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2010 (11) TMI 147 - AT - Income TaxScientific Research u/s 35(2AB) - Disallowance of weighted deduction - expenditure included an amount of Rs. 29.73 lakhs incurred on building and a sum of Rs. 14.89 lakhs incurred outside the in-house R & D set up -The Assessing Officer observed that section 35(2AB) was concerned only about in-house R & D - Held that - The expenditure on clinical trial though the same is an integral part of scientific research will be eligible for weighted deduction under section 35(2AB) only if the expenditure is incurred on an in-house research and development facility. The expenditure incurred on trial conducted outside the in-house R & D facility will not be eligible for weighted deduction under section 35(2AB) Decided against the assessee Disallowance of expenses in relation to the exempt income under section 14A - Rule 8D was not retrospective and that the same would apply only from assessment year 2008-09- Hon ble High Court held that the Assessing Officer was duty bound to determine the expenditure, whether direct or indirect, incurred in relation to exempt income and for this purpose the Assessing Officer must adopt a reasonable basis consistent with all the relevant facts and circumstances and after allowing opportunity of hearing to the assessee - issue remanded back to CIT(A) Addition of Rs. 55,36,200 made by Assessing Officer on account of estimated net profit - Held that The Assessing Officer has rejected the accounts and made the estimated addition on the ground that income declared in the original return did not match with the audited accounts for assessment year 2005-06. The approach adopted by the Assessing Officer is not correct. The assessee had revised the return suo motu on the ground that the original return had been filed on the basis of audit report of assessment year 2004-05. Therefore the income declared in the revised return has to be matched with the audited accounts for assessment year 2005-06. - Addition made by AO is not sustainable.
Issues Involved:
1. Disallowance of weighted deduction claimed by the assessee on scientific research under section 35(2AB) of the Income-tax Act. 2. Disallowance of expenses in relation to the exempt income under section 14A of the Income-tax Act. 3. Addition of estimated net profit by the Assessing Officer. Detailed Analysis: 1. Disallowance of Weighted Deduction on Scientific Research (Section 35(2AB)): Background: The assessee claimed a weighted deduction of Rs. 359.87 lakhs under section 35(2AB), which included Rs. 14.89 lakhs incurred outside the in-house R&D facility. The Assessing Officer disallowed this amount, stating that section 35(2AB) pertains only to in-house R&D. Arguments: - Assessee's Argument: Clinical trials are integral to scientific research in pharmaceuticals, and the Explanation to section 35(2AB) includes such trials. They cited CBDT Circulars and the Gujarat High Court's judgment in CIT v. Claris Lifesciences Ltd. - Revenue's Argument: Only expenditures incurred on in-house R&D facilities are eligible for weighted deduction. Tribunal's Decision: The Tribunal upheld the disallowance, stating: - Section 35(2AB) explicitly requires expenditures to be on in-house R&D facilities. - The Explanation clarifies that clinical trials are part of scientific research but does not extend to expenditures outside in-house facilities. - The cited circulars and case laws do not support the claim for expenditures outside in-house R&D. Conclusion: The Tribunal confirmed that only expenditures incurred on in-house R&D facilities are eligible for weighted deduction under section 35(2AB). 2. Disallowance of Expenses Related to Exempt Income (Section 14A): Background: The assessee made investments generating exempt income but did not allocate any interest expenditure towards these investments. The Assessing Officer disallowed Rs. 4.80 lakhs on a proportionate basis, which CIT(A) upheld under Rule 8D. Arguments: - Assessee's Argument: Rule 8D should not be applied retrospectively. - Revenue's Argument: Supported the application of Rule 8D. Tribunal's Decision: The Tribunal noted that: - The Mumbai High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT ruled that Rule 8D is not retrospective and applies only from the assessment year 2008-09. - For prior periods, the AO must determine the expenditure on a reasonable basis after considering relevant facts and circumstances. Conclusion: The Tribunal set aside the CIT(A)'s order and remanded the matter back for re-examination in light of the Mumbai High Court's judgment, allowing the assessee a hearing opportunity. 3. Addition of Estimated Net Profit: Background: The Assessing Officer noted discrepancies in the net profit declared in the revised return and estimated a net profit addition of Rs. 55.36 lakhs. CIT(A) deleted this addition, noting that the revised return was supported by the correct audit report, and the profit margins were better than the previous year. Arguments: - Assessee's Argument: No defects were found in the books, and the revised return matched the audit report for the correct assessment year. - Revenue's Argument: Supported the estimated addition based on discrepancies in the original return. Tribunal's Decision: The Tribunal found: - The revised return should be considered as it matched the correct audit report. - The net profit and operating margin were better than the previous year, justifying no need for estimated addition. Conclusion: The Tribunal upheld CIT(A)'s decision to delete the estimated addition, finding no justification for the Assessing Officer's approach. Final Result: - The assessee's appeal is partly allowed. - The revenue's appeal is dismissed.
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