DCIT, Bangalore V. M/s Tajas Networks Ltd., Bangalore

ITA 1684/BANG/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7030 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 01-10-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 28-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K R VASUDEVAN SHRI FAR
• Keywords: Capital asset; Depreciation; Opportunity of being heard; Earning of tax free income; Question of law; Cost of acquisition; Bad and doubtful debts; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 115JB; 37(1); 131

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI N.V. VASUDEVAN , JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. NO. 1684 /BANG/201 2 (ASSESSMENT YEAR : 200 8 - 09 ) DY. COMMISSIONER OF INCOME TAX, CIRCLE 12(4), BANG ALORE. VS. M/S. TEJAS NETWORKS LIMITED, NO.58, 1 ST MAIN ROAD, J.P. NAGAR, 3 RD PHASE, BANGALORE - 560 078 PAN AABCT 1670M APPELLANT RESPONDENT. I.T.A. NO. 10 /BANG/201 3 (ASSESSMENT YEAR 2008 - 09 ) (BY ASSESSEE) ASSESSEE BY : SHRI K.R. VASUDEVAN, ADVOCATE . RESPONDENT BY : SHRI FARHAT HUSSAIN QURESHI, CIT (D.R) DATE OF H EARING : 17.10. 2 01 4 . DATE OF P RONOUNCEMENT : 31.12. 201 4 . O R D E R PER SHRI JASON P. BOAZ, A.M. : THESE ARE CROSS APPEALS, BY THE ASSESSEE AND REVENUE, DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - III, BANGALORE DT.2 6.10.201 2 FOR ASSESSMENT YEAR 2008 - 09 . 2. THE FACTS OF THE CAS E, BRIEFLY, ARE AS UNDER : - 2.1 THE ASSESSEE, A COMPANY ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND MANUFACTURING AND TRADING OF NET WORKING EQUIPMENT, FILED ITS RETURN FOR ASSESSMENT YEAR 2 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 2008 - 09 ON 30. 9. 200 8 DECLARING I NCOME OF RS.2,54,56,986 UNDER NORMAL PROVISIONS AND BOOK PROFITS UNDER SECTION 115JB OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') WAS COMPUTED AT RS.16,78,47,305. THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT AND THE CASE WAS TAKEN UP FOR SCRUTINY . THE ASSESS MENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT, V IDE ORDER DT.2 8 .12.201 1 WHEREIN THE INCOME OF THE ASSESSEE WAS COMPUTED AT RS.35,18,17,476 AS AGAINST RETURNED INCOME OF RS.2,54,56,986 IN VIEW OF THE FOLLOWING ADDITIONS / DISALLOWANCES : - (I) PRODUCT D EVELOPMENT EXPENDITURE : RS. 27,97,54,476 . (II) PRODUCT DEVELOPMENT EXPENDITURE DEBITED TO PROFIT AND LOSS ACCOUNT : RS. 10,25,89,536 . (III) DISALLOWANCE U/S.14A R.W. RULE 8D : RS. 1,39,55,097 . (IV) DEPRECIATION ALLOWED ON PRODUCT D EVELOPM ENT EXPENDITURE TREATED AS AN INTANGIBLE ASSET : RS. 6,99,38,619 . THE BOOK PROFITS COMPUTED U/S.115JB OF THE ACT WERE COMPUTED AT RS.19,28,02,402 AS AGAINST THE DECLARED AMOUNT OF RS.16,78,47,305 IN VIEW OF THE FOLLOWING ADJUSTMENTS / ADD ITIONS THERETO : - (I) ADDITION OF PROVISION FOR DOUBTFUL DEBTS : RS.50,00,000. (II) UNSPECIFIED DEDUCTION CLAIMED : RS.60,00,000. (III) ADDL. DISALLOWANCE U/S. 14A : RS.1,39,55,097. 2.2 AGGRIEVED BY THE ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2008 - 09 DT.2 8.12.2011 , THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (APPEALS) III, BANGALORE. THE LEARNED CIT (APPEALS) DISPOSED OFF THE ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2008 - 09 VIDE ORDER DT.26.10.2012 ALLOWING THE ASSESSEE PARTIAL RELIEF. 3 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 3. BOTH REVENUE AND T HE ASSESSEE ARE AGGRIEVED BY THE IMPUGNED ORDER OF THE LEARNED CIT (APPEALS) III, BANGALORE DT.2 6.10.2012 FOR ASSESSMENT YEAR 2008 - 09 AND HAVE PREFERRED APPEALS BEFORE THE TRIBUNAL RAISING THE FOLLOWING GROUNDS : - ASSESSEE'S GROUNDS OF APPEAL (ITA NO.1 0/BANG/2013) 1. PRODUCT DEVELOPMENT EXPENDITURE RS. 279,754,476 1.1 THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) III, BANGALORE ERRED IN CONFIRMING THE DISALLOWANCE OF PRODUCT DEVELOPMENT EXPENDITURE AMOUNTING TO RS. 279,754,476. 1.2 THE LEARNED CIT(A) AND LEARNED AO ERRED IN TREATING PRODUCT DEVELOPMENT EXPENDITURE OF RS. 279,754,476 (CAPITALISED IN THE BOOKS) AS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 35(1)(IV) READ WITH SECTION 35(2) OF THE ACT, ON THE BASIS THAT IT IS NOT IN THE NATURE OF SCI ENTIFIC EXPENDITURE. 1.3 THE LEARNED CIT(A) AND LEARNED AO ERRED IN HOLDING THAT THE EXPENDITURE INCURRED IS COVERED UNDER THE EXCLUSION TO THE DEFINITION GIVEN IN SUBSECTION 4(II) TO SECTION 43 OF THE ACT WHICH STATES THAT THE SCIENTIFIC EXPENDITURE EXCLUDES ANY EXPENDITURE INCURRED IN THE ACQUISITION OF RIGHTS IN, OR ARISING OUT OF, SCIENTIFIC RESEARCH . THE LEARNED CIT(A) AND LEARNED AO ERRED IN NOT APPRECIATING THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS TOWARDS SCIENTIFIC RESEARCH EXPENDITURE INCURR ED DURING CARRYING OUT THE IN - HOUSE RESEARCH AND DEVELOPMENT ACTIVITIES AND HENCE THIS EXPENDITURE CANNOT BE HELD TO BE FOR ACQUISITION OF ANY RIGHTS FROM THIRD PARTIES. 1.4 THE LEARNED CIT(A) AND LEARNED AO ERRED IN NOT FOLLOWING THE ORDER OF THE JURISDICTIO NAL TRIBUNAL S DECISION IN THE APPELLANT S OWN CASE FOR ASSESSMENT YEAR (AY) 2002 - 03 IN ITA NO.470/BANG/2006, AY 2003 - 04 IN ITA NO. 1228/BANG/2007 AND AY 2004 - 05 IN ITA NO. 719/BANG/2010 WHICH HELD THAT THE ACTIVITIES OF THE APPELLANT ARE IN THE NATURE OF SCIENTIFIC RESEARCH EXPENDITURE AND ELIGIBLE FOR DEDUCTION UNDER SECTION 37(1) AND 35(1)(IV) OF THE ACT. 1.5 THE LEARNED CIT(A) ERRED IN HOLDING THAT THE AFOREMENTIONED ORDER IS 4 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 DISTINGUISHABLE TO THE CURRENT FACTS OF THE CASE WITHOUT APPRECIATING THE FACT T HAT THE LEARNED AO HAS NOT RECORDED ANY NEW FACTS IN THE ASSESSMENT ORDER AND THAT THE FACTS RELIED UPON BY THE LEARNED CIT(A) BASED ON THE SWORN STATEMENTS OF CHIEF TECHNOLOGY OFFICER ARE SAME AS THE FACTS DISCUSSED BY THE HONOURABLE ITAT IN ITS AFOREME NTIONED ORDER. 