M/s. Minal Intermediates, Ahmedabad V. CIT(A)-II, Ahmedabad

ITA 3077/AHD/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 5882 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 21-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Gift; Depreciation; Initiation of penalty proceedings; Capital expenditure
• Section: 143(3); 234B; 37; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH BEFORE: SHR I RAJPAL YADAV , JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER M/S. MINAL INTERMEDIATES, PLOT NO. 1405, GIDC PHASE IV, NARODA, AHMEDABAD - 382 330 PAN: AAEFM5214A (APPELLANT) VS THE DCIT, CIRCLE - 3, AHMEDABAD (RESPONDENT) REVENUE BY : S H RI PRASOON KA B RA , SR. D . R. ASSESSEE BY: SMT. URVASHI SHODHAN , A.R. DATE OF HEARING : 23 - 01 - 2 018 DATE OF PRONOUNCEMENT : 23 - 03 - 2 018 / ORDER P ER : AMARJIT SINGH, ACCOUNTANT ME MBER : - THESE TWO ASSESSEE S APPEAL S FOR A.Y. 2010 - 11 , AR ISE FROM ORDER OF THE CIT(A) - II, AHM EDABAD DATED 12 - 09 - 2014 & 01 - 10 - 2014 , IN PROCEEDINGS UNDER SECTION 143(3) & 271(1)(C) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT . 2. THE ASSESSEE HAS RAISE D FOLLOWING GROUNDS OF APPEAL: - 3076/AHD/2014 1. LD. CIT (A) ERRED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANC E MADE BY AO OF RS. 15, 62, 174/ - EXPENSES INCURRED ON RESEARCH & DEVELOPMENT. LD. CIT (A) OUGHT TO HAVE HELD THE APPELLANT ELIGIBLE TO CLAIM T HE EXPENSES FOR RESEARCH ACTIVITIES CARRIED OUT RELATING TO THE BUSINESS. IT BE SO HELD NOW. I T A NO S . 3076 & 3077 / A HD/20 14 A SSESSMENT YEAR 2010 - 11 I.T.A NO S . 3076 & 3077 /AHD/20 14 A.Y. 2010 - 11 PAGE NO M/S. MINAL INTERMEDIATES VS. DCIT 2 2. LD. CIT (A) ERRED IN LAW AND ON FACTS IN CONFIRMING VIEW OF AO THAT DUE TO FAILURE TO DEVELOP ANY NEW PRODUCT CLAIM DID NOT QUALIFY AS EXPENSES INCURRED FOR ' SCIENTIFIC PURPOSE ' WITHIN MEANING OF SECTION 35(1 )(IV) READ WITH SECTION 43(4) OF THE ACT. LD. CIT (A) ERRED IN NOT APPRECIATING TERM 'SCIENTIFIC RESEARCH' IN CONTEXT TO NEW PRODUCTS DEVELOPED BY THE APPELLANT. LD. CIT (A) OUGHT TO HAVE ALLOWED THE CLAIM. IT BE SO HELD NOW. 3. LD. CIT (A) ERRED IN LAW AND ON FACTS IN HOLDING THE APPELLANT INELIGIBLE TO CLAIM THE EXPENSES SINCE DEVELOPING NEW METHODS OF ANALYSIS & TESTING OUTSIDE OF SCIENTIFIC RESEARCH UNDER PROVISIONS OF SECTION 43(4) OF THE ACT. LD. CIT (A) OUGHT TO HAVE HELD ACTIVITIES OF THE APPELLANT AS EXTENSION OF KNOWLEDGE DEVELOPING NEW PRODUCTS. IT BE SO HELD NOW. 4. ALTERNATIVELY AND WITHOUT PREJUDICE TO THE ABOVE GROUND, ID. CIT (A) OUGHT TO HAVE DIRECTED AO TO ALLOW DEPRECIATION ON ASSETS IN STALLED AND READY TO USE FOR THE PURPOSE OF BUSINESS OF THE APPELLANT. IT BE SO HELD NOW. 5. LD. CIT (A) ERRED IN LAW AND ON FACTS IN ENHANCING INCOME OF THE APPELLANT TRE ATING EXPENSE OF RS. 1, 55, 309/ - AS INCURRED FOR NON - BUSINESS PURPOSE & HENCE NOT ALLOWABLE INSTEAD OF DISALLOWANCE U/S 40(A)(IA) OF THE ACT BY AO. LD. CIT (A) OUGHT TO HAVE TREATED EXPENSES DULY SUPPORTED WITH EVIDENCE INCURRED FOR THE PURPOSE OF BUSINESS TO BE GENUINE AND OUGHT NOT TO HAVE ENHANCED INCOME BY DISALLOWING THE SAME. IT B E SO HELD NOW. 6. INITIATION OF PENALTY PROCEEDINGS U/S 271(1 )(C) OF THE ACT ON ENHANCED INCOME BY ID. CIT (A) IS NOT JUSTIFIED. 7. LEVY OF INTEREST U/S 234B & 234C OF THE ACT IS NOT JUSTIFIED. 3. GROUND NOS. 1 TO 4 ARE INTERCONNECTED TO THE SAME ISSU E, THEREFORE, THE SAME ARE ADJUDICATED TOGETHER AS UNDER: - 4. THE BRIEF FACTS OF THE CASE ARE DISCUSSED UNDER DIFFERENT GROUNDS OF APPEAL AS UNDER: - 5. IN THIS CASE, RETURN OF INCOME DECLARING INCOME OF RS. 62 , 90 , 220/ - WAS FILED ON 30 TH SEP, 2010. SUBSE QUENTLY, THE CASE WAS SELECTED UNDER SCRUTINY BY ISSUING OF NOTICE U/S. 143(2) OF THE ACT ON 30 TH AUGUST, 2011. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAS DEBITED AN AMOUNT OF RS. 15 , 62 , 174 / - UNDER THE HE AD SCIENTIFIC AND RESEARCH EXPENSES. ON SCRUTINY, THE ASSESSING OFFICER HAS OBSERVED THAT CLAIMED EXPENSES WERE NOT APPEARED TO BE IN THE NATURE OF SCIENTIFIC RESEARCH EXPENSES . I.T.A NO S . 3076 & 3077 /AHD/20 14 A.Y. 2010 - 11 PAGE NO M/S. MINAL INTERMEDIATES VS. DCIT 3 HOWEVER, T HE ASSESSEE EXPLAINED THAT IT HAS INCURRED CAPITAL EXPENSES OF RS . 15 , 62 , 174/ - PERTAINING TO SCIENTIFIC RESEARCH AND ITS BREAK - UP IS AS UNDER: - 1. TOWARDS CONSTRUCTION OF BUILDING RS. 6,12,976/ - . 2. TOWARDS ELECTRIFICATION RS. 1,04,029/ - 3. TOWARDS FURNITURE AND FIXTURES RS. 7,10,210/ - 4. TOWARD LABORATORY INSTRUMENTS RS. 1,34,959/ - TOTAL RS. 15,62,174/ - ON SCRUTINY T HE ASSESSING OFFICER OBSERVED THAT ALL THE EXPENSES ARE INCURRED ON BUILDING AND FURNITURE AND NO SCIENTIFIC RESEARCH IS INVOLVED, THEREFORE , HE REJECTED THE CLAIM OF THE A SSESSSEE AFTER CITING THE FOLLOWING REASONS: - I) THE EXPENSES INCURRED BY THE ASSESSEE REVEAL THAT THE PAYMENT HAS BEEN MADE FOR CONSTRUCTION ACTIVITY AND FURNISHING/FURNITURE PURPOSES. IN THE ENTIRE EXPENSES DEBITED THERE, IS NO MENTION OF ANY E QUIPMENT OR RELATED ASSETS OR ANY OTHER FACILITY, WHICH COULD BE TERMED AS RELATING TO SCIENTIFIC RESEARCH. THE EXPENSE ON PURCHASING OF ELECTRIC GOODS, CABLE, CEMENT BAGS, STEEL, SAND, ALUMINUM DOORS & WINDOWS, WATER PUMP, PAINTS, ETC. DO NOT CONSTITUTE E XPENSES RELATING TO SCIENTIFIC RESEARCH. II) ON VERIFICATION OF P & L ACCOUNT IT IS SEEN THAT THE MAJOR RECEIPT OF THE ASSESSEE IS FROM M/S. ORCHID CHEMICALS & PHARMACEUTICALS LTD. THE ASSESSEE - MANUFACTURES CHEMICALS STRICTLY AS PER THE CONTRACT GIVEN BY ORCHID CHEMICALS. IN VIEW OF THE SAME, IT IS A FACT THAT THE ASSESSEE IS INVOLVED IN JOB WORK SALE & IS NOT IN TO REGULAR MANUFACTURING ON LARGE SCALE WHICH WOULD REQUIRED THE ASSESSEE TO CONDUCT SCIENTIFIC RESEARCH. IT IS ALSO TO BE NOTED THAT OGS SALES A RE ALSO MADE TO ORCHID CHEMICAL & PHARMACEUTICALS LTD. THE SAID SALES ARE ALS O MADE AS PER SPECIFICATION. III) AS PER THE JOB WORK AGREEMENT ENTERED INTO BY THE ASSESSEE & MS. ORCHID CHEMICALS & PHARMACEUTICALS LTD. IT IS CLEARLY STATED THAT THE PRODUCT S HALL BE MANUFACTURED STRIC TLY AS PET - SPECIFICATION GIVEN AN D THAT INFORMATION REGARDING IMPROVEMENT IN YIELD WILL BE PROVIDED BY ORCHID CHEMICALS & PHARMACEUTICALS LTD. THE RELEVANT CLAUSE NO. 2 OF THE AGREEMENT IS RE - PRODUCE BELOW FOR READY REFERENCE: .. THE MANUFACTURER SHALL MANUFACTURE ON BEHALF OF ORCHID AND DELIVER THE PRODUCT AS PER THE TERMS AND CONDITIONS SET OUT HEREINAFTER. THE MANUFACTURER SHALL MANUFACTURE THE PRODUCT STRICTLY AS PER THE SPECIFICATIONS GIVEN BY ORCHID. ORCHID WILL PROVIDE INFOR MATION' REGARDING THE IMPROVEMENT OF THE YIELD OF THE PRODUCT AND CERTAIN STANDARD TESTING PROCEDURES ETC. TO THE MANUFACTURER. THE ABOVE CLAUSE CLEARLY SHOWS THAT THE ASSESSEE IS SIMPLY IN THE BUSINESS, OF JOB WORK SALES 8S SUPPLY AS PER THE SPECIFICATION S AND REQUIREMENTS OF THE CLIENTS AND IS NOT INVOLVED IN MAJOR MANUFACTURING ACTIVITY WHICH ENTAILS INVESTMENT IN SCIENTIFIC RESEARCH. THUS, FACTUALLY TH E CLAIM OF THE ASSESSEE U/S 35(1 )(IV) OF THE INCOME TAX ACT IS NOT ALLOWABLE. N ON LEGALITY OF THE ISSU E IT IS TO BE NOTED THAT FOR THE PURPOSE OF SECTION 35(1)(IV) SCIENTIFIC RESEARCH HAS BEEN DEFINED IN SECTION 43(4) OF INCOME - TAX ACT, 1961 THE SAME IS REPRODUCED BELOW FOR READY PREFERENCE : (I)' SCIENTIFIC RESEARCH' MEANS ANY ACTIVITIES FOR THE EXTENSION OF KNOWLEDGE IN THE FIELDS OF NATURAL OR APPLIED SCIENCE INCLUDING AGRICULTURE, ANIMAL HUSBANDRY OR FISHERIES; I.T.A NO S . 3076 & 3077 /AHD/20 14 A.Y. 2010 - 11 PAGE NO M/S. MINAL INTERMEDIATES VS. DCIT 4 ( II) PREFERENCES TO EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH INCLUDE ALL EXPENDITURE INCURRED FOR THE PROSECUTION OF SCIENTIFIC RESEARCH, BUT DO NOT INCLUDE ANY EXPENDITURE INCURRED IN THE ACQUISITION OF RIGHTS IN, OR ARISING OUT OF, SCIENTIFIC RESEARCH; (III ) REFERENCES TO SCIENTIFIC RESEARCH RELATED TO A BUSINESS OR CLASS OF BUSINESSES INCLUDE (A )ANY SCIENTIFIC RESEARCH WHICH, MAY LEAD TO OR FACILITATE AN EXTENSION OF THAT BUSINESS OR, AS THE CASE MAY BE, ALL BUSINESSES OF THAT CLASS; (B) ANY SCIENTIFIC RESEARCH OF A MEDICAL NATURE WHICH HAS A SPECIAL RELATION TO THE WELFARE OF WORKER EMPLOYED IN THAT BUSINESS OR, AS THE CASE MAY BE, ALL BUS INESSES OF THAT CLASS; IT WILL BE READILY APPRECIATED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON SCIENTIFIC RESEARCH DOES NOT FALL INTO DESCRIPTION OF SUB - CLAUSES (I) TO (HI) OF SUB - SECTION (4) OF SECTION 43 MENTIONED ABOVE. THUS AS PER THE PROVISION S OF SECTION 35(L)(IU) R.W.S - 43(4) OF THE I.T. ACT. THE SCIENTIFIC RESEARCH EXPENSES DEBITED BY THE ASSESSEE D OES NOT QUALIFY FOR EXEMPTION. V) ACCORDING TO SECTION 43(4) (I) 'SCIENTIFIC RESEARCH' MEANS ANY ACTIVITIES FOR THE EXTEN SION OF KNOWLEDGE IN THE FIELDS OF NATURAL OR APPLIED/ SCIENCE'. SECTION 43(4)(M) REFERENCE TO SCIENTIFIC RESEARCH IS RELATED TO A BUSINESS OR CLASS OF BUSINESS INCLUDE - (A) ANY SCIENTIFIC RESEARCH WHICH MAY LEAD TO OR FACILITATE AN EXTENSION OF THAT BUSINESS OR, AS THE CASE MAY 'BE, ALL BUSINESS OF THAT CLASS'. THE DEFINITION OF 'RESEARCH' AND 'DEVELOPMENT' ACCORDING TO ACCOUNTING STANDARD, AS - 8, ISSUED BY THE COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ON AC COUNTING FOR RESEARCH AND DEVELOPMENT' LAYS DOWN THAT R ESEARCH BE ORIGINAL NEW SCIENTIFIC OR TECHNICAL KNOWLEDGE AND UNDERSTANDING; (IT) AND THAT DEVELOPMENT IS THE TRANSLATION OF RESEARCH FINDINGS OR OTHER KNOWLEDGE INTO A PLAY OR DESIGN FOR THE PRODUCTION OF NEW OR SUBSTANTIALLY IMPROVED MATERIAL, DEVICES, P RODUCTS, PROCESS SYSTEMS' OR SERVICES PRIOR TO THE COMMENCEMENT OF COMMERCIAL PRODUCTION.' IN THE LIGHT OF ABOVE MEANING OF 'SCIENTIFIC', 'SCIENCE', 'RESEARCH', 'SCIENTIFIC RESEARCH' AND 'DEVELOPMENT' AND SECTIONS 35(1) (IV) AND 43(4)(I)(III )(A), TH E CASE OF ASSESSEE, DOES NOT AMOUNT TO SCIENTIFIC RESEARCH. THE 'SCIENTIFIC RESEARCH' MEANS SYSTEMATIC INVESTIGATION TOWARDS INCREASING THE SUM OF KNOWLEDGE. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE NARRATED ABOVE IT CANNOT BE STATED THAT ANY SUCH SYSTEMATIC INVESTIGATION TOWARDS INCREASING THE SUM OF KNOWLEDGE IS INVOLVED. THE ACCOUNTING STANDARD AS - 8 HAS DISTINGUISHED THE TERMS 'RESEARCH' AND 'DEVELOPMENT' AS THE MEANING OF BOTH THESE TERMS ARE DIFFER ENT. IN THIS CASE THERE IS NEITHER 'RESEARCH' NOR 'DEVELOPMENT'. FROM ABOVE DISCUSSION IT CAN BE SAID THAT MERE CONSTRUCTION, ELECTRIC WORK AND FURNITURE IN THE NAME OF 'SCIENTIFIC RESEARCH DOES NOT AMOUNT TO SCIENTIFIC RESEARCH. ( REF. 84 ITD 34 (AHD) (2003)) IN FACT EVEN IN CASES WHERE EQUIPMENT HAVE BEEN INSTALLED THE COURTS HAVE HELD THAT THE SAME SHOULD BE WITHIN THE STANDARDS OF LAW FOR SCIENTIFIC 'RESEARCH' AND 'DEVELOPMENT' REF. 16 ITD 48O (MADRAS) (1986). IN THIS CASE THE ASSESSEE HAS NOT EVEN INSTALLED ANY SCIENTIFIC INSTRUMENT OR EQUIPMENTS. WHICH ESTABLISHES THAT THE EXPENSES CONTRIBUTE TO SYSTE MATIC INVESTIGATION TOWARDS INCREASING THE SUM OF KNOWLEDGE FOR BETTER BUSINESS. THUS AS PER TH E PROVISIONS OF SECTION 35(L)(IV ) R.W.S 43(4) OF THE I.T. ACT. THE SCIENTIFIC RESEARCH EXPENSES DEBITED BY THE ASSESSEE DOES NOT QUALIFY FOR EXEMPTION. VI) THE ASSESSEE HAS QUOTED VARIOUS JUDGMENTS IN SUPPORT OF HIS CONTENTION THAT THE EXPENDITURE IS ALL OWABLE U/S 35 (1) (IV) OF THE I.T. ACT. HOWEVER ON VERIFICATION OF THESE JUDGMENTS IT IS SEEN THAT IN ALL THE CASES THERE HAS BEEN ACTIVITY IN THE NATURE OF SCIENTIFIC RESEARCH AND THE ISSUE DECIDED IS WEATHER CAPITAL EXPENDITURE INVOLVED IN SUCH CASES COULD BE ALLOWED U/S 35 (1) (IV) OF THE I.T. ACT. IN THIS CASE DEDUCTION CANNOT BE ALLOWED AS THE FACTS OF THE CASE SHOW THAT THERE IS ONLY EXPENDITURE IN THE NATURE OF CIV IL CONSTRUCTION WORK AND THERE IS NO ACTIVITY'' RELATING TO RESEARCH AND DEVELOPMENT. I THE LEGAL AS WELL A S FACTUAL EXPECTS OF THE CASE SHOW THAT THE[ DEDUCTION IS NOT ALLOWABLE IN VIEW OF THE J UDGMENT OF THE HON. AHMEDABAD I TAT IN THE CASE OF DCIT V. NUTAN TOBACO (85 1TD 34). SIMILAR VIEW HAS ALSO BEEN TAKEN BY HIGH - COURT OF MADRAS IN THE CASE \ / OF C OROMANDEL INDAG PRODUCTS PVT. LTD V. CIT (217 ITR 585) I.T.A NO S . 3076 & 3077 /AHD/20 14 A.Y. 2010 - 11 PAGE NO M/S. MINAL INTERMEDIATES VS. DCIT 5 CONSEQUENTLY, THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF T HE ASSESSEE OF RS. 15 , 62 , 174/ - STATING THAT THE EXPENSES ARE NOT INCURRED FOR SCIENTIFIC PURPOSES WITHIN T HE MEANING OF SECTION 35(I)( IV) R.W.S. 43(IV) OF THE ACT. 6 . AGGRIEVED ASSESSSEE FILED APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) HAS SUSTAINED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER: - 6.1 I HAVE CONSIDERED THE FACTS AND THE SUBMISSIONS OF THE APPEL LANT. SECTION 35(1) PROVIDES DEDUCTION FOR EXPENDITURE ON SCIENTIFIC RESEARCH. FOR 'SCIENTIFIC RESEARCH' DEFINITION IS GIVEN IN SECTION 43(4). THE SAID SECTION HAS BEEN REPRODUCED BY THE ASSESSING OFFICER ALSO IN HIS ASSESSMENT ORDER ON PAGE - 10. AS COMPREH ENSIVE DEFINITION IS GIVEN IN SECTION 43(4), THERE IS NO NEED TO REFER TO ANY DEFINITION GIVEN IN THE GUIDELINES OF DEPARTMENT OF SCIENCE & TECHNOLOGY OR UNDER THE COMPANIES' ACT AS THEY ARE FOR THE DIFFERENT PURPOSES. THE APPELLANT HAS NOT BROUGHT ON RECO RD THE DETAILS OF ANY DEVELOPMENT WHICH TOOK PLACE TILL THE CURRENT ASSESSMENT YEAR. THE APPELLANT ALSO FAILED TO SHOW THAT BY HIS ACTIVITIES THERE WAS ANY EXTENSION OF KNOWLEDGE IN THE FIELDS OF NATURAL OR APPLIED SCIENCE AS NO NEW PRODUCT WAS DEVELOPED. 6.2 IT IS ALSO PERTINENT TO NOTE THAT APPELLANT DID NOT CLAIM UNDER SECTION 35 ANY DEDUCTION IN THE EARLIER YEARS. THUS THIS IS THE 1 ST TIME WHEN DEDUCTION UNDER SECTION 35 IS CLAIMED FOR THE CAPITAL EXPENDITURE INCURRED. THUS THE PAST HISTORY DOES NOT SH OW THAT APPELLANT WAS ENGAGED IN ANY SCIENTIFIC RESEARCH. THE QUALITY TESTING AND TESTING OF THE PRODUCT FOR SPECIFICATIONS PROVIDED DOES NOT COME WITHIN THE AMBIT OF SCIENTIFIC RESEARCH. 6.3 THE PHOTOGRAPHS RELATE TO THE OUTER BUILDING, COMPUTER, SOME LAB EQUIPMENTS AND SOME TESTING BEING DONE, BUT THESE DO NOT PROVE ANY SCIENTIFIC RESEARCH BEING CARRIED OUT. 6.3 FROM THE DETAILS OF THE ACTIVITIES DESCRIBED BY THE APPELLANT, IT IS HELD THAT IT IS ENGAGED IN TESTING AND COMMERCIAL EXPLOITATION OF AVAILABLE KNOWLEDGE FOR VARIOUS PRODUCTS BUT NO SCIENTIFIC RESEARCH HAS BEEN CARRIED OUT BY IT WHICH CAN BE COVERED UNDER CLAUSE (I) TO CLAUSE (III) OF SUB SECTION (4) OF SECTION 43. THE EXTENSION OF KNOWLEDGE IS NECESSARY FOR COVERING THE ACTIVITY UNDER THE DEFINIT ION OF THE TERM SCIENTIFIC RESEARCH. HONOURABLE GUJARAT HIGH COURT IN THE CASE OF DEPUTY COMMISSIONER OF INCOME TAX VS MASTEK LIMITED (2012) 25 TAXMANN.COM 133 HELD THAT 'ONE NEED NOT FALL BACK ON SUCH GENERAL PRINCIPLES SINCE THE TERM 'SCIENTIFIC RESEARCH ' HAS BEEN DEFINED UNDER SECTION 43(4) TO MEAN ANY ACTIVITIES FOR THE EXTENSION OF KNOWLEDGE IN THE FIELDS OF NATURAL OR APPLIED SCIENCE INCLUDING AGRICULTURE, ANIMAL HUSBANDRY OR FISHERIES. THUS, SCIENTIFIC RESEARCH NEED NOT BE EQUATED WITH A SCIENTIFIC INVENTION. EVEN THE TERM 'INVENTION' A. - DEFINED IN THE PATENT ACT IS WIDER THAN UNDERSTOOD IN PURE SCIENCE WHERE DISTINCTION IS MADE BETWEEN INVENTION AND DISCOVERY. THE PATENT ACT THUS RECOGNIZES NOT ONLY THE PRODUCT PATTERN WHERE A NEW PRODUCT HAS BEEN INVENTED THROUGH SCIENTIFIC RESEARCH, BUT ALSO RECOGNIZES A PROCESS PATTERN WHERE AN EXISTING PRODUCT MAY BE MANUFACTURED THROUGH AN INNOVATIVE PROCESS WHICH WAS HITHERTO UNKNOWN.' THE APPELLANT FAILS TO SHOW THAT BY ITS ACTIVITIES, THERE IS ANY EXTENSION OF SCIENTIFIC KNOWLEDGE. THE PURCHASE OF TESTING EQUIPMENTS IN THE NEXT F.Y. ONLY ESTABLISHES THAT THE APPELLANT IS ENGAGED IN TESTING OF ITS VARIOUS PRODUCTS BUT IT DOES NOT ESTABLISH CARRYING OUT OF SCIENTIFIC RESEARCH. FURTHER, SECTION. 35(3) OF THE ACT IS NOT APPLICABLE SINCE NO DEDUCTION IS CLAIMED UNDER CLAUSES (II) AND (III) OF SECTION 35(1). THUS THE ASSESSING OFFICER WAS COMPETENT TO DECIDE THE QUESTION OF CARRYING OUT OF SCIENTIFIC RESEARCH. IN VIEW OF THIS, THE CLAIM MADE UNDER SECTION 35 BY THE APPELLANT IS LIABLE TO BE REJECTED AND ACTION OF THE ASSESSING OFFICER IN DISALLOWING DEDUCT ION UNDER SECTION 35 IS UPHELD. I.T.A NO S . 3076 & 3077 /AHD/20 14 A.Y. 2010 - 11 PAGE NO M/S. MINAL INTERMEDIATES VS. DCIT 6 7 . DURING THE COURSE OF APPELLATE PROCEEDINGS BEFORE US, THE LD. COUNSEL HAS SUBMITTED PAPER BOOK CONTAINING DETAIL OF SUBMISSION MA DE BEFORE THE ASSESSING OFFICER AND LD. CIT(A) ETC. SHE HAS CONTENDED THAT ASSESSEE HAS INCURRED SCIENTIFIC RESEARCH EXPENSES IN RESPECT OF CAPITAL EXPENDITURE WHICH ARE ALLOWABLE U/S. 35(I) OF THE ACT. ON THE OTHER HAND , LD. DEPARTMENTAL REPRESENTATIVE R ELIED ON THE ORDER OF THE LD. CIT(A). 8 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD CAREFULLY . THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFACTURING OF CHEMICAL. THE ASSESSEE HAS DEBITED AN AMOUNT OF RS . 15 , 62 , 174/ - UNDER THE HEAD SCIENTIFIC RESEARCH EXPENSES AND CLAIMED DEDUCTION FOR THE SAME U/S. 35(I)(IV) OF THE A CT. ON SCRUTINY T HE ASSESSING OFFICER CONCLUDED THAT EXPENSES WERE INCURRED ON BUILDING AND FURNITURE AND NO SCIENTIFIC RESEARCH WAS INVO LVED. HE STATED THAT EXPENSES ON PURCHASE OF CHEMICAL GOODS, CABLE, CEMENT BAG, STEEL, SAND ALUMINUM BOARD AND WINDOWS DO NOT CONSTITUTE EXPENSE RELATING TO SCIENTIFIC RESEARCH. THE MAJOR PART OF THE RECEIPT OF THE ASSESSEE IS OF THE NATURE OF JOB WORK FROM M/S ORCHID CHEMICAL AND PHARMACEUTICAL LTD. UNDER CONTRACT MANUFACTURING AND THE ASSESSEE HAS NOT PROVED WITH RELEVANT MATERIAL OF CARRYING OUT ANY SCIENTIFIC RESEARCH CONNECTED WITH THE JOB WORK . WE FURTHER OBSERVED THAT EXPENSES OF PURCHASE OF CHEMICAL GOODS, CABLE, CEMENT BAG, STEEL, SAND ALUMINUM BOARD AND WINDOWS DO NOT CONSTITUTE EXPENSES RELATING TO SCIENTIFIC RESEARCH. WE HAVE NOTICED THAT SECTION 43(4) OF THE ACT DEFINE THE SCIENTIFIC RESEARCH AS UNDER: - ( 4 ) 85 [( I ) SCIENTIFIC RESEARCH MEANS ANY ACTIVITIES FOR THE EXTENSION OF KNOWLEDGE IN THE FIELDS OF NATURAL OR APPLIED SCIENCE INCLUDING AGRICULTURE, ANIMAL HUSBANDRY OR FISHERIES;] ( II ) REFERENCES TO EXPENDITURE INCURRED ON SCIENTIFI C RESEARCH INCLUDE ALL EXPENDITURE INCURRED FOR THE PROSECUTION, OR THE PROVISION OF FACILITIES FOR THE PROSECUTION, OF SCIENTIFIC RESEARCH, BUT DO NOT INCLUDE ANY EXPENDITURE INCURRED IN THE ACQUISITION OF RIGHTS IN, OR ARISING OUT OF, SCIENTIFIC RESEARCH ; ( III ) REFERENCES TO SCIENTIFIC RESEARCH RELATED TO A BUSINESS OR CLASS OF BUSINESS INCLUDE ( A ) ANY SCIENTIFIC RESEARCH WHICH MAY LEAD TO OR FACILITATE AN EXTENSION OF THAT BUSINESS OR, AS THE CASE MAY BE, ALL BUSINESSES OF THAT CL ASS; I.T.A NO S . 3076 & 3077 /AHD/20 14 A.Y. 2010 - 11 PAGE NO M/S. MINAL INTERMEDIATES VS. DCIT 7 ( B ) ANY SCIENTIFIC RESEARCH OF A MEDICAL NATURE WHICH HAS A SPECIAL RELATION TO THE WELFARE OF WORKERS EMPLOYED IN THAT BUSINESS OR, AS THE CASE MAY BE, ALL BUSINESSES OF THAT CLASS; AFTER CONSIDERING THE ABOVE FACTS AND MATERIAL WE OBSERVE TH AT ASSESSEE FAILED TO DEMONSTRATE HOW ITS ACTIVITIES ARE PERTAINED TO FACILITATE SCIENTIFIC SEARCH AND KNOWLEDGE . THE ASSESSEE HAS ALSO FAILED TO SUBSTANTIATE WITH RELEVANT MATERIAL THE CARRYING OUT ACTIVITY PERTAINING TO SCIENTIFIC RESEARCH . HOWEVER WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF DEPRECIATION AS PER LAW .ACCORDINGLY , THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED DISALLOWANCE U/S. 40(A)(IA) OF RS. 1 , 55 , 309/ - 9 . DURING THE COURSE OF A SSESSMENT PROCEEDINGS, THE ASSESSIN G OFFICER NOTICED THAT ASSESSEE HAS CLAIMED PROMOTIONAL EXPENSES OF RS. 2 , 26 , 922/ - . THE ASSESSEE WAS ASKED TO FURNISH THE DETAIL OF COMPLIANCE MADE WITH TDS IN TERMS OF SECTION 40(A)(IA) OF THE ACT. THE ASSESS EE EXPLAINED THAT THE PAYMENT IS NOT LIABLE FOR TDS SINCE PAYMENT IS GIVEN FOR PROMOTIONAL ACTIVITIES. THE ASSESSING OFFICER HAS OBSERVED THAT ALL THE PAYMENTS ARE NOT IN THE NATURE OF GIFT AND SOME OF THE PAYMENTS ARE IN THE NATURE OF COMMISSION OR OF SIMILAR NATURE. THE DETAILS OF SUCH PAYMENT ARE REPRODUCED AS UNDER: - NO. NAME OF RECIPIENT AMOUNT DATE REMARKS 1 RAJKUMAR GUPTA RS. 15,000 18.07.09 SBI CHEQUE GIVEN 2 RAJKUMAR GUPTA RS.15,000 22.07.09 SBI CHEQUE GIVEN 3 RAMESH S PATEL RS.7 1,000 07.01.10 FOR BUSINESS DEVELOP MENT TOUR 4 MR. SONI RS.19,800 27.04.09 CASH PAID FOR MOBILE 5 SBPRADHAN RS. 9,000 16.10.09 CASH EXP. FOR COMPANY WHOSE JOB WORK IS DONE 6 MK RS.25,509 18.11.09 & 18.12.09 CASH EXP. FOR COMPANY WHOSE JOB WORK IS DONE I.T.A NO S . 3076 & 3077 /AHD/20 14 A.Y. 2010 - 11 PAGE NO M/S. MINAL INTERMEDIATES VS. DCIT 8 TOTAL RS.1, 55,309 . CONSEQUENTLY, T HE ASSESSING OFFICER DISALLOWED U/S. THE SAME U/S 40(A)(IA) OF THE ACT. 10 . AGGRIEVED ASSESSEE FILED APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) HAS DELETED THIS ADDITION ON THE GROUND THAT SAME IS NOT OF THE NATURE OF COM MISSION. HOWEVER, HE HAS ENHANCED THE ASSESSMENT BY ADDING THE SAME AMOUNT ON THE GROUND THAT THE SAME ARE NOT ALLOWABLE U/S. 37 OF THE ACT AS THE ASSESSEE FAILED TO PROVE WITH NECESSARY EVIDENCES THAT THESE EXPENSES ARE INCURRED FOR BUSINESS PURPOSES. 11 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD CAREFULLY. AFTER LOOKING TO THE NATURE OF EXPENSES AS ELABORATED SUPRA IN THE TABLE W E OBSERVED THAT THE ASSESSEE FAILED TO PRODUCE THE SUPPORTING BILL, VOUCHER ETC. TO SUBSTANT IATE THE GENUINENESS AND INCURRING OF THE SUCH EXPENSES FOR THE PURPOSE OF BUSINESS. THE ASSESSEE HAS NOT PRODUCED THE RELEVANT SUPPORTING MATERIAL BEFORE THE ASSESSING OFFICER AND LD. CIT(A). EVEN DURING THE APPELLATE PROCEEDINGS BEFORE US, ASSESSEE H AS NOT DEMONSTRATED THAT THESE EXPENSES ARE INCURRED FOR BUSINESS PURPOSES AND SUPPORTED WITH RELEVANT MATERIAL . CONSEQUENTLY, THE APPEAL OF THE ASSESSEE IS DISMISSED ON THIS ISSUE. 12. GROUND NO. 6 PERTAINS TO INITIATION OF PENALTY U/S 271(C) WHICH I S PREMATURE AT THIS STAGE , THEREFORE , THE SAME IS DISMISSED. 13. GROUND NO.7 IS DISMISSED AS LEVY OF INTEREST U/S 234 B & 234 C IS MANDATORY AS PER LAW. 14 . THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF A PPEAL: - 3077/AHD/2014 I.T.A NO S . 