TMI Blog2010 (11) TMI 147X X X X Extracts X X X X X X X X Extracts X X X X ..... rect, incurred in relation to exempt income and for this purpose the Assessing Officer must adopt a reasonable basis consistent with all the relevant facts and circumstances and after allowing opportunity of hearing to the assessee - issue remanded back to CIT(A) Addition of Rs. 55,36,200 made by Assessing Officer on account of estimated net profit - Held that: The Assessing Officer has rejected the accounts and made the estimated addition on the ground that income declared in the original return did not match with the audited accounts for assessment year 2005-06. The approach adopted by the Assessing Officer is not correct. The assessee had revised the return suo motu on the ground that the original return had been filed on the basis of audit report of assessment year 2004-05. Therefore the income declared in the revised return has to be matched with the audited accounts for assessment year 2005-06. - Addition made by AO is not sustainable. - 1034 and 1739 (MUM.) of 2009 - - - Dated:- 19-11-2010 - N.V. VASUDEVAN, RAJENDRA SINGH, JJ. Rajan R. Vora, Manoj Anchalia and Nikhil Tiwari for the Appellant. S.P. Prasad for the Respondent. ORDER Rajendra Singh, Accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee disputed the decision of the Assessing Officer and submitted before CIT(A) that the expenditure of Rs. 14.89 lakhs had been incurred on out-sourcing of clinical trials and bio-equivalence to know about the product efficacy and its effects on human and animals as the facilities were not available in the in-house R D set up. These specialized tests had to be got conducted from outside but these activities were part of scientific research. CIT(A) however did not accept the contentions raised. It was observed by him that weighted deduction under section 35(2AB) had been provided in order to give incentive for in-house R D work and since the assessee did not have the R D facility for clinical trials and bio-equivalence, the expenditure incurred on out-sourcing of facilities could not be allowed. CIT(A) therefore confirmed the disallowance aggrieved by which the assessee is in appeal before the Tribunal. 2.3 Before us the Learned AR for the assessee argued that clinical trial was an integral part of any scientific research relating to drugs and pharmaceutical and therefore the expenditure incurred on such trials had to be allowed under section 35(2AB). It was also sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntegral part of scientific research in pharmaceutical industry and this position had also been clarified in the Explanation to section 35(2AB). The expenditure should therefore be eligible for weighted deduction. It has also been argued that in case the expenditure is held not allowable the Explanation would lose its relevance. 2.6 We are unable to accept the arguments raised by the Learned AR of the assessee. Under the provisions of section 35(2AB)(1), the expenditure incurred on scientific research on in-house research and development facility is eligible for weighted deduction. It is very clear from the plain reading of the provision that for an expenditure to be eligible for weighted deduction it must be incurred on (i) scientific research and (ii) on in-house research and development facility approved by the prescribed authority. The phraseology used is on in-house research or development facility and not by in-house research and development facility and therefore only the expenditure incurred on in-house research can be allowed under section 35(2AB) and not any expenditure incurred outside such facility. What the Explanation to section 35(2AB)(1) has clarified is that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also be eligible. 2.8 The Learned AR for the assessee has also placed reliance on the judgment of Hon ble High Court of Gujarat in case of Claris Lifesciences Ltd. (supra). The said case in our view is distinguishable and not applicable to the issue raised in this appeal. In that case, in-house research and development facility had been approved with effect from 27-2-2001. The Assessing Officer in the assessment order held only the expenditure incurred from 27-2-2001 would be eligible for deduction. On appeal the Tribunal held that the intention of the Legislature was clear that entire expenditure incurred on in-house research and development facility if approved has to be allowed. It was accordingly held that once the approval had been granted the assessee will be entitled for deduction in respect of the entire expenditure but not only the expenditure incurred after 27-2-2001. There was no issue before the Tribunal as to whether expenditure incurred outside the approved in-house R D facility can be allowed. The Learned AR has also placed reliance on the decision of Tribunal in case of Bharat Bio Tech International (P.) Ltd. (supra). In that case expenditure on clinical trial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment income which was exempt. The Assessing Officer had made disallowance on proportionate basis. CIT(A) has however held that the disallowance has to be made under rule 8D which has retrospective application in view of the decision of the Special Bench of the Tribunal in case of Daga Capital Management (P.) Ltd. (supra). However the said decision of the Special Bench has not been upheld by the Hon ble High Court of Mumbai in case of Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT [IT Appeal No. 626 of 2010]. The Hon ble High Court in the said case have held that Rule 8D was not retrospective and that the same would apply only from assessment year 2008-09. In respect of prior period, Hon ble High Court held that the Assessing Officer was duty bound to determine the expenditure, whether direct or indirect, incurred in relation to exempt income and for this purpose the Assessing Officer must adopt a reasonable basis consistent with all the relevant facts and circumstances and after allowing opportunity of hearing to the assessee. In this case the Assessing Officer had made the disallowance adopting a particular basis on which CIT(A) has not given any finding. He has followed Rule 8D whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant audit report in which no defects were pointed out. The profit declared by the assessee was also better than that of the immediate preceding year. Therefore CIT(A) did not uphold the estimated addition made by the Assessing Officer and the same was accordingly deleted. Aggrieved by the said decision the revenue is in appeal before the Tribunal. 4.3 We have heard both the parties, perused the records and considered the matter carefully. The dispute is regarding estimated addition made by the Assessing Officer to the net profit. The Assessing Officer has rejected the accounts and made the estimated addition on the ground that income declared in the original return did not match with the audited accounts for assessment year 2005-06. The approach adopted by the Assessing Officer is not correct. The assessee had revised the return suo motu on the ground that the original return had been filed on the basis of audit report of assessment year 2004-05. Therefore the income declared in the revised return has to be matched with the audited accounts for assessment year 2005-06. No discrepancy in this regard has been pointed out. We also find that both net profit and operating profit decla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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