DCIT, Cir-1(3), Hyderabad V. M/s. Bharat Biotech International Limited, Hyderabad

ITA 632/HYD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82545 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-12-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 12-04-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITRA
• Keywords: Revenue expenditure; Capital expenditure
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 392/HYD/2010 A.Y. 2006-07 ITA NO. 632/HYD/2011 A.Y. 2007-08 ITA NO. 310/HYD/2012 A.Y. 2008-09 THE DCIT CIRCLE-1(3) HYDERABAD VS. M/S. BHARAT BIOTECH INTERNATIONAL LTD., HYDERABAD PAN: AABCB3822B APPELLANT RESPONDENT APPELLANT BY: SRI RAJAT MITRA RESPONDENT BY: SRI MOHD. AFZAL DATE OF HEARING: 07.10.2014 DATE OF PRONOUNCEMENT: 03.12.2014 O R D E R O R D E R O R D E R O R D E R PER ASHA VIJAYARAGHAVAN, JM: PER ASHA VIJAYARAGHAVAN, JM: PER ASHA VIJAYARAGHAVAN, JM: PER ASHA VIJAYARAGHAVAN, JM: THESE APPEALS BEING ITA NOS. 392/HYD/2010, 632/HYD/2011 AND 310/HYD/2012 WERE HEARD BY THE 'B' BENCH OF THIS TRIBUNAL AND BY ORDER DATED 31.7.2013 THE REVENUE APPEALS WERE ALLOWED. ON MA NOS. 7 TO 9/HY D/ 2014 FILED BY THE ASSESSEE, THE TRIBUNAL HELD BY OR DER DATED 30 TH MAY, 2014 THAT THE MATTER MAY BE RECALLED AND DIRECTED THE REGISTRY TO POST THE CASES FOR HEARING ON 7.10.2014 FOR THE LIMITED PURPOSE OF DECIDING THE I SSUE ON APPLICABILITY OF PROVISIONS OF SECTION 35(3) OF THE INCOME- TAX ACT, 1961. HENCE THE CASES HAVE BEEN POSTED BE FORE US. 2. THE ABOVE THREE APPEALS BY THE REVENUE ARE DIRECTED AGAINST DIFFERENT ORDER OF THE CIT(A) FOR ASSESSMENT YEARS 2006-07, 2007-08 AND 2008-09. SIN CE ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 2 THE ISSUE INVOLVED IN THESE APPEALS IS COMMON IN NA TURE, THEY ARE CLUBBED TOGETHER, HEARD TOGETHER AND ARE B EING DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 3. THE ISSUE COMMON IN THESE APPEALS IS RELATING TO ALLOWABILITY OF DEDUCTION U/S. 35(1) OF THE INCOME- TAX ACT, 1961 SAID TO HAVE BEEN INCURRED ON PRODUCT DEVELOPM ENT WITH REFERENCE TO SCIENTIFIC RESEARCH ACTIVITY. FO R THE A.Y. 2006-07 THE ASSESSEE CLAIMED PRODUCT DEVELOPMENT EXPENDITURE BEING INTEREST ON LOANS AMOUNTING TO RS . 1,19,97,767 AND COST OF CONSUMABLES AMOUNTING TO RS . 1,31,80,372 TOTALLING TO RS. 2,51,16,139 U/S. 37(1) OF THE ACT. SIMILARLY, FOR A.Y. 2007-08 THE ASSESSEE CLAI MED PRODUCT DEVELOPMENT EXPENDITURE BEING INTEREST ON L OANS AMOUNTING TO RS. 1,13,78,502 AND COST OF CONSUMABLE S AMOUNTING TO RS. 1,21,30,620 TOTALLING TO RS. 2,35, 09,122. LIKEWISE, FOR A.Y. 2008-09 THE ASSESSEE CLAIMED PRO DUCT DEVELOPMENT EXPENDITURE AT RS. 88,64,051 U/S. 35(1) OF THE ACT. 4. THE ASSESSING OFFICER DISALLOWED THE ABOVE EXPENDITURE ON THE REASON THAT THE ABOVE EXPENDITUR E IS IN THE NATURE OF CAPITAL EXPENDITURE AS CAPITALISED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE AND IT IS NOT REVE NUE EXPENDITURE, THOUGH THE ASSESSEE PLEADED THAT THE ASSESSEE INCURRED THIS EXPENDITURE ON RESEARCH AND DEVELOPMENT CONDUCTED BY THE ASSESSEE IN THE RECOGN ISED IN-HOUSE FACILITY AND PRODUCT DEVELOPMENT WAS CONDU CTED BY THE ASSESSEE. THE ASSESSEE HAD TAKEN A PLEA THA T WITH REFERENCE TO THE PRODUCT RESEARCH AND DEVELOPMENT, IT IS WORKING ON THREE MOLECULES VIZ., LYSOSTAPHIN, INSUL IN AND VACCINE FOR HEPATITIS A. FOR THESE PRODUCTS THE ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 3 GOVERNMENT OF INDIA, COUNCIL FOR SCIENTIFIC AND IND USTRIAL RESEARCH (CSIR) SANCTIONED LOAN OF RS. 5.6 CRORES. SIMILARLY IDBI LTD., HAD SANCTIONED A TERM LOAN OF RS. 10 CRORES FOR DEVELOPMENT OF INSULIN AND ICICI BANK LT D. UNDER WORLD BANK SPONSORED RESEARCH AND DEVELOPMENT (SPREAD) SANCTIONED RS. 4.75 CRORES EXCLUSIVELY FOR R & D OF HEPATITIS-A VACCINE. THE INTEREST PAID ON THE A BOVE LOANS AND CHEMICALS CONSUMED IN THE DEVELOPMENT OF THESE MOLECULES/VACCINE HAVE BEEN DEBITED TO PRODUC T DEVELOPMENT EXPENDITURE ACCOUNT. IT WAS ALSO CLARI FIED THAT THE EXPENDITURE WAS INCURRED IN THE PRODUCT RE SEARCH AND DEVELOPMENT AND, THEREFORE, CLAIMED AS REVENUE EXPENDITURE THOUGH THE SAME WAS CAPITALISED IN THE BOOKS OF ACCOUNT AS PER ITS ACCOUNTING POLICY. THE ASSES SING OFFICER REJECTED THE ASSESSEE'S CLAIM ON THE GROUND THAT THE ASSESSEE HAS ALREADY MADE A SEPARATE CLAIM IN R ESPECT OF THE EXPENDITURE INCURRED ON R & D U/S. 35(2AB) A ND THAT THE EXPENDITURE ON PRODUCT DEVELOPMENT EXPENDITURE WAS INCURRED WITH THE INTENTION TO GO FOR COMMERCIAL PRODUCTION, RESULTING IN ENDURING BENEFIT AND ADVAN TAGE TO THE ASSESSEE. THE ASSESSING OFFICER FOUND THAT THE EXPENDITURE ON PRODUCT DEVELOPMENT RESULTS IN OBTAI NING PATENT RIGHT AND PROVIDES ENDURING BENEFIT TO THE A SSESSEE AND HENCE REJECTED THE CLAIM U/S. 37 OF THE IT ACT. THE ASSESSING OFFICER RELIED ON THE FOLLOWING JUDICIAL DECISIONS: (A) CIT V. NAVSARI COTTON AND SILK MILLS LTD. (1982) 135 ITR 543 (GUJ.) (B) HYLAM LTD. V. CIT (1973) 87 ITR 310 (AP) (C) TRIVENI ENGINEERING WORKS LTD. V. CIT (1998) 232 ITR 639 (DEL.) ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 4 5. THUS, THE ASSESSING OFFICER DID NOT AGREE WITH THE CONTENTION OF THE ASSESSEE AND DISALLOWED THE ABOVE EXPENDITURE. ON APPEAL, THE CIT(A) OBSERVED THAT T HE ITEMS OF EXPENDITURE WHICH ARE THE SUBJECT MATTER O F APPEAL ARE INTEREST PAYMENT ON LOANS TAKEN FROM IDB I, ICICI BANK AND CSIR, GOVT. OF INDIA AMOUNTING TO RS . 1,19,97,767/- AND COST OF CHEMICALS AND OTHER CONSUMABLES AMOUNTING TO RS. 1,31,18,372, TOGETHER AMOUNTING TO RS. 2,51,16,139. 6. THE CIT(A) FURTHER OBSERVED AS FOLLOWS: 'THERE IS NO DISPUTE AS TO THE FACT OF INCURRING THESE TWO ITEMS OF EXPENDITURE IN THE COURSE OF ASSESSEE'S CONTINUING BUSINESS. THE ASSESSEE CLAIMED THESE TWO ITEMS OF EXPENDITURE IN THE COMPUTATION OF TOTAL INCOME, ALB EIT WITHOUT QUOTING ANY SECTION. THE ASSESSING OFFICER PRESUMED THE CLAIM TO BE U/S 37(1) AND DISALLOWED I T ON THE GROUND THAT THE EXPENDITURE WAS LAID OUT IN THE COU RSE OF DEVELOPMENT OF NEW VACCINES AND FOR THE PURPOSE OF SETTING UP OF FACILITIES FOR THE MANUFACTURE OF NEW PRODUCTS, WOULD RESULT IN OBTAINING PATENT RIGHT, B RING ENDURING BENEFIT AND ADVANTAGE TO THE ASSESSEE AND THUS IS OF CAPITAL IN NATURE. THERE IS NO DOUBT THAT THE EXPENDITURE WAS LAID OUT BY THE ASSESSEE FOR THE PU RPOSE OF DEVELOPING IYSOSTATHIN, INSULIN AND VACCINE FOR HEPATITIS- A. THE EXPENDITURE WAS APPROVED FOR THESE RESEARCH AND DEVELOPMENT PROJECTS BY THE REPUTED ORGANIZATIONS L IKE IDBI, ICICI BANK AND CSIR. A PERUSAL OF THE SANCTI ON LETTERS OF THESE INSTITUTIONS REVEALS THAT THESE AR E THE FUNDING PROGRAMMES TO ASSIST COLLABORATIVE RESEARCH AND DEVELOPMENT AND TECHNOLOGY PROJECTS IN BIOTECH, HEA LTH CARE ETC., AREAS. IT IS SEEN THAT IN MULTI-STAGE D EVELOPMENT ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 5 OF VACCINES/BIO-PHARMACEUTICALS, THE BIOTECH COMPAN IES HAVE TO DEVELOP VACCINES/PHARMACEUTICALS IN VARIOUS STAGES TO REACH THE SUCCESSFUL OUTCOME. IF, THE COM PANY FAILS AT ANY INTERMEDIATE STAGE, OR DOES NOT BECOME SUCCESSFUL, EITHER AT CLINICAL TESTS STAGE OR AT LA BORATORY SCALE OR COMMERCIAL SCALE VIABILITY, THE PROJECT FA ILS AND THE EXPENDITURE INCURRED IN THE PROCESS IS WRITTEN OFF. ON THESE FACTS, IT CANNOT BE SAID THAT THE ASSESSEE WO ULD DERIVE SOME ENDURING ADVANTAGE IN FUTURE. THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT ON SETT ING UP OF ANY NEW MANUFACTURING FACILITIES.' 7. THE CIT(A) OBSERVED THAT A PERUSAL OF THE ABOVE MENTIONED PROVISIONS UNDER CLAUSE (I) OF SUB-SECTIO N 1 OF SECTION 35 SHOWS THAT ANY ASSESSEE CARRYING ON SCIE NTIFIC RESEARCH IS ELIGIBLE TO GET THE DEDUCTION OF ENTIRE REVENUE EXPENDITURE INCURRED IN THE PREVIOUS YEAR. SIMILARLY, CLAUSE (IV) OF SUB-SECTION (1) OF SECTION 35 ALLOWS DEDUCTION OF EXPENDITURE OF CAPITAL NATURE ON SCIENTIFIC RESE ARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE EXCEPT COST OF THE LAND AND BUILDING. 8. THE CIT(A) OBSERVED THAT A PERUSAL OF THE STATEMENT OF FACTS SHOWS THAT THE ASSESSEE IS IN THE BUSINESS OF RESEARCH AND DEVELOPMENT TOWARDS PRODUCTION OF NEW DRUGS THROUGH BIOTECHNOLOGY ROUTES. ' THE CIT(A) STATED THAT IT DEVELOPS AND PRODUCES VACCINES AND OTHER BI O- PHARMACEUTICALS. THE ASSESSEE IS RECOGNIZED AS SCIE NTIFIC RESEARCH COMPANY BY CSIR. FORM NO. 3CL I.E., A REPO RT CERTIFIED BY THE DIRECTOR GENERAL OF CSIR, NEW DELH I, DATED 30-01-2009 STATES THAT THE COMPANY IS CARRYING OUT SCIENTIFIC RESEARCH TO DEVELOP AND PRODUCE INTERNAT IONAL STANDARD RECOMBINANT VACCINES, BIO-PHARMACEUTICALS AND ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 6 HORMONES OFFERED TO INDIAN PUBLIC AT AN AFFORDABLE PRICE AND SPECIFIED THEREIN DETAILS OF THE EXISTING RESEA RCH AND DEVELOPMENT FACILITIES. SIMILARLY, THE SANCTION LET TERS ISSUED BY THE FUNDING AGENCIES NAMELY LDBI, ICICI B ANK AND CSIR SHOW THAT THE ASSESSEE WAS SANCTIONED FUND S FOR COLLABORATIVE RESEARCH AND DEVELOPMENT IN BIOTECH PRODUCTS I.E. FOR DEVELOPMENT OF RECOMBINANT VACCIN ES. CLAUSE (III)(A) OF SUB-SECTION 4 OF SECTION 43 REFE RS TO THE EXPENDITURE INCURRED IN DEVELOPMENT OF A NEW PRODUC T WHICH MAY LEAD TO OR FACILITATE AN EXTENSION OF THE BUSINESS. IN THE ASSESSEE'S CASE, THE PRODUCT DEVEL OPMENT EXPENDITURE IS RELATED TO SCIENTIFIC RESEARCH BY WA Y OF RESEARCH AND DEVELOPMENT IN NEW PRODUCTS WHICH WOUL D FACILITATE EXTENSION OF THE ASSESSEE'S BUSINESS TO DEVELOP NEW VACCINES.' 9. THE CIT(A), AFTER CONSIDERING THE NATURE OF EXPENDITURE INVOLVED I.E. THE INTEREST PAYMENTS ON THE FUNDS BORROWED FOR FURTHER RESEARCH AND DEVELOPMENT PROGRAMME AND THE COST OF CHEMICALS AND OTHER CONSUMABLES UTILIZED IN THE RESEARCH PROGRAMME, HE HELD THAT THE SAME CONSTITUTES REVENUE EXPENDITURE AND I S THUS ALLOWABLE EXPENDITURE U/S 35(1)(I). 10. THE CIT(A) OBSERVED THAT THE ASSESSEE IS A COMPANY CARRYING ON SCIENTIFIC RESEARCH AND THE RESEARCH AN D DEVELOPMENT EXPENDITURE INCURRED IN QUESTION RELATE S TO SCIENTIFIC RESEARCH AND THEREFORE, ASSESSEE IS ELIG IBLE FOR DEDUCTION U/S 35 (L)(I) READ WITH CLAUSE (III) OF S UB-SECTION 4 OF SECTION 43. THE CIT(A) HELD THAT EVEN IF ASSESSI NG OFFICER'S VIEW THAT THE EXPENDITURE IN QUESTION IS CAPITAL IN NATURE, IT IS STILL COVERED BY CLAUSE (IV) OF SUB-S ECTION 1 OF SECTION 35 READ WITH SUB-SECTION 2(IA) OF SECTION 3 5 WHICH ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 7 SPECIFICALLY ALLOWS ANY EXPENDITURE OF A CAPITAL NA TURE ON SCIENTIFIC RESEARCH CARRIED ON BY THE ASSESSEE. THU S, HE HELD THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/ S 35. FURTHER, HE OBSERVED THAT THE ASSESSING OFFICER'S R EPORT SHOWS THAT HE IS UNDER THE IMPRESSION THAT ONCE THE ASSESSEE MAKES A CLAIM U/S 35(2AB), IT IS NOT ELIGI BLE FOR AN INDEPENDENT CLAIM U/S 35(1). IN THIS CONTEXT, IT I S OBSERVED BY THE CIT(A) THAT SECTION 35(2AB) ALLOWS WEIGHTED DEDUCTION IN RESPECT OF EXPENDITURE INCURRED BY A B IO-TECH COMPANY IN ITS IN-HOUSE R&D. WHEREAS, THE DEDUCTIO NS ALLOWABLE FOR ANY COMPANY CARRYING ON SCIENTIFIC RE SEARCH, EVEN BY WAY OF COLLABORATIVE RESEARCH, SEPARATE DED UCTION IS ALLOWABLE FOR DIFFERENT RESEARCH AND DEVELOPMENT PROJECT. THUS, THESE TWO DEDUCTIONS ARE INDEPENDEN TLY ALLOWABLE ON FACTS IN THE ASSESSEE'S CASE. THE CIT (A) GIVEN SIMILAR FINDINGS FOR THE OTHER TWO ASSESSMENT YEARS. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 11. THE LEARNED DR SUBMITTED THAT THIS EXPENDITURE WAS INCURRED ON PAYMENT OF INTEREST AND ALSO TOWARDS CONSUMABLES FOR PRODUCT DEVELOPMENT AND DURING THE PRE- COMMENCEMENT PERIOD AND THERE WAS NO COMMERCIAL PRODUCTION OF ANY PRODUCT BY THE ASSESSEE DURING ASSESSMENT YEAR UNDER CONSIDERATION. HE SUBMITTED THAT THE EXPENDITURE IS INCURRED WITH AN INTENTION TO GO FOR COMMERCIAL PRODUCTION AND THIS EXPENDITURE RESULTS IN GETTING ENDURING BENEFIT AND IS ADVANTAGEOUS TO THE ASSESSEE AND, THEREFORE, SUCH EXPENDITURE IS NOT RE VENUE EXPENDITURE BUT CAPITAL EXPENDITURE. THE DR STATED THAT THE LOAN WAS GRANTED FOR MEETING PART OF THE COST O F THE NEW PROJECT FOR DEVELOPMENT OF VARIOUS MOLECULES. ACCORDING TO THE DR, THE LOAN WAS GRANTED FOR SETTI NG UP OF A NEW FACILITY FOR MANUFACTURING OF DRUGS AND THE ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 8 EXPENDITURE INCURRED BY THE ASSESSEE IS FOR SETTING UP OF A NEW PROJECT WHICH CANNOT BE CONSIDERED AS EXPENDITU RE U/S. 35(1) OF THE ACT. THE DR RELIED ON JUDGEMENT OF GUJARAT HIGH COURT IN THE CASE OF CIT V. NAVSARI CO TTON AND SILK MILLS LTD. (1982) 135 ITR 543 (GUJ.) AND ALSO ON THE JUDGEMENT OF DELHI HIGH COURT IN THE CASE OF TRIVEN I ENGINEERING WORKS LTD. V. CIT (1998) 232 ITR 639 (D EL.) WHEREIN IT WAS HELD AS UNDER: 'THE TEST TO DISCRIMINATE BETWEEN A CAPITAL AND A REVENUE EXPENDITURE IS NOT STRAIGHT. AN ITEM OF EXPENDITURE THOUGH INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS MAY NEVERTHELESS BE INADMISSIBLE AS AN ALLOWANCE IF IT IS OF A CAPITAL NATURE. THE BORDER LINE BETWEEN A CAPITAL EXPENDITURE AND A REVENUE EXPENDITURE IS A BLURRED ONE. DIFFERENT MINDS MAY COME TO DIFFERENT CONCLUSIONS AND MAY YET HAVE VALID REASONS JUSTIFYING EACH OF THE TWO VIEW POINTS. THE AMOUNT SPENT ON THE PROJECT REPORTS WAS NOT FOR THE PURPOSE OF FACILITATING THE ASSESSEE'S EXISTING TRADING OPERATIONS OR ENABLING MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED. IF ONLY THE PROJECT REPORTS HAD BEEN SUCCESSFULLY ACCEPTED AND PUT INTO IMPLEMENTATION, THE ASSESSEE WOULD HAVE GONE INTO MANUFACTURING OF A NEW PRODUCT WHICH WOULD HAVE CERTAINLY REQUIRED INVESTMENT OF FRESH CAPITAL AND COMING INTO EXISTENCE OF ADDITIONAL FIXED ASSETS. THE EXPENDITURE WAS, THEREFORE, ATTRIBUTABLE TO CAPITAL HAVING BEEN INCURRED WITH A VIEW TO BRINGING AN ASSET OR ADVANTAGE INTO EXISTENCE AND HAVING ENDURING BENEFIT. MERELY BECAUSE THE PROJECT DID NOT MATERIALISE, THE NATURE OF THE EXPENDITURE WOULD NOT CHANGE TO REVENUE.' 12. FURTHER THE DR RELIED ON THE JUDGEMENT OF AP HIGH COURT IN THE CASE OF HYLAM LTD. V. CIT (1973) 87 IT R 310 (AP) WHEREIN IT WAS HELD THAT 'ACQUISITION OF KNOWL EDGE IN ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 9 RESPECT OF NEW PRODUCT ALTHOUGH OF AN ALLIED NATURE TO THE PRODUCTS THAT ARE ALREADY BEING MANUFACTURED BY THE ASSESSEE, WOULD AMOUNT TO THE ACQUISITION OF AN ADV ANTAGE OR AN ASSET FOR THE EXTENSION OF THE ASSESSEE'S BUS INESS. 