TaxTMI 
TaxTMI 
2019 (12) TMI 1192
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....r 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 (Rs. 15.86 lakhs), guest house expenses (Rs. 8.96 lakhs), club subscriptions (Rs. 4.18 lakhs) and cost of other services (Rs. 1 lakh) were not called for, thereby, deleting the addition of Rs. 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 expenditure towards staff welfare and other services for the purpose of business, the learned CIT(A) ought to have upheld the action of the assessing officer. 2.4. Having regard to the Hon'bie Kerala High Court decision in the case of Framatone Connector Oen Ltd. v. DCIT (294 ITR 559), the learned CIT(A) ought to have upheld the disallowance made towards club subscriptions. 3.1. The learned CIT(A) erred in holding that th....
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....assessment year viz. ay: 2003-04 on 23.10.2003 declaring loss of Rs. 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 Rs. 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 Rs. 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 Act, vide assessment order dated 30.03.2006 passed by AO u/s 143(3) of the 1961 Act , assessing loss of the assessee at Rs. 342,32,81,858/-. The Revenue is aggrieved by decision of learned CIT(A) in granting relief to assessee on multiple issues as specified in its grounds of appeal filed with tribunal. We will address and adjudicate each of these issue's one by one, as in the succeeding para's of this order 3.3 The first ground of appeal raised by assessee in its appeal filed with tr....
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....ssee 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 expenses were incurred for the purposes of business of assessee and were held to be allowable u/s 37(1) of the 1961 Act, vide appellate order dated 25.07.2008 passed by learned CIT(A). 3.5.1 The Revenue is aggrieved by decision of learned CIT(A) allowing these expenses as business expenses u/s 37(1) of the 1961 Act and has filed an appeal with tribunal. In its ground of appeal , the Revenue has referred to decision of Chennai-tribunal in assessee's own case for immediately preceding ay: 2002-03 in ITA no. 1030/Mds/07, order dated 07.....
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....ad 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 the guest house expenses claimed by assessee. We order accordingly. We have also observed that Revenue vide ground number 5.1 and 5.2 filed in memo of appeal filed with tribunal is aggrieved by allowing of depreciation of guest house by learned CIT(A). Our above decision of allowing 50% of guest house expenses as business expenses, shall apply mutatis mutandis to allowability of depreciation on guest house and hence 50% of the depreciation claimed by assessee on guest hosues shall be allowed as business deduction , while balance 50% of the depreciation cl....
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....f 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 proceedings observed that the assessee has claimed weighted deduction with respect to Research and Development Expenses claimed to be incurred by assessee to the tune of Rs. 3,92,83,629/- u/s 35(2AB) of the 1961 Act at the rate of 150%. The AO observed that the assessee has furnished a certificate from competent authority dated 28.06.2000 in form No. 3CM from Department of Scientific and Industrial Research, but the assessee has not furnished evidences to show that : i) the expenditure was incurred on inhouse research and development facility. ii) that the asse....
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....ts, 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 was no agreement entered into with the prescribed authority as is stipulated under clause (3) to sub-section 35(2AB) of the 1961 Act. It was submitted that audit was conducted of these R&D Expenses and copy of audit is placed on record. The learned counsel would rely on decision of Hyderabad Bench of ITAT in the case of DCIT v. Sri Biotech Laboratories in ITA no. 493/Hyd/2015, dated 22.07.2015 for ay: 2011-12. 4.4 We have heard both the rival parties and perused material on record including cited case law. The issue in dispute is with respect to grant of weighted deduction @150% u/s 35(2AB) of the 1961 Act wit....
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....his 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, [2005]. Provisions of sub-section 35(2AB) of the 1961 Act was inserted by Finance Act, 1997, wef 01.04.1998. Notes on clauses to Finance Bill, 1997 , wrt Section 35(2AB) states as under: As we could see that in the instant case, the Secretary , DSIR vide its approval in form no. 3CM dated 28.06.2000 has approved inhouse Research and Development facility under sub-section 35(2AB) of the 1961 Act. However, it is an admitted position that assessee has not entered into an agreement with prescribed authority viz. Secretary , DSIR as is mandated under clause(3) to sub-section 35(2AB....
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....itutions 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 under clause (3) of sub-section 35(2AB) of the 1961 Act. The issue is no more res-integra as deduction/exemption provisions are to be strictly construed as held by Constitution Bench of Hon'ble Supreme Court in the case of Commissioner of Customs( Imports) v. Dilip Kumar & Company in Civil Appeal Number 3327 of 2007,dated 30.07.2018 is relevant, wherein Hon'ble Supreme Court concluded at para 52 , as under: "52. To sum up, we answer the reference holding as under - (1) Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption cl....
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..... 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 do so, and not otherwise. Therefore, we are constrained to dismiss the appeal for the reasons given above." Since, we have referred to aforesaid two decision of Hon'ble Supreme Court which in our considered view . ratio of these two decision has direct bearing on outcome of this appeal, it will not be now relevant to refer to the decision of Hyderabad-tribunal in the case of DCIT v. Sri Biotech Laboratories in ITA no. 493/Hyd/2015 for ay: 2001-12, dated 22.07.2015 relied upon by assessee. Thus based on our detailed discussions as above keeping in view factual matrix of the case, and in the absence of an agreement being entered into by assessee with Prescribed authorit....
