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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
Per Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the order dated 28.03.2018 passed by the CIT, LTU, Bengaluru for the assessment year 2011-12 on the following grounds:-
“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 Commissioner of Income-tax, Large tax Payers Unit, Bengaluru ("Learned CIT") under section 263 of the Income-tax Act, 1961 ("the Act") to the extent prejudicial to the Appellant, is bad in law and on facts and liable to be quashed.
2. Scope of revision proceedings 2.1 That on the facts and circumstances of the case, the Learned CIT erred in law and on facts in initiating proceedings and passing the order under section 263 of the Act. 2.2 That on the facts and circumstances of the case, the Learned CIT failed to appreciate that the details pertaining to the adjustments proposed to be made were examined/considered by the Assessing Officer in the course of the assessment proceedings. 2.3 That on the facts and circumstances of the case, the Learned CIT erred in concluding that the assessment order passed by the Joint Commissioner of Income tax ("the Learned Assessing Officer" or the "Learned AO") under section 143(3) r.w.s 144C(13) of the Act is erroneous and prejudicial to the interest of revenue by alleging that the Learned AO had accepted the claims of the assessee without reasons and without making enquiry. 2.4 That on the facts and circumstances of the case, the Learned CIT erred in initiating the revision proceedings and passing the order under section 263 on matters that are debatable and where two views are possible. 2.5 That on the facts and circumstances of the case, the Learned CIT erred in not appreciating that the inadequate enquiry, if any, by itself, cannot be a factor in considering the assessment order as erroneous in so far as it is prejudicial to the interests of revenue under section 263.
3. Remanding the issues to the Learned AO for verification 3.1 That on the facts and circumstances of the case, the Learned CIT erred in disregarding the submissions made by the Appellant and remanding all the issues to the Learned AO to verify and pass a suitable order demonstrating the fact that the Learned CIT is seeking to make fishing and roving enquiry, which is not permissible under the provisions of section 263 of the Act. 3.1.1 Deduction under section 35(2AB) of the Act • That on the facts and circumstances of the case, the Learned CIT failed to appreciate that the expenditure incurred on clinical trials, contract manufacturing and foreign research and development activity are integral to in-house research and development activity and closely linked to the research programme of the in-house research and development facility. • That on the facts and circumstance of the case, the Learned CIT failed to appreciate that the situs of utilisation of expenditure is relevant to claim weighted deduction under section 35(2AB) of the Act and not the situs of the payee. • That on the facts and circumstance of the case, the Learned CIT 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 construed liberally and not curtail the ambit of the section to restrict the benefit to the taxpayer. • That on the facts and circumstances of the case, the Learned CIT failed to appreciate that deduction under section 35(2AB) of the Act is not governed by the Department of Scientific and Industrial Research Guidelines ("DSIR") guidelines.
Clinical Trials • That on the facts and circumstances of the case, the Learned CIT erred in disregarding the explanation to section 35(2AB)(i) of the Act, which states that expenditure on scientific research includes expenditure incurred on 'clinical trials'. • That on the facts and circumstances of the case, the Learned CIT erred in disregarding the decision of the Gujarat High Court in the case of Cadila Healthcare Limited [2013] 31 taxmann.com 300 (Gujarat) and the decision of the Hyderabad Tribunal in the case of Bharat Biotech International Limited (ITA No.1327/Hyd/2oo8) wherein it was held that expenditure on outsourced clinical trial activity is eligible for weighted deduction under section 35(2AB) of the Act. Foreign Research and Development cost • That on the facts and circumstance of the case, the Learned CIT erred in disregarding the fact that the procurement of services from outside India would actually be utilised inside the approved research and development facility and therefore such expenditure is eligible for weighted deduction under section 35(2AB) of the Act. Contract manufacturing expenses • That on the facts and circumstance of the case, the Learned CIT erred in disregarding the fact that the end product received from contract manufacturer was consumed inside the approved research and development facility and that it is similar to any other purchase of material or consumable utilised inside the approved research and development facility and therefore such expenditure is eligible for weighted deduction under section 35(2AB) of the Act. • Set off of sales realisation on transfer of development and marketing rights of PEG GCSF • That on the facts and circumstances of the case, the Learned CIT 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 Research and Development Expenditure ("R & D") in respect of transfer of development and marketing rights of PEG GCSF. • Without prejudice of the above, on the facts and circumstance of the case, the Learned CIT erred in disregarding the DSIR guidelines, which specifically states that "sales realization" of assets sold (in cash or kind) and not R&D products, shall be offset against R & D expenditure. • That on the facts and circumstances of the case, the Learned CIT erred in disregarding the fact that PEG GCSF is a product which has emanated from the R & D work carried out in the research facility of the Appellant and not an asset utilised for conducting the research facility, • That on the facts and circumstances of the case, the Learned CIT erred in holding that a third party proof is necessary from an authority like DSIR to substantiate that PEG GCSF is a product generated from the R & D work carried out in the research activity when no such requirement is specified under the provisions of the Act/DSIR guidelines. 3.1.2 Deduction under section 80JJAA of the Act • That on the facts and circumstances of the case, the Learned CIT erred in disregarding the submission made by the Appellant that regular workmen with whom contract of employment is entered into for more than 300 days would be eligible for deduction under section 8oJJAA of the Act. • That on the facts and circumstances of the case, the Learned CIT erred in disregarding the fact that provisions of section 8oJJAA of the Act being a beneficial provision have to be interpreted liberally.
• That on the facts and circumstances of the case, the Learned CIT erred in not appreciating that introduction of second proviso below Explanation (ii) to subsection 2 of section 8oJJAA made by the Finance Act, 2018 is retrospective in nature. • That on the facts and circumstances of the case, the Learned CIT erred in setting aside the issue of deduction u/s 8oJJAA without any finding as to how the assessment order is erroneous in so far as it is prejudicial to the interests of revenue by allowing deduction under the said section. 3.1.3 Disallowance under section 14A of the Act • That on the facts and circumstances of the case, the Learned CIT erred in setting aside the issue of disallowance under section 14A without any finding as to how the assessment order is erroneous in so far as it is prejudicial to the interests of revenue under section 263. 3.1.4 Non deduction of taxes at source under section 195 of the Act • That on the facts and circumstances of the case, the Learned CIT erred in remitting the issue to the Learned AO for verification without appreciating the fact that detailed submissions were filed by the Appellant in relation to non- applicability of taxes at source on payments made in foreign currency made to non-residents during the year. • That on the facts and circumstances of the case, the Learned CIT erred in setting aside the issue of non- deduction of TDS u/s 195 without any finding as to how the assessment order is erroneous in so far as it is prejudicial to the interests of revenue under section 263. 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.”
The facts are that in this case assessment was completed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [the Act] dated 25.1.2016. The CIT on going through the assessment records was of the opinion that the order passed by the AO was erroneous so far as it is prejudicial to the interests of the Revenue. Hence he issued show cause notice to the assessee on 23.1.2017 wherein he raised the following issues:-
(i) Deduction u/s. 35(2AB) of the Act: The assessee has claimed weighted deduction of Rs.54,72,18,073 u/s. 35(2AB) of the Act. It included Rs.27,21,80,265 towards revenue expenses (debited to P&L Account and hence additional claim is another 100%) and Rs.13,75,18,904 of capital expenses (claimed at 200%).
The CIT was of the opinion that clinical trial expenses incurred outside the approved facility is not entitled for weighted deduction and he observed that expenses incurred on scientific research on inhouse research & development facility only is eligible for weighted deduction. Further, he observed that similar issue in AYs 2012-13 & 2013-14 are pending before the Tribunal as these issues have been upheld by the DRP. In view of this, this issue of claim of deduction u/s. 35(2AB) of the Act needs verification. The AO has not examined this issue in proper perspective. Therefore it was remitted back to AO to pass a speaking order after giving opportunity of being heard to assessee.
Deduction u/s. 80JJA of the Act: The assessee claimed (ii) deduction u/s. 80JJA of the Act at Rs.,46,03,657. This issue was also not examined by the AO and it is required to be examined in the light of Karnataka High Court judgment in the case of CIT v. Texas Instruments India Pvt. Ltd. in & 537/2007 dated 17.2.2020 and also order of the Tribunal reported in the case of Texas Instruments India Pvt. Ltd. reported in 27 SOT 72. Thus he remitted this issue also to the file of AO for fresh examination.
Deduction u/s. 14A of the Act : On this issue, the CIT observed (iii) that the AO has not examined and it is required to be examined in the light of the order of Tribunal in assessee’s own case for the AYs 11-12 & 12-13 in & 1329/Bang/2016 dated 18.12.2017.
(iv) Non-deduction of Tax at Source u/s. 195: The CIT observed that assessee made payment to foreign entity without deduction of tax at source to the tune of Rs.3,37,080 million and according to the CIT, it is required to be examined by the AO with a direction to the assessee to file full details regarding nature of services rendered, consultancy rendered, benefits earned, technology used if any, etc.
Thus, he set aside the order of AO passed u/s. 143(3) r.w.s. 144C and remitted it back on the above issues for re-examination. Against this, the assessee is in appeal before us.
The ld. AR submitted that the AO has examined the issue in detail with regard to the issues in the assessment proceedings and the assessee filed various details which are listed below:-
The ld. DR submitted that the CIT has not given any finding on merit. He has set aside the various issues on the ground that they are not properly examined by the AO at the time of assessment and it involves tax. Being so, non-enquiry of the issues in detail which resulted in loss of revenue to the Government. Being so, the CIT invoked jurisdiction u/s. 263 of the Act properly and the same has to be confirmed and the assessee cannot have any grievance on remitting the above issues by the CIT for fresh examination to the AO.
We have heard both the parties and perused the material on record. If due to erroneous order of the AO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The CIT can exercise revision jurisdictional under s. 263 if he is satisfied that the order of the AO sought to be revised is (i) erroneous and also (ii) prejudicial to the interests of the Revenue. The word ‘erroneous’ has not been defined in the IT Act. An order sought to be revised under s. 263 would be erroneous and fall in the category of "errors" if it is, inter alia, based on an incorrect assumption of facts or an incorrect application of law or non-application of mind to something which was obvious and required application of mind or based on no or insufficient materials so as to affect the merits of the case and thereby cause prejudice to the interest of the Revenue.
Sec. 263 seeks to remove the prejudice caused to the Revenue by the erroneous order passed by the AO. It empowers the CIT to initiate suo motu proceedings either where the AO takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie warranted. The CIT will be well within his powers to regard an order as erroneous on the ground that in the circumstances of the case, the AO should have made further inquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral in giving a decision on the basis of evidence produced before it, the role of an AO under the IT Act is not only that of an adjudicator but also of an investigator. He cannot remain passive in the face of a return, which is apparently in order but calls for further enquiry. He must discharge both the roles effectively. In other words, he must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him. The AO has got to protect, on one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what is legitimately due from him, and on the other hand, he has a duty to protect the interests of the Revenue and to see that no one dodged the Revenue and escaped without paying the legitimate tax. The AO is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry. Arbitrariness in either accepting or rejecting the claim has no place. The order passed by the AO becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct.
The CIT may consider an order of the AO to be erroneous not only when it contains some apparent error of reasoning or of law or of fact on the face of it but also when it is a stereotyped order which simply accepts what the assessee has stated in his return and fails to make enquiries or examine the genuineness of the claim which are called for in the circumstances of the case. In view of the foregoing, it can safely be said that an order passed by the AO becomes erroneous and prejudicial to the interests of the Revenue under s. 263 in the following cases : (i) the order sought to be revised contains error of reasoning or of law or of fact on the face of it. (ii) the order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind. (iii) the order passed by the AO is a stereotype order which simply accepts what the assessee has stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case. This view is supported by the judgments in the case of Malabar Industrial Co. Ltd. (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC), Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC) and Smt. Tara Devi Aggarwal vs. CIT 1973 CTR (SC) 107 : (1973) 88 ITR 323 (SC).
Perusal of the assessment order passed by the AO does not show any application of mind on his part. This is a case where the AO mechanically accepted what the assessee wanted him to accept without any application of mind or proper enquiry. The evidence available on record is not enough to hold that the claim made by the assessee was objectively examined or considered by the AO. It is because of such non-consideration of the issues on the part of the AO that the claim by the assessee stood automatically accepted without any proper enquiry. The assessment order is clearly erroneous as it was passed without proper examination or enquiry or verification or objective consideration of the claim made by the assessee. The AO has failed to examine the issue in proper perspective and made the assessment in an arbitrary manner on the issues in dipsute. His order is a completely non-speaking order. It was a fit case for the CIT to exercise his revisional jurisdiction under s. 263 which he rightly exercised by setting aside the assessment order and directing the AO to pass a fresh order after proper verification as directed by him.
The submission of the counsel that the AO had taken a possible view on the impugned issues, the CIT was not justified in assuming the revisional jurisdiction under s. 263 cannot be accepted for two other reasons also. First reason is that the view so taken by the AO without making the requisite inquiries or examining the claim of the assessee will per se be an erroneous view and hence will be amenable to revisional jurisdiction under s. 263. Second reason is that it is not taking of any view that will take the matter under the scope of s. 263. The view taken by the AO should not be a mere view in vacuum but a judicial view. It is well established that the AO being a quasi-judicial authority cannot take a view, either against or in favour of the assessee/Revenue, without making proper inquiries and without proper examination of the claim made by the assessee in the light of the applicable law. As already stated earlier, it cannot be appreciated what material was placed before the AO at the assessment stage to take such a view. The assessee has also not been able to lead enough evidence to show that any inquiry was made by the AO in this regard. Therefore mere allegation that the AO has taken a view in the matter will not put the matter beyond the purview of s. 263 unless the view so taken by the AO is a judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. The judicial view taken by the AO may perhaps place the matter outside the purview of s. 263 unless it is shown that the view so taken by the AO contains some apparent error of reasoning or of law or of fact on the face of it. "Adopting" one of the courses permissible in law necessarily requires the AO to consciously analyse and evaluate the facts in the light of relevant law and bring them on record. It is only then that he can be said to have "adopted" or chosen one of the courses permissible in law. The AO cannot be presumed or attributed to have "adopted" or chosen a course permissible in law when his order does not speak in that behalf. Similarly, "taking" one view where two or more views are possible also necessarily imports the requirement of analysing the facts in the light of applicable law. Therefore, proper examination of facts in the light of relevant law is a necessary concomitant in order to say that the AO has adopted a permissible course of law or taken a view where two or more views are possible. It is only after such proper examination and evaluation has been done by the AO that he can come to a conclusion as to what are the permissible courses available in law or what are the possible views on the issue before him. In case he comes to the conclusion that more than one view is possible then he has necessarily to choose a view, which is most appropriate on the facts of the case. It must therefore first be shown that the AO has "adopted" a permissible course of law or, where two views are possible, the AO has "taken" one such possible view in the order sought to be revised under s.
This requires the AO to take a conscious decision; else he would neither be able to "adopt" a course permissible in law nor "take" a view where two or more views are possible. In other words, it is the AO who has to adopt a permissible course of law or take a view where two or more views are possible. It is difficult to comprehend as to how the AO can be attributed to have "adopted" a permissible course of law or "taken" a view where two or more views are possible when the order passed by him does not speak in that behalf. One cannot assume, in order to provide legitimacy to the assessment order, that the AO has adopted a permissible course of law or taken a possible view where his order does not say so. It could have been a different position if the AO had "adopted" or "taken" a view after analysing the facts and deciding the matter in the light of the applicable law. However, the AO has not at all examined as to whether only one view was possible or two or more views were possible and hence, the question of his adopting or choosing one view in preference to the other does not arise.
The contention that the mere fact that the assessment order passed by the AO was short would neither mean failure on his part in not examining the matter carefully nor would render his order erroneous so long as the view taken by him was a possible view must fail for the reasons already explained in the foregoing paras as the order, which is sought to be revised under s. 263 reflects no proper application of mind by the AO and thus be amenable to revision under s. 263. The assessment order passed by the AO lacks judicial strength to stand. It is not a case where the order is short but is not supported by judicial strength. It is in this view of the matter that the CIT has correctly exercised his revisional jurisdiction under s. 263. The provisions of s. 263 would lose significance if they were to be interpreted in a manner that prevented the CIT from revising the erroneous order passed by the AO, which was prejudicial to the interest of the Revenue. In fact, such a course would be counter-productive as it would have the effect of promoting arbitrariness in the decisions of the AOs and thus destroy the very fabric of sound tax discipline. If erroneous orders, which are prejudicial to the interest of the Revenue, are allowed to stand, the consequences would be disastrous in that the honest taxpayers would be required to pay more than others to compensate for the loss caused by such erroneous orders. For this reason also, the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind or without making requisite inquiries will satisfy the requirement of the order being erroneous and prejudicial to the interest of the Revenue within the meaning of s. 263.
Being so, at this stage, we refrain from going into the merits of the grounds raised by the assessee and the assessee is at liberty to raise the issue on merits at appropriate stage.
In the result, the appeal of the assessee is dismissed.
Pronounced in the open court on this 19th day of March, 2021.