The order of the Bench was delivered by
N.V. Vasudevan, Judicial Member - I.T.A. Nos. 1412 and 1429/B/13 are cross-appeals by the Revenue and the assessee respectively directed against the order dated July 18, 2013 of the Commissioner of Income-tax (Appeals), LTU, Bangalore relating to the assessment year 2009-10. I. T. A. No. 764/B/14 is an appeal by the assessee against the order dated April 9, 2014 of the Commissioner of Income-tax (Appeals), LTU, Bangalore passed under section 154 of the Income-tax Act, 1961 (hereinafter referred to as "the Act" in short) relating to the assessment year 2009-10.
I.T.A. Nos. 1412/13 and 764/14
2. First we shall take up for consideration the appeals by the Revenue in I.T. A. No. 1412/B/13 and that of the assessee in I.T.A. No. 764/B/14 against the order under section 154 of the Act.
3. Ground No. 2 raised by the Revenue in its appeal and the grounds raised by the assessee in its appeal arise out of identical facts and circumstances and are therefore taken up for consideration together. The grounds of appeal are as follows :
Revenue's ground
"2. The learned Commissioner of Income-tax (Appeals) erred in allowing the gross expenditure incurred on scientific research under section 35(2AB)."
Assessee's grounds of appeal
"1. |
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The learned Commissioner of Income-tax has erred in passing rectification order under section 154 of the Income-tax Act, 1961 reversing the decision taken by him in appeal allowing computation of research and development expenditure on the gross expenditure. The appellant has claimed the deduction in its return under section 35(2AB) on the gross expenditure but the Assessing Officer has reduced the sales realisation of its products. The appellant filed the appeal before the Commissioner of Income-tax and he has allowed deduction under section 35(2AB) on the gross expenditure. However the learned Commissioner of Income-tax has passed a rectification order under section 154 allowing research and development expenditure under section 35(2AB) on the net expenditure after reducing sales realised. |
2. |
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The learned Commissioner of Income-tax has erred in not following the substance of the Department of Scientific and Industries Research guidelines which indicates that the sales realisation arising out of assets sold should be reduced while claiming the deduction but the learned Commissioner of Income-tax has erred in reducing the sale of products out of research and development expenditure. Sale of the product which is an outgo of the research and development, cannot be said to be the asset belonging to the assessee to justify set-off of sale proceeds against the expenditure. |
3. |
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The learned Commissioner of Income-tax has no power under section 154 to rectify his own order when the issue is debatable. The issue has been settled down at the Supreme Court in the case of T.S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50 (SC)." |
4. The facts material for adjudication of the aforesaid grounds of appeal, are as follows. The assessee is a company engaged in the business of manufacture of pharmaceuticals. It is not in dispute that the assessee was entitled to claim weighted deduction under section 35(2AB) of the Act. The provisions of section 35(2AB) of the Act in so far as it relates to the dispute in the present appeal are as follows :
"35(2AB)(1). Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by 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 (1) which is incurred after the 31st day of March, 2017.
(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."
5. The assessee had quantified the deduction under section 35(2AB) at a sum of Rs. 12,57,00,920. It had received a sum of Rs. 57,47,808 as product development charges. The Assessing Officer was of the view that under section 35(2AB), it is only net expenditure on scientific research that should be allowed as deduction, not the gross expenditure. Accordingly, he reduced the product development charges received by the assessee and allowed deduction under section 35(2AB) of Rs. 11,70,79,207 which was calculated as follows:
|
(Rs.) |
Revenue expenditure as per 3CD report |
8,16,77,006 |
Less : Product development charges received |
57,47,808 |
Total |
7,59,29,198 |
Add : Capital expenditure as per 3CD report |
21,23,607 |
Total expenditure |
7,80,52,805 |
Deduction under section 35(2AB) at 150 per cent. of the research and development expenditure (deduction to be allowed) |
11,70,79,207 |
Less : Deduction under section 35(2AB) claimed in the return of income |
12,57,00,920 |
Excess deduction claimed to be disallowed |
86,21,713 |
6. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that deduction claimed by the assessee under section 35(2AB) has to be allowed as the provisions of section 35(2AB) of the Act talk only about expenditure and does not speak of net expenditure incurred on scientific research. Following were the relevant observations:
"3.1 I have considered the facts of the case and the legal provision applicable. Section 35(2AB) refers to a situation when the company 'incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to two times of the expenditure incurred' (emphasis added). A plain reading of this section shows that the entire expenditure ('any expenditure') incurred for in-house research and development facility is expected to be allowed as a deduction ('so incurred') and the interpretation of the deduction as being for net expenditure is nowhere evident from the provision. Accordingly, the appellant's claim of weighted deduction on the gross revenue expenditure is held to be in order. This ground, therefore, succeeds."
7. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue has raised ground No. 2 before the Tribunal. After filing of the Revenue's appeal raising ground No. 2, the Commissioner of Income-tax (Appeals) proposed to rectify the order dated December 27, 2013 whereby deduction under section 35(2AB) was allowed to the assessee as claimed. The reasons for invoking the provisions of section 154 of the Act was that as per guidelines for approval in Form 3CM by the Department of Scientific and Industrial Research ("DSIR") as required under the provisions of section 35(2AB), sales realisation arising out of the assets sold should be offset against research and development expenditure. It is after taking note of this guideline that the Commissioner of Income-tax (Appeals) initiated proceedings under section 154 of the Act.
8. In reply to the show-cause notice issued under section 154 of the Act proposing to rectify her original order, the assessee submitted before the Commissioner of Income-tax (Appeals) that the guidelines provides for set-off of realisation of sale of assets used for research and development activities. This is obvious since the cost of assets is allowed as deduction under section 35(2AB) of the Act, obviously the sale of such assets should go to reduce the cost of expenditure. Sale of product which is an outgo of the research and development, cannot be said to be the asset belonging to the assessee to justify set-off of sale proceeds against the expenditure. Similarly, what is required to be reduced is grants/gifts donations, etc., and in the case of the assessee there was no such proceeds. Thus, in the appellate order, the Commissioner of Income-tax (Appeals) has rightly allowed the entire expenditure on research and development for considering the deduction under section 35(2AB) of the Act. There being no infirmity in the appellate order or there being no mistake apparent from the appellate order, the proposed action is without jurisdiction and unwarranted.
9. The Commissioner of Income-tax (Appeals), however, did not agree with the submissions of the assessee and held that substance of the Department of Scientific and Industries Research guidelines clearly indicate the reduction of receipts related to the in-house research and development centre from the gross expenditure outflow on research and development. He was of the view that in the present case the applicability of the Department of Scientific and Industries Research guidelines is not disputed. The substance of the impugned provisions in the guideline for reducing receipts of the research and development centre from the outflow is also very clear. Hence, the issue on hand represents an error apparent from records. He therefore rectified on the aspect of claim of deduction by the assessee under section 35(2AB) and upheld the Assessing Officer's decision in this matter.
10. Aggrieved by the aforesaid decision of the Commissioner of Income-tax (Appeals), the assessee has filed an appeal being I.T.A. No. 764/B/14.
11. The issue that needs to be decided now is as to, what is the nature of product development charges of Rs. 57,47,808 received by the assessee? The details from whom the aforesaid sum was received which is at page 37 of the paper book is given as annexure-I to this order.
