Assistant Commissioner of Income-tax, V. Balaji Amines Ltd.,

ITA 2071/PUN/2013

• Counselvise Citation: 207124514 RSA 2013
• Duration Of Justice: 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 29-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VEMULAPATI SRIDHAR
• Keywords: Capital asset; Depreciation; Search and seizure; Revenue expenditure; Capital expenditure
• Section: 32; 28

Judgement Text

INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NOS.713 & 2071/PN/2013 (ASSESSMENT YEARS : 2009-10- & 2010-11) ACIT, CIRCLE-1, SOLAPUR .. APPELLANT VS. BALAJI AMINES PVT. LTD., BALAJI BHAVAN, 165A, RAILWAY LINES, SOLAPUR-413001 PAN NO. AABCB1049E .. RESPONDENT ASSESSEE BY : SHRI VEMULAPATI SRIDHAR REVENUE BY : SHRI RAJESH DAMOR DATE OF HEARING : 27-10-2014 DATE OF PRONOUNCEMENT : 29-10-2014 ORDER PER R.K. PANDA, AM : THE ABOVE TWO APPEALS FILED BY THE REVENUE ARE DIRE CTED AGAINST THE SEPARATE ORDERS DATED 16-11-2012 AND 05 -09- 2013 OF THE CIT(A)-III, PUNE RELATING TO ASSESSMENT YEARS 2009-10 AND 2010-11 RESPECTIVELY. FOR THE SAKE OF CONVENIENCE, THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO.713/PN/2013 ( A.Y. 2-009-10) : 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A COMPANY ENGAGED IN MANUFACTURING AND SALE OF AMINES , DERIVATIVES AND NATURAL PRODUCTS. IT FILED ITS RET URN OF INCOME ON 01-09-2009 DECLARING TOTAL INCOME OF RS.8,07,71, 040/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASS ESSING 2 OFFICER OBSERVED FROM THE COMPUTATION OF INCOME FIL ED BY THE ASSESSEE THAT IT HAS CLAIMED EXPENDITURE U/S.35(1)( I) OF THE I.T. ACT ON ACCOUNT OF R&D MATERIAL INCLUDED IN THE CLOSING STOCK OF RAW MATERIAL OF RS.1,19,04,059/-. THE ASS ESSING OFFICER ASKED THE ASSESSEE TO FILE THE DETAILS OF T HIS EXPENDITURE AND TO EXPLAIN AS TO HOW THE EXPENDITUR E HAS BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNT. 2.1 THE ASSESSEE FILED THE DETAILS AS REQUIRED BY T HE ASSESSING OFFICER. IT WAS EXPLAINED THAT THE ASSES SEE CLAIMS THE DEDUCTION ON ACCOUNT OF CLOSING STOCK OF R&D MA TERIAL OVER AND ABOVE THE EXPENSES OF R&D MATERIAL ALREADY DEBI TED IN THE PROFIT AND LOSS ACCOUNT. THIS PRACTICE IS BEIN G FOLLOWED SINCE MANY YEARS. THE ASSESSING OFFICER NOTED THAT IN ALL THE EARLIER YEARS THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE AS REGARDS THE DEDUCTION U/S.35(1)(I) ON A CCOUNT OF CLOSING STOCK OF R&D MATERIAL. REJECTING THE VARIOU S EXPLANATIONS GIVEN BY THE ASSESSEE, THE ASSESSING O FFICER DISALLOWED THE CLAIM OF DEDUCTION U/S.35 (1)(I). T HE ASSESSEE FURTHER EXPLAINED THAT IN THE COURSE OF PROCEEDINGS U/S.143(3) OF THE ACT FOR A.YRS. 2007-08 AND 2008-09, THE ASSE SSING OFFICER DISALLOWED THE CLAIM OF CLOSING STOCK OF R& D MATERIAL AS EXPENDITURE U/S.35(1)(I) OF THE ACT. IT WAS SUBMIT TED THAT THE ASSESSEE ON ITS OWN DISALLOWED THE AMOUNT OF CLOSIN G STOCK OF R&D MATERIAL CLAIMED AS DEDUCTION U/S.35(1)(I) FOR A.Y. 2007- 08 IN THE COMPUTATION OF INCOME SHEET FOR A.Y. 2008 -09 AND THE AMOUNT OF CLOSING STOCK FOR A.Y. 2008-09 IN THE COMPUTATION OF INCOME FOR A.Y. 2009-10 RESPECTIVELY . THIS ACTION WOULD AMOUNT TO DOUBLE TAXATION. THE ASSESS ING OFFICER 3 HAS ADDED BACK THE CLOSING STOCK OF R&D MATERIAL IN A.Y. 2008-09 OF RS.1,63,23,232/- BY REDUCING THE AMOUNT ALREADY DISALLOWED DURING THE COURSE OF ASSESSMENT PROCEEDI NGS U/S.143(3) OF THE I.T. ACT FOR A.Y. 2007-08 AND THE ASSESSEE HAS DISALLOWED THE SAME AMOUNT IN ITS COMPUTATION O F INCOME FOR CURRENT A.Y. 2009-10. IT WAS EXPLAINED THAT SI NCE THE ASSESSING OFFICER HAS ALREADY DISALLOWED THE CLOSIN G STOCK OF R&D MATERIAL OF RS.1,63,23,232/- IN ASSESSMENT ORDE R FOR A.Y. 2008-09 THE VOLUNTARY DISALLOWANCE OF SAME AMOUNT M ADE BY THE ASSESSEE IN THE CURRENT RETURN FOR A.Y. 2009-10 SHOULD ALSO BE ALLOWED SO AS TO AVOID DOUBLE TAXATION AND THE S AME AMOUNT IN TWO DIFFERENT ASSESSMENT YEARS. 2.2 HOWEVER, THE ASSESSING OFFICER HELD THAT ALTHOU GH THE ARGUMENT OF THE ASSESSEE IS THEORETICALLY CORRECT, HOWEVER, SINCE THE ASSESSEE HAS CONTESTED THE DECISION OF TH E ASSESSING OFFICER IN APPEAL AND THE MATTER HAS NOT ATTAINED F INALITY, THEREFORE, THE ARGUMENTS ADVANCED BY THE ASSESSEE C ANNOT BE ACCEPTED. 3. IN APPEAL THE LD.CIT(A) HELD THAT THE ASSESSEE I S NOT ENTITLED TO DEDUCTION U/S.35(1)(I) CLAIMED IN THE C OMPUTATION OF INCOME IN RESPECT OF PURCHASE OF MATERIAL MEANT FOR R&D BUT WHICH WERE LYING AS CLOSING STOCK AND NOT ACTUA LLY USED DURING THE YEAR FOR SCIENTIFIC RESEARCH AND DEVELOP MENT. HE ACCORDINGLY CONFIRMED THE DISALLOWANCE OF RS.1,19,0 4,059/- MADE BY THE ASSESSING OFFICER ON THIS GROUND. HOWE VER, ON THE BASIS OF THE ALTERNATE CONTENTION OF THE ASSESS EE, HE DIRECTED THE ASSESSING OFFICER TO EXCLUDE THE AMOUN T OF RS.4,34,44,861/- ADDED BACK BY THE ASSESSEE IN THE 4 COMPUTATION OF TAXABLE INCOME FROM THE TOTAL ASSESS ED INCOME OF THIS YEAR AS THE SAME WAS ALREADY DISALLOWED AND ADDED BACK FOR A.Y. 2008-09 BY THE ASSESSING OFFICER. TH E RELEVANT OBSERVATION OF THE CIT(A) AT PARA 6 AND 7 OF THE OR DER READ AS UNDER : 6.7 THE ALTERNATE CONTENTION OF THE LD. COUNSEL FOR THE APPELLANT IS THAT EVEN ASSUMING THAT THE ASSESSING OFFICER HAS TO F OLLOW THE TREATMENT FOLLOWED BY HIS PREDECESSORS IN THE ASSESSMENT YE AR 2007-08 AND 2008-09, THEN HE SHOULD HAVE ALLOWED THE DEDUCTION OF THE AMOUNT DISALLOWED BY THE ASSESSING OFFICER IN THE AY 2008- 09 AMOUNTING TO RS.4,38,44,861/- WHILE COMPUTING THE TOTAL INCOME FOR THE YEAR UNDER CONSIDERATION. THERE IS MER IT IN THE ALTERNATE CONTENTION OF THE APPELLANT. IN THE COMPU TATION OF TOTAL INCOME FOR THE A.Y. 2009-10, THE AMOUNT OF RS.4,38,4 4,861/- WAS ADDED BACK BY THE APPELLANT ON ITS OWN BEFORE CLAIMI NG DEDUCTION U/S.35 FOR THIS YEAR SINCE SUCH CLOSING STOCK IN RESPECT O F WHICH DEDUCTION U/S.35 WAS CLAIMED IN THE PRECEDING YEAR WO ULD BE PART OF THE OPENING STOCK IN THE SUCCEEDING YEAR. SINCE TH E SAME AMOUNT WAS ALREADY DISALLOWED BY THE ASSESSING OFFICER IN THE IM MEDIATELY PRECEDING YEAR I.E. A Y 2008-09, THE ASSESSING OFFICER OUGHT TO HAVE EXCLUDED THE AMOUNT WHILE COMPUTING THE TOTAL INCOM E FOR THE YEAR UNDER CONSIDERATION. IN FACT, THE ASSESSING OFFICER WHIL E COMPUTING THE TOTAL INCOME FOR THE PRECEDING ASSESSMENT YEAR 2008 -09 EXCLUDED SUCH ADDITION MADE IN THE A.Y. 2007-08 IN A RRIVING AT THE ASSESSED INCOME. FOLLOWING THE SAME ANALOGY, WHILE DISALL OWING 'THE CLAIM OF DEDUCTION CLAIMED OF RS.1,19,04,159/-F OR THE YEAR UNDER CONSIDERATION, THE AMOUNT OF RS.4,38,44,861/-, ADDED BACK BY THE APPELLANT, OUGHT TO HAVE BEEN EXCLUDED FROM THE TOTAL INCOME. AS ALREADY MENTIONED, FOR THE A. Y. 2008-09, THE DISALLOWANCE OF RS.4,38,44,861/ - MADE BY THE ASSESSING OFFICER ON THIS GROUND WAS ALSO SUSTAINED IN THE APPELLATE ORDER P ASSED BY CIT(A). THE FACT THAT THE APPELLANT IS IN FURTHER AP PEAL IN RESPECT OF EARLIER YEARS IS NOT A REASON FOR THE ASSESSING OFFICER TO CAUSE DOUBLE TAXATION OF THE SAME INCOME. ACCORDINGLY, TH E ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE AMOUNT OF RS.4,3 4,44,861/-, ADDED BACK BY THE APPELLANT IN THE COMPUTATION OF T AXABLE INCOME, FROM THE TOTAL ASSESSED INCOME OF THIS YEAR AS THE SAME WA S ALREADY DISAVOWED AND ADDED FOR THE A.Y, 2008-09 BY THE ASSES SING OFFICER. 4. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVE NUE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUND : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD.CIT(A)-III, PUNE WAS NOT JUSTIFIED IN EXCLUDING THE AMOUNT OF RS.4,34,44,861/-, WHICH IS ADDED BACK BY THE ASS ESSEE COMPANY O NITS OWN IN THE COMPUTATION OF TAXABLE IN COME, FROM THE TOTAL ASSESSED INCOME OF THE A.Y. 2009-10, AS THE SAME WAS ALREADY DISALLOWED AND ADDED IN THE A.Y. 2 008-09 BY THE ASSESSING OFFICER. 5 5. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFI CER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE AS SESSEE. WE FIND THE ISSUE OF ALLOWABILITY OF CLAIM OF DEDUCTIO N U/S.35 IN THE COMPUTATION OF INCOME OF THE R&D MATERIAL INCLUDED IN THE CLOSING STOCK OF MATERIAL WAS A SUBJECT MATTER OF A PPEAL BY THE ASSESSEE FOR A.YRS. 2007-08 AND 2008-09. WE FIND T HE TRIBUNAL VIDE ITA NO.1448/PN/2011 ORDER DATED 30-04 -2014 FOR A.Y. 2007-08 WHILE DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE HAS HELD AS UNDER: 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BO TH 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 RELATING TO THE GENUINENESS OF THE PURCHASE OF RAW MAT ERIALS FOR RESEARCH AND DEVELOPMENT ACTIVITIES. THE ONLY DISPUTE IS REGARDING ALLOWABILITY OF THE CLAIM OF DEDUCTION 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 MATERIAL PURCHASED DURING THE YEAR FOR RESEARCH AND DEVELOPMEN T ACTIVITIES, ALTHOUGH NOT PUT TO USE DURING THE YEAR, HAS TO BE AL LOWED AS DEDUCTION/S.35. IT IS THE CASE OF THE REVENUE THAT TH E ASSESSEE IS NOT ENTITLED TO DEDUCTION U/S.35(1) ON ACCOUNT OF PU RCHASE OF RAW MATERIAL MEANT FOR R&D WHICH WERE NOT ACTUALLY USED FOR SCIENTIFIC RESEARCH AND DEVELOPMENT BUT WERE LYING AS CLOSING STOC K. 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 TH E DEDUCTION UNDER SECTION 80J OF THE ACT IN RESPECT OF THE WATCH FACTORY OF THE ASSESSEE, THIS 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 MANNER 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, MACHINE RY, PLANT OR FURNITURE OWNED BY THE ASSESSEE AND USED FOR THE PURPOSES OF THE BUSINESS, ETC. ACCORDING TO THE REVENUE, WHEN AN ASSET I S USED IN THE BUSINESS AFTER IT CEASES TO BE USED FOR SCIENTIFIC RESE ARCH RELATED TO THAT BUSINESS THE ACTUAL COST OF THE ASSET TO THE ASSE SSEE, WHEN THE SAID ASSET IS USED IN THE BUSINESS THEREAFTER, WILL BE THE VALUE DERIVED AFTER DEDUCTING THE DEPRECIATION GRANTED TO THE SAID ASSET WHEN IT WAS USED FOR SCIENTIFIC RESEARCH. 6 SECTION 35 PROVIDES FOR THE EXPENDITURE ON SCIENTIFIC RESEARCH AND AS PER SUB CLAUSE (IV) OF SECTION 35(1), IN RESPECT OF E XPENDITURE ON SCIENTIFIC RESEARCH, ANY EXPENDITURE OF A CAPITAL NAT URE ON SCIENTIFIC RESEARCH IS ALLOWED WHEN IT IS RELATED TO THE BUSINESS C ARRIED ON BY THE ASSESSEE AND SUB SECTION (2) PROVIDES FOR THE COMPUTA TION OF THE DEDUCTION. WHEN AN ASSESSEE USES THE ASSETS FOR SCIENTIF IC RESEARCH AND AVAILS OF SUCH DEDUCTIONS, ACCORDING TO TH E REVENUE, THE VALUE OF THE ASSET WOULD GET REDUCED TO THE EXTEN T OF THE DEDUCTIONS BY THE TIME THE ASSET IS DIVERTED FOR USER IN THE MAIN BUSINESS OF THE ASSESSEE. THIS CONTENTION WAS NOT ACCEPTED BY THE APPELLATE TRI BUNAL. THE TRIBUNAL OBSERVES THAT, 'IT IS NOT DENIED THAT THE ASSE TS ARE STILL BEING USED FOR SCIENTIFIC RESEARCH' AND, THEREFORE, T HESE ASSETS ARE NOT ENTITLED TO ANY DEPRECIATION AT ALL BUT FOR A D EDUCTION UNDER SECTION 35(1)(IV). THE TRIBUNAL FURTHER OBSERVED THAT , FOR THE PURPOSE OF SECTION 80J, THE MEANING OF THE TERM 'ACTU AL COST' STATED IN SECTION 43(1) WITHOUT REFERENCE TO EXPLANATION 1 HAS TO BE APPLIED. THE TRIBUNAL ALSO HAS NOTED THAT IT WAS NOT T HE CASE OF THE REVENUE THAT THE ASSETS IN QUESTION ARE NOT USED FOR THE BUSINESS OF THE INDUSTRIAL UNDERTAKING ; SINCE THESE ASSETS ARE ALSO U SED FOR THE BUSINESS OF THE ASSESSEE, THEY CANNOT BE EXCLUDED FROM THE CAPITAL OF THE COMPANY. THIS WAS THE VIEW TAKEN BY THE COMMIS SIONER (APPEALS), AS WELL AS BY THE APPELLATE TRIBUNAL AND T HE 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. FO R THIS PURPOSE, THE CAPITAL EMPLOYED IN THE INDUSTRIAL UNDER TAKING OF THE ASSESSEE WILL HAVE TO BE COMPUTED IN THE MANNER SPECIFIE D IN SUB SECTION (1A). THIS AGAIN TAKES US TO SUB CLAUSE (II) OF SECTION 80J(1A)(11). ACCORDING TO THIS, THE VALUE OF THE ASSET S SHALL BE ASCERTAINED THUS : 'IN THE CASE OF ASSETS ACQUIRED BY PUR CHASE AND NOT ENTITLED TO DEPRECIATION, THEIR ACTUAL COST TO T HE ASSESSEE'. EXPLANATION 1 STATES THAT, 'IN THIS CLAUSE, 'ACTUAL CO ST' HAS THE SAME MEANING AS IN CLAUSE (1) OF SECTION 43'. THERE IS NO DI SPUTE THAT THESE PROVISIONS GOVERN THE INSTANT CASE AND, THEREFORE, THE ONLY QUESTION ACTUALLY THAT WOULD SURVIVE FOR CONSIDERATIO N WILL BE THE SCOPE OF THE EXPLANATION PERTAINING TO THE TERM 'ACT UAL 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 C OST OF THE ASSETS TO THE ASSESSEE, REDUCED BY THAT PORTION OF THE COST THEREOF, IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OT HER PERSON OR AUTHORITY : PROVIDED THAT WHERE THE ACTUAL COST OF AN ASSET, BEING A MOTOR CAR WHICH IS ACQUIRED BY THE ASSESSEE AFTER THE 31ST DAY OF MARCH, 1967, BUT BEFORE THE 1ST DAY OF MARCH, 1975, AND IS USED OTH ERWISE THAN IN BUSINESS OF RUNNING IT ON HIRE FOR TOURISTS, EXCEEDS TWEN TY FIVE THOUSAND RUPEES, THE EXCESS OF THE ACTUAL COST OVER SUCH AMOUNT SHALL BE IGNORED, AND THE ACTUAL 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 TH AT BUSINESS AND DEDUCTION HAS TO BE MADE UNDER CLAUSE (II) OF SUB SECTI ON (1) OF SECTION 32 IN RESPECT OF THAT ASSET, THE ACTUAL COST OF THE ASSET TO THE 7 ASSESSEE SHALL BE THE ACTUAL COST TO THE ASSESSEE AS REDUCED B Y THE AMOUNT OF ANY DEDUCTION ALLOWED UNDER CLAUSE (IV) O F SUB SECTION (1) OF SECTION 35 OR UNDER ANY CORRESPONDING 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 IND IRECTLY BY ANY OTHER PERSON OR AUTHORITY, TO THAT EXTENT THE ACTUAL COST OF THE ASSESSEE GETS REDUCED. A DEDUCTION GRANTED UNDER SECTION 35 CANNOT BE EQUATED TO A SITUATION WHERE A PORTION 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. A CCORDING TO LEARNED COUNSEL, WHEN THE ASSETS CEASED TO BE USED FOR SCI ENTIFIC RESEARCH AND A DEDUCTION IS TO BE MADE UNDER SECTION 3 2(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 IN VOLVED 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 WHEREIN ACTUAL COST WILL HA VE TO BE COMPUTED FOR ANY OTHER PURPOSE. HENCE, IT IS NOT POSSIB LE FOR US TO ACCEPT THE CONTENTION OF LEARNED COUNSEL. THEREFORE, QUESTION NO. 5 IS ANSWERED IN THE AFFIRMATIVE AND IN FAVOUR OF THE A SSESSEE. 8.3 WE FIND THE HONBLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. GUJARAT ALUMINUM EXTRUSIONS PVT. LTD. (SUPRA) HAS OBSER VED 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 THE 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 INCU RRED BY THE ASSESSEE. THIS IS A PROVISION FOR THE BENEFIT OF THE ASSESSEE AND IF THE ASSESSEE INCURS CAPITAL EXPENDITURE FOR THE PURPOSE O F RESEARCH AND DEVELOPMENT DURING THE RELEVANT PREVIOUS YEAR, I N OUR OPINION, THE REVENUE SHOULD NOT DEPRIVE THE ASSESSEE OF THE BENEF IT OF DEDUCTION UNDER THE PROVISIONS OF SECTION 35 OF THE AC T EVEN IF THE ASSET IS NOT PUT TO USE FOR RESEARCH AND DEVELOPMENT. IT IS A SETTLED LEGAL POSITION THAT THE PROVISION FOR EXEMPTION OR RE LIEF SHOULD BE CONSTRUED LIBERALLY AND IN FAVOUR OF THE ASSESSEE. IF T HE SECTION IS INTERPRETED IN THE MANNER SUGGESTED BY 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 A SSESSEE. IT IS ALSO PERTINENT TO REFER TO CIRCULAR NO. 5-P (LX XVI-63) OF 1967 DATED OCTOBER 9, 1967, ISSUED BY THE DEPARTMENT. THE RELEVANT EXTRACT OF THE SAID CIRCULAR READS AS UNDER : '(II) THE AMOUNT OF CAPITAL EXPENDITURE INCURRED BY AN ASSESSEE AFTER MARCH 31, 1967, ON SCIENTIFIC RESEARCH RELATED TO HIS BUSINESS WILL BE ALLOWED TO BE DEDUCTED IN FULL IN COMPUTING HIS BUSINESS PROFITS OF THE YEAR IN WHICH SUCH EXPENDITURE IS INCUR RED.' 8 FROM THE PROVISIONS OF THE ABOVE REFERRED TO CIRCULAR ALSO, THE INTENTION OF THE REVENUE IS PATENT. THE INTENTION IS TO GIVE BENEFIT TO THE ASSESSEE WHO INCURS EXPENDITURE ON SCIENTIFIC RES EARCH RELATED TO HIS BUSINESS. EVEN THE CIRCULAR ISSUED BY THE DEPARTMENT DOES NOT MAKE USE OF THE CAPITAL ASSET A CONDITION PREC EDENT FOR CLAIMING DEDUCTION UNDER THE PROVISIONS 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 ENACTED BY THE LEGISLATURE AND THE CIRCULAR REFERRED TO HEREINABOVE WHILE ALLOWING DEDUCTION TO THE ASSESSEE UNDER THE PROV ISIONS 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 THE REVENUE TO DEPRIVE THE ASSESSEE OF THE BENEFIT OF DEDUC TION UNDER THE PROVISIONS OF SECTION 35 OF THE ACT IF THE ASSET IS N OT USED IN THE PREVIOUS YEAR IN WHICH THE CAPITAL EXPENDITURE IS INC URRED. IT IS ALSO RELEVANT TO NOTE THAT THE DEDUCTION IS GIVE N NOT ON THE COUNT OF USER. HAD IT BEEN SO, THE ASSESSEE WOULD HAVE BE EN GIVEN BENEFIT IN THE NATURE OF DEPRECIATION. IT CANNOT BE DISPUTED THAT DEPRECIATION IS ALLOWED WHEN THE ASSET IS USED BY THE ASSESSEE AND WHEN HE SUFFERS LOSS ON ACCOUNT OF WEAR AND TEAR OF TH E ASSET. HAD THE INTENTION OF THE LEGISLATURE BEEN TO GRANT ADDIT IONAL DEPRECIATION, WE WOULD HAVE AGREED WITH THE SUBMISSIO NS MADE BY STANDING COUNSEL APPEARING FOR THE REVENUE BUT THE PO SITION IS DIFFERENT IN THE INSTANT CASE. HERE, THE LEGISLATURE W ANTS THE ASSESSEE TO SPEND MORE AMOUNT FOR SCIENTIFIC RESEARCH AND IT ALSO WANTS THE ASSESSEE TO GET THE BENEFIT IMMEDIATELY IN THE YEAR IN WHICH HE INCURS THE EXPENDITURE IN THE NATURE OF REV ENUE OR CAPITAL FOR SCIENTIFIC RESEARCH AND THEREFORE THE LEGISLATURE REFERS TO INCURRING OF THE EXPENDITURE AND NOT THE USING OF TH E ASSET. ONCE IT IS ESTABLISHED THAT THE EXPENDITURE WAS INCURR ED FOR THE PURPOSE OF SCIENTIFIC RESEARCH AND THE CONDITIONS INCOR PORATED IN SECTION 35 OF THE ACT ARE FULFILLED, IN OUR OPINION, THE REVENUE CANNOT EXPECT THE ASSESSEE TO START USING THE ASSET IMMEDIA TELY. IN A GIVEN CASE THE ASSESSEE MIGHT HAVE TO GO ON INCURRING EX PENDITURE FOR SEVERAL YEARS BEFORE PUTTING THE ASSET TO ACTUAL US E. IF THE INTERPRETATION ADVANCED BY STANDING COUNSEL FOR THE R EVENUE IS ACCEPTED, WE ARE AFRAID, THE ASSESSEE WOULD NOT BE IN A POSITION TO AVAIL OF THE DEDUCTION UNDER SECTION 35 OF THE ACT T O THE EXTENT TO WHICH THE 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 PRE VIOUS YEAR IN WHICH THE EXPENDITURE IS INCURRED. IF THE ASSESSEE HAS TA KEN SEVERAL YEARS TO CONSTRUCT 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 CONSTRUCTION OF THE ASSE T IS COMPLETED AND IT WOULD NOT BE OPEN TO HIM TO CLAIM DEDUCTION IN RESPECT OF THE EXPENDITURE INCURRED DURING THE EARLI ER PREVIOUS YEARS BECAUSE LOOKING TO THE PROVISIONS OF SECTION 35 OF THE ACT, THE ASSESSEE CAN AVAIL OF THE BENEFIT OF DEDUCTION OF THE A MOUNT OF EXPENDITURE INCURRED ONLY DURING THE PREVIOUS YEAR AND NOT FOR THE EARLIER PERIOD UNLESS HIS CASE IS COVERED UNDER THE PROV ISIONS OF AN EXCEPTION TO SECTION 35(2)(IA) OF THE ACT. 9 FOR THE REASONS STATED HEREINABOVE, IN OUR OPINION, TH E TRIBUNAL WAS RIGHT WHEN IT CONFIRMED THE ORDER PASSED BY THE CO MMISSIONER OF INCOME-TAX (APPEALS) WHO HAD DELETED THE DISALLOWA NCE. FOR THE AFORE 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 CAP ITAL EXPENDITURE. HOWEVER, WE FIND MERIT IN THE SUBMISSIO N OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE PRINCIPLE SHOULD BE APP LIED EVEN FOR REVENUE EXPENDITURE ALSO. THEREFORE, IN THE LIG HT OF THE ABOVE DECISIONS WE FIND MERIT IN THE ARGUMENTS ADVANCED BY T HE LD. COUNSEL FOR THE ASSESSEE THAT WHEN A MATERIAL IS PURCHASED FOR RESEARCH AND DEVELOPMENT PURPOSE, IT IS IMMATERIAL WHE THER THE MATERIAL IS CONSUMED DURING THE YEAR OR HELD AS CLOSING STOCK AND THE ENTIRE EXPENDITURE INCURRED ON RAW MATERIAL FOR THE PURPOSE OF RESEARCH AND DEVELOPMENT QUALIFIES FOR DEDUCTION U/S. 35 OF THE ACT IRRESPECTIVE OF THE ACCOUNTING TREATMENT OF THE SAME IN THE BOOKS OF ACCOUNT. THEREFORE, IN OUR OPINION, WHENEVER ANY M ATERIAL IS PURCHASED FOR RESEARCH & DEVELOPMENT, THE SAME SHOULD B E ALLOWED AS DEDUCTION U/S.35 OF THE I.T. ACT AND IT IS IMMATERI AL WHETHER THE ASSET IS PUT TO USE OR NOT. WE, THEREFORE, SET-ASIDE TH E ORDER OF THE LD.CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER T O ALLOW THE DEDUCTION CLAIMED U/S.35. AT THE SAME TIME WE ALSO DI RECT 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 SUCH MATERIAL WHICH WAS SHOWN AS CLOSING STOCK BUT GOT BE NEFIT U/S.35 OF THE I.T. ACT. WE HOLD AND DIRECT ACCORDIN GLY. THE GROUND BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 5.1 SINCE THE ACCOUNTING TREATMENT FOLLOWED BY THE ASSESSEE REGARDING THE CLAIM OF DEDUCTION U/S.35(1)(I) FOR U NUSED MATERIAL FOR R&D PURPOSES HAS BEEN DECIDED IN FAVOU R OF THE ASSESSEE BY THE TRIBUNAL, THEREFORE, THE RETURNED INCOME/TREATMENT OF R&D MATERIAL IN THE COMPUTATION OF TOTAL INCOME, WHICH IS BEING FOLLOWED CONSISTENTLY BY THE ASSESSEE IS CORRECT. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE GROUND RAISED BY THE REVENUE. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DISMISSED. ITA NO.2071/PN/2013 (A.Y. 2010-11) : 6. THE ONLY EFFECTIVE GROUND RAISED BY THE REVENUE READS AS UNDER : 10 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(A)-III, PUNE HAS ERRED TO EXCLUD E THE AMOUNT OF RS.1,19,04,059/- CLAIMED U/S.35 OF THE IN COME TAX ACT, 1961, IN RESPECT OF CLOSING STOCK PERTAINING T O R&D ACTIVITIES WHICH WAS ADDED BY THE ASSESSEE COMPANY IN THE COMPUTATION OF THE TOTAL INCOME. 6.1 AFTER HEARING BOTH THE SIDES, WE FIND THE ABOVE GROUND IS IDENTICAL TO THE GROUND OF APPEAL IN ITA NO.713/PN/ 2013. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISE D BY THE REVENUE HAS BEEN DISMISSED. FOLLOWING THE SAME RAT IO, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 7. IN THE RESULT, BOTH THE APPEALS FILED BY THE REV ENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 29-10-2014 SD/- SD/- (R.S. PADVEKAR) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED: 29 TH OCTOBER, 2014 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. CIT(A)-III, PUNE 4. CIT-III, PUNE 5. THE D.R, A PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // ASSISTANT REGISTRAR, ITAT, PUNE BENCHES, PUNE