Income Tax Act | Non-Production Of Form 3CL Isn't Material Suppression; Not Grounds To Reopen Assessment U/S 147: Kerala High Court

Under Section 35(2AB) of the Income Tax Act, 1961, any expenditure on scientific research is allowable as a deduction. A sum equal to one and one-half times the expenditure is allowed as such a deduction.

Section 147 of the Income Tax Act, 1961, empowers the Assessing Officer (AO) to reassess or recompute income that may not have been disclosed due to certain reasons.

Justices A. Muhamed Mustaque and Harisankar V. Menon stated that it was for the assessing authority to be satisfied with the deduction for the expenditure claimed by the assessee company. Form 3CL, before the amendment, only allowed the assessee to claim expenditure subject to verification of such expenditure by the assessing authority. It is only after the amendment in the year 2016 that the law mandates that the prescribed authority has to certify allowable expenditure for deduction.

In this case, in the assessment, the assessee/appellant claimed a deduction under Section 35(2AB) of the Income Tax Act for the assessment year 2009-10.

In the approval granted, in Form 3CL, the prescribed authority quantified the expenditure allowable under Section 35(2AB) at Rs. 1875.02 lakhs. This was communicated both to the assessee and the income tax authority well before the completion of the assessment in the year 2013. This was communicated in Form 3CL on 15/11/2011.

The assessee did not produce Form 3CL during the assessment proceedings. According to the assessee, they did not produce Form 3CL as it was already communicated to the Director General of Income Tax (Exemption), as seen from the form itself.

However, the assessing authority did not take into account the eligible expenditure stated in Form 3CL and completed the assessment on 31/12/2013.

The reassessment procedure was initiated under Section 147 of the Income Tax Act in light of the expenditure certified in Form 3CL. This was resisted on the ground that the reassessment proceedings had been initiated beyond the 4 years contemplated under Section 147.

The question is whether non-disclosure of Form 3CL is material or not. The appellate authority ruled in favour of the assessee. The second appellate Tribunal interfered with the order of the appellate authority.

The Tribunal observed that the mere fact that Form 3CL had been communicated to the Director of Income Tax would not, by itself, absolve the assessee from the statutory obligation to place the said Form before the Assessing Authority at the relevant time. Consequently, the wilful non-disclosure of Form 3CL would furnish sufficient ground for reopening the assessment under Section 147 of the Act.

The bench disagreed with the Tribunal and opined that the Tribunal erred in entering into a finding, placing reliance on explanation 1 of Section 147. As the law stood for the assessment year, the prescribed authority was not under the obligation to assess the expenditure incurred for scientific research as mandated under Section 35(2AB) based on Form 3CL.

Explanation as above becomes decisive if the assessing officer has to rely on Form 3CL alone for determination. If he has to assess independently of Form 3CL, such non-production from the side or non-reference on the side of the assessee is not material suppression, noted the bench.

The bench held that any reference to expenditure in the Form 3CL thus became inconsequential or insignificant for the assessing authority to allow the deduction claimed. In the light of the law as it stood at the time of assessment, it cannot be said that there was willful non-disclosure, as the prescribed authority's reporting was only to report about approval and not about the expenditure incurred.

Therefore, there was no necessity for the assessee to produce Form 3CL except to establish the approval. Since approval is not in dispute, it was obligatory for the assessing officer to verify actual expenditure incurred, including with reference to the non-binding report as to the expenditure reflected in Form 3CL, added the bench.

In view of the above, the bench allowed the appeal.

Case Title: Apollo Tyres Ltd. v. The Assistant Commissioner of Income Tax

Case Number: ITA NO. 42 OF 2024

Counsel for Appellant/Assessee: Abraham Joseph Markos

Counsel for Respondent/Department: Jose Joseph