TMI Blog2013 (7) TMI 1080X X X X Extracts X X X X X X X X Extracts X X X X ..... 37(1) of the Act. Similarly, for A.Y. 2007-08 the assessee claimed product development expenditure being interest on loans amounting to ₹ 1,13,78,502 and cost of consumables amounting to ₹ 1,21,30,620 totalling to ₹ 2,35,09,122. Likewise, for A.Y. 2008-09 the assessee claimed product development expenditure at ₹ 88,64,051 u/s. 35(1) of the Act. 3. 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 pleaded that the assessee incurred this expenditure on research and development conducted by the assessee in the recognised in-house facility and product development was conducted by the assessee. The assessee taken a plea that with reference to the product research and development, it is working on three molecules viz., Lysostaphin, Insulin and vaccine for Hepatitis A. For these products the Government of India, Council for Scientific and Industrial Research (CSIR) sanctioned loan of ₹ 5.6 crores. Similarly IDBI Ltd., had sanctioned a term loan of ₹ 10 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n obtaining patent right, bring enduring benefit and advantage to the assessee and thus is of capital in nature. There is no doubt that the expenditure was laid out by the assessee for the purpose of developing Iysostathin, insulin and vaccine for hepatitis-A. The expenditure was approved for these research and development projects by the reputed organizations like IDBI, 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 is seen that in multi-stage development of vaccines/bio-pharmaceuticals, the biotech companies have to develop vaccines/pharmaceuticals in various stages to reach the successful outcome. If, the company fails at any intermediate stage, or does not become successful, either at clinical tests stage or at laboratory scale or commercial scale viability, the project fails and the expenditure incurred in the process is written off. On these facts, it cannot be said that the assessee would derive some enduring advantage in future. The expenditure incurred by the assessee is not on setting u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it under section 37(1). 8. 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 (l)(i) read with Clause (iii) of sub-section 4 of section 43. 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 observed that the Assessing Officer's report shows that he is under the impression that once the assessee makes a claim u/s 35(2AB), it is not eligible for an independent claim u/s 35(1). In this context, it is observed by the CIT(A) that section 35(2AB) allows weighted deduction in respect of expenditure incurred by a bio-tech company in its in-house R D. Whereas, the deductions allowable for any company carrying on scientific research, even by way of collaborative rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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. 10. Further he relied on the judgement of AP High Court in the case of Hylam Ltd. (supra) 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, would amount to the acquisition of an advantage or an asset for the extension of the assessee's business. 11. On the other hand, the learned AR submitted that the expenditure of the nature claimed by the assessee is under Product Development Expenditure is of revenue in nature as the expenditure claimed is expenditure of interest and consumables incurred by the assessee in relation to research and development and would fall under the ambit of expenditure on Scientific Research and thus would qualify as eligible expenditure to be claimed u/s 35 (1)(i) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT v. Rane Brake Linings Ltd. [2003] 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 Income Tax Act, 1961. In this case, since these expenditure are treated as capital in nature, the claim would squarely fall within the purview of claim allowed u/s 35 (1) (iv) and thus needs to be allowed. 13. The AR brought to our notice the definition of Scientific Research as provided u/s 43(4), which is reproduced hereunder: (i) Scientific research means any activities for the extension of knowledge in the field of natural or applied science including agriculture, animal husbandry or fisheries; (ii) References to expenditure incurred on scientific research include all expenditure incurred for the prosecution, or the provision of facilities for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployed by cement and steel companies and other companies engaged in the infrastructure products. It is also noted that company is having technical collaboration for up-gradation and improvement and development of new products. It is also noted that the company also customizes its equipments based upon the specific request of particular customer to that effect. It has also been stated that R D activities is a part of its business activities so as to remain competitive and qualitative in its line of business. We have also perused the nature of expenses which mainly comprise of salaries, travelling (including foreign travel), raw materials, consumables, hardware etc. It is also noted that in house research and development facilities have also been recognized by the Government of India though such recognition is subject to the condition that the assessee has to claim the deduction as per the provisions of Income-tax Act, 1961. However, this fact of recognition by itself means that assessee is carrying out certain R D activities. Now, coming to the definition of scientific research as provided under section 43(4) of the Act, we find that the activities carried on by the assessee have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... class of business' to include 'any scientific research which may lead to or facilitate an extension of that business or as the case may be, all businesses of that class'. The harmonious construction of these provisions clearly indicates that there should be a 'business carried on by the assessee' and the scientific research should relate to that business which is carried on by the assessee. It nowhere suggests that the 'business of carrying on scientific research' is covered within the ambit of this provision. Again, the reference to the 'extension of that business' in section 43(4)(iii) clearly divulges that the scientific research so done by the assessee should contribute to the extension of business carried on by it. It is not akin to the extension of the business of scientific research. For example, a pharmaceutical company may be selling a particular tablet meant for curing headache within an hour from its consumption. When it undertakes scientific research and invents a formula by which the new tablet would cure the headache within 10 minutes, the scientific research leading to the invention of such new tablet, would certainly lead to or fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the reason that this relates to payment of interest on loan and cost of consumables. This is in the nature of capital expenditure and not relating to scientific research undertaken by the assessee and also the same was capitalised by the assessee in its books of account. It is true that entries in the books of account are not conclusive when it comes to computing income under the Income-tax Act, 1961 but it cannot be said that they are totally irrelevant. In the present case, the dispute is as to whether the assessee will get the benefit of deduction u/s. 35(1)(i) or not. 20. The learned counsel for the assessee also submitted that as per section 35(1)(iv) of the Act deduction in respect of any expenditure of a capital nature on scientific research relates to the business carried on by the assessee is to be allowed in the year in which such expenditure is incurred. The whole of the capital expenditure incurred in a previous year is allowable as deduction against the income, if any, for that previous year. The definition of the term scientific research as per section 43(4) of the Act is as follows: '(i) scientific research means any activities for the extension o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred on interest payment and consumables before completion of product development of a product and commercialisation of that product, the expenditure incurred on such development is to be treated as capital expenditure only. 23. Further, the plain reading of the above cl. (iv) of s. 35(1) reveals that the deduction shall be admissible under s. 35(2) when any expenditure is capital in nature; such capital expenditure is incurred on the scientific research; that scientific research must be related to the business; and that business must have been carried on by the assessee. Further, said clause presumes that there exist two distinct activities with the assessee such as: (a) business carried on by the assessee; and (b) conducting scientific research related to the said business. Both these activities must relate to each other. Further, the words 'carried on by the assessee' used in the said clause shall mean 'to continue by the assessee', or 'to engage in the activity' by the assessee. Therefore, effectively, these words indicate the engagement of the assessee in the business. What is the definition of 'scientific research' and what is 'scient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the assessee's business. Further, we find that the said provisions of ss. 35(1)(iv) and 35(2)(iv) are unambiguous in matters of their language meaning and intention and there is no need to supply additional words. In our opinion, the deduction under s. 35 is not intended to the assessee, who does not develop the in-house scientific research activities. Further, the presence of specific references to 'related to business carried on by the assessee' in the provisions and the inclusive definition given to the same in s. 43(4)(iii)(a), convey that it is not a case of casus omissus too. 24. In the light of the above scope of the provisions, we examined the facts of the case and the arguments of the assessee's counsel that conducting scientific research is the business of the assessee and thus, the said research is related to the business carried on by the assessee. In the present case, the expenditure claimed by the assessee as deduction has nothing to do scientific research. On the other hand, it was incurred for setting up of facilities for commercial production of a new product. In such circumstances, the assessee, in our considered opinion, cannot be said to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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