ORDER
B.L. Khatri, A.M.
1. This appeal by the Revenue is directed against the order of the CIT(A), Udaipur. The Revenue agitated on the ground that the CIT(A) has erred in allowing the claim of Rs. 41,95,434 being expenses towards scientific research claimed to be exempt under Section 35(2)(ia). The assessee has claimed Rs. 41,95,434 under Section 35(2)(ia) of the Act. This claim was in respect of Central Research Development Laboratory, Dewari branch. The assessee received a total sum of Rs. 101.20 lakhs from the Department of Science and Technology, Ministry of Development, Government of India, New Delhi, for setting up the laboratory. The assessee had spent only a part of the grant. The AO held that the assessee had not incurred any expenditure of its own and, therefore, the claim could not be allowed. The assessee had filed xerox copy of the bills for the purchase of X-Ray diffractometer valuing Rs. 33,05,196.20 as also the details of the balance amount to show that the entire amount of the claim of Rs. 41,95,434 had actually been expended on the research laboratory at Dewari branch. The CIT(A) observed that an expenditure is something that has been fully spent and, therefore, the assessee has claimed as a deduction during the year. The same is allowable.
2. The learned Departmental Representative contended that the assessee is not entitled to any deduction under Section 35(2)(ia) as the amount spent has been reimbursed by the Government of India, Department of Science and Technology. He has relied upon the order of AO.
3. The learned authorised representative submitted that the assessee had received a grant of Rs. 60,00,000 from the Department of Science & Technology, Government of India for the said laboratory. The AO has not allowed the deduction on the ground that the assessee has not incurred any expenditure out of its own resources. The learned authorised representative relied upon the decision of the Bangalore Bench of Tribunal in the case of Indian Telephone Industries Ltd. v. IAC (1984) 10 ITD 338 (Bang). The relevant observations of the Bench are quoted hereinbelow :
“…….it appears to us that the expenditure on scientific research coming under Section 35(1)(iv) need not be out of the profits. All that the section says is that in respect of any expenditure of a capital nature on scientific research related to
the business carried on by the assessee, such deduction as will be admissible under the provisions of Sub-section (2) shall be allowed. Sub-section (2) merely states the manner in which it has to be allowed, the basis has changed from year to year. It is admitted that the assessee has set up research laboratory at the Indian Telephone Industries, Bangalore, regarding thick thin film hybrid microcircuits. It is also admitted that the research laboratory is in connection with the business of the assessee. Therefore, the conditions stated in Section 35(1)(iv) are satisfied and the deduction is permissible.”
“Apparently there does not appear to be anything in the Act reguiring the assessee to spend the moneys out of his own resources. Let us take the case of an assessee who receives a gift. The money is introduced in the business and out of that some payments of a revenue nature are made. In computing the income of the assessee the payments are not disallowed on the ground that the disbursements were not made out of the assessee’s own resources or resources generated in the business. In fact, the capital of the business itself might be out of gifts received, but outgoings of revenue nature made out of capital resources, owned or borrowed or obtained otherwise, cannot be disallowed. In this view of the matter, we hold that apparently the receipt of a grant-in-aid by the assessee will not debar the assessee from claiming deduction under Section 35(1)(iv). When the grant-in-aid is received it merges with the funds of the assessee. Thereafter, disbursements are made. It is not the case of the Revenue that the Government has directly paid for some capital equipment on behalf of the assessee. In such a case, there would be some difference in our appreciation of the problem. Obviously, the expenditure has been incurred by the assessee out of a grant received from the Government and, thus, the condition for grant of deduction under Section 35(1)(iv) is satisfied.”
It was, as may be perused above, held by the Hon’ble Bench that when grant-in-aid is received, it merges with the funds of the recipient. On facts, it was also found that the Government did not directly pay for the equipment. The facts of the case as cited above are supportive of the assessee’s contention.
4. We have considered the rival submissions and perused the facts of the case. In this case, the grant-in-aid has been received by the assessee and after receipt of the grant-in-aid the assessee has incurred the expenditure for the development of the laboratory. Therefore, we decline to interfere with the order of the CIT(A) on this count.
5. In the result, the appeal of Revenue is dismissed.