2022 (2) TMI 971 - AT - Income Tax

Revision u/s 263 by CIT - claim of deduction made u/s. 35(2AB) - HELD THAT - As during the course of assessment, the Assessing Officer has made detailed enquiries and raised different queries on the issue of claim of goodwill and claim of deduction u/s. 35(2AB) of the act. In this regard the assessee has made detailed submission along with copies of the relevant documents to substantiate its claim of depreciation on goodwill as well as claim of deduction u/s. 35(2AB). During the course of 263 proceedings before the Pr. CIT, the assessee has submitted the information about the detailed inquiry already made by the AO at the time of original assessment and copies of documents and relevant material which the assessee has submitted before the AO. In this regard, we observed that ld. Pr. CIT has not controverted the supporting and relevant evidences put up before him during the course of proceeding u/s. 263 that Assessing Officer has already made detailed inquiry on the issue of claim of goodwill and deduction claimed u/s. 35(2AB). As prior 1-7-2016 form 3CL had not legal sanctity and it is only w.e.f. with the amendment to rule 6(7a)(b) that quantification of the weighted deduction u/s. 35(2AB) of the act has significance. Similarly, ITAT Bangalore in the case of Provici Animal Nutrition India Pvt. Ltd. 2020 (12) TMI 177 - ITAT BANGALORE has held that prior 11-06-2016 form 3CL granting approval by prescribed authority in relation to quantification of weighted deduction u/s. 35(2AB) had no legal sanctity and it was only w.e.f. 1-7-2016 with amendment to rule 6(7a)(b) that quantification of weighted deduction u/s. 35(2AB) has significance. After perusal of the material on record made by the AO submission of the assessee and judicial finding, we observed that the above said judicial finding was available when the impugned revision order was passed u/s. 263 of the act, meaning there was possible views with regard to the question as to whether furnishing of form 3CL is mandatory or not for claiming deduction u/s. 35(2AB) of the act and the AO has followed one of the possible views in which case, the impugned assessment order cannot be framed as prejudicial to the interest of revenue. Depreciation of goodwill on WDV on the basis of claim of amalgamation of the amalgamating company Troika Pharmaceutical Ltd. with Troika Export Pvt. Ltd. amalgamated company and also claimed deduction u/s. 35(2AB) in respect of R D expenditure - During the course of assessment proceedings for A.Y. 2017-18, Assessing Officer has made detailed enquires and raised different queries similar to the assessment year 2016-17 on the issue of claim of goodwill and claim of deduction u/s. 35(2AB) of the Act. As per material on record placed in the paper book, the assessee has also made detailed submission along with copies of the relevant documents similar to A.Y. 2016-17 to substantiate its claim of depreciation on goodwill and claim of deduction u/s. 35(2AB). We consider that ld. CIT(A) is not justified in treating the order passed u/s. 143(3) of the act dated 30th March, 2019 by the Assessing Officer as erroneous and prejudicial to the interest of the revenue in spite of the information and related document with the Pr. CIT. He could not demonstrate that what kind of inquiry and examination was not made by the AO. AO rightly held in accordance to the amended provision as supra that the weighted deduction is available in respect of expenditure on scientific nature as approved in Form No. 3CL w.e.f. 1.7.2016. If a query was raised during the course of scrutiny by the AO which was answered to the satisfaction of the AO, but neither the query nor the answer was reflected in the assessment order that would not by itself, lead to the conclusion that the order of the Assessing Officer called for interference and revision.

Summary

Issues Involved:
1. Validity of the order passed under Section 263 of the Income Tax Act.
2. Claim of depreciation on goodwill arising from amalgamation.
3. Claim of deduction under Section 35(2AB) for Research & Development (R&D) expenditure.

Issue-wise Detailed Analysis:

1. Validity of the order passed under Section 263 of the Income Tax Act:
The Principal Commissioner of Income Tax (Pr. CIT) invoked Section 263, stating that the assessment orders for A.Y. 2016-17 and 2017-18 were erroneous and prejudicial to the interest of the revenue. The Pr. CIT argued that the Assessing Officer (AO) had not made proper inquiries regarding the depreciation on goodwill and the deduction claimed under Section 35(2AB). However, the Tribunal found that the AO had indeed made detailed inquiries and obtained substantial documentation from the assessee during the original assessment proceedings. The Tribunal emphasized that merely because the AO did not discuss these inquiries in the assessment order does not render the order erroneous. The Tribunal concluded that the Pr. CIT failed to demonstrate how the AO's order was prejudicial to the revenue, thus quashing the order under Section 263.

2. Claim of depreciation on goodwill arising from amalgamation:
The assessee claimed depreciation on goodwill arising from the amalgamation of Troikaa Pharmaceuticals Ltd. with Troikaa Exports Pvt. Ltd. The Pr. CIT contended that the goodwill was artificially created in the books of the amalgamated company and was not eligible for depreciation. The Tribunal referred to the Supreme Court's decision in CIT vs. Smifs Securities Ltd., which held that goodwill is an asset under Explanation 3(b) to Section 32(1) and is eligible for depreciation. The Tribunal also noted that the assessee had followed the purchase method of accounting as per Accounting Standard 14, which justified the recognition of goodwill. The Tribunal concluded that the AO had rightly allowed the depreciation on goodwill.

3. Claim of deduction under Section 35(2AB) for Research & Development (R&D) expenditure:
The assessee claimed weighted deduction under Section 35(2AB) for R&D expenditure. The Pr. CIT argued that the AO allowed excess deduction without proper verification, especially since the Department of Scientific and Industrial Research (DSIR) approved a lower amount of eligible expenditure. The Tribunal found that the AO had issued multiple notices and made detailed inquiries regarding the R&D expenditure during the assessment proceedings. The Tribunal also referred to judicial precedents, including the Gujarat High Court's decision in CIT vs. Cadila Healthcare Ltd., which allowed weighted deduction for clinical trial expenditure conducted outside the approved facility. The Tribunal noted that the AO had restricted the deduction to the amount approved by DSIR, aligning with the amended provisions effective from 1-7-2016. The Tribunal concluded that the AO's order was neither erroneous nor prejudicial to the revenue.

Conclusion:
The Tribunal quashed the Pr. CIT's order under Section 263 for both A.Y. 2016-17 and 2017-18, upholding the AO's original assessment orders. The Tribunal found that the AO had made proper inquiries and allowed the claims based on substantial documentation and judicial precedents. The appeals were allowed in favor of the assessee.