M/s. Shree Paceronics Ltd.,, Indore v. The Addl. CIT.,, Indore

IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH : INDORE BEFORE SHRI JOGINDER SINGH JUDICIAL MEMBER AND SHRI R.C.SHARMA ACCOUNTANT MEMBER PAN NO. : AJLPJ3049E I.T.A.NO.588/IND/2009 A.Y. : 2006-07 M/S. SHREE PACETRONICS LIMITED ADDITIONAL CIT RANGE 3 1 MOON PALACE COLONY VS INDORE. INDORE. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI HIRESH JAIN C. A. RESPONDENT BY : SHRI PRADEEP KUMAR MITRA SR. DR O R D E R PER R. C. SHARMA A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) DATED 222.12.2009 FOR THE ASSESSMENT YEAR 2006-07 IN THE MATTER OF ORDER PASSED U/S 143(3) OF THE INC OME-TAX ACT 1961. 2. THE ONLY GRIEVANCE OF THE ASSESSEE RELATES TO DENIA L OF CLAIM OF DEDUCTION U/S 35(2) IN RESPECT OF EXPENDIT URE INCURRED ON SCIENTIFIC RESEARCH. -: 2: - 2 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORDS PERUSED. 4. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING OF PACEMAKER AND TRADING OF STENT. DU RING THE YEAR UNDER CONSIDERATION IT INCURRED EXPENDITURE O F RS. 19 42 936/- ON BUILDING AND PLANT AND MACHINERY FOR RESEARCH AND DEVELOPMENT PURPOSES. IT CLAIMED 100 P ER CENT DEDUCTION OF SUCH EXPENDITURE U/S 35(2). THE AO DEC LINED THE SAME BY OBSERVING THAT AS PER PROVISIONS OF SECTION 35(2B) IN THE CASE OF COMPANY WHICH IS ENGAGED IN THE BUSINE SS SPECIFIED IN SECTION 35(2AB)(I) THE ASSESSEE HAS T O FOLLOW CERTAIN PROCEDURE THEN ONLY ASSESSEE WILL BE ENTIT LED FOR GETTING DEDUCTION OF 150 % OF EXPENDITURE ON R & D. THE AO FURTHER NOTED THAT IF THE BUSINESS CARRIED ON BY AN ASSESSEE IS COVERED U/S 35(2AB) THEN SECTION 35(1) SHALL NOT A PPLY. HE THEREFORE DECLINED ASSESSEES CLAIM FOR DEDUCTION U/S 35(2). BY THE IMPUGNED ORDER THE LD. CIT(A) CONFIRMED THE ACTION OF THE AO AND THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AN D FOUND -: 3: - 3 THAT THE ASSESSEES CLAIM FOR DEDUCTION IN RESPECT OF EXPENDITURE ON BUILDING AND PLANT AND MACHINERY FOR CARRYING ON RESEARCH & DEVELOPMENT WAS DECLINED. THE DEDUCTI ON WAS CLAIMED BY THE ASSESSEE U/S 35(1)(IV) IN RESPECT OF EXPENDITURE INCURRED ON BUILDING PLANT AND MACHINERY AMOUNTING TO RS. 19 42 936/-. THE AO WAS OF THE VIEW THAT SUCH DEDUC TION CAN BE ALLOWED ONLY IF THE EXPENDITURE IS INCURRED FOR IN HOUSE RESEARCH AND DEVELOPMENT FACILITY AS APPROVED BY TH E PRESCRIBED AUTHORITY. THUS BY REFERRING TO PROVISI ONS OF SECTION 35(2AB) THE ASSESSEES CLAIM WAS DECLINED. IT IS PERTINENT HERE TO REPRODUCE THE RELEVANT PROVISIONS OF LAW UNDER WHICH THE ASSESSEE HAS CLAIMED DEDUCTION ON A CCOUNT OF SCIENTIFIC RESEARCH. SECTION 35(1) READS AS UNDE R :- 35. (1) IN RESPECT OF EXPENDITURE ON SCIENTIFIC RESEAR CH THE FOLLOWING DEDUCTIONS SHALL BE ALLOWED ( I ) ANY EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED ON SCIENTIFIC RES EARCH 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 1 ST DAY OF APRIL 1973) ON PAYMENT OF ANY SALARY [AS DEFINED I N EXPLANATION 2 BELOW SUB-SECTION (5) OF SECTION 40A ] TO AN -: 4: - 4 EMPLOYEE ENGAGED IN SUCH SCIENTIFIC RESEARCH OR ON THE PURCHASE OF MATERIALS USED IN SUCH SCIENTIFIC RESEA RCH THE AGGREGATE OF THE EXPENDITURE SO LAID OUT OR EXPENDE D WITHIN THE THREE YEARS IMMEDIATELY PRECEDING THE COMMENCEM ENT OF THE BUSINESS SHALL TO THE EXTENT IT IS CERTIFIE D BY THE PRESCRIBED AUTHORITY TO HAVE BEEN LAID OUT OR EXPEN DED ON SUCH SCIENTIFIC RESEARCH BE DEEMED TO HAVE BEEN LA ID OUT OR EXPENDED IN THE PREVIOUS YEAR IN WHICH THE BUSINESS IS COMMENCED ;] ( II ) [AN AMOUNT EQUAL TO ONE AND ONE-FOURTH TIMES OF A NY SUM PAID] TO A SCIENTIFIC RESEARCH ASSOCIATION WHICH HAS AS I TS OBJECT THE UNDERTAKING OF SCIENTIFIC RESEARCH OR TO A UNIVERSI TY COLLEGE OR OTHER INSTITUTION TO BE USED FOR SCIENTIFIC RESE ARCH : [ PROVIDED THAT SUCH ASSOCIATION UNIVERSITY COLLEGE OR OTHER INSTITUTION FOR THE PURPOSES OF THIS CLAUSE ( A ) IS FOR THE TIME BEING APPROVED IN ACCORDANCE WIT H THE GUIDELINES IN THE MANNER AND SUBJECT TO SUCH CONDI TIONS AS MAY BE PRESCRIBED; AND ( B ) SUCH ASSOCIATION UNIVERSITY COLLEGE OR OTHER IN STITUTION IS SPECIFIED AS SUCH BY NOTIFICATION IN THE OFFICIAL GAZETTE BY THE CENTRAL GOVERNMENT;] ( IIA ) AN AMOUNT EQUAL TO ONE AND ONE-FOURTH TIMES OF AN Y SUM PAID TO A COMPANY TO BE USED BY IT FOR SCIENTIF IC RESEARCH: PROVIDED THAT SUCH COMPANY ( A ) IS REGISTERED IN INDIA ( B ) HAS AS ITS MAIN OBJECT THE SCIENTIFIC RESEARCH AN D DEVELOPMENT ( C ) IS FOR THE PURPOSES OF THIS CLAUSE FOR THE TIME BEING APPROVED BY THE PRESCRIBED AUTHORITY IN THE PRESCRI BED MANNER AND ( D ) FULFILS SUCH OTHER CONDITIONS AS MAY BE PRESCRIBE D; [ ( III ) [AN AMOUNT EQUAL TO ONE AND ONE-FOURTH TIMES OF ANY SUM PAID] TO A UNIVERSITY COLLEGE OR OTHER INSTITUTION TO BE USED FOR RESEARCH IN SOCIAL SCIENCE OR STATISTICAL RESEA RCH : -: 5: - 5 [ PROVIDED THAT SUCH UNIVERSITY COLLEGE OR OTHER INSTITUTION FOR THE PURPOSES OF THIS CLAUSE ( A ) IS FOR THE TIME BEING APPROVED IN ACCORDANCE WIT H THE GUIDELINES IN THE MANNER AND SUBJECT TO SUCH CONDI TIONS AS MAY BE PRESCRIBED; AND ( B ) SUCH UNIVERSITY COLLEGE OR OTHER INSTITUTION IS SPECIFIED AS SUCH BY NOTIFICATION IN THE OFFICIAL GAZETTE BY T HE CENTRAL GOVERNMENT.] [ EXPLANATION. THE DEDUCTION TO WHICH THE ASSESSEE IS ENTITLED IN RESPECT OF ANY SUM PAID TO A SCIENTIFIC RESEARCH ASSOCIATION UNIVERSITY COLLEGE OR OTHER INSTITUTI ON TO WHICH CLAUSE ( II ) OR CLAUSE ( III ) APPLIES SHALL NOT BE DENIED MERELY ON THE GROUND THAT SUBSEQUENT TO THE PAYMENT OF SU CH SUM BY THE ASSESSEE THE APPROVAL GRANTED TO THE ASSOCI ATION UNIVERSITY COLLEGE OR OTHER INSTITUTION REFERRED T O IN CLAUSE ( II ) OR CLAUSE ( III ) HAS BEEN WITHDRAWN;] ( IV ) IN RESPECT OF ANY EXPENDITURE OF A CAPITAL NATUR E ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE SUCH DEDUCTION AS MAY BE ADMISSIBLE UNDER THE PROVI SIONS OF SUB-SECTION (2) : [ PROVIDED THAT THE SCIENTIFIC RESEARCH ASSOCIATION UNIVERSI TY COLLEGE OR OTHER INSTITUTION REFERRED TO IN CLAUSE ( II ) OR CLAUSE ( III ) SHALL MAKE AN APPLICATION IN THE PRESCRIBED FORM AN D MANNER TO THE [CENTRAL GOVERNMENT] FOR THE PURPOSE OF GRANT OF APPROVAL OR CONTINUANCE THEREOF UNDER CLAUSE ( II ) OR AS THE CASE MAY BE CLAUSE ( III ) : PROVIDED FURTHER THAT THE [CENTRAL GOVERNMENT] MAY BEFORE GRANTING APPROVAL UNDER CLAUSE ( II ) OR CLAUSE ( III ) CALL FOR SUCH DOCUMENTS (INCLUDING AUDITED ANNUAL ACCOUNTS) OR IN FORMATION FROM THE SCIENTIFIC RESEARCH ASSOCIATION UNIVERSITY CO LLEGE OR OTHER INSTITUTION AS IT THINKS NECESSARY IN ORDER TO SATI SFY ITSELF ABOUT THE GENUINENESS OF THE ACTIVITIES OF THE SCIENTIFIC RES EARCH ASSOCIATION UNIVERSITY COLLEGE OR OTHER INSTITUTION AND THAT [ GOVERNMENT] MAY ALSO MAKE SUCH INQUIRIES AS IT MAY DEEM NECESSARY I N THIS BEHALF : -: 6: - 6 PROVIDED ALSO THAT ANY [NOTIFICATION ISSUED BY THE CENTRAL GOVERNMENT UNDER CLAUSE ( II ) OR CLAUSE ( III ) BEFORE THE DATE ON WHICH THE TAXATION LAWS (AMENDMENT) BILL 2006 RECE IVES THE ASSENT OF THE PRESIDENT SHALL AT ANY ONE TIME HA VE EFFECT FOR SUCH ASSESSMENT YEAR OR YEARS NOT EXCEEDING THREE ASSES SMENT YEARS] (INCLUDING AN ASSESSMENT YEAR OR YEARS COMMENCING B EFORE THE DATE ON WHICH SUCH NOTIFICATION IS ISSUED) AS MAY BE SPE CIFIED IN THE NOTIFICATION:] [ PROVIDED ALSO THAT WHERE AN APPLICATION UNDER THE FIRST PROVISO I S MADE ON OR AFTER THE DATE ON WHICH THE TAXATION LAW S (AMENDMENT) BILL 2006 RECEIVES THE ASSENT OF THE PRESIDENT EV ERY NOTIFICATION UNDER CLAUSE ( II ) OR CLAUSE ( III ) SHALL BE ISSUED OR AN ORDER REJECTING THE APPLICATION SHALL BE PASSED WITHIN THE PERIOD O F TWELVE MONTHS FROM THE END OF THE MONTH IN WHICH SUCH APPLICATION WAS RECEIVED BY THE CENTRAL GOVERNMENT.] 6. CLAUSE (IV) OF SUB SECTION (1) OF SECTION 35 WHICH IS APPLICABLE TO ASSESSEE READS AS UNDER :- ( IV ) IN RESPECT OF ANY EXPENDITURE OF A CAPITAL NATU RE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE SUCH DEDUCTION AS MAY BE ADMISSIBLE UNDER THE PROVISIONS OF SUB-SECTION (2) : 7. IT IS QUITE CLEAR THAT DEDUCTION U/S 35(1)(IV) IS ALLOWABLE IN RESPECT OF ANY EXPENDITURE OF CAPITAL NATURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE SUBJECT TO THE CONDITIONS AS PRESCRIBED U NDER SUB SECTION (2) OF SECTION 35. -: 7: - 7 8. RELEVANT CLAUSE (IV) OF SUB SECTION (2) OF SECTION 35 READS AS UNDER :- ( IV ) WHERE A DEDUCTION IS ALLOWED FOR ANY PREVIOUS YEA R UNDER THIS SECTION IN RESPECT OF EXPENDITURE REPRES ENTED 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 RESPE CT OF THAT ASSET ; 9. IT IS CLEAR THAT CLAUSE (IV) STIPULATES FOR DISALL OWING CLAIM OF DEPRECIATION U/S 32 IN RESPECT OF CAPITAL EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH WHICH HAS BEEN FUL LY ALLOWED U/S 35(1). THERE IS NO OTHER CONDITION FOR DISALLOW ING CLAIM OF DEDUCTION U/S 35(1)(IV) OF THE INCOME-TAX ACT 1961 . HOWEVER THE AO HAS INVOKED PROVISIONS OF SECTION 35(2AB) W HICH REQUIRES SPECIAL CONDITION TO BE FULFILLED FOR CLAI M OF HIGHER DEDUCTION @ 150 % OF THE CAPITAL EXPENDITURE INCURR ED ON IN HOUSE SCIENTIFIC RESEARCH AS APPROVED BY THE PRESCR IBED AUTHORITIES. CLAUSE (2AB)(1) OF SECTION 35 READS AS UNDER :- [(2AB)( 1 ) WHERE A COMPANY ENGAGED IN THE BUSINESS OF [BIO-TECHNOLOGY OR IN THE BUSINESS -: 8: - 8 OF] MANUFACTURE OR PRODUCTION OF ANY DRUGS PHARMACEUTICALS ELECTRONIC EQUIPMENTS COMPUTERS TELECOMMUNICATION EQUIPMENTS CHEMICALS OR ANY OTHER ARTICLE OR THING NOTIFIED BY THE BOARD INCURS ANY EXPENDITURE ON SCIENTIFIC RESEARCH (NOT BEING EXPENDITURE IN THE NATURE OF COST OF ANY LAND OR BUILDING) ON IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY TH EN THERE SHALL BE ALLOWED A DEDUCTION OF [A SUM EQUAL TO ONE AND ONE-HALF TIMES OF THE EXPENDITURE] SO INCURRED. [ EXPLANATION. FOR THE PURPOSES OF THIS CLAUSE EXPENDITURE ON SCIENTIFIC RESEARCH IN RELATION T O DRUGS AND PHARMACEUTICALS SHALL INCLUDE EXPENDITURE INCURRED ON CLINICAL DRUG TRIAL OBTAIN ING APPROVAL FROM ANY REGULATORY AUTHORITY UNDER ANY CENTRAL STATE OR PROVINCIAL ACT AND FILING AN APPLICATION FOR A PATENT UNDER THE PATENTS ACT 197 0 (39 OF 1970).] ( 2 ) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE MENTIONED IN CLAUSE ( 1 ) UNDER ANY OTHER PROVISION OF THIS ACT. ( 3 ) NO COMPANY SHALL BE ENTITLED FOR DEDUCTION UNDER CLAUSE ( 1 ) UNLESS IT ENTERS INTO AN AGREEMENT WITH THE PRESCRIBED AUTHORITY FOR CO-OPERATION IN SUCH RESEARCH AND DEVELOPMENT FACILITY AND FOR AUDI T OF THE ACCOUNTS MAINTAINED FOR THAT FACILITY. ( 4 ) THE PRESCRIBED AUTHORITY SHALL SUBMIT ITS REPORT IN RELATION TO THE APPROVAL OF THE SAID FACILITY TO THE DIRECTOR GENERAL IN SUCH FORM AND WITHIN SUCH TIME AS MAY BE PRESCRIBED.] -: 9: - 9 [( 5 ) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE REFERRED TO IN CLAUSE ( 1 ) WHICH IS INCURRED AFTER THE 31ST DAY OF MARCH [ 2012 ]. 10. AS PER OUR CONSIDERED VIEW THE ASSESSEE IS FALLIN G U/S 35(1) AND CLAIMING ONLY DEDUCTION OF 100 % AS PRESC RIBED U/S 35(1). THERE IS NO REASON TO INVOKE PROVISIONS OF S ECTION 35(2AB) WHICH REQUIRES THAT IN HOUSE RESEARCH AND DEVELOPMENT FACILITY SHOULD BE APPROVED BY THE PRES CRIBED AUTHORITY AND THE ASSESSEE WILL BE ENTITLED FOR CLA IM OF HIGHER DEDUCTION @ 150 % OF THE EXPENDITURE INCURRED ON SU CH SCIENTIFIC RESEARCH ( NOT BEING ANY EXPENDITURE IN THE NATURE OF COST OF LAND AND BUILDING ). FURTHER THE DEDUCTION U/S 35 (2AB) IS ALSO RESTRICTED ON EXPENDITURE IN RESPECT OF PLANT AND MACHINERY AND DOES NOT EXTEND TO THE EXPENDITURE IN CURRED ON LAND AND BUILDING. HOWEVER U/S 35(1)(IV) THERE IS NO SUCH RESTRICTION FOR ALLOWING DEDUCTION IN RESPECT OF EX PENDITURE INCURRED ON BUILDING. IN THE INSTANT CASE THE ASSE SSEE HAS INCURRED EXPENDITURE ON BUILDING PLANT AND MACHINE RY AND DEDUCTION EQUAL TO 100 % OF SUCH EXPENDITURE WAS CL AIMED -: 10: - 10 U/S 35(1)(IV). THERE IS NO JUSTIFICATION FOR DENIAL OF CLAIM BY REFERRING TO THE PROVISIONS OF SECTION 35(2AB) UND ER WHICH ASSESSEE HAS NOT PUT ANY CLAIM OF HIGHER DEDUCTION @ 150 % OF ITS INVESTMENT/EXPENDITURE. 11. IT IS PERTINENT TO MENTION HERE THAT IN TERMS OF CL AUSE (IV) OF SUB SECTION (2) HOWEVER THE ASSESSEE IS N OT ENTITLED FOR ANY FURTHER CLAIM OF DEPRECIATION U/S 32 ON SUCH IN VESTMENT. 12. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWE D WITH THE ABOVE OBSERVATIONS. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 7 TH FEBRUARY 2011. SD/- SD/- (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 7 TH FEBRUARY 2011. CPU* 82