Resil Chemicals Pvt. Ltd., V. DCIT,

ITA 514/BANG/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80723 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-10-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 16-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A; 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NOS. 514 & 1578 /BANG/2013 ASSESSMENT YEARS : 2009-10 & 2010-11 RESIL CHEMICALS PVT. LTD., UNIT NO.30, BCIE, OLD MADRAS ROAD, BANGALORE 560 016. PAN: AABCR 2886H VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(4), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI CHERIAN K. BABY, FCA RESPONDENT BY : SHRI P. DHIVAHAR, JT. CIT(DR) DATE OF HEARING : 14.10.2014 DATE OF PRONOUNCEMENT : 31.10.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER ITA 514/B/13 IS AN APPEAL BY THE ASSESSEE AGAINS T THE ORDER DATED 23.1.2013 RELATING TO A.Y. 2009-10 AND ITA 1578/B/1 3 IS ALSO AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 18.9.2013 RELA TING TO A.Y. 2010-11 OF THE CIT(APPEALS)-III, BANGALORE. ITA NOS.514 & 1578/BANG/2013 PAGE 2 OF 40 ITA 514/B/13 2. GROUND NO. I READS AS FOLLOWS:- GROUND I. DISALLOWANCE OF SALES COMMISSION ACCRUED BUT NOT DUE RS.47,86,285. 1. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS UP HELD THE DISALLOWANCE OF SALES COMMISSION ACCRUED BUT NO T DUE MADE BY THE ASSESSING OFFICER ON THE CONTENTION THAT IT IS PROVISIONAL IN NATURE. HE HAS COMPLETELY DISREGARDED THE BINDING D ECISION RENDERED BY THE JURISDICTIONAL TRIBUNAL IN YOUR APP ELLANTS OWN CASE ON THE SAME MATTER FOR AY 2006-07, THOUGH A CO PY OF THE ORDER WAS HANDED OVER TO HIM DURING THE PROCEEDINGS . 2. IN ANY CASE, THE CIT (A) HAS DISALLOWED THIS EXP ENDITURE U/S 40A(IA). IN THAT CASE, HE SHOULD HAVE ALLOWED A T LEAST A SUM OF RS.33,63,231 /- BEING THE AMOUNT ON WHICH TAX WAS D EDUCTED AND PAID BEFORE 30.09.2009 BEING THE DUE DATE OF FILING RETURN OF INCOME FOR AY 2009-10. 3. THE ASSESSEE IS A COMPANY, ENGAGED IN THE BUSINE SS OF MANUFACTURE AND TRADING IN SPECIALTY SILICON FORMUL ATIONS. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE HAD SHOWN A SUM OF RS.47,86,285 AS COMMISSION OUTST ANDING. THE SAID SUM WAS CLAIMED AS A DEDUCTION BY THE ASSESSEE WHIL E COMPUTING INCOME FROM BUSINESS. THE AFORESAID SUM WAS PAYABLE TO TH E DIRECTORS AS COMMISSION. THE AO ALSO NOTICED THAT THE ASSESSEE HAD ALSO PAID SALARY TO THE DIRECTORS, WHICH WERE AS FOLLOWS:- (A) A.YS. 2007-08 & 2008-09 RS.35,26,549 (B) A.Y. 2009-10 RS.12,59,736 RS.47,86,285 ITA NOS.514 & 1578/BANG/2013 PAGE 3 OF 40 4. THE AO WAS OF THE VIEW THAT AS PER THE DEFINITIO N OF SALARY U/S. 17(1)(IV) OF THE ACT, SALARY INCLUDES ANY FEES, COM MISSION, PERQUISITES OR PROFITS IN LIEU OF OR IN ADDITION TO ANY SALARY OR WAGES. THE AO WAS THEREFORE OF THE VIEW THAT THE AFORESAID COMMISSION PAYABLE T O THE DIRECTORS WAS ALSO PART OF THE SALARY. ACCORDING TO THE AO, ASSESSEE DID NOT DEDUCT TAX AT SOURCE ON THE AFORESAID AMOUNT PAYABLE AS COMMISSIO N TO THE DIRECTORS AS PER THE PROVISIONS OF SECTION 192 OF THE ACT AND TH EREFORE THE AFORESAID AMOUNT HAD TO BE DISALLOWED WHILE COMPUTING TOTAL I NCOME IN VIEW OF PROVISIONS OF SECTION 40(A)(IA) OF THE ACT FOR NON- DEDUCTION OF TAX AT SOURCE. 5. BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED THAT AMOUNT PAYABLE AS COMMISSION TO THE DIRECTORS WAS IN FACT COMMISSION PAYABLE TO CHANNEL PARTNERS/AGENTS AND HAD NOTHING TO DO WITH THE DIRECTORS COMMISSION. THE ASSESSEE SUBMITTED THAT COMMISSION WAS PAYABLE TO CERTAIN PARTIES FOR ACTUAL SALES CANVASSED BY THEM. IT WAS FURTHER POINTED OUT THAT AS PER THE AGREED TERMS BETWEEN THE PARTIE S, COMMISSION WAS PAYABLE ONLY ON REALIZATION OF SALE PROCEEDS. SINC E THE AMOUNTS WERE NOT REALIZED BY THE ASSESSEE FROM THE PARTIES TO WHOM S ALES WERE MADE, COMMISSION ACCRUED TO THE THIRD PARTY, BUT WAS NOT DUE TILL REALIZATION BY THE ASSESSEE AND THEREFORE PROVISIONS OF SECTION 40(A)( IA) OF THE ACT WAS NOT APPLICABLE. THE ASSESSEE FURTHER REITERATED THAT I N THE BOOKS, LIABILITY WAS RECOGNIZED AS ASCERTAINED LIABILITY, THOUGH DUE DAT E FOR PAYMENT OF COMMISSION FELL IN THE SUBSEQUENT FINANCIAL YEAR. ITA NOS.514 & 1578/BANG/2013 PAGE 4 OF 40 6. THE CIT(APPEALS) WAS NOT CONVINCED WITH THE AFOR ESAID EXPLANATION OFFERED BY THE ASSESSEE. HE PROCEEDED ON THE BASIS THAT THE AMOUNT SHOWN AS DIRECTORS COMMISSION IS ACTUALLY COMMISSI ON PAYABLE TO THIRD PARTIES. HE WAS OF THE VIEW THAT ONCE THE ASSESSEE ACKNOWLEDGES THE LIABILITY TO PAY COMMISSION IN THE BOOKS OF ACCOUNT , IT BECOMES MANDATORY FOR THE ASSESSEE TO DEDUCT TAX AT SOURCE, AS REQUIR ED U/S. 194H OF THE ACT. IN THIS REGARD, THE CIT(A) OBSERVED THAT U/S. 194H, OBLIGATION TO DEDUCT TAX AT SOURCE IS EITHER AT THE TIME OF CREDIT OF SUCH I NCOME TO THE ACCOUNT OF THE PAYEE, OR AT THE TIME OF PAYMENT OF SUCH INCOME IN CASH, CHEQUE OR OTHER MODES, WHICHEVER IS EARLIER. THE CIT(APPEALS) FOUN D THAT THE ASSESSEE HAD CLAIMED THE AFORESAID SUM AS DEDUCTION, WHICH M EANS THAT THE AMOUNTS ARE SHOWN AS PAYABLE BY CREDIT TO THE ACCOU NT OF THE PAYEE AND THEREFORE EVEN THOUGH THE PAYMENT IS ACTUALLY MADE LATER, THE ASSESSEE OUGHT TO HAVE MADE TDS. THE LD. CIT(A) THEREFORE UPHELD THE ORDER OF THE AO. 7. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE ASSESSEE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. 8. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IDENTICAL ISSUE CAME UP FOR CONSIDERATION IN A SSESSEES OWN CASE FOR A.Y. 2006-07 IN ITA NO.1004/BANG/2011 WHEREIN THIS TRIBUNAL HELD AS FOLLOWS:- ITA NOS.514 & 1578/BANG/2013 PAGE 5 OF 40 HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERE D THE RIVAL CONTENTIONS, WE FIND THAT THE ASSESSEE HAS BEEN CRE DITING SALES COMMISSION AS AND WHEN THE LIABILITY HAS ARISEN BY THE SALE OF GOODS, BUT THE RIGHT TO RECEIVE WOULD ACCRUE O THE RECIPIENT ONLY WHEN THE SALE AMOUNT IS COLLECTED AND REMITTED TO T HE ASSESSEE. THEREFORE, THERE ARE TWO DATES THAT ARE TO BE CONSI DERED IN THIS CASE. THE DATE ON WHICH THE AMOUNT IS CREDITED IN T HE ACCOUNTS OF THE ASSESSEE AND THE DATE ON WHICH THE RECIPIENT IS ELIGIBLE TO RECEIVE THE MONEY. NO DOUBT SEC.194H PROVIDES THAT THE ASSESSEE SHALL BE LIABLE TO DEDUCT TAX AT SOURCE AT THE EARL IEST POINT OF EITHER CREDIT OR PAYMENT. BUT THIS SITUATION WOULD ARISE O NLY WHEN THE LIABILITY TO PAY AND THE RIGHT TO RECEIVE WOULD ARI SE ON THE SAME DATE, BUT THE PAYMENT IS MADE SUBSEQUENTLY. BUT IN THE CASE BEFORE US, THE DATES OF LIABILITY TO PAY AND RIGHT TO RECEIVE ARE DIFFERENT. AS HELD BY THE HONBLE KARNATAKA HIGH CO URT IN THE CASE OF MICO, CITED SUPRA, THE LIABILITY TO DEDUCT TAX AT SOURCE WOULD ARISE ONLY WHEN THE RECIPIENT WOULD BECOME EL IGIBLE TO RECEIVE THE MONEY. IN VIEW OF THE SAME, RESPECTFULL Y FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COU RT WE DECIDE THE ISSUE IN FAVOUR OF ASSESSEE AND HOLD THAT THE A SSESSEES LIABILITY TO DEDUCT TAX WOULD ARISE IN THE NEXT FIN ANCIAL YEAR WHEN THE PAYMENT IS MADE. HENCE, DISALLOWANCE U/S 40A(IA ) IS NOT WARRANTED. 9. THE DECISION OF THE HONBLE HIGH COURT OF KARNAT AKA REFERRED TO IN THE AFORESAID ORDER OF THE TRIBUNAL IS REPORTED IN 249 ITR 141 (KAR). RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL ON IDENTICAL FACTS, WE ARE OF THE VIEW THAT CLAIM OF THE ASSESSEE FOR DEDUCTIO N HAS TO BE ALLOWED. ACCORDINGLY GROUND NO.I IS ALLOWED. 10. GROUND NO.II RAISED BY THE ASSESSEE READS AS FO LLOWS:- ITA NOS.514 & 1578/BANG/2013 PAGE 6 OF 40 DISALLOWANCE OF ENTIRE CLAIM U/S 35(2AB) AMOUNTING TO RS.1,32,44,186/- ON INHOUSE R&D FACILITY APPROVED B Y THE MINISTRY OF SCIENCE AND TECHNOLOGY 3. YOUR APPELLANT IS RECOGNISED FOR IN HOUSE R&D B Y THE MINISTRY OF SCIENCE AND TECHNOLOGY, GOVERNMENT OF I NDIA AND IS CERTIFIED BY DSIR. ACCORDINGLY, A SUM OF RS.L,32,44 ,186/- WAS CLAIMED AS DEDUCTION U/S 35(2AB). 