Case Law Details
Hindustan Aeronautics Limited Vs ACIT (Karnataka High Court)
The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. It has further been held that whether a transaction is capital expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. In the instant case, the total research and development expenses incurred by the assessee was to the tune of Rs.67,478.1 Lakhs, which includes expenses towards raw materials, direct expenses, salaries, interest, depreciation and other expenses. Out of the aforesaid amount, the Assessing Officer has disallowed a sum of Rs.570.61 Lakhs on the ground that the same was made out of the grants given by Government of India. The expenses incurred by the assessee were towards research and development and therefore, the same were revenue in nature and ought to have been allowed as deduction under Section 37 of the Act. The fact that the expenses incurred by the assessee towards research and expenses have been met out of the grants given by the government, which is treated as capital receipt is immaterial. The Tribunal erred in placing reliance on the case of the assessee for Assessment Year 1995-96 as the Tribunal failed to appreciate the aforesaid order, as the order no where states that the revenue expenses incurred out of the grant would not be allowed as deduction under Section 37 of the Act. It is pertinent to mention here that the nature of the expenditure has to be seen and not the nature of receipt and purpose for which such expenditure is made is a relevant criteria. The expenditure was incurred by the assessee for research and development for manufacture of aircrafts, which were to be sold. Thus, the expenditure was incurred for the purpose of business of the assessee and the same ought to have been allowed under Section 37 of the Act instead of Section 35(1)(iv) of the Act.
AO cannot invoke Section 14A of the Act read with Rule 8D without recording his Satisfaction
So far as the claim of the assessee under Section 14A of the Act is concerned, sub-Section (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules prescribe a formula for determination of expenditure incurred in relation to income, which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. The sine qua non for invocation of power under Section 14A of the Act read with Rule 8D of the Rules is the recording of satisfaction by the Assessing Authority that having regard to the accounts of the assessee it is not possible to arrive at the satisfaction with regard to the correctness of the claim of the assessee. In the instant case, the Assessing Officer has not recorded any satisfaction with regard to genuineness of the claim of the assessee before invoking the powers under Section 14A of the Act read with Rule 8D of the rules.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
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