GEM INDIA LTD Vs. INSPECTING ASSISTANT COMMISSIONER
LAWS(IT)-1989-9-19
INCOME TAX APPELLATE TRIBUNAL
Decided on September 14,1989

Appellant
VERSUS
Respondents

JUDGEMENT

V.P. Elhence, Judicial Member - (1.)THE assessee is aggrieved of the order dated 31-3-1986 of the learned Commissioner of Income-tax (Appeals)-I, New Delhi for the assessment year 1979-80.
(2.)The assessee is a limited company engaged in the purchase and sale of refrigerators. The only ground raised in the appeal relates to the rejection of the assessee's claim under Section 35 in Section 154 proceedings. It is necessary to detail the facts leading to the controversy. They are not in dispute. In the return of income filed on 30-6-1979 the assessee made a claim for Rs. 75,209 during the assessment year 1979-80 in question representing expenditure on scientific research allowable under Section 35. In the draft assessment order prepared by the Income-tax Officer on 20-4-1982 the claim was proposed to be disallowed on the ground that the business of the company had not been set up and had not commenced. Along with this claim, the Income-tax Officer also proposed to disallow three other claims raised by the assessee company namely, relating to investment allowance, deduction under Section 80J and provision for bonus in the books of Head Office (excluding the bonus accounted for separately in the case of Project Engineer). Here it may be noted that for the Asst. Year 1976-77 where a similar claim had been raised for Rs. 22,600, the Appellate Tribunal vide its order dated 23-9-1981 in ITA. No. 3341/Del/1983 had observed as follows in para 4 of its order: -
The amount of Rs. 22,600 is not claimed in this year before us. According to the assessee itself, this amount is to be considered in the assessment year 1979-80. We direct that the allowability of this expenditure Under Section 35 should be considered in the assessment year 1979-80.

In the objections raised by the assessee to the draft assessment order the assessee had stated in para Xl(iii) that disallowance of the expenditure on scientific research had been made without application of mind for the only reason that business had not been set up and that the full details of expenditure were as under: -

JUDGEMENT_2338_TLIT0_19890.htm

It was further stated therein that under Section 35 all the scientific research expenses incurred during the A.Y. 1976-77 and 1978-79, whether revenue or capital, were eligible for deduction in the A.Y. 1979-80 as expenses incurred within 3 years immediately preceding the commencement of business. It was also said that in the assessee's case the business of the unit commenced definitely on 3-1-1978 with the start of manufacturing operations and hence the whole of the expenditure was admissible. Lastly, it was said that the Income-tax Officer disallowed the same without assigning any reasons. In para 11 of his directions under Section 144B the IAC (Asst.) observed that the I.T.O. was justified in holding that the business had not commenced. No specific directions were given regarding the claim under Section 35. The I.T.O. while completing the assessment on 9-7-1982, in accordance with the directions of the IAC (Asst.) under Section 144B, disallowed these expenses vide para 7 of his order reiterating the fact that since the business of the company had not been set up and that it had not commenced, the deduction claimed was held to be not admissible. For the same reason he also did not allow investment allowance, deduction under Section 80J and provision for bonus. The assessee filed an appeal before the learned CIT (A) against the said order which was disposed of by the learned CIT (A) vide his order dated 18-1-1984. However, the assessee did not raise any ground in that appeal regarding the disallowance of expenditure on scientific research under Section 35, though it agitated the points relating to non-allowance of investment allowance, deduction under Section 80J as also disallowance of the loss of Rs. 2,46,219 which the assessee had adjusted against the profits arising from the trading activity. The learned CIT(A) held that the expenses pertaining to the period 1-1-1978 to 30-6-1978 were allowable as business expenditure and that the salary of the Project Engineer also should be added up to 31-12-1977 to the preliminary expenses on the setting up of the factory. The IAC(Asst.) was directed to examine the extent to which the expenses incurred up to 31-12-1977 should be capitalised and added to the cost of machinery for the purposes of depreciation. He also directed that the expenses incurred after 1-1-1978 should be eligible for deduction as business expenditure during the relevant previous year. It appears that against the aforesaid order of the learned CIT(A) though the assessee did not file any appeal, the department had preferred an appeal before the Appellate Tribunal, which vide its order dated 9-5-1985 confirmed the order of the learned CIT(A). Thereafter the assessee moved an application dated 7-11-1985 under Section 154 before the IAC(Asst.). In that application it was said that the learned CIT(A) had already held in his order dated 18-1-1984 that the manufacturing activity in the factory had already commenced but that neither the assessing I.T.O. nor the IAC (Asst.) while passing the order dated 15-3-1984 under Section 250 giving effect to the order of the CIT (A), had allowed the expenses of scientific research amounting to Rs. 75,209 and had therefore, committed a mistake which was apparent from- the record. The IAC (Asst.) vide his order dated 23-12-1985 however, rejected the assessee's claim. He discussed each of the items forming the constituents of the aggregate of Rs. 75,209 and held that those expenses could not be said to be expenses on scientific research.

It is against that order that the impugned order dated 31-3-1986 was passed by the learned Commissioner of Income-tax (Appeals). He noticed that the assessee had not filed any appeal against the original order dated 18-1-1984 of the CIT (Appeals) and that though it had filed an appeal against the order dated 15-3-1984 of the IAC (Asst.) under Section 250 giving appeal effect to the first appellate order (in which again the grounds/objections were raised) but the ground regarding expenditure on scientific research was not taken and that appeal was disposed of by the CIT (Appeals) vide his order dated 28-9-1984. He held that the contention of the assessee that the IAC(Asst.) had not given appeal effect correctly was without substance and that as the assessee failed to raise the above ground of appeal on account of omission on its part, it did not entitle it to raise the same ground through the back door by filing an application under Section 154. He also held that the objection raised by the assessee also did not fall within the ambit of Section 250. He held that even otherwise, the question whether the assessee was entitled to the claim of deduction under Section 35 was a debatable issue where more than one opinion was possible and therefore, the provisions of Section 154 were not attracted in this situation. The order of the Income-tax Officer was, therefore upheld.

(3.)BEFORE us on behalf of the assessee Shri S.R. Kharbanda, the learned counsel, firstly submitted that since the I.T.O. while passing the order under Section 154 had not held that the application did not lie under Section 154 but had rejected it on merits after assuming jurisdiction, it was not for the learned CIT(A) to have observed that Section 154 was not attracted in such a case and that the learned CIT(A) had not actually applied his mind to the merits of the assessee's claim under Section 35. He submitted that the directions dated 23-9-1981 of the Appellate Tribunal while disposing of the assessee's appeal for the A.Y. 1976-77 were mandatory and the IAC (Asst.) was bound to give effect to the same after receipt of the Appellate order for the A.Y. 1979-80. He also submitted that the deduction for Scientific Research was to be allowed as an appeal effect consequent to the order of the Commissioner of Income-tax (Appeals) for the Asst. Year in question. On the other hand, Shri Beck Stephen, the learned Departmental Representative strongly supported the order and the observations as made by the learned CIT(Appeals).


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