2014 (6) TMI 630 - AT - Income Tax

Rectification of order - Allowability of deduction u/s 35(1) - Whether the right of the assessee to challenge the additions on merits can be maintained by the Tribunal despite the fact that the assessee failed to agitate and assert such rights before the Tribunal by filing a cross appeal or cross objection Held that - Relying upon CIT v. Rayala Corpn. (P) Ltd. 1995 (1) TMI 42 - MADRAS High Court - It is the duty of the Tribunal to consider the subject-matter of the appeal and pass 'such orders' as are required to adjudicate the subject-matters before it- If for adjudicating various aspects of the subject-matter or matters incidental thereto, an order or direction is required to be issued, then, 'such order' or 'directions' are legally justified in view of the provisions contained under section 254(1) of the Income Tax Act - where particular issue has been omitted to be considered or has not been adjudicated properly or where perverse findings have been recorded in total disregard of the material on record, the Tribunal is competent enough to set aside the order of the lower appellate authority to that extent, although no specific ground is taken for that purpose by the concerned party - in a given situation, there is an obligation on the part of the Tribunal to consider the subject-matter of appeal and secondly to issue effective directions for adjudicating the subject-matter of appeal, which includes the entire process of assessment and which has been held to be an integrated process. Whether a mistake can be pointed out on the part of ITAT even when the assessee did not seek any relief from the Tribunal Held that - It is a mistake apparent from record, so that the order rectifying the mistake is valid- where the Tribunal passes an order taking into account information not disclosed to the assessee, there is a mistake apparent from the order so that Tribunal is duty bound in rectifying the mistake when it is brought to the notice of the Tribunal - while maintaining our order on the main issue with regard to allowability of deduction u/s 35(1) - the Tribunal order is to be amended to that extent and the Registry is directed to post the cases for hearing on 6.10.2014 for the limited purpose of deciding the issue on applicability of provisions of section 35(3) of the Act Decided partly in favour of Assessee.

Issues Involved:
1. Eligibility of the assessee for deduction under Section 35(1)(i) and Section 35(1)(iv) of the Income-tax Act, 1961.
2. Nature of the expenditure incurred by the assessee, whether it is capital or revenue.
3. Applicability of Section 35(3) of the Income-tax Act, 1961.
4. Power of the Tribunal under Section 254(2) of the Income-tax Act, 1961 to rectify mistakes.

Issue-wise Detailed Analysis:

1. Eligibility of the Assessee for Deduction under Section 35(1)(i) and Section 35(1)(iv) of the Income-tax Act, 1961:
The Tribunal initially disallowed the assessee's claim for deduction under Section 35(1)(i), stating that the expenditure was capital in nature and related to setting up facilities for commercial production rather than scientific research. The Tribunal observed that the business of the assessee was developing vaccines and bio-pharmaceuticals, and such expenditure did not fall within the parameters of Section 35(1)(iv). The Tribunal concluded that the expenditure incurred was for setting up facilities for commercial production of a new product and not for scientific research, thus not eligible for deduction under Section 35(1)(i) or (iv).

2. Nature of the Expenditure Incurred by the Assessee:
The Tribunal held that the expenditure incurred by the assessee was capital in nature, as it was for setting up facilities for the commercial production of a new product. The Tribunal noted that the expenditure was not related to scientific research but rather for the development of a marketable product or stock-in-trade. The Tribunal emphasized that the expenditure incurred before the completion of product development and commercialization should be treated as capital expenditure only.

3. Applicability of Section 35(3) of the Income-tax Act, 1961:
The assessee argued that the Assessing Officer did not follow the correct procedure laid down in Section 35(3) while disallowing the claim. The Tribunal acknowledged that if any question arises under this section as to whether any activity constitutes scientific research, the Board shall refer the question to the Central Government or the prescribed authority, whose decision shall be final. The Tribunal recognized that the Assessing Officer should have followed the procedure laid down in Section 35(3) and referred the matter to the prescribed authority rather than disallowing the claim outright.

4. Power of the Tribunal under Section 254(2) of the Income-tax Act, 1961 to Rectify Mistakes:
The Tribunal examined its power under Section 254(2) to rectify mistakes apparent from the record. It was observed that the Tribunal does not have the power to review its earlier order but can rectify mistakes that are apparent on the record. The Tribunal noted that the provisions of Section 254(2) are not similar to those of review under the Civil Procedure Code. The Tribunal emphasized that it cannot recall the entire order and pass a fresh decision, as that would amount to a review, which is not permissible under the Income-tax Act. However, the Tribunal can amend the order to correct any mistake apparent from the record.

Conclusion:
The Tribunal concluded that there was no apparent mistake in the order dated 31.07.2013, as the facts and the case law were duly considered. The Tribunal rejected the assessee's argument that it omitted to deal with the contentions of the assessee and that there was a mistake of facts. The Tribunal held that the assessee was seeking a review of the earlier order, which is not permissible under Section 254(2) of the Act. However, the Tribunal acknowledged that the Assessing Officer did not follow the procedure laid down in Section 35(3) and directed the Registry to post the case for hearing on the limited issue of the applicability of Section 35(3). The Tribunal partially allowed the miscellaneous applications filed by the assessee to this extent.

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