DY. CIT CIRCLE 3(4), MUMBAI, MUMBAI vs. ASIAN PAINTS LTD, MUMBAI

The ground Nos. I & II have not been pressed. Therefore, the same are dismissed as infructous.

In ground No.III, assessee has raised the issue of deduction claim made u/s.35 (2AB) of the Act. The assessee company has claimed weighted deduction u/s. 35(2AB) showing that it has incurred expenditure of scientific research and development to the tune of Rs. 75.16 crores. Out of which, the assessee had claimed Rs. 129.94 crores as 200% weighted deduction. Before the ld. AO assessee produced certificate issued by DSIR in Form 3CL and reconciliation of the same. The ld. AO asked the assessee as to why like in the earlier years similar addition should not be made in this year. The assessee submitted that it has a Research & Development unit at Turbhe, Navi Mumbai which is carrying out scientific research and development fot oits product and has been granted approval from DSIR which includes copy of determination of R & D Unit, copy of approval 7 and others M/s. Asian Paints u/s.35 (2AB) in Form No.3CM and copy of certificate of expenditure in Form No.3CL. The assessee had incurred revenue expenditure amounting to Rs.68.04 Crores and Rs.7.12 Crores on capital expenditure. The details of which has been at page 64 of the paper book which in note No.35 of the financial statements. The ld. AO noted that in Form 3CL DSIR had reduced the assessee’s eligible scientific expenditure u/s.35 (2AB) qua, the revenue expenditure to Rs. 47.21 Crores and thereby denying the weighted deduction of Rs.12.41 Crores. The ld. AO disallowed the claim of revenue expenditure incurred on R & D to the amount which has been disapproved by the DSIR, i.e., Rs.12.41 Crores.

The ld. CIT (A) has also confirmed the said disallowance holding that the amount which has been allowed by the prescribed authority, i.e., DSIR only can be allowed which has been given in Form 3CL and which has been disallowed cannot be allowed by the ld. AO because ld. AO does not have the authority to tinker with the amount u/s.35 (2AB) which has been allowed or disallowed by DSIR.

Ld. Counsel submitted that this issue stands covered by the decision of the Tribunal in assessee’s own case in the A.Y.2007- 08 and then from A.Y.2009-10 to 2015-16. The relevant observation of the Tribunal in A.Y.2007-08 reads as under:- “14. The Id. Counsel for the assessee has also relied on the decision of the Ahmedabad bench of ITAT in the case of ACIT vs Torrent Pharmaceuticals Ltd. in ITA No.3569/Ahd/2004 dated 13.11.2009 in support of the assessee’s case on the issue under consideration. In the said case, weighted deduction claimed by the 8 and others M/s. Asian Paints assessee u/s 35(2AB) on account of R & D expenditure was partly disallowed by the AO relying on the figure contained in the certificate issued by DSIR and the same was held to be unsustainable by the Tribunal holding that There was no Justification in harping upon the figure contained in the certificate issued by DSIR as was done by the Assessing Officer. It was held by the Tribunal that the relevant provisions of the Act did not contain any specific condition that the deduction u/s. 35(2AB) and accordingly the claim of the assessee for deduction u/s 35(2AB) will be restricted to the amount of R & D expenditure as contained in the certificate. The Tribunal found on verification of the relevant details that even the expenditure is not included in the said certificate was eligible for deduction u/s 35(2AB) in respect of the said expenditure was allowed by the Tribunal. In our opinion, the issue involved in the case of Torrent Pharmaceuticals Ltd. thus is similar to the one involved in the present case and this position is not disputed even by the Id. DR at the time of the hearing before us. He, however, has contended that the claim of the assessee of having incurred the expenditure in question on R & D which is eligible u/s 35(2AB) has not been examined either by the AO or by the Id. CIT(A). He has urged that the matter may therefore be restored to the file of AO for giving him an opportunity to verify the same. We find merit in this contention of the Id. DR and since the Id. Counsel for the assessee has also not raised any objection in this regard we restore this issue to the file of the AO with a direction to decide the same afresh after verifying whether the expenditure in question has been incurred by the assessee on research and development which is eligible for deduction u/s 35(2AB). The appeal of the assessee is accordingly treated as allowed for statistical purpose”

He submitted that the issue was set aside on the ground that the amount of expenditure incurred on R & D which is eligible u/s. 35(2AB) has not been examined either by the ld. AO or by ld. CIT(A). Thus, he submitted that the matter should be restored back to the file of the ld. AO to examine the nature of expenditure which has been claimed by the Revenue because the 9 and others M/s. Asian Paints entire expenditure claimed directly pertaining to research and development.

It is in this background, sub-section (4) of Section 43 will have to be considered, which defines as to what activities would constitute "scientific research" as indicated under the said Section namely, Section 43(4). As to whether any expenditure incurred in the acquisition of rights in or arising out of scientific research as indicated in clause(ii) of sub-section 4) of Section 43 is an issue which requires to be examined by the prescribed authority itself and it would not be in the domain of the assessing authority to undertake such an exercise. When Section 35(2AB), Section 35(3) and Section 34) of the Act are read harmoniously, the irresistible conclusion that has to be drawn would be that assessing officer cannot sit in judgment over the report submitted by the prescribed authority in Form No. 3CL. This view is also supported by the judgment of the High Court of Gujarat in Mastek Ltd.'s case (supra). "(Emphasis supplied) ii. Biological E Ltd. Vs. DCIT -ITA No. 1590/Hyd/2018 dated 22.7.2022 passed by ITAT, Hyderabad Bench 'B'. With respect to this judgment of ITAT Hyderabad, the assessee has submitted that the Tribunal has misinterpreted Rule 6(7A) as it existed prior to 1.7.2016. In this context it is to be stated that the Hon'ble Tribunal has harmoniously read and interpreted provisions of section 35(2AB) read with Rule 6, more particularly Rule 6(5A) and Rule 6(7A) as under: '16. Further the approval of the in-house R&D facility ends with issuance of Form 3CM under sub Rule 5A of Rule 6. If 12 and others M/s. Asian Paints really the intention of the legislature, even prior to 01/07/2016, was to confine to the requirement of approval of the in-house facility, then there is no further need to refer to the approval of expenditure incurred on in-house R&D facility under section 35(2AB) of the Act by way of Rule 6 (7A) of the Rules. By virtue of Rule 6(7A) of the Rules the prescribed authority is put under an obligation to verify whether certain conditions are satisfied before approving the expenditure. Rule 6 speaks of the expenditure and its approval and E'orm 3CL is only a Form of communication. Section 35('2AB) of the Act deals with the quantum of deduction that is allowable in respect of expenditure on scientific research and in respect of the business of biotechnology.

Even in respect of Form 3CL, even prior to the amendment thereof by the IT (10th amendment) Rules, 2016 w.e.f 0110712016, vide item No. 9, the report to be submitted by the prescribed authority to the Director General (Income tax exemptions) under section 35(2AB) of the Act, shall contain the total cost of in-house research facility. By way of amendment for the purpose of electronic submission, the Form is made in a detailed manner for incorporation of the total cost of in-house research facility. There are no path breaking changes either in Rule 6(7A) of the Rules or in Form 3L by way of the IT (1 0th Amendment) Rules 2010, so as to impact the powers and duties of the prescribed authority or the right, liability or disability of the 14 and others M/s. Asian Paints companies incurring expenditure on scientific research on in-house R&D facility.

At this juncture, we deem it just and necessary to refer to the observations of the Co-ordinate Bench of this Tribunal in Electronics Corpn. of India (supra), which clinches the issue in our opinion. "17 ..... As per the provisions of sec 35(2AB) of Act as applicable to the relevant Assessment year, the expenditure 15 and others M/s. Asian Paints 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, 69,73,98 7 out of the claim made by the assessee. We, however, direct that in case DSIR corrects the amount of R&D 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 R&D 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." (Emphasis supplied) iii. DCIT vs. Mastek Ltd. [(2012) 25 Taxmann.com 133(Guj)] 16 and others M/s. Asian Paints The assessee has stated that the Hon'ble High Court has referred to section 35(3) and not to section 35(2AB)(3) while delivering the above judgment. In this context it is to be stated that expenditure on scientific research for weighted deduction has not only to satisfy the conditions given in section 35(2AB) but also to the provisions of section 35(3)(b) of the Income Tax Act Therefore, the ratio of the decisions of the Gujarat High Court rendered in the context of allowability of expenditure u/s. 35(1) with reference to provisions of section 35(3) is relevant to the case of our assessee in view of the ratio pertaining to the provisions of section 35(3) ( paras 28 and 29 of the judgment of the Hon'ble High Court.) 4. The assessee has stated that amendment made to Rule 6 w.e.f. 1.7.2016 is ultra vires of the Income-tax, is not correct. Provisions of section 35(2AB) r.w.s. 35(3) mandated that expenditure on scientific research on in-house R & D facility be approved by the prescribed authority both before and after the amendment to the Income Tax Rules. This will be evident from the three case laws, listed in Para 2 of this submission.

We have heard both the parties, perused the relevant provisions of the Act and the Rules and also the relevant finding given in the impugned orders. From the arguments made by both the parties, the main issue which has been raised is, whether the quantification of expenditure by the prescribed authority, DSIR alone should be allowed for deduction and if something has been disallowed or has not been qualified, then, can ld. AO have the power to tinker with such quantification? And vice versa, if DSIR has allowed such an expenditure ld. AO cannot examine the 17 and others M/s. Asian Paints same and whatever has been quantified by the DSIR, that becomes final. 11.1 In order to appreciate the understanding of the said section 35(2AB) r.w.r. 6 as it stood in the relevant assessment year under consideration i.e. A.Y.2016-17 reads as under:- Section 35(2AB) - "(1) Where a company 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 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) 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: Provided------------------- (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 accounts maintained for that facility. [and ['fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed' (4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Principal Chief Commissioner or Chief Commissioner or Principal Director General, before Director General in such form and within such time as may be prescribed.

Post amendment from A.Y.2017-18, the Clause ‘b’ now reads as under:- (b) The prescribed authority shall furnish electronically its report,- (i) in relation to the approval of in-house research and development facility in Part A of Form No. 3CL; (ii) 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) 35 of the Act in Part B of Form No. 3CL; (ba) The report in Form No. 3CL referred to in clause (b) shall be furnished electronically by the prescribed authority to the Principal Chief Com- missioner of Income-tax or Chief Commissioner of Income-tax or Principal Director General of Income-tax or Director 20 and others M/s. Asian Paints General of In- come-tax having jurisdiction over such company within one hundred and twenty days- (i) of the grant of the approval, in a case referred to in sub-clause (i) of clause (b); (ii) of the submission of the audit report, in a case referred to in sub- clause (ii) of clause (b);] (c) The company shall maintain a separate account for each approved facility, which shall be audited annually and "[a report of audit in Form No. 3CLA shall be furnished electronically to the Secretary, Department of Scientific and Industrial Research on or before the due date specified in Explanation 2 to sub-section (1) of section 139 of the Act for furnishing the return of income, for each succeeding year]. Explanation: For the purposes of this sub-rule the expression "audited" means the audit of accounts by an accountant, as defined in the Explanation below sub-section (2) of section 288 of the Income-tax Act, 1961; 13. It is not in dispute that assessee had submitted Form 3CL with DSIR which is an agreement as envisaged u/s. 35(2AB)(3) of the Act and said facility was duly approved by DSIR in Form 3CL. Assessee has also complied with the requirement under the Act and applicable Rule like maintenance of separate accounts for its R & D unit and getting the same audited. The assessee’s contention has been that all the expenditure incurred at its R & D unit pertains to scientific research and no expenditure has been incurred for the company or any diversion of expenditure to the corporate office or for the other company activities. This has been certified and substantiated in the audited financial statements of the assessee.

From the plain reading of Section 35(2AB)(1), it indicates that any expenditure on scientific research" on R&D facility approved by DSIR. Thus, what is relevant is that Assessee should incur expenditure on scientific research and such expenditure should be in respect of facility approved by DSIR. The Section per se nowhere infers that expenditure should be approved and qualified by DSIR. It only provides that the said facility should be approved by the DSIR. Clause (3) mandates that the company is only entitled for deduction if it enters into agreement with the prescribed authority for co-operation and R & D facility and furnishes the report to the prescribed authority. This condition has been satisfied by 23 and others M/s. Asian Paints the assessee in the present case. Rule 6 r.w.sub-Rule 7A which was applicable prior to 01/07/2016 the condition for approval of expenditure incurred on in-house R & D facility by a company was not there. There were twin conditions for approval of expenditure; one was that, prescribed authority shall submit its report in relation to the approval of the in- house research and development facility in Form No.3CL to the Director General (Income Tax Exemption) within sixty days of granting approval. The second condition was that the facility should not be related to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature. Thus, any condition relating to such activity shall not be allowed. The other condition which has been prescribed for allowability that the company shall maintain a separate account for each of the facility which shall be audited annually and copy thereof shall be furnished to the Secretary, DSIR by 31st October. Now, w.e.f. 01/06/2017 another condition has been brought that prescribed authority shall also quantify the expenditure incurred on in-house R & D.

We had enquired from the assessee during the course of hearing as to what is the process of DSIR quantifying the expenditure which is allowable and which is not, except for expenditure which has been prohibited or limited by the Income Tax Act under the relevant Rules. He submitted that no opportunity is given by the DSIR to submit the details of expenses or explanation. Assessee has to submit its audited 24 and others M/s. Asian Paints accounts maintained separately for the facility; entire nature of expenditure highlighting what is revenue and what is pertaining to land and building and even qualifying whether any such expenditure which is prohibited under Rule 6(7A)(a), like the facility should not be related to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature. It is only when in Form 3CL, DSIR qualifies certain expenditure, assessee comes to know that only those expenditure are allowable and other revenue expenditure even if it is directly related to scientific research and development is not even confronted to the assessee or even examined, For instance, here in this case professional fees has been paid to the consultant and scientists for consulting and getting the report which is directly related to R & D has not been allowed and there is no reason or basis given by the DSIR.

By way of rebuttal, ld. CIT DR submitted that sub-Section 3 of Section 35 provides that if there is any question under the Section as to whether at what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to the prescribed authority and such question relates to any activity than the activities specified by him in clause (a), whose decision shall be final. This specimen clearly provides that if there is any dispute with regard to any activity excluding any such expenditure, the matter can be referred to the DSIR by the Board.

The coordinate bench, in the aforesaid decision, further held that for deduction under section 35(2AB) of the Act, the first step was the recognition of the facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. It was also held that once such an agreement has been executed, under which recognition has been given to the facility, then thereafter the role of the Assessing Officer is to look into and allow the expenditure incurred on in-house R&D facility as weighted deduction under section 35(2AB) of the Act. As noted above, in the present case, the prescribed authority has already passed an order granting the approval in Form No. 3CM. We find that in various other decisions relied upon by the learned AR, the coordinate benches of the Tribunal rendered similar findings that prior to the aforesaid amendment from 01/07/2016 once the facility is approved by DSIR, the assessee is entitled to weighted deduction under section 35(2AB) of the Act and there is no requirement that expenses also need to be approved by the DSIR in Form No. 3CL. Therefore, since the aforesaid amendment is not applicable to the assessment year under consideration, we are of the view that the AO erred in restricting the weighted deduction under section 35(2AB) of the Act to the expenditure mentioned in Form No. 3CL.

Further, reliance was also placed on the decision of Hon’ble Ahmedabad Tribunal in the case of Pharmanz Herbal (P) Ltd. vs. DCIT (2023) 203 ITD 159 wherein it was held that- “7.We have heard both the parties, carefully gone through the orders of the authority below and also decisions cited before us. The issue in dispute before us is vis a vis claim of weighted deduction at the rate of 200% of the expenditure incurred on in-house research and development activity, as allowed by section 35(2AB) of the Act. The Revenue restricting the assessee's claim to the extent approved by the prescribed authority in Form No. 3CL, while the assessee claiming weighted deduction on the entire amount of research and development expenditure debited to its P&L account 8. We have gone through the relevant provision of law and the relevant Rules & forms prescribed thereto for executing the provision of law in this regard, and we agree with the Ld. Counsel for the assessee that for the impugned years before 31 and others M/s. Asian Paints us, Le A.Y. 14-15 & 15-16, the prescribed authority, DSIR,- was not required to certify in Form 3CL, the quantum of expenditure incurred by assesses on inhouse research and development eligible for weighted deduction/s35(2AB) of the Act. That therefore the certification by the DSIR of the quantum of expenditure on inhouse research and development in the present case in Form 3CL would not impinge on assesses claim of expenditure incurred as per Profit and Loss account. The detailed reasons are set out below. ……………….

A conjoint reading of all the above reveals that as per the applicable provisions of law there was no requirement for the prescribed authority to certify the quantum of expenditure incurred by assessees on inhouse research and development activity. That the only reporting requirement in Form 3CL by the prescribed authority was with regard to the approval granted by it recognizing the inhouse research and development facility. For the quantum of expenditure eligible for weighted deduction as per section 35(2AB) of the Act, the only requirement prescribed by law was of entering into agreement with the prescribed authority for cooperation in audit of accounts of the facility, the Rules requiring separate accounts to be maintained of the facility which also were required to be audited by an accountant and report submitted in this regard to the prescribed authority every year 17 It is amply evident from the above, that we.f 1-4-2016, the requirement of law underwent a change to the effect that on entering into agreement with DSIR in Form no. 3CK, the assessee was required to submit information of its expenditure incurred in-house research and development facility on land, building, capital and revenue expenditure, every year to the prescribed authority in Annexure-2 of Form no. 3CK and prescribed authority was required to quantify the expenditure eligible for weighted deduction in Part-B of the Form No. 3CL 18. What derives from the above, therefore, is that consequent to amendment to section35(2AB) by the Finance Act, 2015 we.f. 1-4-2016, requirement of law was that the prescribed authority had to quantify the quantum of eligible expenditure incurred on in-house research and development facility by the 32 and others M/s. Asian Paints assessee. But prior to that there was no such requirement in law and the prescribed authority was the only required to grant approval to the in-house research & development activity.

Since we have remanded this issue back to the ld. AO after independently analyzing the provisions and the Rules and therefore, referring and relying upon these judgments are purely academic.

In ground No.IV relates to disallowance of 25% of expenditure incurred on account of distribution of gift articles.

Ground No. V & VI relates to disallowance u/s.14A r.w.r. 8D of the Act.

The brief facts in a very succinct manner are that during the year under consideration, the assessee has received a sum 36 and others M/s. Asian Paints of Rs.70.69 crores as income from dividend and interest on tax free bonds which have been claimed as exempt under section 10 of the Act. The assessee suo moto made a disallowance of Rs.0.31 crore under section 14A rwr 8D of the Act based on the report obtained from an Independent Chartered Accountants, M/s Bansi Mehta & Co., wherein the Chartered Accountants, post verifying assessee's books of accounts and relevant records and material quantified Rs.0.31 crore as expenses incurred in relation to exempt income. However, the ld. AO without recording any objective satisfaction as to why and how the amount suo motto disallowed is wrong, simply proceeded to disallow Rs.2.67 crores (after considering Rs.0.31 crore offered in return) as per rule 8D read with section 14A of the Act. On appeal, the ld. CIT(A) upheld the disallowance made by ld.AO.

Before us ld. Counsel submitted that similar addition was made by ld.AO as per Rule 8D in its own case for AY 2008-09 wherein the Tribunal had set aside the findings of the ld.CIT(A) and directed the AO to delete the additions as per Rule 8D Department had filed an appeal against the said order of ITAT before Hon'ble Bombay High Court which was decided against the Department by the Court by dismissing Department appeal. We find that similar reason given for of disallowance by the ld. AO, the Tribunal has deleted the disallowance in assessee’s own case for A.Y.2009-10. This Tribunal vide order dated 23/02/2021 had observed and held as under:-

In ground No. VII, assessee has challenged the disallowance of expenditure related evaluation of business opportunities. 30. The facts in brief are that during the year under consideration, the assessee has incurred expenditure on account of professional and consultancy fees amounting to Rs.1.57 crores paid to various legal/consulting firms to carry out due diligence/ market survey /legal fees for drafting of agreements and to provide consultancy services for identifying business opportunities in the area of home decor/ improvements etc. The AO disallowed the said expenses by holding it as capital expenditure.

Before us, ld. Counsel that in the earlier year Home Decor/Home Improvement were at setting up stage, however, for the captioned year under consideration along with Paint business, these Home Décor / Home Improvement are primary business and also recorded as business segment. Therefore, since the Home Decor /Home Improvement is already into existence any expenditure related thereto has to be revenue expenditure. The other expenditure is in the nature of design/brand identity for the said business or for evaluating other business opportunities etc. It has been pointed out that this issue stands covered by the decision of “16. In the year under consideration, the assessee has filed the summary of `expenditure incurred on exploring various business opportunities. From the perusal of the aforesaid summary, we find that the entire expenditure was incurred on home improvement projects, furniture and furnishings business, bathroom space business, modular kitchen, market research in Saudi Arabia project, etc. Unlike the assessment year 2014-15, the assessee has not furnished the copy of engagement letters/scope of work in respect of the exploration of various business opportunities by the consultants. However, since in the preceding year, the coordinate bench has examined each business evaluation separately, which appears to have also been undertaken during the year under consideration, we deem it appropriate to restore this issue to the file of the AO for de novo adjudication in light of the decision of the coordinate bench of the Tribunal in assessee's own case in the assessment year 2014-15 cited supra. The AO is directed to decide on the allowability of each expenditure after duly examining the engagement letter with the consultants and the scope of work, in light of the aforesaid decision of the coordinate bench cited supra. Before concluding, from the perusal of the aforesaid summary of expenditure, we note that the assessee has reversed the provision made in the preceding year Since in the preceding year: the other expenditure, which is in relation to the expenditures found to be capital in nature, has been directed to be disallowed, therefore we direct the AO that the provision disallowed in the previous year be not again disallowed in the year under consideration as it would result in taxing the same amount twice. With the above directions, the impugned order on this issue is set aside and ground no.2 raised in assessee's appeal is allowed for statistical Purposes".

Before us the ASSESSEE has submitted the break-up of this expenditure which was filed before the lower authorities and therefore, in line with the earlier years, we restore this 40 and others M/s. Asian Paints matter to the file of the ld. AO for verification of bills / vouchers / invoices / documents and allow said expenses in accordance with law. Accordingly, ground No.VII is allowed for statistical purposes.

In ground No.VIII relates to disallowance of prior period expenditure.

The brief facts are that during the year under consideration, the assessee has shown an amount of Rs.0.76 crore 'as prior period expenditure given at page 435 of PB break up of expense. The ld.AO disallowed the same by inter-alia observing that those expenses which crystallized during the current year because of the events beyond the control of the assessee company can be allowed as deduction and if assessee did not make adequate efforts to reconcile the accounts cannot be the reason to allow such expenditure in the current year and such claims cannot be considered to have been crystallized during the year. On appeal, the ld.CIT(A) concurred with the view of ld.AO and upheld the disallowance.

Before us, ld. Counsel for the assessee submitted that - (i) These expenses in comparison to total expenses (i.e. Rs. 3,636.75 crores) are minuscule, which comes to around only 0.02% of our total expenditure. (ii) That expenses attributable to the earlier years but crystallize in the year under consideration on receipt of 41 and others M/s. Asian Paints invoice/bills ought to be allowed. Even if the bills were dated earlier year but due to certain issues/disputes, approved in the current year, the same crystallize in the current year. Sample copies of invoices has also been tendered during the course of the hearing before us. (iii) Further, if a consistent method of accounting is followed and there is no revenue loss (i.e. tax neutral exercise considering common corporate tax rates), the department should not question the year of allowability of expense.

In support ld. Counsel has placed reliance on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Nagri Mills Co. Ltd. reported in (1957) 33 ITR 681 and judgment of Hon’ble Supreme Court in the case of CIT vs. Excel Industries Ltd. reported in (2013) 358 ITR 295. Further, this issue has been restored back by the Tribunal in A.Y.2015-16 after observing as under:- “19. Undisputedly, the assessee is following the mercantile system of accounting. and therefore only such expenses which are crystallized during the year can be allowed as a deduction while computing the income. Since the issue pertains to the reconciliation of expenses vis-à-vis the year of crystallization, therefore in the interest of justice we deem it appropriate to restore this issue to the file of the AO for de novo adjudication. The assessee is directed to furnish all the details in support of its claim that the expenses claimed as prior period expenses were crystallized during the year under consideration. With the above directions, the impugned order on this issue is set aside and ground no.3 raised in assessee's appeal is allowed for statistical purposes."

In ground Nos. IX & X, assessee has challenged the disallowance of provision for doubtful debts under normal computation and adjustment to book profits u/s.115JB of the Act.

The brief facts are that during the year consideration, the assessee had made an incremental provision for doubtful debts of Rs. 3.34 Crores. The said provision was created by debiting the profit and loss account and correspondingly credit has been reflected the under the sundry debtors account in balance sheet. These provisions for doubtful debts is made at an individual debtor level and not at a consolidated level based on percentage of total value of debtors. Further, the said treatment of reduction from Sundry Debtors is an effective write off as observed by Hon'ble SC in the case of Vijaya Bank Ltd. vs. CIT (2010) 322 ITR 166 and accordingly the assessee has claimed provision for doubtful debts.

However, the ld. AO disallowed such provision observing that judgement of Vijaya Bank only applies to banking companies, further, also made an observation that the provision was created on an estimated basis considering the percentage of the total value of receivables and the individual debtor's account have also not been adjusted with provision 43 and others M/s. Asian Paints amount and also that the assessee had shown its debtors in the balance sheet at full value and the provision amount was shown on the liability side of balance sheet. Further, the ld. CIT(A) upheld the disallowance made by the ld. AO by holding that it was not actual write off as irrecoverable bad debts and hence not allowable. 40.1 Ld. Counsel submitted that this issue is decided by the Tribunal in assessee’s own case for A.Y.2015-16 and observed that if the assessee claims deduction of provision for doubtful debts, without any write-off of irrecoverable debt and it is contrary to section 36(1 )(vii) of the Act. Further, Vijaya Bank (supra) is not applicable in the case of the Assessee, as the said decision was rendered in case of banking company. Accordingly, the provision for doubtful debts was disallowed holding that bad debts written off are allowable in the year in which it is actually written off. Thus this issue was decided against. However, Ld. Counsel for the assessee relied upon by the decision of the Hon’ble Jurisdictional High Court in the case of C1T v. Tainwala Chemicals & Plastics India Ltd. [2013] 215 Taxman 153 wherein assessee-company made provision for doubtful debt given to its group concern and had debited same to profit and loss account and correspondingly reduced assets by reducing amount of unsecured loans, doubtful debt qualified for deduction under section 36(1)(vii) following Vijaya Bank (supra). This judgment was not considered in the earlier AY 2015-16 ITAT order.

Further, decision of Vijaya Bank (supra) is in the context of section 11 5JB qua provision for doubtful debts also followed by Karnataka High Court in CIT v. Kirloskar Systems Ltd 220 Taxman I and Hon'ble Gujarat High Court in the case of CIT v. Vodafone Essar Gujarat Ltd [2017] 397 ITR 55 for doubtful debt while computing book profit u/s.II5JB).

He also submitted that similar issue has arisen in the Joint venture company M/s Asian Paints PPG Pvt Ltd. The ld. CIT (A) had ruled the issue in favour of company. The department had challenged the order of the ld.CIT (A) before the Mumbai Tribunal which was dismissed by the Tribunal. 44. Ld. DR strongly relied upon the order of the ld. AO and ld. CIT(A) and also the decision of the Tribunal in assessee’s own case for A.Y.2015-16. 45. We have heard both the parties and also perused the relevant finding given in the impugned orders. Assessee has made incremental provision for Rs. 3.34 Crores. The said 45 and others M/s. Asian Paints provision was created by debiting the profit and loss account and correspondingly credit has been reflected the under the sundry debtors account in balance sheet. One very important fact is that the provision for doubtful debts is made at an individual data level and on consolidated level based on percentage of total value of debtors. Though this issue has been decided by this Tribunal in A.Y.2015-16, however, we find that Hon’ble Bombay High Court in the case of CIT vs. Tainwala Chemicals & Plastics India Ltd. (supra), following the principle laid down by the Hon’ble Supreme Court in the case of Vijaya Bank Ltd. held that where assessee company made provision for doubtful debts given to its group concern and debited the same to the profit and loss account and correspondingly reduced the assets by reducing the amount of unsecured loans, doubtful debts is qualified for deduction u/s.36(1)(vii). We find that the Tribunal had not considered the judgment of the Hon’ble Jurisdictional High Court and held that judgment of Vijaya Bank is not applicable in the case of assessee as it is applicable on the banking business. Further, we find that the Hon’ble Supreme Court in para 8 of its judgment have held that u/s.36(1)(vii) applies both for banking and non-banking business. Another important fact is that principle of Vijaya Bank in the context of u/s.115JB for the provision of doubtful debts had also been followed by the Karnataka High Court in the case of CIT vs. Kirloskar Systems Ltd(supra), the Hon’ble Gujarat High Court in the case of Vodafone Essar Gujarat Ltd. (supra) wherein the 46 and others M/s. Asian Paints Hon’ble High Courts have allowed the provision for doubtful debts while computing the book profit u/s.115JB. Apart from that in sister concern, this Tribunal has decided this issue in favour of the assessee.

The ld. AO has added provision for doubtful debts to the book profit u/s.115JB. However, under earlier provisions of u/s.115JB any amount set aside for meeting liabilities, other than ascertained liabilities were to be added back. The Department used to add back provision of doubtful debt in said category. However, the Supreme Court in CIT v. HCL Comnet Systems & Services [2008] 174 Taxman 118 decided matter in favour of Assessee. Thereafter, the Act was amended and a provision for diminution in the value of the asset was categorically inserted vide Finance Act 2009 (i.e. under clause (i) However, even after such amendment, Jurisdictional HC in Tainwala Chemicals above observed that - 8. "Whether, on the facts and circumstances of the case, the Tribunal was justified in upholding the decision of the CIT (A), in deleting the addition on account of provision for doubtful debts to the book profit under Section I15JB of the Act without appreciating that the disallowance / addition on account of diminution in the value of assets is mandatory in view of Explanation (I) to Section115JB of the Act ? In so far as question (k) is concerned, the grievance of the Revenue is that for the purpose of computing profits under Section 115JB, the provision of doubtful debts has to be added. In view of our decision 47 ITA No.2700/Mum/2023 and others M/s. Asian Paints to question (u) above, issue of adding back the provisions for the purpose of computing book profits does not survive. This is particularly so in view of the fact that the Tribunal has recorded a finding of fact that the provision has been written off. Accordingly, we see no reason to entertain question (k)'.

This principle of Hon’ble Bombay High Court has been followed by the Hon’ble Karnataka High Court and Hon’ble Gujarat High Court wherein post amendment to Section 115JB also even for the book profit provision for doubtful debts has been allowed as deduction. Therefore, in view of the principles laid down by the Hon’ble Jurisdictional High Court and other High Courts as noted above, we hold that the provision for doubtful debts is deductible not only under normal provisions of law but also u/s.115JB. Accordingly, ground No. IX and X are allowed.

Ground no. XI: disallowance of trip scheme expenses; Ground no. XII: disallowance of colour idea stores expenses; Ground no. XIV: disallowance of discount and incentives which are target based to increase sales (i.e. by way of credit notes) given to dealers (by way of enhancement by ld. CIT(A); Without prejudice to above: Ground no. XVI: earlier year depreciation on colour idea stores expenses; 48 and others M/s. Asian Paints We find that Department in its appeal has also raised this issue in ground no 2:Whether, on the facts and in the circumstances of the case, ld. CIT (A) erred in treating the expenditure incurred for colour idea stores as commission paid to the dealers disregarding the fact that as per the agreement and in substance the 'designated area' with its furniture, fixtures, decors etc is fully under the control of the assessee giving it an enduring benefits and therefore the expenditure incurred on the same is capital in nature? 49. In so far as Ground No. XI & XII are concerned, at the outset, the assessee submits that the issue is favourably covered in the assessee's own case in AY 2009-10 wherein the Tribunal held that relationship between the assessee and its Dealers is Principal to Principal and not Principal to Agent, accordingly, section 194H of the Act does not apply and consequently no disallowance u/s. section 40(a)(ia) of the Act be made. This has been consistently followed by Tribunal in AY 201011 to AY 2015-16.

Before us, ld. Counsel submitted that this principle should be followed for deciding the ground No. XIV as the ld. CIT(A) has disallowed certain discounts / incentives paid to dealers only on the ground that in relation to the assessee and dealers is that of principal to agent which is contrary to the Tribunal. During the course of hearing we had asked ld. Counsel to explain the business model, the same has been submitted which is summarized in the following manner:-

Before us ld. Counsel drew our attention to the following provisions of sale of Goods Act, 1930, which for the sake of ready reference is reproduced hereunder:-

He further submitted that title/property in the goods is transferred to the dealers, for a price, on raising the sales invoice and delivery of such goods. The sales are recorded as 52 and others M/s. Asian Paints and when the goods are sold to the dealers and not when the dealer ultimately sells the same. In case of agency, the principal would record sale as and when agent ultimately sells the goods. Thus, once the Department has not disputed the sales made by the assessee to dealers and accepted the same, question of agency does not arise. In fact, the dealers in response to inquiries made by the CIT (A) has accepted the transaction with the assessee as purchase of goods and submitted the relevant ledger of purchase. This clearly indicates the transaction between the assessee and the dealers is of sale-purchase and not of an agency. The assessee humbly submits that the relationship cannot be based on or cannot change qua the transactions between the parties.

Reliance was placed on the decision of Hon'ble Delhi High Court in the case of CIT v. Mother Diary India Ltd [2013] 358 ITR 218 wherein it was held "It is a well-settled proposition that if the property in the goods is transferred and gets vested in the concessionaire at the time of the delivery, then he is thereafter liable for the same and would be dealing with them in his own right as a principal and not as an agent of the Dairy... The concessionaire purchases the milk from the Dairy. The Dairy raises a bill on the concessionaire and the amount is paid.That question must be decided, on the basis of the fact as to when and at what point of time the property in the goods passed to the concessionaire. In the instant cases, the concessionaire became the owner of the milk and the 53 and others M/s. Asian Paints products on taking delivery of the same from the Dairy. He, thus, purchased the milk and the products from the Dairy and sold them at the MRP.... The Dairy may have fixed the MRP and the price at which they sell the products to the concessionaire but the products are sold and ownership vests and is transferred to the concessionaires. This by itself does not show and establish principal and agent relationship."

Similar view has been taken in the decision of CIT v. Jai Drinks [2011] 336 ITR 383 (Del.) wherein it was held that "From the agreement, it was evident that the distributor was to purchase products at pre-determined price from the assessee for selling the same within specified area.... That being the arrangement between the assessee and the distributor, it could not be said that the relation between them was that of principal and an agent. On the other hand, it was clearly stipulated to be an arrangement between them on principal-to-principal basis.” 55. Accordingly, ld. Counsel submitted that the transaction between the assessee and the dealer for sale of goods and relationship is principal to principal and not that of principal to agent. He submitted that ld. CIT(A) has ignored the order of the Tribunal for A.Y.2009-10 to 2015-16 and concluded that the relationship between the assessee and the dealers are of principal to agent and all the three expenditures mainly trip expenses, colour idea store expenses and post invoice incentives / discounts which issue has been raised by 54 and others M/s. Asian Paints way of enhancement are in nature of commissions subject to TDS u/s.194H of the Act and in absence of TDS, such expenses ought to be disallowed u/s.40(a)(ia) of the Act.

Ld. DR relied on the orders of the ld. CIT(A) and certain observations made by the ld. CIT(A) which are summarized in the following manner:- a. No specific dealer agreement or dealer appointment agreement of the Appellant with their dealers - Pg 19 of CIT(A) Order; b. Reliance was placed on extracts of Colour Idea Store Agreement and apply it to transaction of sale of goods to dealers - Pg 20 to 23 of CIT(A) Order; "For the aforementioned purpose Asian paints intends to enter into an arrangement with its dealers, whereby the dealer shall provide Asian Paints a space in the dealers shop to be exclusively used by Asian Paints for installing its decor, designs, creative and concepts ("Designated Shop Area' ) on the terms and conditions as more fully described in the recitals and clauses hereunder.. The dealer shall provide a minimum of 25 square meter area in his shop as the Designated Shop Area to Asian Paints, as identified by Asian Paints to install its decor, displays, designs, visuals in the Dealers Shop which is intended to give the end consumer a complete experience, a look and feel of the paints world in an innovative way..... Apart from the above counters, the dealer shall also provide Asian Paints a separate contractor transaction area called as the "Decorator 55 and others M/s. Asian Paints express Area" measuring a minimum of 10 sq meter....... The dealer shall get his shop premises and the designated shop area constructed, designed and decorated in accordance with and in the manner suggested by Asian Paints and its consultants/contractors… The dealer shall use the decor elements as per the training manual provided to the dealer by Asian Paints...... The dealer shall provide an unrestricted and unlimited excess to any of the Asian Paints employees, agents and representatives and the records thereto to all reasonable times........ The dealer shall not charge excess of the MRP declared by Asian paints upon its products for the facilities provided to the customers in the Designated Shop area. The dealer shall make known the products and services of Asian paints in every way reasonable practicable to the general public....... The dealer shall all the times maintain appropriate quantity of stocks of the Asian paints products in such quantities as may be advised by Asian Paints from time to time to ensure the availability of the products..... The dealer shall defend, indemnity and hold Asian Paints harmless from and against any and all loss, claims, demands, suits, proceedings, damages, costs, expenses, liabilities (including, without limitation, reasonable legal fees) or causes of actions (collectively liabilities)..." c. Inquiries conducted with dealers u/s. 133(6) of the Act and extract of Dealer Price List provided by them Pg 25 & 27 of the 56 ITA No.2700/Mum/2023 and others M/s. Asian Paints CIT(A) Order - "a. That, if any imposition or addition or any adverse change in the Customs Duty or any other taxes/ duty and/or any adverse change to the company on concessions on Customs Duties or any other taxes / duty on the finished paint, or on raw or packing materials used in goods offered, may be charged to the dealers/purchasers account, b. As per legal metrology act 2009 and the rules framed there under for "tinted shades' the dealer/seller can change the cost of Colorants over and above the MRP of the tinted base. The total price charged to the Consumer shall not be more than the MRP of that particular SKU, as per the Tinted Shades Maximum Retail Price List, separately provided to the Dealer/Seller. c. Company can change the price without any prior notice and same shall be charged. d. Company at its discretion may compensate leakage/breakage that occurs in transit. e. Reopening in the hands of the dealers. "It is understood from these orders passed u/s. 148A(d) of the Act that, the said two dealers were also beneficiaries (from out of 3519 dealers beneficiaries) and that, the said gifts (trips) were not taxed as income in the hands of these beneficiary dealers and re-opening proceedings were dropped u/s. 148A(d) of the Act by the AO concerned for the reason that "expenditure incurred by the Asian Paints Ltd. on holding trips 57 and others M/s. Asian Paints for the dealers has already been taxed in the hands of the said company and taxing the same once again in the hands of its dealer. (i.e. assessee in the present case) would lead to double taxation, which is against the principle of taxation, unless mandated in certain circumstances. Further, it is also the fact that the said free trips to dealers in question were organized by principal company and the same were not as per choice and desire of the dealers (the assessee)"

In rejoinder ld. Counsel has filed written submissions and various points raised by the ld. CIT(A) and DR. In sum and substance, same are reproduced hereunder:- a. Custom Duty - In this regard, the Appellant submits that recovery of such custom duty deals with the element of costs with respect to indirect taxation included in the product pricing which might subsequently be imposed or amended. The Appellant is thus reserving its right to recover any additional cost that it may incur in the future due to any subsequent change. This is a commercial understanding between two independent parties. In fact, in case of agency, any such custom duty would always be borne by Principal. Thus, this clause supports that the dealer is not an agent but acts on Principal to Principal basis. b.MRP tinted shades - In this regard, the Appellant submits that we deliver the base paint to our dealers and thereafter the dealer add colorant to the base paint in order to arrive at the colour shade desired by the end customer. This declaration is mentioned with respect to the provisions package commodity rules [erstwhile Legal Metrology (packaged commodities) rules], wherein we are required to state that the MRP mentioned of the base paint is only of base material. The final MRP of the tinted shade shall be post inclusion of colourant cost and in no point, dealers shall charge price higher than the MRP of the respective tinted shade. Therefore, the dealer can charge the cost of colorant over and above the MRP of the base paint and they are at the liberty to fix the price of the final colour shade subject to the Tinted Shades MRP list separately provided to the dealers i.e. the same cannot exceed the MRP fixed for that particular 60 and others M/s. Asian Paints c.Change in price - the Appellant, being the manufacturer of the product, has complete right over the pricing of the product and thus is well within its rights to change the product price in line with the current market and other factors. Further, a seller is not under any obligation to give prior intimation to its buyers with respect to change in the product's price. d. Compensate leakage/breakage that occur in transit - As per the terms and conditions mentioned in the DPL, the price at which dealers are supplied is ex-depot. Any local taxes/ levies till the time of delivery will have to be borne by the dealer/ purchaser. Further, the Appellant, at its discretion, may compensate for the leakages/breakages that occurs in transit, after proper evaluation of the claims made. Thus, this cannot be inferred to create an agency. In case of agency, loss of agent is loss of principal and there cannot be any discretion.

We have heard both the parties and also perused the relevant materials referred to before us and the findings given in the impugned orders. We will first take up the issue of disallowance of trip scheme expenses and disallowance of colour idea store expenses as raised in ground No.11 & 12 respectively. As mentioned above assessee has various dealers all across the country who are normally hardware stores dealing in many other products other than paints and assessee company sell such paints to various dealers who will further sell to painters and other customers. There is no agreement as such between the assessee and its dealers for sale of goods. The assessee provided the basic details and after verification and due diligence had approved the dealers and then the customer code is created in the books of accounts of the assessee. Thereafter, on receipt of request for goods, the goods are sold to the dealers by the assessee. In so 61 and others M/s. Asian Paints far as assessee is concerned, the title in the goods, research and risk on the goods passed on to the dealers completely, the moment assessee sells the paint to the dealers. The dealers are invoiced based on the Dealer Price List ('DPL") of paints and such invoice is issued post levying appropriate taxes such as VAT, Sales Tax, GST etc. The dealers are responsible for taking their own registration and ensuring compliances.

Another important fact is that dealers have freedom of pricing to sell the paints up to the MRP and it is up to them that at what discount they offer to the customers. When the dealer purchased the paint from the assessee company, the dealer makes upfront payment prior to the realization by the dealer of the proceeds of the sale made by them, irrespective of whether the goods are sold or not by them. Once the goods are sold to the dealers, the assessee company nowhere responsible for any loss incurred by the dealers and assessee has no exclusivity over these dealers i.e. they can sell competitor's goods as well any other products of other company. Apart from that dealers do not have any right to create obligations or incur any liability on behalf of the assessee and none of the goods of the dealer are binding on the assessee company. The dealers carry all the business risk (viz., Inventory risk, risk of non- recoverability of monies from its debtors and other risks). Thus, there is no principal to agent relationship between assessee and dealer. This fact has also been approved by the Tribunal in assessee’s own case for A.Y.2009-10. When the Tribunal held 62 and others M/s. Asian Paints that the relationship between assessee and its dealer is principal to principal and not principal to agent.

In so far as other schemes, assessee company to promote the sales, it launches various schemes wherein it sponsors various trips to dealers in India and abroad and on achieving of certain targets give discounts in the form of credit notes, gifts etc., In so far as trip scheme is concerned, the eligibility is decided on the basis of achievement of targets for purchase of goods from the Company for a given scheme launched by the Company. These schemes are circulated in advance to the dealers and once dealers achieved the targets, he is eligible for business convention under which dealers are informed on latest developments in paints business and knowledge is shared on various types of various paints, markets and various types of products. Dealers also share their success stories and interact with top management to give the feedback. These conventions are often done on the trips sponsored for the dealers who had achieved the target as per the scheme floated by the assessee company. Thus, expenses incurred for organizing such trips is allowable as ‘revenue expenditure’. It has also been brought on record that where assessee was paying to the travel or tour operator, appropriate TDS has been deducted.

In so far as trade discount & cash discounts, in order to promote the sales, the assessee provided discounts to dealers which are given in the bill itself either as trade discounts or 63 and others M/s. Asian Paints as per the general trade practice as cash discounts for immediate payment of sale invoice. These trade discounts / cash discounts are given as reduction in purchase price in the invoice and GST as applicable is levied on the net price. Such discount nowhere can be treated as commission and accordingly, discounts given by the assessee company to the dealers is allowable as ‘revenue expenditure’. The whole case of the ld. AO and ld. CIT (A) is that there is an agency relationship between the assessee company and the dealers. As already held above, the title / property in the goods is transferred to the dealers for a price once the sales invoice is raised and delivery of such goods are made. In case of agency, the principal record the sale as and when agent ultimately sell the goods, but here in this case, sales are recorded as and when the goods are sold to the dealers and not when dealer ultimately sales to the end users. Once this aspect of the business model and the sales has not been disputed then the issue of agency concept cannot be accepted. It has been brought on record that ld. CIT(A) has made an enquiry with the dealers who have confirmed the transaction with the assessee with details of purchase of the goods and also submitted the relevant ledger of purchase, which clearly indicates the transaction between the assessee and the dealers is of sale-purchase and not of an agency. Thus, this finding of ld. CI T(A) is reversed. Moreover, this issue is also covered by the decision of the Hon’ble Delhi High Court in the 64 ITA No.2700/Mum/2023 and others M/s. Asian Paints case of CIT vs. Mother Diary India Ltd [2013] 358 lTR218 as noted above.

Further the Tribunal in assessee’s own case right from A.Y.2009-10 to 2015-16 have categorically been holding that relationship between the assessee and the dealers are principal to principal and all the three expenditures namely trip expenses, colour idea store expenses and post invoice incentives / discounts cannot be treated as in the nature of commission allowable for deduction of TDS u/s.194H. Before us, ld. Counsel had already given detailed write-up on the dealer price list. And has also given a detailed write up as to how the entire transaction including the terms and conditions and the other factors lead to inference that there was no such kind of agency relationship between the assessee and the dealers albeit, it was principal to principal transaction, which we fully agree.

In so far as the issue relating to colour idea store expenditure and the agreement between the assessee company and the dealers wherein dealers have to carve out a designated Shop Area and further maintain minimum stock levels. As stated and brought on record the assessee enters into an agreement with dealers wherein the dealers have the designated area for their colour showroom wherein the dealers will display latest colours and the effect of the colours on the wall and assessee spent part of the money in developing the colour showroom as part of joint sales promotion. This is not in 65 and others M/s. Asian Paints agreement on sale of goods albeit, it is more in the nature of promotion of sales of goods. In so far as maintaining the minimum stock as per the terms of agreement, commercially it was only to ensure that there is a joint promotion of goods and when ultimate consumer visit such discounted studio is able to get various choices and experiences of certain basic products. All these lead to only inference of business promotion and the inference drawn by the ld. CIT(A) by picking up few phrases from the agreement and to conclude that there is a relationship of principal to agent to disallow the expenses as is not correct. It is only a way of business and sales promotion for the assessee because the entire exercise is a joint sale promotion activity of the assessee and the dealer. 63.1 As brought on record and explained before us, that the concept of Colour Idea Store is that in order to increase the sales, over the years the assessee has been using various innovative marketing techniques with respect to advertisement and sales promotion. In order to promote its brands and products through a network of retail outlets wherein end consumers can have a complete experience of the assessee's paints and can understand various products, their attributes, educate themselves through colour consultants and other literature on paints, the assessee had entered into agreement with certain dealers, whereby the dealers shall provide designated space in the dealers shop to be exclusively used by assessee for installing its decor, designs, creative and concepts (referred to as 'Colour Idea Stores"). Also, the 66 and others M/s. Asian Paints dealers have approached the assessee requesting for creating such a designated space at their shops. The said arrangement provides an opportunity to the assessee to show case luxury products and their exclusive range, finished books, brochures, literatures, advertisements, counters called as 'Try and Decide', 'Be inspired area', and 'Chose your finish bar'. It also provides the dealers in giving a new look to their stores so as to drive the retailing concept. It also helps in increasing customer footfall and walk in thereby ultimately generating business for both the assessee as well as the dealers. Under the agreement, both the assessee and the dealer agree to share costs incurred for setting up of the designated area. The cost incurred broadly comprises of civil work, furniture and fittings, electrical fittings, signboards, designs, creative works, advertisement materials. etc. Further even though the assessee incurs expenditure on setting up of the stores, the stores always belong to the dealers. On termination of the agreement, the dealer is not under an obligation to return to the assessee any part of the erection/assembled items, furniture, fittings, etc except books, brochures, literatures and other intellectual property which contains business and product information of the assessee. This arrangement is joint sales promotion activity by the assessee and the dealer, wherein both the parties could benefit from the brand promotion and resultant increase in sale of goods. In fact, generally, the paints are at a dealer which also keeps other hardware stores and ultimate customers may not be inclined 67 ITA No.2700/Mum/2023 and others M/s. Asian Paints to enter and choose the paint. To make it attractive for customer to enter and experience the products of the assessee and visualise how it would look in their home, such corner or designated area is made 63.2 Thus, the expenditure incurred under this head, we hold that it is purely Revenue expenditure as it is in the nature of sales promotion. All other aspects which has been raised by the ld. DR and the ld. CIT(A) has been clarified and reported by the assessee before us which has been incorporated in detailed in the foregoing paragraphs to which we fully endorse for the reasons that there is no concept of agency qua the dealing between the assessee and the dealers. It is purely on principal to principal basis and all the expenses incurred for sales promotion, business promotion, trip expenses, colour Idea store expenses are purely for the purpose of business and allowable as revenue expenditure. Accordingly, ground No. XI and XII are allowed.

Now coming to the Revenue’s appeal, Ground No .I raised by the Revenue reads as under:-

Before us ld. Counsel has relied upon the Delhi ITAT in the case of Fab India Overseas P Ltd v. ACIT [TS-5886-ITAT- 2013(DeIhi)-O] where it has been held that expenditure written off on account of security deposit, double payment to supplier, small outstanding balance from customers, rounding of difference etc are allowable expenditure.

Here it is a case of writing certain old and sundry balances lying in the books of accounts and debited to the profit and loss account which had incurred during the course of normal business expenses like CENVAT on transit, security deposits, old balances/open advances in vendor account and Service Tax paid on traded goods etc., which are otherwise 69 ITA No.2700/Mum/2023 and others M/s. Asian Paints allowable expenditure. Once the nature of expenses and transactions has not been doubted, then it cannot be disallowed and these advances written off cannot be treated at par with bad debts. Accordingly, the order of the ld. CIT(A) is confirmed.

Now, the appeal for 2017-18.

Ground No.IV relates to disallowance of claim made u/s.35(2AB) of the Act. This issue we have already discussed in detaile while dealing with the appeal for the A.Y.2016-17 and also the amendment brought in Rules w.e.f. A.Y.2017-18. Since we have set aside this issue to the file of the ld. AO with certain directions, accordingly, this ground is treated as allowed for statistical purposes.

Ground No.VIII relates to disallowance of sundry balances written off which is similar to the ground raised

We have heard both the parties and also perused the relevant finding given in the impugned orders. The ld. AO has denied the set off relating to Section 70 of sub-Section 3 which for the sake of ready reference is reproduced hereunder:- "Set off of loss from one source against income from another source under the same head of income. 70(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset."

First of all assessee has not incurred any long term capital loss in A.Y.2017-18 and therefore, at the threshold the provision of Section 70 sub-Section 3 will not apply. Assessee has derived the income from sale of flat which is a long term capital asset as it was held from 1997-2017, however, by virtue of dealing 71 and others M/s. Asian Paints provision of Section 70, the same was treated as short term capital gain. The provision to Section 70 makes exactly clear for deeming fiction restricted only to the mode of computation of capital gains contained u/s.48 and 49 of the Act and cannot be extended beyond that. Further, as per section 74(1)(b) any loss related to long term capital asset, it shall be setoff against income under the head of 'Capital Gains' assessable for that assessment year in respect of any other capital asset not being short term capital asset (i.e. long term capital asset), accordingly, the assessee has set-off capital gain from long term capital asset (i.e. Flat) against brought forward long term capital loss.

It is as settled position in law that deeming fiction needs to be strictly constructed and cannot be extended to any other provision of law. Section 50 does not change the character of capital gain from being long term capital gain to short term capital gain for the purpose other than section 50 of the Act. 76. This issue is now covered by the decision of the Hon’ble Bombay High Court in the case of CIT vs. Manali Investment (2013) 219 Taxman 113 and the Hon’ble High Court observed as under:- "2. The respondent - assessee had during the subject assessment year sold its meters and transformers on which it had claimed depreciation. On sale, the respondent - assessee claimed long term capital gains and sought to set-off the same against Its carried forward long term capital loss in terms of Section 74 of the Income Tax Act, 1961 ('Act' for 72 and others M/s. Asian Paints short). The assessing officer disallowed the claim and held that in view of Section 50 of the Act, the gain is in the nature of short-term capital gain. The Commissioner of Income Tax (A) upheld the order of the assessing officer.

In view of the above, we see no reason to entertain the proposed re-framed question of law. Accordingly, the appeal is dismissed with no order as to costs 77. Further Hon’ble Jurisdictional High Court in the case of Hon'ble Jurisdictional High Court in the case of Commissioner of Income-tax v. Parrys (Eastern) (P.) Ltd [2016] 384 ITR 264 held as under:-

Thus, following the aforesaid law laid down by the Hon’ble High Court we allow the set off of long term capital loss against deemed short term capital gain u/s.50.

Another ground raised by the Revenue is with regard to additional claim of foreign tax credit claim. It is seen that in the A.Y.2018-19, this issue is arising in assessee’s appeal in ground No.X.

The brief facts are that assessee has various direct & indirect overseas subsidiaries. From those subsidiaries It is receiving royalty, dividend and recoveries for providing various services to those units. The said amounts are credited to the profit and loss account and offered for tax.

Further, the assessee submits that it is not claiming any FTC for reimbursement as there is no income component involved in. Also, in case of recoveries from subsidiaries, FTC is claimed only on the mark up component and not on the gross receipts.

The assessee has computed approximate expenditure incurred against these foreign incomes (i.e. Net Income) and tax thereon at Tax on net income comes to around 25.47% whereas none of the overseas units are withholding more than 20%. Further, with respect foreign dividend income, the assessee submits that we have made strategic investment in overseas subsidiaries. The investments in those subsidiaries were made out of the internal accruals and hence no expenses have been incurred in earning dividend income from the overseas subsidiaries. However, still such dividend income is offered to tax in India at 17.304% as against withholding of 5%.

The ld. AO disallowed the entire FTC claim by observing that the assessee did not provide any detail of expense in relation such foreign income, no separate books are maintained to such expense and there is no proper computation of FTC. Ld. CIT (A) restricted the FTC claim to 50%.

Thus, the contention of the assessee is that entire FTC claim by the assessee is to be allowed. Further, assessee submitted that certain incomes which are already considered for tax for A.Y.2018-19, however, tax was deducted by foreign tax credit. Subsequently, on making actual payment, accordingly, the assessee receives FTC certificates post filing of ROI, or post the due date of Revised ROl etc. Therefore, the assessee’s only recourse is to file an additional claim for FTC before the AO. The assessee has also submitted the break-up of additional FTC claim at page 505 of PB. In 2017-18 ld. CIT(A) has allowed the claim in A.Y.2018-19 and upheld the action of the ld. AO that any additional claims of deduction which are neither claim in the original return of income nor by way of revised return cannot be granted by the AO. As noted above, from A.Y.2012-13 to 2017-18, ld. CIT(A) has accepted the position and directed the ld. AO to verify the expenditure 76 and others M/s. Asian Paints incurred against such foreign income and grant FTC as per Section 1990-91. Accordingly, ld. AO is directed to verify the details of expenses in relation to such foreign income and examine the claim of foreign tax credit and allow accordingly.

Even for the A.Y.2018-19, additional claim of FTC, even if assessee has filed subsequently on account of actual payment and assessee has received FTC certificates post filing of return of income, the same should also be allowed if it is permissible and allowable under the law and after examining the same, grant the FTC accordingly.

In the result, ground No. XIX of Revenues appeal for A.Y.2017-18 is dismissed and ground No. X for A.Y.2018-19 is allowed for statistical purposes.

In so far as Revenue’s appeal for A.Y.2017-18, the only issue raised is with regard to colour idea stores expenses which issue we have already decided in favour of the assessee holding it to be Revenue in nature. Accordingly, ground raised by the Revenue is dismissed.

Now coming to the appeal grounds relating to A.Y.2018- 19, all these issues have been discussed in details while deciding the appeal for A.Y.2016-17 and accordingly, our finding given therein will apply mutatis mutandis.

Ground No.II: In so far as disallowance of 25% of expenses on distribution of gift articles, the same has been reduced to 10%, accordingly, this issue is partly allowed.

Thirdly, in so far as disallowance u/s.14A r.w.r.8D, since similar issue is permeating in this year also, therefore, this issue is allowed in favour of the assessee.

Fourthly, in so far as disallowance of provision for doubtful debts under the Act and also under the book profit, the same has also been allowed in favour of the assessee according to the judgment of the Hon’ble High Court.

In so far as issue relating to disallowance trip expenses, colour idea store expenses and post invoice incentives / discounts is target based for increase of sales given to the dealers. This issue is decided in favour of the assessee as we have held that these are purely business expenditure and allowable u/s. 37(1).

In so far as issue relating to Non-Acceptance of additional claim of applicability of beneficial rate as per DTAA to the DOT, in all the years this ground has not been pressed, therefore, same is dismissed as not pressed.

In so far as issue of Non-Acceptance of additional claim of Foreign Tax Credit (FTC) and disallowance of foreign tax credit, we have already set aside this issue to the file of the ld.AO.

Lastly, coming to the issue of disallowance of deduction u/s.80G which has been raised by Ground No.4 of the Revenue.

The brief facts are that during the year under consideration, the assessee incurred a CSR expenditure of Rs.46,51 crores and the same has been offered to tax as per section 37 of the Act. Out of which, Rs.9.44 crores are eligible (i.e. 50% of amount) for deduction/claim u/s. 80G of the Act and the assessee has claimed such deduction in its ROI.

The AO denied such deduction on the premise that such being part of mandatory CSR expenditure as per section 135 of the Companies Act, it loses the essence of being a 'donation' which is typically understood as voluntary' act, element of charity is missing. Further, considering the legislative intent of insertion of CSR and its implication u/s. 37, deduction u/s 80G could not be allowed. However, the CIT(A) allowed the claim of the assessee and dismissed the AC's observation by observing as under:-

Before us, ld. Counsel submitted that this issue stands covered in favour of the assessee and reliance was placed on the following judgment:-

It is an undisputed fact that in so far as CSR expenses of Rs. 46.51 Crores, the assessee has already offered to tax in accordance with Section 37 and therefore, there is no issue of claiming of deduction on account of CSR expenses. However, out of the said amount, assessee has made donation to the institutions which are covered u/s.80G and has claimed 15% of the amount of Rs.9.44 Crores which were claimed at deduction in its return of income. This issue has been held by the Tribunal in series of cases wherein it has been held that the claim of deduction u/s.80G is independent of CST and the same has to be allowed in accordance with Chapter VIA was itself independent of prohibition provided in Section 37(1) which only pertains to CSR expenses, accordingly, the ground raised by the Revenue is dismissed.

In the result, appeals filed by assessee and Revenue for A.Yrs. 2016-17, 2017-18 and 2018-19 are partly allowed for statistical purposes.