9911796707
TMI Blog2016 (11) TMI 1251X X X X Extracts X X X X X X X X Extracts X X X X ..... owards R D expenditure. In our considered view, the competent authority has to decide whether a particular expenditure is eligible for deduction u/s 35(2AB) of the Act or not, but not the assessing officer. In the present case, the A.O. without following the due procedure laid down under the provisions of the Act and rules there under, simply disallowed the expenditure claimed by the assessee. Therefore, we direct the A.O. to allow the weighted deduction claimed by the assessee under the provisions of section 35(2AB)(1) of the Act. TDS u/s 194C - disallowance of direct expenses for non-deduction of tax at source - Held that:- We are of the view that no disallowance can be made u/s 40(a)(ia) of the Act, for the amounts which have been already paid during the financial year. However, the facts relating to paid and payable are not emerging from the records, therefore, we set aside the issue to the file of the A.O. and direct the A.O. to examine the issue paid and payable with reference to books of accounts of the assessee and if the expenditure incurred by the assessee is paid within the same financial year, then the A.O. is directed to delete the additions made u/s 40(a)(ia) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of assessment proceedings, the A.O. observed that the assessee has claimed weighted deduction u/s 35(2AB) of the Act, towards research and development expenditure incurred in their in house R D facility. Therefore, to ascertain the correctness of the claim made by the assessee, issued notice and asked to furnish the details of R D facility and nature of research carried out in the R D facilities along with necessary approvals from the competent authority. 3. In response to show cause notice, the assessee submitted that it is in the business of manufacturing and supply of moving display boards, data loggers and electronic systems, etc. to Indian Railways. The assessee further submitted that it has set up a research and development facility which was approved by the Secretary, Department of Scientific and Industrial Research (DSIR) under the provisions of section 35(2AB) of the Act. The assessee further submitted that the goods manufactured by it has been supplied to Indian Railways and Indian Railways is using these products to control and monitor smooth movement of trains and also display of arrival and departure details of trains. These equipments were manufactured as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee reiterated the submissions made before the A.O. The CIT(A) for the reasons recorded, confirmed additions made by the A.O. towards weighted deductions under the provisions of section 35(2AB) of the Act. The CIT(A) further held that one of the conditions laid down u/s 35(2AB) of the Act, that the assessee should be engaged in the business of manufacture or production of any article or thing, except those specified in the 11 schedule. In the present case on hand, as per the information provided by the DRM (S D), Vijayawada, the instruments manufactured by the assessee are in the nature of office machines and apparatus being used in railway stations. The assessee failed to provide any convincing material facts on record to the claim that the instruments/articles manufactured does not fall under the Eleventh schedule. As regards disallowance of direct expenses under the provisions of section 40(a)(ia) of the Act, the CIT(A) held that the assessee has failed to deduct TDS on payment made to contractors under the provisions of section 194C of the Act. Since, the assessee failed to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of office machines and apparatus used in Railway stations for office work and for data processing, therefore, these items are clearly falling in Eleventh schedule. The A.O. further observed that the data loggers, electronic items and electronic moving display boards are nothing but office machines and apparatus, therefore, the assessee is not eligible for claiming deduction u/s 35(2AB) of the Act. The A.O. has made elaborate discussions on the provisions of section 35(2AB) of the Act, Eleventh schedule and items manufactured by the assessee. The A.O. relied upon the letter written by the Railway Manager (S D) vide his letter dated 28.2.2014 and opined that the items manufactured by the assessee are primarily installed in Railway stations to monitor movement of trains and also signals for smooth movement of trains. The A.O. further observed that the data loggers installed in the railway stations, stores data regarding changes that take place in relays, AC/DC voltages and DC current. According to the A.O., the items manufactured by the assessee i.e. data loggers and electronic moving display boards are falling in Eleventh schedule being office machines such as type writers, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufactured with a continuous process of research and development to meet the quality and efficiency of the machines to enhance the accuracy level of machines in controlling the movement of trains. The assessee further submitted that its R D facility has been approved by the competent authority under the provisions of section 35(2AB) of the Act, after scrutinizing thoroughly all the details filed by the assessee. The competent authority has approved the facility and also approved the total expenditure incurred towards research and development. Therefore, the A.O. was not correct in holding that the items manufactured by the assessee are listed in the Eleventh schedule, accordingly, not eligible for weighted deduction u/s 35(2AB) of the Act. 10. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. disallowed weighted deduction claimed by the assessee under the provisions of section 35(2AB) of the Act, for the reason that the items manufactured by the assessee are office machines and apparatus listed in Eleventh schedule. The A.O. was of the opinion that goods manufactured by the assessee are nothi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Eleventh schedule item no.22 or an electronic equipments eligible for claiming deduction u/s 35(2AB) of the Act. Before we go into the facts of the present case, let us understand the provisions of section 35(2AB) of the Act. As per the provisions of section 35(2AB)(1) of the Act, where a company engaged in the business of bio technology or any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh schedule, incurs any expenditure on Scientific research (not being expenditure) in the nature of cost of any land or building, on in house research and development facility as approved by the prescribed authority, then there shall be allowed a deduction of a sum equal to two times of the expenditure so incurred. A plain reading of section 35(2AB)(1) of the Act, makes it clear that to be eligible to claim deduction under the said provision, the assessee should be a company and it should be engaged in research and development facility and to incur expenditure towards such facility and the assessee should be engaged in the business of manufacture or production of any article or thing, except those specified in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocessor based data logger system with various application softwares for railway signaling, etc. and this data logger is similar to aircraft black box. The data loggers records every event happening in the railways, i.e. operating suits of all these log tracks, points, signals, etc. reads the information to Central place via various types of indication intervention lock wire or wireless and through different interlock methods and at central place, located in the railway station itself different application softwares are provided to perform real time analysis to only railway personnel recording failures happening in the railways, equipments states, real time simulation, etc. for enabling corrections indeed. This has tremendously improved safety, reliability and punctuality in railways, therefore, the items manufactured by the assessee cannot be considered as mere office machines and apparatus as defined under Eleventh schedule. Therefore, we are of the view that the items manufactured by the assessee are not a mere office machines or apparatus such as type writers, calculating machines, cash registering machines, cheque writing machines, intercom machines and tele printers. Though, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oval, the Secretary, DSIR sends a report to the Director General, Income Tax (Exemptions) in form no.3CM within 60 days of granting approval. When DSIR passes the order of approval, it scrutinizes the application filed by the assessee with necessary details before granting approval after satisfied with the conditions stipulated under the provisions of section 35(2AB) of the Act. Before granting the approval, DSIR looks into various aspects including the products manufactured by the assessee to satisfy the conditions prescribed in section 35(2AB)(1) of the Act. Therefore, the A.O. was completely erred in observing that the role of DSIR is limited to certifying the quantum of expenditure incurred towards research and development, but not to approve the goods manufactured by the assessee. 15. Having heard both the parties, we find force in the arguments of the Ld. A.R. for the assessee for the reason that the provisions of section 35(2AB) of the Act, with relevant rules makes it mandatory for the assessee company to file its application for approval of its in house R D before the Secretary, DSIR, Government of India. The applicant company should also submit an undertaking as per pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. The next allegation of the A.O. is that the prescribed authority did not submit report in form no.3CL to the Director General, Income Tax (Exemptions) within 60 days of granting approval as required under rule 6(7A)(b) of the Income Tax Rules, 1967, consequently, the assessee is ineligible for claiming exemption u/s 35(2AB) of the Act. The A.O. further observed that the prescribed authority ought to have submitted the approval to the Director General of Income Tax within 60 days, however, the said approval has been submitted to the Director General beyond the time specified under rule, therefore, the assessee is ineligible for exemption. We do not find any merits in the arguments of the assessee for the reason that it is for the competent authority to send the approval to the Director General of Income Tax (Exemptions) within such time as prescribed under the rules. In case such approval is not forwarded to the Director General of Income Tax (Exemptions), it is only a technical mistake for which the assessee cannot be penalized. In the present case on hand, the assessee has fulfilled the conditions prescribed under the provisions of section 35(2AB)(1) of the Act and rules the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d approval granted by Prescribed Authority as it involves expert view or opinion. The controversy arising out of certificate issued by the prescribed authority if any, has to be referred to the prescribed authority by the Board on such doubt being raised by Assessing Officer and also on his request. It is the prescribed authority alone which would be competent to take a decision with regard to correctness or otherwise of its order of approval granted in Form No. 3CL as prescribed under Section 35(2AB) of the Act read with Rule 7A of the Rules. (Para 21) A plain reading of Section 35(2AB) would clearly indicate that where a company is engaged in the business of bio-technology or in any business of manufacture or product/on of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) or in-house research and development facility as approved by the prescribed authority, then, they shall be al/owed a deduction of a sum equal to one and a half times of the expenditure so incurred. The word used 'shall' in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes or constituted or an asset is or was being used for scientific research, then the Assessing Officer would be required to refer such question to the Board for being referred to the prescribed authority. The decision of the prescribed authority in this regard would be final, inasmuch as, the certification of such expenditure is being examined by an expert body and undisputedly, such exercise has been outsourced by the Revenue under the Act itself, since the prescribed authority being possessed of requisite expertise, it would be in a better position to certify as to whether such expenditure claimed by the assessee under Section 35(2AB) would fall within the said provision or outside. This exercise of examining the correctness of the Certificate issued by the prescribed authority is not available to the Assessing Officer as could be seen from scheme of Section 35 of the Act. It is in this background, sub-section (4) of Section 43 will have to be considered, which defines as to what activities would constitute scientific research as indicated under the said Section namely, Section 43(4). As to whether any expenditure incurred in the acquisition of rights in or arising out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. Y. 2008-09) in accordance with section 35(2AB)(4) read with Rule 6(7A)(b) of the Rules. As the approval of the entire period was given once i.e. by way of Form no. 3M, thus, in our view, the assessee complied with the conditions for claim of deduction as required u/s 35(2AB) of the Act. If the aforesaid section was analyzed then the deduction shall be a//owed of a sum equal to two times of the expenditure so incurred and the prescribed authority is to submit its report of such approval/facility to the Director General on a prescribed form within specified time, meaning thereby, the authority concerned had to submit the report to the Director General. However, if the totality of facts are analyzed, as mentioned earlier, the assessee made application for such approval on 11/12/2007 with the prescribed authority and such approval was granted on 04/03/2009, therefore, the assessee cannot be denied the claimed deduction u/s 35(2AB) of the Act merely on the ground that the prescribed authority does not submit form no. 3CL in time to the Incometax Department. The assessee cannot be penalized for the fault, if any, of the Department. The Assessing Officer cannot be expected to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (para 25) Tribunal without discussing full materials on record came to such conclusion which, in our opinion, ought not to have been done. These are matters of extreme scientific complexities. What was the nature of the research undertaken, what was the improvement in the existing software aimed at or desired, whether ultimately the product which was launched by the assessee after undertaking such so called scientific research, was a new product substantially different from the existing one or not were some of the issues on which the Tribunal, in our humble opinion, without bestowing sufficient attention ruled in favour of the assessee. We may caution that such issues of extreme scientific complexities, should not be decided without referring to the full materials on record and appreciating the complexities of the issue on hand. (para 27) Section 35(3) of the Act as noticed requires a reference to be made by the Board to the prescribed authority when a question arises as to whether and if so to what extent, any activity constitutes or constituted or any asset is or was being used for scientific research. The decision of the prescribed authority on such a que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urns filed annually to the prescribed authority to justify the expenditure incurred towards R D expenditure. In our considered view, the competent authority has to decide whether a particular expenditure is eligible for deduction u/s 35(2AB) of the Act or not, but not the assessing officer. In the present case, the A.O. without following the due procedure laid down under the provisions of the Act and rules there under, simply disallowed the expenditure claimed by the assessee. Therefore, we direct the A.O. to allow the weighted deduction claimed by the assessee under the provisions of section 35(2AB)(1) of the Act. 21. The next issue that came up for our consideration is disallowance of direct expenses for non-deduction of tax at source under the provisions of section 194C of the Act. The A.O. disallowed an amount of ₹ 3,57,463/- for the reason that the assessee ought to have deducted TDS on such payments, however, failed to deduct TDS as required under the provisions of section 194C of the Act. It is the contention of the assessee that the expenditure incurred under the head direct expenses have been fully paid within the same financial year and in view of the special b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to books of accounts of the assessee and if the expenditure incurred by the assessee is paid within the same financial year, then the A.O. is directed to delete the additions made u/s 40(a)(ia) of the Act. In other words, the A.O. is directed to restrict the disallowances to the extent the amount remaining payable at the end of the financial year. 23. The next issue that came up for our consideration is disallowance of bank guarantee charges under the provisions of section 40(a)(ia) of the Act for non-deduction of TDS u/s 194H of the Act. The ld. A.R. for the assessee, at the time of hearing submitted that this issue is covered by the decision of ITAT, Visakhapatnam in assessee s own case for the assessment year 2009-10 and submitted that the coordinate bench of this Tribunal, under similar circumstances deleted the additions made by the A.O. We find that the coordinate bench of this Tribunal in ITA No.205/Vizag/2013 for the assessment year 2009-10 by following the decision of ITAT Mumbai in the case of Kotak Securities Ltd. Vs. DCIT (2012) 14 ITR (Trib) 495 deleted the additions made by the A.O. towards bank guarantee charges. The relevant portion of the order is extracte ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
