ACIT 6(2)(1), MUMBAI vs. CROMPTON GREAVES LIMITED, MUMBAI

Apropos ground no.1, the Assessing Officer (‘A.O.’, for short) noted, after verifying Form Nos. 3CM and 3CL concerning the deduction claimed by the assessee u/s. 35(AB) of the Income Tax Act, 1961 (‘the Act', for short), that the eligible amount, as noted by the Department of Scientific and Industrial Research (‘DSIR’ for short), in Form No. 3CL was less as compared to the deduction claimed by the assessee. The A.O. made the disallowance of Rs.42,52,032/- on this basis. The ld. CIT(A) has confirmed the assessment order on this score, by observing as follows:

The ld. Counsel of the assessee has contended that the ld. CIT(A) has erred in confirming the disallowance wrongly made by the A.O., without appreciating that the assessee was eligible for weighted deduction based on the Auditor’s certificates and the tax audit report; that alternatively and without prejudice, the assessee had incurred the expenditure on Scientific Research in the in-house, Research and Development facility approved by the prescribed authority, being the department of Industrial and Scientific presently discussing.

The ld. Departmental Representative (ld. DR for short), on the other hand, has placed strong reliance on the impugned order. It has been contended that the ld. CIT(A) has correctly undone the A.O.’s action of denying the assessee’s weighted deduction of Rs.42,52,032/-, including the amount of Rs.28,34,688/-, being the actual expenditure incurred @ 100% of the expenditure u/s. 35(1)(iv) of the I.T. Act; that the eligible expenditure, as per the DSIR, in Form No. 3CL was lower as compared to the amount claimed by the assessee; that the DSIR had not given any reason in support of its action; that as per the DSIR Regulations, the prescribed authority would pass an order after verification of the expenditure; that the assessee had not furnished the reasons for the DSIR’s action and no objection had been filed; that the ld. CIT(A) has correctly distinguished the decision of the Ahmedabad Tribunal in the case of Torrent Pharmaceuticals Ltd (2009) 28 CCH 781 (Ahd); that it remains undisputed that the DSIR had not given any reason in support of its action; that the extent of the expenditure was never verified by the A.O.; that the assessee also has not pointed out as to which expenditure was not considered by the DSIR; that in these facts, the ld. CIT(A) cannot be said to have faulted in holding that it cannot be ascertained as to whether the expenditure was properly vouched or not; that it is also unclear as to why the DSIR did not allow the claim of the expenditure as made by the assessee; that, therefore, as correctly held by the ld. CIT(A), Torrent Pharmaceuticals Ltd. (supra) was rightly held to be inapplicable to the facts of the present case.

It is the claim of the assessee that this expenditure was deductible u/s.35(2AB) of the Act in computing the total income @ 150% of the actual expenditure. The expenditure was incurred for the Kanjurmarg unit of the company; rather, the unit stood approved by the DSIR, in Form No. 3CM, as on 28.08.2008 (APB, pg. 88), as per the requirements of section 35(2AB) of the Act for the period from 01.04.2007 to 31.03.2009. The assessee’s Auditor duly certified the genuineness of such expenditure and its eligibility for weighted deduction u/s. 35(2)(AB), as available at APB pgs. 93 to 100, as also by the tax auditor, as evident from APB pgs. 91 ^92.

It was the action of the DSIR in issuing Form No. 3CL (APB pgs. 89 & 90), dated 24.08.2010, quantifying the eligible expenditure at Rs.11,04,63,000/-, as against that of Rs.11,32,97,688/-, resulting in a difference of Rs.28,34,688/-, which prompted the A.O. to make the disallowance in question.

It is seen that as rightly contended on behalf of the assessee, section 35 of the Act grants deduction for Scientific Research expenditure, under the circumstances prescribed

Now, whereas in some cases, like those coming under the provisions of sections 35(1)(i) and 35(2AB), a specific approval of quantum of expenditure, by the prescribed authority, is the pre-requisite for deduction, the provisions of section 35(2AB) requires approval for Units and not approval for the quantum of expenditure. For ready reference, section 35(2)(AB) reads as under:

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.

Then, as observed by the Ahmedbad Bench of the Tribunal in the case of Sun Pharmaceutical Industries Ltd. Vs. Pr.CIT (2017) 162 ITD 484 as approved by the Hon’ble Gujarat High Court vide its decision reported at 250 taxmann 270, it has been held that the objective of Form 3CL is limited to the forwarding of the intimation of the approval of the unit; that Form No. 3CL is a mere report for intimation of approval of R & D facility. In this regard, as rightly pointed out, such aspect stands confirmed by sub- rule (7A) of Rule 6 of Income Tax Rules, as within subsisting (now amended w.e.f.

It would also be apt to reproduce here-under the provisions substituted in clause (b) of sub rule (7A) of Rule 6, as brought in by the amendment effective from 01.07.2016 as above: “The prescribed authority shall furnish electronically its report,- (i) in relation to the approval of the in-house research and development facility in Part A of Room No. 3CL; (ii) quantifying the expenditure 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 Income Tax Act, 1961 in Part B of Form No. 3CL.” report in relation to the approval of in-house facility and development facility in Form No. 3CL to the Director General (Income-tax Exemptions) within sixty days of its granting approval.”

The year under consideration is A.Y. 2009-10 and, for this year, the amendment was not applicable. Therefore, the assessee is right in contending that the non approval of the expenditure claimed by CSIR did not entitle the A.O. to make the disallowance and the ld. CIT(A) to confirm the same.

The assessee is found correct in contending that the ld. CIT(A) has observed that the extent of the expenditure was never verified by the A.O. Thus, according to the assessee it goes to confirms that the A.O. disallowed the claim without due application of itself, wherein the ground for the disallowance was the non approval of the expenditure claimed by the DSIR.

On behalf of the assessee, another contention has been raised, that the ld. CIT(A) is wrong in observing that during the remand proceedings, the assessee has not objected to the action of the A.O. in making the disallowance u/s. 35(2AB). This, it has been emphasized, that the assessee had always objected to the disallowance before the A.O. as well as the ld. CIT(A). The attention in this regard has been drawn to the grounds taken by the assessee and the submissions raised by the assessee before the ld. CIT(A). It has further been submitted that in the remand proceedings, qua this issue, no enquiry whatsoever had been made by the A.O., notwithstanding the fact that the remand proceedings were proceedings where the assessee was required to press his claim afresh, which could have only be done by way of objecting to the action of the A.O.

Be that as it may, the disallowance stands objected to by the assessee before us, which issue we have answered in the preceding paragraphs.

So far as regarding ground no. 2, the A.O. did not allow the deprecation to the assessee on higher revised opening WDV of the building, which, as per the assessee was required to be increased, by revising it on account of disallowance of depreciation in the stands allowed by the tribunal vide order (APB pgs. 109 to 111) passed in ITA No. 5295/Mum/2017.

The ld. CIT(A), by virtue of the impugned order, directed the A.O. to allow the claim for the depreciation on revised opening WDV, rather than, granting the relief to the assessee himself.

The grievance of the assessee is that the A.O. disputed the directions of the ld. CIT(A), while passing the order (APB pg. 286) dated 08.02.2018, for giving effect to the ld. CIT(A)’s order, failed to upwardly revise the opening WDV and to allow the higher depreciation to the assessee. The department, per contra, has placed strong reliance on the A.O.’s order dated 08.02.2018, besides relying on the assessment order.

Here, it is seen that the assessee claimed deprecation on a part of the building, i.e., 84%, which become disallowable for the period from A.Y’s 2004-05 to 2007-08. Since such disallowance was confirmed by the ITAT, as such, the aggregate amount, to the extent of 84% of the amount disallowed by the A.O. i.e., 100% was required to be added to the WDV of the building, as on 01.04.2008, for the year under consideration, this come to an amount of Rs.1,90,42,120/-. Since the tribunal order for A.Ys. 2004-05 to 2007-08, confirming the disallowance, came to be passed on 28.03.2012, in the return of income filed by the assessee on 28.09.2009, it had not been possible for the assessee to have adjusted the opening WDV for claiming higher depreciation. It was under such circumstances, that the claim was made by the assessee in the assessment, which was contention of the assessee was not acceptable, as the assessee had not made such claim in the return of income, nor had such claim been made in the assessment proceedings.

The ld. DR has placed reliance on the assessment order in this regard. However, it has been submitted that the ld.CIT(A) has erred in deleting the addition without appreciating the fact that the assessee company has been showing wrong income from the building called CG house, as business income and claiming depreciation on a part of that building, utilized by the assessee, which claim was never made in the return of income filed by the assessee; and that the ld. CIT(A) has erred in entertaining the fresh claim of depreciation on CG house, whereas the ld. CIT(A) has no power to do so, as held by the Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT (2006) 284 ITR 323 (SC).

In his counter, the ld. Counsel of the assessee has argued that the ld. CIT(A) has correctly observed that part of a building CG house was utilized by the assessee for the purpose of its business; that the A.O. having bifurcated the income, there was no need remaining for the claim of the depreciation to have been made; and that the A.O. ought to have allowed higher depreciation to the assessee on upwardly revising the opening WDV, as directed by the ld. CIT(A). It has further been pleaded that since the ITAT order for A.Ys. 2004-05 to 2007-08 is dated 28.03.2012, whereas the assessee filed its return of income on 28.09.2009, there was no occasion for the assessee to have adjusted the opening WDV for claiming the higher depreciation in the return of income itself. assessment orders for these years, is dated 28.03.2012, which falls much later within the date of the filing of the return by the assessee, i.e., on 28.09.2009, cannot be disputed.

Coming to the ground no. 3, the A.O. noted that the assessee had claimed exempt income of Rs.1,34,47,794/-. However, no disallowance u/s. 14A of the Act had been made in the computation of the income. The A.O. considered the assessee’s explanation that it had not incurred any expenditure for earning the exempt income. However, the A.O. rejected the same, relying on Dhanuka and Sons 339 ITR 319 (Cal), wherein it was held that the assessee has to show the source of acquisition of shares by producing the material that the shares are acquired from funds available in the hands of the assessee at the decision of the Hon'ble Jurisdictional High Court in the case of Godrej Agrovet Ltd. (Mum.), which is to the fact that Rule 8D of the Rules is applicable from A.Y. 2008-09.

Challenging the order passed by the ld. CIT(A) on this issue, the ld. Counsel of the assessee has contended that the ld. CIT(A) has erred in confirming the disallowance in respect of Rule 8D(2)(iii) being one half percentage of average value of investments, the income from which does not form part of the total income of the assessee; that the ld. CIT(A) has confirmed the disallowance based on the inference that the assessee has incurred administrative expenses which were composite and divisible and that, hence, the provision of Rule 8D(2)(iii) were applicable; that the assessee had submitted the amount of actual expenditure incurred for earning the exempt income, and that the disallowance ought to be restricted to the same in terms of section 14(1) of the Act, without referring to assessee company has not incurred any expenditure for earning the exempt income which is directly credited electronically to the bank account of the company and the investment is managed by the Managers of Mutual Funds, to whom the payment is made by the fund and not by the company; that the expenditure debited to the profit and loss account has been directly incurred for the purpose of earning taxable income in relation to that in the alternative, the disallowance should be restricted to the amount of salary of the treasury Manager, Shri Prashant Baliga, who alone, at the most, could have been said to have looked after the investments, that the salary paid to him for the year amounted to Rs.7,91,181/-; that the investments did not require any expenditure because the investments in subsidiaries is a onetime investment and did not need any expenditure to maintain it; that it was a legacy investment. Reference in this regard has been made to Nice Bombay Transport (P.) Ltd. v. ACIT (OSD) (2019) 175 ITD 684 (Delhi)(Trib.). It has further been contended that a good part of the investments, upto Rs.92.25 crores was made in the past and it included investments in shares of substitute that did not require expenditure; that the investments were mainly in the units of the mutual funds, maintained by the fund Manager of the mutual funds and, therefore, staff members and the assessee was not required to incur any expenditure on the maintenance of the investments; that it was the responsibility of mutual funds to monitor and maintain the investments and the assessee had not say whatsoever in the said activity; that the income, if any, was directly credited to the bank accounts of the assessee electronically and it did not require the incurrence of any expenditure. Reliance has been placed on Gillette Group India (P.) Ltd. 16 ITR (T) 57 (Del), wherein it was held that the disallowance u/s. 14A of assessee contends that it had given the details of the expenditure incurred to establish that such expenditure was incurred for the assessee’s business purposes only and that it was fully allowable. In the alternative, the assessee submits that the expenditure disallowance should be restricted to the amount of salary of the Treasury Manager, namely, Shri Prashant Baliga, who look after the investments for the company, incidentally as a part of his overall treasury work and was paid on a salary of Rs.79,11,811/-. Here, the ld. Counsel of the assessee has relied on the following decisions:

As a without prejudice argument, the assessee states that the average investments of Rs.128.54 crores, adopted by the A.O./ld. CIT(A) should be reduced by following:

As a further alternative, the assessee averse that the average investments of Rs.128.54 crores adopted by the A.O. for applying sub clause (iii) of Rule 8D(2) should income was received during the year (reliance placed on Maxopp Investment Ltd. 402 ITR 640 (SC), Vineet Investments Private Ltd. 188 ITD 1 (Del.)(SB), Reliance Natural Resources Ltd. 166 ITD 385 (Mum.)); then, it has been requested that the investments should be reduced by those in subsidiaries, aggregating to Rs.163.62 crores including the investments in foreign subsidiary, amounting to Rs.101.33 crores considered to be strategic and excluded from average investment as per tribunal’s order (APB pg. 162) for A.Y. 2008-09, it has also been stated that the investment in foreign subsidiary, amounting to Rs.101.33 crores, on which no exempt income was possible and the income, if any, was taxable; that the total investment of Rs.62.29 crores in Indian subsidiary did not produce any exempt income for the year under consideration, that average investments of Rs.18.89 crores in debt funds, on which the capital gain was taxable and it was to be excluded from the average investments. A working in this regard, on the basis of the revised average investments has been filed.

It has next been contended that since the A.O. had recorded no finding that expenditure was incurred for earning exempt income, no disallowance under the provisions of section 14A could have been made, whereas in fact, the assessee has not incurred any expenditure whatsoever in computing the dividend income claimed exempt from tax; that this fact, as submitted by the assessee before the A.O. during the assessment proceedings, stands duly recorded in paragraph 11 of the assessment order; that nowhere in the assessment order has the A.O. has observed/recorded, having identified any expenditure incurred for earning exempt income; that there be thus, the the absence of a clear finding of incurring of expenditure for earning the exempt income, no disallowance u/s. 14A is called for. Following decisions have been relied on:

It has also been urged on the basis of the assessee that the A.O. did not establish any nexus between the borrowed funds and the investments and that instead of he erroneously assumed that such investments were made wholly out of borrowed funds; that as such, the disallowance requires deletion. Reference has been made to these decisions:

The ld. Counsel of the assessee has contended that last but not the least, without prejudice, the disallowance ought to be, if at all, sustained to the expenditure actually incurred, which is an amount of Rs.7,91,181/- paid as salary to the treasury Manager. For this, reliance has been placed on Gillette Group India (P.) Ltd. (supra).

On the other hand, the ld. DR placing heavy reliance on the order under appeal on this issue, has contended that it has not been disputed that the assessee has claimed various administrative expenditure, or that the assessee has not maintained separate books infact incurred; that the administrative expenses incurred by the assessee are composite and indivisible and interlinked. That the A.O. invoked the provisions of section 14A(ii) of the Act r/w Rule 8D(iii) of the Rules, which action cannot be faulted; that the disallowance so worked out at the amount of Rs.64 lacs and as confirmed by the ld. CIT(A), therefore, required to be upheld; there being no merit in the grievance sought to be raised by the assessee in this regard.

Here it is seen that the A.O. made the disallowance in question for the reason that in a case where the business is a sole indivisible business, whether taxable as well as exempt income accrue, section 14A gets triggered for disallowing the direct and indirect expenditure incurred in relation to income which did not form part of total income. The A.O. placed reliance on Dhanuka and Sons (supra), even in the remand report, the action of disallowing the expenditure was supported. The ld. CIT(A) confirmed the disallowance, observing that no separate books of account for the investment activity stood maintained by the assessee and since the expenditure was composite with indivisible, it was necessary to apportion it in accordance with the provisions of Rule 8D of Rules, disallowing the part thereof.

Be considered, it does not stand disputed hitherto that the assessee has all through maintained that no expenditure was incurred to any exempt income. The burden in this regard is that no separate books of account stood maintained, due to which, there was no substantiation of this stand of the assessee. The assertion of the assessee that except for earning the exempt income is, as a practice, directly credited electronically to the bank who make the payment directly and manage the investments, has nowhere been rebutted by either of the authorities below or even before us. It has not been called any question that the activity of investment did not require any expenditure.

So far as regards to ground nos. 1 & 2, these grounds correspond to, or are relate to ground no. 2 taken in the assessee’s appeal. In view of the findings recorded by us while dealing with ground no.2 of the assessee’s appeal, ground nos. 1 & 2 raised by the department in the present appeal, no longer survives, they are accordingly rejected.

Concerning ground no.3, the ld. DR has contended that the ld. CIT(A) has erred in deleting the disallowance correctly computed by the A.O. under Rule 8D(2)(ii) of the Rules, amounting to Rs.72 lacs; that in this regard, the ld. CIT(A) has erred in holding that the provisions of Rule 8D(2)(ii) are not applicable; that in doing so, the ld. CIT(A) has failed to appreciate the fact that firstly, the assessee had failed to substantiate its assertion before the A.O.; that no interest bearing funds had been utilized, and that the investments had been made exclusively out of the revised funds owned by the assessee. regard also, the tribunal order (APB pgs. 152-163). The assessee’s case for A.Y. 2008-09 has been pressed into service.

A sum of Rs.72 lacs was disallowed by the A.O. under the provisions of section 14A of the Act read with Rule 8D(2)(ii) of the Rules. The ld. CIT(A) deleted the disallowance, observing as under:

Before us, the decisions of the Hon'ble Jurisdictional High Court in the case of SBI DHFL Ltd. (2015) 376 ITR 296 and Commissioner of Income-Tax Vs. HDFC Bank Limited 11 (2014)366 ITR 505(Bom) though not been controverted at the hands of the assessee, much less successfully, wherein, the Hon'ble Jurisdictional High Court has held to the fact that it would be presumed that the investments to the extent of the owners funds or out of interest free funds and that no disallowance u/s.14A read with Rule 8D(2)(ii) can be made. However, on facts similar to those doing the rounds for the year under consideration, in the assessee’s own case, for A.Y. 2008-09, the tribunal vide this order dated 17.10.2014 passed in has held that the investments in shares of the subsidiary companies shall not be included in the value of the average investments for the purpose of Rule 8D. This decision of the tribunal has also not been proceedings.

In view of the above, this issue is also sent back to the file of the A.O. to be re- decided in accordance with the law, particularly in light of SBI DHFL Ltd. (2015) 376 ITR 296 and Commissioner of Income-Tax Vs. HDFC Bank Limited 11 (2014)366 ITR 505(Bom) and the tribunal’s order in (supra) dated 17.10.2014 in assessee’s own case for A.Y. 2008-09. Ground no. 3 taken by the department is decided in accordance with these observations.

Lastly, insofar as regards to ground nos. 4 & 5, the ld. DR has contended that the ld. CIT(A) is directing the A.O. to allow the fresh claim of the assessee concerning the dividend income (u/s.10(35) of the Act); that this claim had not been made by the assessee while filing the return of income; the ld. CIT(A) has failed to appreciate that this additional claim involved afresh examination of the fact as to whether the dividend from the mutual fund is related to Equity Oriental Mutual Funds or Debt Oriented Mutual Funds; that the ld. CIT(A) has also erred in admitting the additional evidence in direct infractuous of Rule 46 of the I. T. Rules, such additional evidence being the claim of the assessee on account of dividend income u/s. 10(35) of the Act; that the ld. CIT(A) also erred in partly allowing the claim of debt compensation upto Rs.12,25,000/-, as against the assessee’s claim of Rs.13,96,668/-, which itself shows that the fresh examination of facts was the prerequisite for such allowance; that on account of such allowing the assessee’s claim concerning the debt compensation, again the ld. CIT(A) has erroneously violated the provisions of section 46A of the Income Tax Act, 1961. made by the ld. CIT(A), as under :

Ground no 9 of the appeal: The ground no 9 of the appeal relates to the non granting of credit to the TDS certificate to the extent of Rs 70,33,561. The assessment order is silent on the issue of granting of TDS certificate. Therefore, AO is directed to verify the claim of TDS and allow the same as per Act. Ground no 9 of the appeal is partly allowed.

So, evidently, the claim made by the assessee cannot be shut out, in view of the Hon'ble Supreme Court decision in the case of Goetze (India) Ltd. v. CIT [2006] 284 ITR 323 (SC), as considered by the Mumbai ITAT in the case of APL India(L) Ltd 58 SOT 41 (URO) (Mumbai) and also referred to in the decision of the ITAT Cochin in the case of Apollo Tyres 60 SOT 1 (Cochin), holding that the appellate authorities are not debarred to entertain the fresh claim. No decision contrary to the said decisions, as referred to by the ld. CIT(A) amongst others. Therefore, it cannot be said that the ld. CIT(A) committed any error in entertaining the claim made by the assessee. The ld. CIT(A) has correctly adjudicated the matter in not finding any error therein, the same is confirmed.