TaxTMI 
TaxTMI 
2010 (11) TMI 147
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....gy or in the business of] manufacture or production of any drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any other article or thing notified by the Board incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of [a sum equal to one and one-half times of the expenditure] so incurred. [Explanation.-For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970)]." 2.2 The Assessing Officer noted that the assessee had claimed deduction of Rs. 359.87 lakhs under section 35(2AB). The expenditure included an amount of Rs. 29.73 lakhs incurred on building and a sum of Rs. 14.89 lakhs incurred outside the in-house R & D set up. The assessee produced a certificate dated ....
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....ed out that expenditure on out-sourcing certain research work had been allowed as deduction under section 35(2AB) by the Tribunal in case of Asstt. CIT v. Bharat Bio Tech International (P.) Ltd. [IT Appeal Nos. 560-636 of 2007 and 1327 of 2008] in the order dated 29-1-2010. Accordingly it was urged that the claim of the assessee should be allowed. 2.4 The Learned DR on the other hand strongly supported the orders of authorities below and argued that only the expenditure incurred on scientific research on in-house R & D facility could be allowed and therefore the orders of authorities below should be upheld. 2.5 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of weighted deduction under section 35(2AB) in respect of expenditure incurred on part of the scientific research out-sourced by the assessee. The assessee was engaged in the business of manufacturing and trading of medicines, pharmaceutical formulations, bulk drug etc. It had set up an in-house research and development facility. The expenditure incurred on scientific research on such in-house research and development facility which is approved by the presc....
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....the Explanation has only clarified the position that clinical trial is part of scientific research. But for allowability of weighted deduction under section 35(2AB), the second condition that the expenditure should be incurred 'on in-house research and development facility' is also required to be fulfilled. In other words, in case the clinical trial is not done in the in-house facility, the expenditure will not be eligible for deduction as the weighted deduction is only in relation to expenditure on in-house research facility. 2.7 The Learned AR for the assessee has referred to Circular No. 763, dated 18-2-1998 and Circular No. 14, dated 22-11-2002 of the CBDT in support of the argument that expenditure on trial conducted outside the R & D facility can also be allowed. We have carefully perused the said circulars. The CBDT in the para 18.2 of the said Circular No. 763 has only explained the provisions of section 35(2AB) and has clarified that the deduction will be available to companies having in-house research and development facility approved by the prescribed authority. There is nothing in the circular to show that even the expenditure incurred outside the approved research a....
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....on 35(2AB) only if the expenditure is incurred on an in-house research and development facility. The expenditure incurred on trial conducted outside the in-house R & D facility will not be eligible for weighted deduction under section 35(2AB). We therefore see no infirmity in the order of CIT(A) confirming the disallowance and the same is therefore upheld. 3. The second dispute is regarding disallowance of expenses in relation to the exempt income under section 14A of the Income-tax Act. The Assessing Officer noted that the assessee had made investments of Rs. 1.7 crores income from which was not taxable. The assessee had also claimed expenditure of Rs. 1.48 crores on payment of interest on borrowings. The assessee had however not allocated any interest expenditure towards the investment. The Assessing Officer also noted that borrowings constituted 46.36 per cent of the total funds of the assessee. He therefore took 46.36 per cent of investments as being funded from borrowed funds and the proportionate interest at the rate of 6 per cent was disallowed amounting to Rs. 4,80,000. In appeal, CIT(A) held that disallowance had to be made in terms of rule 8D which had retrospective ap....
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....come of Rs. 1.05 crores, the net profit was only 1.78 crores which came to only 1.9 per cent of turnover. Assessing Officer also observed that the said profit had been declared as per the revised return. The assessee had revised the return on the ground that with the return of income audit report of assessment year 2004-05 was wrongly attached. The Assessing Officer did not accept the ground of revision as correct. As per the Assessing Officer, the computation of income attached with the return did not match with the audited figure for assessment year 2005-06. The Assessing Officer did not accept the explanation that the difference in income was because of wrong audit report attached with the return. He therefore rejected the audited accounts and estimated the net profit at 2.5 per cent of turnover and thus made addition of Rs. 55,36,200. 4.2 In appeal the assessee submitted that the Assessing Officer had not pointed out any defects in the books of account. It was pointed out that figures of income in the revised return were matching with the audit report figures for assessment year 2005-06. The assessee also submitted that the net profit declared by the assessee in this year wa....