2014 (6) TMI 438 - AT - Income Tax

Deduction u/s 37(1) - pre-operative expenses Scientific research for the purpose of its own business Held that - True, the assessee cannot be considered as engaged in scientific research related to its business in-as-much as the same is being undertaken in pursuance to an agreement with another, Eisai-Japan, which sponsors the same, so that the discovery, if any, resulting there-from, would vest with the latter. However, why is the same not admissible u/s. 37(1), we fail to fathom. The Revenue has in fact itself assessed the receipt by way of service charges for the three years under reference, claimed to be from Eisai-Japan, as business income u/s. 28. How could then the expenditure on a principal activity carried out be considered, even in part (as it would only be for that incurred and claimed for A.Y. 2006-07), as toward pre-operative expenditure? In-asmuch as the expenditure by way of sponsoring the activity of the NGOs (as ARDSI) also forms part of the Agreement dated 01.01.2005, though, as explained by the ld. AR, not subject to a mark-up of 10%, as is the expenditure incurred directly by the assessee, the same cannot be considered as donation, as considered by the Revenue. There being no finding by the authorities below with regard to a direct nexus of the impugned expenditure with the receipt afore-noted - matter remanded back - decided in favor of assessee.

Summary

Issues:
Appeals against CIT(A) orders for assessment years 2006-07, 2007-08 & 2008-09.

Analysis:
The case involved three appeals by the Assessee challenging the CIT(A) orders dismissing the appeals against assessments under section 143(3) of the Income Tax Act, 1961. The primary issue was the admissibility of expenses claimed by the Assessee under an agreement with Eisai Co., Ltd., Japan, for conducting various research activities. The Assessee, a drug manufacturer, claimed expenses for research-related activities, including supporting an NGO dedicated to dementia research. However, the claim was found inadmissible as the Assessee had not conducted scientific research related to its business and had commenced manufacturing and selling drugs only in September 2005. The authorities contended that the expenses did not qualify as scientific research or business expenditure deductible under relevant sections of the Income Tax Act.

The Tribunal carefully analyzed the facts and legal provisions. It noted that while the Assessee was not engaged in scientific research for its business, it was providing services under an agreement with Eisai-Japan. The Tribunal questioned why the expenses were not admissible under section 37(1) if the Assessee was providing resources and services for consideration. The Tribunal disagreed with the Revenue's position and observed that the Assessee could be considered as conducting scientific research for others, making its resources available for a fee. It highlighted that the Revenue had assessed service charges received from Eisai-Japan as business income, raising doubts about disallowing the expenses as pre-operative or non-business expenditure.

The Tribunal concluded that there was no direct nexus established between the expenses claimed and the income received from Eisai-Japan. It decided to remand the matter back to the Assessing Officer to verify the Assessee's claims and determine if the expenses were incurred in consideration of or against the income received. The Tribunal emphasized the need for the AO to provide clear findings after proper verification and hearing. Ultimately, the appeals were allowed for statistical purposes, indicating that no case for disallowance was established without a definitive link between the expenses and income received.

In summary, the Tribunal's judgment focused on the admissibility of expenses claimed by the Assessee for research-related activities under an agreement with Eisai-Japan. It highlighted the distinction between conducting scientific research for one's business and providing research services for consideration. The Tribunal emphasized the need for a direct nexus between expenses claimed and income received, leading to a remand for further verification by the Assessing Officer.