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Before: SHRI AMIT SHUKLA & SMT. RENU JAUHRI
सुनवाई की तारीख / Date of Hearing 16.01.2025 घोषणा की तारीख/Date of Pronouncement 20.03.2025 आदेश / O R D E R PER RENU JAUHRI [A.M.] :- This appeal is filed by the assessee against the order of the Learned Commissioner of Income-tax (Appeals), Mumbai/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] dated 06.09.2024 passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for Assessment Year [A.Y.] 2020-21.
The assessee has raised the following grounds of appeal:
A.Y. 2020-21 Strides Pharma Science Limited “Ground 1: The NFAC has erred in passing the order under Section 143(3) of the Act which is bad in law and in facts and hence, liable to be quashed. Ground 2: Disallowance of ESOP expenses of Rs. 1,58,74,888 under section 37(1) of the Act 2.1 The learned AC and CIT(A) has erred in the fact that the ESOP expenses is notional in nature and not backed up by an underlying transaction. 2.2 The learned AO and CIT(A) has erred in disallowing an amount of Rs. 1,58,74,888/ without appreciating the fact that ESOP expenses are not capital expenditure or a contingent liability but an ascertained revenue expenditure allowed under section 37(1) of the Act. 2.3 Further, the NFAC erred in not following the judicial discipline by disregarding the decision issued by the honorable High Court of Karnataka in the case of Biocon (Blacon Ltd.v. Dy. CIT [2013] 35 taxmann.com 335(Bang.) (SB), decision of honorable High Court of Delhi in the case of Lemon Tree Hotels (PCIT VS Lemon Tree Hotels Pvt Ltd (2019) 104 taxman.com 27(HC). Further, the fact that admission of SLP by Apex court cannot be a basis for the disallowance of the ESOP expenses under section 37(1) of the Act. Ground 3: Disallowance of Rs. 10,90,49,268 weighted deduction under section 35(2AB) of the Act 3.1 The learned AO and CIT(A) has erred in disallowing the weighted deduction under Section 35(2AB) of the Act without appreciating that Section 35(2AB)(1) of the Act prescribes the requirement of approval of the facility and not the expenditure. 3.2 The learned AO and CIT(A) ought to have appreciated the fact that the clinical trials conducted outside the R&D premises is specifically disclosed based on the format prescribed by the CBDT/DSIR authorities and mere disclosure/mentioning of it separately does not tantamount to the disallowance of actual expenses. 3.3 The learned AO and CIT(A) ought to have appreciated the fact that the revenue expenditure which is not approved by DSIR can be claimed as normal business expenditure and not to be disallowed under section 37(1) of the Act. Ground 4: Disallowance under Section 14A of the Act r.w. Rule BD of the Income Tax Rules, 1962 ('the Rules'), of expenses of Rs. 1,73,37,851/- deemed to be incurred in relation to earning exempt income. 4.1. The learned AD and CIT(A) has erred in law and facts by disallowing an amount of Rs. 1,73,37,851/-by applying the provisions of Section 144 r.w. Rule 8D without appreciating the fact that the Appellant had suo-moto disallowed a sum of Rs. 77,90,758/-as indirect expenditure in connection with earning the exempt income. 4.2 The learned AO and CIT(A) Order is legally erroneous as the NFAC has failed to appreciate that the true intent of the provisions of Section 14A was to not allow any expenditure incurred in relation to exempt income. In the absence of any other expenditure incurred by the Appellant in connection with earning the exempt income, the provisions of Section 14A will not be applicable.
A.Y. 2020-21 Strides Pharma Science Limited 4.3 The learned AO and CIT(A) has erred in facts to take cognizance of the Appellant's written submissions that the investments were made out of interest-free funds generated or available with the Company, which does not attract the provisions of Section 14A of the Act. 4.4 The learned AO and CIT(A) grossly erred in computing the disallowance under section 14A of the Act considering all the investments made by the company and then limiting it to the amount of total exempt income earned by the Appellant during the year. In doing so, the learned AO and CIT(A) disregarded the decision issued by Honorable ITAT in the appellant own case for AY 2014-15 and 2015-16 where it is decided that only income yielding funds are to be considered for computing the disallowance under section 14A of the Act. Ground 5: Disallowance/ Add back u/s 14A amounting to INR 1,73,37,851 to the Book Profits under MAT provisions 5.1 The learned AO and CIT(A) has erred in adding back the adjustments amounting to INR 1,73,37,851 which were made under the normal tax regime to the MAT computation as well, without providing any reasons in the order for doing the same. 5.2 The learned AO and CIT(A) has erred in increasing the MAT income without giving any reasons in the show cause notice dated August 25, 2022. It is the Appellant's case that this is an inadvertent mistake which should be rectified. 5.3 The learned AD and CIT(A) grossly erred in disregarding the decision of Mumbai ITAT in the Appellants own case for the AY 2014-15 and other years wherein the AO was directed to delete the addition made to book profit computed under section 115JB of the Act on account of disallowance computed under section 14A of the Act. 5.4 The learned AO and CIT(A) has erred in disregarding the decision of Special Bench of the ITAT in the case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017] Del/2012 (Delhi Tribunal) and also ignoring the principles laid down by the Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC) and Malayala Manorama Vs CIT (5420-5423 of 2002). Ground 6: Disallowance of Rs. 1,36,18,930/- on account of business promotion expenditure under Section 37(1) of the Act 6.1 The learned AO and CIT(A) has erred in disallowing an amount of Rs. 1,36,18,930/- without appreciating the fact that business promotion expenses are not prohibited under the Act for the year under consideration. 6.2 The action of learned AO and CIT(A) in disallowing the expenditure in light of the notification issued by the Medical Council of India and by taking into cognizance of the CBDT Circular No. 5/2012 dated 1 August 2012 is not maintainable and liable to be deleted. 6.3 The learned AO and CIT(A) has erred in not considering the jurisdictional Mumbal ITAT decision in the case of DCIT v PHL Pharma P Ltd. [ITA No. 4605/Mum/2014), ACIT Vs Liva Healthcare Limited [ITA No. 847/Mum/2012), Solvay Pharma India Limited Vs PR CIT [ITA No. 3585/Mum/2016] and other relevant decisions, which are squarely applicable to the present case.
