DCIT, CHENNAI vs. M/S. SOUTHERN PETROCHEMICAL INDUSTRIES CORPN. LTD., CHENNAI

आयकर अपील"य अ"धकरण, ’डी’ "यायपीठ, चे"नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH: CHENNAI "ी एन.आर.एस. गणेशन, "या"यक सद"य एवं "ी र"मत कोचर, लेखा सद"य के सम' BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER "नधा(रण वष( /Assessment Year: 2003-04

v. The Deputy Commissioner of M/s. Southern Petrochemical Income-tax, Industries Corporation Ltd., Company Circle-V(1), SPIC House , 88, Mount Road Chennai. Guindy, Chennai-600032 [PAN: AAACS4668K]

(अपीलाथ+/Appellant) (,-यथ+/Respondent)

Department by : Mr. M.Srinivasa Rao, CIT Assessee by : Mr. R.Vijayaraghavan, Adv. : 18.09.2019 सुनवाई क/ तार"ख/Date of Hearing : 16.12.2019 घोषणा क/ तार"ख /Date of Pronouncement आदेश / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER:

This appeal filed by Revenue is directed against appellate order dated 25.07.2008 passed by learned Commissioner of Income Tax (Appeals)-V, Chennai (hereinafter called “the CIT(A)”), in ITA No.88/2006- 07 for assessment Year (ay) 2003-04, the appellate proceedings before learned CIT(A) had arisen from assessment order dated 30.03.2006 passed by learned Assessing Officer (hereinafter called “the AO”) u/s.143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”). :- 2 -:

with Income-Tax Appellate Tribunal, Chennai (hereinafter called “the Tribunal”) read as under:-

4.1. The learned CIT(A) erred in holding that no disallowance of proportionate interest was called for, thus, deleting the addition of Rs.31,51,15,000/-. 4.2. The learned CIT(A) ought to have noted that the assessee has not proved the commercial expediency aspect for the instant a-y vis-a-vis interest-free advances made to group concerns out of interest bearing funds. 5.1. The learned CIT(A) erred in holding that depreciation of Rs.3,30,991/-on the guest house is allowable. 5.2. Having regard to the Hon'ble Jurisdictional Tribunal decision in the assessee's own case in ITA No.1030/Mds/07 dated 7.3.08 for the a-y 2002-03, the learned CIT(A) ought to have upheld the disallowance of depreciation on the guest house. 6. For these and other grounds may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.” 3. The brief facts of the case are that the assessee is engaged in the business of Fertilizers, Pharma , Bio-tech and Engineering Services. The AO observed in its assessment order passed u/s 143(3) of the 1961 Act

that the assessee is dealing in :-

a) Tuticorn Factory- Manufacturing and sale of Urea , DAP , Aluminum and Fluoride. b) SMO, EHVT Division- Execution of turnkey projects and execution of electrification works contract. c) Pharma Division- Manufacture of bulk drugs and formulations including PEN-G ; and d) Bio-tech Division- Production of tissue culture plants, enzymes and export of cut flowers. 3.2 The assessee filed its return of income with Revenue for impugned

assessment year viz. ay: 2003-04 on 23.10.2003 declaring loss of Rs.

403,84,01,506/-. The said return of income was processed by Revenue :- 4 -:

u/s 143(1) of the 1961 Act on 12.03.2004. The assessee also filed revised

return of income on 30.03.2004 declaring loss of Rs. 298,10,70,500/- . In this revised return of income filed by assessee with Revenue on 30.03.2004 , the assessee offered interest income of Rs. 105.73 crores.

The case of the assessee was selected for framing scrutiny assessment by AO u/s 143(3) read with Section 143(2) of the 1961 Act. The AO issued

statutory notices u/s 143(2) and 142(1) of the 1961 Act to the assessee

and finally scrutiny assessment was framed by AO u/s 143(3) of the 1961

Act, vide assessment order dated 30.03.2006 passed by AO u/s 143(3) of the 1961 Act , assessing loss of the assessee at Rs. 342,32,81,858/-. The Revenue is aggrieved by decision of learned CIT(A) in granting relief to assessee on multiple issues as specified in its grounds of appeal filed with tribunal. We will address and adjudicate each of these issue’s one by one,

as in the succeeding para’s of this order

3.3 The first ground of appeal raised by assessee in its appeal filed with tribunal is general in nature . The leaned CIT-DR has not advanced any arguments before us in support of this ground. In our considered view,

this ground number 1 raised by Revenue with tribunal is general in nature

and does not require separate adjudication and hence ground number 1 is dismissed as general in nature. We order accordingly.

3.4 The second ground of appeal concerns itself with disallowance of Rs.

30,00,000/- by AO on account of expenses incurred towards staff welfare

to the tune of Rs. 15.86 lacs , guest house expenses to the tune of Rs. :- 5 -:

8.96 lacs , club subscription expenses to the tune of Rs. 4.18 lacs and cost of services to the tune of Rs. 1 lacs, aggregating to Rs. 30 lacs. The AO observed that assessee has incurred expenses towards staff welfare,

contribution to clubs, recreation associations amounting to Rs. 15.86 lacs

and the same were disallowed as it was held that these expenses were not incurred wholly and exclusively for the purposes of the business of the assessee. Similarly , AO disallowed guest house expenses on the grounds

that the same cannot be stated to be incurred wholly for the purposes of assessee’s business. The AO also held that club expenses being in nature

of personal benefit of the employees cannot be treated as incurred for the purposes of business of the assessee. The learned CIT(A) allowed the staff

welfare expenses as business expenses by holding that these expenses

were incurred for benefit of its employees through the employees welfare

clubs located at located at employees colony at SPIC Nagar, Tuticorin ,

adjacent to assessee’s company’s fertilizer complex . The learned CIT(A)

allowed guest house expenses to the tune of Rs. 8.96 lacs by holding that these expenses were incurred for assessee company for the maintenance

and provisions of services at its guest house at Tuticorin, Mumbai and Delhi. The learned CIT(A) further observed that detailed accounts of expenses incurred at these guest houses were not provided by assessee

during assessment proceedings. The learned CIT(A) observed that these

guest house expenses were petty in nature and relatable to purchase of provisions, newspaper and wages to the employees at guest houses. It was observed by learned CIT(A) that these expenses were met on day to :- 6 -:

day basis by Head Ofice of the assessee . it was observed by learned

CIT(A) that with passage of time , the assessee is not in a position to gather together all relevant vouchers and some of the vouchers and records are produced during appellate proceedings. The learned CIT(A)

observed that guests using the guest house facilities are employees and management personnel of the assessee company. Thus, in nut-shell the learned CIT(A) held that these evidences furnished indicate that the guest

house was maintained by assessee to facilitate the stay of the employees

who had to travel for business purposes and making alternate

arrangements would have been more expensive. Thus , the learned CIT(A)

relying on provisions of Section 37(1) of the 1961 Act held that these

expenses were incurred for the purposes of business of assessee and were held to be allowable u/s 37(1) of the 1961 Act, vide appellate order dated

25.07.2008 passed by learned CIT(A).

3.5.1 The Revenue is aggrieved by decision of learned CIT(A) allowing

these expenses as business expenses u/s 37(1) of the 1961 Act and has filed an appeal with tribunal. In its ground of appeal , the Revenue has referred to decision of Chennai-tribunal in assessee’s own case for immediately preceding ay: 2002-03 in ITA no. 1030/Mds/07, order dated

07.03.2008, wherein Chennai-tribunal was pleased to uphold disallowance

of guest house expenses , by holding as under:-

“16. The first ground raised by the revenue is that the Learned Commissioner of Income-tax(Appeals) erred in deleting the disallowance made towards guest house expenditure :- 7 -:

amounting to Rs. 15,54,132/- relying upon the order his predecessors in assessee’s own case for the asst. year 2001- 02. 17. This issue is covered against the assessee in decision of the apex court rendered in the case of Britannia Industries Ltd. v. CIT and Another( 278 ITR 546) (Supreme Court) . Respectfully following the same, we allow the this ground of appeal by the revenue.” The learned CIT-DR relied upon decision of the tribunal in assessee’s own

case for ay: 2002-03 and prayed for upholding disallowance of these

expenses. The learned counsel for assessee submitted that decision of Hon’ble Supreme Court in the case of Britannia Industries Limited( cited

supra) was decided for ay:1994-95 wherein provisions of Section 37(3),(4) and (5) of the 1961 Act which were in statute at that time and which created restriction on allowability of guest house expenses at that relevant point in time, while Section 37(3) , 37(4) and (5) of the 1961 Act

were omitted by Finance Act, 1997 w.e.f. 01.04.1998 . Presently we are concerned with ay: 2003-04 and there is no bar on allowability of guest

house expenses provided the same are incurred wholly and exclusively for the purposes of business of the assessee and satisfy the provisions of Section 37(1) of the 1961 Act. After hearing both the parties and perusing material on record, we are of considered view that decision of Hon’ble Supreme Court in the case of Britannia Industries Limited(supra)

was rendered in context of Section 37(3)(4) and(5) of the 1961 Act and the decision was rendered for ay:1994-95 but Section 37(3) , 37(4) and 37(5) of the 1961 Act stood omitted by Finance Act, 1997 w.e.f.

01.04.1998. Presently , we are seized with ay: 2003-04. We have :- 8 -:

observed that learned CIT(A) has noted in its appellate order that the assessee could not furnish complete evidences to support its expenses but positive finding is recorded by learned CIT(A) that guest house(s) were maintained by the assessee at Tuticorin, Mumbai and Delhi and its nexus/connection with employees using guest house while visiting those

places instead of living in alternate accommodation ,but the fact remains

that assessee could not furnish complete bills/invoices/evidences etc. in support of these expenses to prove that the entire expenses were incurred wholly and exclusively for the purposes of business of the assessee to satisfy mandate of Section 37(1) of the 1961 Act and that no outsiders have used these guest house , thus under these circumstances

and keeping in view that it is an old litigation with a view to end litigation

and being fair to both the rival parties, we allow 50% of guest house

expenses as business expenses while we affirm disallowance of balance

50% of the guest house expenses claimed by assessee. We order

accordingly. We have also observed that Revenue vide ground number

5.1 and 5.2 filed in memo of appeal filed with tribunal is aggrieved by allowing of depreciation of guest house by learned CIT(A). Our above

decision of allowing 50% of guest house expenses as business expenses,

shall apply mutatis mutandis to allowability of depreciation on guest house

and hence 50% of the depreciation claimed by assessee on guest hosues

shall be allowed as business deduction , while balance 50% of the depreciation claimed by assessee shall be disallowed for non business

purposes. The Provisions of Section 38(2) of the 1961 Act shall be :- 9 -:

applicable when usage of building is not wholly and exclusively for the purposes of business . This also disposes of ground number 5.1 and 5.2

raised by Revenue in its appeal filed with tribunal. We order accordingly.

