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TMI Blog2021 (2) TMI 848X X X X Extracts X X X X X X X X Extracts X X X X ..... Disallowance of weighted deduction u/s 35(2AB) due to short approval in Form 3CL - HELD THAT:- Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis- -vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below. Courts have held that for deduction under section 35(2AB) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan is to be ignored in terms of section 92F(ii), as the assessee failed to show any comparable cases in which interest has not been charged under uncontrolled circumstances. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the TPO has recharacterised the transaction, whereas the transaction remained as loan only throughout the year but for the last day and failed to note that the assessee only recharacterised the loan as share application money. 5. On the facts and in the circumstances of the case and law, the Ld. CIT(A) failed to appreciate section 43 of the Companies Act 2013, wherein it is provided to charge interest at the rate of 12% per annum, even if it is treated as share application money, if shares are not allotted within 60 days of receipt of the money, to draw a reasonable parallel to charge interest at arm's length though the Act may not be applicable to the AE. 6. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deviating from her predecessor's order for the A.Y. 2010-11 without citing any reasons. 7. On the facts and in the circumstances of the case and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act by relying upon Form 3CL issued by Department of Scientific and Industrial Research (DSIR ) with respect to the appellant's claim for R D expenses. The respondent submits that once R D facility was approved by DSIR, then the expenses incurred by the assessee ought to be allowed by the learned AO under section 35{2AB) of the Act. Computation of deduction u/s 35(2AB) based on the amount specified in the amended Form 3CL is to be applied only prospectively from AY 2016-17 and hence the same is not applicable for the year under consideration 2. The respondent craves leave to add, to amend, vary or alter including by substitution any of the grounds of appeal as they or their representatives may think fit 1) Disallowance u/s 14A r.w.r. 8D. 3. Before us, Ld. AR brought to our notice para 5 of AO order and para 3.3 of Ld. CIT(A) order and submitted that the similar issue has already been decided by the Coordinate Bench of ITAT in assessee s own case for Assessment Year : 2009-10 2010-11 (ITA No. 2301/Mum/2010 3883Mum/2016) on merits in favour of the assessee. 4. On the other hand, Ld. DR relied on the orders passed by revenue authorities, however he c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t if there is no exempted profit then there is no question of invocation of the provisions of section 14A of the IT Act but, we have also carefully perused that very decision of the Tribunal namely Cheminvest Ltd. (supra) was reversed by the Hon ble Delhi High Court, copy placed in the compilation. The Hon ble Delhi High Court in ITA No.749/2014 vide order dated 02-09-2015 titled as Cheminvest Ltd. Vs CIT has decided the substantial question of law that whether disallowance u/s 14A of the Act can be made in a year in which no exempt income has been earned or received by the assessee. The Final verdict was as under: - 23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression does not form part of the total income in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. 7. In short, in a situ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Jurisdictional High Court held that if there is no exempt income there cannot be any disallowance. Respectfully following the said decision, we direct the Assessing Officer to delete the disallowance made u/s. 14A of the Act. Ground raised by the assessee is allowed. 6. Therefore, respectfully following the above decision of Coordinate Bench in assessee s own case in turn relying on the decision of Assessment Year 2009-10 2010-11. This issue is settled in favour of the assessee. Therefore, we are inclined to accept the submission of Ld. AR. Accordingly, this ground raised by the revenue is dismissed. 2. Upward adjust of interest on Share Application Money to RLSI and RLSBV through which share capital was subscribed. 7. Before us, Ld. AR brought to our notice page 8-11 15- 17 of AO order and para 9.3 of Ld. CIT(A) order and submitted that the similar issue has already been decided by the Coordinate Bench of ITAT in assessee s own case for Assessment Year : 2009-10 2010-11 (ITA No. 2301/Mum/2010 3883Mum/2016) on merits in favour of the assessee. 8. On the other hand, Ld. DR relied on the orders passed by revenue authorities, however he conceded that thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions under the Act. 44. We have gone through the judgment of the Hon ble Bombay High Court referred to above in the case of DIT v. Besix Ker Dabhol SA (supra). The Hon ble Bombay High Court while answering the following question observed as under: - Q.1. Whether on the facts and circumstances of the case and in law the Tribunal was right in holding that in the absence of any specific thin capitalization rules in India, the Assessing officer cannot disallow the interest payment on debt capital after having observed the abnormal thin capitalization ratio of 248:1? 4) The respondent-assessee is a company incorporated under the laws of Belgium. The sole business of the respondent assessee is to carry out the project of construction of fuel jetty near Dabhol in India. The respondent-assessee had fully paid capital of 25.00 lacs (Belgium Francs) divided into 2500 shares of 1000 Belgium Francs each. This equity capital was divided in the ratio of 60:40 between the two joint venture partners N V Besix SA, Belgium and Kier International (Investment) Limited of U.K. The respondent assessee also borrowed from its shareholders in the same ratio as the equity share holding am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bill of 2010 that as a part of the General Anti Avoidance Rules it is proposed to introduce a provision by which a arrangement may be declared as an impermissible avoidance arrangement and may be determined by re-charactersing any equity into debt or vice versa. 8) We find no fault with the above observations of the Tribunal. There were at the relevant time and even today no thin capitalization rules in force. Consequently, the interest payment on debt capital cannot be disallowed. In view of the above, the question (i) raises no substantial question of law and is therefore, dismissed. 45. In the case of PCIT v. Aegis Limited (supra) the Hon'ble Jurisdictional High Court while answering the following question observed as under: - Q1. Whether on the facts and circumstances of the case and in law, the Income Tax Appellate Tribunal erred in not considering the fact that the assessee had actually advanced/lent money to its AE in the garb of preference shares leading to attraction of provisions relating to Transfer Pricing in the ease of the assessee in view of Section 92B of the Act, without appreciating the fact that these preferential shares do not carry any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Bombay High Court. Thus, respectfully following the above decisions, we direct the Assessing Officer to delete the adjustment made towards interest on subscription to share capital of AE s. 10. Therefore, respectfully following the above decision of Coordinate Bench in assessee s own case in turn relying on the decision of Assessment Year 2009-10 2010-11. Similarly, revenue has raised grounds on upward adjustment of interest on optionally convertible loan given to its subsidiaries, the coordinate bench in assessee s own case for AY 2009-10 and AY 2010-11 adjudicated in favour of the assessee, when the loan was subsequently converted into share capital, the interest adjustment cannot be made. Hence, These issues are settled in favour of the assessee. Therefore, we are inclined to accept the submission of Ld. AR in thess regard. Accordingly, the grounds raised by the revenue are dismissed. 4. Disallowance of weighted deduction u/s 35(2AB) due to short approval in Form 3CL. 11. Before us, Ld. AR brought to our notice para 6 of AO order and para 4.3 of Ld. CIT(A) order and submitted that if R D facility is approved, disallowance cannot be made based on Form 3CL, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenditure vary. Sub-section (1) to section 35 of the Act deals with expenditure on scientific research, not being in the nature of capital expenditure, is to be allowed to research association, university, college or other institution; for which an application in the prescribed form and manner is to be made to the Central Government for the purpose of grant of approval or continuation thereto. Before granting the approval, the prescribed authority has to satisfy itself about the genuineness of activities and make enquiries in this regard. Under sub-section (2B) to section 35 of the Act, a company engaged in the specified business as laid there on, if it incurs expenditure on scientific research or in-house Research Development facility also needs to be approved by the prescribed authority, is entitled to deduction, provided the same is approved by the prescribed authority. 39. Now, coming to sub-section (2AA) to section 35 of the Act, it talks about granting of approval by the prescribed authority but the approval to the expenditure being incurred is missing under the said section. Similar is the position in sub-section (2A). Further in sub-section (2AB), it is pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (b) to sub-rule (7A) has been substituted by IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016, under which the prescribed authority has to furnish electronically its report (i) in relation to approval of in-house R D facility in part A of form No.3CL and (ii) quantifying the expenditure incurred on in-house R D facility by the company during the previous year and eligible for weighted deduction under sub-section 2AB of section 35 of the Act in part B of form No.3CL. In other words the quantification of expenditure has been prescribed vide IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016. Prior to this amendment, no such power was with DSIR i.e. after approval of facility. 41. Under the amended provisions, beside maintaining separate accounts of R D facility, copy of audited accounts have to be submitted to the prescribed authority. These amendments to rules 6 and 7a are w.e.f. 01.07.2016 i.e. under the amended rules, the prescribed authority as in part A give approval of the facility and in part B quantify the expenditure eligible for deduction under section 35(2AB) of the Act. 42. The issue which is raised before us relates to pre-amended provisions and qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed for weighted deduction as provided by s. 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up R D facility in India, the legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction. 10. We are in full agreement with the reasoning given by the Tribunal and we are of the view that there is no scope for any other interpretation and since the approval is granted during the previous year relevant to the assessment year in question, we are of the view that the assessee is entitled to claim weighted deduction in respect of the entire expenditure incurred under s. 35(2AB) of the Act by the assessee. 44. The Hon ble High Court of Delhi in CIT Vs. Sandan Vikas (India) Ltd. (2011) 335 ITR 117 (Del) on similar issue of weighted deduction under section 35(2AB) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below. 46. The Courts have held that for deduction under section 35(2AB) of the Act, first step was the recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which recognition has been given to the facility, then thereafter the role of Assessing Officer is to look into and allow the expenditure incurred on in-house R D facility as weighted deduction under section 35(2AB) of the Act. Accordingly, we hold so. Thus, we reverse the order of Assessing Officer in curtailing the deduction claimed under section 35(2AB) of the Act by ₹ 6,75,000/-. Thus, grounds of appeal No.10.1, 10.2 and 10.3 are allowed. 15. Therefore, res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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