12. We have heard the submissions of the learned Departmental representative and learned counsel for the assessee and also perused the documents filed in the paper book. 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 Rs. 7,80,52,805, is not in dispute. The weighted deduction under section 35(2AB) at 150 per cent. was claimed by the assessee at a sum of Rs. 12,57,00,920. What is now to be examined is the guidelines of the Department of Scientific and Industries Research, which the prescribed authority under section 35(2AB)(3) and (4) of the Act, has to follow before granting approval of the scientific research carried out by the assessee as eligible for deduction under section 35(2AB). A copy of the guidelines of the Department of Scientific and Industries Research is at pages 27 to 33 of the assessee's paper book. Guideline 5(vii) is relevant for the present case and it reads as follows :
"(vii) Assets acquired and products, if any emanating out of research and development work done in approved facility, shall not be disposed off without approval of the Secretary, DSIR. Sales realisation arising out of the assets sold shall be offset against the research and development expenditure of the research and development centre claimed under section 35(2AB) for the year in which such sales realisation accrues under section 35(2AB) of the Income-tax Act, 1961. Expenditure claimed for deduction under the sub-section shall be reduced to that extent."
13. The Commissioner of Income-tax (Appeals) in his order passed under section 154 of the Act has not quoted the first sentence of the guideline 5(vii) (given above in bold letters), which in our opinion, is very material. The above guideline only means that in the process of carrying out the research and development work, if the assessee acquires any assets or products that should not be disposed of without the approval of Secretary, Department of Scientific and Industrial Research. If such assets are sold, the sales realisation arising therefrom are to be set off against the research and development expenditure of the research and development centre which is claimed as deduction under section 35(2AB). It is evident from the above guideline that it is only sales realisation arising out of the assets sold that should be offset against research and development expenditure. In respect of sale of products acquired emanating out of research and development work done in an approved facility, the sale proceeds need not be reduced from the research and development expenditure. In our view, the reason for not including sales realisation arising out of products emanating out of research and development work done and sold is because such sales would be reflected as receipts by the assessee in its books of account and income from business would be computed treating such sale as part of business receipts. The receipts arising out of sale of products will not go to reduce the expenditure on research and development, whereas the assets acquired in the process of carrying out the research and development if they are sold, such sales realisation would go to reduce the expenditure on scientific research and that is why sales realisation arising out of assets sold is required to be offset against research and development expenditure. The above explanation will be sufficient to hold that the order passed by the Commissioner of Income-tax (Appeals) under section 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 licence and supply agreement which was filed by the assessee before the Assessing Officer as well as the Commissioner of Income-tax (Appeals) is at pages 5 to 26 of the assessee's paper book. The sale of products is nothing but the sale of dossiers by the assessee to persons not associated with the assessee or its directors. In the course of carrying out the scientific research, the assessee prepares elaborate documents regarding the products that would emanate from carrying out scientific research. This would also include the requirement of health authorities for grant of licence to approve the products for human use. The assessee gives the dossiers so prepared to entities outside India, who are interested in getting the marketing authorisation for the product in a particular territory. They pay to the assessee the dossier charges and apply for licence to market the products for human use in their respective territories. On getting the licence, they get marketing authorisation from the assessee. The person who takes the dossier (know-how) 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 get any order M/s. Micro Labs will manufacture and sell them at agreed price. So the know-how given to them is only for limited purpose of registering with the drug control authorities for approval for human consumption. The foreign entities who get the dossiers will get rights to market the assessee's products in their territory and the actual manufacture in course of time will be done by M/s. Micro Labs Ltd. i.e., the assessee.
15. All intellectual property rights, title and interest of any 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 agreement with the other third party who buys dossier from the assessee.
16. The Department of Scientific and Industries Research guidelines No. vii has specifically provided that assets acquired if any out of research and development work shall be disposed of with approval of the Department of Scientific and Industries Research. The assessee has been submitting yearly audit reports and accounts of approved research and development sanction to the Department of Scientific and Industries Research. The research and development accounts have been separately maintained and separate profit and loss account prepared and the dossier sales have been credited to profit and loss account of research and development because these sales are part of normal sales.
17. It is clear from the sample copy of the licence 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 Department of Scientific and Industries Research guidelines.
18. As we have already seen, these receipts are credited to profit and 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 deduction under section 35(2AB) has to be allowed. We are, therefore, of the view that there is no merit in ground No. 2 raised by the Revenue and that the order passed by the Commissioner of Income-tax (Appeals) dated April 9, 2014 under section 154 of the Act cannot be sustained and the same is hereby reversed. Thus, I.T.A. No. 764/B/14 by the assessee is allowed, while ground No. 2 raised by the Revenue is dismissed.
19. Ground No. 3 raised by the Revenue reads as follows :
"3. The learned Commissioner of Income-tax (Appeals) erred in deleting the addition to book profit made by the Assessing Officer by adding the expenditure under section 14A to the book profit."
20. The assessee, as we have already seen, is a company. Section 115JB of the Act provides that where in the case of an assessee being a company, the income-tax payable on the total income as computed under the Act in respect of previous year is less than 7½ per cent. of its book profit, such book profit shall be deemed to be the total income of the assessee and tax payable by the assessee on such total income shall be the amount of income-tax at 7½ per cent. The method of computing the book profits is laid down in section 115JB(2) of the Act.
21. For the assessment year 2009-10, the tax payable on the total income computed under the Act was less than the specified percentage of book profits and therefore the taxable income was computed under section 115JB of the Act.
22. While computing the book profits for the purpose of section 115JB of the Act, the Assessing Officer added to the net profits as per the profit and loss account a sum of Rs. 66,56,821 which was the disallowance of expenses incurred by the assessee to earn income which does not form part of the total income as laid down under section 14A of the Act. The quantum of sum so disallowed was added while computing the total income of the assessee under the normal provisions of the Act. This sum was also adopted for the purpose of adding to the profit as per the profit and loss account to arrive at the book profits as required under Explanation (1)(f) below section 115JB(2) of the Act.
23. The assessee challenged before the Commissioner of Income-tax (Appeals) that the amount disallowed under section 14A of the Act cannot be adopted for the purpose of adding to the profit as per the profit and loss account for arriving at the book profit under section 115JB of the Act. The Commissioner of Income-tax (Appeals), however, held in favour of the assessee, observing as follows :
"5.1 The appellant, in the additional grounds of appeal, has also referred to the enhancement of the book profit by the expenditure relating to exempt income of Rs. 66,56,821 worked out by the Assessing Officer under section 14A read with rule 8D(2). The Assessing Officer has not referred to any legal provision while enhancing the book profit by this amount but it appears to have been done keeping in mind clause (f) to Explanation 1 of section 115JB(2) of the Act where the expenditure relatable to any income to which section 10 (other than provision contained in clause 38 thereof) or section 11 or section 12 apply has been referred to. This is an argument of analogy which is not permissible under the scheme of minimum alternate tax. The computation of book profit for purposes of section 115JB for determining the minimum alternative tax is done as per the book profit evident from the financial statements drawn under the Companies Act. Section 14A and the disallowance envisaged under it by applying rule 8D are adjustments specific to the Income-tax Act. Even where the book profit as per the Companies Act has been allowed to be adjusted by the Income-tax Act, it has been done through very specific provisions in terms of the Explanations to section 115JB. When the language of the explanation is specific and unequivocal and mentions specific exempted incomes in Explanation 1(f), there is no situation for reading in any other Interpretation even if they are analogous to the specified sections. While section 14A deals with disallowance of expenditure related to exempt income, it cannot be equated in letter and spirit with exempted income under section 10 and expenditure related to it which is provided in Explanation 1(f) of section 115JB(2). Hence, the inclusion of expenditure disallowed under section 14A for computing book profit for minimum alternate tax purposes is not within the scheme of the legal provisions and the same is, therefore, directed to be deleted." (Emphasis supplied)
24. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue has raised ground No. 3 before the Tribunal.
25. We have heard the rival submissions. The learned Departmental representative drew our attention to the provisions of section 115JB Explanation 1(f) and submitted that the amount of expenditure relatable to any income to which section 10 applies, should be added to the profit as per the profit and loss account. His submission was that section 14A of the Act read with rule 8D of the Rules is a reasonable method of calculating the amount of expenditure and therefore without going into the question of whether rule 14A can be imported into the provisions of clause (f) to Explanation 1 to section 115JB of the Act, the Commissioner of Income-tax (Appeals) ought to have sustained the addition made by the Assessing Officer. He also placed reliance on the decision of the Income-tax Appellate Tribunal, Bangalore Bench in the case of Dy. CIT v. Sobha Developers [2015] 58 taxmann.com 107.
26. Learned counsel for the assessee, on the other hand, submitted that section 14A of the Act is very specific and is applicable only for the purpose of computing total income under Chapter IV of the Act. His submission was that section 115JB appears in Chapter XII-B of the Act dealing with specific provisions relating to certain companies and therefore those provisions cannot be applied. It was his further submission that even assuming that those provisions are applicable under section 115JB of the Act, it is only direct expenses that are contemplated as capable of being added to the profits as per the profit and loss account. In this regard, our attention was drawn to the expression "expenditure relatable" used in sub-clause (f) of Explanation 1 to section 115JB of the Act. Learned counsel for the assessee contrasted the above expression with the expression used in 14A of the Act which says "expenditure incurred by the assessee in relation to". He also pointed out that in the present case, there was no direct expenses in earning the exempt income and this fact is accepted by the Assessing Officer in the order of assessment. He therefore prayed that the order of the Commissioner of Income-tax (Appeals) should be sustained.
27. We have considered the rival submissions. The relevant provisions of section 115JB(2) and Explanation thereto need to be seen. The said provision read thus :
"115JB. Special provision for payment of tax by certain companies. — (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent. of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent.
(2) Every assessee,—
| (a) |
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being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956) ; or |
(b) |
|
being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company : |
Provided that while preparing the annual accounts including profit and loss account,—
| (i) |
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the accounting policies ; |
(ii) |
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the accounting standards adopted for preparing such accounts including profit and loss account ; |
(iii) |
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the method and rates adopted for calculating the depreciation, |
shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) :
Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,—
| (i) |
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the accounting policies ; |
(ii) |
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the accounting standards adopted for preparing such accounts including profit and loss account ; |
(iii) |
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the method and rates adopted for calculating the depreciation, |
shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year.
Explanation 1. - For the purposes of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by—
| (a) |
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the amount of income-tax paid or payable, and the provision therefor ; or |
(b) |
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the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC ; or |
(c) |
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the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities ; or |
(d) |
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the amount by way of provision for losses of subsidiary companies ; or |
(e) |
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the amount or amounts of dividends paid or proposed ; or |
(f) |
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the amount or amounts of expenditure relatable to any income to which section 10 other than the provisions contained in clause (38) thereof or section 11 or section 12 apply ; or |
(g) |
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the amount of depreciation, |
(h) |
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the amount of deferred tax and the provision therefor, |
(i) |
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the amount or amounts set aside as provision for diminution in the value of any asset, |
(j) |
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the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, if any amount referred to in clauses (a) to (i) is debited to the profit and loss account or if any amount referred to in clause (j) is not credited to the profit and loss account, and as reduced by,— . . . |
(ii) the amount of income to which any of the provisions of section 10 other than the provisions contained in clause (38) thereof or section 11 or section 12 apply, if any such amount is credited to the profit and loss account ;"
(other portions of the section are not relevant for the present case).
28. A reading of the provisions of section 115JB(1) shows that when an assessee is a company and the income-tax payable on the total income as computed under this Act (under the normal provisions of the Act) in respect of any previous year relevant to the assessment year is less than the prescribed percentage (this percentage keeps changing for various assessment years) of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent. Book profit for the purpose of section 115JB of the Act has been defined by Explanation 1 below section 115JB(2) as net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956). Explanation 1 below section 115JB(2) also provides for certain additions and deductions from the said profit where such sums have either been added or reduced while arriving at the book profit as per the profit and loss account for the relevant previous year prepared in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956).
29. In the present case we are concerned with one item which needs to be added to the total income laid down in the first part of Explanation 1 clause (f), viz., the amount or amounts of expenditure relatable to any income to which section 10 other than the provisions contained in clause (38) thereof or section 11 or section 12 apply. Identical issue came up for consideration before this Tribunal in Sobha Developers(supra) for the assessment year 2008-09 wherein on identical order of the Commissioner of Income-tax (Appeals) and on identical facts and identical arguments by the assessee and the Revenue, this Tribunal held as follows :
"33. As far as ground No. 3 is concerned, viz., the addition to the net profit as per profit and loss account expenditure incurred in earning income which does not form part of the total income under the Act, under section 10 of the Act, it is seen that the quantum of expenditure disallowed by the Assessing Officer by invoking the provisions of section 14A of the Act while computing total income under the normal provisions of the Act has not been challenged by the assessee and the said disallowance has been accepted by the assessee. The provisions of section 115JB Explanation 1(f) lay down that the amount of expenditure relatable to income to which section 10 applies, should be added to the profit as per the profit and loss account. Section 14A of the Act read with rule 8D of the Rules is a reasonable method of calculating the amount of expenditure, in a case where the assessee has not been able to satisfy the Assessing Officer regarding the quantum of expenditure incurred in earning income which does not form part of the total income under the Act. If the assessee satisfies the Assessing Officer regarding the quantum of expenditure incurred in earning income which does not form part of the total income under the Act than that can be adopted for the purpose of addition under clause (f) of Explanation 1 below section 115JB(2) of the Act. Rule 8D of the Rules come into play only when there is no other basis for arriving at the quantum of expenditure incurred in earning income which does not form part of the total income under the Act.
34. In our opinion, the question formulated by the Commissioner of Income-tax (Appeals) whether section 14A of the Act read with rule 8D of the Rules can be imported into the provisions of clause (f) to Explanation 1 to section 115JB of the Act, is itself erroneous. The question to be asked is as to how to give effect to the provisions of clause (f) of Explanation 1 to section 115JB of the Act. We do not think that there is any prohibition to adopt the disallowance made by the Assessing Officer under section 14A of the Act read with rule 8D of the Rules, while computing total income under the normal provisions of the Act. The argument of learned counsel for the assessee that section 14A of the Act is very specific and is applicable only for the purpose of computing total income under Chapter IV of the Act and that section 115JB appears in Chapter XII-B of the Act dealing with specific provisions relating to certain companies and therefore the provisions of section 14A read with rule 8D of the Rules cannot be applied while making addition to net profit as per the profit and loss account under section 115JB Explanation 1 clause (f) of the Act, because the expression 'expenditure relatable' is used in sub-clause (f) of Explanation 1 to section 115JB of the Act whereas expression with the expression used in 14A of the Act is 'expenditure incurred by the assessee in relation to' and therefore only direct expenditure attributable to earning of income which does not form part of the total income under the Act can be added under clause (f) of Explanation 1 below section 115JB(2) of the Act, cannot be accepted. In our view, there is no difference between the expression 'expenditure relatable' and the expression 'expenditure incurred by the assessee in relation to'. Both expressions mean that whatever expenditure are incurred to earn income which does not form part of the total income under the Act, both direct and indirect expenditure, have to be disallowed. There is no basis for the argument under section 115JB of the Act, it is only direct expenses that are contemplated as capable of being added to the profits as per the profit and loss account under clause (f) to Explanation 1 below section 115JB(2) of the Act.
35. As we have already seen, the quantum of expenditure disallowed by the Assessing Officer by invoking the provisions of section 14A of the Act while computing total income under the normal provisions of the Act has not been challenged by the assessee and the said disallowance has been accepted by the assessee. In such circumstances, we do not see any reason why the same disallowance cannot be adopted while arriving at the book profits under section 115JB(2) of the Act read with Explanation 1(f) thereto. In our view the Commissioner of Income-tax (Appeals) has fallen into an error in coming to a conclusion contrary. We therefore reverse the order of the Commissioner of Income-tax (Appeals) and restore the order of the Assessing Officer in this regard."
30. In our view, the aforesaid decision will apply to the facts of the present case also, however, with the modification that the quantum of deduction under section 14A of the Act which is determined while computing the total income of the assessee under the normal provisions of the Act and which is ultimately sustained by the Tribunal will be substituted with the sum disallowed by the Assessing Officer. Thus, ground No. 3 raised by the Revenue is allowed.
31. In the result, the appeal by the Revenue is partly allowed and the assessee's appeal is allowed.
I.T.A. No. 1429/13 (assessee's appeal)
32. Ground No. 1 is general in nature and calls for no specific adjudication.
33. Ground No. 2 raised by the assessee reads as follows:
"2. The learned Commissioner of Income-tax (Appeals) has erred in sustaining the additions made by the Assessing Officer under section 14A read with rule 8D on the ground that the appellant has not produced the evidentiary support in relation to dispersal of loan and utilisation of loan. Whereas the appellant has produced the evidence that the amount invested was out of positive bank balance and no borrowings were utilised for the purpose of investment."
34. The assessee earned dividend income of Rs. 38,75,857. It quantified a sum of Rs. 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 under section 14A of the Act.
35. The break-up of the sum of Rs. 3,22,426 is not specifically given, but is stated to be relating to management fee, legal and professional charges, security transaction charges and NSDL charges. It is thus clear that the assessee by implication had claimed that there was no expenditure incurred by way of interest, either directly or indirectly, which is attributable to the borrowed funds which were used for the purpose of investment which yielded tax-free income.
36. The Assessing Officer observed that Schedule G to the financial statements of the assessee had shown investment to the tune of Rs. 28,45,29,937 in shares mutual funds of various companies. He was of the view that 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 under section 14A of the Act, which is given as annexure to the assessment order and enclosed as annexure-II to this order.
37. Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals).
38. Before the Commissioner of Income-tax (Appeals), the assessee submitted that interest bearing loans were borrowed for specific purposes and not for investment purposes and in support of the above contention, the assessee filed copies of the balance-sheets as on March 31, 2003 up to March 31, 2009 to show that the various loans availed from banks were all taken for specific purposes and could not have been utilised for making any investments out of which exempt income was earned. These loans include short-term loans from IDBI Bank, Exim Bank, Barclays Bank and Standard Chartered Bank in 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.
39. On consideration of the above submissions and on perusal of the relevant documents, the Commissioner of Income-tax (Appeals) was of the view that the claim of the assessee was not evidenced from the documents submitted in view of the loans and other sources of funds being mixed up in the common pool of funds. The Commissioner of Income-tax (Appeals) further held that the burden of proof in this matter clearly continues to rest with the assessee and that it was not enough to merely show that surplus funds were available or that bank loans had been availed of for specific purposes including short-term reasons. A one-to-one correlation must also be established to prove that the loans were absolutely utilised for the purpose for which they were claimed. The Commissioner of Income-tax (Appeals) also held that there was no utilisation certificate from the bank filed before the Assessing Officer nor was such evidence furnished before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) 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 utilisation is not proved from the ledger copies as submitted. The Commissioner of Income-tax (Appeals) also referred to the decision of the Mumbai Income-tax Appellate Tribunal in the case of Hercules Hoists Ltd. v. Asstt. CIT [2013] 35 taxmann.com 592/59 SOT 43 (Mum.) (URO), wherein it was held that with the introduction of rule 8D the burden of proof on the assessee has become "more stringent, so that rather than showing existence of sufficient capital, the matter would be required to be examined from the stand point of utilisation of the borrowed interest bearing funds". In the absence of categorical utilisation certificate from the bank, the Commissioner of Income-tax (Appeals) was of the view that there was no evidentiary support of the assessee's claim. Hence, the disallowance under section 14A of the Act as made by the Assessing Officer was upheld by the Commissioner of Income-tax (Appeals).
40. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the assessee has raised ground No. 2.
41. 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 paper book and the same is enclosed as annexure-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves and surplus was much more than investments made by the assessee which could yield tax-free income.
42. The hon'ble Bombay High Court in CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 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 under section 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] 366 ITR 505/49 taxmann.com 335/226 Taxman 132 (Mag.) wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax-free securities, no disallowance of interest expenditure under section 14A can be made.
43. In the light of the abovesaid decisions, we are of the view that disallowance of interest expenses in the present case of Rs. 49,42,473 made under rule 8D(2)(ii) of the Income-tax Rules should be deleted. We order accordingly.
44. As far as disallowance of Rs. 13,91,922 made by the Assessing Officer under rule 8D(2)(iii) of the Rules, i.e., other expenses are concerned, we find that the assessee had made a claim before the Assessing Officer that "other expenses" to be considered for disallowance under rule 8D(2)(iii) is only Rs. 3,22,426. The assessee had also given a break-up of "other expenses" also. Without rejecting the claim of the assessee, the Assessing Officer proceeded to make a disallowance invoking rule 8D of the Rules. In the decision of the hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT[2010] 328 ITR 81/194 Taxman 203, it was held that rule 8D can be resorted to by the Assessing Officer only when he rejects the claim made by the assessee regarding expenditure incurred in earning income which does not form part of the total income. In the present case, the Assessing Officer has not done so. We therefore deem it fit and proper to restore this issue of disallowance under rule 8D(2)(iii) to the Assessing Officer for fresh consideration in the light of observations made above, after affording the assessee an opportunity of being heard. Thus, ground No. 2 raised by the assessee is allowed to the extent indicated above.
45. Ground No. 3 raised by the assessee reads as follows :
"3. The learned Commissioner of Income-tax (Appeals) has erred in sustaining the addition regarding wealth-tax liability under the provisions of section 115JB treating the provision for wealth-tax as unascertained liability."
46. The question that arises for consideration on the aforesaid ground of appeal by the assessee is as to whether wealth-tax liability could be added to the profit as per the profit and loss account for the purpose of arriving at the book profits under section 115JB of the Act? The Assessing Officer did not give any reason for adding provision for wealth-tax to the net profit as per the profit and loss account for arriving at the book profits of the assessee.
47. The Commissioner of Income-tax (Appeals) justified the action of the Assessing Officer observing as under:
"5. The appellant has grieved against the Assessing Officer adding the provision of wealth-tax to the book profit under section 115JB whereas Explanation 1(a) to section 115JB only refers to 'the amount of income-tax paid or payable, and the provision therefor'. While agreeing with the appellant's view that wealth-tax has not been specifically mentioned in this Explanation, I nevertheless find that any provision for meeting liabilities other than ascertained liabilities is liable to be added back to book profit and the appellant's debiting of wealth-tax provisions would be covered under this provision."
48. Before us, learned counsel for the assessee submitted that as per Explanation 1(a) to section 115JB(2), the amount of income-tax paid or payable, and the provision therefor ; has to be added, and wealth-tax is not included therein. According to him, if at all, addition could be made under section 115JB(2) Explanation 1(c) on the ground that the provisions made is not for an ascertained liability. It was submitted by him that the provisions for wealth-tax liability is made on the basis of actual net wealth declared by the assessee in wealth-tax returns and it is not an unascertained liability as is sought to be made out by the Revenue.
49. We agree with the submission of learned counsel for the assessee that wealth-tax liability provision is not covered under Explanation 1(a) to section 115JB(2) of the Act. Regarding applicability of Explanation 1(c) to section 115JB(2) of the Act is concerned, we are of the view that it would be just and proper to remand this issue for fresh consideration to verify the claim of the assessee to the extent that the provision for wealth-tax is based on the actual wealth-tax returns filed by the assessee (and if so), then the same cannot be considered as unascertained liability. Ground No. 3 is treated as allowed for statistical purposes.
50. Thus, the appeal by the assessee is partly allowed.
51. In the result, the appeals, viz., I.T.A. Nos. 1412/13 and 1429/13 are partly allowed and I.T.A. No. 764/14 is allowed.