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TMI Blog2014 (12) TMI 298X X X X Extracts X X X X X X X X Extracts X X X X ..... lved in these appeals is common in nature, they are clubbed together, heard together and are being disposed of by this common order for the sake of convenience. 3. The issue common in these appeals is relating to allowability of deduction u/s. 35(1) of the Income-tax Act, 1961 said to have been incurred on product development with reference to scientific research activity. For the A.Y. 2006-07 the assessee claimed product development expenditure being interest on loans amounting to Rs. 1,19,97,767 and cost of consumables amounting to Rs. 1,31,80,372 totalling to Rs. 2,51,16,139 u/s. 37(1) of the Act. Similarly, for A.Y. 2007-08 the assessee claimed product development expenditure being interest on loans amounting to Rs. 1,13,78,502 and cost of consumables amounting to Rs. 1,21,30,620 totalling to Rs. 2,35,09,122. Likewise, for A.Y. 2008-09 the assessee claimed product development expenditure at Rs. 88,64,051 u/s. 35(1) of the Act. 4. The Assessing Officer disallowed the above expenditure on the reason that the above expenditure is in the nature of capital expenditure as capitalised in the books of account of the assessee and it is not revenue expenditure, though the assessee plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to Rs. 2,51,16,139. 6. The CIT(A) further observed as follows: "There is no dispute as to the fact of incurring these two items of expenditure in the course of assessee's continuing business. The assessee claimed these two items of expenditure in the computation of total income, albeit without quoting any section. The Assessing Officer presumed the claim to be u/s 37(1) and disallowed it on the ground that the expenditure was /aid out in the course of development of new vaccines and for the purpose of setting up of facilities for the manufacture of new products, would result in obtaining patent right, bring enduring benefit and advantage to the assessee and thus is of capita/ in nature. There is no doubt that the expenditure was /aid out by the assessee for the purpose of developing lysostathin, insulin and vaccine for hepatitis-A. The expenditure was approved for these research and development projects by the reputed organizations like /08/, ICICI Bank and CSIR. A perusal of the sanction letters of these institutions reveals that these are the funding programmes to assist collaborative research and development and technology projects in biotech, health care etc., areas. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search and development in new products which would facilitate extension of the assessee's business to develop new vaccines." 9. The CIT(A), after considering the nature of expenditure involved i.e. the interest payments on the funds borrowed for further research and development programme and the cost of chemicals and other consumables utilized in the research programme, he held that the same constitutes revenue expenditure and is thus allowable expenditure u/s 35(1)(i). 10. The CIT(A) observed that the assessee is a company carrying on scientific research and the research and development expenditure incurred in question relates to scientific research and therefore, assessee is eligible for deduction u/s 35 (I)(i) read with Clause (iii) of sub-section 4 of section 43. The CIT(A) held that even if Assessing Officer's view that the expenditure in question is capital in nature, it is still covered by clause (iv) of sub-section 1 of section 35 read with sub-section 2(ia) of section 35 which specifically allows any expenditure of a capital nature on scientific research carried on by the assessee. Thus, he held that the assessee is eligible for deduction u/s 35. Further, he obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and may yet have valid reasons justifying each of the two view points. The amount spent on the project reports was not for the purpose of facilitating the assessee's existing trading operations or enabling management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched. If only the project reports had been successfully accepted and put into implementation, the assessee would have gone into manufacturing of a new product which would have certainly required investment of fresh capital and coming into existence of additional fixed assets. The expenditure was, therefore, attributable to capital having been incurred with a view to bringing an asset or advantage into existence and having enduring benefit. Merely because the project did not materialise, the nature of the expenditure would not change to revenue." 12. Further the DR relied on the judgement of AP High Court in the case of Hylam Ltd. v. CIT (1973) 87 ITR 310 (AP) wherein it was held that "acquisition of knowledge in respect of new product although of an allied nature to the products that are already being manufactured by the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) KDL Biotech Limited vs. ITO (ITA No. 7257/MUM/2004) wherein the Mumbai Tribunal held that accounting treatment followed by the assessee in its annual accounts is irrelevant for allowance of deduction u/s 35 (1)(iv) and entire R&D expenditure is allowable in the year of incurrence itself. (b) Tube Investments of India Ltd. v. CIT (125 Taxman 421) (Mad), wherein it was held that mere fact of a claim not having been found admissible under section 35(2B) will not constitute a bar to allowance of expenditure under section 35(1)(iv) if that expenditure is capital expenditure and falls squarely within the ambit of section 35(1)(iv). (c) Commissioner of Income Tax vs Rane Brake Linings Limited (255 ITR 395), wherein it was held by the Hon'ble High Court of Madras that expenditure of a capital nature incurred by the assessee must be allowed under section 35 (1)(iv). (d) Further, he submitted that section 35 (1) (iv) uses the words "expenditure of a capital nature" which phrase has wider import of meaning rather than the words "capital expenditure" used in section 35(1)(i) and thus would bring in its purview all expenditure which are treated to be capital in nature per the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment of deduction u/s. 35(1) of the Act. While maintaining our order on the main issue with regard to allowability of deduction u/s. 35(1), we consider it necessary to hear both the parties on applicability of provisions of s. 35(3) of the Act. Accordingly, we amend the Tribunal order to that extent and direct the Registry of the Tribunal to post these cases for hearing on 6.10.2014 for the limited purpose of deciding the issue of applicability of provisions of s. 35(3) of the Act. The final result of the Revenue appeal will depend upon the outcome of adjudication of issue relating to applicability of provisions of s. 35(3) of the Act by the Tribunal. In the result, all the MA filed by the assessee are partly allowed." 18. The cases now have been posted for hearing before us to decide the Revenue appeals on the issue of applicability of provisions of s. 35(3) of the Act. 19. The learned counsel submitted that the process of isolation and characterization of virus/bacteria from the affected humans/ animals. is the first step for development of new vaccines or bio-therapeutics, subsequent to this, the same need to be tested and further developed in a highly controlled envir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons at appropriate stages the product would be commercialized if it is feasible to produce the same commercially. It is pertinent to submit that the product may prove to be a failure at any stage including the stage of commercialization." 21. Therefore, it is submitted that the entire process of development from the stage of isolation of virus/molecule and establishing the same as fit for further development of product at pilot scale to commercial scale involves very long and indepth scientific research. 22. The learned counsel submitted that the Assessing Officer has not alleged that the activity of development from the stage of virus/molecule to the stage of vaccine is not Scientific Research. The learned Commissioner (Appeals) after observing the entire process, mentioned various stages of product development in Para 4.0 of his order and held that the product development expenditure is related to scientific research by way of research and development of the new products which could facilitate the extension of the business of the assessee to develop new vaccines. It is further submitted that the scientific research of the assessee is in connection to facilitate the extension of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w useful discovery or mode of manufacture that he shall be entitled during a limited period to the exclusive use and benefit thereof. Therefore, it is respectfully submitted that the learned Assessing Officer, after examining the material submitted in respect of development of the three products I.e. Human Pro insulin, Hepatitis A virus and Lisostaphin, held that these molecules when successfully developed will yield patent rights to the assessee i.e., in other words the Assessing Officer states that in respect of these products the assessee will be the inventor or first producer of the product. Therefore, it is submitted that the expenditure incurred for developing the product is towards invention of a new product i.e. the expenditure incurred is for scientific research therefore, eligible for deduction u/s 35 of the IT Act. This fact of observation by the Assessing Officer is also recorded by the Hon'ble Bench in Para 3 of their order however, inadvertently no attention was paid in respect of this observation of the Assessing Officer regarding obtaining of patent rights. Therefore, it is respectfully submitted that there is a mistake apparent from record in respect of not all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that there is a mistake apparent from record as provided in section 254 (2) of the IT Act, which is to be cured by the Hon'ble Bench. In case the Hon'ble Bench needs any further information the under signed is obliged to furnish the same. 28. The learned counsel also submitted that the definition of scientific research as provided u/s. 43(4)(iii). The AR relied on the decisions in the cases of Ayushakti Ayurved (P.) Ltd. vs ACIT (37 SOT 313), Transweeigh (India) Ltd. vs ITO (22 SOT 338) (MUM.), Enem Nostrum Remedies (P.) Ltd Vs ACIT, 119 ITD 427 (MUM.), wherein the definition of scientific research u/s. 43(4)was analysed. It was submitted that the activities carried out by the assessee squarely falls within the definition of scientific research u/s. 43(4) and would further fall within the subsections of s. 35 to be fully allowable by the claim as scientific research expenditure. 29. We have heard both parties. We are of the opinion that the assessee's case squarely covered by the decision in the case of Enem Nostrum Remedies (P.) Ltd (supra) wherein it was held as follows: "Section 43(4) defines the meaning of 'scientific research. So, in order to avail, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a so developed accorded with the requirements of the parent company. It was obvious that nothing more or less than the order given by the parent company would be acceptable as the end product of the assessee's research in the form of the new formulation which must necessarily match with the order placed. The formula so developed by the assessee, was, thereafter, utilized by Nostrum, USA for the extension of its business. The assessee's activity was facilitating the extension of business of Nostrum, USA and not that of its own. The situation would have been otherwise if the assessee had been engaged in the pharmaceutical business and had utilized the scientific research carried out by it in its business of producing tablets, etc., in which case it would have been qualified for deduction within four corners of said clause. Thus, the Commissioner (Appeals) had correctly proceeded in holding that the assessee was not eligible for deduction under section 35(1)(iv). [Para 11]" 30. It has also been brought to our notice by the learned counsel that in respect of development of three products Human Pro insulin, Hepatitis A virus and Liso staphin it has been held that these molecule ..... X X X X Extracts X X X X X X X X Extracts X X X X
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