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The Commissioner of Income Tax, The Deputy Commissioner of Income Tax Versus M/s Microlabs Ltd.

2016 (4) TMI 219 - KARNATAKA HIGH COURT

Claim for deduction under Section 35(2AB) - assessing authority adopted the net expenditure for allowing the weighted deduction and same was done on the basis of DSIR guidelines - Tribunal setting aside the computation made by the assessing authority in respect of claim for deduction under Section 35(2AB) - Held that:- Tribunal has proceeded on the premise that when the regular work is in the nature of R&D work done and sold, it becomes a business income and chargeable as business income. It is .....

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as the Hon'ble Bombay High Court in Reliance Utilities & Power Ltd.(2009 (1) TMI 4 - BOMBAY HIGH COURT ) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd [2014 (8) TMI 119 - BOMBAY HIGH COURT ] wherein it was held that whe .....

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he circumstances of the case, the Tribunal is right in law in setting aside the computation made by the assessing authority in respect of claim for deduction under Section 35(2AB) of I.T.Act even when the assessing authority rightly adopted the net expenditure for allowing the weighted deduction and same was done on the basis of DSIR guidelines wherein it was stated that the receipts to the in-house R&D centre needs to be reduced from gross expenditure and in accordance with parameters of th .....

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er from paragraph Nos.12 to 17 are as under: "12. We have heard the submissions of the ld. DR and the ld. counsel for the assessee and also perused the documents filed in paperbook. As we have already seen, the assessee carries on scientific research. It is in the business of manufacture of drugs and pharmaceuticals. It incurred expenditure on scientific research and the quantum of such expenditure on scientific research, which is a sum of ₹ 7,80,52,805, is not in dispute. The weighte .....

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follows: "(vii) Assets acquired and products, if any emanating out of R&D work done in approved facility, shall not be disposed off without approval of the Secretary, DSIR. Sales realization arising out of the assets sold shall be offset against the R&D expenditure of the R&D Centre claimed under section 35(2AB) for the year in which such sales realization accrues under section 35(2AB) of IT Act, 1961. Expenditure claimed for deduction under the subsection shall be reduced to t .....

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R&D expenditure of the R&D centre which is claimed as decuction u/s. 35(2AB). It is evident from the above guideline that it is only sales realization arising out of the assets sold that should be offset against R&D expenditure. In respect of sale of products acquired emanating out of R&D work done in an approved facility, the sale proceeds need not be reduced from the R&D expenditure. In our view, the reason for not including sales realization arising out of products emanat .....

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why sales realization arising out of assets sold is required to be offset against R&D expenditure. The above explanation will be sufficient to hold that the order passed by the CIT(A) u/s. 154 of the Act is unsustainable. Nevertheless, we will also examine as to what is the exact nature of receipts from sale of products. 14. A copy of license and supply agreement which was filed by the assessee before the AO as well as CIT(A) is at pages 5 to 26 of the assessee's paperbook. The sale of p .....

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interested in getting the marketing authorization for the product in a particular territory. They pay to the assessee the Dossier charges and apply for license to market the products for human use in their respective territories. On getting the license, they get marketing authorization from the assessee. The person who takes the Dossier (knowhow) takes it for the limited purpose of registration of product in other countries and after registration sale of the products in their country. If they g .....

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ny kind whatsoever in and/or to the Dossier and the Products shall be the exclusive property of MICRO LABS (the Assessee). MICRO LABS i.e., the Assessee may sell the Dossier to any third party, including its clients without the consent of foreign entity buying the dossier. However, MICRO LABS (the Assessee) shall notify the person acquiring the dossier of the transfer or sale of the Dossier to such third party and shall undertake that such third party respect the terms and conditions of the agre .....

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these sales are part of normal sales. 17. It is clear from the sample copy of the license and supply agreement filed before us that the product development charges received by the assessee will not be covered under clause 5(vii) of the DSIR guidelines. As we have already seen, these receipts are credited to profit & loss account are part of normal sales. They are, therefore, not to be reduced from the expenditure incurred by the assessee on carrying out scientific research on which deductio .....

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done and sold, it becomes a business income and chargeable as business income. It is only when the assets acquired in the process of carrying on R&D work, if they are sold, such realization would go to reduce the expenditure of scientific research. 4. In our view, the approach to the issue considered by the Tribunal is appropriate. In any case, no substantial question of law would arise for consideration as canvassed. 5. For the second question, the observations made by the Tribunal in the i .....

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gs were utilized for the purpose of investment." 33. The assessee earned dividend income of ₹ 38,75,857. It quantified a sum of ₹ 3,22,426 as expenditure incurred in earning tax free income dividend income which does not form part of the total income and which is to be disallowed u/s. 14A of the Act. 34. The break-up of the sum of ₹ 3,22,426 is not specifically given, but is stated to be relating to management fee, legal & professional charges, security transaction cha .....

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t such investments cannot be made routinely. No prudent businessman would make any investment without applying the resources wisely. Obviously this entails expenditure, direct as well as indirect. He thereafter proceeded to make disallowance u/s. 14A of the Act, which is given as annexure to the assessment order and enclosed as ANNEXURE-II to this order. 36. Aggrieved by the assessment order, the assessee preferred appeal before the CIT(Appeals). 37. Before CIT(A), the assessee submitted that in .....

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respect of which it was explained that the loans could not have been used for making any long term investment. Copies of some communications from banks regarding sanction of the loans were also filed before me to substantiate the nature of the loan. In respect of IDBI loan, it was submitted that the same had been returned back before the year end, thus bringing the balance to Nil. 38. On consideration of the above submissions and on perusal of the relevant documents, the CIT(A) was of the view .....

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that the loans were absolutely utilized for the purpose for which they were claimed. The CIT(A) also held that there was no utilization certificate from the bank filed before the AO nor was such evidence furnished before the CIT(A). The CIT(A) also held that the documents submitted from the bank during the course of appeal only refer to the disbursal of the loan and even these specify certain conditions required to be met. The date-wise actual disbursal and utilization is not proved from the le .....

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egorical utilization certificate from the bank, the CIT(A) was of the view that there was no evidentiary support of the assessee's claim. Hence, the disallowance u/s.14A of the Act as made by the AO was upheld by the CIT(A). 39. Aggrieved by the order of CIT(A), the assessee has raised ground No.2. 40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paperbook and the same is enc .....

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