By TIOL News Service

AHMEDABAD, JULY 07, 2016: THE issue is - Whether once the prescribed authority has granted approval for scientific research, it is no longer open to the AO to question the satisfaction of conditions under Rule 18DA. YES is the answer.

Facts of the case

The assessee is a company engaged in scientific research activities. For the assessment year 2008-2009, the assessee had filed its return declaring income. Return was selected for scrutiny during which the assessee's principal claim of deduction under section 80IB( 8A) 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. Assessing Officer held that the income of sample storage was not derived from research and development activity and, therefore, could not form part of deduction under section 80IB( 8A) of the Act. Barring this disallowance, the rest of assessee's claim of deduction under section 80IB( 8A) of the Act was left undisturbed. The order was taken in revision by 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. The Commissioner passed order under section 263 directing Assessing Officer to make a fresh assessment. ITAT set aside the revisional order of the Commissioner and remanded the proceedings before the Commissioner for fresh consideration and disposal. The Commissioner thereupon passed fresh order and held 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 subsection and rule 18DA of Income Tax Rules, 1962. ITAT allowed assessee's appeal.

Having heard the parties, the court held that,

++ subsection (8A) of section 80IB provides for deduction and also prescribes four conditions upon fulfillment of which such deduction shall be granted. These conditions are that the company must be registered in India, that it has its main object of scientific and industrial research and development, is approved by the prescribed authority and fulfills such other conditions as may be prescribed.

++ once such authority grants approval and such approval holds the field, it would not be open for the Assessing Officer or any other revenue authority to go behind such approval certificate and reexamine for himself, the fulfillment of the conditions contained in subrule (1) of rule 18DA. These conditions are prescribed in terms of clause no.(iv) of subsection( 8A) of section 80IB of the Act. The Commissioner was therefore, completely in error in observing that even though the assessee company had valid approval issued by the prescribed authority, 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. 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. 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. 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 authority to withdraw the approval if it is found that the same was to avoid payment of taxes by its group companies or companies related to its directors or majority of its shareholders 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.

++ sub rule( 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 provisions, breach of many of them may be purely technical. It is not necessary therefore, in every such breach, irrespective of the nature 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 the Assessing Officer would have any role in the context of verifying requirements relatable to grant, extend or withdraw the approval. These issues solely rest within the jurisdiction of the prescribed authority.

++ once the approval is granted by the prescribed authority and such approval is valid, it would no longer be open for the Assessing Officer to verify the satisfaction of the conditions prescribed under rule 18DA in order to refuse deduction under subsection( 8A) of section 80IB of the Act. This however, does not mean that other issues relevant to the claim of deduction by the assessee would be taken away from the jurisdiction of the Assessing Officer.

++ the power of the Assessing Officer to verify the claim of deduction is not taken away. He can certainly verify the accounts and refuse deduction which does not form part of section 80IB( 8A) and the income which does not arise out of the eligible business. He however, cannot ignore the approval granted by the prescribed authority and hold that the prescribed conditions are not fulfilled by the assessee.

(See 2016-TIOL-1298-HC-AHM-IT)