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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: Shri D.T. Garasia & Shri G Manjunatha
Date of hearing 05 -12-2017 Date of pronouncement -01-2018 O R D E R
Per G Manjunatha, AM :
This appeal by the assessee is directed against the order of the Commissioner of Income-tax-1, Mumbai dated 29-03-2014 u/s 263 of the Income-tax Act, 1961 for the assessment year 2009-10. The assessee has raised the following grounds of appeal:- “On the facts and in the circumstances of the case and in law: 1. . The learned Commissioner of Income Tax-1 (CIT) erred in setting aside the assessment order by invoking powers under s 263, when the said assessment order was neither erroneous nor prejudicial to the interests of the revenue. ..
2. The (earned CIT erred in exercising powers u/s 263, when the jurisdictional conditions for the same had not been satisfied.
3. The learned CIT erred in directing for disallowance of claim u/s 35. Such a direction was outside the scope of s 263, and on merits also, unsustainable. The learned CIT erred in insisting on compliance with additional conditions for allowing the said deduction, when such conditions are not at all mandated by s 35 or any other relevant section.
4. The Order of learned CIT is against the weight of evidence, equity and natural justice.”
2 IT A 3533/Mum/2014 2. The brief facts of the case are that the assessee company engaged in the business of manufacturing and trading of electronic process control equipment and consultancy services, filed its return of income for the assessment year 2009-10 on 30-09-2009 declaring total income at Rs.23,98,230. The assessment was completed u/s 143(3) on 31-10- 2011 determining total income at Rs.26,46,230 interalia making additions towards disallowance of penal interest and adhoc disallowance of 10% travelling expenses.
Subsequently, the Commissioner of Income-tax-1, Mumbai (hereinafter CIT) issued a notice u/s 263 of the Income-tax, 1961 on the basis of proposal received from AO in respect of deduction claimed u/s 35(1) towards research and development expenditure and asked the assessee as to why the assessment order passed by the AO u/s 143(3) on 31-10-2011 shall not be revised. In the said show cause the CIT observed that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue as the AO has allowed deduction u/s 35(1) towards R&D expenditure even though such expenditure is not otherwise allowable to the assessee. In response to show cause notice, Shri Manish Pandit, General Manager (Taxation) appeared and furnished necessary details, as called for. The assessee contended that it is entitled for deduction u/s 35(1) towards capital expenditure incurred on R&D activities undertaken in its in-house R&D
3 IT A 3533/Mum/2014 facility as the same has been approved by the competent authorities, i.e.
Department of Scientific & Industrial Research. The assessee further submitted that it has furnished all details before the AO at the time of completion of assessment u/s 143(3) and the AO after fully satisfied with the explanation completed assessment u/s 143(3) without any adverse comment on deduction claimed u/s 35(1). Therefore, assessment order passed by the AO cannot be considered as erroneous insofar as it is prejudicial to the interest of the revenue.
The CIT, after considering relevant submissions of the assessee observed that there is no documentary evidence available on record to establish that either the assessee has furnished necessary evidence to prove that it is entitled for deduction towards capital expenditure incurred on research and development nor the AO has examined the issue of allowability of deduction u/s 35 of the Act. Therefore, he opined that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue. The CIT(A) further observed that though the conditions prescribed u/s 35(1) stipulates that the assessee needs to maintain separate books of account for its R&D activity, the authorised representative of the assessee accepted that no separate books of account in respect of R&D activity has been maintained. The AO has not looked into whether or not deduction u/s 35 is allowable to the assessee. He has mechanically granted deduction
4 IT A 3533/Mum/2014 without application of mind to the provisions of the Act; therefore, the CIT opined that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue and hence set aside the order passed by the AO and directed him to frame fresh assessment order after disallowing the claim of deduction u/s 35(1)(iv) of the Income-tax Act, 1961. Aggrieved by the order of CIT, the assessee is in appeal before us.
The Ld.AR for the assessee submitted that the Ld.CIT was erred in setting aside assessment order by invoking powers u/s 263 when the said assessment order was neither erroneous nor prejudicial to the interest of the revenue. The Ld.AR further submitted that the assessee has furnished various details in support of deduction claimed u/s 35(1) and the AO has examined the issue in the light of details filed by the assessee. Therefore, merely because there was no discussion in the assessment order about the deduction claimed u/s 35(1), an adverse inference cannot be drawn that the AO has not considered the issue.
The Ld.AR further submitted that its R&D facility has been approved by the competent authority, i.e. Department of Scientific & Industrial Research, Government of India and its claim made in the earlier and subsequent assessment years has been accepted by the department.
The Ld.AR further submitted that the Ld.CIT(A) erred in directing the AO to disallow claim of deduction u/s 35, as such the direction was outside
5 IT A 3533/Mum/2014 the scope of section 263. 6. The Ld.DR, on the other hand, strongly supported the order of CIT. 7. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The CIT set aside the assessment order passed by the AO u/s 143(3) by invoking his powers u/s 263 on the ground that the assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue as the AO has allowed deduction claimed u/s 35(1) towards R & D expenditure even though the assessee is not eligible for deduction.
According to the CIT, the assessee is not eligible for deduction u/s 35(1) as it has failed to fulfil conditions prescribed u/s 35(1) by maintaining separate books of account in respect of R&D facility. The AO, without examining the fact in the light of provisions of section 35(1) mechanically allowed deduction claimed by the assessee which rendered assessment order erroneous insofar as it is prejudicial to the interest of the revenue.
It is the contention of the assessee that its R&D facility is approved by Competent Authority, i.e. Department of Scientific & Industrial Research and it is claiming deduction towards expenditure incurred in its in-house R&D facility right from AY 2001-02 onwards and such claim has been accepted by the department. The assessee further contended that without there being any material changes in facts, the CIT directed the AO to disallow claim u/s 35(1). We do not find any merits in the 6 IT A 3533/Mum/2014 arguments of the assessee for the reason that though assessee claims to have furnished necessary details before the AO in support of deduction claimed u/s 35(1) at the time of original assessment u/s 143(3), but failed to adduce any evidence to justify its claim. We further observe that the AO has allowed deduction claimed u/s 35(1) without any discussion as to whether the claim made by the assessee is in accordance with provisions of section 35(1) or not. We further notice that the authorised representative of the assessee accepted before the CIT that it has not maintained separate books of account in respect of R&D facility even though it was required to maintain separate books of account as per the provisions of the Act. Therefore, we are of the considered view that the CIT was right in setting aside the assessment order passed by the AO u/s 143(3) as the assessment order is erroneous insofar as it is prejudicial to the interest of the revenue.
However, we find merit in the arguments of the assessee that the CIT has given specific direction to the AO to disallow deduction claimed u/s 35(1), without offering an opportunity to furnish necessary details. The CIT, in his order, has given specific direction to the AO to disallow claim of deduction u/s 35(1), in the fresh assessment order passed consequent to order passed u/s 263 of the Income-tax Act, 1961.
Therefore, we are of the view that the direction given by the CIT needs to be modified to the extent of allowing the AO to examine the claim of 7 IT A 3533/Mum/2014 the assessee in the light of provisions of section 35(1) and explanation of the assessee so as to come to a conclusion that assessee is not eligible for deduction. 9. In the result, the appeal filed by the assessee is partly allowed, for statistical purpose. Order pronounced in the open court on 31st January, 2018.