DCIT, Circle-1(1), Hyderabad V. M/s AVRA Laboratories Pvt Ltd, Hyderabad

ITA 371/HYD/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7679 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-11-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 07-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITRA
• Assessee Lawyers: K SREENIVASAN
• Keywords: Additional evidence; Wrong claim; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.371/HYD/2012 ASSESSMENT YEAR 2005-2006 DCIT, CIRCLE 1(1) HYDERABAD. VS. M/S. AVRA LABORATORIES P. LTD., HYDERABAD. PAN AABCA7137G (APPELLANT) (RESPONDENT) FOR REVENUE : MR. RAJAT MITRA FOR ASSESSEE : MR. K. SREENIVASAN DATE OF HEARING : 13.10.2014 DATE OF PRONOUNCEMENT : 12.11.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS IS REVENUE APPEAL FILED AGAINST THE ORDER OF THE LD. CIT(A)-II, HYDERABAD DATED 28.12.2011 FOR A.Y. 2005 -06 ON THE ISSUE OF DISALLOWANCE OF EXPENDITURE UNDER SECTION 35. 2. BRIEFLY STATED, ASSESSEE IS A COMPANY ENGAGED I N THE MANUFACTURE OF SPECIAL CHEMICALS AND INTERMEDIATES AND ALSO IN RESEARCH AND DEVELOPMENT OF MOLECULES. IT FILED ITS RETURN OF INCOME ADMITTING TOTAL INCOME OF RS.2,13,69,953 UNDER SECT ION 115JB. THE ASSESSING OFFICER AMONGST VARIOUS ADDITIONS MADE, D ISALLOWED AN AMOUNT OF RS.2,31,07,017 CLAIMED UNDER SECTION 35(1 )(IV) AS CAPITAL EXPENDITURE INCURRED FOR THE PURPOSE OF RESEARCH. A SSESSING OFFICER WAS OF THE OPINION THAT ASSESSEE IS NOT INDULGING I N RESEARCH AND DEVELOPMENT ACTIVITIES IN ITS OWN BUSINESS BUT UNDE RTAKING CONTRACT RESEARCH FOR THIRD PARTIES. HENCE, THE CLAIM OF CAP ITAL EXPENDITURE 2 ITA.NO.371/HYD/2012 M/S. AVRA LABORATORIES P. LTD., HYDERABAD. UNDER SECTION 35(1)(IV) IS NOT ALLOWABLE. IT WAS SU BMITTED BY ASSESSEE THAT IT IS CARRYING ON MANUFACTURING OF SPECIAL CHE MICALS AND INTERMEDIATES AND ALSO ITS R & D UNIT HAS BEEN APP ROVED FROM ITS INCEPTION BY THE MINISTRY OF SCIENCE AND TECHNOLOGY , DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH WHICH IS PERIODI CALLY RENEWED AND REFERRED TO LATEST ORDER DATED 11.08.2010. IT ALSO GAVE DETAILED NOTE REGARDING VARIOUS R & D ACTIVITIES AND ALSO THE PAT ENT RIGHTS OBTAINED IN VARIOUS PROCESS AND MOLECULES AND ELABORATELY EX PLAINED THAT ASSESSEE IS CARRYING ON SCIENTIFIC RESEARCH ON ITS OWN AND IS HOLDING/APPLIED FOR PATENTS FOR PRODUCTS DEVELOPED IN ITS R & D LABORATORIES. IT WAS ALSO