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TMI Blog2016 (6) TMI 853X X X X Extracts X X X X X X X X Extracts X X X X ..... 3/2016. 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(rounded off). 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. 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. 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. 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, cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s directed to pass a fresh assessment order after considering the issue involved and after allowing opportunity to the assessee as per law." In such order, the Commissioner had referred to following four conditions which had to be complied: That the company (i) is registered in India; (ii) has its main object the scientific and industrial research and development; (iii) is for the time being approved by the prescribed authority at any time after the 31st day of March, 2000 but before the 1st day of April 2007; (iv) fulfills such other conditions as may be prescribed; He agreed that the assessee had fulfilled conditions no.(i) and (iii) but failed to satisfy conditions no.(ii) and (iv). Interalia on such grounds, the Commissioner passed the said order. 6. Against the order of the Commissioner, the assessee approached the Tribunal again. The Tribunal by order dated 31.7.2015 allowed the assessee's appeal. 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. The Tribunal was of the opinion that the presc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rror in examining the very same aspects which the prescribed authority was required to consider while granting or extending approval. Counsel pointed out that the Revenue authorities had in fact, approached the prescribed authority for cancellation of the approval. However, by communication dated 20.3.2013, the prescribed authority refused to withdraw the approval giving detailed reasons. Counsel relied on the following decisions : 1) In case of Gestetner Duplicators Pvt. Ltd. v. Commissioner of Income tax reported in 1979(1) Taxman 1 (SC), in which the Supreme Court in the context of business expenditure under section 36(1)(iv) of the Act, regarding the company's contribution to provident fund held as under : "12. Dealing next with the second question it seems to us clear that having regard to our view on the proper construction of the expression 'salary' occurring in Rule 2(h) of Part A of the Fourth Schedule to the Act it must be held that the Tribunal was right in holding that the Provident Fund maintained by the assessee satisfied the condition laid down in Rule 4(c) of Part A of the Fourth Schedule and that question also must be answered in favour of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the requisite conditions for its recognition for that year; any other course is bound to result in chaos and uncertainty which has to be avoided." 2) In case of Indian Planetary Society v. Central Board of Direct taxes reported in 318 ITR 102 (BOM), in which Bombay High Court in the context of provisions of section 35 of the Act, for expenditure on scientific research observed that : "12. The other aspect of the matter is while considering application under section 35(1)(ii), the amendments have been made from time to time as set out in the earlier part of our order. The earlier prescribed authority were the organizations concerned with science and technology or Agricultural or medicine. In other words a body of persons who would be conversant with the subject. In so far as scientific research association is concerned, this has undergone various changes and now the power has been conferred on the Central Government. Even here we find that the Central Government whilst deciding the matter is empowered to make such inquiries as it may think necessary in this behalf. In our opinion, the application of mind in the absence of the person discharging the function having the experti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness for a period of ten consecutive assessment years, provided the company satisfies the four conditions mentioned therein. 11. Rule 18D of the Income Tax Rules, 1962 prescribes the authority for approval of companies carrying on scientific research and development and reads as under : "18D. (1) For the purposes of subsection (8A) of section 80IB, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India. (2) The prescribed authority shall initially grant approval to a company carrying on scientific research and development for a period of three assessment years and subject to satisfactory performance of that company on periodic review extend the said approval for a further period of three assessment years so that the total period of approval is for ten consecutive assessment years, beginning from the initial assessment year." Subrule( 1) of Rule 18D prescribes the Secretary, Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India ("DSIR" for short) as the authority for the purpose of subsection( 8A) of section 80IB. Subrule( 2) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up companies or companies related to its directors or majority of its shareholders; (b) any provisions of the Act or the rules have been violated, the prescribed authority specified may withdraw the approval so granted. (4) Every company referred to in subrule (1) shall make an application to the prescribed authority for the purposes of obtaining approval. (5) Every application referred to in subrule (4) shall be accompanied by- (a) memorandum of association and articles of association incorporating all amendments duly certified by the company secretary or managing director of the company; (b) annual report of the company for the last three years, if available; (c) photocopies of the memorandum of understanding relating to all ongoing and future sponsored research projects or programmes. 6) The prescribed authority may call for any information or document which may be necessary for consideration of the grant of approval under subrule (2) of rule 18D. (7) The prescribed authority shall grant approval within four months from the date of receipt of the application : Provided that where the approval is not granted, the decision of the said authority shall be communicated to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logical development, improvement of technology and transfer of technology developed by themselves. Clause (f) requires the company to submit the annual return alongwith statement of accounts and annual report within eight months after the close of each accounting year to the prescribed authority. Under subrule( 2) of rule 18DA every company which is approved under subrule (2) has certain obligations such as to sell any prototype or output from its laboratories or pilot plants with the prior permission of the prescribed authority. It has to intimate the change, if any, in its memorandum of association and articles of association relating to its main objects and forward the altered copy of its memorandum of association and articles of association to the prescribed authority. It would have to apply for extension of the approval, three months before expiry of the previous approval granted by the prescribed authority. It would also have to have a system of monitoring the cost of research and development projects. Under subrule( 3) of rule 18DA, the prescribed authority has the power to withdraw the approval if it is found that the approval granted was to avoid payment of taxes by its gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribed authority finds either that the approval granted to the company was to avoid payment of taxes by its group companies or companies related to its directors or majority of its shareholders or that there has been breach of any of the provisions of the Act or the Rules, the prescribed authority would be empowered to withdraw the approval. 17. Thus the statutory scheme envisages the prescribed authority as a body which can minutely examine all these highly technical and scientific requirements in case of a company. We may recall that the prescribed authority is the Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India. It has experts at its command in the field of scientific research to advise it on various extremely complex scientific issues which may arise while granting, extending or recalling the approval. In this context, the requirements contained in clauses (c) to (e) of subrule( 1) of rule 18DA would also have to be necessarily examined by the said authority. When these clauses refer to requirement of adequate infrastructure such as laboratory facilities, well formulated research and development programme and engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders or that any provisions of the Act or the Rules have been violated. Thus once again the task of judging whether the provisions of the Act or the Rules have been violated or not, has entrusted to the prescribed authority with matching powers for withdrawal of the approval, if the authority is satisfied about such breach. 19. The word 'may' used while empowering the prescribed authority, according to the counsel for the Revenue, would be of some significance. He contended that even if there has been a violation of the Acts and the Rules, the prescribed authority is not duty bound to withdraw the approval since the legislature has used the word 'may' and not 'shall'. According to him therefore, it would be open to the Assessing Officer to disallow the deduction on the ground of breach of the provisions of the Act and the Rules even if the prescribed authority has not withdrawn the approval on that basis. To our mind, this is not the correct position. Subrule( 3) is an enabling power empowering the prescribed authority to withdraw the approval, if it finds violation of provisions of the Act or the Rules. However, the Act and the Rules make various provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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