AO erroneously allowed 200% deduction under section 35(2AB) without verifying mandatory Form 3CL submission

The ITAT Ahmedabad upheld the PCIT's revision u/s 263 regarding deduction u/s 35(2AB). The AO erroneously allowed deduction at 200% rate without verifying submission of mandatory Form 3CL from prescribed authority, despite the amended provision limiting the rate to 150% from 01.04.2018. The PCIT correctly identified that Form 3CL was not on record during assessment or revision proceedings. The twin conditions for invoking section 263 - erroneous assessment prejudicial to revenue interests - were satisfied. The assessment order was set aside with directions for fresh assessment after proper verification.

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ISSUES PRESENTED and CONSIDERED

The primary issue considered in this judgment was whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking jurisdiction under section 263 of the Income Tax Act, 1961, to revise the assessment order passed by the Assessing Officer (AO) for the Assessment Year 2018-19. Specifically, the core legal questions included:

• Whether the assessment order allowing a deduction under section 35(2AB) of the Act was erroneous and prejudicial to the interest of the revenue.
• Whether the AO failed to verify compliance with the statutory conditions, including the submission of Form 3CL and the applicable deduction rate.
• Whether the conditions for invoking section 263, namely the assessment order being erroneous and prejudicial to the revenue, were satisfied.
• Whether the PCIT's direction for a fresh assessment was justified.

ISSUE-WISE DETAILED ANALYSIS

1. Relevant legal framework and precedents

The legal framework revolves around section 35(2AB) of the Income Tax Act, which provides for weighted deductions on in-house research and development expenditures. The Finance Act, 2016, and Finance Act, 2018, amended the deduction rate from 200% to 150% effective from 01.04.2018. Compliance with Rule 6 and Rule 6(7A) of the Income Tax Rules, 1962, including the submission of Form 3CL by the Department of Scientific and Industrial Research (DSIR), is mandatory for claiming this deduction.

The precedent set by the Supreme Court in Malabar Industrial Co. Ltd. v. CIT was referenced, which holds that an order cannot be revised merely due to differing opinions if two views are possible.

2. Court's interpretation and reasoning

The Tribunal interpreted that the AO's failure to verify the statutory conditions, particularly the submission of Form 3CL and the adherence to the amended deduction rate, rendered the assessment order erroneous and prejudicial to the revenue. The Tribunal emphasized that the statutory mandate was clear and unambiguous post amendment, and the AO's oversight constituted non-application of mind.

3. Key evidence and findings

The PCIT's revisionary order highlighted the absence of Form 3CL in the assessment records, which is crucial for quantifying eligible expenditure for deduction. The Tribunal found that the AO allowed the deduction mechanically without verifying this essential compliance.

4. Application of law to facts

The Tribunal applied the statutory requirements under section 35(2AB) and the amendments to the facts, concluding that the AO's allowance of a 200% deduction was contrary to the law, which limited it to 150% from A.Y. 2018-19. The failure to ensure compliance with the requirement of Form 3CL further substantiated the PCIT's decision to revise the order.

5. Treatment of competing arguments

The assessee argued that the AO's decision was a plausible view and that the revision was a mere change of opinion. However, the Tribunal dismissed this argument, distinguishing the case from a scenario involving two possible views. Instead, it identified a lack of due inquiry and statutory compliance by the AO.

6. Conclusions

The Tribunal concluded that the PCIT was justified in invoking section 263, as the assessment order was both erroneous and prejudicial to the revenue. The direction for a fresh assessment was warranted to ensure proper verification and compliance with statutory requirements.

SIGNIFICANT HOLDINGS

The Tribunal upheld the PCIT's order under section 263, affirming that:

• "The twin conditions for invoking jurisdiction under section 263 of the Act-namely that the assessment order is erroneous and prejudicial to the interests of the revenue-stand duly satisfied."
• The PCIT's action was valid and sustainable, given the AO's failure to verify the mandatory statutory conditions for deduction under section 35(2AB).
• The Tribunal dismissed the appeal filed by the assessee, reinforcing the necessity for compliance with the amended statutory provisions and procedural requirements.

In summary, the Tribunal's decision underscores the importance of adherence to statutory mandates and the necessity for thorough verification by assessing officers to prevent erroneous and prejudicial assessments. The judgment reinforces the supervisory role of the PCIT in ensuring compliance and protecting revenue interests.

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