M/s. Prakruti Products Private Limited, Karwar V. Deputy Commissioner of Income-Tax-1, Udupi

ITA 475/BANG/2023

• Counselvise Citation: [2023] 102 COUNSELVISE.COM (IT) 0528 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 25-10-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 29-06-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Principle of natural justice; Initiation of penalty proceedings; Competent authority; Set aside
• Section: 271(1)(c); 143(3); 234B; 250

Judgement Text

ITA No.475/Bang/2023 Prakruti Products Pvt. Ltd., Karwar IN THE INCOME TAX APPELLATE TRIBUNAL “A’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.475/Bang/2023 Assessment Year: 2014-15 Prakruti Products Private Limited Ground Floor Sagar Complex Maruthi Temple Road Karwar Karnataka 581 301 PAN NO : AADCP8624P Vs. Deputy Commissioner of Income-tax Circle-1 Udupi APPELLANT RESPONDENT Appellant by : Shri Prashanth G.S., A.R. Respondent by : Sri Nischal B., D.R. Date of Hearing : 26.10.2023 Date of Pronouncement : 26.10.2023 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against order of NFAC passed u/s 250 of the Income-tax Act,1961 ['the Act' for short] for the assessment year 2014-15 dated 25.4.2023. The assessee has raised following grounds of appeal: 1. Assessment order bad in law: 1.1 The Appellant, M/s Prakruti Products Private Limited, humbly submits that the order dated December 30, 2016 passed by the Learned Assessing Officer (`the AO' or 'the Learned AO') under section 143(3) of the Income Tax Act, 1961 (`the Act') is erroneous, contrary to law and facts of the case of the Appellant and is liable to be quashed. 1.2 The Learned AO has passed the assessment order in violation to principles of natural justice and therefore, required to be set aside in entirety. ITA No.475/Bang/2023 Prakruti Products Pvt. Ltd., Karwar Page 2 of 7 1.3 The Commissioner of Income Tax (Appeals) ['the Learned CIT(A)'] has erred in disposing the appeal by confirming the additions made in the assessment order of the Learned AO without considering the documents and evidence produced during the appeal proceedings and therefore, the order of the Learned CIT(A) dated April 25, 2023 is bad in law and is liable to be set aside. 2. Denial of reduction in value of inventory: 2.1 The Learned AO has erred in adding a sum of Rs. 47,84,689 by denying the Appellant's claim of reduction in the value of closing inventory as on March 31, 2014. 2.2 The Learned AO and the Learned CIT(A) has failed to comprehend the nature of inventory of the Appellant that requires appropriate alignment of the valuation with the realisable value in accordance with the valuation standards envisaged in Accounting Standard — 2 (Valuation of Inventories) [AS-2] read with Income Computation and Disclosure Standard — 2 (Valuation of Inventories). 2.3 The Learned AO has erred in not appreciating that the report of the quality control test for defective material in the inventory of the Appellant had identified a decrease in assay and high moisture content in its inventory and had diluted the net realisable value of such inventory and therefore, necessary adjustments were ought to be made to its valuation in the books of account and consequently in the return of income of the Appellant. 2.4 The Learned CIT(A) has erred in holding that the revalued stock might not be a part of the stock as on 31-03-2014 and might be out of the current year's production. Such an assumption of the Learned C'T(A) without verification of facts is not tenable. 2.5 The Learned AO and the Learned CIT(A) has failed to apply the principles set out in AS-2 with respect to valuation of closing inventory. 3. Denial of deduction under section 35(2AB) of the Act: 3.1. The Learned AO has erred in denying an allowance of Rs. 99,47,180 claimed by the Appellant towards scientific research expenditure under section 35(2AB) of the Act. 3.2. The Learned AO has erred in law and on facts in holding that the Appellant is not eligible for availing weighted deduction under section 35(2AB) of the Act without appreciating the facts of the case. The Appellant has incurred expenditure on scientific research on in- house research and development facility after obtaining the necessary approvals from prescribed authorities. ITA No.475/Bang/2023 Prakruti Products Pvt. Ltd., Karwar Page 3 of 7 3.3. The Learned AO has erred in law and on facts in denying the deduction without considering the evidence submitted during the assessment proceedings evidencing the genuineness of the expenditure incurred towards R&D facility. 3.4. The Learned AO has failed to appreciate the fact that the Appellant has obtained the requisite approval from the Department of Scientific and Industrial Research in Form 3CM for the subject AY for claiming the weighted deduction under section 35(2AB) of the Act and that the competent authority has undertaken a detailed verification of facts, documents and genuineness of expenditure before providing the said approval. 3.5. The Learned AO has erred in law and on facts in laying down that merely because the Appellant has not claimed refund of excise duty paid on certain inward invoices relating to the R&D facility, such payments are not eligible for deduction under section 35(2AB) of the Act. 3.6. The Learned AO has erroneously held that the main activity of the Appellant is manufacturing of herbal products and therefore any purchase of raw materials and consumables would automatically be incurred towards manufacture and not towards research and development. 3.7. The Learned AO has erred in holding that the description of materials indicate that the materials can be used for manufacture and not specifically for R&D. The Learned AO has failed to appreciate that neither the invoice received from the vendors of the Appellant nor the description of the materials procured by the Appellant indicate or give reference to the end use of the material. 3.8. The Learned CIT(A) has erred in not appreciating that the Appellant has obtained approval in Form 3CL towards expenditure spent on R&D facility during the subject AY. 3.9. The Learned AO has erred on facts in concluding that the Appellant has not purchased a single equipment during the FY 2013-14 without considering the fact that the Appellant has purchased R&D Equipment and Lab Equipment to the tune of Rs. 11,02,384 during the FY 2013-14. 3.10. The Learned CIT(A) has erred in confirming the disallowance made by the Learned AO without considering the submissions and documents produced during the appeal proceedings. 4. Initiation of penalty proceedings 4.1. The Learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. ITA No.475/Bang/2023 Prakruti Products Pvt. Ltd., Karwar Page 4 of 7 5. Other grounds: 5.1. The Learned AO has erred in law and on facts in levying interest under section 234B and 234C of the Act. The interest so levied, being erroneous, is required to be deleted. 5.2. The Appellant craves leave to add, amend, alter or delete any of the above grounds at any time before or during the hearing of the appeal. 2. At the outset, the ld. A.R. argued the ground nos.1.1 to 1.3 that the evidence produced by assessee before ld. AO and NFAC was not properly appreciated. Hence, he submitted that the issue may be remitted to the file of ld. AO for fresh consideration. 2.1 The ld. A.R. submitted that the assessee had filed its return of income on 30.09.2014 declaring total income at Rs.11,19,3401- and filed revised return of income on 28.11.2014 declaring a loss of Rs.36,65,345/-. 2.2 He submitted that the assessment was completed under section 143(3) of the Act vide order dated 30.12.2016 by making an addition of Rs.47,54,689/- on account of decrease in value of inventory and disallowing a sum of Rs.99,47,177/- being deduction claimed under section 35(2AB) of the Act. The assessee preferred an appeal before the CIT(A) who in turn dismissed the appeal filed. 2.3 The ld. A.R. submitted that the assessee had filed a revised return , as per which the closing stock value was adopted at Rs.3,81,12,000/- which resulted in reduction of inventory to the extent of Rs.47,84,689/- as compared to the original return. The assessing officer disregarded the action of the assessee and considered the total income declared in the original return. ITA No.475/Bang/2023 Prakruti Products Pvt. Ltd., Karwar Page 5 of 7 2.4 He submitted that the assessee had explained the reasons for revising stock vide written submissions dated 24.02.2021 and 21.04.2023. Original & revised stock statements and lab reports were furnished to buttress the claim of the assessee. However, the learned CIT(A) confirmed the additions made without taking cognizance of the submissions made by mentioning at para 6.3, page 14 of his order that the assessee has not filed any evidence to show that the finished goods were defective. This is incorrect as the details were duly furnished both to the assessing officer and CIT(A). 2.5 The ld. A.R. submitted that the assessee had incurred expenses towards scientific research of Rs.99,47,176/- & claimed deduction under section 35(2AB) of the Act. The prescribed authority vide report in Form No. 3CL had reported the research expenses at Rs.94.54 lakhs. The assessing officer despite furnishing Form No. 3CL, disallowed the deduction claimed by holding that the description of materials purchased does not indicate any reference to Research & Development (R&D). Further, the officer has also stated that the description of persons employed for R&D indicate that there are no regularly , employed scientists/ Ph.D. holders & maximum number of persons employed are SSLC qualified. 2.6 He submitted that the ld. CIT(A) at para 6.2, page 14 of the appellate order has stated that the assessee has not filed any evidence to negate the findings of the assessing Officer. The CIT(A) also mentioned that the assessee has not provided the details of research activity currently going on. This finding of the CIT(A) is contrary to the facts of the case. 2.7 He submitted that the assessee had furnished the order of the prescribed authority in Form No. 3CM and also Form No. 3CK filed with the prescribed authority which contain the complete details of the research activities. Further, the assessee had filed written submissions dated 24.02.2021 and 21.04.2023 containing the ITA No.475/Bang/2023 Prakruti Products Pvt. Ltd., Karwar Page 6 of 7 details of research expenses incurred and the list of 27 employees of R & D Department where only 4 helpers are SSLC, 3 lab assistants are PUC & all other employees are Ph.D., 157-173 M.Sc., B.E., M. Pharma & B.Sc. graduates which proves that the finding of the authorities below that no regularly employed scientist/Ph.D. holders were employed is not correct. Therefore, the disallowance of deduction under section 35(2AB) of the Act without taking cognizance of the submissions filed is not in accordance with law and thus the same needs to be allowed on the facts of the case. 2.8 He submitted that when research expenses have been approved & reported by the prescribed authority in Form No. 3CL, the authorities below are not justified in disallowing the said expenses and thus the deduction under section 35(2AB) of the Act needs to be allowed in the interest of equity & justice. 3. The ld. D.R. submitted that the order of NFAC has been passed after giving fair opportunity of hearing to the assessee and hence, issue may be decided on merit only. 4. We have heard the rival submissions and perused the materials available on record. In the present case, as rightly pointed out by the ld. A.R., the assessee has filed various details as listed in his arguments before ld. AO as well as before NFAC, which are not properly appreciated. It is also brought to our notice that the claim of assessee u/s 35(2AB) of the Act was allowed to the assessee in earlier assessment years and also in subsequent assessment years and we are not able to understand how this claim of assessee u/s 35(2AB) of the Act has been rejected without appreciating various submissions and details filed by the assessee before the lower authorities. Hence, in the interest of justice, we remit all the issues in dispute to the file of ld. AO for fresh consideration after giving an opportunity of hearing to the assessee. ITA No.475/Bang/2023 Prakruti Products Pvt. Ltd., Karwar Page 7 of 7 5. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 26 th Oct, 2023 Sd/- (Beena Pillai) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 26 th Oct, 2023. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(Judicial) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.