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2018 (11) TMI 1591 - AT - Income TaxEnhancement of income made by CIT (A) u/s 251(1)(a) - tax the entire gross receipts as the income of the appellant by disallowing entire revenue expenditure debited to Profit & Loss Account - HELD THAT - Expenditure considered in notice of enhancement by Ld.CIT (A) had been subjected to the process of assessment. Merely because assessment order is silent about this item and there is no discussion thereupon would not mean that Assessing Officer had not considered it. We draw our support from assessment order wherein assessee was required to furnish details of expenses and receipt which were examined by Ld.AO on test check basis. Issuance of notice of enhancement under section 251(1) of the Act and applying ratio laid down by Hon ble Supreme Court and various High Court to facts of present case we are of considered opinion that enhancement notice has been issued on an issue which was subject matter during assessment proceedings details of which are already placed on record by assessee itself. We thus hold that Ld.CIT (A) has rightly exercised powers under section 251 (1) of the Act. Disallowance of expenditure holding it to be capital in nature - CIT(A) disallowed entire expenditure by holding that research activity carried on by assessee has resulted in enduring benefits to assessee - test of enduring benefit - HELD THAT - As observed expenditure incurred by assessee is in its normal course of business. Further it is also not disputed that assessee has been remunerated as per contract under which assessee is required to incur expenditure. Ld. AO/CIT(A) did not dispute that expenditure has not been incurred for purposes of research activity carried on by assessee in its normal course of business. We draw our support from decision of Empire Jute Company Ltd vs. CIT 1980 (5) TMI 1 - SUPREME COURT wherein laid down that test of enduring benefit cannot be applied blindly and mechanically without having regard to facts and circumstances of a given case. We are therefore are of considered opinion that assessee has to be granted benefit of expenditure incurred by it incurred in due course of business activity. Deduction u/s 80IB(8A) - Assessee has been granted approval by Department of Scientific and Research Ministry of Science and Technology u/s 80IB(8A) since A.Y. 2003-04 - HELD THAT - Assessee has received approval from prescribed authority which has been renewed from time to time. This clearly shows that assessee fulfils all required criteria to claim deduction under section 80 IB (8A) of the Act read with Rule 18 DA of Income Tax Rules 1963. Further we do not find any requirement for assessee to own research conducted/carried out in its ordinary course of business activity for claiming deduction Disallowance of payments made towards sub-contracting part of research work to the sister concern by invoking provisions of section 80 IB (13) - sub-contract entered into with its sister concern so arranged that transaction had an effect of producing more profit than ordinary profits - assessee is engaged in business of scientific research and informatics services for drug discovery units - HELD THAT - As decided in assessee s own case A.Y. 2008-09 2009-10 and 2010-11 the income earned by the assessee from its connected company namely JB is less than the ordinary profits being the amount charged by the assessee from Eli Lilly & Co. USA. Under these circumstances it becomes evident that the provisions of section 80IA(10) are not triggered. If we ignore this aspect there is nothing in the assessment order to substantiate the claim of the Revenue that the assessee charged exorbitantly from JB so as to divert income from loss making JB to the assessee so as to enable it to claim higher deduction. In our considered opinion that the CIT(A) took an unimpeachable view on the issue by deleting the addition made by the Assessing Officer.
Issues Involved:
1. Validity of enhancement of income by CIT(A) under section 251(1)(a) of the Income Tax Act. 2. Disallowance of expenditure amounting to ?102,52,32,000/- as capital in nature. 3. Denial of deduction under section 80IB(8A) of the Act. 4. Disallowance of payments made towards sub-contracting part of research work to sister concern under section 80IB(13) read with section 80IA(10) of the Act. 5. Levy of penalty under section 271(1)(c) of the Act. Detailed Analysis: 1. Validity of Enhancement of Income by CIT(A) under Section 251(1)(a): The assessee contended that the CIT(A) enhanced the income without issuing a proper notice under section 251(2) of the Act, which is a statutory requirement. The CIT(A) had issued a show cause notice but it did not specify why the expenses should be treated as capital in nature. The assessee argued that the enhancement was illegal as the expenditure was not a subject matter of the original assessment. The department argued that the CIT(A) has the power to enhance the assessment as long as the assessee is given a reasonable opportunity to show cause. The tribunal held that the CIT(A) has the jurisdiction to enhance the income if the matter was subject to the process of assessment, even if it was not explicitly discussed in the assessment order. The tribunal found that the expenditure in question was part of the assessment process and thus the CIT(A)’s enhancement was valid. Therefore, the tribunal dismissed the grounds raised by the assessee regarding the validity of the enhancement. 2. Disallowance of Expenditure Amounting to ?102,52,32,000/- as Capital in Nature: The CIT(A) disallowed the entire expenditure, holding that the research activity provided enduring benefits to the assessee. The assessee argued that the expenditure was incurred in the ordinary course of business and was remunerated as per the contract. The tribunal found that the expenditure was indeed incurred in the normal course of business and was necessary for earning the income. The tribunal referred to the Supreme Court decision in Empire Jute Company Ltd vs. CIT, which stated that the test of enduring benefit should not be applied mechanically. The tribunal concluded that the expenditure should be allowed as it was incurred for business purposes. Therefore, the tribunal allowed the grounds raised by the assessee regarding the disallowance of expenditure. 3. Denial of Deduction under Section 80IB(8A): The assessee had approval from the Department of Scientific and Industrial Research and claimed deduction under section 80IB(8A). The CIT(A) denied the deduction, arguing that the ownership of the research was with a third party. The assessee argued that the approval from the prescribed authority and the auditor’s certificate should suffice for the deduction. The tribunal found that the assessee had the necessary approval and fulfilled all criteria for the deduction under section 80IB(8A). The tribunal held that there was no requirement for the assessee to own the research to claim the deduction. Therefore, the tribunal directed the AO to grant the deduction as per law and allowed the grounds raised by the assessee. 4. Disallowance of Payments Made Towards Sub-Contracting Part of Research Work: The CIT(A) disallowed the payments made towards sub-contracting part of the research work to the sister concern, invoking section 80IB(13) read with section 80IA(10). The assessee argued that similar issues were decided in its favor in previous years by the tribunal. The department could not controvert this fact. The tribunal observed that the facts and circumstances were identical to previous years where the issue was decided in favor of the assessee. Therefore, the tribunal directed the AO to grant the deduction claimed by the assessee and allowed the grounds raised. 5. Levy of Penalty under Section 271(1)(c): The penalty was levied based on the disallowance of expenditure by the CIT(A). As the tribunal deleted the disallowance, the basis for the penalty no longer existed. Therefore, the tribunal allowed the grounds raised by the assessee regarding the penalty appeals. Conclusion: The appeals filed by the assessee were partly allowed. The tribunal upheld the CIT(A)’s enhancement of income but allowed the deductions and expenditures claimed by the assessee. The penalty appeals were also allowed as the disallowances were deleted.
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