3.5.2. Our above decision in para 3.5.1 above shall apply so far as staff

welfare expenses and cost of other services incurred by assessee which stood allowed by learned CIT(A) but fact remains that the assessee could

not provide complete details/evidences/invoices/bills etc. of these staff

welfare expenses and cost of other services to prove that these expenses

were incurred wholly and exclusively for the purposes of the business of the assessee and hence under these circumstances and keeping in view

that it is an old litigation with a view to end litigation and being fair to both the rival parties, we allow 50% of staff welfare expenses and cost of other services claimed by the assessee as business expenses , while we

affirm disallowance of balance 50% of staff welfare expenses and cost of other services claimed by assessee in return of income filed with Revenue.

Thus , ground number 2.1 to 2.3 are disposed off by us in para 3.5.1. to 3.5.2 above and also ground number 5.1 and 5.2 raised by Revenue is disposed off by us in para 3.5.1. We order accordingly.

3.5.3 So far as club expenses disallowed by the AO which stood allowed

by learned CIT(A), we have observed that Chennai-tribunal has consistently decided this issue against assessee by holding that these club

expenses are personal expenses of the Directors. The AO in his

assessment order has referred to these expenses as club expenses and :- 10 -:

not club subscription expenses. Reference is drawn to decision of Chennai-

tribunal in ITA no. 880/Mds/07, order dated 07.03.2008 for ay: 2002-03,

In ITA no.2252/Mds/2003, order dated 20.10.2004 and in ITA no.

1418/Mds/2014, order dated 27.12.2006 for ay: 2009-10, wherein these

club expenses were held not to be allowable and in-fact in ay: 2009-10

the assessee has itself nor pressed this ground before the tribunal. The assessee has not established business nexus of these club expenses being

incurred wholly and exclusively for the purposes of business of the assessee. Thus, based on our above discussion we hold this issue in favour of Revenue and hold that club expenses incurred by assessee shall not be allowed as business deduction. The ground number 2.4 is accordingly adjudicated. We order accordingly.

4.1 The next issue vide ground number 3.1 and 3.2 raised by Revenue in memo of appeal filed with tribunal concerns itself with disallowance u/s 35(2AB) of the 1961 act. The AO disallowed weighted deduction claimed

by assessee u/s 35(2AB) of the 1961 Act of the R%D expenditure incurred

by assessee, while the learned CIT(A) allowed the claim of the assessee

for weighted deduction of R&D expenses. The AO during the course of assessment proceedings observed that the assessee has claimed weighted

deduction with respect to Research and Development Expenses claimed to be incurred by assessee to the tune of Rs. 3,92,83,629/- u/s 35(2AB) of the 1961 Act at the rate of 150%. The AO observed that the assessee has furnished a certificate from competent authority dated 28.06.2000 in form :- 11 -:

No. 3CM from Department of Scientific and Industrial Research, but the assessee has not furnished evidences to show that :

i) the expenditure was incurred on inhouse research and development facility. ii) that the assessee has not furnished evidences to substantiate that the assessee has entered into an agreement with the Development of Scientific and Industrial Research for co-operation in such research and development facility and for audit of accounts maintained for that facility. Thus, the AO vide aforesaid findings disallowed claim of excess deduction

of 50% , which led to disallowance to the tune of Rs. 1,96,41,815/-.

4.2 The assessee being aggrieved by assessment order passed by the AO

u/s 143(3) of the 1961 Act, filed first appeal with learned CIT(A). The learned CIT(A) was pleased to allow claim of weighted deduction @150%

of R&D expenses incurred by assessee u/s 35(2AB) of the 1961 Act vide

appellate order dated 25.07.2008, by holding as under:

“9. The assessee company , in its return of income , had claimed deduction in respect of research and development expenses under Section 35(2AB) at the rate of 150% on an amount of Rs. 3,92,83,629 claimed to be have been spent by it. Such claim made by the assessee company was disallowed by the Assessing Officer on the ground that the assessee company had not furnished evidences to establish that the expenditure was actually incurred on in-house research and development facility and that no evidences had been furnished to establish that the assessee company had entered into an agreement with the Department of Science and Industrial Research and for audit of accounts maintained separately for such facility. It is not in dispute that vide order dated 28.06.2000 the designated authority had granted approval to the in-house research and development facility under Section 35(2AB) of the Act. This was in response to an application filed by the assessee company before the designated authority in Form No. 3CK which was for entering into an agreement with the Department of Science and Industrial Research for conducting in-house research and for audit of accounts :- 12 -:

maintained for that facility. Once both these pre-conditions were incorporated in Part B of the Form No. 3CK, an approval granted by the designated authority would amount to an acceptance of the assessee’s application. It would not be open to the Assessing Officer to reexamine the degree of compliance to these two conditions once the statutory recognized designated authority had considered the assessee’s application and had approved of it. On the present facts, the assessee company would be entitled to weighted deduction under Section 35(2AB) and the ground of appeal filed by the assessee company on this account is hereby allowed.” 4.3 Aggrieved by an appellate order dated 25.07.2008 passed by learned

CIT(A) allowing weighted deduction @150% of R&D expenses u/s 35(2AB)

of the 1961 Act, the Revenue has filed an appeal with tribunal. The learned CIT-DR supported assessment order passed by the AO and relied

upon grounds of appeal filed with tribunal . The learned counsel for the assessee on the other hand submitted that there was no agreement

entered into with the prescribed authority as is stipulated under clause (3)

to sub-section 35(2AB) of the 1961 Act. It was submitted that audit was conducted of these R&D Expenses and copy of audit is placed on record.

The learned counsel would rely on decision of Hyderabad Bench of ITAT in the case of DCIT v. Sri Biotech Laboratories in ITA no. 493/Hyd/2015,

dated 22.07.2015 for ay: 2011-12. 4.4 We have heard both the rival parties and perused material on record

including cited case law. The issue in dispute is with respect to grant of weighted deduction @150% u/s 35(2AB) of the 1961 Act with respect to Research and Development Expenses incurred by assessee. The assessee

has incurred R&D expenses to the tune of Rs. 3,92,83,629/- and claimed

weighted deduction @150% u/s 35(2AB) of the 1961 Act . The AO :- 13 -:

disallowed excess deduction claimed by the assessee@50% which led to disallowance to the tune of Rs 1,96,41,815/-. The AO was of the view

that the assessee has not produced evidence as to expenditure incurred in in-house R&D facility approved by prescribed authority i.e. Secretary,

DSIR and secondly the assessee has not entered into an agreement with prescribed authority for co-operation and for audit of accounts of facility

maintained for R&D which is approved by prescribed authority as is mandated under clause (3) to Section 35(2AB) of the 1961 Act. The learned CIT(A) allowed the claim of the assessee for the reasons specified

in its order which are enumerated in para 4.2 above. Thus, we have elaborately enumerated reasons for taking decision for and against the assessee by authorities below, which are enumerated in para 4.1 and 4.2

of this order. Before we proceed further, it will be profitable at this stage

to reproduce Section 35(2AB) of the 1961 Act as was in statute during

relevant period:

“ [Expenditure on scientific research.

*** *** [(2AB)(1) Where a company engaged in the business of [bio- technology or in the business of] manufacture or production of any drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any other article or thing notified by the Board incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of [a sum equal to one and one-half times of the expenditure] so incurred.

[Explanation.—For the purposes of this clause, “expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall :- 14 -:

include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).]

(2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act.

(3) No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of the accounts maintained for that facility.

(4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Director General in such form and within such time as may be prescribed.]

[(5) No deduction shall be allowed in respect of the expenditure referred to in clause (1) which is incurred after the 31st day of March, [2005].

Provisions of sub-section 35(2AB) of the 1961 Act was inserted by Finance Act, 1997, wef 01.04.1998. Notes on clauses to Finance Bill,

1997 , wrt Section 35(2AB) states as under: :- 15 -:

As we could see that in the instant case, the Secretary , DSIR vide

its approval in form no. 3CM dated 28.06.2000 has approved in-

house Research and Development facility under sub-section 35(2AB)

of the 1961 Act. However, it is an admitted position that assessee

has not entered into an agreement with prescribed authority viz.

Secretary , DSIR as is mandated under clause(3) to sub-section 35(2AB) of the 1961 Act for co-operation in such R&D facility and audit of the approved R&D facility as is mandated under clause(3) to sub-section 35(2AB) which clearly stipulates that no deduction shall be allowed under clause(1) to sub-section 35(2AB) unless the assessee has entered into an agreement with prescribed authority

viz. Secretary DSIR for co-operation and for audit of the accounts of :- 16 -:

the approved facility maintained for R&D . The assessee has admittedly not complied with clause(3) to sub-section 35(2AB) as no such agreement is entered into by assessee with Secretary, DSIR for co-operation audit of accounts for in-house approved facility

maintained for R&D. The intent and purpose of entering into an agreement with prescribed authority viz. Secretary, DSIR is available on website of CSIR i.e. anusandhan.net, which is as follows:

“The company should enter into an agreement with the ‘Prescribed Authority’ (Secretary, DSIR) for co-operation in such research and development facility and for audit of the accounts maintained for that facility, as per format given in Part B of Form 3CK.

Note: The word co-operation shall, inter-alia, mean that the first party shall be willing to undertake projects of national importance, as may be assigned to it by the Prescribed Authority, on its own, or in association with laboratories of CSIR, ICAR, ICMR, DRDO; DBT, DOE, M/O Environment, DOD, DAE, Department of Space, Universities, Colleges or any other public funded institution(s). The First Party would be free to exploit the results of such R&D projects, subject however, to any conditions which may be imposed by Government of India, in view of national security or in public interest".

Even on perusal of Form No. 3CK which is an application form to be submitted for entering into an agreement with DSIR for co-operation in In-house R&D facility and for audit of the accounts maintained for that facility which at Part B is an agreement to be submitted by the applicant

which is to be countersigned by Secretary, DSIR. The purpose of this agreement is that the applicant is willing to undertake projects of national

importance, as may be assigned to it by the prescribed authority of its :- 17 -:

own , or in association with laboratories of CSIR, ICAR, ICMR, DRDO, DBT,

M/O Environment, DOD, DAE, Department of Space , Universities ,

Colleges or any other public funded institutions and the applicant agrees

to exploit the results of such R&D subject to conditions as may be imposed

by GOI, in view of national security or in public interest. The assessee has admittedly not fulfilled this condition of entering into an agreement with prescribed authority although its R & D facilities were approved by Secretary DSIR vide approval granted in Form No. 3CM on 28.06.2000 ,

valid till 31.03.2003.. But, the fact remains that the assessee has not entered into an agreement with Secretary, DSIR as is provided under clause (3) of sub-section 35(2AB) of the 1961 Act. The issue is no more

res-integra as deduction/exemption provisions are to be strictly construed

as held by Constitution Bench of Hon’ble Supreme Court in the case of Commissioner of Customs( Imports) v. Dilip Kumar & Company in Civil

Appeal Number 3327 of 2007,dated 30.07.2018 is relevant, wherein

Hon’ble Supreme Court concluded at para 52 , as under:

“52. To sum up, we answer the reference holding as under - (1) Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.

(2) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue. :- 18 -:

(3) The ratio in Sun Export case (supra) is not correct and all the decisions which took similar view as in Sun Export Case (supra) stands over-ruled.:

Further, decision of Hon’ble Supreme Court in the case of Joshi

Technologies International Inc. v. UOI reported in (2015) 374 ITR 322(SC)

is relevant wherein the tax-payer entered into an Production Sharing

Contract(PSC) with Union of India through Ministry of Petroleum and Natural Gas for exploitation of certain oilfields but clause as to special

allowance under Section 42 of the 1961 Act was not incorporated in Production Sharing Contract entered by tax-payer with Union of India

through Ministry of Petroleum and Natural Gas although tax-payer acted

on understanding that such a benefit would be given to it , under these

circumstances the Hon’ble Supreme Court declined to give benefit of special allowance u/s 42 of the 1961 Act to the taxpayer, wherein Hon’ble

Supreme Court held at para 71-72, as under:-

“71. As pointed out earlier as well, the contract in question was signed after the approval of Cabinet was obtained. In the said contract, there was no clause pertaining to Section 42 of the Act. The appellant is presumed to have knowledge of the legal provision, namely, in the absence of such a clause, special allowances under Section 42 would be impermissible. Still it signed the contract without such a clause, with open eyes. No doubt, the appellant claimed these deductions in its income tax returns and it was even allowed these deductions by the Income Tax Authorities. Further, no doubt, on this premise, it shared the profits with the Government as well. However, this conduct of the appellant or even the respondents, was outside the scope of the contract and that by itself may not give any right to the appellant to claim a relief in the nature of Mandamus to direct the Government to incorporate such a clause in the contract, in the face of the specific provisions in the contract to the contrary as noted above, particularly, Article 32 thereof. It was purely a contractual matter with no element of public law involved thereunder. :- 19 -:

Since, we have referred to aforesaid two decision of Hon’ble Supreme

Court which in our considered view . ratio of these two decision has direct

bearing on outcome of this appeal, it will not be now relevant to refer to the decision of Hyderabad-tribunal in the case of DCIT v. Sri Biotech

Laboratories in ITA no. 493/Hyd/2015 for ay: 2001-12, dated 22.07.2015

relied upon by assessee. Thus based on our detailed discussions as above

keeping in view factual matrix of the case, and in the absence of an agreement being entered into by assessee with Prescribed authority viz.

Secretary, DSIR for co-operation in such R & D facility and for audit of accounts , as is provided under clause (3) to sub-section 35(2AB) of the 1961 Act, the assessee will not be entitled for deduction u/s 35(2AB) of the 1961 Act. Thus, we decide this issue against the assessee on this short ground only. The AO has given a clear and positive finding that no evidence of expenditure incurred on in-house R&D facility is submitted by assessee during the course of assessment proceedings. The learned

CIT(A) has not dealt with this issue at all. Before us, the assessee has filed an audit report dated 21.10.2003 issued by M/s Sambamoorthi &

Company, Chartered Accountants, 463/1, III Main Road, Vidya Nagar, :- 20 -:

Velachery, Chennai-600042 and assessee has also filed form no. 3CL ,

wherein total expenditure stated to be incurred by assessee on in-house

R&D facility for previous year 2002-03 relevant to ay: 2003-04 in its inhouse R&D facility maintained at Pharmaceutical division located at Maraimalai Nagar which is approved for purposes of sub-section 35(2AB)

by Prescribed Authority ( Secretary , DSIR) is stated to be Rs. 205.43

lacs. Thus , firstly the total expenses on in-house R&D is Rs. 205.43 lacs

as certified by auditors and not Rs. 392.83 lacs as claimed by assessee for claiming weighted deduction u/s 35(2AB) and secondly, as per facts

emerging from records, the AO has given positive finding that details of expenditure incurred for in-house R&D are not filed and thirdly, the learned CIT(A) did not dealt with this issue at all. Thus, learned CIT(A)

order could not be sustained on this ground as there is no finding on this issue and in any case if weighted deduction is to be allowed to assessee

u/s 35(2AB) of the 1961 Act, then only an amount of Rs. 205.43 lacs will

be eligible for weighted deduction u/s 35(2AB). As per facts emerging

from records, the AO has given clear and positive finding that evidences in support of expenses incurred on in-house approved R&D facility are not submitted by assessee during the course of assessment proceedings and there is no findings on this issue by learned CIT(A) but we have already

held that no deduction u/s 35(2AB) of the 1961 Act can be allowed to assessee on this short ground of non entering into an agreement for co-

operation with Secretary, DSIR and for audit of accounts of approved R&D

facility as held by us in this order and in case if at any stage our above :- 21 -:

decision is over-ruled by Hon’ble Superior Courts on that count, then the matter shall be remitted back to the file of the AO for denovo adjudication

for verifying the eligible expenditure spent by assessee on its approved in-

house R&D facility for computing weighted deduction u/s 35(2AB) of the 1961 Act , after considering all the evidences/explanations which the assessee may like to rely in its defense and after giving proper and adequate opportunity of being heard to assessee in accordance with principles of natural justice in accordance with law . We order accordingly.

