TMI Blog2014 (2) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... at the belief that on the basis of the material which he had before him income had escaped assessment. The reasons recorded for initiating proceedings u/s 147 of the Act is not a valid reason as there is no tangible material before the Assessing Officer for coming to believe that income has escaped assessment - The Assessing Officer has merely adopted the reason for denial of exemption u/s 10B for the assessment year 2006-07 for initiating action u/s 147 of the assessment year which is not valid – thus, the initiation of proceedings u/s 147 of the Act is without authority of law and consequently the assessment order passed u/s 143(3) read with section 147 of the Act is also invalid in law and quashed – Decided in favour of Assessee. Denial of exemption u/s 10B of the Act – Profits derived from Medicinal Chemistry and Clinical Pharmacology Division – Requirement of production of article or thing or computer software – Held that:- The assessee had given up its claim in respect of the disallowance of exemption u/s 10B of the Act by not pressing the ground before the CIT (A) - Relying upon National Thermal Power Company Limited Versus Commissioner of Income-Tax [1996 (12) TMI 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) The CIT (A) grossly erred in law in denying exemption u/s 10B of the Act on the profits derived from Medicinal Chemistry Division and Clinical Pharmacology Division on the ground that there is no production of article or thing or computer software and therefore not eligible for deduction u/s 10B of the Act. (b) The CIT (A) ought to have seen that the appellant is a 100% EOU and its medicinal chemistry division and clinical pharmacology division are engaged in the production of articles or things or computer software and therefore the profits derived from the said divisions are eligible for deduction u/s 10B of the Act. 3. For all of the above and such other grounds as may beurged at the time of hearing it is most respectfully prayed that this Hon ble Tribunal may be pleased to allow the appeal and suitable directions be given to the Assessing Officer to allow the claim of the appellant in the interest of justice. Subsequently on 23-5-2013, the assessee moved petition seeking permission to raise the following additional grounds:- Ol. The learned Commissioner of Income Tax (Appeals) ought to have appreciated that the re-assessment proceedings initiated u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n u/s 10A and section 10B of the Act. The assessee was subjected to scrutiny assessment proceedings and assessment order u/s 143 (3) was passed on 31-12-2007 by the Assessing Officer accep ting the income returned after allowing deduction u/s 10A and 10B of the Act. However, subsequently action u/s 147 was initiated by the Assessing Officer by issuing a notice dated 29-5-2007 u/s 148 of the Act. As per the reasons communicated to the assessee, the assessment was reopened for the reason that in the scrutiny assessment for the assessment year 2006-07 deduction claimed u/s 10B for medical chemistry division and clinical pharamacology were denied. Since the same fact has been prevailing for the assessment year 2005-06 the assessee is not eligible for deduction u/s 10B in respect of medicinal chemistry and clinical pharmacology division and consequently the taxable income to the extent of Rs.2,83,95,994/- had escaped assessment. 6. In the course of assessment proceedings, the assessee submitted that the company s medicinal chemistry division is engaged in manufacture of R D services (Scientific consulting and contract research in the areas of informatics, chemistry and biology) requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ples are analysed under different methods on LCMS machines for arriving at the conclusions. At final phase, all the data will be collected from clinical and bioanalytical departments and a final report on the study will be prepared. It was there fore contended that various processes are conducted in the above two divisions, manufacturing/producing drugs and generating reports in the areas of informatics, chemistry and biology for producing drugs for their clients and exporting the same. Hence the reports generated by them can be classified as an article or a thing . It was further contended that they are exporting the reports in the form of hard copies and the product/drug manufactured is also exported and delivered to their clients abroad. In support of such contention, the assessee relied upon a decision of Income-tax Appellate Tribunal,Hyderabad Bench in the case of MBL Research and Consultancy Group Pvt. Ltd. Vs. JCIT (107 ITD 438). The Assessing Officer after considering the submissions of the assessee however did not acceptit for the reason that deduction u/s 10B of the Act is allowable only to that undertaking which is manufacturing or producing an article or thing or com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings to disallow the claim u/s 10B of the Act merely because in the succeeding assessment year 2006-07 the Addl. CIT, Range-2 had taken a view that the assessee was not entitled for deduction u/s 10B of the Act in respect of medicinal chemistry division and clinical pharmacology division. He therefore submitted that the Assessing Officer had initiated reassessment proceedings only at the behest of a higher authority by borrowing the satisfaction from his higher ups without proper application of mind. Therefore, it can be said that the Assessing Officer had not formed his own opinion that income had escaped assessment. It was therefore submitted that the powers which are conferred upon the Assessing Officer have to be exercised by the Assessing Officer alone and the satisfaction of the Assessing Officer cannot be substituted with that of the higher authority. In support of such contention, the learned authorised representative for the assessee relied upon the following decisions:- (i) ACIT vs. Resham Petrotech Ltgd. (136 ITD 185 (Ahd.Trib) (ii) CIT Vs. SFIL Stock Broking Ltd. (325 ITR 285 (iii) Jay Bharat Maruti Ltd. Vs. CIT (324 ITR 289 (iv) CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvoking the provisions section 147 of the Act on considering the same set of facts on a mere change of opinion In support of such contention, the learned authorised representative for the assessee has relied upon the following decisions:- (1) CIT v. Foramer France {2003 1264 ITR 66 (SC) (2) CIT v. Kelvinator of India Ltd. and Eicher Ltd. reported in {20101 320 ITR 561 (SC). (3) Gujarat Power Corporation Ltd. v. Asst. CIT reported in {20131 350 ITR 266 (Guj); {2012 177 DTR (Guj) 89. (4) CIT v. Usha International Ltd. reported in {2012 1348 ITR 485 (Delhi) {FBI 5) Ashwamegh Co-operative Housing Society Ltd. v. Dy. Commissioner of Income-tax another 353 ITR 413 (Guj. High Court) (6) Asteroids Trading Investment P. Ltd. vs DCIT(2009)308 ITR 190 (Bom)(193) No new material brought on records - Reassessment on change of opinion of officer not valid. (7) Asian Paints Ltd. v. DCIT (2008) 308 ITR 195 (Bom) (198) Mere change of opinion of A.O. not ground for reassessment (8) ICICI Prudential Life Insurance Co. Ltd. (2010) 325 ITR 471 (Bom) Re-opening of assessment on the same ground in the absence of any tangible material was based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paper book filed by the assessee. We have also carefully applied our mind to the judicial preceden ts placed before us by the parties. There is no dispute to the fact that the assessee in the return filed has claimed deduction u/s 10B of the Act which is supported by an audit report submitted in Form No.56G of the Act. It is also a fact that the Assessing Officer after causing necessary enquiry has completed the assessment u/s 143(3) of the Act accepting the income returned by the assessee. The reasons recorded for reopening of the assessment, a copy of which as communicated to the assessee is at page-16 of the paper book, reads as under:- Office of the Assistant Cormmissioner of Income Tax, Circle-2(2), 8tllFloor, B Block, ITTowers. A.C.Guards, Hyderabad. F.No.ACIT-2(2)/G-144/10-11 Date :07-10..201O. To The Principal Officer, M/s.GVK Bio Sciences Pvt.Ltd., NO.210, My Home Tycoon, 6-3-1192, Kundanbagh, Hyderabad-500 106. Sir, Sub:-I.T.Assessment u/s.143(3)-A.Y.2005-06---Your own-Rag. Ref:-Your Director(Finanace)letter dated 1.7.2009. @@@@ Please refer to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng but a replica of the assessment order passed for asst. Year 2006-07 in the case of the assessee by the Addl. CIT, Range-2. The Assessing Officer has reproduced verbation the findings of the Addl. CIT recorded in the assessment order passed u/s 143(3) of the Act for the assessment year 2006-07. Thus, on perusal of the assessment order, it becomes clear that the reopening of the assessment has been made not on the basis of any fresh tangible material available on record but merely on the basis of the assessment made for the assessment year 2006-07. The Assessing Officer has not shown any reason of his own as to why a different view has to be taken so far as the issue of section 10B of the Act is concerned, then what has been taken in the original assessment on the same sets of facts when there is no fresh tangible material available be fore the Assessing Officer. The Hon ble Supreme Court in the case of CIT vs. Kelvinator India Ltd. (320 ITR 561) held as under:- 4. On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987 ,re-opening could be done under above two conditions and fulfilment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Offiler.lt was pointed out that the meaning of the expression, reason to believe had been explained in a number of court rulings in the past and 'as well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion, To allav these fears, the Amending Act, 1989 , has again amended section 147 to reintroduce the expression 'has reason to believe' in place of the words 'for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same," 17. The ratio laid down by the Hon ble Supreme Court thus is to the effect that unless there is tangible material in the possession of the Assessing Officer to come to a conclusion that there is escapement of income, the reopening of assessment on the same set of facts which are available at the time of original assessment proceedings would amount to reopening of the assessment on a mere change of opinion. The Hon ble Delhi High Court in the case of CIT vs. Usha International Ltd. (348 ITR 485) and Hon ble Gujarat High Court in the case of Gujarat Power Corporation (350 ITR 266) also held similar vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be a reason to reopen the assessment unless there is strong reason to believe on the basis of fresh tangible material available before the Assessing Officer that income has escaped assessment. Therefore, considered in the light of the ratio laid down in the various judicial precedents referred to hereinabove, we are of the view that the reasons recorded for initiating proceedings u/s 147 of the Act is not avalid reason as there is no tangible material before the Assessing Officer for coming to believe that income has escaped assessment. The Assessing Officer has merely adopted the reason for denial of exemption u/s 10B for the assessment year 2006-07 for initiating action u/s 147 of the impugned assessment year which in our considered opinion is not valid. We therefore hold that the initiation of proceedings u/s 147 of the Act is without authority of law and consequently the assessment order passed u/s 143(3) read with section 147 of the Act is also invalid in law and accordingly we quash the same. The grounds raised by the assessee are thus allowed. 19. In the result, the appeal filed by the assessee stands allowed. ITA No.1276/Hyd/2010 pertaining to assessment year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 143(3) of the Acct and since the finding of the Assessing Officer on the issue in dispute is verbation the same, we do not feel it necessary to discuss them over again in this appeal. 21. The assessee being aggrieved of the assessment order preferred an appeal before the CIT (A). In course of hearing before the CIT (A), the assessee however did not press the ground with regard to denial of exemption u/s 10B of the Act. The CIT (A) therefore dismissed the ground by observing as unde r: During the hearing of appeal, the learned authorized representative for the assessee submitted that the appellant does not press for ground No.2. Accordingly, the said ground is dismissed as not pressed. 22. The learned departmental representative raiseda preliminary objection against entertaining the aforesaid ground by submitting that since the assessee has not pressed this ground before the CIT (A), it cannot be entertained now. The learned authorized representative for the assessee countering the objection of the learned Departmental Representative submitted that the assessee had not pressed this ground of appeal before the CIT (A) on a mistaken view of the matter, hence it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, the issue raised in the present ground is not purely aquestion of law but involves appreciation of facts and evidences. The jurisdictional High Court in case of A.K. Babukhan Vs.CIT (102 ITR 757) while considering the issue of production of additional evidence before Tribunal has held that the discretion to receive the additional evidence is to be exercised only when any point is required to be cleared in the interests of justice and this power given to the Tribunal has to be exercised cautiously and sparingly in order to advance interest of justice. The Hon ble jurisdictional High Court further held that rule 29 is not intended to allow an assessee who has been unsuccessful through out to patch up weak parts or to fillup omissions. Undisputedly, in the present case, the facts on record clearly reveal that the assessee has consciously given up its claim u/s 10B of the Act by not pressing the ground before the CIT (A). Therefore, in the aforesaid circumstances, we do not find any merit in the assessee s contention for entertaining the issue raised again in the aforesaid ground which is accordingly dismissed. 24. In ground No.3(a) and 3(b), the assessee assailed the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in scientific research and development activities in the field of drug discovery, bio-informatics, bio-technology, life sciences, bio- sciences leading to technology development, improvement of technology. Further referring to Rule 18DA(1)(f) , it was submitted that the assessee has filed the annual returns along with statement of accounts and annual reports within 8 months fromthe close of the three accounting years i.e. financial year ended on 31-3-2006,31-3-2007 and 31-3-2008. The assessee submitted that it is not selling any prototype or output from their laboratories and the main objects are not altered after approval of DSIR. 25. It was submitted that the assessee has system of monitoring and maintaining the cost details, project wise as required underrule 18DA(2)(d). Referring to section 80IB(13) read with section 80-IA(5). It was submitted that the assessee has calculated the quantum of deduction under this section by treating the eligible business as the only source of income. Further referring to section 80IB (13) read with section 80IA (9), it was submitted that no deduction was claimed on the income from (1) clinical Pharmacology Unit and (2) Medicinal Chemistry Lab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee is for their services rendered only. So far as the clinical pharmacology division is concerned, the Assessing Officer submitted that the nature of work carried on by the assessee is that of carrying out test on human beings to find the efficacy of drugs, which is called as bio-availability and bio-equivalence. He further stated that the data so generated is forwarded to client companies and also analysed to arrive at a proper conclusion. The Assessing Officer observed that in this case the assessee is paid for carrying out the clinical experiments on human beings. He stated that the generation of physical data and its presentation cannot be called scientific research and development. It was submitted that as evident from the services agreement, the assessee is being paid for contract research services and the work contract research frequently used by the assessee could not be equated as carrying on scientific research and development, referred to in section 80 IB(8A) of the Act. The Assessing Officer stated that in the business of carrying on scientific research and development, profits of a company depends on success of research project undertaken. 27. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer further stated that the asses see does not have any own research project and whatever projects are only shown for other companies. The CIT (A) after considering the submissions of the assessee as well as the remand report of the Assessing Officer in the context of provisions contained u/s 80IB (8A) and Rules 18D and 18DA of Income-tax Rules held as under:- 8.6. However, I find that the company does not fulfill the requirements as per the above clauses. Referring to the above clause-(d), the appellant in its submissions, has merely submitted that they have a well formulated research and development programme and a periodic monitoring system of projects in hand. However, it has not been explained nor clarified as to how in their case there was a well formulated research programme with periodic monitoring system. No material or any document has been furnished for substantiating such submission. In absence of any supporting evidence in that regard, such contention cannot be accepted. Thus, I am of the view, the appellant does not have well formulated research and development programme comprising of time bound research and development projects with proper mechanism fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Rule-1SDA(2)(a). Under this clause, it says that the company shall sell any prototype or output, if any, from its laboratories or pilot plants with the prior permission of the prescribed authority. The appellant has submitted that it is not selling the prototype or output of the end product. It is selling only R D reports and conclusions drawn by the scientists. It is further submitted that for selling such reports and results,permissions are not necessary from the prescribed authority. However, such contention of the appellant is not acceptable. As per such submission of the appellant, various reports and conclusions drawn by their scientists are output in their case.Havin9 regard to the stipulation in Rule-18DA(2)(a), even for selling/transferring the same to the concerned MNCs, prior permission of the prescribed authority is necessary. Further, even though the appellant has submitted that for selling those reports permission is not necessary, no evidence has been filed in support of such contention. Under these circumstances, and since the appellant has sold/tra nsferred the output in their case to the MNCs, without prior permission from the prescribed authority, having no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of Hon ble Supreme Court in case of CIT vs. Bharti Cellular Ltd., reported in 330 ITR 239. 30. It is submitted that while interpreting the provisions of section 35(iii) of the Act which are in pari materia to the provisions of section 80IB (8A) of the Act different Courts have held that it is the duty of the prescribed authority to take a final decision on any controversy. It is submitted that in case of J.K. Synthetics Ltd. Vs. O.S. Bajpai (105 ITR 864), the Hon ble Allahabad High Court expressed that if the ITO does not accept the claim of the assessee u/s 35 of the Act, he has to refer the matter to the Board the Board in turn will make a reference to the prescribed authority. Neither the ITO nor the Board is competent to take a final decision on any such controversy. It was submitted that the aforesaid decision of Allahabad High Court was followed in alater decision of the Hon ble Supreme Court in case of Union of India vs. J.K. Synthetics Ltd. (199 ITR 14 (SC). It was submitted that in case of CIT vs. FCS International Marketing (P) Ltd. (283 ITR 32 ) the Hon ble Punjab Haryana High Court held that if any question arises u/s 35(3) as to whether and to what ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the CIT (A) having given a categorical finding to the effect that the assessee has not fulfilled the pre-condition for availing deduction u/s 80IB and 80I of the Act, the disallowance was justified. 33. We have considered the submissions of the parties and perused the materials on record including the documents submitted in the paper book. We have also applied our mind to the decisions relied upon by the parties. It is not disputed that the assessee has obtained approval from the prescribed authority as a research and development company for availing deduction u/s 80IB (8A) of the Act. However, such claim of deduction is subject to fulfilment of other conditions as prescribed u/s 80IB(8A) and Rule 18BA of I T Rules. While the assessee has claimed that it had fulfilled all the conditions and the prescribed authority could not have renewed the approval granted had there been any material to indicate that the assessee has not carried out research and development work, the statutory authorities were not justified in over-riding the approval granted by the prescribed authority and denying the claim of deduction u/s 80IB (8A). Whereas it is the conclusion of the CIT (A) that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not specifically withdrawn. In the appeal before us, admittedly there is no material on record before us to show that the approval granted by the assessee has been withd rawn by the prescribed authority. In the aforesaid circumstances, therefore the deduction claimed u/s 80IB(8A) cannot be denied to the assessee till such time the assessee is approved as research and development organisation by the prescribed authority. In aforesaid view of the matter, we set aside the order of the CIT (A) on this issue and direct the Assessing Officer to allow the claim of deduction u/s 80IB(8A) of the Act. We may further make it clear that this decision of ours, allowing assessee s claim of deduction u/s 80IB (8A) is on considering the facts involved in the present appeal and is confined to the assessment year under consideration before us and it cannot be construed to uniformly apply to the subsequent assessment years also The claim of deduction u/s 80IB(8A) of the Act for the subsequent assessment years will have to be decided on the basis of the facts as may be involved in those assessment years. 35. In the result, ITA No. 215/Hyd/12 is allowed and ITA No.1276/Hyd/10 is allowed in part. O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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