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TMI Blog2015 (4) TMI 1064X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. As sub-section (4) of Section 43 will have to be considered, which defines as to what activities would constitute "scientific research" as indicated under the said Section namely, Section 43(4). As to whether any expenditure incurred in the acquisition of rights in or arising out of scientific research as indicated in clause (ii) of sub-section (4) of Section 43 is an issue which requires to be examined by the prescribed authority itself and it would not be in the domain of the assessing authority to undertake such an exercise. When Section 35(2AB), Section 35(3) and Section 43(4) of the Act are read harmoniously, the irresistible conclusion that has be drawn would be that assessing officer cannot sit in judgment over the report submitted by the prescribed authority in Form No. 3CL. This view is also supported by the judgment of the High Court of Gujarat in Mastek Ltd.'s case (2012 (9) TMI 264 - GUJARAT HIGH COURT ). - Decided in favour of assessee - Writ Petition No. 7004 of 2014 (T - IT) - - - Dated:- 24-4-2015 - Aravind Kumar, J. N. Venkataraman, Sr. Counsel, K.R. Vasudevan and Harish, Advs. for the Petitioner. K.V. Aravind, Sr. Panel Counsel for the Respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Senior counsel appearing on behalf of Sri K.R. Vasudevan, for petitioner, Sri K.V. Aravind, learned Senior panel counsel appearing for respondents. CONTENTIONS ON BEHALF OF ASSESSEE: 4. It is the contention of Sri Venkataraman, learned Sr. counsel appearing on behalf of petitioner that order of first respondent is arbitrary, without application of mind and it is without jurisdiction and has been passed without following due process of law. He would elaborate his submission by contending there are no foundational facts on the basis of which the first respondent could have ignored the certificate issued by the prescribed authority - Department of Scientific and Industrial Research (for short 'DSIR') which is the prescribed authority under Rule 6(1) of the Income Tax Rules, 1961 empowered to issue certificate to the assessee who claims allowance of expenditure under Section 35(2AB) or 35(1)(i) of the Act. It is contended that petitioner is engaged in developing and selling optical network products to its worldwide customers and as such carry out product development activities in developing optical transmission telecommunication equipment which is a continuous pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, this task of certifying or disallowing the claims made in this regard having been outsourced by the Revenue under the Act, Assessing Officer cannot sit in judgment over such certificate issued and hence, in the instant case, the assessing officer committed a jurisdictional error in rejecting the claim on the ground that he would be empowered to disallow such claim made by the assessee though duly certified by the prescribed authority by taking recourse to the later portion of sub-clause (ii) of sub-section (4) of Section 43 of the Act. He would summarise his submissions by contending the definition of 'scientific research' found in Section 43(4) has been imported to Section 35(2AB) and 35(3) and the assessing authority while examining the claim for deduction under Section 35(2AB) will have to necessarily accept the certificate or the report issued by the prescribed authority and once such report is furnished, Assessing Officer has no jurisdiction to examine the correctness or otherwise of such expenditure certified by the prescribed authority and the only option left to the Assessing Officer when disagreeing with the report is to seek for clarification from the prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Resolution Panel which comprises of Three Principal Commissioners or Commissioners of Income Tax constituted by the Board and they inturn have recorded a finding on the claim of allowability sought for by the petitioner under Section 35(2AB) of the Act by rejecting the contention of assessee. He would further contend that only course that was left open to the Assessing Officer on receipt of approval of draft assessment order by DRP, was to accept the said findings of DRP and as such Assessing Officer has passed an order which is appealable under Section 253 of the Act before Income Tax Appellate Tribunal. On account of non availment of the alternate remedy, he prays for dismissal of the writ petition. 9. He would also contend that when a claim is made for weighted deduction under Section 35(2AB) of the Act, the Assessing Officer no doubt cannot sit in judgment over the certificate issued by the DSIR or the prescribed authority, but it does not prevent the Assessing Officer from examining as to whether any expenditure incurred and claimed for allowance would fall within the definition clause of sub-section (4) of Section 43 of the Act. He would also elaborate his submission by c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercise the extraordinary power. The self imposed judicial restraint one of which is that of availability of alternate remedy would be a reason for the writ Court not to issue prerogative writs. Exceptions to this general principles are (1) for enforcement of Fundamental Rights; (2) violation of principles of natural justice; (3) where the order or proceedings under challenge is attacked or being vitiated on the ground of such authority acting without jurisdiction; and (4) where constitutional validity of a provision in a statute or statute is itself under challenge. 