TaxTMI 
TaxTMI 
2026 (3) TMI 695
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.... to determine the year of commencement of the business by the assessee, thereby bringing the order of the CIT(A) within the ambit of perversity. (2) The order of the Ld.CIT(A) may be vacated and that of the Assessing Officer may be restored. (3) The appellant craves leave to add, amend or alter any ground/grounds, which may be necessary." 3. Brief facts of the case are that assessee is a Biopharmaceutical Enterprises, engaged in research and manufacturing of therapeutic proteins for oncology, cardiovascular and immune disorders. Loss of Rs. 5,25,98,291/- declared in the return for A.Y. 2018-19 e-filed on 28.11.2018. Case selected for complete scrutiny on two issues, namely, business loss and large deduction claimed on account of scientific research u/s. 35(1)(iv) of the Act. Valid statutory notices u/s. 143(2) and 142(1) of the Act duly served upon the assessee. During the course of assessment proceedings, Ld.AO observed that assessee has claimed capital expenditure on scientific research at Rs. 3,72,88,916/- u/s. 35(1)(iv) of the Act. Ld.AO also observed that during the year under consideration, there are no purchases, no stock in hand and no sales of products....
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....e were no sales or revenue from business operations, no opening and closing stock, and no purchases made in the financial year relevant to the assessment year 2018-19. Consequently, the officer concluded that actual business activity had not commenced during the assessment year in question. Furthermore, the officer relied on Explanation 1 of Section 35(1), which allows for the deduction of capital expenditure incurred within three years immediately preceding the commencement of business, to disallow the expenditure claimed under Section 35(1)(iv) by the appellant. To resolve the dispute in the appeal, one must determine the year of commencement of the business in the appellant's case. Although the Income Tax Act mentions the setup and commencement of a business, these terms are not defined within the Act. Therefore, examining the nature of the taxpayer's business activity is necessary. In the case of CIT vs Saurashtra Cement and Chemical Industries Limited, the business involved quarrying the limestone, manufacturing cement, and establishing a marketing network to sell cement. Revenue argued that extracting limestone by quarrying leased land was merely preparatory ....
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....d by Department of Scientific and Industrial Research (DSIR) recognizing the company as a scientific research company and also about the nature of work of the capital expenditure in question, ledger account, invoices and copy of bank statement. 8. We have heard rival contentions and perused the records placed before us and also carefully gone through the decisions /judgments referred to and relied on by the assessee in the written submissions filed before the Ld.CIT(A) as well as the findings of the Ld.CIT(A) dealing with such decisions. The only grievance of the Revenue is that Ld.CIT(A) erred in allowing the claim of capital expenditure u/s. 35(1)(iv) read with Explanation 1 of section 35(2) of the Act without appreciating the fact that commencement of business has not started during the year as required under Explanation 1 to the provisions of section 35(2)(ia) of the Act. So far as the issue under consideration is that section 35(1) and section 35(2) has a direct bearing, therefore the same are reproduced as below:- 35. (1) In respect of expenditure on scientific research, the following deductions shall be allowed- (i) any expenditure (not being in the natu....
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....search or to a university, college or other institution to be used for research in social science or statistical research : Provided that such association, university, college or other institution for the purposes of this clause- (A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed; and (B) such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government. Explanation.-The deduction, to which the assessee is entitled in respect of any sum paid to a research association, university, college or other institution to which clause (ii) or clause (iii) or to a company to which clause (iia) applies, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to the association, university, college or other institution referred to in clause (ii) or clause (iii) or to a company referred to in clause (iia) has been withdrawn; (iv) in respect of any expenditure of a capital nature on scientific research related to the busin....
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....r, as may be prescribed, to the prescribed income-tax authority within three months from the date on which this proviso has come into force, and subject to such intimation the notification shall be valid for a period of five consecutive assessment years beginning with the assessment year commencing on or after the 1st day of April, 2022: Provided also that any notification issued by the Central Government under clause (ii) or clause (iia) or clause (iii), after the date on which the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Bill, 2020 receives the assent of the President, shall, at any one time, have effect for such assessment year or years, not exceeding five assessment years as may be specified in the notification. (1A) x x x x x x (2) For the purposes of clause (iv) of sub-section (1),- (i) in a case where such capital expenditure is incurred before the 1st day of April, 1967, one-fifth of the capital expenditure incurred in any previous year shall be deducted for that previous year; and the balance of the expenditure shall be deducted in equal instalments for each of the four immediately succeeding previous year....
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.... subsequent to the year of cessation, and the sale price falls short of the value of the asset taken into account at the time of cessation, an amount equal to the deficiency shall be allowed as a deduction for the previous year in which the sale took place ; (iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clause (ii) of sub-section (1) of section 32 for the same or any other previous year in respect of that asset ; (v) where the asset mentioned in clause (ii) is used in the business after it ceases to be used for scientific research related to that business, depreciation shall be admissible under clause (ii) of sub-section (1) of section 32. 9. The assessee in the instant case has claimed the alleged expenditure u/s. 35(1)(iv) of the Act read with Explanation 1 to Section 35(2) of the Act which deals with the capital expenditure incurred after the 31st day of March, 1997, but before the commencement of business for which an assessee can claim the aggregate of the expenditure so incurred during three years immediately preceding the y....
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....tal expenditure u/s. 35(1)(iv) of the Act in the year of commencement of business. In our view, allowing the claim of capital expenditure u/s. 35(1)(iv) is logically provided under the Act for the promotion of research and development activities in various fields of business and also to promote the scientific research work. On bare perusal of Explanation (1) to section 35(2) of the Act indicates that prior to the commencement of business only the capital expenditure incurred for three years immediately preceding the year of commencement of business is allowable as an expenditure which means that capital expenditure for R&D incurred prior to preceding three years of commencement of business are not allowed to be claimed u/s. 35(1)(iv) read with Explanation 1 to section 35(2) of the Act. Now once capital expenditure has been incurred and a product is formally devised and manufacturing of such product commences, the assessee starts exploiting such research and development and then the capital expenditure which has been incurred in preceding three years for scientific research can be claimed as an expenditure u/s. 35(1)(iv) of the Act in the year when the business is commenced. Sometim....
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....gh, Revenue argued that extracting the limestone by quarrying lease-land is merely preparatory the business could only be considered as set up upon installing the plant and machinery for manufacturing cement. However, Hon'ble Court held that business would commence when the activity which is first in point of time and which must necessarily precede all other activities, is started. 13. We further observe that Ld.CIT(A) has given an example about the assessee engaged in the business of trader carrying purchase and sale of goods and even if the assessee has only purchase goods, but has not sold the same, then also it is to be considered that business has commenced because goods have been purchased. In the instant case, assessee is involved in Biopharmaceutical research and development including product testing. Certificate issued by DSIR is merely a final recognition granted to companies and research institutes having in-house R&D units. There is no dispute that the assessee is carrying on product research and development activity in-house and research activity is consistently going but the first product for which the alleged expenditure has been claimed has still not been man....