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Judgment
PER M. BALAGANESH, AM
The appeal in ITA No.4101/Del/2025 for AY 2014-15, arises out of the order of the ld National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 13.01.2025 against the order of assessment passed u/s 147 r.w.s. 144 r.w.s. 144B of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 29.03.2022 by the Assessing Officer, NFAC, Delhi (hereinafter referred to as ‘ld. AO’).
At the outset, we find that there is a delay in filing of appeal by the assessee before us by 88 days. Considering the reasons adduced in the condonation petition, we find that assessee was prevented from sufficient cause in not filing the appeal before us in time. Hence, we deem it fit and appropriate to condone the delay in the interest of substantial justice and admit the appeal of the assessee for adjudication.
The Ground Nos. 1, 2 and 3 raised by the assessee in Form No. 36 are challenging the validity of assumption of jurisdiction under section 147 of the Act. The Ground Nos. 4 and 5 raised by the assessee in Form No. 36 are challenging the confirmation of disallowance of Rs 22,12,031 made by the learned AO in the reassessment proceedings on account of depreciation figure included in R& D expenses.
We have heard the rival submissions and perused the materials available on record. The assessee company filed its return of income for the assessment year 2014-15 on 26-9-2014, declaring total income of Rs 1,76,36,110. The assessment was completed under section 143(3) of the Act on 7-11-2016 (2:05) after making an addition of Rs 13,619 to the total income on account of interest on TDS. During the year under consideration, the assessee company claimed weighted deduction equal to 200 percent of expenditure incurred on in-house research and development amounting to Rs 1,33,52,427. The assessee duly filed the copy of Form 3CK and 3CM before the lower authorities which are also enclosed in pages 74 to 92 of the paper book. The assessee company submitted that its R&D center is duly recognized by Department of Scientific and Industrial Research (DSIR) vide letter of recognition dated 29-04-2011 which has been extended to 31-03-2014 and all these details were duly placed on record at the time of original assessment proceedings. The assessee also filed its reply dated 12-09-2016 wherein details of R&D expenses were duly submitted during the course of original assessment proceedings. The original assessment was completed under section 143(3) of the Act after due verification of the claim of the claim of weighted deduction of the assessee with regard to R&D expenditure u/s 35(2AB) of the Act and weighted deduction being duly granted to the assessee. Later this assessment was sought to be reopened vide issuance of notice under section 148 of the Act on 28-03-2021 on the basis that assessee’s income had escaped assessment as assessee had not separated the R&D account from P&L account leading to multiple deductions and hence not eligible for weighted deduction under section 35(2AB) of the Act. The reasons recorded for reopening the assessment are enclosed in pages 104-107 of the paper book. For the sake of convenience, the said reasons are reproduced here under:-
“Reasons for opening of the assessment in case of MACHINO POLYMERS LIMITED for AY 2014-15 U/S 147 of the Act
1. Brief details of the Assessee.
As per records available, the assessee is a private company. Assessee filed return of income for A.Y. 2014-15 on electronically declaring an income of Rs. 17636110/-. Later on the case was selected for scrutiny assessment and assessment for the A.Y.2014-15 was completed u/s 143(3) of the act on 07.11.2016 at income of Rs. 17649730/-
2. Brief details of information collected/ received by the AO
As per section 35(2AB) of the IT Act, subject to fulfilment of conditions laid thereunder, a weighted deduction equal to 200% of expenditure incurred on in-house research and development (R&D) will be available. In respect of the aforesaid expenditure no deduction shall be allowed under any other provision of the Act, so that, multiple deductions may be avoided. During the year, it was observed that the assessee company was engaged in the manufacturing of polypropylene advanced material. The company has availed weighted deduction of Rs. 1,33,52,428/-i.e. 200% of Rs. 66,76,214(refer note 27.1 of the balance sheet). The P&L a/c of the company revealed net profit of Rs. 277.57 Lacs. This profit is inclusive of expenditure incurred for R&D work i.e. the expenditure of Rs. 185.60 Lacs and revenue earned for Rs. 139.50 Lacs have been included in the P&L a/c i.e. note 27.15 of the balance sheet. To avoid multiple deductions, if a/c relating to R&D are separated then net profit of the company is 323.67 Lacs as detailed out below: Expenses as per P&L a/c 27832.31 Lacs Less. Expenses as per R&D a/c 185.60 Lacs Balance expenses 27646.71 Lacs Revenue as per P&L a/c 28109.88 Lacs Less: Revenue as per R&D a/c 139.50 Lacs Balance Revenue = 27970.38 Lacs Therefore, Net Profit excluding R&D A/c = 27970.38-27646.71-323.67 Lacs Profit excluding R&D A/c = 323.67 Lacs Profit including R&D A/c = 277.57 Lacs Difference 46.20 Lacs i.e. Rs. 46,09,631/-This amount of difference has been allowed as deduction under normal provisions of the Act and is needed to added back to the taxable income of the assessee.
3. Analysis of information collected/received
Case records & submission furnished by the assessee were carefully perused and information gathered in para 2 was found correct.
4. Enquiries made by the AO as sequel to information collected/ received:
Information gathered in Para 2 was carefully examined. Financials of the assessee company were reconciled and information gathered in para 2 was found correct as per assessment records. This has resulted in under assessment of income.
5. Findings of the AO
On the basis of information gathered & analysed, findings were made that during the year under consideration, the assessee has availed weighted deduction of Rs. 1,33,52,428/-.e. 200% of Rs. 66,76,214 u/s 35(2AB) in excess of the actual weighted deduction calculated as per the normal provisions of the Act and details of the same are given in para 2 above. Therefore, the same needs to be added back to the income computation. Thus, income of Rs. 1,33, 52,428/-chargeable to tax has escaped assessment for the A.Y. 2014-15.
6. Basis of forming reason to believe and details of escapement of income
In view of above facts, I have reason to believe that the income to the extent of Rs. 4609631 chargeable to tax or any other income which comes to my notice subsequently in the course of assessment proceedings u/s 147, has escaped assessment for the A.Y. 2014-15 within the meaning of section 147 of the Income Tax Act, 1961. In order to assess the above income, 1 proceed to initiate proceedings u/s 147 of the I.T. Act, 1961 in the case for A.Y. 2014-15.
7. Seventh paragraph will include escapement of income chargeable to tax in relation to any assets (including financial
interest in any entity located outside India).
Income to the extent of Rs. 4609631/- chargeable to tax or any other income which comes to my notice subsequently in the course of assessment proceedings u/s 147, has escaped assessment for the A.Y. 2014-15.
8. Applicability of the provisions of section 147/151 to the facts of the case:
In this case a return of income was filed for the year under consideration and regular assessment u/s 143(3) was made on 07.11.2016 at income of Rs. 17649730/-. Since, 4 years from the end of the relevant year has expired in this case, the requirements to initiate proceeding u/s 147 of the Act are reason to believe that income for the year under consideration has escaped assessment because of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year under consideration. It is pertinent to mention here that reasons to believe that income has escaped assessment for the year under consideration have been recorded above (refer paragraph above). I have carefully considered the assessment records containing the submissions made by the assessee in response to various notices issued during the assessment/reassessment proceedings and have noted that the assessee has not fully and truly disclosed the material facts necessary for his assessment for the year under consideration as the assessee was not required to claim the excess of weighted deduction as per section 35(2AB) amounting to Rs. 46,09,631/-. It is evident from the above facts that the assessee had not truly and fully disclosed material facts necessary for his assessment for the year under consideration thereby necessitating reopening u/s 147 of the Act. It is that the assessee has submitted information and documents along with return of true disclosure of all material facts necessary for assessment has not been made as noted above. It is pertinent to mention here that even though the assessee has produced information/documents or other evidence as mentioned above, the requisite material facts as noted above in the reasons for reopening were embedded in such a manner that material evidence could not be discovered by the then AO and could have been discovered with due diligence, accordingly attracting provisions of Explanation 1 of section 147 of the Act. Explanation 1 of section 147 of the Act reads as under :-
"Explanation 1. For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:-
(a)where income chargeable to tax has been underassessed; or
(b)where such income has been assessed at too low a rate; or
(c)where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act, 1922 (11 of 1922); or
(d)where excessive loss or depreciation allowance has been computed. It is evident from the above discussion that in this case, the issues under consideration were never examined by the AO during the course of regular assessment. This fact is corroborated from the contents of notices issued by the AO u/s 143(2)/ 142(1) and order sheet entries dated recorded during the 143(3) proceedings. It is important to highlight here that material facts relevant for the assessment on the issue under consideration were not filed during the course of assessment proceeding and the same may be embedded in submitted information in such a manner that it would require due diligence by the AO to extract these information. For afore-stated reasons, it is not a case of change of opinion b the AO. In this case more than four years have lapsed from the end of the assessment year unde consideration. Hence necessary sanction to issue the notice u/s 148 has been obtained separately from Pr. Commissioner of Income Tax as per the provisions of section 151 of Act”
On perusal of the aforesaid reasons, we find that the learned AO is only relying on the basic material available before him, namely the assessment folders and the details already submitted by the assessee during the course of original assessment proceedings and that no new information or tangible material had come to his possession, which lead him to form a belief that income of the assessee had escaped assessment by claiming excess weighted deduction under Section 35(2AB) of the Act. The learned AO had only merely placed reliance on the very same material that was already available with him on which an opinion had already been framed by the learned AO while framing the assessment under Section 143(3) of the Act. Further, the assessee company had indeed maintained separate accounts for R&D expenditure, which has been independently audited by statutory auditor after verification of all details and guidelines of DSIR. The copy of CA certificate submitted to DSIR was also enclosed before the learned AO and the same is also enclosed in page 108 of the paper book. Hence, the contention of the learned AO that the assessee had not separated the R&D account from the main P&L account is factually incorrect and the reasons recorded has been based on incorrect assumption of fact, which itself becomes fatal to the very assumption of jurisdiction under Section 147 of the Act by the learned AO. Factually, the assessee claimed revenue expenses of R&D of Rs. 46,09,631 and capital expenses on R&D of Rs. 20,66,583. The assessee claimed weighted deduction on the aforesaid expenditure of Rs. 1,33,52,428 (6676214*200%) at the rate of 200% of actual expenditure incurred. The aforesaid revenue expenditure of Rs. 46,09,631 on account of R&D includes depreciation of Rs. 22,12,031. The remaining sum of Rs 23,97,600 was duly added back in the computation of total income by the assessee in the return of income. The depreciation figure has not been added back by the learned AO separately and the same was part of the total depreciation as per books which was added back in the computation of income by the assessee. Hence there is no need to separately add back the same by the learned AO in the reassessment order. Further we find that the learned AO in the reassessment order had only added back a sum of Rs 22,12,031 towards depreciation on R&D Assets and had not sought to disturb the claim of weighted deduction under section 35(2AB) of the Act. We find that the learned CITA had totally gone on a different tangent by stating that the learned AO was justified in disallowing the weighted deduction under section 35(2AB) of the Act, which was not even done by the Learned AO in the reassessment. It is pertinent to note that there is no mention of even issuing any enhancement notice by the learned CITA to make an enhancement to total income for denying weighted deduction under section 35(2AB) of the Act. Hence there cannot be any denial of weighted deduction under section 35(2AB) of the Act to the assessee for the year under consideration.
As stated earlier, we hold that the entire reopening of assessment has been made on incorrect assumption of fact by the Learned AO. Further, all the details of claim of weighted deduction under section 35(2AB) of the Act had been duly submitted with all the relevant documents which are duly approved by DSIR before the Learned AO itself in the original assessment proceedings. The Learned AO on due verification of the same had formed an opinion and granted weighted deduction to the assessee in the original assessment proceedings. Thereafter, no tangible material or new information had come into the possession of the Learned AO which would lead him to form a belief that income of the assessee had escaped assessment. Hence, this is a clear case of change of opinion. The Hon’ble Supreme Court in the case of Kelvinator of India Ltd reported in 320 ITR 561 (SC) had categorically held that in the absence of any tangible material or new information, the case of any assessee cannot be reopened under section 147 of the Act. Further, the said decision also held that reopening cannot be made for change of opinion of the assessing officer. Hence, on all counts, the very assumption of jurisdiction is hereby flawed and is declared bad in law. Even on merits, there is absolutely no case as assessee had already added back the depreciation amount of Rs 22,12,031 included in the revenue expenditure of R&D while disallowing the total depreciation as per books of accounts in the return of income. Hence, there is no claim of any multiple deductions by the assessee. So, even on merits there is absolutely no case made out for the revenue. Hence, we hold that the assumption of jurisdiction is totally flawed and accordingly Ground Nos. 1 to 3 raised by the assessee are allowed. The Ground Nos. 4 and 5 raised by the assessee on merits are also allowed in view of the aforesaid observations.
In the result, the appeal of the assessee is allowed.