1989 (6) TMI 79 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Commissioner u/s 263.
2. Method of computing allowable research and development expenditure.
3. Consistency in the method of claiming deductions.
4. Validity of the assessment orders passed by the Income-tax Officer.

Summary:

1. Jurisdiction of the Commissioner u/s 263:
The Commissioner invoked section 263 to set aside the assessment orders for the years 1975-76 and 1976-77, arguing that the Income-tax Officer (ITO) allowed excessive deductions for research and development (R&D) expenses. The assessee contended that the Commissioner had no jurisdiction to invoke section 263 because the assessment orders were passed u/s 143(3) read with section 144B, incorporating directions from the Inspecting Assistant Commissioner (IAC). The assessee argued that the Explanation to section 263(1), inserted by the Taxation Laws (Amendment) Act, 1984, was clarificatory and not retrospective. The Tribunal, however, did not find it necessary to decide on this legal point as the appeals were accepted on merits.

2. Method of Computing Allowable Research and Development Expenditure:
The Commissioner suggested an alternative method for computing R&D expenses, which the assessee argued was inconsistent and inappropriate. The assessee had consistently used a pro-rata basis of global turnover and the turnover of their licenses in India, which had been accepted in previous years. The Tribunal noted that the Commissioner did not provide a clear basis for considering the ITO's method as excessive or erroneous.

3. Consistency in the Method of Claiming Deductions:
The assessee had claimed R&D expenses on a consistent basis since the assessment year 1965-66. The ITO had allowed these expenses after detailed examination and with the approval of the IAC. The Tribunal emphasized that the mere adoption of an alternative method by the Commissioner, which might result in higher revenue, does not render the ITO's method erroneous or prejudicial to the interests of revenue.

4. Validity of the Assessment Orders Passed by the Income-tax Officer:
The Tribunal found that the ITO's assessment orders were not erroneous or prejudicial to the interests of revenue. The ITO had allowed R&D expenses based on a method consistently followed and accepted in the past. The Tribunal cited the Supreme Court's judgment in CIT v. Simon Carves Ltd., which supported the view that the discretion exercised by the ITO in choosing a method that resulted in lower tax liability was proper and judicious. The Tribunal also referred to the Madras High Court's judgment in Venkatakrishna Rice Co. v. CIT, which held that section 263 should not be invoked merely to bring more revenue unless the order is erroneous and prejudicial to the interests of revenue.

Conclusion:
The Tribunal cancelled the Commissioner's order u/s 263 for both assessment years and allowed the assessee's appeals, upholding the validity of the ITO's assessment orders.