M/S. KPIT TECHNOLOGIES LTD,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 14, PUNE

PER BENCH : These two appeals by the assessee relate to the assessment years 2013-14 & 2014-15. Since common issues are raised in these appeals, we are, therefore, proceedings to dispose them off by this consolidated order for the sake of convenience.

A.Y. 2013-14 : 2. The first ground raised in this appeal is against the confirmation of addition of Rs.49,95,140/- made by the Assessing

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Officer (AO) under section 14A of the Income-tax Act, 1961 read

with Rule 8D of the Income-tax Rules, 1962.

engaged in the business of manufacture and development of

software. Exempt income of odd Rs.5.42 crore was declared on

account of dividend. The assessee, in its computation of total

income, attributed expenditure of Rs.10.00 lakh to the exempt

income and offered disallowance. The AO, not satisfied, computed

the disallowance u/s 14A of the Act in two parts viz., under Rule

8D(2)(ii) at Rs.85,45,330/- and under Rule 8D(2)(iii) at

Rs.59,95,150.-. After reducing the suo moto disallowance offered

by the assessee, the AO made an addition of Rs.1,35,40,471/-. The

ld. CIT(A) deleted the disallowance under Rule 8D(2)(ii) pertaining

to interest component. However, the remaining amount of

disallowance under Rule 8D(2)(iii), being, 0.5% of the average

value of investments, was sustained. The assessee is aggrieved by

the confirmation of the pro tanto addition.

material on record, it is observed that the assessee itself offered

disallowance u/s.14A at Rs.10.00 lakh. The AO has recorded that:

3 ITA Nos.1271 & 1272/PUN/2018 M/s. KPIT Technologies Limited

“the assessee was requested to explain as to why the provisions of

section 14A of the I.T. Act, 1961 should not be invoked along with

working of amount of disallowance under the said section r.w. Rule

8D of I.T.Rules, 1962”. Thereafter, the AO recorded that: “The

contention of the assessee has been considered. The same are

however not acceptable. It is seen that the assessee has been

making investments. Where the expenditure is clearly incurred for

earning of exempt income, the same is covered by the provisions of

Rule 8D(2)….. However, where it is not possible to figure out such

expenditure but at the same time such expenditure is being incurred,

provisions of Rule 8D …. are applicable”. Thereafter, he

straightway proceeded to compute the disallowance under Rule

8D(2). It is aptly borne out from the above extracted portions of the

assessment order that the AO did not record any satisfaction as to

how the disallowance of Rs.10.00 lakh offered by the assessee was

incorrect. He simply noted that the assessee offered disallowance

and then came to the conclusion that further disallowance was

called for under Rule 8D. The Hon’ble Supreme Court in Maxopp

Investments Ltd. VS. CIT (2018) 402 ITR 640 (SC) has held in para

41 that: “before applying the theory of apportionment, the AO needs

to record satisfaction that having regard to the kind of the assessee,

4 ITA Nos.1271 & 1272/PUN/2018 M/s. KPIT Technologies Limited

suo moto disallowance u/s.14A was not correct. It will be in those

cases where the assessee in his return has himself apportioned but

the AO was not accepting the said apportionment. In that

eventuality, it will have to record its satisfaction to this effect”. In

view of the above proposition laid down by the Hon’ble Supreme

Court, it is evident that where the assessee has itself offered some

disallowance with which the AO is not satisfied, it becomes

incumbent upon him to record satisfaction, before embarking upon

the disallowance as per rule 8D of the I.T. Rules, as to how the

apportionment made by the assessee was not correct. We are

confronted with a situation in which the assessee suo moto offered a

disallowance of Rs.10.00 lakh. The AO without recording any such

satisfaction about the incorrectness of the apportionment made by

the AO, simply proceeded to compute the disallowance under Rule

8D(2). When we consider the factual panorama prevailing in the

instant case in juxtaposition to the mandate of section 14A(2), it

becomes manifest that the AO failed to record the mandatory

satisfaction before proceeding to make disallowance u/s.14A of the

Act, which has resulted in vitiating the addition. Respectfully

following the precedent, we order to delete the disallowance

sustained in the first appeal.

5 ITA Nos.1271 & 1272/PUN/2018 M/s. KPIT Technologies Limited

assessee in accordance with section 115JB of the Act.

Notwithstanding our deletion of disallowance sustained in the first

appeal, we find that, even otherwise also, no addition can be made

u/s 14A in computation of book profit u/s 115JB of the Act. The

Hon’ble Delhi High Court in Pr. CIT Vs. M/s. Bhushan Steel

Limited and others (2015) 94 CCH 0335 DEL-HC has held that no

disallowance can be made u/s.14A in computation of income

u/s.115JB of the Act. Similar view has been reiterated by the

Special Bench of the Tribunal in ACIT Vs. Vireet Investments (P)

Ltd. (2017) 165 ITD 27 (Del) (SB). We, therefore, hold that neither

the disallowance can be made u/s.14A nor any addition on this score

can be made in the computation of income u/s.115JB of the Act.

These grounds are, therefore, allowed.

the confirmation of disallowance of weighted deduction of

Rs.71,35,914/- u/s.35(2AB) of the Act.

claimed weighted deduction u/s.35(2AB) of the Act amounting to

Rs.3,67,88,233/-. The AO observed that the DSIR (Department of

6 ITA Nos.1271 & 1272/PUN/2018 M/s. KPIT Technologies Limited

Scientific and Industrial Research), New Delhi, which is an

approving authority approving weighted deduction, reduced such

claim to Rs.3,32,20,276/-. The AO, therefore, disallowed the

deduction of such R&D expenses of Rs.35,67,957/-. This resulted

into disallowance of weighted deduction at Rs.71,35,914/-, being,

200% of the amount of expenditure incurred. The ld. CIT(A)

sustained the disallowance.

material on record, it is noted that section 35(2AB), at the material

time, provided for weighted deduction on the basis of report to be

submitted in Form 3CL read with Rule 6 of the Income-tax Rules.

Clause (b) of Rule 6(7A), at the relevant time provided that: “The

prescribed authority shall submit its report in relation to the

approval of in-house Research and Development facility in Form

3CL to the Director General (Income Tax Exemptions) within sixty

days of its granting approval”. An amendment was carried out to

clause (b) of Rule 6(7A) w.e.f. 01-07-2016 providing that “The

prescribed authority shall furnish electronically its report,- (i) in

relation to the approval of in-house Research and Development

facility in Part A of Form No. 3CL; (ii) quantifying the expenditure

7 ITA Nos.1271 & 1272/PUN/2018 M/s. KPIT Technologies Limited

incurred on in-house research and development facility by the

company during the previous year and eligible for weighted

deduction under sub-section (2AB) of section 35 of the Act in Part B

of Form No. 3CL”. Simultaneous with the amendment in Rule

6(7B), an amendment was also made to Form 3CL. Whereas the

earlier Form, being, the Report to be submitted by the prescribed

authority to the Director General (IT Exemptions) u/s.35(2AB),

talked of recognition granted by DSIR to the in-house Research and

Development Centre of the company, the amended Form 3CL,

pursuant to amendment in Rule 6(7A)(b), bifurcated the report into

two parts, namely, Part-A containing one-time recognition by the

DSIR and Part-B containing year-wise details of the expenditure

incurred and approval. When we consider the position prevailing as

per Rule 6(7A) and Form 3CL before and after the amendment

w.e.f. 01-07-2016, it becomes manifest that in the pre-amendment

period, the requirement was only for registration with DSIR and not

to the grant of the year-to-year approval of the amount spent on

Research and Development by a company qualifying for weighted

deduction. Such an amendment came into force only from 01-07-

2016, by virtue of which the claim of the assessee for weighted

deduction became subject matter of examination by the DSIR and

8 ITA Nos.1271 & 1272/PUN/2018 M/s. KPIT Technologies Limited

resultantly the AO, on year to year basis. Since it is the position

prevailing in the pre-amendment era which governs the years under

consideration, once the assessee has been registered and other

necessary requirements have been satisfied, the entire amount spent

on Research and Development qualifies for weighted deduction

u/s.35(2AB) irrespective of the fact that some amount was not

approved by the DSIR. Actual amount spent on research and

development vis-à-vis the approval by the DSIR on year-to-year

basis, entitling the assessee to the weighted deduction, has become

relevant only after the amendment carried out from 01-07-2016.

Since it is not the case of the AO that the assessee did not fulfill all

other relevant conditions, we hold that it is entitled to weighted

deduction for the full amount of the expenditure incurred on

Research and Development irrespective of the fact that a part of the

amount so incurred was not approved by the DSIR.

A.Y. 2014-15 :

material on record. It is a common submission by both the sides

that the facts and circumstances of the instant year are mutatis

mutandis similar to those of the immediately preceding year. In

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fact, both the sides adopted their arguments advanced for the A.Y.

2013-14 and no separate arguments were put forth for the A.Y.

2014-15, except for pointing out the amounts in question.

Rs.74,40,373/- u/s.14A of the Act. For this year, again the AO

recorded satisfaction in the same manner despite the assessee’s suo

moto disallowance of Rs.20.00 lakh as in his order for the

immediately preceding year. Following the view taken

hereinabove, we order to delete the disallowance made u/s.14A of

the Act.

the amount of book-profit as per computation u/s.115JB of the Act

is concerned, we hold that, primarily, there cannot be any addition

because the disallowance itself has been deleted and secondly, even

otherwise the disallowance u/s.14A cannot be made in the

computation of income u/s.115JB of the Act.

deduction u/s.35(2AB). Here again the facts and circumstances are

similar. Following the view taken hereinabove for the immediately

preceding assessment year, we allow this ground.

10 ITA Nos.1271 & 1272/PUN/2018 M/s. KPIT Technologies Limited

Order pronounced in the Open Court on 18th October, 2019.

Sd/- Sd/- (S.S. VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 18th October, 2019 सतीश आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-7, Pune 4. The Pr. CIT-6, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “C” / DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA Nos.1271 & 1272/PUN/2018 M/s. KPIT Technologies Limited

Date 1. Draft dictated on 17-10-2019 Sr.PS 2. Draft placed before author 17-10-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *