TMI Blog2019 (12) TMI 1192X X X X Extracts X X X X X X X X Extracts X X X X ..... at club expenses incurred by assessee shall not be allowed as business deduction. Disallowance u/s 35(2AB) - AO disallowed weighted deduction claimed by assessee u/s 35(2AB) of the R D expenditure incurred by assessee, while the learned CIT(A) allowed the claim of the assessee for weighted deduction of R D expenses - HELD THAT:- As per facts emerging from records, the AO has given clear and positive finding that evidences in support of expenses incurred on in-house approved R D facility are not submitted by assessee during the course of assessment proceedings and there is no findings on this issue by learned CIT(A) but we have already held that no deduction u/s 35(2AB) of the 1961 Act can be allowed to assessee on this short ground of non entering into an agreement for cooperation with Secretary, DSIR and for audit of accounts of approved R D facility as held by us in this order and in case if at any stage our above decision is over-ruled by Hon ble Superior Courts on that count, then the matter shall be remitted back to the file of the AO for denovo adjudication for verifying the eligible expenditure spent by assessee on its approved inhouse R D facility for computing weighte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate proceedings before learned CIT(A) had arisen from assessment order dated 30.03.2006 passed by learned Assessing Officer (hereinafter called the AO ) u/s.143(3) of the Income-tax Act, 1961 (hereinafter called the Act ). 2. The grounds of appeal raised by Revenue in memo of appeal filed with Income-Tax Appellate Tribunal, Chennai (hereinafter called the Tribunal ) read as under:- 1. The order of the learned CIT(A) is contrary to law and facts of the case. 2.1. The learned CIT(A) erred in holding that disallowances on account of staff welfare expenses (₹ 15.86 lakhs), guest house expenses (₹ 8.96 lakhs), club subscriptions (₹ 4.18 lakhs) and cost of other services (₹ 1 lakh) were not called for, thereby, deleting the addition of ₹ 30,00,000/-made on the above counts. 2.2. Having regard to the Hon'ble Jurisdictional Tribunal decision in the assessee's own case in ITA No.1030/Mds/07 dated 7.3.08 for the a-y 2002-03, the learned CIT(A) ought to have upheld the disallowance made towards guest house expenses. 2.3. In the absence of any evidence to substantiate that the assessee incurred the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) Tuticorn Factory- Manufacturing and sale of Urea , DAP , Aluminum and Fluoride. b) SMO, EHVT Division- Execution of turnkey projects and execution of electrification works contract. c) Pharma Division- Manufacture of bulk drugs and formulations including PEN-G ; and d) Bio-tech Division- Production of tissue culture plants, enzymes and export of cut flowers. 3.2 The assessee filed its return of income with Revenue for impugned assessment year viz. ay: 2003-04 on 23.10.2003 declaring loss of ₹ 403,84,01,506/-. The said return of income was processed by Revenue u/s 143(1) of the 1961 Act on 12.03.2004. The assessee also filed revised return of income on 30.03.2004 declaring loss of ₹ 298,10,70,500/- . In this revised return of income filed by assessee with Revenue on 30.03.2004 , the assessee offered interest income of ₹ 105.73 crores. The case of the assessee was selected for framing scrutiny assessment by AO u/s 143(3) read with Section 143(2) of the 1961 Act. The AO issued statutory notices u/s 143(2) and 142(1) of the 1961 Act to the assessee and finally scrutiny assessment was framed by AO u/s 143(3) of the 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mumbai and Delhi. The learned CIT(A) further observed that detailed accounts of expenses incurred at these guest houses were not provided by assessee during assessment proceedings. The learned CIT(A) observed that these guest house expenses were petty in nature and relatable to purchase of provisions, newspaper and wages to the employees at guest houses. It was observed by learned CIT(A) that these expenses were met on day to day basis by Head Ofice of the assessee . it was observed by learned CIT(A) that with passage of time , the assessee is not in a position to gather together all relevant vouchers and some of the vouchers and records are produced during appellate proceedings. The learned CIT(A) observed that guests using the guest house facilities are employees and management personnel of the assessee company. Thus, in nut-shell the learned CIT(A) held that these evidences furnished indicate that the guest house was maintained by assessee to facilitate the stay of the employees who had to travel for business purposes and making alternate arrangements would have been more expensive. Thus , the learned CIT(A) relying on provisions of Section 37(1) of the 1961 Act held that these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision was rendered for ay:1994-95 but Section 37(3) , 37(4) and 37(5) of the 1961 Act stood omitted by Finance Act, 1997 w.e.f. 01.04.1998. Presently , we are seized with ay: 2003-04. We have observed that learned CIT(A) has noted in its appellate order that the assessee could not furnish complete evidences to support its expenses but positive finding is recorded by learned CIT(A) that guest house(s) were maintained by the assessee at Tuticorin, Mumbai and Delhi and its nexus/connection with employees using guest house while visiting those places instead of living in alternate accommodation ,but the fact remains that assessee could not furnish complete bills/invoices/evidences etc. in support of these expenses to prove that the entire expenses were incurred wholly and exclusively for the purposes of business of the assessee to satisfy mandate of Section 37(1) of the 1961 Act and that no outsiders have used these guest house , thus under these circumstances and keeping in view that it is an old litigation with a view to end litigation and being fair to both the rival parties, we allow 50% of guest house expenses as business expenses while we affirm disallowance of balance 50% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Chennaitribunal in ITA no. 880/Mds/07, order dated 07.03.2008 for ay: 2002-03, In ITA no.2252/Mds/2003, order dated 20.10.2004 and in ITA no. 1418/Mds/2014, order dated 27.12.2006 for ay: 2009-10, wherein these club expenses were held not to be allowable and in-fact in ay: 2009-10 the assessee has itself nor pressed this ground before the tribunal. The assessee has not established business nexus of these club expenses being incurred wholly and exclusively for the purposes of business of the assessee. Thus, based on our above discussion we hold this issue in favour of Revenue and hold that club expenses incurred by assessee shall not be allowed as business deduction. The ground number 2.4 is accordingly adjudicated. We order accordingly. 4.1 The next issue vide ground number 3.1 and 3.2 raised by Revenue in memo of appeal filed with tribunal concerns itself with disallowance u/s 35(2AB) of the 1961 act. The AO disallowed weighted deduction claimed by assessee u/s 35(2AB) of the 1961 Act of the R%D expenditure incurred by assessee, while the learned CIT(A) allowed the claim of the assessee for weighted deduction of R D expenses. The AO during the course of assessment pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was for entering into an agreement with the Department of Science and Industrial Research for conducting in-house research and for audit of accounts maintained for that facility. Once both these pre-conditions were incorporated in Part B of the Form No. 3CK, an approval granted by the designated authority would amount to an acceptance of the assessee s application. It would not be open to the Assessing Officer to reexamine the degree of compliance to these two conditions once the statutory recognized designated authority had considered the assessee s application and had approved of it. On the present facts, the assessee company would be entitled to weighted deduction under Section 35(2AB) and the ground of appeal filed by the assessee company on this account is hereby allowed. 4.3 Aggrieved by an appellate order dated 25.07.2008 passed by learned CIT(A) allowing weighted deduction @150% of R D expenses u/s 35(2AB) of the 1961 Act, the Revenue has filed an appeal with tribunal. The learned CIT-DR supported assessment order passed by the AO and relied upon grounds of appeal filed with tribunal . The learned counsel for the assessee on the other hand submitted that there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the prescribed authority, then, there shall be allowed a deduction of [a sum equal to one and one-half times of the expenditure] so incurred. [Explanation.-For the purposes of this clause, expenditure on scientific research , in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).] (2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act. (3) No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of the accounts maintained for that facility. (4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Director General in such form and within such time as may be prescribed.] [(5) No deduction shall be allowed in respect of the expenditure referred to in clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of Form No. 3CK which is an application form to be submitted for entering into an agreement with DSIR for co-operation in In-house R D facility and for audit of the accounts maintained for that facility which at Part B is an agreement to be submitted by the applicant which is to be countersigned by Secretary, DSIR. The purpose of this agreement is that the applicant is willing to undertake projects of national importance, as may be assigned to it by the prescribed authority of its own , or in association with laboratories of CSIR, ICAR, ICMR, DRDO, DBT, M/O Environment, DOD, DAE, Department of Space , Universities , Colleges or any other public funded institutions and the applicant agrees to exploit the results of such R D subject to conditions as may be imposed by GOI, in view of national security or in public interest. The assessee has admittedly not fulfilled this condition of entering into an agreement with prescribed authority although its R D facilities were approved by Secretary DSIR vide approval granted in Form No. 3CM on 28.06.2000 , valid till 31.03.2003.. But, the fact remains that the assessee has not entered into an agreement with Secretary, DSIR as is provided u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deductions in its income tax returns and it was even allowed these deductions by the Income Tax Authorities. Further, no doubt, on this premise, it shared the profits with the Government as well. However, this conduct of the appellant or even the respondents, was outside the scope of the contract and that by itself may not give any right to the appellant to claim a relief in the nature of Mandamus to direct the Government to incorporate such a clause in the contract, in the face of the specific provisions in the contract to the contrary as noted above, particularly, Article 32 thereof. It was purely a contractual matter with no element of public law involved thereunder. 72. Having considered the matter in the aforesaid prospective, we come to the irresistible conclusion that the appellant is not entitled to the relief claimed. Though it may be somewhat harsh on the appellant when it availed the benefit of Section 42 for few years and acted on the understanding that such a benefit would be given to it, but we have no option but to hold that PSCs did not provide for this benefit to be given to the appellant and the contract can be amended only if both the parties agree to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed to assessee u/s 35(2AB) of the 1961 Act, then only an amount of ₹ 205.43 lacs will be eligible for weighted deduction u/s 35(2AB). As per facts emerging from records, the AO has given clear and positive finding that evidences in support of expenses incurred on in-house approved R D facility are not submitted by assessee during the course of assessment proceedings and there is no findings on this issue by learned CIT(A) but we have already held that no deduction u/s 35(2AB) of the 1961 Act can be allowed to assessee on this short ground of non entering into an agreement for cooperation with Secretary, DSIR and for audit of accounts of approved R D facility as held by us in this order and in case if at any stage our above decision is over-ruled by Hon ble Superior Courts on that count, then the matter shall be remitted back to the file of the AO for denovo adjudication for verifying the eligible expenditure spent by assessee on its approved inhouse R D facility for computing weighted deduction u/s 35(2AB) of the 1961 Act , after considering all the evidences/explanations which the assessee may like to rely in its defense and after giving proper and adequate opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that there are loans raised by assessee to the tune of ₹ 2317.03 crores on which interest is paid while total amount advanced to subsidiaries, associates and group concerns is to the tune of ₹ 410.12 crores and interest liability incurred by assessee during the year under consideration is ₹ 178.02 crores, which led to proportionate disallowance of interest expenses to the tune of ₹ 31.51 crores as being incurred not for the purposes of business u/s 37(1) of the 1961 Act, vide assessment order dated 30.03.2006 passed by the AO u/s 143(3) of the 1961 Act. 5.2 Aggrieved by an assessment framed by the AO u/s 143(3) of the 1961 Act, the assessee filed first appeal with learned CIT(A) who was pleased to allow appeal of the assessee , vide appellate order dated 25.07.2008 passed by learned CIT(A) , by holding as under: 11. The next ground of appeal relates to disallowance of proportionate interest relatable to interest free advances to group companies. The Jurisdictional Tribunal, in the assessee s own case, had occasion to consider the nature of such advances and in its order reported in SPIC v. DCIT(93 TTJ 161) , as also in its orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : ₹ 8259.87 lacs b) National Aromatics and Petrochemicals Corporation(Associated Company) : ₹ 1547.09 lacs c) Tuticorin Alkali Chemicals Fertilizers Ltd. : ₹ 1000 lacs Ltd. d) SPIC Petrochemicals Limited-Advance Against Equity : ₹ 30204.72 lacs We have observed from audited Balance Sheet of the assessee as at 31.03.2003 extracted by the AO in its assessment order that total interest bearing loans both secured and unsecured raised by the assessee as at 31.03.2003 were to the tune of ₹ 2317.03 cores and assessee has claimed an interest expenses to the tune of ₹ 178.02 crores as revenue expenses during the year under consideration. We have observed that AO has disallowed proportionate interest expenses wrt to interest free advances made by assessee to its group entities as the claim of the assessee that loans were advanced in earlier years out of interest free funds available with the assessee was not accepted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us while adjudicating appeal for impugned ay: 2003-04. We have observed that learned CIT(A) has merely followed the appellate order passed by Chennai-tribunal for ay: 2000-01 and has deleted disallowance of proportionate interest expenses with respect to interest free advances made by assessee to four entities namely (i) SPIC Fertilizers Chemicals FZE, Dubai ,(b) National Aromatics and Petrochemicals Corporation , (c) Tuticorin Alkali Chemicals Fertilizers Limited and (d) SPIC Petrochemicals Limited. There is no discussion and reasoning given by learned CIT(A) in its appellate order as to how the disallowance of proportionate interest expenses with respect to the all these aforesaid three entities which were not before ChennaiITA tribunal while adjudicating appeal for ay: 2000-01 was to be deleted. The appellate order passed by learned CIT(A) is not a speaking and reasoned order. The Chennai-tribunal while adjudicating on this issue of allowability of proportionate interest expenses wrt interest free advances made by assessee to SPIC Fertilizers and Chemicals FZE, Dubai in ITA no. 2252/Mds/2003 vide orders dated 20.10.2004 for ay: 2000-01 has observed that the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee had incurred interest expenses as well loss on foreign exchange fluctuations on these FRN s. It was also observed by tribunal that said FRN s were issued for financing the import into India of capital goods for its operations and projects in which the assessee is involved and for general corporate purposes permitted by Government of India, which is stated in the offer document issued by assessee. It is also observed that Chennai-tribunal in a decision rendered on 27.12.2016 in assessee s own case for ay: 2009-10 in ITA no. 1821/Mds/2004( of which one of us being Hon ble Judicial Member was part of Division Bench who pronounced that order) has remitted the matter back to the AO for fresh adjudication as to allowability of proportionate interest expenses wrt interest free advances made to associated companies, by holding as under: 18. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee claims that interest free funds were diverted to the companies at Dubai and Jordon. The assessee also claims that they are sister concerns of the assessee. However, the shareholding pattern of socalled companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has produced a copy of the order of this Tribunal for the assessment year 2000-01. For the assessment year 2000-01, the assessee claimed before this Tribunal that investment was made in the company which produces the basic raw material required by the assessee. On a query from the Bench, the Ld.counsel for the assessee submitted that raw material was not supplied at free of cost. It is also not the case of the assessee that the assessee had purchased raw material at subsidized price or cost. Moreover, income of the companies, which are outside India, was not taxable in the hands of the assessee in India. All these facts are not brought to the notice of the earlier Bench which decided the case. When the income of the assessee was from the companies which situated outside India and the assessee claims that the money was invested in other companies, which are said to be subsidiary companies, why the expenditure incurred by the assessee should not be disallowed was not examined by this Tribunal for assessment year 2000-01. Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of both the authorities below are set aside a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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