COOPER CORPORATION PVT. LTD.,,SATARA vs. DEPUTY COMMISSIONER OF INCOME-TAX,,

आदेश / ORDER PER D. KARUNAKARA RAO, AM: These are cross appeals filed by the assessee and Revenue against the order of Commissioner of Income Tax (Appeals)-III, Pune, dated 14.11.2014 for the Assessment Year 2009-10. 2. The assessee originally raised seven grounds raising a couple of issues, namely, (i) the claim of deduction under section 35(2AB) of the Income Tax Act, 1961 (in short ‘the Act’); and (ii) the disallowance of expenditure of Rs.3,19,706/- under section 14A of the Act. During the course of proceedings before us, the assessee raised an additional ground relating to the treatment to be given to the restated foreign exchange loss qua the actual cost of the assets. Accordingly, the effective grounds Nos.1 and 5 of the original grounds and the additional ground are extracted as follows: A. Effective Grounds : 1) On the facts and in the circumstances of the case and in law, the honourable CIT (Appeals) – III, Pune erred in confirming the disallowance of deduction of Rs.24,44,92,248/- u/s 35(2AB) of the Income Tax Act, 1961 (“the Act”) being one and one-half of the eligible expenditure incurred without appreciating the fact that the appellant had duly complied with all the conditions laid down u/s 35(2AB). The appellant hereby prays that the deduction under section 35(2AB) may please be allowed. 2) …… 3) …… 4) …… 5) On the facts and in the circumstances of the case and in law, the honourable CIT (Appeals) – III, Pune erred in confirming the disallowance of Rs.3,19,706/- by applying the provisions of Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1961 without appreciating the facts of the case

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in proper perspective. The appellant hereby prays that the addition may please be deleted. B. Additional ground: “On the facts and circumstances of the case and in law, the appellant ought to be allowed to capitalize the amount of foreign exchange loss incurred to the cost of relevant fixed assets for which the foreign currency loan was taken, and be allowed deduction of depreciation allowance on the same u/s 32(1) of the Income Tax Act. The appellant requests your honour to kindly allow the appellant to add Rs.5,83,64,606/- being the amount of foreign exchange restatement loss to the cost of fixed assets and allow deduction of Rs.2,97,98,070/- being depreciation allowance on the same u/s 32(1) of the Income Tax Act at the applicable rates.” 3. All the other grounds are dismissed as argumentative in nature. 4. Briefly stated, relevant facts includes that the assessee is engaged in the business of the Manufacturing Industry Automobile and Auto Ancillary and filed return of income declaring loss of Rs.8,13,05,274/-. At the end of assessment proceedings under section 143(3) of the Act, total income of assessee is determined at Rs.7,91,33,530/-. The Assessing Officer made the following additions and the contents in para 7 of assessment order are extracted as follows: “7. Subject to the above and on discussion with the authorized representative, the total income is computed as under:- Total income as per return of income – after (-) 17,72,21,614 adjustments for allowable / disallowable items & other deductions claimed, as per the computation of income submitted. Add:- 1. Disallowance of Deduction, as discussed in para 5.1 23,51,99,825 2. Disallowance as discussed in para 5.3 3,19,706 3. Disallowance as discussed in para 5.4 14,19,455 4. Disallowance as discussed in para 5.5 9,45,685 5. Disallowance of Deduction, as discussed in para 5.6 1,68,50,567 6. Disallowance of Deduction, as discussed in para 5.7 16,19,905 25,63,55,143 Total Income 7,91,33,529 Rounded off. 7,91,33,530

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(rounded off), being 150% of eligible expenditure, under the said section. The assessee argues that the denial of the disallowance is unfair when the assessee met all the conditions laid down in section 35(2AB) of the Act. Briefly, the facts include that the assessee is engaged in the business of Manufacturing Industry Automobile and Auto Ancillary. Therefore, the assessee started R&D Division and incurred capital expenditure as mentioned in section 35 of the Act. Though, the R&D Division of the assessee started way back in 2006, this is for the first time, the assessee made a claim of deduction in this year. Huge capital expenditure was incurred in the year under consideration. In this year, the assessee made an application to DSIR for recognition of its R&D unit on 30.01.2009 (within the previous year 2009-10). The assessee received recognition from the DSIR on 03.06.2009 (beyond the previous year). Further, the assessee made an application for approval under section 35(2AB) of the Act in Form No.3CK on 23.05.2009 (beyond the previous year). The approval in Form No.3CM was obtained on 24.08.2010 w.e.f. 03.06.2009 (beyond the previous year). In the assessment order, the Assessing Officer gave a finding that requisite approval from the DSIR as required under section 35(2AB) of the Act was not received. The Assessing Officer also held that the assessee failed to produce any proof about the existence or the receipt of the approval of the DSIR. He accordingly, disallowed the claim as discussed in paras 5.1 and 5.2.

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However, there is reference in his order by the Assessing Officer about the fact of making an alternate claim of deduction under section 35(1)(iv) of the Act. Considering the fact that the said alternate claim is not made in original return of income, the Assessing Officer did not allow same. The Assessing Officer rejected the main claim u/s 35(2AB) of the Act for want of the approval of the DSIR for the year under consideration. In the proceedings before the CIT(A), the assessee demonstrated the existence of approval of DSIR for the R&D activities. However, the CIT(A) did not allow the claim stating that the said approval is received only on 24.08.2010. Therefore, the CIT(A) sided with the order of Assessing Officer on this issue. However, the CIT(A) allowed alternate claim of assessee under section 35(1)(iv) of the Act as per discussion given in para 4.2. In the light of above facts of the case, the assessee is in appeal before us requesting for grant of deduction under section 35(2AB) of the Act. On the other hand, Revenue is also in appeal questioning the correctness of allowing alternate claim of deduction under section 35(1)(iv) of the Act. 8. We shall now deal with both these issues compositely in the following paragraphs: 9. Before us on this issue, the learned Counsel for assessee submitted that the approval of DSIR was very much exists to the R&D division of the assessee which is requirement of law. The learned AR submitted that the assessee made an application for recognition to

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DSIR within previous year under consideration i.e. 30.01.2009 and obtained the approval of recognition on 03.06.2009. Referring to approvals, the assessee submitted that an application was made to DSIR on 23.05.2009 for approval and the approval is duly obtained w.e.f. 03.06.2009 (A.Y. 2010-11). Approval is not there for any period of the previous year (relevant to the assessment year 2009-10). Referring to the dates, the learned Counsel for assessee submitted that cut-off date is not relevant information for deciding the claim of deduction under section 35(2AB) of the Act. Relying on the provisions of the said section, the learned Counsel for assessee submitted that existence of approval is the requirement of law. He further argued that these provisions being beneficial in nature, the same is required to be interpreted in favour of assessee. Otherwise, the benevolent provisions become redundant and defeats the purpose of such Legislation. The learned Counsel for assessee argued for grant of weighted deduction on this issue of dates and cut-off dates and approvals. The learned Counsel for assessee relied on the following decisions:- i) CIT Vs. Sandan Vikas (India) Ltd. (2011) 335 ITR 117 (Del) “2….. the Tribunal has relied upon the judgment of Gujarat High Court in CIT vs. Claris Lifesciences Ltd. (2009) 221 CTR (Guj) 301 : (2008) 16 DTR (Guj) 57 : (2010) 326 ITR 251 (Guj). We have gone through the aforesaid judgment of the Gujarat High Court and find that Gujarat High Court detailed in no-uncertain terms that the cut-off date mentioned in the certificate issued by the DSIR would be of no relevance. What is to be seen is that the assessee was in indulging in R&D activity and had incurred the expenditure thereupon. Once a certificate by DSIR is issued, that would be sufficient to hold that the assessee fulfills the conditions laid down in the aforesaid provisions. The discussions, which is undertaken by the Gujarat High Court while interpreting the aforesaid provisions, is extracted below :

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"7. ...The lower authorities are reading more than what is provided by law. A plain and simple reading of the Act provides that on approval of the research and development facility, expenditure so incurred is eligible for weighted deduction. 8. The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of : (i) development of facility; (ii) incurring of expenditure by the assessee for development of such facility; (iii) approval of the facility by the prescribed authority, which is DSIR; and (iv) allowance of weighted deduction on the expenditure so incurred by the assessee. 9. The provisions nowhere suggest or imply that research and development facility is to be approved from a particular date and, in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which presupposes incurring expenditure in this behalf, application to the prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of s. itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered r. 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by s. 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up research and development facility in India, the legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction. 10. We are in full agreement with the reasoning given by the Tribunal and we are of the view that there is no scope for any other interpretation and since the approval is granted during the previous year relevant to the assessment year in question, we are of the view that the assessee is entitled to claim weighted

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deduction in respect of the entire expenditure incurred under s. 35(2AB) of the Act by the assessee." 3. We are in full agreement with the aforesaid approach of the Gujarat High Court.” ii) CIT Vs. Claris Lifesciences Ltd. (2009) 326 ITR 251 (Guj) iii) Banco Products (India) Ltd. Vs. DCIT (2018) 405 ITR 318 (Guj) “Research and development facility can be set up only after incurring substantial expenditure. The application for approval of such facility can be made only after setting up of the facility. Once an application is filed by the assessee to the prescribed authority, the assessee would have no control over when such application is processed and decided. Even if therefore, the application is complete in all respects and the assessee is otherwise eligible for grant of such approval, approval may take some time to come by. The claim for deduction cannot be defeated on the ground that such approval was granted in the year subsequent to the financial year in which the expenditure was incurred. No such indication was given by this Court in case of Claris Lifesciences Ltd. (supra), none appears from the judgment of the Delhi High Court in case of Maruti Suzuki India Ltd. (supra).” 10. Referring to the DSIR guidelines, the learned Counsel for assessee submitted that the claim of assessee is specific to the capital expenditure incurred during financial year 2008-09 is in tune with the said guidelines of DSIR. In this regard, he relied on the guideline Nos.6(v) and 6(vi) which are reproduced hereunder: “Guideline 6(v): In case of firms, not having DSIR recognized R&D centre, but which have applied for approval u/s 35(2AB) of an in-house R&D center on which they had made capital investments on R&D of more than Rs. One crore, excluding expenditure on land and building, intangible assets he financial year preceding the year in which the firm applied to the prescribed authority for the approval – capital expenditure on the R&D facility for which approval has been requested (excluding capital expenditure on land and building) incurred from the commencement of said preceding year, provided the company had claimed such capital expenditure in their I.T. return for concerned assessment year and the firm / R&D centre fulfils other conditions of approval, and

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provided the centre was subsequently recognized by DSIR. Guideline 6(vi) In case of firms, having R&D centres already recognized by DSIR and who have applied for approval of an in-house R&D centre u/s 35(2AB) and who have made capital investment on R&D of more than Rs.one crore, excluding capital expenditure on land and buildings, on such centre in the financial year preceding the year in which the firm applied to prescribed authority for the approval – such capital expenditure incurred in the said preceding year provided the company had claimed such capital expenditure in their I.R. returns for concerned assessment year.” 11. Eventually, he prayed for grant of weighted deduction of Rs.24.45 crores (rounded off), being 150% of capital expenditure of Rs.16,29,94,833/- incurred on In-house R&D facility approved by DSIR. 12. On the other hand, learned DR heavily relied on the order of CIT(A). The learned DR further relied on the order of Mumbai Bench of Tribunal in the case of PCP Chemicals (P.) Ltd. Vs. ITO (2017) 88 taxmann.com 5 (Mumbai – Trib.), which is relevant for the proposition that in order to claim weighted deduction under section 35(2AB) of the Act, approval of R&D facility by the Competent Authority in prescribed form is mandatory. This is the case where R&D facility was approved by DSIR w.e.f. 01.04.2011 to 31.03.2013 (i.e. A.Ys. 2012-13 to 2013-14) on the basis of application made by assessee in prescribed form on 12.08.2011. The assessee made a claim of deduction under section 35(2AB) of the Act for assessment year 2011-12, for which approval was not given by the DSIR. However, the learned DR has nothing to say

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about the existence of judgments from the Hon’ble High Court of Gujarat in the case of CIT Vs. Claris Lifesciences Ltd. (2009) 326 ITR 251 (Guj) and the Hon’ble High Court of Delhi in CIT Vs. Sandan Vikas (India) Ltd. (2011) 335 ITR 117 (Del). 12.1 Referring to the order of the Tribunal in the case of PCP Chemicals (P.) Ltd. (supra), the ld. AR submitted that the judgement of the Gujarat High Court override the same. The High Court also relies on the Hon’ble Supreme Court judgement in the case of Vegetable Products Ltd. (supra). Decision of the Tribunal on the claim u/s 35(2AB) of the Act 13. We heard both the parties on the issue of claim of weighted deduction under section 35(2AB) of the Act. There is no dispute on the fact of incurring of capital expenditure on R&D facility amounting to Rs.16,29,94,833/-. The only dispute is about meeting of the conditions set in the provisions of section 35(2AB) of the Act qua the approval of the DSIR. We shall now proceed to extract said provision. The said sub-clause of section 35(2AB) is extracted here as under:- “35(2AB)(1) Where a company engaged in the business of bio- technology or in any business of manufacture or production of any article, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and

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development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to two times of the expenditure so incurred.” 14. The above provision specifies the condition of approval by the prescribed authority and the said prescribed authority is The Secretary, Department of Scientific & Industrial Research, Govt. of India. The provision does not indicate the year specific approvals or the date’s specific approvals. For the sake of completeness, the approval of the DSIR is extracted hereunder :- “Order of approval of in-house Research and Development facility under section 35(2AB) of the Income-Tax Act, 1961. 1. Name, Address and PAN of the Compnay: M/s Cooper Corporation Pvt. Ltd., L-3, Addl. MIDC, Kodoli, Satara (Maharashtra), Tele no.02162240413 Fax no.02162240271 AAACC9687J 2. Nature of the business of the company: Manufacture of castings for engines, locomotives, windmills, automobiles, telecommunication equipments; manufacture of gas operated engines and allied products for automotive and telecommunication industry; prime movers for the automobiles and range of multi terrain commercial vehicles running on diesel, petrol, LPG, CNG. 3. Objectives of the scientific research to be conducted by in- house Research and Development facility: To identify, improve and implement new products; development of new technology; new quality assurance systems; emission compliance and cost reduction. 4. Address at which such Research & Development facility is located: M-60-1, Addl. MIDC, Kodoli, Satara (Maharashtra). 5. Ref. No. and Date of the application; letter no.CC/2009/582 dated 23.05.2009: The above Research & Development facility is approved for the purpose of section 35(2AB) from 03.06.2009 to 31.03.2012, subject to the conditions underlined therein. Sd/- (R.R. Abhyankar) Scientist “G” (for and on behalf of Secretary, DSIR) Place : New Delhi. Date : 24 August 210”

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override the High Court judgements. In any case, the Supreme Court’s judgement in the case of Vegetable Products Ltd. (supra) helps the assessee. Thus, the order of CIT(A) on this issue is required to be reversed. Consequently, the decision of CIT(A), in giving relief to the assessee on alternate claim u/s 35(1)(iv) of the Act, needs to be corrected by the Assessing Officer. Accordingly, we order. The ground of appeal No.1 raised by assessee is allowed. 17. The ground No.5 relates to the disallowance under section 14A of the Act. On finding that the assessee earned exempt income of Rs.8,24,530/- (para 5.3 of assessment order), the Assessing Officer invoked provisions of clauses (ii) and iii) of Rule 8D(2) of the Income Tax Rules, 1962 (in short ‘the Rules). Accordingly, the Assessing Officer disallowed an amount of Rs.3,63,653/- i.e. the disallowance of Rs.3,19,706/- under Rule 8D(2)(ii) of the Rules and Rs.43,795/- under Rule 8D(2)(iii) of the Rules. Otherwise, the assessee actually disallowed sum of Rs.43,947/- suo motu in the return of income. 18. Before us, the learned Counsel for assessee submitted that the CIT(A) confirmed the addition made by Assessing Officer ignoring the fact that the assessee has sufficient interest free own funds for making investment which yielded the exempt income. In that case, learned Counsel for assessee submitted that there is no requirement of claiming of disallowance of interest on proportionate basis invoking provisions of clause (2)(ii) of Rule 8D of the Rules. Making prayer of direction to the

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authorities below for complying with the ratios of the judgments in the cases of CIT Vs. Reliance Utilities and Power Ltd. reported in 313 ITR 340 (Bom) and CIT Vs. HDFC Bank Ltd. reported in 366 ITR 505 (Bom), the learned Counsel for assessee submitted that the principle of presumption laid down in the said judgments needs to be interpreted in favour of assessee. In that case, no disallowance is warranted on account of interest expenditure invoking provisions of clause (ii) of Rule 8D(2) of the Rules. 19. On hearing both the parties on this issue, we direct the Assessing Officer to quantity the interest free funds / own funds of the assessee qua the borrowed funds. The Assessing Officer is directed to apply the said presumption principles. The Assessing Officer shall grant reasonable opportunity of being heard to the assessee in accordance with the principles of natural justice. The said ground is allowed in principle. Accordingly, the ground No.5 is allowed for statistical purposes. Additional Ground 20. The third issue raised in the present appeal relates to the treatment to the “foreign exchange loss” linked to the forex valued at the end of the previous year for enabling the assessee to make higher amount of depreciation. In this regard, the learned Counsel for assessee raised additional ground. The learned Counsel for assessee

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argued that this claim existed in the return of income originally filed by the assessee before revision of the same is made. The said claim was withdrawn by the assessee while revising the return of income for fear of the penal provisions, if any. Therefore, it is not a new issue raised for the first time before the authorities. Stating that the assessee raised foreign loans from abroad for procurement of capital assets, ld. AR submitted that the rate differences in the foreign exchange is not favourable to the assessee at the end of the previous year. Therefore, loss was incurred to the assessee on valuation of the loan at the end of the year. It is a notional loss. As per the assessee, the assessee is entitled for the loading the said loss to the actual cost of assets for the purpose of claim of higher amount of depreciation under section 32 of the Act. In this regard, the assessee filed following written submissions:- “The appellant wishes to submit that the claim for depreciation on the Foreign Exchange loss capitalized to the Cost of the Assets was earlier claimed in the Original Return of Income filed. However, as seen in the table above, the said claim for depreciation on Foreign exchange loss was withdrawn in view of the order passed by the learned AO for AY 2008-08 disallowing the claim for deduction of foreign exchange loss holding the said loss to be notional. However, Hon. ITAT (Pune Bench) allowed the claim of the said foreign exchange loss since the said loss was in consonance with Accounting Standard -11: Effects of Changes in Foreign Exchange Rates and the same are to be followed for computation of business income in view of provisions u/s 145 of the Income Tax Act, 1961. Therefore, the appellant is making the claim for capitalization of Foreign Exchange loss to the Written Down Value of the Assets and subsequent depreciation in AY 2009-10 before your honours. Your honour may appreciate that various Courts have laid down the ratio that the Income Tax Appellate Tribunal has authority to admit additional

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grounds of appeal and also has the jurisdiction to entertain fresh claims not made in the return of income. Even in case where the ground was available at the time of filing of return but the said claim was not made due to error of perception / judgement, the said fresh claim may be admitted by the Honourable Tribunal at its discretion considering the facts of the case. We are relying on the following judgements: 1. Jute Corporation of India Ltd. Vs. CIT 187 ITR 688 (SC) 2. CIT Vs. Pruthvi Brokers & Shareholders Pvt. Ltd. 349 ITR 336 (Bom) 3. Rachhpal Singh Vs. ITO 276 ITR 163 (Amritsar Trib.)”

Finally, learned AR prayed for admitting the said additional ground and remand the same for fresh adjudication. As such, there is no issue for investigating into the accounts/issue. 21. On the other hand, the learned DR opposed the admitting of additional ground dutifully. The learned DR argued stating that this issue, though legal in nature, requires investigation into the facts. However, ld. DR could not specify any details of such investigation. 22. On hearing both the parties, we find that the additional ground revolves around the claim of higher amount of depreciation qua foreign exchange loss. On facts, the claim exists in the return of income filed originally by the assessee. The said claim was withdrawn by assessee in the revised return of income. Relevant details i.e. the loan details, fixed asset details etc. are already on records. This is the reason for absence of any decision on this issue from the Assessing Officer or CIT(A).

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the appeal of the assessee, we considered the facts and, in principle, approved the claim of assessee under section 35(2AB) of the Act. In the process, we rejected the CIT(A)’s conclusion in the matter. Consequently, the adjudication of the alternate claim of assessee that revolves under the provisions of section 35(1)(iv) of the Act, becomes an academic exercise only. Thus, grounds raised by Revenue are dismissed as academic. 27. In the result, appeal of assessee is partly allowed for statistical purposes and the appeal of Revenue is dismissed. Order pronounced on this 08th day of February, 2019. Sd/- Sd/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) �याियक सद�य /JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER पुणे Pune; �दनांक Dated : 08th February, 2019 GCVSR/Sujeet आदेश क� �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. 3. The CIT(A)-III, Pune 4. The CIT-III, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “Bench A” Pune; 5. गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER,स स�यािपत �ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune