IT: To allow scientific research expenditure, its nature for research and development is to be ascertained
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[2013] 35 taxmann.com 257 (Karnataka)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax, Central Circle, Bangalore
v.
Encore Software Ltd.*
K. SREEDHAR RAO AND B.V. PINTO, JJ.
IT APPEAL NO. 1143 OF 2006†
OCTOBER 8, 2012
Section 35 of the Income-tax Act, 1961 - Scientific research expenditure [General issues] - Assessment year 2001-02 - Assessee, manufacturer of software and telephone/fax modems, incurred expenditure on development up to 31-3-2000 - In current assessment year a sum proportionate to sale realization was sought to be set off - It was not clear as to whether expenditure pertained to research and development and whether entire semi-finished products were made in that process - Whether fresh assessment was to be made by Assessing Officer - Held, yes [Paras 4 & 5][Matter remanded]
E. Sanmathi Indrakumar for the Appellant. A. Shankar and M. Lava for the Respondent.
JUDGMENT
1. The respondent/assessee who is dealing in manufacture of software development and telephone/fax, modems, said 10 have incurred expenditure of Rs. 7,28,14,022/- towards development costs up to 31.03.2000 which is said to be towards research and development for the assessment year 2000-2001. The data/fax/modems sale realization was Rs. 3,84,39,328/- and telephony and speech coders sale realization was Rs. 31,01,950/-. It was contention of the assessee before the Assessing Officer for the assessment year 2001-2002 that a sum of Rs. 1,85,71,285/- is a set off against development cost and the balance is shown in the balance sheet. The assessee described the same as reduction in the value of the semi-finished inventory. It is the contention of the assessee that the reduction of the cost incurred towards research and development could be in three ways. (-1) Write off of entire amount towards profit in the year of incurrence. (2) claim it as deferred reduction at the rate of 1/5th for each assessment year or proportionate to the estimated sales and (3) claim depreciation of the material value as per its value.
2. The assessee contends that in the present case, he has sought reduction proportionate to the sale realization.
3. Sri Indrakumar, learned Sr. counsel for the revenue,- per contra strenuously submitted that the written and oral submissions made by the assessee could not suggest that the development costs incurred is towards research and development and the same is being set off against profit and loss account towards sale realization for the assessment year in question. The assessee submitted that he seeks proportionate write off against semi-finished goods inventory. That means for future anticipated inventory sales the deduction sought for is impermissible. This Court had framed following substantial law for consideration while admitting the appeal:
"Whether the Tribunal was correct in holding that semi-finished goods to the extent of Rs. 1,85,71,285/- should be allowed as a revenue expenditure which was purely based on estimate since the actual product had not been completed and sold in the open market."
4. On thorough consideration of the submissions made at the Bar, we' find that the arguments submitted in appeal does not appear to be one correctly projected before the Assessing Officer. Further, it is also not clear that whether Rs. 7,28,14,022/- pertains to research and development of the products. It is also not clear the entire semi-finished products are made in the process of research and development or otherwise. The assessee had sought "proportionate write off against the semi-finished goods inventory". The said expression used does not clearly suggest whether the assessee was seeking reduction on research and development expenditure proportionately towards the sale made in the year in question.
5. It is the contention of the counsel for the assessee that expression "reduction in value of semi-finished inventory" would pertain to research and development expenditure. This aspect also has not thoroughly gone into by the Assessing Officer. Therefore, in order to appreciate disputed facts correctly Accordingly, the order of the Tribunal and authorities below are set aside and the matter is remitted to the\Asses-sing Officer for fresh assessment after giving proper opportunity to the assessee. In view of the remand, the question of law is not answered. All contentions are kept open for both sides to establish their stand. The appeal is disposed of.
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