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TMI Blog2018 (11) TMI 1591X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 4. Jubilant Biosis Ltd 2759/D/18 2013-14 Penalty appeal 5. Jubilant Biosisn Ltd 2760/D/18 2014-15 Penalty appeal 6. Jubilant Chemsys Ltd 1824/D/18 2012-13 Quantum appeal 7. Jubilant Chemsys Ltd 1825/D/18 2013-14 Quantum appeal 8. Jubilant Chemsys Ltd 2757/D/18 2012-13 Penalty appeal 9. Jubilant Chemsys Ltd 2758/D/18 2013-14 Penalty appeal At the outset, Ld.Counsel submitted that, all grounds raised by assessee in quantum proceedings and penalty proceedings are similar and identical. It has also been submitted that facts in all Assessment Years are similar. For sake of convenience, Ld. Counsel submitted that ITA No.7302/Del/2017 for A.Y. 2011-12 may be taken as lead appeal. Ld. DR did not object to the request by Ld.Counsel. Grounds raised by assessee in ITA No.7302/Del/2017 are as under: "1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [CIT(A)] has grossly erred in directing the learned Assessing Officer [AO] to tax the entire gross receipts of ₹ 84,49,28,000 as the income of the appellant by disallowing entire revenue expenditure debited to Profit & Loss Account by holding it to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including depreciation and interest) and failed to appreciate that the appellant had produced complete information with regard to nature of expenditure incurred for earning income from various pharmaceuticals companies. 3.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding the aforesaid expenditure to be capital in nature without appreciating that no enduring benefit accrues to the Appellant and also that no asset of enduring nature was created during the year under consideration. 3.2. The learned CIT(A) has erred in making the above disallowance on surmises, conjectures and in complete disregard to facts of the case, evidence and material placed on record, thus, the order passed by the Ld. CIT(A) suffers from perversity and is untenable in law. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that on account of appellant doing research for the third party namely, Eli Lilly & Co and ownership of such research work being vested with Eli Lilly &Co., the appellant was not entitled to deduction u/s 80IB(8A) of the Act without appreciating that Appellant stood approved by the Prescribed Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 102,52,32,000/-, showing loss of ₹ 18,03,04,000/- was shown. Loss was worked out after adjusting depreciation and bonus paid for A.Y. 2010-11. Ld. AO also observed that assessee had approval from Department of Scientific & Industrial Research, and was entitled to claim deduction under section 80 IB (8A) of the Act. Ld.AO thus called upon assessee to furnish relevant details in respect of claims made by assessee in its accounts and computation of income. 2.1. Ld.AO observed that during year under consideration Jubilant Biosys Ltd., had contract with M/s. Eli Lilly and Co, USA. Assessee had entered into a separate contract with Jubilant Chemsys (sister concern of assessee), for rendering services to M/s. Eli Lilly and Co. Ld.AO observed that contract entered into by Jubilant Biosys Ltd., with its sister concern, Jubilant Chemsys, was for rendering services to M/s. Eli Lilly and Co., and payment of research fee amounting to ₹ 15,92,89,609/-has been made by Jubilant Biosys Ltd to Jubilant Chemsys. 2.2. It was also observed by Ld.AO that Jubilant Chemsys also rendered research services to M/s. Eli Lilly and Co., for which fees amounting to ₹ 21,28,77,244/- was rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT (A) for enhancement of income, neither expenses as to why proposed disallowances are warranted nor any reason or justification is specified why expenses incurred by assessee should be treated as capital in nature. Further, law requires show cause notice to be issued under a specific provision of law and not as a correspondence. This shows that requirement of issuing a showcause notice as per the provisions of section 251(2) of the Act is not met in light of Apex Court's ruling in case of Metal Forgings & Anr vs Union of India & Ors [Appeal (civil) 2029-31 of 1995] He thus submitted that Ld. CIT (A) failed to discharge statutory obligations casted upon him by provisions of section 251(2) of the Act, hence addition made on the ground that revenue expenses were to be treated as capital in nature is liable to be deleted. In addition to the above, Ld.Counsel submits that as specifically stated in the Grounds of Appeal, the expenditure amounting to INR 102,52,32,000/- was never in question and did not form subject matter of appeal nor assessee had raised any ground on same. Hence, enhancement of income by Ld. CIT(A) is illegal and invalid and beyond his powers. The Ld. CIT(A) c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und in appeal. In the absence of any statutory provision, the general principle relating to amplitude of appellate authority is, power being co-terminus with that of Assessing Officer should normally be applicable." 