CAVINKARE PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

PER MAHAVIR SINGH, VP:

This appeal by the assessee is arising out of revision

order passed by the Principal CIT, Central-2, Chennai, u/s.263

of the Income Tax Act, 1961 (hereinafter ‘the Act’) vide order

C.No.2744/C-2/2015-16/1 dated 31.03.2016. The assessment

was framed by the Deputy Commissioner of Income Tax,

Company Circle-I(3), Chennai, for the relevant assessment

year 2011-12 u/s.143(3) of the Act vide order dated

20.03.2014.

regards to revision order passed by the PCIT u/s.263 of the

2 ITA No. 1603/Chny/2016

Act revising assessment order framed by the Assessing Officer

u/s.143(3) of the Act allowing claim of deduction u/s.35(2AB) of

the Act, holding the same as erroneous and prejudicial to the

interests of revenue for the reason that the assessee is

engaged in production of cosmetic articles listed in the

Eleventh Schedule. For this, the assessee has raised various

grounds which are argumentative and exhaustive, hence need

not be reproduced.

the Assessing Officer for the relevant assessment year 2011-

12 u/s.143(3) of the Act vide order dated 20.03.2014. The

assessee is engaged in manufacturing of food products,

chemicals and the assessee company is also engaged in

trading of cosmetics as noted by the Assessing Officer in

assessment order. The assessee made claim of deduction for

an amount of Rs.1274.33 lakhs comprising of sum of

Rs.1197.94 lakhs claimed as revenue expenditure and a sum of

Rs.76.39 lakhs as capital expenditure u/s.35(2AB) of the Act.

The Assessing Officer completed assessment after making two disallowances of Rs.7,98,37,813/- u/s.36(1)(ii) and

3 ITA No. 1603/Chny/2016

Rs.1,19,70,421/- u/s.14A of the Act. The Assessing Officer,

however, allowed claim of the assessee u/s.35(2AB) of the Act.

that assessment order framed allowing claim of deduction

u/s.35(2AB) of the Act is erroneous and prejudicial to the

interests of revenue for the reason that the assessee is not

eligible for claim of deduction u/s.35(2AB) of the Act for the

relevant assessment year 2011-12, as the assessee company

was engaged in production of articles listed in the Eleventh

Schedule. The PCIT noticed from case records that the

assessee company was engaged in manufacture of cosmetic

item, which is listed in Eleventh Schedule and he referred to

Para ‘B(1)’ of the Director’s Report at page 5 dated

07.09.2011 prepared for the year ended 31.03.2011, wherein

observations in regard to “personal care business” was made

as under:-

‘Personal care division has contributed about 63% to the turnover and your Company’s personal care business is focused on providing branded consumer goods under the broad categories of Hair Care, Skin Care, Deodorants, Hair Colour Cosmetics and strategic distribution arrangements which addresses various consumer needs including look and feeling their best at an affordable rate.’

4 ITA No. 1603/Chny/2016

The PCIT also noted from the report submitted in Form No.3CL

dated 17.07.2013 to the concerned authority of Government of

India, Ministry of Science & Technology, Department of

Scientific and Industrial Research (DSIR), New Delhi, to the

Director General of Income Tax(Exemptions), wherein the

assessee submitted following details in regard to production of

eligible products during past three years:-

According to the PCIT, for such production, details submitted

and further from Director’s Report dated 07.09.2011 clearly

shows that the assessee was engaged in

manufacture/production of cosmetic items and thereby

assessee is not eligible for claim of deduction u/s.35(2AB) of

the Act and thereby assessment is erroneous and prejudicial to the interests of revenue and hence, issued show-cause notice

as to why assessment order should not be revised invoking

provisions of section 263 of the Act.

