AYUSHAKTI AYURVED PVT.LTD., MUMBAI v. THE ASST.C.I.T. CIRCLE9(1), MUMBAI

ITA 6541/MUM/2008 | 2005-2006
Pronouncement Date: 09-02-2010 | Result: Partly Allowed

Appeal Details

RSA Number 654119914 RSA 2008
Assessee PAN ZAACD0724B
Bench Mumbai
Appeal Number ITA 6541/MUM/2008
Duration Of Justice 1 year(s) 2 month(s) 28 day(s)
Appellant AYUSHAKTI AYURVED PVT.LTD., MUMBAI
Respondent THE ASST.C.I.T. CIRCLE9(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 09-02-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 09-02-2010
Date Of Final Hearing 01-02-2010
Next Hearing Date 01-02-2010
Assessment Year 2005-2006
Appeal Filed On 11-11-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A MUMBAI BEFORE SHRI R.K. GUPTA J.M. AND SHRI A.L. GEHLOT A.M. ITA NO. 6541/M/2008 ASSESSMENT YEAR: 2005-06 AYUSHAKTI AYURVED P. LTD. APPELLANT C-49-50 PRAVASI INDL. ESTATE 1 ST FLOOR OFF AAREY ROAD GOREGAON(E) MUMBAI 400 063. (PAN AZAACD0724B) VS. THE ASSTT. COMMISSIONER OF INCOME-TAX RESPONDENT CIRCLE 9(1) AAYAKAR BHAVAN 2 ND FLOOR M.K. ROAD MUMBAI 400 020. APPELLANT BY : MR. ARVIND SONDE RESPONDENT BY : MR. DEBASHIS CHANDE ORDER PER A.L. GEHLOT A.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A)- IX MUMBAI PASSED ON 04.09.2008 FOR THE ASSESSMENT YEAR 2005-06. 2. THE LEARNED AR SUBMITTED THAT GROUND NOS. 1 TO 4 ARE IN RESPECT OF AD-HOC DISALLOWANCES OUT OF CONVEYANCE EXPENSES AND TELEPHONE AND POSTAGE EXPENSES RS 295418/- OUT OF LOCAL AND FOREIGN TRAVEL EXPENSES RS63269/- AND RS 638284/- RESPECTIVELY. . THEREFORE THESE ARE DECIDED TOGETHER. 3. THE AO DISALLOWED 10% OF THE EXPENDITURE OUT OF CONVEYANCE EXPENSES & TELEPHONE AND POSTAGE EXPENSES AND OUT O F LOCAL TRAVEL EXPENSES AND IN RESPECT OF FOREIGN TRAVELLING DISAL LOWED 25% FOR WANT OF VERIFICATION. THE CIT(A) RESTRICTED THE DISALLOW ANCES TO THE EXTENT OF ITA NO. 6541/MUM/08 AYUSHAKTI AYURVED P. LTD . 2 5% INSTEAD OF 10% IN RESPECT OF CONVEYANCE EXPENSES & TELEPHONE & POSTAGE EXPENSES AND OUT OF LOCAL TRAVEL EXPENSES A ND DISALLOWANCE OF FOREIGN EXPENSES AT THE RATE OF 25% HAS BEEN CONFI RMED THE ORDER OF THE AO. 4. THE LEARNED AR SUBMITTED THAT THE ASSESSEE FURNI SHED ALL THE RELEVANT DETAILS BEFORE THE AO. HE FURTHER SUBMITTE D THAT THE CIT(A) WAS OF THE VIEW THAT NO AD-HOC DISALLOWANCE CAN BE MADE HOWEVER HE HIMSELF HAS SUSTAINED THE AD-HOC DISALLOWANCE TO THE EXTENT OF 5%. THE LEARNED AR SUBMITTED THAT 5% OF DISALLOWANCE SU STAINED BY THE CIT(A) IS WITHOUT ANY BASIS. THE CIT(A) IN THE CASE OF FOREIGN TRAVEL EXPENSES