13. ON THE OTHER HAND, THE LEARNED AR SUBMITTED THAT TH E EXPENDITURE OF THE NATURE CLAIMED BY THE ASSESSEE I S UNDER PRODUCT DEVELOPMENT EXPENDITURE WHICH IS OF REVENUE IN NATURE AS THE EXPENDITURE CLAIMED IS EXPENDITURE OF INTEREST AND CONSUMABLES INCURRED BY THE ASSESSEE I N RELATION TO RESEARCH AND DEVELOPMENT AND WOULD FALL UNDER THE AMBIT OF EXPENDITURE ON SCIENTIFIC RESEARCH AND THUS WOULD QUALIFY AS ELIGIBLE EXPENDITURE TO BE CLAIMED U/S 35 (1)(I) OF THE ACT. IT WAS STRESSED BY THE AR THAT N ONE OF THIS EXPENDITURE HAS BEEN INCURRED OUTSIDE AND ALL THE EXPENDITURE RELATES TO ASSESSEE-COMPANY ONLY. FURT HER, IT WAS POINTED OUT THAT ALL OF THIS EXPENDITURE RELATE S TO SCIENTIFIC RESEARCH, AS IN A COLLABORATIVE RESEARCH , RESEARCH IS CONDUCTED INDEPENDENTLY BY ALL THE PART NERS ACCORDING TO THEIR RESEARCH STRENGTHS. FURTHER, IT WAS ARGUED THAT THE WHOLE FUNDING HAS BEEN AWARDED FOR SCIENTIFIC RESEARCH, AND THE PROGRAMME UNDER WHICH FUNDING WAS GRANTED TO THE ASSESSEE IS SOLELY RESTR ICTED TO RESEARCH AND DEVELOPMENT FUNDING FOR SCIENTIFIC RES EARCH ONLY. IT WAS STATED THAT THE ASSESSING OFFICER HAS WRONGLY PLACED RELIANCE ON TREATMENT OF THIS EXPENDITURE IN THE ANNUAL ACCOUNTS OF THE COMPANY, RATHER THAN GOING B Y THE PROVISIONS OF INCOME-TAX ACT, 1961, WHICH WAS RULED IN ASSESSEE'S FAVOUR AT THE APPEAL STAGE AND SECTION 3 7 CAN ONLY BE APPLIED AS A RESIDUAL SECTION, AND ONLY WHE N NO OTHER SPECIFIC SECTION BETWEEN 30 AND 36 CAN BE APP LIED. FOR THIS PROPOSITION THE AR RELIED ON THE FOLLOWING : ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 10 (A) MALWA VANASPATI & CHEMICALS CO. LTD V. CIT (154 ITR 655) (MP)] - SECTION 37(1) BEING A RESIDUAL PROVISION, IT CANNOT BE TAKEN AID OF, UNLESS AND UNTIL IT IS ESTABLISHED THAT NONE OF THE PROVISIONS OF SECTION 30 TO 36 ARE APPLICABLE TO A GIVEN CASE. (B) KHIMJI VISRAM & SONS (GUJARAT) P LTD V. CIT (209 ITR 993) (GUJ) - IF EXPENSES ARE DEDUCTABLE UNDER SECTIONS 30 TO 36, THEN SECTION 37 IS NOT TO BE RESORTED TO. (C) SINCE THE EXPENDITURE INCURRED BY THE ASSESSEE SPECIFICALLY FALLS UNDER SECTION 35 UNDER CLAIM OF 'RESEARCH AND DEVELOPMENT' EXPENDITURE, THE QUESTION OF APPLICATION OF SECTION 37(1) TOWARDS CONSIDERATION OF SUCH EXPENDITURE AS CAPITAL EXPENDITURE PROVIDING ENDURING BENEFIT DOES NOT ARISE AT ALL. 14. THE LEARNED AR RELIED ON THE FOLLOWING CASE-LAW: (A) KDL BIOTECH LIMITED VS. ITO (ITA NO. 7257/MUM/2004) WHEREIN THE MUMBAI TRIBUNAL HELD THAT ACCOUNTING TREATMENT FOLLOWED BY THE ASSESSEE IN ITS ANNUAL ACCOUNTS IS IRRELEVANT FOR ALLOWANCE OF DEDUCTION U/S 35 (1)(IV) AND ENTIRE R&D EXPENDITURE IS ALLOWABLE IN THE YEAR OF INCURRENCE ITSELF. (B) TUBE INVESTMENTS OF INDIA LTD. V. CIT (125 TAXMAN 421) (MAD), WHEREIN IT WAS HELD THAT MERE FACT OF A CLAIM NOT HAVING BEEN FOUND ADMISSIBLE UNDER SECTION 35(2B) WILL NOT CONSTITUTE A BAR TO ALLOWANCE OF EXPENDITURE UNDER SECTION 35(1)(IV) IF THAT EXPENDITURE IS CAPITAL EXPENDITURE AND FALL S SQUARELY WITHIN THE AMBIT OF SECTION 35(1)(IV). (C) COMMISSIONER OF INCOME TAX VS RANE BRAKE LININGS LIMITED (255 ITR 395), WHEREIN IT WAS HELD BY THE HON'BLE HIGH COURT OF MADRAS THAT EXPENDITURE OF A CAPITAL NATURE INCURRED BY THE ASSESSEE MUST BE ALLOWED UNDER SECTION 35 (1)(IV). (D) FURTHER, HE SUBMITTED THAT SECTION 35 (1) (IV) USES THE WORDS 'EXPENDITURE OF A CAPITAL NATURE' WHICH PHRASE HAS WIDER IMPORT OF MEANING RATHER THAN THE WORDS 'CAPITAL EXPENDITURE' USED IN SECTION 35(1)(I) AND THUS WOULD BRING IN ITS PURVIEW ALL ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 11 EXPENDITURE WHICH ARE TREATED TO BE CAPITAL IN NATURE PER THE INCOME TAX ACT, 1961. IN THIS CASE, SINCE THESE EXPENDITURE ARE TREATED AS CAPITAL IN NATURE, THE CLAIM WOULD SQUARELY FALL WITHIN THE PURVIEW OF CLAIM ALLOWED U/S 35 (1) (IV) AND THUS NEEDS TO BE ALLOWED. 15. THE TRIBUNAL IN ITS ORDER DATED 31 ST JULY, 2013 HELD THAT THE ASSESSEE WILL NOT GET BENEFIT OF DEDUCTION U /S. 35(1)(I) AND CONFIRMED THE ORDER OF THE ASSESSING O FFICER. FURTHER, THE PLEA OF THE ASSESSEE BEFORE THIS TRIBU NAL WAS ALSO THAT IF THE EXPENDITURE IS NOT ALLOWABLE U/S. 35(1)(I) THEN THE EXPENDITURE IS NOTHING BUT SCIENTIFIC R & D EXPENDITURE AND, THEREFORE, ALLOWABLE U/S. 35(1)(IV ) OF THE ACT. UNDER SECTION 35(1)(I) DEDUCTION IS TO BE ALL OWED IN RESPECT OF ANY EXPENDITURE OF CAPITAL NATURE OF SCI ENTIFIC NATURE RELATING TO BUSINESS CARRIED ON BY THE ASSES SEE. 16. HOWEVER, THE TRIBUNAL HELD IN PARA 24 OF ITS ORDER DATED 31 ST JULY, 2013 AS FOLLOWS: 'IN THE LIGHT OF THE ABOVE SCOPE OF THE PROVISIONS, WE EXAMINED THE FACTS OF THE CASE AND THE ARGUMENTS OF THE ASSESSEE'S COUNSEL THAT CONDUCTING SCIENTIFIC R ESEARCH IS THE BUSINESS OF THE ASSESSEE AND THUS, THE SAID RESEARCH IS RELATED TO THE BUSINESS CARRIED ON BY T HE ASSESSEE. IN THE PRESENT CASE, THE EXPENDITURE CLA IMED BY THE ASSESSEE AS DEDUCTION HAS NOTHING TO DO SCIENTIFIC RESEARCH. ON THE OTHER HAND, IT WAS INC URRED FOR SETTING UP OF FACILITIES FOR COMMERCIAL PRODUCT ION OF A NEW PRODUCT. IN SUCH CIRCUMSTANCES, THE ASSESSEE, IN OUR CONSIDERED OPINION, CANNOT BE SAID TO HAVE CARR IED ON SCIENTIFIC RESEARCH ACTIVITY. FURTHER, IT IS AL SO NOT THE CASE OF THE ASSESSEE THAT HE IS COVERED BY S. 43(4) (III)(A) I.E., THE CASES OF SCIENTIFIC RESEARCH WHICH MAY 'L EAD TO OR TO FACILITATE AN EXTENSION OF THAT BUSINESS'. TH US, BY INCURRING THIS EXPENDITURE THE ASSESSEE GENERATES A MARKETABLE PRODUCT OR STOCK-IN-TRADE. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE PROVISIONS OF S. 35(1)(I) OR (IV) HAVE NO APPLICATI ON TO ASSESSEE'S CASE AND ACCORDINGLY THE ARGUMENT OF THE ASSESSEE'S COUNSEL IS DISMISSED.' ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 12 17. THE ASSESSEE FILED MISCELLANEOUS APPLICATIONS IN MA NOS. 7 TO 9/HYD/2014 AND POINTED OUT THAT AN ERROR HAS CREPT IN THE ORDER OF THE TRIBUNAL. THE TRIBUNAL W HILE DISPOSING THE MAS HELD AS FOLLOWS: 'THE AR OF THE ASSESSEE HAS NOT BEEN ABLE TO POINT OUT ANY MATERIAL EVIDENCE WHICH HAS BEEN IGNORED OR ANY OTHER OMISSION ON THE PART OF THE TRIBUNAL WHILE DECIDING THE ISSUE RELATING TO THE TREATMENT OF DEDUCTION U/S. 35(1) OF THE ACT. WHILE MAINTAINING OUR ORDER ON THE MAIN ISSUE WITH REGARD TO ALLOWABILITY OF DEDUCTION U/S. 35(1), WE CONSIDER IT NECESSARY TO HEAR BOTH THE PARTIES ON APPLICABILITY OF PROVISIONS OF S. 35(3) OF THE ACT. ACCORDINGLY, WE AMEND THE TRIBUNAL ORDER TO THAT EXTENT AND DIRECT THE REGISTRY OF THE TRIBUNAL TO POST THESE CASES FOR HEARING ON 6.10.2014 FOR THE LIMITED PURPOSE OF DECIDING THE ISSUE OF APPLICABILITY OF PROVISIONS OF S. 35(3) OF THE ACT. THE FINAL RESULT OF THE REVENUE APPEAL WILL DEPEND UPON THE OUTCOME OF ADJUDICATION OF ISSUE RELATING TO APPLICABILITY OF PROVISIONS OF S. 35(3) OF THE ACT BY THE TRIBUNAL. IN THE RESULT, ALL THE MA FILED BY THE ASSESSEE ARE PARTLY ALLOWED.' 18. THE CASES NOW HAVE BEEN POSTED FOR HEARING BEFORE US TO DECIDE THE REVENUE APPEALS ON THE ISSUE OF APPLICABILITY OF PROVISIONS OF S. 35(3) OF THE ACT. 19. THE LEARNED COUNSEL SUBMITTED THAT THE PROCESS OF ISOLATION AND CHARACTERIZATION OF VIRUS/BACTERIA FR OM THE AFFECTED HUMANS/ ANIMALS. IS THE FIRST STEP FOR DEV ELOPMENT OF NEW VACCINES OR BIO-THERAPEUTICS, SUBSEQUENT TO THIS, THE SAME NEED TO BE TESTED AND FURTHER DEVELOPED IN A HIGHLY CONTROLLED ENVIRONMENT, WHICH IS NORMALLY NO T ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 13 AVAILABLE IN THE LABORATORY WHO ISOLATES THE BASIC VIRUS/ BACTERIA. 20. IT WAS FURTHER SUBMITTED AS FOLLOWS: ' IN MANY OCCASIONS SUCH ISOLATED BACTERIA/VIRUS WILL NOT BE EITHER ACTIVE OR GROW IN PILOT SCALE OR IF IT GROWS, THE G ROWTH MEDIA USED MAY NOT BE COMMERCIALLY VIABLE MEDIA FOR COMMERCIAL EXPLOITATION OF THE INTENDED PRODUCT. TO AVOID ANY FAILURES THIS ACTIVITY HAS TO BE TAKEN UP IN A SPECIALLY CREATED ATMOSPHERE / ENVIRONMENT, WHICH IS NORMALLY ATTACHED TO THE MANUFACTURING UNIT. THE MOLECULE/VI RUS WHICH HAS BEEN OBTAINED BY SEPARATING FROM THE HUMAN/ANIMAL CELLS IN A LABORATORY, WHICH IS RECOGN IZED FOR SUCH PROCESS, IS DEVELOPED/MULTIPLIED BY FEEDING TH E APPROPRIATE FEED. A FAVOURABLE ENVIRONMENT IS TO BE CREATED/FACILITATED FOR THE MULTIPLICATION OF THE M OLECULE. THE GROWTH OF THE MOLECULE WHICH IS BEING DEVELOPED IS EMBEDDED WITH IMPURITIES; THE PURIFICATION PROCESS IS MOST IMPORTANT PART OF THE DEVELOPMENT PROCESS. THERE IS A POSSIBILITY OF LOSING THE ENTIRE DEVELOPED PRODUCT IN THE PROCESS OF PURIFICATION WHICH IS TO BE DONE IN A PR OPRIETARY AND SCIENTIFIC PROCESS BEING DEVELOPED DURING PRODU CT DEVELOPMENT STAGE WHICH IS VERY CRUCIAL FOR COMMERC IAL SUCCESS; OTHERWISE THERE IS A POSSIBILITY THAT THE ENTIRE DEVELOPED STRAIN MAY GO WASTE. IN THE PROCESS THE SCIENTISTS INVOLVED HAS TO IMPROVE THE EXPRESSION L EVEL TO THE MAXIMUM, TO ENSURE THAT THE LEVEL OF GROWTH IS VIABLE FOR COMMERCIALIZATION. AT EACH LEVEL OF THE DEVELOP MENT PROCESS, THE ASSESSEE IS REQUIRED TO OBTAIN PERMISS ION FROM THE APPROPRIATE AUTHORITIES. WHEN IT IS ASSURE D THAT THE GROWTH OF BACTERIA/VIRUS IS OPTIMIZED AND TIME TESTED PRODUCT PROCESS IS DOCUMENTED, THIS MOLECULE IS EXP LOITED COMMERCIALLY AND FURTHER PROCESSED TO ENSURE AT THE ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 14 COMMERCIAL LEVEL ALSO THE GROWTH IS OPTIMUM. AFTER THIS STAGE CLINICAL TRIALS OF THE DEVELOPED PRODUCT STAR TS, UNDER THE PROTOCOLS DEVELOPED SCIENTIFIC TEAM WHO ARE INV OLVED IN PRODUCT DEVELOPMENT BY A SPECIFICALLY TRAINED ME DICAL PERSONNEL. ON SUCCESSFUL COMPLETION OF PHASE-L CLIN ICAL TRIALS, PHASE- 2 CLINICAL TRIAL ARE CONDUCTED AT TH E ALLOTTED HOSPITALS TO CHECK THE EFFICACY OF THE PRODUCT AFTE R OBTAINING PERMISSION FROM THE APPROPRIATE AUTHORITI ES. ONCE THE PRODUCT IS SUCCESSFUL IN PHASE-2 TRIAL, TH E SAME IS TAKEN FOR PHASE-3 TRIAL, BEING CONDUCTED ON A LARGE R GROUP OF VOLUNTEERS. ON SUCCESSFUL TRIALS AND RECTIFICATI ONS AT APPROPRIATE STAGES THE PRODUCT WOULD BE COMMERCIALI ZED IF IT IS FEASIBLE TO PRODUCE THE SAME COMMERCIALLY. IT IS PERTINENT TO SUBMIT THAT THE PRODUCT MAY PROVE TO B E A FAILURE AT ANY STAGE INCLUDING THE STAGE OF COMMERCIALIZATION.' 21. THEREFORE, IT IS SUBMITTED THAT THE ENTIRE PROCESS OF DEVELOPMENT FROM THE STAGE OF ISOLATION OF VIRUS/MO LECULE AND ESTABLISHING THE SAME AS FIT FOR FURTHER DEVELO PMENT OF PRODUCT AT PILOT SCALE TO COMMERCIAL SCALE INVOLVES VERY LONG AND INDEPTH SCIENTIFIC RESEARCH. 22. THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSING OFFICER HAS NOT ALLEGED THAT THE ACTIVITY OF DEVELO PMENT FROM THE STAGE OF VIRUS/MOLECULE TO THE STAGE OF VA CCINE IS NOT SCIENTIFIC RESEARCH. THE LEARNED COMMISSIONER (APPEALS) AFTER OBSERVING THE ENTIRE PROCESS, MENTI ONED VARIOUS STAGES OF PRODUCT DEVELOPMENT IN PARA 4.0 O F HIS ORDER AND HELD THAT THE PRODUCT DEVELOPMENT EXPENDI TURE IS RELATED TO SCIENTIFIC RESEARCH BY WAY OF RESEARC H AND DEVELOPMENT OF THE NEW PRODUCTS WHICH COULD FACILIT ATE THE ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 15 EXTENSION OF THE BUSINESS OF THE ASSESSEE TO DEVELO P NEW VACCINES. IT IS FURTHER SUBMITTED THAT THE SCIENTIF IC RESEARCH OF THE ASSESSEE IS IN CONNECTION TO FACILI TATE THE EXTENSION OF BUSINESS OF THE ASSESSEE WHICH IS MANUFACTURING OF VACCINES. THE ASSESSEE IS NOT DOIN G SCIENTIFIC RESEARCH FOR OTHERS WHO ARE IN THE MANUF ACTURING ACTIVITY. THE SCIENTIFIC RESEARCH OF THE ASSESSEE I S PURELY RELATED TO THE EXTENSION OF ITS BUSINESS. 23. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE BENCH CONFIRMED THE ORDER OF THE ASSESSING OFFICER STATING THAT THE EXPENDITURE IS CAPITAL IN NATURE, UNDER A WRONG ASSUMPTION THAT THE ASSESSEE IS NOT CARRYING ON ANY SCIENTIFIC RESEARCH WHICH WILL LEAD TO OR FACILITAT E AN EXTENSION OF BUSINESS. THIS ASSUMPTION OF THE BENC H IS CONTRARY TO THE FINDINGS GIVEN BY THE CIT(A) WHO HE LD THAT THE ASSESSEE-COMPANY IS CARRYING ON SCIENTIFIC RESE ARCH AND THE EXPENDITURE INCURRED ON SCIENTIFIC R & D WO ULD FACILITATE EXTENSION OF ASSESSEE'S BUSINESS TO DEVE LOP NEW VACCINES. 24. THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSING OFFICER FOR THE ASSESSMENT YEAR 2006-07 & 2007-08 OBSERVED AS THE ASSESSEE'S CONTENTION THAT THE EXPENDITURE INCURRED ON SPECIFIC PRODUCT DEVELOPMEN T IS IN THE NATURE OF RESEARCH EXPENDITURE CANNOT BE ACCEPT ED. SUBSEQUENTLY THE LEARNED ASSESSING OFFICER ALSO OBS ERVED AS THE EXPENDITURE INCURRED BY THE ASSESSEE IS TOWA RDS NEW PROJECT UNDER TAKEN BY THE ASSESSEE AND TO SET UP FACILITIES FOR THE MANUFACTURE OF NEW PRODUCTS. THE EXPENDITURE ON THE PRODUCT DEVELOPMENT RESULTS IN OBTAINING PATENT RIGHTS FOR MANUFACTURING NEW PRODU CTS ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 16 AND COMMERCIALIZATION OF THE PRODUCTS ACCRUING ENDU RING BENEFIT AND ADVANTAGE TO THE ASSESSEE. 25. THE LEARNED COUNSEL SUBMITTED THAT IN THE LIGHT OF ABOVE OBSERVATION OF THE LEARNED ASSESSING OFFICER WHICH ARE CONTRARY TO EACH OTHER AS, AT ONE STAGE THE LEA RNED ASSESSING OFFICER STATED THAT THE EXPENDITURE INCUR RED IS NOT IN THE NATURE OF SCIENTIFIC EXPENDITURE AND AT OTHER PLACE OF THE ORDER HE HAS STATED THAT THE PRODUCT DEVELOPMENT RESULTS IN OBTAINING PATENT RIGHTS FOR MANUFACTURING NEW PRODUCTS. IN THIS REGARD IT IS SU BMITTED THAT THE OBSERVATION OF THE ASSESSING OFFICER AT LA TER STAGE IS EXACTLY CORRECT, TRUE AND FACTUAL. ONCE THE PROD UCT WHICH IS BEING DEVELOPED ATTAINS THE STAGE OF FINAL ITY AND PROVES ITS CAPACITY/EXCELLENCE THE ASSESSEE WILL AP PROACH THE APPROPRIATE AUTHORITY FOR THE PATENT OF THE PRO DUCT AS OBSERVED BY THE LEARNED ASSESSING OFFICER. A PATENT RIGHT IN ITS USUAL SIGNIFICANCE MEANS A PRIVILEGE GRANTED BY THE GOVERNMENT TO FIRST INVENTOR OF A NEW USEFUL DISCOV ERY OR MODE OF MANUFACTURE THAT HE SHALL BE ENTITLED DURIN G A LIMITED PERIOD TO THE EXCLUSIVE USE AND BENEFIT THE REOF. THEREFORE, IT IS RESPECTFULLY SUBMITTED THAT THE LE ARNED ASSESSING OFFICER, AFTER EXAMINING THE MATERIAL SUB MITTED IN RESPECT OF DEVELOPMENT OF THE THREE PRODUCTS I.E . HUMAN PRO INSULIN, HEPATITIS A VIRUS AND LISOSTAPHIN, HEL D THAT THESE MOLECULES WHEN SUCCESSFULLY DEVELOPED WILL YI ELD PATENT RIGHTS TO THE ASSESSEE I.E., IN OTHER WORDS THE ASSESSING OFFICER STATES THAT IN RESPECT OF THESE P RODUCTS THE ASSESSEE WILL BE THE INVENTOR OR FIRST PRODUCER OF THE PRODUCT. THEREFORE, IT IS SUBMITTED THAT THE EXPEND ITURE INCURRED FOR DEVELOPING THE PRODUCT IS TOWARDS INVE NTION OF A NEW PRODUCT I.E. THE EXPENDITURE INCURRED IS FOR SCIENTIFIC RESEARCH THEREFORE, ELIGIBLE FOR DEDUCTION U/S 35 O F THE IT ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 17 ACT. THIS FACT OF OBSERVATION BY THE ASSESSING OFFI CER IS ALSO RECORDED BY THE HON'BLE BENCH IN PARA 3 OF THE IR ORDER HOWEVER, INADVERTENTLY NO ATTENTION WAS PAID IN RES PECT OF THIS OBSERVATION OF THE ASSESSING OFFICER REGARDING OBTAINING OF PATENT RIGHTS. THEREFORE, IT IS RESPEC TFULLY SUBMITTED THAT THERE IS A MISTAKE APPARENT FROM REC ORD IN RESPECT OF NOT ALLOWING DEDUCTION AS THE ASSESSING OFFICER HAS HIMSELF STATED/ OBSERVED THAT THE ASSESSEE WILL BE THE INVENTOR OF THE PRODUCTS AND ENTITLED FOR PATENTS R IGHTS. 26. THE LEARNED COUNSEL SUBMITTED THAT WITH THE CONTRARY OBSERVATIONS AS SUBMITTED ABOVE BY THE ASSESSING OFFICER THE CLAIM WAS NOT ALLOWED BY THE ASSESSING OFFICER WITH A PRESUMPTION THAT IT IS NOT INCURRED AS EXPENDITURE ON SCIENTIFIC RESEARCH. THE LEARNED COMMISSIONER AFTER EXAMINING THE CLAIMS IN DETAIL H ELD THAT THE PROCESS OF DEVELOPMENT OF A MOLECULE TO THE STA GE OF VACCINE/MEDICINE IS A PROCESS INVOLVING SCIENTIFIC RESEARCH. HOWEVER, THE HON'BLE ITAT HAS CONFIRMED O RDER OF THE ASSESSING OFFICER. IN THIS REGARD IT IS SUBM ITTED THAT THE LEARNED ASSESSING OFFICER HAS NOT FOLLOWED THE CORRECT PROCEDURE LAID DOWN IN SECTION 35 WHILE DISALLOWING THE CLAIM. THE RELEVANT PART OF THE SECTION I.E. SECTIO N 35(3) IS PRODUCED HERE UNDER FOR KIND CONSIDERATION OF THE B ENCH. IF ANY QUESTION ARISES UNDER THIS SECTION AS TO WHE THER, AND IF SO, TO WHAT EXTENT, ANY ACTIVITY CONSTITUTES OR CONSTITUTED OR ANY ASSET IS OR WAS BEING USED FOR, SCIENTIFIC R ESEARCH, THE BOARD SHALL REFER THE QUESTION TO (A) THE CENTRAL GOVERNMENT, WHEN SUCH QUESTION RELATES TO ANY ACTIVITY UNDER CLAUSES (II) AND (III ) OF SUB-SECTION (1) AND ITS DECISION SHALL BE FINAL; ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 18 (B) THE PRESCRIBED AUTHORITY, WHEN QUESTION RELATES TO ANY ACTIVITY OTHER THAN THE ACTIVITY SPECIFIED IN CLAUSE (A), WHOSE DECISION SHALL BE FI NAL. 27. THE LEARNED COUNSEL SUBMITTED THAT THE SECTION CLEARLY STATES THAT WHEN THE ASSESSING OFFICER IS N OT ACCEPTING THE CLAIM OF THE ASSESSEE IN RESPECT OF T HE EXPENDITURE INCURRED FOR THE DEVELOPMENT OF STRAIN/MOLECULE TO THE STAGE OF VACCINE/MEDICINE IS IN THE NATURE OF SCIENTIFIC EXPENDITURE, THE PROPER COURSE TO HIM IS TO FOLLOW THE PROCEDURE LAID DOWN IN SECTION 35( 3) OF THE IT ACT. HE IS NOT EMPOWERED TO NEGATIVE THE CLAIM. WHEN THE STATUE PROVIDES FOR A PARTICULAR PROCEDURE THE AUTHORITY HAS TO FOLLOW THE SAME AND CANNOT BE PERM ITTED TO ACT IN CONTRAVENTION OF THE SAME. BEING THE CREA TIONS OF THE ACT THE LEARNED ASSESSING OFFICER AND THE HON'B LE ITAT CANNOT DECIDE THE CLAIM AGAINST THE ASSESSEE WITHOU T FOLLOWING THE PROCEDURE LAID DOWN IN THE ACT. RELIA NCE IS PLACED ON THE ALLAHABAD HIGH COURT DECISION IN THE CASE OF CIT VS RAJIV SHARMA 336 ITR 678 (2010). IN VIEW OF THE ABOVE SUBMISSIONS IT IS RESPECTFULLY SUBMITTED THAT THERE IS A MISTAKE APPARENT FROM RECORD AS PROVIDED IN SECTI ON 254 (2) OF THE IT ACT, WHICH IS TO BE CURED BY THE HON' BLE BENCH. IN CASE THE HON'BLE BENCH NEEDS ANY FURTHER INFORMA TION THE UNDER SIGNED IS OBLIGED TO FURNISH THE SAME. 28. THE LEARNED COUNSEL ALSO SUBMITTED THAT THE DEFINITION OF SCIENTIFIC RESEARCH AS PROVIDED U/S. 43(4)(III). THE AR RELIED ON THE DECISIONS IN THE CASES OF AYUS HAKTI AYURVED (P.) LTD. VS ACIT (37 SOT 313), TRANSWEEIGH (INDIA) LTD. VS ITO (22 SOT 338) (MUM.), ENEM NOST RUM ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 19 REMEDIES (P.) LTD VS ACIT, 119 ITD 427 (MUM.), WHER EIN THE DEFINITION OF SCIENTIFIC RESEARCH U/S. 43(4)WAS ANALYSED. IT WAS SUBMITTED THAT THE ACTIVITIES CARRIED OUT BY THE ASSESSEE SQUARELY FALLS WITHIN THE DEFINITION OF SC IENTIFIC RESEARCH U/S. 43(4) AND WOULD FURTHER FALL WITHIN T HE SUBSECTIONS OF S. 35 TO BE FULLY ALLOWABLE BY THE C LAIM AS SCIENTIFIC RESEARCH EXPENDITURE. 29. WE HAVE HEARD BOTH PARTIES. WE ARE OF THE OPINION THAT THE ASSESSEE'S CASE SQUARELY COVERED BY THE DE CISION IN THE CASE OF ENEM NOSTRUM REMEDIES (P.) LTD (SUPR A) WHEREIN IT WAS HELD AS FOLLOWS: 'SECTION 43(4) DEFINES THE MEANING OF 'SCIENTIFIC RESEARCH'. SO, IN ORDER TO AVAIL, DEDUCTION UNDER SECTION 35, THE ACTIVITY OF THE ASSESSEE SHOULD FIRST FALL WITHIN THE MEANING OF 'SCIENTIFIC RESEARCH' AS PER SECTION 43(4), AND THEN THE CONDITIONS OF RESPECTIVE CLAUSES OF SECTION 35 SHOULD BE FULFILLED. [PARA 10] PRIMARILY THERE IS DIFFERENCE IN THE LANGUAGE OF CLAUSE (IV) OF SECTION 35(1) AND SECTION 43(4)(III)(A) BECAUSE THE REFERENCE IN THE FORMER SECTION IS TO 'SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE' AND IN THE DEFINITION CLAUSE OF SECTION 43, THE LANGUAGE USED IS 'SCIENTIFIC RESEARCH RELATED TO A BUSINESS OR CLASS OF BUSINESS' TO INCLUDE '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'. THE HARMONIOUS CONSTRUCTION OF THESE PROVISIONS CLEARLY INDICATES THAT THERE SHOULD BE A 'BUSINESS CARRIED ON BY THE ASSESSEE' AND THE SCIENTIFIC RESEARCH SHOULD RELATE TO THAT BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE. IT NOWHERE SUGGESTS THAT THE 'BUSINESS OF CARRYING ON SCIENTIFIC RESEARCH' IS COVERED WITHIN THE AMBIT OF THIS PROVISION. AGAIN, THE REFERENCE TO THE 'EXTENSION OF THAT BUSINESS' IN SECTION 43(4)(III) CLEARLY DIVULGES THAT THE SCIENTIFIC RESEARCH SO ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 20 DONE BY THE ASSESSEE SHOULD CONTRIBUTE TO THE EXTENSION OF BUSINESS CARRIED ON BY IT. IT IS NOT AKIN TO THE EXTENSION OF THE BUSINESS OF SCIENTIFIC RESEARCH. FOR EXAMPLE, A PHARMACEUTICAL COMPANY MAY BE SELLING A PARTICULAR TABLET MEANT FOR CURING HEADACHE WITHIN AN HOUR FROM ITS CONSUMPTION. WHEN IT UNDERTAKES SCIENTIFIC RESEARCH AND INVENTS A FORMULA BY WHICH THE NEW TABLET WOULD CURE THE HEADACHE WITHIN 10 MINUTES, THE SCIENTIFIC RESEARCH LEADING TO THE INVENTION OF SUCH NEW TABLET, WOULD CERTAINLY LEAD TO OR FACILITATE IN THE EXTENSION OF THE BUSINESS OF THE SALE OF MEDICINE OF CURING HEADACHE. IT IS THAT TYPE OF RESEARCH THAT WOULD BE COVERED WITHIN THE AMBIT OF SECTION 43(4)(III)(A). NOWHERE IT IS CONTEMPLATED THAT SCIENTIFIC RESEARCH SHOULD LEAD TO THE GROWTH OF THE BUSINESS OF SCIENTIFIC RESEARCH ITSELF IN TERMS OF MORE ORDERS FOR RESEARCH AND DEVELOPMENT. IN THE INSTANT CASE, THE ASSESSEE WAS ENGAGED IN THE DEVELOPMENT OF FORMULATION AS PER THE ORDERS PLACED BY ITS PARENT COMPANY. IT MEANT THAT THE ASSESSEE HAD TO KEEP ON TRYING VARIOUS PERMUTATIONS AND COMBINATIONS TILL THE DESIRED RESULT WAS ACHIEVED AND FORMULA SO DEVELOPED ACCORDED WITH THE REQUIREMENTS OF THE PARENT COMPANY. IT WAS OBVIOUS THAT NOTHING MORE OR LESS THAN THE ORDER GIVEN BY THE PARENT COMPANY WOULD BE ACCEPTABLE AS THE END PRODUCT OF THE ASSESSEE'S RESEARCH IN THE FORM OF THE NEW FORMULATION WHICH MUST NECESSARILY MATCH WITH THE ORDER PLACED. THE FORMULA SO DEVELOPED BY THE ASSESSEE, WAS, THEREAFTER, UTILIZED BY NOSTRUM, USA FOR THE EXTENSION OF ITS BUSINESS. THE ASSESSEE'S ACTIVITY WAS FACILITATING THE EXTENSION OF BUSINESS OF NOSTRUM, USA AND NOT THAT OF ITS OWN. THE SITUATION WOULD HAVE BEEN OTHERWISE IF THE ASSESSEE HAD BEEN ENGAGED IN THE PHARMACEUTICAL BUSINESS AND HAD UTILIZED THE SCIENTIFIC RESEARCH CARRIED OUT BY IT IN ITS BUSINESS OF PRODUCING TABLETS, ETC., IN WHICH CASE IT WOULD HAVE BEEN QUALIFIED FOR DEDUCTION WITHIN FOUR CORNERS OF SAID CLAUSE. THUS, THE COMMISSIONER (APPEALS) HAD CORRECTLY PROCEEDED IN HOLDING THAT THE ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 21 ASSESSEE WAS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 35(1)(IV). [PARA 11]' 30. IT HAS ALSO BEEN BROUGHT TO OUR NOTICE BY THE LEARN ED COUNSEL THAT IN RESPECT OF DEVELOPMENT OF THREE PRO DUCTS HUMAN PRO INSULIN, HEPATITIS A VIRUS AND LISO STAPH IN IT HAS BEEN HELD THAT THESE MOLECULES WHEN SUCCESSFULLY DEVELOPED WILL YIELD PATENT RIGHTS TO THE ASSESSEE. HENCE THE ASSESSEE WILL BE INVENTOR OF SUCH PRODUCT AND, THEREFORE, THE EXPENDITURE IS FOR SCIENTIFIC RESEAR CH AND ELIGIBLE FOR DEDUCTION U/S. 35 OF THE ACT. THIS OB SERVATION OF THE ASSESSING OFFICER AND THE LEARNED COUNSEL AF TER EXAMINING THE CLAIM IN DETAIL HELD THAT THE PROCESS OF DEVELOPMENT OF MOLECULE TO THE STAGE OF VACCINE I.E ., MEDICINE IS THE PROCESS INVOLVED IN SCIENTIFIC RESE ARCH. 31. HOWEVER, THE ASSESSING OFFICER HAS NOT FOLLOWED THE CORRECT PROCEDURE. THE RELEVANT PARA OF SECTION 35 (3) READS AS FOLLOWS: 'IF ANY QUESTION ARISES UNDER THIS SECTION AS TO WHETHER, AND IF SO, TO WHAT EXTENT, ANY ACTIVITY CONSTITUTES OR CONSTITUTED, OR ANY ASSET IS OR WAS BEING USED FOR, SCIENTIFIC RESEARCH, THE BOARD SHALL REFER THE QUESTION TO (A) THE CENTRAL GOVERNMENT, WHEN SUCH QUESTION RELATES TO ANY ACTIVITY UNDER CLAUSES (II) AND (III) OF SUB-SECTION (1), AND ITS DECISION SHALL BE FINAL; (B) THE PRESCRIBED AUTHORITY, WHEN SUCH QUESTION RELATES TO ANY ACTIVITY OTHER THAN THE ACTIVITY SPECIFIED IN CLAUSE (A), WHOSE DECISION SHALL BE FINAL.] 32. HENCE IT IS VERY CLEAR THAT THE PROPER COURSE OF ACTION FOR THE ASSESSING OFFICER IS TO REFER THE MA TTER AS DIRECTED U/S. 35(3). THE TRIBUNAL CANNOT DECIDE TH E CLAIM ITA NO. 392/HYD/2010 & ORS. M /S. BHARAT BIOTECH INTERNATIONAL LTD. ============================== 22 AGAINST THE ASSESSEE OR IN ITS FAVOUR WITHOUT FOLLO WING THE PROCEDURE LAID DOWN IN THE ACT. HENCE WE SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A D IRECTION TO REFER THE CLAIM OF DEDUCTION U/S. 35 ACCORDING TO T HE PROCEDURE LAID DOWN U/S. 35(3) OF THE ACT. 33. IN THE RESULT, THE APPEALS ARE ALLOWED FOR STATISTI CAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 3 RD DECEMBER, 2014. SD/ - (B. RAMAKOTAIAH) ACCOUNTANT MEMBER SD/ - (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER HYDERABAD, DATED 3 RD DECEMBER, 2014 TPRAO COPY FORWARDED TO: 1. THE DCIT, CIRCLE - 1(3), ROOM NO. 413, 4 TH FLOOR, AAYAKAR BHAVAN, HYDERABAD-500 004. 2. M/S. BHARAT BIOTECH INTERNATIONAL LTD., GENOME VALL EY, TURKAPALLY, SHAMEERPET, HYDERABAD. 3. THE CIT(A) - II, HYDERABAD. 4. THE CIT - I, HYDERABAD. 5. THE DR 'B' BENCH, ITAT, HYDERABAD