HAMILTON HOUSEWARES PRIVATE LIMITED,DAMAN & DIU vs. PR. COMMISSIONER OF INCOME TAX, VALSAD

आदेश / O R D E R PER DR. A. L. SAINI, AM: By way of this appeal, the assessee has challenged the correctness of the order dated 30.03.2022 passed by the Learned Principal Commissioner of Income- tax (in short “Ld PCIT”) under section 263 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), for the assessment year 2017-18.Grievances raised by the assessee, which, being interconnected, will be taken up together, are as follows: “1. The order u/s 263 passed by the Learned PCIT is contrary to the facts of the case and law and prejudicial to the assessee. 2. On the facts and the circumstances of the case and law the learned PCIT has erred in invoking jurisdiction u/s. 263 of the Income Tax Act, 1961 by holding that the order of the Learned Assessing Officer framed u/s.143(3) of the Income-tax of Act dated 23.12.2019 is erroneous and prejudicial to the interest of revenue. The notice dated 17.03.2022 u/s. 263 of Act has been issued without complying with the provision of the Act and deserves to be quashed in toto. 3. On appreciation of the facts and circumstances of the case and interpretation of law the learned PCIT has erred in setting aside the order of the Learned Assessing Officer u/s 143(3) of the Act dated 23.12.2019 and in directing the Learned Assessing Officer to frame the assessment order afresh. The order of the Learned

2. The relevant material facts, as culled out from the material on record, are as follows. The assessee before us is a Private Limited Company engaged in the business of manufacturing vaccum refills, thermos ware and trading of glass items. The assessee company filed its revised return of income for assessment year (A.Y.) 2017-18 on 31.03.2018 declaring total income of Rs.1,11,92,87,630/- under the normal provisions of the Income Tax Act, after claiming deduction of Rs.17,73,45,923/- under chapter VI-A and a deemed total income u/s 115JB of the I.T. Act of Rs.1,58,48,65,069/-. Thereafter, the case was selected for complete scrutiny through CASS. Accordingly, the assessment order under section 143(3) of the I.T. Act was passed on 23.12.2019 determining total assessed income at Rs.113,11,71,866/- after making the addition of Rs.19,38,048/- on account of difference in FD interest, disallowance of deduction under section 80IC of the Income Tax Act amounting of Rs.99,46,189/- and under section 80G of the I.T. Act of Rs.5,00,000/-.

3. Later, Ld. PCIT exercised his jurisdiction u/s 263 of the Act and issued a show cause notice to the assessee which is reproduced below: “To M/s Hamilton Housewares Pvt. Ltd. Plot No.49/50, Danudyog Industrial Estate, Dadra Nagar Haveli (UT) Piparia – 396230, Dadra & Nagar Haveli. Sir, Sub: Action u/s 263 of the Income Tax, 1961, in the case of M/s Hamilton Houseware Pvt. Ltd. (PAN: AABCD1683Q) AY.2017-18 – Show Cause notice – Regarding. ************* Please refer to the above, 2. The assessee company is engaged in the business of manufacturing vaccum refills, thermo ware and trading of glass items. The assessee company filed its revised return of income for AY.2017-18 on 31.03.2018 declaring total income of Rs.1,11,92,87,630/- under the normal provisions of the Income-Tax Act, after claiming deduction of Rs.17,73,45,923/- under chapter VI-A and a deemed total Page | 2 ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. income under section 115JB of the I.T. Act of Rs.1,58,48,65,069/-. Thereafter, the case was selected for complete scrutiny through CASS. Accordingly, the assessment order under section 143(3) of the I.T. Act was passed on 23.12.2019 determining total assessed income at Rs.1,13,11,71,866/- after making the addition of Rs.19,38,038/- on account of difference in FD interest, disallowed deduction u/s 80IC of the I.T. Act of Rs.99,46,189/- and u/s 80G of the I.T Act of Rs.5,00,000/-.

