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2015 (10) TMI 2256 - ITAT MUMBAI

2015 (10) TMI 2256 - ITAT MUMBAI - [2016] 48 ITR (Trib) 438 - Disallowance u/s 14A - Held that:- We have been informed that the AO has not passed fresh order so far in pursuance to the order of the Tribunal. in AY 2006-07. In our considered opinion, before this issue can be decided in the impugned year i.e. A.Y. 2007-08, it is imperative that it is first decided by Assessing Officer in A.Y. 2006-07. In case, we decide this issue first, it may pre-empt the order of Assessing Officer for A.Y. 2006 .....

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, ground no.1 of Assessee's appeal and all the grounds of Revenue's appeal are sent back to the file of Assessing Officer.

Disallowance u/s 35(2AB)- expenditure for the 'in-house' research facility - Held that:- Names of the employees have been given along with their rates per hour. It is further noted that ld. Assessing Officer has shown no doubts about the genuineness of these expenses. It was held by Ld. CIT(A) that since claim of assessee with respect to deduction u/s.35(2AB) has .....

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ure.

Software expenses u/s 37(1)- Held that:- The mere fact that a deduction was not claimed before the Income-tax Officer, was not of much importance, since if the liability arises then a claim can be made in a bonafide manner at any stage before the higher authority, who is competent to grant relief. Thus, in view of aforesaid discussion, coupled with facts and circumstances of this case and clear position of law, as discussed above, in our opinion there was no reason to deny the cl .....

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e one separate petition under Rule 46A, the same could have been very well pointed out to the assessee. Without affording opportunity to the assessee, the valid claim of the assessee should not have been denied to it, merely for some technical reasons. Under these circumstances, we find it appropriate to send this issue back to the file of ld. CIT(A) who shall give opportunity to the assessee to file all the evidences as may be considered appropriate, along with petition under Rule 46A etc. The .....

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Revenue against the order of learned Commissioner of Income-Tax (Appeals)-9, Mumbai, dated 20.12.2012 for A.Y. 2007-08. 2. In ITA No.2061/Mum/2013, the Revenue has filed appeal on following grounds: "i) The Learned CIT(A) has erred on facts and in law in restricting the disallowance made under section u/s 14A of the Income-tax Act to ₹ 1,96,000/-, without properly appreciating the factual and legal matrix as clearly brought out by the Assessing Officer. ii) The Learned CIT(A) has erre .....

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/Mum/2013, the Assessee has filed appeal on following grounds: "1. Ground no. 1 : Disallowance u/s 14A (i) The learned Commissioner of Income tax (Appeals) [hereinafter referred to as CIT(A)] erred in confirming the disallowance of ₹ 165,56,576/- u/s 14A of the Income tax Act, 1961. (ii) He failed to appreciate that the disallowance u/s 14A could only be made in respect of expenditure incurred and cannot extend to a notional expenditure which has not been incurred at all. (iii) The ap .....

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the same as capital expenditure. (ii) He failed to appreciate that the expenditure in respect of which weighted deduction was disallowed by him was eligible for deduction u/s 37(1) and therefore his disallowance of the aforesaid claim is totally unjustified. (iii) The appellant prays that the confirmation of disallowance by CIT(A) be deleted. 3. Ground no. 3 : Software expenses u/s 37(1) (i) The learned CIT(A) erred in confirming the action of the A.O. in disallowing a sum of ₹ 776,132/- .....

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appeal and all the grounds raised in Revenue's appeal, address common issue with regard to disallowance u/s14A made by Assessing Officer, and partly sustained by Ld CIT(A). 4.1. At the very outset, ld. Counsel for the assessee brought into notice of the Bench, the order of Tribunal in assessee's own case for immediately preceding year i.e. A.Y. 2006-07, wherein the issue of disallowance made u/s 14A by the Assessing Officer was sent back by the Tribunal to the file of Assessing Officer .....

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e matter to the file of Assessing Officer. The relevant para of the order of Tribunal is reproduced as under: "3. In the first ground of appeal, the assessee has raised the following grievance: i) The learned CIT(A) erred in confirming the disallowance of ₹ 6,81,65,116/- u/s.14A of the Income tax Act, 1961. 4. As far as this issue is concerned, find that the AO has invoked Rule 8D but as held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Limited vs. ACIT, (ITA .....

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ce to the order of the Tribunal. in AY 2006-07. In our considered opinion, before this issue can be decided in the impugned year i.e. A.Y. 2007-08, it is imperative that it is first decided by Assessing Officer in A.Y. 2006-07. In case, we decide this issue first, it may pre-empt the order of Assessing Officer for A.Y. 2006-07, and it may also close the gates for the Assessing Officer to make proper examination of facts and circumstances in A.Y. 2006-07. Therefore, to avoid this situation, we de .....

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l purpose. 5. Ground no.2 of assessee's appeal deals with the action of ld. CIT(A) in confirming the action of the Assessing Officer in disallowing a sum of ₹ 57.66 lacs out of claim of deduction u/s 35(2AB) and u/s 37(1), by treating the same as capital expenditure. 5.1. The brief facts are that the assessee company was engaged in the business of carrying out scientific Research & Development in the area of biotechnology and providing products and services based on biotechnology a .....

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liance Clinical Research Services Pvt. Ltd. (hereinafter called as RCRS) for carrying out clinical trial needed for R & D activity, accordingly, vide questionnaire dt.11.12.09, a show cause was given to the Assessee to explain as to how the expenses not incurred in the 'in-house' research facility is allowable as deduction u/s 35(2AB). The assessee, in its reply dt.15.12.09, submitted to AO that "section 35(2AB) mentions that in respect of any expenditure incurred on scientific .....