2. BROUGHT FORWARD LOSS RS. 313,041,618 2.1 THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY LEARNED AO OF THE LOSSES BROUGHT FORWARD TO BE SET OFF OR CARRIED FORWARD FOR AY 2008 - 09 BY INVOKING PROVISIONS OF SECTION 79. 2.2 THE LEARN ED CIT(A) ERRED IN HOLDING THAT THE APPELLANT HAD NOT SATISFIED THE 51% BENEFICIAL SHAREHOLDING CONDITION STIPULATED UNDER SECTION 79 OF THE ACT FOR AY 2005 - 06 AND AY 2006 - 07 AS COMPARED TO AY 2008 - 09. 2.3 THE LEARNED CIT(A) AND LEARNED AO ERRED IN NOT ACCEPT ING THE APPELLANT S CONTENTION THAT CARRY FORWARD AND SET OFF OF UNABSORBED SCIENTIFIC RESEARCH EXPENDITURE WAS NOT AFFECTED BY THE PROVISIONS OF SECTION 79. THE LEARNED CIT(A) ERRED IN NOT ACCEPTING THE APPELLANT S CONTENTION THAT THE UNABSORBED SCIENTIFI C RESEARCH EXPENDITURE HAS TO BE TREATED AT PAR WITH UNABSORBED DEPRECIATION BASED ON THE PRINCIPLES LAID DOWN BY THE MUMBAI TRIBUNAL IN THE CASE OF MAHYCO VEGETABLE SEEDS LTD. (122 ITD 142). 3. DISALLOWANCE UNDER RULE 8D READ WITH SECTION 14A 3.1 THE LEARNED CIT (A) AND LEARNED AO ERRED IN MAKING AN ADDITIONAL DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D(2)(II). THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE APPELLANT HAD SUO MOTO MADE A DISALLOWANCE UNDER SECTION 14A OF THE ACT. 3.2 THE LEARNED C IT(A) ERRED IN NOT ACCEPTING THE APPELLANT S CONTENTION THAT THE INTEREST ON OD AND TERM LOANS INCURRED BY IT DURING THE YEAR WAS FOR THE PURPOSES OF WORKING CAPITAL AND NOT FOR THE PURPOSES OF MAKING INVESTMENTS. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTE R OR AMEND ALL OR ANY OF THE AFORESTATED GROUNDS OF APPEAL. FOR THE ABOVE AND ANY OTHER GROUNDS WHICH MAY BE REVISED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT (A) BE SET ASIDE. 5 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 REVENUE S GROUNDS OF APPEAL (ITA NO.1884/BANG/2 012) 1. THE ORDER OF THE LEARNED CIT (APPEALS) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT (APPEALS) HAS ERRED IN HOLDING THAT THE PRODUCT DEVELOPMENT EXPENSES OF RS.10,25,89,836 IS AN AL LOWABLE EXPENDITURE U/S.37(1) WITHOUT APPRECIATING THE FACT THAT THE A.O. HAS DISALLOWED THIS EXPENDITURE ON THE GROUND THAT IT REPRESENTS EXPENDITURE ON INCOMPLETE PROJECTS AND ALSO THE SAME CANNOT BE CAPITALIZED AS NO NEW PRODUCTS HAVE BEEN DEVELOPED BY THE ASSESSEE. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT (APPEALS) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 4. TH E APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. THE APPEALS ARE DISPOSED OFF AS UNDER : - 4. GROUNDS NO.1, 3 & 4 OF REVENUE S APPEAL BEING GENERAL IN NATURE , NO ADJUDICATION IS CALLED FOR THEREON. 5. PRODUCT DEVELOPMENT EXPENDITURE. 5.1 T HE GROUNDS RAISED BY THE ASSESSEE AT S.NO. 1 (1.1 TO 1.5) AND GROUND NO.2 OF REVENUE S APPEAL ARE IN RESPECT OF THE ISSUE OF PRODUCT DEVELOPMENT EXPENDITURE AND CHALLENGE THE ORDER OF THE LEARNED CIT (APPEALS ), TO EXTENT HELD AGAINST EACH OF THEM. 5.2 THE FACTS OF THE MATTER AS EMERGE FROM THE RECORD ARE THAT, IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.31,79,30,319 UNDER THE HEAD RESEARCH AND DEVELOPMENT EXPENDITURE . THIS AMOUNT WAS BIFURCATED ; AN AMOUNT OF RS.21,53,40,783 WAS SHOWN AS RESEARCH AND DEVELOPMENT EXPENDITURE ( R&D ) AND AN AMOUNT OF RS.10,25,89,536 WAS SHOWN AS DEBITED 6 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 TOWARDS PRODUCT DEVELOPMENT EXPENDITURE. THE BREAK UP OF THE AMOUNT OF RS.10,25,89,536 WAS AS UNDER : - S.NO. NATURE OF EXPENDITURE AMOUNT (RS.) 1. DESIGN LAYOUT COMPONENTS & PROTOTYPES. 28,40,03,268 2. EMPLOYEE COST PRODUCT DEVELOPMENT 3,83,77,962 3. EMPLOYEE COST STPI DIVISION. 5,99,62,7 82 TOTAL : 38,24,44,012 LESS : AMOUNT CAPITALIZED DURING THE YEAR. (27,97,54,476) EXPENDITURE INCURRED / CLAIMED ON PRODUCT DEVELOPMENT 10,25,89,526 EVEN THOUGH THE AMOUNT OF RS.27,97,54,476 WAS CPAITALISED, IT WAS CLAIMED AS AN ADMISSIBLE DEDUCTION U/S.35(1)(IV) R.W.S. 35(2) OF THE ACT IN THE COMPUTATION OF INCOME. THEREFORE, IN EFFECT, THE AMOUNT OF RS.10,25,89,536 WAS CLAIMED AS A REVENUE EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT, WHEREAS THE AMOUNT OF RS.27,97,54,476 THOUGH CAPITALIZED AND NOT CLAIMED AS REVENUE EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT TO ARRIVE AT THE ASSESSEE'S NET PROFIT, WAS CLAIMED AS A DEDUCTION U/S.35(1)(IV) R.W.S. 35(3) OF THE ACT IN THE COMPUTATION OF INCOME. 5.2.2 THE ASSESSING OFFICER, WHILE EXAMINING T HESE CLAIMS OF THE ASSESSEE, CALLED FOR VARIOUS DETAILS AND ALSO RECORDED THE STATEMENT ON OATH U/S. 131 OF THE ACT OF THE CHIEF TECHNOLOGY OFFICER OF THE ASSESSEE COMPANY ON VARIOUS ASPECTS OF THIS ISSUE. THE ASSESSING OFFICER OBSERVED THAT THE RESEARCH AND DEVELOPMENT ACTIVITIES INVOLVED FOUR PROCESSES, NAMELY; DESIGN CYCLE, PROTOTYPE CYCLE, SOFTWARE CYCLE AND PRODUCT VERIFICATION. 7 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 ACCORDING TO THE ASSESSING OFFICER, TO THE EXTENT OF THE EXPENDITURE INCURRED IN THE DESIGN CYCLE ON SALARIES TO THE ENGINEE RING TEAMS, BASIC RAW MATERIALS AND OTHER EXPENSES INCURRED ON RUNNING THE R&D FACILITY, IT IS EXPENDITURE ON SCIENTIFIC RESEARCH, BUT IN LATER CYCLES, NO SCIENTIFIC RESEARCH IS CARRIED OUT. IN EFFECT, THE ASSESSING OFFICER HAS CATEGORIZED THE PROCESS IN TO TWO PARTS; ONE BEING THE DEVELOPMENT OF BASIC DESIGNS AND THE OTHER BEING THE DEVELOPMENT OF THE PRODUCT AND HELD THAT THE PROCESS OF PRODUCT DEVELOPMENT DOES NOT INVOLVE SCIENTIFIC RESEARCH. THE ASSESSING OFFICER CONCLUDED THAT THE SAID EXPENDITURE IS NOT ON SCIENTIFIC RESEARCH BUT GIVES RISE TO PATENTS, WHICH ARE INTELLECTUAL PROPERTY RIGHTS AND THEREFORE COMES UNDER THE EXCLUSION CLAUSE IN THE DEFINITION OF SCIENTIFIC RESEARCH. IN THIS VIEW OF THE MATTER, THE ASSESSING OFFICER HELD THAT THIS EXPENDI TURE ON PRODUCT DEVELOPMENT DOES NOT QUALIFY TO BE SCIENTIFIC RESEARCH EXPENDITURE, BUT RATHER REPRESENTS AN INTANGIBLE ASSET IN THE FORM OF KNOW HOW AND IS THEREFORE IN THE NATURE OF CAPITAL EXPENDITURE. HAVING HELD SO, THE ASSESSING OFFICER DISALLOWED T HE ENTIRE EXPENDITURE OF RS.27,97,54,576 AS BEING CAPITAL IN NATURE AND ALLOWED DEPRECIATION @ 25% ON THE SAME. 5.2.3 AS REGARDS THE AMOUNT OF RS.10,25,89,536 DEBITED TO THE PROFIT AND LOSS ACCOUNT AS PRODUCT DEVELOPMENT EXPENDITURE , THE ASSESSING O FFICER HELD THAT IT REPRESENTS CAPITAL WORK - IN - PROGRESS AND THEREFORE DOES NOT QUALIFY FOR DEDUCTION AND PROCEEDED TO DISALLOW THE SAME. 8 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 5.3.1 THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT (APPEALS). IN RESPECT OF THE CLAIM OF DEDUCTION OF THE AMOUNT OF RS.10,25,89,536, THE LEARNED CIT (APPEALS) HELD THAT IT IS REVENUE EXPENDITURE AND FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 IN ITA NO.470/BVANG/2006 DT.8.6.2007, A LLOWED THE ASSESSEE'S CLAIM. 