DCIT 2(1)(1), MUMBAI vs. GODAVARI BIOREFINERIES LTD, MUMBAI

Date of hearing 15-05-2018 Date of pronouncement -06-2018 O R D E R

Per G Manjunatha, AM :

“1. "On the facts and in the circumstances of the case and in law, the Id.CIT(A) erred in allowing the deduction u/s 35(2 AB) without appreciating that the assessee was not approved by the prescribed authority u/s 35(2AB) for AY 2012- 13" 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the disallowance u/s 14A r.w. Rule 8D to the exempt income without appreciating that there is no such provision in the IT Act, 1961 for doing so in the relevant year."

The AO also determined book profit of Rs.13,77,63,217 by making adjustments towards disallowance of expenses u/s 14A of the Act.

3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has filed elaborate written submissions on the issue of disallowance of deduction claimed u/s 35(2AB) to argue that the assessee is eligible for deduction as its R&D facility has been approved by the competent authority, i.e. Department of Scientific & Industrial Research, Government of India and to this effect issued form 3CM on 14-01-2013, in response to an application filed by the assessee in form 3CK on 06-11-2012. Insofar as disallowance of expenditure incurred in relation to exempt income, assessee has submitted that it has earned dividend income of Rs.3,945 and suo moto disallowance of Rs.10,000 has been made, whereas the 3 ITA 3473/Mum/2017 AO has determined disallowance of Rs.31,99,258 without appreciating the fact that disallowance contemplated u/s 14A cannot swallow entire exempt income of the assessee.

7.5 I have carefully considered rival submission and facts of the case. It is an undisputed fact that the Appellant Company is engaged in the Research since long and have the recognitions dated 09.04.2009 and 16.06.2009. Therefore, the Appellant's unit was duly recognized for carrying out R&D activities. The Assessing Officer has not doubted the genuineness of the expenditure. The only issue before the Learned Assessing Officer is that Form No. 3CM which was issued 14.01.2013 and was not available for the Assessment Year. I have also noted Section 35(2AB) which states that the R&D unit should be approved. Nowhere in the section is any cut off date prescribed for allowing the weighted deduction. If at the time of assessment, the unit is approved and the expenses are genuine it would meet requirement of section 35(2AB) of the Act and the weighted deduction ought to be allowed. 7.6 It is already noted in the Assessment Order that the Form No. 3CM was issued on 14.01.2013 and was available at the time of assessment. Further, the unit was a recognized unit and the expenses were genuine. There is no restriction in sec 35(2AB) of the I T Act for applying any cut off to allow expenses only after the date Form No. sCM is issued. This view is fortified by the decision of the Delhi High Court in SandanVikas (India) Ltd. 335 ITR 117 and Gujarat High Court in Claris Lifesciences Ltd. 326 ITR 251. 7.7 The Hon'ble Delhi High Court in SandanVikas (India) Ltd. 335 ITR 117 has observed that: "Para 2 The provision further states that i?i order to claim this weighted deduction, it is to be certified by the Competent Authority that the assessee had undertaken research and development activity. The competent authority in this behalf is Department of Scientific & Industrial Research (DSIR). The assessee had approached DSIR vide application dated loth January, 2005. The DSIR vide its letter dated 2^vd

4 ITA 3473/Mum/2017 February, 2006 granted recognition of the in-house R&D facilities of the assessee company and also granted approval for the expenses incurred by the company on in-house R&D facility in prescribed form $CM by letter dated i8th September, 2006. The Assessing Officer, however, refused to accord the benefit of the aforesaid provisions of weighted deduction to the assessee on the ground that recognition and approval was given by the DSIR in February'/September 2006, i.e., in the next assessment year and, therefore, the assessee was not entitled to the benefit. The CIT(Appeal) accepted this view of the Assessing Officer and dismissed the appeal, however, the Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal") has come to the conclusion that the assessee would be entitled to weighted deductions of the aforesaid expenditure incurred by the assessee in terms of the Section 3§(2AB) of the Act and in coming to this conclusion, the Tribunal has relied upon the judgment ofGujarat High Court in CITv. Claris Lifesciences Ltd. [2010!326 ITR 251 /[2oo8] 174 Taxman jj.q . We have gone through the aforesaid judgment of the Gujarat High Court and find that Gujarat High Court detailed in no-uncertain terms that the cut-off date mentioned in the certificate issued by the DSIR would be of no relevance. What is to be seen is that the assessee was in indulging in R&D activity and had incurred the expenditure thereupon. Once a certificate by DSIR is issued, that would be sufficient to hold that the assessee fulfills the conditions laid down in the aforesaid provisions. The discussions, which is undertaken by the Gujarat High Court while interpreting the aforesaid provisions, is extracted below: "7. .........The lower authorities are reading more than what is provided by law. A plain and simple reading of the Act provides that on approval of the research and development facility, expenditure so incurred is eligible for weighted deduction.

9. The provisions nowhere suggest or imply that research and development facility is to be approved from a particular date and, in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which 5 ITA 3473/Mum/2017

presupposes incurring expenditure in this behalf, application to the prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of section itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered Rule 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of Rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by Section 3$(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up research and development facility in India, the legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction. jo. We are in full agreement with the reasoning given by the Tribunal and we are of the view that there is no scope for any other interpretation and since the approval is granted during the previous year relevant to the assessment year in question, we are oj the view that the assessee is entitled to claim weighted deduction in respect of the entire expenditure incurred under Section 35(2AB) of the Act by the assessee," \ 7.8 The Hon'ble Gujarat High Court in Claris Lifesciences Ltd. 326 ITR 251 has observed that: "Para 6- The Tribunal has discussed this issue at length in its order. It was contended by the assessee before the Tribunal that nowhere the provisions provide that expenditure from the date of approval only has to be allowed. In the absence of those words, such conditions cannot be imputed in the statute by the lower authorities. Doing so amounts to reading more in the law which is not expressly provided. The words used are any expenditure incurred by the assessee on scientific research on the in-house "R & D" facility approved by the prescribed authorities has to be allowed by deduction of expenditure so incurred. Meaning of these words is plain and clear that the facility is to be established first and on approval of the facility all the expenditure so incurred by the assessee for development of in-house facility is to be held as eligible for weighted deduction. Form No. 3CM, which is order of approval as provided by the rules in this behalf also does not have any mention of date of approval

6 ITA 3473/Mum/2017 rather it speaks of only approval. The lower authorities are reading more than what is provided by law. A plain and simple reading of the Act provides that on approval of the "R & D" facility, expenditure so incurred is eligible for weighted deduction. Para 7 The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of (i) development of facility; (ii) incurring of expenditure by the assessee for development of such facility; (Hi) approval of the facility by the prescribed authority, which is "DSIR"; and (iv) allowance of weighted deduction on the expenditure so incurred by the assessee. The provisions nowhere suggest or imply that "R & D" facility is to be approved from a particular date and in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which presupposes incurring expenditure in this behalf, application to the prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of section itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered rule 6(5A) and Form No. sCM and come to the conclusion that a plain and harmonious reading of rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of "R & D" facility has to be allowed for weighted deduction as provided by section 3$(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up R & D facility in India, the Legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the Legislature by mdking above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction."

7.9 In view of the above, it is clear that the Learned Assessing Officer was reading more in the section than what is provided in law. My attention is also drawn to the format of Form No. 3CM as given in the Income Tax Rules, 1962. There is no reference in the Form No. sCM to any Assessment Year or cut-off date for allowability of the weighted deduction and therefore, the form is in complete alignment with the section and as interpreted by the Delhi High Court. In view of these facts and the judicial decisions on the issue, Ground No. 2 is allowed. However, the AO is directed to verify and ensure that no depreciation is claimed and allowed on capital expenditure of Rs. 15,33,26,9287- claimed eligible deduction u/s 35(2AB) of the Act by the appellant.”

7 ITA 3473/Mum/2017 Insofar as addition made towards disallowance of expenses incurred in relation to exempt income u/s 14A r.w.r. 8D, the Ld.CIT(A) observed that the correct proposition and the various judicial pronouncements confirm that disallowance contemplated u/s 14A should not exceed the exempt income. However, since the assessee has already made suo moto disallowance of Rs.10,000, further disallowance worked out by the AO u/r 8D(2)(ii) is unwarranted. Accordingly, he directed the AO to restrict disallowance to suo moto disallowance of Rs.10,000 made by the assessee. The relevant portion of the order is extracted below:-

“8. Ground No. 3 relates to disallowance of Rs. 31,99,2587- u/s 14A r.w.r. 8D of the Income Tax Act, 1961. During the course of assessment proceedings, the AO has observed that appellant has not included the dividend income for Rs. 3,945/- in the ottal income. In the computation of income the appellant has made a disallowance of Rs10,000/- but the same is not as per the provisions of section 14A r.w.r. 8D of the IT Rules. After considering the submission of the appellant the AO has recomputed the disallowance u/r 8D(2)(ii) to the extent of Rs. 3o,37,745/- and u/r 8D(2)(iii) to th extent of Rs. i,7i,5i3/-. Thus the total disallowance made by the AO u/s 14A r.w.r. 8D(2)(ii) is worked out to Rs. 32,09,258/-. Since the appellant has itself disallowed Rs. 10,000/-, therefore, balance amount of Rs. 31,99,2587- is disallowed and added back to the income of the appellant. 8.1 On the other hand the appellant submitted that the assessee company has disallowed Rs. 10,000/- u/s 14A of the IT Act considering that the tax free dividend income is only Rs. 3,945/-. The AO has worked out the disallowance u/s 14A r.w.r. 8D(a)(ii) at Rs. 32,09,258/-. The appellant received dividend income to the extent of RS.3,945/- and suo motto made disallowance of Rs. 10,000/-, whereas the AO has computed as per Rule 8D(2)(ii) of the IT Rules, 1962. It is submitted that in view of the various judicial pronouncements confirmed the fact that disallowance should not exceed the exempt income. Therefore, the disallowance to be restricted to the exempt income of Rs. 3>945/'- 8.2 I have carefully considered the rival submissions and fact of the case. The correct proposition and the various judicial pronouncements confirmed the fact that disallowance should not exceed the exempt income. However, since the 8 ITA 3473/Mum/2017 appellant has already made suo motto disallowance of Rs10,000/-, whereas the AO is not required to make computation as per Rule 8D(2)(ii) of the IT Rules, 1962. Therefore, the disallowance to be restricted to suo motto disallowance of Rs10,000/- . Therefore, addition of Rs, 31,99,258/- is to be deleted. In view of the same Ground No. 3 is partly allowed.”

The AO, after considering the evidences filed by the assessee to justify deduction claimed u/s 35(2AB), issued notice u/s 133(6) to the Secretary, Department of Scientific & Industrial Research, Government of India to provide the status of approval granted to the assessee u/s 35(2AB) issued, if any. In response to notice u/s 133(6), Secretary, Department of Scientific & Industrial Research, Government of India, has written a letter dated 15-12-2014 which was received by the AO on 19-12-2014 which has been extracted by the AO in his order at para 5.1 on page 2 as per which, the approval u/s 35(2AB) has been granted to the assessee w.e.f. 01-04-2012, i.e. for AY 2013-14 onwards. In the said letter at para 3 it was categorically stated that since the R&D facility was not approved u/s 35(2AB) for financial year 2011-12 corresponding to AY 2012-13, no form 3CM and form 3CL were issued. The AO, after

9 ITA 3473/Mum/2017 considering relevant details and also considering the explanation submitted by the assessee held that to claim deduction u/s 35(2AB), approval from the competent authority, i.e. Secretary, Department of Scientific & Industrial Research, Government of India is mandatory and without such approval assessee cannot claim weighted deduction u/s 35(2AB) of the Act.

The assessee further submitted that once the R&D facility had been approved by the competent authority, there is no cut off date is prescribed to be eligible for weighted deduction in respect of expenditure incurred towards research and development activities. Therefore, there is no merit in the argument of the AO that there is no approval available for the impugned assessment year. The assessee, referring to the application filed for approval in form 3CK dated 19-11-2012 addressed to Secretary, Department of Scientific & Industrial Research, Government of India and also copy of approval granted in form 3CM

10 ITA 3473/Mum/2017 dated 14-01-2013 submitted that although the letter specifically stated that the approval has been granted from 01-04-2012, the fact remains that the assessee was having approval for earlier period for which necessary evidence has been filed before the AO alongwith copies of report submitted to DSIR for financial year to prove expenditure incurred for R&D facility, copy of audit report of R&D expenses, copy of application filed in form 3CK. The assessee also relied upon various judicial precedents including the decision of Hon’ble Delhi High Court in the case of Sandan Vikas (India) Ltd 355 ITR 117 and Hon’ble Gujarat High Court in the case of CIT v. Claris Life Sciences Ltd. 326 ITR 251.

Alternatively, the assessee further contended that in case if it is held that the assessee is not eligible for weighted deduction u/s 35(2AB), deduction should be allowed u/s 37(1) in respect of expenditure incurred by the assessee as the AO never doubted genuineness of expenditure during assessment proceeding.

11 ITA 3473/Mum/2017 3CM. The only dispute is with regard to the approval of its R&D facility for the impugned assessment year. Accordingly to the AO, assessee’s R&D facility has not been approved for the impugned assessment year which is evident from the fact that the competent authority i.e. Secretary, Department of Scientific & Industrial Research, Government of India has issued a clarificatory letter dated 15.12.2014 wherein it was categorically stated that the assessee’s R&D facility has been approved for the period from 01.04.2012 up to 31.03.2016. The letter further stated that since the company was not approved u/s 35(2AB) of the IT Act, 1961 for the financial year 2011-12 corresponding to AY 2012-13 no Form 3CM and 3CL were issued. The letter further stated that the assessee has filed R&D expenditure incurred for the financial year 2012-13 corresponding to AY 2013-14 alongwith the Form 3CL for which necessary Form 3CM has been issued approving the facility from AY 2013-14 onwards. All these facts were not disputed by either party. The assessee only claims that there is no cut off date specified under the provisions of section 35(2AB). What is required to be seen is whether approval has been granted by the competent authority or not. Once approval has been granted u/s 35(2AB), then the AO is having no power to question such approval regarding date of approval and period of approval.

