RELIANCE LIFE SCIENCES P.LTD, NAVI MUMBAI V. ACIT 7(2), MUMBAI

ITA 1575/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 101294 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 23-02-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 26-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JEETENDRA KUMAR
• Assessee Lawyers: ARVIND SONDE; RIKITA JOSHI
• Keywords: Capital asset; Retrospective amendment; Revenue expenditure; Capital expenditure
• Section: 14A; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH, MUMBAI BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER. ITA. NO. 2061/MUM/2013 (ASSESSMENT YEAR:2007-08) DY. COMMISSIONER OF INCOME TAX-7(2), MUMBAI 400 020 APPELLANT VS. M/S. RELIANCE LIFE SCIENCE PVT. LTD., DALSC, R-282, TTC AREA OF MIDC, THANE BELAPUR ROAD, RABALE, NAVI- MUMBAI-400 701 RESPONDENT & ITA. NO. 1575/MUM/2013 (ASSESSMENT YEAR:2007-08) M/S. RELIANCE LIFE SCIENCE PVT. LTD., DALSC, R-282, TTC AREA OF MIDC, THANE BELAPUR ROAD, RABALE, NAVI- MUMBAI-400 701 APPELLANT VS. DY. COMMISSIONER OF INCOME TAX-7(2), MUMBAI 400 020 RESPONDENT ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 2 PAN: AABCR7594L / BY REVENUE : SHRI JEETENDRA KUMAR, D.R. / BY ASSESSEE : SHRI ARVIND SONDE & MS. RIKITA JOSHI, A.R. /DATE OF HEARING : 23.09.2015 /DATE OF PRONOUNCEMENT : 09.10.2015 ORDER PER ASHWANI TANEJA, A.M: THESE CROSS APPEALS WERE FILED BY ASSESSEE AND REVE NUE AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCOME -TAX (APPEALS)-9, MUMBAI, DATED 20.12.2012 FOR A.Y. 2007 -08. 2. IN ITA NO.2061/MUM/2013, THE REVENUE HAS FILED A PPEAL ON FOLLOWING GROUNDS: I) THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LA W IN RESTRICTING THE DISALLOWANCE MADE UNDER SECTION U/S 14A OF THE INCOME-TAX ACT TO RS.1,96,000/-, WITHOUT PROPERLY APPRECIATING THE FACTUAL AND LEGAL MATRIX AS CLEARLY BROUGHT OUT BY THE ASS ESSING OFFICER. II) THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN RE STRICTING THE DISALLOWANCE U/S.14A TO RS.1,96,000/-, IGNORING THE FACTS THAT THE ASSESSING OFFICER IS BOUND TO WORK OUT THE DISA LLOWANCE UNDER SECTION U/S 14A AS PER RULE 8D AND IT HAS BEE N HELD BY BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE THA T WORKING OF DISALLOWANCE UNDER SECTION U/S 14A READ WITH RUL E 8D IS MANDATORY FROM A.Y. 2008-09 ONWARDS. III) THE LD.CIT(A)S ORDER IS CONTRARY IN LAW AND O N FACTS AND ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 3 DESERVES TO BE SET-ASIDE. 3. IN ITA NO.1575/MUM/2013, THE ASSESSEE HAS FILED APPEAL ON FOLLOWING GROUNDS: 1. GROUND NO. 1 : DISALLOWANCE U/S 14A (I) THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) [HEREINAFTER REFERRED TO AS CIT(A)] ERRED IN CONFIRMING THE DISA LLOWANCE OF RS.165,56,576/- U/S 14A OF THE INCOME TAX ACT, 1961 . (II) HE FAILED TO APPRECIATE THAT THE DISALLOWAN CE U/S 14A COULD ONLY BE MADE IN RESPECT OF EXPENDITURE INCURRED AND CANNOT EXTEND TO A NOTIONAL EXPENDITURE WHICH HAS NOT BEEN INCURRED AT ALL. (III) THE APPELLANT PRAYS THAT THE DISALLOWANCE U/S 14A AS CONFIRMED BY THE CIT(A) IS TOTALLY UNJUSTIFIED AND OUGHT TO BE DELETED. (IV) WITHOUT PREJUDICE TO THE ABOVE, THE APPELLA NT PRAYS THAT THE DISALLOWANCE U/S 14A BE APPROPRIATELY REDUCED, CONS IDERING THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. GROUND NO. 2 : DISALLOWANCE U/S 35(2AB) (I) THE LEARNED CIT(A) ERRED IN CONFIRMING THE A CTION OF THE AO. IN DISALLOWING A SUM OF RS. 57.66 LACS OUT OF CLAIM OF DEDUCTION U/S 35(2AB) AND U/S. 37(1) BY TREATING THE SAME AS CAPITAL EXPENDITURE. (II) HE FAILED TO APPRECIATE THAT THE EXPENDITUR E IN RESPECT OF WHICH WEIGHTED DEDUCTION WAS DISALLOWED BY HIM WAS ELIGIB LE FOR DEDUCTION U/S 37(1) AND THEREFORE HIS DISALLOWANCE OF THE AFORESAID CLAIM IS TOTALLY UNJUSTIFIED. (III) THE APPELLANT PRAYS THAT THE CONFIRMATION OF DISALLOWANCE BY CIT(A) BE DELETED. 3. GROUND NO. 3 : SOFTWARE EXPENSES U/S 37(1) (I) THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE A.O. IN DISALLOWING A SUM OF RS.776,132/- OUT OF SOFTWARE E XPENSES INCURRED BY THE APPELLANT BY TREATING THE SAME AS C APITAL EXPENDITURE/DISALLOWANCE U/S.40(A)(IA). ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 4 (II) HE FAILED TO IGNORE THE INVOICES PLACED ON R ECORD AND SUSTAINING THE ADDITION MADE BY THE AO. (III) HE FAILED TO APPRECIATE THAT SUCH EXPENDIT URE WAS INCURRED DURING THE COURSE OF CARRYING ON BUSINESS AND WAS T HEREFORE PROPERLY ALLOWABLE U/S 37(1). (IV) THE APPELLANT PRAYS THAT THE CONFIRMATION O F DISALLOWANCE BY CIT(A) BE DELETED. 4. GROUND NO.1 OF ASSESSEES APPEAL AND ALL THE GROUNDS RAISED IN REVENUES APPEAL, ADDRESS COMMON ISSUE WI TH REGARD TO DISALLOWANCE U/S14A MADE BY ASSESSING OFFICER, AND PARTLY SUSTAINED BY LD CIT(A). 4.1. AT THE VERY OUTSET, LD. COUNSEL FOR THE ASSESSEE B ROUGHT INTO NOTICE OF THE BENCH, THE ORDER OF TRIBUNAL IN ASSES SEES OWN CASE FOR IMMEDIATELY PRECEDING YEAR I.E. A.Y. 2006-07, W HEREIN THE ISSUE OF DISALLOWANCE MADE U/S 14A BY THE ASSESSING OFFICER WAS SENT BACK BY THE TRIBUNAL TO THE FILE OF ASSESSING OFFICER FOR RE- DECIDING THE SAME. ON THE OTHER HAND, LEARNED DEPA RTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDER OF ASSESSI NG OFFICER, BUT THEN SUBMITTED THAT HE WOULD HAVE NO OBJECTION IF T HE ISSUE, IN TOTALITY, WOULD BE SENT BACK TO THE FILE OF ASSESSI NG OFFICER FOR READJUDICATION, TAKING INTO CONSIDERATION COMPLETE FACTS AND LATEST POSITION OF LAW. 4.2. WE HAVE HEARD BOTH THE SIDES. IT IS NOTED THAT, I N ASSESSEES OWN CASE FOR A.Y. 2006-07, THE TRIBUNAL HAS DEALT W ITH THIS ISSUE AND SENT BACK THE MATTER TO THE FILE OF ASSESSING O FFICER. THE RELEVANT PARA OF THE ORDER OF TRIBUNAL IS REPRODUCE D AS UNDER: ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 5 3. IN THE FIRST GROUND OF APPEAL, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: I) THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF RS.6,81,65,116/- U/S.14A OF THE INCOME TAX ACT, 19 61. 4. AS FAR AS THIS ISSUE IS CONCERNED, FIND THAT THE AO HAS INVOKED RULE 8D BUT AS HELD BY THE HONBLE BOMBAY HI GH COURT IN THE CASE OF GODREJ & BOYCE LIMITED VS. ACIT , (ITA NO.626 OF 2010) DATED 12.8.2010. RULE 8D DOES NOT RETROSPECTIVE EFFECT AND, ACCORDINGLY, IT CANNOT BE INVOKED IN THE PRESENT CASE. HOWEVER, THE MATTER NEEDS TO BE RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER FOR DETERM INING A REASONABLE DISALLOWANCE OF EXPENSES INCURRED TO EAR N THE TAX EXEMPTED INCOME. GROUND NO.1 THUS, ALLOWED FOR STA TISTICAL PURPOSES. 4.3. WE HAVE GONE THROUGH THE ORDER OF THE TRIBUNAL. WE HAVE BEEN INFORMED THAT THE AO HAS NOT PASSED FRESH ORDE R SO FAR IN PURSUANCE TO THE ORDER OF THE TRIBUNAL. IN AY 2006- 07. IN OUR CONSIDERED OPINION, BEFORE THIS ISSUE CAN BE DECIDE D IN THE IMPUGNED YEAR I.E. A.Y. 2007-08, IT IS IMPERATIVE T HAT IT IS FIRST DECIDED BY ASSESSING OFFICER IN A.Y. 2006-07. IN C ASE, WE DECIDE THIS ISSUE FIRST, IT MAY PRE-EMPT THE ORDER OF ASSE SSING OFFICER FOR A.Y. 2006-07, AND IT MAY ALSO CLOSE THE GATES FOR T HE ASSESSING OFFICER TO MAKE PROPER EXAMINATION OF FACTS AND CIR CUMSTANCES IN A.Y. 2006-07. THEREFORE, TO AVOID THIS SITUATION, WE DEEM IT PROPER TO SEND THIS ISSUE OF DISALLOWANCE U/S 14A, IN TOTALITY, TO THE FILE OF ASSESSING OFFICER. HE SHALL RE-DECIDE THIS ISSUE, AFTER GIVING ADEQUATE OPPORTUNITY OF HEARING TO THE ASSES SEE AND AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE LAW AVAILABLE AT THE TIME OF DECIDING THIS ISSUE. THER EFORE, GROUND ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 6 NO.1 OF ASSESSEES APPEAL AND ALL THE GROUNDS OF RE VENUES APPEAL ARE SENT BACK TO THE FILE OF ASSESSING OFFICER. ALL THESE GROUNDS ARE ALLOWED FOR STATISTICAL PURPOSE. 5. GROUND NO.2 OF ASSESSEES APPEAL DEALS WITH THE ACTION OF LD. CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSIN G OFFICER IN DISALLOWING A SUM OF RS. 57.66 LACS OUT OF CLAIM OF DEDUCTION U/S 35(2AB) AND U/S 37(1), BY TREATING THE SAME AS CAPI TAL EXPENDITURE. 5.1. THE BRIEF FACTS ARE THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF CARRYING OUT SCIENTIFIC RESEARCH & DEVELOPMENT IN THE AREA OF BIOTECHNOLOGY AND PROVIDING PRODUCTS AND SERVICES BASED ON BIOTECHNOLOGY AND CELL SCIENCES. DURING T HE COURSE OF THE ASSESSMENT PROCEEDINGS, IT WAS FOUND BY THE AO THAT THE ASSESSEE HAS CLAIMED DEDUCTION U/S 35(2AB) OF THE A CT FOR AN AMOUNT OF RS. 25,92,36,861/-, AND THAT THE ASSESSEE CLAIMED TO HAVE INCURRED A SUM OF RS.17,28,24,574/- AS EXPENDI TURE FOR THE IN-HOUSE RESEARCH FACILITY. HOWEVER, ON VERIFICAT ION OF THE DETAILS OF EXPENSES FILED BY THE ASSESSEE, IT WAS NOTED BY THE AO THAT THE ASSESSEE HAS MADE A PAYMENT OF RS. 57.66 LACS TO M/ S RELIANCE CLINICAL RESEARCH SERVICES PVT. LTD. (HEREINAFTER CALLED AS RCRS) FOR CARRYING OUT CLINICAL TRIAL NEEDED FOR R & D AC TIVITY, ACCORDINGLY, VIDE QUESTIONNAIRE DT.11.12.09, A SHOW CAUSE WAS GIVEN TO THE ASSESSEE TO EXPLAIN AS TO HOW THE EXPE NSES NOT INCURRED IN THE IN-HOUSE RESEARCH FACILITY IS ALL OWABLE AS DEDUCTION U/S 35(2AB). THE ASSESSEE, IN ITS REPLY D T.15.12.09, ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 7 SUBMITTED TO AO THAT 'SECTION 35(2AB) MENTIONS THAT IN RESPECT OF ANY EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH OR IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY, AS APPROVED BY T HE PRESCRIBED AUTHORITY, THERE SHALL BE ALLOWED A DEDUCTION OF A SUM EQUAL TO ONE AND ONE-HALF TIMES OF THE EXPENDITURE SO INCURR ED, AND THAT R & D EXPENDITURE INCLUDES MATERIAL COSTS, MANPOWER C OST, ADMINISTRATIVE COST ON R & D PERSONNEL, CLINICAL TR IAL EXPENDITURE ETC., AND THAT CLINICAL TRIAL NEEDED FOR R & D ACTI VITY HAVE BEEN CARRIED OUT THROUGH RCRS, SINCE IT SPECIALIZES IN C LINICAL TRIALS AND SUCH EXPENDITURE HAVE BEEN INCURRED FOR GETTING CLINICAL TRIAL FOR R & D PURPOSES. IT WAS FURTHER SUBMITTED THAT A DEQUATE DISCLOSURE HAS BEEN MADE IN THE TAX AUDIT REPORT FI LED BY THE ASSESSEE, WHEREIN NO DISQUALIFICATION OR ADVERSE CO MMENTS WERE GIVEN BY THE AUDITORS WITH RESPECT TO PAYMENT MADE TO SUBSIDIARY COMPANY OR FOR DEDUCTION CLAIMED U/S SECTION 35(2AB ). THE AO CONSIDERED ASSESSEES REPLY, BUT DID NOT FIND IT AC CEPTABLE. THE AO ANALYSED PROVISIONS OF THE SECTION 35(2AB) AND O BSERVED THAT THESE WERE APPLICABLE ONLY IN CASE OF EXPENSES INCU RRED ON SCIENTIFIC RESEARCH ON IN-HOUSE RESEARCH AND DEVELO PMENT FACILITY. AS PER AO, THE R&D IN PHARMA /BIO-TECHNOLOGY COMPAN IES INVOLVES TWO MAIN ACTIVITIES DEVELOPMENT OF DRUGS AND ITS CLINICAL TRIALS/TESTING, AND IN THIS CASE THE WORK OF CLINICAL TRIAL WAS OUTSOURCED AND EXPENDITURE OF RS.57.66 LAKHS WA S INCURRED ON THAT, AND THUS THE ASSESSEE HAS NOT INCURRED THE EXPENSES OF RS.57.66 LACS IN THE IN-HOUSE RESEARCH AND DEVELOPM ENT FACILITY, AND THAT SAME WAS PAID TO RCRS AND THUS IT WAS NOT COVERED BY PROVISIONS OF 35(2AB). IN VIEW OF THE ABOVE, THE AS SESSEE'S CLAIM ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 8 OF DEDUCTION OF RS.86.49 LACS, WHICH IS ONE AND ONE -HALF TIMES OF THE EXPENDITURE INCURRED OF RS.57.66 LACS WAS DISAL LOWED AND ADDED TO TOTAL INCOME OF THE ASSESSEE, BY THE AO, A ND THE AMOUNT OF RS.57.66 LACS WAS TREATED AS CAPITAL EXPENDITURE FOR THE DEVELOPMENT OF PATENTS AND WAS CAPITALIZED, TO BE A LLOWED ON FINAL DEVELOPMENT OF THE PATENT. IT WAS FURTHER OBS ERVED BY HIM THAT THE ASSESSEE HAD ALSO ITSELF CAPITALIZED THE C OST INCURRED ON PATENTS, AND THEREFORE ACTION OF AO WAS IN LINE WIT H THE CLAIM OF THE ASSESSEE. 5.2. BEING AGGRIEVED, THE ASSESSEE CONTESTED THE MATTER BEFORE THE LD. CIT(A). IN APPEAL, THE ASSESSEE FILED DETA ILED SUBMISSIONS BEFORE THE LD. CIT(A). THESE ARE REPRO DUCED HEREUNDER FOR THE SAKE OF CONVENIENCE: THE APPELLANT HAD INCURRED TOTAL EXPENDITURE ON RESE ARCH & DEVELOPMENT OF RS.17,28,24,574/- WHICH WAS ELIGIBLE FOR DEDUCTION U/S35(2AB) AND HAD ACCORDINGLY CLAIMED DE DUCTION U/S 35(2AB) OF RS.25,92,36,861/- (BEING 150% OF RS.17,28, 24,574/-). THE DETAILS OF SUCH EXPENDITURE WERE AS FOLLOWS: PARTICULARS AMT. RESEARCH MATERIAL CONSUMED 6,41,75,537 SALARY 8,88,36,874 ADMINISTRATIVE EXP ENSES INCURRED ON RESEARCH & DEVELOPMENT 1,98,12,162 TOTAL 17,28,24,573 DEDUCTION ALLOWED U/S 35(2AB) @ 150% 25,92,36,861 HOWEVER, THE A.O. HAS SINGLED OUT ONE PARTICULAR EXP ENDITURE FOR DISALLOWANCE BEING PAYMENT MADE TO RELIANCE CLINICAL RESEARCH SERVICES PVT. LTD. (RCRS) AMOUNTING TO RS. 57.66 LAC S FOR CARRYING ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 9 OUT CLINICAL TRIAL NEEDED FOR ITS R & D ACTIVITY. TH E REASON GIVEN FOR SUCH DISALLOWANCE BY THE A.O. IS THAT DEDUCTION U/ S 35(2AB) IS APPLICABLE ONLY IN CASE OF EXPENSES INCURRED ON SCI ENTIFIC RESEARCH ON 'IN-HOUSE RESEARCH' AND DEVELOPMENT FACILITY. SI NCE THE CLINICAL TRIAL/TESTING WORK HAS BEEN OUTSOURCED AND EXPENDIT URE OF RS. 57.66 LACS IS INCURRED, SUCH EXPENDITURE CANNOT BE REGARDED AS IN- HOUSE R & D. BY MAKING SUCH OBSERVATION, THE A.O. HAS DISALLOWED RS. 86.49 LACS (BEING 150% OF RS. 57.66 LACS). HOWEVER, NOW SINCE WE HAVE RECEIVED ORDER OF DEPART MENT OF SCIENTIFIC & INDUSTRIAL RESEARCH (DSIR) DT. 24.08.20 10, IN WHICH THE DSIR WHILE APPROVING OUR R & D FACILITIES FOR TH E PURPOSE OF SECTION 35(2AB) HAS NOT CONSIDERED CLINICAL TRIAL EX PENDITURE INCURRED BY US AS A PART OF 'IN-HOUSE R & D EXPENDI TURE' ON THE GROUND THAT BY DEFINITION THESE EXPENDITURE WERE IN CURRED OUTSIDE OF APPROVED R & D FACILITY. THIS IS THE STAND TAKEN BY DSIR FOR ALL PHARMA R & D COMPANIES. ACCORDINGLY, WE WITHDRAW OUR CLAIM FOR WEIGHTED DEDU CTION OF THE AFORESAID EXPENDITURE U/S.35(2AB). HOWEVER, WE SUBM IT THAT THE AFORESAID EXPENDITURE SHOULD BE ALLOWED AS AN EXPEN DITURE U/S 37(1) (WITHOUT WEIGHTAGE OF 150%). THE APPELLANT SUBMITS THAT CLINICAL TRIAL NEEDED FO R RESEARCH & DEVELOPMENT ACTIVITY HAVE BEEN CARRIED OUT THROUGH RCRS SINCE RCRS SPECIALIZES IN CLINICAL TRIAL AND SUCH EXPENDIT URE HAS BEEN INCURRED FOR GETTING CLINICAL TRIAL FOR R & D PURPOS ES. THE APPELLANT SUBMITS THAT THERE ARE MANY EXPENDITURES WHICH THE APPELLANT WILL ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 10 HAVE TO INCUR OUTSIDE ITS PREMISES FOR CARRYING OUT OF IN-HOUSE RESEARCH AND ALL SUCH EXPENDITURE INCURRED OUTSIDE THE IN-HOUSE FACILITY CANNOT BE REGARDED AS NOT HAVING BEEN INC URRED FOR IN- HOUSE RESEARCH FACILITY. THE APPELLANT THEREFORE SUBMITS THAT THOUGH SUCH EXPENDITURE IS NOT ELIGIBLE FOR WEIGHTE D DEDUCTION IN VIEW OF STAND TAKEN BY DSIR VIDE ORDER DT.24.08.2010 , SUCH EXPENDITURE SHOULD BE ALLOWED U/S37(1) ON ACTUAL @ 100% AND NOT 150%. 5.3. IN VIEW OF THE ABOVE SUBMISSIONS OF THE ASSESSEE, W HEREIN THE ASSESSEE HAS WITHDRAWN ITS CLAIM U/S 35(2AB), T HE LD CIT(A), CONFIRMED DISALLOWANCE OF RS.86.49 LAKS MAD E BY THE AO U/S 35(2AB). WITH REGARD TO ALTERNATE CLAIM OF THE ASSESSEE, IT WAS OBSERVED BY HIM THAT SINCE THE ASS ESSEE, AS WELL AS THE AO, HAVE TREATED SUCH AMOUNT AS CAPITAL EXPENDITURE, THEREFORE, THERE WAS NO QUESTION OF AL LOWING OF CAPITAL EXPENDITURE U/S 37 OF THE ACT, ACCORDINGLY NO RELIEF WAS GIVEN BY HIM. 5.4. BEFORE US, LD. COUNSEL HAS SUBMITTED THAT EVEN IF THE CLAIM OF THE ASSESSEE IS HELD TO BE NOT ALLOWABLE U /S 35(2AB), THE ALTERNATIVE CLAIM OF THE ASSESSEE U/S 37(1) IS VERY MUCH ALLOWABLE, AS PER LAW AND FACTS. IT WAS SUBMITTED THAT THE GENUINENESS OF EXPENDITURE IS NOT IN DOUBT, THE FAC T THAT THESE EXPENSES ARE REVENUE IN NATURE IS ALSO NOT IN DOUBT , AND THEREFORE, IN ANY CASE, THESE EXPENSES ARE ALLOWABL E U/S 37(1) ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 11 OF THE INCOME TAX ACT. IN SUPPORT OF HIS CLAIM, LD . COUNSEL HAS DRAWN OUR ATTENTION ON THE INVOICE OF IMPUGNED EXPENSES, SHOWING NATURE OF THE EXPENSES INCURRED. ON THE OT HER HAND, LD DR HAS VEHEMENTLY SUPPORTED THE ORDERS OF LOWER AUTHORITIES, BY SUBMITTING THAT THE DEDUCTION MADE BY THE ASSESSEE U/S 35(2AB) WAS CONTRARY TO LAW AND FACTS, THEREFORE SAME HAS BEEN RIGHTLY DENIED BY THE LOWER AUTHORITI ES. WITH REGARD TO ALLOWABILITY OF THE EXPENSES U/S 37, IT W AS SUBMITTED BY HIM THAT PROPER DETAILS ARE NOT AVAILABLE AND TH EREFORE, THESE EXPENSES CANNOT BE ALLOWED EVEN AS REVENUE EX PENSES. 5.5. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH TH E SIDES AND GONE THROUGH THE ORDERS PASSED BY THE LOW ER AUTHORITIES AND MATERIAL PLACED BEFORE US FOR OUR C ONSIDERATION. SINCE, MAIN CLAIM OF ASSESSEE WITH RESPECT TO DEDUC TION U/S 35(2AB) WAS NOT SERIOUSLY PRESSED BEFORE US, THEREF ORE, SAME IS DISMISSED. WITH RESPECT TO ALTERNATE CLAIM MADE BY THE ASSESSEE U/S 37(1) OF THE ACT, IT IS NOTED THAT THE INVOICE OF M/S. RELIANCE CLINICAL RESEARCH SERVICES PVT. LTD. DATED 31.03.2007 IS ENCLOSED AT PAGE NO. 3 OF THE PAPER B OOK, SHOWING THAT PAYMENT HAS BEEN MADE TO THE SAID COMP ANY UNDER THE HEAD CLINICAL TRIAL FEES FOR THE MONT H OF MARCH, 2007 FOR TIME SPENT ON 1 ST MARCH TO 31 ST MARCH, 2007 FOR CONDUCTING CLINICAL TRIALS, IN SUPPORT OF TO ALL K PROJECTS, FOR A SUM OF RS.57,65,564/-. IT IS FURTHER NOTED THAT ON THE BACK SIDE OF THE INVOICE, COMPLETE DETAILS HAVE BEEN GIV EN WITH ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 12 RESPECT TO TIME SPENT BY 22 EMPLOYEES OF RCRS, ALSO GIVING PARTICULARS OF THE STUDIES DONE BY THESE EMPLOYEES. NAMES OF THESE EMPLOYEES HAVE BEEN GIVEN ALONG WITH THEIR RA TES PER HOUR. IT IS FURTHER NOTED THAT LD. ASSESSING OFFICE R HAS SHOWN NO DOUBTS ABOUT THE GENUINENESS OF THESE EXPENSES. IT WAS HELD BY LD. CIT(A) THAT SINCE CLAIM OF ASSESSEE WIT H RESPECT TO DEDUCTION U/S.35(2AB) HAS BEEN DENIED, THEREFORE, T HESE EXPENSES ARE CAPITAL IN NATURE. IT WAS FURTHER OBS ERVED BY LD. CIT(A) THAT ASSESSING OFFICER, AS WELL AS ASSESSEE, HAVE TREATED THESE EXPENSES AS CAPITAL IN NATURE. IN OUR VIEW, THE OBSERVATIONS OF LD. CIT(A) ARE MISPLACED AND WITHOU T ANY BASIS. WE HAVE GONE THROUGH DETAILS OF THESE EXPENS ES. IN OUR CONSIDERED VIEW, THESE EXPENSES ARE APPARENTLY REVE NUE IN NATURE. LD DR ALSO COULD NOT POINT OUT AS TO WHICH EXPENSES ARE CAPITAL IN NATURE. THUS, IN OUR VIEW, THESE EXP ENSES ARE OF REVENUE NATURE. 5.6. THE OTHER ARGUMENT OF LD DR WAS THAT ASSESSEE DID NOT CLAIM THESE EXPENSES U/S 37 AND DID NOT TREAT THEM AS REVENUE IN NATURE, AND THEREFORE ASSESSEE SHOULD BE PRECLUD ED FROM CLAIMING BENEFIT OF THESE EXPENSES, NOW AT THIS STA GE, IRRESPECTIVE OF THIS FACT THAT THESE EXPENSES MAY H AVE BEEN HELD AS ALLOWABLE, IF THE ASSESSEE WOULD HAVE MADE ITS CLAIM CORRECTLY AS PER LAW, AT THE TIME OF FILING OF RETU RN. WE HAVE CAREFULLY CONSIDERED THIS ARGUMENT, BUT FIND THAT I T IS NOT SUSTAINABLE IN THE EYES OF LAW, IN THE GIVEN FACTS AND ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 13 CIRCUMSTANCES OF THE CASE, AND IN VIEW OF WELL SETT LED POSITION OF LAW. IN OUR VIEW, THERE ARE NO ESTOPPELS AGAINST LAW. EVEN IF, ASSESSEE AGREES OR CONSENTS FOR SOMETHING CONTRARY TO LAW, THE A.O. IS OBLIGED UNDER THE LAW, TO DISCHARGE HIS DU TY OF MAKING FAIR ASSESSMENT OF INCOME AND TO COMPUTE AMOUNT OF TAX PAYABLE AS PER LAW. AS PER ARTICLE 265 OF THE CONSTITUTION OF INDIA, NO TAX CAN BE COLLECTED EXCEPT BY AUTHORITY OF LAW. HONB LE SUPREME COURT IN THE CASE OF RAMLAL VS REWA COALFIELD LTD ( AIR 1962 SC 361), HELD THAT THE STATE AUTHORITIES SHOULD NOT RA ISE TECHNICAL PLEAS IF THE CITIZENS HAVE A LAWFUL RIGHT, WHICH IS BEING DENIED TO THEM MERELY ON TECHNICAL GROUNDS. THE STATE AUTHORI TIES CANNOT ADOPT THE ATTITUDE WHICH PRIVATE LITIGANTS MIGHT AD OPT. FURTHER, WE PLACE OUR RELIANCE ON THE JUDGMENT OF HONBLE DE LHI HIGH COURT IN THE CASE OF CIT VS BHARAT GENERAL REINSURA NCE CO LTD 81 ITR 303 (DEL.) RELEVANT PORTION IS REPRODUCED BE LOW: IT WAS TRUE THAT THE ASSESSEE ITSELF HAD INCLUDED THAT DIVIDEND INCOME IN ITS RETURN FOR THE YEAR IN QUESTION, BUT THERE WAS NO ESTOPPEL IN THE INCOME-TAX ACT AND THE ASSESSEE HAVING ITSEL F CHALLENGED THE VALIDITY OF TAXING THE DIVIDEND DURI NG THE YEAR OF ASSESSMENT IN QUESTION, IT MUST BE TAKEN THAT IT HA D RESILED FROM THE POSITION WHICH IT HAD WRONGLY TAKEN WHILE FILIN G THE RETURN. QUITE APART FROM IT, IT WAS INCUMBENT ON THE INCOME -TAX DEPARTMENT TO FIND OUT WHETHER A PARTICULAR INCOME WAS ASSESSA BLE IN THE PARTICULAR YEAR OR NOT. MERELY BECAUSE THE ASSESSEE WRONGLY INCLUDED THE INCOME IN ITS RETURN FOR A PARTICULAR Y EAR, IT COULD NOT CONFER JURISDICTION ON THE DEPARTMENT TO T AX THAT INCOME IN THAT YEAR EVEN THOUGH LEGALLY SUCH INCOME DI D NOT PERTAIN TO THAT YEAR. THEREFORE THE INCOME FROM DIVIDEND WAS NOT ASSESSABLE DURING THE ASSESSMENT YEAR 1958-59, BUT IT WAS ASSESSABLE IN THE ASSESSMENT YEAR 1953-54. IT COULD NOT, THEREFORE, BE TAXED IN THE ASSESSMENT YEAR 1958-59. ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 14 FURTHER RELIANCE IS PLACED BY US ON ANOTHER JUDGMEN T OF HONBLE GUJARAT HIGH COURT, IN THE CASE OF, S.R. KOSHTI 2 76 ITR 165 (GUJ) IN WHICH RELIEF WAS GRANTED TO ASSESSEE WITH FOLLOWING OBSERVATIONS: THE AUTHORITIES UNDER THE ACT ARE UNDER AN OBLIGATI ON TO ACT IN ACCORDANCE WITH LAW. TAX CAN BE COLLECTED ONLY AS P ROVIDED UNDER THE ACT. IF AN ASSESSEE, UNDER A MISTAKE, MISCONCEPT ION OR ON NOT BEING PROPERLY INSTRUCTED, IS OVER-ASSESSED, THE AU THORITIES UNDER THE ACT ARE REQUIRED TO ASSIST HIM AND ENSURE THAT O NLY LEGITIMATE TAXES DUE ARE COLLECTED. IN THE CASE OF SNEHLATA 192 CTR 50, HONBLE J&K HIG H COURT HELD THAT WHEN THE SUBSTANTIVE LAW CONFERS A BENEFIT ON THE ASSESSEE UNDER A STATUTE, IT CANNOT BE TAKEN AWAY B Y THE ADJUDICATORY AUTHORITY ON MERE TECHNICALITIES. IT I S SETTLED PROPOSITION OF LAW THAT NO TAX CAN BE LEVIED OR REC OVERED WITHOUT AUTHORITY OF LAW. ARTICLE 265 OF THE CONSTITUTION OF INDIA AND SECTION 114 OF THE STATE (J&K) CONSTITUTION IMPOSES AN EMBA RGO ON IMPOSITION AND COLLECTION OF TAX IF THE SAME IS WIT HOUT AUTHORITY OF LAW. LASTLY, WE FIND IT USEFUL TO REFER TO JUDGMENT OF H ONBLE BOMBAY HIGH COURT IN THE CASE OF CENTRAL PROVINCES MANGANE SE ORE 112 ITR 734, HOLDING THAT, THE MERE FACT THAT A DEDUCTI ON WAS NOT CLAIMED BEFORE THE INCOME-TAX OFFICER, WAS NOT OF M UCH IMPORTANCE, SINCE IF THE LIABILITY ARISES THEN A CL AIM CAN BE MADE ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 15 IN A BONAFIDE MANNER AT ANY STAGE BEFORE THE HIGHER AUTHORITY, WHO IS COMPETENT TO GRANT RELIEF. THUS, IN VIEW OF AFORESAID DISCUSSION, COUPLED WITH FACTS AND CIRCUMSTANCES OF THIS CASE AND CLEAR POSITION OF LA W, AS DISCUSSED ABOVE, IN OUR OPINION THERE WAS NO REASON TO DENY T HE CLAIM ASSESSEE U/S 37 OF THE ACT. THEREFORE, THE AO IS D IRECTED TO ALLOW THESE EXPENSES U/S 37 OF THE ACT. ACCORDINGLY, GROU ND NO.2 OF THE ASSESSEES APPEAL IS PARTLY ALLOWED. 6. GROUND NO.3 THE ASSESSEE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN CONFIRMING THE DISALLOWANCE MADE BY A SSESSING OFFICER FOR A SUM OF RS.776,132/- OUT OF SOFTWARE E XPENSES INCURRED BY TREATING THE SAME AS CAPITAL EXPENDITUR E. 6.1. THE BRIEF FACTS ARE THAT ASSESSEE PURCHASED SOFTWA RE LICENSE WORTH RS.7,76,132/- DURING THE YEAR, AND CLAIMED THIS AMOUNT AS REVENUE EXPENDITURE. THE ASSESSING OFFICER NOTED THAT THE SOFTWARE LICENSE WAS A CAPITAL ASSET AS IT GAVE ENDURING BENEFIT TO THE ASSESSEE AND WAS TO BE CAPITALIZED. THUS THE CLAIM OF THE ASSESSEE, THAT IT WAS REVENUE EXPENDITURE, W AS DISALLOWED. IT WAS FURTHER HELD BY THE AO THAT, OTHERWISE ALSO THE EXPENDITURE ON SOFTWARE PURCHASE WAS NOT ALLOWABLE AS THE ASSES SEE DID NOT DEDUCT TDS ON THE SAME. AS PER THE AO, PURCHASE OF SOFTWARE WAS ESSENTIALLY PURCHASE OF COPY RIGHT. THEREFORE, PAYMENT BEING IN THE NATURE OF 'ROYALTY', ATTRACTED TDS PROVISION S U/S 194J, AND THEREFORE, THE SAME WAS COVERED UNDER THE PROVI SIONS OF ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 16 SECTION 194J R.W.S. 40(A)(IA). FURTHER, NO DEPRECI ATION WAS ALLOWED ON THE SAME IS ALLOWED ON THE GROUND THAT T HE ASSESSEE HAD NOT DEDUCTED TDS. 6.2. BEING AGGRIEVED, THE ASSESSEE CONTESTED THE MATTER BEFORE THE CIT(A) AND FILED DETAILED SUBMISSIONS. THE ASSE SSING SUBMITTED BILLS OF THESE EXPENSES, BUT THE LD. CIT( A) REFUSED TO ADMITS THESE BILLS ON THE GROUND THAT THESE WERE NO T FURNISHED BY THE ASSESSEE IN TERMS OF RULE 46A AND CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 6.3. BEFORE US, LD. COUNSEL HAS SUBMITTED THAT INJUSTIC E HAS BEEN DONE BY THE LD. CIT(A) BY NOT EXAMINING THE FA CTS AND EVIDENCES PLACED BY ASSESSEE. ON THE OTHER HAND, L D DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THIS ISS UE CAN BE SENT BACK TO FILE OF ASSESSING OFFICER. 6.4. WE HAVE GONE THROUGH THE SUBMISSIONS MADE BY BOTH THE SIDES. IT IS NOTED THAT FULL CO-OPERATION HAS BEEN EXTENDED BY THE ASSESSEE AT ALL TIMES I.E. DURING COURSE OF ASSESSM ENT PROCEEDING, AND ALSO DURING APPELLATE PROCEEDING BEFORE THE LD. CIT(A). IF THE CIT(A) WANTED TO HAVE ONE SEPARATE PETITION UNDER R ULE 46A, THE SAME COULD HAVE BEEN VERY WELL POINTED OUT TO THE A SSESSEE. WITHOUT AFFORDING OPPORTUNITY TO THE ASSESSEE, THE VALID CLAIM OF THE ASSESSEE SHOULD NOT HAVE BEEN DENIED TO IT, MER ELY FOR SOME TECHNICAL REASONS. UNDER THESE CIRCUMSTANCES, WE F IND IT APPROPRIATE TO SEND THIS ISSUE BACK TO THE FILE OF LD. CIT(A) WHO SHALL GIVE OPPORTUNITY TO THE ASSESSEE TO FILE ALL THE EVIDENCES AS ITA NOS.2061 & 1575/MUM/13 A.Y. 2007-08 (DCIT VS. RELIANCE LIFE SCIENCE PVT. LTD.) PAGE 17 MAY BE CONSIDERED APPROPRIATE, ALONG WITH PETITION UNDER RULE 46A ETC. THE ASSESSEE SHALL ALSO EXTEND FULL CO-OP ERATION TO THE LD. CIT(A) BY PROVIDING FURTHER DETAILS AND DOCUMEN TARY EVIDENCES, AS MAY BE REQUIRED. ACCORDINGLY, THIS G ROUND IS ALLOWED FOR STATISTICAL PURPOSES. 7. AS A RESULT, ITA NO.2061/MUM/2013 BEING THE APPEAL FILED BY REVENUE IS ALLOWED FOR STATISTICAL PURPOSE S AND ITA NO.1575/MUM/2013, BEING THE APPEAL FILED BY ASSESSE E IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 09 TH DAY OF OCTOBER, 2015. SD/- SD/- (SHAILENDRA KUMAR YADAV) (ASHWANI TANEJA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: DATED 09/10/2015 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- / REVENUE / ASSESSEE ! / CONCERNED CIT ' !#$%&' / CIT (A) ()*+& ,--. $%&' $./ / DR, ITAT, MUMBAI 0+1234' / GUARD FILE. BY ORDER / 5. 6%78 %&. $%&' $./ 9