M/S. TRIVITRON HEALTHCARE PVT. LTD.,CHENNAI vs. PCIT, , CHENNAI-3

This appeal filed by the assessee is directed against the order passed by the Principal Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 24.05.2024 and pertains to assessment year 2017-18.

At the outset, we find that there is a delay of 20 days in appeal filed by the assessee, for which petition for condonation of :-2-: ITA. No: 1745/Chny/2024 delay along with reasons for delay has been filed. After considering the petition filed by the assessee and also hearing both the parties, we find that there is a reasonable cause for the assessee in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit appeal filed by the assessee for adjudication.

The only issue in the appeal of assessee is as against the revision order passed by the PCIT u/s.263 of the Act that he failed to satisfy the twin conditions i.e., for order passes by the AO u/s.143(3) of the Act, is erroneous insofar as prejudicial to the interest of Revenue, which is sine qua non to invoke the powers u/s.263 of the Act on the following four issues:- i) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to disallow depreciation on goodwill. ii) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to disallow the deduction u/s.35(2AB) of the Act of Rs.1,21,28,068/- subject to production of Form 3CL by the assessee. iii) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to verify the status of the total income assessed for relevant assessment years and accordingly,

Briefly stated facts are that the assessee company filed its return of income for the A.Y. 2018-19 ON 22.09.2018 BY declaring a Rs.NIL income after set off of brought forward loss of Rs.14,43,60,453/-. The assessee is engaged in the business of manufacturing innovations, distribution of global medical technology. Subsequently, the assessee’s case was selected for complete scrutiny on the following issues:-

Further, it is seen that the assessed income of the assessee has been arrived at Nil after allowing set off of brought forward loss/unabsorbed depreciation of Rs.14,43,60,453/- It is seen that the assessee claimed the brought forward loss (LTCL of AY 2017-18 of Rs.86, 82, 695) and unabsorbed depreciation of Rs.12,91, 87, 507 of AY 2015-16 & Rs.12,21, 16,432/- of AY 201 7-18 and adjusted to the extent of income determined. However, after scrutiny/appeal proceedings, the available unabsorbed depreciation for AY 2015-16 is only Rs.10,75,26, 052/- and for AY 2017-18 is Rs.4,44,27,377/- only. Hence, the AO has allowed excess set off of unabsorbed depreciation and also allowed excess amount of unabsorbed depreciation to be carried forward.”

Before us, the ld.counsel Sri.S.Sridhar, Advocate for the assessee in support of the appeal, filed a paper book consisting of 405 pages as detailed below: Sl.No Date Particulars Page No. RETURN OF INCOME AND FINANCIALS 1 22.09.2018 Return of Income for the AY: 2018-19 1 2 07.08.2018 Tax Audit Report in Form No. 3CA for AY: 113 2018 -19 3 22.09.2018 Form No. 3CEB for AY: 2018 – 19 169 ASSESSMENT PROCEEDING 4 22.09.2019 Notice under Section 143(2) of the Act 204 5 04.10.2019 Reply to Notice under Section 143(2) of the 208 Act 6 21.12.2020 Notice under Section 142(1) of the Act 210 7 05.01.2021 1st Reply to Notice under Section 142(1) of 214 the Act 8 - Form No. 3CK filed for AY: 2018- 19 223 9 - Details of warranty & Swabhiman grant 235 scheme

The ld. Counsel first of all drew our attention to the facts regarding the first issue of directing the AO to disallow the depreciation on the purchased goodwill on the presumption of applicability of 5th proviso to Section 32(1) of the Act without

As regards to third issue, in regard to directing the AO to re- quantify the set off of brought forward loss, the ld.AR stated that the set off of brought forward loss in the assessment year was in order and further ought to have appreciated that there was no error / prejudice caused to the revenue especially in view of the admitted fact the addition / disallowance made in the earlier assessment

The fourth issue raised by the ld.PCIT was directing the AO to re-quantify the book profits in terms of Section 115JB upon verification of depreciation loss. The ld.AR stated that both at the time of initiating the impugned proceedings as well as passing the impugned revision order, the carried forward and brought forward loss was very much available to the assessee thereby negating the presumption of any prejudice to the revenue. Therefore, the presumption of lack enquiry with respect to the quantification of carried forward loss / depreciation loss is wrong, incorrect, erroneous, invalid, unjustified and not sustainable both on facts and in law.

On the other hand, the ld.CIT-DR only supported the revision order.

We have heard rival contentions and gone through the facts and circumstances of the case. We have gone through the PCIT’s order and noted that on account of disallowing depreciation on goodwill, he has noted the facts and his observation as under:- “16. Now the issues are taken up on merits. The first issue is the claim of depreciation on Goodwill. In AY 2017-18, the claim of goodwill was disallowed. The assessee submitted that the ITAT has allowed the appeal's on the issue of depreciation on goodwill in assessee's case and also relied on the decision of Malabar Industrial Company vs CIT (243 ITR 83(Sc) wherein it had been held that the Assessing Officer had taken a possible view with which PCIT did not agree with and hence, it cannot be treated as erroneous and prejudicial to the interest of revenue. The decision of the ITAT has not been accepted by the Department and the Department has gone on further appeal with Hon'ble High Court on this issue. The assessee is aware that the issue is before the Hon’ble High Court of Madras and not reached finality. 17. In this regard, reliance is placed on Hindustan Tin Works Ltd. vs. D.C. of Income Tax [2005 192 ITD 101 (Delhi)(Trib), wherein it was held that if the AO takes a view in conformity with the decision of a High Court or even the jurisdictional high court, if an appeal has been preferred to the Supreme Court against that decision, then the revision is still maintainable. Hence, in this case even though the appeal is filed before Hon'ble High Court also, revision is still maintainable. Therefore, knowing the Department's position the Assessing Officer ought to have caused necessary enquiries which he failed to do so. Hence, provisions of Section 263 is squarely applicable to this case on this issue as held by the ITAT in the aforesaid decision. goodwill arisen out of amalgamation. 18. The claim of the assessee is that the said 1961 defines, 'amalgamation' as Clause (1B) of Section 2 of the Income-tax Act, defines, ‘amalgamation’ as merger of one or more companies, ....otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first- mentioned company.

However, for book purpose, especially while issuing shares of the amalgamated company (say B) to the erstwhile shareholders of the amalgamating company (say A), B may re-value the assets of the A for the purpose of allotting proportionate shares to the erstwhile shareholders of A. However, for the purpose of Income-tax Act, 1961 including the provisions of Section 115JB of the Income-tax Act, 1961 such re-valuation is to be ignored and only the actual book value or the value as per block of assets can only be taken for the purpose of the Income-tax Act, 1961.

Further, the decision of Hon'ble Supreme Court in the case of Smifs Securities Ltd (2012) 348 ITR 302 is distinguishable as the question before the Hon'ble Supreme Court is only whether the :-12-: ITA. No: 1745/Chny/2024 goodwill arising out of amalgamation is intangible assets or not and about the allowance depreciation u/s 32(1) of the Income-tax Act, 1961, especially when the merger in this case is under pooling of interest method. Further, the decision of the Hon'ble |TAT, Bangalore in the case of M/s United Breweries would be applicable to the facts and circumstances of the case. Further, tor the reasons mentioned in paragraphs 20 to 22 above, the assessee cannot claim that the goodwill is arising out of amalgamation to be eligible for depreciation under the Income-tax Act, 1961.

Therefore, invoking the revisionary powers u/s 263 of the Income- tax Act, 1961, the issue is set aside with the direction to the Assessing Officer that the depreciation on goodwill shall be disallowed.”

We noted that the PCIT has simpliciter carried out unnecessary exercise without analyzing that the assessee has been claiming the depreciation from earlier assessment years, which has been upheld by this Tribunal in dated 24.06.2022 for the A.Y. 2015-16 and in dated 12.10.2022 for the A.Y. 2014-15 by quashing the order of the ld.PCIT u/s.263 of the Act. Since, the revenue has filed an appeal in the Hon’ble high court of Madras against the orders of this Tribunal, the ld.PCIT cannot interfere in the order of the AO as erroneous and prejudicial to the interest of revenue. There is no iota of any new finding or reason on the above subject and cannot be inferred from the order of PCIT, except stating that the orders of this ITAT of earlier assessment years on the same issue is challenged by the revenue, which is yet be decided by the Hon’ble high court of Madras. Further for revising the assessment, the PCIT has to give a clear-cut

Coming to next issue is the claim of weighted deduction u/s.35(2AB) of the Act of Rs.1,21,28,068/-, admittedly during the relevant assessment year the assessee company had incurred revenue expenditure of Rs.80,85,379/- towards in house scientific research and development facility. The assessee has maintained separate books of accounts for the same and certified by a CA and corresponding form No.3CK has been filed in this regard to the prescribed authority as a statutory compliance to claim the weighted deduction of revenue expenditure. However, Form 3CL has not been issued by the prescribed authority to the Income Tax authorities as per Rule 6 of the IT rules 1962. The AO after verification of the submissions made by the assessee allowed the expenditure. Hence, the ld.PCIT in his order directed the AO to disallow the claim holding as under : “26. The next issue is the deduction u/s 35(2AB). Sub-clause (3) of Section 35(2AB) states that no company shall be entitled for deduction unless it fulfills such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed. Sub-rule (7A) of Rule 6 prescribes that approval of expenditure incurred on in-house research and development facility by :-14-: ITA. No: 1745/Chny/2024 a company u/s 35(2AB) subject be conditions which include "the prescribed authority shall furnish electronically its report in Form 3CL, quantifying the expenditure. Thus, the requirement of Form 3CL report is mandatory. However, the Assessing Officer has also failed to obtain and verify the certificate in Form 3CL report of the Department of Scientific and Industrial Research from the assessee before allowing deduction u/s 35(2AB) of the Income-tax Act, 1961. In this case, the assessee did not submit Form 3CL and filed only Form 3CK. In the absence of Form 3CL, the deduction is not allowable. In the show cause notice dated 16/03/2021, the Assessing Officer proposed this addition that without fling of Form 3CL, deduction u/s 35(2AB) is not allowable and hence to be disallowed. However, while passing the order the assessing Officer did not disallow the deduction u/s 35(2AB). Therefore, it is case of failure of the Assessing Officer to cause necessary enquiries and hence, it is a deemed case of being erroneous in so far as prejudicial to the interests of revenue, in terms of clause (a) and clause (b) of Explanation 2 under Section 263 of the Income- tax Act, 1961. Therefore, the order of the Assessing Officer comes within the provisions of Section 263 of the Income-tax Act, 1961.

Therefore, invoking the revisionary powers u/s 263 of the Income- tax Act, 1961, the issue is set aside with the direction to the Assessing Officer that the deduction u/s 35(2AB) of Rs.1,21,28,068/- shall be disallowed. However, it is clarified that if the assessee files Form 3CL later for this assessment year within limitation period under law, then the AO may allow the deduction u/s 35(2AB) as per law after due verification.”

Since, the assessee has already filed all the required details to claim the weighted deduction u/s.35(2AB) of the Act, and the same has not been disputed by the AO with regard to the fact of the said expenditure, merely for the reason of certificate in Form 3CL has not been provided by the prescribed authority to the income tax authorities, (which is in the control of the assessee), the PCIT cannot term the decision of the AO as erroneous in so far as prejudicial to the interest of Revenue. This view has been supported

In the facts and circumstances of the case and relying on the above decision, we cannot countenance action of the PCIT in exercising the powers u/s.263 of the Act for revising the assessment on this issue.

We note that the issue of carry forward and set off of brought forward of losses is purely on facts of the assessee based on the assessment records and hence, if there is any error in the order of the AO, the same may also be rectifiable under section 154 of the Act. However, to safeguard the revenue in case of any time barring

The fourth issue raised by the ld.PCIT was directing the AO to re-quantify the book profits in terms of Section 115JB upon verification of depreciation loss. The ld.PCIT in his order is observed as under: “29. The next issue is regarding the computation of loss or unabsorbed depreciation under section 115JB, the assessee states that for as per profit and loss account, loss has been incurred for the FY.2016-17 and the same is claimed in this assessment year. The correctness of the claim of the assessee on carry forward losses has not been verified by the Assessing Officer, Therefore, this issue is set aside to the Assessing Officer with the direction to verify the record and compute the book profit u/s 115JB accordingly.”

We note that the issue of carry forward and set off of brought forward of losses corresponding to computation of income u/s.115JB of the Act is purely on facts of the assessee based on the assessment records and hence, if there is any error in the order of the AO, the same may also be rectifiable under section 154 of the Act. However, to safeguard the revenue in case of any time barring situations, the action of the ld.PCIT in exercising the revisional power u/s.263 of the Act cannot be interfered and hence we concur

In view of the above discussion, the action of the Ld.PCIT in exercising the revisional powers u/s.263 is quashed for the following two issues, namely i) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to disallow depreciation on goodwill. ii) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to disallow the deduction u/s.35(2AB) of the Act of Rs.1,21,28,068/- subject to production of Form 3CL by the assessee.

In the result, the appeal filed by the assessee is partly allowed.