ORDER
1. These are the appeals filed by the Revenue against the order of learned CIT(A), Dehradun, dt. 29th Sept., 2005 for asst. yrs. 1999-2000, 2002-03 and 2001-02.The assessee has also filed cross-objection in the asst. yr. 1999-2000. Following grounds of appeal have been taken by the Revenue:
ITA No. 4517/Del/2005 (asst. yr. 1999-2000):
(1) That the learned CIT(A) has erred in law and on facts in allowing the deductions under Section 80-O of the IT Act, 1961, amounting to Rs. 51,25,370 to the assessee company without appreciating the fact that the patents were in the name of Shri Rakesh Goel and not in the name of the company i.e. M/s S.K. Dynamics (P) Ltd.
(2) The, order of learned CIT(A) be set aside and that of the AO be restored.
ITA No. 4518/Del/2005 (asst. yr. 2002-03):
(1) That the learned CIT(A) has erred in law and on facts in allowing the deductions under Section 80-O of the IT Act, 1961 amounting to Rs. 52,85,620 to the assessee company without appreciating the fact that the patents were in the name of Shri Rakesh Goel and not in the name of the company i.e. M/s S.K. Dynamics (P) Ltd.
(2) The order of learned CIT(A) be set aside and that of the AO be restored.
2. Common grounds have been raised by the assessee with regard to decline of deduction under Section 80-O of the Act, in both the asst. yrs. 1999-2000 and 2002-03. Rival contentions have been heard and record perused. The brief facts of the case are that the assessee, M/s S.K. Dynamics (P) Ltd., was deriving income from research, development of patents and design, prototype manufacturing and production of electro-mechanical systems. The AO found that the assessee had following two patents only:
(i) US patent : Control system for permanent magnet
Synchronous motor
(ii) US patent : Gate driver and hysteresis circuit.
3. The assessee has shown the following patents as pending for approval:
(1) US patent pending : Apparatus and method for generating
gravitational force/gravitational field.
(2) Indian patent pending : Electrical transmission based verticle
take-off and landing vehicle.
(3) Indian patent pending : Apparatus and method for generating
gravitational force/gravitational field
(Design).
(4) Indian patent pending : Apparatus for gravity
generation (Design II).
(5) Indian patent pending : Electronic compass
(6) Indian patent pending : Geared permanent magnet
synchoronous motor
(7) Indian patent pending : Communicationless DC motor
4. The AO found that the entire royalties received by the assessee from M/s Analog Device Inc., USA (herein called ADI), related to the use outside India of the first mentioned two patents and for certain technical designs only. The AO further found that in respect of both these patents, the inventor was Shri Rakesh Goel of Roorkee and the assignee was Analog Device, USA. The AO therefore held that the owner of these patents was Shri Rakesh Goel and not the assessee company and held that assessee was not entitled to deduction under Section 80-O. While refusing deduction under Section 80-O, the AO observed that the so-called patents were in respect of the inventions made by Shri Rakesh Goel. It is clear from the patents itself that the inventor of the same was Shri Rakesh Goyal, Roorkee, India, and the assignee of the same was Analog Device Inc., Norwood. Hence, as per AO the above referred patents were the property of Shri Rakesh Goyal in his individual capacity. The fact that Shri Rakesh Goyal is the managing director of the assessee company depicts a distinctly separate identity of Shri Rakesh Goyal. The AO further stated that in Clause 4 under the subheading Main Objects To Be Pursued By The Company, of the memorandum of association and article of association of the assessee, it has been resolved as under:
To continue to maintain a clear identity of its own in terms of premises, laboratories, workshop, equipment and test, pilot plants, reference and calibration facilities, library, prototype development facilities to meet research and development requirements.
Further, in Clause 4 of para B of memorandum of association and article of association of the assessee having the sub-heading The Objects Incidental Or Ancillary To The Attainment Of The Main Object, it is stipulated as under:
To sell and to receive royalty on embedded software in any form developed by the company which does not employ any manufacturing process.
Hence, as per AO, since the inception of the assessee company not only a clear separate identity was conceptualized but also it was resolved that the assessee company would sell and receive royalty on embedded software in any form developed by the company. Hence, in view of the abovenoted facts, and the legal position in respect of the company being a separate person, it was held by the AO that the identity of the company cannot be coalesced with that of Shri Rakesh Goyal, individual, notwithstanding the fact that Shri Rakesh Goyal was the managing director of the company.
