SALVI CHEMICALS INDUSTRIES LTD,MUMBAI vs. ACIT CIR 13(2)(1), MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

1. On the facts and in the circumstances of the case, the learned Commissioner of income tax (Appeals) -21, Mumbai erred in confirming the order of the Assessing Officer in respect of disallowance of research and development expenses under section 36(1)(iv) r.w.s

36. (2AB) of the Act, amounting to Rs, 1,88,97,692/-, particularly when, the order under section 35(2AB) of the Act (in Form No. 3CM) had been granted registration upto March 31,2012 and renewed upto March 31, 2015.

2. On the facts and in the circumstances of the case, the said learned Commissioner of income tax, Mumbai, erred in confirming the order of the Assessing Officer in respect of disallowance of research and development expenses amounting to Rs. 1,88,97,692/ under section 35(1)(iv) r.w.s. 35 (2AB) of the Act, without appreciating the decisions submitted at the time of hearing or without distinguishing the same.

3. On the facts and in the circumstances of the case, the said learned Commissioner of Income tax, Mumbai, erred in confirming the order of the Assessing Officer in respect of disallowance of research and development expenses of Rs. 1,88,97,692/under section 35(i)(iv) r,w,s, 35 (2AB) of the Act particularly not following decision of Mumbai Tribunal in CIT Vs. Meco Instruments Pvt. Ltd bearing dated August 20,2010 being jurisdictional Tribunal directly applicable to the facts of the case.”

3. The brief facts of the case are that the assessee filed its return of income on 29.11.2014 declaring total income to the tune of Rs.1,63,75,890/-. The case was selected for scrutiny under CASS. Notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee company is engaged in the business of Manufacturing, Importing & Exporting of bulk drug and fine chemicals and shown its income from business. The AO applied the provisions u/s 14A r.w. Rule 8D Rule. The assessee claimed interest expenses of Rs.9,28,302/-. The AO disallowed the expenses in sum of Rs.13,618/- in view of the provisions u/s 14A r.w. Rule 8D and added to the income of the assessee. The assessee claimed the deduction of Rs.1,88,97,692/- u/s 35(1)(iv) and 35(2AB). The assessee was asked to furnish the approval certificate as per Income Tax Act in support of the claim of deduction but the assessee failed to do so, therefore, the claim u/s 35(1)(iv) and 35(2AB) was declined and the said amount was added to the income of the assessee and the total income of the assessee was assessed to the tune of Rs.3,76,91,958/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who dismissed the appeal of the assessee, therefore, the assessee has filed the present appeal before us.

ISSUE NOs. 1 to 3 4. Issue nos. 1 to 3 are in connection with declining the claim of the assessee in which the assessee has raised the claim in view of the provisions u/s 35(1)(iv) and 35(2AB) in sum of Rs.1,88,97,692/-. The bone contention of the assessee is that the assessee company has been registered as Research Institution, other than a Hospital, for the purpose of availing customs/central Excise duty exemption in terms of Govt. notification no.24/2007-Customs dated 01.03.2007 and Central Excise Duty Exemption in terms of Govt. Notification No.16/2007- Central Excise dated 01.03.2007 as amended from time to time and the company was registered by virtue of letter dated 09.06.2010 lies at page no.9 of the paper book. It is also argued that the assessee has received Form No.3CM upto March 31, 2012 lies at page no. 13 to 14 of the paper book. It is also argued that the Registration was extended upto 31.03.2015 by virtue of letter dated 16.12.2013 lies at page no. 19 to 20 of the paper book, therefore, the claim of the assessee was not liable to be declined. It is also argued that the Form No.3CM was not issued and on this ground the claim of exemption u/s 35(1)(iv) and 35(2AB) was declined which is wrong against law and facts, therefore, the claim of the assessee is liable to be allowed in view of the law settled as under:-

“(i) Judgment of Gujarat High Court in the case of CIT Vs. Claris Life Sciences Ltd. (326 ITR 251) (ii) Judgment of Gujarat High Court in the case of Banco Products (India) Ltd. Vs. DCIT (405 ITR 318) (iii) Judgment of Delhi High Court in the case of Maruti Suzuki India Ltd. Vs. Union of India & Others (397 ITR 728) (iv) Decision of Mumbai Tribunal in ACIT, Cir. 6(3) Vs. Meco Instruments Pvt. Ltd. (ITA. No.4246/Mum/2009) dated August 20,2010 However, on the other hand, the Ld. Representative of the Department has strongly relied upon the order passed by the CIT(A) in question. The present case is for the A.Y.2014-15. The registration was valid upto 31.03.2015 by virtue of letter dated 16.12.2013 lies at page no.15 to 18 of the paper book. The only thing is that the Form No.3CM was not issued, therefore, the claim of the assessee u/s 35(1)(iv) and 35(2AB) was declined. The Hon’ble ITAT in dated 20.08.2010 has held that:-