4. THE CONTENTION OF THE ASSESSING OFFICER IS THAT THE APPELLANT COMPANY HAS ACQUIRED SUBSTANTIAL RIGHTS C ONSEQUENT TO THE EXPENDITURE AND HENCE RESTRICTIONS OF SECTION 4 3(4)(II) WERE APPLICABLE AND THUS DISALLOWED THE CLAIM FOR THE EN TIRE EXPENDITURE ON R&D. 5. THE ASSESSING AUTHORITY AND THE CIT (A) HAVE FA ILED TO POINT OUT WHICH ITEM OF EXPENDITURE IS HIT BY THE P ROVISIONS OF SECTION 43(4)(II) OF THE ACT AND HAS INSTEAD DISALL OWED THE ENTIRE CLAIM, THOUGH IT IS CLEAR THAT EXPENDITURE INCURRED FOR ACQUISITION OF RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH SUCH AS APPLICATION FEE FOR PATENT AND OTHER LEGAL EXPENSES CONNECTED T HEREWITH HAVE NOT BEEN INCLUDED IN YOUR APPELLANTS CLAIM AND HENC E NO DISALLOWANCE OUGHT TO HAVE BEEN MADE. 11. AS WE HAVE ALREADY SEEN, THE ASSESSEE IS ENGAG ED IN MANUFACTURE AND TRADING IN SPECIALTY SILICON FORMULATIONS. TH E ASSESSEE CLAIMED AS A DEDUCTION A SUM OF RS.1,32,44,186 BEING EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH. THE CLAIM FOR DEDUCTION WAS MADE IN ACCO RDANCE WITH THE PROVISIONS OF SECTION 35(2AB) OF THE ACT. THE PROV ISIONS OF SEC.35(2AB) OF THE ACT READ AS FOLLOWS: EXPENDITURE ON SCIENTIFIC RESEARCH. 35. (2AB)( 1 ) WHERE A COMPANY ENGAGED IN THE BUSINESS OF BIO- TECHNOLOGY OR IN ANY BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING, NOT BEING AN ARTICLE OR THING SPECIFIED IN THE LIST OF THE ELEVENTH SCHEDULE INCURS ANY EXPENDITUR E ON SCIENTIFIC ITA NOS.514 & 1578/BANG/2013 PAGE 7 OF 40 RESEARCH (NOT BEING EXPENDITURE IN THE NATURE OF CO ST OF ANY LAND OR BUILDING) ON IN-HOUSE RESEARCH AND DEVELOPMENT F ACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY, THEN, THERE S HALL BE ALLOWED A DEDUCTION OF A SUM EQUAL TO TWO TIMES OF THE EXPENDITURE SO INCURRED. EXPLANATION. FOR THE PURPOSES OF THIS CLAUSE, EXPENDITURE ON SCIENTIFIC RESEARCH, IN RELATION TO DRUGS AND PHAR MACEUTICALS, SHALL INCLUDE EXPENDITURE INCURRED ON CLINICAL DRUG TRIAL, OBTAINING APPROVAL FROM ANY REGULATORY AUTHORITY UNDER ANY CE NTRAL, STATE OR PROVINCIAL ACT AND FILING AN APPLICATION FOR A P ATENT UNDER THE PATENTS ACT, 1970 (39 OF 1970). ( 2 ) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE E XPENDITURE MENTIONED IN CLAUSE ( 1 ) UNDER ANY OTHER PROVISION OF THIS ACT. ( 3 ) NO COMPANY SHALL BE ENTITLED FOR DEDUCTION UNDER CLAUSE ( 1 ) UNLESS IT ENTERS INTO AN AGREEMENT WITH THE PRESCRI BED AUTHORITY FOR CO-OPERATION IN SUCH RESEARCH AND DEVELOPMENT F ACILITY AND FOR AUDIT OF THE ACCOUNTS MAINTAINED FOR THAT FACIL ITY. ( 4 ) THE PRESCRIBED AUTHORITY SHALL SUBMIT ITS REPORT IN RELATION TO THE APPROVAL OF THE SAID FACILITY TO THE PRINCIPAL DIRECTOR GENERAL OR DIRECTOR GENERAL IN SUCH FORM AND WITHIN SUCH TIME AS MAY BE PRESCRIBED. ( 5 ) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE E XPENDITURE REFERRED TO IN CLAUSE ( 1 ) WHICH IS INCURRED AFTER THE 31ST DAY OF MARCH, 2017. (6) NO DEDUCTION SHALL BE ALLOWED TO A COMPANY APPR OVED UNDER SUB-CLAUSE (C) OF CLAUSE (IIA) OF SUB-SECTION (1) I N RESPECT OF THE EXPENDITURE REFERRED TO IN CLAUSE (1) WHICH IS INCU RRED AFTER THE 31ST DAY OF MARCH, 2008. SEC.43(4) OF THE ACT DEFINES SCIENTIFIC RESEARCH FOR THE PURPOSE OF THE ACT AND IT READS AS FOLLOWS:- DEFINITIONS OF CERTAIN TERMS RELEVANT TO INCOME FRO M PROFITS AND GAINS OF BUSINESS OR PROFESSION. ITA NOS.514 & 1578/BANG/2013 PAGE 8 OF 40 43. IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUIRES- ( 4 )( I ) 'SCIENTIFIC RESEARCH' MEANS ANY ACTIVITIES FOR THE EXTENSION OF KNOWLEDGE IN THE FIELDS OF NATURAL OR APPLIED SC IENCE INCLUDING AGRICULTURE, ANIMAL HUSBANDRY OR FISHERIES; ( II ) REFERENCES TO EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH INCLUDE ALL EXPENDITURE INCURRED FOR THE PROSECUTIO N, OR THE PROVISION OF FACILITIES FOR THE PROSECUTION, OF SCI ENTIFIC RESEARCH, BUT DO NOT INCLUDE ANY EXPENDITURE INCURRED IN THE ACQUISITION OF RIGHTS IN, OR ARISING OUT OF, SCIENTIFIC RESEARCH; ( III ) REFERENCES TO SCIENTIFIC RESEARCH RELATED TO A BU SINESS OR CLASS OF BUSINESS INCLUDE ( A ) ANY SCIENTIFIC RESEARCH WHICH MAY LEAD TO OR FACI LITATE AN EXTENSION OF THAT BUSINESS OR, AS THE CASE MAY B E, 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; 12. THE AO CALLED UPON THE ASSESSEE TO SHOW AS TO HOW THE EXPENSES INCURRED ON INHOUSE SCIENTIFIC RESEARCH DID NOT CRE ATE ACQUISITION OF RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH. IT IS NOT I N DISPUTE THAT THE EXPENDITURE IN QUESTION WAS CERTIFIED BY THE PRESCRIBED AUTHORI TY [DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH [DSIR], NEW DELH I, MINISTRY OF SCIENCE AND TECHNOLOGY, GOVERNMENT OF INDIA AS HAVING BEEN INCURRED BY THE ASSESSEE ON CARRYING OUT SCIENTIFIC RESEARCH. IN THIS REGARD, IT MAY BE SEEN THAT U/S. 43(4)(II) THE EXPENDITURE INCURRED O N SCIENTIFIC RESEARCH DOES NOT INCLUDE ANY EXPENDITURE INCURRED IN THE ACQUIS ITION OF RIGHTS IN OR ITA NOS.514 & 1578/BANG/2013 PAGE 9 OF 40 ARISING OUT OF SCIENTIFIC RESEARCH. IT IS FOR THI S REASON THAT THE AO CALLED UPON THE ASSESSEE TO SHOW AS TO HOW THE EXPENDITURE INCURRED DID NOT RESULT IN ACQUISITION OF RIGHTS IN OR ARISING OUT O F SCIENTIFIC RESEARCH. 13. THE AO THEREAFTER OBSERVED THAT THE ASSESSEE HA S ACQUIRED SUBSTANTIAL RIGHTS FROM THE EXPENDITURE OF RS.1,32, 44,186/- CLAIMED TO HAVE INCURRED ON SCIENTIFIC RESEARCH U/S 35(2AB) RE AD WITH SECTION 43(4)(II) OF THE INCOME TAX ACT, 1961, (ACT). IN THIS REGARD THE AO REFERRED TO THE REPORT SUBMITTED TO THE DEPARTMENT OF SCIENTIFIC AN D INDUSTRIAL RESEARCH [DSIR], NEW DELHI, MINISTRY OF SCIENCE AND TECHNOLO GY, GOVERNMENT OF INDIA, DATED 30TH OCTOBER, 2009, IN WHICH THE SALIE NT FEATURES OF THE SCIENTIFIC RESEARCH CARRIED OUT BY THE ASSESSEE WAS EXPLAINED AS: 1. NEW PRODUCTS DEVELOPED I. SILICONE FORMULATIONS II. ORGANIC SOFTENERS 2. NEW PROCESS DEVELOPED I. ENZYMATIC PREPARATION: BIO-SCOURCING II. ONE BATH BLEACH CLEAN-UP AND BIO-POLISHING 3. IMPROVEMENT IN THE EXISTING PRODUCTION PROCESS 4. COMMERCIALIZATION OF NEW TECHNOLOGY DEVELOPMENT OF SUPER SOFTENER WITH INSTANT HYDROPHILICITY. 5. PRODUCT AND PROCESS PATENT FOR ANORGONSILICONE COMPOUND AND A PROCESS THEREOF HAS BEEN PATENTED IN INDIA IN THE YEAR 2007, PATENT NO: 00955/CHE/2007. 6. ACHIEVEMENTS IN RESEARCH AND DEVELOPMENT FOR A.Y 2008-09 ITA NOS.514 & 1578/BANG/2013 PAGE 10 OF 40 I. DEVELOPMENT OF SUPER SOFTENER WITH INSTANT HYDR OPHILICITY II. DEVELOPMENT OF AQUEOUS ANTIMICROBIAL SILANE III. MICROENCAPSULATION IV. COST EFFECTIVE SILICONE SOFTENER FOR GARMENT IN DUSTRY V. COST EFFECTIVE YARN SOFTENER VI. SOFTENER FOR SYNTHETIC YARN 7. IMPORT SUBSTITUTION OF THE FOLLOWING I. INNOCELLE FSL II. ULTRACONC WWS III. RESIL 202 IV. ULTRAFAB XP 80 V. ULTRA GM 12 VI. ULTRAFAB XP 81 ACCORDING TO THE AO THE ABOVE DESCRIPTION OF THE SC IENTIFIC RESEARCH CARRIED OUT BY THE ASSESSEE IN THE REPORT CAN ONLY MEAN THAT THE ASSESSEE HAS ACQUIRED RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH. THE AO ALSO REFERRED TO THE FACT THAT THE ASSESSEE HAS APPLIED FOR THE FOLLOWING PATENTS, UNDER THE PATENTS ACT, 1970. SL NO. PATENT NO. TYPE OF PATENT TITLE DATE OF FILING 1 2661/CHE/2010 PROVISION SILANE QUATERNARY AMMONIUM COMPOUNDS AND COMPOSITION THEREOF 11/10/2011 2 416/CHE/2011 PROVISIONAL HIGH VISCOUS AQUEOUS SOFTENER BASED ON AMINO MODIFIED SILOXANE 14/02/2011 3 1430/CHE/2011 PROVISIONAL A COMPOSITION FOR FADING FABRIC 25/04/2011 ITA NOS.514 & 1578/BANG/2013 PAGE 11 OF 40 4 1463/CHE/2011 PROVISIONAL A METHOD FOR SYNTHESIS OF COLLOIDAL SILVER 27/04/2011 5 2694/CHE/2011 PROVISIONAL NON-TOXIC ADVANCED SIXTH GENERATION DISINFECTANT CLEANER 06/08/2011 ACCORDING TO THE AO, THE ABOVE FACT WILL ALSO GO TO SHOW THAT THE SCIENTIFIC RESEARCH CARRIED OUT BY THE ASSESSEE HAS RESULTED I N THE ASSESSEE ACQUIRING RIGHTS IN OR ARISING OUT OF SCIENTIFIC R ESEARCH. 14. THE AO ALSO OBSERVED THAT APPROVAL BY THE PRES CRIBED AUTHORITY WILL NOT MEAN THAT DEDUCTION CLAIMED BY THE ASSESSEE HAS TO BE ALLOWED WITHOUT ANY FURTHER ENQUIRY. THE AO ALSO OBSERVED THAT ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE THAT THE EXPENDITURE CLAI MED DID NOT INCLUDE COST OF ANY LAND OR BUILDING. THE AO ALSO OBSERVED THAT THE AFORESAID EXPENDITURE IS NOT ALLOWABLE U/S. 37(1) OF THE ACT, AS IT IS NOT REVENUE EXPENDITURE. FOR THE ABOVE REASONS, THE AO DISALLO WED THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF RS.1,32,44,186. 15. BEFORE THE CIT(APPEALS), THE ASSESSEE POINTED O UT THAT THE COMPLETE BREAK UP OF THE EXPENSES INCURRED ON SCIENTIFIC RES EARCH HAD BEEN GIVEN BEFORE THE AO IN THE FORM OF AUDIT CERTIFICATE. APP ENDIX I TO THE CERTIFICATE GIVES DETAILS OF EXPENSES AND THE SAME CLEARLY SHOW S THAT NO EXPENDITURE HAD BEEN INCURRED FOR PURCHASE OF ANY LAND OR BUILD ING, WHICH ALONE IS ITA NOS.514 & 1578/BANG/2013 PAGE 12 OF 40 PROHIBITED U/S. 35(2AB)(1) OF THE ACT. THE ASSESSE E ALSO RELIED ON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF CIT V. WHEELS INDIA LTD. 336 ITR 513 (MAD ), WHEREIN IT WAS HELD THAT ONCE PRESCRIBED AUTHORITY APPROVES THE R&D FACILITY, EXPENDITURE CL AIMED BY THE ASSESSEE HAS TO BE ALLOWED AS A DEDUCTION. THE ASSESSEE ALS O CONTENDED THAT INTERPRETATION PLACED BY THE AO ON THE PROVISIONS O F SECTION 43(4)(II) WERE NOT CORRECT. IN THIS REGARD, THE ASSESSEE SUBMITTE D THAT THE PROVISIONS OF SUB-CLAUSE (II) ABOVE HAVE TO BE PROPERLY INTERPRET ED IN THE CONTEXT IN WHICH IT IS USED. IT WAS ARGUED THAT THE PURPOSE OF HIGHE R DEDUCTION ALLOWED U/S.35 IS TO ENCOURAGE SCIENTIFIC RESEARCH AMONG TH E INDIAN COMPANIES. THE DEFINITION TRIES TO BRING IN WITHIN ITS AMBIT A LL EXPENDITURE INCURRED FOR THE PROSECUTION OR THE PROVISION OF FACILITIES FOR THE PROSECUTION OF SCIENTIFIC RESEARCH. THUS IT INCLUDES EXPENDITURE ON MATERIALS , SALARIES AND OTHER INCIDENTAL EXPENSES REQUIRED FOR CARRYING OUT SCIEN TIFIC RESEARCH. WHAT IS ATTEMPTED TO BE EXCLUDED IN SUB-CLAUSE (II) IS THE EXPENDITURE INCURRED ON LEGAL EXPENSES, REGISTRATION CHARGES ETC. FOR OBTAI NING PATENTS WHICH WILL BE ARISING OUT OF SCIENTIFIC RESEARCH AS THAT WOULD NO T BE AN EXPENDITURE FOR PROSECUTION OF SCIENTIFIC RESEARCH. IT WAS ARGUED THAT BY NO STRETCH OF IMAGINATION, ONE CAN INTERPRET THE PROVISIONS OF SE C.43(4)(II) OTHERWISE AS THIS WILL DISCOURAGE THE INDIAN COMPANIES FROM TAKI NG A PATENT ON THE SUCCESSFUL SCIENTIFIC RESEARCH WHICH HAS ALREADY BE EN CARRIED OUT. THE REASONABLE INTERPRETATION OF THIS SECTION WILL NECE SSARILY HAVE TO BE THAT THE EXCLUSION IS OF EXPENDITURE INCURRED IN THE ACQUISI TION OF RIGHTS IN OR ARISING ITA NOS.514 & 1578/BANG/2013 PAGE 13 OF 40 OUT OF SCIENTIFIC RESEARCH WHICH IS THE COST OF TAK ING OUT THE PATENT SUCH AS LEGAL FEES, REGISTRATION FEES AND OTHER INCIDENTAL EXPENSES ON ADVERTISEMENT ETC, WHICH MAY BE REQUIRED FOR REGIST ERING THE PATENT THEREBY ACQUIRING RIGHTS THEREIN OR ARISING OUT OF SCIENTIF IC RESEARCH. IT DOES NOT APPLY TO THE EXPENDITURE INCURRED ON PROSECUTION OR PROVISION ON FACILITIES FOR THE PROSECUTION OF SCIENTIFIC RESEARCH WHICH AR E EXPRESSLY INTENDED TO BE ALLOWED. IT WAS ALSO POINTED OUT THAT THE DEDUCTIO N U/S.35(2AB) IS TO BE ALLOWED IN FULL ON THE CAPITAL AND REVENUE EXPENDIT URE INCURRED FOR PROSECUTING SCIENTIFIC RESEARCH (EXCLUDING COST OF LAND OR BUILDING) , IRRESPECTIVE OF WHETHER THAT SCIENTIFIC RESEARCH HA S LATER RESULTED IN ACQUISITION OF A PATENT ALTHOUGH THE INCREMENTAL EX PENDITURE INCURRED FOR ACQUISITION OF THE PATENT ITSELF WILL NOT BE ALLOWE D AS SCIENTIFIC RESEARCH EXPENDITURE AS IT IS NOT INCURRED ON SCIENTIFIC RES EARCH, BUT ONLY TO ACQUIRE A RIGHT THEREIN. 16. THE CIT(A), HOWEVER, DID NOT ACCEPT THE AFORESA ID ARGUMENT FOR THE FOLLOWING REASONS:- 11.5. THE ARGUMENTS OF THE APPELLANT AND THE CONT ENTIONS OF THE AO ARE CONSIDERED. I FIND THAT THE APPELLANT HAS IN HIS ARGUMENT SKIRTED THE ISSUE OF WHETHER THE RESEARCH ACTUALLY YIELDED THE ACQUISITION OF RIGHTS OR NOT. WHEREAS THE AO HAS ME NTIONED THE ITEMS IN DETAIL TO COME TO HIS FINDING, THE APPELLA NT HAS CHOSEN TO PUT FORWARD ITS ARGUMENTS IN GENERALITIES AND NORMA TIVE INTERPRETATIONS OF THE REQUIREMENTS OF ENCOURAGING SCIENTIFIC RESEARCH. ENCOURAGING OF SCIENTIFIC RESEARCH AND CO MMERCIAL USAGE OF THE RIGHTS ACQUIRED OVER THE PRODUCTS/PROC ESSES ARE TWO SEPARATE ISSUES INVOLVED IN THIS APPEAL. THE APPELL ANT HAS NOT POINTED OUT HOW THE PROVISIONS OF SEC 43(4)(II) DO NOT APPLY TO IT, ITA NOS.514 & 1578/BANG/2013 PAGE 14 OF 40 ONCE IT IS POINTED OUT THAT THE RESEARCH LEADS TO T HE ACQUISITION OF RIGHTS OVER PRODUCTS, PROCESSES AND PATENTS. THE US E OF THE WORDS RIGHTS IN, OR ARISING OUT OF, SCIENTIFIC RESEARCH IN THE SECTION ARE CLEAR AND UNEQUIVOCAL. IN THE PRESENT CASE, THE AO HAS CLEARLY POINTED OUT THAT THE PROSECUTION OF SCIENTIFIC RESE ARCH BY THE APPELLANT LEADS TO THE ACQUISITION OF RIGHTS OVER C ERTAIN PROCESSES AND PRODUCTS, AND FOR THE STRENGTHENING AND PROTECT ION OF THESE RIGHTS, THE APPELLANT HAS OBTAINED/IS IN THE PROCES S OF OBTAINING DUE PATENTS. IN THESE CIRCUMSTANCES, THE ARGUMENTS RAISED BY THE APPELLANT ARE CLEARLY OUTSIDE THE PURVIEW OF THE LE GAL POSITION AS LAID DOWN IN SEC 43(4)(II). THE DISALLOWANCE MADE B Y THE AO IS FOUND TO BE IN ORDER, AND THE SAME IS ACCORDINGLY U PHELD. 17. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. 18. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNSE L FOR THE ASSESSEE, WHO REITERATED THE STAND OF THE ASSESSEE PUT FORTH BEFORE THE REVENUE AUTHORITIES. THE LD. DR RELIED ON THE ORDER OF THE CIT(APPEALS). WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. FROM THE ORDER OF THE LD. CIT(A), IT IS VERY CLEAR THAT HE HAS ACCEPTED THE SUBMISSION OF THE ASSESSEE THAT THE EXPENDITURE IN QUESTION INCURRED BY THE ASSESSEE COULD NOT BE DISALLOWED AS IT INVOLVED CAP ITAL EXPENDITURE IN THE FORM OF ACQUIRING ANY LAND OR BUILDING. THE ONLY B ASIS ON WHICH THE CIT(A) SUSTAINED THE DISALLOWANCE IS THAT THE EXPENDITURE RESULTED IN ACQUISITION OF RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH. T HE LD. CIT(A) HAS PROCEEDED ON THE BASIS THAT IF THE ASSESSEE DOES SCIENTIFIC R ESEARCH AND IS ABLE TO OBTAIN INTELLECTUAL PROPERTY RIGHTS ON SUCH RESEARC H, THEN HE WAS FREE TO ITA NOS.514 & 1578/BANG/2013 PAGE 15 OF 40 COMMERCIALLY USE SUCH INTELLECTUAL PROPERTY RIGHTS AND THIS IS THE REASON WHY THERE IS A PROHIBITION U/S. 43(4)(II) OF THE AC T SO AS TO EXCLUDE EXPENDITURE INCURRED IN THE ACQUISITION OF RIGHTS I N OR ARISING OUT OF SCIENTIFIC RESEARCH. IN OUR VIEW, THE AFORESAID APPROACH OF T HE REVENUE AUTHORITIES IS INCORRECT. THE EXPENDITURE THAT IS SOUGHT TO BE EX CLUDED 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 IS POSSIBLE THAT THE ASSESSEE WITHOUT CARRYING OUT THE SCIENTIF IC RESEARCH, ACQUIRES RIGHTS IN SCIENTIFIC RESEARCH, ACQUIRES RIGHTS ARIS ING OUT OF SCIENTIFIC RESEARCH DONE BY SOMEBODY ELSE AND CLAIMS COST OF ACQUISITIO N OF SUCH RIGHTS AS EXPENDITURE ON SCIENTIFIC RESEARCH. IT IS THIS KIN D OF EXPENDITURE THAT IS SOUGHT TO BE EXCLUDED U/S. 43(4)(II) IN ITS EXCLUSI ON CLAUSE AS EXPENDITURE INCURRED IN ACQUIRING RIGHTS IN OR ARISING OUT OF S CIENTIFIC RESEARCH. IT IS SUCH TYPE OF EXPENDITURE CARRIED OUT BY SOMEBODY ELSE AN D SUCH RIGHT IS ACQUIRED BY THE ASSESSEE, SUCH EXPENDITURE IS SOUGH T TO BE DISALLOWED. THE IDEA BEHIND THE EXCLUSION CLAUSE IN SECTION 43( 4)(II) APPEARS TO BE THAT EXPENDITURE ON SCIENTIFIC RESEARCH SHOULD BE ON THE RESEARCH ACTUALLY CARRIED OUT BY THE ASSESSEE IN-HOUSE AND IT SHOULD NOT MERELY SPENT MONEY IN ACQUIRING RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH CARRIED OUT BY SOME OTHER PERSON. THIS IS CLEAR FROM THE PROVISIONS OF SECTION 35(2AB) WHICH TALKS OF INHOUSE RESEARCH & DEVELOPMENT FACILITIES . THIS ASPECT HAS BEEN CLEARLY OVERLOOKED BY THE REVENUE AUTHORITIES. IF THE INTERPRETATION SOUGHT TO BE PLACED BY THE REVENUE IS TO BE ACCEPTED, THEN TH E BENEFIT SOUGHT TO BE ITA NOS.514 & 1578/BANG/2013 PAGE 16 OF 40 CONFERRED BY THE PROVISIONS OF SECTION 35(2AB) WOUL D BE VIRTUALLY DENIED IN ALL CASES BY INVOKING THE EXCLUSION CLAUSE IN SECTI ON 43(4)(II) OF THE ACT. THE INTERPRETATION SOUGHT TO BE PLACED BY THE REVEN UE, IF ACCEPTED, WILL MEAN THAT ONLY IF SCIENTIFIC RESEARCH IS UNSUCCESSF UL, THEN THE DEDUCTION U/S. 35(2AB) OF THE ACT, WOULD BE ALLOWED. SUCH A CONSE QUENCE WOULD NEVER HAVE BEEN INTENDED BY THE LEGISLATURE. AS ALREADY STATED THE OBJECT BEHIND THE PROVISIONS OF SEC.35 IS TO ENCOURAGE SCIENTIFIC RESEARCH SO THAT THE BENEFIT OF SUCH RESEARCH WOULD BE AVAILABLE FOR ALL . THE CONTENTION OF THE ASSESSEE BEFORE THE CIT(A) THAT WHAT IS SOUGHT TO B E EXCLUDED IN THE EXCLUSION CLAUSE OF SECTION 43(4)(II) IS ONLY EXPEN SES INCURRED AFTER THE ASSESSEE SUCCESSFULLY COMPLETES SCIENTIFIC RESEARCH AND SEEKS TO ACQUIRE OWNERSHIP RIGHTS OVER SUCH SCIENTIFIC RESEARCH IN T HE FORM OF INTELLECTUAL PROPERTY RIGHTS AND IN THAT PROCESS INCURS SOME EXP ENSES, SUCH EXPENSES ARE SOUGHT TO BE EXCLUDED. IN OUR VIEW, THIS INTE RPRETATION IS ALSO A POSSIBLE INTERPRETATION. IN OUR VIEW, KEEPING IN M IND THE LAUDABLE OBJECTS OF THE PROVISIONS OF SECTION 35(2AB) OF THE ACT, IT WO ULD BE ABSURD TO CALL UPON THE ASSESSEE TO SHOW AS TO HOW THE EXPENDITURE INCU RRED IS NOT INCURRED FOR ACQUISITION OF RIGHTS IN OR ARISING OUT OF SCIENTIF IC RESEARCH. WE HAVE ALSO PERUSED THE AUDIT REPORT AND ITS ANNEXURES FOR THE CLAIM OF DEDUCTION U/S. 35(2AB) OF THE ACT. A PERUSAL OF THE AUDIT REPORT SHOWS THAT MAJOR PART OF EXPENSES ARE TOWARDS SALARY, EQUIPMENTS, MATERIALS CONSUMED, CONSULTANCY FEES AND OTHER ROUTINE EXPENSES. IN TH E GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE VIEW THAT CLAIM OF DEDUCTION U/S. ITA NOS.514 & 1578/BANG/2013 PAGE 17 OF 40 35(2AB) OF THE ACT HAS TO BE ALLOWED. THE CONCLUSI ONS DRAWN BY THE REVENUE AUTHORITIES ON DISALLOWANCE OF AFORESAID CL AIM OF THE ASSESSEE ARE INCORRECT AND CANNOT BE SUSTAINED. GROUND NO.II R AISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 19. GROUND NO.III RAISED BY THE ASSESSEE READS AS F OLLOWS:- DISALLOWANCE AMOUNTING TO RS. 13,12,500/- AS DEDUC TION TOWARDS RESEARCH AND DEVELOPMENT EXPENSES U/S 35 (2 AA) AND U/S 35 (I) (II) . 6. THE CIT(A) HAS UPHELD THE DISALLOWANCE MADE BY THE ASSESSING OFFICER CLAIMING THESE ARE INCURRED IN CO NNECTION WITH ACQUISITION OF RIGHTS AND THEREFORE CAPITAL IN NATU RE. THESE PAYMENTS WERE MADE TO INSTITUTIONS APPROVED BY THE PRESCRIBED AUTHORITY FOR THIS PURPOSE AND THE ASSESSING AUTHOR ITY CANNOT GO BEYOND THAT AND DISALLOW THE PAYMENTS ON CONTENTION THAT RIGHTS HAVE BEEN ACQUIRED BY YOUR APPELLANT. 20. THE ASSESSEE CLAIMED DEDUCTION OF A SUM OF RS.1 3,12,500 COMPRISING OF A DEDUCTION OF RS.8,75,000 U/S. 35(2A A) AND A SUM OF RS.4,37,500 U/S. 35(1)(II) OF THE ACT. THE AMOUNT OF RS.8,75,000 WAS PAID BY THE ASSESSEE TO IIT, NEW DELHI AND RS.4,37,500 W AS PAID TO INTERNATIONAL ADVANCED RESEARCH CENTRE FOR POWER ME TALLURGY & NEW MATERIALS, HYDERABAD. THE PROVISIONS OF SECTIONS 3 5(2AA) AND 35(1)(II) OF THE ACT ARE AS FOLLOWS:- 35 EXPENDITURE ON SCIENTIFIC RESEARCH. 35. ( 2AA) WHERE THE ASSESSEE PAYS ANY SUM TO A NATIONAL LABORATORY OR A UNIVERSITY OR AN INDIAN INSTITUTE OF TECHNOLOGY OR A SPECIFIED PERSON WITH A SPECIFIC DIRECTION THA T THE SAID SUM ITA NOS.514 & 1578/BANG/2013 PAGE 18 OF 40 SHALL BE USED FOR SCIENTIFIC RESEARCH UNDERTAKEN UN DER A PROGRAMME APPROVED IN THIS BEHALF BY THE PRESCRIBED AUTHORITY, THEN ( A ) THERE SHALL BE ALLOWED A DEDUCTION OF A SUM EQUAL TO TWO TIMES THE SUM SO PAID ; AND ( B ) NO DEDUCTION IN RESPECT OF SUCH SUM SHALL BE ALLO WED UNDER ANY OTHER PROVISION OF THIS ACT : PROVIDED THAT THE PRESCRIBED AUTHORITY SHALL, BEFORE GRANTIN G APPROVAL, SATISFY ITSELF ABOUT THE FEASIBILITY OF C ARRYING OUT THE SCIENTIFIC RESEARCH AND SHALL SUBMIT ITS REPORT TO THE PRINCIPAL DIRECTOR GENERAL OR DIRECTOR GENERAL IN SUCH FORM AS MAY BE PRESCRIBED. EXPLANATION 1.THE DEDUCTION, TO WHICH THE ASSESSEE IS ENTITLED IN RESPECT OF ANY SUM PAID TO A NATIONAL LABORATORY , UNIVERSITY, INDIAN INSTITUTE OF TECHNOLOGY OR A SPECIFIED PERSO N FOR THE APPROVED PROGRAMME REFERRED TO IN THIS SUB-SECTION, SHALL NOT BE DENIED MERELY ON THE GROUND THAT, SUBSEQUENT TO THE PAYMENT OF SUCH SUM BY THE ASSESSEE, THE APPROVAL GRANTED TO, ( A ) SUCH LABORATORY, OR SPECIFIED PERSON HAS BEEN WIT HDRAWN; OR ( B ) THE PROGRAMME, UNDERTAKEN BY THE NATIONAL LABORAT ORY, UNIVERSITY, INDIAN INSTITUTE OF TECHNOLOGY OR SPECIFIED PERSON, HAS BEEN WITHDRAWN.] EXPLANATION 2 .FOR THE PURPOSES OF THIS SECTION, ( A ) NATIONAL LABORATORY MEANS A SCIENTIFIC LABORATO RY FUNCTIONING AT THE NATIONAL LEVEL UNDER THE AEGIS O F THE INDIAN COUNCIL OF AGRICULTURAL RESEARCH, THE INDIAN COUNCI L OF MEDICAL RESEARCH, THE COUNCIL OF SCIENTIFIC AND INDUSTRIAL RESEARCH, THE DEFENCE RESEARCH AND DEVELOPMENT ORGANISATION, THE DEPARTMENT OF ELECTRONICS, THE DEPARTMENT OF BIO-TE CHNOLOGY OR THE DEPARTMENT OF ATOMIC ENERGY AND WHICH IS APPROV ED AS A NATIONAL LABORATORY BY THE PRESCRIBED AUTHORITY IN SUCH MANNER AS MAY BE PRESCRIBED ; ITA NOS.514 & 1578/BANG/2013 PAGE 19 OF 40 ( B ) UNIVERSITY SHALL HAVE THE SAME MEANING AS IN EXPLANATION TO CLAUSE ( IX ) OF SECTION 47 ; ( C ) INDIAN INSTITUTE OF TECHNOLOGY SHALL HAVE THE S AME MEANING AS THAT OF INSTITUTE IN CLAUSE ( G ) OF SECTION 3 4 OF THE INSTITUTES OF TECHNOLOGY ACT, 1961 (59 OF 1961)]; ( D ) SPECIFIED PERSON MEANS SUCH PERSON AS IS APPROV ED BY THE PRESCRIBED AUTHORITY. 35EXPENDITURE ON SCIENTIFIC RESEARCH. 35. (1) IN RESPECT OF EXPENDITURE ON SCIENTIFIC RESEARC H, THE FOLLOWING DEDUCTIONS SHALL BE ALLOWED ( II ) AN AMOUNT EQUAL TO ONE AND THREE-FOURTH TIMES OF ANY SUM PAID TO A RESEARCH ASSOCIATION WHICH HAS AS ITS OBJECT THE UNDERTAKING OF SCIENTIFIC RESEARCH OR TO A UNIVERSI TY, COLLEGE OR OTHER INSTITUTION TO BE USED FOR SCIENTIFIC RESEARC H : PROVIDED THAT SUCH ASSOCIATION, UNIVERSITY, COLLEGE OR OTHER INSTITUTION FOR THE PURPOSES OF THIS CLAUSE ( A ) IS FOR THE TIME BEING APPROVED, IN ACCORDANCE WIT H THE GUIDELINES, IN THE MANNER AND SUBJECT TO SUCH CONDI TIONS AS MAY BE PRESCRIBED; AND ( B ) SUCH ASSOCIATION, UNIVERSITY, COLLEGE OR OTHER IN STITUTION IS SPECIFIED AS SUCH, BY NOTIFICATION 58 IN THE OFFICIAL GAZETTE, BY THE CENTRAL GOVERNMENT; 21. UNDER SECTION 35(2AA) OF THE ACT, IF AN ASSESSE E PAYS ANY SUM TO IIT OR A SPECIFIC PERSON WITH A SPECIFIC DIRECTION THAT THE SAID SUM SHALL BE USED FOR SCIENTIFIC RESEARCH UNDER THE PROGRAMME AP PROVED IN THIS BEHALF BY THE PRESCRIBED AUTHORITY, THEN DEDUCTION OF ONE- ONE THIRD TIMES OF THE SUM SO PAID SHALL BE ALLOWED AS A DEDUCTION. U/S. 35(1)(II), IF ANY SUM IS ITA NOS.514 & 1578/BANG/2013 PAGE 20 OF 40 PAID TO RESEARCH ASSOCIATION, WHICH HAS AS ITS OBJE CTS, THE UNDERTAKING OF SCIENTIFIC RESEARCH, THE AMOUNT EQUAL TO ONE-ONE FO URTH TIMES OF THE SUM SO PAID WILL BE ALLOWED AS A DEDUCTION. 22. IT IS NOT IN DISPUTE THAT BOTH THE INSTITUTION S TO WHICH THE ASSESSEE MADE THE CONTRIBUTION WERE APPROVED FOR THE PURPOSE S MENTIONED IN SECTIONS 35(2AA) AND 35(1)(II) OF THE ACT. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON THE GROUND THAT THE A SSESSEE DID NOT ESTABLISH THAT THE CONTRIBUTION DOES NOT CREATE ACQ UISITION OF RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH, AS MENTIONED IN THE EXCLUSION CLAUSE OF SECTION 43(4)(II) OF THE ACT. THE LD. CIT(A) CONFI RMED THE ORDER OF THE AO. HENCE GROUND NO.III BY THE ASSESSEE. 23. WE HAVE HEARD THE RIVAL SUBMISSIONS WHICH ARE I DENTICAL TO THE SUBMISSIONS MADE IN GROUND NO.II. WE HAVE DISCUSSE D SIMILAR ISSUE REGARDING APPLICABILITY OF EXCLUSION CLAUSE IN THE DEFINITION OF SCIENTIFIC RESEARCH AS GIVEN IN SEC.43(4)(II) OF THE ACT WHILE ADJUDICATING GROUND NO.II. THE REASONS GIVEN THEREIN WILL APPLY TO THE CLAIM FOR DEDUCTION CONTESTED BY THE ASSESSEE IN GR.NO.III. FOR THE RE ASONS STATED THEREIN, WE HOLD THAT THE EXPENDITURE IN QUESTION IS IN THE NAT URE OF EXPENDITURE ON SCIENTIFIC RESEARCH AS LAID DOWN IN SEC.35(1)(II) A ND 35(2AA) OF THE ACT. WE ALSO UPHOLD THE STAND OF THE ASSESSEE THAT THE Q UESTION WHETHER THE EXPENDITURE IS CAPITAL OR REVENUE IS NOT RELEVANT A S WHAT IS GIVEN BY THE ASSESSEE IS A CONTRIBUTION AND THAT CANNOT BE SAID TO BE CAPITAL ITA NOS.514 & 1578/BANG/2013 PAGE 21 OF 40 EXPENDITURE. IN ANY EVENT UNDER SEC.35(1)(II) & 35 (2AA) OF THE ACT, THERE IS NO DISTINCTION AS TO WHETHER THE EXPENDITURE IS CAP ITAL OR REVENUE AND ANY AMOUNT GIVEN AS CONTRIBUTION HAS TO BE ALLOWED. WE THEREFORE DIRECT THE AO TO ALLOW THE DEDUCTION CLAIMED BY THE ASSESSEE. ACCORDINGLY GROUND NO.III IS ALSO ALLOWED. 