Coromandel International Limited, Secunderabad V. Addl. CIT, Range - 1, ., Hyderabad

ITA 101/HYD/2012

• Counselvise Citation: 10122514 RSA 2012
• Duration Of Justice: 2 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 25-01-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Keywords: Business income; Depreciation; Business expenditure; Earning of tax free income; Competent authority; Scheme of amalgamation; Revenue expenditure; Capital expenditure
• Section: 14A; 37(1); 37; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 101/HYD/2012 ASSESSMENT YEAR : 2008-09 COROMANDEL INTERNATIONAL LTD., SECUNDERABAD. PAN AAACC7852K ADDL. COMMISSIONER OF INCOME- TAX, RANGE 1, HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI VIKRAM VIJAYARAGHAVAN REVENUE BY SHRI D. SUDHAKAR RAO DATE OF HEARING 04-08-2014 DATE OF PRONOUNCEMENT 28-08-2014 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGA INST THE ORDER DATED 14/11/2011 OF THE CIT(A)-II, HYDERABAD PERTAINING T O AY 2008-09. 2. ASSESSEE HAS RAISED FOUR GROUNDS. GROUND NO. 1 IS A GENERAL GROUND, HENCE, NO ADJUDICATION IS REQUIRED. GROUND NOS. 2 & 3 ARE IN RESPECT OF DISALLOWANCE OF DEDUCTION CLAIMED U/S 35 (2)(AB) OF THE ACT. 3. BRIEFLY, THE FACTS ARE, ASSESSEE IS A COMPANY ENGAGED IN MANUFACTURE AND SALE OF FERTILIZERS. FOR THE AY 200 8-09, IT FILED ITS RETURN OF INCOME ON 26/02/2008 DECLARING INCOME OF RS. 358,28,69,964/-. SUBSEQUENTLY, ASSESSEE FILED A REV ISED RETURN ON 29/09/08 DECLARING INCOME OF RS. 358,60,12,275/-. A GAIN INCOME DECLARED WAS REVISED TO RS. 365,30,40,846/- VIDE RE VISED RETURN FILED 2 ITA NO. 101/HYD/2012 COROMANDEL INTERNATIONAL LTD. ON 31/10/2010. THE RETURN WAS INITIALLY PROCESSED U /S 143(1) ON 30/03/2010 RAISING A DEMAND OF RS. 50,35,36,390/-. SUBSEQUENTLY, RECTIFICATION WAS MADE U/S 154 BY GIVING CREDIT TO PREPAID TAXES, WHICH RESULTED IN A REFUND OF RS. 22,97,050/-. DURI NG THE SCRUTINY ASSESSMENT PROCEEDING, THE AO WHILE EXAMINING THE M ATERIALS ON RECORD NOTICED THAT ASSESSEE HAS CLAIMED WEIGHTED D EDUCTION OF RS. 6,05,19,532/- TOWARDS R&D EXPENSES COMPRISING OF RS . 1,31,87,576/- ON ACCOUNT OF REVENUE AND RS. 4,73,31,958/- ON ACCO UNT OF CAPITAL. HOWEVER, AS THE ASSESSEE DID NOT FILE APPROVAL FOR R&D FROM THE COMPETENT AUTHORITY IN THE PRESCRIBED MANNER, THE A O CONCLUDED THAT ASSESSEE IS NOT ENTITLED TO CLAIM WEIGHTED DEDUCTIO N AND ACCORDINGLY ADDED BACK AN AMOUNT OF RS. 3,02,59,766/-. BEING AG GRIEVED OF SUCH DISALLOWANCE, ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 4. IN COURSE OF APPEAL PROCEEDING BEFORE THE CI T(A), ASSESSEE SUBMITTED THE APPROVAL IN FORM 3CL FROM DSIR IN RES PECT OF R&D EXPENSES ON WHICH WEIGHTED DEDUCTION U/S 35(2AB) WA S CLAIMED. THE CIT(A) ON THE BASIS OF THE APPROVAL OF DSIR SUBMITT ED BEFORE HIM CALLED FOR A REMAND REPORT FROM THE AO. AS NOTED BY THE CIT(A) IN PARA 3.1 OF HER ORDER, AO IN HIS REPORT DATED 20/10 /2011 STATED THAT THE ASSESSEE MAY BE ALLOWED WEIGHTED DEDUCTION TO T HE EXTENT EXPENDITURE RECOGNIZED BY DSIR. THE CIT(A) ON EXAMI NING THE APPROVAL OF DSIR IN FORM NO. 3CL NOTICED THAT COMPE TENT AUTHORITY HAS APPROVED CAPITAL EXPENDITURE OF RS. 4,71,08,743 /- AS AGAINST THE CLAIM OF RS. 4,73,31,958 BY THE ASSESSEE. SHE, THER EFORE, ALLOWED THE AMOUNT OF RS. 4,71,08,743/- AS APPROVED BY DSIR AND DISALLOWED CAPITAL EXPENDITURE OF RS. 2,23,215/-, THOUGH SHE D IRECTED THE AO TO VERIFY THE CLAIM OF DEPRECIATION ON THE SAID AMOUNT IN ACCORDANCE WITH LAW. SO FAR AS THE CLAIM OF WEIGHTED DEDUCTION ON R EVENUE EXPENDITURE OF RS. 1,31,87,576/- IS CONCERNED, THE CIT(A) NOTED THAT THE ENTIRE REVENUE EXPENDITURE CLAIMED BY THE ASSES SEE WAS NOT APPROVED BY THE DSIR. THOUGH THE ASSESSEE CONTENDED THAT EVEN THOUGH THE DSIR HAS NOT ALLOWED WEIGHTED DEDUCTION ON THE REVENUE 3 ITA NO. 101/HYD/2012 COROMANDEL INTERNATIONAL LTD. EXPENDITURE OF RS. 1,31,87,576/- BUT THE SAME CAN B E ALLOWED AS A BUSINESS EXPENDITURE U/S 37(1) OF THE ACT. THE CIT (A), HOWEVER, WAS NOT IMPRESSED WITH SUCH CONTENTION OF THE ASSESSEE. SHE NOTED THAT AS PER THE INFORMATION AVAILABLE IN FORM NO. 3CL, D SIR ALLOWED REVENUE EXPENDITURE FOR AY 2009-10 AND 2010-11 BUT DID NOT DO SO FOR THE IMPUGNED ASSESSMENT YEAR. SHE OPINED THAT A NY EXPENDITURE HAS TO BE ALLOWED ONLY IN ACCORDANCE WITH THE PROVI SIONS OF IT ACT, HENCE, CLAIM OF THE ASSESSEE THAT R&D EXPENDITURE C AN BE OTHERWISE ALLOWED U/S 37 IS DEVOID OF MERIT. SHE FURTHER NOTE D THAT REVENUE EXPENDITURE IS TOWARDS DEVELOPMENT OF A NEW PRODUCT AND IT NEEDS TO BE CAPITALIZED ALONG WITH PRODUCT AND DEPRECIATION CAN BE CLAIMED WHEN THE RELEVANT PRODUCT IS CAPITALIZED. SHE FINAL LY CONCLUDED THAT SINCE THE EXPENDITURE OF RS. 1,31,87,576/- WAS NOT INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE, THE SAME CANNO T BE ALLOWED U/S 37(1). 5. THE LEARNED AR SUBMITTED BEFORE US THAT EV EN THOUGH THE DSIR HAS NOT ALLOWED A PART OF THE CAPITAL EXPENDITURE A S WEIGHTED DEDUCTION BUT STILL THE ASSESSEE WOULD BE ELIGIBLE TO AVAIL DEDUCTION AS EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR RES EARCH AND DEVELOPMENT ACTIVITY. IT WAS, THEREFORE, CONTENDED THAT THE DECISION OF THE DSIR THOUGH MAY BE RELEVANT IN THE CONTEXT OF W EIGHTED DEDUCTION AS ENVISAGED U/S 35(2AB) OF THE ACT, BUT, IT IS NOT RELEVANT FOR DECIDING THE NATURE OF EXPENDITURE, WHETHER CAPITAL OR REVENUE. IT WAS SUBMITTED THAT EVEN THOUGH IT MAY NOT BE ALLOWABLE AS WEIGHTED DEDUCTION U/S 35(2AB) OF THE ACT, BUT, STILL IT CAN BE ALLOWED U/S 35(1)(IV) READ WITH SECTION 35(2)(IA) OF THE ACT. S O FAR AS THE REVENUE EXPENDITURE OF RS. 1,31,87,576/- IS CONCERNED, THE LEARNED AR ADVANCING SIMILAR ARGUMENTS AND SUBMITTED THAT THE ONLY REASON ON WHICH CIT(A) HAS DISALLOWED THE CLAIM OF THE ASSES SEE IS THAT EXPENDITURE WAS NOT APPROVED BY THE DSIR. IT WAS SU BMITTED THAT WHEN THERE IS NO