Scientific research expenditure : Deduction u/s.35 of Income-tax Act, 1961 : Research not restricted to applied or natural science but includes any scientific research which may lead to or facilitate extension of business.

[CIT v. Engineering
Innovation Ltd., 327 ITR 392 (HP)]

The assessee was carrying on
the business of manufacture and sale of metal components. The assessee decided
to manufacture and market automatic coffee machines. It imported an automatic
coffee machine from abroad and engaged the services of an engineer for
indeginising and copying the machine in such a fashion so as to make it suitable
for Indian conditions. In the A.Y. 1992-93, the assessee claimed the deduction
of the cost of the imported machine and the retainership fees paid to the
engineer as scientific research expenditure u/s.35 of the Income-tax Act, 1961.
The Assessing Officer disallowed the claim holding that the expenditure was not
incurred on research work. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue,
the Himachal Predesh High Court upheld the decision of the Tribunal and held as
under :

“(i) The definition of
scientific research in S. 43(4) 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. Therefore, the contention of the
Department that scientific research must be in the fields of natural or
applied science, could not be accepted.

(ii) Any methodical or
systematic investigation based on science into the study of any materials or
sources, is a scientific research.

(iii) The investigation
done by the assessee to improvise, indigenise and improve the imported machine
to suit the Indian market would have resulted in expanding and extending its
business and therefore fell within the meaning of the term ‘scientific
research’ as defined in S. 43(4)(iii) of the Act.

(iv) The assessee was entitled for
deduction in terms of S. 35(4).”