CONFIRMED THE DISALLOWANCE 25% WRONGLY OBSERVING THAT THE EXPLANATION OF THE ASSESSEE HAS NOT SUPPORTED B Y DOCUMENTARY EVIDENCE. THE LEARNED AR FURTHER SUBMITTED THAT THE ASSESSEE FURNISHED DETAILS OF FOREIGN TRAVELING EXPENSES AT PAGES 12 TO 18 OF THE PAPER BOOK WHICH IS IN RESPECT OF STAFF OF THE ASS ESSEE. THE LEARNED AR SUBMITTED THAT AD-HOC DISALLOWANCE CANNOT BE MAD E AND IN SUPPORT OF HIS CONTENTION HE RELIED UPON THE FOLLO WING JUDGMENTS:- 1. MONARCH FOODS PVT. LTD. V. ACIT [1996] 54 TTJ (AHD.) 405 2. OIL & NATURAL GAS COMMISSION VS. ADDL. CIT [199 9] 69 ITD (DEL.) 69. 3. ACIT V. KERALA TRANSPORT CO. 51 ITD (COCH.) 405 5. THE LEARNED DR ON THE OTHER HAND RELIED UPON T HE ORDER OF CIT(A). 6. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE DECI SIONS CITED. WE FIND THAT THE ASSESSEE HAS FURNISHED COMPLETE DETAI LS BEFORE THE AO INCLUDING FOREIGN TRAVEL EXPENSES. FOREIGN TRAVELIN G EXPENSES INCURRED IN RESPECT OF STAFF OF THE ASSESSEE AND TH E COPIES OF DETAILS HAVE BEEN PLACED AT FROM PAGES 16 TO 18 OF ASSESSEE S PAPER BOOK. EXPENSES WERE RECORDED IN THE BOOKS OF ACCOUNT ON D AY-TO-DAY BASIS. WHEN THE ASSESSEE FURNISHED COMPLETE DETAILS AD-HO C DISALLOWANCE ITA NO. 6541/MUM/08 AYUSHAKTI AYURVED P. LTD . 3 CANNOT BE MADE. WE ACCORDINGLY DELETE THE ADDITIO NS SUSTAINED BY THE CIT(A) IN RESPECT OF THE ITEMS OF EXPENDITURE NAMELY CONVEYANCE EXPENSES TELEPHONE AND POSTAGE EXPENSES AND LOCA L AND FOREIGN TRAVEL EXPENSES. 7. GROUND NO. 5 IS IN RESPECT OF DISALLOWANCE OF RS . 3 50 800/- OUT OF PROFESSIONAL FEES AND CONTRACT PAYMENTS U/S 40(A )(IA) OF THE ACT FOR LATE PAYMENT OF TAX DEDUCTION AT SOURCE. 8. THE AO NOTICED THAT IN THE FOLLOWING CASES THE ASSESSEE DID NOT REMIT THE TAX DEDUCTED AT SOURCE IN TIME TO THE CEN TRAL GOVT.: PARTICULARS TDS RS. DEDUCTED PAID PRINCIPAL SUM 1 TDS ON PROFESSIONAL SERVICE 2640 JUL-04 09/08/2004 52800 2 TDS ON PROFESSIONAL SERVICE 13668 MAR-05 21/06/2005 273360 3 TDS ON CONTRACT 1236 MAR-05 21/06/2005 24720 TOTAL 350880 8.1 THE AO WAS OF THE VIEW THAT PROVISIONS OF SECTI ON 40(A)(IA) APPLIES TO THE CASE OF THE ASSESSEE THEREFORE HE DISALLOWED RS. 3 50 880/-. THE CIT(A) ALLOWED THE ASSESSEES CLAIM FOR RS. 52 800/- IN THIS YEAR ITSELF. HOWEVER IN RESPECT OF OTHER T WO ITEMS WHICH HAD BEEN DEPOSITED ON 21 ST JULY 2005 HE DIRECTED THE AO TO ALLOW THESE ITEMS OF TDS ON PROFESSIONAL SERVICE AND CONTRACT I N THE SUBSEQUENT YEAR. 9. THE LEARNED AR SUBMITTED THAT TDS OF OTHER TWO I TEMS WERE DEPOSITED ON 21 ST JUNE 2005 WHICH WELL BEFORE THE DATE OF FILING O F RETURN U/S 139(1) OF THE ACT. THEREFORE THESE ARE ALLOWABLE EXPENSES IN THIS YEAR ITSELF. THE LEARNED AR FURTHER SUBMITT ED THAT CIT(A) HAS DUE TO OVERSIGHT HAS NOT BEEN CONSIDERED AND APPREC IATED THE PROVISIONS OF THE IT ACT IN THIS REGARD. SUB-CLAUSE S (I) (IA) AND (IB) OF ITA NO. 6541/MUM/08 AYUSHAKTI AYURVED P. LTD . 