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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI S. RIFAUR RAHMAN, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R PER S. RIFAUR RAHMAN (ACCOUNTANT MEMBER): The present 3 appeals filed by the revenue and Cross Appeals and 2 C.Os filed by the assessee against the order of Ld. CIT(A)-57, Mumbai dated 08.01.2018, 07.06.2018 & 2.08.18 for Assessment Year 2011-12, 2012-13 & 2013-14 respectively.
2. Since the issues raised in all the appeals as well as CO are identical, therefore, for the sake of convenience, these appeals and CO are clubbed, heard and disposed off by this consolidated order. Therefore, we are dealing issues ground-wise raised by assessee as well as revenue jointly. For the sake of clarity, the grounds raised
by revenue and assessee are given below: Revenue’s Grounds:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in disallowing a sum of Rs. 86,34,268/- u/s. 14A of the IT Act read with rule 8D(2) of the Income Tax Rules 1962.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting interest charged on loan by considering it as share capital issued without appreciating that share capital was issued on last day of F.Y. 2010-11 and throughout the year it was outstanding as loan in the books of AE.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the self-serving agreement between the related parties for not charging interest on optionally convertible loan is to be ignored in terms of section 92F(ii), as the assessee failed to show any comparable cases in which interest has not been charged under uncontrolled circumstances." 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the TPO has recharacterised the transaction, whereas the transaction remained as loan only throughout the year but for the last day and failed to note that the assessee only recharacterised the loan as share application money. 5. On the facts and in the circumstances of the case and law, the Ld. CIT(A) failed to appreciate section 43 of the Companies Act 2013, wherein it is provided to charge interest at the rate of 12% per annum, even if it is treated as share application money, if shares are not allotted within 60 days of receipt of the money, to draw a reasonable parallel to charge interest at arm's length though the Act may not be applicable to the AE. 6. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deviating from her predecessor's order for the A.Y. 2010-11 without citing any reasons. 7. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting interest charged on share application money by considering it as share capital issued without appreciating that share capital was issued on last day of F.Y. 2010-11 and throughout the year it was outstanding as share application money in the books of AE.. 8. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate the provisions of section 92F(ii) that no unrelated party at arm's length would keep such huge funds as share application money for such longer periods without any return and the whole transfer pricing study is to look in to the substance of the transaction removing the related-party-nature in controlled conditions.
5 & others M/s Reliance Life Science Pvt. Ltd.
9. On the facts and in the circumstances of the case and law, the ld. CIT(A) failed to appreciate section 43 of the companies Act 2013, wherein it is provided to charge interest at the rate of 12% per annum, if shares are not allotted within 60 days of receipt of the money, to draw a reasonable parallel to charge interest at arm's length though the Act may not be applicable to the AE.
10. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that conversion of share application money to share capital on last day of financial year does not provide immunity to assessee from charging interest for the whole year.
On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the TP adjustment by stating that recharacterisation of transaction is unjustified without appreciating that this case falls in exception as laid down by decision of Hon'ble Delhi High Court in case of CIT vs. EKL Appliances Ltd. as shares were issued on last day of financial year and till march it was in the name of share application money in the books of accounts of assessee. II. The appellant craves leave to amend or alter any ground or add a new ground that may be necessary. III. The appellant prays that the order of CIT (A) on the above grounds be set aside and that of the AO restored.” Assessee’s Ground In Cross Appeal and C.Os are: “1. The learned CIT(A)-57 erred in confirming the disallowance u/s 35(2AB) of Rs. 21,17,794/- by the AO. The learned CIT(A) erred in law and on the facts and in circumstances of the case in restricting weighted deduction u/s. 35(2AB) of the Act by relying upon Form 3CL issued by Department of Scientific and Industrial Research (DSIR") with respect to the appellant's claim for R&D expenses. The respondent submits that once R&D facility was approved by DSIR, then the expenses incurred by the assessee ought to be allowed by the learned AO under section 35{2AB) of the Act. Computation of deduction u/s 35(2AB) based on the amount specified in the amended Form 3CL is to be applied only prospectively from AY 2016-17 and hence the same is not applicable for the year under consideration
6 & others M/s Reliance Life Science Pvt. Ltd. 2. The respondent craves leave to add, to amend, vary or alter including by substitution any of the grounds of appeal as they or their representatives may think fit”
1) Disallowance u/s 14A r.w.r. 8D. 3. Before us, Ld. AR brought to our notice para 5 of AO order and para 3.3 of Ld. CIT(A) order and submitted that the similar issue has already been decided by the Coordinate Bench of ITAT in assessee‟s own case for Assessment Year : 2009-10 & 2010-11 (ITA No. 2301/Mum/2010 & 3883Mum/2016) on merits in favour of the assessee.
