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Income Tax Appellate Tribunal, ‘A’ BENCH, PUNE
ORDER
PER PARTHA SARATHI CHAUDHURY, JM :
This appeal preferred by the assessee emanates from the order of the ld. CIT(A)-6, Pune dated 16-11-2017 for A.Y. 2013-14 as per the following grounds of appeal.
1. The learned CIT(A)-6, Pune erred in law and on facts, in partially sustaining the disallowance of expenses u/s 14A of the ITA, 1961 made by the learned ACIT, Circle-9, Pune. The learned CIT(A)-6, Pune ought not to have sustained disallowance of Rs. 9,06,472/- u/s 14A of the ITA, 1961, considering the facts of the case and various legal propositions.
The learned CIT(A)-6, Pune erred in law and on facts in sustaining disallowance u/s 14A of the ITA, 1961 without appreciating that, no satisfaction as to incorrectness of expenses worked out by the appellant is reached by the learned AO prior to making the said disallowance. 3. The learned CIT(A)-6, Pune and the learned AO erred in law and on facts in making disallowance of interest u/s 14A of the ITA, 1961 disregarding the fact that, investments in various companies are made by the appellant from it's own funds. 4. The learned ClT(A)-6, Pune erred in law and on facts in sustaining the disallowance of weighted deduction of Rs. 1,01,95,807 claimed by the appellant u/s 35(2AB) relating to in- house R & D expenditure incurred. Appellant contends that once bonafide genuine R & D expenditure is incurred in an approved in-house R & D unit, the same qualifies for weighted deduction u/s 35(2AB) ipso facto, without any restrictions. 5. The appellant craves, leave to add / modify / delete all or any of the grounds of appeal
2. Grounds No. 1 to 3 pertain to the disallowance u/s 14A of the Act, 1961 (hereinafter referred to as “the Act”). The brief facts in respect of these grounds are that the assessee had earned a dividend of Rs. 17,10,80,221/- which is Forbes Marshall Pvt. Ltd. A.Y. 2013-14 fully exempt. The assessee-company has disallowed an amount of Rs. 30,000/- u/s 14A of the Act in the computation of income. The ld. A.O holding that the primary source of funding of these shares are out of the OD account of the bank and CC account which are interest bearing funds invoked Rule 8D for working out the disallowance u/s 14A of the Act. He arrived at a disallowance of interest amount of Rs. 9,89,827/- under Rule 8D clause (2) sub-clause (ii) and Rs. 7,90,707/- under rule 8D clause (2) sub-clause (iii). After giving consideration to the disallowance by the assessee himself of Rs. 30,000/- the ld. A.O worked out the disallowance of Rs. 17,50,534/-.
3. Before the ld. CIT(A) the assessee has submitted that there was no specific report by the A.O before invoking disallowance u/s 14A of the Act. Secondly, the investments by the assessee were made from its own funds since the own funds were much more than the amount of investments made during the year. The ld. CIT (A) did not agree with the submission of the assessee and has stated at para 5.2.2 in his order that the assessee was unable to demonstrate through evidence that on the date of investments, there were adequate own funds in the account. Furthermore, the assessee had relied on certain judicial decisions which the ld. CIT (A) has distinguished and had ultimately upheld the disallowance made by the ld. A.O.
4. We find from records with regard to the disallowance under Rule 8D clause (2) sub-clause (ii), on perusal of balance sheet of the assessee for financial year 2012-13 relevant to A.Y. 2013-14, the total reserve and surplus is at Rs. 2,09,23,12,697/- whereas investments were at Rs. 16,91,01,526/-. Therefore, it is evident that the assessee had surplus funds for making investments and as held in the case of Reliance Utilities Ltd. (2009) 313 ITR 340 (Bom) where if own funds are more than the investments then it has to be presumed that such investments have been made from own funds. Further,
Forbes Marshall Pvt. Ltd. A.Y. 2013-14 in the case of assessee for A.Y. 2008-09 and 2011-12 in and 353/PUN/2017 for A.Y. 2008-09 and 2011-12, this issue has been dealt with by Pune Tribunal wherein it has been held as follows; 4.1 With regard to the disallowance u/s.14A r.w.r. 8D(2)(ii), the Ld. Counsel for the assessee took us to the relevant paragraph of the decision of the Co- ordinate Bench of the Tribunal, Pune in (supra.) and the relevant paragraphs is extracted as follows: “11. We have carefully considered the rival submissions, orders of the authorities below and perused various case laws cited. To begin with, We find that it is an admitted position that no expenses directly attributable to the earning of dividend income has been quantified as per Rule 8D(2)(i) of the Rules. Secondly, proportionate disallowance has been made towards interest expenses attributable to the average investments held by the assessee as per formula laid down in Rule 8D(2)(ii) of the Rules. The plea of the assessee is that non-interest bearing own funds as source far exceeds the corresponding application of funds toward investments. In the circumstances, the contention of the assessee that investment in shares cannot be said to be out of borrowed funds on which the interest expenditure has been incurred is well founded and deserves to be accepted. Mere utilization of OD / CC accounts for routing payment towards investment shares by itself has no consequence as such. The payment out of these overdrafts account is only a way of making payment. The overall position of interest-free funds, borrowed funds, etc. qua the corresponding investments yielding tax-free income is a relevant factor need to be borne in mind. It is not the case of the Revenue that any direct expenses including interest expenses have been incurred. The principle governing the case has already been laid down by the Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra). We are also squarely governed by the direct decision of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. reported in (2014) 366 ITR 505 (Bom), wherein the Hon’ble High Court categorically held that in-principle, if there are funds available both interest-free and interest bearing, then a presumption would arise that investment would be out of interest-free funds generated or available with the assessee, if the interest-free funds were sufficient to meet the investments. Hence, in the light of the aforesaid discussion, disallowance of Rs.3,59,897/- retained by the CIT(A) under Rule 8D(2)(ii) of the Rules is not sustained in law and is therefore directed to be deleted. Thus, on this count, assessee succeeds.”
The Ld. DR for the Revenue has placed reliance on the orders of the Sub- ordinate Authorities.
We have perused the case records and heard the rival contentions. We find that this issue has been decided in favour of the assessee in assessee's own case in ITA No.1031/PN/2013 (supra.). The assessee submitted regarding availability of funds and statement is given at the time of hearing. In the interest of justice, we deem it appropriate to restore the matter to the file of the Assessing Officer to examine the issue in the light of the decision of the Co- ordinate Bench of the Tribunal in assessee's own case (supra.) whether funds are available or not with the assessee and subject to the availability of funds, the Forbes Marshall Pvt. Ltd. A.Y. 2013-14
disallowance u/s.14A r.w.r.8D(2)(ii) should be allowed to the assessee. This part of the ground raised in appeal by the assessee is allowed.”
5. Therefore, on perusal of the balance sheet of the assessee where funds are much more than the investments, following the same parity of reasoning as had been held by the Co-ordinate Bench in assessee‟s own case (supra), the disallowance u/s 14A r.w.s. 8D clause (2) sub-clause (ii) is deleted.
6. However, with regard to the disallowance as per Rule 8D clause (2) sub- clause (iii), the said disallowance has been upheld by the Pune Tribunal by observing as under:
“ 7. With regard to the disallowance u/s.14A r.w.r 8D(2)(iii), the Ld. Counsel took us to the relevant paragraph of the decision of the Co-ordinate Bench of the Tribunal, Pune in (supra.) and the relevant paragraph is extracted as follows: “12. As regards the next limb of disallowance carried out under Rule 8D(2)(iii) of the Rules, we find that the assessee itself has made a disallowance of Rs.35,007/- being one month salary of its Accountant towards estimated expenses attributable to the tax-free income. Thus, admittedly, certain expenditure is accepted to have been incurred by the assessee. It is the quantum of estimation which is subject matter of dispute. Statutory framework provides that Rule 8D(2)(iii) of the Rules will come into play when essentially there is certain amount of expenditure which can be said to have been incurred by the assessee for which quantification of exacting standards are not possible. Rule 8D(2)((iii) provides statutory formula for computation of disallowance to cover up probable indirect administrative expenses relatable to tax free income. The assessee has not given any scientific basis for arriving at its own estimation. Ostensibly therefore, preference needs to be given to statutory formula over the ad-hoc estimation made by the assessee. The onus lay upon the assessee to prove the quantum of expenditure incurred in earning the tax-free income which remains un-discharged.
Accordingly, we decline to interfere with the disallowance sustained by the CIT(A) under Rule 8D(2)(iii) of the Rules which is quantified at Rs. Rs.3,10,668/-. Thus, on this count, the plea of the assessee fails.” It is evident from the above, this disallowance has been confirmed by the Co-ordinate Bench of the Tribunal, Pune and therefore, respectfully following the same parity of reasoning, disallowance u/s.14A r.w.r.8D(2)(iii) is hereby sustained. This part of the ground raised
by the assessee is dismissed.”
7. In the aforestated decision the Tribunal observed that the assessee itself had made a disallowance of Rs. 35,007/- and admittedly accepted that certain expenditure have been incurred by the assessee. Reverting to the facts of the Forbes Marshall Pvt. Ltd. A.Y. 2013-14 present case, the assessee itself has made a disallowance of Rs. 30,000/- u/s 14A of the Act and admittedly accepted to have incurred certain expenditure. Therefore, the facts being absolutely similar and identical with the aforestated case, we hold that the disallowance u/s 14A r.w.s. 8D clause (2) sub-clause (iii) is upheld. This part of the ground raised by the assessee is dismissed. Grounds No. 1 to 3 are partly allowed.
8. In Ground No. 4, the assessee is challenging sustenance of the disallowance of weighted deduction of Rs. 1,01,95,807/- claimed by the assessee u/s 35B clause (2AB) of the Act relating to in-house R & D expenses.
The brief facts of the case are that the assessee had claimed deduction of Rs. 6,41,38,046/- u/s 35(2AB) of the Act in respect of the approved in-house Research and Development facility. The assessee-company had received approval of DSIR in respect of R & D expenditure pertaining to financial year 2012-13 relevant to assessment year 2013-14 only on 06-02-2016. The approval in Form No. 3CL reveals that DSIR has restricted the expenditure to Rs. 454.81 lacs as against Rs. 556 lacs claimed by the assessee. The DSIR did not approve the capital R & D expenditure of Rs. 84.61 lacs and the revenue expenditure of Rs. 17.34 lacs claimed by the assessee. Thus the total expenditure which has been approved by DSIR was Rs. 101.95 lacs. As the assessee claimed weighted deduction on this amount, the A.O has disallowed weighted part of the expenditure and allowed 100% of revenue to the extent of Rs. 17.34 lacs u/s 35 clause (1) sub-clause (i) of capital expenditure of Rs. 84.61 lacs u/s 35 clause (1) of clause (iv). The assessee has submitted before the Revenue authorities with respect to this issue that there has been an amendment under Rule 6 w.e.f. 01-07-2016 and the amended Rule 6 has given power to DSIR authorities to quantify the expenditure in form No. 3CL for the Forbes Marshall Pvt. Ltd. A.Y. 2013-14 claim of weighted deduction u/s 35(2AB). The assessee claimed that this power of quantifying the expenditure was not available with the DSIR authorities prior to 01-07-2016 amendment. Thus, relying on this amendment, the assessee argued that there was no requirement of quantification by the DSIR authorities for making the claim u/s 35(2AB) of the Act as long as research facility is approved by them. Therefore, what the assessee contends was that after the amendment from 01-07-2016, approval of DSIR was required along with registration under DSIR. However, prior to 01-07-2016 only registration with DSIR was required and there was no requirement of any approval. This argument was not accepted by the ld. CIT(A) and according to him at para 6.3.2, the CIT(A) held that the prescribed authority i.e. DSIR had the mandate to approve expenditure even before 01-07-2016.
Before us, the ld. Counsel for the assessee apart from reiterating the submissions made before the subordinate authorities placed reliance on the decision of the Co-ordinate Bench Pune in and 1272/PUN/2018 for A.Y. 2013-14 and 2014-15 in the case of M/s. KPIT Technologies Ltd. Vs. DCIT, order dated 18-10-2019, wherein it was observed and held as follows:
Simply put, the facts of the ground are that the assessee claimed weighted deduction u/s.35(2AB) of the Act amounting to Rs.3,67,88,233/-. The AO observed that the DSIR (Department of Scientific and Industrial Research), New Delhi, which is an approving authority approving weighted deduction, reduced such claim to Rs.3,32,20,276/-. The AO, therefore, disallowed the deduction of such R&D expenses of Rs.35,67,957/-. This resulted into disallowance of weighted deduction at Rs.71,35,914/-, being, 200% of the amount of expenditure incurred. The ld. CIT(A) sustained the disallowance.
Having heard both the sides and gone through the relevant material on record, it is noted that section 35(2AB), at the material time, provided for weighted deduction on the basis of report to be submitted in Form 3CL read with Rule 6 of the Income-tax Rules. Clause (b) of Rule 6(7A), at the relevant time provided that: “The prescribed authority shall submit its report in relation to the approval of in- house Research and Development facility in Form 3CL to the Director General (Income Tax Exemptions) within sixty days of its granting approval”. An amendment was carried out to clause (b) of Rule 6(7A) w.e.f. 01-07-2016 providing that “The prescribed authority shall furnish electronically its report,- (i) in relation to the approval of in-house Research and Development facility in Part A of Form No. 3CL; (ii) quantifying the expenditure & 1272/PUN/2018
Forbes Marshall Pvt. Ltd. A.Y. 2013-14 M/s. KPIT Technologies Limited 7 incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Act in Part B of Form No. 3CL”. Simultaneous with the amendment in Rule 6(7B), an amendment was also made to Form 3CL. Whereas the earlier Form, being, the Report to be submitted by the prescribed authority to the Director General (IT Exemptions) u/s.35(2AB), talked of recognition granted by DSIR to the in-house Research and Development Centre of the company, the amended Form 3CL, pursuant to amendment in Rule 6(7A)(b), bifurcated the report into two parts, namely, Part-A containing one-time recognition by the DSIR and Part-B containing year-wise details of the expenditure incurred and approval. When we consider the position prevailing as per Rule 6(7A) and Form 3CL before and after the amendment w.e.f. 01-07-2016, it becomes manifest that in the pre-amendment period, the requirement was only for registration with DSIR and not to the grant of the year-to- year approval of the amount spent on Research and Development by a company qualifying for weighted deduction. Such an amendment came into force only from 01-07- 2016, by virtue of which the claim of the assessee for weighted deduction became subject matter of examination by the DSIR and resultantly the AO, on year to year basis. Since it is the position prevailing in the pre-amendment era which governs the years under consideration, once the assessee has been registered and other necessary requirements have been satisfied, the entire amount spent on Research and Development qualifies for weighted deduction u/s.35(2AB) irrespective of the fact that some amount was not approved by the DSIR. Actual amount spent on research and development vis-à-vis the approval by the DSIR on year-to-year basis, entitling the assessee to the weighted deduction, has become relevant only after the amendment carried out from 01-07- 2016. Since it is not the case of the AO that the assessee did not fulfill all other relevant conditions, we hold that it is entitled to weighted deduction for the full amount of the expenditure incurred on Research and Development irrespective of the fact that a part of the amount so incurred was not approved by the DSIR.”
In the aforestated decision, the Tribunal has held that the assessee was entitled to weighted deduction for the full amount of expenditure incurred on research and development and that the approval by DSIR from year to year basis entitling the assessee for weighted deduction has become relevant only after the amendment carried out from 01-07-2016. The Tribunal also observed that it was not the case of the A.O that the assessee did not satisfy all other relevant conditions and since the present facts pertain to pre-amendment era, the entire amount spent on research and development quantify for weighted deduction u/s 35B clause (2B), irrespective of the fact that whether the same was approved by the DSIR. Reverting to the facts of the present case before us, it pertains to A.Y. 2013-14 i.e. pre-amendment era and in this case it is undisputed that the expenditure was incurred by the assessee. It is also undisputed that the assessee is registered with DSIR. The question of getting approval from DSIR is well explained in the aforesaid judgment of the Tribunal
Forbes Marshall Pvt. Ltd. A.Y. 2013-14 that prior to 01-07-2016 only registration with DSIR was required which the assessee which the assessee has complied with. Respectfully following the aforestated order of the Tribunal we set aside the order of the CIT(A) on this issue and allow this ground of appeal raised by the assessee. Ground No. 4 stands allowed.
In the combined result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on this 11th August 2022.