Case Law Details
RELEVANT PARAGRAPH
9. The plain reading of the above clause (iv) of 35(1) reveals that the deduction shall be admissible u/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, where the former one is an exhaustive definition and later one is inclusive definition. As there is no dispute on the term scientific research, the present discussion is 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 clause (iv) of section 35(1), the words ‘carried on by the assessee’ assumes 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 relate to a business which is 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 section 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’ refers to the business of the assessee. To continue the discussion, we find that an assessee may be engaged in a particular business arid may also undertake the scientific research activity relating to that business and incur capital expenditure on such research. Alternatively, an assessee, as in the instant case, 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, say the subsidiary companies. Whether the deduction u/s 35 is available in all these cases. To resolve the sasme we find that the Board’s circular 281 dated 22.9.1980, para 10.2 in particular, mentions that the section 35(l)(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 dated 9.10.1967 is categorical in stating that the said deductions are aimed at providing the incentives for encouraging the scientific research in India and the assessee’s who needs 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 and not the business of the other assessees. Further, we find that the said provisions of section 35(l)(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 u/s 35 is not intended to the assessee, who does not develop the in-house scientific research activities but is engaged in development and supply of the scientific research to the business of the other assessees. Further, the presence of specific references to ‘related to business carried on by the assessee’r the provisions and the inclusive definition given to the same in section 43(4)(lii)(a) f convey that it is not a case of casus omisustoo.
10. 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. Further, other argument is that the research developed is for the subsidiary companies of the group. In this regard, we find that there is no dispute on the assessee developing the scientific research and sale of the same to CIBA Basle. In such circumstances, the assessee, in our considered opinion, cannot be said to have two distinct activities ie business activity on one side and related scientific research activity on the other. In other words, the assessee does not have the business activity to absorb the developed scientific research. Further, it is also hot the case of the assessee that he is covered by section 43(4)(iii)(a) ie the cases of scientific research, which may lead to or to facilitate an extension of that business’. Thus, by conducting the said research, the assessee generates a marketable product or stock in trade in the form of the scientific research. In these circumstances, we are of the opinion that the provisions of section 35(l)(iv) have no applicable to assessee’s case and accordingly, this part of the arguments of the assessee’s counsel is dismissed.
