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TMI Blog2014 (6) TMI 630X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act and also deduction u/s. 35(1)(i) of the Act. The claim of deduction u/s. 35(2AB) was allowed by the Assessing Officer. However, the claim of deduction u/s. 35(1)(i) was disallowed on the reason that this relates to payment of interest on loan and cost of consumables. This is in the nature of capital expenditure and not relating to scientific research undertaken by the assessee and also the sam e was capitalised by the assessee in its books of account. It is true that entries in the books of account are not conclusive when it comes to computing income under the Income-tax Act, 1961 but it cannot be said that they are totally irrelevant. In the present case, the dispute is as to whether the assessee will get the benefit of deduction u/s. 35(1)(i) or not. 20. The learned counsel for the assessee also submitted that as per section 35(1)(iv) of the Act deduction in respect of any expenditure of a capital nature on scientific research relates to the business carried on by the assessee is to be allowed in the year in which such expenditure is incurred. The whole of the capital expenditure incurred in a previous year is allowable as deduction against the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntific research, even if incurred prior to commencement of business. The provisions allow for deduction of scientific research expenditure if the assessee is engaged in the business of scientific research and carries out such research in connection with its business. However, in the instant case, the assessee-company was engaged in development of vaccines and bio-pharmaceuticals. Therefore, when an expenditure incurred on interest payment and consumables before completion of product development of a product and commercialisation of that product, the expenditure incurred on such development is to be treated as capital expenditure only. 23. Further, the plain reading of the above cl. (iv) of s. 35(1) reveals that the deduction shall be admissible under s. 35(2) when any expenditure is capital in nature; such capital expenditure is incurred on the scientific research; that scientific research must be related to the business; and that business must have been carried on by the assessee. Further, said clause presumes that there exist two distinct activities with the assessee such as: (a) business carried on by the assessee; and (b) conducting scientific research relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tific research related to the assessee's business. Further, para 42 of the other Departmental Circular dt. 9th October, 1967 is categorical in stating that the said deductions are aimed at providing the incentives for encouraging the scientific research in India and the assessees who need the outputs of the scientific research for their business. Thus, the relationship of the said capital expenditure has to be in connection with the assessee's business. Further, we find that the said provisions of ss. 35(1)(iv) and 35(2)(iv) are unambiguous in matters of their language meaning and intention and there is no need to supply additional words. In our opinion, the deduction under s. 35 is not intended to the assessee, who does not develop the in-house scientific research activities. Further, the presence of specific references to 'related to business carried on by the assessee' in the provisions and the inclusive definition given to the same in s. 43(4)(iii)(a), convey that it is not a case of casus omissus too. 24. In the light of the above scope of the provisions, we examined the facts of the case and the arguments of the assessee's counsel that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; "in the present case, the expenditure claimed by the assessee as deduction has nothing to do scientific research. On the other hand, it was incurred for setting up of facilities for commercial production of a new product. On the other hand, it was incurred for setting up of facilities for commercial production of a new product. In such circumstances, the assessee, in our considered opinion, cannot be said to have carried on scientific research activity. Further, it is also not the case of assessee that he is covered by s 43(4)(iii)(a) i.e. the case of scientific research which may lead to facilitate an extension of business. Thus, by incurring this expenditure the assessee generates a marketable product or stock in trade. In these circumstances, we are of the opinion that the provisions of section 35 (1)(i) or (iv) have no application to assessee's case and accordingly the argument of the assessee's counsel is dismissed." 5. The AR submitted that, with the above assumptions the Tribunal held that the assessee is not eligible for deduction u/ s 35 (1) (vi) of the IT Act also, as the assessee is not carrying scientific research activity. In this regard it is respectfull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... protocols developed scientific team who are involved in product development by a specifically trained Medical Personnel. On successful completion of phase-1 clinical trials, phase-2 clinical trials are conducted at the allotted hospitals to check the efficacy of the product after obtaining permission from the Appropriate Authorities. Once the product is successful in Phase-2 trial, the same is taken for Phase-3 trial, being conducted on a larger group of volunteers. On successful trials and rectifications at appropriate stages the product would be commercialized if it is feasible to produce the same commercially. It is pertinent to submit that the product may prove to be a failure at any stage including the stage of commercialization. Therefore, it is submitted that the entire process of development from the stage of isolation of virus / molecule and establishing the same as fit for further development of product at pilot scale to commercial scale involves very long and in-depth scientific research. 6. The AR submitted that the Assessing Officer has not alleged that the activity of development from the stage of virus / molecule to the stage of vaccine is not Scientific Research. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the observation of the assessing officer, we respectfully submit that, the assessee is in the business of selling human vaccine developed through its extensive research and development work or collaborative research work, as this being the standard process adopted by various Biotech companies for commercialization of the each product to extent/ expand its line of business. At no point of time, the assessee is involved directly selling its research outcome to a third party as technology transfer, the assessee always used the outcome of Research and development for manufacturing and selling of human vaccines, therefore, the Tribunal is pleaded to recall the order in respect of allowability of deduction u/s 35 (1)(iv) of the IT Act and also pleaded to allow the claim of deduction u/s 35 (1)(iv) of the IT Act. 8. The AR further submitted that the learned Assessing Officer for the assessment year 2006-07 & 2007-08 observed as the assessee's contention that the expenditure incurred on specific product development is in the nature of research expenditure cannot be accepted. Subsequently the learned Assessing Officer also observed as the expenditure incurred by the assessee is towa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the Tribunal which power the Tribunal does not have. Being so, the same is to be rejected. 11. We have heard both the parties and perused the material on record. On examination of order of the Tribunal dated 31.7.2013, it is found that the Tribunal recorded the facts relating to the issue involved in the appeals of the Revenue as well as the case-law on which reliance was placed by the parties, have been duly considered. Hence no apparent mistake in relation to facts is found in the order of the Tribunal. The Tribunal, after clearly narrating the relevant facts in its order and also recording the submissions of both the parties and case-law on which reliance was placed by them, reached to the conclusion on the issues in favour of the Department and against the assessee. Hence, the allegation of assessee's counsel that the Tribunal omitted to deal with the contentions of the assessee and there was a mistake of facts, is not correct. The AR of the assessee has not been able to point out any material evidence which has been ignored or any other omission on the part of the Tribunal while deciding the issue relating to the treatment of deduction u/s. 35(1) of the Act. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the above discussion, we are inclined to hold that there is no merit in the above argument of the assessee's counsel. Accordingly, this argument of the assessee's counsel is rejected subject to our finding hereunder with regard to application of provisions of section 35(3) of the Act. 14. Further, it is submitted by the AR that the AO has not followed the correct procedure laid down in section 35(3) while disallowing the claim. The relevant part of the section i.e. section 35(3) is produced here under: "S. 35(3) If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to- (a) the Central Government, when such question relates to any activity under clauses (ii) and (iii) of sub-section (1), and its decision shall be final; (b) the prescribed authority, when such question relates to any activity other than the activity specified in clause (a), whose decision shall be final.]" 15. If any question arises und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts can be maintained by the Tribunal despite the fact that the assessee failed to agitate and assert such rights before the Tribunal by filing a cross appeal or cross objection. On this issue, the parties have advanced arguments in relation to the powers of ITAT. In the context of controversy relating to power of the Tribunal, as argued before us, we consider it proper to refer to the relevant statutory provisions contained under section 254, which are as under: "254(1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. 254(2) The Appellate Tribunal may, at any time within four years from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it under sub-section (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the assessing, officer." 19. So far as section 254(1) is concerned, for a proper understanding of this provision, the meaning of the words "pass such orders thereon as it thinks fit", require interpretation in the context of legislative int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se on the basis of such enquiry." (c) The Hon'ble Supreme Court also explained the scope of Rules 12 and 27 by observing as under: "Rules 12 and 27 of the Appellate Tribunal Rules, 1946, are not exhaustive of the powers of the Tribunal. They are merely procedural in character and do not, in any way, circumscribe or control the power of the Tribunal under section 33(4)." (d) In the case of S.N. Swarnammal v. CED (1973) 88 ITR 366 (Mad), it was observed by the Hon'ble Madras High Court that an appeal before the Appellate Assistant Commissioner /Appellate Tribunal is of rehearing and the appellate authority has got all the powers of assessing authority. (e) The issue relating to powers of Appellate Tribunal was again examined by the Hon'ble Supreme Court in the case of Jute Corpn. of India Ltd v. CIT (1990) 53 Taxman 85 (SC). In this case, reversing the decision of Hon'ble Calcutta High Court in the case of Jute Corpn. of India Ltd. v. CIT (1981) 131 ITR 412 (Cal), the Hon'ble Supreme Court observed as under: "An appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only question is whether the Tribunal is bound to take note of the provision contained in sub-section (1A) of section 214 and to apply the same while deciding the quantum of interest. The said provision was there in the statute when the question came up for decision before the Tribunal. Even though the assessee did not specifically refer to sub-section (1A), we cannot say that the Tribunal can ignore the said provision when taking the decision. We are of the view that the Tribunal ought to have considered and referred to the said provision. It is the duty of the Tribunal to consider the law as it existed then even though the assessee failed to bring it to its notice. The Supreme Court in CIT v. Mahalaxmi Sugar Mills Co. Ltd (1986) 160 ITR 920 (SC) observed thus: "In the second place, there is a duty cast on the Income Tax Officer to apply the relevant provisions of the Indian Income Tax Act for the purpose of determining the true figure of the assessee's taxable income and the consequential tax liability. Merely because the assessee fails to claim the benefit of a set off, it cannot relieve the Income Tax Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the statute. Furthermore, being a judicial body, it has all those incidental and ancillary powers which are necessary to make fully effective the express grant of statutory powers. Certain powers are recognized as incidental and ancillary, not because they are inherent in the Tribunal, nor because its jurisdiction is plenary, but because it is the legislative intent that the power which is expressly granted in the assigned field of jurisdictional is efficaciously and meaningfully exercised. The powers of the Tribunal are no doubt limited. Its area of jurisdiction is clearly defined but, within the bounds of its jurisdiction, it has all the powers expressly and impliedly granted. The implied grant is, of course, limited by the express grant and, therefore, it can only be of such powers as are truly incidental and ancillary for doing all such acts or employing all such means as are reasonably necessary to make the grant effective." 22. In view of the above decision, the doctrine of incidental or implied power has been recognized for the exercise of powers by the Appellate Tribunal. On the same logic it can be said that the Income Tax Appellate Tribunals which has wide powers in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner (Appeals). Both the assessee as well as the department have a right to file an appeal/ cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as referred to above, it is the duty of the Tribunal to consider the subject-matter of the appeal and pass 'such orders' as are required to adjudicate the subject-matters before it. If for adjudicating various aspects of the subject-matter or matters incidental thereto, an order or direction is required to be issued, then, 'such order' or 'directions' are legally justified in view of the provisions contained under section 254(1) of the Income Tax Act. 31. It may also be pointed out that Rules 11, 27 and 28 of the Appellate Tribunal Rules also regulate power and procedure to be exercised by the Tribunal. Rule 28 of the Appellate Tribunal Rules also justifies directions for remanding the matter, if the same is called for. Thus, where particular issue has been omitted to be considered or has not been adjudicated properly or where perverse findings have been recorded in total disregard of the material on record, the Tribunal is competent enough to set aside the order of the lower appellate authority to that extent, although no specific ground is taken for that purpose by the concerned party. Thus, in a given situation, firstly, there is an obligation on the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble High Court: "Whether, on the facts and in the circumstances of the case, the Tribunal having reversed the order of the Commissioner (Appeals) on preliminary point, was the Tribunal not required to restore the matter to the file of the Commissioner (Appeals) for deciding other grounds on merits, which had not been decided by the Commissioner (Appeals) in the first round?" 34. The Hon'ble High Court after considering the relevant facts observed as under: "Held, that it was apparent that the assessee had at no stage given up its right of appeal which was available under the statute. In fact the assessee had challenged the addition and disallowance made by the assessing officer on the merits before the Commissioner (Appeals). However, the Commissioner (Appeals) having entertained the additional ground regarding validity of the assessment order and upheld the same holding the assessment order to be non-existent in the eyes of law, there was no occasion for the assessee to file any cross-objection in the revenue's appeal before the Tribunal. Once the Tribunal had come to the conclusion that the assessment order had been signed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Supreme Court by observing as under: "It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute." 39. On examination of the scope of jurisdiction of Income Tax Appellate Tribunal in deciding the appeals and miscellaneous applications under sections 254(1) and 254(2) of the Act and on the analytical appreciation of the propositions laid down in various decisions in relation to the powers of the Tribunal referred to above, we can cull out the following postulates : (1) The power of Tribunal as defined under section 254(1) has been expressed in widest terms as the Tribunal can pass 'such orders as it thinks fit on the subject-matter of appeal before it. (2) In hearing and deciding the appeal, the Tribunal is not prevented from considering questions of law arising in assessment proceedings although not raised earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready adjudicated by the Tribunal, the omission or error on the part of ITAT can be corrected or rectified by amending and adding something to it without subtracting anything from the main order. (12) There is legal obligation on the part of ITAT to rectify errors committed by the authorities below even if neither party objects to such mistake. Such obligation can be discharged by exercising jurisdiction suo motu also. Kapurchand Shrimal v. CIT (1981) 131 ITR 451 (SC). (13) If a mistake is found in the order of ITAT, then such mistake can be rectified by amending the order in the course of deciding the miscellaneous application itself and the order of ITAT need not be recalled for this purpose. (14) A mistake arising as a result of subsequent interpretation of law by Hon'ble Supreme Court and of Hon'ble Jurisdictional High Court, would constitute a mistake apparent from the records and rectifications action under section 254(2) of Income Tax Act would be in order. 40. On application of the above postulates, it is found that there was a legal obligation on the part of Tribunal to restore the subject-matter to lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent amendment of the provisions of law with retrospective effect, but to correct a particular mistake or error in the order which in law may be required to be rectified. It is a case where the Tribunal sought to rectify the order so as to bring it in conformity with the law and the circular of the Department, which was not considered properly. This power of rectification of mistake is executed for the ends of justice. The provisions of s. 254(2) could not be construed in a manner which would produce an anomaly or otherwise produce an irrational or illogical result. The primary aim of legal policy is to do justice. It must be assumed that Parliament does not intend to do injustice or to allow a wrong thing to continue contrary to law or public policy. Accordingly, applying the above principles, it cannot be said that the Tribunal, in the instant case, wanted to exercise its power of review. No fresh material was sought to be considered and the Tribunal did not intend to change its view earlier taken. It is a case where the Tribunal was of the view that a particular statutory rule and the circular of the Department which is binding upon the Tribunal, had not been considered w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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