ACIT, New Delhi V. M/s. Parablic Drugs Ltd., New Delhi

ITA 2111/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3778 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 31-03-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 06-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASHOK PANDEY
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Revised return; Revenue expenditure; Capital expenditure
• Section: 115JB; 80IB; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F, NEW DELHI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER & SHRI K.G. BANSAL, ACCOUNTANT MEMBER ITA NO. 2111/DEL/2010 ASSESSMENT YEAR: 2006-07 ACIT, VS. PARABLIC DRUGS LTD., CIRCLE 14, ROOM NO. 415, 9-AB, 3 RD FLOOR, C.R. BUILDING, I.P. ESTATE, TAIMOOR NAGAR, NEW DELHI. NEW DELHI. AACCP1419K (APPELLANT) (RESPONDENT) APPELLANT BY : ASHOK PANDEY, CIT(DR) RESPONDENT BY : AJAY WADHWA, ADV. ORDER PER I.P. BANSAL, J.M. THIS IS AN APPEAL FILED BY THE REVENUE. IT IS DIR ECTED AGAINST THE ORDER PASSED BY LD. CIT(A) DATED 24.02.2010 FOR A.Y. 2006-07. GROUNDS OF APPEAL READ AS UNDER: - 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS . 7,10,95,947/- MADE BY THE AO ON ACCOUNT OF DISALLOW ANCE OF EXPENDITURE ON R&D BEING CAPITAL IN NATURE. ITA NO. 2111/D/2010 2 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO ALLOW THE DEDUC TION U/S 80IB OF THE I.T. ACT, 1961 IF IT IS OTHERWISE ALLOW ABLE WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS NOT MAD E ANY SUCH CLAIM IN ITS RETURN OF INCOME. 3. THE APPELLANT CRAVES TO THE ALLOWED TO ADD, DELETE OR AMEND ANY OTHER GROUNDS OF APPEAL. 2. THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF BULK DRUGS AND FINE CHEMICALS ETC. THE RETURN OF INCOME ORIGINALLY WAS FILED ON 7.11.2006 DECLARING ITS TOTAL INCOME AT NIL AFTER CLAIMING WEIGHTED DEDUCTION OF EXPENDI TURE INCURRED ON IN-HOUSE SCIENTIFIC RESEARCH & DEVELOPMENT OF RS. 7 ,82,53,487/- AGAINST WHICH IN TERMS OF PROVISIONS CONTAINED IN S EC. 35(2AB) OF THE INCOME TAX ACT, 1961 (ACT), THE ADMISSIBLE DEDU CTION @ 150% WAS COMPUTED AT RS. 11,73,80,230/-. IN VIEW OF TOT AL INCOME COMPUTED AT RS. 8,74,75,594/- THE DEDUCTION U/S 35( 2AB) WAS RESTRICTED TO THAT AMOUNT AND INCOME WAS COMPUTED A T NIL. AS UNDER THE NORMAL PROVISIONS COMPUTABLE INCOME WAS NIL THE TAX WAS PAID ON BOOK PROFIT U/S 115JB AND BOOK PROFIT WAS COMPUT ED AT RS. 9,21,42,714/-. ITA NO. 2111/D/2010 3 3. THE BREAKUP OF TOTAL EXPENDITURE OF RS. 7,82,53, 487/- INCURRED ON RESEARCH & DEVELOPMENT IN DRUGS AND PHARMACEUTIC AL CONSTITUTED OF COST OF FIXED ASSETS SHOWN IN THE BA LANCE SHEET AT RS. 44,41,522/- AND BALANCE SUM OF RS. 7,38,11,965/- WA S 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. SUC H RECOGNITION GRANTED BY DSIR WAS UP TO 31.3.2010. THE ASSESSEE HAD MADE AN APPLICATION TO DSIR CLAIMING THE BENEFIT OF 11,73,8 0,230/- U/S 35(2AB) OF THE ACT. HOWEVER, DSIR APPROVED CAPITAL EXPENDITURE OF RS. 41,69,868/- AND THE REVENUE EXPENDITURE AT R S. 27,16,018/- BOTH AGGREGATING TO RS. 68,85,886/- AND ON THE BASI S OF SUCH APPROVAL THE ASSESSEE REVISED ITS RETURN OF INCOME ON 7.11.2007 DECLARING ITS REVISED TOTAL INCOME AT RS. 60,50,820 /-. IT CLAIM DEDUCTION OF RS. 1,03,28,830/- BEING 150% WAS APPRO VED AMOUNT U/S 35(2AB) AND THE BALANCE EXPENDITURE OF RS. 7,10 ,95,947/- WAS CLAIMED TO HAVE BEEN INCURRED ON REVENUE ACCOUNT WH ICH WAS ON MATERIALS, SALARIES ETC. USED FOR IN-HOUSE RESEARCH AND DEVELOPMENT AS THESE WERE NOT APPROVED FOR CLAIMING WEIGHTED DE DUCTION U/S 35(2AB). THESE EXPENDITURES HAVE BEEN SHOWN AS DEF ERRED REVENUE ITA NO. 2111/D/2010 4 EXPENDITURE IN THE BALANCE SHEET ON THE ASSETS SIDE OF THE BALANCE SHEET UNDER THE HEAD MISCELLANEOUS EXPENDITURE. 5. IN THE IMPUGNED ASSESSMENTS, THE AO HAS DISALLOW ED THE CLAIM OF THE ASSESSEE OF SUM OF RS. 7,10,95,947/- B EING ON ACCOUNT OF REVENUE EXPENDITURE AND HAS TREATED THE SAID AMO UNT AS CAPITAL EXPENDITURE. THE REASON FOR DISALLOWANCE GIVEN BY THE AO IS THAT THE SAID AMOUNT HAS BEEN SHOWN UNDER THE HEAD MISC ELLANEOUS EXPENDITURE IN THE BALANCE SHEET, THEREFORE, IT IS A CAPITAL EXPENDITURE. ACCORDING TO AO THE ASSESSEE ITSELF H AS CLASSIFIED THE SAID AMOUNT AS CAPITAL IN NATURE IN ITS AUDITED BAL ANCE SHEET. ONCE EXPENDITURE AS HAS BEEN IDENTIFIED AND CLASSIFIED A S CAPITAL IN NATURE, BASED ON ITS PURPOSE AND INTENT THE NON-APPROVAL BY DSIR DOES NOT CHANGE THE CHARACTER OF THE EXPENDITURE AS REVENUE. THERE IS NO PROVISION IN THE INCOME TAX ACT TO SAY THAT IF EXPE NDITURE IS NOT APPROVED, THE SAME SHALL CONSTITUTE REVENUE IN NATU RE. IN THE AUDITED ACCOUNT ALSO THESE EXPENDITURES HAVE BEEN IDENTIFIE D AS CAPITAL EXPENDITURE, THEREFORE, THE NATURE OF EXPENSES BEIN G CAPITAL IS UNDISPUTED. AN AUDITORS OPINION ON THE QUANTUM OF CAPITAL EXPENDITURE IS NOT DEPENDENT UPON RESULT OF APPROVA L OF DSIR. THE ASSESSEE HAS FAILED TO ADDUCE ANY EVIDENCE OR ANY C ERTIFICATION FROM ITA NO. 2111/D/2010 5 DSIR THAT THE SAID BALANCE UNAPPROVED AMOUNT IS A R EVENUE EXPENDITURE. 6. THE DETAILS OF THESE EXPENDITURES WERE FURNISHED . THE TOTAL EXPENDITURE HAS BEEN CLASSIFIED IN FOUR BROAD ITEMS AND FROM THE DETAILS THE AO HAS SUMMARIZED THE POSITION AS UNDER : - 1. CAPITAL EXPENDITURE RS. 44.41 LACS THE MAJOR CAPITAL EXPENDITURE INCLUDES EXPENDI TURE FOR PURCHASE OF HPLC COLUMNS I.E. HIGH PRESSURE LIQ UID CHROMATOGRAPH 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 QUAN TIFY 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 TIM ES OF THE MOLECULES. RETENTION TIME VARIES DEPENDING ON THE INTERACTIONS BETWEEN THE STATIONARY PHASE, THE MOLE CULES BEING ANALYZED, AND THE SOLVENTS USED. THESE ARE V ERY ESSENTIAL HIGH TECH TESTING EQUIPMENTS FOR THE TEST ING AND CHEMICAL ANALYSIS OF RAW MATERIAL, CHEMICALS, IN PR OCESS MATERIAL AND FINAL PRODUCTS AND TO ESTABLISH THE QU ALITY PARAMETERS FOR THE PRODUCT. 2. SALARY & WAGES RS. 19.57 LACS ITA NO. 2111/D/2010 6 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 PEOP LE IN THEIR RESPECTIVE FIELD AND ARE GRADUATES, POST GRAD UATES AND DOCTORATE. THERE IS A SEPARATE DEDICATED TEAM, WHO HELPS IN DEVELOPING NEW MOLECULES AND PROCESS IMPROVEMENT OF THE EXISTING PRODUCTS. IT IS PERTIN ENT TO NOTE THAT A RESEARCH AND DEVELOPMENT IS A KEY TO TH E GROWTH OF ANY INDUSTRY PARTICULARLY THE PHARMACEUTI CAL TO BE ABREAST WITH THE LATEST TECHNOLOGY AND PROCESS. 3. MATERIAL/CONSUMABLES/SPARES RS. 611.78 LACS THESE ARE THE MATERIALS/CHEMICALS/CONSUMABLES/SPARE S USED IN CARRYING OUT THE RESEARCH AND DEVELOPMENT ACTIVITY. QUITE A LARGE NUMBER OF CHEMICALS/CONSUM ABLES ARE REQUIRED FOR THE TESTING, ANALYSIS AND USE OF T HE SAME IN THE NORMAL COURSE OF PROCESS DEVELOPMENT. IN TH E PROCESS DEVELOPMENT DIFFERENT PERMUTATIONS AND COMBINATIONS ARE TRIED TO DEVELOP NEW MOLECULES, TO IMPROVE THE YIELD OF THE EXISTING PRODUCTS, SO THAT COST OF PRODUCTS IS MINIMIZED AND BE COMPETITIVE. THIS EXPENDITURE WAS INCURRED ON ACCOUNT OF R&D LAB TRIA L AND TO SCALE UP OF TECHNOLOGY. 4. OTHER EXPENDITURE DIRECTLY RELATED TO R&D RS. 1 06.77 LAC THIS EXPENSES COMPRISES OF AMOUNT INCURRED FOR TECH NICAL CONSULTANCY/ASSISTANCE, REGISTRATION OF PRODUCT, FO R CONTRIBUTION TO NATIONAL LABORATORY ETC. ITA NO. 2111/D/2010 7 7. THE REPLY OF THE ASSESSEE VIDE LETTER DATED 20.1 2.2008 WAS AS UNDER: - DURING THE F.Y. 2005-06 THE COMPANY HAS INCURRED THE TOTAL OF RS. 7,82,53,487/- ON SCIENTIF IC RESEARCH AND DEVELOPMENT UNDER THE FOLLOWING HEADS OF ACCOUNTS: (A) CAPITAL EXPENDITURE (B) SALARY & WAGES (C) MATERIALS/CONSUMABLES/SPARES (D) OTHER REVENUE EXPENDITURE AND WEIGHTED DEDUCTION IS ADMISSIBLE U/S 35(2AB) @ 150% BUT LIMITED TO TAXABLE PROFIT BEFORE DEDUCTION U/S 35(2AB). THE COMPANY HAS CAPITALIZED ALL THE EXPENDITURE INCURRED. THE CAPITAL EXPENDITURE HAS BEEN SHOWN IN SCHEDULE OF FIXED ASSETS AND REVENUE EXPENDITURE SUCH AS SALARY AND WAGES, MATERIAL/CONSUMABLES/SPARES UNDER THE HEAD MISCELLANEOUS EXPENDITURE ON THE ASSETS SIDE IN T HE BALANCE SHEET. IN FACT ALL THESE EXPENDITURE ARE O F REVENUE NATURE AND SHOULD BE CHARGES TO PROFIT AND LOSS ACCOUNT BUT HAS BEEN SHOWN UNDER MISCELLANEOUS EXPENDITURE TO PRESENT THE BETTER POSITION OF PROFI T AND LOSS ACCOUNT AND TO ATTRACT THE SHAREHOLDER. HOWEV ER, THE DUE EFFECT IN THE COMPUTATION OF INCOME HAS BEE N CORRECTLY SHOWN CONSIDERING THE PROVISION OF THE INCOME TAX ACT. IN OUR CASE AS PER ACCOUNTING POLI CY FOLLOWED BY THE COMPANY IT HAS BEEN DECIDED TO WRIT E OFF ITA NO. 2111/D/2010 8 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 I NCURRED. 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. 6,11,7 7,948/- HAS BEEN SHOWN BY THE ASSESSEE AS INCURRED ON R&D LAB T RIAL. THE EXPENDITURE IS INCURRED MAINLY ON THE MATERIALS/ CHEMICALS/CONSUMABLES/SPARES USED IN CARRYING OUT T HE RESEARCH & DEVELOPMENT ACTIVITY ON LAB TRIAL FOR PROCESS DEVEL OPMENT. SUCH FACT CLEARLY ESTABLISHES THAT THE AMOUNTS INCURRED ON VARIOUS ITEMS DURING PREVIOUS YEAR WERE USED JUST FOR TRIAL PRODU CTION 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 POSS IBLE DATE FOR THAT IS ONLY SEPTEMBER, 2006 I.E., BEYOND THE RELEVANT P REVIOUS YEAR. THEREFORE, THE EXPENDITURE ON TRIAL PRODUCTION IS N OTHING BUT CAPITAL. OUT OF OTHER EXPENDITURE RELATED TO R&D OF RS. 1,06 ,77,233/-, AN AMOUNT OF RS. 2,57,176/- WAS SPEND TOWARDS REGISTRA TION OF PRODUCT IN VARIOUS COUNTRIES AND RS. 1,04,20,057/- IS PAID TO VARIOUS PARTIES ITA NO. 2111/D/2010 9 FOR TECHNICAL ASSISTANCE IN RESPECT OF WHICH ASSESS EE HAS FAILED TO HIGHLIGHT THE EXACT NATURE OF TECHNICAL ASSISTANCE OBTAINED TO PROVE THAT IT WAS REVENUE IN NATURE. 9. THE AO ALSO PERUSED THE DETAILS FILED BY THE ASS ESSEE IN FORM 3CK PERTAINING TO ADDITIONAL INFORMATION SUBMITTED TO DSIR IN WHICH THE ESTIMATED TIME OF COMPLETION OF THE TRIAL PROCESS FOR HANDING OVER THE PROCESS TO THE PRODUCTION DEPARTME NT WAS MENTIONED. THEREFORE, THE AO OBSERVED THAT EXPENDI TURE INCURRED DURING THE TRIAL RUN BEFORE ITS COMMERCIAL EXPLOITA TION WAS CAPITAL IN NATURE. THE EXPENDITURE HAD A DEGREE OF INDURABILI TY AND PERMANENCE TO THE TECHNICAL KNOW HOW AND IT SPREAD OVER A LONG PERIOD OF TIME AND IN THE CIRCUMSTANCES LD. AO HAS HELD THAT THE CLAIM OF THE ASSESSEE REGARDING A SUM OF RS. 7,10,9 5,947/- ON ACCOUNT OF ITS BEING REVENUE EXPENDITURE IS NOT ACC EPTABLE AND HE HAS ADDED THE SAID AMOUNT TO THE INCOME OF THE ASSE SSEE AND THE AO HAS ASSESSED THE INCOME OF THE ASSESSEE AT RS. 7,71 ,46,764/-. SINCE TAX PAYABLE UNDER NORMAL COMPUTATION WAS MORE, THE BOOK PROFIT COMPUTED BY THE ASSESSEE WAS IGNORED. 10. THE ADDITION WAS CONTESTED BEFORE CIT(A). AN A DDITIONAL GROUND OF APPEAL WAS FILED BEFORE CIT(A) IN WHICH T HE ASSESSEE HAD ITA NO. 2111/D/2010 10 CLAIMED THAT WITHOUT PREJUDICE TO ITS CLAIM OF THE AFOREMENTIONED AMOUNT AS REVENUE EXPENDITURE THE EXPENDITURE IS OT HERWISE ALLOWABLE U/S 35(1)(I) OF THE ACT BEING IN THE NATU RE OF REVENUE EXPENDITURES, LAID OUT OR EXPANDED ON RESEARCH & DE VELOPMENT RELATED TO THE BUSINESS OF THE ASSESSEE COMPANY. I T WAS PLEADED THAT ADDITIONAL GROUND SHOULD BE ADMITTED AS ALL THE FAC TS NEEDED ARE AVAILABLE ON RECORD AND THE GROUND IS PURELY LEGAL ONE. LD. CIT(A) HAS ADMITTED THE ADDITIONAL GROUND OF THE ASSESSEE AND HAS THUS, EXAMINED THE CLAIM OF THE ASSESSEE FOR ALLOWABILITY OR OTHERWISE OF AFOREMENTIONED AMOUNT UNDER BOTH THE SECTIONS NAMEL Y 37(1) AND 35(1)(I). THE ASSESSEE ALSO FILED WRITTEN SUBMISSI ONS WHICH HAVE BEEN REPRODUCED IN THE ORDER OF CIT(A) AND WHICH WA S ALSO FORWARDED TO AO AND REMAND REPORT WAS ALSO SUBMITTE D BY THE AO DATED 9 TH SEPTEMBER, 2009. THE AO SUBMITTED THAT ADDITIONAL GROUND FURNISHED BY THE ASSESSEE MAY BE ADMITTED FO R ADJUDICATION. THE AO SUBMITTED THAT FROM THE ASSESSMENT IT IS CLE AR THAT THE USE OF NEW PROCESS OF IN-HOUSE RESEARCH & DEVELOPMENT AMOU NTS TO NEW VENTURE WHICH IS NOT IN THE LINE OF ASSESSEES EXIS TING BUSINESS. THE BENEFIT OF SUCH R&D/PROCESS IS ENDURING NATURE AND THE EXPENDITURE OF RS. 7.10 CRORE IS NOT APPROVED FROM THE COMPETEN T AUTHORITY. THEREFORE, THE EXPENDITURE IS OF CAPITAL IN NATURE AND CANNOT BE ALLOWED IN THE YEAR UNDER CONSIDERATION. THE AO OP POSE THE ITA NO. 2111/D/2010 11 ALLOWABILITY OF SUCH EXPENDITURE U/S 37(1) AS IT DO ES NOT COVER THE EXPENDITURE DESCRIBED IN SEC. 30 TO 36 AS WELL AS T HE EXPENDITURE IS IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EX PENDITURE OF THE ASSESSEE. HENCE, AO OPPOSED THE ALLOWABILITY OF THE SE EXPENDITURES ON THE GROUND THAT THOSE ARE EXPENDITURE OF CAPITAL IN NATURE. THE REJOINDER FILED BY THE ASSESSEE VIDE LETTER DATED 1 2 TH 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 T HE REJOINDER OF THE ASSESSEE ON SECOND REMAND REPORT IS REPRODUCED IN PARA 4.9 OF THE ORDER OF CIT(A). 11. CONSIDERING ALL THESE SUBMISSIONS, LD. CIT(A) H AS DELETED THE DISALLOWANCE VIDE PARA 4.11 OF HIS ORDER. ACCORDIN G TO LD. CIT(A), WHILE DISALLOWING THE IMPUGNED AMOUNT THE AO HAS BR OADLY SPECIFIED THE FOLLOWING REASONS: - A) THE EXPENDITURE INCURRED BY THE ASSESSEE IS CA PITAL EXPENDITURE SINCE IT HAS BEEN SHOWN IN THE BALANCE SHEET. B) THE MATERIALS/ CHEMICALS/CONSUMABLE USED IN CAR RYING OUT RESEARCH AND DEVELOPMENT ACTIVITY FOR PROCESS DEVELOPMENT ARE EXPENDITURE INCURRED ON TRIAL PRODUCTION OF THE DRUGS HENCE CAPITAL EXPENDITURE. ITA NO. 2111/D/2010 12 C) THE EXPENDITURE INCURRED ON TRIAL PRODUCTION, B EFORE COMPLETION OF PROCESS IS PART OF RESEARCH AND DEVELOPMENT AND IT IS CAPITAL EXPENDITURE. 12. HE HAS CLASSIFIED TOTAL EXPENDITURE INCURRED BY THE ASSESSEE AMOUNTING TO RS. 7,82,53,487/- IN THE FOLLOWING TAB LE: - AMOUNT (RS.) (IN LACS) COST OF CAPITAL EQUIPMENTS (A) 44.41 MATERIALS/CONSUMABLES/SPARES 611.78 SALARIES AND WAGES 19.57 (B) 631.35 REGISTRATION OF PRODUCTS IN VARIOUS COUNTRIES 2.57 FEE FOR TECHNICAL ASSISTANCE 104.20 (C) 106.77 TOTAL REVENUE EXPENDITURE (B+C) 738.12 GRAND TOTAL (A+B+C) 782.53 13. LD. CIT(A) HAS HELD THAT ACCOUNTING ENTRY IN TH E BOOKS OF ACCOUNT OF THE ASSESSEE OR FOR THAT MATTER HOW IT H AS BEEN SHOWN IN THE BALANCE SHEET OR PROFIT AND LOSS ACCOUNT IS OF NO CONSEQUENCE IN DETERMINING THAT WHETHER IT IS AN ALLOWABLE DEDUCTI ON OR NOT AND REFERENCE IN THIS REGARD HAS BEEN MADE TO THE DECIS ION OF HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMI CALS AND FERTILIZERS LTD. VS. CIT 227 ITR 172 (SC). HE HELD THAT THE EXPENDITURE HAVING BEEN INCURRED ON R&D AND THEY BE ING IN THE ITA NO. 2111/D/2010 13 NATURE OF REVENUE COULD NOT BE HELD OF CAPITAL IN N ATURE EVEN THOUGH THEY ARE DESCRIBED AS DEFERRED REVENUE EXPENDITURE IN THE BALANCE SHEET FILED BY THE ASSESSEE. HE HELD THAT NOMENCLA TURE USED BY THE ASSESSEE IS DEFERRED REVENUE EXPENDITURE WHICH WO ULD MEAN THAT IT TALKS ABOUT REVENUE EXPENDITURE THOUGH SHOWN IN THE BALANCE SHEET FOR ACCOUNTING PURPOSES. HE FOUND THAT THE ASSESSE E HAS CLAIMED THE SAID AMOUNT OF RS. 7,10,95,947/- IN THE COMPUTATION OF INCOME SUBMITTED IN THE RETURN OF INCOME. LD. CIT(A) ALSO HELD THAT NON- APPROVAL OF REVENUE EXPENDITURE FOR WEIGHTED DEDUCT ION 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 M EAN THAT IT IS NOT CAPITAL EXPENDITURE FOR ACCOUNTING PURPOSE IN T HE BOOKS OF ACCOUNT ON WHICH NO DEPRECIATION IS ALLOWABLE. SIM ILARLY, NON- APPROVAL OF REVENUE EXPENSES BY DSIR WILL NOT CHANG E THE CHARACTER OF REVENUE EXPENDITURE. LD. CIT(A) OBSERVED THAT T HIS 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 COMPA NY WAS INCORPORATED IN THE YEAR 1996 AND IS IN THIS LINE O F BUSINESS OF MANUFACTURE OF DRUGS EVER SINCE THEN. ITS TURNOVER HAS INCREASED ITA NO. 2111/D/2010 14 EVERY YEAR. THERE IS A FORCE IN THE ARGUMENT OF TH E ASSESSEE COMPANY THAT EXPENDITURE ON R&D CANNOT BE CONSIDERE D AS EXPENDITURE INCURRED ON TRIAL RUN ESPECIALLY WHEN T HE ASSESSEE COMPANY IS IN THE BUSINESS FOR MANY YEARS. THE EXP ENDITURE INCURRED ON R&D EVEN IN THE COURSE OF TRIAL FOR DRU GS, IF AND ONLY IF IT IS NOT CAPITAL EXPENDITURE, HAS TO BE ALLOWED AS DEDUCTION U/S 35(1)(I) OF THE ACT. THE AO DID NOT DOUBT THE GENU INENESS OF THE EXPENDITURE INCURRED ON R&D WHICH IS ALSO A SEPARAT E WING WITHIN THE FACTORY PREMISES OF THE ASSESSEE. 15. IT IS FURTHER HELD BY LD. CIT(A) THAT THE EXPEN DITURE ON R&D IN THE COURSE OF TRIAL RUNS FOR NEW DRUGS CANNOT BE CLASSIFIED AS CAPITAL EXPENDITURE ON THE GROUND THAT WITH EACH SU CCESSFUL TRIAL RUN, A NEW VENTURE/UNIT COMES INTO EXISTENCE. EVEN IF E XPENDITURE IS INCURRED ON TRIAL RUN IN A BUSINESS WHETHER OR NOT RELATED TO SEPARATE R&D ACTIVITY DOES NOT CONSTITUTE A NEW VENTURE/UNIT . THE AO HAS NOT PROVED THAT ASSESSEE HAS STARTED ALTOGETHER A N EW UNIT TO BE SET UP COMPLETELY INDEPENDENT OF ITS EXISTING UNIT. IF THE EXPENDITURE OF REVENUE IN NATURE ARE INCURRED ON ACCOUNT OF COMMER CIAL EXPEDIENCY, IT HAS TO BE ALLOWED AS DEDUCTION U/S 3 7(1) OF THE ACT, IF THOSE ARE NOT SPECIFICALLY COVERED FOR DEDUCTION U/ S 36 OF THE ACT AND THOSE ARE TO BE ALLOWED U/S 37(1) OF THE ACT. BUT THEY CANNOT BE ITA NO. 2111/D/2010 15 IGNORED ALTOGETHER. THEREFORE, TIME FOR COMPLETION OF TRIAL RUNS OF MEDICINES LOST ITS RELEVANCE AND THE PRINCIPLES OF ENDURING BENEFIT BREAK DOWN. 16. LD. CIT(A) HAS FURTHER HELD THAT INCURRENCE OF EXPENDITURE AT ALL IS NOT DOUBTED BY THE AO. THE FINDINGS OF AO T HAT R&D EXPENSES ARE IN THE NATURE OF CAPITAL ARE BASED ON SUSPICION, SURMISES AND CONJUNCTURES. THEREFORE, ENTIRE EXPENDITURE OF RS. 7,38,11,965/- ARE GENUINE EXPENDITURE INCURRED BY THE ASSESSEE. THE DSIR HAS ALLOWED RS. 27.16 LAKH FOR WEIGHTED DEDUCTION OUT O F ENTIRE REVENUE EXPENDITURE OF RS. 7.38 CRORE. THE BALANCE EXPENDI TURE OF RS. 7,10,95,947/- IS ALSO IN THE NATURE OF REVENUE AND CONSTITUTE AGGREGATED SUM OF RS. 6,11,77,948/- INCURRED TOWARD S MATERIAL COSTS ETC., RS. 19,56,784/- ON SALARY AND WAGES AND RS. 1 ,06,77,233/- INCURRED FOR GETTING REGISTRATION OF PRODUCTS IN OT HER COUNTRIES OR TOWARDS OBTAINING TECHNICAL KNOW HOW FEE FOR PRODUC ING NEW DRUGS ETC. LD. CIT(A) HAS OBSERVED THAT HE HAD CALLED FO R AND PERUSED THE AGREEMENT OF THE ASSESSEE COMPANY AND IND. SWIFT LT D. FOR TRANSFER OF TECHNICAL KNOW HOW. THE AO DID NOT GIVE ANY ADV ERSE COMMENT ON THIS ISSUE IN THE REMAND REPORT. SUCH AGREEMENTS FOR TRANSFER OF TECHNICAL KNOW HOW ARE QUIET COMMON IN PHARMACEUTIC AL INDUSTRY ITA NO. 2111/D/2010 16 DUE TO COMMERCIAL EXIGENCIES AND HE HAS RELIED UPON THE FOLLOWING DECISIONS: - I) JCIT VS. MODI OLIVETTI LTD. 3 SOT 22 (DEL.) II) ACIT VS. MEDICEMEN BIOTECH LTD. 1 SOT 347. THE DEPARTMENT IS AGGRIEVED WITH SUCH FINDINGS OF L D. CIT(A) AND HENCE GROUND NO. 1 HAS BEEN RAISED TO ASSAIL SUCH F INDINGS. 17. WITH REGARD TO GROUND NO. 2 THE DISCUSSION IS O NLY FOUND IN PARA 5 OF THE ORDER OF CIT(A). LD. CIT(A) HAS DIRE CTED THE AO TO RECOMPUTED THE INCOME AS PER APPEAL EFFECT AND CONS IDER THE CLAIM OF THE ASSESSEE IN ACCORDANCE WITH LAW, IF THE SAME IS OTHERWISE ALLOWABLE. IN RESPECT OF THESE DIRECTIONS OF LD. C IT(A) DEPARTMENT HAS RAISED GROUND NO. 2. 18. AFTER NARRATING THE FACTS, IT WAS VEHEMENTLY PL EADED 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 AMO UNT OF RS. 41,69,868/- ON ACCOUNT OF CAPITAL EXPENDITURE AND 2 7,16,019/- ON ACCOUNT OF REVENUE EXPENDITURE. IN THE REVISED RET URN OUT OF TOTAL EXPENDITURE OF RS. 7,38,11,965/- CAPITALIZED AND SH OWN UNDER ITA NO. 2111/D/2010 17 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 APPROVA L BY DSIR FOR CLAIMING BENEFIT U/S 35(2AB). THUS, IN THE REVISED RETURN THE ASSESSEE HAD CLAIMED AMOUNT OF RS. 7,10,95,947/- AS AN EXPENDITURE ALLOWABLE U/S 37(1) OF THE ACT. HE SUBMITTED THAT THE OBJECT OF THE ASSESSEE FOR INCURRING SUCH EXPENDITURE WAS TO DEVE LOP NEW MOLECULES AS WELL AS COST EFFECTIVE PROCESSES FOR E XISTING PRODUCTS. ACCORDING TO FORM NO. 3CK PERTAINING TO ADDITIONAL INFORMATION SUBMITTED BY THE ASSESSEE TO DSIR, THE EARLIEST DAT E OF COMPLETION OF ANY OF THE PROCESS WAS SEPTEMBER, 2006 WHICH DOES N OT FALL WITHIN THE RELEVANT FINANCIAL YEAR. SIMILARLY, FOR THE OT HER PRODUCTS THE PLANT TRIALS AND FULL PRODUCTION COULD BE STARTED O NLY IN SUBSEQUENT YEARS I.E. FINANCIAL YEAR 2007-08 ONWARD. HE SUBMI TTED THAT THESE FACTS HAVE CLEARLY PROVED THAT THE EXPENDITURE INCU RRED ON RESEARCH AND DEVELOPMENT DURING THE YEAR WAS FOR THE PURPOSE S OF DERIVING ENDURING ADVANTAGE TO THE ASSESSEE COMPANY. BENEFIT OF SUCH EXPENDITURE WAS NOT RESTRICTED TO THE YEAR UNDER CO NSIDERATION BUT IT WAS TO SPREAD OVER FOR MANY YEARS. THESE WERE EXPE NDITURE INCURRED ON IN-HOUSE RESEARCH & DEVELOPMENT ONCE AND FOR ALL WITH A VIEW TO BRING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR T HE ENDURING BENEFIT TO THE ASSESSEE. THE ASSESSEE ITSELF HAS CLASSIFIE D THESE EXPENDITURE ITA NO. 2111/D/2010 18 AS CAPITAL IN NATURE IN ITS AUDITED BALANCE SHEET A ND IF ONCE EXPENDITURE HAS BEEN IDENTIFIED AND CLASSIFIED AS C APITAL IN NATURE, BASED ON ITS PURPOSE AND INTENT, THE NON-APPROVAL B Y DSIR DOES NOT CHANGE THE CHARACTER OF THE EXPENSES FROM CAPITAL T O REVENUE AND THERE IS NO PROVISION IN THE INCOME TAX ACT TO CHAN GE THE CAPITAL EXPENDITURE ON NON-APPROVAL BY DSIR INTO REVENUE EX PENDITURE. IN THE AUDITED ACCOUNTS THE EXPENDITURE HAS BEEN IDENT IFIED AS CAPITAL EXPENDITURE AND, THEREFORE, THE NATURE OF THESE EXP ENDITURE BEING CAPITAL IS UNDISPUTED. THE ASSESSEE ALSO FAILED TO ADDUCE ANY EVIDENCE OR ANY CERTIFICATION FROM DSIR THAT SAID U NAPPROVED BALANCE IS REVENUE EXPENDITURE. LD. DR FURTHER SUB MITTED THAT AN AMOUNT OF RS. 6,11,77,948/- SHOWN BY THE ASSESSEE B EING INCURRED ON RESEARCH & DEVELOPMENT LAB TRIAL IS INCURRED MAI NLY ON THE MATERIAL/CHEMICALS/CONSUMABLES/SPARES USED IN CARRY ING OUT THE R&D ACTIVITY ON LAB TRIAL FOR PROCESS DEVELOPMENT A ND SUCH FACT CLEARLY ESTABLISHED THAT THE AMOUNT INCURRED ON VAR IOUS ITEMS WAS USED JUST FOR TRIAL PRODUCTION AND ACTUAL PRODUCTIO N DID NOT COMMENCE. COMMERCIAL PRODUCTION WAS TO START ONLY AFTER 2-3 YEARS AFTER THE COMPLETE PROCESS WAS HANDED OVER TO THE P RODUCTION DEPARTMENT FOR WHICH THE EARLIEST POSSIBLE DATE WAS SEPTEMBER, 2006 WHICH FALLS BEYOND THE RELEVANT PREVIOUS YEAR. FUR THER OUT OF OTHER EXPENDITURES RELATED TO R&D AMOUNTING TO RS. 1,06,7 7,233/- AN ITA NO. 2111/D/2010 19 AMOUNT OF RS. 2,57,176/- WAS SPENT TOWARDS REGISTRA TION OF PRODUCT IN VARIOUS COUNTRIES AND RS. 1,04,20,057/- WAS PAID TO VARIOUS PARTIES FOR TECHNICAL ASSISTANCE FOR WHICH THE ASSE SSEE HAS FAILED TO HIGHLIGHT THE EXACT NATURE OF TECHNICAL ASSISTANCE OBTAINED BY IT SO AS TO DETERMINE THE NATURE OF SUCH EXPENDITURE AND THU S, IT WAS PLEADED BY LD. DR THAT THE CLAIM OF THE ASSESSEE OF AN EXPE NDITURE OF RS. 7,10,95,947/- WAS RIGHTLY DISALLOWED BY THE AO ON A CCOUNT 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 ASSESSE E HAD FILED ADDITIONAL GROUND ACCORDING TO WHICH THESE EXPENDIT URES WERE CLAIMED BY THE ASSESSEE UNDER THE PROVISIONS OF SEC . 35(1)(I) OF THE ACT. HE SUBMITTED THAT LD. CIT(A) WAS WRONG IN ADM ITTING SUCH ADDITIONAL GROUND AND ACCEPTING THE CLAIM OF THE AS SESSEE REGARDING DEDUCTION U/S 35(1)(I) OF THE ACT. HE SUBMITTED TH AT LD. CIT(A) IS ALSO WRONG IN HOLDING THAT EXPENDITURE INCURRED ON TRIAL RUNS ALSO CONSTITUTE REVENUE EXPENDITURE. THEREFORE, HE PLEA DED THAT ASSESSEES CLAIM HAS WRONGLY BEEN ALLOWED BY LD. CI T(A). HIS ORDER SHOULD BE SET ASIDE AND THAT OF AO BE RESTORED. ITA NO. 2111/D/2010 20 20. COMING TO GROUND SECOND, IT WAS SUBMITTED BY LD . DR THAT ASSESSEE DID NOT PUT SUCH CLAIM BEFORE AO THE AO HA S NOT DISCUSSED ANY SUCH CLAIM AND, THEREFORE, CIT(A) WAS WRONG IN ADMITTING SUCH GROUND OF THE ASSESSEE. 21. ON THE OTHER HAND, IT WAS SUBMITTED BY LD. AR T HAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANU FACTURING OF BULK DRUGS. AS A PART OF NECESSITY OF THE BUSINESS OF THE ASSESSEE IT HAS TO MAKE NEW R&D REGARDING MOLECULES BEING USED IN THE EXISTING DRUGS SO THAT THE PRODUCT IS CONTINUOUSLY IMPROVED AND THE PRODUCT BECOME COST EFFECTIVE. FOR THAT PURPOSE AS SESSEE HAS CARRIED OUT IN-HOUSE RESEARCH FACILITY AND NECESSARY DOCUME NTATION WERE DONE TO HAVE APPROVAL FROM THE PRESCRIBED AUTHORITY I.E. DSIR UNDER THE PROVISIONS OF SEC. 35(2AB) SO THAT ASSESSEE MAY GET WEIGHTED DEDUCTION PROVIDED UNDER THAT SECTION TO THE EXTENT OF 150%. THE NORMS FIXED BY DSIR ARE STIFF AND, THEREFORE, ASSES SEE WAS UNABLE TO GET SUCH APPROVAL WITH REGARD TO ENTIRE EXPENDITURE INCURRED BY THE ASSESSEE AND IT GOT PARTIAL APPROVAL ON WHICH THE A SSESSEE HAD CLAIMED WEIGHTED DEDUCTION U/S 35(2AB) WHICH HAS BE EN ALLOWED BY THE AO AND ON THE SAID AMOUNT THERE IS NO DISPUTE. HE SUBMITTED THAT WHAT WAS CAPITAL IN NATURE HAS ALREADY BEEN CL ASSIFIED AS CAPITAL ITA NO. 2111/D/2010 21 AND DEPRECIATION HAS BEEN CLAIMED UPON THAT. ON TH E BALANCE EXPENDITURES WHICH ARE REVENUE IN NATURE THE ASSESS EE HAS CLAIMED THEM U/S 37(1) OF THE ACT IN THE REVISED RETURN. H E SUBMITTED THAT OTHERWISE THOSE EXPENSES HAVING BEEN INCURRED ON RE SEARCH & DEVELOPMENT FACILITIES ALSO FALL UNDER THE PROVISIO NS OF SEC. 35(1)(I) OF THE ACT FOR WHICH AN ADDITIONAL GROUND WAS RAISE D BY THE ASSESSEE BEFORE LD. CIT(A) AND AO IN HIS REMAND REPORT DID N OT OBJECT FOR ADMISSION OF SUCH ADDITIONAL GROUND. ON THE BASIS OF REASONS GIVEN BY LD. CIT(A), THE CLAIM OF THE ASSESSEE HAS BEEN A CCEPTED UNDER BOTH THE SECTIONS BEING ELIGIBLE U/S 35(1)(I) AND A LSO U/S 37(1) OF THE ACT. HE SUBMITTED THAT NATURE OF EXPENDITURE ITSEL F WILL DESCRIBE THAT ALL THESE EXPENDITURES WERE OTHERWISE OF REVENUE IN NATURE WHICH DID NOT GENERATE ANY CAPITAL ASSET TO GIVE ENDURING BEN EFIT TO THE ASSESSEE. HE SUBMITTED THAT AO IS FACTUALLY INCORR ECT IN OBSERVING THAT ASSESSEE IN ITS BOOKS OF ACCOUNT HAS SHOWN THE SE EXPENDITURES AS CAPITAL EXPENDITURE. HE SUBMITTED THAT ASSESSEE HA S NEVER SHOWN THESE EXPENDITURE AS CAPITAL IN NATURE. THESE EXPE NDITURES HAVE BEEN CLASSIFIED AS DEFERRED REVENUE EXPENDITURE UNDER THE HEAD MISCELLANEOUS EXPENDITURE. HE IN THIS REGARD REF ERRED TO THE RELEVANT PORTION OF AUDITED ACCOUNTS. THEREFORE, H E SUBMITTED THAT AO IS WRONG IN SAYING THAT ASSESSEE ITSELF HAS SHOW N THOSE EXPENDITURE AS CAPITAL EXPENDITURE. HE SUBMITTED T HAT NOMENCLATURE ITA NO. 2111/D/2010 22 GIVEN BY THE ASSESSEE TO AN ITEM OF EXPENDITURE CAN NOT BE DETERMINATIVE OF THE NATURE OF EXPENDITURE AS ON TH E FACTS OF THE CASE IT HAS TO BE SEEN THAT WHETHER THE EXPENDITURE INCU RRED 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 IT R 542 (MAD.) (IV) JAT PARABOLIC 6 DTR 233 22. HE SUBMITTED THAT IT WILL BE INCORRECT TO SAY T HAT IF UNDER ONE SECTION THE CLAIM OF THE ASSESSEE DOES NOT FALL, TH EN ASSESSEE CANNOT CLAIM THE SAME UNDER ANY OTHER SECTION. HE SUBMITT ED THAT IT IS PERMISSIBLE TO THE ASSESSEE TO CLAIM ANY EXPENDITUR E UNDER ANY OTHER SECTION, IF IT IS NOT HELD TO BE ALLOWABLE UNDER A PARTICULAR SECTION. FOR THIS PROPOSITION HE HAS RELIED UPON THE DECISIO N IN THE CASE OF TATA CHEMICALS LIMITED VS. CIT 195 ITR 561. 23. FOR THE PROPOSITION THAT THE EXPENDITURES HAVE RIGHTLY BEEN HELD TO BE REVENUE IN NATURE BY LD. CIT(A), LD. AR HAS FURTHER PLACED RELIANCE ON THE FOLLOWING DECISIONS: - ITA NO. 2111/D/2010 23 1. RESEARCH AND DEVELOPMENT EXPENDITURE ON DEVELOPING OF EXISTING PRODUCT, COST EFFECTIVE METHOD AND NEW PRODUCTS (I) EMPIRE JUTE CO. LTD. (1980) 124 ITR 1 (SC) IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING T HE ASSESSEES TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABL Y WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. IN CASE OF THE APPELLANT, NO CAPITAL ASSET HAS COM E INTO EXISTENCE. THE BUSINESS HAS BEEN IN EXISTENCE SINCE LONG. THE EXISTING MEDICINAL PRODUCTS ARE BEING IMPROVED AND NEW PRODUCTS ARE BEING CREATED FOR FACILITATING THE ASSESSES TRADING OPERATIONS. HENCE, THE EXPENDITURE IS REVENUE IN NATURE. (II) ALEMBIC CHEMICAL WORKS CO. LTD. (1989) 177 ITR 377 (SC) A. EXPENDITURE ON IMPROVED PROCESS OF FERMENTATIO N WITH NEW PENICILLIN PRODUCING STRAINS, ISOLATED AND DEVELOPED BY MEIJI SO AS TO INCREASE THE UNIT YIELD OF PENICILLIN PER MILLILITER OF THE CULTURE MEDIUM. B. THE IMPROVISATION IN THE PROCESS AND TECHNOLOG Y IN SOME AREA OF THE ENTERPRISE WAS SUPPLEMENTAL TO THE EXISTING BUSINESS AND THERE WAS NO MATERIAL TO HOLD THAT IT AMOUNTED TO A NEW OR FRESH VENTURE. T HE FINANCIAL OUTLET WAS FOR THE BETTER CONDUCT AND ITA NO. 2111/D/2010 24 IMPROVEMENT OS EXISTING BUSINESS AND SHOULD, THEREFORE, BE HELD TO BE REVENUE. C. WHAT IS MATERIAL TO CONSIDER THE NATURE OF ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHEN THE ADVANTAGE IS IN THE CAPITAL FILED THAT THE EXPENDITURE WOULD BE DISALLOWABLE. IN THE CASE OF THE APPELLANT ALSO, THE BUSINESS WA S IN EXISTENCE AND THE RESEARCH AND DEVELOPMENT MERELY ENABLED THE APPELLANT TO DEVELOP ITS EXISTING PRODUCTS IN TERMS OF QUALITY AND EFFICIENCY. IN TH E ABOVE SAID CASE, THE CAPITAL INCURRED ON PURCHASE O F 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 WA S IN THE NATURE OF SALARY, WAGES, REPAIRS, MAINTENANC E, TRAVELING, ENGINEERING FEE ETC. THE EXPENDITURE WA S CONSIDERED TO BE REVENUE IN NATURE MORE SO THAT THE ITA NO. 2111/D/2010 25 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, I T WAS IMPORTING SEVERAL COMPONENTS. THE ASSESSEE CONSIDERED THAT INSTEAD OF IMPORTING THE COMPONENTS, IT WOULD BE BENEFICIAL TO HAVE COMPONENTS LOCALLY PROCURED AND INDIGENOUSLY MANUFACTURED AND FOR THIS, IT SET UP A SEPARATE CEL L FOR DEVELOPING, IMPORTED SUBSTITUTED COMPONENTS. THE EXPENDITURE INCURRED BY THE ASSESSEE ON SALARY, WAGES, TRAVELING ETC. WAS SHOWN UNDER THE HEAD DEFERRED REVENUE EXPENDITURE. HELD THAT THE EXPENDITURE INCURRED WAS REVENUE IN NATURE AND MERELY BECAUSE THE BENEFIT OF THE EXPENDITURE WAS ALSO AVAILABLE LATER, WAS NOT GROUND TO CONSIDER TH IS EXPENDITURE AS CAPITAL. IT MAY BE APPRECIATED THAT IN THE SAID CASE, THE EXPENDITURE WAS INCURRED FOR DEVELOPING OF NEW PRODUCTS. CONSIDERING THE NATURE OF EXPENDITURE, IT WAS HELD TO BE REVENUE. IN THE APPELLANTS CASE ALSO, THE EXPENDITURE WAS ON MATERIAL, SALARIES, REGISTRATION ETC. HENCE, IT WA S ON THE REVENUE ACCOUNT AND NO NEW CAPITAL ASSET CAME INTO EXISTENCE. (VI) GOOD YEAR INDIA LTD. 249 ITR 239 (DEL) THE ASSESSEE ENTERED INTO AN AGREEMENT FOR ENLARGING TH E RANGE OF ITS EXISTING PRODUCTS AND ACQUIRED THE RIG HT ITA NO. 2111/D/2010 26 TO USE THE TECHNOLOGY OF MANUFACTURE OF A NEW PRODUCT IN THE SAME LINE OF BUSINESS. THE EXPENDITURE WAS ALLOWED AS REVENUE ON THE GROUND THAT THE ASSESSEE HAD ONLY ENLARGED THE RANGE OF IT S EXISTING PRODUCTS AND THE EXPENDITURE WAS AN OUTLAY OF BUSINESS IN ORDER TO CARRY IT ON TO EARN BETTER PROJECTS. (VII) THE MUMBAI TRIBUNAL IN THE CASE OF ARLABS LTD. 5 SOT 749 HELD THAT AN EXPENDITURE TOWARDS RESEARCH AND DEVELOPMENT FOR CARRYING OUT MODIFICATION AND ADDITION WITH A VIEW TO PRODUCE NEW ITEMS WAS ALLOWABLE AS A REVENUE EXPENDITURE. HENCE, THE POWER, FUEL AND INTEREST EXPENDITURE INCURRED WERE ALLOWED. (VIII) USV LTD. 106 TTJ 585 (MUM.) EXPENDITURE INCURRED FOR INFORMATION REGARDING CLINICAL DATA, SCIENTIFIC DETAILS AND VALUABLE MARKET INFORMATION WAS ALLOWED AS REVENUE EXPENDITURE. 