“5. Ld Counsel submitted that the assessee has been granted approval since 1997 till date. In this regard, he referred to paper book regarding Recognition of In-house R&D Unit granted by the Government of India, Ministry of Science and Technology, Department of Scientific & Industrial Research vide letter dated 3.7.1997 and subsequent renewal as per details given below:-

Date Recognition/Renewal Period 3.7.1997 Recognition Upto 31.3.99 6.4.1997 Renewal of recognition Upto 31.3.2002 2.5.2002 -do- Upto 31.3.2005 12.5.2005 -do- Upto 31.3.2008 29.4.2008 -do- Upto 31.3.2011 Ld counsel submitted that in this regard, the objection of the AO is that these approvals have been signed by Scientist. However, the assessee had no control on the same but; in any case, the approval was on the letter head of Ministry of Science and Technology. Ld Counsel submitted that the main objection of the department is that the assessee had not applied in the specified form. He submitted that section 35(2AB) was inserted w.e.f. 1.4.1998 by the Finance Act, 1997. The assessee had the approval of the prescribed authority and the fact of approval not being in the prescribed form was never brought to its notice. However, when the assessment proceedings for the assessment year 2005-06 were taken and the objection was raised, the assessee came to know of the prescribed procedure and then filed the application on 28.4.2008 giving particulars of approval and also expenditure for the financial year 2002-03 to 2004-05. He pointed out that the prescribed authority viz Government of India, Ministry of Science and Technology, Department of Scientific & Industrial Research vide its order dated 28.8.2008 granted the approval in form 3CM w.e.f. 1.4.2007 to 31.3.2011. Ld Counsel pointed out that the approval has been granted by the prescribed authority in prescribed manner. Ld counsel submitted that under the Act and Rules, no time limit has been prescribed for complying with the prescribed procedure for grant of approval. Further, during the course of assessment proceedings, the approval subsequently granted in prescribed form was made available. He submitted that it is well settled law that exemption should not be whittled down for want of procedure. In this regard, he relied on the decision of the Hon‟ble Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy, 32 ITR 466(SC), wherein at page 475, the Hon‟ble Supreme Court has noted that observations of Viswanatha Sastri, J in CIT, Madras v K.E.Sundara Mudaliar and Others as under:-

Exemption from tax granted by a statute should be given full scope and amplitude and should not be whittled down by importing limitations not inserted by the Legislature.

He further referred to the decision of the Hon‟ble Bombay High Court in the case of CIT v. Minerva Maritime Corporation, 155 ITR 258 (Bom), wherein, it has been held that Rules cannot be construed in such a way as to curtail or run counter to the main provisions of the relevant sections of the Act.. He further relied on the decision of the Hon‟ble Supreme Court in the case of Bajaj Tempo Ltd v. CIT, 196 itr 188(SC), wherein at page 189, the Hon‟ble Supreme court observed as under:-

”AA provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it.”

Ld counsel further referred to the decision of the Hon‟ble Bombay High Court in the case of CIT v. Trustees of Shri Teckchand Chandiram Trust, 184 ITR 537 (Bom), wherein, it has been observed that a form prescribed by the rules cannot qualify a statutory provision or impose a time limit which the statute does not provide . Ld counsel further relied on the decision of the ITAT Ahmedabad Bench in the case of Claris Lifesciences ltd v ACIT, 111 ITD 902(Ahd), wherein, the Tribunal under the identical circumstances allowed the assessee‟s claim. He also relied on the decision of the Hon‟ble Gujarat High Court in the case of CIT v. Claris Lifesciences Ltd., 174 Taxman 113(Guj) and contended that the Hon‟ble High Court has upheld the decision of the ITAT Ahmedabad.

6. We have considered the rival submissions and perused the record of the case. It is an admitted position that In-house R&D Unit had been duly approved by the Government of India, Ministry of Science and Technology, Department of Scientific & Industrial Research vide its letter dated 3.7.1997. It is also fact that as per terms and conditions of recognition, the same was not meant for tax exemption which is evident from Sl.No.9 of the terms and conditions, which reads as under:- “The recognition is not meant to tax exemptions; quantum of tax concessions, development rebates and others, if any, will be governed by the tax laws in operation from time to time. All such matters should be taken up directly with the concerned tax authorities.”

This recognition was renewed time and again by various orders, noted earlier, in the arguments of ld Counsel for the assessee and, 31.3.2011 vide latest order dated 29.4.2008. For the assessment year 2005-06, the AO raised objection for the first time in course of assessment proceedings regarding approval being not in the prescribed form. Therefore, the assessee filed an application in the prescribed form No. 3CM on 28.4.2008 giving all relevant details including expenditure on scientific research for F.Y. 2002-03 to 2004-05. On this application, the approval has been granted w.e.f. 1.4.2007 to 31.3.2011. The assessee obtained the note sheets with reference to its application dt.28.4.2008 under Right to Information Act from DSIR and noted that the application for earlier years including A.Y. under consideration had been considered in para 3. However, the approval was granted from 1.4.2007 to 31.3.2011.

6.1 In the backdrop of these facts, the issue before us is whether non- availability of the approval in the prescribed form for the relevant assessment year could disentitle the assessee of deduction u/s.35(2AB) or not. In this regard, we may first refer to section 35 which deals with expenditure on scientific research. This section entitles the assessee to get deduction in respect of expenditure on scientific research laid out or expended in relation to business.

6.2 Section35(2AB) deals with a situation where a company engaged in the business of [bio-technology] or in the business of manufacture or production or any other article or thing not specified in the list of 11th Schedule]] incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land and building) on in-house research and development facility as approved by the prescribed authority i.e. Secretary, Government of India, Ministry of Science and Technology, Department of Scientific & Industrial Research. It is pertinent to note that this section talks of only approval of the prescribed authority but nowhere in the section the phrase “as prescribed” has been used. Therefore, if the approval simpliciter is available from the prescribed authority, then as per this section, no objection could be raised. However, sub-section(4) of Section 35 requires the prescribed authority to submit its report in relation to the approval of the said facility to the Director General in such form and within such time as may be prescribed. Therefore, it would be too technical to hold that merely because the term „prescribed‟ has not been used in section 35(2AB)(i) it follows that there were no prescribed rules for the same. However, at the same time, absence of phrase „prescribed‟ in section 35(2AB)(i) mitigates the assessee‟s default. Rule 6 of the I.T.Rules prescribes the authority for expenditure on scientific research and as per Rules 6(1B) for the purposes of sub-section (2AB) of section 35, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research. The sub-Rule (4) requires the company to furnish the application in Form No.3CK. As per sub-Rule (5A), if the prescribed authority is satisfied that the conditions provided in this rule and in sub-section (2AB) of section 35 of the Act are fulfilled, then pass an order in writing in Form No. 3CM. However, as per the proviso to sub-rule (5A), if the prescribed authority is not so satisfied it is to grant reasonable opportunity to the assessee company before rejecting its application. Sub-Rule (7A) prescribes the certain conditions subject to which approval is to be granted. A close reading of the section r.w. Rule 6 would reveal that nowhere any time has been prescribed within which the application is required to be filed by the assessee company. Further, nowhere, any condition has been prescribed regarding cut off date from which the approval could be made effective. Therefore, once the assessee company is granted approval it will apply till it is revoked with reference to all the assessment years, which come within the ambit of that period. Therefore, mere mentioning of 1.4.2007 in the order dated 28.8.2008 was of no consequence and the approval granted in Form 3CM was also applicable for A.Y. 2005-06. In this regard, it is further noticeable that while granting of approval on 28.8.2008, the prescribed authority has, inter alia, observed in para 5 as under:- „Ref.No. and Date of the application : Ref NBil dated 16.8.2007 The above Research & Development facility is further approved for the purpose of section 35(2AB) from 1.4.2007 to 31.3.2011 subject to the conditions underlined therein.”

The term „further‟ makes it clear that the approval was not limited to 1.4.2007 to 31.3.2011 but was in addition to periods already approved. It is further noticeable that information obtained under RTI clearly showed that the assessee‟s applications were processed for earlier years also but no orders have been passed with reference to earlier assessment years. At the same time, the assessee has not been given any opportunity of being heard as required under proviso to Rule 6 (5A) before rejecting the said application. Therefore, impliedly, the application for the entire period, for which it was made, has to be deemed to have been granted. On the basis of above discussion, we are of the opinion that the assessee was entitled for weighted deduction u/s. 35(2AB).

6.3 Now, we will also examine the issue having regard to the object of legislation. The entire scheme deals with the granting of approval to the facilities and the object is that the research and development facility is not related purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature. The purpose is to have research and development facilities which contribute to the technological advancement and not merely limited to earning of profits. Therefore, once the approval is there by the prescribed authority, it could be easily concluded that the same met the basic requirement and merely the same is not in prescribed form, it would not lead to the conclusion that the approval was of no purpose. As per the terms and conditions of the recognition of In-house R&D unit framed by the Ministry of Science and Technology, the assessee company is required to submit brief summary of the achievements of the R&D unit to the Department of Science and Industrial Research every year which includes paper published, patents obtained and processes developed, new products introduced, awards and prizes received and other achievements. Further, as per clause 8, commercial exploitation of the know-how/process developed by in- house R&D Unit was to be solely governed by the licensing policies in operation from time to time and the decision of the licensing authorities in this regard is considered to be final. Thus, stringent conditions have been imposed by the prescribed authority itself though the said approval was not meant for tax exemption but in substance, there was not much difference between the objects sought to be achieved by these approvals.

6.4 Further, in any view of the matter, at best it could be said that it was only a procedural defect and from the various decisions, noted in the arguments of ld Counsel for the assessee, it is clear that merely on the ground of technicalities of procedure, the benefit bestowed by legislature cannot be denied. When it comes to follow the prescribed procedure, the exemption provisions have to be liberally construed and if in substance, the assessee has fulfilled the basic requirements then the exemption cannot be denied.

6.5 We find that similar view has been taken by the Ahmedabad Bench of the Tribunal in the case of Claris Lifesciences Ltd (supra), which has been confirmed by the Hon‟ble Gujarat High Court, reported in 174 Taxman 113 (Guj)(supra).”

“5. We have considered the submissions made by the learned Standing Counsel appearing for the revenue and we have also perused the orders passed by the authorities below.

6. The Tribunal has discussed this issue at length in its order. It was contended by the assessee before the Tribunal that nowhere the provisions provide that expenditure from the date of approval only has to be allowed. In the absence of those words, such conditions cannot be imputed in the statute by the lower authorities. Doing so amounts to reading more in the law which is not expressly provided. The words used are any expenditure incurred by the assessee on scientific research on the in-house "R & D" facility approved by the prescribed authorities has to be allowed by deduction of expenditure so incurred. Meaning of these words is plain and clear that the facility is to be established first and on approval of the facility all the expenditure so incurred by the assessee for development of in-house facility is to be held as eligible for weighted deduction. Form No. 3CM, which is order of approval as provided by the rules in this behalf also does not have any mention of date of approval rather it speaks of only approval. 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 "R & D" facility, expenditure so incurred is eligible for weighted deduction.

6. On appraisal of the above mentioned finding, we noticed that the claim of the assessee was allowed for the period of which the assessee did not got the registration. However, the assessee got the registration subsequently. The basic intention of the Hon’ble High Court is to encourage the development of the facility by providing deduction of weighted expenditure and to boost up R&D facility. The Hon’ble Gujarat High Court in the case Banco Products (India) Ltd. Vs. DCIT(2018) 405 ITR 318 has also supported the view taken in Claris Lifesciences Ltd. (supra) and in the case of Maruti Suzuki India Ltd. Vs. Union of India & Another (2017) DHC 483 Delhi. The Hon’ble Delhi High Court has also agreement the decision of Hon’ble Gujarat High Court and has held as under: - “40. The settled position in law is that, for availing the benefit under Section 35 (2AB) of the Act what is relevant is not the date of DSIR or even the date of approval but the existence of the recognition. If a R&D Centre is not recognised it is not entitled to deduction but if it is recognised, it is entitled to the benefit. The Gujarat High Court in Claris Lifesciences (supra) has rightly observed that the date of approval of the R&D Centre, not being a part of the provision, extending benefit only from the date of recognition "amounts to reading more in the law which is not expressly provided".

7. Coming to the case in hand, the registration is on the record, which is upto 31.03.2015. The present A.Y.2014-15 is within the purview of registration. However, Form No.3CM is not on record. It is treated as hindrance but on the basis of technical hindrance, the claim of assessee is not liable to be declined. The finding support of above mentioned decisions, we are of the view that the finding of the CIT(A) is not justifiable, hence, is ordered to be set aside and we allowed the claim of the assessee. Accordingly, all the issues are decided in favour of the assessee against the revenue.