2018 (3) TMI 582 - AT - Income Tax

Disallowance of claim of deduction u/s.35(2AB) - articles manufactured by the assessee which are machines used in Railway Stations - eligibility only to electronic items - Held that - Neither the A.0. nor the board was competent to take any decision of any such controversy relating to report and approval granted by the prescribed authority as it involved expert view or opinion. It was prescribed authority alone which would be competent to take decision with regard to the correctness or otherwise and its order of approval granted in form No. 3CL as prescribed u/s. 35( 2AB) read with rule 7A of the Income Tax Rules, 1962. In the present case on hand, on perusal of the facts available on record, we find that the A.0. Without following the procedure laid down under rules, simply disallowed the expenditure claimed by the assessee by holding that the goods manufactured by the assessee are mere office machines and apparatus listed in Eleventh Schedule. A.0. is not correct in disallowing the claim made by the assessee u/s. 35(2AB) of the Act. - Decided in favour of assessee. Allowability of capital expenditure incurred as research development - Held that - As per Form No.3CL, the expenditure was R&D only. The evidence brought on record shows that the expenditure was capital expenditure other than land and building. A.O. disallowed the same without examining the nature of expenditure. Therefore, we do not find any infirmity in the order of the Ld. CIT(A) and the same is upheld.

Issues Involved:
1. Reopening of assessment under Section 147.
2. Allowability of deduction under Section 35(2AB) of the Income Tax Act.
3. Classification of manufactured articles under the Eleventh Schedule.
4. Allowability of capital expenditure incurred for research and development.

Detailed Analysis:

Reopening of Assessment under Section 147:
The core issue was whether the reopening of assessment under Section 147 was justified. The assessee argued that the reopening was based on a change of opinion rather than new material evidence. The Tribunal upheld the CIT(A)'s decision that the reopening was invalid, citing that the original assessment was completed after due verification and there was no fresh material to justify reopening. The Tribunal referenced the Supreme Court decisions in CIT Vs. Bhanji Lavji and ITO Vs. Nawab Mir Bharkat Ali Khan Bahadur, which state that reassessment cannot be initiated based on a change of opinion.

Allowability of Deduction under Section 35(2AB):
The Tribunal examined whether the assessee was entitled to a deduction under Section 35(2AB) for scientific research expenditure. The assessee had obtained approval from the Department of Scientific and Industrial Research (DSIR) for its R&D facility, which was a prerequisite for claiming the deduction. The Tribunal noted that the A.O. had allowed the deduction in the original assessment after verifying the details. The Tribunal reiterated that once the prescribed authority grants approval, the A.O. must allow the deduction unless there is a referral back to the authority for clarification. The Tribunal cited its previous decision in the assessee's own case for A.Y. 2011-12, confirming that the A.O. cannot disallow the deduction without following the due procedure.

Classification of Manufactured Articles under the Eleventh Schedule:
The A.O. had disallowed the deduction on the grounds that the articles manufactured by the assessee fell under the Eleventh Schedule, making them ineligible for the deduction. The Tribunal clarified that the amendment to Section 35(2AB) referencing the Eleventh Schedule was applicable from A.Y. 2010-11 onwards and not for the years under appeal (2008-09 and 2009-10). Therefore, the Tribunal held that the A.O.'s interpretation was incorrect and upheld the CIT(A)'s decision that the assessee was eligible for the deduction.

Allowability of Capital Expenditure for R&D:
The A.O. had disallowed a sum of ?3,92,636/- treating it as capital expenditure. The CIT(A) allowed the appeal, noting that the expenditure was incurred for R&D purposes and was supported by a certificate from the competent authority. The Tribunal agreed with the CIT(A), emphasizing that the A.O. did not examine the nature of the expenditure before making the disallowance.

Conclusion:
The Tribunal dismissed the revenue's appeals, upholding the CIT(A)'s decisions on all counts. The cross objections filed by the assessee in support of the CIT(A)'s orders were deemed infructuous and dismissed. The Tribunal's judgment reinforced the principles of adherence to prescribed procedures and reliance on competent authority approvals in matters of scientific research deductions.

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