5.1 The last issue vide ground number 4.1 and 4.2 raised by Revenue in memo of appeal filed with tribunal relates to decision of learned CIT(A) in deleting disallowance of proportionate interest expenditure on interest free

advances made by assessee to its group concerns which were stated by AO to be made out of interest bearing funds and the AO has disallowed

proportionate interest expenses as the assessee has failed to prove

commercial expediency in granting these interest free advances to group

companies. The AO during the course of assessment proceedings

observed that the assessee has made interest free advances to following

entities:

a) Advance against Equity paid to SPIC Fertilizers and Chemicals : Rs. 8259.87 lacs FZE, Dubai

b) National Aromatics and Petrochemicals Corporation(Associated : Rs. 1547.09 lacs Company)

c) Tuticorin Alkali Chemicals & Fertilizers : Rs. 1000 lacs :- 22 -:

Ltd.

d) SPIC Petrochemicals Limited-Advance : Rs. 30204.72 lacs Against Equity

The AO observed that the assessee has although contended that aforesaid

loans were advanced in earlier period out of internal cash available i.e.

interest free funds available with it but the AO observed that perusal of the audited financial statements will reveal that the assessee’s interest

free funds are replaced by interest bearing funds which have led to huge

interest liability of Rs. 17,802.68 lacs and no tangible benefit has accrued

to the assessee from these huge advances/investments made by assessee

company to these entities, which led AO to disallow proportionate interest

expenses vide assessment order dated 30.03.2006 passed by the AO u/s 143(3) of the 1961 Act. The AO observed from the audited Balance Sheet

as at 31.03.2003 that the share capital and reserves are to the tune of Rs.

1125.70 crores which has been mostly invested for acquiring fixed assets,

capital WIP, Inventories, Sundry Debtors, Cash and bank balances,

investments in shares etc. . The AO observed that there are loans raised

by assessee to the tune of Rs. 2317.03 crores on which interest is paid

while total amount advanced to subsidiaries, associates and group

concerns is to the tune of Rs. 410.12 crores and interest liability incurred

by assessee during the year under consideration is Rs. 178.02 crores,

which led to proportionate disallowance of interest expenses to the tune of Rs. 31.51 crores as being incurred not for the purposes of business u/s :- 23 -:

37(1) of the 1961 Act, vide assessment order dated 30.03.2006 passed by the AO u/s 143(3) of the 1961 Act.

5.2 Aggrieved by an assessment framed by the AO u/s 143(3) of the 1961

Act, the assessee filed first appeal with learned CIT(A) who was pleased to allow appeal of the assessee , vide appellate order dated 25.07.2008

passed by learned CIT(A) , by holding as under:

“11. The next ground of appeal relates to disallowance of proportionate interest relatable to interest free advances to group companies. The Jurisdictional Tribunal, in the assessee’s own case, had occasion to consider the nature of such advances and in its order reported in SPIC v. DCIT(93 TTJ 161) , as also in its order for assessment year 2000-01 in ITA no. 2252/Mds/2003 dated 20-10- 2004 had held that the concerned sister concerns were operating in the same field and there was a close nexus between the raw materials and finished products of the assessee company and its subsidiaries to whom advances has been granted. Interest had not been charged by the assessee company in view of the financial condition of those subsidiaries , but the amounts had been advanced to them for expansion of the assessee company’s business operations. Thus, the ITAT, which is the highest fact finding authority, has arrived at the conclusion that there was a definite business expediency for granting such interest free advances by the assessee company. That being the case, the decision of the Apex Court in the case of S.A. Builders v. CIT(288 ITR 1) would come into operation and no disallowance of proportionate interest was called for on the facts of the present case.. Appeal filed by the assessee company on this ground is hereby allowed.”

5.3 Aggrieved with the aforesaid decision of learned CIT(A), the Revenue

has come in appeal before the tribunal and has raised ground number 4.1

and 4.2 to that effect. The learned CIT-DR supported assessment order

passed by the AO. The learned counsel for the assessee submitted that the Chennai-tribunal in the case of assessee has allowed interest expenses

in the case of loans advanced to SPIC Fertilizer and Chemicals FZE, Dubai

vide orders in ITA no. 2252/Mds/2003 ( (2004) 23 CCH 0635(Chen-trib.) ; :- 24 -:

(2005) 93 TTJ 0161(Chen-trib.) for ay: 2000-01, vide orders dated

20.10.2004. Our attention was drawn to order giving effect to ITAT order

passed by AO for ay: 1997-98 to 1999-00, dated 04.06.2007 wherein the AO has , inter-alia, allowed interest expenses. The learned CIT-DR in rebuttal submitted that learned counsel for the assessee is bringing new

facts before ITAT which requires verification by the AO. It was submitted

that there was change in the nature of advances since 2000-01 and hence

re-examination is required by the AO.

5.4 We have considered rival contentions and perused the material on record including cited case laws. We have observed that assessee has made interest free advances to following entities:

a) Advance against Equity paid to SPIC Fertilizers and Chemicals : Rs. 8259.87 lacs FZE, Dubai

b) National Aromatics and Petrochemicals Corporation(Associated : Rs. 1547.09 lacs Company)

c) Tuticorin Alkali Chemicals & Fertilizers : Rs. 1000 lacs Ltd.

d) SPIC Petrochemicals Limited-Advance : Rs. 30204.72 lacs Against Equity

We have observed from audited Balance Sheet of the assessee as at 31.03.2003 extracted by the AO in its assessment order that total interest

bearing loans both secured and unsecured raised by the assessee as at 31.03.2003 were to the tune of Rs. 2317.03 cores and assessee has claimed an interest expenses to the tune of Rs. 178.02 crores as revenue

expenses during the year under consideration. We have observed that AO :- 25 -:

has disallowed proportionate interest expenses wrt to interest free

advances made by assessee to its group entities as the claim of the assessee that loans were advanced in earlier years out of interest free

funds available with the assessee was not accepted by the AO as in the opinion of the AO, the interest free funds were replaced by interest

bearing borrowings made by the assessee which led to huge interest

liability of Rs. 178.02 crores. The AO also observed that no business

advantage has accrued to the assessee by making these interest free

advances to these entities and indirect advantages may accrue to assessee owing to these interest free advances but on that count it cannot

be said that entire interest expenses were incurred wholly and exclusively

for the purposes of the business of the assessee and hence the AO

disallowed proportionate interest expenses to the tune of Rs. 3151.15

lacs. The learned CIT(A) has passed an cryptic order allowing entire

proportionate interest expenses to the extent of Rs. 3151.15 lacs which was earlier disallowed by AO and in our considered view, this appellate

order passed by learned CIT(A)cannot be sustained for many reasons .The learned CIT(A) has deleted the additions made by AO mainly by following

the tribunal decision in assessee’s own case for ay: 2000-01 in ITA no.

2252/Mds/2003 dated 20.10.2004. The learned CIT(A) also referred to another decision of Chennai tribunal in assessee’s own case reported in 93

TTJ 161 but incidentally this decision is the same decision in ITA no.

2252/Mds/2003 dated 20.10.2004 passed by Chennai-tribunal for ay:

2000-01. This also indicate non application of mind by learned CIT(A) :- 26 -:

while passing cryptic order dated 25.07.2008 on this issue . Coming back,

the learned CIT(A) has deleted the disallowance of proportionate interest

expenses made by the AO by mainly following the aforesaid decision of Chennai-tribunal for ay: 2000-01 in assessee’s own case. It is observed

that Chennai-tribunal while adjudicating disallowance of proportionate

interest expenses with respect to interest free advances made by the assessee was seized of interest free advances made by assessee to only

two entities namely M/s Indo-Jordan Chemicals Co. Ltd., Jordan and M/s

SPIC Fertilizers & Chemicals , FZE, Dubai. For our purposes, we are not presently seized of M/s Indo-Jordan Chemicals Co. Limited. Thus, only one

company to which assessee gave interest free advances, namely SPIC

Fertilizers and Chemicals FZE, Dubai was before Chennai-tribunal while

adjudicating appeal for ay: 2000-01 , which company namely SPIC

Fertilizers and Chemicals FZE, Dubai is also before us while adjudicating

appeal for impugned ay: 2003-04. We have observed that learned CIT(A)

has merely followed the appellate order passed by Chennai-tribunal for ay: 2000-01 and has deleted disallowance of proportionate interest

expenses with respect to interest free advances made by assessee to four

entities namely (i) SPIC Fertilizers & Chemicals FZE, Dubai ,(b) National

Aromatics and Petrochemicals Corporation , (c) Tuticorin Alkali Chemicals

& Fertilizers Limited and (d) SPIC Petrochemicals Limited. There is no discussion and reasoning given by learned CIT(A) in its appellate order as to how the disallowance of proportionate interest expenses with respect

to the all these aforesaid three entities which were not before Chennai- :- 27 -:

tribunal while adjudicating appeal for ay: 2000-01 was to be deleted. The appellate order passed by learned CIT(A) is not a speaking and reasoned

order. The Chennai-tribunal while adjudicating on this issue of allowability

of proportionate interest expenses wrt interest free advances made by assessee to SPIC Fertilizers and Chemicals FZE, Dubai in ITA no.

2252/Mds/2003 vide orders dated 20.10.2004 for ay: 2000-01 has observed that the contentions of the assessee are two fold , firstly that the assessee had not borrowed any money for being invested in the shares of the investee company , which issue was restored by tribunal to the file of the AO to find out whether any borrowed funds were used by the assessee

for being invested in the shares of the investee company , while second

contention of the assessee was accepted that the funds were invested for the purposes of business of the assessee to produce raw material required

by the assessee. The assessee has not filed before us order passed by the AO while giving effect to order passed by ITAT for ay: 2000-01. However, the assessee has filed an order passed by AO while giving effect

to order passed by ITAT for earlier years viz. ay: 1997-98 to 1999-00,

dated 04.06.2007 deleting disallowance of proportionate interest expenses

with respect to interest free advances made by assessee to three entities

namely (a) Indo Jordan Chemicals Company Limited, (b) SPIC Fertilizers

and Chemicals FZE, Dubai and (c) SPIC Petrochemicals Limited. The AO

has accepted the contentions of the assessee while giving effect to the tribunal’s order and allowed relief to the assessee but there is no finding

by AO on utilization of interest free funds for grant of these interest free :- 28 -:

advances, as directed by the tribunal in its order . Presently, we are not concerned with interest free advances made to Indo Jordan Chemicals

Company Limited, but however we are seized with other two entities in this appeal namely SPIC Fertilizers and Chemicals FZE, Dubai and SPIC

Petrochemicals Limited. There is finding by the AO in assessment order for impugned ay that interest free advances were replaced by interest bearing

funds. It will not be out of place to refer to recent decision of Chennai-

tribunal in assessee’s own case for ay: 2003-04 in ITA no.

937/Chny/2008, dated 12.12.2019 wherein revisionary order passed by learned Commissioner of Income-tax u/s 263 of the 1961 Act was upheld

by tribunal. Both of us were part of the Division Bench who pronounced

the said order dated 12.12.2019. In the said order dated 12.12.2019

passed by tribunal , it was observed by tribunal that the assessee has issued Floating Rate Notes(FRN) to the tune of US $ 120 Million in the year 1996 which were due for repayment/maturity in 2003. These FRN’s

were denominated in Foreign currency carrying interest and the assessee

had incurred interest expenses as well loss on foreign exchange

fluctuations on these FRN’s. It was also observed by tribunal that said

FRN’s were issued for financing the import into India of capital goods for its operations and projects in which the assessee is involved and for general corporate purposes permitted by Government of India, which is stated in the offer document issued by assessee. It is also observed that Chennai-tribunal in a decision rendered on 27.12.2016 in assessee’s own

case for ay: 2009-10 in ITA no. 1821/Mds/2004( of which one of us being :- 29 -:

Hon’ble Judicial Member was part of Division Bench who pronounced that order) has remitted the matter back to the AO for fresh adjudication as to allowability of proportionate interest expenses wrt interest free advances

made to associated companies, by holding as under:

“18. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee claims that interest free funds were diverted to the companies at Dubai and Jordon. The assessee also claims that they are sister concerns of the assessee. However, the shareholding pattern of so- called companies at Dubai and Jordon are not available on record. Therefore, it is not known how the assessee claims that the advances were made to sister concerns. Moreover, the balance sheet and other financial documents were not available on record. Therefore, it is not known whether the assessee has advanced funds out of interest free funds or borrowed funds. It is not in dispute that the assessee borrowed funds for business purpose and the same remain outstanding during the year under consideration. Therefore, we have to examine how much funds were borrowed and whether there was any nexus between borrowed funds and investment made in Dubai and Jordon. The shareholding pattern of those companies is also not known. Since these facts were not available on record and the same were also not examined by earlier Bench of this Tribunal during the assessment year 2000-01, this Tribunal is of the considered opinion that the matter needs to be reexamined. Accordingly, the orders of the authorities below are set aside and disallowance of proportionate interest expenses on the advance made to group companies are remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh and bring on record the shareholding pattern of the 12 I.T.A. No.1418 & 1821/Mds/14 companies at Dubai and Jordon and how much advances were made and also find out whether the income from the group companies in which advances were made, is taxable in India, and the object for which the money was advanced and utilization of funds by the companies which received the funds from the assessee and thereafter decide the issue in accordance with law, after giving a reasonable opportunity to the assessee.”

The Chennai-tribunal while adjudicating the issue of disallowance u/s 14A

of the 1961 Act read with Rule 8D of the 1962 Rule in assessee’s appeal :- 30 -:

for ay: 2009-10 in ITA no. 1418/Mds/2014 vide orders dated 27.12.2016(

common order with ITA no. 1821/Mds/2014) had made following

observations which are relevant as to disallowance of proportionate

interest expenses on interest free advances made by assessee to its associated concerns, wherein tribunal held as under:

“8. For the assessment year 2000-01, this Tribunal in I.T.A. No.2252/Mds/2003 examined this issue and remanded back the matter to the file of the Assessing Officer for re-examination. The assessee has produced a copy of the order of this Tribunal for the assessment year 2000-01. For the assessment year 2000-01, the assessee claimed before this Tribunal that investment was made in the company which produces the basic raw material required by the assessee. On a query from the Bench, the Ld.counsel for the assessee submitted that raw material was not supplied at free of cost. It is also not the case of the assessee that the assessee had purchased raw material at subsidized price or cost. Moreover, income of the companies, which are outside India, was not taxable in the hands of the assessee in India. All these facts are not brought to the notice of the earlier Bench which decided the case. When the income of the assessee was from the companies which situated outside India and the assessee claims that the money was invested in other companies, which are said to be subsidiary companies, why the expenditure incurred by the assessee should not be disallowed was not examined by this Tribunal for assessment year 2000-01. Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of both the authorities below are set aside and the issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh and bring on record shareholding pattern of the companies in which the investment was made by the assessee and how the companies outside India are subsidiary companies of the assessee and thereafter decide the issue in accordance with law, after giving a reasonable opportunity to the assessee.”

Thus, for the detailed reasons and discussions as above in this order , we

are of the considered view that the matter is required to be restored to the file of the AO for fresh adjudication de-novo . Needless to say that the AO shall give proper and adequate opportunity of being heard to the :- 31 -:

assessee in accordance with principles of natural justice in accordance with law and evidences/explanations submitted by assessee in its defense shall be admitted by assessee and then adjudicated on merits in accordance with law. We order accordingly.

Order pronounced on the 16th day of December, 2019 in Chennai. (एन.आर.एस. गणेशन) (र"मत कोचर) (N.R.S. GANESAN) (RAMIT KOCHAR) "या"यक सद"य/JUDICIAL MEMBER लेखा सद"य/ACCOUNTANT MEMBER चे"नई/Chennai, 1दनांक/Dated: 16th December, 2019. TLN

आदेश क/ ,"त"ल2प अ3े2षत/Copy to: 4. आयकर आयु4त/CIT 1. अपीलाथ+/Appellant 5. 2वभागीय ,"त"न"ध/DR 2. ,-यथ+/Respondent 6. गाड( फाईल/GF 3. आयकर आयु4त (अपील)/CIT(A)