SUPER SEEDS PVT. LTD.,AHMEDABAD vs. THE DCIT, CIRCLE-4(1)(1), AHMEDABAD

आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-

This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-8, Ahmedabad in Appeal no. CIT(A)-8/10358/17-18 vide order dated 03/02/2020 passed for the assessment year 2015-16.

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“1. The Ld. CIT Appeals 8 Ahmedabad has erred in law and on facts in passing appellate order dated 03/02/2020 for A.Y. 2015-16 in the case of appellant by confirming additions of Rs. 18.93 lakhs u/s. 35 (2AB). Rs. 5,85,170/-

The appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal on or before of the final hearing of appeal

Total tax effect (see note below) Rs. 6,13,355/-”

Ground No. 1 ( CIT(A) erred in law in confirming addition of Rs. 18.93 lakhs u/s. 35(2AB) of the Act

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proceedings. Accordingly, the Assessing Officer disallowed 100% expenditure claimed in the computation amounting to Rs. 62,55,749/- u/s. 35(2AB) of the Act. The assessee filed appeal before CIT(A) and submitted Form 3CL before CIT(A). The assessee submitted that the reason for non- filing of form 3CL was that same was lying with the accountant of the assessee, but he had to leave on urgent basis due the causality in the family. Accordingly, form 3CL could not be submitted during the course of appellate proceedings. Further, the assessee submitted before Ld. CIT(A) that copy of the DSIR report was also forwarded to the Chief Commissioner of Income Tax (Exemption), New Delhi by DSIR directly which fact also proves that DSIR had approved the expense by the said Report. In view of the submissions by the assessee, CIT(A) accepted Form 3CL in appellate proceedings and gave part relief to the assessee on the basis of approved amount mentioned in form 3CL. While passing the order, the CIT(A) made the following observations:

“13.3.1 Considering the fact that the approval has been given by the competent authority i.e. DSIR vide its report reproduced as above and the fact that a copy of the same has been endorsed to the Chief Commissioner of Income Tax (Exemption) and the fact that the default of the appellant being a procedural default and in view of the ratio of judgments relied upon supra, I am inclined to accept the appellant's plea. The additional evidence in the form of the report which was also forwarded to the AO is admitted. Reliance in this regard is also placed on the judgement of judgment of Hon'ble High Court of

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Gujarat in the case of CIT v. Dharamdev Finance P. Ltd. reported in (2014) 43

13.3.2 In view of the approval accorded by DSIR as required by the provisions of section 35 (2AB) of the Act, the expense to the extent of approval is restricted up to Rs.43.62 lakh the claim made in Return of Income are to be allowed as deduction under the provisions of section 35 (2AB) of the Act. However, AO has in the Remand Report stated that the veracity of the expense is not verified. In the appellate proceedings appellant contended that they were not asked to submit any other details except the 3CL report. Hence, AO is directed to verify the genuineness of the expense as approved in the form 3CL report and allow the admissible deductions restricted upto the claim made in the Return of Income as above. Related ground of appeal is partly allowed.” 4. In the result, the appeal is partly allowed.”

4.1 We observe that the Pune ITAT in the case of Cummins India Ltd. v. DCIT [2018] 96 taxmann.com 576 (Pune - Trib.) made the following relevant observations on the quantum of deduction allowable u/s 35(2AB) of the Act, while deciding the issue on identical facts in favour of the assessee:

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“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 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 Assessing Officer to look into the nature of expenditure to be allowed as weighted deduction

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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 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 / 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.”

4.2 We also note that the ITAT Pune Tribunal in the recent case of DCIT v. Force Motors 133 taxmann.com 71 (Pune - Trib.) while dealing with identical issue held that prior to amendment in 2016, section 35(2AB) of the Act does not provide any methodology of approval to be granted by prescribed authority vis-a-vis expenditure from year to year and therefore, order of Assessing Officer in curtailing expenditure and consequent weighted deduction claimed under section 35(2AB) on ground that deduction cannot exceed claims approved by prescribed authority, had rightly been set aside. The Pune ITAT, while passing the order, observed as below:

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“10. Therefore, there is categorical finding given by the Tribunal that the amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 1-7-2016, 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/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. The case before us pertains to FY 2013-14 relevant to AY 2014-15 and therefore, facts and circumstances are absolutely identical in assessee’s case also. Therefore, respectfully, following the order of the Tribunal (supra.) on the same parity of reasoning and under same set of facts and circumstances, we find no reason to interfere with the findings of the Ld. CIT(Appeal) and relief provided to the assessee is hereby sustained. Thus, grounds raised by the Revenue are dismissed.”

4.3 The Kolkota Tribunal in recent case of DCIT v. STP Ltd.[2021] 125 taxmann.com 97 (Kolkata - Trib.) held that prior to 1-6-2016, only requirement to claim deduction under section 35(2AB) was to receive recognition from prescribed authority since said recognition was obtained by assessee on 26-3-2013, deduction could not be denied merely because prescribed authority failed to send intimation in Form 3CL in respect of expenditure incurred by R&D unit for relevant assessment year.

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4.4 In the case of ACIT v. Crompton Greaves Ltd.[2019] 111 taxmann.com 338 (Mumbai - Trib.), the Mumbai Tribunal held that since the mandate of approval of quantum of expenditure had been put in place only with effect from 1-7-2016, hence, non-approval of quantum of expenditure for assessment year 2009-10 did not entitle Assessing Officer to make disallowance under section 35(2AB) of the Act. The Mumbai ITAT in the above case made the following observations:

“9. The operative phrase here is "on in-house research and development facility as approved by the prescribed authority …….", the word "facility" has been hereby show us to emphasis the point that it is the unit which requires approval of the prescribed authority under this provision. Further, in the memorandum, explaining the provision of section and the notes on the clauses issued at the time of insertion of section 35(2AB) in the Act, copies of both of which have been filed on record before us by the assessee, it has been clearly provided that the deduction would be available to the assessee's having an approved in-house R & D facility by the prescribed authority. Undisputedly, there is no mention or approval of the quantum of expenditure.

4.5 In our view, on a perusal of the various Rulings, the position is clear that prior to amendment introduced w.e.f. 01/07/2016, the deduction u/s 35(2AB) of the Act would be available to an assessee having an approved in-house R&D facility by the prescribed Authority Act and there is no mention of approval of the ‘quantum’ of expenditure in the law as it stood

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prior to that date. The mandate of quantification of expenditure has been put in place only w.e.f. 01.07.2016. In view of the above observations and judicial precedents on the subject, we allow the appeal of the assessee.

4.6 In the result, appeal of the assessee is allowed in respect of Ground Number 1.

Ground No. 2 (Addition of Rs. 91,215 out of PF/ESI expenses u/s. 36(1)(va) of the Act:

“From a plain of clause (b) of section 43B of the Act it is very clear that is no mention about the employee's contribution to PF/ESIC. It is a law that provisions always prevail over general provisions. As stated above, section 43B of the Act does not mention the employee's contribution to PF/ESI which is specifically covered by section 36(1)(va) of the Act and in the circumstances, the assessee was under obligation to the employee's contribution of PF/ESIC within due date failing which, the provisions of 36(1)(va) of the Act are attracted.

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Apart from the above, the Hon'ble Gujarat High Court held in the case of CIT Vs. Gujarat State Road Transport Corporation in ITA No. 637 of 2013 that with to the sum received by the assessee from any of his employees to which provision of Sub-clause (x) of clause (24) of Section (2) apply, the assessee shall be entitled to deduction of amount in computing the income referred to in section 28 if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the 'due date'. In view of the above, late payment of employees contribution toward Provident/ ESI of Rs. 91,215A [34,980 + 56,235] is treated as assessee's income u/s. 2(24)(x) of the I. T. Act, and fee is added to the total income. Penalty proceedings n/s. 271(l)(c) of the Act are initiated separately for furnishing inaccurate particulars of income. (Addition of Rs.91,215/-)”

“6.1 I find that the issue is squarely covered by the judgment of Hon'ble High Court of Gujarat in the case of CIT v. GSRTC [2014] 366 ITR 170 (Gujarat), this case Hon'ble High Court have comprehensively dealt with the issue. The relevant part of the judgment is reproduced as below: "7.6 Considering the aforesaid provisions of the Act, as per section 2(24)(x), any sum received by the assessee from his employees as

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contribution to any provident fund or superannuation fund or any fund set up under the provisions of ESI Act or any other fund for the welfare of such employees shall be treated as an 'Income'. Section 36 of the Act deals with the deductions in computing the income referred to in section 28 and as per section 36(1)(va) such sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section 2 apply, the assessee shall be entitled to deduction of such amount in computing the income referred to in section 28 if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the "due date" i.e. date by which the assessee is required as an employer to credit the employee's contribution to the employee's account in the relevant fund, in the present case, the provident fund and ESI Fund under the Provident Fund Act and ESI Act. Section 43B is with respect to certain deductions only on actual payment. It provides that notwithstanding anything contained in any other provisions of the Act, a deduction otherwise liable under the Act in respect of (B) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him. It appears that prior to the amendment of section 43B of the Act vide Finance Act, 2003, an assessee was entitled to deductions with respect to the sum paid by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare

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of the employees (employer's contribution) provided such sum - employer's contribution is actually paid by the assessee on or before the due date applicable in his case for furnishing return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred and the evidence of such payment is furnished by the assessee along with such return. It also further provided that no deduction shall, in respect of any sum referred to in clause (B) i.e. with respect to the employer's contribution, be allowed unless such sum is actually been paid in cash or by issue of cheque or draft or by any other mode on or before the due date as defined in explanation below clause (va) of sub-section (1) of section 36 and where such sum has been made otherwise that in cash, the sum has been realised within 15 days from the due date. By the Finance Act 2003, Second Proviso of section 438 of the Act has been deleted and First Proviso to section 438 has a/so been amended which is reproduced hereinabove. Therefore, with respect to employer's contribution as mentioned in clause (b) of section 43(8), if any sum towards employer's contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of the income under sub-section (1) of section 139, assessee would be entitled to deduction under section 438 on actual payment and such deduction would be admissible for the accounting year. However, it is required to be noted that as such there is no corresponding amendment in section 36(1) (va). Deletion of Second Proviso to section 438 vide

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Finance Act 2003 would be with respect to section 438 and with respect to any sum mentioned in section 43(8) (a to f) and in the present case, employer's contribution as mentioned in section 43B(b). Therefore, deletion of Second Proviso to section 438 and amendment in first proviso to section 438 by Finance Act, 2003 is required to be confined to section 438 alone and deletion of second proviso to section 438 vide amendment pursuant to the Finance Act, 2003 cannot be made applicable with respect to section 36(1) (va) of the Act. Therefore, any sum with respect to the employees' contribution as mentioned in section 36(1)(va), assessee shall be entitled to the deduction of such sum towards the employee's contribution if the same is deposited in the accounts of the concerned employees and in the concerned fund such as Provident Fund, ESI Contribution Fund, etc. provided the said sum is credited by the assessee to the employees' accounts in the relevant fund or funds on or before the 'due date' under the Provident Fund Act, ESI Act, Rule, Order or Notification issued thereunder or under any Standing Order, Award, Contract or Service or otherwise. It is required to be noted that as such there is no amendment in section 36(1) (va) and even explanation to section 36(1)(va) is not deleted and is still on the statute and is required to be complied with. Merely because with respect to employer's contribution Second Proviso to section 438 which provided that even with respect to employers' contribution [(section 43(B)b], assessee was required to credit amount in the relevant fund under the PF Act or any other fund for the welfare of the employees on or before the due date under the relevant Act, is deleted, it cannot be said that

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section 36(1)(va) is also amended and/or explanation to section 36(1)(va) has been deleted and/or amended.

It is also required to be noted at this stage that as per the definition of "income" as per section 2(24) (x), any sum received by the assessee from his employees as contribution to any Provident Fund or Superannuation Fund or any fund set up under the provisions of ESI Act or any other fund for the welfare of the such employees is to be treated as income and on fulfilling the condition as mentioned under section 36(1) (va), the assessee shall be entitled to deduction with respect to such employees' contribution. Section 2(24)(x) refers to any sum received by the assessee from his employees as contribution and does not refer to employer's contribution. Under the circumstances and so long as and with respect to any sum received by the assessee from any of his employees to which provisions of sub-clause (x) of sub-section 24 of section 2 applies, assessee shall not be entitled to deduction of such sum in computing the income referred to in section 28 unless and until such sum is credited by the assessee to the employees' account in the relevant fund or funds on or before the due date as mentioned in explanation to section 36(1)(va). Therefore, with respect to the employees contribution received by the assessee if the assessee has not credited the said sum to the employees' account in the relevant fund or funds on or before the due date mentioned in explanation to section 36(1) (va), the assesses shall not be entitled to deductions of such amount in computing the income referred to in section 28 of the Act."

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6.2 Keeping in view the provisions of section 2(24)(x) r.w.s. 36((1)(va) and respectfully following the judgment of Hon'ble jurisdictional High Court in the case of GSRTC (supra) the sum of Rs.91,215/- being Employees Contribution to PF & ESIC admittedly deposited in the respective accounts beyond the prescribed due dates under the relevant Act is rightly treated as income of the appellant by the AO. Thus, this ground of appeal is decided against the appellant and appeal on this ground is dismissed.”

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infirmity in the order passed by ld. CIT(A). We accordingly dismiss this ground of appeal of the assessee.

Order pronounced in the open court on 19-10-2022

Sd/- Sd/- (P.M. JAGTAP) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 19/10/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद