Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO & SHRI D.S. SUNDER SINGH
आदेश / O R D E R
PER Bench:
These appeals filed by the revenue are directed against
orders of the Commissioner of Income Tax (Appeals) {CIT(A)},
Vijayawada vide ITA Nos.134 & 133/CIT(A)/VJA/15-16 dated 23.9.2016
for the assessment years 2008-09, 2009-10 & 2010-11 and vide order
ITA No.56/CIT(A)/VJA/16-17 dated 15.9.2017 for the assessment year
2013-14. The cross objections filed by the assessee are in support of
the orders passed by the Ld. CIT(A). Since, the facts are identical and
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018 issues are common, they are clubbed, heard together and disposed-off
by way of this common order for the sake of convenience.
ITA Nos.61, 62 & 63/Vizag/2017 (2008-09 to 2010-11):
The assessee is engaged in the business of manufacturing of
electronics, moving display boards, data loggers, electronic systems, etc.
Since the facts are common in these appeals the same are extracted
from the A.Y.2008-09. The assessee filed return of income declaring
total income of Rs.43,09,030/-. The case was selected for scrutiny and
the assessment was completed u/s 143(3) of the Income Tax Act
(hereinafter called as ‘The Act’) on total income of Rs.79,84,858/- by an
order dated 24/12/2010. In the return of income filed by the assessee,
the assessee had claimed the deduction of Rs.3,36,70,436/- u/s
35(1)(2AB) of the Act, which was allowed by the A.O. in the original
scrutiny assessment after verifying the details. Subsequently, the A.O.
collected the information from the Indian Railways according to which
the assessee is primarily engaged in contract works in manufacturing,
installation and commissioning of data loggers as well as manufacturing
and installation of LED equipment, display boards that are installed in
the railway stations. The Ld.AO further observed that the deduction is
available to the assesses who manufactures articles that are not
included in eleventh schedule but the articles manufactured by the 3
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018 assessee are the articles mentioned in eleventh schedule, hence
reopened the assessment u/s 147 by issue of notice u/s 148 of the I.T.
Act. During the reassessment proceedings the assessee argued that the
11 schedule has no reference in Section 35(2AB) of the Act and same
was not applicable for the A.Y.2008-09 and 2009-10. Having obtained
approval from DS&R for Scientific research, in case of dispute with
regard to the deduction has to be sorted out by referring the issue to
the Board as provided in section 35(3) of I.T. act and hence requested
to refer the matter to the prescribed authority. The assessee had also
argued before the A.O. that scientific research works involves not only
the product’s development to Railways but other products such as
weather monitoring system, urban bus displays, battery monitoring unit,
LED lighting equipment. etc., but not substantiated its claim with any
material evidence. Therefore, the A.O. was of the view that the
assessee is not entitled for deduction u/s 35(2AB), accordingly
completed the reassessment by disallowing the claim made by the
assessee u/s 35(2AB) of I.T. Act.
Aggrieved by the order of the A.O., the assessee went on appeal
before the CIT(A) and the Ld. CIT(A) held that reopening of assessment
is bad in law and accordingly allowed the appeal of the assessee.
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018
Aggrieved by the order of the Ld.CIT(A), the revenue is in appeal
before this Tribunal raising the following grounds:
The Ld. CIT(A) ought to have upheld the disallowance of claim of deduction u/s.35(2AB) of Rs.3,36,70,436/-, since the deduction is allowable for manufacture of certain electronic items only and not to the articles manufactured by the assessee which are machines used in Railway Stations that cannot be categorized as electronic items; 2. The Ld. CIT(A) is not justified in allowing the weighted deduction claimed by the assessee u/s.35(2AB) in spite of the fact that the assessee failed to provide any convincing material facts on record to claim that the instruments/articles do not fall under the Eleventh Schedule.
The Ld. CIT(A) erred in deleting the addition though the assessee is not eligible for deduction u/s.35(2AB) of the Act since the main activity of the assessee was manufacturing, installation and commissioning of data loggers as well as manufacturing and installation of LED display boards in the Railway Station, which was certified by the Department of Indian Railways and thus, the assessee is ineligible to make any claim u/s.35(2AB) and that the assessee could not substantiate its claim with any material evidence that its scientific research works involves other products such as weather monitoring system, urban bus displays, battery monitoring unit, LED lighting equipment etc. 4. The Ld. CIT(A) erred in holding that reopening of assessment proceedings u/s.147 are bad in law. 5. The Ld. CIT(A) erred ignoring the fact that the deduction which is not allowable was allowed in the assessment and the initiation of proceedings u/s.147 of the Act is well within the purview of the provisions of the Income Tax Act. 6. Any other ground that may be urged at the time of hearing.
The facts in this case for the assessment years 2008-09 to 2010-
11 are identical. Ground Nos.4 & 5 are related to the reopening of
assessment and the remaining grounds are related to the merits of the
case with regard to the allowability of deduction u/s 35(2AB) of the Act.
In this case, the assessments were completed u/s 143(3) of the Act
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018 originally and the A.O. has allowed the deduction after examining the
details. There is no fresh material available to the A.O. to reconsider the
allowabilty of deduction u/s 35(2AB) of the Act. Though the original
assessment was completed after considering all the facts and evidences,
the present A.O. revisited the assessment considering the amendment
made to section 35(2AB) and schedule 11 which is effective from 2010-
11 and re-analysed the section 35(2AB) of the Act and reopened the
assessment. In fact section 35(2AB) does not contain reference to
schedule 11 before 2010. The assessing officer interpreted the amended
provisions to reopen the assessment without having any fresh material.
The issue considered by the A.O.in original assessment cannot be
revisited by interpreting the provisions applicable in the subsequent
years for the purpose of reopening. The CIT(A) has discussed this issue
in detail in para No.6.3.2 and relied on the decisions of Hon’ble Supreme
Court in the case of CIT Vs. Bhanji Lavji (1971) 79 ITR 582 and ITO Vs.
Nawab Mir Bharkat Ali Khan Bahadur (1974) 97 ITR 239 (SC) and held
that the reopening of assessment is bad in law. For ready reference, we
extract relevant paragraph of the CIT(A) from 6.3 to 6.3.2 as follows:
“6.3 As regards the legal issue of validity of re-opening of assessment for Asst. Years 2008-09 & 2009-10, it is noted that scrutiny assessment u/s 143(3) of the Act was completed after due verification by Assessing Officer for both assessment years.
6.3.1 Assessing Officer quoted the following reason for issue of notice u/s 148 of the Act. 6
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018
As seen from the facts of the case and as per the computation of income, the assessee had claimed deduction u/s 35(1)(2AB) of IT Act to the extent of Rs.2,92,45,167/- which was allowed as deduction, while completing the assessment. The deduction is allowable to the assessee, as per the provisions of Sec.35(1)(2AB) of the IT Act, only if the manufactured articles are not the articles which form part of the Eleventh Schedule. but, as the articles manufactured by the assessee are the articles mentioned in the Eleventh Schedule, the assessee is not eligible for claiming deduction u/s.35(1)(2AB) of the IT Act. Hence, the amount of Rs.2,92,45,167/claimed as deduction by the assessee u/s.35(1)(2AB) of the IT Act did escape the assessment." Similar reasoning was given for re-opening of assessment for Asst. Year 2008-09 also.
6.3.2. An amendment in Sec.35(2AB) of the Act was brought by the Finance (No.2) Act, 2009. we.f 01.04.2010. Relevant explanatory note is reproduced below:
"15. Weighted deduction for in-house research and development.
15.1. Under the ex/sting provisions of the Income-tax Act, under subsection (2AB) of Sec. 35, weighted deduction of 150 per cent is allowed to a company engaged in the business of biotechnology or in the business of manufacture or production of drugs, pharmaceuticals, electronic equipments, computers. telecommunication equipments, chemicals or any other article or thing notified by the Board and which has incurred expenditure (excepting on land and building) on in-house scientific research and development facility approved by the prescribed authority.
15.2. With a view to promoting research and development in all sectors of the economy, the Act has been amended to extend the benefit of weighted deduction to companies engaged in the business of manufacture or production of an article or thing except those specified in the Eleventh Schedule of the Income-tax Act. 15.3. Applicability - This amendment has been made applicable with effect from l April, 2010 and will accordingly apply in relation to the assessment year 2010-11 and subsequent assessment years."
Prior to the amendment (i.e.) for relevant assessment years 2008-09 & 2009-10 in appeal, corresponding provision of Sec.35(2AB)(1) read thus:-
"Where a company engaged in the business of (bio-technology) 7
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018
or in the business of manufacture or production of any drugs, pharmaceuticals, electronic equipments, computers, chemicals or any other article or thing notified by the Board" incurs any expenditure on scientific research (not being 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 of .....(..... of the expenditure) so incurred."
As per this then extant provisions of the Act, appellant's in-house R&D facility is approved by competent authority and appellant's scientific research related to electronic equipments. Hence appellant's case is clearly covered under the provisions of relevant Act.
Assessing Officer cannot make use of an amendment made in the Act which is effective for subsequent assessment years (i.e.) A.Y. 2010-11 and onwards (and not applicable for AYs 2008-09 & 2009-10 in appeal) to deny a claim of deduction u/s.35(2AB) of the Act which appellant is otherwise entitled to by the extant provisions of law by way of reopening of those assessments. - Prima facie, no fresh material/evidence has been brought on record by Assessing Officer necessitating reopening of assessments for AYs 2008-09 & 2009-10. - In my view, this is only change of opinion of Assessing Officer. "When the primary facts necessary for assessment are fully and truly disclosed, the ITO will not be entitled on change of opinion to commence proceedings for reassessment. Similarly, if he has raised a wrong legal inference from the facts disclosed, he will not, on that account, be competent to commence reassessment proceedings - Commissioner of Income-tax Vs. Bhanji Lavji (1971) 79 ITR 582 (SC). Having second thoughts on the same material, and omission to draw the correct legal presumption during original assessment do not warrant the initiation of a proceeding under section 147 - ITO Vs. Nawab Mir Barkat Ali Khan Bahadur (1974) 97 ITR 239 (SC)."
In view of the above, reopening of assessment is, in my view, bad in law. Hence, on legal issue also, the re-opened assessment orders cannot be sustained.”
During the appeal hearing, the Ld. D.R. did not bring any
material to controvert the fact that there was evidence available to the
A.O. leading to escapement of income. In this case as discussed earlier,
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018 the A.O. considered this issue of allowability of deduction u/s 35(2AB) of
the Act and allowed the same after due verification. The assessee also
furnished the necessary details such as certificate from the scientific
research and Industrial development authority and the A.O. allowed the
deduction accepting that the assessee is engaged in the in house
research and development. The assessee demonstrated that the
assessee has satisfied the conditions for allowing the deduction u/s
35(2AB) of the Act and the project was approved by the Government of
India for in house research. The prescribed authority, Department of
Scientific and Industrial Research granted the recognition of in house
R&D facilities in the prescribed form 3CL. R&D facility of the assessee
also approved for the purpose of section 35(2AB) for the A.Y. 2008-09
to 2010-11. Once the certificate is issued that would be sufficient to
hold that the assessee has fulfilled the condition laid down u/s 35(2AB)
of the Act. The assessing officer considered all these facts while
completing the original assessment. Hence, reopening of assessment on
reanalyzing the issue would be difference of opinion. Therefore, we
hold that the reopening of assessment is a change of opinion, hence
cannot be upheld. Accordingly, we uphold the orders of the CIT(A) on
issue of notice u/s 148 of the Act and dismiss the appeals of the
revenue. 9
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018 7. Since we up held the order of the Ld.CIT(A) on the issue of notice
u/s 148, we consider it is not necessary to adjudicate the appeal on
ground Nos.1, 2, 3 & 6 which are related to the merits of the case.
In the result the appeals of the revenue are dismissed.
C.O. Nos.31, 32 & 33/Viag/2017:
The Cross Objections are supportive to the order passed by the
CIT(A) with respect to the deductions claimed by the assessee u/s
35(2AB) of the Act. Since we have dismissed the appeal of the revenue,
the cross objections have become infructuous and the same are
dismissed.
ITA No.551/Vizag/2017:
Ground No.1 is related to the disallowance made u/s 35(2AB) of
the Act towards scientific research expenditure. The assessee filed
return of income admitting total income of Rs.1,31,44,960/- on
25.9.2013. Assessment was completed u/s 143(3) of the Act on total
income of Rs.2,69,82,110/-. In the assessment the A.O. made addition
of Rs.1,34,30,935/- in respect of the deduction u/s 35(2AB) of the Act.
During the assessment proceedings, the A.O. found from the stock
registers maintained for production for the purpose of Central Excise
that the assessee is engaged in the electronic moving display boards for
information text installed in Railway stations with traffic code 85414020 10
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018 and data loggers (based on data acquisition and control systems) with
tariff code 8471 and the A.O. was of the view that the above items are
included in eleventh schedule in Item No.22, hence ineligible for
deduction u/s 35(2AB). The ld.AO also observed that there is no identity
of the employees working in the R&D and the company Efftronics
Systems. The duties of the employees are interchanged and used by
both for R&D and the company, hence was of the view that no weighted
deduction is allowable. accordingly, disallowed the deduction claimed by
the assessee u/s 35(2AB)and added back to the income.
