TMI Blog2020 (4) TMI 911X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the assessee during the year including expenses that have incurred after the date of DSIR approval letter i.e. 09.03.2009. We also find that the AO has observed that deduction u/s 35 has been claimed under the head intangible assets . Core issue of examination of the expenditure has not been resorted as the revenue held that the assessee was not eligible for the deduction u/s 35(2AB) for expenses incurred prior to that date. Hence, in order to meet the ends of justice, a fair opportunity has to be allowed to both the parties, it is hereby directed to submit the details of capital expenditure and revenue expenditure for the entire period from 01.07.2008 to 31.03.2009 so as to avail the correct deduction as per the principle laid down in this order. Addition u/s 14A r.w.r. 8D - assessee has earned exempt dividend income - HELD THAT:- Since no interest bearing funds have been utilized in investment and the revenue could not prove any expenses incurred, the addition made by the AO is hereby directed to be deleted. Disallowance of Expenses - deduction denied on the grounds that the assessee did not furnish the copies of ITR of VIPL to prove that these expenses whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the drivers and other technicians is a business expediency. Owing to the new recruitment as well as job rotation, offboarding and attrition of employees, the training is taken to be an ongoing process for any industry. AO observation that it goes to improve the brand building, if at all, is collateral benefit. There is no provision in the Income Tax Act for apportioning this expenditure over a period of three years as invoked by the AO. Section 37(1) mandates that any expenditure has to be allowed in entirety if it is spent in connection with business of the assessee. There cannot be any formula basis, criteria adopted by the AO while disallowing 2/3rd of such expenditure. At the same time, this expenditure cannot be treated as capital expenditure too - disallowance made by the AO is legally not tenable. Revenue appeal dismissed. - Ms. Sushma Chowla, Vice President And Dr. B. R. R. Kumar, Accountant Member For the Appellant : Sh. Gaurav Jain, Adv. For the Respondent : Sh. N. K. Choudhary, CIT DR And Sh. Saras Kumar, Sr. DR ORDER The present appeals have been fi led by the revenue against the orders of ld. CIT (A)-14, New Delhi dated 20.11.2015 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 On the facts and in the circumstances of the case and in law the order passed by learned CIT(A) is erroneous and the learned CIT(A) has erred in deleting the disallowance of Rs.71,93,752/- made by AO on account of disallowance of bad debts. 2. That the ld. CIT (A) has erred in law and on facts of the case in deleting the disallowance on account of training expenses of Rs.2,30,44,980/- made by the AO by treating the training expenses as deferred revenue expenses. Deduction of Capital Expenditure on R D: 5. The undisputed facts taken from the record are as under: The assessee public company had filed return on income on 29.09.2009 declaring a loss of Rs. 71,64,99,409/- which was incorporated as a joint venture between AB Volvo ( Volvo ) and Eicher Motors Limited ( EML ) and is engaged, inter alia, in the business of manufacture and sale of commercial vehicles and components, including gears and engineering solutions. The relevant previous year is the first year of business of the assessee. During the relevant previous year, the assessee acquired from EML, commercial vehicles undertaking, by way of demerger, w.e.f. 1.7.2008. The said commercial vehicles unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The aforesaid approval was granted from 09.03.2009 (i.e., the date of letter issued by DSIR for granting general recognition approval to in-house R D unit in the name of the assessee) to 31.3.2012. The DSIR also granted approval under section 35(2AB) in the name of EML upto 30-06-2008. In the return of income filed for the relevant previous year, the assessee claimed weighted deduction under section 35(2AB) of the Act @ 150% oil the scientific research expenses incurred at the in-house R D facility, in the following manner: Capital expenditure on building, plant and machinery, etc. Rs.55,10,84,569 Additional deduction at 50 percent in respect of above capital expenditure (excluding cost of building) under section 35(2AB) of the Act. Rs.25,44,90,785 Additional deduction at 50 percent in respect of revenue expenditure Rs.9,00,85,719 Total Rs.89,56,61,072 In the assessment order, the assessing officer disallowed d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee vide order dated 09.03.2009. The CIT(A) has held that the prior approval was given to EML in respect of R D facility, which was subsequently taken over by the assessee and therefore, the assessee company was also eligible for deduction u/s 35(2AB) in respect of R D unit. 5. The R D unit of the assessee company was approved in the name of the assessee for the first time by DSIR w.e.f. 09.03.2009 and upto 31.03.2012. The CIT(A) has wrongly held that since the R D unit of EML was taken over by the assessee company, it will be assumed that the R D unit was already recognized. The fact is that the R D unit of the assessee was recognised for the first time by DSIR w.e.f. 09.03.2009 and upto 31.03.2012. Therefore, the finding of the CIT(A) that the R D facility already stood approved by DSIR and it was only a change in the name on account of transfer of ownership from EML to assessee company and hence the assessee was eligible for deduction is based on incorrect appreciation of facts and law. The fact is the R D unit of EML was approved by DSIR and not the R D facility of the assessee company. 6. As per provisions of Part-B of Form 3CK , an agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to the approved period in Form 3CM, was not allowed. In the above case, decision of Maruti Suzuki Ltd. (supra) has also been considered. 11. Without prejudice to the above, it is to bring to kind notice that u/s 35(5), the Act has provided for continuation of benefit in respect of any asset representing expenditure of a capital nature on scientific resources in the hands of amalgamated company. The said benefit has not been extended in the case of Revenue expenditure. The Act has clearly made provision in respect of amalgamation of companies. There is no such provision in the case of slump sale. Since the assessee company is an entity different from EML having separate PAN, it cannot claim extension/continuation of benefit of deduction u/s 35 (2AB) in respect of R D unit owned by the previous owner. Once the R D unit of assessee is approved by DSIR, unit can be held to be existing approved R D unit for claiming deduction in future. Therefore, unless the R D unit is allowed by DSIR as eligible unit under 35(2AB), it cannot claim deduction prior to approved in Form 3M. 12. To some up, R D unit of the assessee company was not an adjusting approved unit before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing amendments: i) To grant approval under section 35(2AB) in respect of R D facility at Pithampur for the period 1.4.2007 to 30.6.2008 in the name of EML; ii) To change the recognition letter dated 5.6.2008 for the in house R D facility at Pithampur in the name of the assessee (VECV) instead of EML w.e.f. 1.7.2008, and iii) To treat the application dated 3.9.2007 requesting for renewal of approval under section 35(2AB) of the Act in respect of R D facility at Pithampur in the name of the assessee (VECV), for the period commencing from 1.7.2008 and grant approval from that date upto 31.3.2012 in the name of the assessee only. 18.11.2008 Application filed by assessee before the DSIR seeking general recognition of the inhouse R D~ facility at Pithampur under section 35 of the Act in name of the assessee (VECV) for the period beginning from 01.07.2008. 25.11.2008 Application filed by the assessee before the DSIR in Form 3CK requesting for approval under section 35(2AB) of the Act in respect of R D facility at Pithampur in the name of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y shall submit its report in relation to the approval of the said facility to the 86[Principal Chief Commissioner or Chief Commissioner or] [Principal Director General or] Director General in such form and within such time as may be prescribed.] (5) [***] [(6) No deduction shall be allowed to a company approved under sub-clause (C) of clause (iia) of sub-section (1) in respect of the expenditure referred to in clause (1) which is incurred after the 31st day of March, 2008.] 11. The important dates are examined in detail. EML was granted general recognition for R D Centre at Pithampura by DSIR upto 31.03.2011 vide letter dated 05.06.2008. EML divested the CV undertaking including R D facility to the assessee, VECV on 01.07.2008. Letters have been filed to DSIR by EML to grant approval in respect of R D facility in the name of EML for the period from 01.04.2007 to 30.06.2008 i.e. till the date of slump sale and coming into existence of VECV. The letter written to DSIR is reproduced hereunder: Eicher Motors Limited Eicher House, 12 Commercial Complex Greater Kailash-II (Masjid Moth) New Delhi-110048, India Telephone: 011-41437600 Fax: 011-41437 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submitted that as per provisions of section 192A of the Companies Act, 1956 read with the Companies (Passing of the Resolutions by Postal Ballot) Rules, 2001, the approval of the shareholders for this disinvestment has been received on 15,03.2008 (a copy of the resolution is enclosed). Copy of resolution passed in the meeting of the Board of Directors of Eicher Motors Limited held on 26.07.2008 authorizing Managing Director of tire.company to execute transferring the commercial vehicle business w.e.f. 01.07.2008 is enclosed. In view of the above following is requested: 1. To grant approval u/s 35(2AB) in -respect of R D facility situated at Pithampur for the period from 01.04.2007 to 30.06.2008 in the name of Eicher Motors Limited. 2. To grant approval u/s 35(2AR) in respect of R D facility situated at Chennai in the name of Eicher Motors Limited for the period from 01.04.2007 to 31.03.2012. 3. To change the name of the company in the recognition letter dated 05.06.2008 of in-house R D unit situated at Pithampur, Distt Dhar (MP) from Eicher Motors Limited to VE Commercial Vehicles Limited w.e.f. 01.07.2008. 4. To treat our application dated 03 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .. (ii) notwithstanding anything contained in clause (i), where an asset representing expenditure of a capital nature [incurred before the 1st day of April, 1967,] ceases to be used in a previous year for scientific research related to the business and the value of the asset at the time of the cessation, together with the aggregate of deductions already allowed under clause (i) falls short of the said expenditure, then (a) there shall be allowed a deduction for that previous year of an amount equal to such deficiency, and (b) no deduction shall be allowed under that clause for that previous year or for any subsequent previous year ; (iii) if the asset mentioned in clause (ii) is sold, without having been used for other purposes, in the year of cessation, the sale price shall be taken to be the value of the asset at the time of the cessation ; and if the asset is sold, without having been used for other purposes, in a previous year subsequent to the year of cessation, and the sale price falls short of the value of the asset taken into account at the time of cessation, an amount equal to the deficiency shall be allowed as a deduction for the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.] 20. During the arguments, it was submitted by the ld. DR that the provisions of Rule 8D (2) was squarely applicable to the case owing to receipt of the exempt income by the assessee. The ld. AR argued that the dividend has been received on the units of debts mutual funds purchased and sold during the previous year and the dividend has been received after deduction of dividend distribution tax. It was submitted that the investment in the mutual funds was made out of surplus balances available with the company and no interest bearing funds have been utilized for investment in the mutual funds. It was argued that no expenses have been incurred in respect of earning dividend on mutual funds as the only activity required for investment is filing of application and the dividend is directly credited to the bank account of the assessee. 21. Since no interest bearing funds have been utilized in investment and the revenue could not prove any expenses incurred, the addition made by the AO is hereby directed to be deleted. Disallowance of Expenses : (Ground No. 3 of ITA No. 580/Del/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O disallowed the amount on the ground that the said amount has not been offered to tax by the assessee. The ld. CIT (A) gave a categorical finding that the corresponding amount of the debts was offered as income by the predecessor assessee. The assessee has received the business from its predecessor EML by way of demerger wherein the EML sold the vehicles on credit and the said amounts were offered to tax in the earlier years. The question here is not about the debt becoming bad but whether the amounts offered by the earlier company and duly offered to tax turned bad at a later date be allowed as per the provisions of Section 36(1)(vii) r.w.s. 36(2) of the Income Tax Act, 1961. Reliance is placed on the judgment of the Hon ble Apex Court in the case of CIT Vs T. V. Rao 155 ITR 152. Owing to the judgment of the Hon ble Supreme Court, we hereby hold that the bad debts written off as irrecoverable in the books of accounts of the assessee in relation to the debts acquired on purchase of business which has been offered as income by the predecessor company is allowable u/s 36(2). The relevant portion of the judgment is reproduced herewith for ready reference: The Income-tax Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me referred to in section 28 (i) to (vi)** ** (vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year : Sub-section (2) of section 36 declares : (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply (i) no such deduction shall be allowed unless such debt or part thereof (a) has been taken into account in computing the income of the assessee of that previous year or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee, and (b) has been written off as irrecoverable in the accounts of the assessee for that previous year ; (ii) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made ; (iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (2) of section 36 declares that a deduction can be allowed only if the debt, or part thereof, has been taken into account in computing the income of the assessee of that previous year or an earlier previous year and that it has also been written off as irrecoverable in the accounts of the assessee for that previous year. In the present case, the debt was taken into account in the income of the assessee for the assessment year 1963-64 when the interest income accruing thereon was taxed in the hands of the assessee. The interest was taxed as income because it represented an accretion accruing during the earlier year on money owed to the assessee by the debtor. The item constituted income because it represented interest on a loan. The nature of the income indicated the transaction from which it emerged. The transaction was the debt and that debt was taken into account in computing the income of the assessee of the relevant previous year. It is the same assessee who has subsequently, pursuant to a settlement, accepted part payment of the debt in full satisfaction and has written off the balance of the debt as irrecoverable in his accounts. It appears, therefore, that the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s wherein training of the drivers and other technicians is a business expediency. Owing to the new recruitment as well as job rotation, offboarding and attrition of employees, the training is taken to be an ongoing process for any industry. The Assessing Officer observation that it goes to improve the brand building, if at all, is collateral benefit. There is no provision in the Income Tax Act for apportioning this expenditure over a period of three years as invoked by the Assessing Officer. Section 37(1) mandates that any expenditure has to be allowed in entirety if it is spent in connection with business of the assessee. There cannot be any formula basis, criteria adopted by the AO while disallowing 2/3rd of such expenditure. At the same time, this expenditure cannot be treated as capital expenditure too. Reliance is being placed on the judgment of Hon ble Apex Court in the case of Taparia Tools Ltd. Vs JCIT 372 ITR 605 on the issue of deferred revenue expenditure. Hence, we hereby hold that the disallowance made by the AO is legally not tenable. Appeal of the revenue on this ground is dismissed. 28. In the result, the appeals of the revenue are dismissed. Order Pronounced ..... X X X X Extracts X X X X X X X X Extracts X X X X
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