DCIT, CIRCLE-7(1), DELHI vs. EICHER MOTORS LIMITED, DELHI

First we take up Revenue’s appeal in . The Revenue has raised following grounds of appeal.

“1. Whether on the facts and circumstances of the case and in law, the Ld. NFAC has erred in deleting the addition made by the AO on account of disallowing of provision for warranty amounting to Rs. 9,06,17,17,960/- ignoring the observation of the AO that provision for Warranty expenses is not in nature of a associated liability and hence not allowable as deduction under the Income Tax Act, 1961? 2. Whether on the facts and circumstances of the case and in law, the Ld. NFAC has erred in deleting the addition made by the AO on account of disallowance of excess claim u/s 35(2AB) of IT Act 1961 amounting to Rs. 1,89,09,000/- whereas the AO has rightly made disallowance being the difference of amount claimed in ITR vis a vis amount reflected in Form 3CL provided by DSIR in case of the assessee for the year under consideration? 3. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.” assessment order and contended that the learned CIT(A) was not justified in deleting the impugned disallowances.

“Disallowance of provision for Warranty Expenses amouinting to Rs. 9,06,17,17,960/

The assessee, engaged in manufacture and sale of two wheelers and spare parts, makes provision for unexpired warranty liability in respect of sales made until the end of such year, on a rational and scientific basis. During the year, the assessee made provision for warranty of Rs.28,32,17,960 and paid warranty claims aggregating to Rs 19,26,00,000, as is evident from Note No. 32 'Provision for liabilities' of the audited financial statements (refer page 32 of the PB). Details of warranty provisions is at pgs. 135 to 148 of the PB)

Assessing Officer (AO)

The AO, following the assessment orders for the earlier years, made a disallowance of Rs. 9,06,17,960 (Rs. 28, 32 ,17,960-Rs. 19,26,00,000), being the excess amount of the provision over the actual payments made against warranty claims during the year.

The CIT(A), vide order dated 25.10.2023, noting that the issues is covered in favour of the assessee by the orders passed in years by the Tribunal/CIT(A), which have not been challenged further in appeal, deleted the disallowance made by the AO.

Submission

It is, at the outset, respectfully submitted that the aforesaid issue is squarely covered in favour of the assessee by following orders passed by the Hon'ble Tribunal in assessee's own case holding that the provisions for warranty made by the assessee based on past history, cannot be treated as provision made for unascertained liability:

Order passed for AY 2009-10 [pg. nos. 67 to 70 of the PB, relevant finding @ pg. no. 68 to 70]

Order passed for AY 2010-11 [pg. nos. 85-88 of the PB, relevant finding @pg. no. 87 to 88]

Order passed for AY 2011-12 [pg. nos. 102 to 107 of the PB]

It is further pertinent to point out that no further appeal was filed before the High Court against the said orders. Further, the CIT(A) had deleted the disallowance made on this issue in AY s 2012-13 to 2014-15, however, no appeal was preferred by the Department before the Tribunal.

Accordingly, the ground of appeal raised by the department deserves to be dismissed.

Disallowance of deduction claimed u/s 35(2AB) of the Act amounting to Rs. 1,89,09,000/- The assessee has an in-house Research and Development ('R&D') center at Chennai which is duly approved by the Department of Scientific and Industrial Research ('DSIR') and eligible for claiming deduction section 35(2AB) of the Act. During the year, the assessee claimed weighted deduction amounting to Rs. 27,30,84,651/- (i.e. 12,55,73,093+14,75,11,558)

Assessing Officer (AO)

The AO denied deduction of Rs.189.09 lacs u/s 35(2AB) of the Act by holding that DSIR is the authority for certifying the amount eligible for deduction u/s 35(2AB) of the Act and since the DSIR has in Form 3CL [Refer, page 160-161 of the PB] certified that expenditure incurred on R&D activities to the extent of Rs. 2541.76 lacs is eligible for deduction u/s 35(2AB) of the Act, the excess deduction claimed by the assessee of Rs. 189.09 lacs [Rs. 2730.85 lacs - Rs. 2541.76] is not eligible for deduction under that section.

CIT(A)

The CIT(A) following the order passed by the Hon'ble Tribunal in assessee's own case for AY 2013-14 and 2014-15, deleted the disallowance made by the AO.

