M/S. BIOCON LIMITED,BENGALURU vs. COMMISSIONER OF INCOME TAX, LTU,, BENGALURU

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No. 1858/Bang/2018 Assessment Year : 2010-11 The Joint M/s. Biocon Ltd., Commissioner of 20th KM, Hosur Road, Income-tax, Electronic City, Large Tax Payers Bangalore – 560 100. Unit [LTU], PAN: AAACB7461R Vs. Bangalore. APPELLANT RESPONDENT : Shri Padam Chand Khincha, Assessee by CA Revenue by : Shri Pradeep Kumar, CIT DR Date of Hearing : 20-04-2022 Date of Pronouncement : 09-06-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the order dated 28.03.2018 passed by Ld.CIT(A)-3, Bangalore for A.Y. 2010-11 on following grounds of appeal: “The grounds mentioned herein below are independent and without prejudice to the other grounds preferred by the Appellant. 1. That on facts and circumstances of the ' case and in law, the order passed by the Learned Commissioner of Income-tax Appeals ["CIT(A)"] dated March 28, 2018 under section 250 of the Income-tax Act, 1961 ("the Act") for AY 2010-11 to the extent prejudicial to the Appellant, is bad in law and facts and liable to be quashed. 2. Scope of re-assessment proceedings

Page 2 of 41 ITA No. 1858/Bang/2018 2.1 That on facts and circumstances of the case, the Learned CIT(A) erred in upholding the action of the Learned AO in initiating reassessment proceedings under section 147 of the Act. 2.2 That on facts and circumstances of the case, the Learned CIT(A) failed to appreciate that the test of "reason to believe" which is prima facie an essential element to initiate the reassessment proceedings was not substantiated by the Learned AO. 2.3 That on facts and circumstances of the case, the Learned CIT(A) failed to appreciate that reassessment proceedings was initiated based on a mere "change of opinion" and therefore lacking jurisdiction under section 147 of the Act and hence the proceedings are deemed to invalid and void ab initio. 3. Disallowance of clinical trial expenditure in the claim of weighted deduction under section 35(2AB) of the Act 3.1 That on the facts and circumstances of the case, the Learned CIT(A) erred in holding that the expenditure incurred on clinical trials outside the approved research and development facility are not eligible for weighted deduction under section 35(2AB) of the Act. 3.2 That on the facts and circumstances of the case, the Learned CIT(A) erred in incorrectly stating that the decision of the Gujarat High Court in the case of Cadila Healthcare Limited [2013] 31 taxmann.com 300 (Gujarat) wherein it was held that expenditure on clinical trial activity outside the approved facility is eligible for weighted deduction under section 35(2AB) of the Act, is different on facts and hence the same cannot be applied to the case under consideration. 3.3 That on the facts and circumstances of the case, the Learned CIT(A) failed to appreciate that the expenditure incurred on clinical trials are integral to in-house research and development activity and closely linked to the research programme of the in-house research and development facility. 3.4 That on the facts and circumstance of the case, the Learned CIT(A) failed to appreciate that the situs of utilisation of expenditure is relevant to claim weighted deduction under section 35(2AB) of the Act and the not the situs of the payee. 3.5 That on the facts and circumstance of the case, the Learned CIT(A) failed to appreciate that the objective of Section 35(2AB) is to provide an impetus to R&D activity in the country and therefore the provisions should be

Page 3 of 41 ITA No. 1858/Bang/2018 construed liberally and not curtail the ambit of the section to restrict the benefit to the taxpayer. 4. Set off of sales realisation on transfer of development and commercialization rights of Oral Insulin and Certain Monoclonal Antibodies ("MABs") 4.1 That on the facts and circumstances of the case, the Learned CIT(A) failed to appreciate that, in absence of specific provisions in the Act, requiring reduction of sale proceeds, no amount was required to be reduced from the total expenditure eligible for weighted deduction under section 35(2AB) of the Act. 4.2 That on the facts and circumstances of the case, the Learned CIT(A) failed to appreciate that weighted deduction under section 35(2AB) is to be computed on gross expenditure without any reductions. 4.3 That on the facts and circumstances of the case, the Learned CIT(A) failed to appreciate that deduction under section 35(2AB) of the Act is not governed by the Department of Scientific and Industrial Research (`DSIR') guidelines. 4.4 That on the facts and circumstances of the case, the Learned CIT(A) failed to appreciate that power to quantify the expenditure eligible for weighted deduction under Section 35(2AB) was not vested with the DSIR for that year. 4.5 Without prejudice of the above, the Learned CIT(A) erred in concluding that the Oral Insulin and MABs are assets arising as a result of R & D activities and are acquired in the process of carrying out R & D work; hence the same is required to be reduced from the total expenditure eligible for weighted deduction under section 35(2AB) of the Act. 4.6 That on the facts and circumstances of the case, the Learned CIT(A) failed to appreciate that MABs and Oral Insulin are "R&D Product" that have emanated from R&D work carried out in the research facility of the Appellant and are not "Acquired R&D Asset" utilised in the in-house research and facility for conducting the research facility. 4.7 Without admitting but assuming that Oral Insulin and MABs is "R&D Assets"; the Learned CIT(A) ought not to have uphold the action of the Learned AO of reducing the sales proceeds from the expenditure eligible for weighted deduction under section 35(2AB) of the Act on transfer of "development and commercialization rights" of Oral Insulin and MABs as the Appellant has not realised any sales consideration on transfer of Oral Insulin. Further, MABs and Oral Insulin were not "Acquired R&D Assets" but

Page 4 of 41 ITA No. 1858/Bang/2018 developed inside the in-house research and development facility of the Company. 4.8 That on the facts and circumstance of the case, the Learned CIT(A) erred in incorrectly stating that the decision of the Honourable Karnataka High Court in the case of Micro Labs 120161383 ITR 490 (Karnataka) wherein it has been held only receipts (i.e. sales realization) from "sale of acquired assets" shall be offset against R&D expenses is different on facts and hence the same cannot be applied to the case under consideration. 4.9 That on the facts and circumstances of the case, the Learned CIT(A) erred in disregarding the additional evidence filed by the Appellant under Rule 46A of the Income-tax, Rules, 1962 ("the Rules") substantiating non realisation of sales proceeds on transfer of "development and commercialization rights" of Oral Insulin. 4.10 That on the facts and circumstances of the case, the Learned CIT(A) failed to appreciate that the termination agreement for revocation of license for Oral Insulin and the board minutes to this effect were executed subsequent to passing of the final assessment order and accordingly erred in upholding the decision of the Learned AO that the additional evidence filed by the Appellant is an afterthought and consequently denying its admission. 4.11 That on the facts and circumstance of the case, the Learned CIT(A) failed to appreciate that subsequent revocation of license for Oral Insulin could not have made any difference to the tax treatment in relation to such transaction and hence, there was no necessity to terminate the license agreement from a tax perspective as an afterthought. 4.12 That on the facts and circumstances of the case, the Learned CIT(A) failed to appreciate that by way of additional evidence, the Appellant had only fortified/substantiated the fact that while no actual realization took place in year of transfer, even in future years, the Appellant could not realize the sales consideration on transfer of "development and commercialization rights" of Oral Insulin. 5. Addition of unrealised foreign exchange loss in computation of book profits under section 115JB of the Act 5.1 That on the facts and circumstances of the case, the Learned CIT(A) erred in holding unrealised foreign exchange loss to be an unascertained and contingent liability and adding the same in computing the book profits under section 115JB of the Act.