24. THUS, IT WAS PLEADED BY LD. AR THAT THE CLAIM O F THE ASSESSEE HAS RIGHTLY BEEN ALLOWED BY LD. CIT(A) AND HIS ORDE R SHOULD BE UPHELD. 25. WITH REGARD TO SECOND GROUND HE SUBMITTED THAT THERE IS NOTHING WRONG IN THE ORDER OF CIT(A) WHEN HE HAS DI RECTED THE AO ITA NO. 2111/D/2010 27 TO RECOMPUTE THE INCOME OF THE ASSESSEE AS PER APPE AL EFFECT AND CONSIDER THE CLAIM OF THE ASSESSEE IN ACCORDANCE WI TH LAW. 26. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS IN THE LIGHT OF MATERIAL PLACED BEFORE US. THE DETAILS OF THESE EXPENDITURE HAS BEEN PROVIDED BY THE ASSESSEE AS ANNEXURE C&D I N THE PAPER BOOK FROM PAGES 46 TO 47 OF A SUM OF RS. 6,11,77,94 8.16/-, WHICH DESCRIBED IT AS DETAILS OF MATERIAL USED FOR LAB T RIALS FOR PROCESS DEVELOPMENT FOR THE YEAR ENDING 31.3.2006 AND DETA ILS 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 T HIS ORDER IN PARA 6. FROM THE SAID DETAIL, IT CAN BE SEEN THAT CAPIT AL EXPENDITURE AMOUNTING TO RS. 44.41 LAKH HAS BEEN CATEGORIZED BY THE ASSESSEE AS CAPITAL EXPENDITURE AND TO THAT EXPENDITURE THERE I S NO DISPUTE BECAUSE THEY HAVE BEEN CONSIDERED AS CAPITAL EXPEND ITURE BY THE ASSESSEE ITSELF. THE ANOTHER HEAD IS SALARY AND W AGES OF RS. 19.57 LAKH. THIS EXPENDITURE RELATES TO SALARY AND WAGES PAID TO THE MANPOWER DEPLOYED FOR CARRYING OUT R&D ACTIVITY. S O IN ITSELF IT DID NOT CREATE ANY ASSET WHICH COULD GIVE ASSESSEE AN ENDURING BENEFIT. THE THIRD HEAD IS MATERIAL/CHEMICALS/CONS UMABLES/SPARES OF ITA NO. 2111/D/2010 28 RS. 611.78 LAKH. THESE EXPENDITURES HAVE BEEN INCU RRED ON MATERIALS/CHEMICALS/CONSUMABLES/SPARES USED IN CARR YING OUT THE R&D ACTIVITY. IT IS THE CASE OF THE ASSESSEE THAT FOR CARRIED OUT RESEARCH ACTIVITY A LARGE NUMBER OF CHEMICALS/CONSU MABLES ARE REQUIRED FOR THE TESTING, ANALYZING AND USE OF THE SAME IN THE NORMAL COURSE OF PROCESS DEVELOPMENT. IN THE PROCESS DEVE LOPMENT DIFFERENT PERMUTATION AND COMBINATION ARE TRIED TO DEVELOP NEW MOLECULES, TO IMPROVE THE YIELD OF THE EXISTING PRO DUCTS, SO THAT THE COST OF THE PRODUCT IS MINIMIZED AND BE COMPETITIVE . THE FOURTH AND FINAL HEAD IS OTHER EXPENDITURE WHICH IS DIRECTLY RELATED TO R&D AND IS AMOUNTING TO RS. 106.77 LAKHS AND THIS EXPEN DITURE COMPRISES AN AMOUNT INCURRED FOR TECHNICAL CONSULTANCY/ASSIST ANCE, REGISTRATION OF PRODUCT, FOR CONTRIBUTION TO NATIONAL LABORATORY ETC. 27. THEREFORE, THE NATURE OF THESE EXPENDITURES IS NOT IN DISPUTE AND THEIR INCURRENCE BY THE ASSESSEE ON R&D PROGRAM ME ARE ALSO NOT DISPUTED. FIRSTLY, IT IS THE CLAIM OF THE ASSE SSEE THAT SUCH EXPENDITURE FALLS UNDER THE PROVISIONS OF SEC. 35(1 )(I) OF THE ACT AND, ALTERNATIVELY IT IS ALLOWABLE U/S 37(1) OF THE ACT. TO EXAMINE SUCH CONTENTION IT WILL BE RELEVANT TO REPRODUCE SECTION 35(1)(I), WHICH READ AS UNDER: - [ EXPENDITURE ON SCIENTIFIC RESEARCH. ITA NO. 2111/D/2010 29 35. (1) IN RESPECT OF EXPENDITURE ON SCIENTIFIC RESEAR CH, THE FOLLOWING DEDUCTIONS SHALL BE ALLOWED (I) ANY EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS. [EXPLANATION WHERE ANY SUCH EXPENDITURE HAS BEEN LAID OUT OR EXPENDED BEFORE THE COMMENCEMENT OF THE BUSINESS (NOT BEING EXPENDITURE LAID OUT OR EXPENDED BEFORE THE 1 ST DAY OF APRIL, 1973) ON PAYMENT OF ANY SALARY [AS DEFINED IN EXPLANATION 2 BELOW SUB-SECTION (5) OF SECTION 40A] TO AN EMPLOYEE ENGAGED IN SUCH SCIENTIFIC RESEARCH OR ON THE PURCHASE OF MATERIALS USED IN SUCH SCIENTIFIC RESEARCH, THE AGGREGATE OF THE EXPENDITURE SO LAID OUT OR EXPENDED WITHIN THE THREE YEARS IMMEDIATELY PRECEDING THE COMMENCEMENT OF THE BUSINESS SHALL, TO THE EXTENT IT IS CERTIFIED BY THE PRESCRIBED AUTHORITY TO HAVE BEEN LAID OUT OR EXPENDED ON SUCH SCIENTIFIC RESEARCH, BE DEEMED TO HAVE BEEN LAID OU T OR EXPENDED IN THE PREVIOUS YEAR IN WHICH THE BUSINESS IS COMMENCED;] 28. SECTION 35(1)(I) FALLS UNDER CHAPTER IV UNDER T HE HEAD COMPUTATION OF BUSINESS INCOME. IT DESCRIBES THE ALLOWABILITY OF THE EXPENDITURE IN CASE WHERE BUSINESS INCOME IS CO MPUTED. IT DEALS WITH THE EXPENDITURE INCURRED BY THE ASSESSEE ON SC IENTIFIC RESEARCH. IT HAS BEEN PRESCRIBED THEREIN THAT IN RESPECT OF E XPENDITURE ON ITA NO. 2111/D/2010 30 SCIENTIFIC RESEARCH THE SAME WILL BE ALLOWED IF THE SAID EXPENDITURE HAS BEEN LAID OUT OR EXPANDED ON SCIENTIFIC RESEARC H RELATED TO THE BUSINESS. IT IS NOT THE CASE OF ANYBODY THAT EXPLA NATION TO SEC. 35(1)(I) OF THE ACT IS APPLICABLE TO THE FACTS OF T HE CASE. THEREFORE, THE CASE OF THE ASSESSEE HAS TO BE SEEN IN THE LIGH T OF PROVISIONS CONTAINED IN SEC. 35(1)(I) WITHOUT APPLICATION OF E XPLANATION. 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 D OWN THE COST. NO MATERIAL HAS BEEN BROUGHT ON RECORD TO SUGGEST THAT BY INCURRING THESE EXPENDITURE THE ASSESSEE HAS ENTERED INTO ANY NEW ACTIVITY OF MANUFACTURING OR NEW ACTIVITY OF TRADE. IN THE BUS INESS OF MANUFACTURING OF DRUG, PROCESS OF R&D IS CONTINUOUS PROCESS WHICH AUGMENT THE BUSINESS OF THE ASSESSEE. THESE EXPENSE S ARE NOT IN THE NATURE OF ANY PERSONAL EXPENDITURE AS NO SUCH ALLEG ATION HAS BEEN MADE. THEREFORE, THE REMAINING CRITERIA TO CONSIDE R THE ALLOWABILITY IS ONLY THE THING TO BE SEEN IS THAT WHETHER THE EX PENDITURE IS INCURRED BY THE ASSESSEE IS CAPITAL IN NATURE. AS MENTIONED EARLIER THE DETAILS OF THESE EXPENDITURES HAVE ALREADY BEEN DESCRIBED BY THE AO IN SUMMARIZED FORM AND DETAILS OF THESE EXPENDIT URES ARE ALSO FOUND PLACE IN THE PAPER BOOK FILED BY THE ASSESSEE . SO AS IT RELATES ITA NO. 2111/D/2010 31 TO CAPITAL EXPENDITURE OF 44.41 LAKH, THE ASSESSEE ITSELF HAS CLAIMED THE SAID EXPENDITURE AS BEING CAPITAL IN NATURE. T HEREFORE, THERE IS NO DISPUTE WITH REGARD TO THAT. SO AS IT RELATES T O EXPENSES OF 19.57 LAKH ON SALARY AND WAGES THE SAME CANNOT BE CONSIDE RED TO BE EXPENDITURE OF BEING CAPITAL IN NATURE AS THE SAID SALARY AND WAGES ARE PAID TO THE MAN POWER DEPLOYED FOR CARRYING OUT THE R&D ACTIVITY WHICH IS PART AND PARCEL OF THE BUSINESS O F THE ASSESSEE. 29. NOW COMING TO THE EXPENSES OF 611.78 LAKH RELAT ING TO MATERIAL/CONSUMABLE/SPARES. THE DETAIL OF THESE EX PENDITURES HAS BEEN INCORPORATED AT PAGE 46-47 OF THE PAGE. THE N ARRATION GIVEN IS DETAILS OF MATERIAL USED FOR LAB TRIALS FOR PROCES S DEVELOPMENT. THESE ARE IN THE NATURE OF 7-ACA, 6-APA, ACETONITRI LE, AMMONIA, ACTIVATED CARBON, AMF SMIA, ACETONE, DRY ICE, CAUST IC SODA, ACETIC ACID, PAVLIC ACID, PENCILLIN G, PCL 5, ETC. ALL THESE ITEMS ARE IN THE NATURE OF MATERIAL/CONSUMABLES IN THE PROCESS OF R&D. IT IS NOT THE CASE OF THE AO THAT THE SAID M ATERIAL WAS NOT CONSUMED IN THE R&D PROCESS AND SOME PART THEREOF W AS REMAINING IN THE CLOSING STOCK. THEREFORE, THESE EXPENDITURE INCURRED ON MATERIAL USED FOR LAB TRIALS CANNOT IN ANY MANNER B E CONSIDERED AS EXPENDITURE BEING IN THE NATURE OF CAPITAL. THE NE XT ITEM IS OTHER EXPENDITURE DIRECTLY RELATED TO R&D. THE DETAILS OF THESE ITA NO. 2111/D/2010 32 EXPENDITURE ARE INCORPORATED AT PAGE 48 OF THE PAPE R BOOK. IT IS UNDER THE HEAD DETAILS OF OTHER EXPENDITURE DIRECT LY RELATED TO R&D. WITH REGARD TO THESE EXPENDITURE THE FINDING OF FACT HAS BEEN RECORDED BY LD. CIT(A) THAT THESE HAVE BEEN IN CURRED BY THE ASSESSEE FOR REGISTRATION OF PRODUCTS IN OTHER COUN TRIES OR TOWARDS OBTAINING TECHNICAL KNOW HOW FEE FOR PRODUCING NEW DRUGS ETC.. HE HAS RECORDED IN HIS ORDER THAT HE HAS CALLED FOR AN D PERUSED THE AGREEMENTS BETWEEN THE ASSESSEE COMPANY AND IND. SW IFT LTD. (WHICH IS THE MAJOR SUM OF 1 CRORE COMPRISING OF TW O ITEMS OF RS. 50 LAKH EACH) FOR TRANSFER OF TECHNICAL KNOW HOW. HE HAS ALSO OBSERVED THAT AO HAS NOT GIVEN ANY ADVERSE COMMENT IN HIS REPORT REGARDING THIS AGREEMENT AND SUCH TYPE OF AGREEMENT S FOR TRANSFER OF TECHNICAL KNOW HOW ARE QUITE COMMON IN PHARMACEUTIC AL INDUSTRY DUE TO COMMERCIAL EXIGENCY. THESE FINDINGS OF FACT HAVE NOT BEEN CONTROVERTED BY THE REVENUE BY BRINING ANY MATERIAL ON RECORD TO SUGGEST THAT SUCH FINDINGS OF LD. CIT(A) ARE CONTRA RY TO THE FACTS EXISTING ON RECORD. IF IT IS SO, THEN WE FIND NO I NFIRMITY IN THE FINDINGS RECORDED BY LD. CIT(A), WHEREBY FOLLOWING THE DECISION OF DELHI ITAT IN THE CASES OF JCIT VS. MODI OLIVETTI L TD. (SUPRA) AND ACIT VS. MEDICEMEN BIOTECH LTD. (SUPRA), HE HAS ALL OWED THE RELIEF TO THE ASSESSEE. ITA NO. 2111/D/2010 33 30. IN VIEW OF THE ABOVE DISCUSSION, IT HAS TO BE H ELD THAT ALL OF THESE EXPENDITURE WERE INCURRED BY THE ASSESSEE IN THE COURSE OF ITS BUSINESS AND NONE OF THE EXPENDITURE CAN BE CLASSIF IED AS EXPENDITURE IN THE NATURE OF CAPITAL. THE CASE LAW RELIED UPON BY THE LD. AR SUPPORTS THE CASE OF THE ASSESSEE. THEREFOR E, WE FOUND NO INFIRMITY IN THE ORDER OF CIT(A) VIDE WHICH THE ASS ESSEE HAS BEEN HELD ELIGIBLE FOR DEDUCTION OF THESE EXPENDITURE UN DER BOTH THE SECTIONS EITHER U/S 35(1)(I) OR U/S 37(1) OF THE AC T. WE DECLINE TO INTERFERE IN SUCH DELETION AND THIS GROUND OF THE R EVENUE IS DISMISSED. 31. SO AS IT RELATES TO CLAIM OF THE ASSESSEE U/S 8 0IB, IT WAS FOUND THAT THIS CLAIM WAS NOT MADE BY THE ASSESSEE IN THE RETURN OF INCOME, IT WAS ALSO NOT MADE DURING THE COURSE OF ASSESSMEN T PROCEEDINGS. THE FACTS RELATING TO THAT DEDUCTION HAVE ALSO NOT BEEN SHOWN TO BE EXISTING ON RECORD. LD.CIT(A) WITHOUT CONSIDERING T HIS ASPECT HAS DIRECTED THE AO TO EXAMINE THE CLAIM OF THE ASSESSE E IN ACCORDANCE WITH LAW. WHEN THE FACTS REGARDING SUCH DEDUCTION WERE NOT AVAILABLE ON RECORD AND THE GROUND WAS ALSO NOT ARI SING OUT OF ASSESSMENT ORDER, THEN, IN OUR OPINION LD. CIT(A) H AS COMMITTED AN ERROR IN ENTERTAINING SUCH GROUND. THEREFORE, THIS GROUND OF THE REVENUE IS ALLOWED. ITA NO. 2111/D/2010 34 32. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED IN THE MANNER AFORESAID. ORDER WAS PRONOUNCED IN THE OPEN COURT ON 17.6.2011 SD/- SD/- (K.G. BANSAL) (I.P. BANSAL) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 17.6.11 *KAVITA COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR