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TMI Blog2019 (2) TMI 1918X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the prescribed authority and an agreement has been entered into between the facility and prescribed authority, then 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. Thus it is not the requirement of law to get any certification / approval of expenditure from the DSIR in form No.3CL, there is no merit in the orders of authorities below in denying weighted deduction under section 35(2AB) of the Act. It may further be pointed out that the assessee on a later date had received the said form No.3CL from the DSIR on 08.04.2013. Accordingly, we direct the Assessing Officer to allow weighted deduction at 150% of expenditure incurred in the hands of assessee under section 35(2AB) of the Act. Hence, revised ground of appeal No.1 raised by assessee is allowed. Disallowance made under section 14A r.w.r. 8D - HELD THAT:- We find merit in the plea of assessee in this regard, where the assessee had sufficient own funds to make the aforesaid investments and applying the ratio laid down by the Hon ble Bombay High Court in CIT Vs. HDFC Bank Ltd. [ 2014 (8) TMI 119 - BOMBAY H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in allowing the additional claim of deduction of ₹ 23,70,107/- u/s 35(1)(iv) of the Act when such claim was not made by the assessee either in the original return or in the revised return of income or during the course of assessment proceedings contrary to the decision of Apex Court in the case of Goetze (India) Ltd vs. CIT(2006) 284 ITR 323 (SC). 4. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in allowing the additional claim of deduction of ₹ 8,09,016/- u/s 35(1)(iv) of the Act when such claim was not made by the assessee either in the original return or in the revised return of income or during the course of assessment proceedings contrary to the decision of Apex Court in the case of Goetze (India) Ltd vs. CIT(2006) 284 ITR 323 (SC). 5. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in deleting the disallowance of commission paid to liaison representatives relying on the decision of ITAT, Pune and Gujrat High Court wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d claim in the absence of non fulfillment of conditions prescribed under clauses (iii) and (iv) of section 35(2AB) of the Act. However, the CIT(A) considered the alternate plea of assessee that deduction of capital expenditure @ 100% be allowed under section 35(1)(iv) of the Act. The assessee had raised an additional ground of appeal before the CIT(A) in this regard and after admitting the same, the CIT(A) held that the assessee was entitled to the benefit of aforesaid deduction under section 35(1)(iv) of the Act in respect of capital expenditure incurred on R D facility. He further held that cost incurred on building during the year amounting to ₹ 23,70,107/- would be allowed in addition to the R D expenditure of ₹ 2.22 crores, out of total capital expenditure of ₹ 4.76 crores. The assessee also raised an additional ground of appeal for further claim of capital expenditure of ₹ 2.01 crores i.e. expenditure incurred by way of interest on loans capitalized to R D assets and other items of capital expenditure i.e. purchase of fans, motor vehicles, etc. The CIT(A) held that having claimed the interest cost as revenue expenditure and depreciation on assets, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised the issue of claim of weighted deduction under section 35(2AB) of the Act on the expenditure incurred on scientific research on in-house R D facility at ₹ 8.56 crores @ 150% of expenditure incurred of ₹ 5.70 crores under modified ground of appeal No.1 and has raised the issue of disallowance made under section 14A of the Act under original ground of appeal No.4. 10. The learned Authorized Representative for the assessee pointed out that recognition of R D facility to develop own engines was granted on 30.01.2009. An application in form No.3CK and agreement was filed on 23.05.2009. Vide letter dated 24.08.2010, R D facility was approved w.e.f. 03.06.2009, which was the date of recognition. Thereafter, the agreement was signed on 24.08.2010. The assessee received form No.3CM w.e.f. 03.06.2009. The Assessing Officer had disallowed the claim of weighted deduction under section 35(2AB) of the Act on the ground that there was no approval of expenses from DSIR i.e. form No.3CL. The learned Authorized Representative for the assessee pointed out that though the same was not required for claiming weighted deduction but in any case the assessee received form No.3CL on 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer has disallowed weighted deduction to the assessee on the ground that no approval of expenditure has been received from the DSIR in form No.3CL. 15. The first issue is whether such an approval is needed from the DSIR in form No.3CL. The Pune Bench of Tribunal in Minilec India Pvt. Ltd. Vs. ACIT (supra) on similar issue of claim of weighted deduction in the absence of any form No.3CL received from the DSIR had held as under:- 10. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the claim of deduction under section 35(2AB) of the Act i.e. expenditure incurred on Research Development activity. For computation of business income under section 35 of the Act, expenditure on scientific research is to be allowed on fulfillment of certain conditions which are enlisted in the said section. Under various sub-sections of section 35 of the Act, the conditions and the allowability 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) being fulfilled, pass an order in writing in form No.3CM. The proviso however lays down that reasonable opportunity of being heard is to be granted to the company before rejecting an application. So, the application has to be made under sub-rule (4) in form No.3CK and the prescribed authority has to pass an order in writing in form No.3CM. Sub-rule (7A) provides that the approval of expenditure under sub-section (2AB) of section 35 of the Act, shall be subject to the conditions that the facilities do not relate purely to market research, sales promotion, etc. Clause (b) to sub-rule (7A) at the relevant time provided that the prescribed authority shall submit its report in relation to the approval of in-house R D facility in form No.3CL to the DG (Income-tax Exemption) within sixty days of its granting approval. Under clause (c), the company at the relevant time had to maintain separate accounts for each approved facility, which had to be audited annually. Clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of section itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered r. 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of Rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R D facility has to be allowed 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, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid provisions. 18. The Hon‟ble High Court of Madras in CIT Vs. Wheels India Ltd. (2011) 336 ITR 513 (Mad) had also held that the assessee was entitled to weighted deduction for whole year and not merely from the date of notification. It was held by the Hon‟ble High Court that Once the prescribed authority approves the existence of a research and development facility and the expenditure incurred on such scientific research, the assessee would be entitled to the expenditure incurred for the whole of the assessment year and it cannot be granted in a truncated manner. 19. The Pune Bench of Tribunal in Nath Biogenes India Ltd. Vs. ACIT in ITA No.367/PN/2012, relating to assessment year 2008-09, order dated 27.01.2014 held that where the prescribed authority i.e. DSIR had given recognition, then such a facility is recognized for claiming deduction under section 35(2AB) of the Act. The Tribunal further held that if the approval was not in prescribed form No.3CM was not a serious discrepancy, which would result in disallowance of deduction to the assessee under section 35(2AB) of the Act. Where the Competent Authority had granted approval / recognition after veri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority has, inter alia, observed in para 5 as under:- Ref.No. and Date of the application : Ref NBil dated 16.8.2007 The above Research Development facility is further approved for the purpose of section 35(2AB) from 1.4.2007 to 31.3.2011 subject to the conditions underlined therein. The term further‟ makes it clear that the approval was not limited to 1.4.2007 to 31.3.2011 but was in addition to periods already approved. It is further noticeable that information obtained under RTI clearly showed that the assessee‟s applications were processed for earlier years also but no orders have been passed with reference to earlier assessment years. At the same time, the assessee has not been given any opportunity of being heard as required under proviso to Rule 6 (5A) before rejecting the said application. Therefore, impliedly, the application for the entire period, for which it was made, has to be deemed to have been granted. On the basis of above discussion, we are of the opinion that the assessee was entitled for weighted deduction u/s. 35(2AB). 22. The Tribunal concluded by holding that at best it was only a procedural defect and merely on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is granted by the DSIR, for which the application was filed right at inception by the Petitioner. Upon obtaining recognition, which was granted on 26th March 2014, the Form 3CK was filed on 31st March 2014. There has been no lapse of time, unlike in Apollo Tyres (supra) wherein the recognition was granted on 31st March, 2004 and the Form 3CK application was made only on 21st August, 2008. Thus the present case is clearly distinguishable from the facts in Apollo Tyres (supra). 24. The assessee was held to be entitled to the claim of deduction under section 35(2AB) of the Act in the said case by the Hon‟ble High Court of Delhi. 25. The learned Departmental Representative for the Revenue has placed reliance on the ratio laid down by the Hon‟ble High Court of Karnataka in Tejas Networks Ltd. Vs. DCIT (supra), wherein it was first held that under section 35(2AB) of the Act, the prescribed authority was the Secretary, DSIR. Further, under sub-section (3) of section 35(2AB) of the Act provides that no company would be entitled for deduction under clause (1) unless and until it enters into agreement with the prescribed authority. The Hon‟ble High Court of Kar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facility has been recognized by the prescribed authority and an agreement has been entered into between the facility and prescribed authority, then 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. The relevant paras are as under:- 33. The assessee by way of grounds of appeal No.10.1, 10.2 and 10.3 has raised the issue against disallowance of deduction under section 35(2AB) of the Act. 34. Brief facts relating to the issue are that the assessee during the year under consideration had claimed deduction of ₹ 3.89 crores under section 35(2AB) of the Act being 150% of expenditure incurred of ₹ 2.594 crores. The Assessing Officer vide draft assessment order had short granted deduction under section 35(2AB) of the Act by ₹ 6,75,000/- on the ground that the Department of Industrial and Scientific Research i.e. DSIR had approved expenditure only to the extent of ₹ 2.594 crores in form No.3CL. The DRP upheld the draft assessment order and accordingly, the Assessing Officer passed final assessment order granting deduction under section 35(2AB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules, 2016 w.e.f. 01.07.2016, wherein column for certified amounts of expenditure had been inserted in the said form No.3CL. The learned Authorized Representative for the assessee further placed reliance on the ratio laid down by the Ahmedabad Bench of Tribunal in Sun Pharmaceutical Industries Ltd. Vs. Pr.CIT (2017) 162 ITD 484 (Ahmedabad Trib.), wherein it has been held by the Tribunal that form No.3CL is merely a report in the form of intimation regarding approval of in-house R D facility to be sent from prescribed authority‟s end to the Department and once the facility is approved in form No.3CM, the expenses incurred within the notified period have to be allowed under section 35(2AB) of the Act. He further pointed out that the said decision has been affirmed by the Hon‟ble High Court of Gujarat in CIT Vs. Sun Pharmaceutical Industries Ltd. (2017) 250 Taxman 270 (Guj). In respect of decision of the Hon‟ble High Court of Karnataka in Tejas Networks Ltd. Vs. DCIT (2015) 233 Taxman 426 (Kar), the learned Authorized Representative for the assessee pointed out that the said decision was clearly distinguishable on facts. The issue under consideration in the said d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been amended and not before that. 38. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the claim of deduction under section 35(2AB) of the Act i.e. expenditure incurred on Research Development activity. For computation of business income under section 35 of the Act, expenditure on scientific research is to be allowed on fulfillment of certain conditions which are enlisted in the said section. Under various sub-sections of section 35 of the Act, the conditions and the allowability 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 busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (2AB) of section 35 of the Act, shall be subject to the conditions that the facilities do not relate purely to market research, sales promotion, etc. Clause (b) to sub-rule (7A) at the relevant time provided that the prescribed authority shall submit its report in relation to the approval of in-house R D facility in form No.3CL to the DG (Income-tax Exemption) within sixty days of its granting approval. Under clause (c), the company at the relevant time had to maintain separate accounts for each approved facility, which had to be audited annually. Clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of section itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered r. 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of Rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R D facility has to be allowed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure and hence, does not need any adjudication. 22. Now, coming to ground of appeal No.4 raised by assessee i.e. disallowance under section 14A of the Act. 23. The learned Authorized Representative for the assessee pointed out that the assessee himself had disallowed 0.5% of expenses under Rule 8D(2)(iii) of the Rules. However, the Assessing Officer has in addition disallowed interest expenditure relatable to the investments made, on which the income was exempt under Rule 8D(2)(ii) of the Rules. The learned Authorized Representative for the assessee in this regard pointed out that the assessee had sufficient own funds to make the investments of ₹ 88 lakhs only. The reserves itself were sufficient to take care of the same. We find merit in the plea of assessee in this regard, where the assessee had sufficient own funds to make the aforesaid investments and applying the ratio laid down by the Hon ble Bombay High Court in CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), we hold that no disallowance is to be made on account of interest expenditure under Rule 8D(2)(ii) of the Rules. Hence, ground of appeal No.4 raised by assessee is allowed. 24. Now, coming to last issue r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on the basis of certain documents found and impounded. In the totality of such facts, where from the details furnished by assessee it transpires that liaison representatives were involved in technical issues such as quality control, chemical composition as well as day-to-day issues on sample approval, etc. and especially in view of statement recorded during Survey, we find merit in the plea of the learned Departmental Representative for the Revenue that total expenditure on this behalf cannot be allowed in the hands of assessee. The CIT(A) while allowing the claim in the hands of assessee had in turn, relied on the decision of Tribunal in the case of a Limited Company, whereas the assessee before us was a Private Limited Company and the said ratio cannot be applied. Accordingly, in order to plug loopholes and leakage of revenue, we direct the Assessing Officer to disallow 5% out of commission and liaison expenses. The grounds of appeal No.5 and 6 raised by Revenue are thus, partly allowed. The grounds of appeal raised by assessee and Revenue are thus, partly allowed. 27. In the result, both the appeals of assessee and Revenue are partly allowed. Order pronounced on this 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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