2017 (8) TMI 1255 - AT - Income Tax

Reopening of assessment - reason to believe - claim of R&D expenses u/s 35 - Assessee has also claimed deduction u/s. 80IC by apportioning R & D expenses amongst various units. AO declined apportionment and reduced quantum of deduction u/s.80IC - trading sales - Held that - CIT(A) has deleted the addition / disallowance merely by stating that issue of allocation of R & D expenses was subject matter of appeal hence as per the proviso to Section 147 of the Act. - order is CIT(A) is not correct as per the facts of the case. During the course of re-assessment proceedings AO found that trading sales has no connection with the R & D expenses so incurred by the assessee accordingly he directed that the apportionment of R & D expenditure should be made after excluding the sales. However in the course of original assessment which was subject matter of appeal before the CIT(A) only apportionment was declined by AO whereas in the re-assessment proceedings AO has precisely excluded the trading sales before apportionment of R & D expenditure. However in the instant appeal before us the CIT(A) has not decided the issue on merit. Moreover the judgment relied on by learned AR in case of ICICI Bank Ltd. 2012 (7) TMI 521 - BOMBAY HIGH COURT are distinguishable on facts in so far as Bombay High Court was dealing with the 2nd proviso to Section 147 whereas assessee is arguing on third proviso to Section 147. In the interest of justice we restore the matter back to the file of the CIT(A) for deciding the issue on merit. - Decided in favor of revenue.

Summary

Issues Involved:
1. Disallowance of expenditure under Indian Medical Council Regulations.
2. Reduction of deduction under section 80IC due to apportioning of R&D expenses.
3. Reopening of assessment for allocation of R&D expenses.

Analysis:

Issue 1: Disallowance of Expenditure under Indian Medical Council Regulations
The Revenue appealed against the deletion of disallowance of expenditure amounting to INR 2,99,27,462 under Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002. The CIT(A) allowed the claim based on the Tribunal's decision in the assessee's own case for AY 2011-12 and 2012-13. The Tribunal held that the CBDT circular, which the AO relied on, was not applicable for the relevant assessment year. The Mumbai ITAT decision in the case of Syncom Formulations (I) Ltd was also followed, stating that the circular did not warrant any disallowance. The Tribunal upheld the CIT(A)'s decision, allowing the expenditure and dismissing the Revenue's appeal.

Issue 2: Reduction of Deduction under Section 80IC due to Apportioning of R&D Expenses
The Revenue challenged the CIT(A)'s decision to allow the assessee's claim for deduction under section 80IC by apportioning R&D expenses among various units. The AO disallowed the apportionment and reduced the deduction under section 80IC. The CIT(A) upheld the assessee's claim, citing that R&D activities were not carried out at all manufacturing units but at independent R&D units. The AO's decision to exclude trading sales before apportioning R&D expenses was disputed. The Tribunal found no fault in the CIT(A)'s order, following the decision of the Co-ordinate Bench and upholding the allowance of the deduction under section 80IC.

Issue 3: Reopening of Assessment for Allocation of R&D Expenses
The AO reopened the assessment to allocate R&D expenses based on turnover, excluding trading sales. The CIT(A) deleted the allocation made during the original assessment, but the AO reiterated the allocation in the reopening. The Revenue appealed, arguing that the AO's reassessment was not permissible as the issue was already subject to appeal. The Tribunal noted that while the AO excluded trading sales in the reassessment, the CIT(A) did not decide the issue on merit. Considering the legal provisions and precedents, the Tribunal remanded the matter to the CIT(A) for a detailed examination and decision on the allocation of R&D expenses.

In conclusion, the Tribunal partially allowed the Revenue's appeal and dismissed the assessee's cross objection, emphasizing the need for a thorough review of the allocation of R&D expenses by the CIT(A) based on merit.