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Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal filed by the revenue against the order of the CIT(A), Bengaluru dated 8.8.2019 for the A.Y. 2012-13. The grounds filed in the appeal of the revenue are as follows:
The Order of the Ld. CIT(A)-4, Bangalore, in so far as it is prejudicial to the interest of the revenue, is opposed to law and the fact and circumstances of the case.
That the LD. CIT(A) has committed an error in law and in fact, by not appreciating the fact that non-submission of Form 3CL to the prescribed authority will disentitle the assessee from claiming deduction u/s 35(2AB).
M/s. Mahindra Electric Vehicles Ltd., Bengaluru Page 2 of 9 3. That the Ld. CIT(A) has failed to appreciate that the assessee by not submitting the Form 3CL to the prescribed authority has actually attempted to mislead the revenue in claiming the so called deduction u/s 35(2AB) and by its conduct, it has indulged in furnishing inaccurate particulars of income.
4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of CIT(A) is so far as it relates to the above grounds may be reversed and that of Assessing Officer may be restored.
5. The appellant craves the right to add, alter, amend and/or delete any of the grounds that may be urged.
2. The brief facts of the case are that the assessee M/s. Mahindra Reva Electric Vehicles Limited has filed this appeal on 20.4.2017 for the assessment year 2012-13 against the order of Deputy Commissioner of Income-tax Circle 4(1)(2), Bangalore dted 27.3.2017, passed u/s 271(1)(c) of the Income-tax Act,1961 ['the Act' for short]. As per declaration in Form No.35, the date of service of the impugned order and the demand notice is stated to be 7.4.2017. In view of this, the appeal which has been instituted on 20.4.2017 is found to be in time. The assessee is a company engaged in the business of manufacturing battery operated commercial vehicles. For the A.Y. 2012-13, assessee filed the return of income on 27.9.2012 declaring a loss of Rs.60,91,71,433/- after claiming weighed deduction of Rs.35,82,45,470/- u/s 35(2AB) of the Act being expenditure on scientific research and in house research and development facility which is 200% of the actual expenditure of Rs.17,91,22,735/-. The return was processed u/s 143(1). Subsequently, the case was tken up for regular assessment under section 143(3) of the Act. The A.O. completed the assessment u/s 143(3) of the Act on 27.2.2015 determining the total loss of Rs.43,00,48,699/- after making disallowance in deduction claimed u/s 35(2AB). The assessee preferred an appeal before CIT(A) against M/s. Mahindra Electric Vehicles Ltd., Bengaluru Page 3 of 9 the order of the A.O. dated 27.2.2015. The CIT(A) upheld action of the A.O. confirmed the assessment order dated 27.2.2015. Consequently, the A.O. initiated penalty proceedings u/s 271(1)(c) of the Act and levied a penalty of Rs.11,00,00,000/-. Aggrieved the assessee is in appeal before the Ld. CIT(A).
At the time of hearing, it was brought to our notice that the assessee went in appeal before the Tribunal in that Tribunal vide order dated 14.9.2018 has allowed the appeal of the assessee on quantum addition by observing as follows:
“We have heard the rival submissions. The learned DR relied on the order of the AO/CIT(A). The learned counsel for the Assessee reiterated submissions as were made before the revenue authorities and placed reliance on some judicial precedents on identical issue rendered by various benches of ITAT and Hon'ble High Courts.
For AY 2012-13, the previous year is FY 2011-12 i.e., the period from 1.4.2011 to 31.3.2012. The facts on record go to show that the Assessee's in-house R & D facilities was approved by the DSIR, Govt. of India, Ministry of Science and Technology for AY 2012-13 vide their letter dated 20.5.2009, a copy of which is placed at page 30 of the Assessee’s paper book. The approval is for the period 1.4.2009 up to 31.3.2012. Therefore, the condition for allowing deduction u/s.35(2AB) of the Act has been fulfilled by the Assessee. The claim of the revenue, however, is that the approval by the prescribed authority in form No.3CM is not final and conclusive and the quantum of expenditure on which deduction is to be allowed is to be certified by DSIR in form No.3CL. There is no statutory provision in the Act which lays down such a condition. We shall therefore examine what is Form No.3CL.
DSIR has framed guidelines for approval u/s.35(2AB) of the Act. The guidelines as on May, 2010 which is relevant for AY 2012-13, in so far as it is relevant for the present appeal, was as given below. (i) As per guideline 5 (iv) of the guidelines so framed, every company which has obtained an approval from the prescribed authority should also submit an undertaking as per Part C of Form No. 3CK to maintain separate accounts for each R&D centre approved under Section 35(2AB) by the Prescribed Authority, and to get the accounts duly audited every year by an Auditor as defined in subsection (2) of section M/s. Mahindra Electric Vehicles Ltd., Bengaluru Page 4 of 9 288 of the IT Act 1961. (The statutory auditors of the Company should audit the R&D accounts. To facilitate this audit separate books of accounts for R&D should be maintained. Also, the statutory auditors should sign the auditors' certificate in the details required to be submitted as per annexure-IV of the guidelines to facilitate submission of Report in Form 3CL).
As per guideline 5(vi) of the guidelines, the audited accounts for (ii) each year maintained separately for each approved centre shall be furnished to the Secretary, Department of Scientific & Industrial Research by 31st day of October of the succeeding year, along with information as per Annexure-IV of the Guidelines.
As per guideline 5(ix) Expenditures, which are directly (iii) identifiable with approved R&D facility only, shall be eligible for the weighted tax deduction. However, expenditure in R&D on utilities which are supplied from a common source which also services areas of the plant other than R&D may be admissible, provided they are metered/measured and subject to certification by a Chartered Accountant.
(iv) As per guideline 5(x) Expenditure on manpower from departments, other than R&D centre, such as manufacturing, quality control, tool room etc. incurred on such functions as attending meetings providing advice/directions, ascertaining customer choice/response to new products under development and other liaison work shall not qualify for deduction under section 35(2AB) of I.T. Act 1961.
As per guideline 10 Documents required to be submitted by (v) 31st October of each succeeding year of approved period to facilitate submission of Report in Form 3CL (2 sets) are Complete details as per annexure-IV of DSIR guidelines.
The Assessee applied for issue of Form No.3CL to the appropriate authority on 24.3.2017, after the order of the CIT(A). The application so made by the Assessee is at page 43 to 65 of the Assessee's paper book. According to the Assessee, it has complied with all the requirements of the guidelines for issue of Form No.3CL, but the DSIR has issued Form No.3CL dated 5.4.2018 for AY 2014 & 15 & 2015-16 but no Form No.3CL was issued for AY 2012-13. Though there has been no communication to the Assessee in this regard, the learned counsel for the Assessee submitted that since the audited accounts were not submitted by 31st October of the succeeding AY, as is required under M/s. Mahindra Electric Vehicles Ltd., Bengaluru Page 5 of 9 Guideline 5 (vi), the Assessee's application would not have been considered by the DSIR.
Rule-6(7A)(b) of the Rules specifying the prescribed authority and conditions for claiming deduction u/s.35(2AB) of the Act has been amended by the Income Tax (10th Amendment) Rules, 2016 w.e.f. 1.7.2016, whereby it has been laid down that the prescribed authority, i.e., DSIR shall quantify the quantum of deduction to be allowed to an Assessee u/s.35(2AB) of the Act. Prior to such substitution, the above provisions merely provided that the prescribed authority shall submit its report in relation to the approval of inhouse R&D facility in Form No.3CL to the DGIT (Exemption) within 60 days of granting approval. Therefore prior to 1.7.2016 there was legal sanctity for Form No.3CL in the context of allowing deduction u/s.35(2AB) of the Act.
The issue as to whether deduction u/s.35(2AB) of the Act can be denied for absence of Form No.3CL by the DSIR was subject matter of several judicial decisions rendered by various Benches of ITAT. (i) The Pune ITAT in the case of Cummins India Ltd. Vs. DCIT in for AY 2009-10 order dated 15.5.2018 had an occasion to consider a case where part of the claim for deduction u/s.35(2AB) of the Act was claimed supported by Form No.3CL but part of it was not supported by Form No.3CL. The Pune ITAT held as follows:- "45. The issue which is raised in the present appeal is that whether where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on in- house R&D facility, for which the adjudicating authority is the Assessing Officer and whether the prescribed authority is to approve expenditure in form No.3CL from year to year. Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis-à-vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure I methodology was prescribed. In the absence of the there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction prescribed M/s. Mahindra Electric Vehicles Ltd., Bengaluru Page 6 of 9 authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below.
