TaxTMI 
TaxTMI 
2017 (10) TMI 371
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.... section 263 of the Act to modify the assessment order under section 143(3) of the Act for disallowing the claim Under Section 35 of the Act be held ab-initio and / or otherwise void and bad-in-law. 3. Briefly the facts are, assessee a domestic company, is engaged in the business of manufacture and sale of organic chemicals. For the assessment year under dispute assessee filed its return of income on 22.10.07 declaring loss of Rs. 11,32,03,970/- under normal provisions and book profit of Rs. Nill Under Section 115JB. The assessment in case of the assessee was completed Under Section 143(3) r/w section 144(C) of the Act vide order dated 25.01.2011. 4. After calling for and examining the assessment records of the assessee for the impugned assessment year, learned CIT (LTU) being of the view that the Assessment Order passed is erroneous and prejudicial to the interest of the revenue on account of allowance of assessee's claim of deduction of capital expenditure amounting to Rs. 1,24,87,064 Under Section 35(1)(iv) of the Act, exercised his power Under Section 263 of the Act, by issuing a show cause notice to the assessee calling upon it to explain why the Assessment Order should not ....
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....t obtained from research is not sold to the parent company, rather, is used to enhance its own products. He submitted, the assessee does not carry research on job work or contract basis as it is engaged in product manufacturing and selling activities. He submitted no production is undertaken by the parent company on the basis of the reports of the assessee. No formulation is formed on basis of the order placed by the parent company. He submitted, for claiming deduction Under Section 35(1)(iv) of the Act there is no express condition that the assets should be owned by the assessee. He further submitted the deduction Under Section 35(1)(iv) of the Act is allowable even if benefit is availed by a third party. Only condition being, expenditure incurred on R&D activities should be related to the business. To lay emphasis on his contentions, Ld.AR took us through various documentary evidences submitted in the paper book, such as audited financial accounts, approval of its R&D unit as well as agreement with the parent company for carrying out R&D activities. He also relied upon the following decisions: - (i) Indian Telephone Industries Ltd v. IAC (10 ITD 338) Bangalore Tribunal) (ii) ....
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....lly and patiently heard the rival contentions and perused the material on record. We have also applied our mind to the decisions relied upon by both parties. The core issues which arise for consideration before us are whether CIT was justified in exercising his jurisdiction Under Section 263 of the Act and secondly whether assessee's claim of deduction Under Section 35(1)(iv) of the Act is permissible. As far as the first issue is concerned, on perusal of the Assessment Order passed Under Section 143(3) of the Act we have noted that, there is no observation of the Assessing Officer on the issue relating to assessee's claim of deduction Under Section 35(1)(iv) of the Act. Moreover, nothing has been brought on record to demonstrate that in course of the assessment proceedings the Assessing Officer has either examined or enquired into the issue relating to claim of deduction Under Section 35(1)(iv) of the Act. At least, no documentary evidence have been brought to our notice by the Ld.AR to indicate that the Assessing Officer has either raised any query or in any other manner has enquired into the deduction claimed Under Section 35(1)(iv) of the Act. Notably, the assessee itself in it....
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....urred on R&D activities carried on for the parent company. It is very much clear from the audit financial statements of the assessee, it has not claimed any deduction on account of revenue expenditure on R&D in respect of its own business. Whereas, the entire capital expenditure on R&D activities has been claimed as deduction Under Section 35(1)(iv) of the Act on the plea that it relates to it's own business. We fail to understand when the assessee has not claimed any revenue expenditure on R&D for its own business, how the capital expenditure on R&D can relate to its business. As could be seen, assessee on 01.01.2003 had entered into a research and development agreement with SI Group US which is engaged in the development and manufacture of chemical products. For developing new products and enhancing quality continuous R&D activity is required. Since, the assessee has the facilities for research and development of new and enhanced chemical products, SI Group US entered into a research and development agreement which was subsequently renewed vide agreement dated 01.01.2007. As it appears from the terms of the said agreement, the assessee is to render research and development servic....
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....business of the parent company logically it must follow that the capital expenditure on R&D also belongs to the parent company. The assessee cannot blow hot and cold at the same time by claiming capital expenditure on R&D on its own account and revenue expenditure on R&D in the account of its parent company. In any case of the mater, the assessee has not brought any evidence before us to conclusively prove that the capital expenditure claimed a deduction Under Section 35(1)(iv) of the Act is related to R&D activities carried on for assessee's own business. In that view of the matter, one of the conditions of the section 35(1)(iv) of the Act is not fulfilled. In other words, the assessee has failed to prove that the scientific research in relation to which capital expenditure was incurred is carried on for assessee's own business. That being the case, assessee is not eligible to claim deduction Under Section 35(1)(iv) of the Act. Resultantly the Assessing Officer was in error while allowing deduction claimed Under Section 35(1)(iv) of the Act which has caused prejudice to the revenue. Therefore, CIT was justified in revising the Assessment Order by invoking his powers Under Sect....