India Nippon Electricals Ltd., CHENNAI V. DCIT, CHENNAI

ITA 459/CHNY/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7983 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 04-01-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 21-02-2014
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business expenditure; Earning of tax free income
• Section: 143(3); 14A; 80IB

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 459/MDS/2014 / ASSESSMENT YEAR :200 8 - 0 9 M/S. INDIA NIPPON ELECTRICALS LTD., AALIM CENTRE, II FLOOR, 82, RADHAKRISHNAN SALAI, CHENNAI 600 0 04 . [PAN: A A ACI0921R ] VS. THE DEPUTY COMMISSIONER OF INCO ME TAX , COMPANY CIRCLE I I ( 3 ) , CHENNAI 600 034 . ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI R. VIJAYARAGHAVAN , ADVOCATE / RESPONDENT BY : SHRI A. V. SREEKANTH , J CIT / DATE OF HEARING : 0 4 . 0 1 .201 6 / DATE OF P RONOUNCEMENT : 17 . 0 2 .201 6 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) II , CHENNAI , DATED 29 . 11. 20 13 RELEVANT TO THE ASSESSMENT YEAR 2008 - 09. IN THIS APPEAL, THE ASSESSEE HAS RAISED TWO GROUNDS AND THE FIRST GROUND RELATES TO CONFIRMATION OF DISALLOWANCE OF APPORTIONMENT OF EXPENSES TOWARDS R&D BETWEEN 80IB AND NON 80IB UNITS IN THE RATIO OF TURNOVER AND THE SECOND GROUND RELATES TO I. T.A. NO . 459 /M/ 14 2 CONFIRMATION OF DISALLOWANCE MADE UNDER SECTION 14A R.W.R. 8D OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT]. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF ELECTRONIC I GNITION SYSTEM AND FILED ITS RETURN DECLARING AN INCOME OF .7,64,267,970/ - . THE RETURN FILED BY THE ASSESSEE WAS PROCESSED UNDER SECTION 143(1) OF THE ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS I SSUED AND ACCORDINGLY, THE ASSESSEE HAS FILED ALL DETAILS. THE ASSESSEE HAS ITS UNITS IN HOSUR, PUDUCHERRY AND REWARI. THE ASSESSING OFFICER HAS OBSERVED THAT THE PUDUCHERRY UNIT OF THE ASSESSEE QUALIFIES FOR DEDUCTION UNDER SECTION 80IB OF THE ACT. DURING THE PERIOD, THE ASSESSEE HAS SHOWN A NET PROFIT OF .18,03,84,589/ - FROM ITS BUSINESS ON A CONSOLIDATED BASIS. IN THE COMPUTATION OF INCOME, PROFIT FROM PUDUCHERRY UNIT HAS BEEN COMPUTED AT .8,97,13,933/ - OUT OF WHICH AN AMOUNT OF .5,43,66,171/ - HAS BEEN CLAIMED AS DEDUCTION UNDER SECTION 80IB OF THE ACT . AFTER VERIFYING THE DETAILS AND SUBMISSIONS FILED BY THE ASSESSEE, THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT WAS COMPLETED BY MAKING VARIOUS ADDITIONS. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL. AFTER CONSIDERING THE FACTS, SUBMISSIONS OF THE ASSESSEE AND ALSO BY CONSIDERING THE VARIOUS DECISIONS, THE LD. CIT(A) PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE. 4. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. I. T.A. NO . 459 /M/ 14 3 5. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE TH ROUGH THE ORDERS OF AUTHORITIES BELOW. THE FIRST ISSUE RAISED BEFORE THE TRIBUNAL IS WITH REGARD TO APPORTIONMENT OF R&D EXPENSES BETWEEN 80IB AND NON - 80IB UNITS. THE ASSESSING OFFICER HAS OBSERVED THAT THE PONDICHERRY UNIT OF THE ASSESSEE IS QUALIFIED FOR DEDUCTION UNDER SECTION 80IB OF THE ACT, WHILE THE OTHERS ARE NOT. THE ASSESSEE HAS CLAIMED WEIGHTED DEDUCTION ON RESEARCH AND DEVELOPMENT EXPENDITURE @ 150% AMOUNTING TO .2,09,29,926/ - UNDER SECTION 35(2AB) OF THE ACT. THE ASSESSEE IN ITS RETURN OF INCOME CLAIMED THE ENTIRE WEIGHTED DEDUCTION UNDER SECTION 35(2AB) OF THE ACT AGAINST THE INCOME OF HOSUR UNIT. THE ASSESSING OFFICER HAS OBSERVED THAT SINCE ALL THE UNITS MANU FACTURED THE SAME PRODUCT, I.E., ELECTRONIC IGNITION SYSTEM, THE BENEFITS OF THE R&D ARE ACCRUING TO ALL THE UNITS AND HENCE, THE R&D EXPENSES HAVE TO BE APPORTIONED AMONG ALL THE MANUFACTURING UNITS. THUS, THE ASSESSING OFFICER APPORTIONED THE PROPORTIONA TE R&D EXPENSES TO PONDICHERRY UNIT PROPORTIONATE TO ITS TURNOVER AND REDUCED FROM THE ELIGIBLE PROFIT WHILE COMPUTING THE DEDUCTION UNDER SECTION 80IB OF THE UNIT. BEFORE THE LD. CIT(A), THE ASSESSEE HAS SUBMITTED THAT THE BENEFITS UNDER SECTION 35(2AB) O F THE ACT ARE SPECIAL DEDUCTION GRANTED TO THE ASSESSEE IN ORDER TO ENCOURAGE THE RESEARCH AND DEVELOPMENT IN THE COUNTRY AND HENCE, NO PORTION O F THE WEIGHTED DEDUCTION UNDER SECTION 35(2AB) ON R&D CAN BE ATTRIBUTABLE TO ANY OF THE SPECIFIC UNITS. THE ASS ESSEE HAS EXPLAINED BEFORE THE LD. CIT(A) THAT THE R&D I. T.A. NO . 459 /M/ 14 4 CARRIED OUT DURING THE YEAR WAS RELEVANT TO THE HOSUR UNIT AND HENCE, THE ENTIRE R&D EXPENSES ARE ATTRIBUTABLE TO THE HOSUR UNIT ONLY. THE LD. CIT(A) FAIRLY CONCEDED THAT THE R&D FACILITY IS LOCATED IN HOSUR, BUT THE R&D CARRIED OUT IN THE FACILITY IS IN RELATION TO THE IMPROVEMENT AND INNOVATIONS IN THE MANUFACTURING OF ELECTRONIC IGNITION SYSTEMS AT VARIOUS LEVELS. THE LD. CIT(A) HAS OBSERVED THAT ALL THE THREE UNITS ARE ENGAGED IN MANUFACTURING OF SA ME PRODUCT VIZ., ELECTRONIC IGNITION SYSTEMS . FURTHER, IN THE APPROVAL OF THE R&D FACILITY, AS APPROVED BY THE DSIR, IT WAS NOT SPECIFIED AS TO WHICH UNIT THE R&D FACILITY IS RELATED. THE APPROVALS/APPLICATION CONTAINS THE DETAILS OF DEVELOPMENT OF ELECT RONIC IGNITION SYSTEMS ONLY. THE SUB - DIVISIONS ARE NOT SPECIFIED IN THE APPROVALS. AFTER CONSIDERING THE VARIOUS DECISIONS, THE LD. CIT(A) HAS FINALLY HELD THAT THE R&D EXPENSES ARE THE GENERAL BUSINESS EXPENDITURE OF THE ASSESSEE IN THE LINE OF MANUFACTUR ING THE ELECTRONIC IGNITION SYSTEMS AND THEREFORE, THE R&D BENEFITS ARE BOUND TO ACCRUE TO ALL THE UNITS EQUALLY. IN SUCH A SITUATION, THE EXPENDITURE IN R&D, WHICH IS COMMON BUSINESS EXPENDITURE, IS ALSO EQUALLY ATTRIBUTABLE TO ALL THE THREE UNITS. SINCE THE R&D IS COMMON BUSINESS EXPENDITURE, THE EXPENDITURE OF R&D IS TO BE APPORTIONED TO DIFFERENT MANUFACTURING UNITS PROPORTIONATE TO THEIR TURNOVER. ACCORDINGLY, THE LD. CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OFFICER IN APPORTIONING THE R&D EXPENSES TO VARIOUS UNITS PROPORTIONATE TO THEIR TURNOVER. I. T.A. NO . 459 /M/ 14 5 6. THE DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH, IN ORDER TO PROMOTE RESEARCH AND DEVELOPMENT, IDENTIFIES VARIOUS INSTITUTIONS/COMPANIES AND OFFERS VARIOUS REBATES TO BOOST THE R&D ACTIVITIES. TO CLAIM R&D EXPENSES AS ALLOWABLE DEDUCTION UNDER SECTION 35(2AB) OF THE ACT, FIRST OF ALL, THE DSIR HAS TO RECOGNIZE THE IN - HOUSE R&D OF THE COMPANY. AFTER OBTAINING RECOGNITION FROM DSIR, THE COMPANY HAS TO SUBMIT COMPLETE REPORT OF THE R&D ACTIVITIES AND EXPENDITURE INCURRED FOR THE SAME IN THE PRESCRIBED FORMAT TO THE PRESCRIBED AUTHORITY I.E., SECRETARY, DSIR AND AFTER ASSESSMENT OF THE REPORT FURNISHED BY THE ASSESSEE, THE SECRETARY, DSIR WILL COMMUNICATE APPROVAL IN FORM 3CL TO THE DIRECTOR GENERAL OF INCOME TAX [EXEMPTION]. BASED ON THE APPROVAL IN FORM 3CL, THE ASSESSEE CAN CLAIM DEDUCTION UNDER SECTION 35(2AB) OF THE ACT. FROM THE ASSESSMENT ORDER, WE FIND THAT THE ASSESSEE VIDE ITS LETTER DATED 21.12.2010 HAS SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE R&D EXPENSES ARE ACCOUNTED ENTIRELY IN HOSUR UNIT AS THE DSIR RECOGNIZED R&D CENTRE IS LOCATED AT HOSUR ONLY , WHICH SHOWS THAT THE ASSESSEE HAS OBTAINED ONLY RECOGNITION FROM DSIR. MOREOVER, THERE WAS NO MENTION ABOUT THE APPROVAL IN FROM 3CL CO MMUNICATED BY THE SECRETARY, DSIR TO DGIT[E]. MERE RECOGNITION BY DSIR SHALL NOT ENTITLE THE ASSESSEE TO CLAIM DEDUCTION UNDER SECTION 35(2AB) OF THE ACT. SECTION 35(2AB) OF THE ACT IS A SPECIAL PROVISION TO CLAIM R&D EXPENSES. AFTER CAREFULLY GOING THROUG H THE ORDERS OF AUTHORITIES BELOW, WE FIND THAT THE ASSESSEE WAS NOT ASKED TO FILE APPROVAL IN I. T.A. NO . 459 /M/ 14 6 FORM 3CL TO CLAIM THE DEDUCTION UNDER SECTION 35(2AB) OF THE ACT. APPROVAL IN FORM 3CL IS MANDATORY REQUIREMENT TO CLAIM DEDUCTION UNDER SECTION 35(2AB) OF THE A CT. IN THIS CASE, THE DSIR RECOGNIZED THE IN - HOUSE R&D FACILITY OF HOSUR UNIT, AS PER THE WRITTEN SUBMISSION DATED 21.12.2010 BEFORE THE ASSESSING OFFICER. BUT, THE ASSESSING OFFICER FAILED TO CALL FOR THE APPROVAL IN FORM 3CL TO ADMIT THE CLAIM OF THE ASS ESSEE. UNDER THESE FACTS AND CIRCUMSTANCES, WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND REMIT THE MATTER TO THE ASSESSING OFFICER TO CALL FOR (1) SUBMISSION OF REPORT IN THE PRESCRIBED FORMAT [ FORM 3CM/3CK ] TO THE SECRETARY, DSIR AND (2) APP ROVAL IN FORM 3CL COMMUNICATED BY THE SECRETARY, DSIR TO DGIT[E] AND AFTER VERIFICATION OF THE SAME, THE ASSESSING OFFICER SHOULD ALLOW THE CLAIM OF DEDUCTION UNDER SECTION 35(2AB) OF THE ACT, IF THE ASSESSEE PRODUCES APPROVAL IN FORM 3CL COMMUNICATED BY T HE SECRETARY, DSIR TO DGIT[E] TO THE UNIT(S), WHICH WAS RECOGNIZED BY THE DSIR, OTHERWISE, NO CLAIM OF DEDUCTION UNDER SECTION 35(2AB) OF THE ACT COULD BE ALLOWED. FURTHER, WE MAKE IT CLEAR THAT THE DSIR IS THE ONLY AUTHORITY TO RECOGNIZE THE IN - HOUSE R&D FACILITY AND ONCE THE DSIR RECOGNIZED THE HOSUR UNIT ALONE, THE ASSESSING OFFICER HAS NO JURISDICTION TO APPORTION THE R&D EXPENSES RATIONALLY TO VARIOUS UNITS PROPORTIONATE TO THEIR TURNOVER IN THE ABSENCE OF RECOGNIZING OTHER UNITS BY THE DSIR. WE ALSO M AKE IT CLEAR THAT THE DATE OF APPROVAL IN FORM 3CL COMMUNICATED BY THE SECRETARY, DSIR TO DGIT[E] CANNOT BE THE CUT - OFF DATE FOR ALLOWING THE DEDUCTION. IN VIEW OF THE ABOVE I. T.A. NO . 459 /M/ 14 7 FACTS AND CIRCUMSTANCES, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE PARTICULARS AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPORTUNITIES OF HEARING TO THE ASSESSEE. THUS, THE GROUND RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 7. THE SECOND ISSUE RAISED IN THE APPEAL OF THE ASSESSEE RELATE S TO CONFIRMATION OF DISALLOWANCE MADE UNDER SECTION 14A READ WITH RULE 8D. IT IS NOT DISPUTED THAT THE TOTAL INVESTMENTS MADE BY THE ASSESSEE IN THE FORM OF SHARES/FUNDS IS .99,61,87,000/ - AS ON 31.03.2008 AND EARNED DIVIDEND INCOME OF .5,17,68,002/ - DURING THE FINANCIAL YEAR 2007 - 08. IT IS ALSO NOT DISPUTED THAT THE ASSESSEE HAS BORROWED SUBSTANTIAL AMOUNTS OF FUNDS DURING THE FINANCIAL YEAR 2007 - 08 AND INTEREST AMOUNT PAI D ON THESE BORROWINGS STOOD AT .1,01,000/ - . FURTHER, IT WAS ALSO NOT DISPUTED THAT THE MAIN ACTIVITY OF THE ASSESSEE IS MANUFACTURING ELECTRONIC IGNITION SYSTEMS AND IN ADDITION THE ASSESSEE IS ALSO INVESTING AND TRADING IN SHARES/MUTUAL FUNDS, BUT THE AS SESSEE HAS NOT MAINTAINED ANY SEPARATE SETS OF BOOKS FOR THE INVESTMENT ACTIVITY AND THE MANUFACTURING ACTIVITIES. ALL THE FUNDS ARE POOLED UP AND UTILIZED FOR VARIOUS ACTIVITIES FROM A COMMON KITTY. THEREFORE, THE ASSESSING OFFICER HAS SEGREGATED THE PROB ABLE EXPENSES BY WAY OF FINANCIAL CHARGES AND OTHER OVERHEAD EXPENSES BET WEEN THE INVESTMENT ACTIVITY AND MANUFACTURING AND EXPORT ACTIVITIES. ACCORDINGLY, BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AND APPLYING RULE 8D, THE ASSESSING I. T.A. NO . 459 /M/ 14 8 OFFICER APPORTIONED THE EXPENSES AGAINST THE INCOME GENERATED FROM THE INVESTMENT AC TIVITY. THE LD. CIT(A), BY CONSIDERING VARIOUS DECISIONS AND SUBMISSIONS OF THE ASSESSEE, CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. FROM THE DECISION OF T HE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD V. DCIT (320 I TR 81) , IT IS VERY CLEAR THAT THE APPLICATION OF PROVISIONS OF R ULE 8D, WHICH HAS BEEN NOTIFIED WITH EFFECT FROM 24.03.2008, SHALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008 - 09 ONWARDS . 8. THE ASSESSEE HAS RELIED ON THE DECISION OF THE HON BLE DELHI HI GH COURT IN THE CASE OF ACIT V. SUN INVESTMENTS P. LTD. 8 ITR (TRI) 33, WHEREIN IT WAS HELD THAT UNLESS THE ASSESSING OFFICER ESTABLISHES THAT SPECIFIC EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME THERE CAN BE NO DISALLOWANCE UND ER SECTION 14A OF THE ACT , HAS NO APPLICATION TO THE FACTS OF THE PRESENT CASE BECAUSE IN THAT CASE THE ASSESSMENT YEAR RELATES TO 2005 - 06 AND THE ASSESSING OFFICER DISALLOWED 2% OF THE DIVIDEND INCOME AS EXPENSES ATTRIBUTABLE FOR EARNING IT. 9. IN THE PRESENT CASE, THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2008 - 09 AND IN VIEW OF THE DECISION IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD V. DCIT (SUPRA), THE APPLICATION OF PROVISIONS OF R ULE 8D, WHICH HAS BEEN NOTIFIED WITH EFFECT FROM 24.03.2008, SHALL APP LY WITH EFFECT FROM ASSESSMENT YEAR 2008 - 09 ONWARDS . SINCE THE ASSESSEE HAS NOT MAINTAINED ANY SEPARATE I. T.A. NO . 459 /M/ 14 9 SETS OF BOOKS FOR THE INVESTMENT ACTIVITY AND THE MANUFACTURING ACTIVITIES AND MOREOVER, A LL THE FUNDS ARE POOLED UP AND UTILIZED FOR VARIOUS ACTIVITIES FROM A COMMON KITTY. THEREFORE, THE ASSESSING OFFICER HAS SEGREGATED THE PROBABLE EXPENSES BY WAY OF FINANCIAL CHARGES AND OTHER OVERHEAD EXPENSES BETWEEN THE INVESTMENT ACTIVIT IES AND MANUFACTURING AND EXPORT ACTIVITIES. IN VIEW OF THE ABOVE, THE ASSESS ING OFFICER HAS RIGHTLY APPLIED THE PROVISIONS OF RULE 8D BY INVOKING SECTION 14 OF THE ACT, WHICH WAS CONFIRMED BY THE LD. CIT(A). THEREFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND THUS, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. 10 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED ON THE 17 TH FEBRUARY , 201 6 AT CHENNAI. SD/ - SD/ - ( CHANDRA POOJARI ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 17 . 0 2 .201 6 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.