TMI Blog2016 (8) TMI 1525X X X X Extracts X X X X X X X X Extracts X X X X ..... king necessary verifications to his satisfaction, and only on being convinced that no part of the said Patent expenses had in the said preceding years been allowed as a revenue expenditure in the hands of the assessee company, therein rework the entitlement of the assessee company towards deprecation on Block of assets- Patent expenses - Assessee ground allowed for statistical purposes. Disallowance of deduction U/s 35(2AB) - entitlement of the assessee company as regards weighted deduction u/s 35(2AB) - HELD THAT:- As find ourselves to be in agreement with the Ld. A.R and are of the considered view that as the aforesaid expenses had been incurred by the assessee company on the scientific research pertaining to its business of manufacturing pharmaceutical formulations (not being expenditure in the nature of cost of any land or building) on in-house research and development facility approved by the prescribed authority, therefore the same in the absence of any fact which could go to prove that the said claim of expenditure by the assessee company on rent and repairs does not pertain to the R D premises, or the professional and legal charges has no nexus with the scientif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire claim of depreciation of ₹ 10,64,618, and in restricting it to ₹ 5,19,181/- i. e. the depreciation of the current year, without appreciating that the depreciation in respect of patent expenditure treated as capital by the department in earlier years and which treatment had attained finality was also to be allowed. 3. The learned CIT (A) erred in confirming the action of the A.O in restricting the claim under section 35(2AB) to ₹ 737.17 lakhs as against the claim of ₹ 750.95 made by the appellant on the ground that it was not approved by Ministry of science and technology (DSIR) to the extent of 13.78 lakhs. 4. The learned CIT (A) failed to appreciate that the appellant has fully demonstrated that the said expenditure incurred were directly necessary to facilitate or carry on scientific research and therefore the parameters of section 35(2AB) were satisfied. 5. The learned CIT (A) erred in confirming the addition of ₹ 13,04,375/- on account purchase of electrical material which was capitalized by the appellant 6. The learned CIT (A) has erred in confirming the addition made by AO which was primarily based on the information recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to justify its claim as regards allowance of the same as a Revenue expenditure , in compliance whereto the assessee company emphasised on its claim as regards allowability of the said amount as a revenue expenditure, but thereafter came up with an alternative plea that in case of treatment of the same as a Capital expenditure , depreciation of ₹ 10,64,618/-was to be allowed as regards the capitalized value of the Patent expenses pertaining to the year under consideration, as well as those for the preceding years. The A.O discarding the contention of the assessee company and being of the view that as per Explanation 3 to Section 32(1)(ii) of the Act , the patents were covered in the scope and gamut of the definition of intangible assets, therefore the expenses incurred as regards the same was a 'capital expenditure', disallowed the claim of ₹ 20,76,724/- of the assessee company, but on the basis of such recharacterisation of the aforesaid expenditure as a capital expenditure , allowed a consequential depreciation of ₹ 5,19,181/- on the aforesaid capitalized value of ₹ 20,76,724/- (supra) to the assessee company . (ii). Disallowance of deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, coupled with the fact that in light of the specific information received by the investigation wing of the department and the sales tax authority that the aforesaid supplier party i.e. M/s Yashita trading company Pvt. Ltd.(supra) had in itself admitted that it was involved in the practice of providing paper entries and had only provided the accommodation entries to the assessee company, thus in light of the aforesaid state of facts as they so remained, therein concluded that the assessee company had indulged into booking of 'bogus purchases' in its Books of accounts . The A.O further adverting to the specific claim of the assessee company that as it had purchased 'fixed assets' viz. electrical material from the aforesaid supplier party, therefore addition of the entire amount of ₹ 13,04,375/-(supra) could not be made in its hands, therein observing that the additions as claimed to have been made by the assessee company towards 'fixed assets' during the year under consideration, on examination were neither found to be reflected in the assets categorised under the head 'electrical fittings', nor under the other heads of assets, thus being of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressing its income, therein observed that in light of the fact that the assessee company had failed to establish the genuineness and veracity of the purchases claimed to have been made from M/s Yashita trading company private limited (supra) and thus failed to discharge the Onus as stood cast upon it, coupled with the fact that the information received by the A.O from the investigation wing of the Income tax Department as well as the Sales tax Department, Government of Maharashtra, revealed that M/s Yashita trading company Pvt. Ltd. (supra) was admittedly an accommodation bill provider and no genuine purchases had been carried out by the assessee company from the said concern, therein sustained the adverse inferences drawn by the A.O as regards the genuineness and veracity of the purchase transactions in the hands of the assessee company. The CIT(A) further endorsing the observations of the A.O that as the purchases under consideration from the aforesaid party, as claimed by the assessee company to have been made towards additions in the 'fixed assets' during the year under consideration, on examination were neither found reflected in the assets categorised under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D.V of the Patent expenses as on 01/04/2008, and those incurred during the said year. It was thus submitted by the Ld. A.R that as the department in the case of the assessee company had consistently taken the view that expenditure incurred towards 'Patent expenses' is in the nature as that of a capital expenditure and as a result thereof had allowed depreciation on the same, therefore the same would result in amortisation of the expenditure over a period, instead of the same being allowed in the year of incurring of the expenditure. Thus in light of the aforesaid factual background it was averred by the Ld. A.R that the lower authorities had erred in not allowing depreciation as regards the Patent expenses which had been capitalised in the preceding years and had wrongly restricted the same only as regards those incurred during the year under consideration. The Ld. A.R in order to fortify his quantification of depreciation at ₹ 10,64,618/-(supra), as against the depreciation of ₹ 5,19,181/-(supra) allowed by the lower authorities, drew our attention to Page 11 of the APB , wherein the calculation as regards the year wise incurring of expenditure towards pat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.R in order to drive home his contention therein placed reliance on the order of the Hon ble Income tax appellate tribunal, Ahemdabad bench, in the case of : ACIT Vs. Torrent pharmaceuticals Ltd [28 CCH 783 (2009)]. The Ld. D.R on the other hand relied on the orders of the lower authorities and therein submitted that the entitlement of the assessee company towards deduction u/s 35(2AB) was liable to be restricted to the amount approved by the Prescribed authority . It was thus submitted by the Ld. D.R that the order of the CIT(A) be sustained and the appeal of the assessee company as regards the said issue under consideration be dismissed. 4.2. That the Ld A.R further challenging the sustaining of the addition of ₹ 13,04,375/-(supra) by the CIT(A) as regards 'bogus purchases', therein submitted that the assessee company had carried out purchases of ₹ 13,04,375/- (supra) towards purchase of fixed assets (electrical material from the concerned supplier party, i.e M/s Yashita trading company Pvt. Ltd), which inadvertently had been capitalized under the head Factory building . The Ld. A.R in order to substantiate his aforesaid contention, therein took us thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. 5. We have considered the rival submissions of either side and perused the relevant materials on record, including the orders of the authorities below. That as regards the issue pertaining to the expenditure incurred by the assessee company towards Patent expenses , we though are persuaded to be in agreement with the observations of the lower authorities that in light of clearly worded Sec. 32(1)(ii) of the Act , which reads as under:- 32(1). In respect of depreciation of (ii).Know how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998 there can be no escape from the conclusion that the Patent expenses incurred by the assessee company takes the color and character as that of a capital expenditure, on which capitalized value the assessee company would stand duly entitled towards depreciation, as a result whereof the same would result in amortisation of the said expenditure over a period, instead of the same being allowed in the year of incurring of the expenditure, but however are unable to subscribe to the view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessee had claimed deduction in respect of depreciation while computing his total income, or not, the same shall mandatorily be considered to have been given effect to, we are thus of the considered view that pursuant to the recharacterisation of the patent expenses as Capital expenditure by the A.O, the assessee company as a result thereof was entitled towards depreciation on the Block of assets- Patents , i.e not only as regards the capitalized value of the Patent expenses pertaining to the year under consideration, but also as on the Opening W.D.V of those pertaining to the preceding years, to the extent the same had been capitalised in the said preceding years. We thus restore the issue to the file of the A.O with a direction that the entitlement of the assessee company towards deprecation on the capitalized value of the Patent expenses be computed and therein given effect to in light of our aforesaid observations, to which the Ld. D.R is in agreement. However, before parting, we are of the view that though the assessee company had drawn our attention to the relevant extract of the assessment order passed in its case u/s 143(3) for the immediately preceding year, i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;Prescribed authority . We are of the considered view that the lower authorities had absolutely misconceived and misinterpreted the scope and gamut of the weighted deduction contemplated u/s 35(2AB) of the Act . That as per the mandate of Sec. 35(2AB) of the Act , an eligible assessee company which incurs any expenditure on in-house research and development facility (not being expenditure in the nature of cost of any land or building) as approved by the prescribed authority, is entitled for deduction contemplated therein, subject to the condition that it enters into an agreement with the prescribed authority for co-operation in such research development facility and audit of the accounts maintained for that facility, and submits with the Prescribed authority by 31 st day of October of the relevant assessment year the details as regards the expenditure incurred by it on the in-house research and development facility, on the basis of which the Prescribed authority records its approval and submits the details of the expenditure approved to the Director General (Exemptions) in Form 3CL . Thus a bare perusal of Sec. 35(2AB) reveals that what is required to be approved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee company, we are of the considered view that such a stray observation recorded for the first time by the CIT(A), without even confronting the same to the assessee, at the threshold on the said count itself is liable to be vacated. However, independent of the aforesaid factual position, the Ld. A.R submitted before us that as the rent and repair expenditure so claimed by the assessee company as forming part of the eligible amount entitled for claim of deduction u/s 35(2AB) of the Act , in itself pertained to the premises at which the research and development facility was located, as well as the legal and professional charges had been incurred in the course of and to facilitate the scientific research, therefore the said nature of the expenses read in light of the underlying purpose behind incurring of the same, ipso facto established beyond any scope of doubt the inextricable nexus of the said expenses and the scientific research activities of the assessee company, as regards which no infirmity had ever been pointed out by the A.O. The Ld. A.R in support of his aforesaid contention placed reliance on the order of a coordinate bench of the Tribunal in the case of :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation so received and being of the view that the assessee company had failed to discharge the onus as stood cast upon it as regards proving the genuineness and veracity of the purchase transactions under consideration, therein hushed through the matter and made an addition of the entire purchases of ₹ 13,04,375/-(supra) in the hands of the assessee company, which thereafter was sustained by the CIT(A). We have given our thoughtful consideration to the facts of the case and though find ourselves to be in agreement with the lower authorities that the assessee company had failed to have effected strict compliance of the directions of the A.O, and majority of the queries and compliances sought for by the A.O did never see the light of the day, thus it could safely be held that the assessee company had failed to discharge the onus as stood cast upon it as regards proving the genuineness and veracity of the purchase transactions under consideration, but thereafter the lower authorities before arriving at any conclusion, remained under a statutory obligation to consider the explanation of the assessee company, to the extent the same was made available on record, and on the said bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us it was submitted by the Ld. A.R that the purchases of ₹ 13,04,375/- (supra) made by the assessee company towards purchase of fixed assets , inadvertently had been capitalized under the head Factory building , in support of which contention the Ld. A.R has taken us through the relevant extracts of SAP placed on record, wherein the said transactions as claimed hereinabove, stood reflected. We have perused the facts of the case and the material furnished before us, and are of the considered opinion that the lower authorities had hushed through the matter and on the basis of premature findings therein made an addition of ₹ 13,04,375/-(supra) in the hands of the assessee company. Thus taking an overall view of the issue under consideration, we in all fairness herein restore the matter to the file of the A.O for verifying the aforesaid claim of the assessee company that the purchases under consideration had been capitalized under the head factory building , and in case if the said contention of the assessee company is found to be in order, therein direct the A.O to restrict the addition upto the amount of the corresponding depreciation so clamed on the said capitalize ..... X X X X Extracts X X X X X X X X Extracts X X X X
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