Elgi Equipments Ltd., Coimbatore v. JCIT, Coimbatore

ITA 973/CHNY/2015 | 2011-2012
Pronouncement Date: 21-10-2016 | Result: Partly Allowed

Appeal Details

RSA Number 97321714 RSA 2015
Assessee PAN AAACE4784E
Bench Chennai
Appeal Number ITA 973/CHNY/2015
Duration Of Justice 1 year(s) 5 month(s) 22 day(s)
Appellant Elgi Equipments Ltd., Coimbatore
Respondent JCIT, Coimbatore
Appeal Type Income Tax Appeal
Pronouncement Date 21-10-2016
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 21-10-2016
Date Of Final Hearing 22-09-2016
Next Hearing Date 22-09-2016
Assessment Year 2011-2012
Appeal Filed On 29-04-2015
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI . . BEFORE SHRI ABRAHAM P. GEORGE ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR JUDICIAL MEMBER ./I.T.A. NO. 973/MDS/2015 / ASSESSMENT YEAR : 2011-2012 M/S. ELGI EQUIPMENTS LTD ELGI INDUSTIRAL COMPLEX TRICHY ROAD SINGANALLUR COIMBATORE 641 005. [PAN AAACE 4784E] VS. THE JOINT COMMISSIONER OF INCOME TAX CORPORATE CIRCLE 2 COIMBATORE ( / APPELLANT) ( /RESPONDENT) ! ' # / APPELLANT BY : SHRI. N.V. BALAJI ADVOCATE $% ! ' # /RESPONDENT BY : SHRI. SUPRIYO PAL IRS JCIT. & ' '( /DATE OF HEARING : 22-09-2016 )* ' '( /DATE OF PRONOUNCEMENT : 21-10-2016 ! / O R D E R PER SHRI ABRAHAM P. GEORGE ACCOUNTANT MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST AN ORDER DATED 23.02.2015 OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-1 COIMBATORE. ITA NO.973/MDS/2015 :- 2 -: 2. ASSESSEE HAS TAKEN ALTOGETHER NINE GROUNDS OF WHI CH GROUNDS NO. 1 & 9 ARE GENERAL IN NATURE NEEDING NO SPECIFIC ADJUDICATION 3. GROUND NO. 8 IS ON LEVY OF INTEREST U/S.234B AND U/S.234C OF THE INCOME TAX ACT 1961 (HEREIN REFERRED AS TH E ACT) WHICH IS CONSEQUENTIAL IN NATURE. EFFECTIVE GROUNDS APPEA R AS NUMBERS 2 TO 7. 4. THROUGH ITS GROUND NOS. 2 TO 5 ASSESSEE IS AGGRI EVED ON DENIAL OF WEIGHTED DEDUCTION OF 200% ALLOWED U/S.35 (2AB) OF THE ACT FOR THE REVENUE EXPENDITURE INCURRED FOR ITS IN-HO USE RESEARCH AND DEVELOPMENT FACILITY. 5. FACTS APROPOS ARE THAT THE ASSESSEE A MANUFACTUR ER OF AIR COMPRESSORS AND AUTOMOBILE EQUIPMENT HAD FILED A RE TURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR DISCLOSING INCOME OF G122 83 67 099/- UNDER NORMAL PROVISIONS AND BOOK P ROFIT OF G123 06 61 275/- U/S.115JB OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASSESSEE FILED A LETTER DAT ED 27.01.2014 SEEKING WEIGHTED DEDUCTION FOR REVENUE EXPENDITURE INCURRED ON ITS SCIENTIFIC RESEARCH AND DEVELOPMENT FACILITIES. A S PER ASSESSEE DURING THE RELEVANT PREVIOUS YEAR IT HAD INCURRED CAPITAL EXPENDITURE ITA NO.973/MDS/2015 :- 3 -: OF G1 75 67 713/- AND REVENUE EXPENDITURE OF G14 81 50 097/- FOR ITS DSIR APPROVED RESEARCH FACILITY. ASSESSEE POINTED OUT THAT THE SAID FACILITY WAS ORIGINALLY APPROVED BY THE COMPETENT A UTHORITY AS EARLY AS 1994-1995 AND THEREAFTER IT WAS PERIODICALLY RENEWI NG SUCH APPROVAL. AS PER ASSESSEE FOR THE RELEVANT PREVIOUS YEAR REN EWAL LETTER WAS ISSUED BY DSIR ON 14.07.2010 WITH REFERENCE NO.TU/I V- RD/1328/2010. CONTENTION OF THE ASSESSEE WAS THAT THEY HAD BY WAY OF ABUNDANT CAUTION CLAIMED 200% DEDUCTION IN RES PECT OF CAPITAL EXPENDITURE ALONE IN RETURN OF INCOME FILED. AS PE R ASSESSEE IT WAS ELIGIBLE FOR 200% DEDUCTION ON REVENUE EXPENDITURE ALSO. RELYING ON THE OF JUDGMENT OF HONBLE GUJARAT HIGH COURT IN T HE CASE OF CIT VS. CLARIS LIFE SCIENCES LTD (2010) (326 ITR 251) AND THAT OF HONBLE DELHI HIGH COURT JUDGMENT IN THE CASE OF CIT VS. SANDAN VIKAS (INDIA) LTD (2011) (335 ITR 117) ASSESSEE SUBMITTED BEFORE THE LD. ASSESSING OFFICER THAT IT WAS ELIGIBLE FOR WEIGHTED DEDUCTION OF 200% ON THE REVENUE EXPENDITURE ALSO. CONTENTION OF THE ASSESSE E WAS THAT COMPETENT AUTHORITY HAD AUTHORITY ONLY TO APPROVE THE RESEARCH AND DEVELOPMENT FACILITY BUT NOT THE AMOUNT OF EXPEND ITURE ELIGIBLE FOR WEIGHTED DEDUCTION. ASSESSEE ALSO POINTED OUT THAT IT WAS NOT A FRESH CLAIM BUT ONLY IMPROVEMENT OF A CLAIM ALREADY MADE BY IT IN THE RETURN OF INCOME. ITA NO.973/MDS/2015 :- 4 -: 6. HOWEVER LD. ASSESSING OFFICER WAS NOT IMPRESSED BY THE ABOVE REPRESENTATION AND EXPLANATIONS. ACCORDING TO HIM GOVERNMENT OF INDIA HAD GIVEN APPROVAL FOR WEIGHTED DEDUCTION OF 200% ONLY FOR THE CAPITAL EXPENDITURE OF THE R & D FACILITY FOR THE RELEVANT FINANCIAL YEAR AND NOT FOR THE REVENUE EXPENDITURE. HE DID NOT ACCEDE TO THE REQUEST OF THE ASSESSEE FOR GRANTING WEIGHTED DEDUC TION ON REVENUE EXPENDITURE INCURRED BY IT FOR THE R & D FACILIT Y. 7. AGGRIEVED ASSESSEE MOVED IN APPEAL BEFORE LD. COMMISSIONER OF INCOME TAX (APPEALS). CONTENTION OF THE ASSESSEE WAS THAT IT HAD SUBMITTED ALL DETAILS REGARDING CLA IM OF EXPENDITURE U/S.35(2AB) OF THE ACT BUT LD. ASSESSING OFFICER HA D REJECTED SUCH CLAIM WITHOUT GIVING ANY REASON. ON ALL OTHER ASPE CTS SIMILAR CONTENTIONS AS TAKEN BEFORE LD. ASSESSING OFFICER W ERE REITERATED BEFORE LD. COMMISSIONER OF INCOME TAX (APPEALS). 8. LD. COMMISSIONER OF INCOME TAX (APPEALS) HOWEVER W AS NOT IMPRESSED BY THE ARGUMENTS OF THE ASSESSEE. A CCORDING TO HIM DELHI HIGH COURT IN THE CASE OF SANDAN VIKAS (INDIA) LTD (SUPRA ) AND GUJARAT HIGH COURT IN THE CASE OF CLARIS LIFESCIENCES LTD (SUPRA) WERE ADJUDICATING THE RELEVANCE OF THE DATE OF APPROVAL OF A RESEARCH AND DEVELOPMENT FACILITY IN RELATION TO A CLAIMS OF DED UCTION U/S.35(2AB) OF THE ACT. AS PER LD. COMMISSIONER OF INCOME TAX (APP EALS) THESE ITA NO.973/MDS/2015 :- 5 -: JUDGMENTS HAD NOTHING TO DO WITH THE QUANTUM OF DE DUCTION. FURTHER AS PER LD. COMMISSIONER OF INCOME TAX (APP EALS) THE LD. ASSESSING OFFICER HAD TO GO BY THE APPROVAL OF EXP ENDITURE GIVEN BY DSIR AND HAD NO LEE-WAY ON THE QUANTUM. 9. NOW BEFORE US THE LD. AUTHORISED REPRESENTATIVE STRONGLY ASSAILING THE ORDER OF THE LD. COMMISSIONER OF INCO ME TAX (APPEALS) SUBMITTED THAT TERMS AND CONDITIONS UNDER WHICH MIN ISTRY OF SCIENCE & TECHNOLOGY GAVE APPROVAL U/S.35(2AB) OF THE ACT F OR IN-HOUSE R & D UNIT INTERALIA MENTIONED THAT SUCH RECOGNITION DID NOT TANTAMOUNT TO AN APPROVAL UNDER INCOME TAX ACT FOR ANY TAX CONCE SSIONS REBATES IMPORT CONCESSIONS ETC. ARGUMENT OF THE LD. AUTHOR ISED REPRESENTATIVE WAS THAT QUANTUM OF DEDUCTION WAS A MATTER WHICH W AS TO BE CONSIDERED BY THE LD. ASSESSING OFFICER UNDER THE ACT AND NOT BY DSIR. RELIANCE WAS PLACED ON THE RENEWAL OF RECOG NITION GRANTED ON 14 TH JULY 2010 BY MINISTRY OF SCIENCE AND TECHNOLOGY GOVERNMENT OF INDIA WHEREIN THE ABOVE CONDITION WAS MENTIONED. L D. AUTHORISED REPRESENTATIVE BROUGHT TO OUR ATTENTION ORDER OF AP PROVAL DATED 21 ST DECEMBER 2011 PLACED AT PAPER BOOK AT PAGE 74. AC CORDING TO HIM LIMITATION PLACED BY MINISTRY OF SCIENCE AND TECHNO LOGY WHICH DISABLED THE ASSESSEE FROM CLAIMING WEIGHTED DEDUCTION FOR T HE REVENUE EXPENDITURE INCURRED IN ITS TO R & D FACILITY WEN T BEYOND THE SCOPE OF ITA NO.973/MDS/2015 :- 6 -: POWERS VESTED IN THEM. ACCORDING TO HIM LD. ASSESS ING OFFICER HAD NEVER DOUBTED THE CORRECTNESS OF THE CLAIM BUT ER RONEOUSLY WENT BY THE DSIR LETTER. AS PER LD. AUTHORISED REPRESENTA TIVE DISALLOWANCE WAS ONLY MADE FOR A REASON THAT APPROVAL GIVEN BY T HE DSIR WAS FOR CAPITAL EXPENDITURE AND NOT FOR REVENUE EXPENDITURE . ACCORDING TO HIM AUTHORITY WHO WAS TO DETERMINE THE QUANTUM OF EXPEN DITURE ON WHICH WEIGHTED DEDUCTION COULD BE CLAIMED U/S.35(2AB) OF THE ACT WAS ONLY THE LD. ASSESSING OFFICER AND NOT