Tribunal directs Assessing Officer on deduction eligibility. Outcome hinges on section 35(3) reference.

The Tribunal allowed the appeals for statistical purposes, directing the Assessing Officer to follow the procedure under section 35(3) to determine the nature of the expenditures and their eligibility for deduction under section 35. The final decision on the allowability of the deductions will depend on the outcome of the reference made under section 35(3).

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Issues Involved:
1. Allowability of deduction under section 35(1) of the Income-tax Act, 1961 for product development expenditure related to scientific research.
2. Classification of the expenditure as capital or revenue in nature.
3. Applicability of section 35(3) of the Income-tax Act, 1961.

Issue-Wise Analysis:

1. Allowability of Deduction under Section 35(1):
The primary issue in these appeals was whether the product development expenditure incurred by the assessee qualifies for deduction under section 35(1) of the Income-tax Act, 1961. The assessee claimed deductions for product development expenditures, including interest on loans and cost of consumables, under section 35(1) for the assessment years 2006-07, 2007-08, and 2008-09. The Assessing Officer disallowed these claims, arguing that the expenditures were capital in nature as they were capitalized in the books of account and provided enduring benefits to the assessee. The CIT(A) allowed the deductions, stating that the expenditures were incurred in the course of the assessee's scientific research activities and should be treated as revenue expenditures under section 35(1)(i). The Tribunal initially upheld the Assessing Officer's decision but later reconsidered the applicability of section 35(3) following the assessee's Miscellaneous Applications.

2. Classification of Expenditure:
The Assessing Officer classified the expenditures as capital in nature, arguing that they resulted in obtaining patent rights and provided enduring benefits to the assessee. The CIT(A) disagreed, stating that the expenditures were for developing new vaccines and bio-pharmaceuticals, which involved multi-stage development processes and did not necessarily result in enduring benefits. The CIT(A) argued that the expenditures were related to scientific research and development, thus qualifying as revenue expenditures under section 35(1)(i). The Tribunal, in its initial order, held that the expenditures were for setting up facilities for commercial production and did not qualify as scientific research expenditures under section 35(1)(i) or (iv).

3. Applicability of Section 35(3):
The Tribunal, upon reconsideration, focused on the applicability of section 35(3) of the Income-tax Act, 1961, which mandates that any question regarding the nature of scientific research expenditures should be referred to the Central Government or prescribed authority. The assessee argued that the Assessing Officer should have referred the matter under section 35(3) instead of disallowing the claims. The Tribunal agreed, stating that the Assessing Officer did not follow the correct procedure as outlined in section 35(3). Consequently, the Tribunal set aside the issue to the file of the Assessing Officer with a direction to refer the claim of deduction under section 35 according to the procedure laid down in section 35(3).

Conclusion:
The Tribunal allowed the appeals for statistical purposes, directing the Assessing Officer to follow the procedure under section 35(3) to determine the nature of the expenditures and their eligibility for deduction under section 35. The final decision on the allowability of the deductions will depend on the outcome of the reference made under section 35(3).

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