THE DEPUTY. CIT, VIJAYAWADA vs. M/S. EFFTRONICS SYSTEMS PRIVATE LIMITED, VIJAYAWADA

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

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):

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

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.

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.

before this Tribunal raising the following grounds:

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

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 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 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.”

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,

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

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.

C.O. Nos.31, 32 & 33/Viag/2017:

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:

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

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.

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.

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).

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 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 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:

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.

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

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.

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.

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.

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.”

brought on record shows that the expenditure was capital expenditure

other than land and building. The A.O. disallowed the same without

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.

C.O. No.6/Vizag/2018:

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:-

Brindavan Colony, Labbipet, Vijayawada-520 010. 3. आयकर आयु+त / The CIT, Vijayawada

DR, ITAT, Visakhapatnam

आदेशानुसार / BY ORDER

// True Copy //

Sr. Private Secretary ITAT, VISAKHAPATNAM