EXPLAINED THAT ASSESSEE A LSO UNDERTAKES CONTRACT RESEARCH FOR THIRD PARTIES AND THE RECEIPT S ARE ALSO SHOWN IN THE BUSINESS AND THE ENTIRE UNIT ESTABLISHED IS FOR SCIENTIFIC RESEARCH ONLY. 3. LD. CIT(A) CALLED FOR REMAND REPORT VIDE LETTER DATED 16.06.2008 AND REMINDER LETTER DATED 16.10.2008. A. O. WAS ALSO PRESENT BEFORE THE LD. CIT(A) AND ANOTHER (SECOND) REMAND REPORT WAS ALSO CALLED FOR, WHICH WAS GIVEN BY LETTER DATED 07 .06.2011. LD. CIT(A) COMMENTED THAT REMAND REPORT SUBMITTED BY A.O. DO N OT REFLECT THE EXAMINATION OF DOCUMENTS FILED BY ASSESSEE DESPITE REQUESTS MADE BY PREDECESSOR AS WELL AS BY HER AND WENT ON EXAMINING THE ISSUE ON THE MATERIAL AVAILABLE BEFORE LD. CIT(A). THE LD. CIT(A ) GAVE FACTUAL FINDING THAT ASSESSEE IS INVOLVED IN R & D ACTIVITIES FROM ITS INCEPTION IN 1995. THE MAIN OBJECT OF R & D FOR MANUFACTURE WAS SPECIA LITY CHEMICALS, DRUG INTERMEDIATES AND EXPORT OF DRUG INTERMEDIATES . ON THE BASIS OF THE ANNUAL REPORTS, LD. CIT(A) NOTED THAT R & D WAS CARRIED OUT BY THE COMPANY IN RESPECT OF MIFEPRISTONE, CAMPTOTHECIN AN ALOGS AND PROJECTS ON PROSTAGLANDINS. FURTHER, LD. CIT(A) NOT ED THAT ON PROSTAGLANDINS AND ON THE SYNTHESIS OF MESOPROSTOS AND KESOBIDOPA AND IN THE CASE OF ANTI-ANCILLARY DRUGS WHICH HAVE BEEN INITIATED ON TWO PRODUCTS VIZ., BICALGTAMIDE AND ANASTORAZOLE AS SESSEE WAS DOING 3 ITA.NO.371/HYD/2012 M/S. AVRA LABORATORIES P. LTD., HYDERABAD. RESEARCH. IT WAS FURTHER NOTED THAT IN ADDITION TO ITS OWN R & D PROJECTS, AVRA SCIENTISTS HAVE WORKED OUT SEVERAL C ONTRACT RESEARCH PROJECTS OF R & D LEVEL TO OPTIMIZE THE LABORATORY PROCESS AND THEN UNDERTAKEN SCALE-UP AND PRODUCTION. LD. CIT(A) ALSO NOTED THAT ASSESSEE HAS BEEN CLAIMING CAPITAL EXPENDITURE FOR R & D UNDER SECTION 35 FOR A.Y. 2003-04 OF RS.24,30,722, FOR A .Y. 2004-05 RS.48,15,718 AND THESE EXPENSES WERE ALLOWED. ONLY IN THIS YEAR A.O. RAISED OBJECTION. LD. CIT(A) ALSO NOTED THAT CONTRI BUTION OF REVENUE BASED ON THE RESEARCH PRODUCTS IN RESPECT OF THE DO MESTIC AND EXPORT BUSINESS AND THE DETAILS OF PATENT, WHICH ARE FORWA RDED TO A.O. DURING REMAND PROCEEDINGS, VIDE PAGE 13 AND 14 OF THE ORDE R. ON THE BASIS OF THE EVIDENCE FILED, THE LD. CIT(A) GAVE A FINDING T HAT ASSESSEE HAS BEEN DOING ITS OWN RESEARCH AND DEVELOPMENT AND ALSO OBT AINED PATENTS AND SOME HAVE BEEN APPLIED FOR. 4. APART FROM THE FACTUAL ASPECTS, THE LD. CIT(A) ALSO ANALYSED THE PROVISIONS OF SECTION 35(1)(IV) AND DE FINITION GIVEN UNDER SECTION 43(4) AND CASE LAW ON THE POINT TO COME TO CONCLUSION THAT EVEN IF ASSESSEE IS UNDERTAKING JOB WORK FOR THIRD PARTIES IT WOULD NOT DISENTITLE FROM CLAIMING DEDUCTION UNDER SECTION 35 (1)(IV). AFTER ANALYZING THE PROVISIONS OF SECTION 35 AND ALSO FOL LOWING THE PRINCIPLES LAID DOWN BY JURISDICTIONAL HIGH COURT IN THE CASE OF YAMUNA DIGITAL EQUIPMENTS P. LTD., 238 ITR 717, LD. CIT(A) ALLOWED THE CLAIM OF DEDUCTION UNDER CAPITAL EXPENDITURE ON SCIENTIFIC A ND RESEARCH. HENCE, REVENUE IS AGGRIEVED AND HAS RAISED THE FOLL OWING THREE GROUNDS. 1. THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN HOLDIN G THAT CAPITAL EXPENDITURE INCURRED FOR CONTRACT RESEARCH IS ALSO ELIGIBLE FOR DEDUCTION U/S.36(1)(IV) THOUGH SUCH EX PENDITURE WOULD FACILITATE THE BUSINESS OF A THIRD PARTY AND NOT THAT OF THE ASSESSEE. 4 ITA.NO.371/HYD/2012 M/S. AVRA LABORATORIES P. LTD., HYDERABAD. 2. THE LD. CIT(A) ERRED IN LAW IN ALLOWING THE ADDITIO NAL EVIDENCE FILED BY THE ASSESSEE THOUGH SPECIFIC PLEA DINGS WERE MADE TO ALLOW FOR THE VERIFICATION OF SUCH ADDITION AL EVIDENCE. 3. THE LD. CIT(A) ERRED IN IGNORING THE DECISIONS OF M /S. ENEM NOSTRUM REMEDIES P. LTD., VS. ACIT 314 ITR 47 AND I N THE CASE OF M/S. CIBA INDIA P. LTD., VS. ITO 305 ITR (A T) 75. 5. WE HAVE HEARD THE LD. D.R. AND LD. COUNSEL AND PERUSED THE WRITTEN SUBMISSIONS FILED ON BEHALF OF RESPONDE NT AND THE PAPER BOOK EVIDENCING THE ACTIVITIES OF ASSESSEE. ON PERU SAL OF THE SAME, WE ARE OF THE OPINION THAT THERE IS NO MERIT IN REVENU E CONTENTIONS AT ALL. AS FAR AS GROUND NO.1 IS CONCERNED, IT IS A FACT TH AT ASSESSEE IS INVOLVED IN R & D ACTIVITIES AND HAS EMPLOYED ITS A CTIVITIES OF RESEARCH FOR COMMERCIAL PURPOSES ALSO. LD. CIT(A) HAS GIVEN FACTUAL FINDINGS, EVEN THOUGH A.O. REFUSED TO ACKNOWLEDGE IN THE TWO REMAND REPORTS. ASSESSEES UNIT IS RECOGNIZED R & D UNIT AND THERE IS EVIDENCE THAT ASSESSEE IS ALSO INDULGING ITS OWN RESEARCH. IT HAS ALSO EXPLOITED COMMERCIALLY AND ALSO HAS PATENTS TO ITS OWN. A.O. OBJECTION THAT IT WAS DOING CONTRACT RESEARCH WORK CANNOT BE UPHELD O N THESE FACTS. NOT ONLY THAT, EVEN IF ADDITIONAL CAPACITY WAS USED FOR CONTRACT RESEARCH WORK, THE PROVISIONS OF IT ACT DOES NOT D ISENTITLE ASSESSEE IN CLAIMING THE DEDUCTION. THEREFORE, WE UPHOLD THE OR DER OF LD. CIT(A) AND REJECT REVENUE GROUND ON THIS ISSUE. 6. THE JURISDICTIONAL HIGH COURT IN THE CASE OF C IT VS . YAMUNA DIGITAL EQUIPMENTS P. LTD., 238 ITR 717 HAS CLEARLY HELD THAT FROM A READING OF SECTION, IT IS CLEAR THAT IT DOES NOT SAY THAT EXPENDITURE SHOULD BE WHOLLY AND EXCLUSIVELY USED F OR RESEARCH AND DEVELOPMENT. IN THE ABSENCE OF WORD WHOLLY AND EXC LUSIVELY USED FOR RESEARCH AND DEVELOPMENT THE CONTENTION OF THE REV ENUE CANNOT BE ACCEPTED. HENCE, THE EXPENDITURE WHICH IS OF A CAPI TAL NATURE WHEN USED FOR SCIENTIFIC RESEARCH RELATING TO THE BUSINE SS CARRIED ON BY ASSESSEE, THE ASSESSEE IS ENTITLED TO THE DEDUCTION OF THE CLAIM. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT ASSES SEE HAS USED THE 5 ITA.NO.371/HYD/2012 M/S. AVRA LABORATORIES P. LTD., HYDERABAD. ASSETS FOR SCIENTIFIC RESEARCH AND EXPENDITURE INCU RRED IS FOR THE BUSINESS CARRIED ON BY ASSESSEE. IN VIEW OF THIS, W E DO NOT FIND ANY MERIT IN THE CONTENTIONS THAT EXPENDITURE WOULD FAC ILITATE THE BUSINESS OF THIRD PARTY AND NOT THAT OF ASSESSEE. A.O. DID N OT CONSIDER ASSESSEES OWN RESEARCH ACTIVITY AND RELIED ON THE CONTRACT RESEARCH PART WHICH IS A MINISCULE PART OF ASSESSEES BUSINE SS ACTIVITY. GROUND IS REJECTED. 7. COMING TO GROUND NO.2, WE ARE UNABLE TO ACCEPT THE CONTENTION. IN FACT, LD. CIT(A) SENT THE ADDITIONAL EVIDENCE FILED TO A.O. TWICE ON REMAND. AS BRIEFLY STATED ABOVE, THERE ARE TWO REMAND REPORTS FROM A.O. WHAT IS INTERESTING IS THE OBSERV ATION OF LD. CIT(A) AFTER OBTAINING THE REMAND REPORTS FROM A.O. THE LD . CIT(A) HAS OBSERVED IN PAGE 12 OF THE ORDER AS UNDER : SINCE THE REMAND REPORTS SUBMITTED BY THE A.O. DO NOT REFLECT THE EXAMINATION OF THE DOCUMENTS FILED BY THE APPELLANT DESPITE REQUESTED BY MY PREDECESSOR AND ALSO BY ME AND IT L OOKS AS THOUGH THEY ARE DIRECTING THE CIT(A) TO VERIFY AND CONDUCT THE EXAMINATION IN THE SUGGESTED LINES. SINCE THE MATTE R IS VERY OLD BEING FILED ON 30.1.2008, AND ALREADY REMANDED TWIC E I AM PROCEEDING TO DECIDE THE APPEAL ON THE MATERIAL AVA ILABLE BEFORE ME AS UNDER. 8. THIS SHOWS THE ADAMANT ATTITUDE OF A.O. IN NOT RECOGNIZING/NOT EXAMINING THE ADDITIONAL EVIDENCE S ENT UNDER THE RULES FOR PROPER EXAMINATION. IN VIEW OF THIS, WE U PHOLD THE CONTENTION OF LD. CIT(A) THAT APPEAL CAN BE DECIDED ON THE MATERIAL AVAILABLE BEFORE LD. CIT(A). SINCE THE LD. CIT(A) U NDERTOOK EXAMINATION OF DOCUMENTS PLACED AND SINCE LD. CIT(A ) HAS ALSO CO- TERMINUS