DISPUTE THAT THE ASSESSEE HAS INCU RRED EXPENDITURE FOR R&D ACTIVITIES, ONLY BECAUSE THE DSIR HAS NOT A PPROVED THE 4 ITA NO. 101/HYD/2012 COROMANDEL INTERNATIONAL LTD. EXPENDITURE, EXPENDITURE CANNOT BE DISALLOWED. IT W AS SUBMITTED THAT DSIRS APPROVAL IS ONLY CONFINED TO WEIGHTED DEDUCT ION AS ENVISAGED U/S 35(2AB) AND NOT RELEVANT FOR CLAIM OF DEDUCTION UNDER ANY OTHER PROVISION CONTAINED U/S 35 OR U/S 37 OF THE ACT. IN SUPPORT OF SUCH CONTENTION, LEARNED AR RELIED UPON A DECISION OF TH E HONBLE MADRAS HIGH COURT IN CASE OF TUBE INVESTMENTS INDIA LTD. V S. CIT, 260 ITR 94 AND THE DECISION OF THE ITAT, DELHI BENCH IN CASE O F ACIT VS. PARABOLIC DRUGS LTD. 141 TTJ 662. IT WAS SUBMITTED THAT REVENUE EXPENDITURE INCURRED BY THE ASSESSEE IS TOWARDS SAL ARY AND WAGES, HENCE, IS AN ALLOWABLE EXPENDITURE U/S 37 OF THE AC T. FINALLY, LEARNED AR SUBMITTED THAT, IF AT ALL, THERE IS ANY DISPUTE WITH REGARD TO THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER THE PROVISI ONS OF SECTION 35, THE AO CANNOT UNILATERALLY TAKE A DECISION BUT HAS TO REFER THE DISPUTE TO THE BOARD IN TERMS WITH PROVISIONS CONTA INED UNDER SUB- SECTION (3) OF SECTION 35. 6. THE LEARNED DR, ON THE OTHER HAND, SUBMITTE D BEFORE US THAT THE CIT(A) HAVING ALLOWED DEDUCTION STRICTLY IN TER MS WITH THE APPROVAL GRANTED BY DSIR, THE GRIEVANCE OF THE ASSE SSEE IS NOT MAINTAINABLE. 7. WE HAVE CONSIDERED THE ARGUMENTS OF THE PA RTIES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF TH E REVENUE AUTHORITIES. WE HAVE ALSO CAREFULLY APPLIED OUR MI ND TO THE DECISIONS RELIED UPON BY THE PARTIES. IT IS A FACT ON RECORD THAT OUT OF THE TOTAL DEDUCTION OF RS. 4,73,31,953/- CLAIMED BY THE ASSES SEE TOWARDS R&D EXPENDITURE ON CAPITAL FIELD, DSIR IN ITS APPROVAL IN FORM NO. 3CL ALLOWED THE CLAIM TO THE EXTENT OF RS. 4,71,08,743 AND IN THE PROCESS DISALLOWING THE AMOUNT OF RS. 2,23,215/-. WHEREAS T HE ENTIRE REVENUE EXPENDITURE OF RS. 1,31,87,576/- WAS NOT APPROVED B Y DSIR. IT IS THE CONTENTION OF THE LEARNED AR THAT APPROVAL OF DSIR AS ENVISAGED U/S 35(2AB) IS ONLY CONFINED TO DEDUCTION CLAIMED UNDER THAT SECTION. SUCH APPROVAL IS NEITHER NECESSARY TO DECIDE WHETHE R EXPENDITURE IS 5 ITA NO. 101/HYD/2012 COROMANDEL INTERNATIONAL LTD. IN THE NATURE OF REVENUE OR CAPITAL NOR IT IS RELEV ANT FOR CONSIDERING ASSESSEES CLAIM UNDER ANY OTHER PROVISIONS OF THE ACT. WE FIND FORCE IN THE CONTENTION OF THE LEARNED AR. ON A READING O F THE PROVISION CONTAINED U/S 35 AS A WHOLE AND SECTION 35(2AB) IN PARTICULAR AND ON PERUSAL OF FORM NO. 3CL, WE ARE OF THE VIEW THAT A PPROVAL OF DSIR AS CONTEMPLATED IS ONLY IN RESPECT OF WEIGHTED DEDUCTI ON TO BE CLAIMED U/S 35(2AB) OF THE ACT. IT HAS NO RELEVANCE FOR DET ERMINING WHETHER THE EXPENDITURE CLAIMED IS ALLOWABLE UNDER ANY OTHE R PROVISIONS OF THE ACT. THE ONLY CONDITION PRESCRIBED U/S 35(2AB) IS, IF THE CLAIM OF THE ASSESSEE IS ALLOWED U/S 35(2AB) IT WILL NOT BE ALLO WABLE UNDER ANY ANOTHER PROVISION. IN THE PRESENT CASE, NO MATERIA L HAS BEEN BROUGHT ON RECORD BY THE DEPARTMENT TO CONTROVERT ASSESSEE S CLAIM THAT IT HAS INCURRED TOWARDS SALARY AND WAGES OF EMPLOYEES ENGA GED IN REVENUE EXPENDITURE OF RS. 1,31,87,576/-, R&D AND CAPITAL EXPENDITURE OF RS. 4,73,31,953/- ON R&D ACTIVITIES. THAT BEING TH E CASE UNAPPROVED REVENUE EXPENDITURE OF RS. 1,31,87,576/- IF NOT ALL OWABLE U/S 35(2AB) OF THE ACT, IN ABSENCE OF APPROVAL FROM DSIR, CERTA INLY CAN BE ALLOWED AS DEDUCTION U/S 35(1)(I) AND 37(1) OF THE ACT AS THE CASE MAY BE. ITAT, DELHI BENCH IN CASE OF ACIT PARABOLIC DRUGS LTD. (SUPRA) WHILE CONSIDERING THE ISSUE HELD AS FOLLOWS : 28. SEC. 35(1)(I) FALLS UNDER CHAPTER IV UNDER THE HEAD 'COMPUTATION OF BUSINESS INCOME'. IT DESCRIBES THE ALLOWABILITY OF THE EXPENDITURE IN CASE WHERE BUSINESS INCOME IS COMPUTED. IT DEALS WITH TH E EXPENDITURE INCURRED BY THE ASSESSEE ON SCIENTIFIC RESEARCH. IT HAS BEEN PRESCRIBED THEREIN THAT IN RESPECT OF EXPENDITURE ON SCIENTIFIC RESEARCH THE S AME WILL BE ALLOWED IF THE SAID EXPENDITURE HAS BEEN LAID OUT OR EXPENDED ON S CIENTIFIC RESEARCH RELATED TO THE BUSINESS. IT IS NOT THE CASE OF ANYB ODY THAT EXPLANATION TO S. 35(1)(I) IS APPLICABLE TO THE FACTS OF THE CASE. TH EREFORE, THE CASE OF THE ASSESSEE HAS TO BE SEEN IN THE LIGHT OF PROVISIONS CONTAINED IN S. 35(1)(I) WITHOUT APPLICATION OF EXPLANATION. THE BUSINESS OF THE ASSESSEE IS OF MANUFACTURING OF BULK DRUGS AND FINE CHEMICALS ETC. IN THE PROCESS OF ITS MANUFACTURING OF DRUGS IT HAS TO MAKE R&D SO TO MAK E THE DRUG MORE EFFECTIVE AND ALSO TO BRING DOWN THE COST. NO MATER IAL HAS BEEN BROUGHT ON RECORD TO SUGGEST THAT BY INCURRING THESE EXPENDITU RE THE ASSESSEE HAS ENTERED INTO ANY NEW ACTIVITY OF MANUFACTURING OR N EW ACTIVITY OF TRADE. IN THE BUSINESS OF MANUFACTURING OF DRUG, PROCESS OF R &D IS CONTINUOUS PROCESS WHICH AUGMENTS THE BUSINESS OF THE ASSESSEE. THESE EXPENSES ARE NOT IN THE NATURE OF ANY PERSONAL EXPENDITURE AS NO SUCH A LLEGATION HAS BEEN MADE. THEREFORE, THE REMAINING CRITERIA TO CONSIDER THE ALLOWABILITY IS ONLY THE THING TO BE SEEN IS THAT WHETHER THE EXPENDITUR E IS INCURRED BY THE 6 ITA NO. 101/HYD/2012 COROMANDEL INTERNATIONAL LTD. ASSESSEE IS CAPITAL IN NATURE. SO AS IT RELATES TO CAPITAL EXPENDITURE OF RS. 44.41 LAKHS, THE ASSESSEE ITSELF HAS CLAIMED THE SA ID EXPENDITURE AS BEING CAPITAL IN NATURE. THEREFORE, THERE IS NO DISPUTE W ITH REGARD TO THAT. SO AS IT RELATES TO EXPENSES OF RS. 19.57 LAKHS ON SALARY AN D WAGES THE SAME CANNOT BE CONSIDERED TO BE EXPENDITURE OF BEING CAPITAL IN NATURE AS THE SAID SALARY AND WAGES ARE PAID TO THE MANPOWER DEPLOYED FOR CAR RYING OUT THE R&D ACTIVITY WHICH IS PART AND PARCEL OF THE BUSINESS O F THE ASSESSEE. 29. NOW COMING TO THE EXPENSES OF RS. 611.78 LAKHS RELATING TO MATERIALS/CONSUMABLES/SPARES, IT IS NOT THE CASE OF THE AO THAT THE SAID MATERIAL WAS NOT CONSUMED IN THE R&D PROCESS AND SO ME PART THEREOF WAS REMAINING IN THE CLOSING STOCK. THEREFORE, THESE EX PENDITURE INCURRED ON MATERIAL USED FOR LAB TRIALS CANNOT IN ANY MANNER B E CONSIDERED AS EXPENDITURE BEING IN THE NATURE OF CAPITAL. THE NEX T ITEM IS 'OTHER EXPENDITURE DIRECTLY RELATED TO R&D'. WITH REGARD T O THESE EXPENDITURE THE FINDING OF FACT HAS BEEN RECORDED BY CIT(A) THAT TH ESE HAVE BEEN INCURRED BY THE ASSESSEE FOR REGISTRATION OF PRODUCTS IN OTH ER COUNTRIES OR TOWARDS OBTAINING TECHNICAL KNOW-HOW FEE FOR PRODUCING NEW DRUGS ETC. HE HAS RECORDED IN HIS ORDER THAT HE HAS CALLED FOR AND PE RUSED THE AGREEMENTS BETWEEN THE ASSESSEE COMPANY AND IS LTD. (WHICH IS THE MAJOR SUM OF RS. 1 CRORE COMPRISING OF TWO ITEMS OF RS. 50 LAKHS EACH) FOR TRANSFER OF TECHNICAL KNOW-HOW. HE HAS ALSO OBSERVED THAT AO HAS NOT GIVE N ANY ADVERSE COMMENT IN HIS REPORT REGARDING THIS AGREEMENT AND SUCH TYPES OF AGREEMENTS FOR TRANSFER OF TECHNICAL KNOW-HOW ARE Q UITE COMMON IN PHARMACEUTICAL INDUSTRY DUE TO COMMERCIAL EXIGENCY. THESE FINDINGS OF FACT HAVE NOT BEEN CONTROVERTED BY THE REVENUE BY BRININ G ANY MATERIAL ON RECORD TO SUGGEST THAT SUCH FINDINGS OF CIT(A) ARE CONTRARY TO THE FACTS EXISTING ON RECORD. IF IT IS SO, THEN WE FIND NO I NFIRMITY IN THE FINDINGS RECORDED BY LEARNED CIT(A), WHEREBY FOLLOWING THE D ECISIONS OF DELHI TRIBUNAL IN THE CASES OF JT. CIT VS. MODI OLIVETTI LTD. (SUPRA) AND ASST. CIT VS. MEDICAMEN BLOTECH LTD. (SUPRA), HE HAS ALLOWED THE RELIEF TO THE ASSESSEE. 30. IN VIEW OF THE ABOVE DISCUSSION, IT HAS TO BE H ELD THAT ALL OF THESE EXPENDITURE WERE INCURRED BY THE ASSESSEE IN THE CO URSE OF ITS BUSINESS AND NONE OF THE EXPENDITURE CAN BE CLASSIFIED AS EXPEND ITURE IN THE NATURE OF CAPITAL. THEREFORE, NO INFIRMITY IS FOUND IN THE OR DER OF CIT(A) VIDE WHICH THE ASSESSEE HAS BEEN HELD ELIGIBLE FOR DEDUCTION OF TH ESE EXPENDITURE UNDER BOTH THE SECTIONS EITHER UNDER S. 35(1)(I) OR UNDER S. 37(1). WE DECLINE TO INTERFERE IN SUCH DELETION AND THIS GROUND OF REVEN UE IS DISMISSED. 8. IN THE PRESENT CASE, THE DEPARTMENT HAS NO T DISPUTED THE FACT THAT EXPENDITURE INCURRED WAS TOWARDS SALARY AND WA GES. THAT BEING THE CASE, THE EXPENDITURE IS ALLOWABLE U/S 35(1)(I) OR U/S 37(1) AS HELD 7 ITA NO. 101/HYD/2012 COROMANDEL INTERNATIONAL LTD. BY ITAT DELHI BENCH (SUPRA). SO FAR AS DISALLOWANCE OF CAPITAL EXPENDITURE OF RS. 2,23,215 IS CONCERNED, UNDISPUTE DLY, NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE DEPARTMENT TO CON TROVERT ASSESSEES CLAIM THAT SUCH EXPENDITURE INCURRED WAS TOWARDS SCIENTIFIC RESEARCH. DISALLOWANCE WAS ONLY FOR THE REASON THAT IT IS NOT APPROVED BY DSIR. HOWEVER, EVEN IN ABSENCE OF APPRO VAL FROM DSIR THOUGH ASSESSEE MAY NOT BE ELIGIBLE FOR DEDUCTION U /S 35(2AB), STILL ASSESSEE CAN CLAIM THE DEDUCTION U/S 35(1)(IV). IN THIS CONTEXT WE REFER TO THE DECISION OF HONBLE MADRAS HIGH COURT IN CASE OF TUBE INVESTMENTS OF INDIA LTD. VS. CIT (SUPRA) WHEREIN I T IS HELD A UNDER: SEC. 35 OF THE ACT DEALS WITH EXPENDITURE ON SCIENT IFIC RESEARCH. SECTION 35(1)(IV) REFERS TO EXPENDITURE OF A CAPITAL NATURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. SEC. 35 (2B) REFERS TO EXPENDITURE, OTHER THAN CAPITAL EXPENDITURE INCURRED ON THE ACQU ISITION OF ANY LAND OR BUILDING OR CONSTRUCTION OF ANY BUILDING, ON SCIENT IFIC RESEARCH UNDERTAKEN UNDER A PROGRAMME APPROVED IN THAT BEHALF BY THE PR ESCRIBED AUTHORITY, HAVING REGARD TO THE SOCIAL, ECONOMIC AND INDUSTRIAL NEED OF INDIA. IT IS ONLY SUCH EXPENDITURE AS IS INCURRED ON A PROGRAMME WHICH HAS BEEN APPROVED BY THE AUTHORITY PRESCRIBED UNDER S. 35(2B), WHICH CAN BE CLAIMED AS DEDUCTION UNDER THAT PROVISION. THE CAPITAL EXPENDITURE ON THE ACQU ISITION OF LAND OR BUILDING WHETHER ACQUIRED OR CONSTRUCTED CANNOT BE CLAIMED U NDER S. 35(2B). THE BENEFIT OF S. 35 (1)(IV) CAN BE AVAILED BY THE ASSESSEE IN RESPECT OF EXPENDITURE OF A CAPITAL NATURE ON SCIENTIFIC RESEARCH IF THAT RESEA RCH IS RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. THE APPROVAL OF THE AUT HORITY PRESCRIBED UNDER S. 35(2B) IS NOT AN ESSENTIAL PREREQUISITE FOR CLAIMIN G THE ALLOWANCE UNDER S. 35(1)(IV) IF IT IS FOUND THAT A PART OF THE CLAIM F ALLS WITHIN THE AMBIT OF S. 35(1)(IV). THE MERE FACT OF A CLAIM NOT HAVING BEEN FOUND ADMISSIBLE UNDER S. 35(2B) WILL NOT CONSTITUTE A BAR TO ALLOWING AN EXP ENDITURE UNDER S. 35(1)(IV) IF THAT EXPENDITURE IS CAPITAL EXPENDITURE AND FALLS S QUARELY WITHIN THE AMBIT OF S. 35(1)(IV). CAPITAL EXPENDITURE INCURRED ON THE ACQU ISITION OF LAND OR CONSTRUCTION OF BUILDING WHICH IS EXCLUDED BY THE V ERY TERMS OF S. 35(2B) CAN BE CLAIMED UNDER S. 35(1)(IV). 9. FOLLOWING THE RATIO LAID DOWN AS ABOVE, WE HOLD THAT ASSESSEE IS ELIGIBLE FOR DEDUCTION IN RESPECT OF REVENUE EXP ENDITURE OF RS. 1,31,87,576 AND CAPITAL EXPENDITURE OF RS. 2,23,215 /-. THUS, GROUND NOS. 2 & 3 ARE ALLOWED. 10. GROUND NO. 4 IS IN RESPECT OF DISALLOWANCE MADE U/S 14A READ WITH RULE 8D OF THE IT RULES. 8 ITA NO. 101/HYD/2012 COROMANDEL INTERNATIONAL LTD. 11. BRIEFLY THE FACTS RELATING TO THE ISSUE ARE , ASSESSEE DURING THE YEAR RECEIVED DIVIDEND INCOME OF RS. 3,43,15,864 FR OM UNITS OF MUTUAL FUND. IN THE COMPUTATION OF INCOME MADE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, ASSESSEE ITSELF DISALLOWE D AN AMOUNT OF RS. 5,05,951/- U/S 14A OF THE ACT. IN COURSE OF ASSESS MENT PROCEEDING, THE AO, HOWEVER, NOT BEING SATISFIED WITH THE DISAL LOWANCE MADE BY THE ASSESSEE TOWARDS EXPENDITURE INCURRED ON EARNIN G OF EXEMPT INCOME APPLIED RULE 8D OF THE ACT AND COMPUTED DISA LLOWANCE AT RS. 89,60,563/- AS UNDER: DISALLOWANCE U/S 14A (ALL FIGURES IN RS. LAKHS) AVERAGE VALUE OF ON FIRST OF P.Y. ON LAST DAY OF P.Y. AVERAGE A= INTEREST EXPENSES NOT DIRECTLY ATTRIBUTABLE TO PARTICULAR RECEIPT (INTEREST ON TERM LOAN) TOTAL INVESTMENTS 17408.39 35133.71 26271.05 2316.60 B= EXEMPT INVESTMENTS SHARES AND MFS) 13520.11 3342.54 8431.325 EXEMPT INCOME C=ASSETS 173016.14 271449.52 222232.83 343.15864 I) DIRECT EXPENDITURE NIL II) INDIRECT INTEREST EXPENDITURE (A X B/C) 87.89 III) 0.5% AVERAGE VALUE OF EXEMPT INCOME 1.716 DISALLOWANCE U/S 14A 89.60563 12. THE ASSESSEE CHALLENGED THE DISALLOWANCE MAD E BEFORE THE CIT(A). IN COURSE OF HEARING BEFORE THE CIT(A), AS SESSEE SUBMITTED THAT IT HAS NOT MADE ANY INVESTMENTS OUT OF THE BOR ROWED FUNDS, BUT, INVESTMENTS WERE MADE OUT OF SURPLUS FUNDS AVAILABL E WITH IT. ON THE BASIS OF THE SUBMISSIONS MADE, THE CIT(A) CALLED FO R A REMAND REPORT FROM THE AO. IN THE REMAND REPORT, THE AO STATED TH AT ON EXAMINING THE DETAILS SUBMITTED BY THE ASSESSEE IT WAS NOTICE D THAT ON SEVERAL OCCASIONS THE BANK BALANCE IN THE OD ACCOUNT IS NEG ATIVE, WHICH 9 ITA NO. 101/HYD/2012 COROMANDEL INTERNATIONAL LTD. CLEARLY INDICATED A NEXUS BETWEEN THE INVESTMENTS A ND BORROWAL FUNDS. HENCE, ONCE THE NEXUS IS ESTABLISHED, COMP UTATION IN TERMS WITH RULE 8D HAS TO FOLLOW. THOUGH, THE ASSESSEE CO NTESTED THE FINDING OF THE AO, BUT THE CIT(A) REJECTING ALL SUB MISSIONS OF THE ASSESSEE CONFIRMED THE DISALLOWANCE MADE BY THE AO . 13. REITERATING THE SUBMISSIONS MADE BEFORE THE CIT(A), LEARNED AR CONTENDED THAT WHEN THE ASSESSEE HIMSELF HAS COM PUTED THE DISALLOWANCE U/S 14A READ WITH RULE 8D OF THE ACT, THE AO HAS TO RECORD A SATISFACTION BEFORE REJECTING THE COMPUTAT ION MADE BY THE ASSESSEE. IT WAS SUBMITTED THAT IN THE PRESENT CASE , THE AO HAS NOT RECORDED ANY SUCH SATISFACTION BUT HAS ARBITRARILY REJECTED ASSESSEES CLAIM AND PROCEEDED TO MAKE FRESH COMPUTATION ON HI S OWN. THE LEARNED AR SUBMITTED THAT SO FAR AS AVERAGE VALUE O F INVESTMENT ON THE FIRST DAY OF PREVIOUS YEAR IS CONCERNED, AO HAS CONSIDERED THE SAME AT RS. 13,50,20,000/- BY INCLUDING THE INVESTM ENT OF RS. 13149 LAKHS IN M/S GODAVARI FERTILIZERS AND CHEMICALS LTD . WHEREAS PURSUANT TO SCHEME OF AMALGAMATION APPROVED BY THE AP HIGH COURT, GODAVARI FERTILIZERS AND CHEMICALS LTD. MERGED WITH ASSESSEE COMPANY WITH EFFECT FROM 01/04/2007. HENCE, AS ON 1 ST APRIL, 2007, COROMANDEL INTERNATIONAL LTD. DID NOT HOLD ANY SHAR ES IN GODAVARI FERTILIZERS AND CHEMICALS LTD. THEREFORE, INVESTMEN T OF RS. 13,419 LAKHS MADE IN GODAVARI FERTILIZERS AND CHEMICALS LT D. HAS TO BE EXCLUDED WHILE CONSIDERING THE AVERAGE VALUE OF INV ESTMENT FOR THE PURPOSE OF RULE 8D(2). IN THIS CONTEXT, THE LEARNED AR SUBMITTED A WORKING OF AVERAGE VALUE OF INVESTMENT, WHICH ACCO RDING TO THE WORKING AS ON FIRST DAY OF APRIL, 2007 IS RS. 101 L AKHS AS AGAINST 13520 LAKHS TAKEN BY THE AO. THEREFORE, CONSIDERING THE INVESTMENT OF RS. 3343 LAKHS AS ON LAST DATE OF PREVIOUS YEAR, I.E. ON 31/03/2008 AT RS. 3343 LAKHS AND THE AVERAGE VALUE OF INVESTME NT FOR THE YEAR WAS WORKED OUT AT RS. 1722 LAKHS. SO FAR AS THE INT EREST EXPENDITURE IS CONCERNED, THE LEARNED AR REFERRING TO THE DETAI LS OF INVESTMENTS MADE IN MUTUAL FUND DURING FY 2007-08 AT PAGE 54 & 55 OF THE PAPER 10 ITA NO. 101/HYD/2012 COROMANDEL INTERNATIONAL LTD. BOOK, AND INVESTMENT MADE THROUGH BANK STATED THAT TOTAL INTEREST EXPENDITURE WOULD BE RS. 14,35,215/- AND % DISALLO WANCE TO BE MADE ON THE AVERAGE VALUE OF INVESTMENT ON THE FIRS T DAY AND LAST DAY OF THE PREVIOUS YEAR AS PER THE WORKING WOULD BE RS . 8,60,833/-. IT WAS, THEREFORE, SUBMITTED THAT SINCE ALL THESE FACT S WERE NOT PROPERLY CONSIDERED EITHER BY THE AO AT THE TIME OF ASSESSME NT PROCEEDING OR EVEN DURING REMAND AND NOR BY THE CIT(A) IT NEEDS TO BE EXAMINED AGAIN. 14. THE LEARNED DR ON THE OTHER HAND SUBMITTED THAT THE ENTIRE ISSUE HAS BEEN THOROUGHLY VERIFIED BY THE AO AS WEL L AS CIT(A). HOWEVER, HE SUBMITTED THAT IF THE ASSESSEE IS STILL FEELS THAT IT HAS NOT BEEN PROPERLY VERIFIED, THE MATTER CAN BE REEXAMINE D BY THE AO. 15. WE HAVE CONSIDERED THE SUBMISSIONS OF THE P ARTIES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDE RS OF THE REVENUE AUTHORITIES. IN COURSE OF HEARING BEFORE US, THE L EARNED AR HAS SUBMITTED A WORKING OF DISALLOWANCE TO BE MADE U/S 14A READ WITH RULE 8D OF THE ACT. THE GRIEVANCE OF THE ASSESSEE I S ON TWO COUNTS, FIRSTLY, IT IS THE CONTENTION OF THE ASSESSEE THAT THE INVESTMENT IN GODAVARI FERTILIZERS LTD. OF RS. 13,419 LAKHS HAS T O BE EXCLUDED AS THE SAID COMPANY HAS MERGED WITH THE ASSESSEE IN PU RSUANCE TO SCHEME OF AMALGAMATION APPROVED BY THE AP HIGH COUR T. SO FAR AS INTEREST EXPENDITURE IS CONCERNED, AS PER THE DETAI LS FURNISHED BY ASSESSEE AT PAGE 54 & 55 OF PAPER BOOK, TOTAL DISAL LOWANCE ON ACCOUNT OF INVESTMENTS MADE OUT OF BORROWED FUND HA S BEEN WORKED OUT AT RS. 14,35,215/-. THOUGH, ALL THESE FACTS WER E AVAILABLE BEFORE THE DEPARTMENTAL AUTHORITIES, AS IT APPEARS, THEY H AVE NOT PROPERLY APPLIED THEIR MIND TO THESE FACTUAL ISSUES. IN THE AFORESAID VIEW OF THE MATTER, WE CONSIDER IT PROPER TO REMIT THIS ISSUE B ACK TO THE FILE OF THE AO TO CONSIDER IT AFRESH AFTER TAKING INTO ACCOUNT ASSESSEES WORKING OF AVERAGE VALUE OF INVESTMENT AND INTEREST EXPENDI TURE INCURRED BY IT AS SUBMITTED BEFORE US. THE AO SHOULD TAKE A DECISI ON IN THE MATTER 11 ITA NO. 101/HYD/2012 COROMANDEL INTERNATIONAL LTD. AFTER PROPERLY CONSIDERING ASSESSEES SUBMISSIONS A ND ALL FACTS AND MATERIALS ON RECORD AND KEEPING IN VIEW THE PROVISI ONS OF LAW. THIS GROUND IS CONSIDERED TO BE ALLOWED FOR STATISTICAL PURPOSES. 16. IN THE RESULT, APPEAL IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 28/08/2014. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 28 TH AUGUST, 2014 KV COPY TO:- 1) COROMANDEL INTERNATIONAL LTD., COROMANDEL HOUS E, SARDAR PATEL ROAD, P.B. NO. 1589, SECUNDERABAD 500 003. 2) ADDL. CIT, RANGE 1, HYDERABAD. 3) CIT(A)-II, HYDERABAD. 4) CIT-I, HYDERABAD 5)THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD.