V.P. Sharma, Accountant Member - (1.) BOTH these appeals by the assessee relate to the assessment year 1975-76. IT Appeal No. 927 is directed against the Commissioner's order under Section 263 of the Income-tax Act, 1961 ('the Act') setting aside the ITO's assessment order passed under Section 143(3)/144B of the Act on 12-9-1978, and IT Appeal No. 1723 is directed against the Commissioner's order under Section 154 of the Act passed on 22-3-1980, by which the learned Commissioner rectified a mistake apparent from the record which had occurred in his order under Section 263. BOTH the appeals have been heard together and are being disposed of by this common order for the sake of convenience.
(2.) The assessee in this case is a private limited company which was registered on 6-2-1946. It had income from supply of high speed rotary presses imported directly from USA or, by acting as commission agent of foreign manufacturers. Due to foreign exchange difficulty, the assessee-company started manufacture and sale of a sophisticated foreign printing machine, high speed automatic letter press, mercedes super, in collaboration with a Dutch firm. Thereafter, in 1973 the assessee-company decided to develop another two types of printing machines-one web-effect and the other sheet-fed-effect-in view of the growing demand for these machines in India. Till then, these machines had not been manufactured in India. To achieve this purpose, there were two ways, one was to collaborate with some foreign concern and the second was to import a prototype new machine from abroad and then, after understanding the technique and mechanism, to develop its own machine. The company obtained approval and necessary licences from the Government of India and imported one web-effect machine from USA at a cost of Rs. 5,82,910 in June 1974. After considerable study, analysis and research on the prototype, by the end of 1975, the assessee developed its own web-effect in the name of 'Orient web-effect' and the first machine was sold in 1976. The assessee also imported in April 1974, one rapids machine from West Germany for Rs. 2,38,972. Total expenditure on the import of the two machines was Rs. 8,20,962 and the assessee claimed the same as a deduction under Section 35 of the Act, on the ground that it was expenditure incurred on scientific research connected with the assessee's business of manufacture and sale of printing machinery. The ITO allowed deduction for Rs. 5,82,010 but did not allow deduction for the other amount, i.e., Rs. 2,38,972. In appeal, the learned Commissioner (Appeals), however, allowed deduction for Rs. 2,38,972 also, by his order passed on 19-2-1980. In connection with the claim under Section 35 mentioned above, full details were given of the activity relating to scientific research, which had been carried out by the assessee, in the various letters to the ITO. These letters are at pages 4 to 7, 10 to 19, 20 to 23 and 24 to 28 of the assessee's paper book. We would reproduce below the relevant extracts from the letter written to the ITO which is at pages 4 to 7 of the paper book and also from the assessee's letter dated 12-1-1978 which is at pages 10 to 19 of the paper book: In the instant case, the import of machinery was obtained with a view to help the assessee-company not only to make identical or improved parts of the machinery and the machinery, but also to check the quality of each item vis-a-vis the imported machinery as well as its performance. Each part of the machine was renewed and its specifications and quality of material tested and examined so as to enable the company to obtain requisite quality of material and to confer to the specification. But for the work done by the research and development cell of the company by working on these machines, it would not have been possible for us to manufacture the said machinery except through foreign collaboration. It is not merely copying of the machinery as that would not be warranted and permissible under the patent rights of the manufacturers. The company had to find ways and means to show a variance from the original in such a manner so as to avoid infringement of the principal manufacturers' rights. This enabled us to avoid the heavy cost of collaboration. (6) After the Cosa Community Press was chosen for adoption, a deep study was made together with sketches, etc., of alternate changes/adjustments needed to meet the above requirements. On the basis of these sketches, detailed drawings were prepared at the factory from the prototype machine received in June 1974. A final study was made of the prototype machine and the alterations proposed in the drawings as well as of the raw materials to be used, and the further alterations that may be needed to make use of the indigenous talent and indigenous material needed for finally evolving the indigenous machine. (7) Development to suit the Indian market - The major hurdle in making the components was the fact that the original machine made in America was manufactured in inch specifications as per American standards. This was unsuitable. Hence, the design introduced by us was appropriately altered as per the metric system con forming to ISI standards. Considering the material placed before him the ITO came to the conclusion that the assessee had done considerable research in connection with the manufacture of its own web-effect machine and on that view he allowed deduction for Rs. 5,82,010 under Section 35 of the 1922 Act. With regard to the amount of Rs. 2,38,972, he however took a different view, after taking the approval of the IAC under Section 144B of the Act, which was that the said machiney, i.e., rapids machine, had not, in fact, been utilised for the purpose of scientific research, inasmuch as the project was eventually dropped.
(3.) THE learned Commissioner, however, felt that the assessment order of the ITO was erroneous and also prejudicial to the revenue, inasmuch as deduction under Section 35 in respect of expenditure on scientific research claimed at Rs. 5,82,010 had been wrongly allowed by the ITO and accordingly proceedings under Section 263 were initiated. In response to the show cause notice, written submissions were made before the Commissioner (Appeals) by the assessee-company's letter dated 2-11-1979. This letter is at pages 101 to 128 of the assessee's paper book. Full details were given in this letter, of the nature of expenditure which had been incurred and it was also stated that all these details had been supplied to the ITO who duly considered these and came to a correct conclusion after applying his mind to the facts. It was pointed out that there was nothing wrong in the order of the ITO and, therefore, the learned Commissioner could have no jurisdiction under Section 263. In this context, it was also stated that the order of the ITO had been passed after obtaining the IAC's approval under Section 144B and since under Section 263, the Commissioner could deal with the orders passed by the ITO only, such an order which the ITO passed with the IAC's approval under Section 144B cannot be the subject-matter of Commissioner's action under Section 263. It was also pointed out that against the ITO's assessment order, appeal had already been filed to the Commissioner (Appeals), and thus, the assessment order, having become the subject-matter of appeal before the Commissioner (Appeals), it could not be interfered with by the learned Commissioner.;