The main objects of the assessee, a Section 25 company, were to organize and undertake scientific research. The assessee was recognized as a scientific research institution by the CBDT from its inception, which was, however, withdrawn wef 31st March, 1981 as it was found that assessee carried out no scientific research as stated in its main objects. In 1984, assessee applied for and was granted registration under Section 12A of the Act. During the relevant year, the assessee handed over the possession of commerce centre constructed by it to the various lessees and claimed exemption under section 11(1)(a) of the Act in respect of such lease income. The AO denied the exemption. The CIT(A) and ITAT also upheld the order of AO.
On appeal, the High Court held in favour of revenue as under:
1) Compliance with section 12A does not entitle an assessee to the benefit of section 11, ipso facto;
2) The assessee's contention to have been engaged in "scientific research" was unfounded in view of the withdrawal of its recognition under section 35(1)(ii);
3) During the assessment years 1978-79 to 1992-93, its expenditure on scientific research never exceeded 3.32% of income in any year;
4) There was only a facade of being a scientific research institution by making claims in the annual report of scientific research activity;
5) The assessee never engaged itself in any activity connected to its main object, viz., to organize, sponsor, promote, establish, conduct or undertake the scientific research in any way;
6) Under the Companies Act,1956 an entity is entitled to carry on business in respect of the incidental and ancillary activities that didn't by itself entitle it to claim an exemption under section 11;
7) If, however, the main objects are abandoned, it can hardly be said that the expenditure towards the incidental objects was towards a charitable purpose;
8) In the assessee's case, its incidental or ancillary objects on their own, did not constitute charitable purposes. Indeed, it was rightly not even suggested by the assessee that its ancillary objects by themselves constituted charitable purposes.
Therefore, assessee's claim for exemption under section 11 failed - M. VISVESVARAYA INDUSTRIAL RESEARCH & DEVELOPMENT CENTRE v. CIT  26 taxmann.com 200 (Bombay)