DEPARTMENT OF SCI ENTIFIC AND INDUSTRIAL RESEARCH. RELYING ON FORM 3CK PRESCRIBE D UNDER INCOME TAX RULE FOR MOVING AN APPLICATION BEFORE THE SECR ETARY OF DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH OF G OVERNMENT OF INDIA PLACED AT PAPER BOOK PAGE 3 TO 43 LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT SAID FORM DID NOT IN ANY WAY LIMIT T HE ALLOWANCE U/S.35(2A) ONLY TO CAPITAL EXPENDITURE. FURTHER AS PER LD. AUTHORISED REPRESENTATIVE APPROVAL WAS TO BE GIVEN BY THE SAID AUTHORITY IN FORM NO.3CM AND THIS FORM DID NOT HAVE ANY COLUMN OR ROW WHEREIN THE QUANTUM OF EXPENDITURE ON WHICH WEIGHTED DEDUCTION COULD BE GIVEN WAS TO MENTIONED OR QUANTIFIED. RELIANCE WAS PLAC ED BY THE LD. AUTHORISED REPRESENTATIVE ONCE AGAIN ON THE DECISIO N OF GUJARAT HIGH COURT IN THE CASE OF CLARIS LIFESCIENCES LTD (SUPRA ) AND DELHI HIGH COURT IN THE CASE OF SANDAN VIKAS (INDIA) LTD (SUPRA). APART FROM THIS LD. AUTHORISED REPRESENTATIVE ALSO PLACED CONSIDERA BLE RELIANCE ON THE ITA NO.973/MDS/2015 :- 7 -: DECISION OF MUMBAI TRIBUNAL IN THE CASE OF USV LTD VS. DCIT (2012) 54 SOT 0615 . AS PER LD. AUTHORISED REPRESENTATIVE THE LATTER DECISION SQUARELY COVERED THE ISSUE IN FAVOUR OF THE ASSESSE E. 10. PER CONTRA THE LD. DEPARTMENTAL REPRESENTATIVE SU BMITTED THAT ONCE DSIR WHICH WAS THE COMPETENT AUTHORITY TO GIVE APPROVALS U/S. 35(2AB) OF THE ACT HAD SPECIFIED THE ITEMS OF EXPENDITURE ON WHICH SUCH DEDUCTION WAS TO BE GRANT ED IN ITS LETTER OF APPROVAL LD. ASSESSING OFFICER COULD NOT GO BEYO ND THE SAID APPROVAL AND EXAMINE WHETHER ASSESSEE WAS ELIGIBLE FOR A HIG HER CLAIM THAN THAT. AS PER LD. DEPARTMENTAL REPRESENTATIVE JUDGM ENTS OF THE GUJARAT HIGH COURT AND HONBLE DELHI HIGH COURT WERE NOT O NLY ON THE CUT OF DATES THAT WERE TO BE APPLIED BUT ALSO ON THE QUAN TUM OF DEDUCTION. THUS ACCORDING TO HIM LOWER AUTHORITIES WERE JUST IFIED IN RESTRICTING THE CLAIM OF WEIGHTED DEDUCTION ONLY TO CAPITAL EXP ENDITURE 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. SECTION 35(2AB) O F THE ACT IS REPRODUCED HEREUNDER:- (2AB)(1) WHERE A COMPANY 4ENGAGED IN THE BUSINESS OF BIO- TECHNOLOGY OR IN THE ANY BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING NOT BEING AN AR TICLE OR THING SPECIFIED IN THE LIST OF THE ELEVENTH SCHEDULE INCU RS ANY EXPENDITURE ON SCIENTIFIC RESEARCH (NOT BEING EXPEN DITURE IN ITA NO.973/MDS/2015 :- 8 -: THE NATURE OF COST OF ANY LAND OR BUILDING) ON IN-H OUSE RESEARCH AND DEVELOPMENT FACILITY AS APPROVED BY TH E PRESCRIBED AUTHORITY THEN THERE SHALL BE ALLOWED A DEDUCTION OF A SUM EQUAL TO TWO TIMES OF THE EXPENDITURE SO I NCURRED. EXPLANATION FOR THE PURPOSES OF THIS CLAUSE 'EXPEN DITURE ON SCIENTIFIC RESEARCH' IN RELATION TO DRUGS AND PHAR MACEUTICALS SHALL INCLUDE EXPENDITURE INCURRED ON CLINICAL DRUG TRIAL OBTAINING APPROVAL FROM ANY REGULATORY AUTHORITY UN DER ANY CENTRAL STATE OR PROVINCIAL ACT AND FILING AN APPL ICATION FOR A PATENT UNDER THE PATENTS ACT 1970 (39 OF 1970). (2) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE MENTIONED IN CLAUSE (1) UNDER ANY OTHER PROVISION OF THIS ACT. (3) NO COMPANY SHALL BE ENTITLED FOR DEDUCTION UNDE R CLAUSE (1) UNLESS IT ENTERS INTO AN AGREEMENT WITH THE PRE SCRIBED AUTHORITY FOR CO-OPERATION IN SUCH RESEARCH AND DEV ELOPMENT FACILITY AND FOR AUDIT OF THE ACCOUNTS MAINTAINED F OR THAT FACILITY. (4) THE PRESCRIBED AUTHORITY SHALL SUBMIT ITS REPOR T IN RELATION TO THE APPROVAL OF THE SAID FACILITY TO THE DIRECTO R-GENERAL IN SUCH FORM AND WITHIN SUCH TIME AS MAY BE PRESCRIBED . (5) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXP ENDITURE REFERRED TO IN CLAUSE (1) WHICH IS INCURRED AFTER T HE 31ST DAY OF MARCH 2012. (6) NO DEDUCTION SHALL BE ALLOWED TO A COMPANY APPR OVED UNDER SUB-CLAUSE (C) OF CLAUSE (IIA) OF SUB-SECTION (1) IN RESPECT OF THE EXPENDITURE REFERRED TO IN CLAUSE (1 ) WHICH IS INCURRED AFTER THE 31ST DAY OF MARCH 2008. A READING OF THE ABOVE SECTION CLEARLY SHOW THAT TH ERE WAS NO RESTRICTION ON THE TYPE OF EXPENDITURE FOR PREFERRI NG A CLAIM UNDER IT EXCEPT FOR THE RESTRICTIONS PLACED ON COST OF LAND AND BUILDING. LAND AND BUILDING WERE NOT ELIGIBLE FOR SUCH WEIGHTED DE DUCTION . CAREFUL READING OF SUB-SEC. (1) WOULD ALSO SHOW THAT THE D EDUCTION WAS FOR EXPENDITURE INCURRED ON IN-HOUSE RESEARCH AND DEVEL OPMENT FACILITY AS ITA NO.973/MDS/2015 :- 9 -: APPROVED BY PRESCRIBED AUTHORITY. IT WAS NOT ON EX PENDITURE FOR SCIENTIFIC RESEARCH ON IN-HOUSE RESEARCH DEVELOPMEN T FACILITY/APPROVED BY THE PRESCRIBED AUTHORITY. THE CRITICAL DIFFERENC E IS THE WORD AS. THIS PARTICULAR WORD COMING BETWEEN RESEARCH AND DEVELOPMENT FACILITY AND APPROVED BY THE PRESCRIBED AUTHOR ITY IN OUR OPINION CLEARLY MEANS THAT THE APPROVAL CONTEMPLATED WAS NO T FOR THE FACILITY ALONE. INCOME TAX RULES DO PRESCRIBED THE FORM IN WHICH APPROVAL IS TO BE GIVEN BY SECRETARY DSIR. THIS IS FORM NO.3 C M. THE SAID FORM IS REPRODUCED AS UNDER:- FORM NO. 3CM ORDER OF APPROVAL OF IN-HOUSE RESEARCH AND DEVELOPM ENT FACILITY UNDER SECTION 35(2AB) OF THE INCOME-TAX AC T 1961. 1. NAME. ADDRESS AND PAN OF THE COMPANY: 2. NATURE OF THE BUSINESS OF THE COMPANY MANUFACTU RING/ PRODUCTION OF ARTICLE OR THING. 3. OBJECTIVES OF THE SCIENTIFIC RESEARCH TO BE CON DUCTED BY IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY: 4. ADDRESS AT WHICH SUCH RESEARCH & DEVELOPMENT FACILITY IS LOCATED. 5. REF. NO. AND DATE OF THE APPLICATION: THE ABOVE RESEARCH & DEVELOPMENT FACILITY IS APPROV ED FOR THE PURPOSE OF SECTION 35(2AB) SUBJECT TO THE COND ITIONS UNDERLINED THEREIN. PLACE: DATE: (SIGNATURE) (NAME) SECRETARY DSIR (SEAL) FILE NO. ORDER NO. ITA NO.973/MDS/2015 :- 10 -: THE ABOVE FORM NO DOUBT DOES NOT GIVE ANY COLUMN OR ROW FOR SPECIFYING THE QUANTUM OF EXPENDITURE ON WHICH APPR OVAL WAS BEING GIVEN. HOWEVER THE FORMAT OF THIS FORM CANNOT IN OUR OPINION DILUTE THE PROVISIONS OF THE ACT. IN FACT THERE IS NO RUL E AS SUCH IN THE INCOME TAX RULES WHICH REQUIRE THE AUTHORITY CONCER NED TO ISSUE THE APPROVAL IN FORM 3CM ALONE. THERE IS NO DISPUTE IN THE CASE BEFORE US THAT RESEARCH AND DEVELOPMENT FACILITY HAD THE A PPROVAL OF DSIR. CONTENTION IS THAT THERE COULD HAVE BEEN NO DENIA L OF SUCH WEIGHED DEDUCTION ON REVENUE EXPENDITURE. FORM 3 CM ISSUED BY THE COMPETENT AUTHORITY WHICH IS PLACED ON RECORD AT PA GE 74 OF PAPER BOOK IS REPRODUCED HEREUNDER:- GOVERNMENT OF INDIA MINISTRY OF SCIENCE AND TECHNOLOGY DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH TECHNOLOGY BHAVAN NEW MEHRUADI ROAD NEW DELHI 110 016. FORM 3 CM ORDER OF APPROVAL OF IN-HOUSE RESEARCH AND DEVELOPM ENT FACILITY UNDER SECTION 35(2AB) OF THE INCOME-TAX ACT 1961. 1. NAME. ADDRESS AND PAN OF THE COMPANY: MLS E GI EQUIPMENTS LTD. ELGI INDUSTRIAL COMPLEX TRICHY ROAD SINGANALLUR COIMBATORE 641 005 FAX NO. 04222573697 AAACE4784E 2. NATURE OF THE BUSINESS OF THE COMPANY: MANUFACTURING AND PRODUCTION OF MECHANICAL EQUIPMEN TS. ITA NO.973/MDS/2015 :- 11 -: 3. OBJECTIVES OF THE SCIENTIFIC RESEARCH TO BE CON DUCTED BY IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY: TO DESIGN AND DEVELOP COMPETITIVE PRODUCTS IN LINE WITH INTERNATIONAL STANDARDS TO INITIATE NEW TECHNOLOGIES THAT IMPROVES QUALITY PERFORMANCE AND MANUFACTURING ASPECTS OF PRODUCTS. ' TO IDENTIFY NEW TECHNOLOGY INITIATIVES THAT MEET THE SHORT TERM AND LONG TERM BUSINESS GOALS. TO FOCUS ON TECHNOLOGY IMPROVEMENTS REQUIRED TO GET AHEAD ASPECTS IN COMPRESSORS/HEAT EXCHANGE. WORK TOWARD REDUCE THE NOISE LEVELS IN COMPRESSORS TO MEET THE GLOBAL SALES REQUIREMENTS. 4. ADDRESS AT WHICH SUCH RESEARCH & DEVELOPMENT FACILITY IS LOCATED ELGI INDUSTRIAL COMPLEX TRICHY ROAD SINGANALLUR COIMBATORE. 5. REF. NO. AND DATE OF THE APPLICATION: LETTER NO. NIL DATED 23.05.2011. THE ABOVE RESEARCH & DEVELOPMENT FACILITY IS APPROVED FOR THE PURPOSE OF SECTION 35( 2AB) FROM 01.04.2010 TO 31.03.2011 FOR CAPITAL EXPENDITU RE ONLY AND FROM 01.04.2011 TO 31.03.2012 FOR BOTH CAPITAL AND REVENUE EXPENDITURE SUBJECT TO THE CONDITIONS UNDERLINED THEREIN. (KVSP RAO) SCIENTIST 'G' (FOR AND ON BE HALF OF SECRETARY DSIR) PLACE: NEW DELHI DATE : 21 DECEMBER 2011 DSIR REF.:- FILE NO. TU/IV-15(670)/2010 ORDER NO. TU/IV-15(670)/35(2AB)/3CM/49712011 DATED .21.12.2011 COPY TO: THE DIRECTOR GENERAL INCOME TAX (EXEMPTION) DISTRICT CENTRE 2 ND FLOOR PLOT NO.15 LAKSHMI NAGAR. DELHI 110 092 IT CAN BE SEEN FROM CLAUSE 5 ABOVE THAT FOR THE SUB SEQUENT YEAR AUTHORITY HAD GRANTED WEIGHTED DEDUCTION BOTH CAPI TAL AND REVENUE EXPENDITURE. ITA NO.973/MDS/2015 :- 12 -: 12. WE DO FIND THAT AN ALMOST SIMILAR ISSUE HAD COME U P BEFORE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF USV LTD (SUPRA ). IN THE SAID CASE THERE WAS A DIFFERENCE BETWEEN AMOUNT SP ECIFIED IN DISR CERTIFICATE AND AMOUNT CLAIMED BY THE ASSESSEE IN R ESPECT OF THE FOLLOWING ITEMS:- -CLINICAL TRIALS BEING INCURRED ON OUTSIDE LABORATO RY 4 00 32 682/- -PATENT FILING IN VARIOUS FOREIGN COUNTRIES & FOREI GN CONSULTANCY 1 84 87 038/- -EXPENSES ON REPAIRS RENT RATES AND TAXES PERTAIN ING TO BUILDING 71 58 991/- - DIFFERENCE BETWEEN THE AMOUNT REPORTED IN ANNUAL RE PORT AND CLAIMED IN ROI 1 25 17 261/- TOTAL ----------------------------- 7 81 95 972/- -------------------- ARGUMENT TAKEN BY THE ASSESSEE AND THE LD. DEPARTME NTAL REPRESENTATIVE IN THE SAID CASE WERE ALSO SIMILAR TO THESE TAKEN HERE BEFORE US. THESE ARGUMENTS APPEARS AT PARA 27 TO 29 OF THE SAID ORDER WHICH IS REPRODUCED HERE UNDER:- 27. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BE FORE US THAT SECTION 35(2AB) ONLY EXCLUDES COST OF LAND OR BUILDING FROM WEIGHTED DEDUCTION AND NOT ANY CHARGES AND EXPENSES RELATING TO LAND OR BUILDING. HE SUBMITTED THAT THE EXPENDIT URE SUCH AS REPAIRS RENT AND RATES CANNOT BE TREATED AS COST O F LAND AND BUILDING. HE SUBMITTED THAT SUCH EXPENSES ARE REVEN UE IN NATURE. HE SUBMITTED THAT WHEN THE EXPENDITURE ARE INCURRED FOR RENTING THE R&D PREMISES AND FOR INCURRING EXPENDIT URE ON ITA NO.973/MDS/2015 :- 13 -: NORMAL REPAIRS ON R&D FACILITIES HAVE TO BE ALLOWED IN FULL WEIGHTED DEDUCTION. TO SUBSTANTIATE HIS SUBMISSIONS THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED THE DECIS ION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. SAND AN VIKAS (INDIA) LTD. [2012] 207 TAXMAN 216/ 22 TAXMANN.COM 19 A COPY OF WHICH IS PLACED AT PAGE-167 OF THE PAPER BOOK. H E ALSO REFERRED TO THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V. WHEEL'S INDIA LTD.[2012] 20 TAXMANN. COM 682 AND SUBMITTED THAT DSIR CERTIFICATE IS ONLY TO CERT IFY THE FACILITIES OF RESEARCH AND DEVELOPMENT ACTIVITY UNDERTAKEN BY THE ASSESSEE AND NOT A CERTIFICATE FOR EXPENDITURE INCU RRED BY THE ASSESSEE. HE FURTHER SUBMITTED THAT THE DETAILS MEN TIONED IN DSIR CERTIFICATE SHOULD BE TREATED AS A MERE CLARIF ICATION AND NOT AN INDICATION FOR DISALLOWANCE OF THE EXPENDITU RE INCURRED BY THE ASSESSEE. THE LEARNED COUNSEL SUBMITTED THAT ME RELY BECAUSE IN THE CERTIFICATE ISSUED BY THE DSIR CERTA IN AMOUNTS WERE NOT APPROVED IT DOES NOT MEAN THAT THE ASSESS EE HAS NOT INCURRED EXPENDITURE ON RESEARCH AND DEVELOPMENT AC TIVITY AND THEREFORE THE DISALLOWANCE OF WEIGHTED DEDUCTION @ 150% AS PER SECTION 35(2AB) OF THE ACT IS NOT JUSTIFIED. 28. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPRESENTATIVE JUSTIFIED THE ORDER OF THE COMMISSIO NER (APPEALS) AND SUBMITTED THAT THE DSIR CERTIFICATE I S PRE- REQUISITE FOR ANY EXPENDITURE TO BE ALLOWED UNDER S ECTION 35(2AB) OF THE ACT HAS WEIGHTED DEDUCTION @ 150%. H E SUBMITTED THAT SINCE DSIR DID NOT APPROVE THE SAID EXPENDITURE IN CERTIFICATE ISSUED BY IT THE ASSESSING OFFICER RIGHTLY DISALLOWED THE SAME ON THE BASIS OF CERTIFICATE OF DSIR AS HE IS TO FOLLOW THE SAID CERTIFICATE OF DSIR FOR CONSIDER ING AS TO WHETHER THE ASSESSEE IS ENTITLED FOR WEIGHTED DEDUC TION UNDER SECTION 34(2AB) OR NOT AND HE IS NOT TO APPLY HIS M IND FOR THAT PURPOSE. HE SUBMITTED THAT THE ORDER OF THE COMMISS IONER (APPEALS) SHOULD BE CONFIRMED. 29. IN THE REJOINDER THE LEARNED COUNSEL FOR THE A SSESSEE TO HIS SUBMISSIONS REFERRED TO RULE-6(7A) OF THE I.T. RULE S 1962 AND SUBMITTED THAT THIS RULE LAYS DOWN THE CONDITION SU BJECT TO WHICH THE EXPENDITURE INCURRED ON IN-HOUSE RESEARCH AND DEVELOPMENT FACILITIES IS TO BE ALLOWED UNDER SECTI ON 35(2AB) OF THE ACT AND THE SAID RULE DOES NOT PROVIDE THAT THE EXPENDITURE INCURRED IN CONNECTION WITH BUILDING OF R&D FACILIT IES SHOULD NOT BE ALLOWED. HE SUBMITTED THAT THERE IS NO AUTHORITY GIVEN UNDER SECTION 35(2AB) TO MAKE ANY RULE LAYING DOWN ADDITI ONAL CONDITION(S) FOR GRANT OF WEIGHTED DEDUCTION UNDER SECTION 35(2AB). HE SUBMITTED THAT IF THE QUANTIFICATION OF ELIGIBLE EXPENDITURE AS DETERMINED BY THE PRESCRIBED AUTHOR ITY I.E. DSIR IS CONSIDERED AS FINAL THEN AN IMPORTANT RIGH T OF APPEAL TO THE ASSESSEE AGAINST SUCH QUANTIFICATION WILL BE LO ST AS THE ITA NO.973/MDS/2015 :- 14 -: QUANTIFICATION SO LAID DOWN AND TREATED BY THE PRES CRIBED AUTHORITY WILL BE TREATED AS BINDING ON THE APPELLA TE AUTHORITY AS WELL. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTE D THAT THE ASSESSEE IS ENTITLED FOR WEIGHTED DEDUCTION OF THE EXPENDITURE INCURRED ON RENT RATE AND TAXES. THE DIRECTION OF THE LD. TRIBUNAL ARE CONTAINED IN PARA 30 TO 34 OF THE ORDER AND THEY ARE ALSO REPRODUCED HEREUNDER:- 30. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LEARNED REPRESENTATIVES OF THE PARTIES AND THE ORDERS OF THE AUTHORITIES BELOW AS ALSO THE PROVISI ONS OF SECTION 35(2AB) R/W RULE-6(7A) OF THE RULES. ON PERUSAL OF THE PROVISIONS OF SECTION 35(2AB) OF THE ACT WE DO AGREE WITH THE LEARNED COUNSEL FOR THE ASSESS EE THAT THE SAID SECTION EXCLUDES THE EXPENDITURE IN T HE NATURE OF COST OF ANY LAND OR BUILDING FROM WEIGHTE D DEDUCTION TO BE ALLOWED UNDER SECTION 35(2AB). THE SAID SECTION 35(2AB) AS APPLICABLE TO THE ASSESSMEN T YEAR UNDER CONSIDERATION ALONG WITH THE EXPLANATION READS AS UNDER: 'SECTION 35(2AB) PROVIDES THAT (2AB)(1) WHERE A COMPANY ENGAGED IN THE BUSINESS OF [BIO-TECHNOLOGY OR IN THE BUSINESS OF] MANUFACTURE OR PRODUCTION OF ANY DRUGS PHARMACEUTICALS ELECTRONI C EQUIPMENTS COMPUTERS TELECOMMUNICATION EQUIPMENTS CHEMICALS OR ANY OTHER ARTICLE OR THING NOTIFIED BY THE BOARD INCURS ANY EXPENDITURE ON SCIENTIFIC RESEARCH (NOT BEING EXPENDITURE IN THE N ATURE OF COST OF ANY LAND OR BUILDING) ON IN-HOUSE RESEAR CH AND DEVELOPMENT FACILITY AS APPROVED BY THE PRESCRI BED AUTHORITY THEN THERE SHALL BE ALLOWED A DEDUCTION OF [A SUM EQUAL TO ONE AND ONE-HALF TIMES OF THE EXPENDITURE] SO INCURRED. EXPLANATION FOR THE PURPOSES OF THIS CLAUSE 'EXPENDITURE ON SCIENTIFIC RESEARCH' IN RELATION T O DRUGS AND PHARMACEUTICALS SHALL INCLUDE EXPENDITURE INCU RRED ON CLINICAL DRUG TRIAL OBTAINING APPROVAL FROM ANY REGULATORY AUTHORITY UNDER ANY CENTRAL STATE OR ITA NO.973/MDS/2015 :- 15 -: PROVINCIAL ACT AND FILING AN APPLICATION FOR A PATE NT UNDER THE PATENTS ACT 1970 (39 OF 1970).]' 31. THEREFORE IT IS EVIDENT THAT THIS SECTION EXCL UDES FROM WEIGHTED DEDUCTION ONLY COST OF LAND AND BUILD ING AND NOT ANY CHARGES AND EXPENSES RELATED TO LAND OR BUILDING. THE REPAIRS RENT ETC. THE EXPENDITURE INCURRED RELATING TO R&D PREMISES CANNOT FORM PART OF COST OF LAND OR BUILDING. IN THE ABSENCE OF ANY FAC T THAT THE SAID CLAIM OF THE ASSESSEE AGGREGATING TO RS. 62 00 689 IS NOT THE EXPENDITURE ON RENTS RATES A ND TAXES RELATING TO R&D PREMISES WE ARE OF THE CONSIDERED VIEW THAT THE SAID EXPENDITURE HAS TO FO RM PART OF WEIGHTED DEDUCTION AS PER SECTION 35(2AB) O F THE ACT. THEREFORE WE BY REVERSING THE ORDERS OF THE AUTHORITIES BELOW HOLD THAT THE ASSESSEE IS ENTITL ED TO WEIGHTED DEDUCTION ON THE SAID AMOUNT @ 150% AS PER SECTION 35(2AB) OF THE ACT. HENCE GROUND NO.1(B) O F THE APPEAL TAKEN BY THE ASSESSEE IS ALLOWED. 32. IN RESPECT OF GROUND NO.1(C) OF THE APPEAL TAKE N BY THE ASSESSEE RELATING TO DENIAL OF WEIGHTED DEDUCTI ON ON THE CLAIM OF RS. 1 25 17 261 NOT REPORTED IN DS IR CERTIFICATE WE IN THE ABSENCE OF ANY DETAILS BEFO RE US DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE COMMISSIONER (APPEALS). HENCE WE UPHOLD THE ORDER OF THE COMMISSIONER (APPEALS) TO DENY WEIGHTED DEDUCTION ON THE ABOVE CLAIM OF THE ASSESSEE UNDER SECTION 35(2AB) OF THE ACT. THEREFORE GROUND NO.1( C) TAKEN BY THE ASSESSEE IS REJECTED. 33. IN RESPECT OF GROUND NO.3 OF THE APPEAL OF THE DEPARTMENT TO ALLOW WEIGHTED DEDUCTION IN RESPECT O F CONSULTING CHARGES OF RS. 8 65 131 AND PATENT FILI NG CHARGES OF RS. 74 38 119 THE LEARNED DEPARTMENTAL REPRESENTATIVE DURING THE COURSE OF HEARING RELIE D ON THE ORDER OF THE ASSESSING OFFICER AND WHEREAS THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SAME VERY ISSUE WAS CONSIDERED BY THE FIRST APPELLA TE AUTHORITY IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEA R 2006-07 AND HE HAS FOLLOWED THE SAME FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT WHEN THE DEPARTMENT FILED APPEAL FOR ASSESSMENT YEAR 2006-07 BEFORE THE TRIBUNAL THE DEPARTMENT ACCEPTED THE SA ID ORDER OF THE COMMISSIONER (APPEALS) TO ALLOW CONSUL TING CHARGES AND PATENT FILING CHARGES FOR WEIGHTED ITA NO.973/MDS/2015 :- 16 -: DEDUCTION UNDER SECTION 35(2AB) OF THE ACT AND DID NOT DISPUTE THE SAME BEFORE THE TRIBUNAL. 34. WE HAVE CONSIDERED THE ORDERS OF THE AUTHORITIE S BELOW AND SUBMISSIONS OF THE LEARNED REPRESENTATIVE S AND WE HAVE ALSO CAREFULLY CONSIDERED THE COMMISSIONER (APPEALS)'S ORDER FOR ASSESSMENT YEAR 2006-07 A COPY OF WHICH IS PLACED AT PAGES-197 TO 208 OF THE PAPER BOOK (RELEVANT PAGES 206-208. WE OBSERVE THAT THE CONSULTANCY CHARGES HAD BEEN PAID BY THE ASSESSEE IN PROVIDING TECHNICAL SERVICES REGARD ING THE PATENTS OBTAINING PATENT INFORMATION FROM INNOVATOR COMPANIES AND OBTAINING INNOVATOR SAMPLES FOR R&D PURPOSES. THE PAYMENTS HAVE BEEN ACCEPTED TOWARDS RESEARCH AND NOT TOWARDS REGISTERING THE PATENTS. THEREFORE THESE EXPENDITURES HAVE BEEN INCURRED TOWARDS RESEARCH EXPENSES AND NOT TOWARDS ANY PATENT FILING. FURTHER IT IS ALSO OBSERVED THA T THE EXPENDITURE INCURRED IN RESPECT OF PATENT APPLICATI ON FILED UNDER THE PATENT ACT 1970. EXPLANATION TO SE CTION 35(2AB) AS REPRODUCED HEREIN ABOVE SPECIFICALLY PROVIDES THAT THE EXPENDITURE ON SCIENTIFIC RESEARC H FOR THE PURPOSE OF SECTION 35(2AB) OF THE ACT SHALL INC LUDE FILING OF APPLICATION FOR A PATENT UNDER THE PATENT ACT 1970 IN RELATION TO DRUGS AND PHARMACEUTICALS. ANY APPLICATION FOR PATENT FOREIGN COUNTRY HAS TO BE FI LED IN INDIA AS PER SECTION 7 OF THE PATENT ACT 1970 ACCORDING TO PATENT COOPERATION TREATY. THEREFORE WE HOLD THAT THE COMMISSIONER (APPEALS) HAS RIGHTLY HE LD THAT THE SAID EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS PATENT FILING CHARGES IS ELIGIBLE FOR WEIGH TED DEDUCTION UNDER SECTION 35(2AB) R/W EXPLANATION THERETO. IN VIEW OF THE ABOVE WE UPHOLD THE ORDER OF THE COMMISSIONER (APPEALS) BY REJECTING GROUND NO.3 OF THE APPEAL TAKEN BY THE DEPARTMENT. 13. FROM A READING OF THE DIRECTIONS IN THE ORDER OF TH E TRIBUNAL IN THE CASE OF USV LTD (SUPRA) WHAT WE UNDERSTAND IS THAT FOR CERTAIN ITEMS OF DIFFERENCE THE TRIBUNAL HAD APPROVED THE DENIAL OF WEIGHED DEDUCTION WHEREAS FOR CERTAIN OTHER ITEMS WHICH WER E CONNECTED TO R ITA NO.973/MDS/2015 :- 17 -: & D FACILITY OF THE ASSESSEE SUCH CLAIM WAS ALLO WED DESPITE DSIR CERTIFICATE NOT COVERING THE CLAIM. THE BENCH HAD DULY CONSIDERED THE JUDGMENTS OF HONBLE DELHI HIGH COURT IN THE CASE OF SANDAN VIKAS (INDIA) LTD (SUPRA) AND HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. WHEELS INDIA LTD (2011) (336 ITR 513 ). LATTER JUDGMENT HAD IN TURN CONSIDERED THE JUDGMENT OF GUJARAT HIGH COURT IN THE CASE OF CLARIS LIFESCIENCES LTD (SUPRA ). 14. CONSIDERING ALL THE ABOVE WE ARE OF THE OPINION TH AT THE ISSUE REQUIRE A FRESH LOOK. LD. ASSESSING OFFICER HAS TO CAREFULLY CHECK WHETHER CLAIM OF WEIGHTED DEDUCTION WILL BE AVAILAB LE TO THE REVENUE EXPENDITURE ALSO FOR THE IMPUGNED ASSESSMENT YEAR. HE HAS TO APPLY THE POSITION OF LAW MENTIONED BY US IN THE PRECEDIN G PARAS. THEREFORE WE SET ASIDE THE ORDERS OF LOWER AUTHORITIES AND RE MIT THE ISSUE BACK TO THE FILE OF THE LD. ASSESSING OFFICER FOR CONSIDERA TION AFRESH IN ACCORDANCE WITH LAW. GROUND NOS. 2 TO 5 ALLOWED FO R STATISTICAL PURPOSE. 15. VIDE ITS GROUND NOS. 6 & 7 GRIEVANCE RAISED BY TH E ASSESSEE IS ON AN ADDITION OF G95 847/- MADE U/S.14A OF THE ACT R.W.R 8D. ITA NO.973/MDS/2015 :- 18 -: 16. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT LD. ASS ESSING OFFICER HAD APPLIED RULE 8D(2)(III) OF THE ACT DISR EGARDING CLAIM OF THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED FOR EARNI NG EXEMPT INCOME. 17. PER CONTRA THE LD. DR STRONGLY SUPPORTED THE ORDER S OF THE AUTHORITIES BELOW. 18. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUS ED THE ORDERS OF THE AUTHORITIES BELOW. WHAT WE FIND THAT ASSESSEE HAD SUBSTANTIAL INVESTMENTS WHICH GAVE IT TAX FREE DIVI DEND INCOME OF G34 46 860/-. THE INVESTMENTS AS ON 31.03.2011 CAM E TO G47.35 CRORES. LD. COMMISSIONER OF INCOME TAX (APPEALS) I N HIS ORDER HAS SPECIFICALLY NOTED THAT ASSESSEE WAS UNABLE TO GIV E ANY INFORMATION AS TO THE INVESTMENTS POSITION AS ON BEGINNING OF T HE RELEVANT PREVIOUS YEAR. IT MAY BE TRUE THAT ASSESSEE HAD ACCUMULATED RESOURCES MUCH MORE THAN THE INVESTMENTS. HOWEVER DISALLOWANCE MADE WAS UNDER RULE 8D(2)(III) FOR INDIRECT OVERHEADS. THOUGH TH E ASSESSEE HAD MADE A CLAIM THAT NO EXPENDITURE WAS INCURRED FOR EARNIN G THE EXEMPT INCOME CONSIDERING THE HUGE INVESTMENTS IN OUR OPINION LD. ASSESSING OFFICER WAS JUSTIFIED IN REJECTING THIS CLAIM. WE DO NOT FIND ITA NO.973/MDS/2015 :- 19 -: ANY REASON TO INTERFERE WITH THE ORDERS OF THE LOWE R AUTHORITIES. 19. GROUND NOS. 6 & 7 OF THE ASSESSEE STAND DISMISSED . 20. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON FRIDAY THE 21ST DAY OF OCTOB ER 2016 AT CHENNAI. SD/- ( . ) (G. PAVAN KUMAR) $ % & / JUDICIAL MEMBER SD/- ( . ) (ABRAHAM P. GEORGE) ' % & / ACCOUNTANT MEMBER +& / CHENNAI / DATED: 21 ST OCTOBER 2016 KV - ' $'./ 0/' / COPY TO: 1 . ! / APPELLANT 3. 1' () / CIT(A) 5. /45 $'6 / DR 2. $% ! / RESPONDENT 4. 1' / CIT 6. 57 8& / GF