8. Having heard both sides, we do not find any merit in the arguments

12 ITA 3473/Mum/2017 of the assessee for the reason that to get the benefit of deduction u/s 35(2AB), the facility must be approved by the competent authority after fully satisfying with the conditions specified under the said section. Rule 6 of I.T. Rules, 1962 prescribed the procedure for approval of R&D facility as per which assessee needs to file an application in Form 3CK alongwith the necessary details and the competent authority, after satisfying with the conditions prescribed under the Rule, shall issue Form 3CM approving the R&D facility. The Rule further prescribes that the competent authority shall submit its report in relation to the approval of R&D facility in Form 3CL to the Director General Income Tax (Exemption) within a prescribed time. Unless the R&D facility is approved by the competent authority, the assessee shall not be eligible for weighted direction u/s 35(2AB) of the Act. In this case, on perusal of facts available on record, it is abundantly clear that the competent authority has categorically stated that the assessee’s R&D facility had not been approved for the impugned assessment year, in a reply filed to the AO, in response to notice issued u/s 133(6). Therefore, we are of the considered view that the assessee is not eligible for weighted deduction u/s 35(2AB) in respect of R&D expenditure.

The case laws relied upon by the assessee are not applicable to the facts of the assessee’s case as all the case laws are rendered in the context of approval granted by the competent authority in the subsequent financial year, but including the assessment years under consideration therein. Under these circumstances the Courts held that once R&D facility is approved by the competent authority then there is no reason to the AO to deny benefit from the date of approval of such facility as the Act does not prescribe any cut off date for allowing such benefit. In the present case, the competent authority categorically clarified that no such approval has been granted to the assessee for the impugned assessment year. Hence, the case laws relied upon by the assessee are not considered.

10. Coming to the alternative submission of the assessee. The assessee has made an alternative submission inasmuch as that if it is held that the assessee is not eligible for weighted deduction u/s 14 ITA 3473/Mum/2017 35(2AB), at least the deduction should be allowed u/s 37(1) in respect of expenditure incurred towards R&D facility. We find merit in the argument of the assessee for the reason that if the assessee is not eligible for weighted deduction u/s 35(2AB), the expenditure towards such R&D facility cannot be disallowed when the assessee has filed necessary details to prove genuineness of such expenditure. In this case, on perusal of details, we find that the AO has never doubted the expenditure incurred by the assessee towards its R&D activities. The AO also not doubted the genuineness of such expenditure. Therefore, we are of the considered view that once the assessee has proved expenses with a necessary evidence, there is no reason for the AO to disallow such expenditure u/s 37(1) of the Act. Hence, we direct the AO to allow revenue expenditure incurred by the assessee to the extent of Rs.217,26,968/- u/s 37(1) of the Income Tax Act, 1961. Insofar as capital expenditure, we direct the AO to verify the nature of expenditure incurred and allow depreciation as per law.

The assessee also made suo moto disallowance of Rs.10,000 towards

15 ITA 3473/Mum/2017 expenditure incurred in relation to exempt income. The AO has determined disallowance of Rs.32,09,258 u/r 8D(2)(ii) & 8D(2) (iii) on the ground that from the assessment year 2008-09 onwards disallowance contemplated u/s 14A shall be worked out as per the prescribed method provided under rule 8D of I.T. Rules, 1962. It is the contention of the assessee that disallowance contemplated u/s 14A in any way cannot swallow the entire exempt income of the assessee and this legal position is reiterated by various High Courts, including the Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT (2015) 378 ITR 33 (Del) wherein it was held that disallowance contemplated u/s 14A cannot exceed exempt income.

There is no dispute with regard to applicability of provisions of section 14A r.w.r. 8D of I.T. Rules, 1962. The assessee has made suo moto disallowance of Rs.10,000 considering the nature and amount of dividend income earned for the year. Admittedly, the assessee has earned dividend income of Rs.3,945 as against which it has made disallowance of Rs.10,000 towards expenditure incurred in relation to exempt income. The Hon’ble Delhi High Court in the case of CIT vs Cheminvest Ltd vs CIT (supra) held that disallowance contemplated u/s 14A shall not exceed exempt income. This legal proposition is further

16 ITA 3473/Mum/2017 reiterated by the Hon’ble Delhi High Court in the case of Joint Investment (P) Ltd vs CIT (2015) 372 ITR 694 (Del). Therefore, we are of the considered view that disallowance worked out by the AO by invoking Rule 8D(2)(ii) & 8D(2)(iii) is in excess of exempt income earned for the year and in view of the decision of the Hon’ble Delhi High Court, we direct the AO to restrict disallowance to the extent of suo moto disallowance of Rs.10,000 made by the assessee.

Order pronounced in the open court on _____ July, 2018.