ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-5(1), HYDERABAD vs. LAURUS LABS LIMITED, VISAKHAPATNAM

Brief facts of the case are that the assessee is engaged in the business of manufacturing and trading of pharmaceutical products in India and overseas customers. During the assessment year 2016-17, it set up a new manufacturing unit at Atchutapuram Village of Visakhapatnam District. It filed the return of income for assessment year 2016-17 on 30/03/2018, admitting ‘Nil’ income after set off of brought forward unabsorbed depreciation. Assessee claimed investment allowance under section 32AD of the Income Tax Act, 1961 (“the Act”). Assessee further claimed weighted deduction in respect of clinical trials at 200% under section 35(2AB) of the Act also.

During the assessment proceedings, learned Assessing Officer observed that the assessee set up the new manufacturing unit at Atchutapuram during the Assessment Year 2016-17, whereas, the notification under section 32AD was issued by the Central Board of Direct Taxes (CBDT) on 28/09/2016 stating that it shall come into force with effect from the date of its publication in the official gazette; that even if the date of publication is taken to be 28/09/2016, it brings into force the provisions under section 32AD from the Financial Year 2016-17, relevant assessment year being 2017-18. On this premise, learned Assessing Officer disallowed the investment allowance claimed by the assessee under section 32AD of the Act.

Learned Assessing Officer opined that in respect of the expenditure incurred by the assessee towards clinical trials, the assessee is entitled to the 100% deduction, but not at 200% as claimed by the assessee under section 35(2AB) of the Act.

Apart from this, the learned Assessing Officer noticed that the assessee incurred expenditure for making investments in its subsidiaries, and therefore, the disallowance under section 14 read with Rule 8D of the Income Tax Rules, 1962 (The Rules) has to be computed and disallowed.

Aggrieved assessee preferred appeal before the learned CIT(A). Learned CIT(A) concurred with the learned Assessing Officer on the aspect of disallowance of investment allowance under section 32AD of the Act on the same lines holding that since the notification notifying the backward areas of Andhra Pradesh area was issued by the CBDT on 28/09/2016, it shall bring into force the provisions under section 32AD of the Act from the assessment year 2017-18 and therefore, it was rightly disallowed by the learned Assessing Officer for the assessment year 2016-17.

Learned CIT(A), however, while following the decision of the Hon'ble Gujarat Hight Court in the case of CIT Vs. Cadila Healthcare, 31 Taxman.com 300 and the decision of Hyderabad Tribunal in the case of Bharat Biotech International P. Ltd. in held that even if the expenditure incurred outside the R&D facility, the expenditure on clinical trials is allowable at weighted deduction under section 35(2AB) of the Act. So also, while following the decisions in various cases including the case of PCIT Vs.IL & FS Energy Development P. Ltd (399 ITR 483)(Delhi), learned CIT(A) held that when there is no earning of exempt income, no question of disallowance under section 14A of the Act read with Rule 8D of the Rules.

Aggrieved by the disallowance of investment allowance under section 32AD of the Act, assessee preferred ITA 121/Hyd/2024; whereas, challenging the deletion of the disallowance made on account of clinical trials and section 14A of the Act read with Rule 8D of the Rules, Revenue preferred ITA 201/Hyd/2024.

In so far as the disallowance of investment allowance is concerned, Revenue contends that section 32AD of the Act speaks of allowing such claim for investment allowance in the backward areas in the state of Andhra Pradesh, CBDT notified such areas by way of Notification dated 28/09/2016 and, therefore, going by the date of such notification, the units set up in such backward areas are eligible to claim deduction under section 32AD from the financial year 2016-17, relevant to the assessment year 2017-18. On this premise, both the authorities disallowed the investment allowance under section 32AD of the Act.

We have perused the decision in the case of Maheshwari Mining and Energy Private Limited Vs. DCIT in by order dated 06/05/2024. We have gone through this order. The learned third member agreed with the learned Judicial Member and returned a finding that the notification issued by CBDT does not keep the operation of the provisions under section 32AD of the Act in abeyance till the date of such notification and the statement in the notification to the effect that it shall come into force as on the date of its publication in the official gazette cannot overwrite the provisions of section 32AD(1) of the Act. This decision in the case of Maheswari Mining (supra) is holding the field as on the date and binds this Bench.

Section 32AD(1) of the Act clearly says that where an assessee sets up an undertaking for manufacture or production of any article or thing, on or after the 1st day of April, 2015, in any backward area notified by the Central Government in this behalf in the state of Andhra Pradesh or in the state of Bihar etc. and acquires and installs any asset for the purpose of the said undertaking or enterprise during the period beginning on the 01/04/2015 and ending before 01/04/2020 in the said backward area, then, there shall be allowed a deduction of a sum equal to 15% of the actual cost of such new asset for the assessment year relevant to the previous year in which such new asset is installed. It is not in dispute that in the case on hand, the assessee set up an undertaking in the financial year 2015-16 relevant for the assessment year 2016-17 and, therefore, in terms of section 32AD of the Act as held by the Tribunal in the case of Maheswari Mining (supra), the assessee is entitled to claim the investment allowance at 15% of the Capitalized amount as deduction.

Respectfully following the same, we hold that the assessee is entitled to claim investment allowance at 15% of the capitalized amount as deduction under section 32AD of the Act in the assessment year 2016-17 also. Grounds of appeal in ITA 121/Hyd/2024 are allowed accordingly.