Whether approvals granted under the Income Tax Act, 1922 to educational institutions for conducting scientific research, is valid under the present Act

THE issues before the Bench are - Whether when the inquiry is dropped after the assessment is completed based on thorough scrutiny of records, such assessment can still be reopened after the expiry of four years; Whether expenditure on scientific research already allowed, can be disallowed at a later stage, when the AO after due application of mind had previously found no reasons for disallowing such deductions; Whether assessee’s claim of a favourable judgment passed by a non jurisdictional High Court is tenable, when the jurisdictional High Court has not expressed an opinion on the same issue; Whether assessment can be reopened, merely because the notifications relied upon by the assessee for claiming deductions, were not produced on record during the original assessment and Whether approvals granted under the Income Tax Act, 1922 to educational institutions for conducting scientific research, is valid under the present Act. And the verdict goes in favour of the assessee.

Facts of the case

The assessee, Dhara Vegetable Oil & Foods Co. Ltd. is a company registered under the Companies Act, 1956. For the AY 2002-03, the assessee filed its return of income disclosing an income of Rs 7.87 crores which was taken up for scrutiny.

Thereafter, an assessment u/s 143(3) of the Act was framed determining total income at Rs 32.22 crores. In the return of income, the assessee had claimed certain deductions u/s 35(1)(i), (ii) and (iv). The AO raised certain queries on 18.8.2004, regarding laboratory and research expenses and called upon the assessee to furnish documents to substantiate the claim of deduction. The assessee in response to such query produced certain documents and the final assessment order was passed. However, in the assessment order AO made no disallowances towards such claim of laboratory and research expenses. The AO did not even discuss this issue nor gave any reasons for making no disallowances.

Thereafter, more than four years after the end of the relevant AY, the AO issued the notice calling upon the assessee to furnish a return of income stating that he had reason to believe that the income chargeable to tax for the AY 2002-03 had escaped assessment. The AO in its reasons for reopening the assessment mentioned that it was unearthed that the expenditure on research was carried out by Mother Dairy Foods Processing Limited, Delhi, and not by the assessee. The assessee had reimbursed the claim of Mother Dairy Ltd. and yet the assessee claimed such payment u/s 35(1)(i) and 35(1) (iv) which was not allowable u/s u/s 35(1)(i) and 36(1)(iv). It was also unearthed that the claims u/s 35(1)(ii) were in respect of payments to Delhi University, Nagpur University etc., however, the assessee could not produce the proofs evidencing that the universities were approved in accordance with Rule 5C and subject to conditions as per Rule 5-E as required u/s 35(1)(ii).

The assessee contended that the assessment which was previously framed after scrutiny cannot be reopened beyond a period of four years since there was no failure on the part of the assessee to disclose fully and truly all material facts. The assessee further contended that the question of deduction for scientific and research expenditure not carried out in-house, the issue had been decided in favour of the assessee by the Bombay High Court in case of National Rayon Corporation Ltd. With respect to payments made to Delhi University and Nagpur University, the assessee contended that such universities were duly approved under the Income Tax Act of 1922 and by virtue of section 297(2)(k) of the Act, such notification issued in the Income Tax Act of 1922 would be valid under the Income Tax Act, 1961 also. Thus, the main contention of the assessee was that both the issues were examined by the AO while framing the original assessment and any addition now on the same ground amounted to a mere change of opinion.

However, the contentions were rejected by the AO, and the assessee being aggrieved, the assessee filed a petition before this Court to challenge the reopening of the assessment. The assessee submitted the same contentions before the High Court, as were raised before the lower authorities.

Having heard both the parties, the High Court held that,

++ it clearly emerges that in the present case, notice for reopening of the assessment previously framed under section 143(3) of the Act is sought to be reopened beyond a period of four years from the end of the relevant assessment year. In that view of the matter, in addition to the Assessing Officer having reason to believe that the income chargeable to tax has escaped assessment, the additional requirement that such escapement of income was for reason of the assessee's failure to disclose fully and truly all material facts necessary for such assessment, must also be satisfied. Short question is, in the present case, can it be stated that there was failure on the part of the assessee to disclose material facts. We may recall that the Assessing Officer cited two reasons why he believed that the income chargeable to tax had escaped assessment. First was with respect to the payment for scientific research made for the research which was done at the premises of the Mother Dairy, New Delhi. Second was with respect to the payments made to Delhi University and Nagpur University for which the claim under section 35(1)(ii) of the Act was raised;

++ in the return of income, the assessee had claimed research and development expenditure under sections 35(1)(i) and 35(1)(ii) of the Act. In the note attached to the return of income, the petitioner assessee had stated that the company carried on research and development work on oilseeds at Delhi and Nagpur universities which are institutions approved for the purpose of section 35(1)(ii) of the Income Tax Act, 1961. In addition, the company also did research and development at the research facilities set up at Mother Dairy, Delhi. The expenditure incurred being in the nature of revenue as well as capital, was claimed under different sub-sections of section 35(1). Along with the return, the petitioner had further given details of such expenditure;

++ such claims of the petitioner for deduction under section 35(1) of the Act were examined by the Assessing Officer during the scrutiny assessment. In a notice dated 18.8.2004 issued by the Assessing Officer, besides others, he called for the following information for the following information. In reply to such query, the petitioner produced various documents. Such documents are placed before us. Along with such statement, documents and accounts which were produced before the Assessing Officer in response to such query have been placed on record. It was after such scrutiny that the Assessing Officer framed his assessment making several additions and disallowances, and assessing total income of the assessee at Rs.34.22 crores against the declared income of Rs.7.87 crores. It can, thus, be seen that whenever the Assessing Officer had reason to believe that a claim of deduction or disallowance was not to be granted, he made necessary adjustments. Significantly however, with respect to the petitioner's claim for deduction for scientific research under section 35(1) of the Act, he made no disallowance. In other words, without any discussion, he did not disturb the petitioner's claim of deduction under such provision;

++ it can, thus, be seen that the claim of deduction was at large before the Assessing Officer. He applied his mind, called upon the petitioner to supply necessary details to substantiate such claims. If thereafter no disallowances were made, to our mind, it cannot be stated that the petitioner failed to disclose all material facts. Along with the return and during the course of assessment proceedings, the assessee had made necessary disclosures to substantiate such claims. If the Assessing Officer was of the opinion that such claims were not allowable or that further inquiry was necessary, he was free to do so. However, having dropped the inquiry at that stage and indirectly having accepted the claims, in facts of the case, it was thereafter not open to issue a notice for reopening of the entire assessment beyond a period of four years from the end of the relevant assessment year;

++ it may be that the jurisdictional High Court had not expressed any opinion with respect to the issue of scientific research done outside the petitioner's premises. However, when the Bombay High Court had, long before the return was filed by the assessee, held the issue in favour of the assessee, raising such a claim, surely, cannot be stated to be a claim not bona fide made or that the assessee had raised a wholly wrong claim;

++ with respect to the second issue, we find that the Universities of Delhi and Nagpur were duly approved under notification issued under Income Tax Act of 1922 and such notifications were held to be valid for the purpose of successor Act also. Merely because such notifications were not produced on record during the original assessment, can hardly be a ground for reopening the assessment beyond a period of four years. If the Assessing Officer had any doubt about any such notifications, he could have asked the petitioner to produce the same in the earlier assessment proceedings. In the result, the impugned notice dated 30.3.2009 is quashed.