Ground 7: Disallowance of deduction claimed under Section 80G of the Act amounting to INR 1,01,00,000/- 7.1 The learned AO and CIT(A) erred in disregarding the fact that the expenses that has been incurred for the purposes of Corporate Social Responsibility Activities represents the payments that are made to eligible entities as listed in Section 80G of the Act. 7.2 The learned AO and CIT(A) erred in law in not granting the deduction under section 80G of the Act which is otherwise eligible for the Appellant to be claimed, as the deduction that is claimed by the Appellant does not exceed 10% of the gross total income as stated in Section 80G(4) of the Act which is otherwise eligible for the Appellant to claim. Ground 8: Claim of the Appellant amounting to Rs. 30,00,000/- as per Section 35DD of the Act 8.1 The learned AO and CIT(A) has failed to appreciate that the Appellant had inadvertently missed to claim of deduction of 1/5th of the total expenditure incurred in connection with Demerger amounting to Rs 1,50,00,000/- in the return of income under Section 35DD of the Act. 8.2 The learned AO and CIT(A) has erred in not considering the jurisdictional Bombay High Court in the case of Commissioner of Income-Tax Vs. Pruthvi Brokers & Shareholders, Mumbai ITAT in the case of Chicago Pneumatic India Ltd. v. Dy. CAT (2007) 15 SOT 252 (Mumbai), CBDT Circular no. 14 (XL-35) dated April 11, 1955 and various other relevant judicial decisions, which are squarely applicable to the Appellant, wherein the principles emerge that the genuine claim of the Appellant should be granted even in case of alleged procedural lapses. Ground 9: Claim of the Appellant of Rs. Rs. 2,23,73,789 representing 1/5th of the Write down of Inventory and Other Assets disallowed in AY 2018-19 9.1 The learned AO and CIT(A) has erred in not giving the claim of an amount of Rs. 2,23,73,789/-without appreciating the fact that the amount was disallowed in the assessment order for AY 2018-19 and was mentioned that 1/5th will be allowed in the 5 subsequent years beginning from AY 2018-19. Ground 10: Non grant of TDS credit 10.1 The learned AO and CIT(A) has erred in not granting the credit of INR 14,512 related to Strides Emerging Market Limited (PAN AARCS5667D), which was merged during the year. Ground 11: Initiation of penalty proceedings under Section 270A 11.1The learned AO and CIT(A) has erred in law and facts in initiating penalty proceedings under Section 270Aof the Act”
Brief facts of the case are that the assessee, a pharmaceutical company, filed its original return on 31.12.2020 at an income of Rs. 65,27,74,800/- and A.Y. 2020-21 Strides Pharma Science Limited deemed income u/s 115JB of the Act of Rs. 129,55,76,399/-. Subsequently, the assessee filed a revised return on 25.03.2021 declaring a total income of Rs. 62,76,46,192/- and deemed income u/s 115JB of Rs. 129,55,76,398/- and the assessment was completed u/s 143(3) r.w.s. 144B of the Act on 28.09.2022 at an income of Rs. 79,36,27,129/-.
Against the addition made by the Ld. AO, the assessee preferred an appeal before Ld. CIT(A). Vide order dated 06.09.2024, Ld. CIT(A) dismissed the assessee’s appeal.
Aggrieved with the order of Ld. AO, the assessee has filed an appeal before the Tribunal taking as many as 11 grounds which are discussed below: 6. Ground No. 1 is general 7. Ground No. 2: Disallowance of ESOP of expenses of Rs. 1,58,74,888/- 7.1 Brief facts of the issue are that the assessee has claimed an expenditure of Rs. 1,58,74,888/- in respect of the ESOP expenses u/s 37 of the Act. Ld. AO held that the ESOP expenditure claimed is a notional loss on account of the discounted price of shares allotted to the employees and there is no revenue expenditure involved in the transactions of issuance of ESOP at a discount. Moreover, the amount is over and above the face value of the shares and share premium being itself a capital receipt, any under-recovery of share premium on account of issue of shares to employees in future at a lower premium would be, A.Y. 2020-21 Strides Pharma Science Limited at best, a case of short capital receipts and would, therefore, be in the nature of capital expenditure. Accordingly, Ld. AO disallowed the ESOP expenses of Rs 1,58,74,888/- claimed u/s 37(1) of the Act and the disallowance was also confirmed by the Ld. CIT(A) in first appeal. 7.2 Before us, Ld. AR has submitted as under: • Issue is Squarely covered by numerous judgements, including those of the Honourable High courts [Ref. CIT. v.Biocon Ltd [2020] 121 taxmann.com 351.Karnataka,] • Neither the AO nor the CIT(A) have denied that the issue is covered. However, addition is confirmed on the ground that SLP is filed against the ruling in the case of PCIT v/s Lemon Tree Hotels - (2019) 104 Taxmann.com 27 (SC). However, Hon'ble Jurisdictional High Court in the case of Bank of India v/s CCIT-WP 3290 of 2024 has held that the law laid down by the High Court cannot be sidelined by the Revenue merely because an SLP has been filed against the High Court Ruling. • The CIT as well as the AO proceeded on an incorrect footing that there is no expenditure or that the same is notional. Further an illustration could be helpful, where suppose an assessee had issued Capital at fair rate and thereafter paid salary expenses out of the same, would the same be allowable or not? That is a question. As such both the authorities have erred in not granting the deduction. Further, the same ESOP expense has also been allowed in Earlier Years. Therefore, the same be allowed even on the principles of consistency and it prayed accordingly.” 7.3 A chart of ESOP expenses incurred over the years has also been submitted by the Ld. AR to demonstrate that such expenditure has been allowed in several earlier years by the department as under:
Assessment year Financial year Amount in INR Remarks AY 2011-12 FY 2010-11 - AY 2012-13 FY 2011-12 - AY 2013-14 FY 2012-13 26,21,996 AY 2014-15 FY 2013-14 1,01,51,371 AY 2015-16 FY 2014-15 89,57,972 AY 2016-17 FY 2015-16 4,48,25,018 AY 2017-18 FY 2016-17 5,47,10,012 AY 2018-19 FY 2017-18 2,45,21,147 Disallowed in assessment order of Rs. 2,45,20,000 AY 2019-20 FY 2018-19 89,72,990 AY 2020-21 FY 2019-20 1,58,74,888 Disallowed in assessment order 7.4 Ld. DR, on the other hand, has placed reliance on the orders of the lower authorities and submitted that the department has filed SLP on this issue before the Hon’ble Apex Court. 7.5 We have considered the rival submissions and find that the issue is covered in favour of the assessee by several decisions of the High Courts some of which have been cited by the Ld. AR. Specifically, the decision of the Hon’ble Karnataka High Court in the case of CIT v/s Biocon Ltd. (2021) 430 ITR 151 (KAR) is relevant to the facts of the case. The findings of the High Court on the issue are reproduced below: “6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount or the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under Section 37 of the Act. Before proceeding further, it is apposite to take note of Section 37(1) of the Act, which reads as under: Section 37(1) says that any expenditure (nut being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession".
Thus, from perusal of Section 37 (1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expnded and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of Section 37(1) of the Act would be attracted. It is also pertinent to note that Section 37 does not envisage incurrence of expenditure in cash.
Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of the company, A.Y. 2020-21 Strides Pharma Science Limited which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vest with the employees.
In the instant case, the ESOPs vest in an employee over a period of four years i.e., at the rate of 25%, which means at the end of first year, the employee has a definite right to 25% of the shares and the assessee is bound to allow the vesting of 25% of the options. It is well settled in law that if a business liability has arisen in the accounting year, the same is permissible as deduction, even though, liability may have to quantify and discharged at a future date. On exercise of option by an employee, the actual amount of benefit has to be determined is only a quantification of liability, which takes place at a future date. The tribunal has therefore, rightly placed reliance on decisions of the Supreme Court in Bharat Movers supra and Rotork Controls India P. Ltd., supra and has recorded a finding that discount on issue of ESOPs is not a contingent liability but is an ascertained liability.
From perusal of Section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of Section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraph 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition.
11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.
So far as reliance place by the revenue in the case of CIT VS. INFOSYS TECHNOLOGIES LTD. is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under Section 201 of the Act for non deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Year in question was 1997-98 to 1999 2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2) (iiia) was inserted by Finance Act, 1999 with effect from 01.04.2000: Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision rendered in the case of Infosys Technologies is of no assistance to the revenue. The decisions relied upon by the revenue in Gajapathy A.Y. 2020-21 Strides Pharma Science Limited Naidu, Morvi Industries and Keshav Mills Ltd. supra support the case of assessee as the assessee has incurred a definite legal liability and on following the mercantile system of accounting, the discount on ESOPs has rightly been debited as expenditure in the books of accounts. We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd. Supra.” Moreover, the department has also allowed the deduction in several earlier years in similar facts and circumstances in assessee’s own case. Also, Ld. AO while making the addition has duly noted the above decision as well as the decision of the Hon’ble Delhi Court in the case of Lemon Tree Hotel. However, he has stated in the assessment order that he is making the addition as the department’s SLP on this issue has been admitted by the Hon’ble Apex Court in the case of Lemon Tree Hotel [PCIT v/s Lemon Tree Hotels Pvt. Ltd. (2019) 104 taxman.com 27 (SC)]. 7.6 In light of the facts of the case, judicial pronouncements discussed above as well as considering that the deduction has been allowed in several earlier years, we are of the view that the assessee’s claim for ESOP expenses of Rs. 1,58,74,888/- u/s 37(1) is allowable for this year also. 7.7 The assessee’s appeal on this ground is allowed.
8. Ground No. 3 Claim of weighted deduction u/s 35(2AB) - Rs. 10,90,49,268/- 8.1 During the year, the assessee claimed weighted deduction of Rs. 43,78,54,513/- as revenue and Rs. 1,13,38,848/- as capital expenditure u/s 35(2AB) of the Act. Ld. AO during the course of assessment proceedings noted A.Y. 2020-21 Strides Pharma Science Limited that the assessee had filed a certificate from the Department of Scientific and Industrial Research (DSIR) in respect of the above expenditure. However, DSIR in Form 3CL had only approved the following expenditure as eligible for weighted deduction u/s 35(2AB) of the Act: i. Revenue expenditure Rs. 36,51,55,000/- ii. Capital expenditure Rs. 1,13,34,484/- 8.2 Accordingly, Ld. AO proceeded to disallow the difference of Rs. 10,90,49,268/- u/s 32AB of the Act. In first appeal, Ld. CIT(A) also held that the assessee is not eligible to claim weighted deduction on the expenses over and above the amount certified by the DSIR, being the prescribed authority for the purpose. 8.3 During the course of the hearing, Ld. AR has submitted, in a nutshell, as under: • “The AO proceeded on a wrong footing that expense is not approved by DSIR. On a bare perusal of Form 3CL as reproduced even in the AO’s order it is evident that expense on Clinical Drug Trial of Rs.532.81 lakhs has been approved by the DSIR and therefore the same is eligible for weighted deduction at 150%. • It is a settled law that clinical trials are also eligible for weighted deduction under section 35(2AB) even if incurred outside the facility approved [Ref. JB chemicals v. DY. CIT, CIRCLE-2 (1) 2023 (7) ΤΜΙ 23 - ITAT MUMBAI, Cadila healthcare v. ACIT AHMEDABAD 2024 (7) TMI 397- ITAT AHMEDABAD, DCIT. v. Serum Institute ITAT Pune 2022 (9) TMI 830-ITAT PUNE, et. al.] • For the balance amount of Rs. 194.18 Lakhs, it is prayed that the same be allowed u/s 35(1)(i) AO has simply stated the deduction is not allowable u/s 37 without even denying that the same is allowable u/s 35(1)(i). • In the alternative the said amount of Rs.194.18 lakhs is allowable u/s 37. • Without prejudice to the above, even otherwise the entire amount of Rs.7,26,99,513/- alleged to be unapproved by the DSIR, the same should be allowable as per the normal provisions of the Act u/s 35(1)(i) or 37 of the Act since admittedly the same are incurred for the purpose of business.”
8.4 Ld. DR, on the other hand, argued that in view of the fact that expenditure of scientific research has to be quantified certified by the DSIR in Form 3CL, the assessee is entitled to claim expenditure only to that extent u/s 35(2AB) of the Act. In this regard, he pointed out the amendment made in Rule 6(7a) w.e.f. 01.o7.2016 after which the prescribed authority i.e. the Secretary, DSIR has to quantify the expenditure incurred on in-house R&D by the assessee which is eligible for weighted deduction u/s 35(2AB) of the Act. Accordingly, for AY 2020-21, the assessee is entitled to get the deduction in respect of the expenditure of scientific research only to the extent of the amount quantified in Form 3CL by the prescribed authority. 8.5 We have considered the rival submissions and perused the material placed before us. There are two aspects to the issue under consideration: i. Whether expenditure on clinical trials is eligible u/s 35(2AB). ii. Whether the amount eligible for deduction u/s 35(2AB) can only be expenditure quantified DSIR in Form 3CL. 8.5.1 With regard to the first issue relating to expenditure on clinical trials, the explanation to section 35(2AB)(1) is clearly attracted which provides as under: Explanation. For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).”
A.Y. 2020-21 Strides Pharma Science Limited The issue regarding the admissibility of expenditure incurred on clinical trials for weighted deduction u/s 35(2AB) has been decided in favour of the assessee in several decisions of the co-ordinate benches, some of which have been quoted by the assessee during his submissions. In light of the clear provisions of the Explanation as well as judicial pronouncements on the issue, we are of the view that the expenditure incurred by the assessee on clinical trials which has also been certified by the prescribed authority in part b, column 6 of the Form 3CL is eligible for weighted deduction u/s 35(2AB). In view of these facts, we therefore hold that the assessee is entitled to claim expenses on the clinical trials, incurred outside the approved R&D facility, to the tune of Rs. 532.81 lakh u/s 35(2AB) of the Act. 8.5.2 The second issue pertains to the amount of expenditure is allowable u/s 32(2AB) as certified by the auditor or by the prescribed authority in Form 3CL. In this regard, the expenditure claimed by the assessee on the basis of certificate of the auditors and the amount allowed by the Ld. AO on the basis of Form 3CL are as under:
Particular Total Eligible Total Expenses Expense Total revised expenses amount of reported by not claim u/s based on the expenses DSIR in Form reported by 35(2AB) and statutory claimed in 3CL (100%) DSIR in section auditors the return of (C) Form 3CL 35(1)(iv) certificate income (100%) based on the and (150% of A) (D=A-C) DSIR report application (B) in Form 3CL filed with (E=C*150%+D DSIR (100%) (A) Revenue 43,78,54,513 65,67,81,769 36,51,55,000 7,26,99,513 62,04,32,013 Capital 1,13,38,848 2,83,47,120 1,13,38,848 Nil 1,70,08,272 Total 44,91,93,361 68,51,28,889 37,64,93,000 7,26,99,513 63,74, 40,285 In view of the amendment in Rule 6(7a) w.e.f. AY 2017-18, the amount allowable for deduction u/s 35(2AB) has to be quantified by the prescribed authority viz. Secretary, DSIR. In this regard, if there is any variation in Form 3CL in amounts claimed by the assessee, it has the option of making reference to the prescribed authority as per the provisions of section 35(3). In case the assessee or the revenue wishes to seek any variation in the amount quantified by the prescribed authority in Form 3CL, a reference is required to be made to the prescribed authority in terms of section 35(3)(b) whose decision shall be final. Accordingly, we are of the view that the Ld. AO was justified in restricting the allowance of expenditure on in-house R&D to the amounts mentioned in Form 3CL. The assessee should have taken up the matter with the prescribed authority in case he did not accept the quantification given in the Form 3CL. Therefore, the decision of the Ld. AO in restricting the amount eligible for deduction u/s 35(2AB) to Rs. 3,76,93,000/- as against the claim of the assessee amounting to Rs. 44,91,93,361/- is correct as per the provisions of the section and is therefore upheld. However, the alternative claim of the assessee to allow deduction u/s 37 in respect of the balance amount deserves consideration. Accordingly, we deem it proper to restore the issue to Ld. AO for the limited A.Y. 2020-21 Strides Pharma Science Limited purpose of verification of these expenses u/s 37 of the Act. Needless to add, the assessee should be allowed adequate opportunity to substantiate its claim for allowance of deduction u/s 37(1) of the Act. In view of the above, this ground of the assessee is partly allowed for statistical purposes.
9. Ground No. 4 & 5: Disallowance u/s 14A of Rs. 1,73,37,851/- and adding the same to book profit u/s 115JB of the Act. 9.1 Brief facts are that the assessee had earned an exempt dividend income of Rs. 2,51,25,609/- during the year under consideration. The assessee made suo moto disallowance of Rs. 77,90,758/- u/s 14A while filing the return. However, Ld. AO enhanced the disallowance and made a further disallowance of Rs. 1,73,37,841/- resulting in the total disallowance of Rs. 2,51,28,609/- that is to the extent of the entire dividend income. Aggrieved with the order of Ld. AO, the assessee preferred an appeal before Ld. CIT(A) who has also upheld the disallowance. 9.2 Before us, Ld. AR has submitted that this issue is covered in favour of the assessee by the decision of the co-ordinate benches in its own cases for earlier years. A copy of the order for AY 2014-15 in has been placed before us. Relevant portion of the order is reproduced below: “28. We have heard both the parties, perused the material available on record and gone through orders of the authorities below along with case laws cited by both the parties. The Id. AO has disallowed expenditure incurred in relation to exempt income u/s 14A of the Act, by invoking Rule 8D(2)(ii) and (ii) of I.T. Rules, 1962. According A.Y. 2020-21 Strides Pharma Science Limited to the Ld. AO, disallowances contemplated u/s 14A shall be determined, in accordance with prescribed procedure provided under Rule 8D, whether or not the assesee has earned exempt Income for the year under consideration. It is the contention of the assesee that when, own funds are in excess of investments made in shares and securities, which yield exempt income, then no disallowances can be made towards interest expenditure under Rule 8D(2)(ii). The assesee further contended that insofar as, disallowances of other expenditure under Rule 8D(2)(lii), the said disallowances cannot shallow entire exempt income earned by the assesee for the year under consideration. In other words, for other expenses a reasonable amount may be disallowed considering nature of investments and expenditure incurred for the year.
