Tribunal rules against reopening assessments citing lack of new material and upholds R&D deduction method

The Tribunal quashed the reopening of assessments for AY 2009-10 and 2010-11 under Section 147 of the Income Tax Act, ruling that the reasons lacked new tangible material, thus disallowing the AO's appeals and allowing the assessee's cross-objections. Additionally, the Tribunal upheld the weighted deduction claimed under Section 35(2AB) for R&D expenditure, following the assessee's method of deduction without reducing contract research income, preventing double taxation. The judgments emphasized the need for fresh material in reopening assessments and supported the correct method of claiming deductions, resulting in a favorable outcome for the assessee.

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Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act.
2. Disallowance of weighted deduction claimed under Section 35(2AB) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147:
The primary issue pertains to the reopening of the assessment for AY 2009-10 and 2010-11. The assessee contended that the reopening was based on a mere "change of opinion" and lacked any "fresh tangible material." The original return was filed and assessed under Section 143(3). The reopening was initiated after more than four years, necessitating the presence of a failure on the part of the assessee to disclose fully and truly all material facts.

The Tribunal noted that the reasons for reopening were derived from the existing records and audited accounts, which were already available during the original assessment. The AO's reasons did not specify any new information or material that was not previously disclosed. The Tribunal emphasized that reopening based on a change of opinion is not permissible and must be supported by new tangible material, which was absent in this case. Consequently, the Tribunal quashed the reopening of the assessment, allowing the assessee's cross-objection.

2. Disallowance of Weighted Deduction under Section 35(2AB):
The second issue involved the disallowance of the weighted deduction claimed by the assessee under Section 35(2AB) for R&D expenditure. The AO argued that the assessee should have reduced the contract research income from the gross R&D expenditure before claiming the deduction, as per DSIR guidelines. The assessee, however, reduced only the contract research expenses and not the income, contending that the income from contract research had already been offered for taxation.

The Tribunal referred to the decision in the case of Wockhardt Limited and the Karnataka High Court ruling in CIT vs. Micro Labs Ltd., which supported the assessee's method of reducing only the contract research expenses from the R&D expenditure. The Tribunal concluded that the DSIR guidelines did not mandate reducing the contract research income from the R&D expenditure. It upheld the CIT(A)'s decision, which favored the assessee, allowing the deduction under Section 35(2AB) and preventing double taxation of the same income.

Separate Judgments:
For AY 2009-10 and 2010-11, the Tribunal consistently applied the same reasoning. The appeals of the AO were dismissed, and the cross-objections of the assessee were allowed, quashing the reopening of the assessments and confirming the allowance of the weighted deduction under Section 35(2AB).

Conclusion:
The Tribunal's judgment comprehensively addressed the issues of reopening the assessment and the disallowance of the weighted deduction under Section 35(2AB). It emphasized the necessity of new tangible material for reopening assessments and upheld the method of claiming R&D deductions that prevent double taxation. The consistent application of these principles across both assessment years led to the dismissal of the AO's appeals and the allowance of the assessee's cross-objections.

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