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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 ..... aised by the assessee in its appeal arise out of identical facts and circumstances and are therefore taken up for consideration together. The grounds of appeal are as follows:- Revenue's ground "2. The Ld CIT(A) erred in allowing the gross expenditure incurred on scientific research u/s 35(2AB)." Assessee's grounds of appeal 1. The Learned Commissioner of Income Tax has erred in passing rectification order U/s 154 of the Income Tax Act, 1961 reversing the decision taken by him in appeal allowing computation of R & D expenditure on the gross expenditure. The Appellant has claimed the deduction in its return U/s 35(2AB) on the gross expenditure but the Assessing Officer has reduced the sales realization of its products. The Appellant filed the Appeal before the Commissioner of Income Tax and he is allowed deduction U/s 35(2AB) on the gross expenditure. However the Learned Commissioner of Income Tax has passed a rectification order U/s 154 allowing R & D 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 aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral in such form and within such time as may be prescribed. (5) No deduction shall be allowed in respect of the expenditure referred to in clause (1) which is incurred after the 31st day of March, 2017. (6) No deduction shall be allowed to a company approved under sub-clause (C) of clause (iia) of sub-section (1) in respect of the expenditure referred to in clause (1) which is incurred after the 31st day of March, 2008." 5. The assessee had quantified the deduction u/s. 35(2AB) at a sum of Rs. 12,57,00,920. It had received a sum of Rs. 57,47,808 as product development charges. The Assessing Officer was of the view that u/s. 35(2AB), it is only net expenditure on scientific research that should be allowed as deduction, not the gross expenditure. Accordingly, he reduced the product development charges received by the assessee and allowed deduction u/s. 35(2AB) of Rs. 11,70,79,207 which was calculated as follows:- 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 expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts is allowed as deduction u/s. 35(2AB) of the Act, obviously the sale of such assets should go to reduce the cost of expenditure. Sale of 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. Similarly, what is required to be reduced is grants/gifts donations etc and in the case of the assessee there was no such proceeds. Thus, in the appellate order, the CIT(A) has rightly allowed the entire expenditure on R&D for considering the deduction u/s. 35(2AB) of the Act. There being no infirmity in the appellate order or there being 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val of Secretary, DSIR. If such assets are sold, the sales realization arising therefrom are to be setoff against the R&D expenditure of the R&D centre which is claimed as deduction u/s. 35(2AB). It is evident from the above guideline that it is only sales realization arising out of the assets sold that should be offset against R&D expenditure. In respect of sale of products acquired emanating out of R&D work done in an approved facility, the sale proceeds need not be reduced from the R&D expenditure. In our view, the reason for not including sales realization arising out of products emanating out of R&D 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 explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party who buys dossier from the Assessee. 16. DSIR guidelines no. vii has specifically provided that assets acquired if any out of R & D work shall be disposed with approval of DSIR. The assessee has been submitting yearly audit reports & accounts of approved R & D sanction to DSIR. The R & D accounts have been separately maintained and separate P & L Account prepared and the dossier sales have been credited to P & L Account of R & D because these sales are part of normal sales. 17. It is clear from the sample copy of the license and supply agreement filed before us that the product development 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. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure relatable to any income to which Sec.10 (other than provision contained in clause 38 thereof) or Sec.11 or Sec.12 apply has been referred to. This is an argument of analogy which is not permissible under the scheme of MAT. The computation of book profit for purposes of Sec. 115JB for determining the minimum alternative tax is done as per the book profit evident from the financial statements drawn under the Companies Act. Sec.14A and the disallowance envisaged under it by applying Rule 8D are adjustments specific to the Income Tax Act. Even where the book profit as per the Companies 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 explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The relevant provisions of Sec.115JB(2) and Explanation thereto need to be seen. The said provisions read thus: "Sec.115JB:Special provision for payment of tax by certain companies. 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent 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. (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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount or amounts set aside as provision for diminution in the value of any asset, (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, if any amount referred to in clauses (a) to (i) is debited to the profit and loss account or if any amount referred to in clause (j) is not credited to the profit and loss account, and as reduced by,- (i) ..... or (ii) the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee satisfies the AO regarding the quantum of expenditure incurred in earning income which does not form part of the total income under the Act than that can be adopted for the purpose of addition under clause (f) of Expln.1 below Sec.115JB(2) of the Act. Rule 8D of the rules come into play only when there is no other basis for arriving at the quantum of expenditure incurred in earning income which does not form part of the total income under the Act. 34. In our opinion, the question formulated by the CIT(A) whether Sec. 14A 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um disallowed by the AO. Thus, ground No.3 raised by the revenue is allowed. 30. In the result, the appeal by the revenue is partly allowed and the assessee's appeal is allowed. ITA 1429/13 (Assessee's appeal) 31. Ground No.1 is general in nature and calls for no specific adjudication. 32. Ground No.2 raised by the assessee reads as follows:- "2. The learned Commissioner of Income Tax (Appeals) has erred in sustaining the additions made by the assessing officer u/s. 14A read with rule 8D on the ground that 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 Rs. 38,75,857. It quantified a sum of Rs. 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 Rs. 3,22,426 is not specifically given, but is stated to be relating to management fee, legal & professional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans had been availed for specific purposes including short term reasons. A one-to-one correlation must also be established to prove that the loans were absolutely utilised for the purpose for which they were claimed. The CIT(A) also held that there was no utilisation certificate from the bank filed before the AO nor was such evidence furnished before the CIT(A). The CIT(A) also held that the documents submitted from the bank during the course of appeal only refer to the disbursal of 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o restore this issue of disallowance under Rule 8D(2)(iii) to the AO for fresh consideration in the light of observations made above, after affording assessee opportunity of being heard. Thus, ground No.2 raised by the assessee is allowed to the extent indicated above. 44. Ground No.3 raised by the assessee reads as follows:- "3. The learned Commissioner of Income Tax (Appeals) has erred in sustaining the addition regarding wealth tax liability under the provisions 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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