2018 (2) TMI 1582 - AT - Income Tax

Revision u/s 263 - assessment order passed by the AO is erroneous insofar as it is prejudicial to the interest of the revenue - AO has allowed deduction claimed u/s 35(1) towards R & D expenditure even though the assessee is not eligible for deduction - Held that - AO has allowed deduction claimed u/s 35(1) without any discussion as to whether the claim made by the assessee is in accordance with provisions of section 35(1) or not. We further notice that the authorised representative of the assessee accepted before the CIT that it has not maintained separate books of account in respect of R&D facility even though it was required to maintain separate books of account as per the provisions of the Act. CIT was right in setting aside the assessment order passed by the AO u/s 143(3) as the assessment order is erroneous insofar as it is prejudicial to the interest of the revenue. We find merit in the arguments of the assessee that the CIT has given specific direction to the AO to disallow deduction claimed u/s 35(1) without offering an opportunity to furnish necessary details. The CIT in his order has given specific direction to the AO to disallow claim of deduction u/s 35(1) in the fresh assessment order passed consequent to order passed u/s 263. Therefore we are of the view that the direction given by the CIT needs to be modified to the extent of allowing the AO to examine the claim of the assessee in the light of provisions of section 35(1) and explanation of the assessee so as to come to a conclusion that assessee is not eligible for deduction. - Appeal filed by the assessee is partly allowed for statistical purpose.

Issues involved:
1. Jurisdiction of Commissioner of Income Tax under section 263.
2. Allowability of deduction under section 35(1) towards research and development expenditure.
3. Compliance with conditions for claiming deduction under section 35(1).
4. Assessment order being prejudicial to the interest of revenue.

Analysis:

1. Jurisdiction of Commissioner of Income Tax under section 263:
The appeal was against the order of the Commissioner of Income-tax-1, Mumbai invoking powers under section 263 of the Income-tax Act, 1961 for the assessment year 2009-10. The appellant contended that the assessment order was not erroneous or prejudicial to the revenue's interests. However, the Commissioner set aside the assessment order, stating that it was erroneous and prejudicial. The Tribunal observed that the Commissioner rightly set aside the order as the assessment was indeed prejudicial to the revenue. The direction by the Commissioner to disallow the deduction claimed under section 35(1) was modified to allow the Assessing Officer to re-examine the claim.

2. Allowability of deduction under section 35(1) towards research and development expenditure:
The Commissioner found the assessment order erroneous as the Assessing Officer allowed deduction under section 35(1) for research and development expenditure without proper examination. The appellant argued that the R&D facility was approved by the competent authority and the claim had been accepted in previous years. However, the Tribunal noted that the appellant failed to provide evidence to justify the claim. The failure to maintain separate books of account for R&D activities as required by section 35(1) was also highlighted. Ultimately, the Tribunal agreed with the Commissioner's decision to set aside the assessment order.

3. Compliance with conditions for claiming deduction under section 35(1):
The Commissioner observed that there was no documentary evidence to establish the entitlement for deduction towards capital expenditure on research and development. The lack of separate books of account for R&D activities was a crucial point. The Tribunal concurred with the Commissioner's view that the assessment order was erroneous due to non-compliance with the conditions of section 35(1). The direction to disallow the deduction was modified to allow a re-examination by the Assessing Officer.

4. Assessment order being prejudicial to the interest of revenue:
The Commissioner found the assessment order prejudicial to the revenue as the deduction under section 35(1) was allowed without proper verification. The Tribunal upheld this view and agreed that the assessment order needed to be set aside. However, the Tribunal modified the direction to disallow the deduction, allowing the Assessing Officer to re-evaluate the claim based on the provisions of section 35(1) and the appellant's explanation.

In conclusion, the appeal was partly allowed for statistical purposes, with the Tribunal upholding the Commissioner's decision to set aside the assessment order but modifying the direction regarding the disallowance of the deduction claimed under section 35(1).

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