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TMI Blog2012 (6) TMI 471X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in the return of income, it was also not made during the course of assessment proceedings. The facts relating to that deduction have also not been shown to be existing on record. Ld. CIT(A) without considering this aspect has directed the AO to examine the claim of the assessee in accordance with law. When the facts regarding such deduction were not available on record and the ground was also not arising out of assessment order, CIT (A) has committed an error in entertaining such ground. ground of the revenue is allowed. appeal filed by the revenue is partly allowed - ITA No. 2111/Del/2010 - - - Dated:- 17-6-2011 - ORDER PER I.P. BANSAL, J.M. This is an appeal filed by the revenue. It is directed against the order passed by ld. CIT (A) dated 24.02.2010 for A.Y. 2006-07. Grounds of appeal read as under: - 1. That on the facts and circumstances of the case and in law the ld. CIT(A) erred in deleting the addition of Rs. 7,10,95,947/- made by the AO on account of disallowance of expenditure on R D being capital in nature. 2. That on the facts and in the circumstances of the case, the ld. CIT(A) erred in directing the AO to allow the deduction u/s 80IB of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d miscellaneous expenditure . 5. In the impugned assessments, the AO has disallowed the claim of the assessee of sum of Rs. 7,10,95,947/- being on account of revenue expenditure and has treated the said amount as capital expenditure. The reason for disallowance given by the AO is that the said amount has been shown under the head miscellaneous expenditure in the balance sheet, therefore, it is a capital expenditure. According to AO the assessee itself has classified the said amount as capital in nature in its audited balance sheet. Once expenditure as has been identified and classified as capital in nature, based on its purpose and intent the non-approval by DSIR does not change the character of the expenditure as revenue. There is no provision in the Income Tax Act to say that if expenditure is not approved, the same shall constitute revenue in nature. In the audited account also these expenditures have been identified as capital expenditure, therefore, the nature of expenses being capital is undisputed. An auditor s opinion on the quantum of capital expenditure is not dependent upon result of approval of DSIR. The assessee has failed to adduce any evidence or any certificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of R D lab trial and to scale up of technology. 4. Other expenditure directly related to R D Rs. 106.77 lac This expenses comprises of amount incurred for technical consultancy!assistance, Registration of product, for contribution to national laboratory etc. 7. The reply of the assessee vide letter dated 20.12.2008 was as under: - During the F. V. 2005-06 the company has incurred the total of Rs. 7,82,53,487/- on scientific research and development under the following heads of accounts: (A) Capital Expenditure (B) Salary Wages (C) Materials/consumables/spares (D) Other revenue expenditure and weighted deduction is admissible u/s 35(2AB) @ 150% but limited to taxable profit before deduction u/s 35(2AB). The company has capitalized all the expenditure incurred. The capital expenditure has been shown in schedule of fixed assets and revenue expenditure such as salary and wages, material/consumables/spares under the head miscellaneous expenditure on the assets side in the balance sheet. In fact all these expenditure are of revenue nature and should be charges to profit and loss account but has been shown under miscellaneous expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the claim of the assessee regarding a sum of Rs. 7,10,95,947/- on account of its being revenue expenditure is not acceptable and he has added the said amount to the income of the assessee and the AO has assessed the income of the assessee at Rs. 7,71,46,764/-. Since tax payable under normal computation was more, the book profit computed by the assessee was ignored. 10. The addition was contested before CIT (A). An additional ground of appeal was filed before CIT (A) in which the assessee had claimed that without prejudice to its claim of the aforementioned amount as revenue expenditure the expenditure is otherwise allowable u/s 35(1) (i) of the Act being in the nature of revenue expenditures, laid out or expanded on Research Development related to the business of the assessee company. It was pleaded that additional ground should be admitted as all the facts needed are available on record and the ground is purely legal one. Ld. CIT(A) has admitted the additional ground of the assessee and has thus, examined the claim of the assessee for allowability or otherwise of aforementioned amount under both the sections namely 37(1) and 35(1)(i). The assessee also filed written submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Salaries and Wages 19.57 (B) 631.35 Registration of products in various countries 2.57 Fee for Technical assistance 104.20 (C) 106.77 Total Revenue Expenditure (B+C) 738.12 Grand Total (A +B+ C) 782.53 13. Ld. CIT (A) has held that accounting entry in the books of account of the assessee or for that matter how it has been shown in the balance sheet or profit and loss account is of no consequence in determining that whether it is an allowable deduction or not and reference in this regard has been made to the decision of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT 227 ITR 172 (SC). He held that the expenditure having been incurred on R D and they being in the nature of revenue could not be held of capital in nature even though they are described as deferred revenue expenditure in the balance sheet filed by the assessee. He held that nomenclature used by the assessee is deferred revenue expenditure which would mean that it talks about revenue expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. But they cannot be ignored altogether. Therefore, time for completion of trial runs of medicines lost its relevance and the principles of enduring benefit break down. 16. Ld. CIT (A) has further held that incurrence of expenditure at all is not doubted by the AO. The findings of AO that R D expenses are in the nature of capital are based on suspicion, surmises and conjunctures. Therefore, entire expenditure of Rs. 7,38,11,965/- are genuine expenditure incurred by the assessee. The DSIR has allowed Rs. 27.16 lakh for weighted deduction out of entire revenue expenditure of Rs. 7.38 crore. The balance expenditure of Rs. 7,10,95,947/- is also in the nature of revenue and constitute aggregated sum of Rs. 6,11,77,948/- incurred towards material costs etc., Rs. 19,56,784/- on salary and wages and Rs. 1,06,77,233/- incurred for getting registration of products in other countries or towards obtaining technical know-how fee for producing new drugs etc. Ld. CIT(A) has observed that he had called for and perused the agreement of the assessee company and Ind. Swift Ltd. for transfer of technical know-how. The AO did not give any adverse comment on this issue in the remand report. Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not restricted to the year under consideration but it was to spread over for many years. These were expenditure incurred on in-house Research Development once and for all with a view to bring into existence an asset or advantage for the enduring benefit to the assessee. The assessee itself has classified these expenditure as capital in nature in its audited balance sheet and if once expenditure has been identified and classified as capital in nature, based on its purpose and intent, the non-approval by DSIR does not change the character of the expenses from capital to revenue and there is no provision in the Income Tax Act to change the capital expenditure on non-approval by DSIR into revenue expenditure. In the audited accounts the expenditure has been identified as capital expenditure and, therefore, the nature of these expenditure being capital is undisputed. The assessee also failed to adduce any evidence or any certification from DSIR that said unapproved balance is revenue expenditure. Ld. DR further submitted that an amount of Rs. 6,11,77,948/- shown by the assessee being incurred on Research Development Lab trial is incurred mainly on the material/chemicals/consumab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the product become cost effective. For that purpose assessee has carried out in-house Research facility and necessary documentation were done to have approval from the prescribed authority i.e. DSIR under the provisions of sec. 35(2AB) so that assessee may get weighted deduction provided under that section to the extent of 150%. The norms fixed by DSIR are stiff and, therefore, assessee was unable to get such approval with regard to entire expenditure incurred by the assessee and it got partial approval on which the assessee had claimed weighted deduction u/s 35(2AB) which has been allowed by the AO and on the said amount there is no dispute. He submitted that what was capital in nature has already been classified as capital and depreciation has been claimed upon that. On the balance expenditures which are revenue in nature the assessee has claimed them u/s 37(1) of the Act in the revised return. He submitted that otherwise those expenses having been incurred on Research Development facilities also fall under the provisions of sec. 35(1)(i) of the Act for which an additional ground was raised by the assessee before ld. CIT(A) and AO in his remand report did not object for admissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In case of the appellant, no capital asset has come into existence. The business has been in existence since long. The existing medicinal products are being improved and new products are being created for facilitating the assesse s trading operations. Hence, the expenditure is revenue in nature. (ii) Alembic Chemical Works Co. Ltd. (1989) 177 ITR 377 (SC) a. Expenditure on improved process of fermentation with new penicillin producing strains, isolated and developed by Meiji so as to increase the unit yield of penicillin per milliliter of the culture medium. b. The improvisation in the process and technology in some area of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The financial outlet was for the better conduct and improvement os existing business and should, therefore, be held to be revenue. c. What is material to consider the nature of advantage in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for enlarging the range of its existing products and acquired the right to use the technology of manufacture of a new product in the same line of business. The expenditure was allowed as revenue on the ground that the assessee had only enlarged the range of its existing products and the expenditure was an outlay of business in order to carry it on to earn better projects. (vii) The Mumbai Tribunal in the case of Arlabs Lid. 5 SOT 749 held that expenditure towards research and development for carrying out modification and addition with a view to produce new items was allowable as revenue expenditure. Hence, the power, fuel and interest expenditure incurred were allowed. (viii) USV Lid. 106 TTJ 585 (Mum.) Expenditure incurred for information regarding clinical data, scientific details and valuable market information was allowed as revenue expenditure. 24. Thus, it was pleaded by ld. AR that the claim of the assessee has rightly been allowed by ld. CIT (A) and his order should be upheld. 25. With regard to second ground he submitted that there is nothing wrong in the order of CIT(A) when he has directed the AO to recompute the income of the assessee as per appeal effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35(1) (i) of the Act and, alternatively it is allowable u/s 37(1) of the Act. To examine such contention it will be relevant to reproduce section 35(1)(i), which read as under: - [Expenditure on scientific research. 35. (1) In respect of expenditure on scientific research, the following deductions shall be allowed (i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. [Explanation Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of any salary [as defined in Explanation 2 below sub-section (5) of section 40A] to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or expended within the three years immediately preceding the commencement of the business shall, to the extent it is certified by the prescribed authority to have been laid out or expended on such scientific research, be deemed to have been laid out or expended in the previous year in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditures has been incorporated at page 46-47 of the page. The narration given is details of material used for lab trials for process development . These are in the nature of 7-ACA, 6-APA, Acetonitrile, Ammonia, Activated Carbon, AMF SMIA, Acetone, Dry Ice, Caustic Soda, ACETIC ACID, Pavlic Acid, Pencillin G, PCL 5, etc. All these items are in the nature of material/consumables in the process of R D. It is not the case of the AO that the said material was not consumed in the R D process and some part thereof was remaining in the closing stock. Therefore, this expenditure incurred on material used for lab trials cannot in any manner be considered as expenditure being in the nature of capital. The next item is other expenditure directly related to R D . The details of this expenditure are incorporated at page 48 of the paper book. It is under the head details of other expenditure directly related to R D . With regard to these expenditure the finding of fact has been recorded by ld. CIT (A) that these have been incurred by the assessee for registration of products in other countries or towards obtaining technical know-how fee for producing new drugs etc.. He has recorded in his ..... X X X X Extracts X X X X X X X X Extracts X X X X
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