4 SECTION 40(A) OF THE ACT HAS BEEN SUBSTITUTED FOR S UB CLAUSE (I) BY THE FINANCE (NO.2) ACT 2004 WITH EFFECT FROM 01.04.200 5 WHICH PROVIDES THAT IN CASE TAX WAS DEDUCTIBLE AND WAS ALSO DEDUCT ED DURING THE LAST MONTH OF THE PREVIOUS YEAR ON OR BEFORE THE DUE DAT E SPECIFIED IN SUB- SECTION (1) TO SECTION 139 OF THE ACT AND IF THE SA ME IS PAID IN THIS PERIOD NO DISALLOWANCE IS TO BE MADE. THE LEARNED A R SUBMITTED THAT THESE TWO ITEMS ARE IN RESPECT OF MARCH 2005 AND F OR WHICH THE PAYMENT MADE BY THE ASSESSEE ON 21 ST JUNE 2005 WHICH IS WELL WITHIN THE TIME BEFORE THE DUE DATE OF FILING OF RE TURN U/S 139(1) OF THE ACT. 10. THE LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDER OF CIT(A). 11. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. THE ISSUE TO BE EXAMINED IN THE CASE UNDER CONSIDERATION IS RELATED TO SECTION 40(A) OF THE AC T WHICH READS AS UNDR:- AMOUNTS NOT DEDUCTIBLE . 40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SEC TIONS 30 TO 38 [38 ] THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMP UTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION 39 (A) IN THE CASE OF ANY ASSESSEE 40 [(I) ANY INTEREST (NOT BEING INTEREST ON A LOAN ISS UED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL 1938) ROYALTY FEES F OR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THIS ACT WHICH IS PAYAB LE (A) OUTSIDE INDIA; OR (B) IN INDIA TO A NON-RESIDENT NOT BEING A COMPAN Y OR TO A FOREIGN COMPANY ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTE R XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR AFTER DEDUCTION HAS NOT BEEN PAID DURING THE PREVIOUS YEAR OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200 : PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM TAX HAS BEE N DEDUCTED IN ANY SUBSEQUENT YEAR OR HAS BEEN DEDUCTED IN THE PR EVIOUS YEAR BUT PAID IN ANY SUBSEQUENT YEAR AFTER THE EXPIRY OF THE TIME PR ESCRIBED UNDER SUB- SECTION (1) OF SECTION 200 SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID. EXPLANATION.FOR THE PURPOSES OF THIS SUB-CLAUSE ITA NO. 6541/MUM/08 AYUSHAKTI AYURVED P. LTD . 5 (A) ROYALTY SHALL HAVE THE SAME MEANING AS IN EX PLANATION 2 TO CLAUSE (VI) OF SUB-SECTION (1) OF SECTION 9 ; (B) FEES FOR TECHNICAL SERVICES SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE (VII) OF SUB-SECTION (1) OF SECTION 9 ; (IA) ANY INTEREST COMMISSION OR BROKERAGE 41 [RENT ROYALTY ] FEES FOR PROFES- SIONAL SERVICES OR FEES FOR TECHNICAL SERVICES PAYA BLE TO A RESIDENT OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB-CONTRACTOR BEING RESIDENT FOR CARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR F OR CARRYING OUT ANY WORK) ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER C HAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR AFTER DEDUCTION 41A [ HAS NOT BEEN PAID (A) IN A CASE WHERE THE TAX WAS DEDUCTIBLE AND WAS SO DEDUCTED DURING THE LAST MONTH OF THE PREVIOUS YEAR ON OR BEFORE T HE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139 ; OR (B) IN ANY OTHER CASE ON OR BEFORE THE LAST DAY O F THE PREVIOUS YEAR: ] 41B [PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR OR HAS BEEN DEDUCTED (A) DURING THE LAST MONTH OF THE PREVIOUS YEAR BUT PAID AFTER THE SAID DUE DATE; OR (B) DURING ANY OTHER MONTH OF THE PREVIOUS YEAR BU T PAID AFTER THE END OF THE SAID PREVIOUS YEAR SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPU TING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID. ] EXPLANATION.FOR THE PURPOSES OF THIS SUB-CLAUSE (I) COMMISSION OR BROKERAGE SHALL HAVE THE SAME MEANING AS IN CLAUSE (I) OF THE EXPLANATION TO SECTION 194H ; (II) FEES FOR TECHNICAL SERVICES SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE (VII) OF SUB-SECTION (1) OF SECTION 9 ; (III) PROFESSIONAL SERVICES SHALL HAVE THE SAME MEANING AS IN CLAUSE (A) OF THE EXPLANATION TO SECTION 194J ; (IV) WORK SHALL HAVE THE SAME MEANING AS IN EXPL ANATION III TO SECTION 194C ; 42 [(V) RENT SHALL HAVE THE SAME MEANING AS IN CLAUS E (I) TO THE EXPLANATION TO SECTION 194-I ; (VI) ROYALTY SHALL HAVE THE SAME MEANING AS IN E XPLANATION 2 TO CLAUSE (VI) OF SUB-SECTION (1) OF SECTION 9 ;] 42A [ (IB) ANY SUM PAID ON ACCOUNT OF SECURITIES TRANSACT ION TAX UNDER CHAPTER VII OF THE FINANCE (NO. 2) ACT 2004; ] ] 11.1 ON PLAIN READING OF ABOVE SECTION WE FIND THAT THE CIT (A) HAS ALLOWED THE CLAIM OF THE ASSESSEE FOR RS. 52 800/- WHICH IS IN ACCORDANCE WITH ABOVE PROVISIONS THEREFORE THE AS SESSEE SHOULD NOT ITA NO. 6541/MUM/08 AYUSHAKTI AYURVED P. LTD . 6 HAVE ANY GRIEVANCE AND SHOULD NOT HAVE TAKEN SUCH G ROUND IN THE APPEAL FILED. SINCE THE CIT (A) HAS DECIDED THIS I SSUE PARTLY IN FAVOUR OF THE ASSESSEE AND ALLOWED THE CLAIM OF RS. 52 800 /- TO THAT EXTENT THIS GROUND OF THE ASSESSEE BECOMES IN FRUCTUOUS. AS REGARDS THE OTHER TWO ITEMS WE FIND FORCE IN THE SUBMISSION OF THE LEARNED AR THAT TDS MADE IN THE LAST MONTH OF THE ACCOUNTING Y EAR AND IF THE SAME IS PAID BEFORE FILING OF THE RETURN U/S 139(1) OF THE ACT NO DISALLOWANCE IS WARRANTED. IN VIEW OF THE ABOVE DIS CUSSION WE MODIFY THE ORDER OF CIT(A) AND ALLOW THE CLAIM OF THE ASSE SSEE IN RESPECT OF OTHER TWO ITEMS ALSO NAMELY PROFESSIONAL SERVICE AND CONTRACT FOR WHICH TDS DEDUCTED DURING THE LAST MONTH OF THE PRE VIOUS YEAR AND WERE DEPOSITED 21ST JUNE 2005 WHICH ON OR BEFORE THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139. 12. GROUND NOS. 6 TO 9 ARE IN RESPECT OF DISALLOWA NCE OF RS. 25 80 480/- OUT OF PRODUCT DEVELOPMENT LABORATORY EXPENSES QUALITY CONTROL EXPENDITURE ETC. AND ENHANCING THE ADDITIO N BY RS. 6 45 120/- BY THE CIT(A) CONSIDERING THE ITEMS AS C APITAL EXPENDITURE. 13. DURING THE COURSE OF ASSESSMENT PROCEEDINGS TH E AO NOTICED THAT RS. 32 25 600/- PAID BY THE ASSESSEE FOR PRODU CT DEVELOPMENT AND NOT PRODUCT IMPROVEMENT. THE AO WAS OF THE VIE W THAT THE ASSESSEE INCURRED EXPENDITURE FOR ACQUIRING ALTOGET HER NEW ASSETS IN THE FORM OF NEW BRAND OR FORMULATION AND HELD THAT SUCH EXPENDITURE COULD NOT BE TREATED AS REVENUE EXPENDITURE. THEREF ORE THE AO DISALLOWED RS. 32 25 600/- AS CAPITAL IN NATURE AND 1/5 TH OF THE SAME I.E. RS. 6 45 120/- IS ALLOWED SUBJECT TO AMORTIZAT ION OF THE BALANCE IN THE SUBSEQUENT YEARS. THE AO ACCORDINGLY MADE ADD ITION OF RS. 25 80 480/- (RS. 32 25 600 6 45 120). THE CIT(A) HELD AS UNDER:- 6.5 NOW THE QUESTION FOR CONSIDERATION IS WHETHER T HE PAYMENT MADE TO M/S SCI MOLECULES INDIA PVT. LTD. CAN BE TR EATED AS CAPITAL EXPENDITURE OR REVENUE EXPENDITURE. THE PAY MENT MADE TO M/S SCI MOLECULES INDIA PVT. LTD. WAS FOR STANDARDI ZATION OF HERBAL EXTRACTS HERBAL PRODUCT DEVELOPMENT. THUS THE ENTIRE EXPENSES IS A RESEARCH EXPENSES WHICH IS TO BE USED FOR NEW ITA NO. 6541/MUM/08 AYUSHAKTI AYURVED P. LTD . 7 PRODUCT DEVELOPMENT AND PRODUCT IMPROVEMENT AS STAT ED BY THE APPELLANT ( ANNEXURE 1A OF THE PAPER BOOK) IS AN AD VANTAGE FOR THE ENDURING BENEFIT OF ASSESSEES BUSINESS. THE PA YMENT HAS BEEN MADE TO M/S SCI MOLECULES INDIA PVT. LD. FOR T HE FIRST TIME DURING THE YEAR UNDER CONSIDERATION FOR RESEARCH WH ICH IS TO BE USED FOR THE NEW PRODUCT DEVELOPMENT AS STATED ABOV E. THEREFORE THE PAYMENT OF RS. 32 25 600/- MADE TO M/S SCI MOLE CULES INDIA PVT. LTD. NEITHER CAN BE ALLOWED U/S 35 OF THE ACT FOR THE REASONS DISCUSSED IN THE FOREGOING PARAGRAPH NOR U/ S 37 OF THE I.T. ACT. SO FAR AS BALANCE PAYMENT MADE TO HI-TEC H ANALYTICAL WORK AND HI-TECH BIO-LAB IS CONCERNED I FIND THAT THE PAYMENT HAS BEEN MADE FOR ANALYSIS OF HEAVY METAL AND SAMPL E ANALYSIS AND THE SAME PAYMENT HAS BEEN CONSISTENTLY MADE IN THE EARLIER YEAR ALSO. IT IS NOTHING BUT DAY-TO-DAY EXPENSES IN CURRED ON ANALYSIS OF SAMPLE DAY-TO-DAY PRODUCTION CHECKING AND ANALYSIS AND QUALITY CONTROL ETC. AND THEREFORE THE AO HAS ALSO ACCEPTED THE SAME AS REVENUE EXPENDITURE. THUS CONSIDERING THE TOTALITY OF THE FACTS I HOLD THAT OUT OF THE TOTAL EXPENDIT URE CLAIMED AMOUNTING TO RS. 69 10 693/- ONLY THE PAYMENT MADE TO IT ACT BEING CAPITAL EXPENDITURE IN NATURE AS AGAINST DISA LLOWANCE MADE BY THE AO OF RS. 25 80 480/- U/S 35 OF THE I.T . ACT. THE AO IS THEREFORE DIRECTED TO ENHANCE THE INCOME OF THE ASSESSEE BY RS. 6 45 120/- (RS. 32 25 600 RS. 25 80 480) WHIC H MAKES THE DISALLOWANCE TO RS. 32 25 600/-. 14. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. THE CRUX OF THE MATTER IN THE C ASE UNDER CONSIDERATION IS WHETHER CAPITAL EXPENDITURE INCURR ED FOR SCIENTIFIC RESEARCH EXPENSES ARE ALLOWABLE U/S 35 OR NOT. THE ORIGINAL CLAIM OF THE ASSESSEE WAS U/S 37 OF THE ACT. THE AO REJECTED THE ASSESSEES CLAIM U/S 37 OF THE ACT AS THE EXPENSES/ANALYTICAL CHARGES INCURRED WHICH WERE PAID TO M/S SCI MOLECULES INDIA PVT. LTD . WAS NOT A REVENUE EXPENDITURE. THE AO TREATED THE SAID EXPEND ITURE IS CAPITAL IN NATURE AND ALLOWED 1/5 TH OF THE EXPENDITURE SUBJECT TO AMORTIZATION OF BALANCE IN SUBSEQUENT YEARS. THE CIT(A) WAS OF THE VIEW THAT DEDUCTION U/S 35(1)(IV) R.W.S. 35(2)(IA) OF THE ACT . CANNOT BE ALLOWED FOR THE REASON THAT CERTIFICATE WITH REGARD TO M/S SCI MOLECULES INDIA PVT. LTD. WAS NOT CERTIFIED BY THE PRESCRIBED AUTHO RITY AS SPECIFIED IN RULE 6(1) AND THAT THE APPROVAL WAS ACCORDED TO M/S SCI MOLECULES INDIA PVT. LTD. PUNE AS R&D COMPANY ISSUED FOR THE PURPOSE OF SECTION U/S 80IB(5A) OF THE ACT. THE CIT(A) DISALLO WED THE ASSESSEES CLAIM TREATING THE EXPENDITURE AS CAPITAL IN NATURE AND ENHANCED THE ITA NO. 6541/MUM/08 AYUSHAKTI AYURVED P. LTD . 8 ADDITION ACCORDINGLY. WE FIND FORCE IN THE SUBMISSI ON OF THE LEARNED AR THAT THE CIT (A) HAS NOT PROPERLY APPRECIATED TH E PROVISIONS OF SECTION 35 OF THE ACT. TO EXAMINE THE ISSUE THE REL EVANT PORTION OF SECTION 35 READS AS UNDER:- 35. EXPENDITURE ON SCIENTIFIC RESEARCH.(1) IN RE SPECT OF EXPENDITURE ON SCIENTIFIC RESEARCH THE FOLLOWING D EDUCTIONS SHALL BE ALLOWED (I) TO (III) ** ** ** (IV) IN RESPECT OF ANY EXPENDITURE OF A CAPITAL NAT URE 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) : ** ** ** (2) FOR THE PURPOSES OF CLAUSE (IV) OF SUB-SECTION (1) (I) ** ** ** (IA) IN A CASE WHERE SUCH CAPITAL EXPENDITURE IS IN CURRED AFTER THE 31ST DAY OF MARCH 1967 THE WHOLE OF SUCH CAPITAL EXPENDITURE INCURRED IN ANY PREVIOUS YEAR SHALL BE DEDUCTED FOR THAT PREVIOUS YEAR : ** ** ** EXPLANATION.WHERE ANY CAPITAL EXPENDITURE HAS BEEN INCURRED BEFORE THE COMMENCEMENT OF THE BUSINESS THE AGGREG ATE OF THE EXPENDITURE SO INCURRED WITHIN THE THREE YEARS IMME DIATELY PRECEDING THE COMMENCEMENT OF THE BUSINESS SHALL BE DEEMED TO HAVE BEEN INCURRED IN THE PREVIOUS YEAR IN WHICH TH E BUSINESS IS COMMENCED. 14.1 FROM THE PLAIN READING OF SECTION 35 OF TH E ACT WE FIND THAT THE SCOPE OF THIS SECTION IS LIMITED TO ONLY T HE FOLLOWING SUMS INCURRED OR PAID BY THE ASSESSEE: 1) REVENUE EXPENDITURE ON SCIENTIFIC RESEARCH RELAT ED TO HIS BUSINESS [S. 35(1)(1)] 2) AMOUNT PAID TO AN APPROVED SCIENTIFIC RESEARCH A SSOCIATION OR INSTITUTION OR UNIVERSITY ETC. TO BE USED FOR SCIE NTIFIC RESEARCH [ 35(1)(II)] ITA NO. 6541/MUM/08 AYUSHAKTI AYURVED P. LTD . 9 3) AMOUNT PAID TO AN APPROVED COMPANY REGISTERED IN INDIA WITH THE MAIN OBJECT OF SCIENTIFIC RESEARCH AND DEVELOPMENT TO BE USED FOR SCIENTIFIC RESEARCH [S.35(1)(IIA). 4) AMOUNT PAID TO APPROVED UNIVERSITY COLLEGE OR I NSTITUTION TO BE USED FOR RESEARCH IN SOCIAL SCIENCE OR STATISTICAL RESEARCH RELATED TO THE CLASS OF BUSINESS CARRIED ON BY THE ASSESSEE. [ SECTION 35(1)(III) [ THE CONDITION THAT SUCH RESEARCH SHOULD RELATE TO T HE CLASS OF THE BUSINESS CARRIED ON BY THE ASSESSEE IS WAIVED WITH EFFECT FROM THE AY 1992-93] 5) CAPITAL EXPENDITURE ON THE SCIENTIFIC RESEARCH R ELATED TO THE ASSESSEES BUSINESS [SECTION 35(10(IV). 6) AMOUNT PAID TO AN APPROVED ASSOCIATION OR INSTIT UTION OR TO A PUBLIC SECTOR COMPANY TO BE USED FOR SCIENTIFIC RES EARCH UNDERTAKEN UNDER AN APPROVED PROGRAMME; NOT TO BE USED FOR ACQ UIRING LAND OR BUILDING [SECTION 35(2A) [ THIS DEDUCTION IS NOT AV AILABLE FROM 1 ST MARCH 1984 ONWARDS]. 7) AMOUNT PAID TO NATIONAL LABORATORY OR UNIVERSITY OR COLLEGE TO BE USED FOR SCIENTIFIC RESEARCH UNDERTAKEN UNDER AN AP PROVED PROGRAMME [S.35(2AA)]. 8) ANY EXPENDITURE NOT BEING IN THE NATURE OF CAPIT AL EXPENDITURE INCURRED ON THE ACQUISITION OF LAND OR BUILDING OR CONSTRUCTION OF ANY BUILDING INCURRED BY THE ASSESSEE HIMSELF ON SCIENT IFIC RESEARCH UNDERTAKEN UNDER AN APPROVED PROGRAMME [S.35 (2B)] [THIS DEDUCTION IS NOT AVAILABLE FROM1ST MARCH 1984 ONWARDS]. 14.2 THE OBJECT BEHIND THE ENACTMENT OF SECTION 35 OF THE ACT IS TO ENCOURAGE RESEARCH AND DEVELOPMENT ACTIVITIES BY TH E ASSESSEE. AS AN INCENTIVE THE LEGISLATURE HAS GIVEN THIS BENEFIT B Y WAY OF DEDUCTION IN RESPECT OF THE CAPITAL EXPENDITURE INCURRED BY T HE ASSESSEE. THIS IS A PROVISION FOR THE BENEFIT OF THE ASSESSEE AND IF THE ASSESSEE INCURS CAPITAL EXPENDITURE FOR THE PURPOSE OF RESEARCH AND DEVELOPMENT DURING THE RELEVANT PREVIOUS YEAR IN OUR OPINION THE REVENUE SHOULD ITA NO. 6541/MUM/08 AYUSHAKTI AYURVED P. LTD . 10 NOT DEPRIVE THE ASSESSEE OF THE BENEFIT OF DEDUCTIO N UNDER THE PROVISIONS OF SECTION 35 OF THE ACT. 14.3 IN THE LIGHT OF THE ABOVE DISCUSSION IF WE CONSIDER THE ADMITTED FACTS OF THE CASE UNDER CONSIDERATION WE FIND THAT THE ASSESSEE HAS INCURRED RESEARCH EXPENSES WHICH ARE CAPITAL IN NATURE AND THESE FACTS ARE NOT IN DISPUTE. AS PER SECTION 35(1)( IV ) IN RESPECT OF ANY EXPENDITURE OF A CAPITAL NATURE ON SCIENTIFI C RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE SUCH DEDUC TION AS MAY BE ADMISSIBLE UNDER THE PROVISIONS OF SUB-SECTION (2) SHALL BE ALLOWED. SECTION 35(2) ( IA ) PROVIDES THAT IN A CASE WHERE SUCH CAPITAL EXPENDITURE IS INCURRED AFTER 31-3-1967 THE WHOLE OF SUCH CAPITAL EXPENDITURE INCURRED IN ANY PREVIOUS YEAR SHALL BE DEDUCTED FOR THAT PREVIOUS YEAR. THE SECTION REFERS TO CAPITAL EXPEN DITURE AND DOES NOT REQUIRE ANY FURTHER REQUIREMENT. AS STATED ABOVE TH AT THE EXPENDITURE INCURRED IS CAPITAL IN NATURE AND THE SAME IS ALLOW ABLE U/S DEDUCTION U/S 35(1)(IV) R.W.S. 35(2)(IA) OF THE ACT. WE ACCOR DINGLY SET ASIDE THE ORDER OF CIT (A) AND ALLOW THE CLAIM OF THE ASSESSE E. THE ASSESSEE TAKEN GROUND NO 9 FOR WEIGHTED DEDUCTION 125 % UNDE R SECTION 35 OF THE ACT BUT THIS WAS NOT ARGUED BEFORE US THEREFORE SAME IS REJECTED. 15. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED AS INDICATED ABOVE. PRONOUNCED ON THIS 9 TH DAY OF FEBRUARY 2010 SD/- SD/- (R.K. GUPTA) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTAN T MEMBER DATED: 9 TH FEBRUARY 2010 ITA NO. 6541/MUM/08 AYUSHAKTI AYURVED P. LTD . 11 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE A BENCH I.T .A.T. MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR I.T.A.T. MUMBAI. KV S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 01.02.10 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 03.02.10 SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER