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

ITA 3493/MUM/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 5477 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 18-07-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 12-05-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ABHIJIT PATANKAR
• Assessee Lawyers: AAARATI VISSANJI
• Keywords: Depreciation; Earning of tax free income; Competent authority; Revenue expenditure; Capital expenditure
• Section: 14A; 115JB; 37(1)

Judgement Text

1 ITA 3473/MUM/2017 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G, MUMBAI BEFORE SHRI MAHAVIR SINGH(JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NO.3493/MUM/2017 (ASSESSMENT YEAR: 2012-13) DCIT-2(1(2), MUMBAI VS M/S GODAVARI BIOREFINERIES LTD SOMAIYA BHAVAN, 45-47, MG ROAD, FORT, MUMBAI-1 PAN : AABCG2543C APPELLANT RESPONDENT APPELLANT BY SHRI ABHIJIT PATANKAR RESPONDENT BY SMT. AAARATI VISSANJI DATE OF HEARING 15-05-2018 DATE OF PRONOUNCEMENT -06-2018 O R D E R PER G MANJUNATHA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST ORDER OF THE CIT(A)-3, MUMBAI DATED 10-02-2017 AND IT PERTAINS T O AY 2012-13. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID.CIT(A) ERRED IN ALLOWING THE DEDUCTION U/S 35(2 AB) WITHOU T APPRECIATING THAT THE ASSESSEE WAS NOT APPROVED BY THE PRESCRIBED AUTHORI TY U/S 35(2AB) FOR AY 2012- 13' 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN RESTRICTING THE DISALLOWANCE U/S 14A R .W. RULE 8D TO THE EXEMPT INCOME WITHOUT APPRECIATING THAT THERE IS NO SUCH P ROVISION IN THE IT ACT, 1961 FOR DOING SO IN THE RELEVANT YEAR.' 3. FOR THESE AND OTHER GROUND THAT MAY BE URGED A T THE TIME OF HEARING, THE DECISION OF THE C1T(A) MAY BE SET ASIDE AND THAT OF THE AO RESTORED.' 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY, WHICH IS 2 ITA 3473/MUM/2017 ENGAGED IN THE BUSINESS OF MANUFACTURING SUGAR, CHE MICAL DISTILLERIES AND GENERATION OF ELECTRICITY, FILED ITS RETURN OF INCOME FOR AY 2012-13 DECLARING TOTAL INCOME AT NIL UNDER NORMAL PROVISIO NS OF THE ACT AND RS.13,45,63,959 U/S 115JB OF THE ACT. THE CASE WAS SELECTED FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED U/S 143(3 ) ON 29-03-2015 DETERMINING THE TOTAL INCOME AT RS.NIL AFTER SETTIN G OFF BROUGHT FORWARD BUSINESS LOSS BY MAKING DISALLOWANCE OF RS.31,99,25 8 U/S 14A OF THE ACT AND DISALLOWANCE OF WEIGHTED DEDUCTION U/S 35(2 AB) OF THE ACT . THE AO ALSO DETERMINED BOOK PROFIT OF RS.13,77,63,2 17 BY MAKING ADJUSTMENTS TOWARDS DISALLOWANCE OF EXPENSES U/S 14 A OF THE ACT. 3. AGGRIEVED BY THE ASSESSMENT ORDER, ASSESSEE PREF ERRED APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE HAS FILED ELABORATE WRITTEN SUBMISSIONS ON THE ISSUE OF DISALLOWANCE OF DEDUCTION CLAIMED U/S 35(2AB) TO ARGUE THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION AS ITS R&D FACILITY HAS BEEN APPROVED BY THE COMPETENT AUT HORITY, I.E. DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH, GOV ERNMENT OF INDIA AND TO THIS EFFECT ISSUED FORM 3CM ON 14-01-2013, IN RE SPONSE TO AN APPLICATION FILED BY THE ASSESSEE IN FORM 3CK ON 06 -11-2012. INSOFAR AS DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME, ASSESSEE HAS SUBMITTED THAT IT HAS EARNED DIVIDEND INCOME OF RS.3,945 AND SUO MOTO DISALLOWANCE OF RS.10,000 HAS BEEN MAD E, WHEREAS THE 3 ITA 3473/MUM/2017 AO HAS DETERMINED DISALLOWANCE OF RS.31,99,258 WITH OUT APPRECIATING THE FACT THAT DISALLOWANCE CONTEMPLATED U/S 14A CAN NOT SWALLOW ENTIRE EXEMPT INCOME OF THE ASSESSEE. 4. THE CIT(A), AFTER CONSIDERING RELEVANT SUBMISSIO NS OF THE ASSESSEE DELETED ADDITION MADE BY AO TOWARDS WEIGHTED DEDUCT ION CLAIMED U/S 35(2AB) IN RESPECT OF R&D EXPENDITURE BY HOLDING TH AT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 35(2AB) OF THE ACT. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED BELOW:- 7.5 I HAVE CAREFULLY CONSIDERED RIVAL SUBMISSION AN D FACTS OF THE CASE. IT IS AN UNDISPUTED FACT THAT THE APPELLANT COMPANY IS ENGAG ED IN THE RESEARCH SINCE LONG AND HAVE THE RECOGNITIONS DATED 09.04.2009 AND 16.06.2009. THEREFORE, THE APPELLANT'S UNIT WAS DULY RECOGNIZED FOR CARRYI NG OUT R&D ACTIVITIES. THE ASSESSING OFFICER HAS NOT DOUBTED THE GENUINENESS O F THE EXPENDITURE. THE ONLY ISSUE BEFORE THE LEARNED ASSESSING OFFICER IS THAT FORM NO. 3CM WHICH WAS ISSUED 14.01.2013 AND WAS NOT AVAILABLE FOR THE ASSESSMENT YEAR. I HAVE ALSO NOTED SECTION 35(2AB) WHICH STATES THAT THE R& D UNIT SHOULD BE APPROVED. NOWHERE IN THE SECTION IS ANY CUT OFF DAT E PRESCRIBED FOR ALLOWING THE WEIGHTED DEDUCTION. IF AT THE TIME OF ASSESSMEN T, THE UNIT IS APPROVED AND THE EXPENSES ARE GENUINE IT WOULD MEET REQUIREMENT OF SECTION 35(2AB) OF THE ACT AND THE WEIGHTED DEDUCTION OUGHT TO BE ALLOWED. 7.6 IT IS ALREADY NOTED IN THE ASSESSMENT ORDER THA T THE FORM NO. 3CM WAS ISSUED ON 14.01.2013 AND WAS AVAILABLE AT THE TIME OF ASSESSMENT. FURTHER, THE UNIT WAS A RECOGNIZED UNIT AND THE EXPENSES WERE GE NUINE. THERE IS NO RESTRICTION IN SEC 35(2AB) OF THE I T ACT FOR APPLY ING ANY CUT OFF TO ALLOW EXPENSES ONLY AFTER THE DATE FORM NO. SCM IS ISSUED . THIS VIEW IS FORTIFIED BY THE DECISION OF THE DELHI HIGH COURT IN SANDANVIKAS (INDIA) LTD. 335 IT R 117 AND GUJARAT HIGH COURT IN CLARIS LIFESCIENCES LTD. 326 ITR 251. 7.7 THE HON'BLE DELHI HIGH COURT IN SANDANVIKAS (INDIA) LTD. 335 ITR 117 HAS OBSERVED THAT: 'PARA 2 THE PROVISION FURTHER STATES THAT I?I ORDER TO CLAIM THIS WEIGHTED DEDUCTION, IT IS TO BE CERTIFIED BY THE COMPETENT A UTHORITY THAT THE ASSESSEE HAD UNDERTAKEN RESEARCH AND DEVELOPMENT AC TIVITY. THE COMPETENT AUTHORITY IN THIS BEHALF IS DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH (DSIR). THE ASSESSEE HAD APPROA CHED DSIR VIDE APPLICATION DATED LOTH JANUARY, 2005. THE DSIR VIDE ITS LETTER DATED 2VD 4 ITA 3473/MUM/2017 FEBRUARY, 2006 GRANTED RECOGNITION OF THE IN-HOUSE R&D FACILITIES OF THE ASSESSEE COMPANY AND ALSO GRANTED APPROVAL FOR THE EXPENSES INCURRED BY THE COMPANY ON IN-HOUSE R&D FACILITY IN PRESCRIB ED FORM $CM BY LETTER DATED I8TH SEPTEMBER, 2006. THE ASSESSING OF FICER, HOWEVER, REFUSED TO ACCORD THE BENEFIT OF THE AFORESAID PROV ISIONS OF WEIGHTED DEDUCTION TO THE ASSESSEE ON THE GROUND THAT RECOGN ITION AND APPROVAL WAS GIVEN BY THE DSIR IN FEBRUARY'/SEPTEMBER 2006, I.E., IN THE NEXT ASSESSMENT YEAR AND, THEREFORE, THE ASSESSEE WAS NO T ENTITLED TO THE BENEFIT. THE CIT(APPEAL) ACCEPTED THIS VIEW OF THE ASSESSING OFFICER AND DISMISSED THE APPEAL, HOWEVER, THE INCOME TAX APPEL LATE TRIBUNAL (HEREINAFTER REFERRED TO AS 'THE TRIBUNAL') HAS COM E TO THE CONCLUSION THAT THE ASSESSEE WOULD BE ENTITLED TO WEIGHTED DED UCTIONS OF THE AFORESAID EXPENDITURE INCURRED BY THE ASSESSEE IN T ERMS OF THE SECTION 3(2AB) OF THE ACT AND IN COMING TO THIS CONCLUSION , THE TRIBUNAL HAS RELIED UPON THE JUDGMENT OFGUJARAT HIGH COURT IN CITV. CLARIS LIFES CIENCES LTD. [2010!326 ITR 251 /[2OO8] 174 TAXMAN JJ.Q . WE HAVE GONE THROUGH THE AFORESAID JUDGMENT OF THE GUJARAT HIGH COURT AND FIND THAT GU JARAT HIGH COURT DETAILED IN NO-UNCERTAIN TERMS THAT THE CUT-OFF DAT E MENTIONED IN THE CERTIFICATE ISSUED BY THE DSIR WOULD BE OF NO RELEV ANCE. WHAT IS TO BE SEEN IS THAT THE ASSESSEE WAS IN INDULGING IN R&D A CTIVITY AND HAD INCURRED THE EXPENDITURE THEREUPON. ONCE A CERTIFIC ATE BY DSIR IS ISSUED, THAT WOULD BE SUFFICIENT TO HOLD THAT THE ASSESSEE FULFILLS THE CONDITIONS LAID DOWN IN THE AFORESAID PROVISIONS. THE DISCUSSI ONS, WHICH IS UNDERTAKEN BY THE GUJARAT HIGH COURT WHILE INTERPRE TING THE AFORESAID PROVISIONS, IS EXTRACTED BELOW: '7. .........THE LOWER AUTHORITIES ARE READING MORE THA N WHAT IS PROVIDED BY LAW. A PLAIN AND SIMPLE READING OF THE ACT PROVIDES THAT ON APPROVAL OF THE RESEARCH AND DEVELOPMENT FACILITY, EXPENDITURE SO INCURRED IS ELIGIBLE FOR WEIGHTED DEDUCTION. 