Having heard both the sides, and considered material on record, we are of the considered view that insofar as the first arguments of the assessee that the AO has not recorded satisfaction as required u/s 14A(2) of the Act, on perusal of assessment order we found that the AO on the basis of suo-moto disallowance of expenditure, has arrived at clear satisfaction having regard to nature of expenses and amount of exempt income and hence, we reject the +arguments of the Id. AR for the assessee. As regards interest disallowances under rule 8D(2)(ii), we find that the assessee has proved with evidence avallability of own funds which is in excess of investments which yield exempt Income. It is a settled position of law that if own funds, including borrowed fund is in excess of investments, then a general presumption is drawn that investments is out of own funds and consequently, no disallowance could be made towards interest expenses. This legal position is supported the decision of Hon'ble Supreme Court, in the case of CIT vs Reliance Industries Limited (supra), where it was held that no interest disallowances can be made u/s 14A of the Act, if own funds are sufficient to cover-up the value of the investments. The Hon'ble jurisdictional High Court of Bombay, in the case of CIT vs Reliance Utility and Power Limited (supra) held that when, mixed funds including own funds are more than the value of the investments, then a general presumption goes in favor of the assesee that investments made in shares is out of own funds, consequently no disallowance could be made towards interest expenditure. A similar ratio has been laid down by the Hon'ble Bombay High Court, in the case of CIT vs HDFC Bank Limited (supra). Therefore, we are of the considered view that the Ld. AO was erred in disallowed interest expenditure u/s 14A, r.w. Rule 8D(2)(ii) of the I.T. Rules. 1962 and hence, we direct the AO to delete disallowance of interest expenditure u/s 14A of the I.T. Act, 1961. 30. coming back to disallowance of other expenditure under rule 8D(2)(ii) of the Income Tax Rules 1962. No doubt, disallowance contemplated u/s 14A shall be computed under prescribed method provided under rule 8D of the Income Tax Rules 1962. But, such disallowances cannot shallow entire exempt earned for the year. Further, the assessee claims that although it has various investments, but only few investments which have yield exempt income and accordingly, only those investments which yield exempt income needs to be considered for computation of average value of investments. In this regard, he relied on PCIT v/s Oil Industry Development Board - [Delhi High Court - ITA 197 / 2018) which is Affirmed in SLP (C) Diary Nos. 2755/2019, Cheminvest Limited v/s CIT (2016) 378 ITR 33 (Del) which is Affirmed in (2019) 264 Taxman 76 (SC). The sum and substance of ratio laid down by above judgments is that only those investments which yield exempt income needs to be considered for computation of average value of investments. In this case, we notice that the Assessee has himself disallowed an amount of Rs.21,27,797/- which A.Y. 2020-21 Strides Pharma Science Limited has not been found to be accepted by the AO or the DRP. Further, the facts with regard to total investments and investments which yield exempt income is not readily available before us. We, therefore, are of the considered view that ends of justice would be met if the disallowance is made after re-computing average value of investment by considering only those investments which yield exempt income. Hence, the matter is restored to the AO to re-work the disallowance in line of our discussions given hereinabove.” 9.3 Respectfully following the decision of the co-ordinate bench, we remand back the issue to the Ld. AO to work out the disallowance afresh following the decisions in earlier years. 9.4 Related ground on this issue pertains to the addition of disallowance u/s 14A to the book profit u/s 115JB of the Act. This issue is also covered by the decision of the co-ordinate bench for AY 2014-15 wherein it has been held as under: “34. We have heard both the parties, perused materials available on record and gone through orders of the authorities below along with case laws cited by the Id. AR for the assessee. After considering the facts of the case and the various judgements cited supra, we are of the opinion that no addition to book profits u/s 115JB could be made on the basis of disallowance u/s 14A read with Rule 8D of the Income Tax Rules, 1962. This legal proposition is supported by the decision of Hon;ble Bombay High Court in case of CIT v/s Bengal Finance and Investments - (ITXA No. 337 of 2013 Bombay High Court), where it was held that computation contemplated under clause (f) of explanation (1) to section 115JB is to be made without resorting to computation as contemplated u/s 14A r.w.r 8D of the Income Tax Rules, 1962. A similar ratio is laid down by special Bench of ITAT, Delhi in the case of DCIT vs. Vireet investments Pvt Ltd (Supra). We, therefore, respectfully following the ratio laid down by High Courts and Tribunal, direct the AO to delete addition made to book profit computed u/s 115JB, towards disallowances computed u/s 14A of the Income Tax Act, 1961.” Accordingly, ground No. 5 related to the addition of disallowance u/s 14A to book profit is decided in favour of the assessee which ground No. 4 is allowed for statistical purposes.
A.Y. 2020-21 Strides Pharma Science Limited 10. Ground No. 6: Disallowance of business promotion expenses - Rs. 1,36,18,930/-. 10.1 Brief facts of the issue are that the assessee incurred expenditure amounting to Rs 1,36,18,930/- under the head ‘Business Promotion expenses’ which included Rs. 45,974/- incurred for providing freebies to the doctors. Ld. AO held that the expenses relating to the practice of giving gifts & freebies to the medical practitioners and sponsoring practising doctors to attend conferences is in violation of the provision of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 and is therefore inadmissible expenditure u/s 37(1) of the Act. Accordingly, the entire amount of Rs. 1,36,18,930/- was disallowed by the Ld. AO which was also upheld by the Ld. CIT(A). 10.2 Before us, Ld. AR submitted that no freebies were provided to the doctor except for Rs. 45,974/-. The expenditure on business promotion relates to holding of conferences etc. and is therefore allowable u/s 37(1) of the Act. Ld. AR has also submitted breakup of these expenses which is as under:
Particulars Amounts Business event accommodation + other expenses such as participation fees, 44,22,230 delegate fees Travel & other Reimbursement of Expenses for customers, employee and visitors 22,73,642 Sponsorship, Exhibition stall & Event Registration 19,04,618 Team meeting/conference expenses including room rent, sound system, 23,17,993 shamiyana rent etc. Advertisement expenses 25,55,000 Scientific & Virso Lebel & other die cut labels, Raricap Chit pad, daily Call Planner, 99,473 Labels, I Pledge Cards and Medical Tribune & Product concept & design expenses, A.Y. 2020-21 Strides Pharma Science Limited Greeting Cards, Posters, Certificates and other printed Visual Aids, Posters, Cards, visiting Cards, envelop and Visual Aids, ID Cards, sample dispenser etc. Total 1,35,72,956 He, therefore, argued that the majority of expenses are incurred towards business exhibitions, sponsorship and product advertisements which is entirely allowable u/s 37(1) of the Act. 10.3 Ld. DR, on the other hand, vehemently argued that the expenditure being in violation of the guidelines of the Indian Medical Council as well as the circular of the CBDT on the issue, is clearly disallowable. 10.4 We have heard the rival submission and perused the material placed before us. We deem it proper to remand back the matter to the Ld. AO for verification of these expenses. He is directed to give opportunity to furnish requisite details and supporting evidences and the expenses incurred for business promotion and not for providing gifts, freebies to the doctors etc. should be allowed after due verification. This ground is, therefore, allowed for statistical purposes in favour of the assessee.
11. Ground No. 7: Disallowance of deduction claimed u/s 80G – Rs. 1,01,00,000/- 11.1 Brief facts are that the assessee had shown expenses on CSR activities in respect of which deduction u/s 80G has been claimed amounting to Rs. 1,01,00,000/- but the same was disallowed by Ld. AO on the ground that the A.Y. 2020-21 Strides Pharma Science Limited expenditure on CSR activities is not allowable u/s 37 of the Act. In first appeal, Ld. CIT(A) has also confirmed the disallowance. 11.2 Before us, it has been submitted by the Ld. AR that the issue regarding CSR expenses, being eligible for deduction u/s 80G, is settled in favour of the assessee in view of the numerous judicial precedents, some of which are as under: i. Synergia Lifesciences v/s DCIT – ITA 938/Mum/2023 ii. Viraj Profiles v/s DCIT – ITA 2164/Mum/2023 iii. JMS Mining (P.) Ltd. v/s PCIT (2021) 130 taxmann.com 118 (Kolkata-Trib.) 11.3 On the other hand, Ld. DR has argued that the sum paid by the assessee to M/s Strides Foundation, in respect of which deduction u/s 80G has been claimed, cannot be considered a donation as the element of charity is missing. He, therefore, relied on the orders of lower authorities and submitted that the disallowance should be upheld. 11.4 We have considered the rival submissions and perused the judicial pronouncements on this issue cited by the Ld. AR. Admittedly, the donation has been made to an entity which is approved u/s 80G, and hence, the assessee is eligible to claim the deduction u/s 80G in respect of CSR expenses. We find that the issue is discussed in detail in Allegies Services (India) Private Ltd. v/s ACIT, in ITA No. 1693/Bang./2019, wherein deduction in respect of CSR expenses claimed u/s 80G of the Act was denied by the revenue A.Y. 2020-21 Strides Pharma Science Limited in similar facts and circumstances as in the present case. While deciding the issue in favour of the assessee, the coordinate bench vide order dated 29.04.2020 observed as under: “We have perused submissions advanced by both sides in light of records placed before us. “10. Section 135 of Companies Act, 2013 requires companies with CSR obligations, with effect from 01/04/2014. Finance (No.2) Act, 2014 inserted new Explanation 2 to sub-section (1) of section 37, so as to clarify that for purposes of sub- section (1) of section 37, any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.
This amendment will take effect from 1/04/2015 and will, accordingly, apply to assessment year 2015-16 and subsequent years.
12. Thus, CSR expenditure is to be disallowed by new Explanation 2 to section 37(1), while computing Income under the Head Income form Business and Profession'. Further, clarification regarding impact of Explanation 2 to section 37(1) of the Income Tax Act in Explanatory Memorandum to The Finance (No.2) Bill, 2014 is as under: "The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed it the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clare that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein."
From the above it is clear that under Income tax Act, certain provisions explicitly state that deductions for expenditure would be allowed while computing income under the head, 'Income from Business and Profession to those, who pursue corporate social responsibility projects under following sections.. Section 30 provides deduction on repairs, municipal tax and insurance premiums. Section 31, provides deduction on repairs and insurance of plant, machinery and furniture. Section 32 provides for depreciation on tangible assets like building, machinery, plant, furniture and also on intangible assets like know-how, patents, trademarks, licenses.
A.Y. 2020-21 Strides Pharma Science Limited Section 33 allows development rebate on machinery, plants and ships. Section 34 states conditions for depreciation and development rebate. Section 35 grants deduction on expenditure for scientific research and knowledge extension in natural and applied sciences under agriculture, animal husbandry and fisheries. Payment to approved universities/ research institutions or company also qualifies for deduction. In-house R&D is eligible for deduction, under this section. Section 35CCD provides deduction for skill development projects, which constitute the flagship mission of the present Government. Section 36 provides deduction regarding insurance premium on stock, health of employees, loans or commission for employees, interest on borrowed capital, employer contribution to provident fund, gratuity and payment of security transaction tax. Income Tax Act, under section 80G, forming part of Chapter VIA, provides for deductions for computing taxable income as under: Section 80G(2) provides for sums expended by an assessee as donations against which deduction is available. a) Certain donations, give 100% deduction, without any qualifying limit like Prime Minister's National Relief Fund, National Defence Fund, National Illness Assistance Fund etc., specified under section 80G(1) (i). b) Donations with 50% deduction are also available under Section 80G for all those sums that do not fall under section 80G(1)(i). Under Section 80G(2) (iiihk) and (iiihl) there are specific exclusion of certain payments, that are part of CSR responsibility, not eligible for deduction u/s80G.
In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, 'Income form Business and Profession", where as monies spent under section 80G are claimed while computing "Total Taxable income" in the hands of assessee. The point of claim under these provisions are different.
Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, "Income from Business and Profession".
For claiming benefit under section 80G, deductions are considered at the stage of computing "Total taxable income". Even if any payments under section 80G forms part of CSR payments( keeping in mind ineligible deduction expressly provided u/s. 80G), the same would already stand excluded while computing, Income under the head, "Income form Business and Profession". The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing "Total Taxable Income" cannot be denied to assessee, subject to fulfillment of necessary conditions therein.
We therefore do not agree with arguments advanced by Ld.Sr.DR.
In present facts of case, Ld. AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, "Income from Business and Profession". It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of the Act, for computing "Total taxable income", which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing Total Taxable Income". Il assessee is denied this benefit, A.Y. 2020-21 Strides Pharma Science Limited merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature.
On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G of the Act.” In view of the above as well as other decisions on these lines, we hold that the assessee is eligible for deduction u/s 80G in respect of CSR expenses provided other conditions are satisfied. We, therefore, direct the Ld. AO to allow the deduction u/s 80G subject to verification of other prescribed conditions of this section. The issue is, therefore, restored for the limited purpose of such verification subject to which the assessee is entitled to claim deduction u/s 80G in respect of CSR expenses. 11.5 This ground is, accordingly, allowed for statistical purposes.
12. Ground No. 8: claim of deduction u/s 35DD of the Act – Rs. 30,00,000/- 12.1 The assessee has made a claim for deduction u/s 35DD of Rs. 30,00,000/- for the first time at the stage of appeal before the Tribunal. It has been submitted by the Ld. AR that this claim has been allowed by the Ld. AO from AY 2017-18 onwards and pursuant to the assessment order for 2017-18, this claim has been made for the first time before the Tribunal. He has, further, submitted that the same is admissible in view of the decision of the Hon’ble Apex Court in the case of Wipro Finance Ltd. v/s CIT (2022) 443 ITR 250 (SC).
A.Y. 2020-21 Strides Pharma Science Limited 12.2 Ld. DR, on the other hand, has argued that the issue does not arise out of assessment order, and therefore, Ld. CIT(A) has rightly dismissed the same at the time of deciding the first appeal. 12.3 We have considered the rival submissions. As this claim has been made for the first time before us on the basis of a similar allowance for AY 2017-18, we deem it appropriate to restore the issue back to the file of Ld. AO for considering the assessee’s claim after verification of the same as per provisions of section 35DD. 12.4 This ground is, therefore, allowed for statistical purposes.
13. Ground No. 9: claim of 1/5th of write-down value of inventory and other Assets disallowed in AY 2018-19 – Rs. 2,23,73,789/-. 13.1 This deduction has also been claimed for the first time before us on the ground that in the assessment order for AY 2018-19, the claim was disallowed for that year but was allowed by the AO for a period of 5 years from AY 2019-20 onwards. Accordingly, the assessee has made 1/5th of the write-down value of inventory and other assets which was disallowed in AY 2018-19. The assessee, further, relied on the decision of the Hon’ble Apex Court in the Wipro Finance Ltd. v/s CIT (supra) for admissibility of the claim raised for the first time before the Tribunal. On the other hand, Ld. DR has argued that this claim does not arise out of assessment order, and therefore, Ld. CIT(A) has rightly dismissed this issue.
A.Y. 2020-21 Strides Pharma Science Limited Accordingly, he has argued that the assessee’s claim should not be entertained at this stage. 13.2 We have considered the rival submissions. Since this issue has been raised for the first time before us, we deem it appropriate to restore it to the file of the Ld. AO for the purpose of verification and allow the same in case admissible. 13.3 This ground is also allowed for statistical purposes.
14. Ground No. 10: Non-grant of TDS credit – Rs. 14,512/- This ground relates to the non-grant of TDS credit of Rs. 14,512/- to M/s. Strides Emerging Market Limited which was merged with the assessee during the year. Ld. AO is directed to verify and allow the claim of TDS as per the rules.
15. Ground No. 11 relating to the initiation of penalty proceedings is premature and hence is dismissed.