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Vivimed Labs Ltd. v/s Deputy Commissioner of Income-tax, Hyderabad

    IT Appeal No. 1882 (HYD.) of 2014
    Decided On, 23 December 2015
    At, Income Tax Appellate Tribunal Hyderabad
    By, THE HONOURABLE MR. B. RAMAKOTAIAH
    By, ACCOUNTANT MEMBER & THE HONOURABLE MR. SAKTIJIT DEY
    By, JUDICIAL MEMBER
    For the Appellant: P. Murali Mohan Rao, Advocate. For the Respondent: B. Kurmi Naidu, Advocate.


Judgment Text
Saktijit Dey, Judicial Member

1. This is an appeal by the assessee against the order dated 1.10.2014 of learned Commissioner of Income-tax (Appeals) II, Hyderabad for the assessment year 2009-10.

2. Assessee has raised in total 15 grounds. Ground No. 1 and 15 being general in nature, require no specific adjudication.

3. In grounds No. 2 to 5, assessee has challenged the disallowance of deduction claimed under S.35(2AB) of the Act of an amount of Rs. 1,77,03,533.

4. Briefly facts are, the assessee company is engaged in the business of research and development -manufacture of specialised chemicals and pharmaceuticals. For the assessment year under consideration, assessee filed its return of income on 26.9.2009 declaring total income of Rs. 2,36,81,080. During the assessment proceedings, Assessing Officer on verification of the return of income and accompanying statements, found that the assessee has claimed weighted deduction of Rs. 1,77,03,533 under S.35(2AB) of the Act for expenditure incurred on scientific research. The Assessing Officer noticing the same, called upon the assessee's explanation justifying its claim of deduction by furnishing necessary details such as approval of competent authority, etc. In response to the query raised, the assessee submitted that it was having a in-house R&D Centre which is recognised by Department of Scientific and Industrial Research(DSIR). In support of such claim, assessee filed letter No. TU/IV-RD/2509/2011 dated 29.4.2011, wherein the recognition of in-house R&D unit of the assessee was renewed upto 31.3.2015. The Assessing Officer referring to S.35(2AB) and Rule 6 observed that for weighted deduction under the said provision, the assessee is required to make application in Form No. 3CK to the prescribed authority, i.e. DSIR and the prescribed authority has to grant approval in Form No. 3CM and also submit a report in respect of approval granted for in-house research and development facility in Form No. 3CL to the Director General (Income-tax Exemptions). The Assessing Officer opined that as the assessee could not furnish the approval of the prescribed authority in Form No. 3CM, it is not entitled to claim deduction under S.35(2AB). Accordingly, he added back the deduction claimed amounting to Rs. 1,77,03,533.

5. Being aggrieved by such disallowance, assessee preferred appeal before the learned CIT(A) The learned CIT(A) also confirmed the disallowance by observing that as assessee has failed to furnish the approval of the competent authority in Form 3CM, it is not entitled for deduction. However, considering the alternative plea of the assessee, the CIT(A) directed the Assessing Officer to verify whether the expenditure could be allowed under S.35(1)(i) or S.35(1)(iv) of the Act.

6. The learned counsel submitted before us that the only reason the departmental authorities disallowed assessee's claim for weighted deduction under S.35(2AB) is because approval granted is by a Scientist of DSIR and not the Secretary. He submitted that the recognition of assessee's in-house R&D unit has been renewed by the DSIR till 31.3.2015. In this context, he referred to two letters issued by Scientist- G of DSIR vide letter No. TU/IV-RD/2509/2011 dated 29th April, 2011, as submitted in the paper-book. Thus, it was submitted by the learned Authorised Representative that since in-House Research and Development Facility of the assessee is approved by the competent authority, assessee is eligible to claim deduction under S.35(2AB) for the expenditure incurred towards research and development. He submitted that even if the approval is given by the Scientist-G, the same will also entitle the assessee to claim deduction. In this context, he relied upon the following two decisions:-

(a) Asstt. CIT v. Ferment Biotech Ltd. [2014] 45 taxmann.com 329/64 SOT 246 (Trib - Mum.)

(b) Teja Networks Ltd. v. Dy. CIT [2015] 60 taxmann.com.309/233 Taxman 426 (Kar.)

7. Learned Departmental Representative, on the other hand, relying upon the observations of the departmental authorities submitted that since the assessee has failed to obtain the approval in the prescribed manner form the competent authority, it is not eligible to calim deduction under S.35(2AB).

8. We have considered the submissions of the parties, perused the material on record as well as the decisions cited before us. On a careful examination of the relevant statutory provisions it is very much clear that assessee would be entitled to claim deduction under section 35(2AB) for the expenditure incurred towards research and development, if the research and development facility is recognised by the competent authority, which is DSIR in the Ministry of Science and Technology and approval in the prescribed manner, i.e. Form No. 3CM is obtained from the competent authority. Therefore, the approval in Form 3CM, even if it is issued by any Scientist of DSIR would, in our view, entitle the assessee to claim deduction under S.35S(2AB).

9. Keeping in view the aforesaid statutory provision, we have to examine the facts of the present case. It is observed that for claiming deduction under S.35(2AB), assessee has relied on two letters issued by Scientist G, referred to hereinabove. It is seen that one letter, as placed at page 13 of the paper-book, relates to Certificate of Registration for availing customs duty exemption. Second letter, placed at page 14 of the paper-book, is in respect of renewal of recognition granted to the In- house R & D facility till 31.3.2015. The assessee neither before the departmental authorities nor before us has produced any approval in Form 3CM, even from a Scientist of DSIR. Therefore, in our view, only on the basis of either the letter issued for renewal of recognition of In-House R&D unit or certificate granted for customs duty exemption, assessee would not be entitled to claim deduction under S.35(2AB).

10. As for the decisions relied upon by the learned counsel for the assessee, on a careful analysis of the same, it is seen that in the case of Ferment Bio-tech Ltd. (supra), the ITAT Mumbai Bench taking into consideration the fact that the assessee had only furnished a letter issued by Scientist-G towards renewal of recognition of In-house R&D Unit, has observed that formal approval for the In-house R&D facility in prescribed form under S.35(2AB) is required for allowing deduction under S.35(2AB). On carefully going through the finding of the coordinate bench in paragraphs 10 to 13 of the order, it is observed that in spite of the fact that the assessee in that case obtained approval from the prescribed authority in Form 3CM for subsequent assessment years still, the Bench directed the Assessing Officer to verify whether the approval in the prescribed form has been obtained from DSIR, even if it is signed for such authority by any other officer, like Scientist-G for the Assessment year under consideration. Even applying the aforesaid decision of the Tribunal, to the facts of the present case, the assessee must obtain approval from the DSIR in the prescribed form. In the present case, admittedly, assessee has not furnished approval of the prescribed authority in Form 3CM.

11. In the case of Teja Networks Ltd. (supra), from a perusal of facts discussed therein, it is clear that the assessee had obtained report from the prescribed authority in Form 3CL as required in S.35(2AB). Therefore, the Hon'ble High Court, taking that fact into consideration, held that once the competent authority submits his report in the prescribed manner in terms of S.35(2AB), the Assessing Officer cannot sit in judgment over the same. In the present case, neither before the departmental authorities, nor before us, the assessee has submitted the report either in Form 3CM or in Form 3CL.

12. In the facts and circumstances of the case, therefore, we are inclined to remit the matter back to the Assessing Officer for giving an opportunity to the assessee to furnish the report in prescribed form, of the prescribed authority, i.e. either Scientist G of DSIR or any other authority from DSIR, as required in S.35(2AB) of the Act, and redecide the matter in accordance with law, and after giving reasonable opportunity of hearing to the assessee. Accordingly, grounds raised by the assessee on this issue are allowed for statistical purposes.

13. In grounds No. 6 to 11, the assessee has challenged the disallowance made under S.36(1)(iii) of the Act out of bank interest and financial charges.