5. The AO also observed that the term of appointment and the powers to be exercised by the managing director as well as the terms of remuneration to be paid to the managing director, were explicitly stipulated in the memorandum of association and article of the association of the assessee company. As regards the assessee’s condition that “A genuine remuneration for this technical task in shape of commission for technical development etc. has to be paid by M/s SK Dynamics (P) Ltd.”, the AO noticed that the payment of remuneration cannot make the company owner of the patents which are the property of Shri Rakesh Goyal, notwithstanding that he was the managing director of the assessee company.
6. In view of the above discussion, the AO reached to the conclusion that assessee company was not entitled for deduction in respect of income earned by it in foreign convertible exchange from research, development of patents and designs, prototype manufacturing and production of electro-mechanical system.
7. By the impugned order, after recording detailed findings, CIT(A) directed for allowing deduction under Section 80-O by observing that assessee company derived royalty as consideration for use of patents and design in convertible foreign exchange from ADI in respect of patents and designs developed by it under a development, production and licensing agreement dt. 14th May, 1995 entered into between assessee company and ADI. The CIT(A) further recorded a finding that Shri Rakesh Goyal is the managing director of the company and is employed by the company as a scientist, the research undertaken by the company leading to the patent bars consumed as input, both human skill and labour of Shri Rakesh Goyal, the scientist and the physical researches of the assessee company like laboratory and equipment. The CIT(A) further found that Shri Rakesh Goyal has been paid adequately by the assessee company and there is indeed no tacit agreement between Shri Rakesh Goyal and the assessee company by which assessee company alone was the beneficial owner of the patent developed by Shri Rakesh Goyal. The CIT(A) observed that the assessee company has been represented by Shri Rakesh Goyal himself. He has participated in securing for the assessee company and not for himself, the entitlement to receive the royalties due from ADI. This is confirmed beyond any reasonable doubt whatsoever, that the ownership or at least the beneficial ownership to the patents and designs vests with the assessee company.
8. In pp. 4.4 and 4.5 of his appellate order, CIT(A) (has) also given categorical finding regarding fulfilment of all the conditions for claim of deduction as provided under Section 80-0 of the Act. With regard to the quantum of deduction to be allowed out of the receipt in convertible foreign exchange, the CIT(A) directed the AO to take the net receipts after reducing 15 per cent of the total resources utilized for earning the receipt, while allowing deduction under Section 80-O of the Act.
9. Aggrieved by the above order of the CIT(A), the Revenue is in appeal before us.
10. It was contended by the learned Departmental Representative Shri BP Mishra that patents were in respect of the invention made by Shri Rakesh Goyal and the assignee of the same was ADI, therefore, Rakesh Goyal was entitled to have the benefit of deduction under Section 80-O of the Act and not the assessee company. He further placed reliance on the order of the AO.
11. On the other hand, learned Authorised Representative, Shri KP Garg submitted that assessee company was set up in the year 1992 for pursuing research and developed (R&D) projects in the area of electro-mechanical engineering digital signal processing, power electronics and systems engineering. It was duly recognized by the Department of Scientific and Industrial Research, Ministry of Science & Technology, Government of India, as an in-house R&D unit. He further observed that in recognition of and in the course of R&D activities, the assessee company has won several prestigious awards. The deduction under Section 80-O was consistently allowed by the Department in earlier years and there was no change in the facts and circumstances during the year under consideration, the AO was patently wrong in observing that managing director of the company, Shri Rakesh Goyal, was the owner of the patent so developed by the assessee company. It was the assessee company which has entered into agreement with ADI for use of patents and designs developed by it, and the convertible foreign exchange was also received by the assessee company in terms of the agreement so entered dt. 14th May, 1995. He drawn our attention to the various documents placed on the record, which were submitted before the AO, and relied on by the CIT(A) for recording a detailed finding regarding ownership of patent by the assessee company and eligibility of the assessee company with regard to the fulfillment of various conditions for allowing deduction stipulated under Section 80-O of the Act.
12. We have considered the rival contentions, carefully gone through the orders of the authorities below and also deliberated on the case law cited by the lower authorities in their respective orders and referred by the learned Authorised Representative and Departmental Representative during the course of hearing before us. From the record, we found that assessee company was set up for pursuing research and development (R&D Project) since 1992. It was recognized by the Department of Scientific & Industrial Research, Ministry of Science & Technology, Government of India, as an in-house R&D unit since 1995. In respect of the foreign exchange earned by the assessee company from thq research and development of patent designs and its use, was duly supported by the agreement entered into with ADI dt. 14th May, 1995. The claim of deduction under Section 80-O in respect of convertible foreign exchange received by the assessee company was declined by the AO by incorrectly assuming that patents are the property of Shri Rakesh Goyal instead of assessee company, M/s S.K. Dynamics (P) Ltd. We found that Shri Rakesh Goyal was the managing director of the company and was employed by the assessee company as scientist. The patents so developed by the employee, Shri Rakesh Goyal, was for and on behalf of the assessee company. The assessee company has paid to Shri Rakesh Goyal for the services rendered by him, during the process of search, invention, physical resources of the assessee company like laboratory and equipments were used. There was an agreement between the assessee company and Shri Rakesh Goyal, according to which assessee company alone was the beneficial owner of the patents so developed by Shri Rakesh Goyal. Since the assessee company was an artificially created entity, only human being can become an inventor and not any company. A detailed finding has been recorded by the CIT(A), which is as per material on record, to the effect that beneficial ownership of the patents and designs vested with the assessee company and not with Shri Rakesh Goyal. As per provisions of Section 80-O for claiming deduction, the income should be derived by the assessee including a company who is a resident in India and such income should be received from Government of a foreign State or a foreign enterprise, as a consideration for use outside India of any patent, invention, design or registered trademark. Such income should be in convertible foreign exchange or should be received outside India and converted outside India in convertible foreign exchange and should be brought into India by or on behalf of the assessee in accordance with law within six months from the end of the previous year or within such extended time as competent authority may allow in this regard. However, for claiming of such deduction, the assessee is statutorily required to furnish a certificate in the prescribed form being Form No. 10HA, certifying that deduction has correctly been claimed in accordance with the provisions of Section 80-O of the Act. The AO has not found any fault in the certificate so furnished by the assessee. Furthermore, with respect to all the conditions stipulated under Section 80-O, the AO has not expressed any reservation for non-compliance thereof. Only reservation of the AO was that assessee company is not owner of the patent. However, as per Indian law, ownership of invention made by an employee rests with company in the absence of any contract to the contrary. In the instant case, no material has been indicated by the AO to indicate that the patents so invented do not belong to the assessee company but to its employee, Shri Rakesh Goyal. On the basis of the material placed on record, we are satisfied that no fault can be found in the findings recorded by the CIT(A) to the effect that ownership of invention made by Shri Rakesh Goyal, in the course of employment rests with the employer, M/s S.K. Dynamics (P) Ltd. (the assessee).
13. In view of the above discussion, we are inclined to agree with the learned Authorised Representative that assessee company was entitled for claim of deduction under Section 80-O of the Act, both for the asst. yrs. 1999-2000 and 2002-03, and no interference is called for in the findings recorded by the CIT(A) with regard to the ownership of the patents and fulfilment of prerequisite conditions for allowing deduction under Section 80-O of the Act.
14. In the result, the appeals of the Revenue for the asst. yrs. 1999-2000 and 2002-03 are dismissed.
C.O. No. 64/Del/2006:
15. In the asst. yr. 1999-2000, the assessee has filed a cross-objection, objecting reassessment proceedings initiated under Section 147 of the Act. As per learned Authorised Representative, there was only change of opinion which did not empower the AO to reopen the completed assessment, when the primary facts necessary for assessment were fully and truly disclosed. For this proposition, he relied on the decisions of Hon’ble Supreme Court in the cases of CTT v. Dinesh Chandra H. Shah and CIT v. Simon Carves Ltd. and Swedish East Asia Co. Ltd. v. IAC . Learned Authorised Representative further submitted that in the instant case, the AO has reopened the completed assessment just to re-examine and review the completed assessment to find out some more facts to enable the AO to determine whether any income has escaped assessment, whereas Section 147 authorises the AO to reassess any income which has escaped assessment on the basis of positive material. As per learned Authorised Representative, it does not authorize him to review and re-examine the case, even if a different view has been taken in any subsequent years or as per subsequent information with the AO. Under the provisions of Section 147, the AO is not authorized to rectify every mistake committed by the predecessor or himself while making assessment for earlier years. In support of his contention reliance was placed on the various decisions of High Courts reported as CIT v. B.A. Rajakrishnan , CIT v. Sun Engg. Works (P)Ltd. , S. Hariniwas Chowdry v. Asstt. CIT and Arjun Singh v. Director of IT . As per learned Authorised Representative subsequent findings is no ground for issue of notice under Section 148 and for making reassessment under Section 147 in every case. There is no provision in law for reassessment for completed cases merely on the ground that some additions have been made in a subsequent year, as has been done in the case of this assessee. The wrong disallowance made in subsequent year has been utilized for issue of notice under Section 148 for asst. yr. 1999-2000. As per Authorised Representative, in the case of Dinesh Chandra (supra) after considering the existing case law in Bhimraj Panna Lal v. CIT , affirmed in Bhimraj Pannalal v. CIT and Ors., the Hon’ble Supreme Court held, “The rule that the AO is entitled to act on information obtained after the original assessment from the record of assessment itself does not permit fresh application of mind to the same issue or enable the AO to correct his own or his predecessor’s errors of judgment, the AO cannot take any action under this section merely because he happens to change his opinion or to hold an opinion different from that of his predecessor, on the same set of facts.”
16. On the other hand, learned Departmental Representative supported the action of the CIT(A) in holding the reassessment proceedings as validly initiated, and in support of it, he relied on the decisions cited and reported at ITO v. K.L. Srihan (HUF) and V. Jaganmohan Rao v. CIT . As per learned Departmental Representative, if reopening is on one ground, the AO can go on another ground while framing the reassessment.
17. We have considered the rival contentions, carefully gone through the decisions cited by the learned Authorised Representative and Departmental Representative with reference to the validity of reopening and the requisite conditions empowering the AO to initiate reassessment proceedings where income has escaped assessment.
18. In the instant case, we have already decided the issue of deduction under Section 80-O on merits, in favour of the assessee, therefore, technical ground raised by the assessee regarding validity of reopening has become infructuous.
19. In the result, the cross-objection filed by the assessee is being infructuous, disposed of accordingly.
ITA No. 1700/Del/2005:
20. The appeal filed by the Revenue bearing ITA No. 1700/Del/05 relates to asst. yr. 2001-02, wherein following grounds of appeal have been raised:
(1) That the learned CIT(A) has erred in law and on the facts of the case in treating the capital expenditure to be of revenue nature appreciating the fact that neither the projects, except Analog Devices, were complete nor there was any nexus between the amount of expenditure incurred and the profits to be earned in subsequent years, if any.
(2) That the learned CIT(A) has erred in law and on facts of the case in ignoring the provisions of Section 35(1)(iv) of the IT Act, 1961 which state that the expenditure of capital nature can be allowed as deduction only if it is related to business.
(3) That the learned CIT(A) has erred in law and on facts of the case in not appreciating the fact that the assessee had itself admitted that only 8 per cent of the total expenditure was spent towards the project, namely, Analog Devices which earned the income.
(4) That the learned CIT(A) has erred in law and on facts of the case in treating the appellant company as R&D company without appreciating the fact that the certificate for the purpose of Section 80-IB(8) was effective from asst. yr. 2003-04 and not for the year under scrutiny which was 2001-02.
21. Rival contentions have been heard and record perused. Facts in brief are that the assessee was in the business of R&D since its inception. It has been incurring expenditure on research and development. The assessee’s incomes have come from its findings of research and sale of prototypes, use of registered patents, technical know-how, etc. The process of development in scientific field is a long-drawn affair. The results come over the years after hard and prolonged effort and hours that have gone into various projects. During the course of scrutiny assessment, the AO disallowed a sum of Rs. 1,03,87,205 equal to 92 per cent of the expenditure incurred by the assessee on account of various expenditures on the premises that these were incurred on projects under implementation and the question of receving any revenue in future was still not known and hence the expenditure claimed as business expenditure by the assessee could at best be treated as capital expenditure. The AO has discussed the issues relating to aforesaid disallowance in para 4 of the assessment order and held that out of total expenditure incurred by the assessee only 8 per cent expenditure can be treated as revenue and balance of 92 per cent is to be treated as capital expenditure. By the impugned order, CIT(A) allowed the claim of expenses by observing that assessee is a R&D company and that during the year the assessee was fully engaged in its business activities and had also effected sales of Rs. 14.69 lacs. The relevant issue in present appeal revolves around the nature of assessee’s business and allowability of expenditure incurred by it. Undisputedly, the assessee is a R&D company engaged in research, development of patents/designs, prototype, manufacturing products of electro-mechanical system. The AO acknowledges this fact at para 2 (p. 1) of his order where he remarked, “The income declared by the assessee during the year under consideration is by way of manufacturing/sale of E-Cycle and various other products, receipts in foreign currency in the form of royalty, interest income, etc. The assessee has been working on a number of projects during the year, but receipt in foreign currency is only from one project, namely, Analog Devices Inc.(ADI).” Further, the AO remarks at para 4.1 of the order at p. 6, “the reply of the assessee has been considered. The assessee itself admitted that remaining expenditure i.e. 92 per cent was spent towards sales as per P&L a/c and ongoing R&D work for which the patents were pending or R&D work had not finished.”
22. Before the AO, the assessee has furnished copy of audit report under Section 44AB, wherein Clause 8(a) specifies the nature of the assessee’s business. Explanation on the nature of business was also filed vide letter dt. 27th Nov., 2002 and copy of certificate of approval as R&D company under Section 80-IB of the Act was also filed. On the basis of these documents, the AO has duly accepted the fact that the assessee is an R&D company. As an R&D company, its nature of activity is not just material to the facts of the present case, but most important and relevant, conclusive and determinative in deciding the issue whether the expenditure in question was allowable or not. The expenditures debited in the P&L a/c which have been disallowed by the AO are of the following heads of accounts:
S. No. Head of Account Amount
(a) Salary and other benefits 43,60,365
(b) Administrative expenses 50,86,649
(c) Interest and bank charges 40,893
(d) Repairs & Maintenance 8,01,565
(e) Depreciation as per IT 13,16,577
Rules
23. In view of the nature of the assessee’s business being R&D company, even if some of the projects in question were not completed during the year the expenditure incurred on the project in progress cannot be disallowed. From the record, we found that during the year the assessee has also earned income in foreign currency from use of patents, also made sales amounting to Rs. 14.69 lacs which have been duly reflected in the audited P&L a/c, as placed before the AO. The assessee’s business is a going concern concept, expenditures are booked on accrual basis, the same have been incurred to earn the revenue and not to create any capital assets. Even if part of such expenditure has been incurred on projects, in respect of which the scientific research continues and end result is not yet achieved but might be achieved after a few years, it would bring business revenue to the assessee. Undisputediy and evidently, all the aforesaid expenditures incurred by the assessee were revenue in nature, which have been wrongly treated by the AO as capital expenditure. We found that assessee company was assessed to tax since 1993, it has been regularly accounting for expenditure and income on accrual basis, the basis of accounting of the assessee is consistent with the AS-8 issued by the ICAI of India which specifies that costs of R&D are to be charged to expenses in the period in which they are incurred. The Department has never in the past questioned the method of accounting of the assessee. The assessee’s method of accounting is consistent with the one followed in preceding years.
24. The action of the AO in interpreting the provisions of Section 35 was also misplaced. According to Section 35(1)(i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business of the assessee should be allowed as a deduction. Explanation found below Section 35(1)(i) further provides for allowing even the expenditure on payment of salary on purchase of materials for use in scientific research, even if incurred prior to commencement of business. The provision allows for deduction of a scientific research expenditure even if the assessee is not entirely engaged in the business of scientific research but carries out such research in connection with its business. However, in the instant case, the assessee company was solely engaged in the business of scientific research, therefore, any business expenditure that it incurs, would be expenditure on scientific research related to its business hence allowable under Section 35(1) of the Act. Even if the AO takes the stand of treating the said expenditure as capital expenditure, even then Section 35(2)(ia) allows for deduction of said capital expenditure against business income of the assessee. Hon’ble Karnataka High Court in the case CIT v. H.M.T. Ltd. has held that “deduction under Section 35(1)(iv) r/w Section 35(2) is available in respect of the value of capital represented by work-in-progress and machinery in transit and under erection in the assessee’s research division”.
25. Hon’ble Allahabad High Court in the case of J.K. Synthetics Ltd. v. ITO held that if the ITO does not accept the claim of the assessee made under Section 35, he cannot outrightly reject the claim. He is required to refer the matter to the CBDT and the Board has to refer the question to the prescribed authority. On such reference, the decision of the prescribed authority becomes final. The above decision was taken in appeal before the apex Court but this question was not pressed before the Hon’ble Court. Thus, the Department has accepted the decision of jurisdictional High Court.
26. In view of the above discussion, we can safely conclude that the AO was factually and legally wrong in making addition on account of revenue expenditure incurred by the assessee by treating the same as capital expenditure. No interference in the findings recorded by the CIT(A) is required for holding the assessee as R&D company, as the same are as per materials on record. Nothing was brought on record by learned Departmental Representative to persuade us to deviate from the findings recorded by the CIT(A) resulting in allowability of entire expenditures incurred by the assessee which were undisputedly revenue in nature.
27. In the result, the appeal filed by the Revenue is dismissed.