Submission

In this regard, it is, at the outset, respectfully submitted that the aforesaid issue is squarely covered in favour of the assessee by common order passed by the Hon'ble Tribunal in assessee's own case for assessment years 2013- 14 and 2014-15 wherein the Tribunal deleted the disallowance holding that the expenditure eligible for deduction u/s 35(2AB) of the Act cannot be restricted to the amount of expenditure certified by DSIR in Form 3CL [Refer, pg. nos. 115 to 126 of the PB, relevant finding @ pg. no. 116-124.]

Recently, the Hon'ble Delhi High court has in the case of Nagravision India Private Limited v. Secretary, DSIR dated 13.02.2024 has categorically held that provision of section 35(2AB) of the Act provides deduction of "expenditure so incurred." by the approved facility and expenditure eligible for deduction under that section cannot be restricted only to that which is incurred post the grant of approval to the center in terms of Rule 6(5A) of Income Tax Rules, 1962

7 & 3525/Del/2023 It is pertinent to point out that provisions of Rule 6(7A) of the Rules were amended vide Income Tax (Tenth Amendment) Rules, 2016, w.e.f., 01.07.2016, providing for inclusion of details in relation to quantification of expenditure incurred at in-house R&D facility in Form 3CL to be submitted by DSIR to the department.

In the following cases, various benches of the Tribunal have held that the amendment in Rule 6(7A) applies prospectively w.e.f., 01.07.2016 and thus, prior to that Form 3CL granting approval by prescribed authority in relation to quantification of weighted deduction under section 35(2AB) had no legal sanctity:

Provimi Animal Nutrition India Pvt. Ltd [2021] 124 taxmann.com 73 (Bangalore - Trib.) DCIT v. STP Ltd.: [2021] 187 ITD 538 (Kolkata - Trib.) DCIT v. Force Motors: [2021] 91 ITR(T) 8 (Pune - Trib.) MAHLE Behr India (P.) Ltd. v. DCIT: [2021] 190 ITD 852 (Pune - Trib.) ACIT v. Crompton Greaves Ltd.: [2020] 181 ITD 40 (Mumbai - Trib.) M/s. Natural Remedies Pvt. Ltd. v. ACIT: (Bangalore - Trib.) M/s. Mahindra Electric Mobility Ltd. v. ACIT [ITA No.641/Bang/2017 (Bangalore - Trib.) M/s. Indfrag Limited v. ACIT [ITA No.98/Bang/2018 (Bangalore - Trib.)

In view of the aforesaid, the assessee is eligible for claiming deduction on the entire expenditure incurred under on research and development, notwithstanding the fact that certain portion of expense was not certified by the DSIR in Form 3CL.

Accordingly, the ground of appeal raised by the department deserves to be dismissed”.

6. We have considered the rival submissions and perused the material available on record. By way of ground no. 1 the Revenue has assailed the deletion of addition made on account of disallowance of expenses made out of provision of warranty expenses. At the outset it was pointed out by learned Senior Counsel Shri assessee by the decisions of Co-ordinate Benches of this Tribunal in assessee’s own case for A.Y. 2009-10, 2010-11 & 2011-12, holding that the provisions for warranty made by the assessee is based on past history, cannot be treated as provision made for unascertained liability. He submitted that no further appeal was filed against such orders of the Tribunal before the Hon’ble High Court. Learned Senior counsel further submitted that in A.Y. 2012-13 & 2013-14 the CIT(A) had deleted the disallowance made on this issue and no appeal was preferred by the Department even before the Tribunal. He submitted that in the year under consideration the learned CIT(A) in deleting the disallowance has followed earlier orders of the Tribunal and there being no change in facts and circumstances, the same view should be taken herein also.

6.1 Learned DR fairly conceded the aforesaid factual position. He however relied on the order of AO and submitted that the Department has not given up its stand.

6.2. We find that in A.Y. 2011-12 the ITAT Delhi Bench ‘B’ vide its dated 25.11.2016 rendered in has adjudicated identical issue in favour of the assessee, inter alia, by observing as under:

“13. In so far as Ground No. 2 is concerned, we find that similar disallowances were made by the Assessing Officer in A.Ys 2003-04 to 2009 - 9 & 3525/Del/2023 10 and in A.Y. 2010-11. The disallowances were deleted by the CIT(A) and the revenue did not prefer any appeal till A.Y 2008-09. In A.Ys 2009-10 and 2010-11, dispute relating to similar disallowances travelled upto the Tribunal and the Tribunal has decided the issue in favour of the assessee and against the revenue in ITA No. 256 /DEL/2013 for A.Y 2009-10 and ITA No. 2228/ DEL/ 2014 for A.Y 2010-11. The relevant findings of the co- ordinate bench in ITA No. 2228 / DEL /2014 read as under: "19. AO disallowed an amount of Rs.2,10,00,000/- being excess of actual warranty claimed out of Rs.3,67,00,000/- made as provision for warranty by the assessee company on the ground that it was not ascertained liability. CIT (A) vide impugned order deleted the disallowance of Rs.2,10,00,000/-.

10 & 3525/Del/2023 own case entitled DCIT Vs M/s. Eicher Motors Ltd. in I.T.A. No. 3560/Del12008 order dated 18.09.2009. Ld. A.R. also relied upon the judgment of Hon'ble Supreme Court in the case entitled Rotork Controls India Pvt. Ltd. Vs CIT, 314 ITR 62 (S.C.). The ratio of judgment (supra) is that estimated provisions for warranty are allowable for deduction. Operative part of the judgement (supra) is reproduced below for facility of reference: "Held, reversing the decision of the Hon'ble High Court, that the valve actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective; that valve actuator being a sophisticated. item no customer was prepared to buy a valve actuator without a warranty. Therefore, the warranty became an integral part of the sale price: in other words, the warranty stood attached to the sale price of the product. In this case, the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income tax Act, 1961. 11 ITA Nos2228 & 2268/Del./2014 The present value of a contingent liability, like the warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37. The principle of estimation of the contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event: (h) it is probable that an outflow of resources will be required to settle the obligation, and (c) a reliable 11 & 3525/Del/2023 estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of ht items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37."

with earlier decisions of the Tribunal and no change in facts having been pointed out by the learned CIT(A), we see no reason to interfere in the order of learned CIT(A) and the same is affirmed. Ground no. 1 of Department’s appeal in is accordingly rejected.

7.1.1 He further submitted that scientific research expenses incurred at approved in-house R&D facility are eligible for weighted deduction u/s 35(2AB) of the Act whether incurred prior to or post the date of such approval by DSIR mentioned in form 3CM. In support of its contention the learned counsel relied on the judgment of the Hon’ble Jurisdictional High Court of Delhi in the case of Nagravision India Private Limited v. Secretary, DSIR 159 taxmann.com 558 (Delhi) dated 13.02.2024, holding that provision of section 35(2AB) of the Act provides eligible for deduction under that section cannot be restricted only to that which is incurred post the grant of approval to the center in terms of Rule 6(5A) of Income Tax Rules, 1962.

7.1.2 Learned counsel further submitted that Coordinate Benches of the Tribunal have consistently held that amendment in Rule 6(7A) of the Rules, brought on the statute book vide Income Tax (Tenth Amendment) Rules, 2016, w.e.f., 01.07.2016, providing for inclusion of details in relation to quantification of expenditure incurred at in-house R&D facility in Form 3CL to be submitted by DSIR to the department are prospective in nature and prior to that Form 3CL granting approval by prescribed authority in relation to quantification of weighted deduction under section 35(2AB) had no legal sanctity.

7.1.3 Learned counsel submitted that the order of the learned CIT(A) on the issue in question is in consonance with earlier order of the Tribunal in assessee’s own case for A.Y. 2013-14 &2014-15 and therefore requires no interference.

7.2 Learned DR opposed the submissions and relied on the order of AO.

7.3 Having considered the rival submissions on the issue in question we find that the learned CIT(A) in deleting the disallowance of deduction claimed u/s 35(2AB) has followed Tribunal’s decision in assessee’s own case for A.Y. 2013-14 Hon’ble Jurisdictional High Court in the case of Nagravision India Private Limited (supra), wherein the Hon’ble High Court held as under:

“22. Both Section 35(2AB) and Rule 6 speak of expenditure which has already been incurred and therefore it would be wholly incorrect to read those provisions as envisaging benefits being extended only to such expenditure that may have been sustained after the facility has been accorded approval. We also find ourselves in agreement with the view expressed by the Gujarat High Court in Claris Life sciences Ltd., when it observed that the provisions of the Act and the Rules nowhere suggest that the date of approval of the R & D facility would constitute the cutoff date for the purposes of evaluating eligibility of weighted deductions or for expenses incurred only from that date onwards being liable to be taken into account for the purposes of Section 35(2AB) of the Act.”

7.3.1 Thus, the view of the Tribunal has been affirmed by the Hon’ble High Court.

No change in facts for the assessment year in question has been pointed out by the learned DR so as to take a different view in the matter. Respectfully following binding precedents, we affirm the order of learned CIT(A) on the issue in question.

Ground no. 2 of Revenue’s appeal in is dismissed.

“1. That the Commissioner of Income Tax (Appeals), NFAC Delhi [CIT(A)] has grossly erred on facts and in law in not allowing the deduction claimed by the appellant of ESOP expenditure of Rs.32,71,99,370/- being 15 & 3525/Del/2023 the difference between fair market value on the date of exercise and the exercise price, under section 37(1) of the Income-tax Act, 1961 ('the Act').

3. That the learned CIT(A) grossly erred on facts and in law in holding that the AO was right in not considering the said additional claim made otherwise than by filing revised return of income, without appreciating that Assessing Officer is empowered to allow additional claims/relief not claimed in the return of income in view of circular No.14(XL35) dated 11.04.1955 issued by CBDT.

5. That the CIT(A) erred on facts and in law in not following the judicial precedents relied upon by the appellant holding the same to be "per- incuriam" having been passed without considering the provisions under section 119(2)(b) of the Act.

“Disallowance of discount of Rs. 32,71,99,370/- on shares issued to the employees under Employee Stock Option Plan (‘ESOP’) During the relevant year, the assessee allotted 52,500 shares to the employees on exercise of ESOP option granted as per Employee Stock Option Scheme ('ESOS'), 2006 under which an option was granted to the employees to purchase the shares of the assessee company after the completion of the vesting period at a price prevailing on the date of grant of option.

Since, the option to the employee to acquire the shares was given at the prevailing market price, no expenditure, being the difference in the market price and allotted price, was claimed in the return of income filed for the year of such grant of option.

However, in the year of exercise of options by the employees, since the market price of the shares of the company exceeded the allotment/market price as on the date of grant, the difference of Rs. 32,71,99,370/- with respect to aforesaid 52,500 shares represented employee welfare expenditure incurred by the assessee. The working of ESOP expenditure is enclosed at page 241 of the PB. The said deduction, which was inadvertently remained to be claimed in the original return of income, was preferred through a letter dated 08.12.2017 (refer page 418 to 421 of the PB) alongwith revised computation of income during the course of assessment proceedings. (refer page 4 of PB).

Assessing Officer (AO)

The AO did not entertain the aforesaid claim of deduction on the ground that the same was not raised through revised return of income within the time limit prescribed in section 139(5) of the Act, placing reliance upon the decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. vs. CIT: 284 ITR 323.

The CIT(A) also rejected the additional claim on the ground that additional claim ought to be made by way filing a revised return of Income assessee and since time for the same has expired, the assessee should have availed the remedy u/s 119(2)(b) of the Act by filing an application for condonation of delay before the CBDT.

Submission

It is, at the outset, pertinent to point out that the said issue is squarely covered in favour of the assessee by the order passed by the Hon'ble Tribunal for AY 2013-14 and 2014-15, wherein the Tribunal admitted additional ground in respect of deduction of ESOP expenditure, being the difference between fair market value on the date of exercise and exercise price, following the decision in the case of the Biocon Limited vs DCIT: 35 taxmann.com 335 (Bang) (SB) which was affirmed by the Hon'ble Karnataka High Court in 430 ITR 151 (Kar.) and remitted it to the AO for adjudication. (Refer page 115-126 of the PB, relevant finding @ page 124-126).

Thereafter, the AO passed orders u/s 154/254/ 143(3) dated 11.08.2023 for AY 2013-14 and 2014-15 allowing deduction of ESOP discount. (Refer order for AY 2013-14 @ page 127 to 130 and order for AY 2014-15 @ page 131 to 134 of the PB).

Re: Authorities bound to consider legitimate claim, though not claimed in the original return of income

The AO/CIT(A) failed to appreciate that authorities bound to consider legitimate claim, though not claimed in the original return of income. In terms of Article 265 of the Constitution of India, tax can be imposed and collected only by way of authority of law, assessment completed by denying a legitimate claim otherwise available to an assessee, only on the ground that the said claim has not been preferred by way of a revised return, is in clear violation of the aforesaid provision of the Constitution of India

Reference in this regard can be made to the following Circular CBDT Circular No. 14 (XL-35) dated 11.04.1955 issued by the Board and the understated decisions rendered by various Courts wherein, it has been held

18 & 3525/Del/2023 that the AO is duty-bound to grant legitimate benefit and relief available to an assessee in the assessment order, even if the same were not claimed by the assessee in the return of income:

Chokshi Metal Refinery vs. CIT: 107 ITR 63 (Guj) CIT vs. Geo Industries and Insecticides (1) Pvt Ltd: 234 ITR 541 (Mad) Subhash Chandra Sarvesh Kumar v. CIT: 132 ITR 619 (All) CIT vs Mahalaxmi Sugar Mills Co Ltd: 160 ITR 920 (SC) CIT vs Simon Carves Ltd: 105 ITR 212 (SC) Anchor Pressings (P) Ltd vs CIT and Ors: 161 ITR 159 (SC) National Thermal Power Limited vs CIT: 229 ITR 383, (SC) CIT v. Bharat General Reinsurance: 81 ITR 303 (Del.)

