Trivitron Healthcare P Ltd. Vs PCIT (ITAT Chennai)

ITAT Chennai held that PCIT cannot term order passed by AO as erroneous and prejudicial to the interest of revenue merely for non-production of Form 3CL for claiming weighted deduction under section 35(2AB) of the Income Tax Act. Thus, revisionary proceedings u/s. 263 unjustified.

Facts- The only issue in the appeal of assessee is as against the revision order passed by the PCIT u/s.263 of the Act that he failed to satisfy the twin conditions i.e., for order passes by the AO u/s.143(3) of the Act, is erroneous insofar as prejudicial to the interest of Revenue, which is sine qua non to invoke the powers u/s.263 of the Act.

Conclusion- Held that since, the assessee has already filed all the required details to claim the weighted deduction u/s.35(2AB) of the Act, and the same has not been disputed by the AO with regard to the fact of the said expenditure, merely for the reason of certificate in Form 3CL has not been provided by the prescribed authority to the income tax authorities, (which is in the control of the assessee), the PCIT cannot term the decision of the AO as erroneous in so far as prejudicial to the interest of Revenue. Thus, we cannot countenance action of the PCIT in exercising the powers u/s.263 of the Act for revising the assessment on this issue.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal filed by the assessee is directed against the order passed by the Principal Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 24.05.2024 and pertains to assessment year 2017-18.

2. At the outset, we find that there is a delay of 20 days in appeal filed by the assessee, for which petition for condonation of delay along with reasons for delay has been filed. After considering the petition filed by the assessee and also hearing both the parties, we find that there is a reasonable cause for the assessee in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit appeal filed by the assessee for adjudication.

3. The only issue in the appeal of assessee is as against the revision order passed by the PCIT u/s.263 of the Act that he failed to satisfy the twin conditions i.e., for order passes by the AO u/s.143(3) of the Act, is erroneous insofar as prejudicial to the interest of Revenue, which is sine qua non to invoke the powers u/s.263 of the Act on the following four issues:-

i) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to disallow depreciation on goodwill.

ii) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to disallow the deduction u/s.35(2AB) of the Act of Rs.1,21,28,068/- subject to production of Form 3CL by the assessee.

iii) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to verify the status of the total income assessed for relevant assessment years and accordingly, compute losses to be carried forward and set off in the current A.Ys. & other A.Ys. as per law.

iv) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to verify the record with regard to loss or unabsorbed depreciation and compute the book profit u/s.115JB accordingly.

4. Briefly stated facts are that the assessee company filed its return of income for the Y. 2018-19 ON 22.09.2018 BY declaring a Rs.NIL income after set off of brought forward loss of Rs.14,43,60,453/-. The assessee is engaged in the business of manufacturing innovations, distribution of global medical technology. Subsequently, the assessee’s case was selected for complete scrutiny on the following issues:-

“Sl.No. Issues

i. Claim of any other amount allowable as deduction in Schedule BP

ii. Default in TDS & Disallowance for such

iii. Default in TDS

iv. Duty Drawback

v. Expenses incurred for earning Exempt income

vi. Deduction on account of donation for Scientific Research

The issued statutory notices to the assessee and assessee filed its reply from time to time and the AO completed the assessment and passed an order u/s.143(3) r.w.s. 143(3A) & 143(3B) of the Act vide order dated 05.04.2021 by accepting the returned income as assessed income. Subsequently, the PCIT issued show-cause notice for revising the assessment u/s.263 of the Act vide dated 15.02.2024 to examine the following issues: –

“4. On perusal of Schedule MAT of ITR-6 (Pg No. 104), it was noticed that the assessee had deducted an amount of Rs.4,47,55,031/- towards Brought forward loss or Unabsorbed depreciation and arrived at a Book Profit of Rs.1,49,70,530/-.

4.1 For the purpose of MAT ‘book profit’ means the net profit as shown in the P&L account prepared under sub-section115JB(2) as increased by the amounts pertaining to the items specified in Explanation-1and reduced by the amounts pertaining to the items specified in Explaniation -1 (clause i to viii)

4.2 Further Explanation 1 (clause ii) prescribes that the amount of loss brought forward or unabsorbed depreciation whíchever is less as per books of account. For the purposes of this clause,

1. The loss shall not include depreciation;

2. The provisions of this clause shall not apply if the amount of loss brought forward orunabsorbed depreciation is nil. In this connection, the following points are noticed:

4.3 On perusal of Note 4 Reserves and Surplus (pg no. 13) of the Financial Statements for the year ended 31 March 2018, it was noticed that the surplus in the statement of Profit or Loss for the year was stated as Rs.10,04,75,471/- as per books of account. In the circumstances, the amount of Rs.4,47,55,031/- claimed as deduction as loss brought forward or unabsorbed depreciation had been allowed by the AO in the computation of income u/s 115JB of the Act without any verification.

5. Further, it is seen that the assessed income of the assessee has been arrived at Nil after allowing set off of brought forward loss/unabsorbed depreciation of Rs.14,43,60,453/- It is seen that the assessee claimed the brought forward loss (LTCL of AY 2017-18 of Rs.86, 82, 695) and unabsorbed depreciation of Rs.12,91, 87, 507 of AY 2015-16 & Rs.12,21, 16,432/- of AY 201 7-18 and adjusted to the extent of income determined. However, after scrutiny/appeal proceedings, the available unabsorbed depreciation for AY 2015-16 is only Rs.10,75,26, 052/- and for AY 2017-18 is Rs.4,44,27,377/- only. Hence, the AO has allowed excess set off of unabsorbed depreciation and also allowed excess amount of unabsorbed depreciation to be carried forward.”

5. The PCIT accordingly passed a revision order u/s.263 of the Act dated 30.03.2024 directing the AO to verify the following four issues:

i) direction to disallow depreciation on goodwill

ii) direction to disallow the deduction u/s.35(2AB) of the Act of Rs.1,21,28,068/- subject to production of Form 3CL by the assessee

iii) compute losses to be carried forward and set off in the current A.Ys. & Other A.Ys. as per law &

iv) direction to verify the record with regard to loss or unabsorbed depreciation and compute the book profit u/s.115JB accordingly. Aggrieved, assessee preferred appeal before the Tribunal.

6. Before us, the ld. counsel Sri. S. Sridhar, Advocate for the assessee in support of the appeal, filed a paper book consisting of 405 pages as detailed below:

7. The ld. Counsel first of all drew our attention to the facts regarding the first issue of directing the AO to disallow the depreciation on the purchased goodwill on the presumption of applicability of 5^th proviso to Section 32(1) of the Act without assigning proper reasons and justification. The ld.counsel for the assessee, stated that the assessee has claimed deprecation u/s.32(1) of the Act, on goodwill which has been arisen to the assessee on amalgamation of the assessee company with M/s.Kiran Medical systems w.e.f. 01.04.2013 in a scheme of amalgamation approved by the Hon’ble Madras High court vide order dated 28.04.2015. The issue has been completely considered in the assessee’s own case for the A.Y. 2015-16 by this Tribunal in ITA No.97/Chny/2021 dated 24.06.2022 and held that the creation of new asset by virtue of amalgamation like goodwill completely go out of reckoning of 5^th proviso to Section 32(1) of the Act, by quashing the order of the ld. PCIT u/s.263 of the Act in this issue. Similarly, in the identical facts for the A.Y.2014-15 this Tribunal in ITA No.1340/Chny/2019 dated 12.10.2022 has quashed the order of the ld.PCIT u/s.263 of the Act, by following the decision in ITA No.97/Chny/2021 dated 24.06.2022. Therefore, the assessment order u/s.143(3) passed by the AO is in accordance with the law, when this issue is discussed and decided by the AO by relying the decision of this Tribunal and hence, he urged that there is no cause of error in the order of assessment so as to give raise to loss to the Revenue which cause prejudice to the Revenue.

8. As regards to second issue, in regard to disallowance of expenditure claimed u/s.35(2AB) of the Act, ld.counsel explained that the assessee company has incurred a revenue expenditure of Rs.80,85,379/- during the A.Y.2018-19 and no capital expenditure has been made towards in house scientific research and development facility. The assessee also filed the required form No.3CK for approval before the prescribed authority and the form 3CL has to be issued by the prescribed authority to the Department. These details have been sought in the notice u/s.142(1) dated 21.12.2020 issued by the AO (Paper Book page No.211) in its questionnaire and the assessee had filed the entire details in its reply 04.01.2021 (Paper Book page No.217 & 218) same being verified and accepted by the AO. Hence, there is no cause for PCIT to revise the assessment. There is no error in the assessment order nor is it prejudicial to the interest of Revenue.

9. As regards to third issue, in regard to directing the AO to re- quantify the set off of brought forward loss, the ld.AR stated that the set off of brought forward loss in the assessment year was in order and further ought to have appreciated that there was no error / prejudice caused to the revenue especially in view of the admitted fact the addition / disallowance made in the earlier assessment years being set aside / deleted in further appeal. Further, the ld.AR assailed the action of the ld.PCIT that both at the time of initiating the impugned proceedings as well as passing the impugned revision order, the carried forward and brought forward loss was very much available to the assessee thereby negating the presumption of any prejudice to the revenue.

10. The fourth issue raised by the ld.PCIT was directing the AO to re-quantify the book profits in terms of Section 115JB upon verification of depreciation loss. The ld.AR stated that both at the time of initiating the impugned proceedings as well as passing the impugned revision order, the carried forward and brought forward loss was very much available to the assessee thereby negating the presumption of any prejudice to the revenue. Therefore, the presumption of lack enquiry with respect to the quantification of carried forward loss / depreciation loss is wrong, incorrect, erroneous, invalid, unjustified and not sustainable both on facts and in law.

11. In the other hand, the ld.CIT-DR only supported the revision order.

12. We have heard rival contentions and gone through the facts and circumstances of the case. We have gone through the PCIT’s order and noted that on account of disallowing depreciation on goodwill, he has noted the facts and his observation as under:-

“16. Now the issues are taken up on merits. The first issue is the claim of depreciation on Goodwill. In AY 2017-18, the claim of goodwill was disallowed. The assessee submitted that the ITAT has allowed the appeal’s on the issue of depreciation on goodwill in assessee’s case and also relied on the decision of Malabar Industrial Company vs CIT (243 ITR 83(Sc) wherein it had been held that the Assessing Officer had taken a possible view with which PCIT did not agree with and hence, it cannot be treated as erroneous and prejudicial to the interest of revenue. The decision of the ITAT has not been accepted by the Department and the Department has gone on further appeal with Hon’ble High Court on this issue. The assessee is aware that the issue is before the Hon’ble High Court of Madras and not reached finality.

17. In this regard, reliance is placed on Hindustan Tin Works vs. D.C. of Income Tax [2005 192 ITD 101 (Delhi)(Trib), wherein it was held that if the AO takes a view in conformity with the decision of a High Court or even the jurisdictional high court, if an appeal has been preferred to the Supreme Court against that decision, then the revision is still maintainable. Hence, in this case even though the appeal is filed before Hon’ble High Court also, revision is still maintainable. Therefore, knowing the Department’s position the Assessing Officer ought to have caused necessary enquiries which he failed to do so. Hence, provisions of Section 263 is squarely applicable to this case on this issue as held by the ITAT in the aforesaid decision. goodwill arisen out of amalgamation.

18. The claim of the assessee is that the said 1961 defines, ‘amalgamation’ as Clause (1B) of Section 2 of the Income-tax Act, defines, ‘amalgamation’ as merger of one or more companies, ….otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first- mentioned company.

19. The accounting for merger of a company with another can be by two methods, Viz., pooling of interest method or purchase method. The differences between the two are that, –

-Pooling of interest method combines assets, liabilities, and reserves at their historical values, while purchase method depicts assets at fair market value and liabilities at agreed values.

-Pooling of interest method is applied when amalgamation is in the nature of merger, while purchase method is used when the acquisition is in the nature of purchase.

20. As mentioned above, the definition 2(1B) of the Income-tax Act, 1961 only recognises the ‘pooling of interest method’ and does not recognise the ‘purchase method’. If any assessee (amalgamated company) claims that it has accounted the assets under the purchase method, it will cannot be termed as amalgamation for the purpose of Income-tax Act, 1961 and it will not get exemption under clause (vi) of Section 47 of the Act (Transactions not regarded as Transfer) in respect of the said merger.

21. Therefore, the assessee (amalgamated company) which has obligation and responsibility on the behalf of the amalgamating company for the affairs of the amalgamating company either paid due taxes on the transfer under capital gains, etc., if it claims the accounting of the merger under Purchase method or if it is accounted under pooling of interest method. If a company follows pooling of interest method, obviously there will not be any goodwill at all, which can be termed as intangible assets).

22. However, for book purpose, especially while issuing shares of the amalgamated company (say B) to the erstwhile shareholders of the amalgamating company (say A), B may re-value the assets of the A for the purpose of allotting proportionate shares to the erstwhile shareholders of A. However, for the purpose of Income-tax Act, 1961 including the provisions of Section 115JB of the Income-tax Act, 1961 such re-valuation is to be ignored and only the actual book value or the value as per block of assets can only be taken for the purpose of the Income-tax Act, 1961.

23. Thus, in this case, the assessee (amalgamated company) violated the provisions of Income-tax Act, 1961 in relation to amalgamation and wrongly created ‘goodwill’ and claimed depreciation thereon.

24. Further, the decision of Hon’ble Supreme Court in the case of Smifs Securities Ltd (2012) 348 ITR 302 is distinguishable as the question before the Hon’ble Supreme Court is only whether the goodwill arising out of amalgamation is intangible assets or not and about the allowance depreciation u/s 32(1) of the Income-tax Act, 1961, especially when the merger in this case is under pooling of interest method. Further, the decision of the Hon’ble |TAT, Bangalore in the case of M/s United Breweries would be applicable to the facts and circumstances of the case. Further, tor the reasons mentioned in paragraphs 20 to 22 above, the assessee cannot claim that the goodwill is arising out of amalgamation to be eligible for depreciation under the Income-tax Act, 1961.

25. Therefore, invoking the revisionary powers u/s 263 of the Income- tax Act, 1961, the issue is set aside with the direction to the Assessing Officer that the depreciation on goodwill shall be disallowed.”

13. We noted that the PCIT has simpliciter carried out unnecessary exercise without analyzing that the assessee has been claiming the depreciation from earlier assessment years, which has been upheld by this Tribunal in ITA 97/Chny/2021 dated 24.06.2022 for the A.Y. 2015-16 and in ITA No.1340/Chny/2019 dated 12.10.2022 for the A.Y. 2014-15 by quashing the order of the ld.PCIT u/s.263 of the Act. Since, the revenue has filed an appeal in the Hon’ble high court of Madras against the orders of this Tribunal, the ld.PCIT cannot interfere in the order of the AO as erroneous and prejudicial to the interest of revenue. There is no iota of any new finding or reason on the above subject and cannot be inferred from the order of PCIT, except stating that the orders of this ITAT of earlier assessment years on the same issue is challenged by the revenue, which is yet be decided by the Hon’ble high court of Madras. Further for revising the assessment, the PCIT has to give a clear-cut finding that the order passed by the AO u/s.143(3) of the Act suffers from the twin conditions i.e., erroneous in so far as prejudicial to the interest of Revenue, which is sine qua non to invoke the powers u/s.263 of the Act.

14. Coming to next issue is the claim of weighted deduction u/s.35(2AB) of the Act of Rs.1,21,28,068/-, admittedly during the relevant assessment year the assessee company had incurred revenue expenditure of Rs.80,85,379/- towards in house scientific research and development facility. The assessee has maintained separate books of accounts for the same and certified by a CA and corresponding form No.3CK has been filed in this regard to the prescribed authority as a statutory compliance to claim the weighted deduction of revenue expenditure. However, Form 3CL has not been issued by the prescribed authority to the Income Tax authorities as per Rule 6 of the IT rules 1962. The AO after verification of the submissions made by the assessee allowed the expenditure. Hence, the PCIT in his order directed the AO to disallow the claim holding as under :

“26. The next issue is the deduction u/s 35(2AB). Sub-clause (3) of Section 35(2AB) states that no company shall be entitled for deduction unless it fulfills such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed. Sub-rule (7A) of Rule 6 prescribes that approval of expenditure incurred on in-house research and development facility by a company u/s 35(2AB) subject be conditions which include “the prescribed authority shall furnish electronically its report in Form 3CL, quantifying the expenditure. Thus, the requirement of Form 3CL report is mandatory. However, the Assessing Officer has also failed to obtain and verify the certificate in Form 3CL report of the Department of Scientific and Industrial Research from the assessee before allowing deduction u/s 35(2AB) of the Income-tax Act, 1961. In this case, the assessee did not submit Form 3CL and filed only Form 3CK. In the absence of Form 3CL, the deduction is not allowable. In the show cause notice dated 16/03/2021, the Assessing Officer proposed this addition that without fling of Form 3CL, deduction u/s 35(2AB) is not allowable and hence to be disallowed. However, while passing the order the assessing Officer did not disallow the deduction u/s 35(2AB). Therefore, it is case of failure of the Assessing Officer to cause necessary enquiries and hence, it is a deemed case of being erroneous in so far as prejudicial to the interests of revenue, in terms of clause (a) and clause (b) of Explanation 2 under Section 263 of the Income- tax Act, 1961. Therefore, the order of the Assessing Officer comes within the provisions of Section 263 of the Income-tax Act, 1961.

27. Therefore, invoking the revisionary powers u/s 263 of the Income- tax Act, 1961, the issue is set aside with the direction to the Assessing Officer that the deduction u/s 35(2AB) of Rs.1,21,28,068/- shall be disallowed. However, it is clarified that if the assessee files Form 3CL later for this assessment year within limitation period under law, then the AO may allow the deduction u/s 35(2AB) as per law after due verification.”

15. Since, the assessee has already filed all the required details to claim the weighted deduction u/s.35(2AB) of the Act, and the same has not been disputed by the AO with regard to the fact of the said expenditure, merely for the reason of certificate in Form 3CL has not been provided by the prescribed authority to the income tax authorities, (which is in the control of the assessee), the PCIT cannot term the decision of the AO as erroneous in so far as prejudicial to the interest of This view has been supported by the Hyderabad ITAT in the case of M/S. Sri Biotech Laboratories India Ltd. Vs. ACIT ITA No.385/Hyd/2014 for AY 2009-10 order dated 24.9.2014 took the view (vide Paragraph-13 of the order) that:

“13. The aforesaid view expressed by the Mumbai Bench has been subsequently followed in many other decisions of the same Bench. Further, the Hon’ble Delhi High Court in case of CIT vs. Sandan Vikar (India) Ltd. (335 ITR 117) following the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Claris Life Sciences Ltd. (326 ITR 251) approved the view of the Tribunal that once the R & D facility is approved, the entire expenditure incurred for R & D facility has to be allowed towards weighted deduction u/s. 35(2AB) of the Act. The ratio laid down by the ITAT Mumbai Bench and the Hon’ble Delhi High Court in the decisions referred herein above squarely apply to the facts of the present case. Therefore, assessee’s R & D facility having been approved by the prescribed authority and there being no dispute to the fact that assessee has incurred the expenditure towards R & D activities, the deduction claimed u/s. 35(2AB) by the assessee cannot be denied merely on the ground that prescribed authority has not submitted report in Form 3CL. Further, when no show-cause notice has been issued to assessee for rejection of its application, as held by the Mumbai Bench, assessee’s application for approval of expenditure should be deemed to have been approved by the prescribed authority. In the aforesaid view of the matter, we direct AO to allow weighted deduction u/s. 35(2AB) of the Act amounting to Rs. 72,75,245. However, we make it clear that if subsequently the prescribed authority does not approve expenditure claimed by assessee or quantifies at a lesser amount, then the deduction claimed by assessee should be modified accordingly. Assessee’s ground is considered to have been allowed.”

16. In the facts and circumstances of the case and relying on the above decision, we cannot countenance action of the PCIT in exercising the powers u/s.263 of the Act for revising the assessment on this issue.

17. The third issue is in regard to directing the AO to re-quantify the set off of brought forward loss, the ld.AR stated that the set off of brought forward loss in the assessment year was in order and further ought to have appreciated that there was no error / prejudice caused to the revenue especially in view of the admitted fact the addition / disallowance made in the earlier assessment years being set aside / deleted in further appeal. The ld.PCIT in his order is observed as under:

“28. The next issue of set off of brought forward and Carry forward of Losses. Regarding the claim of carry forward losses, the assessee has submitted that the disallowances made in the scrutiny proceedings of the earlier years have been set aside in the subsequent appeal and Notwithstanding the same, even considering the disallowances, the remaining balance of unabsorbed depreciation was sufficient to set off against the income of the company for the A.Y.2018-19. The claim of the Assessee is not acceptable. The Assessing Officer is required to compute the losses available for set off from the earlier assessment years at the time of passing the order and also take necessary in other relevant years as per the provisions of Section 155(4) rws 154 of the Income-tax Act, 1961. Therefore, the Assessing Officer is directed to verify the status of the total income assessed for the relevant assessment years and accordingly, compute/re-compute losses to be carried forward and set off in the current assessment years and other relevant assessment years as per law.”

18. We note that the issue of carry forward and set off of brought forward of losses is purely on facts of the assessee based on the assessment records and hence, if there is any error in the order of the AO, the same may also be rectifiable under section 154 of the Act. However, to safeguard the revenue in case of any time barring situations, the action of the ld.PCIT in exercising the revisional power u/s.263 of the Act cannot be interfered and hence we concur with ld.PCIT in sustaining the order in respect of this issue and direct the AO to follow the direction of the order.

19. The fourth issue raised by the ld.PCIT was directing the AO to re-quantify the book profits in terms of Section 115JB upon verification of depreciation loss. The ld.PCIT in his order is observed as under:

“29. The next issue is regarding the computation of loss or unabsorbed depreciation under section 115JB, the assessee states that for as per profit and loss account, loss has been incurred for the FY.2016-17 and the same is claimed in this assessment year. The correctness of the claim of the assessee on carry forward losses has not been verified by the Assessing Officer, Therefore, this issue is set aside to the Assessing Officer with the direction to verify the record and compute the book profit u/s 115JB accordingly.”

20. We note that the issue of carry forward and set off of brought forward of losses corresponding to computation of income u/s.115JB of the Act is purely on facts of the assessee based on the assessment records and hence, if there is any error in the order of the AO, the same may also be rectifiable under section 154 of the Act. However, to safeguard the revenue in case of any time barring situations, the action of the ld.PCIT in exercising the revisional power u/s.263 of the Act cannot be interfered and hence we concur with ld.PCIT in sustaining the order in respect of this issue and direct the AO to follow the direction of the order.

21. In view of the above discussion, the action of the Ld.PCIT in exercising the revisional powers u/s.263 is quashed for the following two issues, namely

i) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to disallow depreciation on goodwill.

ii) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to disallow the deduction u/s.35(2AB) of the Act of Rs.1,21,28,068/- subject to production of Form 3CL by the assessee.

22. The order of ld.PCIT u/s. 263 of the Act is sustained for the following two issues, namely

i) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to verify the status of the total income assessed for relevant assessment years and accordingly, compute losses to be carried forward and set off in the current A.Ys. & other A.Ys. as per law.

ii) Setting aside the assessment order passed u/s.143(3) by the AO with a direction to verify the record with regard to loss or unabsorbed depreciation and compute the book profit u/s.115JB accordingly.

23. In the result, the appeal filed by the assessee is partly allowed.

Order pronounced in the court on 05^th December, 2024 at Chennai.