Banyan Networks Pvt. Ltd v. The Assistant Commissioner Of Income Tax

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 6.4.2015 CORAM THE HON'BLE MR.JUSTICE R.SUDHAKARANDTHE HON'BLE MS.JUSTICE K.B.K.VASUKI T.C.(A).No.318 of 2008 Banyan Networks Pvt. Ltd.1, Kalyani NagarKottivakkamChennai... AppellantVs. The Assistant Commissioner of Income Tax Company Circle I(2)Chennai – 600 034. .. Respondent PRAYER: Appeal under Section 260A of the Income Tax Act against theorder of the Income Tax Appellate Tribunal, 'A' Bench, Chennai,dated 23.10.2007 made in I.T.A.No.530/ Mds/2006 for the assessmentyear 2002-2003 preferred against order of the Commissioner of IncomeTax (Appeals) III Chennai 34 dated 3.1.2006 made in ITA.No.139/2005-2006/A-III preferred against the Assessment order of the AssistantCommissioner of Income tax, Company Circle 1(2) Chennai dated25.2.2005 made in PAN GIR No.BX3-243/AA BCB 3799D for the Assessmentyear 2002-2003. The assessee has filed this appeal under Section 260A of theIncome Tax Act, 1961 challenging the order of the Income TaxAppellate Tribunal, 'A' Bench, Chennai, dated 23.10.2007 made inI.T.A.No.530/Mds/2006 for the assessment year 2002-2003, and thesame was admitted on the following questions of law: https://hcservices.ecourts.gov.in/hcservices/ (i)Whether the Tribunal was right in holding thatthe deferred revenue expenditure in theaggregate incurred by the assessee towards theproduct development is not allowable? (ii)Whether the Tribunal was right in holding thatthe deferred revenue expenditure claimed by theassessee is not allowable in terms ofexplanation to Section 35 of the Income Tax Act?(iii)Whether the Tribunal was right in holding thatthe assessee is not entitled to the deduction ofthe prior year's expenditure forming part of thedeferred revenue expenditure even though, such aclaim is allowable in law as per the decision ofthe Supreme Court in the case of MadrasIndustrial Investment Corporation Ltd. v.Commissioner of Income Tax, (1997) 225 ITR 802(SC)? 2.1. The facts in a nutshell are as under: The appellant is aprivate limited company engaged in the business of manufacture oftelecommunication products, research and development intelecommunication products, software development and supportservices. The assessee filed return of income admitting totalloss of Rs.5,26,38,410/-. The return was processed under Section143(1) of the Act and subsequently, the case was selected forscrutiny and notice under Section 143(2) of the Act was issued.In response to the said notice, the assessee's representativeappeared in person and furnished various details as sought forduring the course of scrutiny. 2.3. In the financial year 2000-2001 (assessment year 2001-2002), only a sum of Rs.18,89,182/- was claimed as expenditure tobe written off during the year, even though the total expenditureduring the year was to the tune of Rs.1,35,56,259/-. The assessee carried forward the expenditure to the next financial year 2001-2002 (assessment year 2002-2003) and claimed expenditure to thetune of Rs.2,27,43,213/-, of which only a sum of Rs.34,44,649/-was allowed by the Assessing Officer, while completing theassessment under Section 143(3) of the Act by an order dated25.2.2005. The Assessing Officer disallowed the claim ofexpenditure relating to Rs.1,92,98,564/- stating that there is noprovision for carrying forward such expenditure. In brief, thefinding of the Assessing Officer is as follows: carried forward the expenditure to the next financial year 2001-2002 (assessment year 2002-2003) and claimed expenditure to thetune of Rs.2,27,43,213/-, of which only a sum of Rs.34,44,649/-was allowed by the Assessing Officer, while completing theassessment under Section 143(3) of the Act by an order dated25.2.2005. The Assessing Officer disallowed the claim ofexpenditure relating to Rs.1,92,98,564/- stating that there is noprovision for carrying forward such expenditure. In brief, thefinding of the Assessing Officer is as follows: “It will be seen from the above details that theassessee has incurred expenses of Rs.76,31,487/- inthe financial year 1999-2000. Rs.1,35,56,259/- inthe financial year 2000-01 and Rs.34,44,649/- in thefinancial year 2001-02. In the lengthy submissionsmade by the assessee the assessee has only stated asto how the product was developed and what is itsutility and the market potentiality. However thereis no explanation as to why the expenses were writtenoff in one year and as to why the research anddevelopment expenses which fall under the purview ofSection 35 have been deferred. In the formaldiscussion it was however stated that since newtechnologies are being developed in their field theproduct technology has become obsolete and thereforeit was decided to write off the whole expenses.A careful study of the assessee's submissions and theclose look at the details of expenses would revealthat none of the expenses mentioned in the list areof capital nature. The same were also stated to havebeen incurred on Research and development. It isalso stated that company was developing a technologyfor its new product known as DIAS. The assessee inthe background of submissions has admitted the factthat during the year the company was close on thecompletion of the development of their product andthe necessary field trials of the product werecompleted. This very revelation indicate that theexpenses made by the assessee were made for researchand developments. They therefore very much fallunder the purview of section 35. As per thesubmissions made by the assessee, the assessee haswritten off Rs.18,89,182/- for the financial year2000-01 relevant to the assessment year 2001-02. Thebalance is treated as deferred scientificexpenditure. There is no concept like deferredscientific research expenses the Income-tax Act. TheResearch & Development expenses as envisaged u/s.35of the Income-tax Act and as relevant to theassessee's case states as under:- (1) In respect of expenditure on scientificresearch, the following deductions shall beallowed— (i) any expenditure (not being in the natureof capital expenditure) laid out or expendedon scientific research related to thebusiness. Explanation.—Where any such expenditure hasbeen laid out or expended before thecommencement of the business (not beingexpenditure laid out or expended before the1st day of April, 1973) on payment of anysalary [as defined in Explanation 2 below sub-section (5) of section 40A] to an employeeengaged in such scientific research or on thepurchase of materials used in such scientificresearch, the aggregate of the expenditure solaid out or expended within the three yearsimmediately preceding the commencement of thebusiness shall, to the extent it is certifiedby the prescribed authority to have been laidout or expended on such scientific research,be deemed to have been laid out or expended inthe previous year in which the business iscommenced; Explanation.—Where any such expenditure hasbeen laid out or expended before thecommencement of the business (not beingexpenditure laid out or expended before the1st day of April, 1973) on payment of anysalary [as defined in Explanation 2 below sub-section (5) of section 40A] to an employeeengaged in such scientific research or on thepurchase of materials used in such scientificresearch, the aggregate of the expenditure solaid out or expended within the three yearsimmediately preceding the commencement of thebusiness shall, to the extent it is certifiedby the prescribed authority to have been laidout or expended on such scientific research,be deemed to have been laid out or expended inthe previous year in which the business iscommenced; Here in this, the assessee's business has alreadycommenced and therefore the explanation to section 35is not applicable to the assessee. Looking to thenature of expenses the same does not include anyexpenditure towards acquisition of any capital assetand therefore as per the provisions of the Act if atall it was an expenditure on research anddevelopment, the same ought to have been claimed inthe year in which it was actually incurred. Theassessee has not done so. As the assessee companyitself has admitted these expenses as expenses onresearch and development and there is no concept ofdeferred expenses u/s.35 only those expenses whichrelate to the year under consideration can be allowedto the assessee. I Accordingly restrict theassessee's only to the extent of Rs.34,44,649/-. Thebalance expenses of Rs.1,92,98,564/- are disallowedas not pertaining to this year and added to theassessee's total income.” (emphasis supplied) 2.4. Calling into question the assessment order, the assesseepreferred an appeal before the Commissioner of Income Tax(Appeals). The Commissioner of Income Tax (Appeals), whileconcurring with the finding of the Assessing Officer, dismissedthe appeal holding that the expenditure incurred by the assesseeon research and development falls within the purview of Section 35of the Act and since the business of the assessee has alreadycommenced, the expenditure shall be allowed only in the year inwhich it was incurred. 2.5. Aggrieved by the said order, the assessee appealed tothe Tribunal. The Tribunal observed that since the business ofthe assessee had already commenced, the assessee cannot comewithin the purview of Explanation to Section 35 of the Act. Itwas also observed that the expenses relatable to the year underconsideration were duly allowed by the Assessing Officer and onlythe expenditure not relatable to the relevant year of assessmentwas disallowed. The Tribunal held that the assessee failed toproduce any evidence to demonstrate that the expenditure claimedis relatable to the year under consideration. Thus, the Tribunalupheld the orders passed by the authorities below. 2.6. Assailing the said order, the assessee has preferredthis appeal on the questions of law referred supra. 3. We have heard Mr.K.Magesh, learned counsel for theappellant and Mr.T.Ravi Kumar, learned Senior Standing Counselappearing for the revenue and perused the orders passed by theTribunal and the authorities below. 4. Before adverting to the merits of the case, it would beapposite to refer to Section 35(1)(i) of the Act and theExplanation thereto, which are as under: “Section 35. Expenditure on Scientific Research: (1) In respect of expenditure on scientific research,the following deductions shall be allowed-- (i) any expenditure (not being in the nature ofcapital expenditure) laid out or expended onscientific research related to the business; 2.6. Assailing the said order, the assessee has preferredthis appeal on the questions of law referred supra. 3. We have heard Mr.K.Magesh, learned counsel for theappellant and Mr.T.Ravi Kumar, learned Senior Standing Counselappearing for the revenue and perused the orders passed by theTribunal and the authorities below. 4. Before adverting to the merits of the case, it would beapposite to refer to Section 35(1)(i) of the Act and theExplanation thereto, which are as under: “Section 35. Expenditure on Scientific Research: (1) In respect of expenditure on scientific research,the following deductions shall be allowed-- (i) any expenditure (not being in the nature ofcapital expenditure) laid out or expended onscientific research related to the business; Where any such expenditure has been laid out orexpended before the commencement of the business (notbeing expenditure laid out or expended before the 1stday of April, 1973) on payment of any salary asdefined in Explanation 2 below sub-section (5) ofsection 40A to an employee engaged in such scientificresearch or on the purchase of materials used in such https://hcservices.ecourts.gov.in/hcservices/ scientific research, the aggregate of the expenditureso laid out or expended within the three yearsimmediately preceding the commencement of thebusiness shall, to the extent it is certified by theprescribed authority to have been laid out orexpended on such scientific research, be deemed tohave been laid out or expended in the previous yearin which the business is commenced” (emphasis supplied) 5. With regard to the second question of law, namely, whetherthe Tribunal was right in holding that the deferred revenueexpenditure claimed by the assessee is not allowable in terms ofexplanation to Section 35 of the Act, the learned counsel for theassessee fairly states that the business of the assessee hascommenced long prior to the relevant assessment year and,therefore, he is not canvassing the said question of law. In viewof the fair submission made by the learned counsel for theassessee, we do not propose to answer the same in this appeal. 6. Apropos the first question of law, on a plain reading ofSection 35 of the Act, we are unable to accept the plea of thelearned counsel for the assessee that deferred revenue expenditurecould be allowed by way of carry forward. There is no provisionunder the Income Tax Act which provides for such a method ofclaiming deferred research and development expenditure. Moreover,the Assessing Officer has allowed the expenses relatable to theyear under consideration and disallowed only the expenditure notrelatable to the relevant assessment year. It is also not thecase of the assessee that the expenditure is relatable to the yearunder consideration. Therefore, in our firm view, the authoritiesbelow were justified in disallowing such a claim made by theassessee. Accordingly, the first question of law is answeredagainst the assessee and in favour of the Revenue. 7. As regards the third question of law, the main plank ofthe argument of the learned counsel for the assessee is based onthe decision of the Supreme Court in Madras Industrial InvestmentCorporation Ltd. v. Commissioner of Income Tax, (1997) 225 ITR 802(SC). However, we find that the said decision relates to theissue of discount on debentures and the said decision does notapply to the facts of the present case. Therefore, in ourconsidered opinion, the third question of law does not meritconsideration. For the foregoing reasons, this appeal is dismissed. Nocosts. Sd/- Asst.Registrar 7. As regards the third question of law, the main plank ofthe argument of the learned counsel for the assessee is based onthe decision of the Supreme Court in Madras Industrial InvestmentCorporation Ltd. v. Commissioner of Income Tax, (1997) 225 ITR 802(SC). However, we find that the said decision relates to theissue of discount on debentures and the said decision does notapply to the facts of the present case. Therefore, in ourconsidered opinion, the third question of law does not meritconsideration. For the foregoing reasons, this appeal is dismissed. Nocosts. Sd/- Asst.Registrar /true copy/ Sub Asst. RegistrarsasiTo:1. The Assistant Registrar, Income Tax Appellate Tribunal Chennai Bench "A", Chennai.2. The Commissioner of Income Tax (Appeals) - III Chennai.3. The Assistant Commissioner of Income Tax Company Circle I(2), Chennai.1 cc to Mr. Mohammed Sheffiq, Advocate, sr. 188851 cc to Mr.T. Ravikumar, Advocate, Sr. 18922T.C.(A).No.318 of 2008SK (CO)kk 8/5