Page 5 of 41 ITA No. 1858/Bang/2018 5.2 That on facts and circumstances of the case, the Learned CIT(A) failed to appreciate the fact that the computation of foreign exchange losses were in accordance with the Accounting Standard ("AS") and are hence not arbitrary expenses but towards ascertained liabilities on account of foreign currency translations. 5.3 That on facts and circumstances of the case, the Learned CIT(A) erred in disregarding the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Vs Commissioner of Income Tax (2000) (245 ITR 428) (SC) and the Hon'ble Bangalore Tribunal in the case of Wipro GE Medical Systems Ltd v DCIT (81 77'J 455) wherein it was held that a liability is not contingent, if the liability should be certain to be incurred; and the liability should be capable of being estimated with reasonable certainty even though the quantification may not be possible. 5.4 That on facts and circumstances of the case, the Learned CIT(A) erred in disregarding that in the Appellants case, it was certain that there would be an exchange difference as on March 31st of the relevant financial year. 5.5 That on facts and circumstances of the case, the Learned CIT(A) erred in law in disregarding the fact that the amount of exchange difference is computed based on the formula prescribed in AS 11 and recognized in books as per the same accounting standard, there is no uncertainty in respect of its occurrence and the same cannot be considered as a contingent liability. 5.6 That on facts and circumstances of the case, the Learned CIT(A) erred in law and on facts in not considering the decision of the Hon'ble Bangalore Tribunal in the case of Quality Engineering & Software Technologies (P.) Ltd. Vs Deputy Commissioner of Income Tax 12015] 152 ITD 320 (Bangalore - Trib.) wherein the restatement of assets and liabilities was considered as an allowable expenditure under MAT. 5.7 That on facts and circumstances of the case, the Learned CIT(A) erred in law and on facts in disregarding the ruling of the Honourable Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254, wherein the Court had supported the claim of such losses for computation of book profits under section 115JB of the Act. Hence, the same cannot be treated as contingent/ unascertained liability for MAT purposes. 6. Non- grant of enhanced relief under section 10AA/10B of the Act on account of disallowance of weighted deduction under section 35(2AB) of the Act 6.1 That on facts and circumstances of the case, the Learned CIT(A) erred in not considering the revised return

Page 6 of 41 ITA No. 1858/Bang/2018 of income filed by the Appellant wherein the weighted deduction under section 35(2AB) was allocated to units eligible for deduction under section 10AA/ 10B of the Act. 6.2 That on facts and circumstances of the case, the Learned CIT(A) erred in holding that no weighted deduction under section 35(2AB) of the Act was claimed by the Appellant in relation to units eligible for deduction under section 10AA/10B of the Act. The assessee craves leave to add, alter, vary, omit, substitute or amend the above grounds, at any time before or at the time of hearing. Each of the above grounds is independent and without prejudice to the other grounds preferred by the assessee.” 2. Brief facts of the case are as under: 2.1 Assessee is engaged in the manufacturing of biotechnological products in the pharmaceuticals and enzyme sectors through fermentation-based technology. 2.2 For the year under consideration, the assessee filed its return of income on 15.10.2010 which was subsequently revised on 30.11.2011 declaring taxable income of Rs.9,26,34,266/- under the normal provisions of the Act, and book profits of Rs.126,03,68,189/- as per the provisions of section 115JB of the Act. The return was picked up for scrutiny. The Ld.AO noticed that, the assessee deposited TDS of Rs.3,16,42,729/-, advance tax of Rs.20,10,00,000/-. The assessee claimed foreign tax credit of Rs.42,61,934/-. The Ld.AO completed the assessment u/s. 143(3) vide order dated 23.05.2014 computing gross total income of Rs. 72,78,61,570/-. The Ld.AO in the original assessment order disallowed Rs.27,95,73,000/- as notional foreign exchange loss. Subsequently, the JCIT initiated reassessment proceedings u/s. 148 of the Act on 01.10.2014. The assessment was reopened after recording following reasons. The reasons recorded by the Ld.AO that

Page 7 of 41 ITA No. 1858/Bang/2018 was issued to the assessee is scanned and reproduced hereunder for sake of convenience:

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Page 9 of 41 ITA No. 1858/Bang/2018 3. In response to the reasons recorded, assessee filed its objections on 30.10.2014 which are as under:

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Page 15 of 41 ITA No. 1858/Bang/2018 5. The Ld.AO thereafter dealt with the issues in respect of weighted deduction claimed on clinical trial expenditure amounting to Rs.11,05,68,815/- and setting-off of sales realisation of Rs.115,37,60,000/- and attribution of profit in respect of the EOU by calling for various details / submissions in respect of the same. 6. The Ld.AO passed the reassessment order on 29.03.2016 by determining taxable income in the hands of the assessee at Rs.330,31,04,170/-. Aggrieved by the order of Ld.AO, the assessee filed appeal before the Ld.CIT(A). 7. The Ld.CIT(A) upheld the reassessment order, however directed the Ld.AO to restrict the disallowance u/s. 35(2AB) to the extent of the deduction claimed. 8. Aggrieved by the order of Ld.CIT(A), assessee filed the present appeal before this Tribunal. 9. At the outset, the Ld.AR submitted that, in Ground no. 2, the assessee raises validity of reopening, being change of opinion, and therefore, lacking jurisdiction u/s. 147. It is submitted that assessee raised in the reasons recorded have been considered by the Ld.AO in the order passed u/s. 143(3) and therefore notice issued u/s. 148 is void-ab-initio. The Ld.AR submitted that, during the original assessment, assessing officer issued notice u/s. 142(1) dated 13.08.2012 calling for following details against which the assessee filed details as tabulated hereunder: Documents/ Details asked through Documents/ Details submitted notice u/s 142 (1) dated during original assessment 13/08/2012 through submissions dated 1) Break-up of R&D expenses — Submission — 18 February 2014

Page 16 of 41 ITA No. 1858/Bang/2018 1xvii - Pg 6 of 142(1) Break-up of R&D — Pg 194 Submission — 7 July 2011 — Pg 162 Tax Audit Report — Pg 103 2) Why clinical trial activities should not be disallowed — 6xii Submission — 10 March 2014 — Pg - Pg 10 of 142(1) 198 Break-up of clinical services and other expenses — Pg 381 Submission — 7 July 2011 — Pg 162 Tax Audit Report — Pg 103 3) Justification for claim of Submission — 18 February 2014 Note exemption u/s 47(iv) — 2xiv - on Capital Gains — Pg 193 Pg 2 of 142(1) Submission dated — 10 March 2014 — Pg 197 Note on computation of Capital Gains 4) Why deduction u/s 35(2AB) should be allowed on transfer No specific submission made of MABs — 6xiv - Pg 10 of 142(1) 10. The Ld.AR submitted that, the Ld.AO made specific enquiries in relation to clinical trial expenses, set off of sales realisation on transfer of Oral Insulin and & MABs, and exchange fluctuation loss, with regard to which, the assessee furnished various submissions, including specific disclosures made in the tax audit report on the tax position taken by the assessee. The Ld.AR submitted that, the Ld.AO examined the submissions furnished by the assessee and passed the original assessment order, after due application of mind. 11. The Ld.AR submitted that, further with regard to claim of weighted deduction on clinical trial, the expenditure as well as set- off of sale realisation on transfer of Oral Insulin and MABs, the Ld.AR submitted that in following decision weighted deduction on clinical trial expenditure as well as calculation of weighted deduction u/s. 35(2AB) on a “gross” expenditure without reducing sale proceeds of assets etc, stood allowed. He submitted that

Page 17 of 41 ITA No. 1858/Bang/2018 these were already on record were prior to the date of the assessment order dated 27.05.2014, passed by the Ld.AO u/s. 143(3) of the Act.  Decision of Hon’ble Gujarat High Court in case of CIT vs. Cadila Healthcare Ltd. reported in 31 taxmann.com 300  Decision of Ahmedabad Tribunal in case of ACIT vs. Torrent Pharmaceuticals Ltd. in ITA No. 3569/Ahd/2004 & C.O. No. 18/Ahd/2005 by order dated 06.10.2009  Decision of Mumbai Tribunal in case of ACT vs. Wockhardt in ITA No. 71/Mum/2007 by order dated 27.08.2010  Decision of Hon’ble Delhi High Court in case of CIT vs. Sandan Vikas (India) Ltd. reported in 22 taxmann.com 19 12. The Ld.AR submitted that, in the tax audit report, note in respect of the same was incorporated, and the Ld.AO after verifying all the details specifically called for the details on the alleged issues during the original assessment proceedings and took plausible view by granting the deduction. 13. The Ld.AR emphasised that the initiation of reassessment proceedings is nothing but mere change of opinion, as there is no reason to believe, based on independent material that, income has escaped assessment. He placed heavy reliance on the decision of Hon’ble Supreme Court in case of ACIT vs. Marico Ltd. reported in [2020] 117 taxmann.com 244. 14. On the contrary, the Ld.CIT.DR placed reliance on the written submissions that is reproduced as under. “May it please Your Honours In the present case filed by the assessee, the Grounds of Appeal as raised by the assessee has been broadly categorised into the following headings for A.Y: 2010-11 and D.R. submissions thereon. a. Scope of re-assessment proceedings. Submission: The appellant has submitted that the reason for reopening was a mere change of opinion. The CIT(A) has perused the assessment records and held that the issue of excess deduction u/s 35(2AB) of the Act was never examined by the A.O. while passing earlier order.

