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Income Tax Appellate Tribunal, DELHI BENCH “A”: NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the cross appeals filed by the ld AO as well as the assessee against the order passed by the ld CIT(A)-I, New Delhi dated 27.04.2017 for Assessment Year 2014-15. 2. In the assessee has raised the solitary ground of appeal of deduction of Rs. 8,42,000/- u/s 37(1) of the Act. The ld AO has also raised the solitary ground of appeal wherein, the addition made by him of Rs. 9,54,80,025/- on account of wrong claim of deduction u/s 35(2AB) of the Act deleted by the ld CIT(A).
3. Brief facts of the case shows that the assessee is a company engaged in manufacturing of auto electrical parts and earns income by domestic sales as well as of export of goods. It filed its return of income on 29.11.2014 of Rs. 4,78,05,890/-. During the course of assessment proceeding the ld AO noted that Page | 1 it has claimed deduction of Rs. 9,54,80,025/- u/s 35(2AB) of the Act as weighted deduction of R&D Centre expenditure. The form No. 3CL dated 08.05.2015 was furnished by the assessee claiming R&D expenditure eligible for weighted deduction @ 200% amounting to Rs. 468.98 lakhs. The ld AO considered that the amount of R & D Expenses claimed is Rs. 4,77,40,012/- whereas the sum mentioned in Form No. 3CL is only Rs. 4,68,98,000/-. He further noted that the assessee has not furnished Annexure IV along with return of income in Form No. 3CL which was furnished on 08.05.2015. Therefore the deduction u/s 35(2AB) claimed by the assessee wherein, such expenditure is statutorily approved by DSIR in Form No. 3CL only on 08.05.2015. The ld AO noted that CAG report No. 5/2015 states that the submission of Form No. 3CL should proceed the date of filing of return of income and then only the assessee could have claimed such sum. Accordingly, he disallowed the weighted deduction u/s 35(2AB) of Rs. 9,54,80,025/- and computed total income of the assessee vide order dated 29.11.2016 passed u/s 143(3) of the Act determining the total income of the assessee of Rs. 14,32,91,915/-.
4. The assessee aggrieved with the same preferred an appeal before ld CIT(A). The ld CIT(A) decided the issue in favour of the assessee holding as under:- “I have considered the submission of the appellant and observation of the Assessing Officer in the assessment order. It is seen that the appellant is engaged in the business of manufacturing of auto electrical parts for automobile companies. The appellant has set up an in-house Research and Development Centre for improvement in the technology and the parts made. This Research and Development Centre has been approved by Department of Scientific and Industrial Research from 2004-05 which has been subsequently renewed by the said Department. The renewal has been granted upto 31.03.2014 vide letter dated 19.05.2010 which has been filed before the AO and placed in the paper book at page 105. The appellant has submitted that it has made investment in Research and Development Centre which is separate from its manufacturing activity and quality control which has separate manpower, equipment and separate defined dedicated area. The appellant has taken up various research program for development of new products and improvement in the existing products, in new processes and improvement in existing processes. The appellant has claimed expenses relating to research and development of revenue nature of Rs.363.66 lakhs debited to Profit & Loss A/c and Rs.113.73 lakhs on account of capital expenditure. The total expenditure under the Research and Development is shown at 497.3 lakhs under this head for which the appellant has claimed weighted deduction @ 200% i.e. 954.78 lakhs in the return of income. Details of such expenses have been submitted by the appellant in Form 3CD to the Tax Audit Report. The said expenditure has been certified by the statutory auditor in the audit report as per detail Appendix 2 to Annexure IV of DSIR guidelines. These details are filed at page 69 of the paper book. The appellant has submitted that the said expenditure of Research and Development has been approved by the Department of Scientific and Industrial Research vide its letter dated 08.05.2015 which is placed at page 39 and 40 of Page | 2 the PB filed before me. On going through the approval i.e. given in Form 3CL, it is seen that Department of Scientific and Industrial Research has approved capital expenditure other than land and building of Rs.113.73 lakhs and recurring expenditure of Rs.356.15 lakhs only. The DSIR has reduced recoveries to the extent of Rs.90,000/- from the said approval, as a result, the Department of Scientific and Industrial Research has approved the total expenditure of Rs.468.98 lakhs as against the claim of 477.39 lakhs submitted by the appellant before of Department of Scientific and Industrial Research. It is also seen from the Form 3CL submitted by the Department of Scientific and Industrial Research to the DG (Exemption) that the appellant has entered into an agreement with the DSIR for cooperation, research and development facility and for audit of their accounts maintained for such facility. During the course of assessment proceedings, the AO has observed that The claim of the appellant made u/s 35(2AB) suffers following lacunae: “(i) The amount claimed is Rs. 4,77,40,012/- where as the amount mentioned in Form 3CL is Rs. 4,68,98,000. (ii) The assessee had not furnished Annexure IV i.e. on what date it had made the claim of for the amount of deduction for the year under consideration. On what basis, the claim had been made in the return of income for deduction u/s 35(2AB) when form 3CL had been issued to the assessee is dated 08.05.2015 and the return had been filed on 29.11.2014. Therefore, deduction based on R&D expenditure are claimed by assesse3e company before such expenditure is statutorily approved by DSIR. (iii) The CAG report Union Govt. Deptt. Of Revenue, Direct Taxes, rEport no. 5 of 2015 which had examined the scope and provisions of section 35(2AB) had examined the same and held that Form 3CL should precede the filling of return of income and thus claim made by the assessee. But the assessee failed to provide the date of Annexure IV or the documents on the basis of which the Form 3CL is issued to the assessee company. (iv) IN the list of the employees the name of Sh. R.K Sarine is also mentioned who is also Member of Board of Directors. He is vice president R&D and getting the emoluments of Rs.5.8 lakh. Accordingly, to the guidelines the remuneration paid to the members of the board of Directors, should not be included in the R&D expenditure of the purpose of Section 35(2AB). ” In view of these lacunaes, the AO held that the appellant is not entitled for deduction u/s 35(2AB) of the Act and disallowed the entire claim of weighted deduction of Rs.9,54,80,025/- i.e. @ 200%. During the course of appellate proceedings, the appellant vide its submission dated 24.04.2017 submitted that appellant company is engaged in the manufacturing of auto components since 1971-72 and has been consistently involved in research and development activity. The appellant company has been allowed to claim weighted deduction u/s 35(2AB) from FY 2004-05 relevant to AY 2005-06 vide CBDT’s letter dated 21.09.2004. The appellant’s R&D Centre Page | 3 has been recognized and approved by DSIR to claim deduction u/s 35(2AB). It is also claimed by the appellant that it has been consistently claiming deduction u/s 35(2AB) and same was allowed by the Department. The claim made by the appellant for different years and was allowed by the Department is given as per Annexure 1 to the submission which is as under: Assessment Year Amount of Deduction u/s 35(2AB) 2005-2006 48,239,541 2006-2007 48,350,495 2007-2008 51,476,046 2008-2009 56,421,594 2009-2010 68,625,768 2010-2011 69,331,572 2011-2012 110,919,550 2012-2013 105,620,780 2013-2014 73,311,664
The appellant has submitted that Assessing Officer has quoted the conditions for claim of deduction as stated in Section 35(2AB) and in sub-section (3) which have been reproduced in the assessment order. The appellant contended that Section quoted by the AO in the assessment order is amended 35(2AB)(3) Section which is applicable from 01.04.2016 and the same is not applicable for the assessment year under consideration. The pre-amended section 35(2AB)(3) which is applicable for AY 2014-15 is reproduced hereunder: “No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for co- operation in such research and development facility and for audit of the accounts maintained for that facility". As per the pre-amended section, the conditions prescribed are that appellant has to enter into an agreement with Department of Scientific and Industrial Research (appropriate authority) and audit of accounts maintained for such approved scientific research facility. It is seen that the appellant has entered into an agreement with Department of Scientific and industrial Research and has also agreed for audit of such accounts maintained for such facility which has been specified by the DSIR in form 3CL vide point no. 10 wherein they have stated as under: Point No. “(10) Whether agreement for co-operation and Research & Development facility and for audit of the accounts maintained for that facility entered into - YES" The above statement by DSIR vides point no. 10 of Form 3CL confirms that appellant has entered into an agreement with the Department of Scientific and Industrial Research and has agreed for the audit of the accounts maintained for such facility. The observation of the AO that appellant has not furnished Annexure IV i.e. on what date it had made claim for the amount of deduction for the year under consideration and on what basis the claim had been made u/s 35(2AB) when form 3CL has been issued to the appellant vide letter dated 08.05.2013 whereas the return has been filed on 29.11.2014. The appellant has submitted Page | 4 that it has made claim on the basis of the recognition given to it vide letter dated 19.05.2010 by Department bf Scientific and Industrial Research wherein the appellant has been approved in-house R&D unit till 31.03.2014. The copy of the letter is filed at page 105 of the paper book. The appellant has also submitted that vide letter dated 01.08.2012 the approval of in- house R&D facility u/s 35(2AB) was extended by the DSIR till 31.03.2014 in form 3CM which is filed at page 103 of the paper book which is reproduced hereunder: Form No. 3CM “Order of approval of In-house Research and Development Facility under section 35(2AB) of the Income-Tax Act, 1961 1. Name, Address and M/s Auto Ignition Ltd. PAN of the company: 49 KM Mile Stone, Delhi - Mathura Road, Village Prithla - 121 102, District Palwal (Haryana) Tel. No. 01275 – 249200 Fax No. 01275 - 262041 PAN No. AAACA 5390 E 2. Nature of the business of the company: Manufacture of automobile components.
Objectives of the scientific research to be conducted by In-house Research and Development facility: Design and develop new range of starter motors, alternators and other auto electrical products. Design/develop new products on time and first time okay. Continuously improve the R&D personnel through training and imparting information on new technological development. To reduce the lead time for new products development. To develop world class products in terms of reliability & durability through techniques such as design for 6 signand Multiple Environment Over Stress Testing (MEOST).
Address at which such Research & Development facility is/are located: 49 KM Mile Stone, Delhi - Mathura Road, Village Prithla - 121102, District Palwal (Haryana) 5. Ref. No. and Date of the application : NO. Nil, dated 24th July, 2012. The above Research & Development facility is approved for the purpose of section 35(2AB) from 01.04.2012 to 31.03.2014." In the said letter, the research and development program undertaken by the appellant in its in-house R&D centre for new products and improvement in the existing products has been defined. The above letter clearly shows that appellant was approved for the purpose of section 35(2AB) till 31.03.2014 and accordingly appellant had made claim u/s 35(2AB) for the revenue as well as capital expenses incurred by it on its approved research and development facility duly approved by DSIR. The appellant has further submitted that documents of Annexure IV could not be filed before the AO as the same were not traceable at the time of Page | 5 assessment and appellant had asked some time for filing the same. The AO verbally agreed for the same. However, without giving any further opportunity, AO passed order denying the claim of deduction u/s 35(2AB) of the I.T. Act. The appellant has submitted that these documents were submitted to the DSIR and on the basis of such documents, Form 3CL has been issued to the DG (Exemption) and copy thereof has been marked to the appellant. The copy of the Annexure IV documents filed before DSIR have been filed by the appellant from page 41 to 101 of the paper book. The appellant submitted that Annexure IV documents are relevant for DSIR and not for the Department and these things are to be examined by the DSIR and not the Department as inspection of research and development facility is the sole domain of the Department of Research and Industrial Research. Since, the appellant has been issued Form 3CL by DSIR granting the approval for claim of 35(2AB) weighted deduction, it is imperative that all Annexure IV documents were submitted to DSIR and there is no irregularity on the part of the assessee as far as the requisite documents as well as the facility are concerned. The AO has also referred the observation of CAG made in Direct Tax - Report 5 of 2015 which has examined the scope and provision of Section 35(2AB) wherein the CAG has suggested that Form 3CL should precede the filing of return of income. This observation of CAG is recommendatory in nature and it is not the procedure stated in income Tax Act. However, the recommendation of CAG has been considered by the Department and the Section has been amended with effect from 01.04.2016 which is applicable for AY 2017-18 and not to the assessment year under consideration. As per the Section 35(2AB) applicable for the assessment year under consideration, the facility has to be approved and there has to be an agreement with the DSIR and there has to be a follow-up audit of such expenses. All the conditions specified in Section 35(2AB) as well as in Rule 6(7A) and procedures of submission of relevant documents to DSIR like Form 3CK, audit report on annual basis and Annexure IV documents have been fulfilled by the appellant and on the basis of such documents Form 3CL has been issued to DG (Exemption) and copy thereof has been marked to the appellant. Therefore, the appellant is entitled for deduction u/s 35(2AB) to the extent of Rs.468.98 lakhs which includes 113.73 lakhs for capital expenditure and 355.25 lakhs for recurring expenditure. AO is therefore, directed to allow weighted deduction to the appellant @ 200% of the expenditure approved by the DSIR. Accordingly, this ground of the appeal of the appellant is allowed.”
Therefore, now the revenue is in appeal against the relief granted by the ld CIT(A) and assessee is in appeal against non allowance of deduction u/s 37(1) of the Act of the sum of Rs. 8,42,000/- which was neither allowed u/s 35(2AB) and nor u/s 37(1) of the Act.
The ld AR vehemently submitted that the provision of section 35(2AB) provides deduction on scientific expenditure incurred by the assessee wherein, the assessee gets deduction @200% of the in house research facilities approved by Secretary, Department of Scientific and Industrial Research, Govt. of India. It was further submitted that the introduction of Rule 6(7A) of the Act which provides for several conditions for deduction as it stood for the impugned Page | 6 assessment order only provides that a prescribed authority shall submit its report within 60 days of granting of the approval. It was further stated that amendment in Rule 6(7A) has been brought in w.e.f 01.07.2016 wherein, the prescribed authority is required to furnish the report in Form No. 3CL electronically. Therefore, there is no error in the order of the ld CIT(A) in granting deduction to the assessee u/s 35(2AB) of the Act.
The ld DR supported the orders of the ld AO.
We have carefully considered the rival contentions and perused the order of the lower authorities. The fact shows that the assessee has a in house research and development Center which has been recognized and approved for deduction u/s 35(2AB) since FY 2004-05 as per CBDT letter dated 29.09.2004. The assessee has been continuously granted deduction up to Assessment Year 2013-14. For this year Form No. 3CL has also been submitted by the Approving authority [DSIR] wherein, the amount of expenditure has been approved to the extent of Rs. 468.98 lakhs out of the total expenditure incurred by the assessee of Rs. 477.39 lakhs. Thereby, the approving authority has not approved the research and development expenditure of the assessee of Rs. 8.41 lakhs as R&D expenditure eligible for weighted deduction u/s 35(2AB) of the Act. The ld AO has disallowed the above sum holding that CAG observation says that for claiming deduction u/s 35(2AB) of the Act the approval in the form of 3CL should be submitted along with return of income or it should precede the filing of return of income of the assessee. We find that there is no such amendment made in the income tax to this effect for Assessment Year 2014-15 and therefore, same cannot be imputed in the Act. Further, w.e.f. 01.04.2016, the income tax Rules has been amended and Form No. 3CL has been introduced which is required to be uploaded along with return of income. Further, Form No. 3CL in para 3 is also required to state amount of expenditure claimed by the assessee by to be certified by „an accountant‟ but this applicable from 01.04.2016. In view of the above facts and perusal of the order of the ld CIT(A) we do not find any infirmity in the claim of the assessee for deduction u/s 35 (2AB) of scientific research and development expenditure amounting to Rs. 468.98 lakhs. Thus, the order of the ld CIT(A) is upheld and the appeal of the ld AO in is dismissed.
Coming to the appeal of the assessee, we found that out of total expenditure incurred by the assessee of Rs. 477.39 lakhs , form 3CL computed the deduction allowable to the assessee only on sum of Rs. 468.98 lakhs. Therefore, Page | 7