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TMI Blog2021 (9) TMI 972X X X X Extracts X X X X X X X X Extracts X X X X ..... n claimed. 2.2 The Commissioner of Income Tax (Appeals) is not justified in sustaining the disallowance of Rs. 1,08,22,000/- made by the Assessing Officer out of weighted deduction claimed u/s. 35(2AB) stating that professional charges of Rs. 19,49,201/- and Rent & maintenance charges of Rs. 25,81,848/- (17,33,712 + 8,48,136) were not forming part of Form 3CL. The Commissioner of Income Tax (Appeals) ought to have seen that Rent and Maintenance charges of Rs. 25,81,848/- was incurred on account of R & D activity and is therefore eligible for weighted deduction u/s. 35(2AB) of IT Act. 2.3 The Commissioner of Income Tax (Appeals) also ought to have seen that Maintenance Charges of Rs. 8,79,599/- though not eligible for weighted deduction u/s. 35(2AB), the same is allowable as regular business expenditure. Hence the Commissioner of Income Tax (Appeals) ought to have allowed Rs. 8,79,599/- as deduction though such expenditure is not eligible for weighted deduction u/s. 35(2AB). 3. The Commissioner of Income Tax (Appeals) is not justified in sustaining the disallowance of expenditure of Rs. 3,83,231/- (consisting of Rs. 3,09,462/- of interest and Rs. 73,769/- of other expenses) u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be disallowed. In response, the assessee before the Assessing Officer vide letter dated 12.12.2016 submitted that the excess claim of weighted average deduction of Rs. 108.22 lakhs was due to the professional charges & rent payments which were not included in the expenses mentioned in form 3CL. 5.1. The Assessing Officer has not accepted the assessee's contention on the following grounds: "1. Section 35(2AB) of the IT Act, 1961, clearly states that only that expenditure, as approved by the prescribed authority will be eligible for weighted deduction. 2. Secondly, the assessee has not been able to justify that such professional & rental expenditure has been incurred exclusively for R & D and that it has not been claimed separately in P & L under professional charges & rent. Thus, the Assessing Officer concluded that the above facts do not entitle the assessee to excessive weighted discussion u/s. 35(2AB). In view of the above, the Assessing Officer disallowed an amount of Rs. 1,08,22,000/- 5.2. Before the CIT(A), the assessee submitted that Research and Development expenses of Rs. 29,29,86,585/- includes expenses on 'Electricity and Maintenance' of Rs. 34 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acture and sale of formulations and bulk drugs. It filed return of income for AY 2014-15 on 29-11-2014 declaring total income of Rs. 281,94,85,660/-. Later, a revised return was filed on 30-03-2016 declaring total income of Rs. 278,30,12,260/- and Rs. 330,70,75,013 u/s. 115JB. Regular assessment was completed u/s. 143(3) on 13-12-2016. Two disallowances were made while computing total income: a). Disallowance u/s. 35(2AB) Rs. 1,08,22,000/- b(i). Disallowance made u/s. 14A LW.S. Rule 8D(2)(ii) Rs. 3,09,462/- b)(ii). Disallowance made u/s. 14A r.w.s. Rule 8D(2)(iii): Rs. 73,769/- 2. The appellant claimed weighted deduction u/s. 35(2AB) of the Act. On expenditure of Rs. 3,160.17 lakhs appellant claimed weighted deduction at 200% in an amount of Rs. 6,340.34 lakhs.(200%*3160.17 lakhs) The AO found on verification of Form No. 3CL that R & D expenditure of Rs. 3,116.06 lakhs was approved as per Form 3CL. Based on this, the AO called upon the appellant, to explain why the difference of Rs. 1,08,22,000(6340.44 lakhs - 6232.12 lakhs) should not be disallowed. The appellant replied stating that difference was on account of professional charges and rent payments. The details of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred in other units: on actuals: Rs. 8,79,599. c). Business expenditure on professional charges: on actuals Rs. 19,49,201. Total: Rs. 79,92,496. 5. Learned C.I.T. (Appeals) declined to allow deduction as claimed by the appellant. She stated that the appellant did not submit Form 3CM or 3CL. Learned C.I.T. (Appeals) also stated that the appellant has not submitted documentary evidence as regards the incurring of the rent, electricity and maintenance charges. In this connection the appellant submits that the details submitted at pages 28 to 30 of the paper book are extracted from the accounts maintained by the appellant which were subjected to scrutiny. The appellant also submits that tax was deducted on the payments towards rent, electricity charges etc. made to IKP Knowledge park and Rational Labs Pvt. Ltd., vide pages 31 to 41 of the paper book. The appellant submits that the learned C.I.T.(A) is not justified confirming the disallowance made by the A.O. without assigning any valid reasons. 6. Aggrieved by the order of the learned C.I.T. (Appeals), the appellant filed appeal before the Hon'ble ITAT. 7. As regards submission of Form 3CL before the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 Rs. 6,75,000/-. Thus, grounds of appeal No. 10.1, 10.2 and 10.3 are allowed." 10. In the case of CIT vs. Cadila Healthcare Ltd. 31 Taxmann.com 300 GUJ HC (pages 25 to 30 of paper book No. 2) the High Court noted that the certificate issued by DSIR is only for the purpose of listing the total expenditure under the Rules and has no impact on the allowability of deduction under section 35(2AB). Therefore it can be contended that merely because certain expenses are shown separately in the DSIR certificate and/or not ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessing officer himself. These items clearly are within the purview of allowable u/s. 35(2AB) of the Act as weighted deduction. The security expenses are also directly related to in-house research as proper security is required to avoid leakage and only in-house staff will have assessed to building. Accordingly, this expenditure is for preserving the research which is completed and its clinical trial is pending. As regards to the environmental issue, the assessee-company has set up an affluent plant and as is widely accepted the vegetation, i.e. trees have contained the pollution. This expenditure of gardening and plantation has been done for the perseverance of environment and this is directly related to R & D facilities. As regards to salary paid to Dr. C. Dutt amounting to Rs. 58.54 lakhs, he is in-charge of R & D Centre at Bhatt. He is the person through whom all coordination of technical scientists and other technical persons are carried out. The entire reporting of the research activity to the management has been taken to the Board of Directors through him only and for this the salary is paid. Accordingly, the assessee has rightly paid the entire expenditure of Rs. 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant on R & D activities and for purposes of its business." 5.5. The ld. DR, on the other hand, relied on the orders of revenue authorities. He vehemently argued the case and submitted that the A.O. has rightly disallowed the disputed amount which was not part of the approval granted as per section 35(2AB) of the Income Tax Act. 1961. These three expenses viz., Rent, Electricity & maintenance and professional charges were not directly related to the approved projects. The case law relied on by the ld. AR of the assessee are not applicable to the present case of the assessee as they are distinguishable in facts. 5.6. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. A.O. was of the view that as per Sec. 35(2AB) of the Act only so much of expenditure as has been approved by the prescribed authority will be eligible for weighted deduction and hence weighted deduction can be allowed only to that extent. Secondly, he stated that the appellant has not been able to justify that such professional & rental expenditure has been incurred exclusively for R & D and also that it has not been claimed separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure incurred in relation to earning the exempt income by applying Rule 8D and worked out the total disallowance u/s. 14A at Rs. 3,83,231/- and the CIT(A) confirmed the same. 6.1. Before us, the ld. AR of the assessee filed written submissions wherein it was stated that apart from the facts submitted before the learned C.I.T.(A), it may also kindly be seen from the balance sheet that its capital and reserved were Rs. 166,75,43,738 as at 31-03-2013 and Rs. 403,27,43,216/- as at 31-03-2014. In this connection the appellant relies on the decision of the Hon'ble Bombay High Court in the case of Pr.CIT vs. Shapoorji Pallonji & Co. Ltd., 117 Taxmann.com 625 BOM HC wherein it has been held that where interest-free funds were available with the appellant, it was to be presumed that investments were made out of interest-free funds. Appellant prays that the disallowance made under rule 8D(2)(ii) may kindly be directed to be deleted. 6.2. Ld. DR, on the other hand, relied on the orders of revenue authorities. 6.3. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The AR of the assessee submitted th ..... 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