14. Briefly, facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee made investment of Rs. 2,50,93,178 in equity share capital of two companies, namely, M/s. Creative Healthcare Pvt. Ltd. and M/s. Vivimed Holdings Ltd., dividend income from which is exempt from tax. Assessee during the relevant previous year has claimed deduction towards bank interest and financial charges for an amount of Rs. 9,57,01,000. The Assessing Officer further noticed that secured and unsecured loans shown by the assessee are Rs. 96,14,40,000 and Rs. 76,70,15,000 respectively. After examining the details in respect of investment in equity shares of the two companies, the Assessing Officer found that the source of investment is from the bank account held with Citi Bank, Secunderabad, State Bank of Hyderabad, Overseas Branch, Somajiguda, HDFC Bank, Nacharam, Hyderabad, Axis Bank, Tarnaka Branch, Hyderabad. It was explained by the assessee during the assessment proceedings that the investment made in equity shares was out of internal accruals and not from borrowed funds. However, the Assessing Officer observed that the assessee could not substantiate that the investments made in equity shares was out of commercial expediency. Relying upon certain judicial precedents, he worked out the proportionate disallowance from bank interest and financial charges, and made a disallowance of Rs. 17,85,000.

15. Being aggrieved of such disallowance, assessee challenged the same before the CIT(A). The CIT(A), upon considering the submission of the assessee that investment in equity shares was from out of internal accruals and not from borrowed funds, did not find merit in the same, and sustained the disallowance made by the Assessing Officer.

16. Learned counsel for the assessee, reiterating the stand taken before the departmental authorities, submitted that assessee had sufficient interest free funds available with him to make the investment in equity shares of the two companies. He further submitted that investments were made in the years 2005 to 2007 and not in the assessment year under consideration. Therefore, when disallowance of expenditure was not made in the assessment year in which investments were actually made, no disallowance out of interest expenditure could be made in the year under appeal. In support of his contentions, he relied upon the following decisions-

(a) Ambience properties Ltd. v. Dy. CIT [IT Appeal No. 58 (Hyd.) of 2012, 22-1-2014]

(b) CIT v. Bharti Televenture Ltd. [2014] 331 ITR 502/200 Taxman 39/11 taxmann.com 356 (Delhi)

(c) S.A. Builders Ltd. v. CIT [2007] 158 Taxman 74/288 ITR 1 (SC)

17. The Learned Departmental Representative on the other hand, relied upon the finding and orders of the Assessing Officer and the CIT(A).

18. We have considered the submissions of the parties and perused the material on record. It is relevant to note that right from the assessment stage, it is the plea of the assessee that investment in equity shares of the two companies was made from out of internal accruals and no interest bearing fund was utilised. In fact, during the appellate proceedings before the CIT(A), a remand report was called from the Assessing Officer, wherein the Assessing Officer accepted the payments made through Axis Bank as from internal accruals of the company. Further, the financial statement submitted by the assessee also demonstrates that sufficient interest free fund was available with the assessee to make the investment in equity shares of the two companies. Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) has held that when the assessee has mixed funds, i.e. both interest free and interest bearing funds, presumption would be interest free advances are from interest free funds available with the assessee. Applying the same principle, it has to be held that the investment in equity shares were made from out of surplus interest free funds available with the assessee. Further, it is a fact on record that investments in equity shares have been made during the period from 8.10.2005 to 21.1.2007 and not in the previous year relevant to the assessment year under dispute. The Department also has not controverted the contention of the assessee that no disallowance out of interest expenditure was made during the assessment year in which the investment was actually made. In view of the aforesaid factual position, we hold that the disallowance of interest expenditure amounting to Rs. 17,85,00 is not sustainable. Accordingly, we delete the same, allowing the grounds of the assessee on this issue.

19. In ground No. 12, assessee has challenged the direction of the CIT(A) with regard to deduction claimed under S.80G.

20. Briefly the facts are, the Assessing Officer at the time of assessment proceedings, noticed that the assessee has claimed deduction under S.80G on account of donation made of Rs. 1 lakh to TTD. Observing that the assessee could not establish that the trust/institution is exempt under S.80G of the Act, he disallowed the deduction claimed.

