Wp/7004/2014 Of M/S Tejas Networks Limited v. The Deputy Commissioner Of Income Tax

IN THR HIGH COURT OF KARNATAKA AT BBNGALURU| DATED THIS THE 24[th]DAY OF APRIL, 2019 BEFORE THE HON’BLE MR.JUSTICE ARAVIND KUMAR. "WRIT PETITION NO.7004/2014 (TIT) BETWEEN: M/S TEJAS NETWORKS LIMITEDA COMPANY INCORPORATED UNDERTHE COMPANIES ACT, 1956HAVING ITS OFFICE Al:PLOT NO.25, 5 CROSS,|J.P. SOFTWARE PARK|ELECTRONIC CITY,PHASE-1, HOSUR ROAD,BBNGALURU-560 100RBEPRBSEBENTBD BY IMANAGING DIRBCTORMR. SANJAY NAYAK9/O SRI. SHANKAR NAYAK|AGED ABOUT 49 YEARS... PETITIONBR (BY SRI N VENKATARAMAN, Sr.COUNSEL A/W |SRI K.R.VASUDEVAN & SRI. HARISH ADVOCATES) | AND: 1.THR DEPUTY COMMISSIONBR OFINCOME TAX, CIRCLE 12(4),BENGALURURASHTROTHANA PARISHAD BHAVAN(4 FLOOR) NO.14/3A,_NRUPATHUNGA ROADBENGALURU-560 OO1.. |THE DISPUTE RESOLUTION PANEL, BENGALURU, | RASHTROTHANA PARISHAD BHAVAN!' FLOOR) NO.14/3A,_NRUPATHUNGA ROADBENGALURU-560 OO1.. —.. RBSPONDENTS (BY SRI K.V.ARAVIND, SR.PANEL COUNSEL) THIS WRIT PETITION IS FILED UNDER ARTICLE 226)AND 227 OF THE CONSTITUTION OF INDIA, PRAYING TOQUASH THE IMPUGNED ORDER ISSUED BY THE k-l,PASSED U/S. 143(3) OF THE ACT, DATED 31.1.2013 FORTHERE ASSHSSMENT YEAR 2OO9-10 VIDE ANNBUXRE-R THE CONSEQUENTIAL DEMAND NOTICE ISSUED BY THER-1, DATED 31.01.2014 FOR THE ASSESSMENT YEAR2009-10 THAT IS VIDE ANNEXURE R-1. THIS|PETITIONCOMINGONKOR|DICTATING|ORDERS THIS DAY, THE COURT MADE THE FOLLOWING: ORDER Petitioner1S seekingfor.quashingottheassessment order passed by first respondent under|143(3) r/w Section 144C(13) of the Income Tax Act,|1961 (for short “‘Act’?)) dated 31.01.2013 - Annexure-and consequential demand notice dated 31.01.2014 at|Annexure-R1 issued by first respondent. By consent of|learned Advocates appearing for parties matter is takenup for final hearing. FACTUAL MATRIX: 2 |Petitioner iS an assessee under the Act and|is engaged in the business of software development,|manufacturing and trading of networking equipments.Return of income for the assessment year 2009-10 cameto be filed on 29.09.2009 declaring nil income and_Claiming loss ofV7,19,99,922/- . On said return being)selected for scrutiny, notice came to be issued and draft)assessment order came to be framed on 27.03.2013|under Section 144C(1) of the Act whereunder income of)petitioner was revised after making certain adjustments.On receipt of the draft assessment order, assessee filed|its objection before the Dispute Resolution Panel (“DRP’|for short) and after affording opportunity of hearing to.theASSESSCE, LRP1iSSUedadirectionTO|thejurisdictional assessing Officer on 30.12.2013. The DRP|held that where the express provisions of the Act)excludes certain expenditure from the purview of)section 35 of the Act, such expenditure cannot be)allowed and as such, the report of the prescribed) 4. authority cannot be considered as far as such excluded|expenditure is concerned. It was also held by DRP thatcertificate issued by the prescribed authority cannot|over rule the express provision of the Act and|accordingly directions came to be issued to assessing|Officer after considering the directions issued by the|DRP, framed assessment order on 31.01.2013 -|Annexure-R framed assessment order whereunder as/against the deduction claimed by the assessee under|Section35(2ZAB)1nNrespect.otResearch|andDevelopment expenditure in a sum of=a89,35,48,193/-,Qa sum of“a48,41,82,071/- was disallowed and samecame to be added to the income of assessee-company.Further, a sum of=2,63,68,301/- claimed by the,assessee as 100% deduction under Section 309(1)(i) alsocame to be disallowed. Said order of assessment dated|31.01.2013 is impugned in the present writ petition. 3.)I have heard the arguments of SriyuthsN Venkataraman, learned Senior counsel appearing on| 5 beha ltotSr1K.R.Vasudevan,forpetitioner, SriK.V.Aravind, learned Senior panel counsel appearing for|respondents. CONTENTIONS ON BEHALF OF ASSESSEE: 3.)I have heard the arguments of SriyuthsN Venkataraman, learned Senior counsel appearing on| 5 beha ltotSr1K.R.Vasudevan,forpetitioner, SriK.V.Aravind, learned Senior panel counsel appearing for|respondents. CONTENTIONS ON BEHALF OF ASSESSEE: 4It is the contention of Sri Venkataraman,|learned Sr.counsel appearing on behalf of petitioner|that order of first respondent is arbitrary, without|application of mind and it is without jurisdiction and|has been passed without following due process of law.|He would elaborate his submission by contending thereare no foundational facts on the basis ot which the first|respondent could have ignored the certificate issued by|the prescribed authority — Department of Scientific and|Industrial Research (for short ‘DSIR?) which is the|prescribed authority under Rule 6(1) of the Income Tax|Rules, 1961 empowered to issue certificate to the|assessee who claims allowance of expenditure under|section 39(2AB) or 35(1)(i) of the Act. It is contended|that petitioner is engaged in developing and selling| 6| optical network products to its worldwide customers|and as such carry out product development activities in developingopticaltransmission|telecommu nicationequipment which is a continuous process and as such,petitioner is entitled to claim deduction of sum equal totwo times of the expenditure incurred on ‘scientific|research’ as permitted under Section 35(2AB) of the Act.It is contended that petitioner accordingly has obtained|approval in form No.3CL after audit came to be|conducted by DSIR and a report has been submitted by|the said prescribed authority by its report dated|10.04.2013 duly communicated to the Director General|of Income Tax (Exemptions) whereunder expenditure to the tune otfv46.03 Crores as against claim of“59 57 Crores of the petitioner came to be approved. It is the|erievance of the petitioner that once such certificate is issued, it is deemed that the petitioner has complied theconditions prescribed under Section 309(2AB) andconsequently, it would be eligible to claim the deductionpermissible under the said Section. He would draw the attention ottheCourtTO|theimpugned|orderwhereunder at paragraph 4.9 the approval granted by|DSIR came to be considered and held that it cannot be|considered as the only condition for claiming deduction|under Section 39(2AB) on the premise that sub-section|(2) Section 43(4) enables the Assessing Officer toexclude the expenditure incurred by an assessee in the|acquisition of rights, in or arising out of scientific|research and held that expenditure recorded as product|development expenditure by the assesse cannot be|accepted as research and development expenditure|being eligible for deduction under Section 35(2AB) and|section 3o(1)(i) r/w Section 43(4)(ii) of the Act and|accordingly disallowance of the claim is_ withoutjurisdiction and it would amount to sitting in judgment|over the certificate issued by the prescribed authority|and same is impermissible. © 5He would further elaborate his submission|by contending that if an Assessing officer were to| 5He would further elaborate his submission|by contending that if an Assessing officer were to| entertain a doubt with regard to certificate issued by|prescribed authority, the course left open to such|assessing officer is to forward the same to the Central|Board of Direct Taxes (for short ‘CBDT’) and the Board|in turn is required to refer the question to the|prescribed authority whose decision would be final and|the technical aspects being involved with regard to|scientific research, the prescribed authority being a|Specialized authority, it would be in a better position toexamine the issue and as such, this task of certifying or disallowing the claims made in this regard having been|outsourced by the Revenue under the Act, assessing|Officer cannot sit in judgment over such certificate|issued and hence, in the instant case, the assessing|officer committed a jurisdictional error in rejecting the|claim on the ground that he would be empowered todisallow such claim made by the assessee though duly|certified by the prescribed authority by taking recourse|to the later portion of sub-clause (ii) of sub-section (4) ofSection 43 of the Act. He would summarise his| submissions by contending the definition of ‘scientific|research’ found in Section 43(4) has been imported tosection 39(2AB) and 35(3) and the assessing authority|while examining the claim for deduction under Section|39(2AB) will have to necessarily accept the certificate or the report issued by the prescribed authority and once|such report is furnished, assessing Officer has no|jurisdiction to examine the correctness or otherwise ofsuch expenditure certified by the prescribed authority|and the only option left to the assessing officer when|disagreeing with the report is to seek for clarification|from the prescribed authority through Board. Hence, hewould contend that assessing Officer could not have|gone into merits of the certificate issued by prescribed|authority and as such impugned order is bad and|erroneous in law. 6.In support of his submissions, he has relied| upon the following judgments. (1)(2008) 174 Taxman 113 (Guj.)CIT vs. Claris Lifesciences Ltd., (2)(2012) 207 Taxman 216 (Delhi)CIT vs. Sandan Vikas (India) Ltd.,CIT vs. Sandan Vikas (India) Ltd., (3)(1976) 105 ITR 864 (All) J K Synthetics vs. ITO (4)(2012) 210 Taxman 432 (Guj.) Deputy Commissioner of Income-tax (Asstt.)| vs. Mastek Ltd., (5)(1973) 87 ITR 539 (SC) Raza Textiles Ltd., vs. Income Tax Officer,| Rampur (6)(2003) 128 Taxman 190 Hemalatha Gargya vs. CIT| (7)(2013) 40 taxman.com 5495Vodafone India Ltd., vs. Union of IndiaVodafone India Ltd., vs. Union of India (8)(1961) 41 ITR 191 (SC) Calcutta Discount Co. Ltd., vs. Income Tax| Officer (9)(2003) 264 ITR 566 (SC) Commissioner of Income-tax vs. Foramer| Hrance| (10)|(20077) 001 CLR 0067 (SC) Union of India and Another vs. Kunisetty| patyanarayana (11)(AA) (2009) 236 ELT 425 (SC) M/s.Godre}]SaraLeeLtd.,VS.Asst.Commissioner.Commissioner. (12)|(2010) 254 ELT 6 (SC)Asst.Commissioner,CommercialTax|Department vs. Shukla & BrotherAsst.Commissioner,CommercialTax|Department vs. Shukla & Brother CONTENTIONS ON BEHALF OF REVENUE: TSPer contra, Sri K.V.Aravind, learned Panel|counsel appearing for respondents would submit that|petitioner without exhausting the alternate remedy of|appeal namely, approaching the jurisdictional Income|Tax Appellate Tribunal, has invoked the extraordinary|jurisdiction:otthisCourtandtheSarm©beingimpermissible, petition is liable to be dismissed on this|sround alone. In support of this proposition, he has|relied upon the judgment of Hon’ble Apex Court in the|case ofCIT vs CHABILDASreported in|(2013)357 ITR357(SC). oO.It is the contention of Sri K.V.Aravind,|learned panel counsel appearing for respondent-Revenue that present writ petition is lable to be)dismissed on the ground that petitioner not having)availed alternate remedy and contends that order)impugned in the present writ petition has been passed|by the jurisdictional Assessing Officer under Section| oO.It is the contention of Sri K.V.Aravind,|learned panel counsel appearing for respondent-Revenue that present writ petition is lable to be)dismissed on the ground that petitioner not having)availed alternate remedy and contends that order)impugned in the present writ petition has been passed|by the jurisdictional Assessing Officer under Section| 143(3) read with Section 144C(13) of the Income Tax|Act, 1961 or in other words, drait assessment order|having been issued to the petitioner was subject to|objections and as such assessee objected to said orderbefore the Dispute Resolution Panel which comprises ofThree Principal Commissioners or Commissioners ofIncome Tax constituted by the Board and they inturn|have recorded a finding on the claim of allowability|sought for by the petitioner under Section 35(2AB) ofthe Act by rejecting the contention of assessee. He|would further contend that only course that was left|open to the assessing Officer on receipt of approval of|draft assessment order by DRP, was to accept the said|findings of DRP and as such assessing Officer has|passed an order which is appeallable under Section 253of the Act before Income Tax Appellate Tribunal. On|account of non availment of the alternate remedy, he|prays for dismissal of the writ petition. | 10| OQ He would also contend that when a claim ismade for weighted deduction under Section 35(2AB) ofthe Act, the Assessing Officer no doubt cannot sit in|judgment over the certificate issued by the DSIR or the|prescribed authority, but it does not prevent theAssessing Officer from examining as to whether any)expenditure incurred and claimed for allowance would)fall within the definition clause of sub-section (4) of)Section 43 of the Act. He would also elaborate his|submission by contending that if any question arises)under Section 39(2AB) namely, as to whether and if so)to what extent any activity constitutes or any asset is or)was being used for scientific research, then such issue|is required to be referred by the Board to ‘Central|Government’ if such question relates to any activity)under clauses (ii) & (iti) of sub-section (1) and to)‘Prescribed Authority’ when such question relates to any|activity other than the activity specified in clause (a) of)sub-section (3) and in both eventualities such decision|would be final and issue regarding admissibility of such 14| expenditure would be within the domain of the|assessing Officer to examine. He would submit thatassessing Officer having examined this issue has|rejected the claim for weighted deduction and as such| he prays for rejection of the writ petition. 10.Havingheard thelearnedAdvocatesappearing for the parties and on perusal of the records|and the case laws relied upon by the learned Advocates|appearing for the parties, this Court is of the considered|view that following points would arise for consideration: (1)Whether Writ Petition isliable|to be dismissed on the ground|of petitioner not having availedalternate remedy of filing anappealbefore,+605902103)&.Income Tax Appellate Tribunal|as|providedunder|Section253(4) of the Act?to be dismissed on the ground|of petitioner not having availedalternate remedy of filing anappealbefore,+605902103)&.Income Tax Appellate Tribunal|as|providedunder|Section253(4) of the Act? (2)If the answer to the above.question is in the negative;|Whether impugned order dated|question is in the negative;|Whether impugned order dated| 15| 301.01.2014Annexure-Rpassed by first respondent isliable to be interfered for any|reason whatsoever? (3)What order? RE: POINT No.(1) ll.Learned Advocate appearing for respondents has raised a preliminary objection with regard tomaintainability of writ petition. (2)If the answer to the above.question is in the negative;|Whether impugned order dated|question is in the negative;|Whether impugned order dated| 15| 301.01.2014Annexure-Rpassed by first respondent isliable to be interfered for any|reason whatsoever? (3)What order? RE: POINT No.(1) ll.Learned Advocate appearing for respondents has raised a preliminary objection with regard tomaintainability of writ petition. 12.Availability of alternate remedy would be a.good ground to refuse the relief under Article 226 of the)Constitution of India. The power of this Court to issue)writs under Article 226 ot the Constitution of India|being plenary in nature is not limited by any other)provisions of the Constitution of India. This Court has)discretion to entertain or not to entertain a writ petition.However, availability of alternate remedy would be thenormal rule for this Court to refuse to exercise its|jurisdiction under Article 226 of the Constitution. But,| 16| it is not an inviolable rule and the availability of an|alternate remedy would not act as a bar for this Court|to exercise the extraordinary power. The self imposed|judicial restraint one of which is that of availability ofalternate remedy would be a reason for the writ Court|not to issue prerogative writs. Exceptions to this|generalprinciplesare|(1),forentorcementotFundamental Rights; (2) violation of principles of|natural justice; (3) where the order or proceedings|under challenge is attacked or being vitiated on the|sround of such authority acting without jurisdiction;|and (4) where constitutional validity of a provision in a|statute or statute is itself under challenge. | 13.After analyzing plethora of judgments, the|Hon’ble Apex Court in|WHIRLPOOL CORPORATION vs REGISTRAR OF TRADE MARKS, MUMBAI AND|OTHERSreported in(1998)8 SCC 1has held exerciseof jurisdiction by the High Court to entertain a writ)petition under Article 226 of the Constitution of India,| 17| in spite of availability of alternative statutory remedies|is not affected where the authority against whom the|writ is sought for is shown to have exercised its|jurisdiction which it had none or had usurped the|jurisdiction without any legal foundation. The Hon’ble| Apex Court in conclusion has held as under: M2O. Much water has since tlown under|the bridge, but there has been nocorrosive etfect on these decisionswhich, though old, continue to holdthe field with the result that law asto the jurisdiction of the High Courtin entertaining a writ petition underArticle 226 of the Constitution, inspite of the alternative statutoryremedies, is not affected, specially ina case where the authority againstwhom the writ is filed is shown tohave had no jurisdiction or hadpurportedTO usurpjurisdictionwithout any legal foundation.the bridge, but there has been nocorrosive etfect on these decisionswhich, though old, continue to holdthe field with the result that law asto the jurisdiction of the High Courtin entertaining a writ petition underArticle 226 of the Constitution, inspite of the alternative statutoryremedies, is not affected, specially ina case where the authority againstwhom the writ is filed is shown tohave had no jurisdiction or hadpurportedTO usurpjurisdictionwithout any legal foundation. D1.That being so, the High Court wasnot justified in dismissing the writpetition at the initial stage withoutexamining the contention that theshow-cause notice issued to theappellant|Waswhollywithoutjurisdiction and that the Registrar,in the circumstances of the case,was not justified in acting as the“Tribunal”.not justified in dismissing the writpetition at the initial stage withoutexamining the contention that theshow-cause notice issued to theappellant|Waswhollywithoutjurisdiction and that the Registrar,in the circumstances of the case,was not justified in acting as the“Tribunal”. 18| D1.That being so, the High Court wasnot justified in dismissing the writpetition at the initial stage withoutexamining the contention that theshow-cause notice issued to theappellant|Waswhollywithoutjurisdiction and that the Registrar,in the circumstances of the case,was not justified in acting as the“Tribunal”.not justified in dismissing the writpetition at the initial stage withoutexamining the contention that theshow-cause notice issued to theappellant|Waswhollywithoutjurisdiction and that the Registrar,in the circumstances of the case,was not justified in acting as the“Tribunal”. 18| 14.Thus, keeping this salutary principle in|mind, when the facts on hand are examined, it would|indicate that in the instant case, petitioner at the time|of filing its return of income on 29.09.2009 claimed|weighted deduction under Section 39(2AB) contending|interalia that itis an allowable deduction. The assessingofficer at paragraph 4.9 has held that approval issued|by Department of Scientific and Industrial Research (for|Short ‘DSIR’) is a pre requisite to claim deduction under|section 39(2AB) but it cannot be held to be the only|condition for claiming deduction under Section 39(2AB)of the Act. 15.Section 43 of the Act would indicate that!definition ot certain terms relevant to “income fromprofits and gains of business or profession’' has beendefined. Under sub-section (4) of Section 43, the word|MScientific Research” has been detined. On the one.hand, the assessee is contending that once a certificate|is issued by the prescribed authority, the jurisdictional| 19| assessing officer would be out of bounds to examine thecorrectness of the said certificate. On the other hand,|Revenue is contending that without going into the issueoft the correctness of such certificate or its contentsthereof, the power of the assessing officer to disallow theclaim made by an assessee under Section 39(2AB)|which does not include any expenditure incurred in the|acquisition of rights, in, or arising out of scientific)researchwouldbe|withinthedomain.otthejurisdictional assessing Officer. In other words, theissue of jurisdiction of assessing officer to examine such claim, is an issue which requires to be examined by thisCourt in this writ petition. 16. In the event of this Court coming to aconclusion that contention of the Revenue deserves to be accepted, then, the natural course which this Court)will adopt is to dismiss the writ petition as being not|maintainable since petitioner has an alternate remedy of|filing statutory appeal. However, if itis being held that, such power is not available to the assessing officer, it will have to be necessarily held as writ petition being|maintainable. Inotherwords,whenissueotjurisdiction is under consideration, it cannot be held|that writ petition is not maintainable at the threshold.In that view of the matter, this Court is of the|considered view that subject to the answer on Point|No.2, this Court would answer Point No.1. Re: Point No.2 17.In order to adjudicate the point No.2 relevant.statutory provisions which will have bearing on the|issue requires to be extracted and they are extracted|herein below: “Expenditure on scientific research. 35.(1) In respect of expenditure on)scientific research, the followingdeductions shall be allowed-scientific research, the followingdeductions shall be allowed- (i) any expenditure (not being|in the nature of capital expenditure)laid out or expended on scientificresearch related to the business. (11) to (iv) Xxx. (2)For the purposes xxx of Section 32. 21| (2A) Where xxx of Section 32A. (2AA) Where the assessee xxx authority. Re: Point No.2 17.In order to adjudicate the point No.2 relevant.statutory provisions which will have bearing on the|issue requires to be extracted and they are extracted|herein below: “Expenditure on scientific research. 35.(1) In respect of expenditure on)scientific research, the followingdeductions shall be allowed-scientific research, the followingdeductions shall be allowed- (i) any expenditure (not being|in the nature of capital expenditure)laid out or expended on scientificresearch related to the business. (11) to (iv) Xxx. (2)For the purposes xxx of Section 32. 21| (2A) Where xxx of Section 32A. (2AA) Where the assessee xxx authority. (2AB)(1) Where a company engaged in thebusiness of |bio-technology or in [anybusiness of manufacture or production ofany article or thing, not being an article or|thing specified in the list of the Eleventh|oechedule}} incurs any expenditure onscientific research (not being expenditurein the nature of cost of any land or)building)OTLin-houseresearchanddevelopment facility as approved by the)prescribed authority, then, there shall beallowed a deduction of |a sum equal to|two|times|ot|theexpenditure]SO|incurred. {Explanation- For the purposes of this'clause,“expenditureOT)scientificresearch”, 1NrelationCO|drugsandpharmaceuticals,shallincludeexpenditure incurred on clinical drug trial,|obtaining approval from any regulatoryauthority under any Central, State orProvincial Act and filing an application fora patent under the Patents Acts, 1970 (39°of 1970).| (2)No deduction shall be allowed inrespect of the expenditure mentioned in)clause (1) under any other provision ofthis Act. (3)No company shall be entitled fordeduction under clause.(1)‘unless it enters into an agreement with the prescribedauthorityforco-operation1n suchresearch and development facility and for audit of the accounts maintained tor that.facility. (4)Theprescribed|authorityshallsubmit its report in relation to the)approval of the said facility to the){Principal Director General or} Director|General in such form and within such|time as may be prescribed. (5)No deduction shall be allowed inrespect of the expenditure referred to inclause (1) which is incurred aiter the 3] day of March, {2017}. (6)No deduction shall be allowed to acompany approved under sub-clause (C) ofclause (ila) of sub-section (1) in respect ofthe expenditure referred to in clause (1)which is incurred after the 31 day of|March, 2008. (2B)(a) to (d) xxx (3) It any question arises under thissection as to whether, and if so, to what)extent,anyactivityconstitutesOT|constituted, or any asset iS or was beingused for, scientific research, the Boardshall refer the question to- !:#theCentralGovernment,when such question relates to any activity under clauses (11)and (111) of sub-section (1), and|its decision shall be final;when such question relates to any activity under clauses (11)and (111) of sub-section (1), and|its decision shall be final; !>#theprescribedauthority,when such question relates toany activity other than the|activity specified in clause (a),whose decision shall be final.when such question relates toany activity other than the|activity specified in clause (a),whose decision shall be final. 23| (4)The provisions xxx depreciation. (5)Where,inaschemeot|amalgamation, xxx asset.” Definitions of certain terms relevant to.income from profits and gains ofbusiness or profession. 43.In sections 28 to 41 and in this|section, unless the context otherwise|requires— !Ip"actual cost" means xxx section 4/7. (2"<&09"means actually xxx profession. !3p"<.&)1" includes xxx fittings. | !4#O!1)"scientific research"MCanhs aflyactivities for the extension of knowledge inthe fields of natural or applied scienceincluding agriculture, animal husbandryor fisheries;| 23| (4)The provisions xxx depreciation. (5)Where,inaschemeot|amalgamation, xxx asset.” Definitions of certain terms relevant to.income from profits and gains ofbusiness or profession. 43.In sections 28 to 41 and in this|section, unless the context otherwise|requires— !Ip"actual cost" means xxx section 4/7. (2"<&09"means actually xxx profession. !3p"<.&)1" includes xxx fittings. | !4#O!1)"scientific research"MCanhs aflyactivities for the extension of knowledge inthe fields of natural or applied scienceincluding agriculture, animal husbandryor fisheries;| !11) references to expenditure incurred onscientific research include all expenditureincurred for the prosecution, or theprovision of facilities for the prosecution,|of scientific research, but do not includeanyexpenditure incurred|intheacquisition of rights in, or arising out of,|scientific research; !ll) references to scientific research relatedto a business or class ot business.include— ![)anyscientificresearch|which may lead to or facilitatean extension oft that businessor, as the case may be, all| businesses of that class; DOG !b) any scientific research of amedical nature which has aespecial relation to the welfare|of workers employed in that)business or, as the case maybe, all businesses of that!class; !)"speculative transaction"TnheansS XXXthis purpose. (!)"written down value"means xxx thisAct. INCOME TAX RULES, 1961) Prescribed authority for expenditure onscientific research. 6. (1) For the purposes of clause (i) ofsub-section (1) and sub-section (2A) ofsection 35, the prescribed authority shall|xxx Government of India. (1A) For the purposes of sub-section (2AA)_of section 35, the prescribed authorityshall be-| !:#in the case xxx case may be;!>#in the case xxx Government ot|India. (1B) For the purposes of sub-section(2AB) ot|section|SO,theprescribedauthorityshallbethesecretary,Department of Scientific and Industrial|Research. (2) Omitted w.e.f. 30.10.2006 (3) The application for obtaining approvalunder sub-section (2AA) of section 39. 25| shall be made by a sponsor in Form)No.3CG. Explanation:For the purposes of this rule.“sponsor” means a person who makes an.application in Form No.3CG_ (4)TheapplicationrequiredTO befurnished by a company under sub-section (2AB) of section 35 shall be inHorm No. 3CK.(5) The head of the National Laboratory orthe University or the Indian Institute of)Technology jor the Principal ScientificAdviser to the Government of India| shall,if he is satisfied that it is feasible to carry|out the scientific research programme|then,subjectTO other|conditionsprescribed in this rule and section 39.(2AA) of the Act, pass an order in writingin Form No.3CH: Providedthat a reasonable opportunity of)being heard shall be granted to the)sponsor before rejecting an application: Provided turtherthat an order under this |rule shall be passed within two months ofthe receipt of the application under sub-rule (1A):| Provided alsothat the Principal ScientificAdviser to the Government of India mayauthorize an officer who is not below the|rank of a Deputy Secretary to issue suchorder,|after.thescientificresearch|programme has been approved by him.| (SA) The prescribed authority shall, if he issatistied that the conditions provided in)this rule and in sub-section (2AB) of section 35 of the Act are fulfilled, pass an)order in writing in Form No.3CM: 763409-9that a reasonable opportunity ofbeing heard shall be granted to the)company before rejecting an application. (6) The National Laboratory, University,Indian Institute of Technology or specified|person| shall issue a receipt of paymentfor carrying out an approved programmeof scientific research under sub-section|(2AA) in Form No.3Cl. (7) XXx (7A) Approval of expenditure incurred onin-houseresearch|anddevelopment,facility by a company under sub-section(2AB) of section 35 shall be subject to thefollowing conditions, namely:- (SA) The prescribed authority shall, if he issatistied that the conditions provided in)this rule and in sub-section (2AB) of section 35 of the Act are fulfilled, pass an)order in writing in Form No.3CM: 763409-9that a reasonable opportunity ofbeing heard shall be granted to the)company before rejecting an application. (6) The National Laboratory, University,Indian Institute of Technology or specified|person| shall issue a receipt of paymentfor carrying out an approved programmeof scientific research under sub-section|(2AA) in Form No.3Cl. (7) XXx (7A) Approval of expenditure incurred onin-houseresearch|anddevelopment,facility by a company under sub-section(2AB) of section 35 shall be subject to thefollowing conditions, namely:- !:#Thefacilityshouldnotrelate purely to marketresearch, sales promotions,qualitycontrol, testing,commercial|production,style changes, routine data.collection or activities of alike nature;relate purely to marketresearch, sales promotions,qualitycontrol, testing,commercial|production,style changes, routine data.collection or activities of alike nature; !>#Theprescribedauthority shall submit itsreport in relation to theapprovalot|in-houseResearch and Developmentfacility in Form No.3CL totheDirector|General(Income-taxExemptions)within sixty days of itseranting approval;authority shall submit itsreport in relation to theapprovalot|in-houseResearch and Developmentfacility in Form No.3CL totheDirector|General(Income-taxExemptions)within sixty days of itseranting approval; 2'7 !A#TheCOTlpanhshallmaintain|aseparate|account for each approvedfacility;whichshallbe.auditedannuallyandaCOPYthereot|shallbe|furnished to the Secretary,Departmentot|Scientific and Industrial Research by31 day of October of each.succeeding year. Explanation:Korthepurposes of this sub-ruletheexpression“audited”IneanStheaudit|ot|accounts by an accountant,as|definedintheExplanationbelow49>"section (2) of section 288 ofthe Income-tax Act, 1961; (d)Assetsacquired1Nrespect of development of|scientificresearch|anddevelopment tacility shallnot be disposed of withouttheapprovalotthesecretary, Department of|Scientific andIndustrialResearch.| 18.A plain reading of Section 39(2AB)(1) would.indicate that where a company is engaged in the|business of biotechnology or any business of|manufacture or production of any article or thing, not| being an article or thing specified in the list of the|BleventhSchedule.IncursanyexpenditureOT)MScientific Research”' (not being expenditure in thenature of cost of any land or building) on in-house,|research and development facility“as approved by theprescribedauthority,”such assesseewould be!entitled to a deduction of a sum equal to one and halftimes of the expenditure so incurred. The word|“Scientific Research” has been defined under sub-section (4) of Section 43 of the Act, which is extracted|supra and same would indicate expenditure incurred insuch.scientific researchincludes.allexpenditureincurred for the prosecution or the provision of facilitiesfortheprosecutionotsuch.scientific|research.However, it does not include expenditure incurred in theacquisition of rights in or arising out of scientific|research. such expenditure incurred should be|approved by the authority prescribed under Section|S9(2AB) of the Act read with Rules framed thereunder.The authority prescribed to grant such approval under| Rule 60(1B) of the Income Tax Rules, 1961 is thesecretary, Department of Scientific and Industrial|Research. Rule 60(1B) of the Income Tax Rules, 1961 is thesecretary, Department of Scientific and Industrial|Research. 19.A perusal of the above rule would clearlyindicate that the prescribed authority for the purposes|of sub-section (1) of Section 35(2AB) is the Secretary,|Department of Scientific and Industrial Research. Sub-section (3) of the Section 395(2AB) would indicate that nocompany would be entitled for deduction underclause (1) unless it enters into an agreement with the|prescribed authority tor cooperation in such research|and development facility and for audit of accounts|maintained for that facility. Said authority is required|to examine the application and if satisfied thatconditions provided under Section 35(2AB) are satisfied|would pass an order in writing in Form No.3CM. In the|event of such application of assessee is being rejected|by the prescribed authority, an opportunity of being)heard would be extended by the prescribed authority to) the assessee. AS per sub-section (4) of Section 39(2AB)|the prescribed authority would in turn submit its reportto the approval of the said facility to the Director|General (Income tax Exemptions) in Form No.3CL|within 60 days as per Rule 7(A)(b) of the Rules. Approvalof such expenditure incurred by a company under|section 359(2AB) would be subject to conditionsstipulated in clauses (a) to (d) of Rule 7A of the Rules. ©This would clearly indicate that the prescribed authority|after receiving the application under Rule 3CK would|examine the said application in the background of the|definition found in sub-section (4) of Section 43 and on|being satisfied that such application satisfies the|criteria prescribed under the Act, then alone it would|issue the certificate by granting its approval to the|expenditure incurred by a company. To put it.differently, the prescribed authority is the authority|under the Act which would examine the claim for grant|of approval under Section 39(2AB). Pursuant to such|application filed by assessee to the prescribed authority, Ol| a report would be submitted by the prescribed authority|to the Director General (Income tax Exemptions) in|Form No.3CL in order to entitle the assessee to weighteddeduction and such report by the prescribed authoritywould be forwarded to Director General (Income tax|Exemptions) within 60 days from order of approval. This|order in Form No.3CM would be passed by the.prescribed authority only after being satisfied that the)conditions provided in Rules (7A) and in sub-section|(2AB) of Section 35 of the Act are fulfilled. Facts onhand would clearly indicate that application had been|filed by assessee on O7.01.2009 and after calling for)documents /informationfromASSESSEEandOf]examinationandscrutinyoT|such|documents /information furnished by assessee, Order ofapproval came to be granted in favour of assessee on)18.11.2009 in Form No.3CM vide Annexure-G. YAO.It would be apt to point at this juncture itself, that in the event of any question would arise before the| Oo| assessing officer under Section 35 as to whether|amounts certified by the prescribed authority is eligible|for being allowed as expenditure and to what extent andwhether such activity constitutes or constituted, or any|asset is or was being used for scientific research in that|regard, then assessing officer has to request the Board|to refer such question to the prescribed authority as|provided under clause (b) of Section 35(3). In other|words, the correctness or otherwise of the order passed|by the prescribed authority is not examined by the|assessing officer or by the Income Tax Authority and|this exercise is outsourced by the Income Tax|Department and same is being done by the prescribed|authoritynamely, DepartmentoT|Scientific|andIndustrial Research. This is the plain meaning which|can be deciphered from the perusal of above said|statutory provisions. Q1.Thus, reading of Section 305 (3) of the Act|would clearly indicate that where the assessing officer| Q1.Thus, reading of Section 305 (3) of the Act|would clearly indicate that where the assessing officer| does not accept the claim of the assessee made under|section 30(2AB), he has to refer the matter to the Board,which inturn, will refer the question to the prescribed|authority. The decision of the prescribed authority|would be final as could be seen from clause (b) of sub-section (3) of Section 395. Thus, it would emerge from|above analysis that neither the assessing officer nor theBoard is competent to take any decision on any such|controversy relating to report and approval granted by|“Prescribed Authority” as it involves expert view or opinion. The controversy arising out of certificateissued by the prescribed authority if any, has to be|referred to the prescribed authority by the Board on|such doubt being raised by assessing Officer and also|on his request. It is the prescribed authority alone|which would be competent to take a decision with|regard to correctness or otherwise of its order of)approval granted in Form No.3CL as prescribed under|section 35(2AB) of the Act read with Rule 7A of the.Rules. D?.Aforesaid view is also fortified by the|judgment rendered by the High Court of Gujarat in thecase oftDEPUTY COMMISSIONER OF INCOME TAX|(ASSTT.) VS MASTEK LIMITEDreported in(2013)263 CTR Gu 671,wherein it has been held that§§whenever question arises as to whether and if so to|what extent, any activity constitutes or constituted or any asset iS or was being used for scientific research,|the Board, as provided under Section 359(3) of the Actwould have to reter the issue for the decision of the|prescribed authority, whose decision would be final. It) has been held as under: “2/. We are, however, of the opinion thatinsofar as the second aspect of the matteris concerned, the Tribunal was perfectlyjustiied in holding in favour of theassessee. Section 35(3) of the Act asnoticed requires a reference to be madeby the Board to the prescribed authoritywhen a question arises as to whether and1T SOCO|whatextent,anyactivityconstitutes or constituted or any asset isor was being used for scientific research.The decisions of the prescribed authorityon such a question would be final.In ouropinion, therefore, whenever any such|question arises, the Assessing Officer| cannot decide the issue but must placethe issue before the Board who, in|terms of section 35(3) of the Act,wouldrefer|the|questionTO|the|prescribed authority. The decision of|the prescribed authority would govern|the parties.Therefore, if an assessee|puts forth a claim of deduction undersection 39(1) for expenditure incurred onscientific research and if the AssessingOfficer is not inclined to accept such aclaim, the question can be stated to havearisen, in such a situation, the AssessingOfficer cannot take a decision but mustseek|theopinionOT theprescribedauthority, We may hasten to add thatonly when such a question arises that thereferencewouldbecompetent.Horexample, if in a given case, the assesseelodges a claim without any supportingmaterial, it cannot be stated that thequestion has arisen which would requirea reference by the Board. Similarly, if theAssessing Officer accepts the claim of theassessee, no such question can be statedto have arisen. We are, however, unableto accept Shri. Bhatt’s contention thatsuch a question would arise only whenthe assessment is finally framed and thatthereatter the onus would be on theassessee to seek a reterence. No suchintention is emerging from section 305(3)of the Act. Whenever an Assessing Officeris not inclined to accept the assessee’scase for deduction, we fail to see how atthat very stage, the question cannot bestated to have arisen.” (emphasis supplied) O26 (emphasis supplied) O26 YAS.Turning my attention back to the facts on|hand, case-papers would indicate that on return of|income being filed by the assessee, same came to be|processed by the first respondent by issuing notices|under Section 143(2) and 142(1) of the Act. After'clarification called for and on discussion with the!assessee’s representative, draft assessment order dated|"27.03.2013 came to be forwarded to the assesseewherein the income was proposed as against the loss|returned in the return of income. On receipt of the draftassessment order, assessee filed its objections before|the Dispute Resolution Panel -— DRP 1.e., secondrespondent herein who, after hearing the assessee|issued directions on 30.12.2013 under Section 144C(95)of the Act and in compliance of the directions issued by|the DRP, first respondent — assessing Officer concluded|the final assessment. The assessing Officer under the|assessment order dated 31.01.2013 disallowed the'deduction claimed by the assessee under Section|39(2AB) of the Act on the following grounds: O77 (i)assessee has incurred expenditure of“a13,95,73,315/- in respect of incompleted projects as the new products have not yet been developed; (11)“a11,00,79,095/- which are treated as.capital expenditure by the assessee represents know-_how/technology ready for use contributing to increase.in revenue and thereby of enduring benefit to the.assessee and as against claim of |“a16,91,18,6040/-, 25%otsuch.expenditurerepresentingknow-how|WaSallowed. (iii)=a9,14,82,154/- treated as capitalwork in progress was held as expenditures incurred on|incomplete projects as the new products have not yet|been developed and as such, do not qualify for|deduction as revenue expenditure and accordingly, the|weighted deduction claimed at ©“a13,72,23,231/- cameto be disallowed. WA.Thus, an amount of=a48,41,82,071/- out of deduction ot |=a89,35,48,193/- claimed under Section 39(2AB) was disallowed and added to the income of the|assessee. It has been held by the second respondent|that the mandate of the prescribed authority is limited|to certifying to what extent, any activity constitutes or constituted, or any asset 1S or was being used for,|scientific research. It is further held by the second|respondent that allowability or otherwise of the)expenditure will be governed by the express provisions|of the Act. It has been held by the second respondent|in the direction issued to the first respondent on|30.12.2013 under Annexure -— QO as under: “11.8 .|Thus the mandate ot the.prescribed authority is limited to certifyingto what extent, any activity constitutes or|constituted, or any asset is or was being)USECfor,scientificresearch.Theallowability OT|otherwiseot|theexpenditure will be governed by theexpress provisions of the Act. Where theexpress provision of the Act excludecertain kind of expenditure from thepurview of section 39 of the Act, such)expenditure cannot be allowed under)section 35 of the Act and when certain.expenditure does not fall in the scope ofsection 35 of the Act the report ofprescribed authority cannot be considered|as far as such excluded expenditure is o9| considered.ThecertificateOT theprescribed authority cannot overrule the)express provisions of the Act. Thus thestand of the AO that such expenditureSIVESriseTO|patentsOTLproducts/ processes which are intellectualpropertyrightsandthereforesuchexpenditure is capital in nature (Capitalwork in progress as the project isincomplete) and cannot be allowed u/s.3o(1) of the Act is justified. As regards theallowability of depreciation on such capitalwork in progress, it has already been held|that no depreciation is allowed on CWIP.. o9| considered.ThecertificateOT theprescribed authority cannot overrule the)express provisions of the Act. Thus thestand of the AO that such expenditureSIVESriseTO|patentsOTLproducts/ processes which are intellectualpropertyrightsandthereforesuchexpenditure is capital in nature (Capitalwork in progress as the project isincomplete) and cannot be allowed u/s.3o(1) of the Act is justified. As regards theallowability of depreciation on such capitalwork in progress, it has already been held|that no depreciation is allowed on CWIP.. 25.Insofar.aSdisallowanceunderSection 3S9(2AB) of the Act is concerned, the DRP reiterated itsabove finding and held that where the express|provisions of the Act exclude certain kind of expenditurefrom th