3076 & 3077 /AHD/20 14 A.Y. 2010 - 11 PAGE NO M/S. MINAL INTERMEDIATES VS. DCIT 9 1 LD. CIT (A) ERRED IN LAW AND ON FACTS IN LEVYING PENALTY U/S 271(1)(C) OF THE ACT OF RS. 47, 990/ - ON INCOME ENHANCED BY THE APPELLATE AUTHORITY. LD. CIT (A) OUGHT NOT TO HAVE LEVIED PENALTY ON ENHANCED INCOME SINCE THE APPELLANT NEITHER CONCEALED NOR FURNISHED INACCURATE PARTICULARS OF INCOME. IT BE SO HELD NOW. 2 LD. CIT (A) ERRED IN LAW AND ON FACTS IN LEVYING PENALTY IGNORING THE FACT THAT APPELLANT DISCHARGED INITIAL ONUS CAST UNDER LAW SUBMITTING DETAILED EXPLANATION WITH DOCUMENTARY EVIDENCE TO SUBSTANTIATE CL AIM OF EXPENSES INCURRED FOR THE PURPOSE OF BUSINESS. LD. CIT (A) OUGHT NOT TO HAVE HELD EXPLANATION 1 TO SECTION APPLICABLE TO FACTS OF THE CASE. IT BE SO HELD NOW. 3 LD. CIT (A) ERRED IN LAW AND ON FACTS IN LEVYING PENALTY NOT APPRECIATING THAT CL AIM DISALLOWED ONLY BECAUSE OF NON ACCEPTANCE OF THE EXPLANATION OF THE APPELLANT IS NOT SUBJECT TO AUTOMATIC LEVY OFF PENALTY WHEN NO COGENT EVIDENCE OF CONCEALMENT OF INCOME IS BROUGHT ON RECORD. THE ORDER OF ID. CIT (A) DESERVES TO BE QUASHED AND PENALT Y LEVIED DESERVES TO BE DELETED. 4 LD. CIT (A) ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE SUBMISSIONS THAT THE APPELLANT ALREADY SUBJECTED TO PENALTY PROCEEDINGS BY AO DID NOT DESERVE TO BE SUBJECTED TO A SEPARATE ROUND OF PENAL PROCEEDING S WHEN APPEAL AGAINST THE QUANTUM PROCEEDINGS IS PENDING FOR ADJUDICATION BEFORE THE HON'BLE IT AT. IT IS THEREFORE PRAYED TO QUASH PENALTY LEVIED ON INCOME ENHANCED IN APPELLATE PROCEEDINGS. IT BE SO HELD NOW. 15 . GROUND NOS. 1 TO 4 ARE INTER - CONNECTED TO SIMILAR ISSUE, THEREFORE, THE THEY ARE ADJUDICATED TOGETHER AS UNDER: - 16 . AS ELABORATED SUPRA IN THIS ORDER EXPENSES OF RS. 1 , 55 , 309/ - CLAIMED AS PAYMENT OF COMMISSION WAS DISALLOWED BY THE ASSESSING OFFICER FOR NON DEDUCTION OF TDS U/S. 40(A)(IA) OF THE ACT. THE LD. CIT(A) IN THE APPELLATE PROCEEDINGS HAS HELD THAT THESE EXPENSES ARE NOT IN THE NATURE OF COMMISSION NOT LIABLE FOR TDS, HOWEVER HE HAS MADE ENHANCEMENT OF THE SAME AMOUNT BY STATING THAT ASSESSEE FAILED TO PROVE WITH NECESSARY EVIDEN CES THAT THESE EXPENSES ARE INCURRED FOR THE BUSINESS PURPOSES U/S. 37 OF THE ACT. THEREAFTER, HE HAS ALSO INITIATED PENALTY PROCEEDINGS U/S. 271(1)(C) OF THE ACT FOR FURNISHING INACCURATE PARTICULAR OF INCOME. CONSEQUENTLY , THE LD. CIT(A) LEVIED PENALT Y U/S. 271(1)(C) OF RS. 47990/ - BY STATING THAT ASSESSEE HAS BEEN UNABLE TO SHOW IN THE PENALTY PROCEEDINGS THAT I TS CLAIM IS BONA FIDE WITH REGARD TO SALES PROMOTION EXPENSES. I.T.A NO S . 3076 & 3077 /AHD/20 14 A.Y. 2010 - 11 PAGE NO M/S. MINAL INTERMEDIATES VS. DCIT 10 17 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD C AREFULLY. THE ASSESSEE HAS FURNISHED COMPLETE PARTICULARS OF EXPENSES AND IT WAS NOT PROVED THAT THESE EXPENSES WERE BOGUS . THE DISALLOW ANCE WAS MADE FOR WANT OF SUPPORTING MATERIAL . IN VIEW OF THE ABOVE WE ARE NOT INCLINED WITH THE DECISION OF THE LD. CIT(A) FOR LEVYING OF IMPUGNED PENALTY, A CCORDINGLY, THE APPEAL OF THE ASSESSEE ON THIS ISSUE IS ALLOWED. 18. IN THE RESULT , IN RESPECT OF ITA 3076 /AHD/2014, GROUND NO. 1 TO 4 OF THE ASSESSEE IS PARTLY ALLOWED, GROUND NO. 5 TO 7 ARE DISMISSED . IN RESPECT OF ITA 3077 /AHD/2014 PERTAINING TO LEVY OF PENALTY , THE GROUND NO. 1 TO 4 ARE ALLOWED. ORDER PR ONOUNCED IN THE OPEN C OURT ON 23 - 03 - 201 8 SD/ - SD/ - ( RAJPAL YADAV ) ( AMARJIT SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD : DATED 23 /03 /2018 / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,