M/s Sri Biotech Laboratories India Ltd., Hyderabad V. Asst.CIT,Circle 3(2), Hyderabad

ITA 385/HYD/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82387 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 05-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KIRAN KATTA
• Keywords: Opportunity of being heard; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER I.T.A. NO. 385/HYD/2014 ASSESSMENT YEAR 2009-10 M/S. SRI BIOTECH LABORATORIES INDIA LTD. HYDERABAD VS. THE ASST. CIT CIRCLE-3(2) HYDERABAD APPELLANT RESPONDENT APPELLANT BY: SRI VIJAY MEHTA RESPONDENT BY: SRI KIRAN KATTA DATE OF HEARING: 0 9.0 9 .201 4 DATE OF PRONOUNCEMENT: 24.09.2014 O R D E R PER SAKTIJIT DEY, JM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 15.11.2012 PASSED BY CIT(A)-IV, HYDERABAD PERTAININ G TO ASSESSMENT YEAR 2009-10. 2. THE REGISTRY HAS POINTED OUT A DELAY OF 396 DAYS IN FILING THIS APPEAL. ASSESSEE HAS SUBMITTED A DELAY CONDON ATION PETITION SUPPORTED BY AN AFFIDAVIT SWORN BY SRI K.R .K. REDDY, MANAGING DIRECTOR OF THE COMPANY, EXPLAINING IN DET AIL CAUSE OF DELAY. NARRATING THE SEQUENCE OF EVENTS, LEARNED A R OF ASSESSEE SRI VIJAY MEHTA SUBMITTED BEFORE US, INITIALLY INCO ME-TAX MATTERS OF ASSESSEE RELATING TO ASSESSMENT AND APPE LLATE PROCEEDINGS FOR A.Y. 2009-10 WAS HANDLED BY A CHART ERED ACCOUNTANT FIRM (CA) VIZ., M/S. AKASAM & ASSOCIATES AND ONE MS. J. RUPALI, CA APPOINTED BY THE CA FIRM APPEARED AND REPRESENTED ASSESSEE BEFORE CIT(A). HOWEVER, ASSES SEE CHANGED ITS EARLIER CA M/S. AKASAM & ASSOCIATES AND APPOINT ED A NEW CA IN THE MONTH OF OCTOBER, 2012 TO LOOK AFTER AND HANDLE TAX I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 2 MATTERS OF ASSESSEE FROM FINANCIAL YEAR 2009-10 ONW ARDS. IT WAS SUBMITTED, THE IMPUGNED ORDER OF CIT(A) PASSED ON 15.11.2012 WAS SERVED ON ASSESSEE ON 4.12. 2012. T HEREFORE, ORDINARILY APPEAL SHOULD HAVE BEEN FILED BEFORE THE ITAT ON OR BEFORE 2.2.2013 WHICH WAS ULTIMATELY FILED ON 5.3.2 014 WITH A DELAY OF 396 DAYS. IN THIS CONTEXT, IT WAS SUBMITT ED THAT, MANAGING DIRECTOR OF THE COMPANY WHO CONTROLLED BUS INESS AFFAIRS OF THE COMPANY USED TO TAKE DECISION ON ALL THE IMPORTANT MATTERS. AS PER THE NORMAL PROCEDURE, TH E MANAGING DIRECTOR WAS FORWARDED A COPY OF THE ORDER PASSED B Y CIT(A) IN THE MONTH OF DECEMBER, 2012 FOR TAKING FURTHER ACTI ON. HOWEVER, AS THE MD WAS SERIOUSLY ILL DURING THE REL EVANT POINT OF TIME DUE TO HEART PROBLEM WAS NOT ABLE TO ATTEND THE OFFICE REGULARLY. ULTIMATELY THE MD HAD TO UNDERGO MEDICA L TREATMENT INCLUDING OPEN HEART SURGERY DURING THE PERIOD JANU ARY TO JUNE 2013 AND RESUMED OFFICIAL WORK IN THE MONTH OF JULY 2013 THAT TOO FOR A FEW HOURS IN A DAY. DUE TO SHEER INADVER TENCE THE MD LAPSED TO NOTICE THE ORDER OF CIT(A) WHICH HAD REMA INED UNATTENDED AND THIS COULD ONLY BE NOTICED IN THE MO NTH OF FEBRUARY 2013 WHEN THE NEW CA ENQUIRED ABOUT THE ST ATUS OF APPEAL IN ITAT FOR A.Y. 2009-10. THUS, IT WAS SUBM ITTED, BEING MADE AWARE OF NON-FILING OF APPEAL, ASSESSEE TOOK I MMEDIATE STEPS FOR FILING OF THE APPEAL BEFORE ITAT. THUS, IT WAS SUBMITTED BY THE LEARNED AR, THE APPEAL COULD NOT B E FILED WITHIN THE TIME PRESCRIBED NOT DUE TO DELIBERATE OR MALA FIDE INTENTION BUT FOR GENUINE REASONS ARISING OUT OF IL LNESS OF THE MD. 3. THE LEARNED AR SUBMITTED, THE DELAY BEING DUE TO BO NA- FIDE REASONS IT SHOULD BE CONDONED. IN THIS CONTEX T HE RELIED UPON THE FOLLOWING DECISIONS: A) COLLECTOR, LAND ACQUISITION V. MST. KATIJI & ORS. ( 167 ITR 471) (SC) I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 3 B) VENKATADRI TRADERS LTD. VS. CIT (248 ITR 681) (MAD) 4. THE LEARNED AR SUBMITTED, THERE IS A LAPSE ON THE P ART OF THE MD IN TAKING APPROPRIATE STEPS IN FILING THE AP PEAL BUT THAT ALONE CANNOT BE ENOUGH TO TURN DOWN ASSESSEE'S PLEA FOR CONDONING DELAY. IN THIS CONTEXT, THE LEARNED AR R ELIED UPON THE DECISION OF HONBLE SUPREME COURT IN CASE OF N. BAL AKRISHNAN VS. M. RAMAMURTHY (1998) 7 SCC 123. ON THE BASIS O F THE ABOVE SAID SUBMISSION, LEARNED AR REQUESTED FOR CON DONATION OF DELAY. 5. THE LEARNED DR, ON THE OTHER HAND, OBJECTED TO ASSE SSEES PRAYER FOR CONDONING THE DELAY. 6. WE HAVE CONSIDERED SUBMISSIONS OF PARTIES AND PERUS ED MATERIALS ON RECORD ON THE ISSUE OF DELAY. FROM TH E FACTS STATED IN DELAY CONDONATION PETITION AND THE AFFIDAVIT AS WELL AS ACCOMPANYING DOCUMENTS LIKE MEDICAL REPORT, PRESCRI PTION, ETC., IT IS ESTABLISHED THAT THE MD OF ASSESSEE-COMPANY W AS SUFFERING FROM A SERIOUS DISEASE PERTAINING TO HEART PROBLEM AND ULTIMATELY HAD TO UNDERGO OPEN HEART SURGERY. THOU GH SUBSEQUENTLY HE RESUMED HIS OFFICIAL WORK FROM JULY 2013 BUT FILING OF APPEAL AGAINST ORDER OF CIT(A) ESCAPED HI S ATTENTION. IN OUR VIEW SUCH LAPSE ON THE PART OF THE MD IS UNDERS TANDABLE. A PERSON RECUPERATING FROM A DISEASE LIKE HEART PROBL EM MUST BE STILL UNDER SOME STRESS AND STRAIN AND FOR THAT REA SON MANY OFFICIAL ACTS AND DEEDS REQUIRED TO BE DONE QUITE P OSSIBLY MIGHT HAVE ESCAPED HIS ATTENTION. AS THE HONBLE SUPREME COURT HELD IN ASSESSEE OF N. BALAKRISHNAN VS. M. KRISHNAMURTHY (SUPRA) EVERY LAPSE ON THE PART OF A LITIGANT CANNOT BE A R EASON ENOUGH TO TURN DOWN HIS PLEA AND SHUT THE DOOR AGAINST HIM UNLESS THE EXPLANATION SMACK OF MALA-FIDES OR IT IS PUT FORTH AS PART OF A DILATORY STRATEGY. IN THE FACTS OF THE PRESENT CAS E, WE ARE OF THE I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 4 VIEW THAT THERE EXISTS A GENUINE CAUSE FOR NOT PREF ERRING THE APPEAL IN TIME BY THE ASSESSEE. AS HELD BY THE HON BLE SUPREME COURT IN THE CASE OF COLLECTOR, LAND ACQUISITION VS . MST. KATIJI & ORS., 167 ITR 471, WHEN SUBSTANTIAL JUSTICE AND TEC HNICAL CONSIDERATIONS ARE PITTED AGAINST EACH OTHER, THE C AUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERRED FOR TH E OTHER SIDE CANNOT CLAIM TO HAVE A VESTED RIGHT IN INJUSTICE BE ING DONE BECAUSE OF A NON-DELIBERATE DELAY. THEREFORE, CON SIDERING ASSESSEES CASE IN THE CONTEXT OF THE RATIO LAID DO WN BY THE HONBLE SUPREME COURT, AS AFORESAID, WE ARE OF THE VIEW THAT THIS IS A FIT CASE FOR DELAY TO BE CONDONED. ACCOR DINGLY, WE DO SO AND ADMIT APPEAL OF ASSESSEE FOR HEARING ON MERIT. 7. THE ASSESSEE RAISED FOUR GROUNDS. GROUND NO. 4 BEI NG A GENERAL GROUND IS NOT REQUIRED TO BE ADJUDICATED. THE LEARNED AR AT THE OUTSET EXPRESSED HIS INTENTION NOT TO PRE SS GROUND NO. 1. HENCE GROUND NO. 1 IS DISMISSED AS NOT PRESSED. 8. IN GROUND NO. 2, ASSESSEE HAS RAISED THE ISSUE OF DISALLOWANCE OF DEDUCTION CLAIMED U/S. 35(2AB) OF T HE ACT. BRIEFLY THE FACTS RELATING TO THE AFORESAID ISSUE A RE, ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AN D SALE OF PESTICIDES, BIO-FERTILISERS AND ORGANIC MANURES. F OR THE A.Y. UNDER CONSIDERATION, ASSESSEE FILED ITS RETURN OF I NCOME ON 28.1.2010 DECLARING TOTAL INCOME OF RS. 7,86,92,796 AFTER CLAIMING DEDUCTION U/S. 80JJA OF RS. 5,55,96,201. DURING THE SCRUTINY ASSESSMENT PROCEEDINGS, AO NOTICED THAT DU RING THE YEAR ASSESSEE HAS INCURRED R & D EXPENDITURE TO THE TUNE OF RS. 10,55,59,759 WHICH WAS CLAIMED AS DEDUCTION U/S. 35 (2) AND U/S. 35(2AB) OF THE ACT. THE AO NOTED THAT AS PER COMPUTATION OF ASSESSEE, R & D REVENUE AND CAPITAL EXPENDITURE OF RS. 10,55,59,759 INCLUDES DEDUCTION OF RS. 72,75,245 TO WARDS 150% WEIGHTED DEDUCTION U/S. 35(2AB) ON REVENUE EXP ENDITURE I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 5 OF RS. 48,50,153. AS NOTED BY AO, DURING THE ASSES SMENT PROCEEDINGS WHEN ASSESSEE WAS CALLED UPON TO FURNIS H APPROVAL FROM PRESCRIBED AUTHORITY IN SUPPORT OF CLAIM U/S. 35(2AB), ASSESSEE FAILED TO FURNISH THE SAME. HENCE, AO RES TRICTED THE CLAIM TO 100% OF THE EXPENDITURE I.E., RS. 48,50,16 3 AND DIFFERENTIAL AMOUNT OF RS. 25,24,081 WAS ADDED TO I NCOME OF ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR. BEING A GGRIEVED OF SUCH ADDITION ASSESSEE PREFERRED APPEAL BEFORE CIT( A). 9. IN THE COURSE OF HEARING BEFORE CIT(A) IT WAS SUBMI TTED BY ASSESSEE THAT SCIENTIFIC RESEARCH FACILITY WAS DULY APPROVED BY DSIR IN THE YEAR 2003 AND SUCH APPROVAL HAS BEEN RE NEWED FROM TIME TO TIME AND AS OF NOW APPROVAL IS EXTENDE D TILL 31.3.2015. IN SUPPORT OF SUCH CONTENTION ASSESSEE ALSO SUBMITTED COPIES OF THE APPROVAL. SO FAR AS CERTIF ICATION OF EXPENDITURE INCURRED BY ASSESSEE IT WAS SUBMITTED, THE COMPANY HAS APPLIED FOR NECESSARY CERTIFICATION OF THE AMOUNT SPENT BY MAKING AN APPLICATION IN FORM 3CK TO DSIR. IT WAS ALSO SUBMITTED THAT ASSESSEE HAS ALSO MAINTAINED SE PARATE BOOKS OF ACCOUNT FOR RESEARCH ACTIVITY AND STATUTOR Y AUDIT HAS ALSO BEEN CONDUCTED. THUS, IT WAS SUBMITTED BY ASS ESSEE THAT WHEN ASSESSEE'S RESEARCH FACILITY IS APPROVED AND I T HAS ALSO APPLIED IN FORM 3CK FOR CERTIFICATION, THE EXPENDIT URE CLAIMED OF WEIGHTED DEDUCTION U/S. 35(2AB) CANNOT BE DISALLOWE D. IN SUPPORT OF SUCH CONTENTION, ASSESSEE RELIED UPON CE RTAIN DECISIONS OF HIGH COURT. CIT(A) AFTER CONSIDERING SUBMISSIONS OF ASSESSEE AND EXAMINING FACTS AND MATERIALS ON RECOR D NOTED THAT ASSESSEE'S R & D FACILITY HAS BEEN GRANTED RE COGNITION TILL 31.3.2013. SHE FURTHER NOTED, THE ONLY REASON FOR WHICH WEIGHTED DEDUCTION WAS DENIED WAS REPORT IN FORM 3C L HAD NOT BEEN SUBMITTED. CIT(A) OBSERVED THAT ASSESSEE HAS MET ALL REQUIREMENTS FOR CLAIMING DEDUCTION U/S. 35(2AB) OF THE ACT. SO FAR AS NON-FURNISHING OF REPORT IN FORM 3CL, CIT(A) OPINED I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 6 ASSESSEE CANNOT BE SAID TO HAVE ANY CONTROL OVER TH E SAME AS THE SAID FORM IS TO BE SUBMITTED BY THE SECRETARY, DSIR TO THE DIRECTOR GENERAL (EXEMPTIONS). IN VIEW OF THE AFOR ESAID, CIT(A) DIRECTED AO TO ALLOW WEIGHTED DEDUCTION U/S. 35(2AB ) TO THE ASSESSEE ON RECEIPT OF FORM 3CL BY ASSESSEE FROM DS IR. BEING AGGRIEVED OF THE AFORESAID DIRECTION OF LEARNED CIT (A), ASSESSEE IS IN APPEAL BEFORE US. 10. THE LEARNED AR SUBMITTED BEFORE US THAT WHEN ASSESS EE'S R & D FACILITY HAS BEEN APPROVED BY DSIR AND ASSESS EE HAS PERFORMED ITS PART OF OBLIGATION UNDER THE STATUTE BY APPLYING IN FORM 3CK AS PROVIDED U/S. 35(2AB) OF THE ACT READ W ITH RULE 6 OF THE IT RULES, ONLY BECAUSE DSIR HAS NOT FORWARDE D ITS REPORT IN FORM NO. 3CL, ASSESSEE'S CLAIM OF DEDUCTION U/S. 35(2AB) CANNOT BE DISALLOWED WHEN THERE IS NO DISPUTE THAT ASSESSEE HAS INCURRED EXPENDITURE TOWARDS SCIENTIFIC RESEARCH. IN THIS CONTEXT, THE LEARNED AR RELIED UPON THE FOLLOWING D ECISIONS: A) ACIT V. MECO INSTRUMENTS P. LTD., ITA NO. 4246/MUM/2009. B) ACIT V. MECO INSTRUMENTS P. LTD., ITA NOS. 4931, 4804, 4805 & 4806/MUM/2009. C) AARTI INDUSTRIES V. ADDL. CIT AND VICE VERSA IN ITA NOS. 8387 AD 8554/MUM/2004. D) CLARIS LIFE SCIENCES LTD. VS. ACIT (112 ITD 307) (A HD) E) CIT VS. CLARIS LIFE SCIENCES LTD. (326 ITR 251) (GU J) F) CIT VS. SANDAN VIKAR (INDIA) LTD. (335 ITR 117) (DE L) 11. THE LEARNED DR ON THE OTHER HAND, SUBMITTED THAT TH ERE IS NO AGREEMENT BETWEEN ASSESSEE AND DSIR IN TERMS OF SEC. 35(2AB) CLAUSE (3) AND THERE IS NO APPROVAL IN FORM 3CL, HENCE, DEDUCTION CLAIMED BY ASSESSEE U/S. 35(2AB) CANNOT B E ALLOWED. 12. WE HAVE CONSIDERED SUBMISSIONS OF PARTIES, PERUSED ORDERS OF REVENUE AUTHORITIES AS WELL AS OTHER MATE RIALS ON I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 7 RECORD. WE HAVE ALSO CAREFULLY APPLIED OUR MIND TO THE DECISIONS RELIED UPON BY LEARNED AR. AT THE OUTSE T, IT MUST BE PUT ON RECORD THAT THERE IS NO DISPUTE TO THE FACT THAT EXPENDITURE OF RS. 48,40,163 WAS INCURRED BY ASSESS EE TOWARDS R & D ACTIVITY AS AO HIMSELF HAS ALLOWED 100% OF TH E SAID AMOUNT AS DEDUCTION. THE ONLY REASON FOR WHICH AO HAS DISALLOWED CLAIM OF WEIGHTED DEDUCTION OF 150% OF T HE EXPENDITURE IS, THERE IS NO REPORT FROM DSIR IN FOR M 3CL. HOWEVER, AS CAN BE SEEN FROM THE FACTS ON RECORD AS WELL AS THE OBSERVATIONS MADE BY THE LEARNED CIT(A), ASSESSEE'S R & D FACILITY HAS BEEN APPROVED BY THE COMPETENT AUTHORI TY FROM THE A.Y. 2003-04 AND SUCH APPROVAL HAS BEEN EXTENDED TI LL 31.3.2015. IT FURTHER TRANSPIRES FROM RECORD THAT ASSESSEE ON 26.9.2012 SUBMITTED ITS APPLICATION IN FORM NO. 3CK FOR CERTIFICATION OF R&D EXPENDITURE RELATING TO FYS 20 08-09, 2009- 10 AD 2001-11 WHICH IS DULY CERTIFIED BY THE AUDITO RS. IT IS FURTHER EVIDENT THAT ASSESSEE ALONG WITH FORM 3CK H AS ALSO SUBMITTED ACCOUNT COPIES. THEREFORE, IT IS EVIDENT THAT ASSESSEE HAS COMPLIED TO THE PROVISIONS OF SECTION 35(2AB) O F THE ACT R.W. RULE 6. IT IS FURTHER EVIDENT THAT ON THE APPLICAT ION MADE BY ASSESSEE IN FORM 3CK DATED 26.9.2012 DSIR HAS ALSO ISSUED ORDER OF APPROVAL IN FORM NO. 3CM APPROVING R & D F ACILITY OF ASSESSEE UP TO 31 ST MARCH, 2016 FOR THE PURPOSE OF SEC. 35(2AB). THEREFORE, WHEN THE PRESCRIBED AUTHORITY HAS APPROV ED ASSESSEE'S R & D FACILITY AND ASSESSEE HAS COMPLIED TO THE CONDITIONS LAID DOWN IN SECTION 35(2AB) R.W. RULE 6 , ONLY BECAUSE THE PRESCRIBED AUTHORITY HAS NOT SUBMITTED THE REPORT IN FORM 3CL TO THE DIRECTOR (EXEMPTIONS), ASSESSEE' S CLAIM OF DEDUCTION U/S. 35(2AB) CANNOT BE DISALLOWED CONSIDE RING THE FACT THAT INCURRING OF EXPENDITURE BY ASSESSEE HAS NOT BEEN DISPUTED. IN THESE CIRCUMSTANCES, AS OBSERVED BY T HE CIT(A), WHEN ASSESSEE HAS NO CONTROL OVER THE SUBMISSION OF FORM 3CL I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 8 BY THE PRESCRIBED AUTHORITY, IT CANNOT BE PENALISED FOR NON- SUBMISSION OF THE SAME. THE ITAT MUMBAI BENCH IN T HE CASE OF ACIT VS. MECO INSTRUMENTS P. LTD. IN ITA NO. 4246/M UM/2009 DATED 20.8.2010 HAD OCCASION TO EXAMINE TRUE IMPORT OF PROVISIONS CONTAINED U/S. 35(2AB) AS WELL AS RULE 6 . FOR BETTER CLARITY, WE REPRODUCE THE FINDING OF THE CO-ORDINAT E BENCH HEREUNDER: '6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD OF THE CASE. IT IS AN ADMITTED POSITION THAT IN-HOUSE R&D UNIT HAD BEEN DULY APPROVED BY THE GOVERNMENT OF INDIA, MINISTRY OF SCIENCE AND TECHNOLOGY, DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH VIDE ITS LETTER DATED 3.7.1997. IT IS ALSO FACT THAT AS PER TERMS AND CONDITIONS OF RECOGNITION, THE SAME WAS NOT MEANT FOR TAX EXEMPTION WHICH IS EVIDENT FROM SL.NO.9 OF THE TERM S AND CONDITIONS, WHICH READS AS UNDER:- THE RECOGNITION IS NOT MEANT TO TAX EXEMPTIONS; QUANTUM OF TAX CONCESSIONS, DEVELOPMENT REBATES AND OTHERS, IF ANY, WILL BE GOVERNED BY THE TAX LAWS IN OPERATION FROM TIME TO TIME. ALL SUCH MATTERS SHOULD BE TAKEN UP DIRECTLY WITH THE CONCERNED TAX AUTHORITIES. THIS RECOGNITION WAS RENEWED TIME AND AGAIN BY VARIOUS ORDERS, NOTED EARLIER, IN THE ARGUMENTS OF LD COUNSEL FOR THE ASSESSEE AND, THUS, THE APPROVAL WAS AVAILABLE UP TO 31.3.2011 VIDE LATEST ORDER DATED 29.4.2008. FOR THE ASSESSMENT YEAR 2005-06, THE AO RAISED OBJECTION FOR THE FIRST TIME IN COURS E OF ASSESSMENT PROCEEDINGS REGARDING APPROVAL BEING NOT IN THE PRESCRIBED FORM. THEREFORE, THE ASSESSEE FILED AN APPLICATION IN THE PRESCRIBED FORM NO. 3CM ON 28.4.2008 GIVING ALL RELEVANT DETAILS INCLUDING EXPENDITURE ON SCIENTIFIC RESEARCH FOR F.Y. 2002-03 TO 2004-05. ON THIS APPLICATION, THE APPROVAL HAS BEEN GRANTED W.E.F. 1.4.2007 TO 31.3.2011. THE ASSESSEE OBTAINED THE NOTE SHEETS WITH REFERENCE TO ITS APPLICATION DT. 28.4.2008 UNDER RIGHT TO INFORMATIO N ACT FROM DSIR AND NOTED THAT THE APPLICATION FOR EARLIER YEARS INCLUDING A.Y. UNDER CONSIDERATION HA D I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 9 BEEN CONSIDERED IN PARA 3. HOWEVER, THE APPROVAL WAS GRANTED FROM 1.4.2007 TO 31.3.2011. 6.1 IN THE BACKDROP OF THESE FACTS, THE ISSUE BEFOR E US IS WHETHER NON-AVAILABILITY OF THE APPROVAL IN T HE PRESCRIBED FORM FOR THE RELEVANT ASSESSMENT YEAR COULD DISENTITLE THE ASSESSEE OF DEDUCTION U/S. 35(2AB) OR NOT. IN THIS REGARD, WE MAY FIRST REFER TO SECTION 35 WHICH DEALS WITH EXPENDITURE ON SCIENTIF IC RESEARCH. THIS SECTION ENTITLES THE ASSESSEE TO GET DEDUCTION IN RESPECT OF EXPENDITURE ON SCIENTIFIC RESEARCH LAID OUT OR EXPENDED IN RELATION TO BUSINE SS. 6.2 SECTION 35(2AB) DEALS WITH A SITUATION WHERE A COMPANY ENGAGED IN THE BUSINESS OF [BIO-TECHNOLOGY] OR IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OR ANY OTHER ARTICLE OR THING NOT SPECIFIED IN THE LIS T OF 11TH SCHEDULE]] INCURS ANY EXPENDITURE ON SCIENTIFI C RESEARCH (NOT BEING EXPENDITURE IN THE NATURE OF CO ST OF ANY LAND AND BUILDING) ON IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY I.E. SECRETARY, GOVERNMENT OF INDIA, MINISTRY OF SCIENCE AND TECHNOLOGY, DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH. IT IS PERTINENT T O NOTE THAT THIS SECTION TALKS OF ONLY APPROVAL OF THE PRESCRIBED AUTHORITY BUT NOWHERE IN THE SECTION THE PHRASE AS PRESCRIBED HAS BEEN USED. THEREFORE, IF THE APPROVAL SIMPLICITER IS AVAILABLE FROM THE PRESCRIBED AUTHORITY, THEN AS PER THIS SECTION, NO OBJECTION COULD BE RAISED. HOWEVER, SUB-SECTION(4) OF SECTION 35 REQUIRES THE PRESCRIBED AUTHORITY TO SUBMIT ITS REPORT IN RELATION TO THE APPROVAL OF TH E SAID FACILITY TO THE DIRECTOR GENERAL IN SUCH FORM AND WITHIN SUCH TIME AS MAY BE PRESCRIBED. THEREFORE, I T WOULD BE TOO TECHNICAL TO HOLD THAT MERELY BECAUSE THE TERM PRESCRIBED HAS NOT BEEN USED IN SECTION 35(2AB)(I) IT FOLLOWS THAT THERE WERE NO PRESCRIBED RULES FOR THE SAME. HOWEVER, AT THE SAME TIME, ABSENCE OF PHRASE PRESCRIBED IN SECTION 35(2AB)(I ) MITIGATES THE ASSESSEES DEFAULT. RULE 6 OF THE I.T . RULES PRESCRIBES THE AUTHORITY FOR EXPENDITURE ON SCIENTIFIC RESEARCH AND AS PER RULES 6(1B) FOR THE PURPOSES OF SUB-SECTION (2AB) OF SECTION 35, THE PRESCRIBED AUTHORITY SHALL BE THE SECRETARY, DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH. T HE SUB-RULE (4) REQUIRES THE COMPANY TO FURNISH THE APPLICATION IN FORM NO. 3CK. AS PER SUB-RULE (5A), IF THE PRESCRIBED AUTHORITY IS SATISFIED THAT THE I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 10 CONDITIONS PROVIDED IN THIS RULE AND IN SUB-SECTION (2AB) OF SECTION 35 OF THE ACT ARE FULFILLED, THEN PASS AN ORDER IN WRITING IN FORM NO. 3CM. HOWEVER, AS PER THE PROVISO TO SUB-RULE (5A), IF THE PRESCRIBED AUTHORITY IS NOT SO SATISFIED IT IS TO GRANT REASON ABLE OPPORTUNITY TO THE ASSESSEE COMPANY BEFORE REJECTIN G ITS APPLICATION. SUB-RULE (7A) PRESCRIBES THE CERTA IN CONDITIONS SUBJECT TO WHICH APPROVAL IS TO BE GRANT ED. A CLOSE READING OF THE SECTION R.W. RULE 6 WOULD REVEAL THAT NOWHERE ANY TIME HAS BEEN PRESCRIBED WITHIN WHICH THE APPLICATION IS REQUIRED TO BE FILE D BY THE ASSESSEE COMPANY. FURTHER, NOWHERE, ANY CONDITION HAS BEEN PRESCRIBED REGARDING CUT OFF DAT E FROM WHICH THE APPROVAL COULD BE MADE EFFECTIVE. THEREFORE, ONCE THE ASSESSEE COMPANY IS GRANTED APPROVAL IT WILL APPLY TILL IT IS REVOKED WITH REFE RENCE TO ALL THE ASSESSMENT YEARS, WHICH COME WITHIN THE AMBIT OF THAT PERIOD. THEREFORE, MERE MENTIONING OF 1.4.2007 IN THE ORDER DATED 28.8.2008 WAS OF NO CONSEQUENCE AND THE APPROVAL GRANTED IN FORM 3CM WAS ALSO APPLICABLE FOR A.Y. 2005-06. IN THIS REGAR D, IT IS FURTHER NOTICEABLE THAT WHILE GRANTING OF APP ROVAL ON 28.8.2008, THE PRESCRIBED AUTHORITY HAS, INTER ALIA, OBSERVED IN PARA 5 AS UNDER:- REF. NO. AND DATE OF THE APPLICATION : REF NBIL DA TED 16.8.2007 THE ABOVE RESEARCH & DEVELOPMENT FACILITY IS FURTHE R APPROVED FOR THE PURPOSE OF SECTION 35(2AB) FROM 1.4.2007 TO 31.3.2011 SUBJECT TO THE CONDITIONS UNDERLINED THEREIN. THE TERM FURTHER MAKES IT CLEAR THAT THE APPROVAL WAS NOT LIMITED TO 1.4.2007 TO 31.3.2011 BUT WAS IN ADDITION TO PERIODS ALREADY APPROVED. IT IS FURTHER NOTICEABLE THAT INFORMATION OBTAINED UNDER RTI CLEARLY SHOWED THAT THE ASSESSEES APPLICATIONS WER E PROCESSED FOR EARLIER YEARS ALSO BUT NO ORDERS HAVE BEEN PASSED WITH REFERENCE TO EARLIER ASSESSMENT YEARS. AT THE SAME TIME, THE ASSESSEE HAS NOT BEEN GIVEN ANY OPPORTUNITY OF BEING HEARD AS REQUIRED UNDER PROVISO TO RULE 6 (5A) BEFORE REJECTING THE S AID APPLICATION. THEREFORE, IMPLIEDLY, THE APPLICATION FOR THE ENTIRE PERIOD, FOR WHICH IT WAS MADE, HAS TO BE DEEMED TO HAVE BEEN GRANTED. ON THE BASIS OF ABOVE DISCUSSION, WE ARE OF THE OPINION THAT THE ASSESSEE WAS ENTITLED FOR WEIGHTED DEDUCTION U/S. 35(2AB). I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 11 6.3 NOW, WE WILL ALSO EXAMINE THE ISSUE HAVING REGARD TO THE OBJECT OF LEGISLATION. THE ENTIRE SCH EME DEALS WITH THE GRANTING OF APPROVAL TO THE FACILITI ES AND THE OBJECT IS THAT THE RESEARCH AND DEVELOPMENT FACILITY IS NOT RELATED PURELY TO MARKET RESEARCH, SALES PROMOTION, QUALITY CONTROL, TESTING, COMMERCIAL PRODUCTION, STYLE CHANGES, ROUTINE DATA COLLECTION OR ACTIVITIES OF A LIKE NATURE. THE PURPOSE IS TO HAVE RESEARCH AND DEVELOPMENT FACILITIES WHICH CONTRIBUT E TO THE TECHNOLOGICAL ADVANCEMENT AND NOT MERELY LIMITED TO EARNING OF PROFITS. THEREFORE, ONCE THE APPROVAL IS THERE BY THE PRESCRIBED AUTHORITY, IT C OULD BE EASILY CONCLUDED THAT THE SAME MET THE BASIC REQUIREMENT AND MERELY THE SAME IS NOT IN PRESCRIBE D FORM, IT WOULD NOT LEAD TO THE CONCLUSION THAT THE APPROVAL WAS OF NO PURPOSE. AS PER THE TERMS AND CONDITIONS OF THE RECOGNITION OF IN-HOUSE R&D UNIT FRAMED BY THE MINISTRY OF SCIENCE AND TECHNOLOGY, THE ASSESSEE COMPANY IS REQUIRED TO SUBMIT BRIEF SUMMARY OF THE ACHIEVEMENTS OF THE R&D UNIT TO THE DEPARTMENT OF SCIENCE AND INDUSTRIAL RESEARCH EVERY YEAR WHICH INCLUDES PAPER PUBLISHED, PATENTS