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TMI Blog2015 (3) TMI 982X X X X Extracts X X X X X X X X Extracts X X X X ..... ill not be covered under clause 5(vii) of the DSIR guidelines. As we have already seen, these receipts are credited to profit & loss account are part of normal sales. They are, therefore, not to be reduced from the expenditure incurred by the assessee on carrying out scientific research on which deduction u/s. 35(2AB) has to be allowed. We are, therefore, of the view that there is no merit in ground raised by the revenue and that the order passed by the CIT(A) u/s. 154 of the Act cannot be sustained and the same is hereby reversed. - Decided in favour of assessee. Addition to book profit by adding the expenditure u/s 14A to the book profit - CIT(A) deleted the addition - Held that:- Identical issue came up for consideration before this Tribunal in DCIT v. Sobha Developers [2015 (2) TMI 940 - ITAT BANGALORE] wherein held that there is no difference between the expression “expenditure relatable” and the expression “expenditure incurred by the Assessee in relation to”. Both the expressions mean that whatever expenditure are incurred to earn income which does not form part of the total income under the Act, both direct and indirect expenditure, have to be disallowed. There is no bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered for disallowance under Rule 8D(2)(iii) is only ₹ 3,22,426. The assessee had also given a break-up of ‘other expenses’ also. Without rejecting the claim of assessee, the AO proceeded to make a disallowance invoking Rule 8D of the Rules. In the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co., (2010 (8) TMI 77 - BOMBAY HIGH COURT), it was held that Rule 8D can be resorted to by the AO only when he rejects the claim made by the assessee regarding expenditure incurred in earning income which does not form part of total income. In the present case, the AO has not done so. We therefore deem it fit and proper to restore this issue of disallowance under Rule 8D(2)(iii) to the AO for fresh consideration - Decided in favour of assessee for statistical purposes. Addition regarding wealth tax liability under the provisions of section 115JB treating the provision for wealth tax as unascertained liability - Held that:- We agree with the submission of the learned counsel for the Assessee that wealth tax liability provision is not covered under Expln- 1(a) to Sec.115JB(2) of the Act. Regarding applicability of Expln-1(c ) to Sec.115JB(2) of the Act is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure U/s 35(2AB) on the net expenditure after reducing sales realized. 2. The Learned Commissioner of Income Tax has erred in not following the substance of DSIR guidelines which indicates that the sales realization arising out of assets sold should be reduced while claiming the deduction but the Learned Commissioner of Income Tax has erred in reducing the sale of products out of R D expenditure. Sale of the product which is an outgo of the R D, cannot be said to be the asset belonging to the assessee to justify set-off of sale proceeds against the expenditure. 3. The Learned Commissioner of Income Tax has no power U/s 154 to rectify his own order when the issue is debatable. The issue has been settled down at the Supreme Court in the case of T.S.Balaram ITO Bombay Vs Volkart Brothers Others 82 ITR 50. 4. The facts material for adjudication of the aforesaid grounds of appeal, are as follows. The assessee is a company engaged in the business of manufacture of pharmaceuticals. It is not in dispute that the assessee was entitled to claim weighted deduction u/s. 35(2AB) of the Act. The provisions of Sec.35(2AB) of the Act in so far as it relates to the dispute in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue Expenditure as per 3 CD Report 8,16,77,006 Less: Product Development Charges received 57,47,808 Total 7,59,29,198 Add: Capital Expenditure as per 3 CD Report 21,23,607 Total Expenditure 7,80,52,805 Deduction u/s35(2AB) at 150% of the R D expenditure (Deduction to be a1lowed) 11,70,79,207 Less Deduction u/s 35(2AB) claimed in the return of income 12,57,00,920 Excess deduction claimed to be disallowed 86,21,713 6. Aggrieved by the order of AO, assessee filed an appeal before the CIT(Appeals). The CIT(A) held that deduction claimed by the assessee u/s. 35(2AB) has to be allowed as the provisions of Sec.35(2AB) of the Act talk only about expenditure and does not speak of net expenditure incurred on scientific research. Following were her relevant observations:- 3.1 I have considered the facts of the case and the legal provision applicable. Sec.35(2AB) refers to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng no mistake apparent from the appellate order, the proposed action is without jurisdiction and unwarranted. 9. The CIT(A), however, did not agree with the submissions of the assessee and held that substance of the DSIR guidelines clearly indicate the reduction of receipts related to the in-house R D Centre from the gross expenditure outflow on R D. He was of the view that in the present case the applicability of the DSIR guidelines is not disputed. The substance of the impugned provisions in the guideline for reducing receipts of the R D Centre from the outflow is also very clear. Hence, the issue on hand represents an error apparent from records. He therefore rectified on the aspect of claim of deduction by the assessee u/s.35(2AB) and upheld the AO s decision in this matter. 10. Aggrieved by the aforesaid decision of the CIT(A), the assessee has filed appeal being ITA No.764/B/14. 11. The issue that needs to be decided now is as to, what is the nature of product development charges of ₹ 57,47,808 received by the assessee? The details from whom the aforesaid sum was received which is at page 37 of the PB is given as ANNEXURE-I to this order. 12. We have hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work done and sold is because such sales would be reflected as receipts by the assessee in its books of account and income from business would be computed treating such sale as part of business receipts. The receipts arising out of sale of products will not go to reduce the expenditure on R D, whereas the assets acquired in the process of carrying out the R D if they are sold, such sales realization would go to reduce the expenditure on scientific research and that is why sales realization arising out of assets sold is required to be offset against R D expenditure. The above explanation will be sufficient to hold that the order passed by the CIT(A) u/s.154 of the Act is unsustainable. Nevertheless, we will also examine as to what is the exact nature of receipts from sale of products. 14. A copy of license and supply agreement which was filed by the assessee before the AO as well as CIT(A) is at pages 5 to 26 of the assessee s paperbook. The sale of products is nothing but the sale of Dossiers by the assessee to persons not associated with the assessee or its directors. In the course of carrying out the scientific research, the assessee prepares elaborate documents regarding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t charges received by the assessee will not be covered under clause 5(vii) of the DSIR guidelines. As we have already seen, these receipts are credited to profit loss account are part of normal sales. They are, therefore, not to be reduced from the expenditure incurred by the assessee on carrying out scientific research on which deduction u/s. 35(2AB) has to be allowed. We are, therefore, of the view that there is no merit in ground No.2 raised by the revenue and that the order passed by the CIT(A) dated 9.4.2014 u/s. 154 of the Act cannot be sustained and the same is hereby reversed. Thus, ITA No.764/B/14 by the assessee is allowed, while ground No.2 raised by the revenue is dismissed. 18. Ground No.3 raised by the revenue reads as follows:- 3. The Ld CIT(A) erred in deleting the addition to book profit made by AO by adding the expenditure u/s 14A to the book profit. 19. The assessee, as we have already seen, is a company. Section 115JB of the Act provides that where in the case of an assessee being a company, the income tax payable on the total income as computed under the Act in respect of previous year is less than 7 % of its book profit, such book profit shall be dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies Act has been allowed to be adjusted by the IT Act, it has been done through very specific provisions in terms of the explanations to Sec. 115JB. When the language of the explanation is specific and unequivocal and mentions specific exempted incomes in explanation 1(f), there is no situation for reading in any other Interpretation even if they are analogous to the specified sections. While Sec.14A deals with disallowance of expenditure related to exempt income, it cannot be equated in letter and spirit with exempted income u/s.10 and expenditure related to it which is provided in explanation 1(f) of Sec. 115JB. Hence, the inclusion of expenditure disallowed u/s. 14A for computing book profit for MAT purposes is not within the scheme of the legal provisions and the same is, therefore, directed to be deleted. (emphasis supplied) 23. Aggrieved by the order of CIT(A), the revenue has raised ground No.3 before the Tribunal. 24. We have heard the rival submissions. We have heard the rival submissions. The ld. DR drew our attention to the provisions of section 115JB Explanation 1(f) and submitted that the amount of expenditure relatable to any income to which section 10 appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent. (2) Every assessee,- (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956); or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including profit and loss account,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (38) thereof)] or section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or (iia) .. (other portions of the section are not relevant for the present case) 27. A reading of the provisions of Sec.115JB(1) shows that when an Assessee is a company and the income-tax, payable on the total income as computed under this Act (under the normal provisions of the Act) in respect of any previous year relevant to the assessment year is less than prescribed percentage (this percentage keeps changing for various AYs) of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent. Book profit for the purpose of Sec.115JB of the Act has been defined by Expln.-1 below Sec.115JB(2) as net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956). Expln.1 below Sec.115JB(2) also provides for certain additions and deductions from the said profit where such s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act read with Rule 8D of the rules can be imported into the provisions of clause (f) to Explanation (1) to section 115JB of the Act, is itself erroneous. The question to be asked is as to how to give effect to the provisions of clause (f) to Explanation (1) to section 115JB of the Act. We do not think that there is any prohibition to adopt the disallowance made by the AO u/s.14A of the Act read with Rule 8D of the rules, while computing total income under the normal provisions of the Act. The argument of the learned counsel for the Assessee that section 14A of the Act is very specific and is applicable only for the purpose of computing total income under Chapter IV of the Act and that section 115JB appears in Chapter XII-B of the Act dealing with specific provisions relating to certain companies and therefore the provisions of Sec.14A read with Rule 8D of the Rules cannot be applied while making addition to net profit as per profit and loss account u/s.115JB Expln.1 clause (f) of the Act, because the expression expenditure relatable is used in subclause (f) of Explanation (1) to section 115JB of the Act whereas expression with the expression used in 14A of the Act is expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant has not produced the evidentiary support in relation to dispersal of loan and utilization of loan. Whereas the appellant has produced the evidence that the amount invested was out of positive bank balance and no borrowings were utilized for the purpose of investment. 33. The assessee earned dividend income of ₹ 38,75,857. It quantified a sum of ₹ 3,22,426 as expenditure incurred in earning tax free income dividend income which does not form part of the total income and which is to be disallowed u/s. 14A of the Act. 34. The break-up of the sum of ₹ 3,22,426 is not specifically given, but is stated to be relating to management fee, legal professional charges, security transaction charges and NSDL charges. It is thus clear that the assessee by implication had claimed that there was no expenditure incurred by way of interest, either directly or indirectly, which is attributable to the borrowed funds which were used for the purpose of investment which yielded tax free income. 35. The AO observed that Schedule G to the Financial Statements of the assessee had shown investment to the tune of ₹ 28,45,29,937 in shares mutual funds of various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan and even these specify certain conditions required to be met. The date-wise actual disbursal and utilisation is not proved from the ledger copies as submitted. The CIT(A) also referred to the decision of Mumbai ITAT in the case of Hercules Hoists Ltd. (ITA No.7944, 7946, 2255 7943/mum/2011), wherein it was held that with the introduction of Rule 8D the burden of proof on the assessee has become more stringent, so that rather than showing existence of sufficient capital, the matter would be required to be examined from the stand point of utilisation of the borrowed interest bearing funds. In the absence of categorical utilisation certificate from the bank, the CIT(A) was of the view that there was no evidentiary support of the assessee s claim. Hence, the disallowance u/s.14A of the Act as made by the AO was upheld by the CIT(A). 39. Aggrieved by the order of CIT(A), the assessee has raised ground No.2. 40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee s paperbook and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 115JB treating the provision for wealth tax as unascertained liability. 45. The question that arises for consideration on the aforesaid ground of appeal by the Assessee is as to whether wealth tax liability could be added to the profit as per P L account for the purpose of arriving at the book profits u/s. 115JB of the Act? The AO did not give any reason for adding provision for wealth-tax to the net profit as per P L account for arriving at the book profits of the assessee. 46. The CIT(A) justified the action of AO observing as under:- 5. The appellant has grieved against the AO adding the provision of Wealth Tax to the Book Profit u/s. 115JB whereas explanation 1(a) to Sec. 115JB only refers to the amount of income tax paid or payable, and the provision therefor. While agreeing with the appellant s view that wealth tax has not been specifically mentioned in this explanation, I nevertheless find that any provision for meeting liabilities other than ascertained liabilities is liable to be added back to book profit and the appellant s debiting of wealth tax provisions would be covered under this provision. 47. Before us, the ld. counsel for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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