M/s.Bioplus Life Sciences Pvt. Ltd., Bangalore V. Deputy Commissioner of Income-Tax, Bangalore

ITA 1859/BANG/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 2337 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 03-11-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: DR P V PRADEEP KUMAR
• Keywords: Principle of natural justice; Wholly owned subsidiary; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER ITA NO. 1859 /BANG/201 6 ASSESSMENT YEAR : 20 1 0 - 1 1 M/S. BIOPLUS LIFE SCIENCES PVT. LTD., SITE NO. 10/1A, KRISHNARAJPURAM HOBLI HOODI VILLAGE, BANGALORE 560 048. PAN: AACCB3621R VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SMT. SHEETAL BORKAR, ADVOCATE RESPONDENT BY : DR. P.V. PRADEEP KUMAR, ADDL. CIT (DR) DATE OF HEARING : 2 6 . 0 7 .2018 DATE OF PRONOUNCEMENT : 31 . 0 8 .2018 O R D E R PER SHRI A.K. GARODIA, ACCOUNTANT MEMBER THIS APPEAL IS FILED BY THE ASSESSEE AND THE SAME I S DIRECTED AGAINST THE ORDER OF LD. CIT(A)-14, LTU, BANGALORE DATED 20.09.2016 FOR ASSESSMENT YEAR 2010-11. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) OUGHT TO HAVE ALLOWED THE CLAIM OF DEDUCTION ON THE EXPENDITURE ON RESEARCH A ND DEVELOPMENT. 2. ON THE FACTS THE LEARNED COMMISSIONER (A) OUGHT TO HAVE APPRECIATED THE SUM OF RS. 1,04,60,447/- INCURRED A ND CLAIMED TOWARDS RESEARCH AND DEVELOPMENT EXPENSES FOR THE R ESEARCH AND DEVELOPMENT CARRIED OUT BY THE SUBSIDIARIES FOR THE PURPOSE OF APPELLANT'S BUSINESS AND ACCORDINGLY THE EXPENDITUR E AS CLAIMED WAS LIABLE TO BE ALLOWED U/S.35(1) OF THE ACT. 3. THE LEARNED COMMISSIONER (A) ERRED IN HOLDING TH AT THE APPELLANT DID NOT FILE ANY MATERIAL TO JUSTIFY THE CLAIM WHEN THE APPELLANT HAD SUBMITTED A NOTE AS TO THE PROJECTS TOWARDS RESEARC H. ITA NO. 1859/BANG/2016 PAGE 2 OF 5 4. IN THE INTEREST THE LEARNED COMMISSIONER (A) OUG HT TO HAVE GIVEN AN OPPORTUNITY TO THE APPELLANT FOR FURNISHING SUPPORT ING DETAILS IN CASE THE NOTE SUBMITTED BY THE APPELLANT WAS NOT ADEQUAT E AND HAVING FAILED TO GIVE AN OPPORTUNITY, THE IMPUGNED ADDITIO N AS SUSTAINED IS OPPOSED TO THE PRINCIPLES OF NATURAL JUSTICE. 5. WITHOUT PREJUDICE, THE ADDITION IS EXCESSIVE, AR BITRARY AND UNREASONABLE AND LIABLE TO BE DELETED IN TOTO. 6. THE LEARNED COMMISSIONER (A) ERRED IN CONFIRMING THE INTEREST U/S.234C OF THE ACT. 7. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL THE APPELLANT PRAYS THAT THE APPEAL M AY BE ALLOWED. 