INCOME TAX ACT, 1961

Section 263

Revision under section 263 - Validity - AO allowed claim of assessee for deduction under section 35(2AB) - Allegation that expenditure on scientific research claimed and allowed as deduction under section 35(2AB) was not apportioned and debited to profit and loss account of the two EOUs of assessee

AO allowed the claim of assessee for deduction under section 35(2AB). CIT subsequently took up the matter in suo moto revision in exercise of powers under section 263 and held that the order was erroneous and was prejudicial to the interest of the revenue as the AO wrongly allowed the deduction under section 35(2AB). CIT alleged that assessee had two Export-Oriented Units (EOU) and the profits of these EOUs were entitled to 100% deduction under section 10B of the Act as they were EOUs and the benefits of research and expenditure would accrue to all the manufacturing units of the assessee. However, according to CIT, expenditure on scientific research claimed and allowed as deduction under section 35(2AB) was not apportioned and debited to the profit and loss account of the two EOUs. Held: Assessee demonstrated that the enquiries contemplated by the CIT in the show cause notice under section 263 were not required at all and that fact was also accepted by the CIT in his order. CIT only remanded the issue to AO for verification of an insignificant issue whether of approval of units continued even during the previous year and which was demonstrated by assessee before the CIT with sufficient documentary evidence. Therefore, Tribunal concluded that there was no necessity to have remanded the matter. It has further been held by the Tribunal that the CIT has accepted that if R & D activity carried on at the 100% EOUs were different, then there was no need to apportion the R & D expenses of the two EOUs. Certificates of the Chartered Accountant given in Form 56G for both these units clearly mention the nature of activities of these two units for the previous year were the same activity for which approvals were granted to these 100% EOUs, which was clearly demonstrated by the assessee before CIT that expenditure on R & D had no connection, whatsoever with the 100% EOUs. Therefore, there was no need for the CIT to set aside the order of AO for suitable enquiries and deciding the issue afresh.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2008-09

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