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ure have been incurred for getting clinical trial for R & D purposes. It was further submitted that adequate disclosure has been made in the Tax Audit Report filed by the assessee, wherein no disqualification or adverse comments were given by the auditors with respect to payment made to subsidiary company or for deduction claimed u/s section 35(2AB). The AO considered assessee's reply, but did not find it acceptable. The AO analysed provisions of the section 35(2AB) and observed that the .....

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t facility, and that same was paid to RCRS and thus it was not covered by provisions of 35(2AB). In view of the above, the assessee's claim of deduction of ₹ 86.49 lacs, which is one and one-half times of the expenditure incurred of ₹ 57.66 lacs was disallowed and added to total income of the assessee, by the AO, and the amount of ₹ 57.66 lacs was treated as capital expenditure for the development of patents and was capitalized, to be allowed on final development of the pat .....

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/- which was eligible for deduction u/s35(2AB) and had accordingly claimed deduction u/s 35(2AB) of ₹ 25,92,36,861/- (being 150% of ₹ 17,28,24,574/-). The details of such expenditure were as follows: Particulars Amt. Research Material consumed 6,41,75,537 Salary 8,88,36,874 Administrative expenses incurred on research & Development 1,98,12,162 Total 17,28,24,573 Deduction allowed u/s 35(2AB) @ 150% 25,92,36,861 However, the A.O. has singled out one particular expenditure for disa .....

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ed, such expenditure cannot be regarded as inhouse R & D. By making such observation, the A.O. has disallowed ₹ 86.49 lacs (being 150% of ₹ 57.66 lacs). However, now since we have received order of Department of Scientific & Industrial Research (DSIR) dt. 24.08.2010, in which the DSIR while approving our R & D facilities for the purpose of section 35(2AB) has not considered clinical trial expenditure incurred by us as a part of "in-house R & D expenditure" o .....

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ied out through RCRS since RCRS specializes in clinical trial and such expenditure has been incurred for getting clinical trial for R & D purposes. The appellant submits that there are many expenditures which the appellant will have to incur outside its premises for carrying out of in-house research and all such expenditure incurred outside the 'in-house facility' cannot be regarded as not having been incurred for 'inhouse research facility'. The appellant therefore submits t .....

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, as well as the AO, have treated such amount as capital expenditure, therefore, there was no question of allowing of capital expenditure u/s 37 of the Act, accordingly no relief was given by him. 5.4. Before us, Ld. Counsel has submitted that even if the claim of the assessee is held to be not allowable u/s 35(2AB), the alternative claim of the assessee u/s 37(1) is very much allowable, as per law and facts. It was submitted that the genuineness of expenditure is not in doubt, the fact that the .....

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ied by the lower authorities. With regard to allowability of the expenses u/s 37, it was submitted by him that proper details are not available and therefore, these expenses cannot be allowed even as revenue expenses. 5.5. We have considered the submissions made by both the sides and gone through the orders passed by the lower authorities and material placed before us for our consideration. Since, main claim of assessee with respect to deduction u/s 35(2AB) was not seriously pressed before us, t .....

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39;, for a sum of ₹ 57,65,564/-. It is further noted that on the back side of the invoice, complete details have been given with respect to time spent by 22 employees of RCRS, also giving particulars of the studies done by these employees. Names of these employees have been given along with their rates per hour. It is further noted that ld. Assessing Officer has shown no doubts about the genuineness of these expenses. It was held by Ld. CIT(A) that since claim of assessee with respect to d .....

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s, in our view, these expenses are of revenue nature. 5.6. The other argument of Ld DR was that assessee did not claim these expenses u/s 37 and did not treat them as revenue in nature, and therefore assessee should be precluded from claiming benefit of these expenses, now at this stage, irrespective of this fact that these expenses may have been held as allowable, if the assessee would have made its claim correctly as per law, at the time of filing of return. We have carefully considered this a .....

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cept by authority of law". Hon'ble Supreme Court in the case of Ramlal vs Rewa Coalfield Ltd (AIR 1962 SC 361), held that the state authorities should not raise technical pleas if the citizens have a lawful right, which is being denied to them merely on technical grounds. The state authorities cannot adopt the attitude which private litigants might adopt. Further, we place our reliance on the judgment of Hon'ble Delhi High Court in the case of CIT vs Bharat General Reinsurance Co Lt .....

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me-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it could not confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year. Therefore the income from dividend was not assessable during the assessment year 1958-59, but it was assessable in the assessment year 1953-54. It could not, .....

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essed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected." In the case of Snehlata 192 CTR 50, Hon'ble J&K High Court held that "when the substantive law confers a benefit on the assessee under a statute, it cannot be taken away by the adjudicatory authority on mere technicalities. It is settled proposition of law that no tax can be levied or recovered without authority of law. Article 265 of the Constitution of Ind .....

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stage before the higher authority, who is competent to grant relief. Thus, in view of aforesaid discussion, coupled with facts and circumstances of this case and clear position of law, as discussed above, in our opinion there was no reason to deny the claim assessee u/s 37 of the Act. Therefore, the AO is directed to allow these expenses u/s 37 of the Act. Accordingly, ground no.2 of the assessee's appeal is partly allowed. 6. Ground no.3 - The assessee has challenged the action of Ld. CIT(A .....

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, that it was revenue expenditure, was disallowed. It was further held by the AO that, otherwise also the expenditure on software purchase was not allowable as the assessee did not deduct TDS on the same. As per the AO, purchase of software was essentially purchase of copy right. Therefore, payment being in the nature of "Royalty", attracted TDS provisions u/s 194J, and therefore, the same was covered under the provisions of section 194J r.w.s. 40(a)(ia). Further, no depreciation was a .....

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