2020 (3) TMI 345 - HC - Income Tax

Disallowance of R D expenditure - HELD THAT - Expenditure was incurred by the assessee for and on behalf of the partnership firm and therefore it was not for the purpose of assessee s business. The second objection was with respect to correlation of such expenditure for setting up in-house R D facilities. The Commissioner agreed with the first contention in part and granted only pro-rata relief in terms of the proportionate exports of the assessee. Weighted deduction u/s 35(2AB) of clinical trial expenses incurred outside the approved facility - HELD THAT - Often times in the field of research and invention, the efforts undertaken may or may not yield fruitful results. What is to be ascertained is whether any scientific research was undertaken and not whether such scientific research resulted into the ultimate aim for which such research was undertaken. It can be easily envisaged that the scientific research undertaken often times would completely fail to achieve desired results. That by itself does not mean that no scientific research was undertaken. What the Legislature desired to encourage by granting deduction under section 35(1) of the Act was a scientific research and not necessarily only the successful scientific research undertaken by an assessee. Tribunal committed no error. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those can were incurred outside, in our opinion, by itself would not be sufficient to deny the benefit to the assessee under section35(2AB) of the Act. It is not as if that the said authority was addressing the issue for deduction under section 35(2AB) of the Act in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. See Commissioner of Income-tax I vs. Cadila Healthcare Ltd 2013 (3) TMI 539 - GUJARAT HIGH COURT

Summary

Issues:
1. Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal.
2. Questions of law proposed by the Revenue regarding R&D expenditure and weighted deduction under sections 35(2AB).
3. Admittance and rejection of questions 2(a) and 2(b) by the Court.

Analysis:
1. The appeal was filed by the Revenue under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Ahmedabad dated 20th June 2019 for the Assessment Year 2008-09.
2. The Revenue raised substantial questions of law concerning the disallowance of R&D expenditure and weighted deduction under section 35(2AB). The Court rejected question 2(a) based on a previous decision in the assessee's case, emphasizing that the issue was fact-based and did not raise any legal question.
3. Regarding question 2(b), the Court referred to the case of Commissioner of Income-tax vs. Cadila Healthcare Ltd and highlighted the importance of encouraging scientific research, especially in clinical trials. The Court emphasized that clinical trials may not always be conducted in an in-house facility, and such trials are essential for the development of pharmaceutical drugs. The Court cited previous judgments to support the broad interpretation of scientific research for claiming deductions under section 35(2AB).
4. Consequently, the Court rejected question 2(b) as well, concluding that the Tribunal did not commit any error in its decision. The appeal was dismissed, affirming the decisions on both questions raised by the Revenue.

This detailed analysis of the judgment provides insights into the legal issues raised by the Revenue, the Court's reasoning behind the rejection of the questions, and the broader interpretation of scientific research for claiming deductions under the Income Tax Act.