5.4. Ld.Sr DR submitted that ratio that emerges out of decisions relied upon by Ld.Counsel passed by Hon'ble Supreme Court and various High Courts is that, Ld.CIT (A) is not vested with powers of enhancement in respect of "new source" of "income", and assessment has to be confined to those items of income, which were subject matter of original assessment. 5.5. He submitted that all decisions are distinguishable factually, vis-a-vis present facts of case. Enhancement notice in present case has been issued by Ld.CIT(A) in relation to expenditure claimed by assessee for earning income, which was subject matter of assessment. He submitted that there is no "new source" of "income", which has been raised in notice issued to assessee for enhancement by Ld.CIT (A), and same deserves to be upheld. 6. We have perused submissions advanced by both sides in the light of the records placed before us. 7. At this juncture, we refer to following commentary by Kanga and Palkhivala on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. ITO 99 ITR 236 5. 44 ITR 891 6. 66 ITR 443 7. Sneh Lata vs. CIT 61 ITR 139, 143 (1), CIT vs. Jagdish 51 ITR 266 (2), Prabhudas vs. CIT 62 ITR 621(3), CIT vs. Chaganlal 148 ITR 7 (4), Lokenath vs. CIT 161 ITR 82 (5), CIT vs. Nirbheram 127 ITR 491 (6), 8. We also refer to decision of Hon'ble Bombay High Court in case of Shapoorji Pallonji Mystery vs CIT (which has been affirmed by Hon'ble Supreme Court in 44 ITR 891, referred to herein above). Hon'ble Bombay High Court clarified that "Source" of income would not mean "source" in sense of head of income as used in the Income Tax Act, but would mean a specific source from which a particular income/expenditure sprang or arose. Hon'ble Court held as under: "Therefore, it is clear that what we meant by "source" was not source in the sense of head of income as used in the Income-tax Act. By "source" what we meant was the specific source from which a particular income sprang or arose. The Supreme Court had to consider this judgment very recently and, with respect, it has approved of our judgment in Narrondas Manordas's case (supra) and it has itself deduced the principle which emerges from this judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessment year; and the opinion then expressed by him was that this payment could not be treated as a business receipt. Now, if his successor had expressed the same opinion for the assessment year 1947-48, then undoubtedly the Appellate Assistant Commissioner could have refused to accept that opinion and brought this amount to tax. In our opinion, therefore, it is clear that, under the circumstances of this case, the Appellate Assistant Commissioner was not competent to enhance the assessment of the assessee for the assessment year 1947-48 by a sum of ₹ 40,000." Hon'ble Court hereinabove held enhancement notice to be invalid, for reason that, "receipt" that was considered for purposes of taxation in notice of enhancement issued by Ld. CIT (A), in aforestated case, did not fall in Assessment Year, that was under consideration and therefore amount did not form part of assessment record before Assessing Officer. 8.1. Similar is the view propounded by Hon'ble Supreme Court in case of CIT vs. Rai Bahadur Hardutory Motilal Chamaria reported in 66 ITR 443, Full Bench decision of Hon'ble Delhi High Court in case of CIT vs. Sardari Lal & Co reported in (2001) 251 ITR 864, decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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. 10.4. Accordingly Ground No. 1-2.4 raised by assessee stands dismissed. 11. Ground No. 3-3.2 is in respect of disallowance of expenditure amounting to ₹ 102,52,32,000/- holding it to be capital in nature. 12. Ld.Counsel submitted that Ld.CIT(A) disallowed entire expenditure by holding that research activity carried on by assessee has resulted in enduring benefits to assessee. He submitted that while doing so, Ld.CIT(A) examined various definitions of the term "research" to arrive at the conclusion that the activity pertains to enhancement of cumulative knowledge of human civilisation and, therefore, cost of research done by assessee resulted in long and enduring benefit, which cannot be held as revenue expenditure. Ld.Counsel submitted that Ld. CIT (A) failed to appreciate that assessee is in the business of research and informatics services for drug discovery units based upon Insilco Solutions. It has been submitted that assessee provides discovery informatics products and services and collaborative d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure 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 Hon'ble Supreme Court in case of Empire Jute Company Ltd vs. CIT reported in (1980) 124 ITR 1, wherein Hon'ble Court 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 also referred to Clause 5.1 of agreement at page 109 of paper book, wherein assessee has to ensure that it is able to carry out its obligations under contract, wherein the ownership of inventions of research services under agreement was to be retained by Eli Lilly and not by assessee. 17. 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. 18. Accordingly ground No. 3-3.2 raised by assessee stands allowed. 19. Ground No. 4-4.1 is in respect of deduction under section 80 IB (8A) of the Act being denied to assessee. 20. Ld.Counsel submitted that assessee has been granted approval by Department of Scientific and Research, Ministry of Science and Technology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in assessee's own case for A.Y. 2010-11 and 2011-12 vide order dated 12/09/18, a copy of which is placed before us at pages 1-20 of paper book. 27. Ld.CIT DR though opposed submissions advanced by Ld. Counsel, could not controvert the fact that issue decided by this Tribunal in assessee's own case for immediately preceding A.Y. were on identical facts and circumstances. 28. We have perused submissions and rival contentions of both sides based upon records placed before us. We have also perused order passed by this Tribunal in assessee's own case for A.Y. 2008-09, 2009-10 and 2010-11 (supra). 29. It has also been observed that agreement based upon which, services has been rendered by Jubilant Biosys Ltd., to Jubilant Chemsys are also same. On perusal of assessment orders and records for immediately preceding A.Y. placed in the paper book before us it is observed that Ld.A.O., made similar addition in hands of assessees on similar facts and circumstances. We therefore do not find any reason to deviate from view taken by this Tribunal in assessee's own case for A.Y. 2008-09, 2009-10 and 2010-11 (supra). On careful perusal of order passed by this Tribunal, it is observed that the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve earned profit of Rs.l10/- from such transaction because of its connection with, the other enterprise, then, it is the excess of ₹ 10/-, which can be disallowed. Ergo, in any event, the Assessing Officer needs to bring on record some material to indicate ordinary profit, which is then compared with the profit declared by the assessee resulting from its transactions with the connected assessee so as to trigger this provision. 7. When we advert to the facts of the instant case, it turns out that the Assessing Officer simply invoked the provisions of section 80IA(10) and disallowed deduction for the entire receipt of ₹ 2.32 crore, without showing in any manner the ordinary profit which might have resulted if there had been no connection between the assessee and JB. Page 67 of the paper book is a copy of invoice raised by the assessee on JB. This invoice is dated 31.05.2007. The description given in the invoice is '(P035) FTE Charges for service provided by 32 FTEs.' The unit rate has been given as USD 1 lac at page 133 of the paper book is another invoice which the assessee raised on Eli Lilly & Co., USA. Description given in the invoice is '(P035) FTE Charges for serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m higher deduction. In our considered opinion, that the Ld.CIT(A) took an unimpeachable view on the issue by deleting the addition of ₹ 2.32 crore made by the Assessing Officer. 9. In so far as the appeal of the Jubilant Biosys Ltd., is concerned, the grievance of the Revenue is to the effect that the ld. CIT(A) erred in allowing expenditure of ₹ 2.32 crore for which payment was made to JC. The Assessing Officer, vide his order dated 29.12.2010 referred to the facts noted in the case of JC. Here also, he reproduced section 80IB(13) read with section 80IA(10) and, eventually, laid down that the course of business was arranged between JB and JC in such a way so as to produce more than ordinary profit in the hands of JC. He, therefore, disallowed payment made by the assessee to JC amounting to ₹ 2.32 crore. The Id. CIT(A) deleted the addition. 10. In view of our findings given in the case of JC by which we have upheld the impugned order in deleting the addition of ₹ 2.32 crore, the consequential effect in the instant appeal is that such an expenditure has to be allowed as deduction in the hands of JB. We, therefore, uphold the impugned order. 11. In the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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