24. GROUND NO.IV RAISED BY THE ASSESSEE READS AS FO LLOWS:- DISALLOWANCE OF PROVISION FOR LEAVE ENCASHMENT OF RS.11,45,829/- 7. A SUM OF RS.11,45,829/- WAS DISALLOWED ON THE C ONTENTION THAT AS THE JUDGMENT OF KOLKATA HIGH COURT IN THE C ASE OF EXIDE INDUSTRIES LTD VS. UOI 292 ITR 470 ALLOWING SUCH PR OVISIONING HAS BEEN STAYED BY THE HON. SUPREME COURT, IT CANNO T BE RELIED UPON. IT SHOULD BE NOTED THAT A MERE ORDER OF STAY DOES NOT MAKE THE DECISION AS NOT OPERATIONAL SINCE THERE IS NO F INALITY YET ON THIS MATTER. THE HONBLE HIGH COURT OF KERALA IN TH E CASE OF CIT V/S HINDUSTAN LATEX (ITA NO.64/2012) AND THE HON. I TAT, BANGALORE BENCH IN THE CASE OF KRISHNA GRAMEENA BAN K VS ACIT (ITA 232/BANG/2012) HAVE HELD SUCH PROVISIONS TO BE ALLOWED. UNDER ANY CIRCUMSTANCES, THE PROVISIONS OF SEC. 43B(F) ARE APPLICABLE TO PROVISION FOR LEAVE ENCASHMENT AM OUNT THAT HAS BECOME PAYABLE AND NOT THAT ACCRUED BUT NOT YET BEC OME PAYABLE. 25. THE ASSESSEE CLAIMED AS A DEDUCTION A SUM OF RS .11,45,829 TOWARDS PROVISION FOR LEAVE ENCASHMENT. THE AO WAS OF THE VIEW THAT ANY AMOUNT CLAIMED AS A DEDUCTION SHOULD HAVE BEEN ACTU ALLY INCURRED BY THE ASSESSEE OR SHOULD HAVE ACCRUED AS A LIABILITY TO T HE ASSESSEE. SINCE THE CLAIM OF THE ASSESSEE WAS BY WAY OF PROVISION, WHIC H HAS NEITHER ACCRUED NOR ACTUALLY PAID, THE SAME CANNOT BE ALLOWED AS A DEDUCTION. ACCORDINGLY, ITA NOS.514 & 1578/BANG/2013 PAGE 22 OF 40 A SUM OF RS.11,45,829 FOR PROVISION TOWARDS LEAVE E NCASHMENT WAS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASS ESSEE. 26. ON APPEAL BY THE ASSESSEE, THE LD. CIT(A) CONFI RMED THE ORDER OF THE AO. THE CIT(A) FOUND THAT AS PER THE PROVISIONS OF SECTION 43B(F) OF THE ACT INTRODUCED BY THE FINANCE ACT, 2011 W.E.F. 1.4. 2002, ANY SUM PAYABLE BY AN ASSESSEE AS AN EMPLOYER IN RELATION TO ANY LE AVE AT THE CREDIT OF HIS EMPLOYEE, WILL BE ALLOWED AS A DEDUCTION, ONLY WHEN THE SAME IS ACTUALLY PAID. THE CIT(A) ALSO MADE A REFERENCE TO THE FAC T THAT THE AFORESAID PROVISIONS WERE INTRODUCED TO OVERCOME THE DECISION OF THE HONBLE SUPREME COURT RENDERED IN THE CASE OF BEML, 245 ITR 428 (SC) . THE CIT(A) ALSO FOUND THAT THE AFORESAID PROVISIONS WER E HELD TO BE UNCONSTITUTIONAL BY THE CALCUTTA HIGH COURT IN EXIDE INDUSTRIES, 292 ITR 470 (CAL) , BUT THE AFORESAID DECISION OF THE HONBLE CALCUTT A HIGH COURT HAS BEEN STAYED BY THE HONBLE SUPREME COURT ON AN APPEAL FILED BY THE REVENUE. IN THE GIVEN CIRCUMSTANCES, THE LD. CIT(A ) CONFIRMED THE ORDER OF THE AO AND DISALLOWING THE CLAIM OF THE ASSESSEE FO R DEDUCTION. 27. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT IDENTICAL ISSUE HAD COME UP FOR CONSIDERATION IN ASSESSEES O WN CASE IN A.Y. 2008-09 IN ITA NO.117/BANG/2012 AND THIS TRIBUNAL BY ORDER DATED 14.12.2012 , FOLLOWING THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF BEML (SUPRA) AND THE DECISION OF HONBLE CALCUTTA HIGH COURT IN ITA NOS.514 & 1578/BANG/2013 PAGE 23 OF 40 THE CASE OF EXIDE INDUSTRIES (SUPRA) HELD THAT CLAIM OF THE ASSESSEE IS TO BE ALLOWED. 28. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. C OUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT DECISION OF THE T RIBUNAL RENDERED IN ASSESSEES OWN CASE FOR THE A.Y. 2008-09 WILL NOT B E OF ANY HELP TO THE CASE OF THE ASSESSEE. THE TRIBUNAL IN THAT A.Y., P ROCEEDED ON THE BASIS THAT SECTION 43B(F) OF THE ACT HAD BEEN HELD TO BE UNCONSTITUTIONAL BY THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF EXIDE INDUSTRIES (SUPRA) AND THEREFORE RATIO LAID OUT BY THE HONBLE SUPREME COU RT IN THE CASE OF BEML (SUPRA) HAD TO BE FOLLOWED. STAY OF THE OPERATION OF THE JUDGMENT OF THE HONBLE CALCUTTA HIGH COURT BY THE SUPREME COURT WA S NOT BROUGHT TO THE NOTICE OF THE BENCH WHEN THE ORDER FOR A.Y. 2008-09 WAS PASSED BY THE TRIBUNAL. WITH THE JUDGMENT OF THE HONBLE SUPREME COURT STAYING THE OPERATION OF THE JUDGMENT OF THE HONBLE CALCUTTA H IGH COURT IN THE CASE OF EXIDE INDUSTRIES (SUPRA) , THE PROVISIONS OF SECTION 43B(F) OF THE ACT WILL HAVE TO BE CONSIDERED. IN LIGHT OF THE PROVISIONS OF SECTION 43B(F) OF THE ACT, THE ASSESSEE CANNOT CLAIM THE DEDUCTION IN QUE STION, WITHOUT ACTUAL PAYMENT AND ON THE BASIS OF A PROVISION. WE, THERE FORE, CONFIRM THE ORDER OF THE CIT(APPEALS) AND DISMISS GROUND NO.IV RAISED BY THE ASSESSEE. 29. GROUND NO.V READS AS FOLLOWS:- DISALLOWANCE OF RS.29,35,6081- PAID TOWARDS LEASE RENTALS OF VEHICLES ON OPERATING LEASE ALLOTTED TO VARIOUS EXE CUTIVES ITA NOS.514 & 1578/BANG/2013 PAGE 24 OF 40 8. THE CIT(A) IN HIS ORDER HAS TREATED THIS AS CAP ITAL EXPENDITURE ON THE CONTENTION THAT THIS IS A FINANC E LEASE AND ALLOWED DEPRECIATION TO BE CLAIMED AS PER PRESCRIBE D RATES. THE ARRANGEMENT, BEING AN OPERATING LEASE, IS CLEARLY R EVENUE IN NATURE AND WAS DEBITED TO PROFIT / LOSS ACCOUNT IN LINE WITH ACCOUNTING STANDARD 19 LEASES, WHICH IS A MANDATO RY ACCOUNTING STANDARD APPLICABLE TO ALL COMPANIES AS NOTIFIED UNDER THE COMPANIES ACCOUNTING STANDARDS (RULES) 2006. HE NCE, THIS EXPENDITURE OUGHT TO HAVE BEEN ALLOWED AS A DEDUCTI ON. 30. THE ASSESSEE CLAIMED AS A DEDUCTION A SUM OF RS .26,21,184 UNDER THE HEAD PAYMENT TOWARDS VEHICLE MAINTENANCE AND HI RE CHARGES. ON ENQUIRY BY THE AO, THE ASSESSEE FURNISHED A COPY OF THE TRIPARTITE AGREEMENT CALLED MASTER AGREEMENT BETWEEN THE ASS ESSEE, LEASE PLAN INDIA LTD. (LPIN) AND LEASE PLAN FLEET MANAGEMENT INDIA PVT. LTD. (LPFMI). THE ASSESSEE IS REFERRED TO AS CLIENT IN THIS AGREEMENT. LPIN PERFORMS THE ROLE OF ACQUIRING VEHICLES AND GIVING THEM ON LEASE. LPFMI PERFORMS THE ROLE OF FLEET MANAGEMENT OF VEHICLES. AS PER TERMS OF THE AGREEMENT, LPIN AGREED TO GIVE VEHICLES ON HIRE AS AND WHEN REQUIRED BY THE ASSESSEE. LPFMI AGREED TO RENDER FLEET MANAGE MENT SERVICES IN RESPECT OF THE VEHICLES LEASED. ARTICLE 1 OF THE A GREEMENT SAYS THAT AT THE REQUEST OF THE ASSESSEE FROM TIME TO TIME, LPIN WIL L ACQUIRE AND GRANT ON LEASE VEHICLES ON THE TERMS & CONDITIONS CONTAINED IN THE AGREEMENT. ARTICLE 2 PROVIDES THAT LPFM WILL RENDER FLEET MANA GEMENT SERVICES TO THE ASSESSEE. ARTICLE-2.2 CLAUSE (III) OF THE AGREEMEN T PROVIDES AS FOLLOWS: REGISTRATION OF VEHICLES WITH TRANSPORT AUTHORITIE S- LPFMI SHALL ASSIST IN COMPLETING THE FORMALITIES OF REGIS TRATION OF THE ITA NOS.514 & 1578/BANG/2013 PAGE 25 OF 40 VEHICLE. THE VEHICLE SHALL BE REGISTERED AS REQUIR ED UNDER THE MOTOR VEHICLES ACT, 1988 (THE MOTOR VEHICLES ACT) AND RULES FRAMED THEREUNDER, IN THE NAME OF THE CLIENT AND LP IN SHALL BE REGISTERED THEREIN AS THE FINANCIER UNDER THIS MAST ER AGREEMENT AND THE CLIENT SHALL BE FULLY LIABLE AND RESPONSIBL E FOR ALL THE OBLIGATIONS, LIABILITIES AND DUTIES AS PROVIDED UND ER THE MOTOR VEHICLES ACT OR UNDER ANY OTHER LAW OR INSTRUMENT P ERTAINING TO THE USE OF THE VEHICLE. HOWEVER, THIS SHALL NOT IN ANY WAY AFFECT THE ABSOLUTE OWNERSHIP OF LPIN ON THE VEHICLES AND SHALL NOT CONFER UPON THE CLIENT ANY RIGHT OTHER THAN THAT OF LESSEE OF THE VEHICLE. 31. THE ASSESSEE ASSIGNED VEHICLES THAT WERE CLAIME D TO HAVE BEEN TAKEN ON LEASE FROM LPIN, TO ITS EMPLOYEES AS PER D ETAILS CONTAINED IN A CHART SET OUT IN PARA 14.5 OF THE ORDER OF THE AO. THE CHART LISTS OUT THE NAME OF THE EMPLOYEES (15 IN EMPLOYEES), THEIR DESI GNATION VEHICLE NUMBER, CAR MAKE AND MODEL. THE LIST ALSO CONTAINS TWO OTHER COLUMNS VIZ.,(I) RECOVERY TOWARDS COST AND (II) RECOVERY T OWARDS LEASE RENTAL. TO QUOTE AN EXAMPLE AT SL.NO.13 OF THE LIST IS THE NAM E OF ONE MR. R. BALAJI WHO HAS BEEN GIVEN A CAR IKON MAKE. A TOTAL SUM OF RS.1,93,524 HAS BEEN PAID BY THE ASSESSEE AS LEASE RENTALS, OUT OF WHICH RS.1,01,782 HAS BEEN PAID TOWARDS RECOVERY TOWARDS COST AND RS.91,7 42 TOWARDS RECOVERY TOWARDS LEASE RENTALS. THE PERIOD OF LEASE AS BETW EEN THE ASSESSEE AND LPIN IN RESPECT OF THIS CAR IS 60 MONTHS FROM 19.2. 2007. 32. ON THE ABOVE FACTS THE AO WAS OF THE VIEW THAT SINCE THE PAYMENT OF LEASE RENT BY THE ASSESSEE WAS A COMPOSITE PAYMENT COMPRISING OF RECOVERY TOWARDS COST AND RECOVERY TOWARDS RENTALS AND SINCE THE VEHICLE ITA NOS.514 & 1578/BANG/2013 PAGE 26 OF 40 REGISTRATION STANDS IN THE NAME OF THE ASSESSEE AS PER ARTICLE 2.2 (III) OF THE MASTER AGREEMENT, THE ARRANGEMENT BETWEEN THE ASSES SEE AND LPIN WAS PURELY A FINANCE ARRANGEMENT WHEREBY LPIN FINANCED THE PURCHASE OF THE VEHICLE AND THE ASSESSEE WAS ITS OWNER. THE ASSES SEE WAS REPAYING THE LOAN BORROWED FROM LPIN IN THE FORM OF LEASE RENTAL S. SINCE THE ASSESSEE IS THE OWNER OF THE VEHICLE AND THE LEASE IS ONLY A FINANCE LEASE, THE AO WAS OF THE VIEW THAT THE ASSESSEE CAN ONLY CLAIM DE PRECIATION ON THE VALUE OF THE VEHICLE OWNED BY IT AND CANNOT CLAIM LEASE R ENTALS AS REVENUE EXPENDITURE. HE WAS OF THE VIEW THAT THE EXPENDITU RE WAS CAPITAL EXPENDITURE. HE WAS ALSO OF THE VIEW THAT THE ASSE SSEE WILL NOT BE ENTITLED TO DEPRECIATION ALSO BECAUSE THE VEHICLES WERE NOT USED BY THE ASSESSEE FOR ITS BUSINESS BUT WERE GIVEN TO EMPLOYEES FOR TH EIR USE. 33. THE ASSESSEE SUBMITTED BEFORE THE AO THAT LEASE RENTS WERE REVENUE EXPENDITURE AND THAT THE ASSESSE HAD DEDUCT ED TAX AT SOURCE, WHICH IS IN ACCORDANCE TO CBDT CIRCULAR NO.2/2001 D ATED 9TH FEBRUARY, 2001 AND ALSO PLACED RELIANCE IN THE CASE OF RAJSHREE ROADWAYS VS UNION OF INDIA [2003] 263 ITR 206 [RAJ] . THE AO HOWEVER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT MERE DEDUCTION OF TAX SOURCE CANNOT ESTABLISH THE GENUINENESS OF THE TRAN SACTION. HE ALSO OBSERVED THAT THE DECISION OF THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF RAJSHREE ROADWAYS (SUPRA) AND THE CIRCULAR STATE THAT UNDER LEASING TRANSACTION THE OWNER OF THE ASSET IS ENTITLED TO D EPRECIATION WHICH IS ITA NOS.514 & 1578/BANG/2013 PAGE 27 OF 40 DETERMINED BY THE TENOR OF CONTRACT BETWEEN THE LES SOR AND THE LESSEE. THE AO WAS OF THE VIEW THAT IN THE CASE OF THE ASSE SSEE THE LEASE AGREEMENT HAS BEEN DRAFTED TO CIRCUMVENT THE PROVIS IONS OF INCOME TAX ACT, 1961 FROM WHICH BOTH, M/S LEASE PLAN FLEET MAN AGEMENT (INDIA) PRIVATE LIMITED, NEW DELHI, AND THE ASSESSEE COMPAN Y WILL BENEFIT MUTUALLY. IN THIS REGARD, THE AO ALSO OBSERVED THAT THE ASSESSEE CLAIMS THE ENTIRE PAYMENT OF RS.29,35,608/- INCLUDING THE COST OF THE VEHICLES OF RS.16,52,020/- AND THE INTEREST OF RS.12,83,588/- A S REVENUE EXPENDITURE. IN THE CASE OF LPIN, DEPRECIATION ON VEHICLES WILL BE CLAIMED THOUGH THE ASSET DOES NOT BELONG TO IT. THIS WILL IN EFFECT RE DUCE THE TAX LIABILITY OF BOTH THE ENTITIES BY CLAIMING NON-GENUINE EXPENDITURE. THE AO FINALLY CONCLUDED ON THIS ISSUE AS FOLLOWS: 14.15. THE ABOVE EXPENDITURE OF RS.16,52,020/- TOWARDS THE COST OF THE VEHICLES AND AN AMOUNT OF RS.12,83,588/ - TOWARDS PERQUISITES ARE TO BE PART OF FORM 16 OF THE INDIVI DUAL EMPLOYEES AND TAX DEDUCTED AT SOURCE ACCORDINGLY. THE ASSESSE E COMPANY HAS NOT BEEN ABLE TO FURNISH THE COPIES OF FORM 16 OF THE ABOVE EMPLOYEES TO EVIDENCE THAT THE ABOVE EXPENDITURE AR E REFLECTED AS PERQUISITES AND TAX DEDUCTED ACCORDINGLY. 14.16, THEREFORE, AN AMOUNT OF RS.29,35,608/- [R S.16,52,020/- PLUS RS.1283588/-] IS NOT AN ALLOWABLE EXPENDITURE. HOWEVER, AS THE ASSESSEE COMPANY HAS ONLY CLAIMED AN AMOUNT OF RS.26,21,184/-FOR THE PURPOSE OF THE ABOVE EXPENDIT URE, THE DISALLOWANCE IS RESTRICTED TO RS.26,21,184/- AND AD DED BACK TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. THUS, THE ADDITION UNDER THIS HEAD IS RS.26,21,184/ -. ITA NOS.514 & 1578/BANG/2013 PAGE 28 OF 40 34. ON APPEAL BY THE ASSESSEE, THE LD. CIT(A) CONFI RMED THE ORDER OF THE AO. THE CIT(A) HOWEVER HELD THAT THE ASSESSEE SHOUL D BE GIVEN THE BENEFIT OF DEDUCTION ON ACCOUNT OF DEPRECIATION AS THE USE BY THE EMPLOYEES OF THE ASSESSEE IS ALSO USE BY THE ASSESS EE FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. AGGRIEVED BY THE ORDER O F THE CIT(A) THE ASSESSEE HAS RAISED GROUND NO.V BEFORE THE TRIBUNAL . 35. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. C OUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO HAS WRONGLY DISALLOW ED AN AMOUNT OF RS. 26,21,184/- CLAIMED, BEING AMOUNTS PAID AS LEASE RE NT FOR MOTOR VEHICLES. THESE VEHICLES WERE ALLOTTED TO VARIOUS EXECUTIVES OF THE COMPANY FOR THEIR OFFICIAL USE. THE CONTENTIONS OF THE ASSESSING OFFI CER, WHICH WAS UPHELD BY THE CIT(A) IS, FIRSTLY, THAT THE OWNER OF THE VEHIC LE IS THE INDIVIDUAL EMPLOYEE AND NOT THE LESSOR AND, SECONDLY, THAT THE LEASE IS A FINANCE LEASE, RENDERING THE EXPENDITURE CLAIMED AS CAPITAL EXPEND ITURE. HE SUBMITTED THAT THE AO ERRED IN REJECTING THE CLAIM ON THE GRO UND THAT THE OWNERSHIP OF THE VEHICLE IS NOT REFLECTED IN ACCORDANCE WITH THE MOTOR VEHICLE ACT, 1988 AND ACCOUNTING STANDARD 19. IN THIS CONNECTION, OUR ATTENTION WAS DRAWN TO THE PROVISIONS OF MOTOR VEHICLES ACT, 1988 - SEC .2(30) WHEREIN THE WORD OWNER IS DEFINED WHICH READS AS UNDER: OWNER MEANS A PERSON IN WHOSE NAME A MOTOR VEHICL E STANDS REGISTERED, AND WHERE SUCH PERSON IS A MINOR, THE G UARDIAN OF SUCH MINOR, AND IN RELATION TO A MOTOR VEHICLE WHIC H IS THE SUBJECT OF A HIRE PURCHASE, AGREEMENT, OR AN AGREEMENT OF L EASE OR AN AGREEMENT OF HYPOTHECATION, THE PERSON IN POSSESSIO N OF THE VEHICLE UNDER THAT AGREEMENT; ITA NOS.514 & 1578/BANG/2013 PAGE 29 OF 40 36. THEREFORE, FOR THE PURPOSES OF THE MOTOR VEHICL ES ACT, WHERE THE MOTOR VEHICLE IS UNDER AN AGREEMENT OF LEASE, THE P ERSON IN POSSESSION OF THE VEHICLE UNDER THE SAID AGREEMENT IS TREATED AS THE OWNER. THIS WOULD BE IRRESPECTIVE OF THE ACTUAL OWNER. THIS IMPLIES T HAT, UNDER THE PROVISIONS OF THAT ACT, THE LESSEE, WHO ENJOYS ONLY SPECIAL AN D NOT GENERAL PROPERTY THE VEHICLE, IS THE OWNER. IN THE PRESENT CASE, THE ASSESSEE, AS THE LESSEE, BEING THE PERSON IN POSSESSION OF THE VEHICLE HAS B EEN ENTERED AS THE REGISTERED OWNER OF THE VEHICLE IN THE REGISTRATION CERTIFICATE WHICH IS FOR THE LIMITED PURPOSE OF THE MOTOR VEHICLES ACT TO ENABLE THE POLICE TO TAKE NECESSARY ACTION IN THE EVENT THE VEHICLES ARE MISU SED FOR ILLEGAL PURPOSE OR GET INVOLVED IN AN ACCIDENT, ETC. THIS DOES NOT MEAN THAT THE ASSESSEE IS THE DE FACTO OWNER. 37. OUR ATTENTION WAS INVITED TO THE RELEVANT TERMS AS PER ARTICLE 2.2 OF THE LEASE DEED, WHICH WERE SUMMARIZED AS FOLLOWS:- (1) THE LESSOR (I.E. LEASE PLANT FLEET MANAGEMENT ( INDIA) PVT. LTD) SHALL ARRANGE FOR THE ACQUISITION OF THE VEHIC LE. (2) THE SAID LESSOR SHALL ALSO ARRANGE FOR THE INSU RANCE, THE PREMIUM IN RESPECT OF WHICH SHALL BE BORNE BY THEM AND THAT CLAIMS IF ANY, FROM THE INSURANCE COMPANY SHALL BE PAID TO THE LESSOR OR DESIGNATED AUTHORIZED WORKSHOPS AND NOT T O YOUR APPELLANT THE LESSEE. (3) IT IS ALSO MADE CLEAR IN THE AGREEMENT THAT THE REGISTRATION OF THE VEHICLE IS IN THE NAME OF THE LESSEE ONLY FOR T HE PURPOSE OF COMPLYING WITH THE PROVISIONS OF THE MOTOR VEHICLES ACT. THIS SHALL NOT IN ANY WAY AFFECT THE ABSOLUTE OWNERSHIP OF THE LESSOR ITA NOS.514 & 1578/BANG/2013 PAGE 30 OF 40 AND THAT IT SHALL NOT CONFER UPON THE LESSEE ANY RI GHT OTHER THAN THAT OF THE LEASE OF THE VEHICLE. (4) THE LESSOR IS ALSO REQUIRED TO PAY THE ROAD TAX AND ARRANGE FOR MAINTENANCE OF THE VEHICLE INCLUDING ATTENDING TO B REAKDOWN SERVICES. 38. IT WAS FURTHER SUBMITTED THAT ARTICLE 3.1 PROVI DES FOR EARLY TERMINATION OF THE LEASE. ON THE OCCURRENCE OF EITHER EARLY TER MINATION OR ON EXPIRY OF PERIOD, THE CLIENT IS REQUIRED TO RETURN THE VEHICL E TO THE LESSOR ALONG WITH THE VARIOUS DOCUMENTS AS MENTIONED THEREIN. 39. IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT AS PER THE PROVISIONS OF THE LEASE AGREEMENT AS MENTIONED ABOVE, IT WILL BE CLEAR THAT A SUBSTANTIAL PART OF THE RISKS AND REWARDS INCIDENTA L TO THE OWNERSHIP OF THE ASSET VESTS WITH THE LESSOR WHO IS THE DE FACTO OWN ER AND NOT WITH THE ASSESSEE (LESSEE), WHO IS ONLY A DE-JURE OWNER FOR THE LIMITED PURPOSE OF MOTOR VEHICLES ACT. HENCE, UNDER THE ACCOUNTING PRI NCIPLES PRESCRIBED BY THE MANDATORY ACCOUNTING STANDARD 19, THIS IS AN OP ERATING LEASE AND NOT A FINANCE LEASE. THE LEASE RENTALS ARE TREATED AS BEI NG REVENUE IN NATURE AND OUGHT TO BE ALLOWED AS AN EXPENSE EVEN THOUGH THE N AME OF ASSESSEE IS ENTERED AS THE OWNER IN THE R.C. BOOK DUE TO THE SP ECIAL PROVISIONS OF THE MOTOR VEHICLES ACT. 40. IT WAS FURTHER SUBMITTED THAT THE COMPUTATION O F PROFIT OF A COMPANY HAS TO BE DONE IN ACCORDANCE WITH THE MANDATORY ACC OUNTING STANDARDS AND CANNOT BE DONE IN A MANNER DIFFERENT FROM THE P ROVISIONS OF THE ITA NOS.514 & 1578/BANG/2013 PAGE 31 OF 40 ACCOUNTING STANDARDS, UNLESS SPECIFIC PROVISIONS IN THE COMPUTATION SECTIONS 28 TO 34 OF THE IT ACT REQUIRES DOING SO. ACCOUNTING STANDARD 19 IS A MANDATORY ACCOUNTING STANDARD APPLICABLE TO ALL C OMPANIES AS NOTIFIED UNDER THE COMPANIES ACCOUNTING STANDARDS (RULES) 20 06. THE TERM LEASE IS DEFINED IN PARA 3.2 AND 3.3 OF THE SAID STANDARD STATING WHAT IS FINANCE LEASE AND AN OPERATING LEASE. A FINANCE LEASE IS DEFINED AS A LEASE THAT TRANSFERS SUBSTANTIALLY ALL THE RISKS AND REWARDS I NCIDENTAL TO OWNERSHIP OF AN ASSET WHILE THE OPERATING LEASE IS A LEASE OTHER THAN A FINANCE LEASE. ACCORDINGLY, THE ASSESSEE HAS CONSISTENTLY CHARGED OFF THE LEASE PAYMENTS AS AN EXPENSE AND THE SAME IS TO BE ALLOWED IN FULL ON THE BASIS OF THE SOUND ACCOUNTING PRINCIPLES, WHICH IS REQUIRED TO B E MANDATORILY FOLLOWED BY THE ASSESSEE IN THE ABSENCE OF ANY OTHER SPECIFI C PROVISIONS FOR NOT ALLOWING THE SAME UNDER OTHER PROVISIONS OF SECTION S 28 TO 44 OF THE ACT. 41. THE LEARNED DR RELIED ON THE ORDER OF THE REVEN UE AUTHORITIES. 42. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. A LEASE IS AN AGREEMENT WHEREBY THE LESSOR CONVEYS TO THE LESSEE IN RETURN FOR A PAYMENT OR SERIES OF PAYMENTS THE RIGHT TO US E AN ASSET FOR AN AGREED PERIOD OF TIME. A LEASE CAN BE EITHER A FINANCE LE ASE OR AN OPERATING LEASE. A FINANCE LEASE IS A LEASE THAT TRANSFERS SUBSTANTI ALLY ALL THE RISKS AND REWARDS INCIDENT TO OWNERSHIP OF AN ASSET. AN OP ERATING LEASE IS A LEASE OTHER THAN A FINANCE LEASE. IN AN OPERATING LEASE T HE PAYMENTS MADE FOR RIGHT TO USE THE VEHICLE ARE TREATED AS RENT. IN A FINANCE LEASE THE PAYMENTS ITA NOS.514 & 1578/BANG/2013 PAGE 32 OF 40 MADE TO THE LESSOR ARE TREATED AS INTEREST. THE LE SSOR IS ENTITLED TO CLAIM DEPRECIATION IN AN OPERATING LEASE. IN A FINANCE L EASE THE LESSEE WILL BE ABLE TO CLAIM DEPRECIATION AS OWNER OF THE ASSET LE ASED. THERE ARE A SERIES OF DECISIONS OF HONBLE HIGH COURTS/SUPREME COURT E XPLAINING THE NATURE OF THE HIRE-PURCHASE AGREEMENT AND MOSTLY THESE DECISI ONS WERE RENDERED WHEN THE QUESTION AROSE WHETHER THERE WAS A SALE SO AS TO ATTRACT PAYMENT OF TAX UNDER THE SALES TAX ACT. THE DECISION OF TH E HONBLE SUPREME COURT IN THE CASE OF M/S. SUNDARAM FINANCE LTD. VS. STATE OF KERALA AIR 1966 SC 1178 IS THE LEADING CASE ON THIS POINT AND STILL IS REG ARDED AS LAYING DOWN THE LAW IN THIS REGARD. THE FACTS OF THE SAID CASE AND THE DECISION RENDERED WOULD THEREFORE BE OF GREAT IMPOR TANCE TO RENDER A DECISION IN THE PRESENT CASE. THE FACTS OF THE SAI D CASE WERE THAT M/S. SUNDARAM FINANCE LTD.,(HEREINAFTER CALLED COMPANY ) WAS A COMPANY CARRYING ON BUSINESS OF FINANCING PURCHASES OF MOTO R VEHICLES ON THE SECURITY OF THOSE VEHICLES. THE MANNER IN WHICH TRA NSACTIONS WERE EFFECTED WAS THAT A CUSTOMER DESIROUS OF PURCHASING A MOTOR- VEHICLE, BUT UNABLE TO PAY THE PRICE TO THE DEALER, AGREES TO PURCHASE THE VEHICLE AND MAKES PART PAYMENT OF THE PRICE TO THE DEALER. HE THEN APPROAC HES THE COMPANY AND REQUESTS THAT A LOAN BE ADVANCED TO HIM. ON THE COM PANY AGREEING TO GRANT A LOAN, THE CUSTOMER EXECUTES NINE DOCUMENTS. THE PRINCIPAL DOCUMENTS ARE A SALE LETTER AND H.P. AGREEMENT. UN DER THE SALE LETTER, THE CUSTOMER STATES THAT ON THE DATE OF HIS MAKING APPL ICATION FOR LOAN THE VEHICLE IS DEEMED TO HAVE BEEN SOLD TO THE COMPANY. THE OTHER TERMS OF ITA NOS.514 & 1578/BANG/2013 PAGE 33 OF 40 H.P. AGREEMENT IS ALSO IDENTICAL WITH THE TERMS WHI CH WE HAVE SET OUT IN THE CASE OF THE ASSESSEE IN THE PRESENT APPEAL ONE OF W HICH IS A TERM (CLAUSE- 6) THAT ON FULFILLMENT OF CONDITIONS STIPULATED IN THE H.P. AGREEMENT AND DISCHARGE OF ALL MONIES PAYABLE THEREUNDER, THE OWN ERSHIP OF THE ASSET WILL STAND VESTED WITH THE CUSTOMER. THE VEHICLE STANDS REGISTERED IN THE NAME OF THE CUSTOMER BUT THE FACT THAT THE VEHICLE IS SU BJECT TO A HIRE PURCHASE AGREEMENT IS DULY RECORDED IN THE REGISTRATION CERT IFICATE OF THE VEHICLE. ACCORDING TO THE SALES-TAX AUTHORITIES, BETWEEN THE DATE ON WHICH THE CUSTOMER AGREED TO PURCHASE A VEHICLE AND THE DATE ON WHICH HE BECAME FULL OWNER OF THE VEHICLE WITHOUT ANY ENCUMBRANCE, THREE SALE TRANSACTIONS WERE INTERPOSED : A SALE BY THE DEALER TO THE CUSTO MER; A SALE BY THE CUSTOMER TO THE COMPANY UNDER THE 'SALE LETTER' REF ERRED TO EARLIER; AND A SALE BY VIRTUE OF CL. 6 OF THE HIRE-PURCHASE AGREEM ENT. IT WAS COMMON GROUND THAT THE FIRST TRANSACTION IS TAXABLE UNDER THE APPROPRIATE SALES TAX ACT. ON BEHALF OF THE STATE OF KERALA, IT WAS CONCE DED THAT THE SECOND TRANSACTION IS NOT TAXABLE, BUT IT IS SO BECAUSE TH E CUSTOMER IS ORDINARILY NOT A DEALER WITHIN THE MEANING OF THE ACT, BUT THEY CO NTEND THAT INASMUCH AS UNDER THAT TRANSACTION THE APPELLANTS BECOME TRANSF EREES OF THE RIGHTS OF THE CUSTOMER IN THE VEHICLE UNDER THE SALE LETTER, WHEN BY THE OPERATION OF CL. 6 OF THE HIRE-PURCHASE AGREEMENT THE RIGHTS OF THE APPELLANTS ARE EXTINGUISHED, THERE RESULTS A SALE IN FAVOUR OF THE CUSTOMER WHICH IS TAXABLE UNDER THE ACT. THE QUESTION WAS WITH REGARD TO EXIG IBILITY TO TAX OF WHAT THE STATE OF KERALA CONTENDS IS A SALE RESULTING FROM T HE PAYMENT OF ALL THE ITA NOS.514 & 1578/BANG/2013 PAGE 34 OF 40 INSTALMENTS UNDER THE HIRE-PURCHASE AGREEMENT. THE COMPANY SUBMITTED THAT EXECUTION OF A 'SALE LETTER' BY THE CUSTOMER A CKNOWLEDGING SALE OF THE VEHICLE TO THEM DOES NOT CREATE IN THEM ANY RIGHT O F OWNERSHIP, THE 'SALE LETTER' BEING MERELY ONE OF A SET OF DOCUMENTS UNDE R WHICH ARRANGEMENT FOR GRANTING A LOAN AND FOR ENSURING REPAYMENT OF T HE MONEY ADVANCED BY THE APPELLANT'S IS MADE. THE COMPANY CONTENDED THAT THEY DO NOT BECOME OWNERS OF THE VEHICLE UNDER THE 'SALE LETTER', THAT THE TRUE EFFECT OF THE TRANSACTION ON THE EXECUTION OF THE NINE DOCUMENTS IS TO HYPOTHECATE THE VEHICLE IN FAVOUR OF THE APPELLANTS, THAT THE VEHIC LE CONTINUES TO REMAIN OF THE OWNERSHIP OF THE CUSTOMER, AND THAT UNDER CL. 6 OF THE HIRE-PURCHASE AGREEMENT THERE IS EXTINCTION OF ENCUMBRANCE AND NO T A TRANSFER OF TITLE WHICH MAY BE CALLED A SALE TAXABLE UNDER THE TRAVAN CORE-COCHIN GENERAL TAX ACT. THE COURT ELABORATED AS TO WHAT IS A HIRE PURCHASE AGREEMENT IN THE FOLLOWING WORDS:- A HIRE-PURCHASE AGREEMENT IS NORMALLY ONE UNDER WH ICH AN OWNER HIRES GOODS TO ANOTHER PARTY CALLED THE HIRER AND FURTHER AGREES THAT THE HIRER SHALL HAVE AN OPTION TO PURCH ASE THE CHATTEL WHEN HE HAS PAID A CERTAIN SUM, OR WHEN THE HIRE-RE NTAL PAYMENTS HAVE REACHED THE HIRE-PURCHASE PRICE STIPULATED IN THE AGREEMENT. BUT THERE ARE VARIATIONS WHEN A FINANCIER IS INTERP OSED BETWEEN THE OWNER OF THE GOODS AND THE CUSTOMER. THE AGREEM ENT, IGNORING VARIATIONS OF DETAIL, BROADLY TAKES ONE OR THE OTHER OF TWO FORMS : (1) WHEN THE OWNER IS UNWILLING TO LOOK TO THE PURCHASER OF GOODS TO RECOVER THE BALANCE OF THE PRICE, AND T HE FINANCIER WHO PAYS THE BALANCE UNDERTAKES THE RECOVERY. IN TH IS FORM, GOODS ARE PURCHASED BY THE FINANCIER FROM THE DEALE R, AND THE FINANCIER OBTAINS A HIRE-PURCHASE AGREEMENT FROM TH E CUSTOMER UNDER WHICH THE LATTER BECOMES THE OWNER OF THE GOO DS ON PAYMENT OF ALL THE INSTALMENTS OF THE STIPULATED HI RE AND EXERCISING HIS OPTION TO PURCHASE THE GOODS ON PAYM ENT OF A ITA NOS.514 & 1578/BANG/2013 PAGE 35 OF 40 NOMINAL PRICE. THE DECISION OF THIS COURT IN K. L. JOHAR & COMPANY V. DEPUTY COMMERCIAL TAX OFFICER ([1965] 2 S.C.R. 112.) DEALT WITH A TRANSACTION OF THIS CHARACTER. ( 2) IN THE OTHER FORM OF TRANSACTIONS, GOODS ARE PURCHASED BY THE CU STOMER, WHO IN CONSIDERATION OF EXECUTING A HIRE-PURCHASE AGREE MENT AND ALLIED DOCUMENTS REMAINS IN POSSESSION OF THE GOODS , SUBJECT TO LIABILITY TO PAY THE AMOUNT PAID BY THE FINANCIER O N HIS BEHALF TO THE OWNER OR DEALER, AND THE FINANCIER OBTAINS A HI RE-PURCHASE AGREEMENT WHICH GIVES HIM A LICENCE TO SEIZE THE GO ODS IN THE EVENT OF FAILURE BY THE CUSTOMER TO ABIDE BY THE CO NDITIONS OF THE HIRE-PURCHASE AGREEMENT. THE COURT THEREAFTER EMPHASIZED THE NEED TO JUDGE T HE TRUE EFFECT OF A TRANSACTION FROM THE TERMS OF THE AGREEMENT CONSIDE RED IN THE LIGHT OF THE SURROUNDING CIRCUMSTANCES. THE COURT HELD AS FOLLOW S:- IN EACH CASE, THE COURT HAS, UNLESS PROHIBITED BY STATUTE, POWER TO GO BEHIND THE DOCUMENTS AND TO DETERMINE THE NAT URE OF THE TRANSACTION, WHATEVER MAY BE THE FORM OF THE DOCUME NTS. AN OWNER OF GOODS WHO PURPORTS ABSOLUTELY TO CONVEY OR ACKNOWLEDGES TO HAVE CONVEYED GOODS AND SUBSEQUENTL Y PURPORTS TO HIRE THEM UNDER A HIRE-PURCHASE AGREEMENT IS NOT STOPPED FROM PROVING THAT THE REAL BARGAIN WAS A LOAN ON THE SEC URITY OF THE GOODS. IF THERE IS A BONA FIDE AND COMPLETED SALE O F GOODS, EVIDENCED BY DOCUMENTS, ANTERIOR TO AND INDEPENDENT OF A SUBSEQUENT AND DISTINCT HIRING TO THE VENDOR, THE T RANSACTION MAY NOT BE REGARDED AS A LOAN TRANSACTION, EVEN THOUGH THE REASON FOR WHICH IT WAS ENTERED INTO WAS TO RAISE MONEY. IF TH E REAL TRANSACTION IS A LOAN OF MONEY SECURED BY A RIGHT O F SEIZURE OF THE GOODS, THE PROPERTY OSTENSIBLY PASSES UNDER THE DOC UMENTS EMBODYING THE TRANSACTION, BUT SUBJECT TO THE TERMS OF THE HIRING AGREEMENT, WHICH BECOME PART OF THE BUYER'S TITLE, AND CONFER A LICENCE TO SEIZE. WHEN A PERSON DESIRING TO PURCHAS E GOODS AND NOT HAVING SUFFICIENT MONEY ON HAND BORROWS THE AMO UNT NEEDED FROM A THIRD PERSON AND PAYS IT OVER TO THE VENDOR, THE TRANSACTION BETWEEN THE CUSTOMER AND THE LENDER WILL UNQUESTION ABLY BE A LOAN TRANSACTION. THE REAL CHARACTER OF THE TRANSAC TION WOULD NOT BE ALTERED IF THE LENDER HIMSELF IS THE OWNER OF TH E GOODS AND THE OWNER ACCEPTS THE PROMISE OF THE PURCHASER TO PAY T HE PRICE OR THE ITA NOS.514 & 1578/BANG/2013 PAGE 36 OF 40 BALANCE REMAINING DUE AGAINST DELIVERY OF GOODS. BU T A HIRE- PURCHASE AGREEMENT IS A MORE COMPLEX TRANSACTION. T HE OWNER UNDER THE HIRE-PURCHASE AGREEMENT ENTERS INTO A TRA NSACTION OF HIRING OUT GOODS ON THE TERMS AND CONDITIONS SET OU T IN THE AGREEMENT, AND THE OPTION TO PURCHASE EXERCISABLE B Y THE CUSTOMER ON PAYMENT OF ALL THE INSTALMENTS OF HIRE ARISES WHEN THE INSTALMENTS ARE PAID AND NOT BEFORE. IN SUCH A HIRE-PURCHASE AGREEMENT THERE IS NO AGREEMENT TO BUY GOODS; THE H IRER BEING UNDER NO LEGAL OBLIGATION TO BUY, HAS AN OPTION EIT HER TO RETURN THE GOODS OR TO BECOME ITS OWNER BY PAYMENT IN FULL OF THE STIPULATED HIRE AND THE PRICE FOR EXERCISING THE OPTION. THIS CLASS OF HIRE- PURCHASE AGREEMENTS MUST BE DISTINGUISHED FROM TRAN SACTIONS IN WHICH THE CUSTOMER IS THE OWNER OF THE GOODS AND WI TH A VIEW TO FINANCE HIS PURCHASE HE ENTERS INTO AN ARRANGEMENT WHICH IS IN THE FORM OF A HIRE-PURCHASE AGREEMENT WITH THE FINANCIE R, BUT IN SUBSTANCE EVIDENCES A LOAN TRANSACTION, SUBJECT TO A HIRING AGREEMENT UNDER WHICH THE LENDER IS GIVEN THE LICEN CE TO SEIZE THE GOODS. 43. WE SHALL EXAMINE THE FACTS OF THE PRESENT CASE IN THE LIGHT OF THE LAW LAID DOWN BY THE HONBLE SUPREME COURT. IN THE PRE SENT CASE LPIN FINANCES PURCHASE OF THE VEHICLE. THE VEHICLE IS P URCHASED AS AND WHEN THE ASSESSEE (CLIENT) MAKES A DEMAND FOR HIRING OF VEHICLE. THE OWNERSHIP OF THE VEHICLE IS REGISTERED IN THE NAME OF THE CLI ENT ONLY FOR THE PURPOSE OF PASSING THE RISK OF OWNERSHIP IN LAW ON THE CLIENT. ARTICLE 2.2(III) OF THE LEASE DEED WHICH HAS BEEN SET OUT IN THE EARLIER PA RT OF THIS ORDER CLEARLY SPELLS OUT THE ABOVE PURPOSE AND REITERATES THAT LP IN IS THE OWNER OF THE VEHICLE AND THAT THE CLIENT IS ONLY A LESSEE. THE BIFURCATION OF THE MONTHLY PAYMENT AS PARTLY TOWARDS RECOVERY OF COST AND PART LY TOWARDS INTEREST IS ONLY FOR ACCOUNTING PURPOSES. IT CAN DECIDE THE CH ARACTER OF THE TRANSACTION. ARTICLE 3.1 PROVIDES FOR EARLY TERMIN ATION OF THE LEASE. ON THE ITA NOS.514 & 1578/BANG/2013 PAGE 37 OF 40 OCCURRENCE OF EITHER EARLY TERMINATION OR ON EXPIRY OF PERIOD, THE CLIENT IS REQUIRED TO RETURN THE VEHICLE TO THE LESSOR ALONG WITH THE VARIOUS DOCUMENTS AS MENTIONED THEREIN. THUS THE DE FACTO OWNERSHIP AND CONTROL OF THE VEHICLE IS ALWAYS WITH LPIN. THE ASSESSEE ( CLIENT) HAS A RIGHT TO USE THE VEHICLE SUBJECT TO PAYMENT OF THE HIRE INSTALLM ENTS AND COMPLYING WITH THE OTHER TERMS OF THE AGREEMENT. THE ASSESSEE (CL IENT) HAS NO OTHER RIGHTS. ON A CONSIDERATION OF THE TERMS OF THE AGR EEMENT BETWEEN THE PARTIES, WE ARE OF THE VIEW THAT THE LEASE IN QUEST ION IS AN OPERATION LEASE AND THEREFORE THE ASSESSEE WOULD BE ENTITLED TO CLA IM THE LEASE RENTALS AS DEDUCTION AS REVENUE EXPENDITURE. THE CONCLUSIONS TO THE CONTRARY BY THE REVENUE AUTHORITIES ARE NEITHER CORRECT IN LAW NOR ON FACTS. WE THEREFORE ALLOW GR.NO.V RAISED BY THE ASSESSEE. 44. CONSEQUENTLY, THE APPEAL BY THE ASSESSEE IS PARTLY ALLOWED . ITA 1578/B/13 45. GROUND NO. I RAISED BY THE ASSESSEE READS AS FO LLOWS:- DISALLOWANCE OF A SUM OF RS. 5,213 UNDER SECTION 14 A READ WITH RULE 8D, SAID TO BE 0.5% OF THE AVERAGE INVEST MENT IN SHARES 1. THE CIT (A) HAS ERRED IN UPHOLDING THE DISALLOW ANCE OF RS. 5,213/- IN CONNECTION WITH EXEMPT DIVIDEND INCO ME AS BOTH AUTHORITIES HAVE NOT FOUND THAT ANY EXPENDITURE WAS INCURRED AT ALL IN EARNING THIS EXEMPT INCOME. THE FACT THAT TH E INVESTMENT WAS MADE OUT OF OWNED FUNDS WAS UPHELD BY THE COMMI SSIONER OF INCOME TAX (APPEALS)-III IN HIS APPELLATE ORDER RELATING TO THE ITA NOS.514 & 1578/BANG/2013 PAGE 38 OF 40 AY 2006-07. THIS HAS NOT BEEN FOLLOWED BY THE CIT( A) IN HER ORDER. 2. WITHOUT PREJUDICE TO THE ABOVE, THE DISALLOWANC E IS INCORRECT AS IT HAS BEEN QUANTIFIED AT RS. 5,213 IN STEAD OF RS. 1,620, BEING HALF A PER CENT OF RS. 3,24,000/-. THI S HAS ALSO NOT BEEN ALLOWED BY THE CIT(A). 46. THE AO NOTICED THAT THE ASSESSEE HAD DISALLOWE D A SUM OF RS.5,213 AS EXPENDITURE INCURRED IN EARNING DIVIDEN D INCOME BY THE ASSESSEE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT R.W. RULE 8D(III) OF THE RULES. THE LD. CIT(A) CONFIRMED THE ORDER OF THE AO. 47. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT NO EXPENDITURE WHATSOEVER WAS INCURRED IN EARNING THE EXEMPT DIVIDEND INCOME. IN THIS REGARD, THE ASSESSEE POINTED OUT T HAT INVESTMENT WHICH YIELDED THE DIVIDEND INCOME WAS A VERY OLD INVESTME NT IN THE SHARES OF CATHOLIC SYRIAN BANK. IT WAS SUBMITTED THAT THE RE VENUE AUTHORITIES HAVE BLINDLY APPLIED RULE 8D(III) OF THE RULES, WITHOUT REJECTING THE CLAIM OF THE ASSESSEE THAT NO EXPENSES WERE INCURRED IN EARNING THE EXEMPT INCOME. THE LD. DR RELIED ON THE ORDERS OF THE REVENUE AUTH ORITIES. 48. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. RULE 8D(III) NEED NOT BE APPLIED BLINDLY. ONE HAS TO LOOK AT THE PROBABLE E XPENSES THAT ASSESSEE WOULD HAVE INCURRED IN EARNING THE EXEMPT DIVIDEND INCOME. THE SHARES IN QUESTION WHICH YIELDED DIVIDEND INCOME WERE PURCHAS ED IN THE YEAR 1997- 98. IT CANNOT BE SAID THAT ANY EXPENSES WHATSOEVER WOULD HAVE BEEN ITA NOS.514 & 1578/BANG/2013 PAGE 39 OF 40 INCURRED BY THE ASSESSEE TO EARN THIS DIVIDEND INCO ME. CONSIDERING THE SMALLNESS OF THE QUANTUM OF THE DIVIDEND AND EXPEND ITURE DISALLOWED, WE ARE OF THE VIEW THAT THE REVENUE AUTHORITIES OUGHT TO HAVE EXERCISED THEIR DISCRETION IN NOT MAKING A DISALLOWANCE U/S. 14A OF THE ACT. WE HOLD ACCORDINGLY AND DELETE THE ADDITION MADE. GROUND N O. I IS ALLOWED. 49. GROUNDS NO.II, III & IV RAISED BY THE ASSESSEE ARE IDENTICAL TO GROUNDS NO.II, III & IV RAISED IN THE A.Y. 2009-10 RESPECTIVELY. FOR THE REASONS GIVEN WHILE DECIDING THE AFORESAID GROUNDS IN A.Y. 2009-10, WE ALLOW GROUNDS NO.II, III, IV. WE MAY ALSO MENTION THAT THE FACTS AND CIRCUMSTANCES AND THE BASIS ON WHICH THE REVENUE AU THORITIES PASSED THE IMPUGNED ORDERS FOR A.Y. 2010-11 ARE IDENTICAL AS I N A.Y. 2009-10. THE APPEAL IS ACCORDINGLY ALLOWED. 50. IN THE RESULT, ITA NO. 514/BANG/2013 IS PARTLY ALLOWED, WHILE ITA NO.1578/BANG/2013 IS ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF OCTOBER , 2014 . SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEM BER BANGALORE, DATED, THE 31 ST OCTOBER, 2014 . /D S/ ITA NOS.514 & 1578/BANG/2013 PAGE 40 OF 40 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.