9911796707
TMI Blog2025 (1) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2017-18. Since common issues are involved in the appeals filed by Revenue, CO and appeal filed by the assessee, therefore, for the sake of convenience, these were heard together and are being disposed of by this common order. 2. First we take up ITA No.127/PUN/2024 for assessment year 2014-15 as the lead case. Facts of the case, in brief, are that the assessee is engaged in the business of manufacturing of Automobile Ancillaries particularly Heat Exchangers i.e. Radiators, Evaporators, Condensers and Automotive Air Conditioning system. It filed its return of income on 29.11.2014 declaring total income of Rs. 9,95,44,850/-. The Assessing Officer completed the assessment u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') on 23.12.2016 determining the total income at Rs. 19,31,29,820/- wherein he made the disallowance of Rs. 8,31,07,474/- being the weighted deduction u/s 35(2AB) of the Act and Rs. 1,04,77,500/- being the Product Development expenses treating the same as Capital Expenditure as against Revenue expenditure claimed by the assessee. The Assessing Officer while making the disallowance u/s 35(2AB) followed the decision of the Ahmedabad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here can be no question of granting any weighted deduction on the expenses incurred outside India. To sum up, it is held that the assessee is entitled to weighted deduction u/s 35(2AB) on total amount of expenditure incurred in India amounting to Rs. 5,45,58,297/-. Resultantly, no weighted deduction is admissible in respect of expenditure incurred outside India amounting to Rs. 9,61,80,237/-. 16. At this juncture, it is pertinent to note the mandate of section 35 with the caption Expenditure on scientific research Clause (iv) of section 35(1) provides for deduction of expenditure on scientific nature "in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2)." Sub-section (2) of section 35, in turn, provides through sub-clause (ia) that for the purposes of clause (iv) of sub-section (1): 'in a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year. The proviso provides for not allowing deduction in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment itself, total of capital R&D expenditure incurred outside India will be eligible for deduction u/s 35(1)(iv) of the Act." UNQUOTE" It is seen from the above discussion in the honourable ITAT Pune's order that the facts are somewhat similar here. Respectfully following the above decision, it is accordingly held that the product development expenses of Rs. 4,15,53,737 spent outside India is not eligible for weighted deduction u/s 35(2AB). However it is allowed as a deduction u/s 35(1)(iv) as capital expenditure incurred on scientific purpose. Appeal is partly allowed on this ground." 6. So far as the expenditure incurred by the assessee of Rs. 1,04,77,500/- on Product Development expenses treating the same as capital is concerned, the Ld. CIT(A) also allowed the same by observing as under: "3.3 I have carefully considered the submission of the appellant in light of the facts of the case. In this case, it is seen that the Hon'ble ITAT, Pune vide its order ITA No. 624/PUN/2018 dated 17.05.2022 in appellant's own case for AY 2011-12 has decided the similar issue in favour of the appellant. The relevant paragraphs of the Hon'ble ITAT, Pune's order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd against the revenue." 9. In the light of legal position discussed above, having regard to the facts of the case that the expenditure was incurred only up-gradation of existing products, we are of the considered opinion that the expenditure is not in the nature of capital but revenue expenditure. Accordingly, we direct the Assessing Officer to allow the expenditure as revenue nature. Accordingly, this ground of appeal no.8 filed by the assessee stands allowed UNQUOTE" The facts are somewhat similar this year's expenses of Rs 1,39,70,000 spent on product testing, inspection and validation. In view of the above discussion, respectively following the decision of the Hon'ble ITAT, Pune, appeal on this ground is allowed." 7. Aggrieved with such order of the Ld. CIT(A) giving part relief, the assessee is in appeal before the Tribunal by raising the following grounds of appeal: Being aggrieved by the order passed u/s 250 of the Income Tax Act 1961 (the Act) by the learned Commissioner of Income Tax Appeals 13, Pune (CITA) your appellant submits following grounds for your kind and sympathetic consideration which are raised without prejudice to each other: On facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,77,500/- on product development expenses as revenue expense by relying upon the decisions of Hon'ble ITAT in assessee's own case for AY 2011-12, without appreciating that the said decision has not beers accepted by the Department and an appeal has been filed before the Hon'ble Bombay High Court. 5. The appellant craves leave to add, amend, or alter any ground(s) of appeal at the time of hearing before the Hon'ble Tribunal. 9. So far as ground of appeal No.1 by the Revenue challenging the order of the Ld. CIT(A) in allowing the capital expenditure outside India on R&D u/s 35(1)(iv) is concerned, we find the same stands covered in favour of the assessee by the Tribunal in assessee's own case for assessment year 2011-12 wherein the Tribunal has observed as under: "3. Succinctly, the facts of the case are that the assessee is engaged in manufacturing automobile accessories particularly Heat exchangers, i.e. Radiators, Evaporators, Condensers and Automotive air conditioning systems. The return was filed declaring total income of Rs. 3.56 crore and odd. One of the reported international transactions was Payment of Research and development expenses to three Associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his order, reading as under : Particulars Amount Outside India Remaining Claim u/s. 35(2AB) Considered in FA additions - - - - Capitalised Development Cost 4,48,35,186 3,39,60,518 1,08,74,668 - Tangible Investments-Additions 42,94,251 - 42,94,251 - Manpower Cost 6,91,701 - - - Sub Total (A) 4,98,21,138 3,39,60,518 1,58,60,621 9,96,42,277 Considered in CWIP Development Cost 5,47,24,293 5,47,24,293 - - Tangible Investments 6,800 - 6,800 - Salary-Design 1,18,45,866 - 1,18,45,866 - Travel Expenses 2,05,632 - 2,05,632 - Sub-Total (B) 6,67,82,591 5,47,24,293 1,20,58,298 13,35,65,182 Expenses Debited to P&L A/c. (Sub-total C) 3,41,34,804 74,95,427 2,66,39,378 3,41,34,804 Grand Total 15,07,38,534 9,61,80,237 5,45,58,297 26,73,42,263 5. It can be seen from the above Table that the assessee categorized R&D expenses under three broad heads: 'Considered in FA Additions' amounting to Rs. 4,98,21,138/- (Sub-total A); 'Considered in CWIP' amounting to Rs. 6,67,82,591/- (Sub-total B); and 'Expenses Debited to P&L A/c' amounting to Rs. 3,41,34,804/- (Sub-total C). The three heads h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re considered from Ist April of the year in which application is made in Form 3CK. The assessee in the instant case filed application on 15-07-2010 whose copy is available at page 26 to 66 of the paper book. Pursuant to the assessee's application, it was accorded recognition vide letter issued by DSIR on 07-12-2010. Going with the mandate of clause (i) of para 6 of the Guidelines as extracted above, the approval will have to be considered from Ist April of 2010, which is the previous year relevant to the assessment year under consideration. Clause (iii) providing for the approval to be considered from the date of recognition, applies only in case of companies not having DSIR recognized in-house R&D. Since the assessee has a valid approval granted by the DSIR for R&D Centre, it is covered within the four walls of clause (i) and there is no scope for applying clause (iii) and accordingly making it eligible for deduction only from the date of recognition. Accordingly, it is held that the approval to the assessee's in-house R&D centre is to be considered from Ist April of 2010 under the above clause (i). The view point of the ld. CIT(A) considering the expenditure only from the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture by the competent authority for the purposes of weighted deduction u/s. 35(2AB) was not there. The only requirement was to submit the report in relation to the approval of in-house R&D facility. Any amount of expenditure incurred in respect of in-house R&D facility qualified for the deduction - whether or not approved by the prescribed authority. Only the existence of approval and incurring of the expenditure were relevant considerations in the pre-amended era and not the amount quantified by the prescribed authority. The new stipulations came to be introduced w.e.f. 01-07-2016. As the assessment year under consideration is 2011-12 and the approval was granted by DSIR on 07-12-2010, the amended sub-clause (b) of Rule 6 (7A) coming into vogue even after the passing of the assessment order can have no applicability. We, therefore, hold that the ld. CIT(A) was not justified in restricting the amount of weighted deduction to the quantification done by the prescribed authority. The impugned order is reversed on this score. 11. The ld. CIT(A) also held that the capital expenditure in the nature of Intangibles incurred by the assessee could not qualify for the weighted deduction. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rescribed authority approved the in-house R&D unit of the assessee situated at "Gat No.626/1/2 and 622/1/0, 26 Milestone, Pune-Nasik Highway, Village Kuruli, Tal : Khed, District Pune". On a further query, the ld. AR submitted that the assessee's approved R&D facility was engaged in designing and developing of Engine cooling systems and HVAC systems for vehicles. During the designing and development phase, engine coolant and HVAC systems are required to be put in Performance Evaluation Testing in variant weather conditions artificially created, for which sophisticated technology and set up is required that is not available in India. It was for such Performance Evaluation Test under variant weather conditions artificially created that the assessee availed services from its three AEs situated abroad. It was pointed out that the three AEs conducted the needful tests for which the assessee incurred total cost of Rs. 9.61 crore tabulated under Column "Outside India", which was accepted by the TPO at ALP. 15. From the above discussion, it is abundantly clear that the total sum of Rs. 9.61 crore incurred by the assessee outside India has not been incurred on in-house R&D facility as app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred by the assessee outside India amounting to Rs. 9,61,80,237/-, we find that the expenditure of revenue nature, namely Rs. 74,95,427/- was claimed by the assessee as revenue expenditure and accordingly allowed also. It is only the remaining capital expenditure of Rs. 8,86,84,811/- [Rs.3,39,60,518/- being sub-total (A) and Rs. 5,47,24,293/- being sub-total (B)] that qualifies for deduction u/s. 35(1)(iv). We order accordingly. 18. The ld. DR took strong exception to the claim of the ld. AR for granting deduction of the capital expenditure on scientific research and development incurred outside India u/s. 35(1)(iv). He submitted that no such ground has been taken by the assessee. It is apparent that the assessee raised a claim for weighted deduction on such an amount u/s. 35(2AB) of the Act. We have held hereinabove that the amount does not qualify for the weighted deduction. The fact that the claim of the assessee cannot be entertained under one provision does not oust it from consideration under any other provision, if it is otherwise allowable under such latter provision. We have noticed that the amount of capital expenditure incurred on research and developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee of Rs. 4,09,65,000/- on product development was incurred only for up-gradation of existing products without appreciating that the said expenses were incurred by the assessee for development of new prototype product and assessee was also getting patent for the products developed. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing expenditure of Rs. 1,09,05,000/- on product development expenses as revenue expense without appreciating that the said expenses were incurred by the assessee for development of new prototype product and assessee was also getting patent for the products developed and hence the expenses incurred were for a capital asset and therefore capital in nature. 3 On the facts and circumstances of the case and in law the Ld CIT(A) has erred in allowing expenditure of Rs. 4,09,65,000/- on product development expenses as revenue expense by relying upon the decisions of Hon'ble ITAT in assessee's own case for AY 2011-12, without appreciating that the sad decision has not been accepted by the Department and an appeal has been filed before the Hon'ble Bombay High Court 4. The appellant craves leave t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the facts and figures are already on record and the Tribunal in assessee's own case for assessment year 2011-12 has already decided the issue in assessee's favour and in assessment year 2014-15 also the Ld. CIT(A) had allowed such claim of the assessee. He accordingly submitted that this alternate claim should be allowed. 19. After hearing both the sides, the additional ground of objection raised by the assessee is admitted for adjudication. 20. The Ld. Counsel for the assessee filed the following written submissions: Learned CIT(A) has confirmed the disallowance of weighted deduction (200%) and implicitly upheld the allowance of expenses at 100% granted by the AO u/s 35 (1) (iv). However the learned CIT(A) has given a concluding and self contradictory finding that the grounds raised by the assessee including the claim for deduction u/s 35 (1) (iv) are dismissed. (Page 19 of CITA order). Honourable Tribunal in appellant's own case for the preceding A.Y. 2011-12 has after upholding the disallowance of claim for weighted deduction (at 200%) has allowed the alternate claim for deduction u/s 35 (1) (iv) of the outside India testing and validation expenditure. (Copy of IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment (R & D) facility u/s 35(2AB) of the Income Tax Act, 1961 (the Act). 2. The learned CIT(A) failed to appreciate that the said claim of the appellant u/s 35 (2AB) was made after duly complying with and in conformity with the relevant provisions of the Act including the submission of requisite information regarding the R & D expenditure in the prescribed forms and non receipt of the report from Department of Scientific and Industrial Research (DSIR) quantifying in Form 3 CL the said expenditure as per Rule 6 was a technicality beyond the control of the appellant and clearly was not fatal to the entitlement of the said claim. 3. Learned CIT A failed to appreciate that rejection of appellant's claim solely on the basis of non receipt of DSIR report especially when the appellant was held to be eligible to claim deduction of expenditure on in house approved R & D for the period anterior to the year in question did not serve the purpose of meeting ends of substantial justice. The AO erred in drawing an adverse and unwarranted inference that a notified rule takes precedence over the provisions of Law. 4. The CIT(A) erred in passing the order in haste without providing an op ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