3. THE LD. AR OF ASSESSEE REITERATED THE SAME CONTE NTIONS WHICH WERE RAISED BEFORE CIT (A). AS AGAINST THIS, THE LD. DR OF REV ENUE SUPPORTED THE ORDER OF CIT (A) AND PLACED RELIANCE ON THE TRIBUNAL ORDER R ENDERED IN THE CASE OF ELECTRONICS CORPN. OF INDIA LTD. VS. ACIT AS REPORT ED IN [2012] 28 TAXMANN.COM 280(HYD.) AND THE JUDGEMENT OF HON'BLE KARNATAKA HI GH COURT RENDERED IN THE CASE OF TEJAS NETWORKS LTD. VS. DCIT AS REPORTED IN [2015] 60 TAXMANN.COM 309 (KARNATAKA). HE SUBMITTED COPY OF THE TRIBUNAL ORDER AND THE JUDGEMENT OF HON'BLE KARNATAKA HIGH COURT AND SUBMITTED THAT PAR A 17 OF THE TRIBUNAL ORDER AND PARAS 20 & 27 OF THE JUDGEMENT OF HON'BLE KARNA TAKA HIGH COURT ARE RELEVANT. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIRST OF ALL, WE EXAMINE THE APPLICABILITY OF THE JUDGMENT OF HON'BLE KARNATAKA HIGH COURT CITED BY LD. DR OF REVENUE HAVING BEEN RENDERED IN THE CASE OF TEJAS N ETWORKS LTD. VS. DCIT (SUPRA). FOR THIS, WE REPRODUCE THE RELEVANT PARAS OF THE ORDER OF CIT (A) WHICH ARE PARAS 6, 6.1 AND 6.2. THESE PARAS ARE REPRODUC ED HEREINBELOW. DISALLOWANCE OF R & D EXPENDITURE 6. THE AO IN THE ASSESSMENT ORDER STATED THAT IN TH E PROFIT & LOSS ACCOUNT, IT IS OBSERVED THAT THE ASSESSEE COMPANY H AS DEBITED A SUM OF RS.1,04,60,447/- TOWARDS RESEARCH & DEVELOPMENT EXP ENSES WITH REFERENCE TO THE HOSUR UNIT OF THE APPELLANT. THE AO ALSO POINTED OUT THAT THE COMPANY HAS NOT P RODUCED NECESSARY APPROVALS TAKEN FROM THE PRESCRIBED AUTHO RITY NAMELY, ITA NO. 1859/BANG/2016 PAGE 3 OF 5 SECTARY, DEPARTMENT OF SCIENTIFIC AND INDUSTRIALRES EARCH, GOVT. OF INDIA OR IF THE ASSESSEE HAS PAD THE SUM TO A UNIVE RSITY, THE UNIVERSITY SHOULD HAVE HAD APPROVAL FROM THE HEAD O F NATIONAL LABORATORY OR FROM THE PRINCIPAL SCIENTIFIC ADVISOR TO THE GOVT. OF INDIA. IN THE CASE OF THE ASSESSEE NO SUCH APPROVAL S HAVE BEEN PRODUCED. MOREOVER, IT IS JUST NOT ENOUGH THAT THE ASSESSEE HAS DEVELOPMENT ACTIVITIES IN ITS LABORATORY. THE ASSES SEE NEED TO PROVE WITH DOCUMENTARY EVIDENCES THAT THE RESEARCH AND DE VELOPMENT ACTIVITIES WERE CARRIED OUT BY IT. FURTHER, MORE TH E RESEARCH AND DEVELOPMENT CARRIED OUT BY THE ASSESSEE COMPANY, IF ANY, WOULD GIVE HIM ENDURING BENEFIT AND SUCH THE EXPENDITURE IS CAPITAL IN NATURE AND CANNOT BE ALLOWED AS REVENUE EXPENDITURE . BASED ON LACK OF EVIDENCE, THE CLAIM OF DEDUCTION O F THE ASSESSEE TOWARDS EXPENSES OF RESEARCH AND DEVELOPMENT OF RS. 1,04,60,447/- IS DISALLOWED AND ADDED TO THE INCOME.' 6.1 DURING THE COURSE OF APPEAL BEFORE ME THE ASSES SEE IN HIS WRITTEN SUBMISSION DT. 14.06.2016, THE APPELLANT CONTENDED THAT IT HAS PAID THE R & D EXPENSES TO ITS 100% SUBSIDIARY COMPANY FOR C ARRYING OUT RESEARCH AND DEVELOPMENT ON BEHALF OF THE COMPANY, AND THE PAYMENT WAS MADE TO SUBSIDIARY AGAINST THE QUARTERLY DEBIT NOTES RAISED BY THE SUBSIDIARY, AND THESE R& D EXPENSES ARE ACCORDING T O SUB CLAUSE (I) OF CLAUSE 1 OF SEC.35 OF IT ACT AND THAT FOR AO'S O RDER DESERVE TO BE SET ASIDE. 6.2 APART FROM THE ABOVE SUBMISSION, THE ASSESSEE D ID NOT FILE ANY MATERIAL TO JUSTIFY HIS CLAIM ON R & D NOR HAS HE P RODUCED ANY EVIDENCE AS POINTED OUT BY THE AO IN HIS ORDER. TH EREFORE, I HAVE NO HESITATION IN AGREEING WITH THE FINDINGS OF THE AO AND THIS GROUND IS DISMISSED. 5. FROM THE ABOVE PARAS REPRODUCED FROM THE ORDER O F CIT (A), IT IS SEEN THAT IN THE PRESENT CASE, IT IS ADMITTED POSITION OF FACT T HAT THE ASSESSEE HAS NOT CARRIED OUT THE RESEARCH AND DEVELOPMENT ACTIVI TY ITSELF AND INSTEAD, THE ASSESSEE HAS ADMITTEDLY PAID THE R&D EXPENSES TO IT S 100% SUBSIDIARY COMPANY FOR CARRYING OUT RESEARCH AND DEVELOPMENT O N BEHALF OF THE ASSESSEE COMPANY AND THE PAYMENT WAS MADE TO SUBSIDIARY AGAI NST THE QUARTERLY DEBIT NOTES RAISED BY THE SUBSIDIARY. THIS IS ALSO NOTED BY AO IN ASSESSMENT ORDER AS REPRODUCED BY CIT(A) AS ABOVE THAT THE ASSESSEE HAS NOT PRODUCED NECESSARY APPROVALS TAKEN FROM THE PRESCRIBED AUTHO RITY NAMELY, SECRETARY, DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH, G OVT. OF INDIA. IN THE LIGHT OF THESE FACTS, NOW WE EXAMINE THE APPLICABILITY OF TH E JUDGMENT OF HON'BLE ITA NO. 1859/BANG/2016 PAGE 4 OF 5 KARNATAKA HIGH COURT RENDERED IN THE CASE OF TEJAS NETWORKS LTD. VVS DCIT (SUPRA) ON WHICH RELIANCE HAS BEEN PLACED BY LD. DR OF REVENUE. IN THIS CASE, IT WAS HELD BY HON'BLE KARNATAKA HIGH COURT THAT THE A O WILL BE EXCEEDING IN HIS JURISDICTION, IF HE WERE TO UNDERTAKE THE EXERCISE OF EXAMINING AS TO WHETHER THE CERTIFICATE ISSUED BY THE PRESCRIBED AUTHORITY IS WITHIN THE PARAMETERS OF STATUTORY PROVISIONS OF THE ACT OR OTHERWISE. THE HON'BLE KARNATAKA HIGH COURT HAS ALSO NOTED THE SUB-SECTION (3) TO SECTION 35 OF THE ACT WHEREIN IT IS PROVIDED THAT NO COMPANY SHALL BE ENTITLED FOR DEDU CTION UNDER CLAUSE (1) UNLESS IT ENTERS INTO AN AGREEMENT WITH THE PRESCRI BED AUTHORITY FOR CO- OPERATION IN SUCH RESEARCH AND DEVELOPMENT FACILITY AND FULFILS SUCH CONDITIONS WITH REGARD TO MAINTENANCE OF ACCOUNTS AND AUDIT TH EREOF AND FURNISH REPORTS IN SUCH MANNER AS HAS BEEN PRESCRIBED. ALTHOUGH IN TH AT CASE, THE APPLICATION WAS FILED BY THE ASSESSEE FOR APPROVAL OF SECRETARY , DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH ON 07.01.2009 AND AFTER CAL LING FOR DOCUMENTS/INFORMATION FROM ASSESSEE AND ON EXAMINAT ION AND SCRUTINY OF SUCH DOCUMENTS /INFORMATION FURNISHED BY ASSESSEE, ORDER OF APPROVAL CAME TO BE GRANTED IN FAVOUR OF ASSESSEE ON 18.11.2009 IN FORM NO.3CM. IN SPITE OF THIS, THE AO WENT ON TO EXAMINE THE CORRECTNESS OF CERTIF ICATE ISSUED BY THE PRESCRIBED AUTHORITY AND WHEN THE WRIT WAS FILED BE FORE HON'BLE KARNATAKA HIGH COURT, IT WAS HELD THAT THE AO HAS NO JURISDICTION TO EXAMINE THE CORRECTNESS OF THE CERTIFICATE ISSUED BY THE PRESCRIBED AUTHORITY. IN THE PRESENT CASE, A CATEGORICAL FINDING IS GIVEN BY AO WHICH REMAINS UN CONTROVERTED THAT THE ASSESSEE HAS NOT PRODUCED NECESSARY APPROVAL TAKEN FROM THE PRESCRIBED AUTHORITY NAMELY, SECRETARY, DEPARTMENT OF SCIENTIF IC AND INDUSTRIAL RESEARCH, GOVT. OF INDIA. IN OUR CONSIDERED OPINION, PARA 18 OF THIS JUDGEMENT IS VERY MUCH RELEVANT IN THE PRESENT CASE AND HENCE, THE SA ME IS REPRODUCED HEREINBELOW. 18. A PLAIN READING OF SECTION 35(2AB)(1) WOULD IND ICATE THAT WHERE A COMPANY IS ENGAGED IN THE BUSINESS OF BIOTECHNOLO GY OR ANY BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICL E OR THING, NOT BEING AN ARTICLE OR THING SPECIFIED IN THE LIST OF THE ELEVENTH SCHEDULE INCURS ANY EXPENDITURE ON 'SCIENTIFIC RESEARCH' (NO T BEING EXPENDITURE IN THE NATURE OF COST OF ANY LAND OR BU ILDING) ON IN-HOUSE, RESEARCH AND DEVELOPMENT FACILITY 'AS APPROVED BY T HE PRESCRIBED AUTHORITY,' SUCH ASSESSEE WOULD BE ENTITLED TO A DE DUCTION OF A SUM ITA NO. 1859/BANG/2016 PAGE 5 OF 5 EQUAL TO ONE AND HALF TIMES OF THE EXPENDITURE SO I NCURRED. THE WORD 'SCIENTIFIC RESEARCH' HAS BEEN DEFINED UNDER SUBSEC TION (4) OF SECTION 43 OF THE ACT, WHICH IS EXTRACTED SUPRA AND SAME WO ULD INDICATE EXPENDITURE INCURRED IN SUCH SCIENTIFIC RESEARCH IN CLUDES ALL EXPENDITURE INCURRED FOR THE PROSECUTION OR THE PRO VISION OF FACILITIES FOR THE PROSECUTION OF SUCH SCIENTIFIC RESEARCH. HO WEVER, IT DOES NOT INCLUDE EXPENDITURE INCURRED IN THE ACQUISITION OF RIGHTS IN OR ARISING OUT OF SCIENTIFIC RESEARCH. SUCH EXPENDITURE INCURR ED SHOULD BE APPROVED BY THE AUTHORITY PRESCRIBED UNDER SECTION 35(2AB) OF THE ACT READ WITH RULES FRAMED THEREUNDER. THE AUTHORIT Y PRESCRIBED TO GRANT SUCH APPROVAL UNDER RULE 6(1B) OF THE INCOME TAX RULES, 1961 IS THE SECRETARY, DEPARTMENT OF SCIENTIFIC AND INDU STRIAL RESEARCH. 6. FROM THE ABOVE PARA REPRODUCED FROM THIS JUDGEME NT, IT IS SEEN THAT IT IS HELD BY HON'BLE KARNATAKA HIGH COURT THAT ON A PLAIN REA DING OF SECTION 35(2AB) (1), DEDUCTION IS ALLOWABLE U/S. 35(2AB) IF IT IS APPROV ED BY THE PRESCRIBED AUTHORITY. SINCE IN THE PRESENT CASE, NO APPROVAL OF PRESCRIBE D AUTHORITY IS AVAILABLE, THE ASSESSEES CLAIM FOR DEDUCTION IS NOT ALLOWABLE AND HENCE, RESPECTFULLY FOLLOWING THIS JUDGEMENT OF HON'BLE KARNATAKA HIGH COURT, WE DECIDE THIS ISSUE AGAINST THE ASSESSEE. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. SD/- SD/- (SUNIL KUMAR YADAV) (ARUN KUMAR GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 31 ST AUGUST, 2018. /MS/ COPY TO: 1. APPELLANT 4. CIT(A) 2. RESPONDENT 5. DR, ITAT, BANGALORE 3. CIT 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.