3. On perusal of the assessment records for the year under consideration. It is observed that the assessee company had claimed deduction Rs.19,84,38,114/- for AY. 2017-18 on account of deduction u/s 35(2AB) of the I.T. Act for Scientific Research being 200 percent of Rs.9,92,19,057/-. However, on perusal of the submission submitted by the assessee company during the course of assessment proceedings, it is noticed that the assessee company has not submitted Form 3CL. On verification of case records, only application forwarded for approval to the Department of Scientific and Industrial Research (DSIR) was found but the grants approval of expenditure in Form 3CL by DSIR is not available on records. No further steps taken by the assessee are on record. Therefore, the claim of deduction had been erroneously allowed without the confirmation of approved expenditure in Form 3CL. The A.O. was required to disallow of Rs.9,92,19,057/- by invoking the provisions of section 35(2AB) of the I.T. Act and added to the total income of the assessee for the year under consideration.

4. In view of the above, it is clear that the AO has passed the assessment order without carrying proper verification. Therefore, the assessment made by the AO in the case of the assessee for AY.2017-18 is not only erroneous but also detrimental to the interest of revenue and therefore need to be revised under section 263 of the I.T. Act, 1961.

5. Please note that your reply must explain each entry separately and clearly establish why this order dated 23.12.2019 is neither erroneous nor prejudicial to the interest of Revenue. You are accordingly informed that if nothing is heard on or before 24.03.2022, it will be presumed that you have nothing to explain in this matter and there is no objection for the proposed action under section 263 of the Income Tax Act, 1961 and an order under section 263 of the Income Tax Act, 1961 will be passed on the basis of material available on records.”

4. In response to the notice of Ld. PCIT, the assessee submitted its reply on 24.03.2022 and submitted another reply on 28.03.2022 which are indexed as an Annexure A and B of the Ld. PCIT order. The Ld. PCIT has considered the reply of the assessee and observed that section 35(2AB) of the Act grants weighted deduction to specified companies subject to compliance with conditions as laid down in the section, Rules and in the DSIR guidelines. Weighted deduction is granted for capital and revenue expenditure (except for cost of land or building) incurred directly on scientific research facility which has been recognised and approved by the DSIR. Further, the assessee is also required to file annually with the DSIR a certificate for claim of weighted deduction. In order to ensure better and Page | 3

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. meaningful monitoring mechanism, the Section 35(2AB)(4) has been amended requiring DSIR to share their report approving the facility with the “Pr. CCIT” having jurisdiction over the assessee company. Recently CBDT vide notification dated 28 April 2016 has amended Rule 6 and notified the forms for claiming weighted deduction and the same are summarised as under: a) DSIR to furnish electronically, report approving the facility to the “Pr. CCIT or CCIT or DGIT of DGIT” (prescribed authorities) having jurisdiction over the company in form 3CM within 120 days from the date of granting of approval by DSIR (as against earlier time limit of 60 days). b) The erstwhile Rule and DSIR guidelines did not prescribe any time limit for issuing the report approving the claim of expenditure eligible for weighted deduction. Thus prescribing time line of 120 days from the date of submission of audit report to quantify the expenditure within the time limit. c) DSIR to electronically inform the prescribed authorities having jurisdiction over the company, about expenditure approved in Form 3CL. d) Revised rules have also made changes to audit report required to be furnished. Relevant charges made in relation thereto are summarised as under: Particulars Prior to notification Post notification Audit Report Format prescribed in the DSIR New Form CCLA – guidelines. notified in Rules prescribing format of audit report. Breakup of No breakup of the expenditure was Breakup of expenditure expenditure required to be mentioned. in the form of Revenue, Capital, Land and Building and Others is required to be furnished in the report. Exclusion Audit was required to specially The said requirement report whether certain expenses has been deleted. listed in the form were excluded from the weighted deduction claim Due date for 31 October Linked to due date for furnishing furnishing the return of report income by the company Audit Report Statutory Auditor only Any Chartered to be signed by Accountant

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. e) Amendments prescribed in revised Rules are applicable with effect from 1st July, 2016. Thus, all companies claiming weighted deduction for AY.2016-17 onwards would require compliance with the revised rules. It is further noted that no such information has been provided by the DSIR in the case of the assessee regarding the quantification and approval of expenditure which is to be allowed by the AO under section 35(2AB).

Therefore, ld PCIT noted that the assessment year being 2017-2018 therefore the new rule is applicable and if DSIR does not approve any expenditure than same cannot be given by the AO. In this case such approval is not on record and therefore the AO was duty bound not to allow the same however as AO has done so therefore the assessment order becomes erroneous as well as prejudicial to the interest of revenue. For this, ld PCIT relied on the order of coordinate Bench of ITAT Kolkata in the case of DCIT, Circle-10(2), Kolkata vs. M/s Stp Ltd., Kolkata in for Assessment Year: 2013-14 order dated 13 January, 2021 wherein it was held that there is a difference in situation before the notification of Rule 6(7a)(b) of the Rules by the CBDT with effect from 1/7/2016 while claiming deduction under section 35(2AB). The findings of the Coordinate Bench of ITAT Kolkata are as follows: “DCIT, Circle-10(2), Kolkata vs M/s Stp Ltd., Kolkata ITA No.1761/Kol/2019 for Assessment Year: 2013-14 dated 13 January, 2021 ORDER

Per Shri A.T. Varkey, JM:

1. This is an appeal preferred by the Revenue against the order of Ld. CIT(A)-4, Kolkata dated 29/03/2019 for 2013-14.

raised by the Revenue are as under:

1. Whether in the facts and the circumstances of the case, the Ld. CIT(A) was correct in allowing the deduction to the tune of Rs. 2,55,25,677/- u/s 35(2AB) of the Income Tax Act, 1961 in respect of the in-housing Scientific Research and development expenditure of the Sipaigachhi Unit, where the DSIR does not approve of such expenditure in the Form 3CL?

2. Whether the Ld. CIT(A) was correct in holding that in order to avail up the deduction u/s 35(2AB) irrespective of the date of recognition and the cut off date mentioned in the certificate of the prescribed authority the existence of recognition is required?

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. 3. That the appellant craves to add, delete or modify any of the grounds of appeal before or at the time of hearing.

3. Brief facts of the case as noted by the AO is that the assessee company is engaged in the business of manufacturing and trading of waterproofing felts, bitumals coal tar products and construction additives etc. The AO observes from a perusal of ITR of the assessee and the computation of income of the assessee for the year under consideration that the assessee had claimed deduction of Rs.2,79,56,896/- u/s 35(2AB) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”). The AO notes that the assessee had filed the details of expenses incurred on Research & Development (R&D) during the relevant year under consideration. However, according to AO the assessee has not filed the copy of Form No. 3CL which according to him, has to be submitted by the Secretary of Department of Scientific and Industrial Technology Bhawan, New Delhi (hereinafter referred to as DSIR) to DGIT(Exemption) of Income Tax Department u/s 35(2AB) of the Act. According to AO, he gave notice to the assessee to explain why the deduction should not be allowed as claim u/s 35(2AB) of the Act. The AO acknowledges that pursuant to the said notice, the assessee filed reply dated 24.02.2016 along with the copy of Form No. 3CL in respect of this assessment year (AY 2013-14) issued by Secretary DSIR. However, according to AO, in the Form 3CL the breakup of total cost of in-house research was given as under: a) Capital Expenditure : Rs. 1.40 Lakh (other than land & building) b) Recurring Expenditure : Rs. 21.50 Lakh Rs. 22.90 Lakh

4. The AO notes that even though the DSIR Form 3CL approves only Rs.22.90 Lakhs, the assessee along with the return had filed the computation of income wherein it has availed deduction u/s 35(2AB) the following: (i) Recurring Expenditure to the tune of Rs. 67,96,974/- and (ii) Capital Expenditure of Rs. 1,05,79,961/-. Thus, according to AO, the deduction availed by the assessee u/s 35(2AB) of the Act is therefore, not in conformity with the Report in Form 3CL given by Secretary DSIR. The AO therefore asked the assessee to reconcile the difference and he reproduces the reply of assessee dated 24.02.2016 wherein the assessee explained the discrepancy as under: “This is to inform that our R&D division at M6-9, Cuncolim Industrial Estate, Cuncolim, Selectee, Goa and Village-Sipaigachi, Post Office: Charpur, District: Hooghly, P.S. Haripal, West Bengal is approved by Department of Scientific and Industrial Research (DSIR) vide their recognition certificate no. TU/IV-RD/3247/2011 dated 24.08.2011 and further by TU/IV-RD/3247/2013 dated 26.03.2013 valid up to 31.03.2016. During the financial year 2012-13, A.Y. 2013-14 the company has incurred Rs. 105.80 lac towards Capital Expenditure and Rs.67.97 towards Revenue Expenditure. In this regard a certificate by the Statutory Auditor dated 09.01.2014 is already submitted to your department. A deduction of Rs.2,79,56,896/- (Rs.6796974/- towards revenue and Rs.21159922/- towards Capital) was provided in the computation of income for I. T. Return. Details of the same are annexed below:

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. Further we have received form 3CL from DSIR wherein they have allowed Rs.22.90 lacs which is for our Goa R&D only. Accordingly to DSIR the deduction for our Sipaigachi R&D unit could not be allowed due to its recognition date which is 26.03.2013. (Copy of Form 3CL is enclosed for your perusal) But as per I.T. Act the deduction is allowed for full year in which the recognition of R&D unit is provided by the DSIR (Refer section 35). The matter was upheld by various Hon’ble High Courts and Tribunals, a few are submitted in earlier hearing.”

5. The AO thereafter rejects the assessee’s claim u/s 35(2AB) by holding as under: “3.5. The submission filed by the assessee has been duly considered. The Department of Scientific & Industrial Research has granted Registration to the Sipaigachi unit only on 26.03.2013. This fact has been accepted by the assessee in its submission also. The assessee can claim deduction u/s 35(2AB) only on those expenses which are approved by the Department of Scientific & Industrial Research and the said expenses are duly reflected in Form 3CL issued by Secretary, DSIR, which is a statutory requirement. The DSIR in its Report in Form 3CL has not certified / approved the expenses claimed to be incurred by the assessee in respect of its R&D unit at Sipaigachi. The ratio of the judgments relied upon by the assessee is not applicable in the case of the assessee. In this case, not only the registration was granted to R&D unit of the assessee company at Sipaigachi on 26.03.2013, but also the Secretary, DSIR in its report in Form 3CL has not approved / certified recurring as well capital expenditure incurred at Sipaigachi R&D unit in F.Y. 2012-13. 3.6 Hence as discussed above, the submission of the assessee is found unacceptable. No weighted deduction u/s 35(2AB) of the I.T. Act, 1961 is allowed to the assessee in respect of recurring and capital expenditure incurred at R&D unit Sipaigachi. The recurring and capital expenditure incurred at R&D unit at Sipaigachi are as follows:- Recurring Expenditure : Rs. 46,46,543/- Capital Expenditure : Rs. 1,04,39,567/- Weighted deduction claimed u/s 35(2AB) : Rs.2,55,25,677/- in respect of R&D unit at Sipaigachi 6. Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who was pleased to allow the claim of the assessee.

8. We have heard both the parties and perused the records. We note that the assessee company is engaged in the business of manufacturing and trading of waterproofing felts, bitumals coal tar products and construction additives etc. The AO observes from a perusal of ITR and TAR of the assessee that it had claimed deduction of Rs. 2,79,56,896/- u/s 35(2AB) of the Act. However, the AO notes that in the Form No. 3CL given by Secretary DSIR, it has not certified/approved the recurring expenditure of Rs. 46,46,543/- and capital expenditure of Rs. 1,04,39,567/- in respect of R & D division at Sipaigachi and since the Secretary DSIR has issued the recognition u/s 35(2AB) of the Act only on 26.03.2013 in respect of R&D division at Sipaigachi, the assessee’s claim of expenditure to the ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. tune of Rs. 2,55,25,677/- cannot be allowed. On appeal the Ld. CIT(A) has taken note of the decision of Hon’ble Gujrat High Court in the case of Banco Products (India) Ltd. vs. DCIT (2018) 405 ITR 318 / 258 Taxman 244(Guj)(HC) and given relief to the assessee. We note that in order to adjudicate this issue the relevant provision of Section 35(2AB) of the Act and the relevant Rules applicable need to be understood are reproduced as under: Expenditure on scientific research. 35. (1) In respect of expenditure on scientific research, the following deductions shall be allowed— (2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure 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 equal to one and one-half times of the expenditure so incurred: …………………………………………. (2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act. (3) No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of the accounts maintained for that facility. (4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General in such form and within such time as may be prescribed. ………………………………..” Rule 6 of the Income Tax Rules, 1962 (Rules) prescribes procedure to be followed by the prescribed Authority for grant of approval under Section 35(2AB) of the Act. The relevant part of Rule 6, insofar as it relates to this appeal, reads thus:- [(1B) For the purposes of sub-section (2AB) of section 35, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research.] [(4) The application required to be furnished by a company under sub-section (2AB) of section 35 shall be in Form No. 3CK.] [(5A) The prescribed authority shall, if he is satisfied that the conditions provided in this rule and in sub-section (2AB) of section 35 of the Act are fulfilled, pass an order in writing in Form No. 3CM : Provided that a reasonable opportunity of being heard shall be granted to the company before rejecting an application.] 9. From a plain reading of the aforesaid provision it is taken note that under section 35(l)(i) an assessee is entitled to deduction in respect of expenditure on scientific research not being in the nature of capital expenditure laid out or expended on scientific research related to the business. Under section 35(2AB) of the Act deduction is allowed at a sum equal to two times of the expenditure incurred on scientific research if the assessee is engaged in the business of bio- technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs Page | 8 ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority. Deduction under section 35(1 )(i) and section 35(2AB) of the Act are similar except that the deduction under section 35(2AB) is allowed as weighted deduction at 200% of the expenditure, while deduction under section 35(1 )(i) is allowed only at 100%. The conditions for allowing deduction under section 35(l)(i) of the Act and under section 35(2AB) of the Act are identical with the only difference being that the assessee claiming deduction under section 35(2AB) of the Act should be engaged in manufacture of certain articles or things.

11. It has to be taken note that Rule 6(7A)(b) of the Income Tax Rules, 1962 (hereinafter referred to as the “Rules”) specifying the prescribed authority and conditions for claiming deduction under Section 35(2AB) of the Act has been amended by the Income Tax (10th Amendment) Rules, 2016) with effect from 01.07.2016, whereby it has been laid down that the prescribed authority, i.e. DSIR shall quantify the quantum of deduction to be allowed to an assessee under section 35(2AB) of the Act. Prior to such substitution, the above provisions merely provided that the prescribed authority shall submit its report in relation to the approval of in-house R&D facility in Form No. 3CL to the DGIT(Exemption) within 60 days of granting approval. Therefore, prior to 01.07.2016 there was no legal sanctity for Form No. 3CL in the context of allowing deduction under Section 35(2AB) of the Act. The courts have held that for deduction under Section 35(2AB) of the Act, first step was the recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which recognition has been given to the facility, then thereafter the role of AO is to look into and allow the expenditure incurred on in-house R&D facility as weighted deduction under Section 35(2AB) of the Act.

12. The Hon'ble Delhi High Court quoted the following observations of the Hon'ble Gujarat High Court and agreed with the said view:-

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. "7. The lower authorities are reading more than what is provided by law. A plain and simple reading of the Act provides that on approval of the research and development facility, expenditure so incurred is eligible for weighted deduction.

8. The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of:- (i) development of facility; (ii) incurring of expenditure by the assessee for development of such facility; (iii) approval of the facility by the prescribed authority, which is DSIR; and (iv) allowance of weighted deduction on the expenditure so incurred by the assessee.

14. The assessee’s claim for deduction u/s 35(2AB) for its R&D, Sipaigachi Unit (recurring expenditure of Rs. 46,46,543/- and capital expenditure of Rs. 1,04,39,567/-) was thus disallowed by the AO on the grounds that the assessee’s R&D unit at Sipaigachi unit was granted recognition by Secretary DSIR only on 26.03.2013 and in the Form 3CL issued for the year under consideration, the DSIR has not approved the expenses claimed to have been incurred by the assessee in respect of its R&D Unit at Sipaigachi therefore, an amount of Rs. 2,55,25,677/- was disallowed. On appeal, the Ld. CIT(A) has allowed the claim of the assessee by relying on the decision of Hon’ble Gujrat High Court in the case of Banco Products (India) Ltd. (supra). And we note that similar issue came up before the Hon’ble Gujrat High Court in the case of CIT vs. Sun Pharmaceutical Industries Ltd. reported in (2017) 250 TAXMAN 0270 wherein the Hon’ble high held as under: “5. Having heard learned counsel for the parties and having perused the orders on record, we are broadly in agreement with the view of the Tribunal. Undisputedly, the research and development facility set up by the assessee was approved by the prescribed authority and necessary approval was granted in the prescribed format. The communication in Form 3CM was thereafter, between the prescribed authority and the department. If the same was not so, surely, the assessee cannot be made to suffer. To this extent, the Tribunal was perfectly correct and the Commissioner was not, in observing that in absence of such certification, claim of deduction under section 35(2AB) was not allowable. However, neither the prescribed authority nor the assessing officer has applied the mind as to the expenditure, be it revenue or capital in nature, actually incurred in developing the in-house research and development facility. To the limited extent, the Commissioner desired the assessing officer to verily such figures, we would allow the assessing officer to do so. In other words, in principle, we accept the Tribunals reasons and conclusions. Merely because the prescribed authority failed to send intimation in Form 3CL, would not be reason enough to deprive the assessees claim of deduction under section 35(2AB) of the Act. However, in facts of the present case, it would be open for the assessing officer to verify the actual expenditure incurred by the assessee.”

15. We note that the AO has accepted the fact that the assessee’s R&D unit at Sipaigachi was given recognition by Secretary, DSIR vide letter dated 26.03.2013 which is placed at page 73 of PB and various certificates of registration which is placed at page 74 to 80 of PB. Therefore, since the prescribed authority as per Section 35(2AB) i.e. Secretary DSIR has approved the research and development facility set up by the assessee and necessary approval has been granted, the action of AO not giving weighted deduction u/s 35(2AB) for absence of Form 3CL cannot be countenanced . And the other objection of AO in respect of the date of approval given by DSIR being on 26.03.2013, the deduction for AY 2013-14 cannot be given also has no legal sanction. The provision we note nowhere suggests or implies that ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. R&D facility should be approved from a particular date and in other words, it is nowhere suggested that date of approval only will be cut off date for eligibility of weighted deduction on the expenses incurred from that date onwards. The statute does not say that and therefore, AO erred in prescribing something which is not in the statute and thus not allowing the claim on this reason also is erroneous.

16. As we have discussed (supra) prior to 01.07.2016, Form 3CL had no legal sanctity and it is only w.e.f 01.07.2016 with the amendment to Rule 6(7a)(b) of the Rules that the quantification of the weighted deduction u/s 35(2AB) of the Act has significance. We note that for claiming deduction u/s 35(2AB) of the Act, the assessee should be engaged in manufacture of certain articles or things as stipulated in that provision. It is not in dispute that the assessee is engaged in the business to which Section 35(2AB) of the Act applied. The other condition required to be fulfilled for claiming deduction u/s 35(2AB) of the Act is that the research and development facility should be approved by the prescribed authority i.e, Secretary, Department of Scientific Industrial Research, Govt. of India (DSIR ). It is not in dispute that the assessee in this case received recognition of its R&D unit at Sipaigachi vide letter dated 26.03.2013 vide page 73 of PB. In the aforesaid facts and circumstances we are of the view that the deduction u/s 35(2AB) of the Act ought to have been allowed as weighted deduction at 200% of the expenditure as claimed by the assessee. However, we note that neither the prescribed authority (Refer page 82 & 83 of PB) nor the AO has applied the mind as to the expenditure, actually incurred for the R&D facility at Sipaigachi. Merely because the prescribed authority (DSIR) failed to send intimation in Form 3CL in respect of expenditure incurred by R&D unit at Sipaigachi would not be reason enough to deprive the assessee’s claim of deduction u/s 35(2AB) of the Act. Since the verification has not been done by the prescribed authority (DSIR) or the AO, we set aside the impugned order of the Ld. CIT(A) and remand this issue for the limited purpose to the file of AO to verify the actual expenditure incurred by the assessee in respect of its R&D establishment at Sipaigachi. For this we rely on the Hon’ble Gujrat High Court in the case of CIT vs. Sun Pharmaceutical Industries Ltd. (supra) against which the revenue preferred an SLP [Civil Diary No. 18273 of 2018] before the Hon’ble Supreme Court which has been dismissed on 28.07.2018 and reported in 2018 Tax Pub (DT) 5079 (SC).

6. In view of the facts and observations discussed in the foregoing paragraphs, the Ld. PCIT observed that AO has passed the assessment order without making inquiries or verification on this issue which ought to have been made in this case and therefore, assessment completed in the case of Hamilton Houseware Private Limited for A.Y.2017-18 passed on 23.12.2019 by the Assessing Officer is erroneous in so far it is prejudicial to the interest of the Revenue. Therefore, the assessment order u/s 143(3) of the Income Tax Act, 1961 dated 23.12.2019 for AY.2017-18 was set aside by ld PCIT with the direction to AO to frame the assessment De novo after making proper enquiries on aforesaid issues.

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. 7. Aggrieved by the order of Ld. CIT(A), the assessee is in appeal before us.

11. In Scindia Steam Navigation Co. Ltd. v. Commissioner of Income-tax [1954] 26 I.T.R. 686, a Division Bench of the Bombay High Court, consisting of Chagla C.J. and Tendolkar J., considered the question-as to the effect of an amendment which came into force after the commencement of the financial year. The facts in that case were these. The assessee's ship was lost as a result of enemy action. The Government paid the assessee in 1944 a certain- amount as compensation which exceeded the original cost of the ship. The Income-tax Officer included the difference between the original cost and the written down value of the ship in the total income of the assessee for the assessment year 1946-47. The Tribunal upheld that decision and referred the question, whether the sum representing the difference between the original cost and the written down value was properly included in the assessee's total income computed for the assessment year 1946-47. It was argued that the fourth proviso to section 10(2)(vii) of the Income-tax Act (inserted by the Amendment Act of 1946 with effect from May 4, 1946) under which the inclusion of the amount was justified by the department, had no application to the case.

12. The learned judges held that as it was the Finance Act of 1946 that imposed the tax for the assessment year 1946-47, the total income had to be computed in accordance with the provisions of the Income-tax Act as on April 1, 1946; that as the amendments made by the Amendment Act of 1946 with effect from May 4, 1946, were not retrospective, they could not be taken into consideration merely because the assessee was assessed after that date ; and that the assessee was not liable to pay tax on the sum because the fourth proviso to section 10(2)(vii) of the Income-tax Act under which it was sought to be taxed was not in force in respect of the assessment year 1946-47.

13. This court affirmed this decision in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. [1961] 42 I.T.R. 589; [1962] 1 S.C.R. 788, where it was stated at page 816 as follows: "On the merits, the appellant had very little to say. He sought to contend that the proviso though it came into force on May 5, 1946, was really intended to operate from April 1, 1946, and he referred us to certain other enactments as supporting that inference. But we are construing the proviso. In terms, it is not retrospective, and we cannot import into its construction matters which are ad extra legis, and thereby alter its true effect."

14. In Commissioner of Sales Tax, Uttar Pradesh v. Modi Sugar Mills Ltd. [1961] 2 S.C.R. 189 ; 12 S.T.C. 183 this court held by a majority at page 199 as follows: "A legal fiction must be limited to the purpose for which it has been created, and cannot be extended beyond its legitimate field. The turnover of the previous year is ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. fictionally made the turnover of the year of assessment: it is not the actual or the real turnover of the year of assessment. By the imposition of a different tariff in the course of the year, the incidence of tax liability may competently be altered by the legislature, but for effectuating that alteration, the legislature must devise machinery for enforcing it against the taxpayer and if the legislature has failed to do so, the court cannot resort to a fiction which is not prescribed by the Legislature and seek to effectuate that alteration by devising machinery not found in the statute."

15. In the instant case, there is no escape from the conclusion that the Surcharge Act not being retrospective by express intendment, or necessary implication, it cannot be made applicable from April 1, 1957, as the Act came into force on September 1, of that year.

17. This decision is authority for the proposition that though the subject of the charge is the income of the previous year, the law to be applied is that in force in the assessment year, unless otherwise stated or implied. The facts of the said decision are different and distinguishable and the High Court was clearly in error in applying that decision to the facts of the present case.

9. Therefore, Ld. Counsel contended that law stands at the beginning of the year should be applicable to the assessee under consideration and hence the CBDT Circular dated 01.07.2016 should not be applicable to the assessee under consideration for assessment year 2017-18. Therefore, order passed by the assessing officer is sustainable in law.

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. 10. On merits, Ld. Counsel submitted before us that Assessing Officer has issued notice under section 142(1) of the Act, vide notice no. ITBA/AST/F/142(1)/2019-20/1017988366(1), dated 14.09.2019 (vide paper book page nos.7), wherein the issue raised by ld PCIT is mentioned and this shows that assessing officer conducted enquiry.

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. As required by your goodself, please find the following supporting Documents in regard to the deduction of Rs. 9.92,19,057/- claimed by us, U/s 35(2AB) of the Income Tax Act, enclosed and Marked as Annexure # 2 to this Submission. a) Copy of Approval Letter of in House Research and Development facilities under section 35(2AB) of the Income Tax Act, 1961, by Government of India, Ministry of Science and Technology, Department of Scientific and Industrial Research Technology Bhavan, New Mehrauli Road- New Delhi. b) Copy of Form No- 3CM Order of Approval in House Research and Development facilities under section 35(2AB) of Income Tax Act, 1961, by Government of India, Ministry of Science and Technology, Department of Scientific and Industrial Research Technology Bhavan, New Mehrauli Road- New Delhi. c) Copy of Form No- 3CL filed with Ministry of Science and Technology, Department of Scientific and Industrial Research,,--"' Technology Bhavan, New Mehrauli Road- New Delhi. d) Copy of Balance sheet and profit loss account of R&D divisions. e) The details of the Capital Expenditure incurred by the Assessee Company on its Research & Development Activity during the FY 2016-17 along with a Copy of Invoices for such expenses incurred.”

13. On identical facts and to substantiate his arguments, the Ld. Counsel relied on the judgment of the Hon'ble Gujarat High Court in the case of CIT vs. Sun Pharmaceutical Industries Ltd., 85 taxmann.com 82 (Guj. HC), wherein it was held as follows: “3. The Commissioner of Income-tax was of the opinion that the Assessing Officer had not made proper inquiries before accepting the claim. After giving notice to the assessee, he passed an order dated 28.3.2016 under section 263 of the Act and held that the order of assessment was passed without proper verifications, investigation and examination. The same was therefore, erroneous and prejudicial to the interest of the Revenue. He therefore, directed the Assessing Officer to examine the issues discussed in the order and pass a fresh order of assessment in view of such discussion. In the process the Assessing Officer would also "consider correct amount of disallowable expenditure after considering the financial ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. documents and other relevant details/submissions filed by the assessee and as available on record with a view to ensure that there is no discrepancy in the facts and figures on record." One of the main grounds which appealed to the Commissioner was that the prescribed authority had not sent the intimation in Form 3CL to the Revenue, in absence of which, according to the Commissioner, claim could not have been accepted.

4. The assessee approached the Tribunal. The Tribunal by the impugned judgment allowed the appeal inter-alia holding that the prescribed authority shall submit its report in relation to the approval of the in-house research and development in Form 3CL to the Director General of Income Tax (Exemption) within 60 days of its granting approval. In the opinion of the Tribunal, same was merely in form of intimation to be sent by the prescribed authority to the department. In case of the assessee, the research and development activity having already been approved in Form 3CM, the assessee thereafter, had no further role to play in the inter- departmental correspondence. The Tribunal therefore, held that the assessee was entitled to deduction on the capital and revenue expenses incurred on in-house research and development amounting to Rs.237,77,05,310/-.

16. From the above documents and evidences, it is vivid that during the assessment proceedings, the Assessing Officer has raised the relevant questions and Page | 19

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. asked the assessee to submit the documents and evidences in support of its claim of deduction u/s 35(2AB) of the Act, which is placed in paper book of the assessee. The assessee furnished the relevant documents and evidences before the assessing officer. The Assessing Officer has examined these documents and evidences and applied his mind to verify the eligibility of the assessee to claim deduction under section 35(2AB) of the I.T. Act. Having examined the eligibility of the assessee to claim the deduction under section 35(2AB) of the Act, the Assessing Officer has allowed the deduction therefore, we are of the view that such order of the assessing officer cannot be treated erroneous on account of lack of enquiry, as alleged by ld PCIT.

17. Moreover, we note that in the assessment order itself, the Assessing Officer has discussed the issue raised by the Ld. PCIT. The relevant para of the assessment order is reproduced below: “2. The assessee company is engaged in the business of manufacturing vacuum refills, thermo ware and trading of Glass items. The assessee company has an in- house research and development unit and the expenditure incurred towards the same was claimed as a deduction U/s. 35(2AB) of the Act. During the year under consideration, it runs the following units:

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd.

18. Therefore, we note that Assessing Officer has discussed the issue raised by the Ld. PCIT in his order also, hence it cannot be said that there is lack of inquiry on the part of the assessing officer.

ITA 163/SRT/2022/AY.2017-18 Hamilton Housewares Pvt. Ltd. Officer is erroneous as well as prejudicial to the interest of revenue, on account of lack of inquiry, has to fail. Based on these facts and circumstances, we quash the order dated 30.03.2022 passed by the ld PCIT under section 263 of the Act.

Order pronounced on 31/05/2023 in the open court.