With reference to the finding of the Ld. CIT that the Form 3CM and 3CL are not filed which are mandatory, it was the submission that assessee has filed Form 3CM in letter format issued by DSIR granting renewal of recognition up to 3 1.03.2015 by the letter dated 18.04.2011 before the A.O. So the finding of CIT is not correct. Further, it was submitted that the Form 3CL is a communication by DSIR to the DIT (E) and referred to Rule 6 (7A) to reiterate that assessee had no role in that, except filing form in 3CK which it did. Since the assessee complied with the conditions prescribed and A.O. enquired and allowed the claim, the exercise of jurisdiction by the Pr. CIT is bad in law.
FULL TEXT OF THE ITAT JUDGMENT
The issue in this appeal by assessee is whether the jurisdiction exercised by Ld Principal Commissioner of Income Tax (Pr. CIT-2), Hyderabad u/s 263 vide his order dated 27/03/2017 is valid or not.
2. Briefly stated facts are assessee-company filed its return of income for the A.Y. 2012-13 on 08.09.2012 admitting total income of Rs. 24,00,510/-. The case was selected for scrutiny under CASS. Assessing Officer completed the assessment u/s 143(3) of the Act on 30.05.20 14 determining the total income at Rs. 42,74,025/-. Subsequently, Ld. CIT invoked jurisdiction u/s 263 and issued a show-cause notice to the assessee stating “on perusal of the record, P & L Account and balance sheet, it was noticed that the assessee claimed deduction u/s 35(2AB) of the I.T. Act at Rs. 2,71,17,627/-”. Ld CIT-2 observed that “as per the I.T. Act, to avail weighted deduction u/s 35(2AB) the assessee had to submit the form 3CM order of approval of in-house research and development facility by DSIR and Form 3CL in which the prescribed authority (DSIR) certify the expenditure which entitle the assessee to avail weighted deduction. However, the assessee did not submit any details in Form 3CM and 3CL report. Further, as per clause 15 of the 3CD, Auditor has not certified any admissible deduction u/s 35(2AB). In the absence of mandatory Form 3CM and Form 3CL, allowance of weighted deduction cannot be given. The A.O. allowed this allowance, without complying the related provisions of law, as mentioned above. Since the Assessing Officer has not brought anything on record about this allowance, the same has to be treated as non-application of mind. This non-application of mind is to be treated as “error” as held by the Hon’ble Supreme Court in the case of M/s. Malabar Industrial Limited”.
3. When the show-cause noticed was issued, assessee sought one-week time to reply as the assessee-company got merged with M/s. H.M. Clause India Private Ltd., and filed copies of the order of Hon’ble Delhi High Court in support and information has to be obtained from earlier management.
4. Learned CIT-2, without considering that the company was not existing on that date, having merged with another company, went on to set-aside the assessment stating as under:-
“I have carefully considered the submissions of the assessee and perused the case records. As per the provisions of Income Tax Act, to avail weighted deduction u/s 35(2AB), filing of Form 3CM and Form 3CL is mandatory. In the absence of these forms, allowance of weighted deduction is not allowable. The Assessing Officer has neither called for these details nor examined this aspect but has allowed the claim of weighted deduction u/s 35(2AB) of the IT Act, 1961 and this is an “error” and caused “prejudice to the interest of revenue”. Not conducting enquiries where it is required, is “error” as held by the Hon’ble Supreme Court in the case of Tara Devi Agarwal vs. CIT (88 ITR 323) (SC) and Ram Pyari Devi vs. CIT (67 ITR 84) (SC). When the A.O. has not conducted any enquiry and gave relief to assessee, it caused serious prejudice to the interest of Revenue. Therefore, I have come to the conclusion that the assessment made is erroneous and prejudicial to the interests of the Revenue and hence the same is set aside by virtue of powers vested in me u/s 263 of the I.T. Act for the limited purpose of examining the issue of allowability of deduction u/s 35(2AB) on production of Form 3CM and Form 3CL by the assessee. Needless to say that, an opportunity should be given to the assessee before completing the set-aside assessment.”
5. Even though assessee raised grounds on the issue of jurisdiction of the non-existing company, these grounds are not argued as the assessee wants the issues to be considered on merits.
6. It was the submission that the A.O. in the course of scrutiny proceedings has enquired about the claim u/s 35(2AB) and referred to the questionnaire issued by A.O. dated 28.04.2014 (Item 5 in Annexure) and replies by assessee dated 26.05.2014 (Item 23 in page 42 of Paper Book) continuation letter dated 29.05.2014 (Item 30 in page 45) and copy of ledger account (Item 52 in page 50). It was the submission of that the A.O. has enquired and allowed the claim. With reference to the finding of the Ld. CIT that the Form 3CM and 3CL are not filed which are mandatory, it was the submission that assessee has filed Form 3CM in letter format issued by DSIR granting renewal of recognition up to 3 1.03.2015 by the letter dated 18.04.2011 before the A.O. So the finding of CIT is not correct. Further, it was submitted that the Form 3CL is a communication by DSIR to the DIT (E) and referred to Rule 6 (7A) to reiterate that assessee had no role in that, except filing form in 3CK which it did. Since the assessee complied with the conditions prescribed and A.O. enquired and allowed the claim, the exercise of jurisdiction by the Pr. CIT is bad in law. Ld Counsel relied on the coordinate Bench decision on the same issue as under:-
(i) Sri Biotech Laboratories India Ltd vs. ACIT (36 ITR (Trib) 88) and
(ii) Texaco Rail & Engineering Ltd vs. Pr. CIT (86 Taxmann. com50) (Kolkata – Trib.)
7. Ld CIT-DR reiterated the stand taken by Pr. CIT and submitted that Coordinate Bench in the case of Sri Biotech Laboratories India Ltd., (supra) has allowed A.O. to modify the order and referred to para 13 of that order.
8. We have considered the rival contentions and perused the documents placed on record. It is to be admitted that the A.O. has enquired during the assessment proceedings about the recognition of R & D unit and claim at 200% as per the provisions. Assessee had filed necessary expenditure details and recognition of the R & D unit by DSIR upto 31.03.2015. Thus the finding of Ld CIT that A.O. has not enquired is not factually correct as Form 3CM is on record (even though not stated as 3CM but a registration by DSIR as prescribed).
8.1. Coming to the issue of filing of Form 3CL, the Rule 6(7A) is as under:-
[(7A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely :—
(a) The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature;
[ (b) The prescribed authority shall furnish electronically its report,—
(i) in relation to the approval of in-house research and development facility in Part A of Form No.3 CL;
(ii) quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Act in Part B of Form No.3 CL;
(ba) The report in Form No.3 CL referred to in clause (b) shall be furnished electronically by the prescribed authority to the Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax or Principal Director General of Income-tax or Director General of Income-tax having jurisdiction over such company within one hundred and twenty days,—
(i) of the grant of the approval, in a case referred to in sub-clause (i) of clause (b);
(ii) of the submission of the audit report, in a case referred to in sub-clause (ii) of clause (b);]
(c) The company shall maintain a separate account for each approved facility; which shall be audited annually and [a report of audit in Form No.3CLA shall be furnished electronically to the Secretary, Department of Scientific and Industrial Research on or before the due date specified in Explanation 2 to sub-section (1) of section 139 of the Act for furnishing the return of income, for each succeeding year].
(d) Explanation : For the purposes of this sub-rule the expression “audited” means the audit of accounts by an accountant, as defined in the Explanation below sub-section (2) of section 288 of the Income-tax Act, 1961;
(d) Assets acquired in respect of development of scientific research and development facility shall not be disposed of without the approval of the Secretary, Department of Scientific and Industrial Research.]
The Form is to be sent by DSIR to DIT (E). It is an internal mechanism before two Government Departments on which assessee has no role or control, except filing the necessary application with DSIR which assessee complied. So, non-filing of Form 3CL by assessee does not arise in such a situation.
8.2. Coordinate Bench at Kolkata on similar facts while examining jurisdiction u/s 263 has considered and held as under in the case of Texaco Rail & Engineering Ltd (supra):-
“11. We have given a very careful consideration to the rival submissions. We are of the view that in the facts and circumstances of the present case, the CIT ought not to have exercised jurisdiction u/s.263 of the Act and set aside the order of the AO. It is undisputed that Department of Scientific and Industrial Research (DSIR) granted recognition to the Assessee for the period from April 1st, 2010 to 31st March, 2019. It has been held in the decision referred to by the learned counsel for the Assessee in the proceedings before the CIT u/s. 263 of the Act and before the Tribunal that deduction Sec.35(2AB) read with rule 6 does not prescribe any time limit within which application for approval in form No.3CM has to be made. Once approval is granted by DSIR the same would apply till it is revoked. The Hon’ble Gujarat High Court and the Hon’ble Delhi High Court in the case of Claris Lifesciences Ltd., and Sadan Vikas (India) Ltd., have taken the view that on a plain and harmonious reading of rule 6(5A) and Form No. 3CM it would be appropriate to come to a conclusion once a research facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by s. 35(2AB). In the light of the aforesaid judicial pronouncements, it cannot be said that the order of the AO was erroneous. Even if it were to be said that the view taken by the Courts and Tribunal are not correct, the said views were a possible view. Once the view taken by the AO is either correct or a possible view then the CIT in exercise of his powers u/s.263 of the Act cannot hold the order of the AO to be erroneous just because he does not agree with the view of the AO. Since the primary condition for exercise of jurisdiction u/s.263 of the Act viz., the order of the AO should be erroneous is absence in the present case, we are of the view that the order u/s.263 of the Act is unsustainable and the same is hereby quashed. The appeal of the Assessee is allowed.”
8.3. In view of the above, we are satisfied that the A.O. has correctly allowed the deduction and there is no “error” in the order passed by A.O. u/s 143(3). Once a research facility is approved, entire expenditure incurred on Department of R & D has to be allowed weighted deduction as provided u/s 35(2AB). Filing of Form 3CL by assessee does not arise. In these circumstances, we hold that Pr. CIT exercised jurisdiction on incorrect appreciation of facts and law, therefore the order is not sustainable. Consequently, the impugned order u/s 263 by Pr. CIT dated 27.03.20 17 is hereby quashed and order of A.O. u/s 143(3) is restored. However, we make it clear that if subsequently the prescribed authority does not approve the expenditure claimed by the assessee or quantified at a lessor amount, then the deduction claimed by the assessee can be modified as per the provisions of the Act accordingly.
9. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 20th July, 2018.