Assessee wins partial appeal: deductions allowed, penalties deleted.

Jubilant Biosys Ltd. And Jubilant Chemsys Ltd Versus Dy. CIT, Circle – 1 Noida, UP

Jubilant Biosys Ltd. And Jubilant Chemsys Ltd Versus Dy. CIT, Circle – 1 Noida, UP - TMI Issues Involved:
1. Validity of enhancement of income by CIT(A) under section 251(1)(a) of the Income Tax Act.
2. Disallowance of expenditure amounting to Rs. 102,52,32,000/- as capital in nature.
3. Denial of deduction under section 80IB(8A) of the Act.
4. Disallowance of payments made towards sub-contracting part of research work to sister concern under section 80IB(13) read with section 80IA(10) of the Act.
5. Levy of penalty under section 271(1)(c) of the Act.

Detailed Analysis:

1. Validity of Enhancement of Income by CIT(A) under Section 251(1)(a):
The assessee contended that the CIT(A) enhanced the income without issuing a proper notice under section 251(2) of the Act, which is a statutory requirement. The CIT(A) had issued a show cause notice but it did not specify why the expenses should be treated as capital in nature. The assessee argued that the enhancement was illegal as the expenditure was not a subject matter of the original assessment. The department argued that the CIT(A) has the power to enhance the assessment as long as the assessee is given a reasonable opportunity to show cause.

The tribunal held that the CIT(A) has the jurisdiction to enhance the income if the matter was subject to the process of assessment, even if it was not explicitly discussed in the assessment order. The tribunal found that the expenditure in question was part of the assessment process and thus the CIT(A)’s enhancement was valid. Therefore, the tribunal dismissed the grounds raised by the assessee regarding the validity of the enhancement.

2. Disallowance of Expenditure Amounting to Rs. 102,52,32,000/- as Capital in Nature:
The CIT(A) disallowed the entire expenditure, holding that the research activity provided enduring benefits to the assessee. The assessee argued that the expenditure was incurred in the ordinary course of business and was remunerated as per the contract. The tribunal found that the expenditure was indeed incurred in the normal course of business and was necessary for earning the income. The tribunal referred to the Supreme Court decision in Empire Jute Company Ltd vs. CIT, which stated that the test of enduring benefit should not be applied mechanically.

The tribunal concluded that the expenditure should be allowed as it was incurred for business purposes. Therefore, the tribunal allowed the grounds raised by the assessee regarding the disallowance of expenditure.

3. Denial of Deduction under Section 80IB(8A):
The assessee had approval from the Department of Scientific and Industrial Research and claimed deduction under section 80IB(8A). The CIT(A) denied the deduction, arguing that the ownership of the research was with a third party. The assessee argued that the approval from the prescribed authority and the auditor’s certificate should suffice for the deduction.

The tribunal found that the assessee had the necessary approval and fulfilled all criteria for the deduction under section 80IB(8A). The tribunal held that there was no requirement for the assessee to own the research to claim the deduction. Therefore, the tribunal directed the AO to grant the deduction as per law and allowed the grounds raised by the assessee.

4. Disallowance of Payments Made Towards Sub-Contracting Part of Research Work:
The CIT(A) disallowed the payments made towards sub-contracting part of the research work to the sister concern, invoking section 80IB(13) read with section 80IA(10). The assessee argued that similar issues were decided in its favor in previous years by the tribunal. The department could not controvert this fact.

The tribunal observed that the facts and circumstances were identical to previous years where the issue was decided in favor of the assessee. Therefore, the tribunal directed the AO to grant the deduction claimed by the assessee and allowed the grounds raised.

5. Levy of Penalty under Section 271(1)(c):
The penalty was levied based on the disallowance of expenditure by the CIT(A). As the tribunal deleted the disallowance, the basis for the penalty no longer existed.

Therefore, the tribunal allowed the grounds raised by the assessee regarding the penalty appeals.

Conclusion:
The appeals filed by the assessee were partly allowed. The tribunal upheld the CIT(A)’s enhancement of income but allowed the deductions and expenditures claimed by the assessee. The penalty appeals were also allowed as the disallowances were deleted.