Page 18 of 41 ITA No. 1858/Bang/2018 When there is no discussion on the issue in the earlier assessment order and no finding on the issue has been given, the question of change of opinion would not arise. The reopening has been done within 4 years from the end of the relevant assessment year and as such it was not required to show that the failure was on part of the appellant to disclose fully and truly all material facts necessary for its assessment for the year under consideration. In view of the above, the factual and legal position, the action of the AO to reopen the case is valid and legal. I agree with the decision of the Ld.CIT(A) and the same may be upheld and assessee's grounds may be dismissed. b.Disallowance of weighted deduction under section 35(2AB) of the Act. The reasons for not allowing weighted deduction on clinical trial expenditure are discussed in detail in the assessment order along with the judicial pronouncements on the issue. Reliance placed by the assessee on the decision of Hon'ble Gujarat High Court in the case of Cadila Health care ltd (2013) was not considered in view of pending SLP before the Hon'ble Supreme Court. The CIT(A) considered the fact that the Revenue has not accepted the decision of Hon'ble Gujarat High Court in the case of Cadila Health care Ltd., (2013) and has filed SLP before the Hon'ble Supreme Court. The assessee/appellant got the clinical trials through an outside agency as the assessee did not have the facility for the same in the in- house R & D centre. The Ld.CIT(A) relied on the decision of the Hon'ble ITAT in DCIT vs USV Ltd., in ITA No: 453/Mum/2009 (A.Y: 2006-07) dated 12/11/2008. In view of the above, the Ld.CIT(A) upheld the action of the A.O. in disallowing deduction u/s 35(2AB) of the Act on the expenditure incurred on clinical trials through an outside agency and carried outside the approved in-house research and development facility. I agree with the decision of the Ld.CIT(A) and the same may be upheld. c. Set off of sales realisation on transfer of development and commercialization rights. The assessee submitted that it had transferred certain development and marketing rights of Oral Insulin and certain monoclonal antibodies were transferred by it for a consideration. The guideline 5(vii) of the DSIR, which the prescribed authority u/s 35(2AB)(3) and (4) of the Act, has to follow certain guidelines before granting approval of the scientific research carried out by the assessee as eligible for deduction u/s 35(2AB). The argument of the appellant that the DSIR guidelines need to be ignored is devoid of

Page 19 of 41 ITA No. 1858/Bang/2018 merit. Further in the case of the appellant, the assets are result of the R&D activities and as such the same are acquired in the process of carrying out R&D work and so the same are required to be reduced from expenditure related to the scientific research, in view of the direct decision of the jurisdiction HC on the issue. In view of the above, the Ld.CIT(A) upheld the action of the A.O. in reducing the sales consideration for the purposes of computing deduction u/s 35(2AB) of the Act. I agree with the decision of the Ld.CIT(A) and the same may be upheld. d. MAT Credit. The appellant contended that unrealised foreign exchange gain is not an unascertained and contingent liability. The disallowance was made by the A.O. in his original assessment order passed u/s 143(3) of the Act and the appellant has already disputed the action of the A.O. in a separate appeal filed before the Ld.CIT(A). So, the issue of nature of unrealised foreign exchange would get determined in the said appeal only. As per Explanation-1 to Section 115JB of the Act, such amount needs to be added to the book profit, it the same has been debited to the P & L account. In view of the above, the Ld.CIT(A) upheld the action of the A.O. I agree with the decision of the Ld.CIT(A) and the same may be upheld. h. Non-grant of enhanced relied under section 10AA/10B of the Act account of disallowance of weighted deduction u/s 35(2AB) of the Act. The A.O.has relied upon the order of the CIT(A) for A.Y: 2008- 09 to make the addition and denying it the benefit of Section 10B of the Act. A perusal of the Ld.CIT(A) order for A.Y:2008-09 shows that enhancement in the case of the appellant was done by the Ld.CIT(A). Since the facts of the case and the submissions of the appellant on the issue remain same as for A.Y:2008-09, there is no reason to differ from the finding of the Ld.CIT(A) for A.Y:2008-09. In view of the above, the Ld.CIT(A) upheld the order of the A.O. and I agree with the same and the same may be upheld. Conclusion: In view of the submissions made above, examination of submissions made by the assessee, the order of the Ld.A.O, Ld.CIT(A)bBangalore are not erroneous and not bad in law. The assessee's appeal may be dismissed. Prayer: In the wake of the above submissions, it is humbly prayed to dismiss the appeal of the assessee/appellant and any other order as may please your honours. Respectfully submitted.”

Page 20 of 41 ITA No. 1858/Bang/2018 15. The Ld.CIT.DR also placed reliance on the decision of Hon’ble Karnataka High Court in case of CIT vs. Rinku Chakraborthy reported in [2011] 242 [2012] 20 taxmann.com 609 (Kar.). 16. We have perused the submissions advanced by both sides in the light of records placed before us. 17. The issue that arises for consideration is a legal issue that goes to the root of the case. It is the submissions of the Ld.AR that “reason to believe” in the context of section 147 of the Act cannot be based on a mere change of opinion by the Ld.AO. This issue has been considered by Hon’ble Karnataka High Court in case of CIT vs. Hewlett-Packard Globalsoft (P.) Ltd. reported in [2017] 79 taxmann.com 387. The Hon’ble Court while considering the issue therein, also referred to the decision of Coordinate Bench in the case of CIT vs. Rinku Chakraborthy (supra). Hon’ble Court after going through various submissions in case of CIT vs. Hewlett Packard (supra) observed as under: “12. We have given careful consideration to the submissions. We are dealing with a reference to a larger bench where we have been called upon to decide the questions formulated by a Division (2010) 320 ITR 561 (1967) 63 ITR 219 (SC) (1999) 236 ITR 0034 (SC) Bench of this Court. The first two questions revolve around the issue whether the Division Bench of this Court in the case of Rinku Chakraborthy (supra) has laid down the correct law. We must, therefore, refer to the decision in the case of Rinku Chakraborthy (supra). This was a case where the Tribunal had interfered with proceedings initiated in accordance with Section 147 of the said Act. The Tribunal held that reopening of an assessment on the basis of a mere change of opinion was not justified. The submission before the High Court was that it was not a case of change of opinion by the Assessing Officer, but it was a case of an income escaping the assessment. In paragraph 17 of the said decision, the Division Bench held thus:

Page 21 of 41 ITA No. 1858/Bang/2018 "17. It is in this background, it is necessary to look into the judgment of the Apex Court, where the scope of reassessment has been explained. The leading case on the point is Kalyanji Mavji & Co. v. CIT, 1976 CTR (SC) 85 : (1976) 102 ITR 287 (SC). The Supreme Court dealing with s. 34(1)(b) of 1922 Act, has held as under: "On a combined review of the decisions of this Court the following tests and principles would apply to determine the applicability of s. 34(1)(b) to the following categories of cases: (1) where the information is as to the true and correct state of the law derived from relevant judicial decisions; (2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the ITO. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority; (3) where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment; (4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law. If these conditions are satisfied then the ITO would have complete jurisdiction to reopen the original assessment. It is obvious that where the ITO gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, s. 34(1)(b) would have no application." (Underlines supplied) Based on the said decision of the Apex Court, this Court held that: (a) Where in the original assessment, the income liable to tax escapes assessment due to oversight or inadvertence or a mistake committed by Assessment Officer, the jurisdiction to reopen the original assessment vests in the Assessment Officer. (b) A tax payer should not be allowed to take advantage of an oversight or mistake committed by Assessment Officer. 13. Thus, what is held in the case of Rinku Chakraborthy is clearly based on the decision of the Apex Court in the case of Kalyanji Mavji and Company and in particular what is held in Clause (2) highlighted above.

Page 22 of 41 ITA No. 1858/Bang/2018 In paragraph 13 of the decision of Kalyanji Mavji and Company (supra) it was held thus: "13. On a combined review of the decisions of this Court the following tests and principles would apply to determine the applicability of Section 34(1)(b) to the following categories of cases: "(1) Where the information is as to the true and correct state of the law derived from relevant judicial decisions; (2) Where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income Tax Officer. This is obviously based on the principle that the tax- payer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority; (3) Where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment; (4) Where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law." If these conditions are satisfied then the Income Tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where the Income Tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, Section 34(1)(b) would have no application." (Underlines supplied) 14. In the case of M/s. Indian and Eastern Newspaper Society (supra), one of the issues which arose for consideration was whether reassessment is justified on the basis of an error found by the Assessing Officer on the reconsideration of the same material, which was before him when he made the original assessment. Another issue before the Apex Court was whether a view expressed by an internal auditor of the Income Tax Department on a point of law can be regarded as an information within the meaning of Clause (b) of Section 147 of the said Act. The Apex Court considered its several earlier decisions and in paragraph 14 of the said decision, the Apex Court held thus: "14. Now, in the case before us, the Income Tax Officer had, when he made the original assessment, considered the provisions of Sections 9 and 10. Any different view

Page 23 of 41 ITA No. 1858/Bang/2018 taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. The Revenue contends that it is open to him to do so, and on that basis to reopen the assessment under Section 147(b). Reliance is placed on Kalyanji Mavji & Co. v. CIT, where a Bench of two learned Judges of this Court observed that a case where income had escaped assessment due to the "oversight, inadvertence or mistake" of the Income Tax Officer must fall within Section 34(1)(b) of the Indian Income Tax Act, 1922. It appears to us, with respect, that the proposition is stated too widely and travels farther than the statute warrants insofar as it can be said to lay down that if, on reappraising the material considered by him during the original assessment, the Income Tax Officer discovers that he has committed an error in consequence of which income has escaped assessment it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power. That was the view taken by this Court in Maharaj Kumar Kamal Singh v. CIT, CIT v. Raman & Co. and Bankipur Club Ltd. v. CIT and we do not believe that -the law has since taken a different course. Any observations in Kalyanji Mavji & Co. v. CIT suggesting the contrary do not, we say with respect, lay down the correct law." (Underlines supplied) 15. Hence, Apex Court expressly held that the law laid down by a Bench of two Hon'ble Judges of the Apex Court in the case of Kalyanji Mavji and Company (supra) was not correct. The Apex Court after noticing the view taken in its earlier decision in the case of Kalyanji Mavji and Company (supra) expressly held that an error discovered on reconsideration of the same material does not give the Income Tax Officer the power to reopen a concluded assessment. 16. At this stage, we may make a useful reference to a subsequent decision of the Apex Court in the case of CIT v. Kelvinator of India Limited (supra). It is a decision of the Bench of three Hon'ble Judges. In paragraphs 3.1 and 3.2 of the said decision, the Apex Court has quoted Section 147 which existed prior to 1st April 1989 and after 1st April 1989. Paragraphs 3.1 and 3.2 of the said decision read thus: "3.1 After enactment of Direct Tax Laws (Amendment) Act, 1987, i.e., prior to 1-4-1989, section 147 of the Act, reads as under:

Page 24 of 41 ITA No. 1858/Bang/2018 "147. Income escaping assessment.- If the Assessing Officer, for reasons to be recorded by him in writing, is of the opinion that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year)." 3.2 After the Amending Act, 1989, section 147 reads as under: "147. Income escaping assessment.- If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year)." (Underlines supplied) We are concerned with the provision of Section 147 as amended with effect from 1st April 1989. In paragraph 4 of the said decision, the Apex Court held thus: "4. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the assessing officer to make a back assessment, but in Section 147 of the Act (with effect from 1-4-1989), they are given a go- by and only one condition has remained viz. that where the assessing officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1-4-1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the assessing officer to reopen assessments on the basis of

Page 25 of 41 ITA No. 1858/Bang/2018 "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The assessing officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the assessing officer. Hence, after 1-4- 1989, assessing officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in Section 147 of the Act. However, on receipt of representations from the companies against omission of the words "reason to believe", Parliament reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the assessing officer. "7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression 'reason to believe' in section 147. - A number of representations were received against the omission of the words 'reason to believe' from section 147 and their substitution by the 'opinion' of assessing officer. It was pointed out that the meaning of the expression, 'reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989 has again amended section 147 to reintroduce the expression 'has reason to believe' in place of the words 'for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same." (Underlines supplied) 17. Thus, what is held by the Apex Court is that when a power under Section 147 is to be exercised, concept of change of opinion must be treated as an inbuilt test to check abuse of power of the Assessing Officer. Further, it is held that after 1st April 1989, the Assessing Officer has power to reopen provided there is a tangible material to

Page 26 of 41 ITA No. 1858/Bang/2018 come to the conclusion that there is escapement of income from assessment. The Apex Court held that mere change of opinion on consideration of the same material is no ground to invoke Section 147 of the said Act. 18. As noted earlier, the decision in the case of Rinku Chakraborthy (supra) is based only on what is held in Clause (2) of paragraph 13 of the decision in the case of Kalyanji Mavji and Company (supra). The decision rendered in the case of Kalyanji Mavji and Company (supra) was by a Bench of two Hon'ble Judges. Subsequently, a larger Bench of three Hon'ble Judges in the case of M/s. Indian and Eastern Newspaper Society (supra) has clearly held that oversight, inadvertence or mistake of the Assessing Officer or error discovered by him on the reconsideration of the same material does not give him power to reopen a concluded assessment. It was expressly held that the decision in the case of Kalyanji Mavji and Company (supra), on this aspect does not lay down the correct law. The decision in the case of Rinku Chakraborthy (supra) is based solely on the decision of the Apex Court in the case of Kalyanji Mavji and Company (supra) and in particular what is held in Clause (2) of paragraph 13. The said part is held as not a good law by a subsequent decision of the Apex Court in the case of M/s. Indian and Eastern Newspaper Society (supra). 19. Therefore, in the light of law laid down in the case of M/s. Indian and Eastern Newspaper Society (supra), the first question will have to be answered in the negative by holding that the decision in the case of Rinku Chakraborthy does not lay down correct position law to the extent to which it follows what is held in clause (2) of paragraph 13 of the decision of the Apex Court in the case of Kalyanji Mavji and Company (supra). The second question will have to be answered in the affirmative. In view of the consistent decisions of the Apex Court holding that "reason to believe" in the context of Section 147 of the Income Tax cannot be based on mere change of opinion of the Assessing Officer, the third question will have to be answered in the negative. In fact, in view of settled law, framing of question No.3 was not warranted at all.” 18. From the above decision by Hon’ble Karnataka High Court, wherein the decision of Coordinate Bench in case of CIT vs. Rinku Chakraborthy (supra) has been distinguished, in our view the reliance placed by revenue on the ratio expressed in CIT vs. Rinku Chakraborthy (supra) is not of any assistance.

Page 27 of 41 ITA No. 1858/Bang/2018 Coming to the facts of the present case, what needs to be analysed is, whether the Ld.AO at the time of original assessment had collected information in respect of the claim of deduction by assessee u/s. 35(2AB). We have perused the notice issued by the Ld.AO dated 13.08.2012 u/s. 142(1) which is reproduced herewith.

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Page 40 of 41 ITA No. 1858/Bang/2018 original assessment proceedings, assessee filed submissions which are placed at pages 161 – 162, along with letter dated 07.07.2011, along with various annexures vide letter dated 18.02.2014, and pgs. 381 – 385, wherein the breakup of research and development expenses towards clinical trial services are placed. 20. Based on the above, we are of the view that, all primary facts in connection with the deduction claimed by assessee u/s. 35(2AB) of the Act, was called for by the Ld.AO during the original assessment proceedings. 21. The view subsequently formed by the Ld.AO based on the materials filed by the assessee during the original assessment proceedings, thereby granting deduction. 22. Hon’ble Supreme Court in case of Calcutta Discount Co. Ltd. vs. ITO reported in 41 ITR 191 has held that, it is the duty of the assessee to disclose all primary facts which have a bearing on the liability of income earned by the assessee, being subjected to tax. It is then for the assessing officer, to draw an inference from such facts and apply the law to determine such liability of the assessee. Once that is done, and the assessment order is framed, the assessing officer cannot at a later point of time, merely on forming an opinion by giving it a second thought to the primary facts disclosed by the assessee, arrive at a finding that the deduction could not have been allowed to the assessee. Discovering of any new material or facts, that was not present at the time of original assessment would only then constitute a “reason to believe”, in such circumstances within the meaning of section 147 of the Act. 23. In our view, the entire material that was placed before the Ld.AO which was specifically summoned from the assessee in the

Page 41 of 41 ITA No. 1858/Bang/2018 notice u/s. 142(1) at the time of original assessment, and the Ld.AO after verifying such material accepted the view canvassed by the assessee. The successor in office, then cannot have a reason to reopen the assessment of the assessee under such circumstances without there being a new material. We therefore hold the notice u/s. 148 of the Act be bad in law to the present facts of the case. As we have quashed the notice u/s. 148, the assessment order passed dated 29.03.2016 stands quashed and set aside. In view of the above, the issue raised by assessee on merits becomes academic at this juncture. In the result, the appeal filed by the assessee is allowed on the legal issue raised in ground no. 2. Order pronounced in open court on 09th June, 2022.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 09th June, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, ITAT, Bangalore