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Bbc Brown Boveri and Co. Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1989)31ITD408(Mum.)
AppellantBbc Brown Boveri and Co. Ltd.
Respondentincome-tax Officer
Excerpt:
.....1975-76 and 1976-77 by which the commissioner had set aside the assessment orders passed by the income tax officer for the assessment years 1975-76 and 1976-77 with a direction to the income-tax officer to redo the same in accordance with the provisions of law. these assessments were set aside by the commissioner on the ground that deduction allowed by the income-tax officer in relation to expenditure on research and development appeared to be excessive.2. the brief facts of the case are that the appellant is a non-resident liable to tax in india on royalty received by it in respect of the products manufactured and sold in india under the know-how agreement entered into between the appellant company and the indian parties. the appellant company had been receiving this royalty since.....
Judgment:
Method adopted for allowance of research and development expenditure by assessing officer resulted in excessive allowance. No basis for such conclusion there orders were not erroneous and prejudicial.

The Commissioner has not given any basis for holding that as to how the deduction allowed by the assessing officer was considered by him to be excessive or incorrect. The expenses claimed by the assessee for research and development attributable to royalty income in India are also supported by the certificates of the licensed auditors. The mere fact that the method selected by the assessing officer resulted in lower tax liability of the assessee compared to the liability which would have resulted from the adoption of another method, it cannot be said that discretion was not exercised by the assessing officer in a proper and judicious manner. In view of the aforesaid, the assessment orders passed by the assessing officer for both the years under consideration cannot be said to be erroneous or prejudicial to the interest of the revenue.

1. These two appeals have been filed by the assessee against an order under Section 263 of the Income-tax Act, 1961 passed by the Commissioner of Income-tax, Bombay City-II, Bombay, for the assessment years 1975-76 and 1976-77 by which the Commissioner had set aside the assessment orders passed by the Income tax Officer for the assessment years 1975-76 and 1976-77 with a direction to the Income-tax Officer to redo the same in accordance with the provisions of law. These assessments were set aside by the Commissioner on the ground that deduction allowed by the Income-tax Officer in relation to expenditure on research and development appeared to be excessive.

2. The brief facts of the case are that the appellant is a non-resident liable to tax in India on royalty received by it in respect of the products manufactured and sold in India under the know-how agreement entered into between the appellant company and the Indian parties. The appellant company had been receiving this royalty since the assessment year 1965-66 onwards. For claiming deduction in respect of expenditure incurred for research and development against income from royalty, the assessee had adopted pro-rata basis of global turnover and the turnover of their licence in India. After comparing turnover of products manufactured according to Brown Boveri design by their licences in India and in various countries and by Brown Boveri in Baden with the turnover of company's licence in India, the percentage was obtained for allocution of the research and development expenses to be set off against royalty income received from the licences in India and such proportionate expenses were claimed as deduction against royalty income by the assessee. According to the assessee's representative these figures claimed as deduction on account of expenses incurred for research and development have been certified by the licensed auditors who had certified that the proportionate expenses claimed by the appellant company is true and fair proportion of the total research and development cost attributable to royalty payments received in India.

The assessee had claimed such proportionate expenses for the research and development attributable to royalty payments received in India at Rs. 27,74,998 against the royalty income of Rs. 24,62,932 in assessment year 1975-76. The learned Income-tax Officer, after detailed examination of the entire relevant facts and material allowed research and development expenses to be set off against the royalty income at Rs. 19,74,998 and thereby disallowed a sum of Rs. 8,00,000 out of the deduction claimed by the assessee in relation to research and development expenditure. In assessment year 1976-77, the appellant had claimed deduction of such proportionate expenses for research and development amounting to Rs. 11,58,211 against gross income from royalty amounting to Rs. 17,53,077. The Income-tax Officer had allowed 2/3rd of the aforesaid expenses for research and development, which comes to Rs. 7,72,142. The assessment for assessment year 1975-76 was completed after taking into consideration the instructions received from the Inspecting Assistant Commissioner of Income-tax, Foreign Companies Range-I, Bombay, under Section 144A of the Income-tax Act, 1961 and also with the final approval under Section 144B of the Income-tax Act, 1961. The assessment for assessment year 1976-77 was also completed in accordance with the directions of the Inspecting Assistant Commissioner, Foreign Companies Range-I, Bombay under Section 144B. It was submitted by the assessee before the Income-tax Officer that expenditure in relation to research and development has been claimed consistently from assessment year 1965-66 onwards on similar manner and was allowed by the Income-tax Officer on similar basis, as claimed by the assessee in the assessment years under consideration.

3. The Commissioner has set aside the assessment orders for the two years under appeal on the ground that the method adopted by the Income-tax Officer in computing the allowable research and development expenditure has resulted in excessive allowance of such expenses. The learned Commissioner further observed that the Income-tax Officer should have considered the various methods by which the research and development expenditure can be computed including the method suggested by the Commissioner in the impugned order passed under Section 263. The Commissioner suggested that the following basis be adopted : (a) The total world sales of the company for the period covering the relevant previous years should be ascertained. The royalty received in India over the said period should also be so determined and a percentage of the royalty received in India to the total world sales should be worked out. Such percentage should be applied to the total research and development expenditure and the resultant sum should be deducted from the royalty received in India. It was submitted by the assessee that the aforesaid method suggested by the Commissioner is inconsistent inasmuch as a comparison is sought to be made between the royalty income received in India to the total world sales. The total world sales are made up of recoveries for cost of materials, cost of labour and recoveries of other charges, which augment the profits of the appellant. It was further submitted that & more correct comparison should be on a like to like basis. The Indian royalty should be compared to the total income or the Indian sales should be compared to the total sales. The other matters are not in dispute.

4. The learned counsel for the assessee argued that the Commissioner had no jurisdiction to invoke the provisions of Section 263 in relation to assessment orders passed by the Income-tax Officer, as the assessment orders were passed under Section 143(3) read with Section 144B and the assessment orders passed by the Income-tax Officer were not merely orders of the Income-tax Officer but were orders incorporating the directions of the Inspecting Assistant Commissioner over which the Income-tax Officer had no control. He further submitted that the Explanation inserted by the Taxation Laws (Amendment) Act, 1984 to Section 263(1) with effect from 1st day of October, 1984 was an amendment of a clarificatory nature and will not apply retrospectively in relation to assessment proceedings for assessment years 1975-76 and 1976-77. The learned assessee's counsel placed reliance on the decision of the Special Bench of the Tribunal in the case of East Coast Marine Products (P)Ltd. v. ITO [1983] 4 ITD 73 (Hyd.) and also relied upon the decisions of the Delhi Bench of the Tribunal in the case of Auto Pins (India) v. ITO [J987] 20 ITD 1 and in the case of Aeroplane Shoe Factory v. ITO [1989] 28 ITD 478. The learned counsel for the assessee further relied upon the judgment of the Hon'ble Bombay High Court in the case of CWT v. Mahavirprasad Bubna [1980] 122ITR 570 in which it was held that unlike declaratory provisions, a clarificatory provision has no retrospective effect but is always prospective in its operation.

He further invited our attention towards the notes on clauses of Taxation Laws (Amendment) Bill 1984 appearing in 149 ITR (St.) p.62 which shows that the aforesaid Explanation inserted with effect from 1st day of October 1984 merely seeks to clarify that for the purpose of Section 263, an order of assessment passed by the Income-tax Officer on the basis of instructions issued by the Inspecting Assistant Commissioner under Section 144A or 144B shall be regarded as an order passed by the Income-tax Officer. He submitted that it is ,thus evident from the notes on clauses that the said amendment was of a clarificatory nature and cannot be made applicable with retrospective effect. The learned assessee counsel therefore submitted that the order passed by the Commissioner under Section 263 is wholly without jurisdiction.

On the merits of the case, the learned counsel for the assessee submitted that the Commissioner has merely observed that the expenditure on research and development allowed by the Income-tax Officer appeared to be excessive, but he has not pointed out as to how the deduction allowed by the Income-tax Officer in respect of research and development expenses was excessive and has also not given any basis for holding the same as erroneous. He further submitted that the Commissioner has observed in the order under Section 263 that the Income-tax Officer should have considered the various methods by which allowable research and development expenditure can be computed. The learned counsel submitted that the adoption of an alternate method by itself would not be within' the scope of Section 263 unless it is conclusively established that the method adopted by the Income-tax Officer for allowing such research and development expenditure was erroneous and prejudicial to the interests of revenue. The learned assessee's counsel submitted that merely because some alternate method may bring some more revenue will not render the assessment orders passed by the Income-tax Officer as erroneous in law. He further submitted that the method adopted by the assessee is the one which has been consistently adopted from year to year and the method adopted by the assessee has been accepted in the past for over ten years and does not call for any revision under Section 263. He has also invited our attention towards the judgment of the Hon'ble Supreme Court in the case of CIT v. Simon Carves Ltd. [1976] 105ITR 212. The head-note appearing at page 213 is reproduced hereunder: Held, affirming the decision of the High Court, that discretion was vested in the Income-tax Officer under Rule 33 for the purpose of making his choice of the methods. There was nothing to show that the discretion was not exercised by him in a proper or judicious manner; nor was it suggested that the Officer was actuated by some oblique motive. From the mere fact that the method selected by him was such as resulted in lower tax liability of the assessee compared to the, liability which would have resulted from the adoption of another method, it did not follow that the discretion was not exercised in a proper and judicious manner. The order made by the Income-tax Officer at the time of the original assessment was a legally correct order and was not vitiated by any error. The absence of an error justified the inference that this was not a case of income escaping assessment.

He further invited our attention towards the judgment of the Hon'ble Madras High Court in the case of Venkatakrishna Rice Company v. CIT [1987] 163 ITR 129. The relevant extracts from the head-note of the aforesaid judgment delivered by the Hon'ble Madras High Court is also reproduced hereunder: Held, that as in the instant case, the order of assessment of the Income-tax Officer was in accordance with law, it could not be held to be erroneous in law and consequently it could not be prejudicial to the interest of the Revenue and hence the action of the Commissioner was not justified. The Tribunal was, therefore, not right in upholding the order of the Commissioner.

The scope of interference under Section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury nor is the section meant to get at sheet escapement of revenue which is taken care of by other provisions in the Act. The prejudice that is contemplated under Section 263 is prejudice to the income-tax administration as a whole. Section 263 is to be invoked not ,as a jurisdictional corrective or as a review of a subordinate's order in exercise of the supervisory power but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the Revenue which is a unique conception which has to be understood in the context of and in the interest of revenue administration. Such a power cannot in any manner be equated to or regarded as approaching in any way the appellate jurisdiction or even the ordinary revisional jurisdiction conferred on the Commissioner under Section 263.

In view of the above, the learned counsel for the assessee contended that the order passed by the Commissioner under Section 263 deserves to be quashed.

5. The learned Departmental Representative contended that the Commissioner had validity invoked the provisions of Section 263. He further relied upon the decision of the Hon'ble Andhra Pradesh High Court in the case of Torson Products Ltd. v. CIT[1988] 173ITR 611/38 Taxman 72 in which it was held that an assessment order passed in accordance with the directions given by the Inspecting Assistant Commissioner under Section 144B continues to be one passed by the Income tax Officer and such an order cannot be regarded as an order passed by the Inspecting Assistant Commissioner. It was further held in the aforesaid judgment that the Commissioner has jurisdiction to revise an order passed by the Income-tax Officer in accordance with the directions of the Inspecting Assistant Commissioner under Section 144B.The learned Departmental Representative also relied upon the judgment of the Hon'ble Andhra Pradesh High Court in CIT v. Mulkanoor Co-operative Rural Bank Ltd. [1988] 173 ITR 629/38 Taxman 293, supporting his aforesaid contention.

As regards the merits of the case, the learned Departmental Representative vehemently argued that the deduction allowed by the Income-tax Officer in respect of research and development expenditure in both the aforesaid years was excessive. It was further submitted that the method adopted by the Income-tax Officer in computing the allowable research and development expenditure has resulted in excessive allowance of such expenses and hence the orders passed by the Income-tax Officer were erroneous inasmuch as they were Prejudicial to the interests of revenue. The learned Departmental Representative further took us through the various findings given by the Commissioner in his order under Section 263 holding as to how excess deduction had been allowed by the Income-tax Officer with regard to such research and development expenses attributable against income from royalty received in India. He, therefore, contended that the order passed by the Commissioner under Section 263 deserves to be sustained.

6. We have carefully considered the rival submissions made by both the sides. It is apparent from the perusal of the order passed by the Commissioner that he merely concluded that the method adopted by the Income-tax Officer in computing the allowable research and development expenditure has resulted in excessive allowance of such expenses to the assessee in assessment years 1975-76 and 1976-77. However, the Commissioner has not indicated as to how he has arrived at the conclusion that such deduction allowed by the Income-tax Officer has been considered by him to be excessive. He has further not pointed out the basis on which it can be validly concluded that the deduction allowed by the Income-tax Officer in respect of such expenses is incorrect and erroneous. It has not been disputed by the learned Departmental Representative nor by the Commissioner in his order under Section 263 that the method adopted by the assessee and accepted by the Income-tax Officer is the one which has been consistently adopted from year to year. The mere fact that by adopting some other alternative method for computing the allowable amount of expenditure on account of research and development would fetch some more revenue will not render the assessment orders passed by the Income-tax Officer erroneous and prejudicial to the interests of the revenue. We find that the assessee claimed deduction in respect of research and development expenses by allocating such proportionate expenses by adopting pro-rata basis of global turnover and the turnover of their licences in India and such method of allocating research and development expenditure attributable to royalty income in India has been consistently accepted in the past several years. The assessee had made claim for deduction of such expenses for research and development amounting to Rs. 27,74,998 in assessment year 1975-76 and Rs. 11,58,211 in assessment year 1976-77.

The Income-tax Officer had examined the question relating to the allowability of the said expenditure at great length in the assessment orders passed by him and the aforesaid point relating to the allowability of research and development expenditure was also the subject matter of scrutiny by a superior authority, viz. the Inspecting Assistant Commissioner during the proceedings under Section 144B. After detailed consideration of the entire facts and circumstances, the Income-tax Officer had allowed research and development expenses at Rs. 19,74,998 for assessment year 1975-76 and Rs. 7,72,142 for assessment year 1976-77. The Commissioner has not given any basis for holding the aforesaid deduction allowed by the Income-tax Officer as to how it was considered by him to be excessive or incorrect. The expenses claimed by the assessee for research and development attributable to royalty income in India, are also supported by the certificates of the licensed auditors. The Commissioner has brushed aside the said report of the auditors merely by saying that the opinion given by the auditors is restricted to the system adopted by the assessee and does not consider any other fair method. The judgment of the Hon'ble Supreme Court relied upon by the learned counsel for the assessee in the case of Simon Carves Ltd. (supra) fully supports the assessee's contention that the mere fact that the method selected by the Income-tax Officer resulted in lower tax liability of the assessee compared to the liability which would have resulted from the adoption of another method, it cannot be said that discretion was not exercised by the Income-tax Officer in a proper and judicious manner. In view of the aforesaid discussions, we hold that the assessment orders passed by the Income-tax Officer for both the years under consideration/cannot be said to be erroneous or prejudicial to the interest of the revenue, merely because the Commissioner wants to substitute another estimation for allowable expenditure for research and development by adopting other alternative methods in substitution of the estimated research and development expenditure allowed by the Income-tax Officer based on the method consistently followed and accepted in the past several years. The provisions of Section 263 are not meant to set aside merely unfavourable orders and bring to tax some more money to the treasury unless it is established that the order passed by the Income-tax Officer is erroneous and prejudicial to the interest of the revenue.

This view is also supported by the judgment of the Hon'ble Madras High Court in Venkatakrishana Rice Co's case (supra) Since we have accepted the assessee's appeals on the merits of the case, we do not consider it necessary to decide the legal points raised by the assessee as to whether the Commissioner can revise an assessment order passed by the Income-tax Officer in accordance with the directions given under Section 144B of the Income-tax Act, 1961 by the Inspecting Assistant Commissioner.

7. In the result, the order passed by the Commissioner under Section 263 for both the years is cancelled and the assessee's appeals are allowed.


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