INVENTIA HEALTHCARE P.LTD,MUMBAI vs. DCIT 9(2), MUMBAI

ORDER PER RAVISH SOOD, J.M: The present appeal filed by the assessee company for assessment year 2010-11 is directed against the order passed by the CIT (A)-20, Mumbai dated 06-05-2014, which in turn has arisen out of order passed by the Assessing officer (in short „A.O‟) under section 143 (3) of the income tax „Act‟ 1961 (in short „Act‟), dated 22/02/2013.The grounds of appeal raised by the assessee company read as under:

“1. The learned CIT (A) erred in confirming the denial of the depreciation on Patent expenses which were capitalised in the books by the appellant in earlier years.

at any time or at the time of hearing."

2. The facts of the case are that the assessee a private limited company engaged in the business of manufacturing pharmaceutical formulations filed its return of income as on 07.09.2010 declaring a „loss‟ of Rs.8,55,11,372/-, which was revised at a „loss‟ of Rs. 8,71,24,645/- by way of a revised return of income filed as on 25.09.2010. The case of the assessee company was taken up for scrutiny assessment, pursuant whereto the A.O after deliberating on certain issues, assessed the total loss of the assessee company at Rs. 8,20,26,201/-. The A.O during the course of the assessment proceedings carried out certain disallowances/additions in the hands of the assessee company, the factual background of those which had been assailed by the assessee company before us are briefly culled out as under: (i). Disallowance of Patent expenses: That during the course of the assessment proceedings it was observed by the A.O that an amount of Rs.20,76,724/- incurred by the assessee company towards „Patent expenses‟ was debited under the head 'Miscellaneous expenses' in the „P & loss a/c‟. The A.O being of the view that as the said expenditure was in the nature of a „Capital expenditure‟, therefore called upon the assessee company to justify its claim as regards allowance of the same as a „Revenue expenditure‟, in compliance whereto the assessee company emphasised on its claim as regards allowability of the said amount as a revenue expenditure, but thereafter came up with an alternative plea that in case of treatment of the same as a „Capital expenditure‟, depreciation of Rs.10,64,618/-was to be allowed as regards the capitalized value of the „Patent expenses‟ pertaining to the year under consideration, as well as those for the preceding years. The A.O discarding the contention of the assessee company and being of the view that as per Explanation 3 to Section 32(1)(ii) of the „Act‟, the patents were covered in the scope and gamut of the definition of intangible assets, therefore the expenses incurred as regards the same was a 'capital expenditure', disallowed the claim of Rs. 20,76,724/- of the assessee company, but on the basis of such recharacterisation of the aforesaid expenditure as a „capital expenditure‟, allowed a consequential depreciation of Rs.5,19,181/- on the aforesaid capitalized value of Rs. 20,76,724/- (supra) to the assessee company . (ii). Disallowance of deduction U/s 35(2AB): That during the course of the assessment proceedings the A.O while scrutinizing the claim of the assessee company towards deduction u/s 35(2AB) of the „Act‟, therein observed that while for the copy of approval received in 'Form 3CM' and the report in 'Form 3CL' from the 'Ministry of science and technology' revealed that 'capital expenditure' of Rs. 2,73,27,967/- and 'revenue expenditure' of Rs. 6,54,51,287/-, therein aggregating to 9,27,79,254/- had been approved by the said prescribed authority as the amount eligible for claim of deduction U/s 35 (2AB) of the „Act‟, on the basis of which the said deduction stood quantified at Rs.7,37,17,242/-, however a perusal of the audit report of the assessee company revealed that the latter had claimed 'capital expenditure' of Rs.2,73,27,967/-and 'revenue expenditure' of Rs. 6,82,06,583/-, therein aggregating to Rs. 9,55,34,550/- as the amount eligible for claim of deduction U/s 35(2AB) of the „Act‟, on the basis of which the claim towards the said deduction was raised by the assessee company at an amount of Rs. 7,50,95,242/-. The AO holding a conviction that the claim of the assessee company towards deduction u/s 35(2AB) was liable to be restricted on the basis of the amount approved by the prescribed authority, and not on the basis of the claim raised by the assessee company in its financial statements, thus restricted the said claim of the assessee company to an amount of Rs.7,37,17,242/-, and made a consequential addition/disallowance of Rs.13,78,000/-in the hands of the assessee company. (iii). Addition on account of bogus purchases: That during the course of the assessment proceedings the A.O acting on the basis of the information received from the investigation wing that the assessee company had indulged in the practice of taking bogus purchases bills from one M/s Yashita trading company Pvt. Ltd., and during the year under consideration had routed 'bogus purchases' amounting to Rs. 13,04,375/- through its „books of accounts‟, therein being of the view that as the assessee company despite being afforded sufficient opportunity to substantiate the genuineness and veracity of the aforesaid purchase transactions, had however failed to discharge the 'Onus' as stood cast upon it, coupled with the fact that in light of the specific information received by the investigation wing of the department and the sales tax authority that the aforesaid supplier party i.e. M/s Yashita trading company Pvt. Ltd.(supra) had in itself admitted that it was involved in the practice of providing paper entries and had only provided the accommodation entries to the assessee company, thus in light of the aforesaid state of facts as they so remained, therein concluded that the assessee company had indulged into booking of 'bogus purchases' in its „Books of accounts‟. The A.O further adverting to the specific claim of the assessee company that as it had purchased 'fixed assets' viz. electrical material from the aforesaid supplier party, therefore addition of the entire amount of Rs. 13,04,375/-(supra) could not be made in its hands, therein observing that the additions as claimed to have been made by the assessee company towards 'fixed assets' during the year under consideration, on examination were neither found to be reflected in the assets categorised under the head 'electrical fittings', nor under the other heads of assets, thus being of the view that the assessee company had suppressed its income by booking „bogus purchases‟ of Rs. 13,04,375/-(supra), therein made an addition/disallowance of the said amount in the hands of the assessee company.

3. The assessee company being aggrieved with the assessment framed by the AO carried the matter in appeal before the CIT(A)-20, Mumbai, who upheld the order of the AO and dismissed the appeal of the assessee company. That the CIT(A) while sustaining the disallowance/addition of Rs. 20,76,724/- made by the AO as regards the 'Patent expenses', further referred to the fact that similar disallowance made in the hands of the assessee company in A.Y. 2007-08 and A.Y 2009-10 had been upheld by his predecessor, which was not further agitated in appeal by the assessee company, as a result whereof it could safely be inferred that the assessee company had concurred to the same. The CIT(A) still further declined to entertain the alternative contention of the assessee company on the issue of quantification of depreciation on 'Patent expenses' as was so claimed by him, as against that allowed by the A.O. That adverting to the contention of the assessee company that the A.O had erred in restricting its entitlement towards claim of deduction U/s 35(2AB) of the „Act‟ by an amount of Rs.13,78,000/-, the CIT (A) being of the view that as the said entitlement of the assessee company was statutorily required to be in parity with the amount computed on the basis of the figures which were approved by the 'Ministry of science and technology', and no fallacy as regards the said quantification so carried out by the prescribed authority had been pointed out by the assessee company, therefore upheld the disallowance/addition made on the said count by the AO. The CIT (A) while upholding the disallowance/addition made by the A.O towards claim of deduction u/s 35(2AB), further came up with a fresh observation that the assessee company had also failed to substantiate as to how the expenses pertaining to rent, repair expenditure and professional and legal charges, which had been considered by the assessee company while computing its deduction U/s 35(2AB) were related to scientific research. The CIT(A) further adverting to the addition of Rs. 13,04,375/- made by the A.O as regards the „bogus purchases‟ booked by the assessee company for suppressing its income, therein observed that in light of the fact that the assessee company had failed to establish the genuineness and veracity of the purchases claimed to have been made from M/s Yashita trading company private limited (supra) and thus failed to discharge the „Onus‟ as stood cast upon it, coupled with the fact that the information received by the A.O from the investigation wing of the Income tax Department as well as the Sales tax Department, Government of Maharashtra, revealed that M/s Yashita trading company Pvt. Ltd. (supra) was admittedly an accommodation bill provider and no genuine purchases had been carried out by the assessee company from the said concern, therein sustained the adverse inferences drawn by the A.O as regards the genuineness and veracity of the purchase transactions in the hands of the assessee company. The CIT(A) further endorsing the observations of the A.O that as the purchases under consideration from the aforesaid party, as claimed by the assessee company to have been made towards additions in the 'fixed assets' during the year under consideration, on examination were neither found reflected in the assets categorised under the head 'electrical fittings', nor under the other heads of assets, therein rejected the said contention of the assessee company and upholding the order of the A.O, therein sustained the addition of Rs. 13,04,375/- made towards „bogus purchases‟ in the hands of the assessee company.

4. That the assessee company being aggrieved with the dismissal of its appeal by the CIT(A) had filed the present appeal therein assailing the sustaining of the aforesaid additions/disallowances in its hands. That at the very outset the Ld. authorised representative for the assessee company (for short „A.R‟) adverting to the issue as regards claim of „Patent expenses‟ by the assessee company as a revenue expenditure in its „Profit & loss account‟, therein submitted that the assessee company remaining under a bonafide belief that as the said expenditure was incurred towards registration charges and did not give rise to an intangible asset, had thus claimed the same as a revenue expenditure. It was further submitted by the Ld. A.R that the lower authorities after characterizing the aforesaid expenditure as „Capital expenditure‟, had erred by restricting the entitlement of the assessee company towards depreciation only as regards the „Patent expenses‟ of Rs. 20,76,724/-, i.e the expenditure incurred by the assessee company during the year under consideration, therein absolutely loosing sight of the „Written down value‟ (for short „W.D.V‟) of the capitalized value of the „Patent expenses‟ pertaining to the preceding years, which as in the year under consideration had also been treated by the department in the said preceding years as a „Capital expenditure‟. The Ld. A.R in order to fortify his claim, therein drew our attention to the relevant extract of the assessment order passed u/s 143(3) of the „Act‟ in the case of the assessee company for the immediately preceding year, i.e A.Y. 2009-10 (Page 64 - 65 of the „APB‟), which therein revealed that as in the year under consideration, the A.O while framing the assessment for the said preceding year, though on a similar footing had discarded the claim of the assessee company that the „Patent expenses‟ of Rs. 4,51,282/- so incurred during the said year were to be allowed as a „revenue expenditure‟, but simultaneously had accepted the claim of the assessee company and allowed depreciation on the aggregate of the opening W.D.V of the „Patent expenses‟ as on 01/04/2008, and those incurred during the said year. It was thus submitted by the Ld. A.R that as the department in the case of the assessee company had consistently taken the view that expenditure incurred towards 'Patent expenses' is in the nature as that of a capital expenditure and as a result thereof had allowed depreciation on the same, therefore the same would result in amortisation of the expenditure over a period, instead of the same being allowed in the year of incurring of the expenditure. Thus in light of the aforesaid factual background it was averred by the Ld. A.R that the lower authorities had erred in not allowing depreciation as regards the „Patent expenses‟ which had been capitalised in the preceding years and had wrongly restricted the same only as regards those incurred during the year under consideration. The Ld. A.R in order to fortify his quantification of depreciation at Rs.10,64,618/-(supra), as against the depreciation of Rs.5,19,181/-(supra) allowed by the lower authorities, drew our attention to Page 11 of the „APB‟, wherein the calculation as regards the year wise incurring of expenditure towards patents expenses by the assessee company, on the basis of which the entitlement of the assessee company towards claim of depreciation was computed at an amount of Rs 10,64,618/-(supra) stood reflected. That on the other hand the Ld. D.R during the course of hearing, on a query by the bench as regards the inconsistent approach adopted by the A.O as regards the statutory entitlement of the assessee company towards depreciation on the „Block of assets- Patent expenses‟, therein submitted that the matter may be restored to the file of the A.O with a direction to make necessary verification as regards the genuineness and veracity of the said claim of the assessee company. 4.1 That as regards the restricting of the deduction claimed by the assessee company under section 35(2AB) of the „Act‟ to an amount of Rs. Rs.7,37,17,242/- by the lower authorities, as against the claim of the assessee company of Rs. 7,50,95,242/-, therein leading to a consequential addition /disallowance of Rs. 13,78,000/-in the hands of the assessee company, it was submitted by the Ld. A.R that the authorities below had misconceived and misinterpreted the scope and gamut of section 35(2AB) of the „Act‟, and thus had wrongly observed that the entitlement of the assessee company towards claim of deduction u/s 35(2AB) was liable to be quantified on the basis of the amount of expenditure as was approved by the „Ministry of science and technology‟. It was submitted by the Ld. A.R that the claim of the assessee company u/s 35(2AB) was as per the mandate of law, and though the provisions of section 35(2AB) requires that the details of expenditure incurred by an assessee are to be submitted to the „Department of science and industrial research‟ (for short „DSIR‟), but however merely on account of difference of opinion between the „DSIR‟ and the assessee, the latter cannot be denied the benefit of deduction as claimed by it under section 35(2AB). It was further submitted by the Ld. A.R that neither the section, nor any other specific provision mandates that the weighted allowance under section 35(2AB) is liable to be restricted to the expenditure approved by the 'DSIR', for the reason if that had been so then the provisions would had clearly provided for affording of an opportunity to the assessee to explain his case in regard to the variance in the said expenditure. The Ld. A.R in order to drive home his contention therein placed reliance on the order of the Hon’ble Income tax appellate tribunal, Ahemdabad bench, in the case of : ACIT Vs. Torrent pharmaceuticals Ltd [28 CCH 783 (2009)]. The Ld. D.R on the other hand relied on the orders of the lower authorities and therein submitted that the entitlement of the assessee company towards deduction u/s 35(2AB) was liable to be restricted to the amount approved by the „Prescribed authority‟. It was thus submitted by the Ld. D.R that the order of the CIT(A) be sustained and the appeal of the assessee company as regards the said issue under consideration be dismissed. 4.2. That the Ld A.R further challenging the sustaining of the addition of Rs. 13,04,375/-(supra) by the CIT(A) as regards 'bogus purchases', therein submitted that the assessee company had carried out purchases of Rs.13,04,375/- (supra) towards purchase of „fixed assets‟ (electrical material from the concerned supplier party, i.e M/s Yashita trading company Pvt. Ltd), which inadvertently had been capitalized under the head „Factory building‟. The Ld. A.R in order to substantiate his aforesaid contention, therein took us through the relevant extracts of SAP placed on record, wherein the said transactions stood reflected. It was thus in the aforesaid factual background submitted by the Ld. A.R that though not admitting, however even if the genuineness and veracity of the purchase transactions under consideration were to be disbelieved by the lower authorities, the resultant disallowance could not exceed the amount of depreciation pertaining to the amount capitalized by the assessee company in its „books of accounts‟. It was thus submitted by the Ld. A.R that now when the purchases under consideration so made by the assessee company had not been claimed as a „revenue expenditure‟, therefore the lower authorities without rebutting the said claim of the assessee company and placing on record any material which could go to prove otherwise, were not justified in making an addition of the aforesaid amount of Rs.13,04,375 (supra) in the hands of the assessee company. The Ld. A.R in order to substantiate the genuineness of the purchase transactions under consideration, therein further submitted that the payments towards the purchase consideration to the aforesaid supplier party were made by the assessee company through regular banking channels. It was thus submitted by the Ld. A.R that the A.O without appreciating the facts of the case in the right perspective, had therein on the basis of premature findings hushed through the matter and made an addition of Rs. 13,04,375/- (supra) in the hands of the assessee company, which thereafter had been sustained as such by the CIT(A). 4.3. The Ld. D.R on the other hand heavily relied on the orders of the lower authorities and therein submitted that in light of the fact that the supplier party had admitted that it was involved in the business of accommodation bill provider, coupled with the fact that the assessee company had failed to discharge the onus as was so cast upon it to prove the genuineness and veracity of the purchase transactions under consideration, therefore the A.O had rightly made an addition of Rs. 13,04,375/- as regards the said „bogus purchases‟ in the hands of the assessee company, which thereafter had rightly been sustained by the CIT(A). It was thus submitted by the Ld. D.R that the appeal of the assessee company as regards the said issue under consideration may be dismissed and the order of the CIT(A) be upheld.

5. We have considered the rival submissions of either side and perused the relevant materials on record, including the orders of the authorities below. That as regards the issue pertaining to the expenditure incurred by the assessee company towards „Patent expenses‟, we though are persuaded to be in agreement with the observations of the lower authorities that in light of clearly worded Sec. 32(1)(ii) of the „Act‟, which reads as under:- “32(1). In respect of depreciation of – (ii).Know how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998” , there can be no escape from the conclusion that the „Patent expenses‟ incurred by the assessee company takes the color and character as that of a capital expenditure, on which capitalized value the assessee company would stand duly entitled towards depreciation, as a result whereof the same would result in amortisation of the said expenditure over a period, instead of the same being allowed in the year of incurring of the expenditure, but however are unable to subscribe to the view of the lower authorities that the entitlement of the assessee company towards depreciation is liable to be restricted only as regards the capitalized value of the patent expenses pertaining to the year under consideration, while for no cognizance is to be taken of the capitalized value of the „Patent expenses‟ incurred by the assessee company in the preceding years. We are of the considered opinion that now when the lower authorities had discarded the claim of the assessee company and had held that the „Patent expenses‟ were not to be allowed as a „revenue expenditure‟, and had recharacterised the same as a „capital expenditure‟, thereafter pursuant to such recharacterisation, all the more in light of the specific claim raised by the assessee company, the A.O remained under a statutory obligation to allow depreciation, i.e both as regards the capitalized value of the „Patent expenses‟ pertaining to the year under consideration, as well as on the W.D.V of those as had been capitalised in the preceding years. (i.e on the W.D.V of the „Block of asset-patents‟). The Ld. A.R had during the course of hearing of the appeal drawn our attention to Page 11 of „APB‟, wherein the quantification of depreciation as regards the „Block of assets-Patent expenses‟, as computed by the assessee company stands reflected at Rs.10,64,618/- (supra). Though we are not oblivious of the settled position of law that an assessee cannot be allowed to improve upon his return of income by raising fresh claims in the course of the assessment proceedings, but as in the case of the present assessee company, where as a result of differential treatment given by the A.O to a claim raised by an assessee in his return of income, a consequential statutory entitlement emerges and gets vested with the latter, then to our opinion the A.O remains under a statutory obligation to give effect to the same without any reservation. Thus in the case of the present assessee company, in the background of the settled position of law as stands contemplated in Sec. 32(1)(ii)- Explanation 5, which reads as under:- “Explanation 5 – For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income.”

, and thus provides that irrespective of the fact that as to whether an assessee had claimed deduction in respect of depreciation while computing his total income, or not, the same shall mandatorily be considered to have been given effect to, we are thus of the considered view that pursuant to the recharacterisation of the patent expenses as „Capital expenditure‟ by the A.O, the assessee company as a result thereof was entitled towards depreciation on the „Block of assets- Patents‟, i.e not only as regards the capitalized value of the „Patent expenses‟ pertaining to the year under consideration, but also as on the Opening W.D.V of those pertaining to the preceding years, to the extent the same had been capitalised in the said preceding years. We thus restore the issue to the file of the A.O with a direction that the entitlement of the assessee company towards deprecation on the capitalized value of the „Patent expenses‟ be computed and therein given effect to in light of our aforesaid observations, to which the Ld. D.R is in agreement. However, before parting, we are of the view that though the assessee company had drawn our attention to the relevant extract of the assessment order passed in its case u/s 143(3) for the immediately preceding year, i.e A.Y. 2009-10 (Page 64 - 65 of „APB‟), wherein it stands reflected that the A.O had allowed depreciation, both on the capitalized value of the „Patent expenses‟ of Rs. 4,51,282/- pertaining to the said preceding year, as well as the Op. W.D.V of „Patent expenses‟ amounting to Rs.24,57,716/- as on 01/04/2008, pursuant whereto the „Op. W.D.V‟ of the „Block –Patent expenses‟ as on 01/04/2009, i.e for the year under consideration, as claimed by the assessee company stands reflected at Rs. 21,81,749/-, but we are of the considered view that the summarily acceptance of the Opening W.D.V of „Patent expenses‟ of Rs. 24,57,716/-(supra) by the A.O while framing the assessment in the hands of the assessee company for A.Y. 2009-10, does not inspire much confidence, therefore as a word of caution the A.O is directed to work out the Op. W.D.V of the „Block-Patent expenses‟ as on 01/04/2009 after making necessary verifications to his satisfaction, and only on being convinced that no part of the said „Patent expenses‟ had in the said preceding years been allowed as a „revenue expenditure‟ in the hands of the assessee company, therein rework the entitlement of the assessee company towards deprecation on „Block of assets- Patent expenses‟, in light of our aforesaid observations. The „Ground of appeal No. 1 & 2‟ so raised by the assessee company before us are thus allowed in light of our aforesaid observations for statistical purposes. 5.1. We have further considered the rival submissions of either side and perused the relevant materials on record, including the orders of the authorities below as regards the addition/disallowance made by the A.O u/s 35(2AB) of the „Act‟ and are unable to find ourselves to be in agreement with the observations of the lower authorities, to the extent the latter had concluded that the entitlement of the assessee company as regards weighted deduction u/s 35(2AB) of the „Act‟ is liable to be restricted to Rs.7,37,17,242/-, i.e on the basis of the amount approved by the „Ministry of Science & Technology‟, as against the claim of Rs. 7,50,95,242/- raised by the assessee company as per its financial statements, for the reason as had weighed with them, the entitlement of the assessee company is statutorily required to be in parity and cannot exceed the amount computed on the basis of the figures which were approved by the 'Prescribed authority‟. We are of the considered view that the lower authorities had absolutely misconceived and misinterpreted the scope and gamut of the weighted deduction contemplated u/s 35(2AB) of the „Act‟. That as per the mandate of Sec. 35(2AB) of the „Act‟, an eligible assessee company which incurs any expenditure on in-house research and development facility (not being expenditure in the nature of cost of any land or building) as approved by the prescribed authority, is entitled for deduction contemplated therein, subject to the condition that it enters into an agreement with the prescribed authority for co-operation in such research & development facility and audit of the accounts maintained for that facility, and submits with the „Prescribed authority‟ by 31st day of October of the relevant assessment year the details as regards the expenditure incurred by it on the in-house research and development facility, on the basis of which the „Prescribed authority‟ records its approval and submits the details of the expenditure approved to the „Director General (Exemptions)‟ in „Form 3CL‟. Thus a bare perusal of Sec. 35(2AB) reveals that what is required to be approved by the „Prescribed authority‟ is the „in-house R & D facility‟, and not the „amount of expenditure incurred by R&D approved unit‟. That for the sake of clarity the relevant extract of Sec. 35(2AB) is reproduced as under:- “Sec. 35(2AB). Where a company engaged in the business of .........incurs any expenditure on scientific research............on in-house research and development as approved by the prescribed authority then, there shall be allowed a deduction [of a sum equal to one and one-half times of the expenditure so incurred]. Thus in light of the aforesaid clearly worded statutory provision, it stands inescapably gathered beyond any scope of doubt that Sec. 35(2AB) though postulates approval by the prescribed authority of the “in-house R & D facility”, however the same no where provides that the amount of deduction shall be regulated and restricted on the basis of the amount approved by the „Prescribed authority‟. That our aforesaid view is fortified by the order of the Hon’ble Ahemdabad bench of the Tribunal, in the case of : ACIT Vs. Torrent Pharmaceuticals Ltd. [28 CCH 783(2009)] , wherein the Tribunal observing that the amount of expenditure approved by the „Prescribed authority‟ in „Form 3CL‟ will not have any bearing as regards the allowability of the weighted deduction in the hands of the eligible assessee company, held as under:-

“Thus there was no justification in harping upon the figure contained in Form 3CL as is done by the Assessing Officer. The provisions of the Act does not contain any specific conditions for the allowance of expenditure to the effect that it will be restricted to that contained in Form 3CL” We find ourselves to be in agreement with the aforesaid order of the co-ordinate bench of the Tribunal, and thus in light of our aforesaid observations set aside the findings of the lower authorities that the entitlement of the assessee company towards weighted deduction u/s 35(2AB) is liable to be restricted to the extent the in-house research and development expenditure incurred by the assessee company is approved by the prescribed authority. Now, adverting to the observations of the CIT(A) that the assessee company had failed to substantiate as to how the expenses pertaining to rent, repair expenditure and legal and professional charges had been incurred in the course of the scientific research activities of the assessee company, we are of the considered view that such a stray observation recorded for the first time by the CIT(A), without even confronting the same to the assessee, at the threshold on the said count itself is liable to be vacated. However, independent of the aforesaid factual position, the Ld. A.R submitted before us that as the rent and repair expenditure so claimed by the assessee company as forming part of the eligible amount entitled for claim of deduction u/s 35(2AB) of the „Act‟, in itself pertained to the premises at which the research and development facility was located, as well as the legal and professional charges had been incurred in the course of and to facilitate the scientific research, therefore the said nature of the expenses read in light of the underlying purpose behind incurring of the same, ipso facto established beyond any scope of doubt the inextricable nexus of the said expenses and the scientific research activities of the assessee company, as regards which no infirmity had ever been pointed out by the A.O.

The Ld. A.R in support of his aforesaid contention placed reliance on the order of a coordinate bench of the Tribunal in the case of :- USV Ltd. Vs. DCIT, Central Circle-32, Mumbai (2012) 24 taxmann.com 218 (Mum)

, wherein it was held:

“The repairs, rent, etc., the expenditure incurred relating to R & D premises cannot form part of cost of land or building. In the absence of any fact that the said claim of the assessee aggregating to Rs. 62,00,689/- , is not the expenditure on rents, rates and taxes relating to R &D premises, we are of the considered view that the said expenditure has to form part of weighted deduction as per section 35(2AB) of the Act” We thus in light of the aforesaid facts and settled position of law, find ourselves to be in agreement with the Ld. A.R and are of the considered view that as the aforesaid expenses had been incurred by the assessee company on the scientific research pertaining to its business of manufacturing pharmaceutical formulations (not being expenditure in the nature of cost of any land or building) on in-house research and development facility approved by the prescribed authority, therefore the same in the absence of any fact which could go to prove that the said claim of expenditure by the assessee company on rent and repairs does not pertain to the R &D premises, or the professional and legal charges has no nexus with the scientific research of the assessee company, thus stands duly eligible for claim of weighted deduction u/s 35(2AB) of the „Act‟. Thus in light of our aforesaid observations, the disallowance of Rs. 13,78,000/- (supra) so made by the A.O is set aside, and the „Ground of appeal No.3 & 4‟ so raised by the assessee company are allowed.

5.2. We have further considered the rival submissions of either side and perused the relevant materials on record, including the orders of the authorities below as regards the addition/disallowance of Rs. 13,04,375/- made by the A.O on account of „bogus purchases‟ stated to have been made by the assessee company during the year under consideration. We find that the A.O acting on the basis of information received from the investigation wing and the Sales tax department, that the assessee company had during the year under consideration routed through its „books of accounts' certain „bogus purchases‟ made from one M/s Yashita trading company Pvt. Ltd., a concern which was stated to be carrying on the business of accommodation bill provider, therein going by the aforesaid information so received and being of the view that the assessee company had failed to discharge the onus as stood cast upon it as regards proving the genuineness and veracity of the purchase transactions under consideration, therein hushed through the matter and made an addition of the entire purchases of Rs. 13,04,375/-(supra) in the hands of the assessee company, which thereafter was sustained by the CIT(A). We have given our thoughtful consideration to the facts of the case and though find ourselves to be in agreement with the lower authorities that the assessee company had failed to have effected strict compliance of the directions of the A.O, and majority of the queries and compliances sought for by the A.O did never see the light of the day, thus it could safely be held that the assessee company had failed to discharge the onus as stood cast upon it as regards proving the genuineness and veracity of the purchase transactions under consideration, but thereafter the lower authorities before arriving at any conclusion, remained under a statutory obligation to consider the explanation of the assessee company, to the extent the same was made available on record, and on the said basis ought to have arrived at a logical conclusion. However, we find that the A.O dealing with the alternative contention of the assessee company that as it had purchased „fixed assets‟ (i.e electrical material from the aforesaid supplier party, i.e M/s Yashita trading company Pvt. Ltd), and thus if adverse inference as regards the genuineness and veracity of the said purchase transactions were to be drawn, even then the addition was liable to be restricted only as regards the corresponding claim of depreciation so raised by the assessee company as regards the capitalized value of the said assets, however proceeded with and observing that the additions as claimed to have been made by the assessee company towards 'fixed assets' during the year under consideration, on examination were neither found reflected in the assets categorised under the head 'electrical fittings', nor under the other heads of assets, thus hushed through the matter and concluded that the assessee company had suppressed its income by booking „bogus purchases‟ of Rs. 13,04,375/-, and made an addition/disallowance of the said amount in the hands of the assessee company . We are of the considered opinion that the A.O while making the addition of Rs. 13,04,375/-(supra) in the hands of the assessee company, had gravely erred by loosing sight of the fact that it had never emerged that the amount of Rs. 13,04,375/-(supra) had been claimed by the assessee company as a revenue expenditure, the genuineness and veracity of which having not been established, was thus liable to be added/disallowed in the hands of the assessee company. That to be brief and explicit, the situation which had emerged pursuant to the addition of Rs. 13,04,375/-(supra) is that the A.O had carried out disallowance of the aforesaid amount, which though had not been proved to have been claimed as an expense by the assessee company in its „books of accounts‟. Rather we are of the view that now when it was throughout claimed by the assessee company that the purchases under consideration being in the nature as that of „fixed assets‟, had thus been capitalized, therefore a very heavy onus was cast upon the lower authorities, i.e not only to dislodge the said contention, but also to prove that the said amount had been claimed as an expenditure in the „final accounts‟ of the assessee company. That before us it was submitted by the Ld. A.R that the purchases of Rs.13,04,375/- (supra) made by the assessee company towards purchase of „fixed assets‟, inadvertently had been capitalized under the head „Factory building‟, in support of which contention the Ld. A.R has taken us through the relevant extracts of SAP placed on record, wherein the said transactions as claimed hereinabove, stood reflected. We have perused the facts of the case and the material furnished before us, and are of the considered opinion that the lower authorities had hushed through the matter and on the basis of premature findings therein made an addition of Rs. 13,04,375/-(supra) in the hands of the assessee company. Thus taking an overall view of the issue under consideration, we in all fairness herein restore the matter to the file of the A.O for verifying the aforesaid claim of the assessee company that the purchases under consideration had been capitalized under the head „factory building‟, and in case if the said contention of the assessee company is found to be in order, therein direct the A.O to restrict the addition upto the amount of the corresponding depreciation so clamed on the said capitalized value. That needless to say, the A.O shall afford sufficient opportunity of being heard to the assessee company during the course of the set aside proceedings. Thus in light of our aforesaid observations, the „Grounds of appeal

No. 5 to 8‟ raised by the assessee company are allowed for statistical purposes.

6. In the result, the appeal of the assessee company is partly allowed. Order pronounced in the open court on 26/08/2016.