WABCO INDIA LIMITED,CHENNAI vs. ACIT CORPORATE CIRCLE 3(2), CHENNAI

आदेश / O R D E R PER DUVVURU RL REDDY, Judicial Member: This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals)-11, Chennai dated 18.06.2019 relevant to the assessment year 2014-15. The grounds raised in the appeal of the assessee are that the ld. CIT(A) has erred in confirming the restriction of weighted deduction under section 35(2AB) of the Income Tax Act, 1961 [“Act” in short] and confirmation of disallowance under section 14A r.w. Rule 8D.

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the statutory notices, the assessee furnished the details. On verification of the details filed by the assessee, the Assessing Officer completed the assessment under section 143(3) of the Act by determining total income of the assessee at ₹.1,32,26,31,394/- after making disallowance under section 35(2AB) of the Act at ₹.10,52,69,078/- and disallowance under section 14A r.w. Rule 8D at ₹.18,40,430/-. On appeal, while confirming the disallowance made under section 14A r.w. Rule 8D, the ld. CIT(A) directed the Assessing Officer to sallow correct amount of deduction under section 35(2AB) of the Act after taking note of the DSIR certificate.

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allowability of weighted deduction as enunciated at (ii) of para 2 of the above said notification. Further, by relying on the decision in the case of Electronic Corporation of India Ltd. v. ACIT in I.T.A. No. 1106/Hyd/2011 dated 25.09.2012, the ld. DR strongly supported the order passed by the ld. CIT(A).

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since the assessment year under consideration is 2014-15, it was prayed for allowing the relief under section 35(2AB) of the Act as claimed in the return of income. We have perused the Notification of the CBDT dated 28.04.2016, wherein, the CBDT has stated that the amendment to the Income Tax Rules, 1962 shall come into force on the 1st day of July, 2016 with specific directions to quantify 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 Act in Part B of Form No. 3CL. Thus, the claim of the assessee on the applicability from subsequent assessment year stands ruled out.

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section 35 of the Act in Part B of Form No. 3CL, when in the case of Electronic Corporation of India Ltd. v. ACIT (supra), the Hyderabad Bench of the Tribunal has observed as under: “17. As per the provisions of sec 35(2AB) of Act as applicable to the relevant Assessment year , the expenditure incurred by the assessee in any approved in-house research facility, to the extent of approved by the prescribed authority, is entitled to weighted deduction of 150% of such approved expenditure. Therefore, the expenditure as approved by the DSIR in the certificate given by them in Form 3CL alone is to be granted weighted deduction. The DSIR in their certificate has certified expenditure eligible for weighted deduction as Rs.3,126.02 lakhs. Therefore, it is not for either the assessing authority or the appellate authority to decide on the expenditure which will be entitled to weighted deduction u/s.35(2AB). In fact, U/s.35(2AB)(3) if any question arises u/s.35 as to whether and if so, what extent any activities constitutes or constituted or any asset was used for scientific research, the matter should be referred to the appropriate authority whose decision will be final. In this case the appropriate Authority is the DSIR. Therefore once the DSIR has certified the quantum of eligible R&D expenditure for the purposes of weighted deduction u/s 35(2AB) the figure cannot be tampered with by ITAT. Even if the assessee is right in that the there is a mistake in the certificate issued by the DSIR, which we don't know, the same can only be rectified by DSIR and not the ITAT in appellate proceedings. We, therefore, uphold the decision of lower authorities in restricting the weighted deduction u/s.35(2AB) to Rs.46,89,03 lakhs and disallowing sum of Rs.1,69,73,987 out of the claim made by the assessee. We, however, direct that in case DSIR corrects the amount of research and development expenditure on which the assessee is entitled weighted deduction for the assessment year under appeal, corresponding weighted deduction u/s.35(2AB) shall be granted on receipt of the clarification from DSIR. Consequentially if the assessee is able to prove that any amount of expenditure in their in-house research and development facilities was omitted to be considered by the DSIR for weighted deduction the same may be allowed as a deduction u/s.35/ 37 of the Act. With this observation we dismiss the appeal of the assessee on this issue.” Further in the case of Tejas Networks Ltd. v. DCIT [2016] 60 taxmann.com 309, the Hon’ble Karnataka High Court has observed as under: A plain reading of Section 35(2AB) would clearly indicate that where a company is engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing

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specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) or in-house research and development facility as approved by the prescribed authority, then, they shall be allowed a deduction of a sum equal to one and a half times of the expenditure so incurred. The word used 'shall' in the above said provision would ordinarily mean that it should be understood in the context in which it is used and there cannot be departure in this regard. The said provision would also indicate that such expenditure as approved by the prescribed authority would be entitled for being allowed as a weighted deduction. There being no dispute to the fact that DSIR being the prescribed authority in the instant case, had issued the report in Form No. 3CL - Annexure - M certifying the total R&D expenditure (excluding land and buildings) as prescribed under Section 35(2AB) for a sum of Rs. 4,601.9 lakhs as against the claim of Rs. 5,957 lakhs made by the assessee in the return of income and as such, neither the second respondent nor first respondent could have sat in judgment over the said certificate issued by the prescribed authority. In other words, when the prescribed authority had certified the extent of expenditure which would be allowable, the assessing officer could not have sat in appeal over such certification made by the prescribed authority. The allowability or otherwise of such expenditure cannot be the subject matter of scrutiny by the assessing officer. It would also be required to be noticed that the assessing officer would be out of bounds to examine as to whether such expenditure as certified by the prescribed authority can be allowed or disallowed under Section 35 of the Act. In other words, the assessing officer is precluded from examining the correctness or otherwise of the certificate issued by the prescribed authority on the ground that it is either being contrary to facts or contrary to the express provisions of the Act. It would not be out of context to state that when assessee files the report issued by the prescribed authority, as indicated under Section 35(2AB), before the jurisdictional assessing officer and seeks for allowability of such expenditure, the Assessing Officer would be exceeding in his jurisdiction, if he were to undertake the exercise of examining as to whether the certificate issued by the prescribed authority is within the parameters of statutory provisions of the Act or otherwise…………………” From the above decision of the Hyderabad Bench of the Tribunal as well as the decision of the Hon’ble Karnataka High Court, it is clear that the prescribed authority viz., the DSIR is the authority in 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 Act in “Part B” of Form No. 3CL. There is no vested right of the tax payer in the procedures. The amendment made in the Income Tax

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Rules, 1962, which is coming into force on 01.07.2016, whereby, the DSIR is directed to quantify the expenditure incurred on in-house research and development facility by the assessees incurred during the previous year cannot be said to have adversely affected or restricted the substantive right of the tax payer and no prejudice said to have been caused by the said amendment of Income Tax Rules, 1962 to the assessee and in fact, the DSIR, who is a technical body is well equipped to assessee to quantify the expenses incurred by the tax payer on in-house research and development. Hence, all reports in Form 3CL shall be issued by the DSIR effective from 01.07.2016 which should include in “Part B” is to quantification of the expenses incurred by the tax payers in in-house research in terms of section 35(2AB) of the Act. Hence, the contention of the assessee has no legs to stand and is out rightly rejected. Thus, the entire claim of weighted deduction claimed by the assessee cannot be acceded to over and above the restriction made by the DSIR. In view of the above facts and circumstances and case law relied on, we are of the considered opinion that the ld. CIT(A) has rightly directed the Assessing Officer to allow the correct amount of deduction under section 35(2AB) of the Act after taking note of the DSIR certificate dated 16.03.2017. Thus, the ground raised by the assessee stands dismissed.

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assessee has incurred an interest expenditure of ₹.14,46,000/-. However, the Assessing Officer noticed that the assessee has not deducted any expenditure for investment made in view of the provisions of section 14A of the Act. After considering the submissions of the assessee, by invoking the provisions of section 14A of the Act r.w.r. 8D of the Income-tax Rules, 1962, the Assessing Officer determined the expenditure component at ₹.18,40,430/- and brought to tax. On appeal, the ld. CIT(A) confirmed the disallowance against which the assessee preferred further appeal before the Tribunal.

8.1 The ld. Counsel for assessee has submitted before the Bench that assessee has not earned any dividend income during the year under consideration and hence no exempt income was claimed by it in return of income. The ld. counsel for assessee would submit that in view of no exempt income earned by assessee, no disallowance of expenditure is warranted under section 14A of the Act. The assessee has relied on various decision including the decision of Hon’ble Madras High Court in the case of CIT v. Chettinad Logistics (P.) Ltd. reported in [2017] 80 taxmann.com 221 (Madras), wherein, Hon’ble Madras High Court has held that no disallowance of expenditure can be made by invoking provisions of section 14A of the Act, when there is no exempt income earned by the assessee. It was further submission that the SLP filed by Revenue before Hon’ble Supreme Court in the case of CIT v. Chettinad Logistics (P.) Ltd., reported in [2018] 95 taxmann.com 250 (SC), has since been dismissed by Hon’ble Supreme Court

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and thus, prayed for deleting the addition. The ld. DR would rely on the orders of authorities below.

8.2 We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. In this case, the assessee has made investments to the tune of ₹.48 crores. The assessee has not earned any dividend income during year under consideration and hence no exempt income was claimed by assessee in return of income. However, by invoking the provisions of section 14A of the Act r.w. Rule 8D made disallowance of expenditure to the tune of ₹.18,40,430/-, which was confirmed by ld. CIT(A). Now it is a well settled proposition that in case no exempt income is received during year under consideration, no disallowance of expenditure can be made by invoking provisions of section 14A of the Act. It is a matter of fact that the assessee earned no exempt income during the year under consideration. Further, it is observed that Assessing Officer has not recorded any satisfaction before invoking Rule 8D of the 1962 Rules and has simply invoked provisions of section 14A of the Act r.w. Rule 8D. The Assessing Officer has not analysed modus operandi followed by the assessee in making investments, personnel deployed nor has looked into books of accounts of the assessee to compute expenditure incurred in relation to earning of an exempt income.

8.3 We find that the in the case of Chettinad Logistics Private Limited(supra), the Hon’ble Madras High Court has held that no disallowance

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of expenditure under section 14A of the Act can be made when no exempt income is earned by the assessee. The SLP filed by Revenue against decision of Hon’ble Madras High Court decision in case of Chettinad Logsitics Private Limited (supra) has been dismissed by Hon’ble Supreme Court. It is also relevant here to mention the decision of Hon’ble Madras High Court in case of Redington (India) Limited v. Addl. CIT 392 ITR 633, wherein, similar view was taken and in fact, the Hon’ble Madras High Court in case of Chettinad Logistics Private Limited (supra) relied upon this decision of Hon’ble Madras High Court in case of Redington India Limited (supra) to hold and decide the issue in favour of the assessee. Thus, keeping in view decision of the Hon’ble jurisdictional High Court cited above, we are of the considered view that no disallowance of expenditure by invoking provisions of section 14A of the Act is warranted as the assessee has not earned any exempt income during the year under consideration and hence, the disallowance made by the Assessing Officer under section 14A of the Act stands deleted. 9. In the result, the appeal filed by the assessee is partly allowed. Order pronounced on the 26th December, 2019 in Chennai.

Sd/- Sd/- (RAMIT KOCHAR) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Chennai, Dated, 26.12.2019 Vm/- आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant, 2.��थ�/ Respondent, 3. आयकर आयु� (अपील)/CIT(A), 4. आयकर आयु�/CIT, 5. िवभागीय �ितिनिध/DR & 6. गाड� फाईल/GF.