POWERS WITH THAT OF A.O. WE DO NOT FIND AN Y MERIT IN REVENUE CONTENTION. IN FACT, BOTH A.O. AS WELL AS ADDL. CIT MIS-DIRECTED THEMSELVES IN REJECTING THE CONTENTIONS OF ASSESSEE . IN FACT, THE REPORT OF ADDL. CIT AS EXTRACTED BY LD. CIT(A) IN PAGE 12 PARTICULARLY PARA 12 IS INTERESTING TO READ WHICH IS AS UNDER : 6 ITA.NO.371/HYD/2012 M/S. AVRA LABORATORIES P. LTD., HYDERABAD. THE UNDERSIGNED IS IN PARTIAL AGREEMENT WITH DCIT- II AND REQUEST THE LD. CIT(A) TO KINDLY DIRECT THE ASSESSE E TO PROVE POINT TO POINT CORRESPONDENCE WITH THE QUANTUM OF EXPENDI TURE IN THE FORM OF CAPITAL R & D EXPENDITURE INCURRED WITH REF ERENCE TO IN- HOUSE PRODUCTS AS WELL AS CONTRACT RESEARCH. 9. THIS INDICATES THAT BOTH A.O. AND ADDL. CIT ACK NOWLEDGES THAT ASSESSEES CAPITAL R & D EXPENDITURE WAS INCUR RED WITH REFERENCE TO IN-HOUSE PRODUCTS AS WELL AS CONTRACT RESEARCH. IF THAT IS THE FACT, WHAT IS THE NEED FOR POINT TO POINT CORRESPONDENCE TO BIFURCATE THE QUANTUM OF EXPENDITURE, WHEN THE LAW PERMITS ALLOWA NCE OF ENTIRE AMOUNT IF IT IS SPENT FOR THE PURPOSE OF R & D, WHE THER IT IS FOR IN- HOUSE PRODUCTS OR FOR CONTRACT RESEARCH. AS RIGHTLY HELD BY HONBLE JURISDICTIONAL HIGH COURT THE SECTION DOES NOT SAY THAT EXPENDITURE SHOULD BE WHOLLY AND EXCLUSIVELY FOR IN-HOUSE PRODU CTS ONLY. SO LONG AS THE EXPENDITURE IS FOR THE PURPOSE OF BUSINESS A ND IN R & D ACTIVITY, THE EXPENDITURE HAS TO BE ALLOWED. THEREF ORE, WE DO NOT FIND ANY MERIT IN GROUND NO.2. 10. AS FAR AS GROUND NO.3 IS CONCERNED, THE DECISI ON RELIED ON BY REVENUE DOES NOT APPLY TO THE FACTS OF THE CASE. IN THE CASE OF M/S. ENEM NOSTRUM REMEDIES P. LTD., VS. ACIT 314 ITR 47 THAT COMPANY HAS UNDERTAKEN RESEARCH AND DEVELOPMENT WORK FOR IT S PARENT COMPANY IN USA AND THE CAPITAL EXPENDITURE OF R & D WAS DISALLOWED ON THE GROUND THAT ASSESSEE WAS NOT INVOLVED IN THE BUSINESS OF EITHER MANUFACTURING OR SELLING ANY PRODUCTS FOR ITS OWN B USINESS. IN THAT CASE, THE BENEFITS OF LABORATORY SERVICES WERE UTIL IZED BY OTHERS AND NOT BY THE COMPANY. ON THOSE FACTS, THE DISALLOWANC E WAS APPROVED. SIMILARLY IN THE CASE OF M/S. CIBA INDIA P. LTD., V S. ITO 305 ITR (AT) 75 THAT ASSESSEE ALSO INDULGED IN THE BUSINESS OF C ARRYING ON SPECIALIZED RESEARCH ACTIVITIES FOR TWO COMPANIES I N SWITZERLAND AND USA AND THE EXPENDITURE WAS DISALLOWED AS SCIENTIFI C RESEARCH WAS NOT RELATED TO BUSINESS OF ASSESSEE. THE FACTS