VINS BIOPRODUCTS LIMITED,HYDERABAD vs. ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE -17(2), HYDERABAD

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ITA 191/HYD/2021Status: DisposedITAT Hyderabad13 April 2022AY 2016-1714 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the Principal Commissioner of Income Tax (PCIT) had incorrectly exercised jurisdiction under Section 263 of the Income Tax Act, 1961. The Tribunal found that the Assessing Officer (AO) had correctly allowed the deduction under Section 35(2AB) of the Act. The reasoning was based on the principle that once a research facility is approved by the DSIR, the entire expenditure incurred on the R&D facility should be allowed for weighted deduction as provided under Section 35(2AB). The Tribunal noted that the filing of Form 3CL by the assessee did not arise in such a situation, as it is an internal mechanism between government departments. Relying on the coordinate bench decision in Texaco Rail & Engineering Ltd., the Tribunal concluded that the AO's order was not erroneous, as the view taken was a possible view. Therefore, the PCIT could not hold the AO's order to be erroneous simply because he disagreed with it. The impugned revision order under Section 263 was quashed, and the AO's order under Section 143(3) was restored. However, it was clarified that if the prescribed authority subsequently did not approve the expenditure or quantified it at a lesser amount, the deduction could be modified accordingly.

What were the facts?

The assessee, M/s. Vins Bioproducts Limited, filed an appeal against an order passed by the Principal Commissioner of Income Tax (PCIT), Hyderabad-2, under Section 263 of the Income Tax Act, 1961. The PCIT had revised the regular assessment order passed by the Assessing Officer (AO) under Section 143(3) for Assessment Year 2016-17, deeming it erroneous and prejudicial to the interest of the revenue. The PCIT noted that the AO had allowed a deduction of Rs. 3,15,64,284/- under Section 35(2AB) for scientific research expenditure without verifying the fulfillment of conditions, specifically the approval from the Department of Scientific and Industrial Research (DSIR) in the prescribed Form 3CM. The assessee contended that renewal of recognition was received from DSIR, non-receipt of Form 3CM was a procedural lapse, and Form 3CL was a report not fatal to the deduction claim.

What were the issues?

1. Whether the Assessing Officer's order allowing a deduction under Section 35(2AB) of the Income Tax Act, 1961, without verifying the fulfillment of all prescribed conditions, including approval in Form 3CM, rendered the assessment erroneous and prejudicial to the interest of the revenue, thereby justifying revision under Section 263 of the Act? Assessee's contentions: - Renewal of recognition from DSIR was received up to 31.3.2018. - Non-receipt of Form 3CM is a procedural lapse and not fatal to the deduction claim. - Form 3CL is a mere report, and its non-submission is not a ground for denial of deduction. - Non-submission of these forms does not make the assessment erroneous. Revenue's contentions: - The assessment order was erroneous and prejudicial to the interest of the revenue because the AO allowed the deduction without proper verification of the conditions laid down in Section 35(2AB) and related rules, particularly the approval in Form 3CM.

Which sections of the Income-tax Act were involved?

Section 35(2AB),Section 263,Section 143(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, HYDERABAD ‘A’ BENCH, HYDERABAD.

Before: SHRI S.S. GODARA & SHRI L. P. SAHU

For Appellant: Shri Bhupesh Dand, CA
For Respondent: Shri Rajendra Kumar, CIT-D.R
Hearing: 12.04.2022Pronounced: 13.04.2022

Per Shri S.S. Godara, J.M. :

This assessee’s appeal for Asst. Year 2016-17 arises against the Pr. Commissioner of Income Tax, Hyderabad-2’s order dt.9.3.2021 passed in case No. ITBA / REV / F/REV5/2020-21/1031350879 in proceedings under Section 263 of Income Tax Act, 1961 (‘the Act’ in short).

Heard both the parties. Case file perused.

2.

We straightaway notice at the outset that the learned PCIT’s revision direction under challenge herein hold the corresponding 143(3) regular assessment framed on 25.12.2018 as an erroneous one causing prejudice to the interest of the Revenue as follows :

2.

| had an occasion to examine the assessment records of the assessee for the assessment year under consideration. On perusal of the assessment records, it was observed that assessee claimed

--Space left intentionally-- deduction of revenue and capital expenditure to the extent of 200 % under Section 35(2AB) of the Income Tax Act 1961. However, various conditions mentioned in Income Tax Act 1961 and Income Tax Rules 1962 were not fulfilled. While the basic condition for claiming deduction is obtaining approval from prescribed authority, ie Department of Scientific and Industrial Research(DSIR); and assessee stated during scrutiny proceedings that the said certificate was yet to be received; Assessing Officer allowed the deduction claimed of Rs. 3,15,64,284/-, without requisite approval of DSIR in Form No. 3CM.

3.

The above issue of satisfaction of conditions necessary for allowing deduction u/s 35(2AB) of the Income Tax Act 1961 was not examined by the Assessing Officer while completing the assessment u/s 143(3) of the Income Tax Act 1961. This action of Assessing Officer has to suitably revise the assessment completed u/s 143(3) of the Income Tax Act 1961 for the Assessment Year 2016-17, in as much as it is erroneous and prejudicial to the interests of the Revenue, giving the assessee an opportunity of being heard on 3.3.2020. Another hearing notice was issued on 12.1.2021, giving the assessee another opportunity of being heard on 21.1.2021. In the information filed by the assessee dt 19.1.2021 through e-proceedings, submissions made are abstracted as under :

a. That the assessee received renewal of recognition from DSIR upto 31.3.2018 vide letter dt. 17? June 2015. b. That non receipt of Form 3CM is a procedural lapse and is not fatal for claim of deduction.

c. That Form 3CL is a mere report and its non-submission would not constitute a ground for denial of deduction.

d. That non submission of above forms would not make the assessment erroneous.

5.

The assessee’s submissions are examined. Deduction u/s 35(2AB) is governed by certain conditions which are enumerated in the section itself and in Rule 6(7A) of the Income Tax Rules 1962. 5.1 Section 35(2AB) as it appeared during the Financial Year 2015-16 relevant to Assessment Year 2016-17 is extracted as under :

(2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the 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 (7) 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 Director General in such form and within such time as may be prescribed.

5.

2 As per Rule 6(1B) of Income Tax Rules 1962 (as it appeared during the Financial Year 2015-16 relevant to Assessment Year 2016-17),

“For the purposes of subsection (2AB) of section 35, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research”.

5.

4 As per Rule 6(4) of Income Tax Rules 1962 (as it appeared during the Financial Year 2015-16 relevant to Assessment Year 2016-17),

“ The application required to be submitted by a company under sub-section (2AB) of section 35 shall be in Form No 3Ck”.

5.

5 As per Rule 6(5A) of Income Tax Rules 1962 (as it appeared during the Financial Year 2015-16 relevant to Assessment Year 2016- 17),

“The prescribed authority shall, if he 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 3CM”

5.

6 As per Rule 6(7A) of Income Tax Rules 1962 (as it appeared during the Financial Year 2015-16 relevant to Assessment Year 2016- 17),

Rule 6(7A) :Approval of expenditure incurred for in-house research and development facility by a company under subsection 2AB of section 35 shall be subject to the following conditions, namely :-

1.

The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature.

. The prescribed authority shall submit its report in relation to the approval of in- house Research and Development facility in Form no. 3CL to the Director General of Income Tax (Exemptions) within sixty days of its granting approval.

. The company shall maintain a separate account for each approved facility; which shall be audited annually and a copy thereof shall be furnished to the Secretary, Department of Scientific and Industrial Research by the 31st day of October of each succeeding year.

N

@

Explanation : For the purpose of this sub-rule the expression “audited” means the audit of accounts by an accountant, as defined in the Explanation below subsection (2) of Section 288 of Income Tax Act 1961. .Assets acquired in respect of development of scientific research and development facility shall not be disposed of without the approval of the Secretary, Department of Scientific and Industrial Research.

6.

It is examined whether the assessment was completed after verification of conditions enumerated in above sections and rules, for allowing deduction u/s 35(2AB) during the assessment;

Condition 1 : The in-house research and development facility in which a company is undertaking eligible scientific research should be approved by Department of Scientific and Industrial Research(DSIR). The order passed by DSIR should be in Form 3CM.

Observation : Assessment was completed without verifying whether order was passed by DSIR in Form 3CM, as prescribed by Rule 6(5A) and Section 35(2AB)(4). The letter from DSIR dt 17.6.2015, in respect of renewal of recognition is not in prescribed Form 3CM.

Condition 2 : The application for the same should be in Form 3 CK, and DSIR should send report to the Income Tax Department in Form 3CL within 60 days of granting approval.

Observation : Assessment was completed without verifying whether assessee applied in Form 3CK,as prescribed by Rule 6(4); and whether DSIR sent its report in Form 3CL, as prescribed by Rule 6(7A)(b).

Condition 3 : Deduction cannot be allowed unless the company enters into an agreement with DSIR as per Sec. 35(2AB)(3) of the I.T Act, 1961. Observation : Assessment was completed without verifying whether the company entered into an agreement with DSIR, as required under section 35(2AB)(3).

Condition 4 : Audit report in respect of the separate accounts maintained for the approved facility should be submitted by 31S October of the succeeding year.

Observation : Assessment was completed without verifying whether such audit report in respect of separate accounts maintained for the approved facility was submitted before 318 October 2016, in accordance with Rule 6(7A)(c) and thereby without properly verifying the eligibility of such claim made by the assessee.

Condition 5 : Expenditure claimed for deduction should not be expenditure in the nature of cost of any land or building.

Observation : Assessment was completed without verifying whether expenditure claimed for deduction pertains to cost of any land or building.

7.

As the case was selected for ‘complete scrutiny’, and as the assessment was completed without verifying the requirements prescribed in the statute for claim of exemption of Rs. 3,15,64,284/- u/s 35(2AB) of the Income Tax Act, 1961 and without verifying the eligibility of such a claim, it is held that the assessment is erroneous and also prejudicial to the interests of the revenue.

8.

Accordingly, the assessment order passed for AY 2016-17 is set aside with a direction to the Assessing Officer to pass assessment order afresh in accordance with law and after giving opportunity of being heard to the assessee, and also after verifying the eligibility of the claim of the assessee in accordance with the Income Tax Act, 1961 and |.T. Rules, 1962 in this regard.

3.

Both the learned representatives reiterate their respective stands during the course of hearing before us. We notice in this factual backdrop that the PCIT’s first and foremost issue for exercising his impugned 263 revision jurisdiction is that the Assessing Officer had not carried out any enquiry(ies) regarding assessee's section 35(2AB) deduction claim in the course of scrutiny. The same is found to be going against the record wherein the assessee has duly filed the Assessing Officer’s 142(1) show cause notice dt.16.11.2018 raising the specific issue of 35(2AB) weighted deduction of Rs.3,15,64,284 along with the supporting documents as well as DSIR approval in the prescribed format. The assessee's paper book running into 42 pages suggests that the DSIR had granted its registration in prescribed format from 17.06.2015 onwards for the period beyond 31.03.2015 pertaining to its inhouse R&D unit(s). Coupled with this, this tribunal's co-ordinate No.942/Hyd/2017 dt.20.07.2018 holds that an assessee is very much eligible for the impugned weighted deduction once the said prescribed authority approves the said facility

as under :

“S. Even though assessee raised grounds on the issue of jurisdiction of the non-existing company, these grounds are not argued as the assessee wants the issues to be considered on merits.

6.

It was the submission that the A.O. in the course of scrutiny proceedings has enquired about the claim u/s 35(2AB) and referred to the questionnaire issued by A.O. dated 28.04.2014 (Item 5 in Annexure) and replies by assessee dated 26.05.2014 (Item 23 in page 42 of Paper Book) continuation letter dated 29.05.2014 (Item 30 in page 45) and copy of ledger account (Item 52 in page 50). It was the submission of that the A.O. has enquired and allowed the claim. With reference to the finding of the Ld. CIT that the Form 3CM and 3CL are not filed which are mandatory, it was the submission that assessee has filed Form 3CM in letter format issued by DSIR granting renewal of recognition up to 31.03.2015 by the letter dated 18.04.2011 before the A.O. So the finding of CIT is not correct. Further, it was submitted that the Form 3CL is a communication by DSIR to the DIT (E) and referred to Rule 6 (7A) to reiterate that assessee had no role in that, except filing form in 3CK which it did. Since the assessee complied with the conditions prescribed and A.O. enquired and allowed the claim, the exercise of jurisdiction by the Pr. CIT is bad in law. Ld Counsel relied on the coordinate Bench decision on the same issue as under:-

-- Space left intentionally -- () Sri Biotech Laboratories India Ltd vs. ACIT (36 ITR (Trib) 88) and (ii) Texaco Rail & Engineering Ltd vs. Pr. CIT (86 Taxmann.com 50) (Kolkata — Trib.)

7.

Ld CIT-DR reiterated the stand taken by Pr. CIT and submitted that Coordinate Bench in the case of Sri Biotech Laboratories India Ltd., (supra) has allowed A.O. to modify the order and referred to para 13 of that order.

8.

We have considered the rival contentions and perused the documents placed on record. It is to be admitted that the A.O. has enquired during the assessment proceedings about the recognition of R & D unit and claim at 200% as per the provisions. Assessee had filed necessary expenditure details and recognition of the R & D unit by DSIR upto 31.03.2015. Thus the finding of Ld CIT that A.O. has not enquired is not factually correct as Form 3CM is on record (even though not stated as 3CM but a registration by DSIR as prescribed).

8.1.

Coming to the issue of filing of Form 3CL, the Rule 6(7A) is as under:-

[(7A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely :—

(a) The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature;

[ (o) The prescribed authority shall furnish electronically its report,-—

(i) in relation to the approval of in-house research and development facility in Part A of Form No.3CL;

fi) quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Act in Part B of Form No.3CL;

(ba) The report in Form No.3CL referred to in clause fb) shall be furnished electronically by the prescribed authority to the Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax or Principal Director General of Income-tax ar Director General of Income-tax having jurisdiction over such company within one hundred and twenty days, — (i) of the grant of the approval, in a case referred to in sub-clause 6) of clause fb);

fi) of the submission of the audit report, in a case referred to in sub- clause fii) of clause fo}

(Q) The company shall maintain a separate account for each approved facility; which shall be audited annually and [a report of audit in Form No.3CLA shalt be furnished electronically to the s ecretary, Department of Scientific and Industrial Research on or before the due date specified in Explanation 2 to sub-section (1) of section 139 of the Act for furnishing the return of income, for each succeeding year).

Explanation : For the purposes of this sub-rule the expression “audited” the audit of accounts by an accountant, as defined in lanation below sub-section (2) of section 288 of the Income-tax Act,

(@ Assets acquired in respect of development of scientific research and development facility shall not be disposed of without the approval of the Secretary, Department of Scientific and Industrial Research. ]

The Form is to be sent by DSIR to DIT (E). It is an internal mechanism before two Government Departments on which assessee has no role or control, except filing the necessary application with DSIR which assessee complied. So, non-filing of Form 3CL by assessee does not arise in such a situation.

8.2.

Coordinate Bench at Kolkata on similar facts while examining jurisdiction u/s 263 has considered and held as under in the case of Texaco Rail & Engineering Ltd (supra):-

“11, We have givena very careful consideration to the rival submissions. We are of the view that in the facts and circumstances of the present case, the CIT ought not to have exercised jurisdiction u/s.263 of the Act and set aside the order of the AO. It is undisputed that Department of Scientific and Industrial Research (DSIR) granted recognition to the Assessee for the period from April 1st, 2010 to 31st March, 2019. It has been held in the decision referred to by the learned counsel for the Assessee in the proceedings before the CIT u/s. 263 of the Act and before the Tribunal that deduction Sec.35(2AB) read with rule 6 does not prescribe any time limit within which application for approval in form No.3CM has to be made. Once approval is granted by DSIR the same would apply till it is revoked. The Hon'ble Gujarat High Court and the Hon'ble Delhi High Court in the case of Claris Lifesciences Ltd., and Sadan Vikas (India) Ltd., have taken the view that on a plain and harmonious reading of rule 6(SA) and Form No. 3CM it would be appropriate to come to a conclusion once a research facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by s. 35(2AB). In the light of the aforesaid judicial pronouncements, it cannot be said that the order of the AO was erroneous. Even if it were to be said that the view taken by the Courts and Tribunal are not correct, the said views were a possible view. Once the view taken by the AO is either correct or a possible view then the CIT in exercise of his Powers u/s.263 of the Act cannot hold the order of the AO to be erroneous just because he does not agree with the view of the AO. Since the primary condition for exercise of jurisdiction u/s.263 of the Act viz., the order of the AO should be erroneous is absence in the present case, we are of the view that the order u/s.263 of the Act is unsustainable and the same is hereby quashed. The appeal of the Assessee is allowed.”

8.3.

In view of the above, we are satisfied that the A.O. has correctly allowed the deduction and there is no “error” in the order passed by A.O, u/s 143(3). Once a research facility is approved, entire expenditure incurred on Department of R & D has to be allowed weighted deduction as provided u/s 35(2AB). Filing of Form 3CL by assessce does not arise. In these circumstances, we hold that Pr. CIT exercised jurisdiction on incorrect appreciation of facts and law, therefore the order is not sustainable. Consequently, the impugned order u/s 263 by Pr. CIT dated 27.03.2017 is hereby quashed and order of A.O. u/s 143(3) is restored. However, we make it clear that if subsequently the prescribed authority does not approve the expenditure claimed by the assessee or quantified at a lessor amount, then the deduction claimed by the assessee can be modified as per the provisions of the Act accordingly.

4.

Learned CIT-DR at this stage argued that there is no non-discussion in an assessment does not render it to be erroneous one causing prejudice to the interest of Revenue once the Assessing Officer conducts all due enquiry(ies) in the course of scrutiny. We therefore hold the PCIT’s impugned revision directions herein are not sustainable in law. The same stand reversed.

5.

This assessee's appeal is allowed in above terms.

Order pronounced in the open court on 13th April, 2022. (L.P. SAHU) (S.S. GODARA) Accountant Member Judicial Member

Hyderabad, Dt. 13.04.2022. * Reddy gp

Copy to:

1.

| M/s. Vins Bioproducts Limited, 806, Essjay House, Road No.3, Banjara Hills, Hyderabad.

2.

| ACIT, Circle 17(2), Hyderabad.

3.

| Pr. CIT, Hyderabad-2, Hyderabad.

4.

| DR, ITAT, Hyderabad. 5. | Guard File.

By Order Sr. Pvt. Secretary, ITAT, Hyderabad.

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