TaxTMI 
TaxTMI 
2012 (6) TMI 471
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.... was filed on 7.11.2006 declaring its total income at Nil after claiming weighted deduction of expenditure incurred on in-house Scientific Research & Development of Rs. 7,82,53,487/- against which in terms of provisions contained in sec. 35(2AB) of the Income Tax Act, 1961 (Act), the admissible deduction @ 150% was computed at Rs. 11,73,80,230/-. In view of total income computed at Rs. 8,74,75,594/- the deduction u/s 35(2AB) was restricted to that amount and income was computed at Nil. As under the normal provisions computable income was Nil the tax was paid on book profit u/s 115JB and book profit was computed at Rs. 9,21,42,714/-. 3. The breakup of total expenditure of Rs. 7,82,53,487/- incurred on Research & Development in drugs and pharmaceutical constituted of cost of fixed assets shown in the balance sheet at Rs. 44,41,522/- and balance sum of Rs. 7,38,11,965/- was shown under the head "miscellaneous expenditure" in the balance sheet as on 31.3.2006. 4. The assessee company was approved company u/s 35(2AB) by the appropriate authority called as "DSIR". Such recognition granted by DSIR was up to 31.3.2010. The assessee had made an application to DSIR claiming the benefit....
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....ns i.e. High Pressure Liquid Chromato graph Column. High performance liquid chromatography (or High pressure liquid chromatography, HPLC) is a form of column chromatography used frequently in biochemistry and analytical chemistry to separate, identify and quantify compounds. HPLC utilized a column that hold chromatographic packing material (stationary phase), a pump that moves the mobile phase(s) through the column, and a detector that shows the retention times of the molecules. Retention time varies depending on the interactions between the stationary phase, the molecules being analyzed, and the solvents used. These are very essential high tech testing equipments for the testing and chemical analysis of raw material, chemicals, in process material and final products and to establish the quality parameters for the product. 2. Salary & Wages Rs. 19.57 lacs The expenditure on salary and wages include the salaries! wages paid to the manpower deployed for carrying out the research and development activity. They are highly experienced and qualified technical people in their respective field and are graduates, post graduates and doctorate. There is a separate dedicated team, ....
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....unting policy followed by the company it has been decided to write off the expenditure shown under the head "miscellaneous expenditure" over a period of five years. Further, revenue expenditure, which is incurred wholly and exclusively for the purpose of business must be allowed in entirely in the year in which it is incurred. It cannot be spared over a number of years even if the assessee has written off in his books over a period of years." 8. The AO has observed that an amount of Rs. 6,11,77,948/- has been shown by the assessee as incurred on R&D Lab Trial. The expenditure is incurred mainly on the materials/ chemicals/consumables/spares used in carrying out the Research & Development activity on Lab Trial for process development. Such fact clearly establishes that the amounts incurred on various items during previous year were used just for trial production and actual production did not come out. Commercial production was to be started only after 2 to 3 years after the complete process was handed over to the production department and earliest possible date for that is only September, 2006 i.e., beyond the relevant previous year. Therefore, the expenditure on trial p....
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....may be admitted for adjudication. The AO submitted that from the assessment it is clear that the use of new process of in-house Research & Development amounts to new venture which is not in the line of assessee' s existing business. The benefit of such R&D/process is enduring nature and the expenditure of Rs. 7.10 crore is not approved from the competent authority. Therefore, the expenditure is of capital in nature and cannot be allowed in the year under consideration. The AO oppose the allowability of such expenditure u/s 37(1) as it does not cover the expenditure described in sec. 30 to 36 as well as the expenditure is in the nature of capital expenditure or personal expenditure of the assessee. Hence, AO opposed the allowability of these expenditures on the ground that those are expenditure of capital in nature. The rejoinder filed by the assessee vide letter dated 12th October, 2009 is also reproduced in the order of CIT (A) in para 4.5. The AO also submitted second remand report dated 16.12.09 which has been reproduced in para 4.8 of the order of CIT(A) and the rejoinder of the assessee on second remand report is reproduced in para 4.9 of the order of CIT(A). 11. Considerin....
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....for weighted deduction u/s 35(2AB) of the Act by DSIR would not mean that the expenditure is no longer revenue expenditure. He observed that in case the capital expenditure is not approved by DSIR, it would not mean that it is not capital expenditure for accounting purpose in the books of account on which no depreciation is allowable. Similarly, non-approval of revenue expenses by DSIR will not change the character of revenue expenditure. Ld. CIT (A) observed that this can never be the intention of the law. The expenditure incurred on R&D is also business expenditure, allowable as deduction u/s 35(1)(i) of the Act. 14. Ld. CIT (A) has further held that Assessee Company was incorporated in the year 1996 and is in this line of business of manufacture of drugs ever since then. Its turnover has increased every year. There is a force in the argument of the assessee company that expenditure on R&D cannot be considered as expenditure incurred on trial run especially when the assessee company is in the business for many years. The expenditure incurred on R&D even in the course of trial for drugs, if and only if it is not capital expenditure, has to be allowed as deduction u/s 35(1)(i) o....
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....ech Ltd. 1 SOT 347. The department is aggrieved with such findings of ld. CIT(A) and hence ground no. 1 has been raised to assail such findings. 17. With regard to ground no. 2 the discussion is only found in para 5 of the order of CIT (A). Ld. CIT (A) has directed the AO to recomputed the income as per appeal effect and consider the claim of the assessee in accordance with law, if the same is otherwise allowable. In respect of these directions of ld. CIT (A) department has raised ground no. 2. 18. After narrating the facts, it was vehemently pleaded by ld. DR that originally assessee made a claim of Rs. 11,73,80,230/- u/s 35(2AB) on the ground that the expenditure incurred by the assessee on in-house Scientific Research & Development falls under that section. As against that DSIR approved only an amount of Rs. 41,69,868/- on account of capital expenditure and 27,16,019/- on account of revenue expenditure. In the revised return out of total expenditure of Rs. 7,38,11,965/- capitalized and shown under "miscellaneous expenditure" in the balance sheet an amount of Rs. 7,10,95,947/- was claimed as revenue expenditure as the balance amount of Rs. 27,16,019/- was already given a....
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....roduction was to start only after 2-3 years after the complete process was handed over to the production department for which the earliest possible date was September, 2006 which falls beyond the relevant previous year. Further out of other expenditures related to R&D amounting to Rs. 1,06,77,233/- an amount of Rs. 2,57,176/- was spent towards registration of product in various countries and Rs. 1,04,20,057/- was paid to various parties for technical assistance for which the assessee has failed to highlight the exact nature of technical assistance obtained by it so as to determine the nature of such expenditure and thus, it was pleaded by ld. DR that the claim of the assessee of an expenditure of Rs. 7,10,95,947/- was rightly disallowed by the AO on account of the same being capital expenditure and thus, the AO was right in rejecting the claim of the assessee of allowability of the same u/s 37(1) of the Act. Ld. CIT(A) has wrongly accepted the claim of the assessee. 19. Ld. DR submitted that before CIT(A) the assessee had filed additional ground according to which these expenditures were claimed by the assessee under the provisions of sec. 35(1)(i) of the Act. He submitted that ....
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....elf will describe that all these expenditures were otherwise of revenue in nature which did not generate any capital asset to give enduring benefit to the assessee. He submitted that AO is factually incorrect in observing that assessee in its books of account has shown these expenditures as capital expenditure. He submitted that assessee has never shown this expenditure as capital in nature. These expenditures have been classified as "deferred revenue expenditure" under the head "miscellaneous expenditure". He in this regard referred to the relevant portion of audited accounts. Therefore, he submitted that AO is wrong in saying that assessee itself has shown those expenditure as capital expenditure. He submitted that nomenclature given by the assessee to an item of expenditure cannot be determinative of the nature of expenditure as on the facts of the case it has to be seen that whether the expenditure incurred is of capital in nature or it is in the nature of revenue. For this proposition ld. AR has relied upon the following decisions: - (i) "Tuticoren 172 ITR 227 (SC) (ii) Challapalli Sugar Ltd. 98 ITR 167 (iii) CIT V. Seshsayee Paper and Boards Ltd. 156 ITR 542 (M....
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....y enabled the appellant to develop its existing products in terms of quality and efficiency. In the above said case, the capital incurred on purchase of technology for improving the process of manufacture was held to be revenue in nature. (iii) ACIT V. Medicamen Biotech Ltd. (2006) 99 TTJ (Del) 873 - The expenditure incurred towards launching the new product was held to be revenue in nature even though the said expenditure was considered as deferred revenue expenditure in the books of account. The judgment of Madras Industrial Corporation 225 ITR 802 distinguished at page 880. (iv) Indo Rama Synthetic (I) Ltd. V. CIT (2010) 228 CTR (Del) 278 - A new unit was to be set up which would have an inextricable linkage with the business of the appellant. Expenditure incurred was in the nature of salary, wages, repairs, maintenance, traveling, engineering fee etc. The expenditure was considered to be revenue in nature more so that the project was amended and no new assets to be created. (v) CIT V. Denso India Ltd. (2009) 318 ITR 140 (Del) - The assessee was engaged in the manufacturing of auto electrical parts for which, it was importing several components. The assessee co....
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....as been provided by the assessee as Annexure C&D in the paper book from pages 46 to 47 of a sum of Rs. 6,11,77,948.16/-, which described it as "details of material used for lab trials for process development for the year ending 31.3.2006" and details of Rs. 1,06,77,233/- is the "details of other expenditure directly related to R&D" for the year ending 31.3.2006. The AO in the assessment order has broadly discussed these details under the four heads which have already been reproduced in the above part of this order in para 6. From the said detail, it can be seen that capital expenditure amounting to Rs. 44.41 lakh has been categorized by the assessee as capital expenditure and to that expenditure there is no dispute because they have been considered as capital expenditure by the assessee itself. The another head is "salary and wages" of Rs. 19.57 lakh. This expenditure relates to salary and wages paid to the manpower deployed for carrying out R&D activity. So in itself it did not create any asset which could give assessee an enduring benefit. The third head is material/chemicals/consumables/spares of Rs. 611.78 lakh. These expenditures have been incurred on materials/chemicals/consu....
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....ness income is computed. It deals with the expenditure incurred by the assessee on scientific research. It has been prescribed therein that in respect of expenditure on scientific research the same will be allowed if the said expenditure has been laid out or expanded on scientific research related to the business. It is not the case of anybody that explanation to sec. 35(1) (i) of the Act is applicable to the facts of the case. Therefore, the case of the assessee has to be seen in the light of provisions contained in sec. 35(1) (i) without application of explanation. As mentioned earlier the business of the assesse is of manufacturing of bulk drugs and fine chemicals etc. In the process of its manufacturing of drugs it has to make research and development so to make the drug more effective and also to bring down the cost. No material has been brought on record to suggest that by incurring this expenditure the assessee has entered into any new activity of manufacturing or new activity of trade. In the business of manufacturing of drug, process of R&D is continuous process which augments the business of the assessee. These expenses are not in the nature of any personal expenditure as....