1978 (8) TMI 106 - AT - Income Tax

Tribunal overturns Commissioner's decision on scientific research expenditure under Income-tax Act

CIP. LTD. Versus INCOME TAX OFFICER.

The Tribunal held that the Commissioner of Income Tax's order setting aside the Income Tax Officer's assessment orders for scientific research expenditure ... - Issues Involved:1. Whether the Income Tax Officer (ITO) properly allowed the assessee's claim for scientific research expenditure under Section 35(1)(iv) of the Income-tax Act, 1961.2. Whether the Commissioner of Income Tax (CIT) was justified in setting aside the ITO's assessment orders on the grounds that they were erroneous and prejudicial to the interests of the Revenue due to the lack of reference to the prescribed authority under Section 35(3).Detailed Analysis:Issue 1: Allowance of Scientific Research Expenditure by the ITOThe ITO, in the assessment orders for the years 1973-74, 1974-75, and 1975-76, allowed the assessee's claims for scientific research expenditure amounting to Rs. 2,20,201, Rs. 86,412, and Rs. 2,71,493, respectively. The ITO's reasoning was consistent across these years, stating that the assessee had produced sufficient evidence of engaging in scientific research activities and incurring the expenses. The ITO accepted these claims without controversy, thus not raising a 'question' under Section 35(3) that would necessitate a reference to the prescribed authority.Issue 2: CIT's Justification for Setting Aside the ITO's OrdersThe CIT issued show-cause notices under Section 263, arguing that the ITO had not properly allowed the expenditure and had failed to make a reference to the prescribed authority as required by Section 35(3). The CIT contended that the ITO's orders were erroneous and prejudicial to the interests of the Revenue because the prescribed authority had previously determined that only 50% of the expenditure could be attributed to research and development (R&D) activities, with the remaining 50% being for production work. Consequently, the CIT set aside the ITO's assessments and directed fresh assessments after making the necessary reference.Tribunal's Decision:The Tribunal considered the language of Sections 35(1)(iv) and 35(3) of the Income-tax Act, 1961. Section 35(1)(iv) allows for deductions of capital expenditure on scientific research related to the business, while Section 35(3) mandates a reference to the prescribed authority only if a 'question' arises regarding the extent or nature of the scientific research.The Tribunal highlighted that the term 'question' implies a controversy or subject of controversy. Since the ITO had accepted the assessee's claims without dispute, there was no 'question' to refer to the prescribed authority. The Tribunal relied on the Allahabad High Court's interpretation in J.K. Synthetics Ltd. vs. Income Tax Officer, which clarified that a reference under Section 35(3) is necessary only if the ITO does not accept the assessee's claim.The Tribunal also noted that the CIT and other tax authorities are not competent to disallow the claim without a reference to the prescribed authority if there is no initial dispute. The Tribunal found that the CIT's show-cause notices and subsequent order were based on an incorrect interpretation of the requirement for a reference under Section 35(3).Conclusion:The Tribunal concluded that the CIT's order was legally untenable and cancelled it. The Tribunal upheld the ITO's original assessment orders, allowing the assessee's claims for scientific research expenditure. The appeals by the assessee were allowed, affirming that the ITO's acceptance of the claims without controversy did not necessitate a reference to the prescribed authority under Section 35(3).