IN T HE ABOVE CASES ARE ENTIRELY DIFFERENT FROM THE FACTS OF ASSESSEE, WHER EIN THE PRESENT 7 ITA.NO.371/HYD/2012 M/S. AVRA LABORATORIES P. LTD., HYDERABAD. ASSESSEE IS NOT ONLY INVOLVED IN RESEARCH FOR IN-HO USE PRODUCTS WHICH ARE ALSO COMMERCIALLY EXPLOITED BUT ALSO FOR CONTRA CT RESEARCH OF THE EXCESS CAPACITY AVAILABLE IN R & D, WHICH IS ALSO Y IELDING GOOD RETURNS TO ASSESSEE. IN VIEW OF THIS, THE CASE LAW RELIED O N BY REVENUE DOES NOT APPLY TO THE FACTS OF THE CASE. GROUND NO.3 IS ALSO ACCORDINGLY REJECTED. 11. BEFORE PARTING WITH THE ISSUE, WE PLACE IT ON RECORD THAT A.O. IS NOT CORRECT IN DENYING THE BENEFITS TO AN A SSESSEE WHO IS GENUINELY UNDERTAKING THE RESEARCH WORK. EVEN THOUG H, A.O. TOOK PAINS IN EXAMINING THE WEBSITE OF ASSESSEE AND TOOK EXTRACTS FROM WEBSITE IN DENYING THE BENEFIT, THE FACT THAT ASSES SEE IS ALSO INVOLVED IN ITS OWN RESEARCH AND OWN PATENTS HAS NOT BEEN CO NSIDERED IN THE CORRECT PERSPECTIVE. WHEN THESE ARE POINTED OUT BEF ORE LD. CIT(A) AND SENT FOR REMAND, THE A.O. REFUSES TO ACKNOWLEDGE TH E SAME. THEREFORE, THE LD. CIT(A) HAD TO EXPRESS HER DISPLEASURE AND W ENT ON TO EXAMINE THE FACTS. THIS ATTITUDE OF A.O. IS NOT PROPER FOR DISCHARGE OF STATUTORY DUTIES. IT IS ALSO A FACT THAT SIMILAR R & D EXPEND ITURE IN EARLIER TWO ASSESSMENT YEARS WAS ALLOWED TO ASSESSEE. IF REVENU E IS SO CONCERNED THAT ASSESSEE MADE BOGUS CLAIMS OR WRONG CLAIM, THE Y COULD HAVE TAKEN NECESSARY STEPS FOR REOPENING THE ASSESSMENTS IN OTHER YEARS. WITHOUT DISTURBING THOSE YEARS, AS RIGHTLY POINTED OUT BY LD. CIT(A), ONLY IN THIS YEAR A.O. TOOK OBJECTION. THIS SORT O F ACTION ON THE PART OF AO/ ADDL.CIT CANNOT BE APPRECIATED. SINCE ASSESSEE HAS NOT ASKED FOR COSTS, WE ARE NOT LEVYING ANY COSTS. THERE IS NO OR DER AS TO COSTS. 12. IN THE RESULT, REVENUE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 12.11.2014. SD/- SD/- (ASHA VIJAYARAGHAVAN) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 12 TH NOVEMBER, 2015. VBP/- 8 ITA.NO.371/HYD/2012 M/S. AVRA LABORATORIES P. LTD., HYDERABAD. COPY TO 1. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1( 1), 4 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 2. M/S. AVRA LABORATORIES P. LTD., 7-102/54, AVRA H OUSE, SAI ENCLAVE, HABSIGUDA, HYDERABAD. 3. COMMISSIONER OF INCOME TAX (APPEALS)-II, HYDERAB AD. 4. COMMISSIONER OF INCOME TAX-I, HYDERABAD. 5. D.R. ITAT B BENCH, HYDERABAD