EMBIO LTD,MUMBAI vs. ACIT 15(1)(2), MUMBAI

1. 1. The Learned CIT (A) erred in treating the additional ground filed as invalid ground for year of applicability of provision of section 72A r.w. Rule 9C in A Y 2012-13 and not earlier years.

2. The Learned CIT(A) erred in confirming disallowances u/s 72A rw Rule 9C of set-off of brought forward losses claimed in the earlier years i.e. A Y 2009-10 to A Y 2011-12 instead of in A Y 2012-13 the year in which the conditions are not fulfilled.

3. Without prejudice to above, direction be given that the withdrawal of set off of brought forward business losses & unabsorbed depreciation losses of KMBL in earlier years be cancelled and directed to be withdrawn in A Y 2012-13.

3. The assessee has also raised the following additional grounds of appeal:

IV. APPLICABILITY OF THE YEAR OF WITHDRAWAL OF CLAIM UIS 72A OF THE BROUGHT FORWARD LOSSES (BUSINESS AND UNABSORBED DEPRECIATION) ON NON FULFILMENT OF CONDITIONS LAID DOWN u/s 72A(2)(iii) RW RULE 9C:-

1. 1. The Learned AO failed to appreciate the fact that the provisions of section 72A are applicable in A Y 2012-13 when the conditions as laid down U/S 72A(2)(iii) r.w rule 9C are not fulfilled.

2. The Learned AO erred in disallowing the brought forward business losses & unabsorbed depreciation losses of Karnataka Malladi Biotics Ltd. (KMBL) in the earlier years instead of fourth year ie AY 2012-13 in the & 5414 Mum 2017-Embio Limited year on non fulfillment of conditions as laid down u/s 72A(2)(iii) rw Rule 9C.

4. The brought forward losses which were set off in the earlier years i.e from A Y 2009- 10 to A Y 2011-12, ought to have been disallowed in the forth year i.e A Y 2012-13 & not earlier.

5. The disallowance of set-off of brought forward losses u/s 72A of KMBL requires to be made only in the fourth year i.e AY 2012-13 and not in earlier years.

6. Without prejudice to above, direction be given that the withdrawal of set off of brought forward business losses & unabsorbed depreciation losses of KMBL in earlier years be cancelled and directed to be withdrawn in A Y 2012-13.

5. The Assessing Officer also noted that the assessee has claimed deduction of Research & Development expenditure to Rs. 39,50,218/- under section 35(1)(i). The claim of assessee was not accepted by Assessing Officer holding that as per report no. 3CL, the competent authority did not allow the revenue expenditure of Rs. 39,50,218/- as expenditure not incurred for the purpose of R & D Expenditure. On appeal before the ld. CIT(A) the action of Assessing Officer was confirmed on both the disallowance.

Therefore, further aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us.

The Assessing Officer disallowed 200% of Rs. 39,50,218/- i.e. Rs. 79,00,436/-. The approval of DSIR is only in respect of weighted deduction to be claimed under section 35(2AB). The report of DSIR has no relevance for determining whether expenditure claimed as allowable 6 & 5414 Mum 2017-Embio Limited or not under any other provisions of the Act. The ld. AR for the assessee submits that he expenditure was incurred wholly and exclusively for Scientific and Industrial Research during the course of business of assessee. The lower authority has not brought any material on record that assessee has not incurred the expenses against the salary and wages of the employee, power, raw-material etc. in revenue expenditure on research and development activities.

Tube Investments of India Ltd. vs. CIT 260 ITR 94 (Madras HC) (ii) CIT vs. Yamuna Digital Electronics Pvt. Ltd. 238 ITR 717 (AP HC) (ii) ACIT vs. Parabolic Drugs Ltd. 141 TTJ 662 (Del. ITAT) & (iv) JCIT vs. ITC 112 ITD 57 (Hyd ITAT).

Capital expenditure incurred on the acquisition of land or construction of building which is excluded by the very terms of section 35(2B) can be claimed under section 35(1)(iv).

“ 5.5 We have considered the submissions made by both the sides and gone through the orders passed by the lower authorities and material placed before us for our consideration. Since, main claim of assessee with respect to deduction u/s. 35(2AB) was not seriously pressed before us, therefore, same is dismissed. With respect to alternate claim made by the assessee u/s. 37(1) of the Act, it is noted that the invoice of M/s. Reliance Clinical Research Services Pvt. Ltd. dated 31.03.2007 is enclosed at page no. 3 of the paper book, showing that payment has been made to the said company under the head "Clinical Trial Fees" - for the month of March, 2007 for time spent on 1st March to 31st March, 2007 for conducting clinical trials, in support of to all 'K projects', for a sum of Rs. 57,65,564/-. It is further noted that on the back side of the invoice, complete details have been given with respect to time spent by 22 employees of RCRS, also giving particulars of the studies done by these employees. Names of these employees have been given along with their rates per hour. It is further noted that ld. Assessing 9 & 5414 Mum 2017-Embio Limited

Officer has shown no doubts about the genuineness of these expenses. It was held by Ld. CIT (A) that since claim of assessee with respect to deduction u/s. 35(2AB) has been denied, therefore, these expenses are capital in nature. It was further observed by ld. CIT (A) that Assessing Officer, as well as assessee, have treated these expenses as capital in nature. In our view, the observations of Ld. CIT (A) are misplaced and without any basis. We have gone through details of these expenses. In our considered view, these expenses are apparently revenue in nature. Ld DR also could not point out as to which expenses are capital in nature. Thus, in our view, these expenses are of revenue nature. 5.6 The other argument of Ld DR was that assessee did not claim these expenses u/s. 37 and did not treat them as revenue in nature, and therefore assessee should be precluded from claiming benefit of these expenses, now at this stage, irrespective of this fact that these expenses may have been held as allowable, if the assessee would have made its claim correctly as per law, at the time of filing of return. We have carefully considered this argument, but find that it is not sustainable in the eyes of law, in the given facts and circumstances of the case, and in view of well settled position of law. In our view, there are no estoppels against law. Even if, assessee agrees or consents for something contrary to law, the A.O. is obliged under the law, to discharge his duty of making fair assessment of income and to compute amount of tax payable as per law. As per Article 265 of the Constitution of India, "No tax can be collected except by authority of law". Hon'ble Supreme Court in the case of Ramlal, Motilal and Chhotelal v. Rewa Coalfield Ltd. AIR 1962 SC 361, held that the state authorities should not raise technical pleas if the citizens have a lawful right, which is being denied to them merely on technical grounds. The state authorities cannot adopt the attitude which private litigants might adopt. Further, we place our reliance on the judgment of Hon'ble Delhi High Court in the case of CIT v. Bharat General Reinsurance Co. Ltd. [1971] 81 ITR 303 Relevant portion is reproduced below: "It was true that the assessee itself had included that dividend income in its return for the year in question, but there was no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quite apart from it, it was incumbent on the income-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it could not confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year. Therefore the income from dividend was not assessable during the assessment year 1958-59, but it was 10 & 5414 Mum 2017-Embio Limited assessable in the assessment year 1953-54. It could not, therefore, be taxed in the assessment year 1958-59." Further reliance is placed by us on another judgment of Hon'ble Gujarat High Court, in the case of, S.R. Koshti v. CIT [2005] 276 ITR 165/146 Taxman 335 in which relief was granted to assessee with following observations: "The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected." In the case of Smt. Sneh Lata Jain v. CIT [2004] 140 Taxman 156, Hon'ble J&K High Court held that "when the substantive law confers a benefit on the assessee under a statute, it cannot be taken away by the adjudicatory authority on mere technicalities. It is settled proposition of law that no tax can be levied or recovered without authority of law. Article 265 of the Constitution of India and section 114 of the State (J&K) Constitution imposes an embargo on imposition and collection of tax if the same is without authority of law." Lastly, we find it useful to refer to judgment of Hon'ble Bombay High Court in the case of CIT v. Central Provinces Manganese Ore Co. Ltd. [1978] 112 ITR 734, holding that, the mere fact that a deduction was not claimed before the Income-tax Officer, was not of much importance, since if the liability arises then a claim can be made in a bonafide manner at any stage before the higher authority, who is competent to grant relief. Thus, in view of aforesaid discussion, coupled with facts and circumstances of this case and clear position of law, as discussed above, in our opinion there was no reason to deny the claim assessee u/s. 37 of the Act. Therefore, the AO is directed to allow these expenses u/s. 37 of the Act. Accordingly, ground no. 2 of the assessee's appeal is partly allowed.

The KMBL has held continuously on the date of amalgamation at least ¾ 13 & 5414 Mum 2017-Embio Limited of book value of fixed assets held by it from the years prior to the date of amalgamation. The said condition was fulfilled. The assessee-company continuously hold ¾ book value of fixed asset of KMBL acquired in the claim of amalgamation. The assessee is continued the business of manufacturing of KMBL products which is manufacturing of Bulk drugs.

The assessee also in compliance of Rule 9C. In Assessment Year 2009- 10, the assessee company achieved the capacity utilization of 83.56% and claim was allowed in assessment order under section 143(3). In Assessment Year 2010-11 i.e. second year from the date of amalgamation the assessee achieved capacity utilization of 10.76% due to labor problem, thereby the assessee made an application as per Rule 9C before the Central Government to allow the extension of time for achieving minimum production of 50% beyond stipulated four year i.e. on or before the 31.03.2012 until the labour unrest was mutually resolved and allowed the assessee to claim set off of carry forward business losses and unabsorbed depreciation on amalgamating company of KMBL. The CBDT rejected the application of assessee on 02.02.2015 on the reasoning that there is no certainty of labour strike and the matter is pending before the Labour Tribunal and further litigation before the Hon’ble High Court cannot be ruled out. The ld. AR of the assessee submits that CBDT while rejecting the application of assessee no-where held that the amalgamation as non-genuine nor made any adverse 14 & 5414 Mum 2017-Embio Limited comment of any nature. In support of his submissions the ld AR for the assessee relied on the decision of Mumbai Tribunal in Bayer Material Science P Ltd Vs ACIT [2013] 32 taxmann.com 134 (Mumbai Trib.). The ld AR further submits that claim of set off of loss/unabsorbed depreciation was allowed in AY 2009-10 in assessment order passed under section 143(3) dated 15.12.2011, which was withdrawn in AY 2010-11. In without prejudice submissions the ld AR for the assessee submits that withdrawal if any can be only in AY 2012-13 ( i.e. in the year under consideration) 16. On the other hand the ld. DR for the revenue supported the orders of the authorities below. The ld. DR further submits that the assessee has not fulfilled the condition of achieving 50% of production level and continue to maintain the same level before the end of four year from the date of amalgamation. The application made by the assessee for extension of time was also dismissed by CBDT vide order dated 02.01.2015.

Ltd Vs ACIT (supra) held that Section 72A(2)(b)(iii) provides that the accumulated loss of the amalgamating company shall not be set off or carried forward and unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company if the amalgamated company fails to fulfill such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose. The 'prescribed' conditions as referred to in this provision have been set out in rule 9C.

This rule has two clauses. First clause provides that the amalgamated company shall achieve level of production of at least 50 per cent of the installed capacity of the amalgamating company before the end of four years from the date of amalgamation and continue to maintain the said minimum level of production till the end of five years from the date of amalgamation. The second clause states that the amalgamated company shall furnish to the Assessing Officer a certificate in Form No. 62 duly 16 & 5414 Mum 2017-Embio Limited verified by an accountant showing particulars of production along with return of income 'for the assessment year relevant to the previous year during which the prescribed level of production is achieved and for the subsequent assessment years relevant to previous years falling within five years from the date of amalgamation'. On going through clause (a) of rule 9C, it is found that the amalgamated company is required to achieve the level of production of at least 50 per cent of the installed capacity of the undertaking of the amalgamating company 'before the end of four years from the date of amalgamation'. A cursory perusal simply divulges that the requirement of achieving production of at least 50 per cent of the installed capacity of the undertaking is to be fulfilled before the end of four years from the date of amalgamation. This production level may be achieved in the first year or second year or third year or even before the end of the fourth year.

is restore to the file of assessing office to reconsider the issue afresh and decided it after following the order of the Tribunal. The assessing officer is also directed to consider the submission of the assessee that withdrawal of loss or depreciation if any can be only in AY 2012-13 ( i.e. in the year under consideration) and to decided the issue in accordance with law. In the result this ground of appeal is allowed for statistical purpose.

17. ITA No. 2460 & 5414 Mum 2017-Embio Limited

ITA No. 5414/Mumbai/2017 for AY2013-14.

I. NON GRANT OF DEDUCTION OF REVENUE R&D EXPENDITURE OF Rs.64,80,742/- UIS 35(1)(i) 1. The Learned CIT(A) erred in not granting the claim of R&D expenditure ofRs.64,80,742/- U/S 35(1)(i) made in the revised return of income by interpreting that non-consideration by Department of Scientific and Industrial Research (DSIR) in its report in Form 3CL for deduction U/S 35(2AB) as R&D expenditure the same are non-genuine expenditure.

2. The Learned CIT(A) erred in drawing incorrect conclusion that DSIR did not approve the expenditure of Rs. 64,80,742/- as they are non-genuine expenditure without any base or such report by DSIR 3. The Learned CIT(A) erred in following his order dated 02.01.2017 for A.Y. 2012-13 4. The claim made for deduction U/S 35(1)(i) of Rs. 64,80,742/- required to be allowed.

1. 1. The Learned CIT(A) erred in not granting the claim of R&D expenditure of Rs.64,80,742/- U/S 37(1) by interpreting that non-consideration by Department of Scientific and Industrial Research (DSIR) in its report in Form 3CL for deduction U/S 35(2AB) as R&D expenditure the same are non-genuine expenditure.

2. The Learned CIT(A) erred in drawing incorrect conclusion that DSIR did not approve the expenditure of Rs. 64,80,742/- as they are non-genuine expenditure without any base or such report by DSIR 3. The Learned CIT(A) erred in following his order dated 02.01.2017 for A.Y. 2012-13.

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4. The claim made for deduction u/s 37(1) of Rs. 64,80,742/- requires to be allowed. III. NON GRANT OF DEDUCTION OF CAPITAL R&D EXPENDITURE OF Rs.44,664/- U/S 35(1)(iv) 1. The Learned CIT(A) erred in not granting the claim of capital R&D expenditure of Rs.44,664/- u/s 35(1 )(iv) as per revised return of income. 2. The Learned CIT(A) ought to have allowed the claim R&D expenditure of Rs. 44,664/- u/s 35(1 )(iv) as per revised return of income.

Order pronounced in the open court on 23/04/2019.