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....der 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 of being heard to assessee in accordance with principles of natural justice in accordance with law . We order accordingly. 5.1 The last issue vide ground number 4.1 and 4.2 raised by Revenue in memo of appeal filed with tribunal relates to decision of learned CIT(A) in deleting disallowance of proportionate interest expenditure on interest free advances made by assessee to its group concerns which were stated by AO to be made out of interest bearing funds and the AO has disallowed proportionate interest expenses as the assessee has failed to prove commercial expediency in granting these interest free advances to group companies. The AO during the course of assessment proceedings observed th....
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....mpanies. 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 order for assessment year 2000-01 in ITA no. 2252/Mds/2003 dated 20-10- 2004 had held that the concerned sister concerns were operating in the same field and there was a close nexus between the raw materials and finished products of the assessee company and its subsidiaries to whom advances has been granted. Interest had not been charged by the assessee company in view of the financial condition of those subsidiaries , but the amounts had been advanced to them for expansion of the assessee company's business operations. Thus, the ITAT, which is the highest fact finding authority, has arrived at the conclusion that there was a definite business expediency for granting such interest free advances by the assessee company. That being the case, the decision of the Apex Court in the case of S.A. Builders v. CIT(288 ITR 1) would come into operation and no disallowance of proportionate interest was called for on the facts of the present case.. Appeal filed by the assessee company on this ground is hereb....
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....g borrowings made by the assessee which led to huge interest liability of Rs. 178.02 crores. The AO also observed that no business advantage has accrued to the assessee by making these interest free advances to these entities and indirect advantages may accrue to assessee owing to these interest free advances but on that count it cannot be said that entire interest expenses were incurred wholly and exclusively for the purposes of the business of the assessee and hence the AO disallowed proportionate interest expenses to the tune of Rs. 3151.15 lacs. The learned CIT(A) has passed an cryptic order allowing entire proportionate interest expenses to the extent of Rs. 3151.15 lacs which was earlier disallowed by AO and in our considered view, this appellate order passed by learned CIT(A)cannot be sustained for many reasons .The learned CIT(A) has deleted the additions made by AO mainly by following the tribunal decision in assessee's own case for ay: 2000-01 in ITA no. 2252/Mds/2003 dated 20.10.2004. The learned CIT(A) also referred to another decision of Chennai tribunal in assessee's own case reported in 93 TTJ 161 but incidentally this decision is the same decision in ITA no. 2252/Md....
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....n the shares of the investee company , which issue was restored by tribunal to the file of the AO to find out whether any borrowed funds were used by the assessee for being invested in the shares of the investee company , while second contention of the assessee was accepted that the funds were invested for the purposes of business of the assessee to produce raw material required by the assessee. The assessee has not filed before us order passed by the AO while giving effect to order passed by ITAT for ay: 2000-01. However, the assessee has filed an order passed by AO while giving effect to order passed by ITAT for earlier years viz. ay: 1997-98 to 1999-00, dated 04.06.2007 deleting disallowance of proportionate interest expenses with respect to interest free advances made by assessee to three entities namely (a) Indo Jordan Chemicals Company Limited, (b) SPIC Fertilizers and Chemicals FZE, Dubai and (c) SPIC Petrochemicals Limited. The AO has accepted the contentions of the assessee while giving effect to the tribunal's order and allowed relief to the assessee but there is no finding by AO on utilization of interest free funds for grant of these interest free advances, as directed ....
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....e advances were made to sister concerns. Moreover, the balance sheet and other financial documents were not available on record. Therefore, it is not known whether the assessee has advanced funds out of interest free funds or borrowed funds. It is not in dispute that the assessee borrowed funds for business purpose and the same remain outstanding during the year under consideration. Therefore, we have to examine how much funds were borrowed and whether there was any nexus between borrowed funds and investment made in Dubai and Jordon. The shareholding pattern of those companies is also not known. Since these facts were not available on record and the same were also not examined by earlier Bench of this Tribunal during the assessment year 2000-01, this Tribunal is of the considered opinion that the matter needs to be reexamined. Accordingly, the orders of the authorities below are set aside and disallowance of proportionate interest expenses on the advance made to group companies are remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh and bring on record the shareholding pattern of the 12 I.T.A. No.1418 & 1821/Mds/14 companies....
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....er afresh and bring on record shareholding pattern of the companies in which the investment was made by the assessee and how the companies outside India are subsidiary companies of the assessee and thereafter decide the issue in accordance with law, after giving a reasonable opportunity to the assessee." Thus, for the detailed reasons and discussions as above in this order , we are of the considered view that the matter is required to be restored to the file of the AO for fresh adjudication de-novo . Needless to say that the AO shall give proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law and evidences/explanations submitted by assessee in its defense shall be admitted by assessee and then adjudicated on merits in accordance with law. We order accordingly. 6. In the result, the appeal filed by Revenue in ITA No.1466/Chny/2009 for ay: 2003-04 is allowed as indicated above Order pronounced on the 16th day of December, 2019 in Chennai. ============= Document 1 Clause 5 seeks to amend section 35 of the Income-tax Act relating to expenditure on scientific research. The proposed amendment....