IN THE HIGH COURT OF HIMACHAL PRADESH SHIMLA I.T.Appeal No. 2 of 2003. Judgment reserved on : 29.7.2008 Date of decision : August 4, 2008 Commissioner of Income Tax, Shimla ..Appellant. Versus. M/s Engineering Innovation Ltd. …Respondent. Coram: The Hon’ble Mr. Justice Deepak Gupta, Judge . The Hon’ble Mr. Justice V.K.Ahuja, , Judge. Whether approved for Reporting ? Yes For the Petitioner: Mr. Vinay Kuthiala, Advocate. For the Respondents: Mr. R.L.Sood, Sr.Advocate with Mr. Vikas Rajput, Advocate. Deepak Gupta, J. This appeal has been admitted on the following substantial questions of law:- i) “Whether on the facts and in the circumstances of the case the ITAT was right in holding that the definition of Scientific research given in Section 43(4) is not relevant to claim of expenditure u/s 35? ii) Whether on the facts and in the circumstances of the case the ITAT was correct in holding that the expenditure of a capital nature was admissible as deduction - 2 - when the expenditure was not incurred for existing business.” This appeal relates to the assessment year 1992-93. The undisputed facts of the case are that the assessee was carrying on the business of manufacture and sale of precision sheet metal components. In the assessment year under reference, the assessee decided to manufacture and market automatic Coffee Machine named VENDOMATE. The case of the assessee was that before manufacturing and marketing such a machine, the assessee had imported an automatic coffee machine from abroad at a cost of Rs.3,62,014/-. It had also engaged the services of an Engineer Shri H.O.Verma, for indigenizing and copying the machine in such a fashion so as to make it suitable for Indian conditions. A sum of Rs. 1,70,500/- was paid to Er. H.O.Verma as retainer-ship. According to the assessee, the imported machine was dismantled into various parts and, therefore, the engineer developed a new machine and a prototype machine was manufactured on the basis of the research done by the engineer. On these, factual aspects the assessee claimed deduction of the aforesaid two amounts as well as some other smaller amounts incurred for traveling expenses, - 3 - marketing etc. The amount of deduction was claimed as expenditure on scientific research. The Assessing Officer came to the conclusion that the assessee had not incurred this expenditure on research work and disallowed the entire claim. The assessee filed an appeal. The CIT(A) partly accepted the appeal of the assessee and allowed deduction to the extent of Rs.5,32,514/- i.e. the amount spent for importing the machine and paid to Er. H.O.Verma but did not disallow the claim on other counts. The revenue filed an appeal before the Tribunal which rejected the claim of the revenue and dismissed the appeal. The Tribunal came to the conclusion that the definition of the phrase “scientific research” under Section 43(4) has no connection with the deduction claimed under Section 35 and rejected the case of the revenue. Hence the present appeal by the revenue. To appreciate the rival contention of the parties, it would be appropriate to quote Section 35(1)(i)&(iv) of the Income Tax Act, ( for short: the Act) which reads as under: “35 (1) In respect of expenditure on scientific research, the following deductions shall be allowed:- (i) any expenditure ( not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. (ii) xxxx xxx xxxx xx xxx - 4 - (iii) xxx xxx xx xxx (iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2): Section 35(2B)(3) of the Act which also reads as under:- “(3) If any question arises under this section 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, the Board shall refer the question to the prescribed authority, whose decision shall be final.” Relevant portion of Section 43 (4) of the Act, reads as follows:- (4) (i) “scientific research” means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries: (ii) xxx xx xx xx xx (iii) references to scientific research related to a business or class of business include - (a) any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all business of that class; (b) any scientific research of a medical nature which has a special relation to the welfare of workers employed in that business or, as the case may be, all businesses of that class;” The main contention raised by Shri Vinay Kuthiala on behalf of the revenue is that no scientific research has been carried out as defined in Section 35(i)(iv) and no deduction could have been deducted. He also urges that the definition of scientific research in Section 35 is relevant to decide whether the deduction for scientific research should be allowed under Section 35. It was further contended that - 5 - this expenditure was not in relation to the business. It was lastly contended that the matter should have been referred to the prescribed authority under Section 35(2B)(3) of the Act. Section 43(4) defines the scientific research. In sub clause (i), scientific research has been defined to mean any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. It is contended on behalf of the revenue that this is the sole definition of scientific research and sub clause (iii) cannot be read in isolation of sub clause (i). This argument cannot be accepted. Section 43(4) in totality defines scientific research. The definition is comprehensive but the use of the word “include” in every clause of the section clearly implies that the definition is inclusive and not comprehensive. The section in fact gives an example of activities which could be included in scientific research and does not limit the definition of the phrase “scientific research” to any particular item. Therefore, the contention of Shri Vinay Kuthiala that scientific research must be in the fields of natural or applied science, cannot be accepted especially in view of the wording of clause (iii) of the section wherein legislature in its wisdom has in no uncertain - 6 - terms stated that references to scientific research related to business shall include any scientific research which may lead to or facilitate an extension of that business. The Andhra Pradesh High Court in [1999] Vol.238 ITR 717 Commissioner of Income Tax v. Yamuna Digital Electronics (P) Ltd , has held as follows:- “From a reading of the section, it is clear that it does not say that the expenditure should be wholly and exclusively used for research and development. In the absence of the words “wholly and exclusively used for research and development”, in the section contention of the Revenue cannot be accepted. Hence, the expenditure which is of a capital nature as long as it is used for scientific research relating to the business carried on by the assessee, the assessee is entitled for the deduction of the claim.” The word “scientific” has been defined in the Oxford dictionary as (i) relating to or based on science (ii) systematic or methodical. The word ‘research’ has been defined in the same dictionary as ‘the systematic investigation into and study of materials and sources in order to establish facts and reach new conclusions’. On a combined reading of the meanings of the aforesaid two words, it is obvious that any methodical or systematic investigation based on science into the study of any materials and sources, is a scientific research. The dismantling of the imported Coffee machine with a view to - 7 - decipher how the said machine functions and also with a view to develop a new model of the machine with the intention of making the said machine suitable to Indian conditions is an investigation based on science and included in the definition of scientific research. When the term scientific research is used in relation to business, it does not have to be a research only in the fields of natural or applied sciences. Clause (iii) of Section 43(iv) itself makes it clear that any scientific research which may lead to or facilitate an extension of business is included in the definition of scientific research. Therefore, the investigation done by the assessee to improvise, indigenize and improve the imported machine to suit the Indian market would have resulted in expending and extending its business and therefore falls within the meaning of the term ‘scientific research’ as defined in Section 43(4)(iii) of the Act. As such, the assessee was entitled for deduction in terms of Section 35(4) wherein any expenditure of capital nature on scientific research is covered. In fact question No.2 as framed is not proper. We, therefore, answer the question No.1 in favour of the revenue by holding that the definition of scientific research in Section 43(4) is relevant to decide the claim under Section 35. However, after holding so, we hold that - 8 - the activity of the assessee amounted to scientific research and therefore the assessee was entitled to claim deduction of the said amount under Section 35(1)(i) &(iv). The last contention of Shri Vinay Kuthiala is that only the prescribed authority under Section 35(2B)(3) can decide the question as to what activity constitutes scientific research. In support of his contention, he has relied upon a judgment of the Allahabad High Court In [1976] Vol 105 ITR 864, J.K. Synthetics Ltd. v. O.S. Bajpai, Income Tax Officer, Central Circle V, Kanpur and another. At the out set, we may note that this contention was neither raised before any of the income tax authorities nor was raised in the grounds of appeal and for the first time it was raised at the time of hearing of the matter. We are, therefore, of the view that at this stage the revenue cannot be permitted to raise this ground. However, we have also considered that aspect of the matter in detail. After referring to Section 35, the Allahabad High Court held as follows:- “It is apparent that if the Income tax Officer does not accept the claim of the assessee under section 35, he has to refer the matter to the Central Board of Direct Taxes and the Board in turn will make a reference to the prescribed authority. The decision of the prescribed authority shall be final. This shows very clearly that neither the Income tax Officer nor the Board is competent to - 9 - take a decision on any such controversy. The controversy has to be referred to the prescribed authority which alone is competent to give a decision. Now, in the instant case, the claim of the assessee was referred to the Board and the Board referred the same to the prescribed authority. Admittedly, the prescribed authority had not given its decision before the impugned assessment order was passed.” It is apparent from the observations made by the Allahabad High Court that the claim of the assessee had already been referred to the Board and the Board in turn had referred the matter to the prescribed authority. In the present case neither the assessee nor the revenue ever thought it fit to have the matter referred to the Board. Section 35(2B)(3) only empowers the Board to refer the matter to the prescribed authority. Under the Act, the Assessing Officer or the CIT(A) or the Tribunal have no power to directly refer the matter to the Board. How the matter is to be referred to the Board by the Income Tax Authorities has not been pointed out to this Court. Shri Vinay Kuthiala learned counsel for the revenue has failed to bring to our notice any provision of the Act or the rules which empowers the Assessing Officer or other income tax authorities to refer the matter to the Board. Once the matter is before the Assessing Officer, he must decide the same since the revenue has failed to show us any provision of law - 10 - vesting the assessing authority with the power to refer the matter to the Board, the Assessing Authority must decide the matter himself and cannot refer it to the Board. In our view Section 35 (2B)(iii) has no applicability the facts of the case. This section applies only when the matter goes before the Board and then the Board is bound to refer the matter to the prescribed authority. No such limitation has been placed on the powers of the Assessing Authority. In our opinion, the Assessing Authority is the authority to decide the question as to whether the amount claimed as deduction for scientific research is an amount spent for scientific research or not. In view of the above discussion, the appeal filed by the revenue is rejected. (Deepak Gupta ),J. August 4, 2008 ( V.K.Ahuja ),J. s.