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TMI Blog2014 (12) TMI 838X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) of the Act and the order in respect of the reassessment order passed by the learned A O under section 143(3) read with section 147 of the Act." The objections raised in ground no.2 in our view cannot be sustained as there is no bar for the Commissioner of Income-tax (Appeals) to pass a consolidated order. In any event doing so will not render the initiation of reassessment proceedings illegal or void. 4. Ground no.4 raised by the assessee reads as follows : "4. The learned CIT (A) has erred in law and in fact in not appreciating that the re-assessment order was passed by the learned A O beyond a period of four years from the end of the relevant assessment year although scrutiny assessment proceedings were carried out earlier in the case of the Appellant and there was no failure on the part of the Appellant to truly or fully disclose all material facts and hence the reassessment order passed by learned Assessing Officer was time barred in light of the proviso to section 147 that inter alia provides that no action can be taken beyond a period of four years from the end of the relevant assessment year." 5. As far as ground no.4 is concerned, we are of the view that the grievance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded Sales-tax and Excise duty from the Export turnover while computing deduction u/s.80HHC of the Act. 8. In the reasons recorded for reopening the assessment (copy of which is at page nos.141 to 143 of the assessee's paper book), the Assessing Officer has recorded the fact that the assessee had claimed deduction u/s.35(2AB) of the Act, which allows a company engaged in the business of biotechnology deduction of expenditure, including expenditure of a capital nature, on scientific research or on creating an in-house research and development facility approved by the prescribed authority. The deduction allowed is a sum equal to one and half times of the expenditure so incurred. Similarly, the assessee had also claimed deduction u/s.10B of the Act in respect of its unit known as 'BCZ'. According to the Assessing Officer while claiming deduction u/s.10B of the Act, the assessee should have considered the deduction u/s.35(2AB) of the Act and the profits of 10B unit should have been arrived at after such deduction. Failure on the part of the Assessee do so has resulted in the deduction u/s.10B of the Act being allowed at a higher sum and the other taxable income of the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the omission to form an opinion in the original assessment on the basis of existing material then, cannot be termed as change of opinion. The Hon'ble Court held that for reopening assessment, it is not necessary that the information must be derived from external source of any kind or that there must be disclosure of new and important matters, subsequent to original assessment. Where income liable to tax has escaped in the original assessment due to oversight and inadvertence or a mistake committed by the AO, then he has jurisdiction to reopen the assessment. 11. In the light of the aforesaid judicial pronouncement of the Hon'ble Karnataka High Court, we are of the view that the argument advanced by the ld. counsel for the assessee that initiation of reassessment proceedings us/. 147 of the Act is on a change of opinion and therefore not valid, cannot be accepted. Consequently grounds No.3, 4 & 6 are dismissed. 12. Grounds 7 to 12 raised by the assessee are with regard to disallowance of deduction claimed by the Assessee while computing income from business expenditure incurred on Employee stock option plan amounting to Rs. 3,38,63,779. On the above issue, we fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 10B of the Act. Disallowance of deduction under section 35(2AB) of the Act in respect of ESOP expenses 15. The learned CIT(A) erred in law and in fact in upholding the disallowance of Rs. 1,692,952 being fifty percent of the ESOP expenditure of Rs. 3,385,904 considered for deduction under section 35(2AB) of the Act. 16. The learned CIT(A) erred in law and in fact by upholding the action of the AO of relying on the assessment order for assessment year 2005-06 in disallowing expenditure incurred in connection with ESOP expenses while computing deduction under section 35(2AB) of the Act." 14. To understand the issue that arises for consideration in the aforesaid grounds, some factual details need to be narrated. As we have already seen, the assessee is a manufacturer of enzymes and pharmaceutical ingredients. Under section 35(2AB) of the Act, if an assessee which is engaged in the business of biotechnology or in the business of manufacture of production of any drugs, pharmaceuticals; incurs any expenditure on scientific research or in-house research & development facility as approved by the prescribed authority, then there shall be allowed deduction of a sum equal to 150% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o were engaged in scientific research on which deduction u/s. 35(2AB) of the Act had been claimed at 150%, while allowing deduction u/s. 35(2AB) of the Act. The expenditure on ESOP had been disallowed in the assessment completed u/s. 143(3) of the Act on the ground that the liability of the assessee did not crystallize during the previous year relevant to A.Y. 2003-04. The weighted deduction allowed to the assessee u/s. 35(2AB) of the Act had therefore to be worked out by the AO in the reassessment proceedings because while allowing deduction u/s. 35(2AB) of the Act, the expenses on ESOP in respect of employees engaged in scientific research of Rs. 33,85,904 had not been excluded. 18. Going by what the AO says as above in the order u/s. 148 of the Act, the AO should have excluded 150% of Rs. 33,85,904. The AO has, however, added only 50% of Rs. 33,85,904 in the computation of total income in the order u/s. 148 to the total income computed as per the order u/s. 143(3) of the Act. The reason, as we could see, is that Rs. 3,38,63,779 which was claimed as deduction on account of ESOP expenses which include Rs. 33,85,904 being ESOP expenses on employees engaged in scientific research h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has to be disapproved. 23. We are of the view that the CBDT Circular cannot obliterate the interpretation of a provision by the Hon'ble High Court. Therefore, the decision of the Hon'ble Karnataka High Court in the case of Yokogawa (supra) will continue to be followed as a binding precedent. The Circular referred to by the ld. counsel for the assessee cannot also be said to be a benevolent Circular, inasmuch as treating the provisions of section 10A/10B as a deduction provision results in hardship to the assessee, especially in the context of set off losses of non-10A/10B units against the profits of 10A/10B unit before allowing deduction u/s. 10A/10B of the Act. The same Circular could turn out to be a benevolent circular when there is loss in the 10A/10B unit against taxable income of non-10A/10B unit. In this scenario, it would be most appropriate to follow the binding decision of the Hon'ble High Court of Karnataka in the case of Yokogawa (supra). The Hon'ble Karnataka High Court in the case of Yokogawa (supra) noticed that deduction u/s. 10A/10B of the Act has to be allowed from the "total income" and not while computing total income. The Hon'ble Court also noticed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l by the revenue, while ITA 369/10 is an appeal by the assessee. Both these appeals are directed against the order dated 13.11.2009 of the CIT(Appeals), LTU, Bangalore relating to A.Y. 2004-05. ITA 248/2010 (Revenue's Appeal) (AY 04-05) 29. We will first deal with the appeal by the revenue. The grounds of appeal raised by the revenue reads as follows:- "1. The order of CIT(A), LTU is opposed to law and facts of the case. 2. The order of the CIT(A) has erred in allowing deduction on expenditure u/s 35(2AB) on such idle assets which are not commissioned during the year 3. The CIT(A) has allowed the deduction on expenditure u/s 35(2AB) even the assessee did not furnish concrete evidence regarding commissioning of the machine & carrying out the research activity during the year using those machines. 4. The CIT(A) has allowed the deduction u/s 35(AB) on acquiring assets which is not used in the research activity during the year. Unless, the research is carried out using the assets deduction can not be allowed on such an acquisition. 5. For these and such other grounds that may be urged at the time of hearing of appeal it is humbly prayed that the order of the CIT(A) be set aside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X 150%] u/s. 35(2AB) of the Act. 32. On appeal by the assessee on the aforesaid disallowance, the CIT(Appeals) after making a reference to the provisions of section 35(2AB) of the Act held that section 35(2AB) speaks of : (i) Development of facilities; (ii) Incurring of expenditure by the appellant for development of such facilities; (iii) Approval of facility by the prescribed authority, which is 'DSIR'; (iv) Allowance of weighted deduction on the expenditure so incurred by the appellant. According to the CIT(A) from a plain reading of the Section it was clear that it contemplates only developing facility, which presupposes incurring expenditure in this behalf and filing application to the prescribed authority who, after following the proper procedure, will approve the facility. In such an event the Assessee will be entitled to weighted deduction in respect of all expenditure so incurred. The provision nowhere suggests or implies that machinery will be acquired, installed and commissioned before the expiry of the relevant previous year. He also held that the provision postulates approval of 'R & D' facility, which implies that a development facility shall be in existence whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch inclusive of capital expenditure. The revenue refused to allow deduction u/s. 35 of the Act in respect of capital expenditure on construction of a building on the ground that the construction of the building was not over and building was not put to use during the previous year. On the above facts, the Hon'ble Gujarat High Court held as follows:- "The object behind the enactment of s. 35 is to encourage research and development activities by the assessee. As an incentive, the legislature has given this benefit by way of deduction in respect of the capital expenditure incurred by the assessee. This is a provision for the benefit of the assessee and if the assessee incurs capital expenditure for the purpose of research and development during the relevant previous year, the Revenue should not deprive the assessee of the benefit of deduction under the provisions of s. 35 even if the asset is not put to use for research and development. It is a settled legal position that the provision for exemption or relief should be construed liberally and in favour of the assessee. If the section is interpreted in the manner suggested by the Revenue, the assessee would be deprived of the benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only when construction of the asset is completed and it would not be open to him to claim deduction in respect of expenditure incurred during the earlier previous years because looking to the provisions of s. 35 the assessee can avail the benefit of deduction of the amount of expenditure incurred only during the previous year and not for the earlier period unless his case is covered under the provisions of an exception to s. 35(2)(ia). For the reasons stated hereinabove, the Tribunal was right when it confirmed the order passed by the CIT(A) who had deleted the disallowance." 35. In the case of Belpahar Refractories Ltd. (supra), the Hon'ble Orissa High Court held that expenditure incurred during the previous year is eligible for deduction u/s. 35 of the Act and the fact that the liability in respect of expenditure incurred during the previous year was discharged by the assessee by actual payment in a subsequent assessment year cannot be the basis to deny the claim of the assessee for deduction u/s. 35 of the Act. 36. In view of the aforesaid judicial pronouncements which are rendered in the context of section 35(2) of the Act, the wordings of which are in pari materia to that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.Y. 2003-04. For the reasons stated therein, grounds No. 8 & 9 are dismissed, while ground No.10 is treated as partly allowed for statistical purposes to determine the quantum of expenses to be disallowed. 41. In the result, the appeal by the revenue is dismissed, while the appeal by the assessee is partly allowed for statistical purposes. ITA 370/Bang/2010 (Assessee's appeal for AY 05-06) 42. In this appeal, the grounds No. 1 to 10 raised by the assessee against the order dated 13.11.2009 of the CIT(Appeals), LTU, Bangalore for the A.Y. 2005-06 are identical to the grounds raised by the assessee in ITA No.369/Bang/2010 for the A.Y. 2004-05. For the reasons stated therein, ground No.1 is general in nature and does not call for any specific adjudication. Grounds No. 2 to 7 are allowed for statistical purposes. Grounds 8 & 9 are dismissed. Ground No.10 is partly allowed for statistical purposes. 43. Ground Nos.11 & 12 raised by the assessee were not pressed and therefore, they are dismissed as not pressed. 44. Ground No.13 with regard to levy of interest u/s. 234C and 234D is purely consequential and the AO is directed to give consequential relief. 45. In the result, the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls for no specific adjudication. 55. Ground Nos.2 to 7 are identical to grounds No.2 to 7 raised by the assessee in ITA No.369/B/2010. For the reasons stated therein, these grounds are treated as allowed for statistical purposes. Ground No.8 is identical to ground No.10 decided in ITA No.369/B/2010 for the A.Y. 2004- 05. For the reasons stated therein, this ground of appeal is treated as partly allowed for statistical purposes. 56. Ground Nos. 9 to 14 raised by the assessee reads as follows:- "Denial of carry forward of unabsorbed depreciation 9. The learned CIT(A) has erred in law and in fact in denying the benefit of carry forward of unabsorbed depreciation in respect of the amount of Rs. 1,012,203,277 as reflected by the appellant in its return of income. 10. The learned CIT(A) has erred in law and in fact in holding the Assessing Officer's order that the loss of Rs. 1,012,203,277 sought to be carried forward represents relief under section 10B of the Act in excess of total income. 11. The learned CIT(A) has erred in fact in holding that the unabsorbed depreciation and loss proposed to be carried forward by the Appellant pertains to Units eligible for relief under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore effect will have to be given to the provisions of section 72 of the Act, even in respect of profits of the 10B unit. Accordingly, the claim of the assessee for carry forward of loss of non-10B unit was not allowed by the AO. 60. On appeal by the assessee, it was contended that the provisions of section 10A and section 10B are exemption provisions and therefore the profit of 10A and 10B units will not enter the computation of total income at all and therefore the profits of these units need not be set off against the loss of non-10B unit by invoking the provisions of section 72 of the Act. 61. The CIT(Appeals) did not agree with the contention of the assessee and in doing so, he placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Himatsingike Seide Ltd., 286 ITR 255 (Kar). In the aforesaid decision, the Hon'ble High Court has taken the view that deduction u/s. 10B has to be allowed after set off of unabsorbed depreciation and unabsorbed investment allowance. The Hon'ble Court took the view that the aforesaid provision was only an exemption provision. The CIT(Appeals) noticed that the aforesaid decision was followed by the ITAT Bangalore Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. The Hon'ble Court noticed that Sec.10- A(1) of the Act (which is in pari materia with Sec.10-B of the Act) read as follows: "10B. Special provisions in respect of newly established undertaking in free trade zone etc.,-(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the Previous-year in which the under-taking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :" (emphasis supplied) 64. The expression "Deduction" and "shall be allowed from the total income of the Assessee" used in the aforesaid provisions was considered by the Hon'ble High Court and it held in para 13 to 15 of its judgment that the expression " shall be allowed from the total income of the Assessee" does not mean total income as defined u/s.2(45) of the Act but that expression means "profits and gains of the STP undertaking as understood in its commercial sense or the total income of the STP unit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal and held that the brought forward depreciation had to be adjusted against the profits of the EOU before computing the exemption allowable u/s 10B. In Civil Appeal No.1501 of 2008 dated 19.9.2013 against the aforesaid decision of the Hon'ble Karnataka High Court, the Hon'ble Supreme Court observed as follows while dismissing the appeal:- "Having perused the records and in view of the facts and circumstances of the case, we are of opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly." 67. Thus the ratio has to be confined to the facts and circumstances of the case. The aforesaid observations have to be confined to the facts of that case and as applicable to a case where brought forward losses and depreciation of the very same STP undertaking are not adjusted while arriving at the profits of the 10B unit for allowing deduction u/s.10A/10B of the Act and not in respect of brought forward losses and depreciation of other undertakings/non-10A/10B units. S. 10A/10B(6) as amended by the FA 2003 w.r.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 & onwards is eligibl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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