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TMI Blog2017 (4) TMI 1030X X X X Extracts X X X X X X X X Extracts X X X X ..... dgement of Co-ordinate Bench of Hyderabad in the case of Dy. CIT v. Reliance Celulose Products Ltd. [2013 (8) TMI 762 - ITAT HYDERABAD] wherein held that Merely because part of the expenditure incurred by the approved R&D facilities is not considered for weighted deduction u/s.35(2AB) of the Act would not render that expenditure is not towards R&D or not for the purposes of the business. Allowability of such expenditure u/s.35(1) or under other appropriate provisions will have to be considered. In view of the judgements, we hold that unapproved R&D capital expenditure of ₹ 11,73,074/- and revenue expenditure of ₹ 3,95,68,226/- is not entitled for weighted deduction u/s.35(2AB) of the Act, However, unapproved R&D capital expenditure of ₹ 11,73,074/- to be considered u/s.35(1)(iv) of the Act. If the assessee fulfills the condition in terms of explanation below the provisions 35(1) of the Act as held by the P&H High Court in the case of CIT v. FCS International Marketing (P.) Ltd. [2005 (8) TMI 60 - PUNJAB AND HARYANA High Court]. Accordingly, we hold that the matter is required to be referred by the AO to the prescribed authority and only on the basis of such ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t us take up Assessee 's appeal in ITA No.2487/Mds./2016 as under :- 2. The first issue in its appeal is with regard to sustenance of disallowance of scientific Research and Development expenses of ₹ 4,19,14,375/- as not eligible for weighted deduction u/s.35(2AB) of the Act. 3. The facts of the case are that the assessee is a manufacturer of pharmaceuticals formulations and the assessment for assessment year 2011-12 was completed u/s.143(3) of the Act on 14.03.2014. During the assessment proceedings, the AO found that the AO has claimed weighted deduction u/s.35(2AB) of the Act on the R D expenditure incurred ruing the assessment year under consideration. For the purpose of allowability of the claim, the assessee was asked to produce the approval of the expenditure by the Competent Authority as per the provisions of the section 35(2AB) of the Act. The assessee submitted Form No.3CL dated 22.12.2011 issued by the Competent Authority i.e. Department of Scientific and Industrial Research in which the following R D expenditure has been approved for assessment year 2011-12. Sl No. Expenditure A.Y 2011-12 (Rs. in lakhs) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instant case the DSIR has clearly approved the appellant's claim of R D expenses to the extent of ₹ 14,48,08,226/- only. In other words, the balance of ₹ 4,19,14,375/-, which was not approved by the DSIR, is totally outside the purview of the provisions of sec.35(2AB) of the Act, for the purpose of weighted deduction. If the claim of the appellant that even if the claim of R D expenses are not aproved by the DSIR in the concerned year, still the weighted deduction u/s.35(2AB) of the Act is to be allowed as long as the R D facility is approved, is to be accepted, it will defeat the very purpose of the enactment of the provisions of sec.35(2AB) and the stipulations and the restrictions imposed therein. This will also render the requirement of assessees submitting the details expenses in R D to the DSIR in the prescribed format and obtaining the necessary approvals for the same, totally irrelevant. This is not the intention of the legislature. The requirement of assessee furnishing the details of expenses of R D to the DSIR and obtaining necessary approval, itself shows that the weighted deduction is available only on fulfilling these requirements. Therefore, if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oval by the DSIR, then it should be considered u/s.35(1)(iv) of the Act, Being so, in our opinion, the Ld.CIT(A) is not justified in disallowing the same. For this purpose, we placed reliance in the judgement of Co-ordinate Bench of Hyderabad in the case of Dy. CIT v. Reliance Celulose Products Ltd. [2013] 36 CCH 269 wherein held that Merely because part of the expenditure incurred by the approved R D facilities is not considered for weighted deduction u/s.35(2AB) of the Act would not render that expenditure is not towards R D or not for the purposes of the business. Allowability of such expenditure u/s.35(1) or under other appropriate provisions will have to be considered. 4.1 In view of the judgements, we hold that unapproved R D capital expenditure of ₹ 11,73,074/- and revenue expenditure of ₹ 3,95,68,226/- is not entitled for weighted deduction u/s.35(2AB) of the Act, However, unapproved R D capital expenditure of ₹ 11,73,074/- to be considered u/s.35(1)(iv) of the Act. If the assessee fulfills the condition in terms of explanation below the provisions 35(1) of the Act as held by the P H High Court in the case of CIT v. FCS International Marketing (P.) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n multiple grounds. It was contended that there were sufficient reserves and surpluses available for the purpose of investments, and borrowed funds, for which the payment of interest had been incurred, had not been invested. The assessee sought to draw a nexus between the borrowed funds and the interest payments, highlighting the position that the quantum of available free funds was far in excess of the investments made. The Bench, in the light of the above submissions, remanded the issue to the file of the assessing officer to be considered de novo and after conducting a proper enquiry. Inter alia a direction was issued to the assessee to tender a proper explanation for the interest payments. The open remand was made in the facts and circumstances of that case and no conclusion was drawn by the Bench on the position of law involved. In fact, the substantial question of law raised in that case for the consideration of the Court was couched in general terms as follows Whether on the facts and in the circumstances of the case. the Income Tar Appellate Tribunal is right in law in confirming the disallowance under Section 11.1 of the income Tax Act, of an amount of ₹ 55,00.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... department and the appeal allowed. No costs Being so, we direct the Assessing Officer to disallow the expenditure u/s.14A to the extent of exempted income only. This ground of appeal of assessee is partly allowed. 7. The common ground in both the appeals is with regard to partly confirming the disallowance u/s.37(1) being gift of gold coins to doctors/medical practitioners. 7.1 The facts of the issue are that the AO disallowed sales promotion and other selling expenses of ₹ 5,19,37,891/- u/s.37(1) of the Act. The AO found that the assessee incurred sales promotion expenses of ₹ 3,18,49,500/- and other selling expenses of ₹ 6,64,51,614/-. Out of these expenses, ₹ 2,14,71,297/-(under 'sales promotion expenses ) and ₹ 3,04,66,594/- ( under 'other selling expenses ) are by way of freebies and gifts to the doctors and medical practitioners, in the form of gold coins, laptos, LCD TVs. Refrigerators etc. The AO opined that as per Medical Council (professional Conduct, Etiquette and Ethics ) Regulations, 2002, these expenses are prohibited expenses and the AO invoked the provisions of the section 37(1) of the Act and disallowed the sales prom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. Assessing Officer and disallowance of expenditure incurred towards distribution of gold coins to the doctors and medical practitioners included in the above amount. Against the order of Ld.CIT(A), both the assessee and the Revenue is preferred appeal before us. 8. We have heard both the parties and perused the material on record. In our opinion, the Medical Council (professional Conduct, Etiquette and Ethics ) Regulations, 2002 prohibits the distribution of gift to the doctors and medical practitioners. Accordingly, this ground raised by the assessee is dismissed and the by the Revenue is allowed. 9. The next ground raised in Revenue's appeal is with regard to allowing the differential interests on borrowed funds diverted for non business purposes. 9.1 The brief facts of the case are that the assessee during the financial year 2010-11, advanced more than ₹ 28 crores by way of inter-corporate deposits to some of its group concerns and the interest charged on the loan is only @ 10%. However, the AO found that the assessee borrowed substantial amounts of interest bearing loans, where the rate of interest paid is 13.5% and the total amount of interest paid during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. Therefore the above inter- corporate deposits of ₹ 28 crores can safely presumed to be out of the above interest free funds of ₹ 45 crores. Once the interest free funds are more than the amount of loans given, it is not possible to presume that there is a diversion of interest bearing funds. Under such circumstances, the assessee is free to decide its own rate of interest to be charged, the AO is not empowered to disallow any proportionate interest. Therefore, the Assessing Officer's action of invoking the provisions of section 36(1)(iii) of the Act and disallowing the proportionate interest @ 3.5% (being the difference between the rate of interest paid and the interest received) on account of the so called diversion of interest bearing funds for investing in inter-corporate deposits, is not justified. The disallowance made by the Assessing Officer is legally untenable and therefore deleted. Aggrieved with the order of Ld.CIT(A), the Revenue is in appeal before us. 10. We have heard both the parties and perused the material on record and gone through the case law cited by the ld.A.R. Ld.A.R submitted that the assessee is having ₹ 45 crores interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have any different colour. Whatever are the receipts in the business, which have the colour of business receipts and have no separate identification? The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to group concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to him, could not be repaid prematurely to any lender, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted to group concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to group concern or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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