OBTAINED AND PROCESSES DEVELOPED, NEW PRODUCTS INTRODUCED, AWARDS AND PRIZES RECEIVED AND OTHER ACHIEVEMENTS. FURTHER, AS PER CLAUSE 8, COMMERCIAL EXPLOITATION OF THE KNOW-HOW/PROCESS DEVELOPED BY IN-HOUSE R&D UNIT WAS TO BE SOLELY GOVERNED BY THE LICENSING POLICIES IN OPERATION FROM TIME TO TIME A ND THE DECISION OF THE LICENSING AUTHORITIES IN THIS R EGARD IS CONSIDERED TO BE FINAL. THUS, STRINGENT CONDITIO NS HAVE BEEN IMPOSED BY THE PRESCRIBED AUTHORITY ITSEL F THOUGH THE SAID APPROVAL WAS NOT MEANT FOR TAX EXEMPTION BUT IN SUBSTANCE, THERE WAS NOT MUCH DIFFERENCE BETWEEN THE OBJECTS SOUGHT TO BE ACHIEVE D BY THESE APPROVALS. 6.4 FURTHER, IN ANY VIEW OF THE MATTER, AT BEST IT COULD BE SAID THAT IT WAS ONLY A PROCEDURAL DEFECT AND FR OM THE VARIOUS DECISIONS, NOTED IN THE ARGUMENTS OF LD COUNSEL FOR THE ASSESSEE, IT IS CLEAR THAT MERELY O N THE GROUND OF TECHNICALITIES OF PROCEDURE, THE BENE FIT BESTOWED BY LEGISLATURE CANNOT BE DENIED. WHEN IT COMES TO FOLLOW THE PRESCRIBED PROCEDURE, THE EXEMPTION PROVISIONS HAVE TO BE LIBERALLY CONSTRUED AND IF IN SUBSTANCE, THE ASSESSEE HAS FULFILLED THE BASIC REQUIREMENTS THEN THE EXEMPTION CANNOT BE DENIED.' I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 12 13. THE AFORESAID VIEW EXPRESSED BY THE MUMBAI BENCH HA S BEEN SUBSEQUENTLY FOLLOWED IN MANY OTHER DECISIONS OF THE SAME BENCH. FURTHER, THE HONBLE DELHI HIGH COURT IN CA SE OF CIT VS. SANDAN VIKAR (INDIA) LTD. (335 ITR 117) FOLLOWING T HE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V S. CLARIS LIFE SCIENCES LTD. (326 ITR 251) APPROVED THE VIEW OF TH E TRIBUNAL THAT ONCE THE R & D FACILITY IS APPROVED, THE ENTIR E EXPENDITURE INCURRED FOR R & D FACILITY HAS TO BE ALLOWED TOWAR DS WEIGHTED DEDUCTION U/S. 35(2AB) OF THE ACT. THE RATIO LAID DOWN BY THE ITAT MUMBAI BENCH AND THE HONBLE DELHI HIGH COURT IN THE DECISIONS REFERRED HEREIN ABOVE SQUARELY APPLY TO T HE FACTS OF THE PRESENT CASE. THEREFORE, ASSESSEE'S R & D FACILITY HAVING BEEN APPROVED BY THE PRESCRIBED AUTHORITY AND THERE BEIN G NO DISPUTE TO THE FACT THAT ASSESSEE HAS INCURRED THE EXPENDIT URE TOWARDS R & D ACTIVITIES, THE DEDUCTION CLAIMED U/S. 35(2AB ) BY THE ASSESSEE CANNOT BE DENIED MERELY ON THE GROUND THAT PRESCRIBED AUTHORITY HAS NOT SUBMITTED REPORT IN FORM 3CL. FU RTHER, WHEN NO SHOW-CAUSE NOTICE HAS BEEN ISSUED TO ASSESSEE FO R REJECTION OF ITS APPLICATION, AS HELD BY THE MUMBAI BENCH, AS SESSEE'S APPLICATION FOR APPROVAL OF EXPENDITURE SHOULD BE D EEMED TO HAVE BEEN APPROVED BY THE PRESCRIBED AUTHORITY. IN THE AFORESAID VIEW OF THE MATTER, WE DIRECT AO TO ALLOW WEIGHTED DEDUCTION U/S. 35(2AB) OF THE ACT AMOUNTING TO RS. 72,75,245. HOWEVER, WE MAKE IT CLEAR THAT IF SUBSEQUENTLY THE PRESCRIBED AUTHORITY DOES NOT APPROVE EXPENDITURE CLAIMED BY A SSESSEE OR QUANTIFIES AT A LESSER AMOUNT, THEN THE DEDUCTION C LAIMED BY ASSESSEE SHOULD BE MODIFIED ACCORDINGLY. ASSESSEE' S GROUND IS CONSIDERED TO HAVE BEEN ALLOWED. 14. THE NEXT ISSUE AS RAISED IN GROUND NO. 3 IS IN RESP ECT OF DISALLOWANCE OF DEDUCTION U/S. 80JJA OF THE ACT. I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 13 15. BRIEFLY, THE FACTS ARE, DURING THE ASSESSMENT PROCE EDINGS, AO WHILE EXAMINING ASSESSEE'S CLAIM OF DEDUCTION U/ S. 80JJA OF THE ACT NOTED THAT ASSESSEE IS ENGAGED IN BUSINESS OF MANUFACTURING AND SALE OF ORGANIC MANURES AND NON-O RGANIC PRODUCTS. THE PROFITS AND GAINS FROM COLLECTING AN D PROCESSING OF BIO-DEGRADABLE WASTE INTO ORGANIC MANURE AND THE SALE OF SAME HAS BEEN CLAIMED AS DEDUCTION U/S. 80JJA OF TH E ACT. IN THIS CONTEXT THE ASSESSEE ALSO SUBMITTED SEPARATE P ROFIT AND LOSS A/C. FOR ORGANIC MANURE AND INORGANIC PRODUCTS . ON EXAMINING THE PROFIT AND LOSS A/C. SUBMITTED BY ASS ESSEE, AO NOTICED THAT ASSESSEE HAS APPORTIONED DIRECT EXPENS ES BETWEEN BOTH THE SEGMENTS ON ACTUAL BASIS, WHEREAS GENERAL EXPENDITURE HAS BEEN APPORTIONED BETWEEN BOTH THE SEGMENTS ON T URNOVER BASIS. AO NOTED THAT WHILE TOTAL TURNOVER DURING T HE YEAR WAS RS. 65,58,87,447, THE TURNOVER FROM ORGANIC MANURE SALE WAS RS. 14,95,68,465 (22.8%) AND FROM NON-ORGANIC PRODU CTS WAS RS. 50,63,18,982 (77.2%). AO OBSERVED THAT R & D E XPENDITURE HAS BEEN DEBITED IN THE ACCOUNTS OF NON-ORGANIC PRO DUCTS WITHOUT APPORTIONING THE SAME BETWEEN ORGANIC AND N ON- ORGANIC SEGMENTS. ACCORDINGLY, AO PROPOSED TO APPO RTION R & D EXPENDITURE BETWEEN BOTH THE SEGMENTS ON TURNOVER BASIS SIMILAR TO OTHER GENERAL EXPENSES. THEREFORE, APPL YING THE RATIO OF 22.8% AND 77.2%, AO ALLOCATED EXPENDITURE OF RS. 2,35,14,706 TO ORGANIC MANURE SEGMENT AND RS. 7,96, 19,971 TO NON-ORGANIC SEGMENT. AS A RESULT OF SUCH ALLOCATIO N, THE DEDUCTION CLAIMED U/S. 80JJA WAS RESTRICTED TO RS. 3,20,81,495 RESULTING IN ADDITION OF EXCESS CLAIMED TO THE TUNE OF RS. 2,35,14,706. BEING AGGRIEVED OF THE ADDITION, ASSE SSEE PREFERRED APPEAL BEFORE CIT(A). HOWEVER, CIT(A) ALSO CONFIRM ED THE ADDITION. 16. THE LEARNED AR SUBMITTED BEFORE US THAT THE R & D EXPENDITURE IS ENTIRELY TOWARDS BIO-FERTILISERS AS NO SCIENTIFIC I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 14 RESEARCH IS REQUIRED FOR ORGANIC MANURE. HOWEVER, THE LEARNED AR SUBMITTED THAT THE MATTER CAN BE REMITTED TO AO FOR VERIFICATION. 17. LEARNED DR, ON THE OTHER HAND, REFERRING TO THE INFORMATION SUBMITTED IN FORM 3CK SUBMITTED THAT TH ERE IS NO BIFURCATION BY THE ASSESSEE FOR R & D FACILITY. TH EREFORE, AO HAS CORRECTLY ALLOCATED EXPENDITURE TO BOTH THE SEGMENT S. 18. WE HAVE CONSIDERED SUBMISSION OF PARTIES AND PERUSE D MATERIAL ON RECORD. AS CAN BE SEEN FROM OBSERVATIO NS OF AO, HE HAS ALLOCATED R & D EXPENDITURE TO BOTH ORGANIC AND NON- ORGANIC MANURE SEGMENTS ON THE SOLE CONSIDERATION T HAT THE OTHER EXPENSES ARE ALLOCATED TO BOTH THE SEGMENTS. HOWEVER, IT IS THE CLAIM OF ASSESSEE THAT R & D EXPENDITURE IS ONLY CONFINED TO NON-ORGANIC SEGMENT. CONSIDERING THE NATURE OF DISPUTE AND ALSO THE FACT THAT ASSESSEE NEEDS TO ESTABLISH ITS CLAIM BY PRODUCING ADEQUATE EVIDENCE, WE ARE INCLINED TO REM IT THE MATTER BACK TO THE FILE OF AO TO RE-CONSIDER THE IS SUE OVER AGAIN AFTER EXAMINING THE FACTS AND MATERIALS AVAILABLE O N RECORD. IF THE ASSESSEE IS ABLE TO ESTABLISH THE FACT THAT THE ENTIRE R & D EXPENDITURE IS CLAIMED TOWARDS NON-ORGANIC SEGMENTS THEN THE AO CAN ALLOW THE CLAIM OF DEDUCTION U/S. 80JJA AFTE R PROPER VERIFICATION. ASSESSEE'S GROUND IS ALLOWED FOR STA TISTICAL PURPOSES. 19. IN THE RESULT, ASSESSEE'S APPEAL IS TO BE ALLOWED P ARTLY. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH SEPTEMBER, 2014. SD/- (P.M. JAGTAP) ACCOUNTANT MEMBER SD/- (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED 24 TH SEPTEMBER, 2014 TPRAO I.T.A. NO. 385/HYD/2014 M/S. SRI BIOTECH LABORATORIES INDIA LTD. ============================= 15 COPY FORWARDED TO: 1. M/S. SRI BIOTECH LABORATORIES INDIA LTD., PLOT NO. 21, STREET O. 2, SAGAR SOCIETY, BANJARA HILLS, HYDERABA D. 2. THE ASST. CIT, CIRCLE - 3(2), HYDERABAD. 3. THE CIT(A) - I V, HYDERABAD. 4. THE CIT - III, HYDERABAD. 5 . THE DR B BENCH, ITAT, HYDERABAD `