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THE PRINCIPAL COMMISSIONER OF INCOME TAX-1 Versus B.A. RESEARCH INDIA LTD

2016 (6) TMI 853 - GUJARAT HIGH COURT

Eligibility of deduction under section 80IB - whether 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? - Held that:- Once the approval is granted by the prescribed authority and such approval is valid, it would no longer be .....

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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 as .....

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L NO. 234 of 2016 - Dated:- 16-6-2016 - MR. AKIL KURESHI AND MR. A.J. SHASTRI, JJ. FOR THE APPELLANT : MR MANISH BHATT, SR COUNSEL WITH MS MAUNA M BHATT, ADVOCATE FOR THE OPPONENT : MR MUKESH M PATEL WITH MR RK PATEL WITH MR BD KARIA WITH MR JIGAR M PATEL WITH MR DARSHAN R PATEL ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. These appeals arise in similar background. While admitting these appeals on 30.3.2016, the Court had framed the following substantial question of law : Whether .....

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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 ₹ 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 .....

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tudy 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. 3. 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 a .....

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verification of the eligibility of the assessee to claim the same. 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. 5. The assessee carried the matter in appeal before the Tribunal. 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. The Commissioner there .....

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80IB(8A) and Rule 18DA. Since the Assessing Officer had allowed deduction u/s 80IB(8A) amounting ₹ 11.79 crores without thoroughly examining the requisite documents and conducting independent inquiry, there was substantial loss of revenue to the exchequer since the income of the assessee was assessed at a lower rate due to granting of excessive deduction. In light of these facts, it is held that the assessment order passed u/s 143(3) dated 31122010 for AY 200809 was erroneous and prejudic .....

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t 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 .....

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which the Revenue has challenged in this appeal. 7. Learned counsel Shri Bhatt for the Revenue contended that the approval from the prescribed authority is just one of the many conditions to be fulfilled before the assessee can claim deduction under section 80IB( 8A) of the Act. In the present case, the Assessing Officer without verifying satisfaction of such conditions, granted deduction. The Commissioner therefore, rightly exercised revisional poweRs. The Commissioner prima facie, found that n .....

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se of Southern Technologies Ltd. v. Joint Commissioner of Incometax reported in (2010) 320 ITR 577(SC), in which the Supreme Court held that the provisions made in the Companies Act allowing non banking financial companies to adjust a provision for possible diminution of value of the asset or for doubtful debt would not govern the manner in which the income should be taxed as per the Income Tax Act. 8. On the other hand, learned counsel Shri Mukesh Patel for the assessee submitted that the quest .....

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val can also be withdrawn by the same authority in terms of subrule( 3) of rule 18DA. He therefore, contended that the Commissioner committed a grave error 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 with .....

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he 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 assessee and against the Revenue However, we would like to make some observations with regard to the true impact of the recognition granted by the Commissioner .....

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ce of the Commissioner and that said recognition had continued to remain in operation during the relevant assessment years in question; the last fact in particular clearly implied that the Provident Fund of the assessee did satisfy all the conditions laid down in Rule 4 of Part A of the Fourth Schedule to the Act even during the relevant assessment yeaRs. In that situation we do not think that it was open to the taxing authorities to question the recognition in any of the relevant years on the g .....

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over it. There is ample power conferred upon the Commissioner under Rule 3 of Part A of the Fourth Schedule to withdraw at any time the recognition already granted if, in his opinion, the Provident Fund contravenes any of the conditions required to be satisfied for its recognition and if during assessment proceedings for any particular assessment year the taxing authority finds that the Provident Fund maintained by an assessee has contravened any of the conditions of recognition he may refer th .....

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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 .....

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ject and having knowledge of the subject including research that can be done in the subject. In the absence of such an examination the action will be vitiated as being a nullity being by a person having no expertise in that particular field of science or research;. The power to make inquiries has advisedly been conferred so that the person discharging the function has the advise of persons in the field conversant with the field of science and research. In a case where the appellant is a person l .....

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once the prescribed authority grants approval in terms of subrule( 2) of rule 18D of the Rules, can the Revenue authorities examine fulfillment of conditions of deduction and deny the same? 10. In this context, we may notice the statutory provisions. Section 80IB of the Act pertains to deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. Subsection (8A) pertains to deduction in cases of company carrying on scientific r .....

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any time after the 31st day of March, 2000 but before the 1st day of April 2007; iv.fulfils such other conditions as may be prescribed; Under Subsection( 8A) of section 80IB, in case of a company carrying on scientific research and development, there would be hundred per cent deduction of the profits and gains of such business 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 prescri .....

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ct 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 80I .....

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n (8A) of section 80IB and reads as under: 18DA. (1) Any company carrying on scientific research and development shall be eligible for deduction specified in subsection (8A) of section 80IB, if such company- (a) is registered in India; (b) has its main object the scientific and industrial research and development; (c) has adequate infrastructure such as laboratory facilities, qualified manpower, scaleup facilities and prototype development facilities for undertaking scientific research and devel .....

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onths after the close of each accounting year to the prescribed authority. (2) Every company which is approved under subrule (2) of rule 18D shall- (a) sell any prototype or output, if any, from its laboratories or pilot plants with the prior permission of the prescribed authority; (b) 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 t .....

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s 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) .....

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he approval is not granted, the decision of the said authority shall be communicated to the applicant within the said period of four months : Provided further that no approval shall be refused unless the applicant has been given an opportunity of being heard. 13. Combined reading of the statutory provisions noted above, the scheme for grant of deduction to the companies involved in scientific research and development becomes clear. Subsection (8A) of section 80IB provides for deduction and also .....

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and fourth conditions, which according to him, were not fulfilled. In this context, we may refer to rule 18D. This rule in addition to prescribing DSIR as the prescribed authority; under subrule( 2) authorises such prescribed authority to grant approval initially for a period of three yeaRs. The renewal is subject to satisfactory performance to be judged on periodic review. The maximum extension would be for a period of 10 years from the initial assessment year. Rule 18DA carries the title Presc .....

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es, qualified manpower, scaleup facilities and prototype development facilities for undertaking scientific research and development of its own. Clause (d) requires a well formulated research and development programme comprising of time bound research and development projects with proper mechanism for selection and review of the projects or programme. Clause (e) requires the company to be engaged exclusively in scientific research and development activities leading to technological development, i .....

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ed 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 .....

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. Subrule( 5) of Rule 18DA provides for documents and details required to be filed along with such application for approval. Under Subrule( 6) of Rule 18DA, the prescribed authority may call for any further information and documents which will be necessary for consideration of application for grant of approval. Subrule( 7) of Rule 18DA lays down the time limit within which such approval will be granted. Further proviso to subrule( 7) provides that the applicant would be heard before rejecting th .....

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which would be judged on periodic review by the prescribed authority. While granting approval in addition to information prescribed under subrule( 5) of Rule 18DA, the prescribed authority is empowered to call for such other information or documents, which may be found necessary for consideration of the application for grant of approval. Even during the currency of the approval granted by the prescribed authority, in terms of subrule( 2) of rule 18DA, the company has to satisfy several condition .....

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rch and development has been maintained. 16. As noted, if at any stage, the 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 w .....

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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 engagement of the company exclusively in scientific research and development activities, the same would be within the realm of the said prescribed authority. 18. Under the circumstances, once such authority grants approval and such .....

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hority, the Assessing Officer still had to examine whether such company had fulfilled the conditions referred to in clause(iv), as such other conditions as may be prescribed, reference to which we find in rule 18DA. Any other view would create conflict of decision making process. Even counsel for the Revenue could not dispute that many of these requirements prescribed under rule 18DA are to be examined by the prescribed authority. If once the prescribed authority examines such conditions and upo .....

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hich is prescribed under the Rules for a specific purpose has been invested with statutory functions, the Assessing Officer should be allowed to overrule the decision of the said body. Thirdly, there are multiple indications within the Rules themselves. We may recall, under subrule( 2) of rule 18D, extension of approval once granted is subject to satisfactory performance of the company, to be judged on periodic review. Further, subrule( 3) of Rule 18DA gives wide powers to the prescribed authori .....

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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 t .....

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ture of the breach, the prescribed authority must withdraw the approval, the moment it is pointed out that there has been a violation of any other provisions of the Act or the Rules. It is possibly therefore, that the legislature has while clothing the prescribed authority with sufficient powers to withdraw the approval, used the word 'may' rather than 'shall' giving discretion in appropriate cases to the authority not to withdraw the approval. This however, would not mean that t .....

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