Aggrieved by the order of the A.O., the assessee went on appeal
before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assessee
following the order of this Tribunal in assessee’s own case for the
assessment year 2011-12 in ITA No.188 & 216/Vizag/2015 dated
21.10.2016.
Aggrieved by the order of the CIT(A), the assessee is in appeal
before this Tribunal. During the appeal hearing, the Ld. D.R. relied on
the order of the A.O. against reliance placed by the assessee on the
order of the Ld. CIT(A).
We have heard both the parties, perused the materials available
on record and gone through the orders of the authorities below. The
issue with regard to the allowability of deduction u/s 35(2AB) of the Act 11
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018
in the case of the assessee was examined by the Tribunal in the
assesee’s own case for the assessment year 2011-12, which is cited
(supra). For ready reference, we extract relevant paragraph of the
order of the Ld. CIT(A) in para Nos.7.1 to 7.3, which reads as under;
7.1 Hon'ble ITAT, Visakhapatnam in appellant's own case for earlier assessment year 2011-12 in its order dated 21.10.2016 in ITA No. 188/Vizag/2015 & 216/Vizag/2015 held the following:
'Para 15: Having heard both the parties, we find force in the arguments of the Ld. A. R. for the assessee for the reason that the provisions of section 35('2AB) of the Act, with relevant rules makes it mandatory for the assessee company to file its application for approval of its in house R&D before the Secretary, DSIR, Government of India. The applicant company should also submit an undertaking as per para-C of form no. 3CK to maintain separate accounts for each R&D centre approved u/c. 35(2AB) of the Act by the prescribed authority and to get accounts duly audited every year by an auditor as defined in sub section (2) of section 288 of the Act. The company should enter into an agreement with the prescribed authority (Secretary, DSIR) for cooperation in such research and development facility and for audit of the accounts maintained for that facility as per form given in para-B of Form 3CK. The Secretary, DSIR after satisfied with the details furnished by the assessee and also after complied with the conditions prescribed under the provisions of section 35(2AB) of the Act and rules there under pass an order of approval inform no. 3CM by duly intimating such approval to the Director General of Income Tax (Exemption) in form no. 3C'L within 60 days of granting approval. Once, the R&D facility is approved by the competent authority and assessee has complied with the prescribed rules, the A. 0. is bound to allow the deductions claimed u/s. 35(2AB) of the Act, if he is satisfied that the assessee facility is approved by the competent authority. In case the A. 0. is having any doubt with regard to the goods manufactured by the assessee or expenditure claimed, the A.0. is bound to refer the matter back to the competent authority through appropriate authority i.e. the Central Board of Direct Taxes ('C'BDT) and seek clarifications. Thus, it would emerge from above analysis that neither the A.0. nor the board was competent to take any decision of any such controversy relating to report and approval granted by the prescribed authority as it involved expert view or opinion. It was prescribed authority alone which would be competent to take decision with regard to the correctness or otherwise and its order of approval granted in form No. 3CL as prescribed u/s. 35('2AB) of the Act read with rule 7A of the Income Tax Rules, 1962. In the present case on hand, on perusal of the facts available on record, we find that the A.0. Without following the procedure laid down 12
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018
under rules, simply disallowed the expenditure claimed by the assessee by holding that the goods manufactured by the assessee are mere office machines and apparatus listed in Eleventh Schedule. Therefore, we are of the view that the A.0. is not correct in disallowing the claim made by the assessee u/s. 35(2AB) of the Act. Para. 20: Considering the facts and circumstances of this case and also respectfully following the ratios of decisions discussed above, we are of the view that the A.0. erred in disallowing the weighted deduction claimed by the assessee under the provisions of section 35(2AB) of the Act, despite the assessee’s R&D facility was approved by the competent authority. We further were of the view that the goods manufactured by the assessee are not a mere office machines or apparatus as listed in Eleventh Schedule, but they are specially designed electronic equipments meant for use by Indian Railways to monitor smooth movement of trains. The assessee has categorically proved by filing necessary evidences of approval granted by the prescribed authority and also returns filed annually to the prescribed authority to justify the expenditure incurred towards R&D expenditure. In our considered view, the competent authority has to decide whether a particular expenditure is eligible for deduction,, u/s. 35(2AB) of the Act or not, but not the assessing officer. In the present case, the A.0. without following the due procedure laid down under the provisions of the Act and rules there under, simply disallowed the expenditure claimed by the assessee. Therefore, we direct the A.0. to allow the weighted deduction claimed by the assessee under the provisions of section 35(2AB) (1) of the Act."
7.2 R&D facility of the appellant was approved by competent authority for the purpose of section 35(2AB) of the Act for the period 01.04.2012 to 31 .03.2016. The copy of approval in Form No. 3CM is reproduced below:
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018
7.3 In view of the above ITAT decision and the fact that appellant’s R&D facility was approved by the competent authority for the purpose of section 35(2AB) for the period 1.4.2012 to 31.3.2016, I direct the Assessing Officer to delete addition of ` 1,34,30,935/- made in the assessment order as the issue involved for this Asst. Year 2013-14 is identical to the issue decided by Hon’ble ITAT for Asst. Year 2011-12. Grounds of appeal numbers 2 & 3 are allowed.
During the appeal hearing, the Ld. D.R. did not furnish any
evidence or the case law of any higher judicial authority to controvert
the finding of the Ld. CIT(A).The Ld.CIT(A) has given a categorical
finding that the R&D facility was approved for the period 1.4.2012 to
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018 31.3.2016. Therefore, respectfully following the view taken by this
Tribunal in the assessee’s own case for the earlier assessment year, we
hold that the assessee is eligible for deduction u/s 35(2AB) of the Act
and the appeal of the revenue is dismissed on this ground.
Ground No.2 is related to the allowability of capital expenditure
incurred as research development amounting to Rs.3,92,636/-. During
the assessment proceedings, the A.O. found that the assessee has
deducted a sum of Rs.3,92,636/- towards capital equipment. Hence, the
assessing officer treated the expenditure as a capital expenditure and
disallowed the same.
Aggrieved by the order of the A.O., the assessee went on appeal
before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assessee
holding that the expenditure was incurred for the purpose of R&D only.
For ready reference, we reproduce para No.7.4 of the Ld. CIT(A) which
reads as under:
“7.4 A sum of ` 3,92,636/- was wholly incurred for the purpose of R&D only is evident from Form No.3CL.
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018
In view of the certificate issued by competent authority in Form No.3CL, I direct the Assessing Officer to delete addition made of Rs.3,92,636/- towards capital expenditure (other than land & building). Assessing Officer without examining the nature of expenditure cannot make disallowance holding that the expenditure was not wholly incurred for the purpose of R&D. Hence grounds of appeal number 4 is allowed.”
As per Form No.3CL, the expenditure was R&D only. The evidence
brought on record shows that the expenditure was capital expenditure
other than land and building. The A.O. disallowed the same without
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018 examining the nature of expenditure. Therefore, we do not find any
infirmity in the order of the Ld. CIT(A) and the same is upheld.
In the result, the appeal of the revenue is dismissed.
C.O. No.6/Vizag/2018:
The cross objection filed by the assessee is supporting order to the
Ld. CIT(A). Since we have dismissed the appeal of the revenue, the
C.O. filed by the assessee becomes infructuous and accordingly
dismissed. The above order was pronounced in the open court on 9th Mar’18.
Sd/- Sd/- (वी. दुगा�राव) ( ड.एस. . . . सु�दर "संह) (V. DURGA RAO) (D.S. SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER #वशाखापटणम /Visakhapatnam: 'दनांक /Dated : 09.03.2018 VG/SPS आदेश क� ��त)ल#प अ*े#षत/Copy of the order forwarded to:-
अपीलाथ� / The Appellant – The DCIT, Circle-2(1), Vijayawada
��याथ� / The Respondent – M/s. Efftronics Systems Pvt. Ltd., D.No.40-15-9,
Brindavan Colony, Labbipet, Vijayawada-520 010. 3. आयकर आयु+त / The CIT, Vijayawada
आयकर आयु+त (अपील) / The CIT (A), Vijayawada
ITA Nos.61, 62 & 63/Vizag/2017 ; CO Nos. 31, 32&33/Vizag/2017, ITA 551/Vizag/2017 & CO 6/Vizag2018
#वभागीय ��त�न.ध, आय कर अपील�य अ.धकरण, #वशाखापटणम /
DR, ITAT, Visakhapatnam
गाड� फ़ाईल / Guard file
आदेशानुसार / BY ORDER
// True Copy //
Sr. Private Secretary ITAT, VISAKHAPATNAM