M/S. BHARAT BIOTECH INTERNATIONAL LTD. Vs. THE DCIT
LAWS(IT)-2014-5-124
INCOME TAX APPELLATE TRIBUNAL
Decided on May 30,2014

M/S. Bharat Biotech International Ltd. Appellant
VERSUS
The Dcit Respondents

JUDGEMENT

Chandra Poojari, Member - (1.) BY the above Miscellaneous Applications (MAs) the assessee is seeking rectification/recall of the Tribunal order dated 31.07.2013 in ITA Nos. 392/Hyd/2010, 632/Hyd/2011 and 310/Hyd/2012.
(2.) ON earlier occasion, in this case, the Revenue came in appeal before this Tribunal. The Tribunal vide order dated 31.07.2013 allowed the appeals of the Revenue and rejected the claim of the assessee u/s. 35(1) of the Income -tax Act, 1961 by observing as follows: 19. We have heard both the parties and perused the material on record and also gone through the case-law cited by the rival parties. The assessee in this case is engaged in the business of development of vaccines and bio pharmaceuticals. The assessee claimed deduction u/s. 35(2AB) 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 same 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 income, if any, for that previous year. The definition of the term "scientific research" as per section 43(4) of the Act is as follows: (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 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 be, all businesses of that class; 21. It is the plea of the assessee that even if the expenditure is considered as of capital nature the same should be allowed as deduction u/s. 35 provided such expenditure is incurred on scientific research. According to the AR, if the expenditure is not allowable u/s. 35(1)(i) then the expenditure is nothing but scientific research and development expenditure and, therefore, allowable u/s. 35(1)(iv) of the Act. U/s. 35(1)(iv) deduction is to be allowed in respect of any expenditure of capital nature on scientific research relating to business carried on by the assessee. The business carried on by the assessee in the present case, cannot itself be considered as research and development. It is not the purpose of section 35(1)(iv) to allow such deduction. In the present case, the business of the assessee was developing vaccines and bio -pharmaceuticals. Any expenditure incurred in doing so cannot by itself fall within the parameters of section 35(1)(iv) of the Act. The allowability of such expenditure will be governed by the provisions of section 37(1) of the Act because there is no other provision under Chapter IV in section 28 to 44 of the Act under which allowability of the expenditure can be considered. 22. Further, we make it clear that u/s. 35(1)(i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research relating to the business of the assessee should be allowed as deduction. Explanation below section 35(1)(i) further provides for allowing even the expenditure on payment of salary and purchase of materials for use in scientific 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 related to the said business. Both these activities must relate to each other. Further, the words 'carried on by the assessee' used in the said clause shall mean 'to continue by the assessee', or 'to engage in the activity' by the assessee. Therefore, effectively, these words indicate the engagement of the assessee in the business. What is the definition of 'scientific research' and what is 'scientific research related to a business' are defined, whereas the former one is an exhaustive definition, latter one is inclusive definition. As there is no dispute on the term 'scientific research', the present discussion restricted to 'scientific research related to a business', an area of dispute between the parties. 'Scientific research related to a business' when read in conjunction with the cl. (iv) of s. 35(1), the words 'carried on by the assessee' assume importance. Consequently, the scientific research related to a business carried on by the assessee should be read to restrict the scope of the deductions. Consequently, the deduction is not available when the scientific research relates to a business not carried on by the assessee. The nexus between the scientific research on one side and its relationship with the business carried on by the assessee on the other side assumes great significance. The reference to 'scientific research related to a business' in s. 43(4)(iii)(a) is defined to include the cases of scientific research, which may 'lead to or to facilitate an extension of that business' and the words 'that business' refer to the business of the assessee. Further, 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 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. Whether the deduction under s. 35 is available in all these cases. To resolve the same, we find that the Board's Circular No. 281, dt. 22nd September, 1980, para 10.2 in particular, mentions that the s. 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 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 conducting scientific research is the business of the assessee and thus, the said research is related to the business carried on by the assessee. 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. 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 the assessee that he is covered by s. 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 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 s. 35(1)(i) or (iv) have no application to assessee's case and accordingly the argument of the assessee's counsel is dismissed. The learned AR now submitted that in respect of claim of deduction u/s. 35(1)(i) the Tribunal in para 22 of its order wrongly observed the expenditure as capital expenditure.
(3.) THE AR submitted that the Tribunal held that the expenditure is in the nature of capital expenditure. The CIT(A) has held that the assessee is a company carrying on scientific research and development expenditure in question relates to scientific research and therefore, assessee is eligible for deduction u/s. 35(1)(i) r.w.s. 43(4)(iii). The learned CIT(A) further held that even assuming that the expenditure is capital in nature as assumed by the Assessing Officer, the claim is still covered by clause -(iv) of sub -section -1 of section 35 r.w.s. 2 (ia) of section 35 which specifically allows any expenditure of capital nature on scientific research carried on by the assessee. Therefore, it is respectfully submitted that the learned Commissioner adjudicated the issue of allowability of expenditure, even assuming that the same is capital expenditure in nature, as the assessee's activity of developing the product from the stage of molecule to the stage of vaccine by undertaking the process of development at various stages, is scientific research related to the business carried on by the assessee. Against this adjudication the Tribunal wrongly observed in para 24 of its order as under: 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.;


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