The Kerala High Court (Ernakulam Bench) ruled that the law does not permit the AO to reopen an assessment after four years merely to rectify his own mistake of not adverting to Form 3CL given by the prescribed authority under Section 35(2AB) of the Income Tax Act. Since it was not obligatory for the prescribed authority to certify the expenditure incurred on scientific research by a taxpayer, the Court clarified that any reference to expenditure in the Form 3CL thus became inconsequential for the AO to allow the deduction claimed under Section 35(2AB).
In the light of the law as it stood at the time of assessment, the Court observed that it cannot be said that there was any wilful 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 appellant-taxpayer to produce Form 3CL except to establish the approval.
The Division Bench comprising Justice A. Muhamed Mustaque and Justice Harishankar V. Menon observed that since approval by the prescribed authority under Section 35(2AB) is not in dispute, the AO is obligated to verify actual expenditure incurred, including with reference to the non-binding report as to the expenditure reflected in Form 3CL. That omission on the part of the AO to verify the actual allowable deduction cannot be taken for its advantage, unless the blame is squarely attributable to the taxpayer.
The Bench pointed out that Form 3CL, before the amendment, only allowed the taxpayer to claim expenditure subject to verification of such expenditure by the AO. 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. No doubt, this case could have been reopened on the grounds of non-consideration of expenditure reflected in Form 3CL, if it had been done within the time.
Finally, the Bench concluded that if independent of records such as ‘Form 3CL’, an assessment has to be made, then such a fact itself would not constitute non-disclosure of material facts.
Briefly, in this case, the appellant had claimed a deduction under Section 35(2AB) of Rs. 4111.09 lacs, on account of expenditure incurred on scientific research. The prescribed authority, i.e., the Secretary, Department of Scientific Industrial Research, however, in its approval granted in Form 3CL, quantified the said expenditure at Rs. 1875.02 lacs. This was communicated both to the appellant and the income tax authority well before the completion of the assessment.
The dispute arose when the AO did not take into account the eligible expenditure stated in Form 3CL and completed the assessment. Later, a reassessment procedure was initiated under Section 147 in light of the non-disclosure of expenditure certified in Form 3CL. This was resisted on the ground that the reassessment proceedings were initiated beyond the 4 years and that too, when the appellant had disclosed the material facts fully and truly.
When the matter went before the ITAT, it held that the mere fact that Form 3CL had been communicated to the Director of Income Tax would not, by itself, absolve the appellant-taxpayer from the statutory obligation to place the said Form before the AO at the relevant time. Consequently, the wilful non-disclosure of Form 3CL would furnish sufficient ground for reopening the assessment under Section 147.
Appearances:
Advocates Abraham Joseph Markos, V. Abraham Markos, Isaac Thomas, P.G. Chandapillai Abraham, Alexander Joseph Markos, Joseph Kodanthara, John Vithayathil, and Aibel Mathew Siby, for the Appellant/ Taxpayer
Advocate Jose Joseph, for the Respondent/ Revenue
