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Deduction u/s 80-IB - Once the Approval is Granted by the Prescribed Authority it would No longer be Open for the AO to Verify the Satisfaction of the Conditions Prescribed under Rule 18DA in order to Refuse Deduction - Gujarat High Court Featured

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Approval under Rule 18D & Deduction u/s 80-IB Approval under Rule 18D & Deduction u/s 80-IB

Refusal of Deduction u/s 80-IB once approval is given under Rule 18D

1. Once the approval is granted by the prescribed authority and such approval is valid, it would no longer be open for the Assessing Officer to verify the satisfaction of the conditions prescribed under rule 18DA in order to refuse deduction under sub­ section (8A) of section 80­IB of the Act

2. Power of the Assessing Officer to verify the claim of deduction is not taken away. He can certainly verify the accounts and refuse deduction which does not form part of section 80­IB(8A)  and the income which does not arise out of the eligible business

FactsRefusal of Deduction

1. Court had framed the following substantial question of law :

“Whether the Income Tax Appellate Tribunal has substantially erred on facts and in law in holding that once the prescribed authority grants approval under sub­rule (2) of rule 18D of the Income Tax Rules, 1962, the revenue cannot deny deduction under section 80IB read with rules 18D and 18DA and thereby considering such grant of approval to be the sole requirement for granting deduction under section 80IB(8A)(ii) of the Act?” 

2. The respondent assessee is a company engaged in scientific research activities. For the assessment year 2008-­2009, the assessee had filed its return of income on 15.9.2008 declaring a total income of Rs.3.32 lacs

3. Such return was taken in scrutiny by the Assessing Officer during which the assessee's principal claim of deduction under section 80­IB(8A) of Income Tax Act, 1961 (“the Act” for short) came up for consideration

4. The Assessing Officer questioned the assessee regarding sample storage income of Rs.22.81 lacs, calling upon the assessee to show how such   income   was   derived   from   the   research   and development   activities

5. The assessee pointed out to the Assessing Officer   that   in   the   process   of   its   scientific research,   at   times,   the   assessee   is   requested   by   the customers to hold or store clinical samples collected from the volunteers for carrying out such research work, till the approval  is granted  by  the  approving  authorities

6. If the clinical data submitted is found inadequate, further study may also be required to be carried out. Since these are biological samples they are required to be stored in specific storage   conditions.   The   assessee   therefore,   charges   the respective customers for storage of such clinical samples and   the   income   therefore,   is   derived   from   the   research activities of the company

7. The Assessing Officer however, was not convinced. He gave detailed reasons to hold that the said income of sample storage was not derived from research and development activity and, therefore, could not form part of deduction under   section   80­IB(8A)   of   the   Act

8. Barring   this disallowance, the rest   of   assessee's   claim   of   deduction under section  80­IB(8A) of the Act was left undisturbed

9. The order of the Assessing Officer was taken in revision by the   Commissioner   prima   facie,   believing   that   the assessment was erroneous and prejudicial to the interest of the  Revenue  since  in the opinion  of  the  Commissioner, such   deduction   was   allowed   by   the   Assessing   Officer without verification of the eligibility of the assessee to claim the same

10. The Commissioner after hearing  the assessee passed order dated 26.3.2013 under section 263 of the Act and asked the Assessing Officer to make a fresh assessment

11. The assessee carried the matter in appeal before the Tribunal

12. The Tribunal by an order dated 19.7.2013 set aside the revisional order of the Commissioner and remanded the proceedings before the Commissioner for fresh consideration and disposal

13. The Commissioner thereupon passed fresh order dated 29.3.2014 and held that the assessee was not eligible to claim deduction under section 80­IB(8A) of the Act as it did not satisfy all the provisions listed in the said sub­section and rule 18DA  of Income Tax Rules, 1962 (“the Rules” for short

14. Against the order of the Commissioner, the assessee approached the Tribunal again

15. The Tribunal by order dated 31.7.2015 allowed the assessee's appeal

16. The Tribunal referred to and relied upon the decision of coordinate Benches of Bombay and Delhi Tribunal to come to the conclusion that the Revenue authorities cannot sit in appeal over the order of the prescribed authority

17. The Tribunal was of the opinion that the prescribed authority was an expert body exercising powers to grant approval for the purpose of deduction under section 80­IB(8A) of the Act and  the  Revenue  cannot  decline  the  deduction  ignoring such approval

18. It is this judgement of the Tribunal which the Revenue has challenged in this appeal before the Honb. High Court

19. Honb. Gujarat High Court decided the issue in favour of the Assessee

Adjudication

Decision of High CourtIn our opinion,  once  the approval is granted by the prescribed authority and such approval   is   valid,   it   would   no   longer   be   open   for   the Assessing Officer to verify the satisfaction of the conditions prescribed under rule 18DA in order to refuse deduction under   sub­section(8A)   of   section   80­IB   of   the   Act. This however, does not mean that other issues relevant to the claim of deduction by the assessee would be taken away from the jurisdiction of the Assessing Officer. We do not share   the   anxiety   of   the   counsel   for the   Revenue   that interpretation   that   we   have   adopted   would   divest   the Assessing Officer from examining any claim of deduction under   the   said   provisions   and   grant   deduction mechanically without verifying the claim. For example, in this very case, the Assessing Officer had doubt about the sample storage income being part of the income from eligible business. After hearing the assessee, he disallowed the deduction holding that the same does not form part of the income of the assessee's business of scientific research and development....

In the result, while answering the question in favour of the assessee, we clarify that the power of the Assessing Officer to verify the claim of deduction is not taken away. He can certainly verify the accounts and refuse deduction which does   not   form   part  of   section   80­IB(8A)  and  the income which does not arise out of the eligible business. He however,  cannot  ignore  the approval granted  by the prescribed   authority   and   hold   that   the   prescribed conditions are not fulfilled by the assessee.

Cases Referred to

1. Southern Technologies Ltd. v. Joint  Commissioner of Income ­tax (2010) 320 ITR 577(SC)

2. Gestetner   Duplicators   Pvt.   Ltd.   v. Commissioner of Income tax 1979(1) Taxman 1 (SC)

3. Indian Planetary Society v. Central Board of Direct   taxes  318  ITR 102  (BOM)

Additional Info

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