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TMI Blog2020 (4) TMI 911X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee during the year including expenses that have incurred after the date of DSIR approval letter i.e. 09.03.2009. We also find that the AO has observed that deduction u/s 35 has been claimed under the head intangible assets . Core issue of examination of the expenditure has not been resorted as the revenue held that the assessee was not eligible for the deduction u/s 35(2AB) for expenses incurred prior to that date. Hence, in order to meet the ends of justice, a fair opportunity has to be allowed to both the parties, it is hereby directed to submit the details of capital expenditure and revenue expenditure for the entire period from 01.07.2008 to 31.03.2009 so as to avail the correct deduction as per the principle laid down in this order. Addition u/s 14A r.w.r. 8D - assessee has earned exempt dividend income - HELD THAT:- Since no interest bearing funds have been utilized in investment and the revenue could not prove any expenses incurred, the addition made by the AO is hereby directed to be deleted. Disallowance of Expenses - deduction denied on the grounds that the assessee did not furnish the copies of ITR of VIPL to prove that these expenses which were booked provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a business expediency. Owing to the new recruitment as well as job rotation, offboarding and attrition of employees, the training is taken to be an ongoing process for any industry. AO observation that it goes to improve the brand building, if at all, is collateral benefit. There is no provision in the Income Tax Act for apportioning this expenditure over a period of three years as invoked by the AO. Section 37(1) mandates that any expenditure has to be allowed in entirety if it is spent in connection with business of the assessee. There cannot be any formula basis, criteria adopted by the AO while disallowing 2/3rd of such expenditure. At the same time, this expenditure cannot be treated as capital expenditure too - disallowance made by the AO is legally not tenable. Revenue appeal dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT(A) is erroneous and the learned CIT(A) has erred in deleting the disallowance of Rs.71,93,752/- made by AO on account of disallowance of bad debts. 2. That the ld. CIT (A) has erred in law and on facts of the case in deleting the disallowance on account of training expenses of Rs.2,30,44,980/- made by the AO by treating the training expenses as deferred revenue expenses." Deduction of Capital Expenditure on R&D: 5. The undisputed facts taken from the record are as under: The assessee public company had filed return on income on 29.09.2009 declaring a loss of Rs. 71,64,99,409/- which was incorporated as a joint venture between AB Volvo ('Volvo') and Eicher Motors Limited ('EML') and is engaged, inter alia, in the business of manufacture and sale of commercial vehicles and components, including gears and engineering solutions. The relevant previous year is the first year of business of the assessee. During the relevant previous year, the assessee acquired from EML, commercial vehicles undertaking, by way of demerger, w.e.f. 1.7.2008. The said commercial vehicles undertaking acquired from EML, included, inter alia, research and development centre at Pithampur ('R&D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral recognition approval to in-house R&D unit in the name of the assessee) to 31.3.2012. The DSIR also granted approval under section 35(2AB) in the name of EML upto 30-06-2008. In the return of income filed for the relevant previous year, the assessee claimed weighted deduction under section 35(2AB) of the Act @ 150% oil the scientific research expenses incurred at the in-house R&D facility, in the following manner: * Capital expenditure on building, plant and machinery, etc. Rs.55,10,84,569 * Additional deduction at 50 percent in respect of above capital expenditure (excluding cost of building) under section 35(2AB) of the Act. Rs.25,44,90,785 * Additional deduction at 50 percent in respect of revenue expenditure Rs.9,00,85,719 Total Rs.89,56,61,072 In the assessment order, the assessing officer disallowed deduction under section 35(2AB) of the Act claimed by the assessee on the ground that during the relevant previous year, the assessee was not eligible for weighted deduction since approval under that section was granted to the in-house R&D facility from 09.03.2009 only. 6. This leaves us with the issue to adjudicate whether the deduction is allowable only f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the first time by DSIR w.e.f. 09.03.2009 and upto 31.03.2012. The CIT(A) has wrongly held that since the R & D unit of EML was taken over by the assessee company, it will be assumed that the R & D unit was already recognized. The fact is that the R & D unit of the assessee was recognised for the first time by DSIR w.e.f. 09.03.2009 and upto 31.03.2012. Therefore, the finding of the CIT(A) that the R & D facility already stood approved by DSIR and it was only a change in the name on account of transfer of ownership from EML to assessee company and hence the assessee was eligible for deduction is based on incorrect appreciation of facts and law. The fact is the R & D unit of EML was approved by DSIR and not the R & D facility of the assessee company. 