The Division Bench of Gujarat High Court in a recent ruling held that once the prescribed authority grants approval for deduction under income tax rules, the revenue cannot verify its conditions.
The assessee had filed its return of income on 15.9.2008 declaring a total income of Rs.3.32 lacs and claimed deduction of 22.81 Lacs as deduction under section 80IB(8A) of Income Tax Act, 1961.According to them, the income was derived from the research and development activities. The assessee pointed out 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, charges the respective customers for storage of such clinical samples and the income therefore, is derived from the research activities of the company.
The assessing Officer, being not convinced by the explanation of the assessee, passed an order by disallowing the claim for deduction. Against the Order, the assessee preferred a revision petition before the Commissioner. The Commissioner prima facie, believing that the assessment was erroneous and prejudicial to the interest of the Revenue since in the opinion of the Commissioner, such deduction was allowed by the Assessing Officer without verification of the eligibility of the assessee to claim the same and therefore, directed the Officer to make a fresh assessment. The matter was brought before the Tribunal and the Tribunal set aside the revisional order of the Commissioner and remanded the proceedings before the Commissioner for fresh consideration and disposal.
The Commissioner, while passing a fresh order, hold a view that the assessee was not eligible to claim deduction under section 80IB(8A) of the Act as it did not satisfy all the provisions listed in the said sub-section and rule 18DA of Income Tax Rules, 1962.
On appeal filed by the assessee 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 prescribed authority was an expert body exercising powers to grant approval for the purpose of deduction under section 80IB( 8A) of the Act and the Revenue cannot decline the deduction ignoring such approval. This order of the Tribunal was challenged by the Revenue before the High Court.
The substantial question of law that arises for the consideration of the Court was that, whether once the prescribed authority grants approval in terms of sub-rule (2) of rule 18D of the Rules, can the Revenue authorities examine fulfillment of conditions of deduction and deny the same?
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 no research and development activities had been undertaken by the assessee. He therefore, required the Assessing Officer to examine such issues. In the light of section 80IB(8A) of the Act and rules 18D and 18DA of the Rules it was contended that the approval by the prescribed authority would not shut out the inquiry by the revenue authorities regarding the fulfillment of other conditions of deduction.
Subsection (8A) pertains to deduction in cases of company carrying on scientific research and development. To avail the deduction, a company must follow the following conditions.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.fulfils such other conditions as may be prescribed;”
The Court found that The Commissioner in his revisional order agreed that in respect of the assessee company, first and third conditions were duly satisfied, but he referred to second and fourth conditions, which according to him, were not fulfilled. In this context,the Court 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 “Prescribed conditions for deduction under subsection(8A) of section 80IB”and thus has correlation to the fourth condition contained in subsection (8A) of section 80IB. Subrule(1) of Rule 18DA prescribes six requirements contained in clauses (a) to (f) for a company to be eligible for deduction under section 80IB (8A).
the Court further held that If once the prescribed authority examines such conditions and upon being satisfied thatthe above conditions are fulfilled, grants approval, then the Assessing Officer cannot take a different view. It was observed that the prescribed authority is a specialised body having expertise in the field of scientific research and development. The requirements are extremely complex scientific requirements and have therefore, been rightly placed in the hands of an expert body to judge. Further, there is no reason why once an authority which 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. There are multiple indications within the Rules themselves.
While passing an order in favor of the assessee the Court observed that the prescribed authority is a specialized body having expertise in the field of scientific research and development. The requirements are extremely complex scientific requirements and have therefore, been rightly placed in the hands of an expert body to judge. Secondly, there is no reason why once an authority which 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.He however, cannot ignore the approval granted by the prescribed authority and hold that the prescribed conditions are not fulfilled by the assessee.
Read the full text of the Judgment below.
