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TMI Blog2009 (3) TMI 643X X X X Extracts X X X X X X X X Extracts X X X X ..... the depreciation u/s 32 @ 25 per cent and 60 per cent on plant and machinery and on computers respectively instead. HELD THAT:- The assessee, in our considered opinion, cannot be said to have two distinct activities, i.e., business activity on one side and related scientific research activity on the other. In other words, the assessee does not have the business activity to absorb the developed scientific research. Further, it is also not the case of the assessee that he is covered by section 43(4)( iii )( a ), i.e., the cases of scientific research, which may lead to or to facilitate an extension of that business . Thus, by conducting the said research, the assessee generates a marketable product or stock-in-trade in the form of the scientific research. In these circumstances, we are of the opinion that the provisions of section 35(1)( iv ) have no applicable to assessee s case and, accordingly, this part of the arguments of the assessee s counsel is dismissed. The assessee incurred capital expenditure on the scientific research and undisputedly it is related to the subsidiary company such as CIBA Basle. Assessee does not have any active business activity carried on by him to which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on merits relating to the deduction under section 35(1)(iv). Rejecting the assessee's request for dropping the reassessment proceedings, the Assessing Officer proceeded to complete the reassessment proceedings after denying the deduction claimed under section 35(1)(iv). Assessing Officer considered the assessee's reply vide its letter dated 16-12-2004 and the contents therein as mentioned in paragraphs 3 and 4 of the assessment order. On jurisdiction issue, during the reassessment proceedings, the assessee's submitted that assessee made full disclosure of facts in the return and, therefore, the said proceedings should be dropped. Regarding the issue of deduction, the assessee stated that the assessee is engaged in the business of carrying out of a specialized research activities for CIBA Speciality Chemicals Inc. Basle (CIBA Basle) for which FIBA approval dated 20-12-1995 was obtained wherein assessee was permitted to carry out "Specialised Research Activi- ties" in India. The letter also stated that Memorandum of Association of CIBA India Pvt. Ltd. laid out the Research as one of the primary objects of the Company and stated that expenditure of a capital nature on scientific rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, CIT(A) observed that this is case where the Assessing Officer initiated the reassessment proceedings within 4 years from the end of the relevant assessment year (i.e., assessment year 2000-01) and the original assessment was not completed under section 143(3) and, thus, the CIT(A) approved the validity of the reassessment relied on the jurisdictional High Court in the case of Dr. Amin's Pathology Laboratory v. P.N. Prasad, Jt. CIT (No. 1) [2001] 252 ITR 673 (Bom.) and Gujarat High Court's judgment in the case of Praful Chunnilal Patel v. M.J. Makwana, Asstt. CIT [1999] 236 ITR 832 for the proposition that the disclosure of facts is an irrelevant information to the cases of this kind, which are reopened within 4 years from the end of the assessment year 2000-01. Thus, the CIT(A) upheld the jurisdictional issue. Further, relating to the merits of the disallowance of the claim under section 35(1)(iv), the CIT(A) also considered the assessee's submissions as well as the Allahabad High Court judgment in the case of CIT v. U.P. Electronics Corpn. Ltd. [2005] 276 ITR 45 and Supreme Court judgment in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 432 and distinguished the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned DR argued stating that principle of res judicata applies to the matters relating the income-tax and every assessment must be decided independent of the others. Therefore, the opinion formed in respect of the assessment year 1999-2000 is applicable to the instant assessment year. Further, ld. DR outlined the significance of the relationship between the summary assessment under section 143(1) and the formation of opinion in view of the judgment in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra). Thus, the DR heavily relied on the orders of the revenue and the said judgments. 5. We heard both the parties on this issue of validity of jurisdiction and considered the facts of the case as well as the Apex Court judgment referred above. From the arguments, it is noticed that there are a couple of arguments of the counsel to be discussed here and they are (i) disclosure related submissions; and (ii) relevance of an opinion formed by the Assessing Officer for assessment year 1999-2000 for the purpose of initiation of reassessment proceedings for the assessment year 2000-01. Regarding the submissions relating to the full disclosure of the relevant details relating to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be allowed. His arguments in this regard are : (i) assessee's business is conducting scientific research and investing in joint ventures and the said research is related to that business; (ii) undisputedly, the outcome of such research is for the business of the subsidiary companies; (iii) the words 'related to business' used in clause (iv) of section 35(1) has wider connotation vis-a-vis the words 'for the purposes of the business' used in section 37 and, therefore, deduction should be available even in cases, where the assessee's business is doing scientific research for the business of the subsidiary companies of the assessee; and (iv) quoting the co-ordinate Bench decision dated 22-8-2007 in the assessee's own case for the assessment year 2001-02 vide ITA No. 8680/M/2004, where the Tribunal held that the assessee is not entitled to deduction under section 35 in respect of the capital expenditure incurred on scientific research, the counsel for assessee has taken us through the said order and argued that the said decision is deficient to the extent the decisions/judgments, say Vickers Sperry of India's case (supra), relied on by the assessee, were not distinguished in the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clause (ii) of sub-section (1) of section 32 for the same or any other previous year in respect of that asset; ****** Further, sub-section (4) of section 43 relating to "Definitions of certain terms relevant to income from profits and gains of business or profession" provides for the definition of "scientific research" and they are as follows : "43. (1) to (4) ****** (i)"scientific research" means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries; (ii)references to expenditure incurred on scientific research include all expenditure incurred for the prosecution, or the provisions of facilities for the prosecution, or scientific research, but do not include any expenditure incurred in the acquisition of rights in, or arising out of scientific research ; (iii)references to scientific research related to a business or class of business include-- (a)any scientific research which may lead to or facilitate an extension of that business or, as the case may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we find that an assessee may be engaged in a particular business and may also undertake the scientific research activity relating to that business and incur capital expenditure on such research. Alternatively, an assessee, as in the instant case, may be engaged in the scientific research activity as its business and by that activity, assessee may be catering to the said research needs of the business carried on by the other assessees, say the subsidiary companies. Whether the deduction under section 35 is available in all these cases. To resolve the same, we find that the Board's Circular No. 281, dated 22-9-1980, para 10.2 in particular, mentions that the section 35(1)(iv) provides for the deduction in respect of capital expenditure incurred on scientific research related to the assessee's business. Further, para 42 of the other departmental Circular dated 9-10-1967 is categorical in stating that the said deductions are aimed at providing the incentives for encouraging the scientific research in India and the assessee's who needs the outputs of the scientific research for their business. Thus, the relationship of the said capital expenditure has to be in connection with the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r connotation vis-á-vis 'for the purpose of the business' and, therefore, the benefits of section 35 must be available even when the assessee is engaged in the business of scientific research and such research is not used for the business carried on by the assessee. The perusal of the said judgment revealed that it was pronounced in the times when there was debate on the issue whether the assessee is entitled to depreciation claim under section 32 in the later previous years in respect of the expenditure already allowed under section 35 in a previous year. Though, in principle, the said judgment was nullified by a retrospective amendment brought in by the Finance (No. 2) Act, 1980 with retrospective effect from 1962 by inserting 'any other' in section 35(2)(iv) and denying any depreciation benefits in any other later previous years on use basis in respect of the capital expenditure on account of the scientific research already allowed in a previous year under section 35 of the Act. Further, the facts of the case of that Special Bench decision were that the assessee was carrying on the business of manufacture and sale of hydraulic equipments. The assessee incurred capital exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic research related to a business' in section 43(4) as under : (which is reproduced on page 8 of this order). ****** The inclusive definition clearly contemplates expenditure on scientific research to be in connection with the expansion of the business as distinct from in connection with the existing business. Therefore, the possibility that section 35 may cover expenditure on scientific research under clauses (i) and (iv) of sub-section (1) of section 35 also which may not be for the purposes of the business as such, cannot be altogether ruled out. In our view, the learned standing counsel for the revenue has perhaps this extended scope of scientific research in mind when he contends that the entire scheme of section 35 is for an expenditure incurred on a separate and fundamental scientific research and development unit, which cannot be treated as used for the purpose of the business so long as it is used for scientific research. In this view of the matter, we do not agree with the learned standing counsel for the revenue that 'expenditure on scientific research related to business' and 'used for the purpose of business' are two altogether different concepts. Nor do we agree wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness. In the present case, the business of the assessee itself was to carry out scientific research. The Hon'ble Special Bench, therefore, had no occasion to consider issues as to whether where a business of an assessee itself undertaking Scientific Research, deduction under section 35(1)(iv) was available. This aspect gets further strengthened by the observations in the first and second sentence of Para 6.3 and the italicised portion in Para 6.1 of the order of the Hon'ble Special Bench referred to above. We are, therefore, of the view that the decision of the Special Bench in the case of Vickers Sperry of India (supra) does not help the case of the assessee. D. In the light of the above discussion, we are of the opinion that the above judgment delivered in pre-amendment period is no longer good for the year under consideration. Consequent to our finding in the preceding paragraphs that the assessee's research is related to business of the subsidiary company and the scope of 'related to business carried on by the assessee' does not extend to the cases of business of the subsidiary company, the counsel's strong reliance on the said judgment is misplaced. 12. Next issue for delibe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to section 35(2)(iv) to suppress the effects of the Tribunal decision in the case of Vickers Sperry of India (supra). Consequently, the recent Co-ordinate Bench decision in assessee's own case for assessment year 2001-02 as discussed above is applicable and binding. Regarding the Assessing Officer's decision in thrusting of the depreciation under section 32 of the Act, in the facts and circumstances of the issue where the expenditure on plant and machinery and on computers is undisputedly capital in nature and the same assets were undisputedly owned and used for the business, we find Assessing Officer's decision is fair and found valid. Accordingly, the ground 2 of assessee's appeal is dismissed. 14. In the result of the appeal of the assessee is dismissed. ITA No. 6720/Mum./2006 for assessment year 2003-04 - Assessee's appeal 15. This is the Income-tax appeal filed by the assessee against the order of the CIT(A)-IX dated 5-9-2006. The ground reads as under :-- "The CIT(A) erred in upholding disallowance of expenditure on scientific research of Rs 1,00,93,770 claimed under section 35(1)(iv) of the Income-tax Act, 1961." 16. Ld. counsel for the assessee, at the very outset, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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