13. After analyzing plethora of judgments, the Hon'ble Apex Court in Whirlpool Corpn. v. Registrar of Trade Marks, Mumbai [1998] 8 SCC 1 has held exercise of jurisdiction by the High Court to entertain a writ petition under Article 226 of the Constitution of India, in spite of availability of alternative statutory remedies is not affected where the authority against whom the writ is sought for is shown to have exercised its jurisdiction which it had none or had usurped the jurisdiction without any legal foundation. The Hon'ble Apex Court in conclusion has held as under: '20. Much water has since flo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing officer to examine such claim, is an issue which requires to be examined by this Court in this writ petition. 16. In the event of this Court coming to a conclusion that contention of the Revenue deserves to be accepted, then, the natural course which this Court will adopt is to dismiss the writ petition as being not maintainable since petitioner has an alternate remedy of filing statutory appeal. However, if it is being held that such power is not available to the assessing officer, it will have to be necessarily held as writ petition being maintainable. In other words, when issue of jurisdiction is under consideration, it cannot be held that writ petition is not maintainable at the threshold. In that view of the matter, this Court is of the considered view that subject to the answer on Point No. 2, this Court would answer Point No. 1. Re: Point No. 2 17. In order to adjudicate the point No. 2 relevant statutory provisions which will have bearing on the issue requires to be extracted and they are extracted herein below: '35. Expenditure on scientific research.- (1) In respect of expenditure on scientific research, the following deductions shall be allowed- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to- (a) the Central Government, when such question relates to any activity under clauses (ii) and (iii) of sub-section (1), and its decision shall be final; (b) the prescribed authority, when such question relates to any activity other than the activity specified in clause (a), whose decision shall be final. (4) The provisions xxx depreciation. (5) Where, in a scheme of amalgamation, xxx asset. Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires- (1) actual cost means xxx section 47. (2) paid means actually xxx profession. (3) plant includes xxx fittings. (4)[(i) scientific research means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries;] (ii) references to expenditure incurred on scientific research include all expenditure incurred for the prosecution, or the provision of facilities for the prosecution, of scientific research, but do not include any expenditure incurred in the acquisition of rights in, or arising ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amme has been approved by him. (5A) The prescribed authority shall, if he is satisfied that the conditions provided in this rule and in sub-section (2AB) of section 35 of the Act are fulfilled, pass an order in writing in Form No. 3CM: Provided that a reasonable opportunity of being heard shall be granted to the company before rejecting an application. (6) The National Laboratory, University, Indian Institute of Technology or specified person shall issue a receipt of payment for carrying out an approved programme of scientific research under sub-section (2AA) in Form No. 3CI. (7) ****** (7A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely:- (a) The facility should not relate purely to market research, sales promotions, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature; (b) The prescribed authority shall submit its report in relation to the approval of in-house Research and Development facility in Form No. 3CL to the Director General (Income-tax Exemptions) with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under clause (1) unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of accounts maintained for that facility. Said authority is required to examine the application and if satisfied that conditions provided under Section 35(2AB) are satisfied would pass an order in writing in Form No. 3CM. In the event of such application of assessee is being rejected by the prescribed authority, an opportunity of being heard would be extended by the prescribed authority to the assessee. As per sub-section (4) of Section 35(2AB) the prescribed authority would in turn submit its report to the approval of the said facility to the Director General (Income tax Exemptions) in Form No. 3CL within 60 days as per Rule 7(A)(b) of the Rules. Approval of such expenditure incurred by a company under Section 35(2AB) would be subject to conditions stipulated in clauses (a) to (d) of Rule 7A of the Rules. This would clearly indicate that the prescribed authority after receiving the application under Rule 3CK would examine the said application in the background of the definition found in sub-section (4) of Section 43 and on being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim of the assessee made under Section 35(2AB), he has to refer the matter to the Board, which inturn, will refer the question to the prescribed authority. The decision of the prescribed authority would be final as could be seen from clause (b) of sub-section (3) of Section 35. Thus, it would emerge from above analysis that neither the assessing officer nor the Board is competent to take any decision on any such controversy relating to report and approval granted by Prescribed Authority as it involves expert view or opinion. The controversy arising out of certificate issued by the prescribed authority if any, has to be referred to the prescribed authority by the Board on such doubt being raised by Assessing Officer and also on his request. It is the prescribed authority alone which would be competent to take a decision with regard to correctness or otherwise of its order of approval granted in Form No. 3CL as prescribed under Section 35(2AB) of the Act read with Rule 7A of the Rules. 22. Aforesaid view is also fortified by the judgment rendered by the High Court of Gujarat in the case of Mastek Ltd. (supra) wherein it has been held that whenever question arises as to whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Turning my attention back to the facts on hand, case-papers would indicate that on return of income being filed by the assessee, same came to be processed by the first respondent by issuing notices under Section 143(2) and 142(1) of the Act. After clarification called for and on discussion with the assessee's representative, draft assessment order dated 27.03.2013 came to be forwarded to the assessee wherein the income was proposed as against the loss returned in the return of income. On receipt of the draft assessment order, assessee filed its objections before the Dispute Resolution Panel - DRP i.e., second respondent herein who, after hearing the assessee issued directions on 30.12.2013 under Section 144C(5) of the Act and in compliance of the directions issued by the DRP, first respondent - Assessing Officer concluded the final assessment. The Assessing Officer under the assessment order dated 31.01.2013 disallowed the deduction claimed by the assessee under Section 35(2AB) of the Act on the following grounds: (i) assessee has incurred expenditure of ₹ 13,95,73,315/- in respect of incompleted projects as the new products have not yet been developed; (ii) S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards the allowability of depreciation on such capital work in progress, it has already been; held that no depreciation is allowed on CWIP. 25. Insofar as disallowance under Section 35(2AB) of the Act is concerned, the DRP reiterated its above finding and held that where the express provisions of the Act exclude certain kind of expenditure from the purview of Section 35 of the Act, such expenditure cannot be allowed under Section 35 of the Act when such expenditure does not fall within the scope of Section 35 of the Act. Second respondent while issuing direction to first respondent on 30.12.2013 under Annexure - Q has held as under: 12.1 We have carefully gone through the order passed by the Assessing Officer and by the TPO and the objections filed by the assessee as well as the records of the case of the assessee. It has already been decided in para 11 above that where the express provisions of the Act exclude certain kind of expenditure from the purview of section 35 of the Act such expenditure cannot be allowed under section 35 of the Act and when certain expenditure does not fall in the scope of section 35 of the Act, the report of prescribed authority cannot be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled for being allowed as a weighted deduction. There being no dispute to the fact that DSIR being the prescribed authority in the instant case, had issued the report in Form No. 3CL - Annexure - M certifying the total R D expenditure (excluding land and buildings) as prescribed under Section 35(2AB) for a sum of ₹ 4,601.9 lakhs as against the claim of ₹ 5,957 lakhs made by the assessee in the return of income and as such, neither the second respondent nor first respondent could have sat in judgment over the said certificate issued by the prescribed authority. In other words, when the prescribed authority had certified the extent of expenditure which would be allowable, the assessing officer could not have sat in appeal over such certification made by the prescribed authority. The allowability or otherwise of such expenditure cannot be the subject matter of scrutiny by the assessing officer. It would also be required to be noticed that the assessing officer would be out of bounds to examine as to whether such expenditure as certified by the prescribed authority can be allowed or disallowed under Section 35 of the Act. In other words, the assessing officer is preclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 35(2AB), Section 35(3) and Section 43(4) of the Act are read harmoniously, the irresistible conclusion that has be drawn would be that assessing officer cannot sit in judgment over the report submitted by the prescribed authority in Form No. 3CL. This view is also supported by the judgment of the High Court of Gujarat in Mastek Ltd.'s case (supra). 29. For the myriad reasons aforestated, Point No. (2) formulated herein above will have to be answered in the affirmative, i.e., in favour of petitioner - assessee and by concluding that the impugned order dated 31.01.2013 - Annexure - R and consequential demand notice dated 31.01.2014; - Annexure - R1 are without jurisdiction. 30. In view of the finding that Assessing Officer - first respondent had no jurisdiction to sit in judgment over the report submitted by the prescribed authority in Form No. 3CL as required under Section 35(2AB) of the Act read with Rule (7A)(b) of Income Tax Rules, 1961, it has to be held that the issue of entertaining the writ petition on the ground of alternate remedy would recede to background and it has to be held that present writ petition would be maintainable in the facts obtained in the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X
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