The Courts have held that for deduction under section 35(2AB) of the Act, first step was the recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which recognition has been given to the facility, then thereafter the role of Assessing Officer is to look into and allow the expenditure incurred on in-house R&D facility as weighted deduction under section 35(2AB) of the Act. Accordingly, we hold so. Thus, we reverse the order of Assessing Officer in curtailing the deduction claimed under section 35(2AB) of the Act by Z 6,75,000/-. Thus, grounds of appeal No.10.1, 10.2 and 10.3 are allowed." (ii) The Hyderabad ITAT in the case of M/S. Sri Biotech Laboratories India Ltd. Vs. ACIT for AY 2009-10 order dated 24.9.2014 took the view (vide Paragraph-13 of the order) that when the Assessee's R & D facility is approved the deduction u/s.35(2AB) of the Act cannot be denied merely on the ground that prescribed authority has not submitted report in Form 3CL.
19. The question of allowing deduction u/s.35(2AB) of the Act was considered by the Hon'ble Delhi High Court in the case of CIT vs. Sadan Vikas (India) Ltd. (2011) 335 ITR 117 (Del) where AO refused to accord the benefit of the weighted deduction to the assessee under s. 35(2AB) on the ground that recognition and approval was given by the DSIR in February/September, 2006, i.e., in the next assessment year and, therefore, the weighted deduction cannot be allowed. The CIT(A) firmed the order of the AO. The Tribunal held that the assessee would be entitled to weighted deductions of the aforesaid expenditure incurred by the assessee in terms of the s. 35(2AB) of the Act and in coming to this conclusion, the Tribunal relied upon the judgment of Gujarat High Court in CIT vs. Claris Lifesciences Ltd. 326 ITR 251 (Guj). In its decision the Hon'ble Gujarat High Court held 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 fulfils the conditions laid down in the aforesaid provisions. The Hon'ble Delhi High Court followed the decision of the Hon'ble Gujarat High Court and upheld the decision of the Tribunal. The Hon'ble Delhi High Court quoted the following observations of the Hon'ble Gujarat High Court and agreed with the said view:
"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.
M/s. Mahindra Electric Vehicles Ltd., Bengaluru Page 7 of 9 8. The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of : development of facility; (i) incurring of expenditure by the assessee for development (ii) of such facility; approval of the facility by the prescribed authority, which is (iii) DSIR; and allowance of weighted deduction on the expenditure so (iv) incurred by the assessee.
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." 20.From the above discussion it is clear that prior to 1.7.2016 Form 3CL had no legal sanctity and it is only w.e.f 1.7.2016 with the amendment to Rule 6(7A)(b) of the Rules, that the quantification of the weighted deduction u/s.35(2AB) of the Act has significance. In the present case there is no difficulty about the quantum of deduction u/s.35(2AB) of the Act, because the AO allowed 100% of the expenditure as deduction u/s.35(2AB)(1)(i) of the Act, as expenditure on scientific research. Deduction u/s.35(1)(i) and Sec.35(2AB) of the Act are similar except that the deduction u/s.35(2AB) is allowed as weighted deduction at 200% of the expenditure while deduction u/s.35(1)(i) is allowed only at 100%. The conditions for allowing M/s. Mahindra Electric Vehicles Ltd., Bengaluru Page 8 of 9 deduction u/s 35(1)(i) of the Act and under Sec.35 (2AB) of the Act are identical with the only difference being that the Assessee claiming deduction u/s 35(2AB) of the Act should be engaged in manufacture of certain articles or things. It is not in dispute that the Assessee is engaged in business to which Sec.35(2AB) of the Act applied. The other condition required to be fulfilled for claiming deduction u/s.35(2AB) of the Act is that the research and development facility should be approved by the prescribed authority. The prescribed authority is the Secretary, Department of Scientific Industrial Research, Govt. Of India (DSIR). It is not in dispute that the Assessee in the present case obtained approval in Form No.3CM as required by Rule 6 (5A) of the Rules. In these facts and circumstances and in the light of the judicial precedents on the issue, we are of the view that the deduction u/s.35(2AB) of the Act ought to have been allowed as weighted deduction at 200% of the expenditure as claimed by the Assessee and ought not to have been restricted to 100% of the expenditure incurred on scientific research. We hold and direct accordingly and allow the appeal of the Assessee.
In the result, appeal by the Assessee is allowed.
Since the quantum addition is also deleted by the Tribunal, there is no question of levying of any penalty and the CIT(A) has rightly deleted the penalty on the basis of the order of the Tribunal of quantum additions. Accordingly, we confirm the finding of Ld. CIT(A) in deleting the penalty.
In the result, the appeal filed by the revenue is dismissed.