TMI Blog2018 (11) TMI 1591X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 251 (1) of the Act. Disallowance of expenditure holding it to be capital in nature - CIT(A) disallowed entire expenditure by holding that research activity carried on by assessee has resulted in enduring benefits to assessee - test of enduring benefit - HELD THAT:- As observed expenditure incurred by assessee is in its normal course of business. Further, it is also not disputed that assessee has been remunerated as per contract, under which assessee is required to incur expenditure. Ld. AO/CIT(A) did not dispute that expenditure has not been incurred for purposes of research activity carried on by assessee in its normal course of business. We draw our support from decision of Empire Jute Company Ltd vs. CIT [1980 (5) TMI 1 - SUPREME COURT] wherein laid down that test of enduring benefit cannot be applied blindly and mechanically without having regard to facts and circumstances of a given case. We are therefore are of considered opinion that assessee has to be granted benefit of expenditure incurred by it, incurred in due course of business activity. Deduction u/s 80IB(8A) - Assessee has been granted approval by Department of Scientific and Research, Ministry of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Quantum appeal 2. Jubilant Biosis Ltd 1822/D/18 2013-14 Quantum appeal 3. Jubilant Biosis Ltd 1823/D/18 2014-15 Quantum appeal 4. Jubilant Biosis Ltd 2759/D/18 2013-14 Penalty appeal 5. Jubilant Biosisn Ltd 2760/D/18 2014-15 Penalty appeal 6. Jubilant Chemsys Ltd 1824/D/18 2012-13 Quantum appeal 7. Jubilant Chemsys Ltd 1825/D/18 2013-14 Quantum appeal 8. Jubilant Chemsys Ltd 2757/D/18 2012-13 Penalty appeal 9. Jubilant Chemsys Ltd 2758/D/18 2013-14 Penalty appeal At the outset, Ld.Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work is meant to create an enduring asset. 2.3. That the Ld. CIT(A) failed to appreciate that the appellant in an ordinary course of its business activity incurs such expenses on year to year basis and had been remunerated by its customer for such business activity under the contract. 2.4. The Ld. CIT(A) has failed to appreciate that in the absence of an assessment having been made in respect of the allowability of such expenses by the Ld. AO or being considered by Ld. AO in the order of assessment, the same was not the subject matter of appeal and was thus outside the scope of the provisions of Section 246A of the Act. 3. On the facts and in the circumstances of the case and in law, Ld.CIT(A) has grossly erred in making the aforesaid disallowance of revenue expenditure of ₹ 102,52,32,000 (including depreciation and interest) and failed to appreciate that the appellant had produced complete information with regard to nature of expenditure incurred for earning income from various pharmaceuticals companies. 3.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding the aforesaid expenditure to be capital in nature without appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. 2. Brief facts of the case are as under:(ITA No. 7302/D/17 AY 2011-12) Ld.AO observed that assessee is engaged in business of scientific research and informatics services, for drug discovery units, based upon Insilco Solutions. It was observed that assessee provided discovery informatics products and services and collaborative drug services that include pre-clinical, in-vivo and formulation services. It also provides Discovery Research Services, which is driven by concept of structure Directed Drug Design. It was observed by Ld.AO that assessee had claimed gross receipts of ₹ 84,49,28,000/-, which included other income of ₹ 19,58,000/-, against which expenditure amounting to ₹ 102,52,32,000/-, showing loss of ₹ 18,03,04,000/- was shown. Loss was worked out after adjusting depreciation and bonus paid for A.Y. 2010-11. Ld. AO also observed that assessee had approval from Department of Scientific Industrial Research, and was entitled to claim deduction under section 80 IB (8A) of the Act. Ld.AO thus called upon assessee to furnis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al before us now. 5. Ground Nos. 1-2.4 raised by assessee is in respect of validity of enhancement of income made by Ld.CIT (A) under section 251 (1) (a) of the Act. 5.1. Ld.Counsel submitted as under: It was submitted that no enhancement notice has been issued and served on assessee by Ld.CIT(A) while invoking his power u/s 251(1)(1) of the Act. He submitted that power conferred with CIT(A) of enhancement of assessment has been granting reasonable opportunity of showing cause to assessee. Ld. Counsel submitted that Ld.CIT proceeded to issue directions which are detrimental to interest of assessee. It has been submitted that he could have enhanced only after issuing notice under sub-section (2) of section 251. Since no such notice was issued, order passed by Ld. CIT suffers from illegality. Ld. Counsel submitted that notice issued by Ld. CIT (A) for enhancement of income, neither expenses as to why proposed disallowances are warranted nor any reason or justification is specified why expenses incurred by assessee should be treated as capital in nature. Further, law requires show cause notice to be issued under a specific provision of law and not as a correspondence. This sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub clause (2) of section 251 of the Act, further envisages that Ld.CIT (A) to consider and decide any matter arising out of proceedings, in which order appealed against was passed, notwithstanding that, such matter was not raised before Ld.CIT (A) by assessee. Ld.Sr.DR thus placed reliance upon Explanation, in support of, enhancement notice issued by Ld.CIT (A) on issues, which were not subject matter of appeal before Ld.CIT (A). 5.3. He placed reliance upon specific observation by Hon ble Supreme Court in case of Jute Corporation of India Ltd vs. CIT, reported in (1991) 187 ITR 68 wherein Hon ble Court observed that, The Act does not contain any express provision debarring assessee from raising an additional ground in appeal and there is no provision in the Act placing restrictions on power of appellate authority in entertaining an additional ground in appeal. In the absence of any statutory provision, the general principle relating to amplitude of appellate authority is, power being co-terminus with that of Assessing Officer should normally be applicable. 5.4. Ld.Sr DR submitted that ratio that emerges out of decisions relied upon by Ld.Counsel passed by Hon ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment includes not only taxing an income but also holding that a particular income is not taxable. (iii) Therefore, the CIT (A) can tax the income which the AO had, expressly or by clear implication, considered and held to be not taxable-irrespective of the question whether the income falls under a head with regard to which an appeal has or has not been preferred. However, the CIT (A) cannot tax an items of income, the taxability of which had not been considered at all by the AO.7 Footnote details in respect of extract reproduced hereinabove are as under: 1. CIT vs Namberumal reported in 1 ITR 32; Gowri vs CIT 31 ITR 250; 2. Peareylal 10 ITR 239; 3. Narrondas vs. CIT 31 ITR 909 approved in CIT vs. Macmillan (SC) 33 ITR 182 4. Jagarnath vs. CIT 2 ITC 4, CIT vs. Nawaz 6 ITR 370; Gajalakshmi vs. CIT 22 ITR 502, 510; Narrondas vs. CIT 31 ITR 909; Sterling vs. ITO 99 ITR 236 5. 44 ITR 891 6. 66 ITR 443 7. Sneh Lata vs. CIT 61 ITR 139, 143 (1), CIT vs. Jagdish 51 ITR 266 (2), Prabhudas vs. CIT 62 ITR 621(3), CIT vs. Chaganlal 148 ITR 7 (4), Lokenath vs. CIT 161 ITR 82 (5), CIT vs. Nirbheram 127 ITR 491 (6), 8. We also refer to decision of Hon ble Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Income-tax Officer and determined in the course of the assessment; and matter is used, not in the sense of a head of income, but in the sense of a specific source of income. So the question that has to be asked when deciding whether the Appellate Assistant Commissioner has the power or not is : Is this the matter which was considered and decided by the Income-tax Officer ? If it was, irrespective of the nature of the appeal preferred by the assessee, the Appellate Assistant Commissioner would have the power to consider that matter. Now, it is clear on the record that the Income-tax Officer never considered this matter in the assessment year 1947-48. Strangely enough, as the record shows, he did consider it in the assessment year 1946-47 when it was unnecessary for him to consider it because the receipt did not fall in that assessment year; and the opinion then expressed by him was that this payment could not be treated as a business receipt. Now, if his successor had expressed the same opinion for the assessment year 1947-48, then undoubtedly the Appellate Assistant Commissioner could have refused to accept that opinion and brought this amount to tax. In our opinion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... habad High Court in case of Dr Shashi Kant Garg, reported in (2006) 152 Taxmann 308 10.2. It has been urged in written submission by Ld. Cousnel that nonotice has been issued u/s 251(2) of the Act. However, Ld.Sr.DR placed on record before us today, copy of order sheet entry recorded during appellate proceedings dated 08.03.2006, where representative of assessee admits to acceptance of notice u/s 251(1). Relevant portion of order sheet entry is reproduced herein below: 10.3. In view of afore stated discussions and analysis of background relating to issuance of notice of enhancement under section 251(1) of the Act, and applying ratio laid down by Hon ble Supreme Court and various High Court to facts of present case, we are of considered opinion that, enhancement notice has been issued on an issue which was subject matter during assessment proceedings, details of which are already placed on record by assessee itself. We thus hold that Ld.CIT (A) has rightly exercised powers under section 251 (1) of the Act. 10.4. Accordingly Ground No. 1-2.4 raised by assessee stands dismissed. 11. Ground No. 3-3.2 is in respect of disallowance of expenditure amounting to ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Subcontractor Services 15,92,90,000 Such expenses were incurred towards sub-contracting of a part of research activities Depreciation Amortisation 8,27,41,000 Such expenses were incurred towards normal wear and tear of fixed assets Interest 13,33,54,000 Such expenses were incurred towards unsecured loans borrowed by the Appellant Total: 1,02,52,32,000 13. He placed reliance upon decision of Hon ble Supreme Court in case of Bombay Steam Navigation Co (1953) (P.) Ltd., vs. CIT reported in (1965) 56 ITR 52. 14. On the contrary, Ld. Sr.DR placed reliance upon the orders of authorities below. 15. We have perused submissions advanced by both sides in the light of records placed before us. 16. It is observed that, expenditure incurred by assessee is in its normal course of business. Further, it is also not disputed that assessee has been remunerated as per contract, under which assessee is required to incur expenditure. Ld. AO/CIT(A) did not dispute th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee to own research conducted/carried out, in its ordinary course of business activity for claiming deduction. Similar view has been taken by following decisions as relied upon by Ld.Counsel: i. Dy.CIT vs. Fortis Clinical Research Ltd. (2012) 27 taxmann.com 4 (Del ITAT) ii. Quintiles Research (India) (P) Ltd. vs. DCIT (2016) 74 taxmann.com 228 (Guj. HC) iii. Pro.CIT vs. B.A.Research India Ltd. (2016) 70 taxmann.com 268 (Guj. HC) iv. Siro Clinpharm (P) Ltd. vs. DCIT (2014) 49 taxmann.com 62 (Mumbai ITAT) 24.We therefore, direct Ld. AO to grant deduction under section 80 IB (8A) of the Act as per law to assessee. Accordingly Ground nos. 4 - 4.1 raised by assessee stands allowed. 25.Ground No. 5-5.1 is in respect of disallowance of payments made towards sub-contracting part of research work to the sister concern by invoking provisions of section 80 IB (13) read with ATI A (10) of the Act. 26. At the outset Ld.Counsel submitted that identical issues on similar facts and circumstances based on same agreement has been decided by this Tribunal in assessee s own case for A.Y. 2008-09 and 2009-10 vide order dated 27/07/18 in ITA No. 3464 -3465/Del/2014 and 3466-3467/D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than ordinary profits which might be expected to arise in such eligible business. Thus, it is evident that a mere close connection between the two assessees is not conclusive for invoking the provisions of section 80IB(13) read with section 80IA(10). Rather, it is simply a starting point for unfolding if the assessee has shown more than normal profits in its hands so as to claim higher amount of deduction. The Assessing Officer is enabled to abandon the profit declared by the assessee and substitute it with a reasonable profit only on demonstrating that the arrangement between the two assessees is such that the assessee claiming deduction has been shown to have earned more than the ordinary profits which might be expected to arise in such eligible business. It is, therefore, essential that the Assessing Officer must first positively illustrate that the profit declared by the assessee from the transaction with its connected concern is more than the one ordinarily earned from such transactions. The expression more than the ordinary profits' is a relative term which needs to be depicted with reference to the ordinary profits. If ordinary profit from a transaction is ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised on JB and such percentage is 36% in the invoice raised by the assessee on Eli Lilly Co., USA. If reimbursement on account of chemicals is removed from both the sets of invoices, what remains is that the assessee charged I lac USD from IB and for similar work, it charged ' 1,33,333 USD from Eli Lilly Co., USA. Thus, it is proved that the rate charged by the assessee from JB for similar work is lower than the rate charged by it from Eli Lilly Co., USA. In other words, the assessee has earned lower income from JB than it earned ordinarily from unrelated parties. 8. When we again come back to section 80IA(10), which has been invoked by the Assessing Officer, the tables get turned in the sense that the income earned by the assessee from its connected company, namely, JB is less than the ordinary profits, being, the amount charged by the assessee from Eli Lilly Co., USA. Under these circumstances, it becomes evident that the provisions of section 80IA(10) are not triggered. If we ignore this aspect, there is nothing in the assessment order to substantiate the claim of the Revenue that the assessee charged exorbitantly from JB so as to divert income from loss making JB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrary, placed reliance upon orders passed by authorities below in support of his contentions and reiterated argument reproduced hereinabove in respect of each ground. 33. We have perused submissions advanced by both sides in light of records placed before us. We also observe that, facts in respect of all other A.Ys under consideration are similar to the one that has been considered in detail hereinabove. The issues raised by assessee are also similar and identical. 34. We therefore following same observations and views taken hereinabove dismiss ground raised by assessee in respect of challenge against the issuance of notice under section 251 (1) by Ld.CIT(A), and allow other grounds relating to expenditure/deductions claimed by assessee. In the result appeals filed by assessee in all the years under consideration before us stands partly allowed. ITA Nos. 2759 2760/Del/18 (A.Y.-2013-14 2014-15) ITA 2757 2758/Del/18 (A.Y.-2012-13 2013-14) 35. These are penalty appeals filed by assessee are in respect of levy of penalty under section 271 (1) of the Act on disallowance of expenditure made by Ld. CIT (A) in all years under consideration. 36. As we have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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