1. This is an appeal filed by the Department against the order of the CIT(A) dt 31st March, 1994, relating to asst. yr. 1992-93.
"1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in allowing deduction of Rs. 28,46,808 under Section 35(2)(ia) without appreciating the facts that deduction under Section 35 is only for the business activities while the activities carried on by the assessee are covered under the terms 'Profession'.
2. The learned CIT(A) has erred in allowing the deduction of Rs. 28,46,808 without appreciating the fact that the capital expenditure has been incurred for extension of commercial activities carried on by the assessee-company.
3. It is prayed that the order of the Ltd. CIT(A) may be vacated and that of the AO be restored.
4. The appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed of." 3. From the above noted grounds, it would be clear that the only grievance of the Department relates to the allowing of deduction of Rs, 28,46,808 under Section 35(2)(ia) which was disallowed by, the AO.The relevant facts relating to the issue in brief are that the assessee being a private limited company was engaged in carrying on the profession of nursing home which provides medical treatment to patients with all kinds of eye problems. The assessee filed its return of income declaring an income of Rs. 61,58,140 on 14th Dec., 1992. During the assessment proceedings, the AO noted that the assessee had claimed deduction under Section 35(2)(ia) amounting to Rs. 28,46,808 on account of machinery used for scientific research costing Rs. 37,15,408. He further noted that the assessee had reduced from the cost of machinery Rs. 8,68,600 on account of experimental receipts. The AO asked the assessee to substantiate its claim under Section 35(2)(ia) of the IT Act. It was submitted before the AO that the expenditure of capital nature had been incurred on scientific research related to the business carried on by the assessee and the research had led/facilitated an extension of the assessee's business. It was further stated that the excimer laser machine for development of laser delivery system for reducing high refractive error of both plus (+) and minus (-) numbers without any operation and without creating a corneal opacification had been purchased by the assessee. The video film showing the use of laser machine was also shown to the AO along with various stereo slit lamp photographs showing various stages of research work. The AO observed that deduction under Section 35 was available only when the scientific research was related to the business and there was no inclusion of profession for the purpose of administering the benefit under Section 35. According to him, the assessee was not engaged in the business but was in the profession, as such the provisions of Section 35 were not applicable in its case. He further observed that the machinery was new both to the doctors as well as to the patients, and the results had been compiled for 121 patients who had followed a period ranging from 6 months to 12 months. According to him, the details filed were in fact a data collection and statistical records but not the scientific research. He opined that the exercise by the assessee was only a practice related activity to facilitate it to the use of stranger machine with a sense and thorough familiarisation and as such the activity of the assessee was not a business but profession. The AO further stated that the assessee had shown a receipt of Rs. 8,68,600 from the persons who volunteered themselves for the purpose of such research work being conducted on them. He was of the opinion that the experimental receipts by the assessee was a activity of commercial nature and not of scientific nature. According to him, the machine acquired by the assessee was manufactured for the purpose of professional activities which later had been used in the normal course of the conduct of the profession. Accordingly, he held that the professional activity was merely renamed as scientific research, therefore, rejected the claim of the assessee.
4. In the first appeal before the learned CIT(A), it was stated that the. assessee was a private limited company which could not do profession by itself, as such the activity of the assessee-company was a business of running a nursing home. It was emphasised that the assessee-company had a separate legal entity different from its shareholders and employees and as such could not have the skill, education or learning which was required for carrying on a profession.
Accordingly, it was submitted that the activity of the assessee was business and not the profession. The reliance was placed on the following case law : It was argued that although the terms science and research were not defined in the IT Act but the dictionary meaning of those terms made it clear that it referred to the knowledge possessed as a result of studies or practice, science was a branch of study which was concerned with observations, classification of facts and formulation of laws and any investigation or experimentation for the discovery of new facts and their correct interpretation which amounted to discovery. Accordingly, it was submitted that the assessee-company carried on a scientific research and achieved the desired results. It was further submitted that the assessee purchased "excimer laser" machinery for the development of laser delivery system for reducing high refractive error of both plus and minus numbers without any operation and without creating corneal opacification. It was explained that the high numbers both plus and minus created problems and the research conducted by the assessee aimed at reducing those numbers to a great extent. In this regard, it was submitted that the basic method to reduce the number was to change the curvature of cornea as the cornea is so structured that even if any minor operation is carried on, varying degrees of corneal opacification could be caused. It was explained that the main techniques used for that purpose were following : It was stated that in all those four techniques, some minor operations were undertaken which involved certain complications. As such the assessee had undertaken a new technique by using excimer laser leading to gradual improvement over the earlier techniques. The new technique was explained which the learned CIT(A) discussed at pp. 2 and 3 in the impugned order. It was also explained before the learned CIT(A) that a detailed clinical research had been done on a number of patients who had been operated with the laser, so that it could be known that those patients were responding to the treatment and what more changes were required for improving technique to obtain better and consistent results. The various exercises conducted were explained in the following words : "We present here our results in 121 patients, who have been followed up for at least 6 months. The longest follow up is 12 months. The patients are divided into the following four groups : It will be seen that we have chosen more cases in the higher myopia groups. We did this because it was thought that an undercorrection in a high myopia will lead to less dissatisfaction, than in the low myopia group. Our approach has been amply justified by the practical experience of the patients.
We have lumped the total number of the myopic dioptres to be correct in each group, and the results actually obtained have been kept as sum total of all the cases. The results are as follows : From the figures given above, it is obvious that the percentage of undercorrection and overcorrection is almost the same in all the groups." It was further submitted that there was one more problem in the patients i.e., formation of haze. In that respect also studies were conducted on various patients and haze was removed almost to negligible. It was claimed that a few stereo slit lamp photographs showing various stages of research and Video film were also submitted at the time of assessment. It was also stated that the results of the research were discussed in various seminars and conferences where Dr.
Daljit Singh, a renowned eye surgeon, was invited to apprise about the results achieved in this regard and one such conference was held at Manheim (Germany) in the month of September, 1992.
4.1. The AO was also present before the learned CIT(A) and admitted that the assessee had used excimer laser machine for development of laser delivery system but asserted that the machine was meant for reducing high refractive error and no research whatsoever was made by the assessee-company. The AO further stated that if the doctors associated with the assessee-company were able to reduce the number, that was mainly because of their experience in the field and not because of any research made by them. It was further submitted that merely the problems or quantitative data were discussed in some forum of international activity of research, but the exercise undertaken by the assessee was only a practice relating to the activity and as such the assessee could not take advantage of the deduction provided for a specific purpose. The AO further stated that the assessee was engaged in the medical profession which could not be called the business for the purposes of IT Act, 1961. Accordingly, it was submitted that the deduction under Section 35 was not available to the assessee because the same related to the business only.
4.2. The learned CIT(A) after considering the rival submissions opined that deduction under Section 35 of the IT Act related to the expenditure on scientific research which might be of revenue or capital nature. He observed that since the assessee had claimed the deduction on the purchase of machinery, there was no doubt that the expenditure was of capital nature. He further stated that as per Section 43(4)(i) of the IT Act, the "Scientific research" means any activities for the extension of knowledge in the fields of natural or applied science.
According to him, there was no doubt that the activity of the assessee was covered by the field specified in the definition and as such the activity of the assessee lead to the extension of the knowledge. He opined that the experiments made by the assessee on the various patients definitely added to the knowledge in respect of technique of reducing the plus and minus numbers and thus, the experience of handling case after case and gradual improvement in the technique was definitely a step for the extension of knowledge on this particular subject. He, therefore, held that the assessee's case was covered by the definition, so far as scientific research was concerned.
4.3. As regards to the activity carried out by the assessee, the learned CIT(A) observed that the term used was not "business" but" related to the business carried on by the assessee". According to him, the income from profits or gains of business or profession should have been computed in accordance with the provisions of ss. 30 to 43A and Section 35 was covered for the purpose of computation of income both from business or profession. He emphasised that the term 'business' as used in Section 35 was only used as a part of the phrase "related to business carried on by the assessee". He, therefore, opined that as per the definition as appearing in Section 43(4)(iii), the definition related to business carried on by the assessee was an inclusive definition which provided that the scientific research related to a business include the following : "(i) any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all business of that class; (ii) any scientific research of a medical nature which has a special relation to the welfare of workers employed in that business or, as the case may be, all business of that class." According to him, the words used in an inclusive definition denote extension and could not be treated as restricted in any sense. He, therefore, held that the assessee was carrying on the business of nursing home and the scientific research undertaken by it was related to its business which caused a tremendous increase in the business. He, therefore, concluded that there was no justification to deprive the assessee of the deduction under Section 35(2)(ia) of the Act, and accordingly he allowed the claim of the assessee.
5. Now, the Department is in appeal against the order of the learned CIT(A). The learned Departmental Representative submitted before us that the activities undertaken by the assesses were commercial under the terms 'Profession' and not the 'Business', as such the deduction under Section 35 was not available to it. It was further stated that the assessee had not conducted any scientific research but the capital expenditure incurred by the assessee was for extension of the commercial activities by acquiring new machinery. It was vehemently argued that the machinery acquired was new and whatever the work was done with the help of the machinery was analysed by the assessee in the shape of statistical records, as such no new finding had come out as a result of the compilation of the statistical data. It was further submitted that the assessee had not taken the approval from the prescribed authority as required under Section 35(3) of the IT Act.
Accordingly, it was submitted that the AO rightly disallowed the claim of the assessee and the learned CIT(A) was not justified in allowing the same when the deduction was not available as per law.
6. In his rival submissions, the learned counsel for the assessee submitted that the assessee being a private limited company was engaged in the business and not in the profession. It was stated that the AO computed the income by taking the income as per P&L a/c, as such the income of the assessee was business income, therefore, the provisions of Section 35(1) were clearly applicable. It was stated that the professional activities when taken on commercial lines become a business, hence the activities of the assessee were related to the business as there was a motive of earning profit. The reliance was placed on the various decisions viz : It was vehemently argued that the machine purchased by the assessee was used for the scientific research. A reference was made to Section 43(4)(iii) of the IT Act. It was submitted that the research undertaken by the assessee had facilitated an extension of its business which could be possible only after the scientific research conducted by the assessee and only for that purpose, an excimer laser machine was purchased. It was explained that high spectacle number was a very big handicap as the quality of the vision achieved even after wearing high-powered spectacles, was nowhere near to normal, in the certain cases, it was a great hazards for the patients who lead active lives, particularly the night driving because it was difficult to see some areas in the field of vision which might have miscalculated moves.
Thus, to overcome such type of problems, new research was required in order to reduce the high spectacle number, It was explained that earlier, old methods like radial 'keratotomy, keratomilieusis, epikeratophakia, phakic intraocular lens implants, etc. were used, which were not much successful because in certain techniques, major surgery was required, in others risk involved was higher to remove such type of difficulties faced by the patients and also by doctors, as such new research was aimed at by the assessee by using the excimer laser.
It was stated that in this new technique the curvature of the cornea was cut by using the laser for remodelling cornea surface in order to perform the task of etching a minus (-) or plus (+) lenticule on the surface of the cornea. For this purpose, a detailed clinical research had been done on a number of patients who had been operated with the laser and their results were collected to study the response to the treatment and also what more changes were required for improving the technique to obtain better and consistent results.
On the basis of above explanation, it was claimed that the assessee carried out the research, as such the deduction was available under Section 35(1)(iv) of the IT Act.
6.1. As regards to the contention raised by the Department that the approval of Scientific Research Authority was required, the learned counsel for the assessee submitted that there was no such need because the approval was required for claiming deduction under Sections 35(1)(ii) and (iii) but not for claiming deduction under Section 35(1)(iv) of the IT Act. The reliance was also placed on the various case laws viz. : (3) CIT v. Smith Kline & French (India) Ltd. (1994) 209 ITR (St) 89; and 7. We have heard both the parties at length and carefully gone through the material available on the record along with various citations quoted before us. In the instant case, the first reason for the AO in denying the claim of the assessee was that the activity undertaken by the assessee were not covered under the term "business" but were related to the "profession". The word "business" and "profession" has been defined in Sections 2(13) and 2(36) of the IT Act, 1961. According to the aforesaid sections, "Business" includes any trade, commerce or manufacture of any adventure or concern in the nature of trade, commerce or manufacture, while the "profession" includes vocation. The Section 2(36) does not state that the "profession" means : it only states that profession will include vocation. We are of the opinion that the word "business" is a word of wide import. The expression business though extensively used in taxing statutes is a word of definite import. In taxing statutes, it is used in the sense of an occupation or profession which occupies the time, attention and labour of a person, normally, with the object of making profit, to regard an activity as business there must be a course of dealings, either actually, continued or contemplated to be continued with a profit motive, and not for sport or pleasure. The person carrying on business in a particular commodity must depend upon the volume, frequency, continuity and regularity and the transaction must ordinarily be entered into with a profit motive. On the other hand, the "profession" involves idea of occupation requiring special knowledge and skill, usually advanced education, on the basis of some special learning and there should be some special qualification of a person, apart from skill and ability, which is required for carrying any activity, which can be considered as "profession". This can be by having education in particular system either in college or university or it may be even by experience. From the above discussion, it can be said that the word "business" on a wider interpretation can include within its scope profession for the purpose of the IT Act.
We think it appropriate to discuss the views of various Courts on the similar issues.
The Hon'ble Gujarat High Court in the case of Natvarlal Ambalal Dave v.CIT (supra) held that : "Merely because a person happens to be a professionally qualified doctor, it cannot be said that such person's activity cannot be treated as an activity of carrying on business. A professional activity can also be characterised as an activity of carrying on business if it is carried on like a commercial activity." On the similar issue, the Hon'ble Madras High Court in the case of CIT v. Dr. V.K. Ramachandran (supra) held that : "even a professional activity could be tinged with a commercial character if the indicia of commerce are manifest in it. The way in which the assessee carried on the X-ray activity was in noway different from a non-qualified person carrying on a radiological institute. The mere fact that a professional man had, as an adjunct to his professional activities, such an institute did not disable him from running it as a commercial venture and earning income therefrom." In the instant case also, it is beyond any doubt that the income of the assessee was assessed under the head "Business and profession". The AO has taken the income of the assessee as income as per P&L a/c. From the above fact, it is clear that the assessee was earning the income and its motive was to earn the income. In other words, there was profit motive in the adventure of the assessee. In that view of the matter, we are of the view that the assessee was involved in the business.
Moreover, the word "profession" involves labour, skill, education and special knowledge and implies a vocation requiring higher education and learning. All the aforesaid qualities can be possessed by an individual and not by a person who is not living being. In the instant case, although the assessee-company is a person in the eyes of law but individually it has no brain having the senses, as such it cannot possess skill which is basic requirement for doing a profession.
In that view of the matter also, it can safely be held that a company cannot do a profession by itself.
It is well settled law that a company is separate from its individual directors and employees, although the directors or employees of the company can do the profession, but the company itself cannot do the profession, as such the activities undertaken with a profit motive by the assessee-company were related to the business and not to the profession.
In view of the above discussion, we are of the considered view that the AO was not justified in holding that the assessee was engaged in the profession and as such the deduction under Section 35(1) was not available to it.
7.1. Now the question arises whether the activities undertaken by the assessee involved scientific research. The word "scientific research" has been defined in "Scientific research" means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandary or fisheries." Further, Section 43(4)(iii)(a) defines scientific research related to a business or class of business and reads as under : "(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;." In the present case, the AO disallowed the claim of the assessee by stating that the machinery acquired was new and the activity of the assessee was to facilitate it to the use of stranger machine with a sense and thorough familiarisation.
From the above observation of the AO it is beyond any doubt that the machinery was new and was not in much use, the research can be done only for new things and not for existing. In the present case, the assessee has choosen the cases in higher myopia groups and examined as much as 121 patients who were followed at least upto 6 months and maximum for 12 months. The records of the patients were kept and compared with other patients. As such there was extension of knowledge because the extension of knowledge means the increase in the information regarding a particular subject. In the instant case, the experiments made by the assessee on various patients definitely added to the knowledge in respect of technique of reducing plus (+) and minus (-) numbers. The experiment of handling case after case and gradual improvement in technique was definitely a step for the extension of knowledge. In the present case, the change in the shape of cornea was done with the help of excimer laser machine and as such it cannot be said that the machinery was not used by the assessee. From the above facts, it is clear that the scientific research as undertaken by "the assessee was related to its business and the AO has not doubted that there was an increase in assessee's business. In that view of the matter, we are of the view that the AO was not justified in rejecting the claim of the assessee, which has rightly been allowed by the learned CIT(A), after appreciating the facts in right perspective.
7.3. In view of the aforesaid discussions, we endorse the view taken by the learned CIT(A) and therefore, find no merit in the appeal preferred by the Department.