JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 779 of 2006 With TAX APPEAL NO. 780 of 2006 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see judgment ? 2 To be referred to Reporter or not ? 3 Whether their Lordships wish to see fair copy of judgment ? 4 Whether this case involves substantial question of law as to interpretation of Constitution of India, 1950 or any order made thereunder ? 5Whether it is to be circulated to civil judge ? ================================================================ COMMISSIONER OF INCOME TAX....Appellant(s) Versus MASTEK LTD.....Opponent(s) ================================================================ Appearance: MRS MAUNA M BHATT, ADVOCATE for Appellant(s) No. 1 MRS SWATI SOPARKAR, ADVOCATE for Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and Page 1 of 7 HC-NIC Page 1 of 7 Created On Fri May 06 14:56:58 IST 2016 O/TAXAP/779/2006 JUDGMENT HONOURABLE MR.JUSTICE K.J.THAKER Date : 20/11/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. By way of these appeals, appellant-Revenue has challenged judgment and order dated 06.07.2005 passed by Income-tax Appellate Tribunal, Ahmedabad Bench, in ITA No. 405/Ahd/1999 & 61/Ahd/1999 for assessment year 1995-96. 2. While admitting these appeals on 22.11.2000, this Court has framed following substantial question of law: (A) Whether Appellate Tribunal is right in law and on facts in holding that activities carried out by assessee constituted research activity in terms of section 43(4) and therefore assessee was entitled to deduction of expenditure incurred, capital as well as revenue, Pune centre under section 35(1) (B) Whether before permitting deduction under section 35(1) of Act to assessee, Tribunal ought to have obtained opinion of Central Board of Direct Taxes on question whether expenditure incurred by assessee on its project at Pune was for research activities? Page 2 of 7 HC-NIC Page 2 of 7 Created On Fri May 06 14:56:58 IST 2016 O/TAXAP/779/2006 JUDGMENT 3. facts of present case are that during course of assessment proceedings, respondent claimed huge amount as expenses for research and development u/s 35 of Act. assessing officer relying upon order of previous year disallowed claim. Commissioner (Appeals) upheld same. On further appeal Tribunal reversed order relying upon its order for previous year wherein it had held that activity carried on by respondent did constitute research u/s 43(4) of Act. assessee had also claimed expenses as royalty as it was appointed as distributor in respect of software packages of two companies. Assessing Officer disallowed same holding that same was in nature of acquisition of know how and not royalty. Against said order of assessment, assessee has preferred appeal before CIT(A) which was allowed, against which, Revenue has preferred appeal before Tribunal which came to be dismissed and order of CIT(A) was upheld. Against said orders of Tribunal, Revenue has preferred present Tax Appeals. 4. Heard learned advocates appearing for parties and considered submissions. identical issue also came up for consideration before this Court in Tax Appeal No. 242 of 2000 with Tax Appeal No. 243 of 2000 with Tax Appeal No. 263 of 2000, where this Court has observed as under: 26. With above clarity in mind, if we revert back to case on hand, Tribunal allowed assessee's appeal primarily on two grounds. Firstly, Tribunal was of opinion that assessee had placed sufficient material to establish that new product was developed through scientific research. expenditure Page 3 of 7 HC-NIC Page 3 of 7 Created On Fri May 06 14:56:58 IST 2016 O/TAXAP/779/2006 JUDGMENT incurred for such purpose was, therefore, allowable deduction under section 35(1) of Act. second ground on which Tribunal accepted assessee's case was that under section 35(1) of Act, Assessing Officer could not have rejected such claim without making reference to Board. 27. Insofar as first aspect of matter is concerned, we are of opinion that Tribunal without discussing full materials on record, came to such conclusion which, in our opinion, ought not to have been done. These are matters of extreme scientific complexities. What was nature of research undertaken, what was improvement in existing software aimed at or desired, whether ultimately product which was launched by assessee after undertaking such so called scientific research, was new product substantially different from existing one or not were some of issues on which Tribunal, in our humble opinion, without bestowing sufficient attention ruled in favour of assessee. We may caution that such issues of extreme scientific complexities, should not be decided without referring to full materials on record and appreciating complexities of issue on hand. In our opinion, simply accepting one view over other without fully grasping complexities would be hazardous in given situation. 28. We are, however, of opinion that insofar as second aspect of matter is concerned, Tribunal was perfectly justified in holding in favour of assessee. Section 35(3) of Act as noticed requires reference to be made by Board to prescribed authority when question arises as to whether and if so to what extent, any activity constitutes or constituted or any asset is or was being used for scientific research. decision of prescribed authority on such question would be final. In our opinion, therefore, whenever any such question arises, Assessing Officer cannot decide issue but must place issue before Board who, in terms of section 35(3) of Act, would refer question to prescribed authority. decision of prescribed authority would govern parties. Therefore, if assessee puts forth claim of deduction under section 35(1) for expenditure incurred on scientific research and if Assessing Officer is not inclined to accept such claim, question can be stated to have arisen. In such Page 4 of 7 HC-NIC Page 4 of 7 Created On Fri May 06 14:56:58 IST 2016 O/TAXAP/779/2006 JUDGMENT situation, Assessing Officer cannot take decision but must seek opinion of prescribed authority, We may hasten to add that only when such question arises that reference would be competent. For example, if in given case, assessee lodges claim without any supporting material, it cannot be stated that question has arisen which would require reference by Board. Similarly, if Assessing Officer accepts claim of assessee, no such question can be stated to have arisen. We are, however, unable to accept Shri Bhatt's contention that such question would arise only when assessment is finally framed and that thereafter onus would be on assessee to seek reference. No such intention is emerging from section 35(3) of Act. Whenever Assessing Officer is not inclined to accept assessee's case for deduction, we fail to see how at that very stage, question cannot be stated to have arisen. 29. In view that we have taken, we are supported by decisions of three High Courts namely, decision of Allahabad High Court in case of J.K. Synthetics Ltd. vs. O.S. Bajpai, Income-Tax Officer, Central Circle V, Kanpur and Another (supra), Punjab & Haryana High Court in case of Commissioner of Income-Tax vs. F.C.S. International Marketing P. Ltd. (supra) and Delhi High Court in case of Commissioner of Income-Tax vs. Deltron Ltd. (supra). We are conscious that Himachal Pradesh High Court in case of Commissioner of Income-Tax vs. Engineering Innovation Ltd. (supra) has taken somewhat different view. We are unable to persuade ourselves to accept reasoning of Himachal Pradesh High Court. High Court was of opinion that neither section 35(3) of Act nor any other provision under Act or rules empowers revenue authorities to refer matter to Board. We are of opinion that very scheme of section 35(3) of Act would require revenue authority whenever question arises as to whether expenditure was incurred for scientific research or not before Board who, as provided under section 35(3) of Act, would have to refer issue for decision of prescribed authority. In such case, revenue authority is not making reference to Board but is only placing issue at disposal of Board to act in terms of section 35(3) of Act to make reference to prescribed authority. It is undoubtedly true that Page 5 of 7 HC-NIC Page 5 of 7 Created On Fri May 06 14:56:58 IST 2016 O/TAXAP/779/2006 JUDGMENT power of making such reference lies with Board and not with revenue authorities, however, act of revenue authorities to place such issue before Board for making reference cannot be seen as reference made directly by revenue authority. 30. Assessing Officer not having obtained such decision of prescribed authority though serious question in present case had arisen, in our opinion, was not justified in rejecting assessee's claim for deduction of expenditure incurred for scientific research. Tribunal in this regard, in our view, came to correct conclusion. 31. last question that survives is whether at this stage should we permit revenue to seek such reference and opinion of prescribed authority. In facts of present case, we are not inclined to accept any such request for following reasons. Firstly, at no stage, right up to Tribunal and even during pendency of these appeals before High Court, any such attempt was made by revenue. Secondly, in meantime, more than 20 years have passed since assessee incurred expenditure. Expecting assessee to now produce minute details of research activity undertaken would be unreasonable. Thirdly, that Commissioner held that substantial portion of such expenditure was in any case of revenue nature and in respect of provision of section 37(1) of Act, assessee was entitled to claim full deduction thereof. We have noticed that such conclusion of Commissioner was not disturbed by Tribunal though revenue had specifically preferred appeal in this respect. Against non- entertaining of such appeal, further appeals by revenue also came to be dismissed by this court. No useful purpose would, therefore, be served in permitting reopening of entire issue at this distant point of time. 32. In result, we answer question No.A by holding that Tribunal itself ought not to have decided this question without opinion of prescribed authority, particularly without full discussion on materials on record. question No.B is answered by holding that reference ought to have been sought by revenue before Board to prescribed authority and not having done so, Tribunal was justified in reversing orders of Page 6 of 7 HC-NIC Page 6 of 7 Created On Fri May 06 14:56:58 IST 2016 O/TAXAP/779/2006 JUDGMENT revenue authorities rejecting assessee's claim for deduction. 5. In that view of matter, no elaborate reasons are required and we answer question in favour of assessee and against Revenue. Accordingly, we answer question No. by holding that Tribunal itself ought not to have decided this question without opinion of prescribed authority, particularly without full discussion on materials on record. Question No. B is answered by holding that reference ought to have been sought by revenue before Board to prescribed authority and not having done so, Tribunal was justified in reversing orders of revenue authorities rejecting assessee's claim for deduction. present Tax Appeals are dismissed accordingly. (K.S.JHAVERI, J.) (K.J.THAKER, J) divya Page 7 of 7 HC-NIC Page 7 of 7 Created On Fri May 06 14:56:58 IST 2016 Commissioner of Income-tax v. Mastek Ltd