5.3.2 HOWEVER, IN RESPECT OF THE EXPENDITURE OF RS.27,97,54,476 CLAIMED U/S. 35(1)(IV) R.W.S. 35(2) OF THE ACT, THE LEARNED CIT (APPEALS) CONC URRED WITH THE FINDING OF THE ASSESSING OFFICER AND UPHELD THE DISALLOWANCE, MAKI NG THE FOLLOWING OBSERVATIONS : - (I) THE ASSESSEE ITSELF HAS TREATED THIS EXPENDITURE AS CAPITAL EXPENDITURE AND HENCE THIS PART OF THE ARGUMENT OF THE ASSESSING OFFICER IS NOT CONTESTED BY THE ASSESSEE; (II) THE NATURE OF EXPENDITURE CREATES AN INTELLEC TUAL PROPERTY RIGHT WHICH IS EXPLOITED BY THE ASSESSEE FOR ITS PROTOTYPE PRODUCTION; (III) THE DECISION OF THE CO - ORDINATE BENCH OF THIS ITAT IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 (SUPRA), IS DISTINGUISHABLE SINCE THE ISSUE BEFORE THE BEN CH IN THAT CASE WAS ONLY WITH REGARD TO THE DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURE AND THE MATTER OF IT BEING EXCLUDED AS PER SECTION 43(4)(II) WAS NOT BEFORE THE ITAT FOR ADJUDICATION; (IV) THE VIEW OF THE TRIBUNAL THAT THE EXPENDITURE WAS A LLOWABLE U/S.35(1)(IV) OF THE ACT , WAS RENDERED IN A DIFFERENT AND MORE GENERAL CONTEXT AND THE FACTS OF THE CASE FOR 9 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 ADJUDICATION ON THE ISSUE OF THE EXCEPTION PROVIDED FOR IN SECTION 43(4)(II) OF THE ACT ARE DIFFERENT FROM THOSE BEFORE THE BENCH OF THE T RIBUNAL; (V) THE ASSESSING OFFICER IS RIGHT IN TREATING THE EXPENDITURE AS INCURRED FOR ACQUISITION OF AN INTANGIBLE ASSET IN THE FORM OF INTELLECTUAL PROPERTY RATHER THAN ON SCIENTIFIC RESEARCH, FOR DEDUCTION U/S.35(1)(IV) R.W.S. 43(4)(II) OF THE ACT; ( VI) THE FACT THAT THE PROCESS OF R&D AND ITS ATTENDING EXPENDITURE RESULTED IN VESTING OF AN IPR IN THE HANDS OF THE ASSESSEE, QUITE CLEARLY POINT TO THE ACQUISITION OF THOSE RIGHTS. 5.4.1 AGAINST THIS DECISION OF THE LEARNED CIT (APPEALS) BOTH RE VENUE AND THE ASSESSEE ARE IN APPEAL BEFORE US. REVENUE IS AGGRIEVED AGAINST THE DECISION TO ALLOW DEDUCTION OF RS.10,25,89,563 BY TREATING IT AS REVENUE EXPENDITURE AND THE ASSESSEE IS AGGRIEVED AGAINST THE DISALLOWANCE OF THE AMOUNT OF RS.27,97,54,476 C LAIMED AS DEDUCTION UNDER SECTION 35(1)(IV) OF THE ACT. 5.5 THE LEARNED DEPARTMENTAL REPRESENTATIVE VEHEMENTLY ARGUED THAT THE LEARNED CIT (APPEALS) HAD ERRED IN RELYING ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CA SE FOR ASSESSMENT YEAR 2002 - 03 (SUPRA), AS THE ASSESSING OFFICER HAS BROUGHT IN NEW FACTS WHICH WERE NOT BEFORE THE TRIBUNAL IN THE EARLIER YEAR CONCERNED, I.E. ASSESSMENT YEAR 2002 - 03. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, THE ASSESSING O FFICER HAS MADE OUT A CASE THAT THE ENTIRE EXPENDITURE DOES NOT QUALIFY AS SCIENTIFIC RESEARCH AS PER THE DEFINITION GIVEN IN SECTION 43(4)(II) OF THE ACT AND THIS 10 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 WAS A NEW ISSUE WHICH WAS NOT BEFORE THE CO - ORDINATE BENCH IN ASSESSMENT YEAR 2002 - 03. F URTHER, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO POINTED OUT THAT THE LEARNED CIT ( APPEALS) ACCEPTED THE VIEW OF THE ASSESSING OFFICER THAT THE EXPENDITURE IN QUESTION DOES NOT QUALIFY AS SCIENTIFIC RESEARCH AS FAR AS THE CAPITALIZED EXPENDITURE IS CONCERNED AND THAT BEING SO, THE LEARNED CIT (APPEALS) WAS WRONG IN ALLOWING THE NON - CAPITALISED PORTION OF THE EXPENDITURE AS ALLOWABLE DEDUCTION. 5.6.1 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE CARRIED OUT RESEARCH AND DEVELOPMENT IN DEVELOPING OPTICAL TRANSMISSION TELECOMMUNICATION EQUIPMENT. THE R&D IS A CONTINUOUS PROCESS AND WAS CARRIED OUT TO DEVELOP PRODUCT TJ 100. THE R&D EXPENDITURE TYPICALLY INCLUDES SALARY COST OF THE EMPLOYEES AND ENGINEERING C HARGES AND COST OF COMPONENTS AND PROTOTYPES WHICH ARE INCURRED BY THE ASSESSEE IN CONNECTION WITH THE R & D OF THE TELECOMMUNICATION PRODUCT. IT WAS THEREFORE CONTENDED THAT THE ENTIRE EXPENDITURE IS TOWARDS SCIENTIFIC RESEARCH AND QUALIFY FOR DEDUCTION . IT WAS SUBMITTED THAT EVEN IF THE R&D EXPENDITURE IS TO BE CONSIDERED TO BE CAPITAL EXPENDITURE, IT SHOULD BE ELIGIBLE FOR DEDUCTION UNDER SECTION 35(1)(IV) OF THE ACT. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE DECI SION OF A CO - O R DINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 (SUPRA) AND POINTED OUT THAT AT PARAS 19 & 20 THEREOF THE TRIBUNAL HAD HELD AS UNDER : - 11 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 19. IN THE INSTANT CASE, THE BENEFIT IS NOT DERIVED FOR A PERIOD O F MORE THAN FIVE YEARS. HENCE, IN THE INSTANT CASE, IT CANNOT BE SAID THAT THE BENEFIT IS OF ENDURING NATURE AND THE EXPENDITURE IS TO BE TREATED AS CAPITAL. ACCORDINGLY, WE HOLD THAT THE EXPENDITURE ON PROTOTYPE DEVELOPMENT IS TO BE TREATED AS REVENUE A ND NOT AS CAPITAL. 20. WE ALSO FIND FORCE IN THE ALTERNATIVE SUBMISSIONS OF THE LEARNED AR. IN VIEW OF THE CASE LAWS RELIED ON BY THE LEARNED AR, WE ARE OF THE VIEW THAT EXPENDITURE IS ALLOWABLE U/S.35(1)(IV), EVEN IF THE SAME IS TO BE HELD AS CAPITAL. 5.6.2 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE ALSO SUBMITTED THAT THE HON'BLE KARNATAKA HIGH COURT HAS CONFIRMED THE ABOVE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN ITS ORDER DT.25.8.2014 IN ITA NO.813 OF 2007 AND POINTED O UT THAT AT PARAS 11 TO 14 THEREOF THE HON'BLE COURT HAS HELD AS UNDER : - 11. IN THE LIGHT OF THE AFORESAID FACTS AND THE RIVAL CONTENTIONS, IT IS CLEAR THAT THE ASSESSEE IS IN THE BUSINESS OF DEVELOPING AND SELLING LEADING EDGE OPTICAL NETWORKING PRODUCT S FOR WORLDWIDE CUSTOMERS. IT HAS DEVELOPED SOFTWARE DIFFERENTIATED, NEXT GENERATION PRODUCTS THAT ENABLE TELECOMMUNICATION CARRIERS TO BUILD CONVERGED NETWORKS. THE LIFE SPAN OF THIS PRODUCT IS HARDLY A YEAR. BECAUSE OF COMPETITION IN THE MARKET, THE A SSESSEE HAS TO COME OUT WITH NEW FEATURES EVERY YEAR IF THEY WANT TO BE IN THE FIELD. THEREFORE, THERE IS A CONSTANT UPGRADATION OF THE ORIGINAL PRODUCT. IT IS IN THAT CONTEXT SUBSTANTIAL AMOUNT IS SPENT TOWARDS EMPLOYEES COST AND THE UPGRADATION ALSO IN CLUDES USE OF COMPONENTS PURCHASED EVERY YEAR. IN FACT, THOSE COMPONENTS ARE USED FOR MANUFACTURING PRINTED CIRCUIT BOARDS. EVERY YEAR THESE CIRCUIT BOARDS UNDERGO MODIFICATION, CHANGES. THEREFORE, THE EXPENSES INCURRED IN THIS REGARD IS IN THE NATURE O F REVENUE EXPENDITURE. 12. THE APEX COURT IN THE CASE OF EMPIRE JUTE COMPANY LIMITED VS. CIT (1980 VOL. 124 PAGE 1) HAS HELD THAT, THE DECIDED CASES HAVE, FROM TIME TO TIME, EVOLVED VARIOUS TESTS FOR DISTINGUISHING BETWEEN CAPITAL AND REVENUE EXPENDITU RE BUT NO TEST IS PARAMOUNT OR CONCLUSIVE. THERE IS NO ALL EMBRACING FORMULA WHICH CAN PROVIDE A READY SOLUTION TO THE PROBLEM; NO TOUCHSTONE HAS BEEN DEVISED. EVERY CASE HAS TO BE DECIDED ON ITS OWN FACTS, KEEPING IN MIND THE BROAD PICTURE OF THE WHOLE OPERATION IN RESPECT OF WHICH THE EXPENDITURE HAS BEEN INCURRED. FURTHER THEY HELD THAT, THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING ADVANTAGE OF ENDURING BENEFIT, MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSEE THAT MAKES IT A CAPITAL EXPENDITURE. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE 12 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 ADVANTAGE IN A COMMERCIAL SENSE. IF THE ADVANTAGE CONSISTS MERELY IN FA CILITATING THE ASSESSEE'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT, EVE N THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. THE TEST OF ENDURING BENEFITS IS, THEREFORE, NOT A CERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AND MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF A GIVEN CASE. 13. IN FACT, THE APEX COURT IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT, GUJARAT ( 1989 VOL. 177 PAGE 377) HELD THAT, IT WOULD BE UNREALISTIC TO IGNORE THE RAPID ADVANCES IN RESEARCH IN ANTIBIOTIC MEDICAL MICROBIOLOGY AND TO ATTRIBUTE A DEGREE OF ENDURABILITY AND PERMANENCE TO THE TECHNICAL KNOW - HOW AT ANY PARTICULAR STAGE IN THIS FAST CHANGING AREA OF MEDICAL SCIENCE. THE STATE OF THE ART IN SOME OF THESE AREAS OF HIGH PRIORITY RESEARCH IS CONSTANTLY UPDATED SO THAT THE KNOW - HOW CANN OT BE SAID TO BE THE ELEMENT OF THE REQUISITE DEGREE OF DURABILITY AND NONEPHEMERALITY TO SHARE THE REQUIREMENTS AND QUALIFICATIONS OF AN ENDURING CAPITAL ASSET. THE RAPID STRIDES IN SCIENCE AND TECHNOLOGY IN THE FIELD SHOULD MAKE US A LITTLE SLOW AND CIR CUMSPECT INTO READILY PIGEON - HOLING ON OUTLAY SUCH AS THIS AS CAPITAL .. THE IMPROVISATION IN THE PROCESS AND TECHNOLOGY IN SOME AREAS OF THE ENTERPRISE WAS SUPPLEMENTAL TO THE EXISTING BUSINESS AND THERE WAS NO MATERIAL TO HOLD THAT IT AMOUNTED TO A NEW O R FRESH VENTURE. THE FURTHER CIRCUMSTANCE THAT THE AGREEMENT PERTAINED TO A PRODUCT ALREADY IN THE LINE OF THE ASSESSEE'S ESTABLISHED BUSINESS AND NOT TO A NEW PRODUCT INDICATES THAT WHAT WAS STIPULATED WAS AN IMPROVEMENT IN THE OPERATIONS OF THE EXISTING BUSINESS AND ITS EFFICIENCY AND PROFITABILITY NOT REMOVED FROM THE AREA OF THE DAY - TO - DAY BUSINESS OF THE ASSESSEE'S ESTABLISHED ENTERPRISE. 14. WE ARE OF THE VIEW THE AFORESAID STATEMENT OF LAW EQUALLY HOLDS GOOD IN THE AREA OF TELECOMMUNICATION, MAY B E WITH MORE FORCE. HAVING REGARD TO THE FACTS OF THIS CASE, THE EXPENDITURE THAT IS CLAIMED IS FOR UPGRADING THE EXISTING PRODUCT. THEREFORE, THE PRODUCT SO UPGRADED GOES ON CHANGING AS TIME PROGRESSES, KEEPING IN MIND THE REQUIREMENT AND THE COMPETITION IN THE MARKET. THE TRIBUNAL RIGHTLY HELD THAT THE EXPENDITURE IS NOT IN THE NATURE OF CAPITAL EXPENDITURE BUT IS REVENUE EXPENDITURE. THEREFORE, THE FIRST SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 5.6. 3 AS REGARDS THE VIEW OF THE ASSESSING OFFICER THAT THE EXPENDITURE DOES NOT FALL UNDER THE DEFINITION OF SCIENTIFIC RESEARCH AS G IVEN IN SECTION 43(4)(II) OF THE ACT, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ENTIRE EXPENDITURE HAS BEEN 13 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 INCURRED ON ACCOUNT OF IN - HOUSE R&D AND HAS NOT ARISEN OUT OF ACQUISITION OF RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH. IT WAS CONTENDED THAT BOTH THE ASSESSING OFFICER AND THE LEARNED CIT(A) HAVE MISCONSTRUED THE PROVISIONS OF SECTION 43(4) (II) OF THE ACT TO HOLD THAT R&D EXPENDITURE RESULTING IN VESTING OF AN IPR POINTS TO THE ACQUISITION OF RIGHTS. 5.6. 4 THE LEARNED AUTHORISED REPRESENTATIVE ALSO ASSAILED THE VIEW OF THE ASSESSING OFFICER AND THE LEARNED CIT(A) THAT THE FACTS FOR A DJUDICATION IN THE CASE ON HAND FOR THE CURRENT PERIOD I.E. ASSESSMENT YEAR 2008 - 09, IS DIFFERENT FROM THE FACTS BEFORE THE CO - ORDINATE BENCH OF THE TRIBUNAL FOR ASSESSMENT YEAR 2002 - 03. THE LEARNED AUTHORISED REPRESENTATIVE EXTENSIVELY QUOTED FROM THE ORDER OF THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 (SUPRA) AND THE STATEMENT RENDERED UNDER SECTION 131 OF THE ACT OF THE CHIEF TECHNICAL OFFICER (CTO) TO MAKE THE POINT THAT THE FACTS INVOLVED IN THIS YEA R ARE THE SAME AS THE FACTS INVOLVED IN THE EARLIER YEARS AND THAT THE STATEMENT OF THE CTO HAS BEEN WRONGLY QUOTED AND INTERPRETED. IN THIS REGARD THE LEARNED AUTHORISED REPRESENTATIVE REFERRED TO WRITTEN SUBMISSIONS MADE ON THIS ISSUE. 5.6. 5 THE LEA RNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE ALSO ASSAILED THE VIEW OF THE ASSESSING OFFICER AND THE LEARNED CIT(A) THAT THE ISSUE OF THE EXEMPTION TO SECTION 43(4)(II) OF THE ACT IS A NEW ISSUE IN THIS YEAR AND WAS NOT BEFORE THE AUTHORITIES IN EARLIER YEARS. IN THIS CONTEXT, THE LEARNED AUTHORISED REPRESENTATIVE TOOK US THROUGH THE ORDER 14 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 OF ASSESSMENT FOR ASSESSMENT YEAR 2002 - 03 AND THE DECISION OF THE CO - ORDINATE BENCH IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 (SUPRA), TO MAKE THE POINT T HAT THE ISSUE OF SCIENTIFIC RESEARCH EXPENDITURE RELATED TO THE PROVISIONS OF SECTION 43(4)(II) OF THE ACT WAS ALSO BEFORE THE AUTHORITIES BELOW IN THE EARLIER YEARS. IN SUPPORT OF THE ASSESSEE'S CONTENTIONS, THE LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE FOLLOWING DECISIONS : - I) CIT V TALISMA CORPORATION PVT. LTD. IN ITA NO.515 OF 2007 (KAR) DT.30.10.2013. II) DCIT V TCIL BELL SOUTH LTD. (2003) 130 TAXMAN 37 (DEL) (ITAT). 5.7.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFU LLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL DECISIONS CITED. THE PRIMARY ISSUE FOR CONSIDERATION / ADJUDICATION BEFORE US IS THE INTERPRETATION OF THE DEFINITION OF SCIENITIFIC RESEARCH AS PER THE PROVISIONS OF SECTION 43(4)(II) OF THE ACT; AND PARTICULARLY THE EXCLUSION TO THE DEFINITION GIVEN IN CLAUSE (II) TO SUB - SECTION (4) OF SECTION 43 OF THE ACT WHICH STATES THAT SCIENTIFIC RESEARCH EXPENDITURE EXCLUDES ...ANY EXPENDITURE INCURRED IN THE ACQUISITION OF RIGHTS IN, OR ARISING O UT OF, SCIENTIFIC RESEARCH. THE STAND OF THE REVENUE SEEMS TO BE THAT THE EXPENDITURE INCURRED ON IN - HOUSE R&D ALSO NEEDS TO BE EXCLUDED FROM THE DEFINITION OF SCIENTIFIC RESEARCH IF IT LEADS TO ANY INTELLECTUAL PROPERTY RIGHTS. PER CONTRA, THE STAND OF THE ASSESSEE IS THAT THE EXPENDITURE INCURRED ON IN - HOUSE R&D DOES NOT FALL UNDER THE EXCLUSION CLAUSE PROVIDED IN SECTION 43(4)(II) OF THE ACT. 15 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 5.7.2 WE FIND THAT THIS ISSUE HAS BEEN CONSIDERED AND ANSWERED BY THE HON'BLE KARNATAKA HIGH COURT IN T HE CASE OF TALISMA CORPORATION PVT. LTD. (SUPRA). IN THAT CASE, THE HON'BLE HIGH COURT HAD FRAMED THE FOLLOWING QUESTION OF LAW AT PARA 4 OF ITS ORDER WHICH ARE AS UNDER : - 4. THE SUBSTANTIAL QUESTIONS OF LAW, WHICH ARISE FOR CONSIDERATION IN THIS APPE AL, ARE AS UNDER : - 1. WHETHER THE APPELLATE AUTHORITIES WERE CORRECT IN HOLDING THAT THE EXPENSES INCURRED BY THE ASSESSEE WERE IMPROVEMENT OF CAPITAL ASSETS, SHOULD BE TREATED AS A CAPITAL ASSET AS HELD BY THE ASSESSING OFFICER BUT ALSO SHOULD BE GIVEN DEDU CTION U/S. 35(1)((IV) OF THE ACT, BASED ON AN ALTERNATIVE PLEA RAISED BY THE ASSESSEE BEFORE THE APPELLATE COMMISSIONER FOR THE FIRST TIME WITHOUT RAISING THIS ISSUE BEFORE THE ASSESSING OFFICER ? 2. 2. WHETHER THE APPELLATE AUTHORITIES WERE CORRECT IN GRAN TING RELIEF TO THE ASSESSEE U/S. 35(1)(IV) OF THE ACT, WHEN THE ASSESSING OFFICER HAD TREATED THIS IMPROVEMENT AS A CAPITAL ASSET AND HAD ALLOWED DEPRECIATION OVER IT AND WHEN SUCH DOUBLE DEDUCTION IS NOT PERMISSIBLE IN ACCORDANCE WITH SECTION 35(2)(IV) OF THE ACT ? THE HON'BLE HIGH COURT DECIDED THE ABOVE QUESTION OF LAW AT PARA 9 OF ITS ORDER WHICH IS EXTRACTED HEREUNDER : - 9. IT IS THE SPECIFIC CASE OF THE REVENUE THAT, THE AMOUNT OF RS.10.82 CRORES SPENT BY THE ASSESSEE IN ACQUIRING AN INTELL ECTUAL PROPERTY IS CAPITALIZED IN THE BOOKS. NOW FURTHER AMOUNT OF RS.9,27,34,277 IS SPENT IN DEVELOPING AND IMPROVING THE SAID PRODUCT. THEREFORE, THE EXPENDITURE ON FURTHER DEVELOPMENT OF SOFTWARE WHICH IS TREATED AS A CAPITAL IN NATURE, IS ALSO CAPITA L IN NATURE. THIS DEVELOPMENT IS ON ACCOUNT OF SCIENTIFIC RESEARCH. THE EVIDENCE ON RECORD SHOWS MOST OF THE MONEY IS SPENT TOWARDS COST OF THE EMPLOYEES, WHO HAD DEVELOPED THE PRODUCT TALISMA ENTERPRISE 2.5 , MULTI CHANNEL CUSTOMER RELATIONSHIP MANAGE MENT SOLUTION, WHICH PROVIDES SALES, MARKETING, SERVICES, HUMAN RESOURCES AND FINANCE THROUGH THE MEDIUM OF E - MAIL, CHAT, WIRELESS, FAX, PHONE, ETC. TO THE END USERS. THEREFORE, THE EXPENDITURE IN RESPECT OF THE SCIENTIFIC RESEARCH, EVEN IF IT IS CAPITAL IN NATURE AS IT WAS INCURRED IN RELATION TO THE BUSINESS CARRIED ON BY THE ASSESSEE UNDER SECTION 35(1)(IV) OF THE ACT, THE SAID EXPENDITURE IS TO BE DEDUCTED. THAT IS WHAT THE APPELLATE AUTHORITY AS WELL AS THE TRIBUNAL HAVE HELD. 16 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 ACCORDINGLY, WE A NSWER THE SUBSTANTIAL QUESTIONS OF LAW IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 5.7.3 IN THE CASE OF TALISMA CORPORATION PVT. LTD. (SUPRA) CITED ABOVE, THE TAX PAYER HAD ACQUIRED INTELLECTUAL PROPERTY RIGHTS (IPR) WHICH WERE CAPITALISED I N THE BOOKS OF ACCOUNTS. THE TAX PAYER SPENT FURTHER AMOUNTS IN DEVELOPING AND IMPROVING THE SAME. THE EXPENDITURE INCURRED ON IMPROVEMENT WERE ALSO CAPITALISED IN THE BOOKS OF ACCOUNT. WHILE THE AMOUNT SPENT ON ACQUIRING THE IPR WERE NOT ALLOWED AS D EDUCTION U/S. 35 OF THE ACT, THE EXPENDITURE INCURRED IN - HOUSE FOR IMPROVEMENT OF THE SAME WAS ALLOWED AS DEDUCTION U/S.35 (1)(IV) OF THE ACT, EVEN THOUGH IT WAS CAPITALISED IN THE BOOKS OF ACCOUNT. 5.7.4 SECTION 43(4) OF THE ACT DEFINES SCIENTIFIC RE SEARCH FOR THE PURPOSES OF THE ACT AND THE DEFINITION READS AS FOLLOWS : - 43 ( 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 FISH ERIES; ( II ) REFERENCES TO EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH INCLUDE ALL EXPENDITURE INCURRED FOR THE PROSECUTION, OR THE PROVISION OF FACILITIES FOR THE PROSECUTION, OF SCIENTIFIC RESEARCH, BUT DO NOT INCLUDE ANY EXPENDITURE INCURRED IN THE ACQUI SITION OF RIGHTS IN, OR ARISING OUT OF, SCIENTIFIC RESEARCH; ( 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 CA SE 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; FROM THE ABOVE DEFINITIO N, IT CAN BE SEEN THAT U/S.43(4)(II) OF THE ACT, THE EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH DOES NOT INCLUDE ANY EXPENDITURE INCURRED IN THE ACQUISITION OF RIGHTS IN, OR ARISING OUT OF, SCIENTIFIC RESEARCH. IT APPEARS THAT IT IS FOR 17 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 THIS REASON TH AT THE ASSESSING OFFICER CONCLUDED THAT THE EXPENDITURE INCURRED HAS RESULTED IN ACQUISITION OF RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH. 5.7.5 IN THE CASE ON HAND, THE ONLY BASIS ON WHICH THE LEARNED CIT(A) SUSTAINED THE DISALLOWANCE IS THE V IEW THAT THE EXPENDITURE RESULTED IN THE ACQUISITION OF RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH. THE LEARNED CIT(A) HAS PROCEEDED ON THE BASIS THAT IF THE ASSESSEE CARRIES OUT SCIENTIFIC RESEARCH AND IS ABLE TO OBTAIN IPRS ON SUCH RESEARCH, THEN H E WAS FREE TO COMMERCIALLY USE SUCH IPRS AND THIS IS THE REASON WHY THERE IS A PROHIBITION U/S.43(4)(II) OF THE ACT SO AS TO EXCLUDE EXPENDITURE INCURRED IN THE ACQUISITION OF RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH. IN OUR VIEW, THE AFORESAID APP ROACH OF THE AUTHORITIES BELOW IS NOT CORRECT. THE EXPENDITURE THAT IS SOUGHT TO BE EXCLUDED U/S.43(4)(II) OF THE ACT IS AN EXPENDITURE WHICH THE ASSESSEE INCURS IN ACQUIRING RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH ALREADY DONE BY SOMEBODY. IT I S POSSIBLE THAT THE ASSESSEE WITHOUT CARRYING OUT ANY SCIENTIFIC RESEARCH, ACQUIRES RIGHTS IN SCIENTIFIC RESEARCH, ARISING OUT OF SCIENTIFIC RESEARCH DONE BY SOMEBODY ELSE AND CLAIMS COST OF ACQUISITION OF SUCH RIGHTS AS EXPENDITURE ON SCIENTIFIC RESEARCH. IT IS THIS KIND OF EXPENDITURE THAT IS SOUGHT TO BE EXCLUDED U/S. 43(4)(II) OF THE ACT IN ITS EXCLUSION CLAUSE AS EXPENDITURE INCURRED IN ACQUIRING RIGHTS IN, OR ARISING OUT OF SCIENTIFIC RESEARCH. IT IS SUCH TYPE OF EXPENDITURE CARRIED OUT BY SOMEB ODY ELSE AND SUCH RIGHT IS ACQUIRED BY THE ASSESSEE, THAT IS SOUGHT TO BE DISALLOWED. THE OBJECTIVE BEHIND THE EXCLUSION CLAUSE IN SECTION 43(4)(II) OF THE ACT APPEARS TO BE THAT EXPENDITURE ON SCIENTIFIC RESEARCH SHOULD 18 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 BE ON THE RESEARCH ACTUALLY CARRI ED OUT BY THE ASSESSEE IN - HOUSE AND IT SHOULD NOT MERELY SPE N D MONEY IN ACQUIRING RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH CARRIED OUT BY SOME OTHER PERSON. IF THE INTERPRETATION SOUGHT TO BE PLACED BY REVENUE / AUTHORITIES BELOW IS TO BE ACCEPTED, THEN THE BENEFIT SOUGHT TO BE CONFERRED BY THE PROVISIONS OF SECTION 35(1)(IV) OF THE ACT WOULD BE VIRTUALLY DENIED IN ALL CASES BY INVOKING THE EXCLUSION CLAUSE IN SECTION 43(4)(II) OF THE ACT. SUCH A CONSEQUENCE WOULD NEVER HAVE BEEN INTENDED BY THE LEGISLATURE. AS ALREADY STATED, THE OBJECT BEHIND THE PROVISIONS OF SECTION 35 OF THE ACT IS TO ENCOURAGE SCIENTIFIC RESEARCH SO THAT THE BENEFIT OF SUCH RESEARCH WOULD BE AVAILABLE TO ALL. IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE AS DISCUSSED AB OVE, WE ARE OF THE VIEW THAT THE CLAIM OF DEDUCTION UNDER SECTION 35(1)(IV) OF THE ACT IS TO BE ALLOWED. IN ANY EVENT, THERE IS NO DISTINCTION AS TO WHETHER THE EXPENDITURE INCURRED IS CAPITAL OR REVENUE, BECAUSE WHILE THE PROVISIONS OF SECTION 35(1) OF T HE ACT ALLOWS DEDUCTION OF REVENUE EXPENDITURE, THE PROVISIONS OF SECTION 35(1)(IV) OF THE ACT ALLOWS DEDUCTION IN RESPECT OF CAPITAL EXPENDITURE. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO ALLOW THE DEDUCTION CLAIMED BY THE ASSESSEE. CONSEQUENTLY, G ROUND NO.1 OF THE ASSESSEE'S APPEAL IS ALLOWED AND GROUND NO.2 OF REVENUE S APPEAL IS DISMISSED. 6. GROUND NO.2 ASSESSEE'S APPEAL DISALLOWANCE OF BROUGHT FORWARD LOSSES AS PER SECTION 79 OF THE ACT. 6.1 IN THE COURSE OF ASSESSMENT PROCEE DINGS, THE ASSESSING OFFICER OBSERVED THAT THE AUDITORS IN FORM NO.3CD HAD REPORTED CHANGE IN THE SHARE HOLDING OF THE ASSESSEE 19 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 COMPANY IN THE RELEVANT PREVIOUS YEAR. THE ASSESSING OFFICER CALLED FOR AND EXAMINED THE DETAILS OF SHARE HOLDING OF THE ASSES SEE COMPANY FOR VARIOUS YEARS AND EXAMINED THE SAME IN THE LIGHT OF THE PROVISIONS OF SECTION 79 OF THE ACT; I.E. FROM ASSESSMENT YEAR 2002 - 03 TO 31.3.2008, RELEVANT TO THE YEAR UNDER CONSIDERATION, NAMELY ASSESSMENT YEAR 2008 - 09. THE ASSESSING OFFICER ON EXAMINATION THEREOF CONCLUDED THAT THERE WAS A CHANGE IN SHARE HOLDING OF MORE THAN 51% AS ON 31.3.2008 IN COMPARISON TO THE VARIOUS EARLIER YEARS AND DISALLOWED THE BUSINESS LOSS OF THE ASSESSMENT YEARS 2002 - 03, 2003 - 04, 2005 - 06 AND 2006 - 07 FROM BEING CA RRIED FORWARD. THE ASSESSING OFFICER HAS ATTACHED THE DETAILS OF THE SHARE HOLDING AS AN ANNEXURE TO THE ORDER OF ASSESSMENT. 6.2.1 ON APPEAL, BEFORE THE LEARNED CIT(A), THE ASSESSEE CONTENDED THAT OUT OF THE TOTAL AMOUNT OF RS.31,30,41,618 CARRIED FORWARD AS LOSS, AN AMOUNT OF RS.28,56,91,922 REPRESENTS UNABSORBED SCIENTIFIC RESEARCH EXPENDITURE WHICH WOULD BE CONSIDERED AT PAR WITH UNABSORBED DEPRECIATION AND THE CARRY FORWARD OF THE SAME CANNOT BE DENIED. IT WAS SUBMITTED BY THE ASSESSEE THAT THE PROVISIONS OF SECTION 79 OF THE ACT ARE APPLICABLE ONLY TO BUSINESS LOSSES AND NOT FOR UNABSORBED DEPRECIATION AND THEREFORE THE LOSSES TO THE EXTENT OF UNABSORBED SCIENTIFIC EXPENDITURE SHOULD BE ALLOWED TO BE CARRIED FORWARD. IN SUPPORT OF ITS CONTENT IONS, THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF MAHYCO VEGETABLE SEEDS LTD. (2008) 25 SOT 46. 6.2.2 THE LEARNED CIT(A), HOWEVER, DID NOT AGREE WITH THE CONTENTIONS OF THE ASSESSEE. HE OBSERVED THAT WHILE THE DECISIONS CITED BY THE ASSESSEE RELATE TO EXPENSES COVERED BY 20 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 SECTION 35(1)(IV) OF THE ACT AND THEIR RELATION TO UNABSORBED DEPRECIATION, WHEREAS IN THE ASSESSEE'S CASE THE ENTIRE EXPENSES HAS BEEN SHOWN AS REVENUE EXPENDITURE AND CLAIMED AS DEDUCTION IN THE VARIOUS YEARS IN QUESTION AND THEREFORE, CLAIMING THE BENEFIT OF CAPITALISED EXPENDITURE U/S. 35(1)(IV) OF THE ACT FOR THE SAME YEARS FOR THE PURPOSES OF CARRY FORWARD LOSSES IS NOT TENABLE. THEREFORE, THE LEARNED CIT(A) UPHELD THE ACTION OF THE ASSES SING OFFICER IN DENYING THE CARRY FORWARD OF THE EXPENSES. 6.3 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE WAS HEARD IN SUPPORT OF THE GROUNDS RAISED AND REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. IT WAS ALSO SUBMITTED T HAT THE ASSESSING OFFICER HAS NOT COMPUTED THE 51% OF SHARE HOLDING OF THE ASSESSEE COMPANY FOR THE VARIOUS YEARS CORRECTLY. IN THIS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THE DETAILS OF THE SHAREHOLDING, WHICH AS PER THE COUNSEL, SHOW T HAT THE ASSESSEE HAS SATISFIED THE CONDITION OF CHANGE IN THE SHAREHOLDING BEING NOT MORE THAN 51% AS STIPULATED UNDER SECTION 79 OF THE ACT. IT WAS ALSO SUBMITTED THAT THE CHART PRESENTED DURING THE PROCEEDINGS BEFORE US IS EXACTLY THE SAME DETAILS WHICH WAS PRODUCED BEFORE THE ASSESSING OFFICER AND WHICH HAS BEEN ANNEXED TO THE ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2008 - 09. 6.4 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 6.5.1 WE HAVE HEARD TH E RIVAL CONTENTIONS AND HAVE PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. THE ASSESSEE HAS INCURRED BUSINESS LOSSES DURING THE PERIOD 21 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 ASSESSMENT YEAR 2002 - 03 TO ASSESSMENT YEAR 2006 - 07 AMOUNTING TO RS.31,30,41,618, THE BREAK UP OF WHICH IS, F URNISHED BY THE ASSESSEE, AS UNDER : - ASST. YEAR BUSINESS LOSS (RS.) UNABSORBED SCIENTIFIC RESEARCH EXPENDITURE (RS.) TOTAL (RS.) 2002 - 03 -- 1,26,62,000 1,26,62,000 2003 - 04 -- 3,53,80,262 3,53,80,262 2004 - 05 -- 4,80,86,800 4,80,86,800 2005 - 06 2,08,23,4 40 9,11,85,931 11,20,09,371 2006 - 07 65,26,256 9,83,76,929 10,49,03,185 TOTAL : 2,73,49,696 28,56,91,922 31,30,41,618 IT IS THE CONTENTION OF THE ASSESSEE THAT THE UNABSORBED SCIENTIFIC RESEARCH EXPENDITURE SHOULD BE TREATED ON PAR WITH DEPRECIATI ON AND SHOULD BE ALLOWED TO BE CARRIED FORWARD, IRRESPECTIVE OF WHETHER THERE HAS BEEN ANY CHANGE IN THE SHAREHOLDING PATTERN AS PROVIDED IN SECTION 79 OF THE ACT. AS REGARDS THE UNABSORBED BUSINESS LOSSES, IT IS THE CONTENTION OF THE ASSESSEE THAT IT HAS SATISFIED THE PROVISIONS OF SECTION 79 OF THE ACT REGARDING THE CHANGE IN SHAREHOLDING BEING NOT MORE THAN 51% FOR THE ASSESSMENT YEARS 2005 - 06 AND 2006 - 07 AND THEREFORE THE UNABSORBED BUSINESS LOSSES FOR THESE TWO YEARS SHOULD BE ALLOWED TO BE CARRIED FO RWARD. 6.5.2 THE ISSUE UNDER CONSIDERATION CONSISTS OF TWO PARTS / COMPONENTS, NAMELY, (I) WHETHER UNABSORBED SCIENTIFIC RESEARCH EXPENDITURE SHOULD BE TREATED ON PAR WITH UNABSORBED DEPRECIATION ? AND 22 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 (II) WHETHER THERE HAS BEEN A CHANGE IN SHAREHOLD ING OF MORE THAN 51% IN THE EARLIER YEARS UNDER CONSIDERATION, AS COMPARED TO THE ASSESSMENT YEAR 2008 - 09. 6.5.3 AS REGARDS THE FIRST PART / COMPONENT OF THE ISSUE, THE ASSESSEE'S CONTENTION THAT THE UNABSORBED SCIENTIFIC RESEARCH EXPENDITURE IS ON PAR WITH UNABSORBED DEPRECIATION IS BASED ON ITS RELIANCE ON THE DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF MAHYCO VEGETABLE SEEDS LTD. (SUPRA). IN THAT CASE, THE EXPENDITURE IN QUESTION WAS UNABSORBED CAPITAL EXPENDITURE INCURRED ON SCIENTIFIC RESEAR CH CLAIMED AS DEDUCTION UNDER SECTION 35(1)(IV) OF THE ACT. THE SCIENTIFIC RESEARCH HAD BEEN CAPITALISED AND IT WAS HELD THAT THE UNABSORBED CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH HAS THE SAME EFFECT AS UNABSORBED DEPRECIATION. THEREFORE, FOR APPLYIN G THE ABOVE CITED DECISION TO THE FACTS OF THE CASE, IT IS NECESSARY THAT THE SCIENTIFIC RESEARCH EXPENDITURE SHOULD HAVE BEEN CAPITALISED AND DEDUCTION CLAIMED UNDER SECTION 35(1)(IV) OF THE ACT. IF THE EXPENDITURE HAS BEEN CLAIMED AS REVENUE EXPENDITURE , AS MENTIONED BY THE LEARNED CIT(A), THEN THE ASSESSEE CANNOT CLAIM OTHERWISE FOR THE PURPOSES OF CARRY FORWARD OF THE LOSSES. IF THE ASSESSEE HAS TREATED THE SCIENTIFIC RESEARCH EXPENDITURE AS REVENUE EXPENDITURE AND CLAIMED DEDUCTION AS REVENUE EXPEN DITURE, THERE IS NO CASE TO CLAIM THAT IT IS IN THE NATURE OF UNABSORBED DEPRECIATION, FOR THE PURPOSE OF CARRY FORWARD OF LOSSES. IN SUCH A CASE, IT HAS TO BE TREATED AS BUSINESS LOSSES AND THE PROVISIONS OF SECTION 79 OF THE ACT WILL APPLY. IF, ON THE OTHER HAND, THE ASSESSEE HAS TREATED THE SCIENTIFIC RESEARCH EXPENDITURE AS CAPITAL EXPENDITURE AND CLAIMED DEDUCTION UNDER SECTION 35(1)(IV) OF THE ACT, THEN THE 23 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF MAHYCO VEGETABLE SEEDS LTD. (SUPRA) SHALL A PPLY TO THE FACTS OF THE CASE. THIS ASPECT REQUIRES TO BE EXAMINED BY THE ASSESSING OFFICER. 6.5.4 AS REGARDS THE ISSUE OF CHANGE IN SHAREHOLDING , THE ASSESSEE ITSELF IN GROUND AT S.NO.2.2 HAS MENTIONED THAT THERE IS NO CHANGE IN THE SHAREHOLDING FOR ASSESSMENT YEARS 2005 - 06 & 2006 - 07. THEREFORE, BY DEDUCTION, THE FINDING OF THE ASSESSING OFFICER THAT THERE HAS BEEN A C HANGE IN THE SHAREHOLDING OF MORE THAN 51% FOR ASSESSMENT YEARS 2002 - 03 TO 2004 - 05 IS ACCEPTED BY THE ASSESSEE. IN RESPECT OF THE LAT ER TWO YEARS, I.E. ASSESSMENT YEARS 2005 - 06 AND 2006 - 07, IT IS THE CONTENTION OF THE ASSESSEE THAT THE CHANGE IN THE SHAREHOLDING IS NOT MORE THAN 51% AND THEREFORE THE CONDITIONS STIPULATED IN SECTION 79 OF THE ACT IS SATISFIED. IN SUPPORT OF THIS CONTENTION , THE LEARNED AUTHORISED REPRESENTATIVE HAS FURNISHED THE DETAILS OF THE GROUPING OF SHAREHOLDING, WHICH IS CLAIMED TO BE THE SAME DETAILS AS FILED BEFORE THE ASSESSING OFFICER. THE DETAILS FURNISHED BEFORE US, IN THIS REGARD, ALSO REQUIRE TO BE EXAMINED. 