Re:Decision of Supreme Court in the case of Goetze (India) Ltd. - not applicable

Further, it is pertinent to note that Supreme Court in the case of Goetze (India) Ltd (supra), made it clear that the bar on considering any additional claim made otherwise than by way of filing revised return of income was limited to the power of the AO and did not impinge on the powers of the appellate authorities to entertain additional claim/ ground of appeal

Reference in this regard, is invited to the following decisions, wherein it has been held that an additional claim though not made in the return, can be entertained by the CIT(A) / Tribunal and the principle rendered in Goetze (supra) does not impinge on powers of the appellate authorities to entertain such an additional claim:

Wipro Finance Ltd. v. CIT: 443 ITR 250 (SC) National Thermal Power Limited v. CIT: 229 ITR 383 (SC) CIT v. Jai Parabolic Springs Ltd.: 306 ITR 42 (Del.) CIT v. Aspentech India (P) Ltd.: (Del.)(HC) CIT v. Sam Global Securities Ltd.: (2014) 360 ITR 0682 (Del.)(HC) CIT v. Pruthvi Brokers and Shareholders P. Ltd. 349 ITR 336 (Bom.) JCIT v Hero Honda Finlease Ltd.: 115 TTJ 752 (Del. Trib.) SNC-Lavalin/Acres Inc.: 110 TTJ 13 (Del.) CIT vs. Aspentech India P. Ltd.: ITA No. 1233/2011 Chicago Pneumatic India P. Ltd. v DCIT: (2007) 15 SOT 252

19 & 3525/Del/2023 Without prejudice, it is further submitted that the aforesaid claim of deduction can even otherwise be allowed as additional ground by the Hon'ble Tribunal notwithstanding that the said additional claim was not made in the return of income.

Accordingly, the claim of deduction of discount on issue of ESOPs not claimed in the return of income but claimed during the assessment proceedings ought to be allowed.

10.1 Learned counsel submitted that the Tribunal in A.Y. 2013-14 and 2014-15 admitted the additional ground in respect of deduction of ESOP expenditure being the difference between fair market value on the date of exercise and exercise price, following the decision of the Special Bench of the ITAT in the case of the Biocon Limited vs DCIT: 35 taxmann.com 335 (Bang) (SB) which was subsequently affirmed by the Hon'ble Karnataka High Court in 430 ITR 151 (Kar.) and had remitted it to the AO for adjudication. He drew our attention to Tribunal’s order available at pages 115 to 126 of the P.B. (relevant finding at pages 120-125).

10.2 On the other hand, learned DR supported the order of the authorities below.

10.3 Having heard rival submissions we find that under identical facts the ITAT Delhi Bench ‘B’ in assessee’s own case for A.Y.2013-14 & 2014-15 vide order dated 29.08.2022 rendered in & 8739/Del/2019, has adjudicated the issue, inter alia, holding as under:

"That on the facts and circumstances of the case and in law, the ESOP expenditure of Rs. 1, 29 ,68,750/- -being the difference between fair market value on the date of exercise and the exercise price, ought to be allowed as deduction under section 37(1) of the Act."

"The aforesaid additional ground of appeal calls for being admitted and adjudicated on merits in view of the discretion vested in your Honour under Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, the decision of the Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT: 229 ITR 383 and Jute Corporation of India vs CIT: 187 ITR 688 (SC)."

14. Upon careful consideration, we admit this additional ground. In this, the Ld. Counsel for the assessee submitted that he shall be relying on ITAT Special Bench decisions in case of Biocon Limited vs DCIT 155 TTJ 649 (Bang.)(SB) which was affirmed by the Hon'ble Karnataka High Court in 430 ITR 151 (Karn.). However, he fairly agreed that these decisions were not there when the matter was considered by revenue authorities. Hence, he prayed that this issue may be remitted to the file of the AO to decide as per the ratio arising in these case laws.

10.4 Therefore, taking a consistent view, herein also the issue is restored to the file of learned AO for decision afresh in the light of directions for A.Y. 2013-14 & 2014-14. Grounds are allowed for statistical purposes.

Order pronounced in open court on 15th March, 2024.