2026 (2) TMI 804

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....issues, however, while completing the fresh assessment in pursuance to the directions of learned PCIT, the Assessing Officer has made addition only with respect to the deduction claimed u/s. 10AA of the Act in respect of expenditure on Research and Development (R&D). 3. Keeping in view, the aforesaid submission of learned counsel for the assessee, we deem it appropriate to examine the validity of the impugned order passed u/s. 263 of the Act qua the disallowance/ addition made in respect of deduction claimed on account of R&D expenditure. 4. Briefly the facts are, the assessee is a resident corporate entity engaged in the business of providing Software and Digital Services to its customers. For the assessment year under dispute, the assessee had filed its return of income on 09.02.2021, declaring total income of Rs. 176,25,19,070/-, under normal provisions of the Act and book profit of Rs. 275,57,06,552/- u/s. 115JB of the Act. Subsequently, the assessee filed a revised return of income on 31.03.2021, declaring income of Rs. 169,58,36,070/- under normal provisions and book profit at Rs. 275,57,06,552/- u/s. 115JB of the Act. Assessee's case was selected for complete scrutiny.....

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.... after proper application of mind. The assessment order so passed cannot be considered as either erroneous or prejudicial to the interest of Revenue so as to empower the PCIT to revise it. Learned PCIT, however did not find merit in the submissions of the assessee. Ultimately, he concluded that while completing the assessment, the Assessing Officer had not enquired into and examined the issues in the manner in which, they were required to be examined. Therefore, in the opinion of learned PCIT, the assessment order is not only erroneous but prejudicial to the interest of Revenue requiring revision u/s. 263 of the Act. Accordingly, he passed the impugned order setting aside the order of assessment with a direction to the Assessing Officer to re-examine the issues, keeping in view the observations made by him in the order passed u/s. 263 of the Act. 6. While implementing the directions of learned PCIT as stated earlier, the Assessing Officer made addition only with regard to assessee's claim of deduction on R&D expenses by making proportionate allocation between eligible and non-eligible units. Whereas, on couple of other issue raised by learned PCIT, the Assessing Officer did not ....

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....cial to the interest of Revenue, merely because the decision of the Assessing Officer allowing assessee's claim of deduction in respect of R&D expenses is not acceptable to learned PCIT. 8. Drawing our attention to the provision contained u/s. 10AA of the Act, learned counsel submitted, language used is "profit derived from". He submitted, expression "derived from" has been interpreted by courts and Tribunal to mean that such profit must have direct first-degree nexus with the activities of the undertakings. In this context, he placed reliance on following decisions: - (i) Zandu Pharmaceuticals Works Ltd. vs. CIT, [2013] 31 taxmann.com 191 (Bombay). (ii) CIT vs. Torrent Pharmaceuticals Ltd. [2017] 88 taxmann.com 530 (Gujarat). (iii) Dr. Reddy's Laboratories Ltd. vs. DCIT, ITA No. 1844 to 1846/Hyd/2017 order dated 08.06.2018. (iv) Wockhardt Ltd. vs. The ACIT, ITA No. 6323/Mum/2010, order dated 13.04.2012. 9. Proceeding further, learned counsel submitted that the process of initiation of proceeding u/s. 263 of the Act is not an independent decision of the revisionary authority but purely based on audit objection. Thus, he submitted, since the....

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....es identified for enquiry/examination is expenditure incurred for exempt income, which covers exemption claimed by the assessee u/s. 10AA of the Act. Thus, the issue, which arises for consideration is, whether in course of assessment proceeding, the Assessing Officer has enquired into and examined the issue. On 11.11.2021, the Assessing Officer issued a notice u/s. 142(1) of the Act (copy placed at Page 95 of the paper book) with an annexure wherein the Assessing Officer specifically referring to the R&D expenditure of Rs. 5,56,51,192/- and called the assessee to furnish the breakup of the deduction along with documentary evidences to support the claim. Failing which, assessee should explain why the deduction claimed should not be disallowed. In response to the said query, the assessee furnished its reply on 23.11.2021 providing detailed breakup of R&D expenses of Rs. 5,56,51,192/- and justifying why deduction should be allowed. Thereafter, on 17.12.2021, the Assessing Officer issued another notice u/s. 142(1) of the Act directing the assessee to justify the deduction claimed u/s. 10AA of the Act. In response to the said notice, the assessee furnished the requisite reply. Further o....

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....roducts, processes and/or solutions, including developing an internal knowledge base for advancements of technical capabilities within the organization. As the SEZ units were engaged in similar activities, the R&D expenses of Rs. 556.51 lakh clearly provided both direct and indirect benefits to them. Hence, a reasonable apportionment based on turnover or another appropriate method should have been applied between SEZ and non-SEZ units. If these expenses were allocated to SEZ units, the profit of SEZ units, the eligible profit for deduction under section 10AA would have reduced, thereby increasing the taxable income. 5.3 In any case, the Assessing Officer has not at all verified the nexus of R&D expenditure to the activities of SEZ units and also the other units. The AO has simply failed to consider this issue and also not made any enquiry on this. The Assessing Officer has also failed to examine the allocation of various common expenses debited in head office to SEZ units resulting into the higher deduction being allowed to SEZ units. The Assessing Officer has simply accepted the working given in the form 56 F without making any enquiry or verification regarding the turnov....