6.5.4 IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE ON THIS ISSUE, WE DEEM IT APPROPRIATE TO REMAND THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE ISSUE IN THE LIGHT OF THE OBSERVATIONS MADE ABOVE AFTER AFFORDING THE ASSESSEE A DEQUATE OPPORTUNITY OF BEING HEARD AND TO SUBMIT DETAILS / SUBMISSIONS REQUIRED IN THIS REGARD, WHICH SHALL BE CONSIDERED. IT IS ORDERED ACCORDINGLY. CONSEQUENTLY, GROUND NO.2 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 24 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 7. GROUND NO.3 : DISALLOWA NCE UNDER SECTION 14A OF THE ACT. 7.1 IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.3,14,10,280 WHICH HAS BEEN CLAIMED AS EXEMPT UNDER SECTION 10(34) OF THE ACT. THE ASSESSEE HA D ADDED BACK AN AMOUNT OF RS.22,94,435, BEING 0.5% OF THE AVERAGE VALUE OF THE INVESTMENT, AS DISALLOWANCE TOWARDS EXPENDITURE FOR EARNING EXEMPT INCOME AS PER CLAUSE (III) OF SUB - RULE (2) OF RULE 8D OF THE IT RULES, 1962. THE ASSESSING OFFICER, HOWEVER, MADE DISALLOWANCE OF FURTHER AMOUNT OF RS.1,39,55,097 TOWARDS INTEREST EXPENDITURE TO BE DISALLOWED UNDER RULE 8D, FOR THE FOLLOWING REASONS : - I) THE ASSESSEE HAD ADEQUATE FUNDS FOR CARRYING ON THE BUSINESS WITHOUT APPROACHING THE BANKS FOR LOANS. II) TH E NECESSITY TO GO FOR SECURED LOANS HAS ARISEN ONLY ON ACCOUNT OF DIVERSION OF BUSINESS FUNDS TO THE INVESTMENTS; III) THE INTEREST INCURRED CAN BE INDIRECTLY ATTRIBUTED TO INVESTMENTS AND THEREFORE THE INTEREST EXPENDITURE NEEDS TO BE DISALLOWED. 7.2 ON APPEAL, THE LEARNED CIT(A) CONFIRMED THE DECISION OF THE ASSESSING OFFICER, HOLDING THAT THE ASSESSEE IS UNABLE TO PROVE THAT ALL THE INTEREST PAYMENTS ARE ATTRIBUTABLE TO ONLY THE USE OF BUSINESS FUNDS. THE LEARNED CIT(A), HOWEVER, HELD THAT DISCOU NTING AND FACTORING CHARGES ARE IN THE NATURE OF FINANCE CHARGES AND THEREFORE CANNOT BE CONSIDERED AS PART OF INTEREST FOR THE PURPOSE OF COMPUTING THE DISALLOWANCE 25 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 UNDER SECTION 14A OF THE ACT AND DIRECTED THE ASSESSING OFFICER TO RECOMPUTE THE DISALLOWA NCE ACCORDINGLY. 7.3.1 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW THAT THE EXEMPT INCOME, IN THE NATURE OF DIVIDEND, WAS FROM INVESTMENT IN MUTUAL FUNDS (MFS) AND THA T THE INVESTMENT WAS MADE OUT OF SURPLUS FUNDS AND FUNDS FROM OTHER SOURCES AND THAT NO PART OF THE BORROWED FUNDS WAS UTILISED FOR MAKING THE INVESTMENT IN MFS. IT WAS SUBMITTED THAT THE PURCHASE OF INVESTMENTS IN THE YEAR UNDER CONSIDERATION WERE FUNDED FROM OUT OF THE FOLLOWING SOURCES : - I) INVESTMENTS REDEEMED : - THE INVESTMENTS IN MFS RE DEEMED DURING THIS YEAR AMOUNTING TO RS.201,54,66,194 (REDEMPTION VALUE RS.202,91,49,246) WERE SWITCHED TO NEW INVESTMENTS WHICH ARE DISCLOSED AS PURCHASED DURING THE YEAR. II) DIVIDENDS RE - INVESTED : - THE ASSESSEE HAD EARNED DIVIDENDS DURING THIS YEAR AMOUNTING TO RS.2,03,30,469 WHICH WERE RE - INVESTED IN MFS. III) ISSUE OF SHARES : - THE ASSESSEE RECEIVED ADDITIONAL FUNDS TOWARDS SHARE CAPITAL ON VARIOUS DATES AMOUNTING TO RS.95,00,06,759 DURING WHICH PERIOD THE COMPANY MADE MOST OF ITS INVESTMENTS IN MFS. 7.3.2 THE LEARNED AUTHORISED REPRESENTATIVE ALSO SUBMITTED THAT IT IS SETTLED PRINCIPLE THAT WHEN NO EXPENDITURE IS INCURRED BY THE ASSESSEE IN EARNING T HE DIVIDEND INCOME, NO 26 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 NOTIONAL EXPENDITURE COULD BE DEDUCTED FROM THE SAID INCOME AND IN THIS CONTEXT PLACED RELIANCE IN THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASES OF I) CCI LTD. V JCIT (250 CTR 291) (KAR); AND II) ACIT V ORIENTAL ST RUCTURAL ENGINEERS PVT. LTD. (2011 - TMI - 2074763 - ITAT - DELHI) ASST. YEAR 2008 - 09 (AFFIRMED BY THE HON'BLE DELHI HIGH COURT). 7.4 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE LEARNED CIT(A) IN THE IMPUGNED ORDER. 7.5 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL DECISIONS CITED AND PLACED RELIANCE UPON. THE ASSESSEE'S CONTENTION IS THAT IT HAS SUFFICIENT FUNDS TO MAKE INVESTMENTS AND THAT THE INTEREST - B EARING BORROWED FUNDS WERE NOT USED FOR MAKING THE INVESTMENTS IN MFS DURING THE PERIOD UNDER CONSIDERATION. THIS ASPECT OF THE ASSESSEE'S CONTENTION, IN OUR CONSIDERED VIEW, REQUIRES VERIFICATION. IN THIS VIEW OF THE MATTER, WE DEEM IT APPROPRIATE TO RE MAND THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE ISSUE IN THE LIGHT OF THE ASSESSEE'S SUBMISSIONS AND THE GUIDANCE RENDERED IN THE JUDICIAL DECISIONS CITED (SUPRA). 8.1WITHOUT PREJUDICE TO THE ABOVE GROUND OF APPEAL, THE ASSESSEE HA D SUBMITTED THAT THE ASSESSING OFFICER HAD ERRED IN COMPUTING THE DISALLOWANCE OF INTEREST IN THAT HE HAD INCLUDED FINANCE CHARGES LIKE FACTORING AND OTHER CHARGES, BILL DISCOUNTING CHARGES, ETC. AS PART OF INTEREST CHARGES. IT IS THE CONTENTION OF THE ASSESSEE THAT THE COMPUTATION MADE 27 ITA NOS. 1684 /BANG/2012 & 10/BANG/2013 BY THE ASSESSING OFFICER IS ERRONEOUS, SINCE SUCH FINANCE CHARGES CANNOT BE INCLUDED AS INTEREST FOR THE PURPOSES OF RULE 8D OF THE IT RULES, 1962. 8.2 WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE LEARNED AUTHO RISED REPRESENTATIVE OF THE ASSESSEE AND LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE AND HAVE PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. WE FIND FROM THE RECORD THAT THE LEARNED CIT(A) HAS ALREADY DIRECTED THE ASSESSING OFFICER TO EXCLU DE THESE CHARGES FROM THE COMPUTATION OF INTEREST AND HENCE NO ADJUDICATION IS CALLED FOR AT THIS STAGE. 9. IN THE RESULT, THE ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2008 - 09 IS PARTLY ALLOWED AND REVENUE S CROSS APPEAL IS DISMISSED. ORDER PR ONOUNCED IN THE OPEN COURT ON 31 ST DEC., 20 1 4 . SD/ - SD/ - ( N.V. VASUDEVAN ) ( JASON P BOAZ ) JUDICIAL MEMBER ACCOUNTANT MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - B BENCH. 6. GUARD FILE. (TRUE COPY) BY ORDER ASST. REGISTRAR, ITAT, BANGALORE