TaxTMI 
TaxTMI 
2016 (11) TMI 1251
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....er normal provisions and Rs. 2,03,94,650/- under the provisions of section 115JB of the Income Tax Act, 1961 (hereinafter called as 'the Act'). The return was processed u/s 143(1) of the Act and subsequently, the case has been taken up for scrutiny assessment and accordingly, notice u/s 143(2) of the Act was issued. In response to notices, the authorized representative of the assessee appeared from time to time and furnished books of accounts and other relevant details called for. During the course of assessment proceedings, the A.O. observed that the assessee has claimed weighted deduction u/s 35(2AB) of the Act, towards research and development expenditure incurred in their in house R&D facility. Therefore, to ascertain the correctness of the claim made by the assessee, issued notice and asked to furnish the details of R&D facility and nature of research carried out in the R&D facilities along with necessary approvals from the competent authority. 3. In response to show cause notice, the assessee submitted that it is in the business of manufacturing and supply of moving display boards, data loggers and electronic systems, etc. to Indian Railways. The assessee further submitted....
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....s. As per the provision of section 194C of the Act, TDS is ought to have deducted on such payments, where the payments exceed Rs. 30,000/- during the financial year. Since the assessee failed to deduct TDS, the amount of Rs. 3,57,463/- is disallowed under the provisions of section 40(a)(ia) of the Act. Similarly, the A.O. has disallowed bank guarantee charges incurred by the assessee for non-deduction of tax at source under the provisions of section 194H of the Act. 5. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee reiterated the submissions made before the A.O. The CIT(A) for the reasons recorded, confirmed additions made by the A.O. towards weighted deductions under the provisions of section 35(2AB) of the Act. The CIT(A) further held that one of the conditions laid down u/s 35(2AB) of the Act, that the assessee should be engaged in the business of manufacture or production of any article or thing, except those specified in the 11 schedule. In the present case on hand, as per the information provided by the DRM (S&D), Vijayawada, the instruments manufactured by the assessee are in the nature of office mach....
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....45/- towards revenue expenditure and a sum of Rs. 25,22,566/- under capital expenditure. The assessee has claimed weighted deduction of 200% on total expenditure incurred towards R&D. The expenditure claimed by the assessee has been approved by the Director of Scientific and Industrial Research. 7. The A.O. disallowed the claim of weighted deductions u/s 35(2AB) of the Act, for the reasons that the items manufactured and supplied by the assessee to Indian Railways are in the nature of office machines and apparatus used in Railway stations for office work and for data processing, therefore, these items are clearly falling in Eleventh schedule. The A.O. further observed that the data loggers, electronic items and electronic moving display boards are nothing but office machines and apparatus, therefore, the assessee is not eligible for claiming deduction u/s 35(2AB) of the Act. The A.O. has made elaborate discussions on the provisions of section 35(2AB) of the Act, Eleventh schedule and items manufactured by the assessee. The A.O. relied upon the letter written by the Railway Manager (S&D) vide his letter dated 28.2.2014 and opined that the items manufactured by the assessee are pr....
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....and to coordinate between the pilots for arrival and departure of trains. The coordination is called signaling interlocking. The system provides the status of various digital operations where the signal is ON or OFF, relay is UP or DOWN, the fuse is intact. Further data loggers provides the status of various voltages such as the track circuit voltage, AC voltage, DC voltage or high frequency axle channel voltages with accuracy. It was further submitted that these items were manufactured with a continuous process of research and development to meet the quality and efficiency of the machines to enhance the accuracy level of machines in controlling the movement of trains. The assessee further submitted that its R&D facility has been approved by the competent authority under the provisions of section 35(2AB) of the Act, after scrutinizing thoroughly all the details filed by the assessee. The competent authority has approved the facility and also approved the total expenditure incurred towards research and development. Therefore, the A.O. was not correct in holding that the items manufactured by the assessee are listed in the Eleventh schedule, accordingly, not eligible for weighted ded....
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....e competent authority, in case of any clarification required in this regard. The A.O. did not followed the due procedure under the rules, simply disallowed the claim made by the assessee for the reason that the goods manufactured by the assessee are listed in Eleventh schedule. 12. The only question came up for our consideration is whether on facts and circumstances of the case, the goods manufactured by the assessee are mere office machines or apparatus which are listed in Eleventh schedule item no.22 or an electronic equipments eligible for claiming deduction u/s 35(2AB) of the Act. Before we go into the facts of the present case, let us understand the provisions of section 35(2AB) of the Act. As per the provisions of section 35(2AB)(1) of the Act, where a company engaged in the business of bio technology or any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh schedule, incurs any expenditure on Scientific research (not being expenditure) in the nature of cost of any land or building, on in house research and development facility as approved by the prescribed authority, then there shall be allowe....
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....installed at various railway stations which are assisted in controlling the movement of railways. According to the assessee, the data loggers provides study of various digital operations whether the signal is ON or OFF, the relay is UP or DOWN, the fuse is intact. Further, data loggers provide the study of voltage such as the track circuit voltage, AC voltage, DC voltage or high frequency axle channel voltage with accuracy. The assessee indigenously developed micro processor based data logger system with various application softwares for railway signaling, etc. and this data logger is similar to aircraft black box. The data loggers records every event happening in the railways, i.e. operating suits of all these log tracks, points, signals, etc. reads the information to Central place via various types of indication intervention lock wire or wireless and through different interlock methods and at central place, located in the railway station itself different application softwares are provided to perform real time analysis to only railway personnel recording failures happening in the railways, equipments states, real time simulation, etc. for enabling corrections indeed. This has trem....
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....tifying the quantum of expenditure incurred towards R&D expenditure as, as per the provisions of section 35(2AB) of the Act and Rule 6(1)(b) of the Income Tax Rules, 1962 provides that any assessee applied for approval of its R&D facility before the Secretary, DSIR, Government of India in form no.3CK, the Secretary DSIR, if he satisfied about the activities of the assessee of other parameters passes an order of approval in form no.3CM. After according sanction of approval, the Secretary, DSIR sends a report to the Director General, Income Tax (Exemptions) in form no.3CM within 60 days of granting approval. When DSIR passes the order of approval, it scrutinizes the application filed by the assessee with necessary details before granting approval after satisfied with the conditions stipulated under the provisions of section 35(2AB) of the Act. Before granting the approval, DSIR looks into various aspects including the products manufactured by the assessee to satisfy the conditions prescribed in section 35(2AB)(1) of the Act. Therefore, the A.O. was completely erred in observing that the role of DSIR is limited to certifying the quantum of expenditure incurred towards research and dev....
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....es, 1962. In the present case on hand, on perusal of the facts available on record, we find that the A.O. without following the procedure laid down under rules, simply disallowed the expenditure claimed by the assessee by holding that the goods manufactured by the assessee are mere office machines and apparatus listed in Eleventh schedule. Therefore, we are of the view that the A.O. is not correct in disallowing the claim made by the assessee u/s 35(2AB) of the Act. 16. The next allegation of the A.O. is that the prescribed authority did not submit report in form no.3CL to the Director General, Income Tax (Exemptions) within 60 days of granting approval as required under rule 6(7A)(b) of the Income Tax Rules, 1967, consequently, the assessee is ineligible for claiming exemption u/s 35(2AB) of the Act. The A.O. further observed that the prescribed authority ought to have submitted the approval to the Director General of Income Tax within 60 days, however, the said approval has been submitted to the Director General beyond the time specified under rule, therefore, the assessee is ineligible for exemption. We do not find any merits in the arguments of the assessee for the reason th....
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....not accept the 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 subsection (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. (Para 21) A plain reading of Section 35(2AB) would clearly indicate that where a company is engaged in the business of bio-technology or in any business of manufacture or produc....
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.... in his jurisdiction, if he were to undertake the exercise of examining as to whether the certificate issued by the prescribed authority is within the parameters of statutory provisions of the Act or otherwise. Keeping in mind that such contingency may arise, Parliament has incorporated sub-section (3) to Section 35 of the Act which would be a complete answer to such situations. Thus, if any question arises as to what extent, any activity constitutes or constituted or an asset is or was being used for scientific research, then the Assessing Officer would be required to refer such question to the Board for being referred to the prescribed authority. The decision of the prescribed authority in this regard would be final, inasmuch as, the certification of such expenditure is being examined by an expert body and undisputedly, such exercise has been outsourced by the Revenue under the Act itself, since the prescribed authority being possessed of requisite expertise, it would be in a better position to certify as to whether such expenditure claimed by the assessee under Section 35(2AB) would fall within the said provision or outside. This exercise of examining the correctness of the Cert....
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....ved/granted in-house research and development facility u/s 35(2AB) of the Act on 04/032009 for a period from October 19, 2007 to 31st March 2010 in Form no. 3CM, in accordance with Rule 6(5A) of the Rules. This approval was produced before the Assessing Officer during assessment proceedings i.e. before framing the assessment on 30/12/2011. The prescribed authority sent form no.3CL to the Income-tax Department on 22nd November 2010 (A. Y. 2008-09) in accordance with section 35(2AB)(4) read with Rule 6(7A)(b) of the Rules. As the approval of the entire period was given once i.e. by way of Form no. 3M, thus, in our view, the assessee complied with the conditions for claim of deduction as required u/s 35(2AB) of the Act. If the aforesaid section was analyzed then the deduction shall be a//owed of a sum equal to two times of the expenditure so incurred and the prescribed authority is to submit its report of such approval/facility to the Director General on a prescribed form within specified time, meaning thereby, the authority concerned had to submit the report to the Director General. However, if the totality of facts are analyzed, as mentioned earlier, the assessee made application....
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....clude wide variety of activities. What is to be ascertained is whether any scientific research was undertaken and not whether such scientific research resulted into the ultimate aim for which such research was undertaken. What the Legislature desired to encourage by granting deduction under section 35(1) of the Act was a scientific research and not necessarily only the successful scientific research undertaken by an assessee. (para 25) Tribunal without discussing full materials on record came to such conclusion which, in our opinion, ought not to have been done. These are matters of extreme scientific complexities. What was the nature of the research undertaken, what was the improvement in the existing software aimed at or desired, whether ultimately the product which was launched by the assessee after undertaking such so called scientific research, was a new product substantially different from the existing one or not were some of the issues on which the Tribunal, in our humble opinion, without bestowing sufficient attention ruled in favour of the assessee. We may caution that such issues of extreme scientific complexities, should not be decided without referring to the full....
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....ty. We further was of the view that the goods manufactured by the assessee are not a mere office machines or apparatus as listed in Eleventh schedule, but they are specially designed electronic equipments meant for use by Indian Railways to monitor smooth movement of trains. The assessee has categorically proved by filing necessary evidences of approval granted by the prescribed authority and also returns filed annually to the prescribed authority to justify the expenditure incurred towards R&D expenditure. In our considered view, the competent authority has to decide whether a particular expenditure is eligible for deduction u/s 35(2AB) of the Act or not, but not the assessing officer. In the present case, the A.O. without following the due procedure laid down under the provisions of the Act and rules there under, simply disallowed the expenditure claimed by the assessee. Therefore, we direct the A.O. to allow the weighted deduction claimed by the assessee under the provisions of section 35(2AB)(1) of the Act. 21. The next issue that came up for our consideration is disallowance of direct expenses for non-deduction of tax at source under the provisions of section 194C of the Ac....
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....g the ratio of the coordinate bench, we are of the view that no disallowance can be made u/s 40(a)(ia) of the Act, for the amounts which have been already paid during the financial year. However, the facts relating to paid and payable are not emerging from the records, therefore, we set aside the issue to the file of the A.O. and direct the A.O. to examine the issue paid and payable with reference to books of accounts of the assessee and if the expenditure incurred by the assessee is paid within the same financial year, then the A.O. is directed to delete the additions made u/s 40(a)(ia) of the Act. In other words, the A.O. is directed to restrict the disallowances to the extent the amount remaining payable at the end of the financial year. 23. The next issue that came up for our consideration is disallowance of bank guarantee charges under the provisions of section 40(a)(ia) of the Act for non-deduction of TDS u/s 194H of the Act. The ld. A.R. for the assessee, at the time of hearing submitted that this issue is covered by the decision of ITAT, Visakhapatnam in assessee's own case for the assessment year 2009-10 and submitted that the coordinate bench of this Tribunal, under si....