW THAT THE ISSUES RELATING TO THE NATURE OF THE GRANT IN AID, THE R & D EXPENSES INCU RRED OUT OF THE SAID GRANT IN AID, ELIGIBILITY OF THE ASSESSEE TO CLAIM WEIGHTED DEDUCTION ON SUCH EXPENSES, THE QUESTION WHETHER IT IS A TIED UP GRANT OR NOT, ETC. HAVE NOT BEEN PROPERLY EXAMINED BY THE ASSESSING OFFICER. ACCORDINGLY, IN OUR VIEW, THIS ISSUE REQUIRES ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 11 FRESH EXAMINATION AT THE END OF THE ASSESSING OFFIC ER. ACCORDINGLY, WE SET ASIDE THE ORDER OF LEARNED CIT(A) ON THIS ISSUE AND RESTO RE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THI S ISSUE AFRESH AFTER DULY ADDRESSING THE SUBMISSIONS/CLAIMS MADE BY THE ASSES SEE AND TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW. 22. THE NEXT ISSUE IN THE APPEAL OF THE ASSES SEE RELATES TO THE NATURE OF GRANT IN AID RECEIVED TOWARDS VRS COMPENSATION PAYM ENT. THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE IS THAT THE ASSES SEE HAS BEEN TREATING THE VRS COMPENSATION GRANT AS ITS LIABILITY AND ALSO AS TI ED UP GRANT FOR THE PAST SEVERAL YEARS AND THE SAID ACCOUNTING METHODOLOGY HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE EARLIER YEARS. ACCORDINGLY, IT WAS CONTENDE D THAT THE AO WAS NOT RIGHT IN DEVIATING FROM THE ACCEPTED ACCOUNTING METHODOLOGY. IT WAS FURTHER SUBMITTED THAT THE VRS COMPENSATION GRANT IS IN THE NATURE OF TIED UP GRANT AND HENCE IT WAS NOT CORRECT TO TREAT THE SAME AS ASSESSEES INC OME. WE NOTICE THAT THE AO DID NOT ADDRESS THE VARIOUS CONTENTIONS RAISED BY T HE ASSESSEE. IN THE PRECEDING PARAGRAPHS, WE HAVE SET ASIDE THE ISSUES LIKE ASCER TAINING THE QUANTUM AND NATURE OF GRANT IN AID, DISALLOWANCE OF R & D EXPEN SES ETC TO THE FILE OF THE AO. IN OUR VIEW, THE ISSUE RELATING TO VRS COMPENSATION GRANT IS ALSO LINKED TO THE ABOVE SAID ISSUES. ACCORDINGLY, WE ARE OF THE VIEW THAT THIS ISSUE MAY ALSO REQUIRE FRESH CONSIDERATION AT THE END OF THE AO. ACCORDINGLY, WE SET ASIDE THE ORDER OF LEARNED CIT(A) ON THIS ISSUE AND RESTORE T HE SAME TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THE ISSUE AFRESH AFTER DULY ADDRESSING THE VARIOUS SUBMISSIONS MADE BY THE ASSE SSEE AND DECIDE THE SAME IN ACCORDANCE WITH THE LAW. 23. NEEDLESS TO MENTION, THE ASSESSEE SHOULD BE GIVEN NECESSARY OPPORTUNITY OF BEING HEARD. THE ASSESSEE IS ALSO D IRECTED TO FURNISH ALL THE DETAILS AND INFORMATION THAT MAY BE CALLED FOR BY THE ASSES SING OFFICER. ITA NO.1257/HYD/2011 & 2 ORS M/S. ELECTRONIC CORPORATION OF INDIA LTD., HYDERABAD 12 24. IN THE RESULT, THE APPEAL OF THE REVENUE RELATING TO THE ASSESSMENT YEAR 2002-03 IS DISMISSED AND THE OTHER APPEALS FIL ED BY THE ASSESSEE AND REVENUE RELATING TO THE ASSESSMENT YEAR 2004-05 ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 04.01.2013 SD/- SD/- ( ASHA VIJAYARAGHAVAN) ( B.R.BASKARAN ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED/- 04 TH JANUARY, 2013 COPY FORWARDED TO: 1. M/S. ELECTRONIC CORPORATION OF INDIA LTD., ECIL POST, MOULA - ALI, HYDERABAD 500 062 2. 3. 4. 5. ASSTT COMMISSIONER OF INCOME - TAX CIRCLE 2(2), HYDERABAD COMMISSIONER OF INCOME-TAX(APPEALS) III, HYDERABAD COMMISSIONER OF INCOME-TAX II, HYDERABAD DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S.