21. In appellate proceedings, the first appellate authority, considering the fact that the assessee had neither furnished the details of payment, nor could produce the receipt of donation issued by the TTD directed the Assessing Officer to allow the deduction, if the assessee is able to produce the exemption certificate.

22. Having considered the submissions of the parties and perused the material on record, we do not find any infirmity in the directions of the CIT(A). Since the assessee has not furnished the necessary proof with regard to the claim of deduction, the learned CIT(A), in our view, is justified in issuing directions to Assessing Officer to allow the deduction claimed, in case the assessee produces exemption certificate. This ground is accordingly dismissed.

23. In ground No. 13, assessee has challenged the disallowance of interest on Foreign Currency Convertible Bonds(FCCB).

24. Briefly, the facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction towards bank interest and finance charges, which included interest on Foreign Currency Convertible Bonds, amounting to Rs. 86,88,000. Noticing that the assessee has not deducted tax at source on the interest paid on FCCBs in terms of S.195 of the Act, the Assessing Officer disallowed the amount of Rs. 86,88,000, invoking provisions of S.40(a)(ia).

25. Being aggrieved, the assessee challenged the disallowance before the first appellate authority, who has sustained the disallowance made, by upholding the view of the Assessing Officer.

26. The learned counsel for the assessee submitted before us that the entire FCCBs were raised abroad and the payments were also made through assessee's bank account abroad. He submitted that as the source from which the bonds were raised were outside India and the payment of interest is also outside India, the provisions of S.195 would not apply, since the payments were made to non-residents outside India. In this context, he relied upon the following decisions:-

(a) Asstt. DIT(International Taxation), v. Adani Enterprises [2015] 63 taxmann.com. 11/155 ITD 714 (Ahd. - Trib.)

(b) Mahindra & Mahindra Ltd. v. Dy. CIT [2012] 24 taxmann.com 267/54 SOT 146 (Mum.) (URO)

27. The Learned Departmental Representative, on the other hand, relied upon the findings of the departmental authorities.

28. We have considered the submissions of the parties and perused the material on record. As could be seen, the assessee has raised long term bonds from the international market by issuing FCCBs of US $ 50 Million, with option to convert into equity shares or claim repayment after five years. The bonds were raised in the financial year 2007-08 with interest rate of 1% per annum. It is the claim of the assessee that not only the bonds were raised from international market, but the payments were also sourced from assessee's bank account abroad. Therefore, the provisions of S.195 could not be applied. On a perusal of the assessment order and the order of the first appellate authority, it is seen that the only reason on which the departmental authorities disallowed the expenditure is, assessee has not deducted tax at source in terms of S

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.195 of the Act. However, it is well settled principle of law that if the payments on which tax is sought to be deducted is not chargeable to tax in India, provisions of S.195 would not apply. In the present case, it is not controverted by the Learned Departmental Representative with cogent evidence that not only the bonds were raised outside India, but the interest payments were also made to non-resident Indians outside India from a bank account held by the assessee outside India. Therefore, since no part of the transaction relating to payment of interest has taken place in India, it cannot be said that interest payment made to non-residents has accrued or arisen in India in terms of S.9 of the Act. In our view, therefore, the provisions of S.195 would not apply to such payments, thereby requiring the assessee to deduct tax at source. We are supported in our view by the decisions cited by the learned counsel for the assessee. Accordingly, we direct the Assessing Officer to delete the disallowance made in this behalf, and allow this ground of the assessee. 29. In ground no. 14, assessee has challenged the levy of interest under S.234B and S.234C of the Act, on the ground that the assessee has paid tax under S. 115JB. 30. Having considered the submissions of the parties, we are unable to accept the plea raised by the assessee. On a perusal of the material available on record, it is seen that in the computation of income filed alongwith the return of income, assessee itself has calculated interest under S.234B and S.234C, which is more than the interest computed by the Assessing Officer. In view of the decision of Hon'ble Supreme court relied upon by ld. CIT(A) assessee's claim cannot be allowed. That being the case, we decline to interfere with the order of the CIT(A) on this issue. 31. In the result, assessee's appeal is partly allowed.
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