2018 (10) TMI 1713 - AT - Income Tax

Disallowance u/s 35(1)(i) - HELD THAT - First reason for disallowing the claim of deduction is that research work was carried out by Mother Diary Foods Processing Ltd, Delhi and not by assessee and later on, part of costs were recovered from the assessee company. The Revenue alleges that the assessee itself had not carried out R D activities. Thus the correlation of expenses incurred with the business of the assessee could not be established which is primarily required for allowance of deduction u/s 35(1)(i) of the Act. Answer to this quarrel is in the decision of the Hon'ble High Court of Bombay in the case of National Rayon Corporation Limited 1981 (8) TMI 24 - BOMBAY HIGH COURT has held that for claiming the deduction u/s 35(1)(i) of the Act, research must have been carried on by the assessee itself is not borne out by phraseology of the statutory provision. The assessee can claim the deduction even if the research is carried on by some other person on behalf of the assessee. Contribution by the assessee to Delhi University and Nagpur University - HELD THAT - AO was of the opinion that u/s 35(1)(ii) of the Act, the deduction of any sum paid to scientific research association is allowable if such association s object is undertaking of scientific research or to a university, college or other institution to be used for scientific research subject to fulfilment of certain conditions. AO was of the opinion that though the assessee has furnished proof of approval under the I.T. Act, 1922, but has failed to produce any evidence under the provisions of ITAT Rules, 1962. We find that a similar dispute was considered by DHARA VEGETABLE OIL FOODS CO LTD VERSUS DEPUTY COMMISSIONER OF INCOME TAX 2012 (7) TMI 593 - GUJARAT HIGH COURT and at para 17 of its order the Hon'ble High Court has decided the issue in favour of the assessee and against the Revenue.

Issues Involved:
1. Deletion of disallowance under Section 35(1)(i), 35(1)(ii), and 35(1)(iv) of the Income-tax Act, 1961.
2. Reopening of the assessment under Section 147 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 35(1)(i), 35(1)(ii), and 35(1)(iv) of the Income-tax Act, 1961:

The Revenue's primary grievance was the deletion of disallowance of ?92,10,889 under Section 35(1)(i), ?65,64,853 under Section 35(1)(ii), and ?1,96,910 under Section 35(1)(iv) of the Income-tax Act, 1961. The Assessing Officer (AO) initially disallowed these expenses, considering them capital expenditures related to intangible assets (patents) and allowed depreciation instead. The AO's observation was that these expenses should be capitalized as they were incurred to bring patents into existence, which are intangible assets as per Section 32(1)(ii) of the Act.

The Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld the AO's decision but directed the AO to verify if any patent applications were rejected or abandoned. If so, the expenses related to such applications should be treated as revenue expenditure. The CIT(A) upheld the capitalization of expenses where patent registration was granted.

Upon appeal, the Tribunal examined the submissions and found that the AO was aware of the primary facts and had scrutinized the claims during the original assessment. The Tribunal referred to the Bombay High Court's decision in National Rayon Corporation Limited, which held that for claiming deduction under Section 35(1)(i), the research need not be carried out by the assessee itself but could be done by another entity on behalf of the assessee. The Tribunal also noted that similar disallowances in previous years (A.Ys 2004-05 to 2007-08) were deleted, and the CIT(A)'s findings were consistent with those decisions.

2. Reopening of the Assessment under Section 147 of the Income-tax Act, 1961:

The assessee challenged the reopening of the assessment under Section 147, arguing that it was done beyond the permissible period of four years without any failure on their part to disclose material facts. The Tribunal noted that the original assessment was completed under Section 143(3), and the reopening was proposed after four years, invoking the first proviso to Section 147. This proviso allows reopening only if there was a failure to disclose fully and truly all material facts necessary for the assessment.

The Tribunal found that the assessee had disclosed all relevant details, including R&D expenses and patent expenses, in their returns and audit reports. The AO had scrutinized these details during the original assessment and made necessary adjustments. The Tribunal emphasized that reopening an assessment merely because a subsequent officer has a different opinion is not justified, especially when the primary facts were already available and considered during the original assessment.

The Tribunal also referred to a similar case where the Gujarat High Court quashed the reopening notice on identical facts. The Tribunal concluded that the reopening of the assessment was not justified and held it to be bad in law.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on both counts: the deletion of disallowance under Sections 35(1)(i), 35(1)(ii), and 35(1)(iv) and the invalidity of the reopening of the assessment under Section 147. The appeal by the Revenue was dismissed. The order was pronounced in open court on 11.10.2018.

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