On the other hand, Ld. DR relied on the orders passed by revenue authorities, however he conceded that this ground is covered by the order of ITAT.
Considered the rival submission and material placed on record. We notice from the records that the identical ground has already been decided by the Coordinate Bench of ITAT in & 3883/Mum/2016 for AY 2009-10 & 2010-11 in assessee‟s own case on merits. For the sake of clarity, which is reproduced below:-
7 & others M/s Reliance Life Science Pvt. Ltd.
We have heard the rival submissions, perused the orders of the authorities below. We agree with the submissions of the Ld. Counsel for the assessee that since assessee has not earned any exempt income and therefore no disallowance is warranted u/s. 14A of the Act. In the case of Joint Investments Pvt. Ltd. v. CIT [372 ITR 694] the Hon'ble Delhi High Court held that the disallowance u/s. 14A of the Act should not exceed the exempt income. The Revenue filed SLP against this decision and the Hon'ble Supreme Court dismissed the SLP filed by the Revenue. Similar view has been taken by the Hon'ble Delhi High Court in the case of Cheminvest Limited v. CIT [378 ITR 33].
In the case of ACIT v. M/s. Ballarpur Industries Ltd., in ITA.No. 346 to 379/NAG/2014 dated 04.12.2015 the Nagpur Bench of the Tribunal following the decision of the Hon'ble Delhi High Court in the case of Cheminvest v. CIT (supra) held as under:
“6. We have heard both the sides at some length and carefully perused the orders of the authorities below in the light of the precedence cited. As far as the exemption for the years under consideration were concerned, it was an admitted factual position that the AO has not mentioned any such amount. Meaning thereby, there was no 8 & others M/s Reliance Life Science Pvt. Ltd. exempt income earned by the assessee for the years under consideration. In reply to one of our questions, the learned AR, Mr. K. P. Dewani has also made a statement at Bar that no dividend was declared, hence, there was no earning of exempted dividend income. He has also clarified that for the purpose of invocation of the provisions of section 14A of the IT Act, the AO has applied the formula only in respect of disallowance of proportionate interest expenditure. There was no allegation of the AO that the exempt income was earned by the assessee. In the light of the undisputed finding on facts, we have perused the decision of the Hon‟ble Courts. We may like to mention that a view has been expressed consistently that if there is no exempted profit then there is no question of invocation of the provisions of section 14A of the IT Act but, we have also carefully perused that very decision of the Tribunal namely Cheminvest Ltd. (supra) was reversed by the Hon‟ble Delhi High Court, copy placed in the compilation. The Hon‟ble Delhi High Court in ITA No.749/2014 vide order dated 02-09-2015 titled as “Cheminvest Ltd. Vs CIT” has decided the substantial question of law that whether
9 & others M/s Reliance Life Science Pvt. Ltd. disallowance u/s 14A of the Act can be made in a year in which no exempt income has been earned or received by the assessee. The Final verdict was as under: -
23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression „does not form part of the total income‟ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
In short, in a situation when that very order of the Tribunal which was the basis for invocation of the provisions of Section 14A of the IT Act got reversed by the Hon‟ble Delhi High Court, hence, the very said basis do not survive any more. As a result, we hereby confirm the findings of the learned CIT (A) on this issue. We hereby also hold that in view of the numbers of decisions on this issue in favour of the tax payers, we find no
This decision of the Tribunal has been affirmed by the Hon'ble Bombay High Court in the case of Pr.CIT v. M/s. Ballarpur Industries Limited in ITA.No. 51 of 2016 dated 13.10.216 by rejecting the appeal of the Revenue and held that no substantial question of law arises. While holding so the Hon'ble High Court observed as under: - “On hearing the learned Counsel for the Department and on a perusal of the impugned orders, it appears that both the Authorities have recorded a clear finding of fact that there was no exempt income earned by the assessee. While holding so, the Authorities relied on the judgment of the Delhi High Court in Income Tax Appeal No. 749/2014, which holds that the expression “does not form part of the total income” in Section 14A of the Income Tax Act, 1961 envisages that there should be an actual receipt of the income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. The Income Tax Appellate Tribunal held that the provisions of 11 & others M/s Reliance Life Science Pvt. Ltd. Section 14A of the Income Tax Act, 1961 would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the Assessing Officer that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income.
The findings of facts recorded by both the Authorities do not give rise to any substantial question of law.
Since no substantial question of law arises in this income tax appeal, the income tax appeal is dismissed with no order as to costs.”
The Hon'ble Jurisdictional High Court held that if there is no exempt income there cannot be any disallowance. Respectfully following the said decision, we direct the Assessing Officer to delete the disallowance made u/s. 14A of the Act. Ground raised by the assessee is allowed.
12 & others M/s Reliance Life Science Pvt. Ltd. 6. Therefore, respectfully following the above decision of Coordinate Bench in assessee‟s own case in turn relying on the decision of Assessment Year 2009-10 & 2010-11. This issue is settled in favour of the assessee. Therefore, we are inclined to accept the submission of Ld. AR. Accordingly, this ground raised by the revenue is dismissed.
2. Upward adjust of interest on Share Application Money to RLSI and RLSBV through which share capital was subscribed. 7. Before us, Ld. AR brought to our notice page 8-11 & 15- 17 of AO order and para 9.3 of Ld. CIT(A) order and submitted that the similar issue has already been decided by the Coordinate Bench of ITAT in assessee‟s own case for Assessment Year : 2009-10 & 2010-11 (ITA No. 2301/Mum/2010 & 3883Mum/2016) on merits in favour of the assessee.
On the other hand, Ld. DR relied on the orders passed by revenue authorities, however he conceded that this ground is covered by the order of ITAT.
9. Considered the rival submission and material placed on record. We notice from the records that the identical ground has 13 & others M/s Reliance Life Science Pvt. Ltd. already been decided by the Coordinate Bench of ITAT in ITA No. 2301/Mum/2015 & 3883/Mum/2016 for AY 2009-10 & 2010-11 in assessee‟s own case on merits. For the sake of clarity, which is reproduced below:-
42. We have heard the rival submissions and perused the orders of the authorities below. On a perusal of the order of the Ld. TPO, we find that assessee subscribed to equity shares of RLSI and RLSBV as a part of its capital investment in its 100% subsidiary. The assessee submitted before the TPO that since the basic objective of the above investment in the form of share application was to fund its AE‟s for developing global business opportunities for further expanding the assessee‟s business operations outside India, the specification to the shares of AE‟s at fair value has been shown at arm‟s length price. Assessee also contended that since subscription to equity shares does not have a bearing on the determination of income of the assessee the provisions of section 92(1) of the Act are not applicable to the international transaction of such nature as defined in section 92B(1) of the Act. However, the TPO held that since no shares have been allotted by AE‟s to the assessee in respect of the amount paid towards share application the same would be characterized as being in the nature of interest free 14 & others M/s Reliance Life Science Pvt. Ltd. loan provided to AE‟s. TPO also observed the fact that AE‟s were setup for developing global business opportunities for further expanding the assessee‟s business operations outside the India is not a valid ground for non-allotment of shares by AE‟s to the assessee. Therefore, in the absence of allotment of shares the share application money is treated as loan given by the assessee to its AE‟s and applied interest rate at 6% per annum and accordingly made adjustment. The Ld.CIT(A) upheld the adjustment.
43. Before us, Ld. Counsel for the assessee placing reliance on the decision of the Hon‟ble Bombay High Court in the case of Director of Income-tax v. Besix Kier Dabhol Stay Application in ITA.No. 776 of 2011 dated 30.08.2012 and PCIT v. Aegis Limited in ITA.No. 1248 of 2016 dated 27.01.2019 contends that recharecterisation of transaction is not permitted in the absence of specific provisions under the Act.
44. We have gone through the judgment of the Hon‟ble Bombay High Court referred to above in the case of DIT v. Besix Ker Dabhol SA (supra). The Hon‟ble Bombay High Court while answering the following question observed as under: - “Q.1. Whether on the facts and circumstances of the case and in law the Tribunal was right in 15 & others M/s Reliance Life Science Pvt. Ltd. holding that in the absence of any specific thin capitalization rules in India, the Assessing officer cannot disallow the interest payment on debt capital after having observed the abnormal thin capitalization ratio of 248:1?
4) The respondent-assessee is a company incorporated under the laws of Belgium. The sole business of the respondent assessee is to carry out the project of construction of fuel jetty near Dabhol in India. The respondent-assessee had fully paid capital of 25.00 lacs (Belgium Francs) divided into 2500 shares of 1000 Belgium Francs each. This equity capital was divided in the ratio of 60:40 between the two joint venture partners N V Besix SA, Belgium and Kier International (Investment) Limited of U.K. The respondent assessee also borrowed from its shareholders in the same ratio as the equity share holding amount of Rs.57.09 crores from N.A. Basix SA and Rs.37.01 crores from Kier International Investment Limited. In the circumstances, the respondent had equity capital of Rs. 38.00 lacs and debt capital of Rs.9410 lacs. Thus, debt equity ratio worked out is to 248:1.
16 & others M/s Reliance Life Science Pvt. Ltd. 5) The respondent assessee paid interest of Rs. 5.73 crores on the aforesaid borrowing of Rs.57.09 crores and Rs.37.01 crores from NV Basix SA and Kier International (Investments) Limited respectively. However, the Assessing Officer disallowed the payment of interest in view of the Reserve Bank of India's approval letter dated 3/11/1998 granting approval to the assessee to do business in India. The approval letter dated 03/11/1998 specifically provided that India Branch Office will not borrow or lend from/to any person in India without specific permission of the Reserve bank of India. The Assessing officer further observed that in view of India Belgium Double Taxation Avoidance Agreement interest on monies paid by the Head Office to the branches was not allowable as a deduction.
6) In appeal, the Commissioner of Income Tax (Appeals) by an order dated 29/3/2007 upheld the order of the Assessing officer and disallowed the deduction on account of interest of Rs.5.73 crores paid to Joint Venture Partners. The Commissioner of Income Tax (Appeals) held that Article 7(3)(b) of the Double Taxation Avoidance Agreement forbids allowance of any interest paid to the head office by permanent establishment in India as a 17 & others M/s Reliance Life Science Pvt. Ltd. deduction. Further, the payment of interest also directly violates the conditions imposed by RBI in its letter dated 3/11/1998. Therefore, the order of the Assessing Officer was upheld.
7) However, the Tribunal allowed the respondent- assessee's appeal. During the course of the proceedings before the Tribunal the revenue contended that the borrowings on which the interest has been claimed as a deduction are in fact capital of the assessee and brought only under the nomenclature of loan for tax consideration. It was the case of the appellant- revenue before the Tribunal that debt capital is required to be re-characterized as equity capital. However, the Tribunal held that in India as the law stands there were no rules with regard to thin capitalization so as to consider debt as an equity. It is only in the proposed Direct Tax Code Bill of 2010 that as a part of the General Anti Avoidance Rules it is proposed to introduce a provision by which a arrangement may be declared as an impermissible avoidance arrangement and may be determined by recharactersing any equity into debt or vice versa.
18 & others M/s Reliance Life Science Pvt. Ltd. 8) We find no fault with the above observations of the Tribunal. There were at the relevant time and even today no thin capitalization rules in force. Consequently, the interest payment on debt capital cannot be disallowed. In view of the above, the question (i) raises no substantial question of law and is therefore, dismissed.”
45. In the case of PCIT v. Aegis Limited (supra) the Hon'ble Jurisdictional High Court while answering the following question observed as under: - “Q1. Whether on the facts and circumstances of the case and in law, the Income Tax Appellate Tribunal erred in not considering the fact that the assessee had actually advanced/lent money to its AE in the garb of preference shares leading to attraction of provisions relating to Transfer Pricing in the ease of the assessee in view of Section 92B of the Act, without appreciating the fact that these preferential shares do not carry any dividend and are beyond scope of any capital appreciation ? ….
The respondent-assessee is a Company registered under the Companies Act. For the Assessment Year 2009 10, the assessee was subjected to transfer pricing regime. Question 19 & others M/s Reliance Life Science Pvt. Ltd. no.1 arises out of the action of the Revenue to tax notional interest in the hands of the assessee through transfer pricing. The facts are that, during the period relevant to the assessment year in question, the assessee had subscribed to redeemable preferential shares of its Associated Enterprises ("AE" for short) and redeemed some of its shares at par. The Transfer Pricing Officer ("TPO" for short) held that the preference shares were equivalent to interest free loans advanced by the assessee and accordingly charged the interest on notional basis. The Tribunal by the impugned judgment, deleted the addition observing that the TPO had re-characterised the transaction of subscription of shares into advancing of unsecured loans. The Tribunal did not accept such conclusion, inter-alia on the grounds that the TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the assessee entered into such transaction.
20 & others M/s Reliance Life Science Pvt. Ltd. 3. We are broadly in agreement with the view of the Tribunal. The facts on record would suggest that the assessee had entered into a transaction of purchase and sale of shares of an AE. Nothing is brought on record by the Revenue to suggest that the transaction was sham. In absence of any material on record, the TPO could not have treated such transaction as a loan and charged interest thereon on notional basis. No question of law arises.”
46. Similar view has been taken by the Hon'ble Bombay High Court in a recent Judgement in the case of Pr.CIT v. Concentrix Services India Pvt. Ltd., in ITA.No. 778 of 2017 and 867 of 2017 dated 04.09.2019. Further, the Ld. DR has not brought any contrary decisions to our notice. The ratio of the above decisions squarely applicable to the facts of the assessee‟s case. The TPO has recharectersied the transaction of investment of preference shares into loan which is not permissible in view of the judgments of the Hon‟ble Bombay High Court. Thus, respectfully following the above decisions, we direct the Assessing Officer to delete the adjustment made towards interest on subscription to share capital of AE‟s.
21 & others M/s Reliance Life Science Pvt. Ltd.
10. Therefore, respectfully following the above decision of Coordinate Bench in assessee‟s own case in turn relying on the decision of Assessment Year 2009-10 & 2010-11. Similarly, revenue has raised grounds on upward adjustment of interest on optionally convertible loan given to its subsidiaries, the coordinate bench in assessee‟s own case for AY 2009-10 and AY 2010-11 adjudicated in favour of the assessee, when the loan was subsequently converted into share capital, the interest adjustment cannot be made. Hence, These issues are settled in favour of the assessee. Therefore, we are inclined to accept the submission of Ld. AR in thess regard. Accordingly, the grounds raised by the revenue are dismissed.
4. Disallowance of weighted deduction u/s 35(2AB) due to short approval in Form 3CL. 11. Before us, Ld. AR brought to our notice para 6 of AO order and para 4.3 of Ld. CIT(A) order and submitted that if R & D facility is approved, disallowance cannot be made based on Form 3CL, DSIR was not required to approve quantum of expenditure prior to Assessment Year 2017-18. Only from A.Y. 22 & others M/s Reliance Life Science Pvt. Ltd. 2017-18, the section was amended to incorporate the approval of expenses. In this respect, he submitted that the similar issue has already been decided by the Coordinate Bench of ITAT in the case of Glenmark Pharmaceuticals Ltd. vrs. ACIT (2019) ITA No. 5651/Mum/2017 (Mum-Trib) on merits in favour of the assessee. He also relied on the following case law, which are reproduced below:- i) ACIT vrs. Crompton Greaves Ltd. (2019) 111 taxmann.com 338 (Mum-ITAT) ii) Cummins India Ltd. vrs. DCIT (2018) ITA No. 309/Pun/2014 (Pune ITAT) iii) CIT vrs. Claris Lifescience Ltd. (2008) 174 taxmann.com 113 (Guj-HC). He also relied on Rule 6 of IT Rules, 1962.
On the other hand, Ld. DR relied on the orders passed by revenue authorities and he submitted that section 35(2AB) clearly indicate that the expenses has to be approved by „DSIR‟. He brought to our notice Pg. 207 of the paper book and submitted that no doubt the R&D is approved but the expenses is not
Considered the rival submission and material placed on record. We notice from the records that the identical ground has already been decided by the Coordinate Bench of ITAT(Mumbai and Pune ) and Hon‟ble Gujarat High Court on merits, which are given below:- i) Glenmark Pharmaceuticals Ltd. vrs. ACIT (2019) (Mum-Trib) ii) ACIT vrs. Crompton Greaves Ltd. (2019) 111 taxmann.com 338 (Mum-ITAT) iii) Cummins India Ltd. vrs. DCIT (2018) ITA No. 309/Pun/2014 (Pune ITAT) iv) CIT vrs. Claris Lifescience Ltd. (2008) 174 taxmann.com 113 (Guj-HC).
For the sake of clarity, the decision in the case of Cummins India Ltd (supra) is reproduced below:-
We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the claim of deduction under section 24 & others M/s Reliance Life Science Pvt. Ltd. 35(2AB) of the Act i.e. expenditure incurred on Research & Development activity. For computation of business income under section 35 of the Act, expenditure on scientific research is to be allowed on fulfillment of certain conditions which are enlisted in the said section. Under various subsections of section 35 of the Act, the conditions and the allowability of expenditure vary. Sub-section (1) to section 35 of the Act deals with expenditure on scientific research, not being in the nature of capital expenditure, is to be allowed to research association, university, college or other institution; for which an application in the prescribed form and manner is to be made to the Central Government for the purpose of grant of approval or continuation thereto. Before granting the approval, the prescribed authority has to satisfy itself about the genuineness of activities and make enquiries in this regard. Under sub-section (2B) to section 35 of the Act, a company engaged in the specified business as laid there on, if it incurs expenditure on scientific research or in-house Research & Development facility also needs to be approved by the prescribed authority, is entitled to deduction, provided the same is approved by the prescribed authority.
Now, coming to sub-section (2AA) to section 35 of the Act, it talks about granting of approval by the 25 & others M/s Reliance Life Science Pvt. Ltd. prescribed authority but the approval to the expenditure being incurred is missing under the said section. Similar is the position in sub-section (2A). Further in sub-section (2AB), it is provided that facility has to be approved by the prescribed authority, then there shall be allowed deduction of expenditure incurred whether 100%, 150% or 200% as prescribed from time to time. Clause (2) to section 35 of the Act provides that no deduction shall be allowed in respect of expenditure mentioned in clause (1) under any provisions of the Act. Clause (3) further lays down that no company shall be entitled for deduction under clause (1) unless it enters into agreement with prescribed authority for co-operation in such R & D facility. The Finance Act, 2015 w.e.f. 01.04.2016 has substituted and provided that facility has to fulfill such condition with regard to maintenance of accounts and audit thereof and for audit of accounts maintained for that facility.
Under Rule 6 of Income Tax Rules, 1962 (in short „the Rules), the prescribed authority for expenditure on scientific research under various subclauses has been identified. As per Rule 6(1B) of the Rules for the purpose of sub-section 2AB of section 35 of the Act, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research i.e. 26 & others M/s Reliance Life Science Pvt. Ltd. DSIR. Under sub-rule (4), application for obtaining approval under section 35(2AB) of the Act is to be made in form No.3CK. Under sub-rule (5A) of rule 6 of the Rules, the prescribed authority shall, if satisfied that the conditions provided in the rule and in sub- section (2AB) being fulfilled, pass an order in writing in form No.3CM. The proviso however lays down that reasonable opportunity of being heard is to be granted to the company before rejecting an application. So, the application has to be made under sub-rule (4) in form No.3CK and the prescribed authority has to pass an order in writing in form No.3CM. Sub-rule (7A) provides that the approval of expenditure under sub- section (2AB) of section 35 of the Act, shall be subject to the conditions that the facilities do not relate purely to market research, sales promotion, etc. Clause (b) to sub-rule (7A) at the relevant time provided that the prescribed authority shall submit its report in relation to the approval of in-house R & D facility in form No.3CL to the DG (Income-tax Exemption) within sixty days of its granting approval. Under clause (c), the company at the relevant time had to maintain separate accounts for each approved facility, which had to be audited annually. Clause (b) to sub-rule (7A) has been substituted by IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016, under which the prescribed authority has 27 I.T.A. No. 2130/Mum/2018 & others M/s Reliance Life Science Pvt. Ltd. to furnish electronically its report (i) in relation to approval of in-house R & D facility in part A of form No.3CL and (ii) quantifying the expenditure incurred on in-house R & D 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. In other words the quantification of expenditure has been prescribed vide IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016. Prior to this amendment, no such power was with DSIR i.e. after approval of facility.
Under the amended provisions, beside maintaining separate accounts of R & D facility, copy of audited accounts have to be submitted to the prescribed authority. These amendments to rules 6 and 7a are w.e.f. 01.07.2016 i.e. under the amended rules, the prescribed authority as in part A give approval of the facility and in part B quantify the expenditure eligible for deduction under section 35(2AB) of the Act.
The issue which is raised before us relates to pre- amended provisions and question is where the facility has been approved by the prescribed authority, can the deduction be denied to the assessee under section 35(2AB) of the Act for non issue of form No.3CL by the said prescribed authority or the power is with the 28 & others M/s Reliance Life Science Pvt. Ltd. Assessing Officer to look into the nature of expenditure to be allowed as weighted deduction under section 35(2AB) of the Act. The first issue which arises is the recognition of facility by the prescribed authority as provided in section 35(2AB) of the Act.
The Hon‟ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (2010) 326 ITR 251 (Guj) have held that weighted deduction is to be allowed under section 35(2AB) of the Act after the establishment of facility. However, section does not mention any cutoff date or particular date for eligibility to claim deduction. The Hon‟ble High Court held as under:-
“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.
The provisions nowhere suggest or imply that R&D 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 29 & others M/s Reliance Life Science Pvt. Ltd. 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 section 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 R&D 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.
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 deduction in respect of the entire 30 & others M/s Reliance Life Science Pvt. Ltd. expenditure incurred under s. 35(2AB) of the Act by the assessee.”
The Hon‟ble High Court of Delhi in CIT Vs. Sandan Vikas (India) Ltd. (2011) 335 ITR 117 (Del) on similar issue of weighted deduction under section 35(2AB) of the Act held that the condition precedent was the certificate from DSIR, but the date of certificate was not important, where the objective was to encourage research and development by the business enterprises in India. In the facts before the Hon‟ble High Court of Delhi, the assessee had approached DSIR vide application dated 10.01.2015. The DSIR vide letter dated 23.02.2006 granted recognition to in-house research and development facility of assessee. Further, vide letter dated 18.09.2006, DSIR granted approval for the expenses incurred by the company on in-house research and development facility in the prescribed form No.3CM. The Assessing Officer in that case refused to accord the benefit of aforesaid provision on the ground that recognition and approval was given by DSIR in the next assessment year. The Tribunal allowed the claim of assessee relying on the decision of the Hon‟ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (supra). The Hon‟ble High Court of Delhi taking note of the decision of the Hon‟ble High Court of Gujarat observed that it has been held that cutoff date 31 I.T.A. No. 2130/Mum/2018 & others M/s Reliance Life Science Pvt. Ltd. mentioned in the certificate issued by DSIR would be of no relevance where once the certificate was issued by DSIR, then that would be sufficient to hold that the assessee had fulfilled the conditions laid down in the aforesaid provisions.
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, 32 & others M/s Reliance Life Science Pvt. Ltd. no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed 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 ₹ 6,75,000/-. Thus, grounds of appeal No.10.1, 10.2 and 10.3 are allowed.
Therefore, respectfully following the above decision of Coordinate Bench of ITAT, we are inclined to accept the
In the net result, all the appeal filed by the revenue for Assessment Year 2011-12 , 2012-13 and 2013-14 are dismissed and all the COs filed by the assessee for Assessment Year 2011- 12 & 2013-14 are allowed and the appeal filed by assessee for Assessment Year 2012-13 is allowed.