5 ITA No. 1603/Chny/2016

dated 16.02.2016 by filing various details and the assessee

contended that it is not manufacturing cosmetic items, but the

company is manufacturing only ‘personal care items’, but, the

PCIT has not accepted contention of the assessee and held the

assessment order as erroneous and prejudicial to the interests

of revenue by observing in para 5.3 to 5.7 as under:-

‘5.3 The assessee has submitted that it is not manufacturing Cosmetic items. It is stated that the company is manufacturing personal care Items. However, such contention is not correct and hence not acceptable. Production Manufacture of cosmetic items is admitted by the assessee itself, which is evident from its Director's Report dated 7.9.2011, for the year ended 31.3.2011, wherein there is clear mention regarding production of ‘Hair Colour Cosmetics', in addition to other cosmetic products, in form of skin care, Deodrants and hair care products etc. Such report, as referred to and reproduced in para 2.3 above, was brought to the notice of the assessee, vide that notice dated 5.2.2016, issued u/s 263 of the Act, to the assessee. As may be noticed, the assessee has remained silent with regard to such fact admitted in its case, in the said Director's report. Under these circumstances, having regard to the provisions contained in Section 35(1) of the Act, the assessee company is thus not entitled for deduction u/s 35(2AB) of the Act.

5.4 As stated above, cosmetics and toilet preparations are mentioned at Sl.No.3 of the list of articles or things, under ‘The Eleventh Schedule'. An assessee engaged in production or manufacture of cosmetic products, in view of the specific provisions contained in sub-section (1) to Section 35(2AB), is not entitled to deduction u/s 35(2AB). Meaning of cosmetic, as per Oxford Dictionary is "substance designed to beautify skin, hair etc, ;- intended to improve appearances'. In normal sense, cosmetics are beauty-restoring-and-enhancing products.

ITA No. 1603/Chny/2016

Cosmetic products are meant for improving the look and appearance of a person. In the case of the assessee, company, as seen from such Director's report , dated 7.9.2011 for the year ended 31.3.2011 and that report in Form 3CL dated 17.7.2013, referred to in paras 2.4 above, it was engaged in production of cream, hair colour and shampoo etc. which are nothing but cosmetic products, during the previous year 2010-11, thereby disentitling it for deduction u/s 35(2AB). Under skincare products, as noticed from the said Director's report, at page no.7, the company was engaged in the production of various brands of Deo, fragrance Talcum Powder and Fairever fairness cream etc., .which are entirely cosmetic products. Thus, under the facts and circumstances of the case, the assessee company was not entitled to deduction u/s 35(2AB), for the A.Y 2011-12. However, as the AO has allowed deduction u/s 35(2AB), for the A.Y 2011- 12. of an amount of Rs.1274.33 lakhs to the assessee in the said assessment order passed u/s 143(3), dated 20.3.2014, in its case, it is thus clear that he has allowed such deduction erroneously, in the case of the assessee, for A.Y 2011-12.

5.5 Theassessee has contended that the AO has allowed such deduction u/s 35(2AB), after scrutinising all documents/certificates filed during the assessment proceedings and there is no error on that account. However, the same is not acceptable, since the AO has not carefully examined the provisions of Section 35(2AB), particularly the sub-section (1) of Section 35(2AB) and the Eleventh Schedule of the Act. In fact, he has not carried out the required enquiries/verification during the assessment and has allowed such deduction/relief erroneously, in the case of the assessee, for the A.Y 2011-12. The case of the assessee is squarely covered under the provisions of Clause (a) & (b) of Explanation 2 to Section 263 of the Act, inserted vide Finance Act, 2015 w.e.f 1.6.2015, which read as under :-

Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made;

ITA No. 1603/Chny/2016

(b) the order is passed allowing any relief without inquiring into the claim;

5.6 In this context, it is further pertinent to keep in mind the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Company Ltd. vs CIT (2000), 243 ITR 83, relied on by the assessee,

Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,—

(a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim;

5.6 In this context, it is further pertinent to keep in mind the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Company Ltd. vs CIT (2000), 243 ITR 83, relied on by the assessee, wherein it was held that, an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous: It may be mentioned here that in support of its contention that the assessment order is not erroneous, as per Section 263, the assessee has relied on several decisions. However, as the facts in those cases are fully distinguishable from that of the assessee, the same are not applicable to the case of the assessee.

5.7 As discussed in detail above, the assessee company was not entitled to deduction u/s 35(2AB) of the Act. Since it was engaged in the production of cosmetic items, listed in the Eleventh Schedule, such deduction allowed by the AO erroneously, in contravention of the provisions contained in Sub- Section (1) to Section 35(2AB) of the Act, in the assessment order dated 20.3.2014 passed by him, has to be withdrawn, in the case of the assessee, for the A.Y 2011-12. Thus, the said amount of Rs.1274.33 lakhs allowed deduction u/s 35(2AB) of the Act by the Assessing Officer for A.Y 2011-12, in the case of the assessee, needs to be withdrawn.”

8 ITA No. 1603/Chny/2016

Aggrieved, the assessee came in appeal before the Tribunal.

all, raised issue of assumption of jurisdiction by the PCIT for

invoking provisions of section 263 of the Act. He argued that

pre-requisite condition for invoking provisions of section 263 of

the Act is that order of the Assessing Officer must be

erroneous and prejudicial to the interests of the revenue, which

is not in the present case. He stated that the Assessing Officer

has allowed deduction u/s.35(2AB) of the Act only after

applying his mind to the facts of the case and for this, he took

us through events leading to completion of assessment and

enquiries conducted by the Assessing Officer during the course

of assessment proceedings, which are reproduced as under:-

“I. Notice u/s.142(1) dated 03.08.2012 issued by the Assessing Officer requiring the appellant to submit nature of exemption / deduction claimed and the relevant documents and audit reports in support of such exemption / deduction (Page 16 of Paper Book)

II. Notice uls.142(1) dated 14.11.2013 issued by the Assessing Officer requiring the appellant to submit the approval for claim of deduction u/s.35D, Form 3CM, Form 3CL etc. (Page 17 of Paper Book).”

9 ITA No. 1603/Chny/2016

The learned counsel also filed following details which were

filed before the Assessing Officer during the course of

assessment proceedings:-

I) Certificate of recognition of in-house R&D Units of the appellant by the Department of Scientific & Industrial Research (DSIR) bearing No.TU-IV/2518/2009 dated 30.09.2005. II. Certificate of renewal of recognition of in-house R&D Units of the appellant by the Department of Scientific & Industrial Research (DSIR) bearing No.TU-IV/2008/RDI/25I8 dated 29.04.2008 Ill. Certificate of registration of R&D Units of the appellant with the Department of Scientific & Industrial Research (DSIR) bearing No.TU-IV/2518/2009 dated 24.062009 for the purpose of availing customs duty and central excise duty exemption. IV. Form No.3CK submitted by the appellant to DSIR along with annexures. V. Auditors certificate dated 15.09.2011 submitted along with Form No.3CK. VI. Form No.3CM issued by the Hon’ble Ministry & Science and Technology granting approval for Research and Development Facility of the appellant for the purpose of Section 35(2AB) from 01.04.2009 to 31.03.2016. VII. Form No.3CL submitted by the lIonble Ministry of Science and Technology to the Income Tax Department uls.35(2AB) of the Income Tax Act, 1961. VIII. Annual Report of the appellant for the Financial Year 2010-11.”

The learned counsel stated that in view of the above

documents submitted by the assessee during the scrutiny

assessment proceedings, the Assessing Officer after making

enquiries allowed claim of deduction claimed u/s.35(2AB) of

10 ITA No. 1603/Chny/2016

the Act. Hence, according to him, assessment order is neither

erroneous nor prejudicial to the interests of revenue, as the

Assessing Officer has allowed deduction u/s.35(2AB) of the

Act, only after properly analyzing facts and verifying necessary

documents and applicable law. For this, the learned counsel for

the assessee has relied on decision of the Hon'ble Supreme

Court in the case of Malabar Industrial Co. Ltd. Vs. CIT (2000)

243 ITR 83 (SC).

but not discussed in the assessment order, the PCIT cannot

invoke provisions of section 263 of the Act and revise the

assessment. For this, the learned counsel for the assessee

relied on decision of the Hon’ble Bombay High Court in the

case of CIT Vs. Gabriel India Ltd. Vs. (1993) 203 ITR 108

(Bom), wherein it is held as under:-

“The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. Such decision of the ITO cannot be held to be ‘erroneous’ simply because in his order he did not make an elaborate discussion in that regard.”

11 ITA No. 1603/Chny/2016

the assessee also made his detailed submissions that the

Assessing Officer has correctly allowed deduction u/s.35(2AB)

of the Act and details of products manufactured by the

assessee for which research was conducted during the year

and product was in the nature of ‘personal care’ and not

cosmetics.

relied on written submissions filed by the Department on

03.11.2021 and particularly filed by Mr. M. Rajan, CIT DR. He

referred to the written submissions and argued that issue of

assumption of jurisdiction for revision u/s.263 of the Act raised

by the assessee is not in favour of the assessee for the reason

that an incorrect assumption of facts or an incorrect application

of law will satisfy the requirement of the order being erroneous.

For this, he relied on the case law of Hon’ble Supreme Court in

the case of Malabar Industrial Co. Ltd.(supra). Further, he relied

on the decision of Hon’ble High Court of Allahabad in the case

of M/s. Swarup Vegetable Products Vs CIT (187 ITR

412),wherein it is held that when the Assessing Officer

12 ITA No. 1603/Chny/2016

accepted the assessee’s claim without making proper enquiries,

the Commissioner acting under section 263 of the Act, was

justified in setting aside the assessment order. Similar view has

been taken by the Hon’ble Madras High Court in Jai Bharath

Tanners (264 ITR 673). The Hon’ble High Court of Madras in

the case of Ashok Leyland Ltd Vs CIT (260 ITR 599) has held

that when the Assessing Officer was required to examine claim

of the assessee, but has failed to do so, the order passed by

him was not only erroneous, but also prejudicial to the interest

of the revenue. Further, the Hon’ble Madras High Court in K. A.

Ramaswamy Chettiar vs. CIT (220 ITR 657) has held that

when the Officer is expected to make an enquiry of income and

if he does not make an enquiry as expected, it is to be a ground

to interfere with the order passed by the Assessing Officer,

since such an order passed by the officer is erroneous and

prejudicial to the interest of revenue.Regarding powers of the

PCIT u/s 263 of the Act, he relied on judgement of the Hon’ble

High Court of Punjab & Haryana in the case of PCIT vs. Venus

Woolen Mills, [2019] 105 taxmann.com 287(P&H)

13 ITA No. 1603/Chny/2016

observed that the assessee company was engaged in

manufacturing items specified in schedule-XI and hence, not

eligible for deduction u/s 35(2AB) of the Act. The company was

involved in manufacturing of Cosmetics and Toilet Preparations,

but with a different category name as ‘Personal Care Products”.

It was established that the AO allowed the claim without proper

application of mind and hence, the order is erroneous and

prejudicial to the interests of revenue.

assessee is eligible for weighted deduction u/s 35(2AB) of the

Act, towards in-house scientific research and he stated that

the assessee is not engaged in manufacture of any of the items

specified in Schedule-Xl of the IT Act. In accordance with the

provisions of section 35(2AB) of the Act, a company engaged in

manufacturing or production of any article or thing specified in

the list contained in the Eleventh Schedule, is not eligible for

deduction as envisaged therein. The PCIT, while examining the

case u/s. 263 of the Act has brought out based on the materials

on record that the company is into manufacturing of cosmetic

14 ITA No. 1603/Chny/2016

items, which is listed as SI.No.3, in Schedule-Xl of the Act. The

company has categorized such products under the head

“Personal Care Products” and claimed that the same are not

forming part of Schedule-Xl. The PCIT has observed that, at

page 5 of the Director’s Report dated 07.09.2011 relevant to the

AY, it was stated as follows:

“Personal care division has contributed about 63% to the turnover and your Company’s personal care business is focused on providing branded consumer goods under the broad categories of Hair Care, Skin Care, Deodorants, Hair Colour Cosmetics and strategic distribution arrangements which address various consumer needs including look and feeling their best at an affordable rate”. (Emphasis supplied)

In view of this, he argued that admissions of the Director of the

assessee company that the products clubbed under the

category as ‘Personal Care Products’ are nothing but cosmetic

products with a different nomenclature. Just because, the

company calls their cosmetic products with a different category,

name cannot be a reason to claim deduction u/s 35(2AB) of the

Act, so long their products are undoubtedly cosmetics listed in Schedule-Xl. The term Cosmetic” is defined in section 3(aaa) of

The Drugs and Cosmetics Act, 1940, as follows:

15 ITA No. 1603/Chny/2016

“cosmetic” means any article intended to be rubbed, poured, sprinkled or sprayed on, or introduced into, or otherwise applied to, the human body or any part thereof [or cleansing, beautifying, promoting attractiveness, or altering the appearance, and includes any article intended for use as a component of cosmetic”

The products manufactured by the assessee are available in

the website of their company, where the type and purpose of

the products have been explained. Bare reading of them proves

undoubtedly that their products are Shampoos with different

brand names to nourish the hair, Dye to colour the hair,

Powders and Creams to nourish the face and skin,

Disinfectants and cleaning liquids/spray for toilet, surface and

vegetable cleaning and Massage creams and other products

for use at their beauty saIons. The product description as

downloaded from the website of the company is appended

below:

“ Hair Care

Chik CHIK Shampoo is an conic brand that marked the beginning of the Cavinkare journey. This journey has brought about the Sachet Revolution in the FMCG industry and made CHIK one of the most successful brands in the country. CHIK Shampoo today is a popular case study in management schools across the world. Innovative sachet packaging, strategic pricing, unmatched distribution and the ability to adopt to the last changing consumer needscape has helped CHIK Shampoo get where it’s at today.

16 ITA No. 1603/Chny/2016

• NyleNaturals :Nyle Naturals is a range of Natural and Safe shampoo made from Natural ingredients with years of dedicated research. Even Nyle Shampoo is I00% paraben free and is PH balanced packed with Natures goodness for your hair. Our range of six different variants take care of all your hair problems. So go ahead and try one for yourself. We are sure you will be pleased. • Meera- Meera is one of the flagship brands of CavinKare which is in its 27th year of delivering strong and healthy hair. Meera boosts of a portfolio of products like Shampoo, Herba Powder, Coconut Oil, Herbal Oil, Conditioner and Hairwash Paste, stressing an wholesome heath for hair. The brand derives its strengths from deep understanding of traditional Indian practices and giving it to consumer in easy-to-use contemporary formats. The brand ‘MEERA’ evokes immense respect from both consumers & retailers which only a few other brands can claim and is one of the household brands of South India. .Karthika - Rediscover the traditional practice of using natural herbs to wash your hair with the new Karthika Range of Shampoos and Hairwash powder.

Hair Care: • Indica - Launched in 1995, Indica Herbal hair colour has goodness of 5 herbal ingredients that colours your hair safely and effectively. In 2009, brand Indica was relaunched with a new consumer insight and innovation of 70 minutes and thus Indica 10 minutes herbal hair colours was born. Men’s Grooms • Bikers - Bikers brand vision Is to be an exclusive brand for all male consumers, by offering a whole range of innovative and accessible personal care products. We boost of a strong portfolio with 2-in-1 shampoo & conditioner, shower gels, body wash, beard oils and beard cream, Trust, perseverance, and winning attitude are our brand ethos. The products are curated with love and care. Skin Care & Fragrance: Spinz- When the World Cup Cricket fervour reached fever pitch in 1996, it was not just the men who were having fun. In the offices of Cavinkare, an exciting new range of deodorants and talcs for women were taking form. inspired by spin bowling, the range was called Spinz’ and was launched in the markets in 1997. • Fairever - Fairever Fairness Cream has been created from years of knowledge and decades of listening to the needs of Indian women. Fairever contains the goodness of Saffron and Milk - two pure, perfectly

17 ITA No. 1603/Chny/2016

safe and nourishing ingredients that have been known since time immemorial to enhance the complexion and quality of skin. Health &Hygine • Bacto-V - Disinfectant for Toilets and Hand Wash. • Germ Flush - Toilet Cleaner • Electrix - Surface disinfectant liquid & Spray • Saafoo - SaaFoo as a brand is committed to your food (vegetables & fruits) hygiene and safety. Our range of wash are prepared with I00% food grade ingredients only and are fortified with the germicidal/anti- microbial properties of neem, turmeric, apple cider vinegar and salt. We are safe on food and tough on germs. — Professional Care Raaga Professional - Raaga Professional Is a fast growing professional care brand that offers range of products catering to most of the services offered by salons. Be it the Hair Care range (Pro Botanix), which consists of shampoos & conditioners or the Hair Colour range (Pro10 Express - world’s first 10-minute permanent hair colour) or Skin Care, which allows salons to offer variety of services like facials, tan removing and waxing services to their clients or the most sought after Heady & Body Massage Oils, Raago’s vision is to continuously offer unique products that would give salons the opportunity to pamper their clientele with confidence. Lava Berry - Infused with the wholesomeness of fruits like papaya, strawberry and apple, Lava 8erry offers all the vital necessities required for a personal care regimen like shampoo, de-tan and facial kit which consists of massage cream, wipe-off masque, Scrub and Cleanser apart from a whole range of beauty care products. These beauty care products are suitable for all hair and skin types and applicable for everyday usage.

A bare reading of the above descriptions of the products in the

company website of the assessee proves beyond doubt that the

descriptions about their beauty products exactly fit into the

definition of the term ‘Cosmetic’ as defined in The Drugs and

Cosmetics Act mentioned above.

18 ITA No. 1603/Chny/2016

decision of the Hon’ble Karnataka High Court in the case of

Tajas Networks, wherein it has been held that once a certificate

has been issued by the DSIR, the AO is prohibited from looking

into the amount of admissibility of deduction. The decision

relied deals with how much of the quantum out of the claim

would constitute actual ‘scientific expenditure’. Whereas the

present case is not about the quantum expense, but about

engagement in production of items specified in Schedule-Xl,

which is disqualified for claim of deduction u/s 35(2AB) of the

Act.Approval of DSIR is a condition prerequisite for the claim of

deduction u/s 35(2AB) of the Act. Because, the assessee

succeeded in obtaining approval of the DSIR quoting a different

nomenclature that is not mentioned in Schedule-Xl, but

ultimately engaged in products listed therein cannot be allowed

to get away with the deduction specifically denied for such

products. Having known fact that products are those specified

in ScheduleXI, deduction can be allowed throwing away

responsibility on the strength of approval obtained for research

from DSIR. Approval and licence are in fact mandatory even

for manufacture of cosmetics in accordance with section 18(c)

19 ITA No. 1603/Chny/2016

of The Drugs and Cosmetics Act. However, manufacturing of

Cosmetics and Toilet preparations does not qualify for

deduction u/s 35(2AB) of the Act, as the same are listed in

Schedule-Xl.It is pertinent to note that the Hon’ble Allahabad

High Court in the case of The Commissioner Trade Tax Vs.

Singhal Brothers, dated 28.10.2005, had an opportunity to

discuss and decide whether ‘Boroplus” a product of Himani”

generally used in protection of skin is a medicine or cosmetic.

After elaborate discussions about the definition of the term

Cosmetic available in various dictionaries and with due regards

to the decisions of various other courts, it was held by the

Hon’ble High Court that the product is cosmetic and shall be

liable to tax accordingly.In the instant case, the product

description and in their website clearly suggest that those

products are cosmetics and toilet preparations. On the contrary,

just because, the assessee categorise them with a different

name, claims that none of those items are listed in Schedule-Xl,

which is not acceptable.

and circumstances of the case. We have also gone through

20 ITA No. 1603/Chny/2016

case records, including paper books filed by the assessee, case

laws relied on by the assessee, written submissions filed by

the assessee and the department. The only controversy before

us in this appeal of the assessee is against revision order

passed by the PCIT u/s.263 of the Act, wherein he has set

aside assessment order framed by the Assessing Officer

u/s.143(3) of the Act, stating that the assessee was engaged in

the production of cosmetic products, which is one of the

articles listed in Eleventh Schedule to which deduction u/s.35(2AB) of the Act does not apply and therefore, the

Assessing Officer has erroneously allowed claim of deduction

to the assessee u/s.35(2AB) of the Act, in contravention of said

section without carrying out any verification or enquiry. We

noted that the Assessing Officer during the course of

assessment proceedings issued notice u/s.142(1) dated

03.08.2012, wherein the assessee was required to explain

nature of exemption/deduction claimed and relevant

documents, details and audit reports in support of such

exemption/deduction to be submitted. Further, vide notice u/s.142(1) dated 14.11.2013, the Assessing Officer required

the assessee to submit approval for grant of deduction u/s.35D

21 ITA No. 1603/Chny/2016

of the Act, Form No.3CM & Form No.3CL etc. The assessee in

response to same furnished certificate of recognition of in-

house R&D units of the assessee approved by DSIR bearing

No. TU-IV-RD/2518/2005 dated 30.09.2005 and even

certificate of renewal of recognition of in-house R&D units

bearing No.2(35)/2008/RDI/2518 dated 29.04.2008. The

assessee had also submitted certificate of recognition of R&D

units of the assessee with DSIR bearing No.TU-IV/2518/2009

dated 24.06.2009 issued for the purpose of availing customs

duty and central excise duty exemption. The assessee also

submitted auditor certificate along with Form No.3CK to the

DSIR. The assessee also submitted Form No.3CM issued by

Ministry of Science & Technology granting approval for

Research & Development facility of the assessee for the

purpose of claim of deduction u/s.35(2AB) of the Act from

01.04.2009 to 31.03.2016. The assessee also submitted copy

of Form No.3CL filed with Ministry of Science & Technology to

the Income-tax department u/s.35(2AB) of the Act. The

Assessing Officer has gone into these details, documents filed

during scrutiny assessment proceedings and after examining

the same allowed claim of deduction u/s.35(2AB) of the Act. In

22 ITA No. 1603/Chny/2016

view of the above and in accordance with the provisions of

section 35(2AB) of the Act, for the purpose of claiming

deduction under the section, a company should have incurred

expenditure on eligible business as approved by the prescribed

authority. In the present case, prescribed authority u/s.35(2AB)

of the Act is the Department of Scientific & Industrial Research

(DSIR) and the assessee got approval for claim of deduction

u/s.35(2AB) of the Act from very same department.

covered under approval granted by DSIR, does the Assessing

Officer has any power to question the same as approval

granted by DSIR under power vested under the provisions of

section 35(2AB) of the Act. In our view, the Assessing Officer

has rightly allowed claim of deduction u/s.35(2AB) of the Act

based on Form No.3CM & Form No.3CL issued by DSIR, as

per provisions of section 35(2AB) of the Act, which does not

give power to the Assessing Officer jurisdiction to question

approval granted by the DSIR.

23 ITA No. 1603/Chny/2016

the Act, which reads as under:-

“35(2AB)(1): Where a company is engaged in the business of bio-technology or in any business of manufacture or production of any article or thing specified in the list of Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then there shall be allowed a deduction of a sum equal to two times of the expenditure so incurred.

Explanation—For the purposes of this clause ‘expenditure on scientific research’, in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).

(2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act.

(3) No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of the accounts maintained for that facility.

(4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Principal Chief Commissioner or Chief Commissioner

24 ITA No. 1603/Chny/2016

or Principal Director General or Director General in such form and within such time as may be prescribed.”

our attention to the provisions of section 35(3), which answers

the question whether approval granted by DSIR can be

questioned by the Assessing Officer. This has been answered

in this provision, which reads as under:-

“35(3)- “ If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to –

(a) the Central Government, when such question relates to any activity under clauses (ii) and (iii) of sub-section (1), and its — shall be final;

(b) the prescribed authority, when such question relates to any activity other than the activity specified in clause (a), whose decision shall be final.”

From the above, sub-section (3) of section 35, it is clear that as

per clause (b), decision of DSIR will be final, because as per

Rule 6 of Income Tax Rules, 1962 (hereinafter ‘the Rules’)

dealing with “prescribed authority for expenditure on scientific

research”. Sub-Rule 5A of Rule 6 of the Rules clearly states

that DSIR, if satisfied will issue certificate u/s.35(2AB) of the

25 ITA No. 1603/Chny/2016

Act and an order in writing in Form No.3CM. The relevant sub-

rule (5A) reads as under:-

“(5A) The prescribed authority shall, if he is satisfied that the conditions provided in this rule and in sub- section (2AB) of section 35 of the Act are fulfilled, pass an order in writing in Form No.3CM.”

is engaged in manufacturing of cosmetics and toilet

preparations, in our view, observations of the Revenue is not

based on facts. We noted the arguments of the Revenue,

wherein many products cited by the Department are such as

Bikers, Bacto-V, Germ Flush, Electric, Saafoo, Paaga

Professional and Lava Berry are products which have been

taken from current website of the assessee. We noted that as

contended by the learned counsel for the assessee, these

products were launched in recent years i.e. for and from the

year 2019 and 2020 and hence, these are not relevant for

consideration for assessment year 2011-12. We also noted

that certificate as approved by DSIR in Form No.3CM & 3CL,

which categorically mentions nature of business activity of the

assessee as “manufacture and marketing of personal care

products”, which clearly proves that the assessee company is

26 ITA No. 1603/Chny/2016

engaged in manufacture or production of articles or things,

which is eligible for claim of deduction u/s.35(2AB) of the Act.

Further, sub-section(3) of section 35 clearly provides that if any

question arises under this section as to whether, and if so, to

what extent, any activity constitutes or constituted, or any asset

is or was being used for scientific research, the Board should

refer question to the prescribed authority and whose decision

shall become final and binding. In our view, neither the

Assessing Officer nor the PCIT can sit on judgement on the

approval granted by the prescribed authority i.e., DSIR, as in

the present case.

jurisdiction, apart from merits as discussed above, the

Assessing Officer has allowed deduction while framing

assessment u/s.143(3) and u/s.35(2AB) of the Act only after

verifying all necessary documents and certificates and hence,

we find that assessment order framed is neither erroneous nor

prejudicial to the interests of revenue and assumption of

jurisdiction by the PCIT is bad in law in the given facts and

circumstances of the case. Hence, we set aside the revision

27 ITA No. 1603/Chny/2016

order and allow appeal filed by the assessee on merits as well

as on assumption of jurisdiction.

Order pronounced in the open court on 23rd December , 2022

Sd/- Sd/- (मनोज कुमार अ%वाल) (महावीर �संह) (Manoj Kumar Aggarwal (Mahavir Singh) लेखा सद%य / Accountant Member उपा य!/ Vice-President चे(नई/Chennai, )दनांक/Date: 23.12.2022 DS

आदेश क� ��त+ल,प अ-े,षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु.त (अपील)/CIT(A) 4. आयकर आयु.त/CIT 5. ,वभागीय ��त�न2ध/DR 6. गाड� फाईल/GF.