M/s Hindustan Aeronautics Ltd., V. AddlC.I,.T., Bangalore

ITA 309/BANG/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0459 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 17-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 11-03-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PRAVEEN KUMAR PRASAD ITP
• Keywords: Capital asset; Depreciation; Earning of tax free income; Capital receipt; Revised return; Capital expenditure
• Section: 14A

Judgement Text

ITA.309/BANG/2013 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'C', BANGALORE BEFORE SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI. VIJAYPAL RAO, JUDICIAL MEMBER I.T.A NO.309/BANG/2013 (ASSESSMENT YEAR : 2009-10) M/S. HINDUSTAN AERONAUTICS LTD, NO.15/1, CUBBON ROAD, BANGALORE 560 001 .. APPELLANT PAN : AAACH3641R V. ADDL. COMMISSIONER OF INCOME-TAX, RANGE - 11, BANGALORE .. RESPONDENT ASSESSEE BY : SHRI. PRAVEEN KUMAR PRASAD, ITP REVENUE BY : SHRI. SANJAY KUMAR, CIT -III HEARD ON : 17.03.2016 PRONOUNCED ON : 22.04.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE AGAINST AN O RDER DT.24.12.2012 OF CIT (A)-I, BENGALURU, IT HAS ALTOGETHER RAISED SIX GROUNDS OF WHICH GROUNDS 1 AND 6 ARE GENERAL AND GROUND 5 IS CONSEQUENTIAL I N NATURE NEEDING NO SPECIFIC ADJUDICATION. ITA.309/BANG/2013 PAGE - 2 02. GROUNDS 2 AND 3 ARE REPRODUCED HEREUNDER : 03. FACTS RELATING TO THE ABOVE GROUNDS ARE THAT AS SESSEE A PUBLIC SECTOR UNDERTAKING INVOLVED IN DESIGNING, DEVELOPING, MANU FACTURING AND DOING WORKS RELATED TO REPAIR AND OVERHAUL OF AIRCRAFTS, HELICOPTER ENGINES, AVIONIC SYSTEMS ETC., HAD FILED ITS RETURN FOR THE IMPUGNED ASSESSMENT YEAR DECLARING INCOME OF RS.1238,61,15,646/-. 04. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTED BY THE AO THAT WHILE COMPUTING THE TOTAL INCOME ASSESSEE HAD THROUGH ITS COMPUTATION STATEMENT DEDUCTED A SUM OF RS.570,61,55,000/-, WHI CH WAS CREDITED IN ITS P & L ACCOUNT UNDER THE HEAD 'GRANTS RECEIVED FROM GOVERNMENT FOR R & D'. ASSESSEE WAS REQUIRED TO EXPLAIN WHY CORRESPON DING EXPENDITURE INCURRED FOR THE R & D WAS NOT ADDED BACK. EXPLANA TION OF THE ASSESSEE WAS THAT THE GRANTS RECEIVED FROM THE GOVERNMENT WE RE FOR THE R & D ACTIVITIES. AS PER THE ASSESSEE, EXPENDITURE INCUR RED AGAINST SUCH GRANTS WERE REVENUE IN NATURE AND THERE WAS NO NECESSITY T O REDUCE IT FROM TOTAL ITA.309/BANG/2013 PAGE - 3 EXPENDITURE. BREAK-UP OF SUCH EXPENDITURE GIVEN BY THE ASSESSEE READ AS UNDER LIGHT COMBAT AIRCRAFTS ('LCA' IN SHORT) RELATED TO DEVELOPMENT OF COMBAT AIRCRAFTS, ARDC EXPENDITURE AT LUCKNOW RELATED TO A CCESSORIES, KORWA, RWRDC AND SLDRC RELATED TO HYDERABAD DIVISION. 05. AO PUT THE ASSESSEE ON NOTICE TO EXPLAIN AS TO WHY EXPENDITURE RELATABLE TO R & D GRANTS SHOULD NOT BE CONSIDERED AS CAPITAL OUTGO AND DISALLOWED. EXPLANATION OF THE ASSESSEE COULD BE S UMMARISED AS UNDER : I)FUNDS RECEIVED FROM THE GOVERNMENT AS GRANTS WAS FOR CONDUCTING DEFENCE RELATED RESEARCH ULTIMATELY HELPING THE ASS ESSEE TO ACQUIRE CAPITAL ASSET IN THE FORM OF INDIGENOUS AND SELF-RE LIANT TECHNOLOGY FOR THE MANUFACTURE OF LCA, INTERMEDIATE JET TRAINER (I JT), SEA HARRIER, WEAPON SYSTEM INTEGRATION (WSI), LIGHT UTILITY HELI COPTER (LUH) AND LIGHT COMBAT HELICOPTER (LCH). II)EXPENDITURE INCURRED WAS TO ACHIEVE SELF-RELIANC E IN MANUFACTURE OF AEROSPACE EQUIPMENT. III)DUE TO THE INFRASTRUCTURE ASSESSEE HAD FOR R & D, IT COULD DEVELOP PRODUCTS LIKE ALH, IJT AND LCA. ITA.309/BANG/2013 PAGE - 4 IV)ASSESSEE HAD PARTNERSHIP WITH DRDO AND CSIR LABS , IITS AND SISTER DSPUS FOR DEFENCE RESEARCH. ASSESSEE WAS DE VELOPING BASIC PLATFORM IN AREAS LIKE SENSORS, ACTUATORS, ADVANCED RADOR ELECTRO OPTICS, INTELLIGENT AUTONOMOUS SYSTEMS AND NETWORK ENABLED CAPABILITIES. V)LCA DEVELOPMENT PROGRAMME FOR DEVELOPING A MULTI UTILITY AIRCRAFTS WITH FULLY INTEGRATED AVIATION SYSTEM WA S BEING MANAGED BY AERONAUTICAL DEVELOPMENT AGENCY OF DEFENCE RESEA RCH & DEVELOPMENT ORGANISATION WITH ASSESSEE AS A MAJOR P ARTNER. 06. IN SUM AND SUBSTANCE, CONTENTION OF THE ASSESSE E WAS THAT ITS EXPENDITURE RELATABLE TO THE GRANT RECEIVED WAS INC URRED FOR DESIGN AND DEVELOPMENT OF WEAPONARY FOR AIRCRAFT, COMBAT AIRCR AFTS, AVIONICS FOR COMBAT AIRCRAFTS, DEVELOPMENT OF LIGHT UTILITY HELI COPTER AND FOR DEVELOPING A FIFTH GENERATION FIGHTER AIRCRAFT TO REPLACE THE AGING JAGUAR AND MIG 29. ASSESSEE ALSO POINTED OUT THAT A COORDINATE BENCH O F THIS TRIBUNAL HAD HELD SUCH GRANTS FROM THE GOVERNMENT TO BE CAPITAL RECEI PT FOR A. YS. 1994-95 TO 1997-98. AS PER THE ASSESSEE, EXPENDITURE INCURRED USING SUCH GRANT MADE IT POSSIBLE TO DESIGN AND DEVELOP NEW FIGHTER AIRCR AFT AND HELICOPTERS WHICH WERE OF VITAL IMPORTANCE TO THE SECURITY OF THE COU NTRY. 07. AO AGREED WITH THE CONTENTION OF THE ASSESSEE T HAT RECEIPTS OF GRANT WERE CAPITAL IN NATURE. HOWEVER ACCORDING TO HIM, MATCHING PRINCIPLES REQUIRED EXPENDITURE WHICH WERE RELATABLE TO SUCH G RANT TO BE EXCLUDED ITA.309/BANG/2013 PAGE - 5 FROM THE TOTAL EXPENDITURE DEBITED IN THE P & L ACC OUNT. AS PER THE AO EXPENDITURE INCURRED OUT OF CAPITAL RECEIPTS FOR SP ECIFIC R & D COULD BE TREATED ONLY AS CAPITAL EXPENDITURE. AO ALSO NOTED THAT ASSESSEE IN ITS LETTER DT.14.11.2011 ITSELF CLAIMED THE EXPENDITURE TO BE OF CAPITAL IN NATURE. AS PER THE AO ASSESSEE ITSELF HAD ADMITTED THAT THE EX PENDITURE INCURRED WERE FOR DEVELOPMENT OF LCA AND LC HELICOPTER, INTERMEDI ATE JET TRAINER AND DEVELOPMENT OF NEW TECHNOLOGY FOR AVIONICS AND INS TRUMENTATION. AO NOTED THAT EXPENDITURE INCURRED BY THE ASSESSEE FOR DEVELOPMENT OF NEW COMBAT AIRCRAFTS, HELICOPTER AND FIGHTERS OUGHT TO HAVE BEEN SHOWN AS WORK-IN-PROGRESS TILL SUCH TIME IT COULD BECOME MAR KETABLE COMMODITY. RELYING ON THE DECISION OF HON'BLE APEX COURT IN M/ S. J. K. INDUSTRIES LTD AND ANOTHER V. UNION OF INDIA [297 ITR 176], AO WAS OF THE OPINION THAT RS.570,61,55,000/- BEING THE GRANT RECEIVED FROM TH E GOVERNMENT SHOULD BE REDUCED FROM EXPENDITURE ALSO. SUCH REDUCTION R ESULTED IN AN ADDITION OF THE SAME SUM TO THE TOTAL INCOME RETURNED BY THE ASSESSEE. 08. AGGRIEVED ASSESSEE MOVED IN APPEAL BEFORE THE C IT (A). APART FROM REITERATING THE CONTENTIONS TAKEN BEFORE THE AO, AS SESSEE MADE THE FOLLOWING FURTHER SUBMISSIONS BEFORE THE CIT (A) : I) CAPITAL RECEIPTS BY ITSELF DID NOT MEAN THAT EXP ENDITURE INCURRED THEREFROM WAS CAPITAL EXPENDITURE. II) EXPENDITURE INCURRED AGAINST GRANT OF RS.570,61 ,55,000/- WAS FOR THE PURPOSE OF RECREATING EXISTING TECHNOLOGY A ND DEVELOPING ITA.309/BANG/2013 PAGE - 6 NEW TECHNOLOGY. EVEN IF THE EXPENDITURE WAS CONSID ERED AS CAPITAL IN NATURE BY VIRTUE OF SECTION 35(1)(IV) OF THE AC T, IT WAS ALLOWABLE. III) EXPENDITURE INCURRED BY THE ASSESSEE WAS ONLY FOR SCIENTIFIC RESEARCH WITHIN THE MEANING OF SECTION 35(1)(IV) RE AD ALONG WITH SECTION 43(4) OF THE ACT. 09. CIT (A) SOUGHT A REMAND REPORT FROM THE AO. AO MADE THE FOLLOWING REMARKS IN HIS REMAND REPORT : (I) NATURE OF A RECEIPT OR EXPENDITURE THEREFROM WO ULD NOT CHANGE AT THE WHIMS AND FANCIES OF THE ASSESSEE. (II) GRANT RECEIVED BY THE ASSESSEE FROM THE GOVERN MENT WAS ONLY FOR MEETING EXPENDITURE WHICH WAS IN THE NATURE OF CAPITAL OUTLAY. (III) ASSESSEE ITSELF HAD EXPLAINED THAT THE GRANTS WERE RECEIVED FOR R & D RELATING TO NEW AIRCRAFTS, TECHNOLOGY AND AVION ICS. (IV) GRANTS RECEIVED BY THE ASSESSEE FROM THE GOVER NMENT WERE PART OF ALLOCATIONS FOR DEFENCE IN THE UNION BUDGET AND LETTERS OF GRANT CLEARLY SPELT OUT THE PURPOSE OF SUCH GRANT AS DEVE LOPMENT OF VARIOUS DEFENCE AND AERONAUTICAL PROTOTYPES. (V) THOUGH THE NATURE OF CERTAIN CLASSES OF EXPENDI TURE LIKE MATERIAL PURCHASE AND SUNDRY EXPENDITURE IN RELATION TO DEVE LOPMENT OF PROTOTYPES WAS PRIMA FACIE REVENUE IN NATURE, CONSI DERING THE ULTIMATE RESULT WHICH WAS THE CREATION OF A CAPITAL ASSET IN THE FORM OF NEW PROTOTYPE DESIGN, IT WAS REQUIRED TO BE CAPI TALISED. (VI) ASSESSEE HAD TAKEN OUT THE GRANTS WHILE COMPUT ING ITS TOTAL INCOME THE CORRESPONDING CAPITAL OUTGO WAS NOT REDU CED FROM THE EXPENDITURE. 10. CIT (A) AFTER CONSIDERING THE SUBMISSIONS OF TH E ASSESSEE AND THE REMAND REPORT OF THE AO WAS OF THE OPINION THAT FUN DS RECEIVED BY THE ASSESSEE FROM THE GOVERNMENT AS GRANTS WERE FOR ACQ UIRING ADVANCED ITA.309/BANG/2013 PAGE - 7 TECHNICAL KNOWHOW FOR MANUFACTURE OF ADVANCED COMBA T AIRCRAFT EQUIPMENTS. AS PER THE LD. CIT (A), GRANTS GIVEN B Y GOI WERE APPROPRIATED OUT OF THE CAPITAL BUDGET OF MINISTRY OF DEFENCE. CIT (A) HELD THAT ACTION OF THE ASSESSEE OF EXCLUDING ONLY THE CAPITAL RECEIPT FROM THE NET PROFIT WITHOUT CORRESPONDING REDUCTION OF E XPENDITURE RESULTED IN UNDER-STATEMENT OF PROFITS. FURTHER ACCORDING TO H IM EXPENDITURE INCURRED BY THE ASSESSEE RESULTED IN CREATION OF NEW CAPITAL ASSETS IN THE FORM OF PROTOTYPES AND DESIGNS. HE REJECTED THE CONTENTION OF THE ASSESSEE THAT THE EXPENDITURE INCURRED WAS FOR RECREATING THE EXISTIN G TECHNOLOGY. 11. AS FOR THE CLAIM OF ASSESSEE THAT DEDUCTION OF SUCH EXPENDITURE WAS TO BE GIVEN UNDER SECTION 35(1)(IV) OF THE ACT, WHI CH WAS RAISED AS AN ADDITIONAL GROUND, CIT (A) RELYING ON THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. BAE HAL SOFTWARE LTD, IN ITA NO.136 OF 2010, DT.01.03.2011, WHICH INCIDENTAL LY WAS A SISTER CONCERN OF THE ASSESSEE, HELD THAT WITHOUT FILING A REVISED RETURN, SUCH A CLAIM COULD NOT BE ADMITTED. AS PER THE CIT (A) AS SESSEE HAD NEVER CLAIMED SUCH A DEDUCTION EITHER IN THE RETURN OF IN COME OR DURING THE PENDENCY OF THE PROCEEDINGS BEFORE THE AO. THOUGH THE CIT (A) DID NOT ADMIT THE ADDITIONAL GROUND, HE GAVE A FINDING T HAT SUCH GROUND ITSELF REFLECTED ASSESSEES PREDICAMENT REGARDING THE NATURE OF EXPENDITURE. ACCORDING TO THE CIT (A), IF IT WAS SURE THAT EXPEN DITURE WAS SCIENTIFIC IN ITA.309/BANG/2013 PAGE - 8 NATURE, IT OUGHT HAVE CLAIMED A DEDUCTION U/S.35(1 )(IV) OF THE ACT, IN THE RETURN OF INCOME , OR AT LEAST THROUGH A REVISED RE TURN. FURTHER ACCORDING TO HIM, SECTION 35(1)(IV) AND SECTION 43(4) OF THE AC T USED THE TERM SCIENTIFIC RESEARCH AND NOT R & D. AS PER THE CI T (A) CLAIM OF THE ASSESSEE WAS UNDER THE HEAD R & D AND NOT UNDER SCI ENTIFIC RESEARCH. THUS HE DID NOT ACCEPT THE ALTERNATE CLAIM OF THE ASSESS EE FOR DEDUCTION U/S.35(1)(IV) OF THE ACT. 12. NOW BEFORE US, LD. AR STRONGLY ASSAILING THE OR DERS OF THE AUTHORITIES BELOW SUBMITTED THAT ASSESSEE HAD REDUC ED THE GRANTS AMOUNT OF RS.570,61,55,000/- FROM ITS TOTAL INCOME THROUGH TH E COMPUTATION STATEMENT, SINCE IT WAS A CAPITAL RECEIPT. HOWEVER THIS, ACCORDING TO HIM IT WOULD NOT MEAN THAT EXPENDITURE MADE OUT OF THE GRA NT WAS ALSO CAPITAL OUTGO. AS PER THE LD. AR, ASSESSEE HAD INCURRED EX PENDITURE OF ABOUT RS.67,478.11 LAKHS FOR R & D. THIS INCLUDED RAW MA TERIALS, EXPENDITURE ON SALARIES AND OTHER EXPENDITURE LIKE DEPRECIATION, P ROVISIONS ETC., ACCORDING TO HIM, A BREAK-UP OF THE SAID EXPENDITURE, PLACED AT PAPER BOOK PAGE 145, CLEARLY PROVED THAT THESE WERE REVENUE IN NATURE AN D DID NOT RESULT IN ACQUISITION OF ANY CAPITAL ASSET. FURTHER ACCORDING TO HIM, THE QUESTION OF MATCHING PRINCIPLE DID NOT ARISE IN THE GIVEN CASE. JUST BECAUSE EXPENDITURE WAS INCURRED FOR R & D, A PRESUMPTION COULD NOT BE TAKEN THAT IT RESULTED IN ACQUISITION OF ANY CAPITAL ASSET. IN ANY CASE ACCO RDING TO HIM, IF IT WAS ITA.309/BANG/2013 PAGE - 9 TREATED AS A CAPITAL OUTGO, LOWER AUTHORITIES OUGHT TO HAVE GIVEN ELIGIBLE DEDUCTION U/S.35(1)(IV) OF THE ACT. ASSESSEE HAD N O CHANCE FOR RAISING SUCH A CLAIM BEFORE THE AO SINCE IT HAD CLAIMED THE WHOL E OF THE EXPENDITURE AS REVENUE IN NATURE. WHEN A DISALLOWANCE OF THE EXPEN DITURE WAS MADE, ASSESSEE HAD PREFERRED SUCH A CLAIM BEFORE THE CIT (A). AS PER THE LD. AR, CIT (A) REFUSED TO ENTERTAIN THE CLAIM, RELYING ON A JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S.BEAHAL SOFTWARE LTD, (SUPRA), WHICH WAS ON A DIFFERENT SET OF FACTS. 13. PER CONTRA, LD. DR SUBMITTED THAT ASSESSEE HAVI NG ADMITTED TO HAVE INCURRED EXPENDITURE AGAINST THE GRANT, FOR DEVELOP MENT OF PROTOTYPES OF NEW AIRCRAFTS AND NEW TECHNOLOGIES, WHICH WERE YET TO BE COMMERCIALIZED, OUGHT TO HAVE SHOWN IT AS WORK-IN-PROGRESS AND OUGH T NOT HAVE CHARGED IT TO THE P & L ACCOUNT. HAVING NOT DONE SO, THAT AS P ER THE LD. DR, LOWER AUTHORITIES WERE JUSTIFIED IN DISALLOWING THE RELAT ABLE EXPENDITURE. 14. IN SO FAR AS THE ALTERNATE PLEADING OF THE ASSE SSEE THAT IT HAD TO HAVE BEEN ALLOWED DEDUCTION UNDER SECTION 35(1)(IV) OF T HE ACT, LD. DR SUBMITTED THAT THERE WAS NO WAY THE AO COULD HAVE A LLOWED IT, WITHOUT A CLAIM FROM THE ASSESSEE. RELYING ON THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF GOETZE (INDIA) LTD V. CIT [284 ITR 3 23], LD. DR SUBMITTED THAT A FRESH CLAIM COULD NOT HAVE BEEN MA DE OTHERWISE THAN ITA.309/BANG/2013 PAGE - 10 THROUGH A REVISED RETURN, WHICH ASSESSEE HAD NOT DO NE. 15. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT ASSESSEE HAD RECEIVED A SUM OF RS.5 70,65,61,000/- AS GRANT FROM THE CENTRAL GOVERNMENT. IT HAD DEDUCTED THE S AID SUM WHILE COMPUTING ITS TOTAL INCOME FOR THE TAX PURPOSES. I N OTHER WORDS, ASSESSEE ITSELF HAD TREATED IT AS CAPITAL RECEIPTS. WE FIND THAT SUCH TREATMENT GIVEN BY THE ASSESSEE IS IN ACCORDANCE WITH A DECISION GIVEN BY THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR A Y. 1995-96 IN ITA NO.763/ BANG/1998, DT.22.02.2002, PLACED AT PAPER BOOK PAGE NOS.207 TO 230. IN THE SAID DECISION A REFERENCE HAS BEEN MADE TO THE MEMORANDU M OF UNDERSTANDING BETWEEN THE ASSESSEE AND AERONAUTICAL DEVELOPMENT A GENCY OF GOVERNMENT OF INDIA. IT SEEMS IN THE SAID MEMORAND UM OF UNDERSTANDING, ONE OF THE CONDITIONS AGREED BY THE ASSESSEE WAS TH AT THERE WOULD BE NO CHARGE OF DEPRECIATION ON CAPITAL ASSETS FUNDED BY THE GOVERNMENT. RELEVANT OBSERVATIONS OF THE TRIBUNAL AT PARA 23 & 24 IS REPRODUCED HEREUNDER : 23. NEITHER PARTY HAS PUT BEFORE US THE MEMORANDUM OF UNDERTAKING BETWEEN THE ASSESSEE AND GOVERNMENT AGENCY RELEASIN G THE GRANTS. HENCE IT IS DIFFICULT FOR US TO GIVE ANY FINDING ON THE B ASIS OF ITS REFERENCE IN ORDER U/S.263 FOR ASSESSMENT YEAR 1994-95. THE SAME HAS NOT BEEN DISCUSSED BY THE AUTHORITIES BELOW. HOWEVER, THE CONDITION R EGARDING NO CLAIM OF ITA.309/BANG/2013 PAGE - 11 DEPRECIATION BY ASSESSEE SUPPORTS ITS CONTENTION AS TO THE CAPITAL NATURE OF THE GRANT. IT CAN BE SAFELY CONCLUDED THAT THOUGH THE ASSESSEE BY RECEIVING SUCH A GRANTS DEVELOPS A TECHNOLOGY OR DE SIGN FOR MANUFACTURE, WHICH WILL BE A CAPITAL ASSET, YET, IT WILL NOT BE ELIGIBLE TO CLAIM DEPRECIATION. THE ASSESSEE IS NOT IN BUSINESS OF SE LLING TECHNOLOGIES. THE GOVERNMENT RETAINED THE SERVICES OF THE ASSESSEE TO DEVELOP THE TECHNOLOGY TO BE USED SUBSEQUENTLY, IN MANUFACTURE OF VITAL DEFENCE EQUIPMENTS. MERE CALCULATION OF PAYMENT BASED ON M AN HOUR BASIS DOES NOT IMPLY THAT IT IS REIMBURSEMENT OF EXPENSES. TH E BASE FOR GIVING GRANT DOES NOT CHANGE THE VERY CHARACTER OF RECEIPTS. TO THIS EXTENT, THE ARGUMENTS ADVANCED BY THE REVENUE IS NOT CONVINCING SO AS TO TREAT THE NATURE OF GRANT AS REVENUE RECEIPTS. 24. WE THEREFORE, HOLD THAT THE GRANTS RECEIVED BY THE ASSESSEE THOUGH CREDITED TO P & L ACCOUNT IS CAPITAL RECEIPT AND HE NCE NOT INCOME U/S.5 CHARGEABLE TO TAX. THIS GROUND IS THEREFORE, ALLOW ED. 15. A CLEAR OBSERVATION HAS BEEN MADE BY THE TRIBUN AL THAT BY UTILISING THE GRANTS, ASSESSEE WAS DEVELOPING TECHNOLOGIES OR DESIGN FOR MANUFACTURE WHICH WOULD BE A CAPITAL ASSET. THIS WAS THE REASO N WHY TRIBUNAL ACCEPTED THE CLAIM OF THE ASSESSEE THAT GRANTS RECEIVED WERE CAPITAL IN NATURE. 16. IN ASSESSMENT PROCEEDINGS FOR A. Y. 2003-04 ALS O THERE WAS AN ISSUE REGARDING NATURE OF THE GRANT RECEIVED FROM THE CEN TRAL GOVERNMENT. ASSESSEE HAD DURING THE COURSE OF HEARING FOR SAID YEAR ADDRESSED A LETTER TO THE ACIT, DT.29.12.2005, GIVING A BACKGROUND OF ITS CLAIM REGARDING THE GRANT. COPY OF THIS HAS BEEN PLACED AT PAPER BOOK PAGES 231 TO 258. RELEVANT PARAS APPEARING THEREIN IS REPRODUCED HERE UNDER : ITA.309/BANG/2013 PAGE - 12 ITA.309/BANG/2013 PAGE - 13 ITA.309/BANG/2013 PAGE - 14 17. AT PARA 4.1.6 ABOVE IT IS ADMITTED BY THE ASSES SEE THAT EXPENDITURE INCURRED OUT OF THE GRANTS RECEIVED FROM THE GOVERN MENT WOULD RESULT IN ACQUISITION BY THE ASSESSEE OF A CAPITAL ASSET IN T HE FORM OF INDIGENOUS AND SELF-RELIANT TECHNOLOGY FOR THE MANUFACTURE OF LCH / LCA, WHICH WERE ITA.309/BANG/2013 PAGE - 15 REQUIRED FOR THE DEFENCE OF THE COUNTRY. CONDITION S OF THE GRANT REQUIRED THE ASSESSEE TO UTILISE IT FOR THE R & D OF THE LCA AND LCH AND RELATED TECHNOLOGY. THUS THE EXPENDITURE INCURRED BY THE A SSESSEE USING SUCH GRANT WHICH WERE DEBITED TO ITS PROFIT AND LOSS ACCOUNT W ERE SUCH THAT IT WOULD RESULT IN ACQUISITION OF A CAPITAL ASSET IN THE NAT URE OF INDIGENOUS SELF-RELIANT TECHNOLOGY FOR MANUFACTURE OF COMBAT AIRCRAFTS AND HELICOPTER. AS NOTED BY THE LOWER AUTHORITIES SUCH EXPENDITURE WOULD BE A P ART OF THE CAPITAL WORK- IN-PROGRESS, AND COULD NOT HAVE BEEN CLAIMED BY THE ASSESSEE AS REVENUE OUTGO. BEFORE THE AO, ASSESSEE ITSELF HAS STATED T HAT ONCE THE LCA WAS DEVELOPED AND CERTIFIED, IT WOULD BE COMMERCIALLY P RODUCED AND AT THAT TIME REVENUE WOULD BE OFFERED TO TAX. THUS THERE I S AN INDIRECT ADMISSION BY THE ASSESSEE THAT EXPENDITURE INCURRED OUT OF TH E GRANT RESULTED IN ACQUISITION OF A CAPITAL ASSET. ONCE IT IS CONSIDE RED SO, IN OUR OPINION, ASSESSEE COULD NOT CLAIM SUCH EXPENDITURE AS REVENU E OUT GO. 18. NOW COMING TO THE CLAIM OF THE ASSESSEE THAT EX PENDITURE SHOULD BE CONSIDERED AS ELIGIBLE FOR DEDUCTION U/S.35(1)(IV) OF THE ACT, CIT(A) HAD NOT ADMITTED IT CONSIDERING IT TO BE A FRESH ONE. SECTION 35(1) (IV) OF THE ACT IS REPRODUCED HEREUNDER : ITA.309/BANG/2013 PAGE - 16 SECTION 35 (1) IN RESPECT OF EXPENDITURE ON SCIENTI FIC RESEARCH, THE FOLLOWING DEDUCTIONS SHALL BE ALLOWED (I)--- (II)--- (III)--- (IV) IN RESPECT OF ANY EXPENDITURE OF A CAPITAL NAT URE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE, SUCH DEDUCTION AS MAY BE ADMISSIBLE UNDER THE PROVISIONS OF SUB- SECTION (2): 19. MANDATE AS PER THE ABOVE SECTION IS THAT THE EX PENDITURE CLAIMED ON SCIENTIFIC RESEARCH SHALL ALLOWED, PROVIDED IT SATI SFIES THE CONDITIONS SPECIFIED THEREIN. WHAT HAS BEEN DISALLOWED BY THE AO IS R & D EXPENDITURE INCURRED BY THE ASSESSEE DEBITED IN ITS P & L ACCOUNT. SUCH R & D EXPENDITURE AS PER THE ASSESSEE'S AUDITED FINAL ACCOUNTS CAME TO RS.67,478.11 LAKHS AND THE BREAK UP OF THIS HAS BEE N GIVEN AT PAPER BOOK PAGE.145 AS UNDER : 20. ASSESSEE HAVING CLAIMED THE EXPENDITURE AS PART OF REVENUE OUTGO THROUGH ITS P & L ACCOUNT, WHEN THE AO FOUND THAT S UCH CLAIM WAS NOT ALLOWABLE CONSIDERING IT TO BE A CAPITAL OUT GO, IN OUR OPINION, HE OUGHT ITA.309/BANG/2013 PAGE - 17 HAVE ALLOWED A DEDUCTION AS MANDATED U/S.35(1) OF T HE ACT. SECTION SAYS ASSESSEE WHICH SATISFIES THE CONDITIONS SET OUT THE REIN SHALL BE ALLOWED AND THERE IS NO CONDITION THEREIN WHICH DISENTITLES AN ASSESSEE FROM GETTING THIS BENEFIT FOR WANT OF A SPECIFIC CLAIM. NEVERTHELESS WE FIND THAT CIT (A) HAS GIVEN A FINDING THAT ASSESSEE WAS NOT DOING ANY SC IENTIFIC RESEARCH, BUT ONLY R & D. WE ARE UNABLE TO APPRECIATE THIS FINDI NG OF THE CIT (A). DEVELOPMENT OF AVIONICS FOR MODERN LC AIR-CRAFT AND HELICOPTER, RADAR SYSTEMS FOR FIGHTER AIRCRAFTS, REQUIRES CONSIDERABL E SCIENTIFIC RESEARCH AND CANNOT BE CONSIDERED AS MERE R & D EXPENDITURE. DE FINITION OF SCIENTIFIC RESEARCH AS GIVEN IN SECTION 43(4) OF THE ACT, BRIN GS WITHIN ITS FOLD ANY ACTIVITY FOR THE EXTENSION OF KNOWLEDGE IN THE FIEL D OF NATURAL OR APPLIED SCIENCE. TO SAY THAT RESEARCH THAT GOES INTO DEVEL OPMENT OF MODERN LCA OR HELICOPTER IS NOT AN ACTIVITY FOR THE EXPANSION OF KNOWLEDGE OF APPLIED SCIENCE IS, IN OUR OPINION, WILL BE INCORRECT AND F AR FROM TRUTH. THUS ASSESSEE HAD EVERY RIGHT TO SAY THAT IT WAS ENGAGED IN SCIENTIFIC RESEARCH AND DEDUCTION U/S.35(1)(IV) OF THE ACT, WAS AVAILAB LE TO IT. CIT (A) IN OUR OPINION, ERRED IN CONSIDERING IT TO BE A FRESH CLAI M WHICH REQUIRED FILING OF A REVISED RETURN. JUDGMENT OF HON'BLE APEX COURT I N THE CASE OF GOETZE (INDIA) LTD (SUPRA) ONLY LIMITS THE POWER OF THE AO TO CONSIDER A NEW CLAIM BUT DOES NOT LIMIT THE POWERS OF APPELLATE AUTHORIT IES IN ANY WAY. HOWEVER THE QUESTION AS TO WHAT COULD BE THE AMOUNT OF SCIE NTIFIC RESEARCH ITA.309/BANG/2013 PAGE - 18 EXPENDITURE ON WHICH ASSESSEE IS ELIGIBLE FOR CLAIM OF DEDUCTION U/S.35(1) OF THE ACT, REQUIRE VERIFICATION SINCE IT NEED NOT BE EQUAL TO THE GRANT AMOUNT RECEIVED BY THE ASSESSEE. IT COULD BE EITHE R MORE OR LESS. THIS ASPECT, IN OUR OPINION, REQUIRES A FRESH LOOK BY TH E LOWER AUTHORITIES. THUS, THOUGH ASSESSEE'S CLAIM THAT EXPENDITURE AGAINST GO VERNMENT GRANT WERE WHOLLY ALLOWABLE AS REVENUE OUTGO IS INCORRECT, IT CANNOT BE DENIED DEDUCTION AVAILABLE TO IT UNDER SECTION 35(1)(IV) OF THE ACT, IF IT CAN SHOW THAT OTHER CONDITIONS SET OUT THEREIN ARE SATISFIED . THUS WE UPHOLD THE ORDER OF THE LOWER AUTHORITIES, IN SO FAR AS DISALLOWANCE OF EXPENDITURE IS CONSIDERED. HOWEVER, VIS-A-VIS CLAIM OF THE ASSE SSEE IT OUGHT HAVE BEEN GIVEN DEDUCTION U/S.35(1)(IV) OF THE ACT, TO THE EX TENT IT WAS ELIGIBLE, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND REMIT IT BACK TO THE FILE OF AO FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. G ROUND 2 OF THE ASSESSEE IS DISMISSED, WHEREAS GROUND 3 IS ALLOWED FOR STATI STICAL PURPOSE. 21. VIDE ITS GROUND 4, GRIEVANCE RAISED BY THE ASSE SSEE IS THAT DISALLOWANCE OF RS.15,18,810/- MADE BY THE AO U/S.1 4A OF THE ACT, WAS SUSTAINED BY THE CIT (A). 22. FACTS APROPOS ARE THAT ASSESSEE HAD CLAIMED DIV IDENDS OF RS.62.18 LAKHS AS EXEMPT U/S.10(34) OF THE ACT. AS PER THE ASSESSEE IT HAD INCURRED ITA.309/BANG/2013 PAGE - 19 NO EXPENDITURE IN RELATION TO EARNING OF SUCH DIVID END INCOME. ASSESSEE ALSO CLAIMED THAT INVESTMENTS RESULTING IN THE DIVI DENDS WERE FOR STRATEGIC PURPOSE AND SECTION 14A OF THE ACT WOULD NOT BE ATT RACTED. HOWEVER, AO WAS NOT IMPRESSED. ACCORDING TO HIM, EVEN THOUGH T HERE WAS NO DIRECT OR INDIRECT INTEREST EXPENDITURE, ASSESSEE WOULD HAVE INCURRED OTHER INDIRECT EXPENDITURE CALLING FOR APPLICATION OF RULE 8D(2)(I II) OF THE IT RULES. CONSIDERING 0.5% OF THE AVERAGE AMOUNT OF INVESTMEN TS, AO MADE A DISALLOWANCE OF RS.15,80,810/-. 23. AGGRIEVED ASSESSEE MOVED IN APPEAL BEFORE THE C IT (A). RELIANCE WAS PLACED ON THE JUDGMENT OF HON'BLE DELHI HIGH CO URT IN THE CASE OF MAXOPP INVESTMENTS LTD V. CIT [347 ITR 272]. AS PE R THE ASSESSEE INVESTMENTS MADE BY THE ASSESSEE WERE STRATEGIC IN NATURE AND IN GROUP COMPANIES. HOWEVER CIT (A) WAS NOT IMPRESSED. ACC ORDING TO HIM, AO COULD INVOKE RULE 8D, EVEN WHERE ASSESSEE CLAIMED N O EXPENDITURE TO HAVE BEEN INCURRED IN RELATION TO THE EXEMPT INCOME. HE UPHELD THE DISALLOWANCE. 24 NOW BEFORE US, LD. AR STRONGLY ASSAILING THE ORD ERS OF LOWER AUTHORITIES SUBMITTED THAT AO WITHOUT EXPRESSING SA TISFACTION WHICH WAS NECESSARY TO BE REACHED WITH REGARD TO ASSESSEE'S C LAIM THAT NO EXPENDITURE WAS INCURRED FOR EARNING THE EXEMPT INCOME, HAD PRO CEEDED TO AUTOMATICALLY APPLY THE RULE. RELYING ON THE DECISI ON OF COORDINATE BENCH ITA.309/BANG/2013 PAGE - 20 IN THE CASE OF DCIT V. SUBRAMANYA CONSTRUCTIONS & D EVELOPMENT CO. LTD [ITA NO.404/BANG/2015 & CO .89/BANG/2013, DT.20.02. 2015], LD. AR SUBMITTED THAT AO WAS BOUND TO MAKE A VERIFICATION EVEN WHEN THERE WAS A CLAIM BY THE ASSESSEE WHEN THERE WAS NO EXPENDITURE INCURRED BY INVOKING SECTION 14A AND RULE 8D. 25. PER CONTRA, LD. DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 26. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. RELIANCE PLACED BY THE ASSESSEE IS ON A DECISION OF COORDINATE BENCH IN THE CASE OF SUBRAMANYA CONSTRUCTIONS & DEVELOPMENT CO. LTD (SUPRA). IN THE SAID CASE, DIVIDEND INCOME EARNED WAS RS.33,600/- O N SHARES WORTH RS.2,30,400/- HELD IN INDIAN OVERSEAS BANK. HOLDIN G OF THE ASSESSEE WAS THE VERY SAME AT THE BEGINNING OF THE YEAR AND AT T HE END OF THE YEAR. IN OTHER WORDS, THERE WERE NO INCREMENTAL INVESTMENTS. IT WAS ON ACCOUNT OF THIS REASON THAT TRIBUNAL HELD THAT THE CLAIM OF NO EXPENDITURE WAS TO BE ACCEPTED UNLESS AO HAD RECORDED HIS DISSATISFACTION THEREON. AS AGAINST THIS, IN THE GIVEN CASE BEFORE US, IT IS AN ACCEPTE D POSITION THAT THERE WAS SUBSTANTIAL CHANGE IN THE INVESTMENTS HELD BY THE A SSESSEE AS AT THE BEGINNING OF THE YEAR AND AT THE ENDING OF THE YEAR . DIVIDEND INCOME OF RS.62.18 LAKHS CLAIMED WAS NOT AN INSIGNIFICANT SUM . THEREFORE, IN OUR OPINION, DECISION OF THE COORDINATE BENCH IN THE CA SE OF SUBRAMANYA ITA.309/BANG/2013 PAGE - 21 CONSTRUCTIONS & DEVELOPMENT CO. LTD, WOULD NOT COME TO THE AID OF THE ASSESSEE. FOR THE ASSESSEE TO SAY THAT NO EXPENDIT URE WAS INCURRED EVEN WHEN IT WAS HOLDING SUBSTANTIAL INVESTMENTS WAS PRI MA FACIE INCORRECT. WHAT WE NOTE IS THAT AO HAD MADE DISALLOWANCE UNDER RULE 8D(2)(III) OF THE IT RULES, ONLY FOR INDIRECT EXPENDITURE. ARGUM ENT OF THE ASSESSEE THAT THE INVESTMENTS WERE FOR STRATEGIC PURPOSE HAS NOT BEEN SUBSTANTIATED AND EVEN IF TRUE, IT CANNOT BE DISPUTED THAT IT HAD EAR NED SUBSTANTIAL DIVIDEND OF RS.62.18 LAKHS DURING THE RELEVANT YEAR. WE ARE AL IVE TO THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENTS LTD (SUPRA), WHERE IT WAS HELD THAT AO NECESSARILY HAD TO EXPRESS HIS DISSATISFACTION ON THE INADEQUACY OF THE EXPENDITUR E DISALLOWED SUO MOTU, BY THE ASSESSEE BEFORE INVOKING SECTION 14A OF THE ACT. HOWEVER THIS JUDGMENT CANNOT BE STRETCHED TO INCLUDE IN ITS FOLD CASES WHERE NO EXPENDITURE WAS CLAIMED TO HAVE BEEN INCURRED DESPI TE SUBSTANTIAL HOLDINGS IN INVESTMENT, DESPITE SUBSTANTIAL CHANGE IN INVES TMENTS AND DESPITE EARNING OF SUBSTANTIAL DIVIDEND INCOME. WE ARE THE REFORE OF THE OPINION THAT DISALLOWANCE OF 0.5% THE AVERAGE INVESTMENTS M ADE UNDER RULE 8D(2)(III) OF THE RULES, WAS JUSTIFIED. NO INTERFE RENCE IS REQUIRED. GROUND FOUR STANDS DISMISSED. ITA.309/BANG/2013 PAGE - 22 27. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND DAY OF APRIL, 2016. SD/- SD/- (VIJAY PAL RAO) (ABRA HAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR