ITA No. 2061/Mum/2013, ITA No. 1575/Mum/2013

Shailendra Kumar Yadav, JM And Ashwani Taneja, AM

Shri Jeetendra Kumar, DR For the Appellant :
For the Respondent : Shri Arvind Sonde & Ms Rikita Joshi, AR

ORDER

The order of the Bench was delivered by

Ashwani Taneja, AM-These cross appeals were filed by assessee and 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 Rs. 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 erred on facts and in restricting the disallowance u/s.14A to Rs. 1,96,000/-, ignoring the facts that the Assessing Officer is bound to work out the disallowance under section u/s 14A as per Rule 8D and it has been held by Bombay High Court in the case of Godrej & Boyce that working of disallowance under section u/s 14A read with Rule 8D is mandatory from A.Y. 2008-09 onwards.

iii) The Ld.CIT(A)'s order is contrary in law and on facts and deserves to be set-aside."

3. In ITA No.1575/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 Rs. 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 appellant prays that the disallowance u/s 14A as confirmed by the CIT(A) is totally unjustified and ought to be deleted.

(iv) Without prejudice to the above, the appellant prays that the disallowance u/s 14A be appropriately reduced, considering the facts and circumstances of the case.
2. Ground no. 2 : Disallowance u/s 35(2AB)

(i) The learned CIT(A) erred in confirming the action of the AO. in disallowing a sum of Rs. 57.66 lacs out of claim of deduction u/s 35(2AB) and u/s. 37(1) by treating 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 Rs. 776,132/- out of software expenses incurred by the appellant by treating the same as capital expenditure/disallowance u/s.40(a)(ia).

(ii) He failed to ignore the invoices placed on record and sustaining the addition made by the AO.

(iii) He failed to appreciate that such expenditure was incurred during the course of carrying on business and was therefore properly allowable u/s 37(1).
(iv) The appellant prays that the confirmation of disallowance by CIT(A) be deleted."

4. Ground no.1 of assessee's 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 for redeciding the same. On the other hand, Learned Departmental Representative has relied upon the order of Assessing Officer, but then submitted that he would have no objection if the issue, in totality, would be sent back to the file of Assessing Officer for readjudication, taking into consideration complete facts and latest position of law.

4.2. We have heard both the sides. It is noted that, in assessee's own case for A.Y. 2006-07, the Tribunal has dealt with this issue and sent back the 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 Rs. 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 No.626 of 2010) dated 12.8.2010. Rule 8D does not retrospective effect and, accordingly, it cannot be invoked in the present case. However, the matter needs to be restored back to the file of the Assessing Officer for determining a reasonable disallowance of expenses incurred to earn the tax exempted income. Ground No.1 thus, allowed for statistical purposes."

4.3. We have gone through the order of the Tribunal. 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. 2006-07, 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 deem it proper to send this issue of disallowance u/s 14A, in totality, to the file of Assessing Officer. He shall re-decide this issue, after giving adequate opportunity of hearing to the assessee and after considering the facts and circumstances of the case and the law available at the time of deciding this issue. Therefore, ground no.1 of Assessee's appeal and all the grounds of Revenue's appeal are sent back to the file of Assessing Officer. All these grounds are allowed for statistical 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 Rs. 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 and cell sciences. During the course of the assessment proceedings, it was found by the AO that the assessee has claimed deduction u/s 35(2AB) of the Act for an amount of Rs. 25,92,36,861/-, and that the assessee claimed to have incurred a sum of Rs. 17,28,24,574/- as expenditure for the 'in-house' research facility. However, on verification of the details of expenses filed by the assessee, it was noted by the AO that the assessee has made a payment of Rs. 57.66 lacs to M/s Reliance 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 research or in-house research and development facility, as approved by the prescribed authority, there shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred, and that R & D expenditure includes material costs, manpower cost, administrative cost on R & D personnel, clinical trial expenditure etc., and that clinical trial needed for R & D activity have been carried out through RCRS, since it specializes in clinical trials and such expenditure 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 these were applicable only in case of expenses incurred on scientific research on in-house research and development facility. As per AO, the R&D in pharma /bio-Technology companies involves two main activities - development of drugs and its clinical trials/testing, and in this case the work of clinical trial was outsourced and expenditure of Rs. 57.66 lakhs was incurred on that, and thus the assessee has not incurred the expenses of Rs. 57.66 lacs in the in-house research and development 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 Rs. 86.49 lacs, which is one and one-half times of the expenditure incurred of Rs. 57.66 lacs was disallowed and added to total income of the assessee, by the AO, and the amount of Rs. 57.66 lacs was treated as capital expenditure for the development of patents and was capitalized, to be allowed on final development of the patent. It was further observed by him that the assessee had also itself capitalized the cost incurred on patents, and therefore action of AO was in line with the claim of the assessee.

5.2. Being aggrieved, the assessee contested the matter before the Ld. CIT(A). In appeal, the assessee filed detailed submissions before the Ld. CIT(A). These are reproduced hereunder for the sake of convenience:

"The appellant had incurred total expenditure on Research & Development of Rs. 17,28,24,574/- which was eligible for deduction u/s35(2AB) and had accordingly claimed deduction u/s 35(2AB) of Rs. 25,92,36,861/- (being 150% of Rs. 17,28,24,574/-). The details of such expenditure were as follows:

However, the A.O. has singled out one particular expenditure for disallowance being payment made to Reliance Clinical Research Services Pvt. Ltd. (RCRS) amounting to Rs. 57.66 lacs for carrying out clinical trial needed for its R & D activity. The reason given for such disallowance by the A.O. is that deduction u/ s 35(2AB) is applicable only in case of expenses incurred on scientific research on "in-house research" and development facility. Since the clinical trial/testing work has been outsourced and expenditure of Rs. 57.66 lacs is incurred, such expenditure cannot be regarded as inhouse R & D. By making such observation, the A.O. has disallowed Rs. 86.49 lacs (being 150% of Rs. 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" on the ground that by definition these expenditure were incurred outside of approved R & D facility. This is the stand taken by DSIR for all pharma R & D companies.

Accordingly, we withdraw our claim for weighted deduction of the aforesaid expenditure u/s.35(2AB). However, we submit that the aforesaid expenditure should be allowed as an expenditure u/s 37(1) (without weightage of 150%).

The appellant submits that clinical trial needed for Research & Development activity have been carried 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 that though such expenditure is not eligible for weighted deduction in view of stand taken by DSIR vide order dt.24.08.2010, such expenditure should be allowed u/s37(1) on actual @ 100% and not 150%."

5.3. In view of the above submissions of the assessee, wherein the assessee has withdrawn its claim u/s 35(2AB), the Ld CIT(A), confirmed disallowance of Rs. 86.49 laks made by the AO u/s 35(2AB). With regard to alternate claim of the assessee, it was observed by him that since the assessee, 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 these expenses are revenue in nature is also not in doubt, and therefore, in any case, these expenses are allowable u/s 37(1) of the Income Tax Act. In support of his claim, Ld. Counsel has drawn our attention on the invoice of impugned expenses, showing nature of the expenses incurred. On the other hand, Ld DR has vehemently supported the orders of lower authorities, by submitting that the deduction made by the assessee u/s 35(2AB) was contrary to law and facts, therefore same has been rightly denied 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, therefore, same is dismissed. With respect to alternate claim made by the assessee u/s 37(1) of the Act, it is noted that the invoice of M/s. Reliance Clinical Research Services Pvt. Ltd. dated 31.03.2007 is enclosed at page no. 3 of the paper book, showing that payment has been made to the said company under the head "Clinical Trial Fees" - for the month of March, 2007 for time spent on 1st March to 31st March, 2007 for conducting clinical trials, in support of to all 'K projects', for a sum of Rs. 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 deduction u/s.35(2AB) has been denied, therefore, these expenses are capital in nature. It was further observed by ld. CIT(A) that Assessing Officer, as well as assessee, have treated these expenses as capital in nature. In our view, the observations of Ld. CIT(A) are misplaced and without any basis. We have gone through details of these expenses. In our considered view, these expenses are apparently revenue in nature. Ld DR also could not point out as to which expenses are capital in nature. Thus, 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 argument, but find that it is not sustainable in the eyes of law, in the given facts and circumstances of the case, and in view of well settled position of law. In our view, there are no estoppels against law. Even if, assessee agrees or consents for something contrary to law, the A.O. is obliged under the law, to discharge his duty of making fair assessment of income and to compute amount of tax payable as per law. As per Article 265 of the Constitution of India, "No tax can be collected except 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 Ltd 81 ITR 303 (Del.) Relevant portion is reproduced below:

"It was true that the assessee itself had included that dividend income in its return for the year in question, but there was no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quite apart from it, it was incumbent on the income-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, therefore, be taxed in the assessment year 1958-59."

Further reliance is placed by us on another judgment of Hon'ble Gujarat High Court, in the case of, S.R. Koshti 276 ITR 165 (Guj) in which relief was granted to assessee with following observations:
"The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over-assessed, 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 India and section 114 of the State (J&K) Constitution imposes an embargo on imposition and collection of tax if the same is without authority of law."

Lastly, we find it useful to refer to judgment of Hon'ble Bombay High Court in the case of Central Provinces Manganese Ore 112 ITR 734, holding 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 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) in confirming the disallowance made by Assessing Officer for a sum of Rs. 776,132/- out of software expenses incurred by treating the same as capital expenditure.

6.1. The brief facts are that assessee purchased software license worth Rs. 7,76,132/- during the year, and claimed this amount as revenue expenditure. The Assessing Officer noted that the software license was a capital asset as it gave enduring benefit to the assessee and was to be capitalized. Thus the claim of the assessee, 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 allowed on the same is allowed on the ground that the assessee had not deducted TDS.

6.2. Being aggrieved, the assessee contested the matter before the CIT(A) and filed detailed submissions. The Assessing submitted bills of these expenses, but the Ld. CIT(A) refused to admits these bills on the ground that these were not furnished by the assessee in terms of Rule 46A and confirmed the disallowance made by the Assessing Officer.

6.3. Before us, Ld. Counsel has submitted that injustice has been done by the Ld. CIT(A) by not examining the facts and evidences placed by assessee. On the other hand, Ld Departmental Representative submitted that this issue can be sent back to file of Assessing Officer.

6.4. We have gone through the submissions made by both the sides. It is noted that full co-operation has been extended by the assessee at all times i.e. during course of assessment proceeding, and also during appellate proceeding before the ld. CIT(A). If the CIT(A) wanted to have 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 assessee shall also extend full co-operation to the ld. CIT(A) by providing further details and documentary evidences, as may be required. Accordingly, this ground is allowed for statistical purposes.

7. As a result, ITA No.2061/Mum/2013 being the appeal filed by Revenue is allowed for statistical purposes and ITA No.1575/Mum/2013, being the appeal filed by Assessee is partly allowed.

The order pronounced in the open court on 9.10.2015.