2023 (3) TMI 338 - AT - Income Tax

Revision u/s 263 - claim of deduction u/s.35(2AB) - whether once the assessee is covered under approval granted by DSIR, does the Assessing Officer has any power to question the same as approval granted by DSIR under power vested under the provisions of section 35(2AB)? - HELD THAT - In our view, the Assessing Officer has rightly allowed claim of deduction u/s.35(2AB) of the Act based on Form No.3CM Form No.3CL issued by DSIR, as per provisions of section 35(2AB) of the Act, which does not give power to the Assessing Officer jurisdiction to question approval granted by the DSIR. As regards argument of the Revenue that the assessee is engaged in manufacturing of cosmetics and toilet preparations, in our view, observations of the Revenue is not based on facts. We noted the arguments of the Revenue, wherein many products cited by the Department are such as Bikers, Bacto-V, Germ Flush, Electric, Saafoo, Paaga Professional and Lava Berry are products which have been taken from current website of the assessee. We noted that as contended by assessee, these products were launched in recent years i.e. for and from the year 2019 and 2020 and hence, these are not relevant for consideration for assessment year 2011-12. Certificate as approved by DSIR in Form No.3CM 3CL, which categorically mentions nature of business activity of the assessee as manufacture and marketing of personal care products , which clearly proves that the assessee company is engaged in manufacture or production of articles or things, which is eligible for claim of deduction u/s.35(2AB) - Further, sub-section(3) of section 35 clearly provides that if any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for scientific research, the Board should refer question to the prescribed authority and whose decision shall become final and binding. Neither the Assessing Officer nor the PCIT can sit on judgement on the approval granted by the prescribed authority i.e., DSIR, as in the present case. In the present case before us, even on assumption of jurisdiction, apart from merits as discussed above, the Assessing Officer has allowed deduction while framing assessment u/s.143(3) and u/s.35(2AB) of the Act only after verifying all necessary documents and certificates and hence, we find that assessment order framed is neither erroneous nor prejudicial to the interests of revenue and assumption of jurisdiction by the PCIT is bad in law in the given facts and circumstances of the case. Hence, we set aside the revision order and allow appeal filed by the assessee on merits as well as on assumption of jurisdiction. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Assumption of jurisdiction by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961.
2. Eligibility of the assessee for deduction under section 35(2AB) of the Income Tax Act, 1961.
3. Determination of whether the assessee's products fall under the category of cosmetic items listed in the Eleventh Schedule.
4. Examination of the Assessing Officer's (AO) application of mind and verification of documents during the assessment proceedings.

Detailed Analysis:

1. Assumption of Jurisdiction by PCIT:
The PCIT invoked section 263 of the Act, asserting that the AO's order allowing the assessee's deduction claim under section 35(2AB) was erroneous and prejudicial to the interests of revenue. The PCIT contended that the AO did not make proper inquiries or verification regarding the nature of the assessee's products, which he believed were cosmetic items listed in the Eleventh Schedule, thus disqualifying the assessee from the deduction. The assessee argued that the AO had allowed the deduction after thorough scrutiny and verification of documents, including certificates from the Department of Scientific & Industrial Research (DSIR). The Tribunal noted that the AO had indeed issued notices and required the assessee to submit relevant documents, which were duly examined before allowing the deduction.

2. Eligibility for Deduction under Section 35(2AB):
The assessee claimed a deduction under section 35(2AB) for expenditures on scientific research. The PCIT argued that the assessee was engaged in manufacturing cosmetic items, which are listed in the Eleventh Schedule, making them ineligible for the deduction. The assessee, however, maintained that it was manufacturing personal care items, not cosmetics. The Tribunal observed that the AO had allowed the deduction based on approvals and certificates from DSIR, which recognized the assessee's R&D activities. The Tribunal emphasized that the AO had no jurisdiction to question the DSIR's approval.

3. Classification of Products:
The PCIT's argument was based on the assertion that the assessee's products, such as creams, hair color, and shampoo, were cosmetic items listed in the Eleventh Schedule. The assessee contended that these were personal care products, not cosmetics. The Tribunal noted that the products cited by the PCIT were from the current website and were launched in recent years, not relevant for the assessment year 2011-12. The Tribunal also referenced the DSIR's approval, which categorized the assessee's business as the manufacture and marketing of personal care products, thus supporting the assessee's claim.

4. AO's Verification Process:
The Tribunal highlighted that the AO had made specific inquiries during the assessment proceedings, requiring the assessee to submit various documents and certificates related to the R&D activities and the claimed deduction. The AO had reviewed these documents, including DSIR approvals, before allowing the deduction under section 35(2AB). The Tribunal concluded that the AO had conducted a proper verification process, and the assessment order was neither erroneous nor prejudicial to the interests of revenue.

Conclusion:
The Tribunal found that the PCIT's assumption of jurisdiction under section 263 was not justified, as the AO had conducted a thorough verification process and allowed the deduction based on valid DSIR approvals. The Tribunal set aside the revision order and allowed the appeal in favor of the assessee, stating that the assessment order was neither erroneous nor prejudicial to the interests of revenue.