6. As per provisions of Part-B of Form 3CK , an agreement has to be entered into between the assessee and DSIR. Form 3CM provides for name, address and PAN of the assessee. Form 3CL is issued by DSIR giving details of expenditure incurred by the assessee in terms of section 35(2AB). In this case, the R & D facility of the assessee has been approved for the first time w.e.f. 09.03.2009. Hence, 35(2AB) deduction can be allowed only w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. The said benefit has not been extended in the case of Revenue expenditure. The Act has clearly made provision in respect of amalgamation of companies. There is no such provision in the case of slump sale. Since the assessee company is an entity different from EML having separate PAN, it cannot claim extension/continuation of benefit of deduction u/s 35 (2AB) in respect of R & D unit owned by the previous owner. Once the R & D unit of assessee is approved by DSIR, unit can be held to be existing approved R & D unit for claiming deduction in future. Therefore, unless the R & D unit is allowed by DSIR as eligible unit under 35(2AB), it cannot claim deduction prior to approved in Form 3M. 12. To some up, R & D unit of the assessee company was not an adjusting approved unit before 09.03.2009 and therefore, the assessee can claim deduction u/s 35(2AB) with effect from 09.03.2009 onwards." 8. The ld. DR has also relied on the judgment of the Hon'ble Delhi High Court in the case of Apollo Tyres Vs Union of India WP(C) 13338/2009 order dated 20.04.2010 wherein the issue of deduction u/s 35(2AB) has been discussed. we have perused the same . It was held that the deduction is el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.2008 Application filed by assessee before the DSIR seeking general recognition of the inhouse R&D~ facility at Pithampur under section 35 of the Act in name of the assessee (VECV) for the period beginning from 01.07.2008. 25.11.2008 Application filed by the assessee before the DSIR in Form 3CK requesting for approval under section 35(2AB) of the Act in respect of R&D facility at Pithampur in the name of the assessee. 18.12.2008 Approval under section 35(2AB) of the Act granted to EML in respect of R&D facility at Pithampur upto 30.6.2008 in Form 3CM. 09.03.2009 DSIR renewed the General recognition already granted to the R&D centre at Pithampura upto 31.03.2012 in name of the assessee. 18.02.2010 Approval granted by DSIR to assessee under section 35(2AB) of the Act in Form 3CM from 9.3.2009 to 31.3.2012 10. The relevant portion of Section 35(2AB) reads as under: "Section 35…………. [(2AB)(1) Where a company engaged in the business of [biotechnology or in [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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 01.04.2007 to 30.06.2008 i.e. till the date of slump sale and coming into existence of VECV. The letter written to DSIR is reproduced hereunder: "Eicher Motors Limited Eicher House, 12 Commercial Complex Greater Kailash-II (Masjid Moth) New Delhi-110048, India Telephone: 011-41437600 Fax: 011-41437700 Web http://www.eicherworld.com Department of Scientific & Industrial Research Ministry of Science & Technology Technology Bhawan New Mehrauli Road, New Delhi-110016 Kind Attn: Mr. Indu Bhaskar, Scientist 'E' Dear Sir, Sub: In the matter of Eicher Motors Limited Regarding our application dated 03.09.2007 for renewal of in-house R&D facilities at Pithampur (MP) and Chennai (Tamil Nadu) u/s 35(2AB) of the Income Tax Act, 1961 This has reference to our application dated 3rd September 2007 (filed on 07.09.2007 -- copy enclosed), for renewal of approval u/s 35(2AB) of the Income Tax Act, 1961 in respect of R&D facilities situated at following addresses: 1. Eicher Motors (Commercial vehicle division of Eicher Motors Limited) 102 & 102A, Industrial Area No. 1 Pithampur 454 775 Distt. Dhar (MP) 2. Royal Enfield (Motorcycle division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognition letter dated 05.06.2008 of in-house R&D unit situated at Pithampur, Distt Dhar (MP) from Eicher Motors Limited to VE Commercial Vehicles Limited w.e.f. 01.07.2008. 4. To treat our application dated 03.09.2007 requesting for renewal of application u/s 35(2AB) in respect of R&D facility situated at Pithampur in the name of VE Commercial Vehicles Limited, for the period commencing from 01.07.2008 and to giant the approval from 01.07.2008 to 31.03.2012 in the name of VE Commercial Vehicles Limited. In case any other information is required, we shall be pleased to submit the same." 12. From the reading of the above letter point 3 and point 4, it is clear that the EML sought to change the name of the company from EML to VECV w.e.f. 01.07.2008. In pursuance to the letter dated 13.10.2008 of EML, DSIR vide letter dated 09.03.2009 accorded approval upto 31.03.2012. 13. Having gone through the complete correspondence between EML and DSIR, we come to the conclusion that the letter dated 09.03.2009 granting recognition for in house R&D unit is not from 09.03.2009 but it only denotes that the extension upto 31.03.2012 against the period given upto 31.03.2011 to the EML vide l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion ; and if the asset is sold, without having been used for other purposes, in a previous year subsequent to the year of cessation, and the sale price falls short of the value of the asset taken into account at the time of cessation, an amount equal to the deficiency shall be allowed as a deduction for the previous year in which the sale took place;" 17. A going concern basis basically means that an entity will remain in business in the near future. We find that the above provisions cannot be applied to the facts of the instant case as the approval u/s 35(2AB) in respect of the R&D unit has been granted by the DSIR w.e.f. 01.07.2008 as consequence to the approval granted to EML. 18. In conclusion, having gone through the entire facts of the instant case, we hold that the assessee is eligible for deduction u/s 35(2AB) from 01.07.2008, the date on which the EML divested the CV unit and the R&D facility. Having said so, we also find that the ld. CIT (A) has given a categorical finding that the AO has disallowed total R&D expenses incurred by the assessee during the year including expenses that have incurred after the date of DSIR approval letter i.e. 09.03.2009. Further, we also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bank account of the assessee. 21. Since no interest bearing funds have been utilized in investment and the revenue could not prove any expenses incurred, the addition made by the AO is hereby directed to be deleted. Disallowance of Expenses: (Ground No. 3 of ITA No. 580/Del/2016 A.Y. 2009-10 and Ground No. 1 of ITA No. 581/Del/2016 A.Y. 2010-11) 22. During the relevant previous year, the assessee had acquired business undertaking from Volvo India Pvt. Ltd. ('VIPL') through scheme of demerger, duly approved by the High Court of Karnataka and Delhi, w.e.f 01.07.2008. As a consequence of the aforesaid business of VIPL devolving on the assessee, through demerger, the assessee took over the provisions on account of inventory obsolescence of Rs.2.56 crores, on account of service charges of Rs.3.70 crores and on account of warranty of Rs.7.65 crores totalling Rs.13.90 crores. Out of these provisions, the assessee has utilized an amount of Rs.7.3 crores on all the three accounts and claimed deduction in the P&L account. The AO disallowed the deduction claimed by the assessee on the grounds that the assessee did not furnish the copies of ITR of VIPL to prove that these expenses which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee in relation to the debts acquired on purchase of business which has been offered as income by the predecessor company is allowable u/s 36(2). The relevant portion of the judgment is reproduced herewith for ready reference: "The Income-tax Department appealed to the Tribunal against the order of the AAC and urged that clause (i) of sub-section (2) of section 36 of the Act did not permit such an allowance because it did not satisfy the requirement mentioned in subclause (a) and sub-clause (b) of that provision, and, therefore, it was not open to the assessee to claim a deduction of Rs. 15,100 as a bad debt nor the legal expenses of Rs. 6,880. The Tribunal dismissed the appeal, holding that where a business was succeeded to by an assessee, it was entitled to write off the bad debts of the business taken over. The Tribunal observed that whenever a business was succeeded to as a whole and as a running enterprise, the assets and liabilities so taken over became the assets and liabilities of the successor and, therefore, the assessee was entitled to write off the bad debts. It noted that the assessee had not only treated the amount as a debt owed to it but had allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made ; (iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year, but the Income-tax Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year ; (iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year and the Income-tax Officer is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-section (6) of section 155 shall apply." 7. Section 28 of the Act, referred to in sub-section (1) of section 36, provides that income under the head 'Profits and gains of business or profession', shall be chargeable to incometax. The profits and gains of a business are charged to incometax. To compute the profits and gains so chargeable, section 36 provides for allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year. It is the same assessee who has subsequently, pursuant to a settlement, accepted part payment of the debt in full satisfaction and has written off the balance of the debt as irrecoverable in his accounts. It appears, therefore, that the conditions in both sub-clauses (a) and ( b) of clause (i) of sub-section (2) of section 36 are satisfied in the present case and the High Court as well as the Tribunal and the AAC are right in the view which they took. 8. It seems to us that even if the debt had been taken into account in computing the income of the predecessor-firm only and had subsequently been written off as irrecoverable in the accounts of the assessee, the asses-see would still have been entitled to a deduction of the amount written off as a bad debt. It is not imperative that the assessee referred to in sub-clause (a) must necessarily mean the identical assessee referred to in sub-clause (b). A successor to the pertinent interest of a previous assessee would be covered within the terms of subclause (b). The successor assessee, in effect, steps into the shoes of his predecessor. 9. Accordingly, we hold that the assessee in the instant case was entitled to the de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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