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Income Tax Appellate Tribunal, DELHI ‘B’ BENCH,
Before: SHRI N.K. BILLAIYA, & SMT BEENA A. PILLAI
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax(A)-VIII, New Delhi dated 15.02.2013 pertaining to A.Y 2003-04.
The solitary grievance of the Revenue is that the ld. CIT(A) erred in deleting the disallowance of Rs. 92,10,889/- u/s 35(1)(i) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act], Rs. 65,64,853/- u/s 35(1)(ii) and Rs. 1,96,910/- u/s 35(1)(iv) of the Act.
The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused.
At the very outset, the ld. AR urged for the application of Rule 27 of the ITAT Rules stating that the assessee had challenged the reopening of the assessment before the first appellate authority and this issue has been decided against him, though on merits the first appellate authority has decided the appeal in favour of the assessee and against the Revenue.
Since the issue raised by the counsel goes to the root of the matter, we will first address on this issue.
Rule 27 of the ITAT Rules reads as under:
“The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him.”
We find that vide Ground No. 2 of the appeal, preferred before the CIT(A), the assessee has challenged the reopening of the assessment and the CIT(A) has dismissed this ground of appeal. In our considered opinion, Rule 27 clearly applies on the given facts of the case and the assessee is at liberty to challenge the reopening of the assessment while defending the order of the first appellate authority.
In this case, the original assessment was framed u/s 143(3) of the Act vide order dated 17.03.2006. During the course of scrutiny assessment proceedings, vide submission dated 08.02.2006, the assessee replied to the queries raised by the Assessing Officer and at Point Nos. 8 & 9, statement showing the details of Research & Development [R&D] expenses and details of patent expenses were furnished.
After considering the details submitted by the assessee, the Assessing Officer observed as under:
“On perusal of the return of income, it has been observed that the assessee has claimed expense of Rs. 19,90,750/- for the patent registration as revenue expenditure. During the course of assessment proceedings, the assessee was requested to explain as to why patent registration expense of in-house research and development should not be capitalized, as the same has been incurred in respect of an intangible assets.
In response to the above, the assessee company vide Its submission dated 8-2-2.006 and 14-3-2006 giving the details of R&D expenses and R&D patent expenses of Rs. 1990750/-. The expenses are in respect of patent fees and consultancy charges for filing various patent applications. The bills in support are furnished.”
The Assessing Officer observed in the assessment order as under:
“I have gone through the submissions as noted above but the claim that these are revenue expenses is not found to be tenable. These expenses have been incurred in relation to an intangible asset in the form of registration of patents. Any expenditure incurred to bring an asset into existence has to be capitalized with value of that asset. In the instant case, this expense has been incurred to bring patent into existence. Further the nature of the patent is capital is strengthen in view of the provisions of section 32(l)(ii) of the Act which allows depreciation on patents. Therefore, the same needs to be capitalized with the value of the intangible asset. Hence Rs. J.990750/- is disallowed considering it as capital expenditure. The depreciation is allowed in view of the provisions of section 32(l)(ii) of the Act. The patent expenses upto 30-9-2002 are Rs. 658603/- and after 30-9-2002 are Rs. 1332147/-. Depreciation on these is worked out at Rs. 331168[S. The disallowance on this account is Rs. 1659582/- (1990750 - 331168).”
The assessee carried the matter before the ld. CIT(A) and ld. CIT(A), vide order dated 29.08.2007 addressed the issues as under:
“AS regards Ground No.(3), the Assessing Officerobserved that the appellant had claimed patent registration expenses and consultancy charges for in house research and development. He held the same to have been incurred in relation to an intangible capital asset being patent as provided u/s. 32(1 )(ii) of the Act. He allowed depreciation on the same.
Before me, the appellant has argued that the expenditure represents fees paid to various consultancy firms for making for registration of patents. It has been argued that the patents may or may not be granted ultimately. It has argued that in case its claim of revenue expenditure is not acceptable, the expenditure so incurred in relation to the applications about which no patent has been granted may, at least, be granted as revenue expenditure.
I have considered the rival submissions. It is observed that the similar issue had come up before me in the appellant's case for AY. 2002-03 in which I have directed the Assessing Officer in my order dated 14-11-2006 at Para 19 to verify the details to see if the patent's applications have been rejected and, the expenditure incurred in respect of such rejected applications may be allowed as revenue expenditure since no enduring benefit would have accrued to the appellant in such cases. Relying on the same finding and decision in this regard, the Assessing Officer is directed to verify if there are any applications for patents which have been rejected by the Department or were abandoned by the appellant itself. If it is found that there are applications of this category, the expenditure on their registration shall be treated as revenue expenditure. The Assessing Officer is directed to withdraw the depreciation already allowed by him on such amount. The appellant gets relief to that extent. It is further held that expenditure in respect of the applications where the registration has been granted shall be treated as capital expenditure and the view of the Assessing Officer in this regard is upheld”
Vide notice dated 26.06.2009, issued u/s 148 of the Act, the Assessing Officer proposed for reopening of the assessment. The reasons for reopening of the assessment u/s 147 of the Act read as under:
“In this case, the assessment orders U/s. 143(3) for A.Y.2005-06 & 2006-07 were completed on 17.12.2007 and 11.12.2008 respectively. It was noticed that the assessee had claimed expenditure on scientific research under sub-clause (i), (ii) & (iv) of sub section (1) of section 35 of the I T. Act. In the assessment order the AO has disallowed the claims as assessee could not substantiate its claims with supporting evidence. It was unearthed that though the expenditure on research was carried out by Mother Dairy Foods Processing Limited, Delhi, and not by the assessee. The asessee had reimbursed the claim of Mother Dairy Ltd. and yet the assessee claimed such payment U/s.35(1)(i) and 35(1 )(iv) which was not allowable U/s.35(1)(i) and 35(1)(iv). It was also unearthed that the claims U/s.35(1)(ii) were in respect of payments to Delhi University, Nagpur University etc., however, the assessee could not produce the proofs evidencing that the universities were approved in accordance with Rule 5C and subject to conditions as per Rule 5-E as required U/s 35(1)(ii). The assessee during the course of assessment proceedings for A.Y.2006-07 had (i) withdrawn sizable amount of claim, (ii) certain amount of claim was withdrawn from section 35 claimed u/s 35(1)(i). However, even the remaining amount of the claims were disallowed in the assessment order.
The perusal of the records for A.Y.2003-04 reveals that the assessee had claimed deductions under sub-clause (I), (ii) & (iv) of sub section (1) of section 35 of the I.T. Act. The details of which are as under:- u/s.35(1)(i) Rs.92,10,889/- u/s.35(1 )(ii) Rs.65,64,853/- u/s.35(1 )(iv) Rs. 1,96,910/-
The claims as above are made without supporting evidences proofs and therefore not allowable. In view of the above discussion, income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. I have therefore reason to believe that income to the extent of Rs.1,59,72,652/- has escaped the assessment.
Issue notice u/s. 148 of the Act.
(Y.C. Surti) Dy. Commissioner of Income-tax, Circle-1 (1), Baroda”
9 13. As the date of notice is 26.06.2009, obviously the reopening is proposed to be done after four assessment years, which means that the first proviso to section 147 clearly applies, which reads as under:
“Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:”
A perusal of the aforementioned first proviso to section 147 of the Act shows that a completed assessment can be reopened only if there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.
We find that in the statement showing computation of total income for the year under consideration, the assessee has clearly mentioned the R & D expenses as reduced by the patent expenses at Rs. 19,90,450/- and further R & D expenses were shown separately as per Annexure III(a) and III(b) of Form 3CD. These details can be found from Exhibits 2 & 3 of the paper book. Exhibit 4 is the notes attached to and forming part of returned income and at point No. 5, the assessee states as under:
“The company has been carrying on research and development work on oilseeds at Delhi and Nagpur universities which are institutions approved for the purpose of section 35(1)(ii) of the Income tax Act, 1961. In addition, the company has also done the research and development at Mother Dairy Fruits & Vegetable Ltd., New Delhi. The expenditure incurred being in the nature of revenue as well as capital, has been claimed under different subsections of section 35(1) “.
In its Profit and Loss Account, the assessee has claimed R & D expenses of Rs. 1,54,62,330/-. This can be seen at Exhibit 12 of the paper book. Under Schedule 16 of Significant Accounting Policies, at point No. 10, the assessee has stated:
“The Revenue expenditure on R & D and towards registration of patents is written off in the year in which it is incurred. Capital expenditure of R & D having alternate use is treated as fixed assets.
In its audit report, the assessee has given details of amount admissible u/ss 33AB, 33AC, 35, 35ABB, 35AC, 35CCA, 35CCB, 35D & 35E as under:
Name of the Institution Section Amount Deduction Debited Rs. Allowable In house capital 35(2)(ia) 1,04,235 1,04,235 Mother Dairy Fruits and 35(i)(iv) 1,96,910 1,96,910 Rs. expenditure Delhi University 35(i)(ii) 9,12,544 11,40,680 Vegetable Ltd. Total 12,13,689 14,41,825
And Name of the Institution Section Amount Deduction Debited Rs. Allowable In house capital 35(2)(ia) 1,04,235 1,04,235 Mother Dairy Fruits and 35(i)(iv) 1,96,910 Rs. 1,96,910 expenditure Delhi University 35(i)(ii) 9,12,544 11,40,680 Vegetable Ltd. Total 12,13,689 14,41,825
In our understanding of facts, in the original assessment order as well as the order made by the first appellate authority, it was clear that the Assessing Officer was well aware of the primary facts, namely claim made by the assessee, circumstances under which the claim was made, and provisions of law, which could be applied while granting the benefits. A decision may be right or wrong, but that was none of the concern of the subsequent officer. If the primary facts were not available or there was concealment or there was no application of mind at all, then a case of reopening the assessment could be made out. But when all the facts were placed before the Assessing Officer and the Assessing Officer consciously considered the facts and arrived at a decision, then, it could not be reopened merely because subsequently he changes his opinion or some other officer takes a different view.
Surprisingly, in the immediately preceding year, completed assessment was reopened on identical set of facts and for identical reasons for reopening assessment u/s 147 of the Act.
The matter travelled up to the the then Hon'ble Jurisdictional High Court of Gujarat and the Hon'ble High Court in Special Civil Application No. 9826 of 2009 quashed the impugned notice for reopening the assessment.
In the case in hand, we find that specific enquiries were made by the officer during the course of original assessment proceedings and the claims of the assessee for deduction u/s 35 of the Act were examined by the Assessing Officer during the scrutiny assessment. The detailed reply of the assessee is placed at pages 106 & 107 of the paper book.
In support of its claim for deduction, documents were placed before the Assessing Officer. The statements of accounts were also produced before the Assessing Officer. It was after such scrutiny that the Assessing Officer framed his assessment dated 17.03.2006 by making several additions and disallowances, assessing the total income of the assessee at Rs. 2.96 crores against the declared total income of Rs. 2.53 crores. It can thus be seen that whenever the Assessing Officer had a reason to believe a claim of deduction or disallowance was not to be granted, he made necessary adjustments. Significantly, however, with respect to the claim for deduction for scientific research he treated the same as capital expenditure and allowed depreciation as per the applicable rules.
It can thus be seen that the claim of deduction was at large before the Assessing Officer. He applied his mind and called the assessee to supply necessary details to substantiate such claims. In our considered opinion, if the Assessing Officer was of the opinion that such claims were not allowable or that further enquiry was necessary, he was free to do so. However, having dropped the enquiry at that stage and indirectly having accepted the claim, it was, thereafter, not open to issue notice for reopening of the entire assessment beyond a period of four years from the end of the relevant A.Y.
Considering the facts of the case in totality, the assessee succeeds u/r 27 of the ITAT Rules. We hold that the reopening of the assessment is bad in law.
We do not want to rest our decision at this point but would like to address the issue on merits of the case.
The bone of contention is the claim of deduction u/s 35(1) (i),(ii) & (iv) of the Act. The first reason for disallowing the claim of deduction is that research work was carried out by Mother Diary Foods Processing Ltd, Delhi and not by assessee and later on, part of costs were recovered from the assessee company. The Revenue alleges that the assessee itself had not carried out R & D activities. Thus the correlation of expenses incurred with the business of the assessee could not be established which is primarily required for allowance of deduction u/s 35(1)(i) of the Act.
We find the answer to this quarrel is in the decision of the Hon'ble High Court of Bombay in the case of National Rayon Corporation Limited 140 ITR 143 wherein the Hon'ble High Court has held that for claiming the deduction u/s 35(1)(i) of the Act, research must have been carried on by the assessee itself is not borne out by phraseology of the statutory provision. The assessee can claim the deduction even if the research is carried on by some other person on behalf of the assessee.
Second quarrel is in respect of contribution made by the assessee to Delhi University and Nagpur University.
The Assessing Officer was of the opinion that u/s 35(1)(ii) of the Act, the deduction of any sum paid to scientific research association is allowable if such association’s object is undertaking of scientific research or to a university, college or other institution to be used for scientific research subject to fulfilment of certain conditions.
The Assessing Officer was of the opinion that though the assessee has furnished proof of approval under the I.T. Act, 1922, but has failed to produce any evidence under the provisions of ITAT Rules, 1962.
We find that a similar dispute was co9nsidered by the the then Hon'ble High Court of Gujarat in the case of the appellant in the case of Special Civil Application No. 9876 of 2009 in order dated 10.07.2012 and at para 17 of its order the Hon'ble High Court has decided the issue in favour of the assessee and against the Revenue.
Moreover, identical issues were the bone of contention in A.Ys 2004-05 to 2007-08 where disallowances made by the Assessing Officer were deleted. This fact is also evident from the findings of the first appellate authority, who, at pages 10 to 12 of his order has extracted the findings given in A.Y 2007-08.
Considering the disallowance from all possible angles, we do not finding any merit in such disallowance and, therefore, the findings of the CIT(A) cannot be faulted with. The findings of the first appellate authority are, accordingly, upheld on this count.
In the result, the appeal of the Revenue in is dismissed.
The order is pronounced in the open court on 11.10.2018.