8. THE TRIBUNAL HAS CONSIDERED THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND TOOK THE VIEW THAT SECTION SPEAKS OF: (I) DEVELOPMENT OF FACILITY; (II) INCURRING OF EXPENDITURE BY THE ASSESSEE FOR D EVELOPMENT OF SUCH FACILITY; (IN) APPROVAL OF THE FACILITY BY THE PRESCRIBED AUT HORITY, WHICH IS DSIR; AND (IV) ALLOWANCE OF WEIGHTED DEDUCTION ON THE EXPENDI TURE SO INCURRED BY THE ASSESSEE. 9. THE PROVISIONS NOWHERE SUGGEST OR IMPLY THAT RESEAR CH AND DEVELOPMENT FACILITY IS TO BE APPROVED FROM A PARTI CULAR DATE AND, IN OTHER WORDS, IT IS NOWHERE SUGGESTED THAT DATE O F APPROVAL ONLY WILL BE CUT-OFF DATE FOR ELIGIBILITY OF WEIGHTED DE DUCTION ON THE EXPENSES INCURRED FROM THAT DATE ONWARDS. A PLAIN R EADING CLEARLY MANIFESTS THAT THE ASSESSEE HAS TO DEVELOP FACILITY , WHICH 5 ITA 3473/MUM/2017 PRESUPPOSES INCURRING EXPENDITURE IN THIS BEHALF, A PPLICATION TO THE PRESCRIBED AUTHORITY, WHO AFTER FOLLOWING PROPER PR OCEDURE WILL APPROVE THE FACILITY OR OTHERWISE AND THE ASSESSEE WILL BE ENTITLED TO WEIGHTED DEDUCTION OF ANY AND ALL EXPENDITURE SO IN CURRED. THE TRIBUNAL HAS, THEREFORE, COME TO THE CONCLUSION THA T ON PLAIN READING OF SECTION ITSELF, THE ASSESSEE IS ENTITLED TO WEIGHTED DEDUCTION ON EXPENDITURE SO INCURRED BY THE ASSESSE E FOR DEVELOPMENT OF FACILITY. THE TRIBUNAL HAS ALSO CONS IDERED RULE 6(5A) AND FORM NO. 3CM AND COME TO THE CONCLUSION T HAT A PLAIN AND HARMONIOUS READING OF RULE AND FORM CLEARLY SUG GESTS THAT ONCE FACILITY IS APPROVED, THE ENTIRE EXPENDITURE S O INCURRED ON DEVELOPMENT OF R&D FACILITY HAS TO BE ALLOWED FOR W EIGHTED DEDUCTION AS PROVIDED BY SECTION 3$(2AB). THE TRIBU NAL HAS ALSO CONSIDERED THE LEGISLATIVE INTENTION BEHIND ABOVE E NACTMENT AND OBSERVED THAT TO BOOST UP RESEARCH AND DEVELOPMENT FACILITY IN INDIA, THE LEGISLATURE HAS PROVIDED THIS PROVISION TO ENCOURAGE THE DEVELOPMENT OF THE FACILITY BY PROVIDING DEDUCTION OF WEIGHTED EXPENDITURE. SINCE WHAT IS STATED TO BE PROMOTED WA S DEVELOPMENT OF FACILITY, INTENTION OF THE LEGISLATURE BY MAKING ABOVE AMENDMENT IS VERY CLEAR THAT THE ENTIRE EXPENDITURE INCURRED BY THE ASSESSEE ON DEVELOPMENT OF FACILITY, IF APPROVED, HAS TO BE ALL OWED FOR THE PURPOSE OF WEIGHTED DEDUCTION. JO. WE ARE IN FULL AGREEMENT WITH THE REASONING GIVEN B Y THE TRIBUNAL AND WE ARE OF THE VIEW THAT THERE IS NO SC OPE FOR ANY OTHER INTERPRETATION AND SINCE THE APPROVAL IS GRANTED DU RING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR IN QU ESTION, WE ARE OJ THE VIEW THAT THE ASSESSEE IS ENTITLED TO CLAIM WEI GHTED DEDUCTION IN RESPECT OF THE ENTIRE EXPENDITURE INCURRED UNDER SE CTION 35(2AB) OF THE ACT BY THE ASSESSEE,' \ 7.8 THE HON'BLE GUJARAT HIGH COURT IN CLARIS LI FESCIENCES LTD. 326 ITR 251 HAS OBSERVED THAT: 'PARA 6- THE TRIBUNAL HAS DISCUSSED THIS ISSUE AT LENGTH IN ITS ORDER. IT WAS CONTENDED BY THE ASSESSEE BEFORE THE TRIBUNAL T HAT NOWHERE THE PROVISIONS PROVIDE THAT EXPENDITURE FROM THE DATE O F APPROVAL ONLY HAS TO BE ALLOWED. IN THE ABSENCE OF THOSE WORDS, SUCH CON DITIONS CANNOT BE IMPUTED IN THE STATUTE BY THE LOWER AUTHORITIES. DO ING SO AMOUNTS TO READING MORE IN THE LAW WHICH IS NOT EXPRESSLY PROV IDED. THE WORDS USED ARE ANY EXPENDITURE INCURRED BY THE ASSESSEE ON SCI ENTIFIC RESEARCH ON THE IN-HOUSE 'R & D' FACILITY APPROVED BY THE PRESC RIBED AUTHORITIES HAS TO BE ALLOWED BY DEDUCTION OF EXPENDITURE SO INCURR ED. MEANING OF THESE WORDS IS PLAIN AND CLEAR THAT THE FACILITY IS TO BE ESTABLISHED FIRST AND ON APPROVAL OF THE FACILITY ALL THE EXPENDITURE SO INC URRED BY THE ASSESSEE FOR DEVELOPMENT OF IN-HOUSE FACILITY IS TO BE HELD AS E LIGIBLE FOR WEIGHTED DEDUCTION. FORM NO. 3CM, WHICH IS ORDER OF APPROVAL AS PROVIDED BY THE RULES IN THIS BEHALF ALSO DOES NOT HAVE ANY MENTION OF DATE OF APPROVAL 6 ITA 3473/MUM/2017 RATHER IT SPEAKS OF ONLY APPROVAL. THE LOWER AUTHOR ITIES ARE READING MORE THAN WHAT IS PROVIDED BY LAW. A PLAIN AND SIMPLE RE ADING OF THE ACT PROVIDES THAT ON APPROVAL OF THE 'R & D' FACILITY, EXPENDITURE SO INCURRED IS ELIGIBLE FOR WEIGHTED DEDUCTION. PARA 7 THE TRIBUNAL HAS CONSIDERED THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE AND TOOK THE VIEW THAT SECTION SPEAKS OF (I) DEVELOPMENT OF FACILITY; (II) INCURRING OF EXPENDITURE BY THE ASSE SSEE FOR DEVELOPMENT OF SUCH FACILITY; (HI) APPROVAL OF THE FACILITY BY THE PRESCRIBED AUTHORITY, WHICH IS 'DSIR'; AND (IV) ALLOWANCE OF WEIGHTED DED UCTION ON THE EXPENDITURE SO INCURRED BY THE ASSESSEE. THE PROVIS IONS NOWHERE SUGGEST OR IMPLY THAT 'R & D' FACILITY IS TO BE APPROVED FR OM A PARTICULAR DATE AND IN OTHER WORDS, IT IS NOWHERE SUGGESTED THAT DA TE OF APPROVAL ONLY WILL BE CUT-OFF DATE FOR ELIGIBILITY OF WEIGHTED DE DUCTION ON THE EXPENSES INCURRED FROM THAT DATE ONWARDS. A PLAIN READING CL EARLY MANIFESTS THAT THE ASSESSEE HAS TO DEVELOP FACILITY, WHICH PRESUPP OSES INCURRING EXPENDITURE IN THIS BEHALF, APPLICATION TO THE PRES CRIBED AUTHORITY, WHO AFTER FOLLOWING PROPER PROCEDURE WILL APPROVE THE F ACILITY OR OTHERWISE AND THE ASSESSEE WILL BE ENTITLED TO WEIGHTED DEDUC TION OF ANY AND ALL EXPENDITURE SO INCURRED. THE TRIBUNAL HAS, THEREFOR E, COME TO THE CONCLUSION THAT ON PLAIN READING OF SECTION ITSELF, THE ASSESSEE IS ENTITLED TO WEIGHTED DEDUCTION ON EXPENDITURE SO INCURRED BY THE ASSESSEE FOR DEVELOPMENT OF FACILITY. THE TRIBUNAL HAS ALSO CONS IDERED RULE 6(5A) AND FORM NO. SCM AND COME TO THE CONCLUSION THAT A PLAI N AND HARMONIOUS READING OF RULE AND FORM CLEARLY SUGGESTS THAT ONCE FACILITY IS APPROVED, THE ENTIRE EXPENDITURE SO INCURRED ON DEVELOPMENT O F 'R & D' FACILITY HAS TO BE ALLOWED FOR WEIGHTED DEDUCTION AS PROVIDE D BY SECTION 3$(2AB). THE TRIBUNAL HAS ALSO CONSIDERED THE LEGIS LATIVE INTENTION BEHIND ABOVE ENACTMENT AND OBSERVED THAT TO BOOST U P R & D FACILITY IN INDIA, THE LEGISLATURE HAS PROVIDED THIS PROVISION TO ENCOURAGE THE DEVELOPMENT OF THE FACILITY BY PROVIDING DEDUCTION OF WEIGHTED EXPENDITURE. SINCE WHAT IS STATED TO BE PROMOTED WA S DEVELOPMENT OF FACILITY, INTENTION OF THE LEGISLATURE BY MDKING AB OVE AMENDMENT IS VERY CLEAR THAT THE ENTIRE EXPENDITURE INCURRED BY THE A SSESSEE ON DEVELOPMENT OF FACILITY, IF APPROVED, HAS TO BE ALLOWED FOR THE PURPOSE OF WEIGHTED DEDUCTION.' 7.9 IN VIEW OF THE ABOVE, IT IS CLEAR THAT THE LEARNED ASSESSING OFFICER WAS READING MORE IN THE SECTION THAN WHAT IS PROVIDED I N LAW. MY ATTENTION IS ALSO DRAWN TO THE FORMAT OF FORM NO. 3CM AS GIVEN IN THE INCOME TAX RULES, 1962. THERE IS NO REFERENCE IN THE FORM NO. SCM TO ANY ASSESSMENT YEAR OR CUT-OFF DATE FOR ALLOWABILITY OF THE WEIGHTED DEDUC TION AND THEREFORE, THE FORM IS IN COMPLETE ALIGNMENT WITH THE SECTION AND AS IN TERPRETED BY THE DELHI HIGH COURT. IN VIEW OF THESE FACTS AND THE JUDICIAL DECI SIONS ON THE ISSUE, GROUND NO. 2 IS ALLOWED. HOWEVER, THE AO IS DIRECTED TO VE RIFY AND ENSURE THAT NO DEPRECIATION IS CLAIMED AND ALLOWED ON CAPITAL EXPE NDITURE OF RS. 15,33,26,9287- CLAIMED ELIGIBLE DEDUCTION U/S 35(2AB) OF THE ACT BY THE APPELLANT. 7 ITA 3473/MUM/2017 INSOFAR AS ADDITION MADE TOWARDS DISALLOWANCE OF EX PENSES INCURRED IN RELATION TO EXEMPT INCOME U/S 14A R.W.R. 8D, THE LD .CIT(A) OBSERVED THAT THE CORRECT PROPOSITION AND THE VARIOUS JUDICIAL PR ONOUNCEMENTS CONFIRM THAT DISALLOWANCE CONTEMPLATED U/S 14A SHOULD NOT E XCEED THE EXEMPT INCOME. HOWEVER, SINCE THE ASSESSEE HAS ALREADY MA DE SUO MOTO DISALLOWANCE OF RS.10,000, FURTHER DISALLOWANCE WOR KED OUT BY THE AO U/R 8D(2)(II) IS UNWARRANTED. ACCORDINGLY, HE DIRE CTED THE AO TO RESTRICT DISALLOWANCE TO SUO MOTO DISALLOWANCE OF RS.10,000 MADE BY THE ASSESSEE. THE RELEVANT PORTION OF THE ORDER IS EXT RACTED BELOW:- 8. GROUND NO. 3 RELATES TO DISALLOWANCE OF RS. 31,99,2587- U/S 14A R.W.R. 8D OF THE INCOME TAX ACT, 1961. DURING THE COURSE OF A SSESSMENT PROCEEDINGS, THE AO HAS OBSERVED THAT APPELLANT HAS NOT INCLUDED THE DIVIDEND INCOME FOR RS. 3,945/- IN THE OTTAL INCOME. IN THE COMPUTATION OF INCOME THE APPELLANT HAS MADE A DISALLOWANCE OF RS10,000/- BUT THE SAME IS N OT AS PER THE PROVISIONS OF SECTION 14A R.W.R. 8D OF THE IT RULES. AFTER CONSID ERING THE SUBMISSION OF THE APPELLANT THE AO HAS RECOMPUTED THE DISALLOWANCE U/ R 8D(2)(II) TO THE EXTENT OF RS. 3O,37,745/- AND U/R 8D(2)(III) TO TH EXTENT OF RS. I,7I,5I3/-. THUS THE TOTAL DISALLOWANCE MADE BY THE AO U/S 14A R.W.R. 8D(2)(II ) IS WORKED OUT TO RS. 32,09,258/-. SINCE THE APPELLANT HAS ITSELF DISALLO WED RS. 10,000/-, THEREFORE, BALANCE AMOUNT OF RS. 31,99,2587- IS DISALLOWED AND ADDED BACK TO THE INCOME OF THE APPELLANT. 8.1 ON THE OTHER HAND THE APPELLANT SUBMITTED THAT THE ASSESSEE COMPANY HAS DISALLOWED RS. 10,000/- U/S 14A OF THE IT ACT CONSI DERING THAT THE TAX FREE DIVIDEND INCOME IS ONLY RS. 3,945/-. THE AO HAS WOR KED OUT THE DISALLOWANCE U/S 14A R.W.R. 8D(A)(II) AT RS. 32,09,258/-. THE AP PELLANT RECEIVED DIVIDEND INCOME TO THE EXTENT OF RS .3,945/- AND SUO MOTTO MADE DISALLOWANCE OF RS. 10,000/-, WHEREAS THE AO HAS COMPUTED AS PER RULE 8 D(2)(II) OF THE IT RULES, 1962. IT IS SUBMITTED THAT IN VIEW OF THE VARIOUS J UDICIAL PRONOUNCEMENTS CONFIRMED THE FACT THAT DISALLOWANCE SHOULD NOT EXC EED THE EXEMPT INCOME. THEREFORE, THE DISALLOWANCE TO BE RESTRICTED TO THE EXEMPT INCOME OF RS. 3>945/'- 8.2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND FACT OF THE CASE. THE CORRECT PROPOSITION AND THE VARIOUS JUDICIAL PRONOU NCEMENTS CONFIRMED THE FACT THAT DISALLOWANCE SHOULD NOT EXCEED THE EXEMPT INCO ME. HOWEVER, SINCE THE 8 ITA 3473/MUM/2017 APPELLANT HAS ALREADY MADE SUO MOTTO DISALLOWANCE O F RS10,000/-, WHEREAS THE AO IS NOT REQUIRED TO MAKE COMPUTATION AS PER RULE 8D(2)(II) OF THE IT RULES, 1962. THEREFORE, THE DISALLOWANCE TO BE RESTRICTED TO SUO MOTTO DISALLOWANCE OF RS10,000/- . THEREFORE, ADDITION OF RS, 31,99,258/ - IS TO BE DELETED. IN VIEW OF THE SAME GROUND NO. 3 IS PARTLY ALLOWED. 5. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATI ON FROM REVENUE APPEAL IS DISALLOWANCE OF WEIGHTED DEDUCTION CLAIME D U/S 35(2AB) OF THE INCOME-TAX ACT, 1961. DURING THE COURSE OF ASSESSM ENT PROCEEDINGS, THE AO CALLED UPON THE ASSESSEE TO EXPLAIN AS TO HO W IT IS ELIGIBLE FOR WEIGHTED DEDUCTION U/S 35(2AB) IN RESPECT OF R&D EX PENDITURE WITH. THE AO, AFTER CONSIDERING THE EVIDENCES FILED BY TH E ASSESSEE TO JUSTIFY DEDUCTION CLAIMED U/S 35(2AB), ISSUED NOTICE U/S 13 3(6) TO THE SECRETARY, DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RE SEARCH, GOVERNMENT OF INDIA TO PROVIDE THE STATUS OF APPROVAL GRANTED TO THE ASSESSEE U/S 35(2AB) ISSUED, IF ANY. IN RESPONSE TO NOTICE U/S 133(6), SECRETARY, DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH, GOV ERNMENT OF INDIA, HAS WRITTEN A LETTER DATED 15-12-2014 WHICH WAS REC EIVED BY THE AO ON 19-12-2014 WHICH HAS BEEN EXTRACTED BY THE AO IN HI S ORDER AT PARA 5.1 ON PAGE 2 AS PER WHICH, THE APPROVAL U/S 35(2AB) HAS BEEN GRANTED TO THE ASSESSEE W.E.F. 01-04-2012, I.E. FOR AY 2013-14 ONWARDS. IN THE SAID LETTER AT PARA 3 IT WAS CATEGORICALLY STATED T HAT SINCE THE R&D FACILITY WAS NOT APPROVED U/S 35(2AB) FOR FINANCIAL YEAR 20 11-12 CORRESPONDING TO AY 2012-13, NO FORM 3CM AND FORM 3CL WERE ISSUED . THE AO, AFTER 9 ITA 3473/MUM/2017 CONSIDERING RELEVANT DETAILS AND ALSO CONSIDERING T HE EXPLANATION SUBMITTED BY THE ASSESSEE HELD THAT TO CLAIM DEDUCT ION U/S 35(2AB), APPROVAL FROM THE COMPETENT AUTHORITY, I.E. SECRETA RY, DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH, GOVERNMENT OF IND IA IS MANDATORY AND WITHOUT SUCH APPROVAL ASSESSEE CANNOT CLAIM WEIGHTE D DEDUCTION U/S 35(2AB) OF THE ACT. 6. IT IS THE CONTENTION OF THE ASSESSEE THAT ITS R& D FACILITY HAD BEEN APPROVED BY THE COMPETENT AUTHORITY SINCE AY 2009-1 0 AND FURTHER APPROVAL IS ONLY RENEWAL OF ALREADY EXISTING APPROV AL GRANTED BY THE COMPETENT AUTHORITY WHICH HAS BEEN GIVEN FROM THE D ATE OF ORIGINAL APPROVAL, THEREFORE, THE AO WAS ERRED IN HOLDING TH AT THE ASSESSEE IS NOT APPROVED BY THE COMPETENT AUTHORITY FOR THE IMPUGNE D ASSESSMENT YEAR. THE ASSESSEE FURTHER SUBMITTED THAT ONCE THE R&D FA CILITY HAD BEEN APPROVED BY THE COMPETENT AUTHORITY, THERE IS NO CU T OFF DATE IS PRESCRIBED TO BE ELIGIBLE FOR WEIGHTED DEDUCTION IN RESPECT OF EXPENDITURE INCURRED TOWARDS RESEARCH AND DEVELOPMENT ACTIVITIE S. THEREFORE, THERE IS NO MERIT IN THE ARGUMENT OF THE AO THAT THERE IS NO APPROVAL AVAILABLE FOR THE IMPUGNED ASSESSMENT YEAR. THE ASSESSEE, RE FERRING TO THE APPLICATION FILED FOR APPROVAL IN FORM 3CK DATED 19 -11-2012 ADDRESSED TO SECRETARY, DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH, GOVERNMENT OF INDIA AND ALSO COPY OF APPROVAL GRANT ED IN FORM 3CM 10 ITA 3473/MUM/2017 DATED 14-01-2013 SUBMITTED THAT ALTHOUGH THE LETTER SPECIFICALLY STATED THAT THE APPROVAL HAS BEEN GRANTED FROM 01-04-2012, THE FACT REMAINS THAT THE ASSESSEE WAS HAVING APPROVAL FOR EARLIER P ERIOD FOR WHICH NECESSARY EVIDENCE HAS BEEN FILED BEFORE THE AO ALO NGWITH COPIES OF REPORT SUBMITTED TO DSIR FOR FINANCIAL YEAR TO PROV E EXPENDITURE INCURRED FOR R&D FACILITY, COPY OF AUDIT REPORT OF R&D EXPEN SES, COPY OF APPLICATION FILED IN FORM 3CK. THE ASSESSEE ALSO R ELIED UPON VARIOUS JUDICIAL PRECEDENTS INCLUDING THE DECISION OF HONB LE DELHI HIGH COURT IN THE CASE OF SANDAN VIKAS (INDIA) LTD 355 ITR 117 AN D HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V. CLARIS LIFE SCIENC ES LTD. 326 ITR 251. ALTERNATIVELY, THE ASSESSEE FURTHER CONTENDED THAT IN CASE IF IT IS HELD THAT THE ASSESSEE IS NOT ELIGIBLE FOR WEIGHTED DEDUCTION U/S 35(2AB), DEDUCTION SHOULD BE ALLOWED U/S 37(1) IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE AS THE AO NEVER DOUBTED GENUINENESS OF EXPENDITURE DURING ASSESSMENT PROCEEDING. 7. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES B ELOW. THE FACT WITH REGARD TO THE APPROVAL OF ASSESSEES R&D FACILITY B Y THE COMPETENT AUTHORITY, I.E. SECRETARY, DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH, GOVERNMENT OF INDIA IS NOT DISPUTED. THE ASSESSEE H AS FILED NECESSARY EVIDENCE TO PROVE APPROVAL GRANTED BY THE COMPETENT AUTHORITY IN FORM 11 ITA 3473/MUM/2017 3CM. THE ONLY DISPUTE IS WITH REGARD TO THE APPROVA L OF ITS R&D FACILITY FOR THE IMPUGNED ASSESSMENT YEAR. ACCORDINGLY TO TH E AO, ASSESSEES R&D FACILITY HAS NOT BEEN APPROVED FOR THE IMPUGNED ASSESSMENT YEAR WHICH IS EVIDENT FROM THE FACT THAT THE COMPETENT A UTHORITY I.E. SECRETARY, DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH, GOV ERNMENT OF INDIA HAS ISSUED A CLARIFICATORY LETTER DATED 15.12.2014 WHER EIN IT WAS CATEGORICALLY STATED THAT THE ASSESSEES R&D FACILITY HAS BEEN AP PROVED FOR THE PERIOD FROM 01.04.2012 UP TO 31.03.2016. THE LETTER FURTHE R STATED THAT SINCE THE COMPANY WAS NOT APPROVED U/S 35(2AB) OF THE IT ACT, 1961 FOR THE FINANCIAL YEAR 2011-12 CORRESPONDING TO AY 2012-13 NO FORM 3CM AND 3CL WERE ISSUED. THE LETTER FURTHER STATED THAT THE ASSESSEE HAS FILED R&D EXPENDITURE INCURRED FOR THE FINANCIAL YEAR 201 2-13 CORRESPONDING TO AY 2013-14 ALONGWITH THE FORM 3CL FOR WHICH NECE SSARY FORM 3CM HAS BEEN ISSUED APPROVING THE FACILITY FROM AY 2013 -14 ONWARDS. ALL THESE FACTS WERE NOT DISPUTED BY EITHER PARTY. THE ASSESSEE ONLY CLAIMS THAT THERE IS NO CUT OFF DATE SPECIFIED UNDER THE P ROVISIONS OF SECTION 35(2AB). WHAT IS REQUIRED TO BE SEEN IS WHETHER APP ROVAL HAS BEEN GRANTED BY THE COMPETENT AUTHORITY OR NOT. ONCE APP ROVAL HAS BEEN GRANTED U/S 35(2AB), THEN THE AO IS HAVING NO POWER TO QUESTION SUCH APPROVAL REGARDING DATE OF APPROVAL AND PERIOD OF A PPROVAL. 8. HAVING HEARD BOTH SIDES, WE DO NOT FIND ANY MERI T IN THE ARGUMENTS 12 ITA 3473/MUM/2017 OF THE ASSESSEE FOR THE REASON THAT TO GET THE BENE FIT OF DEDUCTION U/S 35(2AB), THE FACILITY MUST BE APPROVED BY THE COMPE TENT AUTHORITY AFTER FULLY SATISFYING WITH THE CONDITIONS SPECIFIED UNDE R THE SAID SECTION. RULE 6 OF I.T. RULES, 1962 PRESCRIBED THE PROCEDURE FOR APPROVAL OF R&D FACILITY AS PER WHICH ASSESSEE NEEDS TO FILE AN APP LICATION IN FORM 3CK ALONGWITH THE NECESSARY DETAILS AND THE COMPETENT A UTHORITY, AFTER SATISFYING WITH THE CONDITIONS PRESCRIBED UNDER THE RULE, SHALL ISSUE FORM 3CM APPROVING THE R&D FACILITY. THE RULE FURTH ER PRESCRIBES THAT THE COMPETENT AUTHORITY SHALL SUBMIT ITS REPORT IN RELATION TO THE APPROVAL OF R&D FACILITY IN FORM 3CL TO THE DIRECTOR GENERAL INCOME TAX (EXEMPTION) WITHIN A PRESCRIBED TIME. UNLESS THE R& D FACILITY IS APPROVED BY THE COMPETENT AUTHORITY, THE ASSESSEE S HALL NOT BE ELIGIBLE FOR WEIGHTED DIRECTION U/S 35(2AB) OF THE ACT. IN T HIS CASE, ON PERUSAL OF FACTS AVAILABLE ON RECORD, IT IS ABUNDANTLY CLEAR T HAT THE COMPETENT AUTHORITY HAS CATEGORICALLY STATED THAT THE ASSESSE ES R&D FACILITY HAD NOT BEEN APPROVED FOR THE IMPUGNED ASSESSMENT YEAR, IN A REPLY FILED TO THE AO, IN RESPONSE TO NOTICE ISSUED U/S 133(6). TH EREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE IS NOT ELIGIBLE F OR WEIGHTED DEDUCTION U/S 35(2AB) IN RESPECT OF R&D EXPENDITURE. 9. COMING THE CASE LAWS RELIED UPON BY THE ASSESSEE . THE ASSESSEE HAS RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF 13 ITA 3473/MUM/2017 SANDAN VIKAS (INDIA) LTD. (SUPRA) AND ALSO THE DECI SION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CLARIS LIFE SCIEN CES (SUPRA). THE ASSESSEE ALSO RELIED UPON THE DECISION OF ITAT HYDE RABAD BENCH, IN THE CASE OF SHRI BIOTECH LABORATORIES INDIA V. ACIT (20 16) 69 TAXMANN.COM 361 (HYDERABAD-TRIB). WE HAVE GONE THROUGH THE CASE LAWS RELIED UPON BY THE ASSESSEE IN THE LIGHT OF PROVISIONS OF SECTI ON 35(2AB) OF THE ACT. THE CASE LAWS RELIED UPON BY THE ASSESSEE ARE NOT A PPLICABLE TO THE FACTS OF THE ASSESSEES CASE AS ALL THE CASE LAWS A RE RENDERED IN THE CONTEXT OF APPROVAL GRANTED BY THE COMPETENT AUTHOR ITY IN THE SUBSEQUENT FINANCIAL YEAR, BUT INCLUDING THE ASSESS MENT YEARS UNDER CONSIDERATION THEREIN. UNDER THESE CIRCUMSTANCES TH E COURTS HELD THAT ONCE R&D FACILITY IS APPROVED BY THE COMPETENT AUTH ORITY THEN THERE IS NO REASON TO THE AO TO DENY BENEFIT FROM THE DATE O F APPROVAL OF SUCH FACILITY AS THE ACT DOES NOT PRESCRIBE ANY CUT OFF DATE FOR ALLOWING SUCH BENEFIT. IN THE PRESENT CASE, THE COMPETENT AUTHORI TY CATEGORICALLY CLARIFIED THAT NO SUCH APPROVAL HAS BEEN GRANTED TO THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR. HENCE, THE CASE LAWS RELI ED UPON BY THE ASSESSEE ARE NOT CONSIDERED. 10. COMING TO THE ALTERNATIVE SUBMISSION OF THE ASS ESSEE. THE ASSESSEE HAS MADE AN ALTERNATIVE SUBMISSION INASMUC H AS THAT IF IT IS HELD THAT THE ASSESSEE IS NOT ELIGIBLE FOR WEIGHTED DEDUCTION U/S 14 ITA 3473/MUM/2017 35(2AB), AT LEAST THE DEDUCTION SHOULD BE ALLOWED U /S 37(1) IN RESPECT OF EXPENDITURE INCURRED TOWARDS R&D FACILITY. WE FIND MERIT IN THE ARGUMENT OF THE ASSESSEE FOR THE REASON THAT IF THE ASSESSEE IS NOT ELIGIBLE FOR WEIGHTED DEDUCTION U/S 35(2AB), THE EXPENDITURE TOW ARDS SUCH R&D FACILITY CANNOT BE DISALLOWED WHEN THE ASSESSEE HAS FILED NECESSARY DETAILS TO PROVE GENUINENESS OF SUCH EXPENDITURE. I N THIS CASE, ON PERUSAL OF DETAILS, WE FIND THAT THE AO HAS NEVER D OUBTED THE EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS ITS R& D ACTIVITIES. THE AO ALSO NOT DOUBTED THE GENUINENESS OF SUCH EXPENDITUR E. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT ONCE THE ASSESSEE H AS PROVED EXPENSES WITH A NECESSARY EVIDENCE, THERE IS NO REASON FOR T HE AO TO DISALLOW SUCH EXPENDITURE U/S 37(1) OF THE ACT. HENCE, WE DI RECT THE AO TO ALLOW REVENUE EXPENDITURE INCURRED BY THE ASSESSEE TO THE EXTENT OF RS.217,26,968/- U/S 37(1) OF THE INCOME TAX ACT, 19 61. INSOFAR AS CAPITAL EXPENDITURE, WE DIRECT THE AO TO VERIFY THE NATURE OF EXPENDITURE INCURRED AND ALLOW DEPRECIATION AS PER LAW. 11. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS DISALLOWANCE OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. DU RING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS EARNED DIVIDEND INC OME OF RS.3,945 WHICH WAS CLAIMED AS EXEMPT U/S 10(34) OF THE INCOM E-TAX ACT, 1961. THE ASSESSEE ALSO MADE SUO MOTO DISALLOWANCE OF RS. 10,000 TOWARDS 15 ITA 3473/MUM/2017 EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE AO HAS DETERMINED DISALLOWANCE OF RS.32,09,258 U/R 8D(2)(I I) & 8D(2) (III) ON THE GROUND THAT FROM THE ASSESSMENT YEAR 2008-09 ONWARD S DISALLOWANCE CONTEMPLATED U/S 14A SHALL BE WORKED OUT AS PER THE PRESCRIBED METHOD PROVIDED UNDER RULE 8D OF I.T. RULES, 1962. IT IS THE CONTENTION OF THE ASSESSEE THAT DISALLOWANCE CONTEMPLATED U/S 14A IN ANY WAY CANNOT SWALLOW THE ENTIRE EXEMPT INCOME OF THE ASSESSEE AN D THIS LEGAL POSITION IS REITERATED BY VARIOUS HIGH COURTS, INCLUDING THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD VS CIT (2015) 378 ITR 33 (DEL) WHEREIN IT WAS HELD THAT DISALLOWANCE CONTEMPLATED U/S 14A CANNOT EXCEED EXEMPT INCOME. 12. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED M ATERIAL ON RECORD. THERE IS NO DISPUTE WITH REGARD TO APPLICABILITY OF PROVISIONS OF SECTION 14A R.W.R. 8D OF I.T. RULES, 1962. THE ASSESSEE HA S MADE SUO MOTO DISALLOWANCE OF RS.10,000 CONSIDERING THE NATURE AN D AMOUNT OF DIVIDEND INCOME EARNED FOR THE YEAR. ADMITTEDLY, T HE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.3,945 AS AGAINST WHICH IT HAS MADE DISALLOWANCE OF RS.10,000 TOWARDS EXPENDITURE INCUR RED IN RELATION TO EXEMPT INCOME. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS CHEMINVEST LTD VS CIT (SUPRA) HELD THAT DISALLOWANC E CONTEMPLATED U/S 14A SHALL NOT EXCEED EXEMPT INCOME. THIS LEGAL PRO POSITION IS FURTHER 16 ITA 3473/MUM/2017 REITERATED BY THE HONBLE DELHI HIGH COURT IN THE C ASE OF JOINT INVESTMENT (P) LTD VS CIT (2015) 372 ITR 694 (DEL). THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT DISALLOWANCE WORKED OUT BY THE AO BY INVOKING RULE 8D(2)(II) & 8D(2)(III) IS IN EXCESS O F EXEMPT INCOME EARNED FOR THE YEAR AND IN VIEW OF THE DECISION OF THE HON BLE DELHI HIGH COURT, WE DIRECT THE AO TO RESTRICT DISALLOWANCE TO THE EX TENT OF SUO MOTO DISALLOWANCE OF RS.10,000 MADE BY THE ASSESSEE. 10. IN THE RESULT, APPEAL FILED BY THE REVENUE IS P ARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON _____ JULY, 2018. (MAHAVIR SINGH) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : JULY, 2018 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER SR.PS, ITAT, MUMBAI