Income Tax Appellate Tribunal - Chennai
Mrf Limited, Chennai vs Dcit, Central Circle-3(3), Chennai on 20 September, 2024
आयकर अपीलीय अिधकरण, 'डी' यायपीठ,चे ई
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH, CHENNAI
ी महावीर सह, उपा य एवं ी एस. आर.रघुनाथा, लेखा सद य के सम
BEFORE SHRI MAHAVIR SINGH, HON'BLE VICE PRESIDENT AND
SHRI S. R. RAGHUNATHA, HON'BLE ACCOUNTANT MEMBER
आयकरअपीलसं./IT(TP)A Nos.: 64 & 65/Chny/2022 &
41/Chny/2023
िनधारणवष / Assessment Years: 2017-18, 2018-19 & 2019-20
MRF Limited, Deputy Commissioner of Income
124, MRF House, v. tax,
Greams Road, Central Circle -3(3),
Thousand Lights, Chennai - 600 034.
Chennai - 600 006.
[PAN: AAACM-4154-G]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओरसे/Appellant by : Shri. Vikram Vijayaraghavan, Advocate
यथ क ओरसे/Respondent by : Shri. A. Sasikumar, CIT
सुनवाई क तारीख/Date of Hearing : 12.08.2024
घोषणा क तारीख/Date of Pronouncement : 20.09.2024
आदेश /O R D E R
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
These appeals by the assessee are filed against the separate order of the Deputy Commissioner of Income Tax, Central Circle -
3(3), Chennai, u/s. 143(3) r.w.s. 144C(13) of the Act, for the assessment years 2017-18, 2018-19 & 2019-20 dated 30.08.2022, 29.08.2022 and 27.02.2023, respectively. Since facts are identical and issues are common, for the sake of convenience we dispose off all these appeals by this consolidated order.
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& 41/Chny/2023
IT(TP)A No.64/Chny/2022 - A.Y. 2017-18
Firstly, we deal with the appeal filed by the assessee for the A.Y. 2017-18:
2. The assessee has raised the following grounds of appeal:
The grounds of appeal listed below are independent and without prejudice to each other.
1. The order of the Deputy Commissioner of Income-tax, Central Circle 3(3), Chennai ('learned AO') dated 30 August 2022 bearing Document Identification Number ('DIN'): ITBA/AST/S/143(3)/2022-
23/1045032369(1) passed pursuant to the directions issued by the Hon'ble Dispute Resolution Panel ('DRP") is erroneous, bad in law, prejudicial to the Appellant and contrary to the facts and circumstances of the case.
Issue No. 1 - Disallowance of depreciation on retention money amounting to RS. 80,65,113
2. The learned AO/ Hon'ble DRP has erred in law and facts by disallowing depreciation on plant and machinery amounting to Rs.80,65,113/- in relation to the portion of retention money payable to the contractors by the Appellant.
3. The learned AO/ Hon'ble DRP has erred in holding that the liability to the extent of retention money is contingent and not an ascertained liability.
4. The learned AO / Hon'ble DRP ought to have appreciated that the Appellant has an enforceable debt to pay the retention money though the payment would be made subject to fulfillment of certain conditions.
5. The learned AO / Hon'ble DRP has erred in not following the decision of this Hon'ble Tribunal in the Appellant's own case in IT A No. 641 to 645/Chny/2018.
Issue No. 2 - Disallowance of forward contract premium incurred by the Appellant amounting to Rs.8,85,53,023
6. The learned AO / Hon'ble DRP has erred in disallowing forward contract premium incurred by the Appellant during the subject year on account of its import and export transactions.
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& 41/Chny/2023
7. The learned AO/ Hon'ble DRP erred in holding that the premium for hedging is speculative in nature and not a regular business expenditure.
8. The learned AO / Hon'ble DRP ought to have appreciated that forward contract premium on account of hedging contracts are incurred in the course of import and export of goods and hence would amount to business expenditure of the Appellant allowable for the purpose of computation of business income under the provisions of the Act.
9. The learned AO / Hon'ble DRP has erred in not considering that the forward contract premium is allowable as a deduction in computing the total income under the express provisions of the Income Computation and Disclosure Standards ('ICDS') VI relating to the effects of changes in foreign exchange rates.
10.The learned AO / Hon'ble DRP has erred in not following the decision of this Hon'ble Tribunal in the Appellant's own case in IT A No. 641 to 645/Chny/2018.
Issue No. 3 - Disallowance of deduction under section 14A of the Income-tax Act, 1961 ('the Act')
11.The learned AO / Hon'ble DRP has erred in disallowing expenditure of Rs.26,20,528 under section 14A read with Rule 8D of the Income- tax Rules, 1962 ('the Rules') where no expenditure is incurred for earning exempt income.
12.The learned AO/ Hon'ble DRP failed to appreciate that disallowance under section 14A of the Act is unwarranted where the investments are made from the surplus funds of the Appellant.
13.The learned AO / Hon'ble DRP failed to appreciate the settled position of law that disallowance under section 14A of the Act cannot exceed the exempt income earned by the Appellant for the subject year.
14.The learned AO/ Hon'ble DRP failed to provide any objective dis- satisfaction to the suo-moto disallowance under section 14A of the Act made by the Appellant for the subject year.
Issue No. 4-- Disallowance of provision for warranty amounting to Rs.2,46,09,532
15.The learned AO / Hon'ble DRP has erred in disallowing the provision made for warranty of Rs.2,46,09,532 by the Appellant on a scientific basis during the year.
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& 41/Chny/2023
16.The learned AO /Hon'ble DRP failed to appreciate the fact that the Appellant has accounted for provision for warranty based on mercantile system of accounting which has been followed consistently.
17.The learned AO /Hon'ble DRP has erred in holding that there is no contractual obligation for the Appellant in respect of provision for warranty without fully appreciating the facts and circumstances of the case of the Appellant.
18.The learned AO/ Hon'ble DRP ought to have appreciated the scientific method followed by the Appellant for calculation of the amount of provision for warranty and has erred in disallowing the same without going through the warranty computation and without providing any explicit and cogent reasons for the rejection of the scientific method followed by the Appellant.
19.The learned AO / Hon'ble DRP ought to have appreciated the ratio of the decision of the Supreme Court in Rotork Controls India P Ltd v CIT (314 ITR 62) which recognizes a pro-rate reversal or otherwise based on historical trend.
Issue No. 5 - Disallowance of expenses relating to international transaction entered with MRF SG Pte Limited, Singapore ('MRF SG)
20.The learned AO / Hon'ble DRP has erred in law and facts by disallowing the business expenditure incurred by the Appellant
21.The learned AO /Hon'ble DRP has erred in concluding that MRF SG undertakes only documentation work and does not undertake any high-end work which is contrary to the facts on record.
22.The learned AO /Hon'ble DRP has grossly erred in arriving at incorrect conclusions on certain factual aspects of the subject issue.
23.The learned AO /Hon'ble DRP has erred in invoking the provisions of section 40A(2) of the Act for a transaction where the learned TPO after detailed examination has concluded that the transaction is at arm's length
24.The learned AO / Hon'ble DRP has erred in disallowing the expenditure under section 37 of the Act where the expenditure was incurred wholly for the purpose of the Appellant's business
25.The learned AO /Hon'ble DRP has erred in not appreciating that the provision of section 37 of the Act cannot be invoked to reduce the :-5-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 quantum of a genuine commercial expenditure incurred (i.e. the action of allowing only a margin of 0.5% instead of 3%)
26.The learned AO /Hon'ble DRP has grossly erred in stating that the Appellant has not filed any submission in response to the notice issued under section 142(1) of the Act dated 15 April 2021 despite the fact that a detailed submission furnishing relevant details and documents in relation to the said transaction was filed by the Appellant vide its submission dated 23 April 2021
27.The learned AO /Hon'ble DRP has erred in not appreciating that the statements recorded pursuant to a survey do not have any evidentiary value in relation to assessment proceedings under the Act as held by multiple judicial precedents.
28.The learned AO has erred in passing the draft assessment order and final assessment order which deals with aspects beyond the show cause notice dated 09 September 2021 and as such the order suffers from non-compliance with principles of equity and natural justice Issue No. 6- Disallowance of entrance fee and club service fee paid by the Appellant amounting to Rs.16,91,849
29.The learned AO /Hon'ble DRP has erred in disallowing the amount of entrance fee and club service fee paid by the Appellant during the subject year amounting to RS. 16,91,849 which is the genuine business expenditure of the Appellant.
Issue No. 7 Disallowance of expenses in relation to employee's contribution to relevant fund under section 36(1)(ya)_of the Act
30.The learned AO /Hon'ble DRP has erred in disallowing the employee's contribution of Rs.2,90,370/- to Employee State Insurance Scheme ('ESI') remitted after the due date specified in ESI Act, 1948 but before the due date of filing of return of income for the subject AY.
31.The learned AO / Hon'ble DRP has failed to appreciate that that on a joint reading of sections 36(1)(va) and 438 of the Act, even though the ESI contribution had been made after the relevant statutory due date, the same shall be allowed as a deduction as the same is deposited within the due date for filing the return of income.
32.The learned AO/ Hon'ble DRP failed to appreciate the fact that the amendment made to section 36(1)(va) and section 43B of the Act :-6-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 brought out vide Finance Act 2021 is prospective in nature as laid down by various judicial precedents and not clarificatory in nature Issue No. 8 Disallowance of claim made by the Appellant under section 35(2AB) of the Act A) Disallowance of Research & Development ('R&D') expenses incurred at Thiruvottiyur Unit
33.The learned AO /Hon'ble DRP has erred in disallowing the claim of deduction on R&D expenses amounting to Rs.32,78,39,700 pertaining to eligible capital expenditure incurred by the Appellant in its Thiruvottiyur R&D unit.
34.The Hon'ble DRP has failed to appreciate that the learned AO has misinterpreted facts with respect to dates of commissioning of eligible machinery in the Thiruvottiyur Unit on which deduction was claimed by the Appellant.
35.The learned AO /Hon'ble DRP has erred in disallowing the claim of deduction on R&D expenses under section 35(2AB) without appreciating that the Department of Scientific and Industrial Research ('DSIR') being the prescribed authority under the provisions of the Act has scrupulously verified the claim in detail for the subject AY.
36.Without prejudice to the above grounds, the learned AO I Hon'ble DRP failed to appreciate that for the purpose of claiming deduction under section 35(2AB) of the Act, the relevant event is 'incurrence of expenditure' not 'put to use' of capital asset on which deduction is claimed.
37.The learned AO/ Hon'ble DRP has erred in disallowing an ad-hoc 50% of the capital expenditure claimed as a deduction under section 35(2AB) of the Act without any basis/ cogent reasoning.
38.The learned AO /Hon'ble DRP has erred in not appreciating that the statements recorded pursuant to a survey do not have any evidentiary value in relation to assessment proceedings under the Act as held by multiple judicial precedents.
Disallowance of R&D expenses incurred at Trichy Unit
39.The learned AO / Hon'ble DRP has erred in disallowing the claim of deduction on R&D expenses amounting to Rs.31,85,54,353/- pertaining to eligible capital expenditure incurred by the Appellant in its Trichy Unit.
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& 41/Chny/2023
40.The learned AO / Hon'ble DRP, without appreciating the fact that the approval for in-house R&D facility for the Trichy Unit has been granted by the DSIR [being the prescribed authority under the provisions of the Act] from 01 April 2016, has grossly erred in stating that the R&D facility at Trichy was not in operation during the subject year.
41.The learned AO /Hon'ble DRP has erred in disallowing the claim of deduction on R&D expenses under section 35(2AB) without appreciating that the DSIR being the prescribed authority under the provisions of the Act has scrupulously verified the claim in detail for the subject A Y.
42.Without prejudice to the above grounds, the learned AO / Hon'ble DRP failed to appreciate that for the purpose of claiming deduction under section 35(2AB) of the Act, the relevant event is 'incurrence of expenditure' not 'put to use' of capital asset on which deduction is claimed.
43.The learned AO / Hon'ble DRP failed to appreciate that it is a settled position of law that where any question arises on the validity of the deduction claimed by the Appellant under section 35(2AB) of the Act, then the Board shall refer such question to the DSIR, being the prescribed authority and the learned AO has no powers to verify the claim made by the Appellant under section 35(2AB) of the Act.
44.The learned AO / Hon'ble DRP has erred in not appreciating that the statements recorded pursuant to a survey do not have any evidentiary value in relation to assessment proceedings under the Act as held by multiple judicial precedents.
Issue No. 9 - Short-credit of Dividend Distribution Tax ('DDT')_paid by the Appellant during the subject year
45.The learned AO has erred in not giving the entire credit of DDT paid by the Appellant during the subject year.
46.The learned AO has erred in law by levying interest under section 234P of the Act.
Issue No. 10 -Additional claim on deduction under section 115-0(1A) of the Act for the purpose of calculation of DDT payable
47.On the facts and circumstances of the case, the Appellant prays that the benefit of the provisions of section 115-O(1A) of the Act shall be :-8-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 extended to the Appellant for the subject year for the purpose of computing DDT payable for the subject year.
48.The Appellant prays before your good-self to permit the additional claim made by the Appellant in accordance with the principles laid down by various judicial precedents which has held that additional ground can be raised at the appellate stages.
Issue No. 11 : Transfer Pricing adjustment on account of fees towards issue of letter of comfort
49.The learned AO / TPO and Hon'ble DRP have erred in considering the letter of comfort as an "international transaction" without appreciating that the transaction does not have any bearing on the profits, income, losses or assets of the Appellant and therefore, cannot be considered an "international transaction" under Section 92B of the Act.
Further, the learned AO / TPO and Hon'ble DRP erred in treating the letter of comfort provided by the Appellant as equivalent to a corporate guarantee by not appreciating the modalities of letter of comfort and the fact that it does not result in any additional risk or financial burden on the Appellant and therefore, no 0separate charge/fee is warranted.
50.Without prejudice to above ground, the learned AO / TPO and Hon'ble DRP erred in making transfer pricing adjustment without a detailed economic analysis but basis a comparison of bank guarantee rates, without appreciating that due to differences in business operations, risk parameters, etc. bank guarantees are inherently different from and cannot be compared with letter of comfort.
Further, the learned AO / TPO failed to provide the Appellant an opportunity to review the comparables adopted for the arm's length range proposed at the time of issuing the SCN and provide its contentions, thereby violating principles of natural justice.
Others
51.The learned AO has erred in law and facts, by initiating penalty proceedings under Section u/s. 274 read with section 271AA and section 270A of the Act, without appreciating the contentions placed in the above grounds.
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& 41/Chny/2023
52.The Appellant craves leave to add, supplement, amend, delete or otherwise modify any of the grounds stated hereinabove before commencement of or at the time of hearing.
3. The brief facts of the case are that, the assessee company is engaged in the business of manufacturing and selling of automobiles tyres, tubes, flaps and other rubber products. The assessee company has filed its original Return of Income for the AY.2017-18 on 29.11.2017 admitting a total income of Rs.1171,90,64,850/-.
Later the assessee company filed Revised return of Income u/s.139(5) of Income tax Act, 1961 declaring total income of Rs.1180,33,90,840/-and book profit u/s. 115JB of Rs.2122,18,02,070/-. Subsequently, the case was selected for scrutiny under CASS and notice u/s. 143(2) of Income tax Act, 1961 was issued on 27.09.2019 and was duly served on the assessee.
Further, survey proceedings u/s.133A of Income tax Act, 1961 has been carried out at the premises of the assessee company on 20.11.2019. A notice u/s. 142(1) dated 05.12.2019 was issued from erstwhile jurisdiction. Subsequently, the case of the assessee company has been centralized and notified to this office vide Notification No. 3/2020-21 from the office of the Pr.CIT- 4, Chennai in C N 27/Centralisation/PCIT-4/2020-21 dated 19.10.2020. Further a notice u/s.142(1) of Income tax Act, dated 15.04.2021 with a :-10-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 detailed questionnaire and the assessee company was also informed of change in jurisdiction. The assessee company has made its submission vide letters dated 05.12.2019, 20.12.2019, 21.12.2019, 21.04.2021 and 23.04.2021 before the undersigned which were duly perused. On the basis of the same, the assessment is completed as under:
1. TRANSFER PRICING ADJUSTMENTS:
The case of the assessee company was referred to Transfer pricing officer on 05.12.2019 as per the provisions of the Income tax Act, 1961 for determination of arm's length price with reference to International Transaction(s) reported in Form No. 3CEB filed by the assessee company. The Transfer Pricing Officer, Circle 2(2) Chennai, vide order in ITBA/TPO/F/92CA3/2020-21/1030198874(1) dated 29.01.2021 determined a total upward adjustment of Rs.6,48,34,571/- towards the Unreported International Transaction-
"Fee for issue of Letter of Credit". Hence, in light of the order passed by the TPO, a sum of Rs.6,48,34,571/- is proposed to be added to the total income of the assessee company for assessment year 2017-18 vide draft assessment order passed u/s. 144C of IT Act. 1961 dated 30.09.2021. Aggrieved by the draft order, the assessee company filed objection before the Hon'ble DRP. The Hon'ble DRP, vide order dated 21.06.2022 received in this office on :-11-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 04.07.2022, upheld the additions made in the draft assessment order. Hence, the addition made in the draft assessment order is hereby confirmed.
4. On the basis of the above discussion, the assessment proceedings is completed u/s. 143(3) r.w.s. 144C(13) of the Act, 1961 and total assessed income is determined as under:
S.No Description Amount
Income returned for AY 2017-18 1180,33,99,840
ADD: Determination of Arm's Length Price 6,48,34,571
ADD: Disallowance of Depreciation on retention 80,65,113
money payable
ADD: Disallowance of Forex Gain/Loss and 18,85,53,023
Forward contract premium charges:
ADD: Disallowance as 14A r.w.r. 8D 26,20,528
ADD: Disallowance of excess provision for 2,46,09,532
warranty
ADD: Issue of transactions of the assessee 23,76,15,197
company through MRF- Singapore:
ADD: Disallowance of Entrance Fees and Club 16,91,849
Services Fees
ADD: Disallowance of expenses in relation to 2,90,370
employee's contribution to the relevant
fund
ADD: Disallowance of deduction claimed u/s. 70,46,94,053
35(2AB) of the Act, 1961
Assessed income u/s. 143(3) r.w.s. 1303,63,74,076
144C(13) of the Act, 1961
Aggrieved by the final order U/s.143(3) r.w.s. 144C(13) of the AO, the assessee is before us. The assessee has raised various common grounds for the A.Y. 2017-18, 2018-19 & 2019-20 and the same has been dealt in this order by considering the A.Y. 2017-18 as lead :-12-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 year and the decision made for all these issues will be applicable mutatis mutandis for the A.Y.2018-19 and 2019-20 also.
5. Issue 1: Disallowance of depreciation / expenses on retention money payable of Rs.80,65,113/- (Ground Nos. 2 to 5) 5.1 The Appellant enters into purchase contracts which generally carry the right to retain a small portion of the bills raised for the contract until successful performance of the machinery which portion is referred to as retention money. The Company records the liability to pay such retention money once obligation is created on the basis of invoices by following the mercantile system of accounting.
Contention of AO/DRP: The retention money payable on capital account and expenditure on revenue account by the Appellant to the vendors is contingent in nature and is to be disallowed.
Relevant extracts of the final order:
"On a similar analogy and on matching principle, the retention money with held by the assessee is also not an expenditure that was accrued and hence not an allowable expenditure. (Pg No. 4 of the final order) Relevant extracts of the DRP order:
"In view of the above and as a corollary, the right to receive retention monies is said to accrue in the hands of the contractor only on meeting the terms & obligations set out in the contract and on completion of project; then correspondingly in the case of the assessee company who retains such retention monies, the liability to pay shall also crystallize when the contract is successfully executed and the machinery/project is delivered to the assessee company." -
(Para No. 2.4 in Pg No. 5 of the DRP order)
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& 41/Chny/2023
5.2 The Ld. Counsel of the assessee stated that the retention moneys payable represents a liability that has actually accrued, and the full value of the liability is recognised in the books in accordance with the accounting principles and applicable mercantile system of accounting.
5.3 Further the Ld.Counsel relied on the Hon'ble Supreme Court in Bharat Earth Movers vs. CIT [2000] 245 ITR 428 (SC) held as follows:
"4. The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date."
Hence, the ld. Counsel argued that the entire liability is allowable as revenue expenditure/ depreciation on the capitalised expenditure.
Further he stated that this issue has been decided in favour of the assessee in its own case by this Hon'ble ITAT in ITA No.641 to 645/Chny/2018 (Enclosed in Page No.13 of the paper book of case laws - Para 3.1 of the order) and hence prayed for deleting the addition of Rs.80,65,113/- made by the AO, by allowing the ground of the assessee.
5.4 Per contra the Ld.DR relied on the assessment order of the AO.
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& 41/Chny/2023
5.5 We heard the rival arguments and perused the materials on record. We note that the very same issue has already been dealt by this tribunal in assessee's own case by holding as under:
"3.1 We heard the rival contentions, find merit in the submissions made by the AR. Since, the assessee is maintaining mercantile system of accounting, upon the basis of which the profits or gains are computed under the head " Profits and gains of business or profession" for the relevant assessment years and it has been regularly following it, the assessee's claims are in accordance with law and hence the AO is directed to allow depreciation on the retention money on capital account and also allow the retention money with held on revenue account. Corresponding grounds of the assessee are allowed for both these assessment years."
5.6 In view of the matter and considering the facts and circumstances of the case, by respectfully following the decision of the tribunal(supra) we are of the considered opinion that the assessee's claims are in accordance with law and hence the is AO directed to delete the addition and recompute the income of the assessee. Thus, the ground Nos.2 to 5 raised by the assessee is allowed.
6. Issue 2: Disallowance of premium charges on forward contract on import of raw materials Rs.18,85,53,023/- (Ground Nos. 6 to 10) Contention of AO/DRP:
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& 41/Chny/2023
The forward contract premium charges incurred by the Appellant on normal import / export transactions is speculative in nature and not incurred for the purpose of business of the Appellant.
Relevant extracts of the final order:
"Forward cover premium charges are incurred in relation to forward contract entered into by the assessee for hedging the foreign currency risk against any exchange fluctuation; the same is speculative loss and is not a business loss."- Pg No. 7 of the final order.
Relevant extracts of the DRP order:
"Further in view of the judgment of Supreme Court in the case of CIT Vs Woodward Governor India Ltd (312 ITR 254), the premium paid for any forward contracts entered into to hedge any capital expenditure, re-payment of borrowings or any other item of expenditure of capital account shall not be allowed since the same is in capital field."- Para No. 3.4 in Pg No. 5 of the DRP order. 6.1 The Ld.Counsel stated that the issue has been decided in favour of the Appellant in its own case by this Hon'ble ITAT in ITA No. 641 to 645/Chny/2018 (Enclosed in Page No. 13of the paper book of case laws Para 5.2 of the order)and hence prayed for deleting the addition of Rs.18,85,53,023/- made by the AO, by allowing the ground of the assessee.
6.2 Per contra the Ld.DR relied on the assessment order of the AO/DRP.
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& 41/Chny/2023
6.3 We heard the rival arguments and perused the materials on record. We note that the very same issue has already been dealt by this tribunal in assessee's own case by holding as under:
"5.1 We heard the rival submissions. Since, the assessee pleads that the foreign currency loan was used for the purpose of acquiring the assets in India, it is clear from the orders of the lower authorities that the relevant facts in connection with this claim have not been verified and hence this issue is remitted back to the AO for verification as to whether the impugned asset(s) were purchased in India with the foreign currency loan or not. If it is/they are of Indian origin, then section 43A would not apply. In such case, since the assessee is maintaining its books of account on mercantile system basis and following the Accounting Standard-11, then the ratio of Woodward Governor India Pvt. Ltd., [312 ITR 244 (SC)] would apply and accordingly the loss claimed by the assessee has to be allowed. Subject to the above verification and findings, the issue is remitted back to the AO and the assessee's corresponding grounds of appeals are treated as partly allowed for statistical purposes. 5.2. With regard to the premium charges on foreign currency loan, on the same ratio laid by the Supreme Court in 312 ITR 244, the loss claimed by the assessee has to be allowed over a period of contracts. The corresponding grounds of the assessee's appeals are allowed for both the assessment years."
6.4 In view of the matter and considering the facts and circumstances of the case, by respectfully following the decision of the tribunal we are of the considered opinion that the forward contract premium charges on foreign currency claimed by the assessee is allowed and hence we delete the addition by directing the AO to recompute the income of the assessee. Thus we allow the ground Nos.6 to 10 taken by the assessee.
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& 41/Chny/2023
7. Issue 3: Disallowance u/s.14A of the Income-tax Act, 1961 'the Act' Rs.26,20,528/- (Ground Nos.11 to 14) Contention of AO/DRP:
The AO has disallowed an amount of Rs.26,20,528/- u/s.14A r.w.r 8D where the assessee has earned exempt income of only Rs.11,11,412/-
Relevant extracts of the final order:
"It cannot be denied that some of the personnel would be involved in carrying out these transactions. Similarly, it cannot be denied that a portion of such expenses as consultations charges, bank charges, printing charges, legal &professional charges, electricity charges etc. would be relatable to earning of income from the investments" - (Pg No. 8 and 9 of the final order) Relevant extracts of the DRP order:
"We however agree that the debt oriented mutual funds which did not give rise to exempt income could not be considered for the purposes of computing disallowance under Rule8D. The AO is therefore directed to re-compute the disallowance u/s.14A read with Rule 8D after excluding the debt oriented funds which were not capable of yielding exempt income."- (Para No. 4.3 in Pg No. 6 of the DRP order) 7.1 The Ld.Counsel stated that without prejudice that section 14A doesn't apply, the disallowance under section 14A of the Act shall not exceed the exempt income earned by the Appellant of Rs.11,11,412/-. This issue is also covered in assessee's own case in :-18-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 Tax Case Appeal No. 217 of 2021 (Mad HC) [Page No. 154 of the paper book of case laws].
7.2 Per contra the Ld.DR relied on the assessment order of the AO/DRP.
7.3 We heard the rival arguments and perused the materials on record. We note that the very same issue has already been dealt by this tribunal in assessee's own case by holding as under:
This appeal has been filed by the Revenue under Section 260A of the Income Tax Act, 1961 ('the Act' for brevity) challenging the order dated 09.05.2018 made in ITA.No.643/Chny/2017 for the assessment year 2011-12 on the file of the Income Tax Appellate Tribunal, Madras 'D' Bench, Chennai ('the Tribunal' for brevity).
2. The Revenue has raised the following substantial question of law for consideration:
"Whether the Tribunal was justified in directing the AO to restrict the disallowance made u/s.14A of the I.T. Act, 1961 to the extent of dividend income earned especially when the section does not provide for any such exceptions?"
3. We have heard Mrs.R.Hemalatha, learned Senior Standing Counsel appearing for the appellant-Revenue and Mr.R.Vijayaraghavan, learned counsel for the respondent-assessee.
4. The issue is with regard to disallowance made under Section14A of the Act.
5. The Tribunal, after taking note of the submissions made by the assessee and also the decision in the case of Joint Investments Pvt. Ltd. Vs Commissioner of Income Tax [372 ITR 694 (Delhi)], had noted that the assessee earned dividend income for the assessment years 2012-13 and2013-14 and disallowance, if any, has to be restricted to the dividend income earned as per the decision in Joint Investments (supra). Therefore, the matter was remanded to the :-19-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 Assessing Officer to restrict the disallowance in accordance with the said decision."
7.4 In view of the matter and considering the facts and circumstances of the case, by respectfully following the decision of the Hon'ble Madras High court of the assessee's own case, we are of the considered view that the assessee's claim of disallowance U/s.14A r.w.r 8D is restricted to the dividend income earned and we delete the addition by directing the AO to recompute the income of the assessee accordingly. Therefore, we allow the ground Nos.11 to 14 taken by the assessee.
8. Issue 4: Disallowance of excess provision for warranty of Rs.2,46,09,532/- (Ground Nos. 15 to 19) Contention of AO/DRP:
No scientific basis has been followed while determining the provision for warranty.
Relevant extracts of the final order:
"The assessee company has not made its workings on a proper scientific basis." - (Pg No. 10 of the final order) Relevant extracts of the DRP order:
"In the circumstances the assessee has been unable to provide that the provision for warranty has been scientifically ascertained. Accordingly, the judgment relied upon by the assessee cannot be applied since the facts are distinguishable."- (Para No. 5.2 in Pg No. 7 of the DRP order) :-20-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 8.1 The Ld.Counsel stated that this issue for the earlier AYs were remanded back to the file of the AO for fresh consideration by this Hon'ble Tribunal in ITA No.2632 to 2634/Chny/2019 (Page No. 574of the paper book of case laws) and the methodology adopted by the Appellant was accepted by the AO for those years vide orders dated 29 March 2024 (Refer to Page No. 6 of the additional paper book). The same methodology is adopted by the Assessee historically including the subject A.Y. in appeal without any change and hence prayed that the adjustment may be deleted.
8.2 Per contra the Ld.DR relied on the assessment order of the AO/DRP.
8.3 We heard the rival arguments, perused the materials on record and gone through the orders of the authorities below. We note that the very same issue has already been dealt by this tribunal in assessee's own case by holding as under:
7. We have heard rival contentions and gone through facts and circumstances of the case. We noted from the order of CIT(A) that neither the AO nor CIT(A) has examined the details filed before them during the set aside assessment proceedings or even remand proceedings by the AO and simply noted that the assessee could not establish that all the conditions prescribed in the decision of Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd., supra are satisfied. We noted that the authorities below have neither examined the issue nor gone into the details and just simpliciter confirmed the disallowance. Moreover, we noted from the Tribunal order for assessment year 2010-11 in ITA No. 740/Mds/2014 dated :-21-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 15.05.2015, wherein the Tribunal has given categorical finding while setting aside the matter to the file of the AO by observing in para 7 as under:-
7. We have heard both the sides and perused the materials on record.
According to the ld.AR, the assessee has adopted the financial year 2008-09 as base year. The retail sale and actual warranty paid for 9 months was taken to arrive at the percentage of warranty to sales. This warranty percentage was further split into truck and non-truck segment. Such percentage of warranty to sales was adopted for the year under consideration and the warranty requirement was debited in the profit and loss accounts of the assessee. Further, when the provision created is more than the claim, it is reversed in the next year and this provision was consistently followed by the assessee. In the light of the circumstances, a legal obligation to make payment in future said to have been accrued. According to the AR, it is not required to wait for the contingency to offer and it can be inferred that a better liability has definitely arisen in the assessment year under consideration though the quantification is discharged on this warranty liability at a future date. The assumption of the assessee's liability is in praesenti. Though the liability discharged at a future date, it is not a contingent one. The contention of the ld. DR is that the assessee has not provided details of actual working of warranty before the Assessing Officer. According to him, expenditure which is deductible under income-tax is one which is towards a liability actually existing at the time, but putting aside of money which may become expenditure on happening of an event which IS not expenditure. The former is deductible but not the later. However, the Supreme Court in the case of Bharat Earth Movers V. CIT (245 ITR 428) held that if a business liability has definitely arisen in a financial year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though actual quantification with accuracy may not be possible, if these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.
:-22-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
In the present case, the assessee has not produced any basis on which the provision of warranty was determined before the Assessing Officer. However, it has produced actual working of warranty before the Commissioner of Income-tax(Appeals). Therefore, it is not clear that what extent the liability actually required in the assessment year under consideration while framing the assessment by the Assessing Officer. The provision made whether on actual quantification or not, was not verified by the Assessing Officer. The Commissioner of Income- tax(Appeals) after getting the assessee's actual working of warranty not get verified from the AO and he has decided himself that it is correct. Therefore, in our opinion it is appropriate to remit the issue to the file off the Assessing Officer to examine the actual quantification of the provisions made towards warranty and decide in the light of the judgment of Supreme Court in the case of Rotork Controls India Pvt. Ltd. (supra).
7.1 We noted that the issue of warranty can be allowed on satisfying the following conditions as held by Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. (supra):-
a. That there an enterprise has a present obligation as result of past event.
b. It is probable that an out flow of resources will be required to settle the obligation and c. A reliable estimate can be made on the amount of obligations From the above, we noted that even now, the assessee could not produce before the AO or the CIT(A) as to how the provision is made based on historical trend and a realiable estimate as held by Hon'ble Supreme Court. Now the assessee has filed the details before us but we have no mechanism to verify the same and accordingly, the matter needs to go back to the file of the AO. The details are recorded in para 5 above.
7.2 One more fact that assessment for assessment year 2010-11 is pending before AO and the AO can examine the issue in assessment year 2010-11 according to above observation of ours and the directions of the Tribunal in AY 2010-11. Hence, we set aside these three appeals to the file of the AO for fresh adjudication in term of the above directions."
:-23-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
8.4 We have observed that, the AO has accepted the methodology adopted by the assessee for claiming the provision for warranty expenses and deleted the addition in the A.Ys. 2011-12, 2012-13 & 2013-14 as per the directions of the co-ordinate bench of this Tribunal's decision (supra). Since, methodology for provision for warranty is adopted by the Assessee historically including the relevant A.Y. in appeal without any change which has been verified and accepted by the AO for the AYs 2011-12, 2012-13 & 2013-14 and considering the facts and circumstances of the case, by respectfully following the decision of this tribunal in assessee's own case(supra), we are of the considered view that the AO has erred in disallowing the provision for warranty and hence we direct the AO to allow the expenditure of provision for warranty and to recompute the income of the assessee accordingly. Thus, we allow the ground Nos.15 to 19 taken by the assessee.
9. Issue_5:_Disallowance_of expenses relating to international transaction entered with MRF SG Pte Limited, Singapore (Ground Nos. 20 to 28) 9.1 The Ld.AR submitted that the assessee has signed Bilateral Advance Pricing Agreement ('BAPA') with the CBDT determining the Arm's Length Price ('ALP') in respect of the said transaction to be :-24-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 0.5% (Enclosed in Page No 769 of the paper book of factual documents) and has filed modified return of income under section 92CD of the Act declaring the enhanced income and paying tax on the same. Therefore, the adjustment is to be deleted (as the Appellant has filed modified return offering such income) and these grounds of appeal are academic.
9.2 Since, the Assessee has entered into APA and not pressed the Ground Nos. 20 to 28, we dismiss the grounds as not pressed.
10. Issue 6: Disallowance of entrance and club service fee paid by the Appellant of Rs.16,91,849/- Ground Nos. 29:
Contention of AO/DRP:
The AO has disallowed a portion of entrance and club service expenses incurred by the Appellant for the purpose of business for not furnishing any documentary evidence.
Relevant extracts of the final order:
"Hence, as per direction received by the DRP, Bangalore and verification of details submitted by the assessee, the expenditure to the tune of Rs.16,91,849/- (Rs.51,41,849/- - Rs.34,50,000/-) is disallowed and added back to the total income of the assessee for the A Y. 2017-18." - (Pg No. 21 of the final order) Relevant extracts of the DRP order:
"For the rest, as no documentary evidence has been filed before the Panel, the Panel confirms the disallowance of the balance."- (Para No. 7.3 in Pg No. 20 of the DRP order) :-25-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 10.1 The Ld.AR stated that the assessee has incurred the expenses which are genuine expenditure and spent for the purpose of business. Further the Ld.AR stated that the relevant extract of the ledger account has been produced before the authorities. The Ld.AR stated that considering the nature of business and size of the turnover the expenditure spent is very small and prayed for deleting the disallowance of the same.
10.2 Per contra the Ld.DR relied on the assessment order of the AO/DRP.
10.3 We have heard the rival contentions and gone through the orders of the authorities. We note that the company has achieved a huge turnover and earned a profit regularly. Considering the nature and volume of business performance of the assessee, the amount spent towards Club and entrance fees of Rs.51,41,849/- is reasonable and in support of the claim of the expenditure, the assessee has furnished the ledger extract before the AO. Therefore, we do not concur with the disallowance of this expenditure and we are inclined to delete the disallowance of Rs.16,91,849/- and direct the AO to re-compute the income accordingly. Thus, we allow the ground No.29 of the assessee.
:-26-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
11. Issue 7: Disallowance of expenses in relation to employees' contribution to relevant fund under section 36(1)(va) of the Act (Ground Nos. 30 to 32) Contention of AO/DRP:
The payments are not made within the due date specified in the ESI Act, 1948 and it is contravention of the provisions of the Act.
Relevant extracts of the final order:;
"In the instant case also, employees' contributions, and not employer contribution, tabulated as above, have not been credited to the respective on or before the due date specified as section 36(1)(va) of Income tax Act, 1961."- (Pg No. 23 of the final order) Relevant extracts of the DRP order:
"We find that the disallowance of sum of Rs.2,90,370/- under section 36(1)(va) of the Act, on account of employee's contribution to the ESI which was not credited to the ESI authorities account by the due date under the respective law, has been correctly made by the AO" - (Para No. 8.13 in Pg No. 27 of the DRP order) 11.1 The ld.AR fairly accepted that the position of claim of the assessee of these expenditure is now settled against the Assessee in Checkmate Services (P.) Ltd [2022) 448 ITR 518 (SC). 11.2 Per contra the Ld.DR relied on the assessment order of the AO/DRP.
11.3 We have gone through the orders of the authorities and we note that the AO by following the decision the Hon'ble Supreme court in the case of Checkmate Services (P.) Ltd (supra) has made :-27-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 the disallowance of sum of Rs.2,90,370/- under section 36(1)(va) of the Act, on account of employee's contribution to the provident fund etc. which was not credited to the employee's account by the due date under the respective law. Therefore, we do not find any merit in the grounds of the appeal of the assessee and confirm the action of the AO. Thus, the ground Nos.30 to 32 of the assessee is dismissed.
12. Issue 8: Disallowance of claim made by the Appellant under section 35(2AB) of the Act (Ground Nos. 33to 44) 12.1 The assessee claimed deduction under section 35(2AB) of the Act with respect to its R&D units in Thiruvottiyur and Trichy. But the AO based on a survey which happened in 20/11/2019 by relying on his own erroneous interpretation of the statements and other facts disallowed certain amounts on an ad-hoc basis. The DSIR after extensive verification has granted its approval in Form 3CL on 08/04/2021 with respect to the eligible capital and revenue expenditure.
12.2 The AO's contentions leading to the disallowance as well as the rebuttals of the assessee outlining the factual and legal inaccuracies in the AO's reasoning are explained below:
Primary Contention of the assessee:
:-28-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
The Ld.AR argued that once the DSIR after extensive verification has quantified the deduction claimed by assessee u/s.35(2AB) of the Act, the AO cannot override the functions of the DSIR and cannot disallow the deduction already allowed by the DSIR and relied on the following judicial precedents in favour of the assessee
- Tejas Networks Limited [ITA No. 1073 of 2008/Hon'ble Karnataka High court];
- CIT vs F.C.S. International Marketing [2006] 203 CTR 601 (Punjab & Haryana);
- Ranbaxy Laboratories Limited [2011] 71 ITR(T) 161 [Delhi]. 12.3 The Ld. AR submitted that the assessee has obtained the Approval of the eligible amounts certified by the DSIR in Form 3CL dated 08/04/2021 is enclosed (Pg Nos. 521 to 522 of the factual paper book) is extracted as below:
FORM NO. 3CL Report to be submitted by the prescribed authority to the Income- tax Authority specified under section 35(2AB) of the Income-tax Act, 1961
1. Name & address of the registered office of the company including Telex/FAX/Phone No.:
M/s MRF Limited
124. Greams Road, Chennai - 600006 Tel. No. 044- 2829 2777, Fax No. 044 - 2829 5597
2. Permanent Account Number (PAN) of the company: AAACM4154G
3. Name and designation of the Principal Officer of the company Mr.ArunMammen, Vice Chairman & Managing Director :-29-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023
4. Nature of business/activity of the company: Manufacture of automobile tyres, tubes, flaps,pre-cured tread rubber, rubberised material, solid tyres, cycle tyres, conveyor belting.
Part-A
1. Annual production of the eligible products of the company during the past three years.
Sl. Products Yearly Production
No 2015-16 2016-17 2017-18
1. Tyres (Nos) 4,61,46,169 5,02,66,094 5,42,12,759
2. Tubes (Nos) 3,09,48,660 3,04,83,644 3,26,77,966
3. Tread rubber (MT) 745 758 822
4. Pre-cured treads (MT) 5,838 6,103 6,285
2. Proposed objectives of scientific Research contemplated by the company
- To develop new products for the domestic and overseas markets. Speed rated low aspect ratio passenger radial tyres All steel truck radial tyres Special tyres for gravel rally and winter rally Helicopter tyres
- To develop compounds and tyre design parameters to conform to the performance requirements of the tyres for specialized applications and to satisfy the needs of the automobile Original Equipment Manufactures.
- R&D on process development for improvement of productivity, consistency and precision.
- Process development for fuel and energy conservation
- To evaluate new materials and regular raw material sources for cost optimization and import substitution.
- To develop new machinery& modify the existing equipment & accessories for improved accuracy & reliability and also for import substitution as a part of indigenous development.
- Advance design concepts for tyre development
3. Whether the nature of the business is related to the proposed objectives of the scientific research contemplated by the company: Yes.
:-30-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
4. Details of the nature of existing in-house Research and Development facilities specifying whether the in-house Research and Development facility is adequate for carrying out scientific research. Yes, adequate R&D facilities for carrying out research as per proposed objectives are available.
5. Registration number, date and validity of Recognition granted by Department of Scientific and Industrial Research to the In-house Research and Development centre of the company: No. TUIV-RD/118/2018 Dated :13.07.2018 valid upto 31-03-2022
6. Whether agreement for co-operation and Research and Development facility and for audit of the accounts maintained for that facility entered into: Yes.
Part-B
1. Assessment year: 2017-18 & 2018-19
2. Previous year: 2016-17 & 2017-18
3. Location of the research and development facility:
(i) Kasi Koil Street, Tiruvottiyur, Chennai-600019; and
(ii) Naranamangalam Village & Post, KunnamTaluk, Perambalur District (Near Trichy), Tamil Nadu
4. Annual production of the eligible products during the year: As per para-1 of Part-A
5. Details of expenditure: (Rs. in lakhs) R&D Expenditure AY 2017-18 AY 2018-19 Capital Exp. (excl. Land & Building) 9772.33 9868.14 Revenue Exp. 3480.92 4159.12 Eligible R&D expenditure u/s 35(2AB) of 13253.25 14027.26 IT Act, 1961.
I certify that the above details are true and correct to the best of my knowledge and belief.
(K.R. VAIDHEESWARAN)
JOINT SECRETARY
(For and on behalf of Secretary, DSIR)
Place: New Delhi
:-31-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
Date: 08.04.2021
DSIR Ref.
File No. TUIV-15(253) )2017
Order in Form-3CM No. TU/IV-15(253)/35(2AB)/3CM/170/2019 Form-3CL No. TU/IV-15(253)/35(2AB)/3CL/5428/2021 To:
(1) The Principal Chief Commissioner of Income Tax, Aayakar Bhawan, 121, M.G. Road, Nungambakkam, Chennai - 600 034; Phone: 044-28338301 Copy to:
(1) Mr.ArunMammen, Vice Chairman & Managing Director, M/s MRF Ltd., 124, Greams Road,Chennai-600006 12.4 The Ld.AR stated that the AO has made the disallowance on the following reasons :
12.4.1 Issue No. 1: Disallowance on the basis that the Appellant has claimed deduction with respect to partially constructed building in Trichy R&D unit Contention of AO/ORP:
The first issue considered by the AO is that the Appellant had not completed constructing one of the buildings in its Trichy R&D unit by considering the statement of Mr. Cheriyan Zachariah during the survey proceedings (Page No. 579 of the factual paper book) and hence, the entire deduction claimed on capital expenditure with respect to Trichy R&D unit during the relevant AY was disallowed.
:-32-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
The Ld.AR also stated that the main reason for the AO's conclusion is that one of R&D building have not been completed and hence the Appellant is not entitled for weighted deduction u/s.35(2AB) which is without any basis.
Relevant extracts of the final order:
"Further it is also seen that as per milestone reports submitted by contractors that the substantial building in Trichy Unit was completed only towards the end of April, 2018"(Pg No. 24 and 25 of final order) Relevant extracts of DRP order:
"Clearly emanating from the statements recorded from the Survey are facts that the Trichy R&D unit was not in operation during the F. Y. 2016-17 relevant to assessment year 2017- 18." (Para No. 10.4 in Pg No. 35 of the DRP order) 12.4.2 At the outset, the Ld.AR stated that the assessee has not claimed deduction U/s.35(2AB) - R&D expenditure with respect to the building under construction, but only with respect to plant & machineries purchased during the year. Therefore, the AO's findings are illogical. Further, the AO has conveniently left out to mention that there was already another annexure building in which the machineries were located and used, which is evident from the sworn statement of the employee which invalidates the entire contention :-33-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 of the AO - Refer to answer by Mr. Cheriyan Zachariah to Question No. 3 (in Page No. 579 of the factual paper book) 12.4.3 Further, the Ld.AR stated that it should be borne in mind that section 35 including section 35(2AB) speaks of allowance on the "expenditure incurred" on R&D. It is not essential that the machinery for which the expenditure was incurred was actually acquired, installed and put to use - reference is made to jurisdictional HC in the following cases
- Rane Brake Linings Ltd [2002] 255 /TR 395 (Madras HC)
- Navin Fluorine International Ltd [2019] 178 /TD 201 (Mumbai);
- Gujarat Aluminium Extrusions (P.) Ltd [2003] 184 CTR 297 [Guj HG] It is re-iterated by the Ld.AR that the assessee had obtained DSIR approval for the entire capital expenditure incurred in Trichy unit which the AO cannot dis-regard based on surmises and conjectures.
12.5 Issue No.2: Disallowance on the basis that the Appellant is not doing any high-end R&D activities in the Thiruvottiyur R&D unit Contention of AO/DRP:
The AO has come to the conclusion that there is no high-end R&D activity carried on in Thiruvottiyur R&D unit of the Appellant and only sample testing activities were carried out. For this he relies on :-34-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 a statement made by Mr. Mohan Kurian during the survey proceedings (Pg No. 571 of the factual paper book).
Relevant extracts of the final order:
"Shri. Mohan Kurian, Vice-president, Procurement operation of MRF Ltd., Chennai, stated in his statement recorded u/s. 131 of Income tax Act, 1961 on 22.11.2019 that the R&D Lab were meant mainly for sample testing for various vendors and this resulted in only vendor selection which is against the guidelines laid down by DSIR"
- Pg No. 25 and 26 of the final order Relevant extracts of the DRP order:
"Having perused the submissions of the assessee and the conclusions arrived at by the AO, the Panel is of the opinion that although the prescribed Authority for quantification of the Expenditure eligible for weighted deduction u/s.35(2AB) of the Act is DSIR, the findings of the Survey carried out by the Department u/s 133 A cannot be ignored." - Para No. 10.5 in Pg No. 36 and 37 of the DRP order 12.5.1 The Ld.AR submitted that it is not the jurisdiction of the AO to sit on judgment of what constitutes high-end R&D activity and what doesn't. This is exactly why the DSIR exists and for the AO to superimpose and substitute the DSIR is beyond the provisions of the Act read with Rules. It is also pertinent to mention that the assessee as part of the approval by DSIR must submit reports on the activities undertaken in their R&D Unit every year. There is no :-35-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 finding by the DSIR that the activities carried out by the Appellant in their R&D Unit is of inferior quality as has been erroneously deduced by the AO based on his own interpretation of survey statements.
Therefore, there is no basis for the AO to conclude that there is no high-end R&D activity in the Thiruvottiyur R&D unit.
12.5.2 Further, the Ld. AR argued that the sworn statement relied on by the AO deals with an entirely different issue i.e., transaction of the assessee with its subsidiary towards purchase of raw materials. The person examined was in charge of acquisition of raw materials for the assessee company. In Question No.5 of the statement recorded (Pg No. 572 of the factual paper book) requires Mr.Mohan Kurian to explain in detail the role of the assessee in procuring materials through their Singapore subsidiary.
In fact, in none of the questions, there is any reference to activity of the R&D by the assessee. Therefore, the Ld.AR stated that it is not clear as to how from these queries regarding purchase of raw material, can the AO conclude that there is no high-end R&D activity carried on in their Thiruvottiyur R&D Unit.
12.6 Issue No. 3: Disallowance that the employees are not technically qualified in the Thiruvottiyur unit:
Contention of AO/DRP:
:-36-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
Following from the above sworn statement by Shri Mohan
Kurien(Pg 571 of paper book) supra, the AO has also come to the conclusion that employees are not technically qualified for carrying out R&D facilities.
Relevant extracts of the final order:
"The assessee company was not doing any high-end R&D and examination of the man power clearly indicated that the employees who did not possess technical knowledge formed bulk of the man power." (Pg No. 26 of the final order) Relevant extracts of the DRP order:
"Having perused the submissions of the assessee and the conclusions arrived at by the AO, the Panel is of the opinion that although the prescribed Authority for quantification of the Expenditure eligible for weighted deduction u/s.35(2AB) is DSIR, the findings of the Survey carried out by the Department u/s 133 A cannot be ignored." (Para No. 10.5 in Pg No. 36 and 37 of the DRP order) 12.6.1 The Ld.AR submitted that it is not the jurisdiction of the AO to sit on judgment of what qualification the assessee's personnel ought to have for conducting R&D activity. The capacity and competence of R&D facility and the work carried out was to be approved only by the DSIR and not by some ad-hoc conclusion by the AO. Further, the Ld.AR stated that it is to be noted that the :-37-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 assessee had provided sample Educational certificates wherein the employees have degree in B.E., B.Tech, M.Tech, B.Sc, M.Sc, and Ph.D. etc. (as provided in Page 682 of the factual PB) which is as per DSIR guidelines. The AO thus has grossly erred in making an ad-hoc disallowance in this regard.
12.6.2 Further, the Ld.AR stated that the sworn statement relied by the AO deals with an entirely different issue (i.e., transaction of the assessee with MRF SG) and it does not deal with the technical qualification of the employees of the assessee and hence, the conclusion arrived at by the AO is erroneous. 12.7 Issue No.4: Disallowance due to capitalisation of assets in advance in the Thiruvottiyur R&D unit:
Contention of AO/DRP:
The AO has examined, a sample of TWO machineries purchased for the R&D unit and has stated that the "acceptance letter" for the machinery was dated in the next FY, whereas the assessee has capitalised the same in the current year. He has relied on the sworn statement of one Mr. Anindya Kundu. (Question No.2 in Page 584 of the Factual paper book).
:-38-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
Relevant extracts of the final order:
"The response of the Shri. AnindyaKundu, Chief accounts Manager of MRF of Thiruvottiyur plant, to Q.2 of statement recorded during the course of survey proceedings u/s. 133A of Income tax Act, 1961 on 21.11.2019 clearly shows that in assets where there were no installation certificates were pushed to be capitalized early in A Y 2017-18 itself." (Pg No. 25 of the final order) Relevant extracts of the DRP order:
"Having perused the submissions of the assessee and the conclusions arrived at by the AO, the Panel is of the opinion that although the prescribed Authority for quantification of the Expenditure eligible for weighted deduction u/s.35(2AB) of the Act, is DSIR, the findings of the Survey carried out by the Department u/s.133A of the Act cannot be ignored." (Para No. 10.5 in Pg No. 36 and 37 of the DRP order) 12.7.1 The Ld.AR of the assessee stated that it is the assessee's submission that the AO has wrongly interpreted the term 'Acceptance certificate'. The machinery was capitalised on the date of commissioning, and they were put to use from the date of test run and NOT on date of acceptance certificate (which calls for optimum utilization requiring a minimum learning time criteria and hence is always subsequent to put-to-use date (Refer the answer to Q No. 2 given by Mr. AnindyaKundu in Page 584) :-39-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 12.7.2 The Ld.AR further stated that for one of the machineries chosen by the AO (namely, Aircraft Dynamometer machine)- The Acceptance certificate also was issued during the relevant previous year itself. This has been missed by the AO and it is not clear how the AO concluded that the machinery was not put to use and hence the assessee is not entitled to deduction u/s.35(2AB) of the Act. 12.7.3 The Ld.AR summarised and stated that in any case, as pointed out in the beginning what is to be examined is the expenditure incurred during the year towards capital or revenue expenditure. It does not matter whether machinery was installed and put to use in a particular AY for claiming deduction u/s.35 including Section 35(2AB) as held in the following decisions of the hon'ble courts;
- Rane Brake Linings Ltd [2002] 255 ITR 395 (Madras HC)
- Navin Fluorine International Ltd [2019] 178 ITD 201 (Mumbai);
- Gujarat Aluminium Extrusions (P.) Ltd [2003] 184 CTR 297 [Guj HC] 12.7.4 In view of the above facts, the Ld.AR stated that the AO having finalized by himself disallowances of R&D expenditure which are without any basis and grossly against the provisions of the Act do not warrant a re-look and hence prayed for deleting the disallowance and the claim as approved by DSIR should be allowed.
:-40-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
12.7.5 Per contra the Ld.DR relied on the orders of the AO / DRP
and stated that the data and details found during the survey proceedings cannot be ignored and hence the action of the AO/DRP is in accordance of law and hence the assessee's ground on this issue be dismissed.
12.7.6 We have heard the rival contentions and gone through the relevant materials and orders of the authorities below. It is admitted fact that, during the Assessment year 2017-18, the assessee has incurred certain expenditure of both revenue and capital in nature, towards its R & D division for the 2 units situated at Thiruvottiyur and Trichy. Accordingly, in the relevant A.Y. 2017- 18 the assessee has claimed weighted deduction of an expenditure on Scientific Research U/s.35(2AB) of the Act, to the tune of Rs.276,70,98,974/- on Revenue Expenditure of Rs.40.63 Crores (Weighted deduction of Rs.81.26 Crores) and Capital Expenditure of Rs.97.72 crores (Weighted deduction of Rs.195.44 Crores) with respect to its 2 R&D units situated at Thiruvottiyur and Trichy.
Further, the DSIR as per Form 3CL issued dated 08/04/2021, has approved eligible R & D Expenditure as per Section 35(2AB) of the Act in the case of assessee is as follows:
:-41-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
a) Revenue Expenses Weighted deduction
as certified Rs.34.80 Cr : Rs.69.60 Crores
b) Capital Expenses Weighted deduction
as certified Rs.97.72 Cr : Rs.195.44 Crores
Total a) + b) Rs.132.53 Cr : Rs.265.04 Crores
12.7.7 We note that the excess claim of weighted revenue
expenditure to tune of Rs.5,83,00,000/- made by the assessee has been disallowed by the AO/DRP after considering amounts certified in the Form 3CL issued by the DSIR on 08/04/2021. According to Ld.AR, the AO / DRP has accepted the Form 3CL issued by DSIR dated 08/04/2021 in respect of above disallowance. However, allowing the claim of the assessee in respect of capital expenditure of the 2 units u/s.35(2AB) of the Act, the AO/DRP has rejected the amount certified in Form 3CL issued by DSIR dated 08/04/2021, thereby the order of the lower authorities is disallowing the capital expenditure is erroneous by discriminating in accepting the Form 3CL.
Firstly, let us understand the provisions of the Section 35(2AB) of the Act and rules thereon:
Manner of verification of the claim under section 35(2AB) by the DSIR The Company had submitted before the learned AO that the provisions of section 35(2AB) of the Act, as applicable for FY 2016-17 (relevant to the :-42-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 subject AY), provides that where a company is engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, 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 so incurred.
Further, Rule 6 of the Rules prescribes that the DSIR, which is a nodal body administering various research and development activities in the country, is the authority to review and approve the benefit."
Coming back to the issue of capital expenditure incurred by the assessee for R&D at situated at Thiruvottiyur and Trichy. The assessee has claimed capital expenditure during the A.Y. 2017-18 of Rs.97.72 crores with respect to its 2 R&D units situated at Thiruvottiyur of Rs.65.56 Crores and Trichy of Rs.31.85 Crores.
12.7.8 We note that the assessee's at Thiruvottiyur R & D unit has applied for and granted recognition initially in the year 1974.
Subsequently it had applied for obtaining renewal of recognition multiple times with the latest renewal granted in the year 2018 upto the year 2021. The Trichy R & D unit had applied for and obtained recognition from DSIR in the year 2018 upto the year 2021. During :-43-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 the course of survey proceedings U/s.133A of the Act, held on 21/11/2019 and statements recorded from the employees of the company and revenue authorities obtained certain information in respect of the expenditure incurred by the assessee towards R&D units. The Assessee has furnished before the DSIR, the details of various research projects undertaken by the R&D units, the details of the scientific equipment used by these units, the qualification of people involved in the research and the same have been taken into consideration by the DSIR before granting the above recognition.
12.7.9 According Ld.AR as a part of the recognition process, the DSIR authorities have visited the premises of R&D centres situated at Thiruvottiyur and Trichy in 2018, to satisfy themselves of the research activity carried out by the assessee at such units. The detailed presentation explaining the existing and proposed R&D activities of the assessee was also been made before the DSIR authorities. The assessee also been regularly filing and receiving approval from the DSIR for claiming expenditure under section 35(2AB) in the prescribed format and diligently meeting all the requirements for claiming deduction u/s.35(2AB) by following the procedure/process as under:
:-44-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
The recognition and approval of in-house R&D units and approval for the expenses granted by the DSIR is based on certain guidelines laid down by DSIR which includes presence of independent infrastructure, adequate technically qualified manpower, well defined time bound R&D programs and projects, exclusion of certain activities from R&D as a negative list, maintenance of separate books of accounts, third part audit of expenses incurred etc. The details of expenses were filed with DSIR along with an Audit report from an independent accountant in Form 3CLA. Based on review of all information, multiple rounds of clarifications as required, multiple discussions and meetings where the nature· of expenditures were· justified to the DSIR, the authorities provided approval for the amount of capital and revenue expenditure that can be claimed as a deduction in Form 3CL, dated 8 April 2021.
12.8 Disallowance of capital R&D expenses claimed on account of commissioning of machinery subsequently capitalized in Thiruvottiyur The assessee has capitalized in its books of accounts on the date of commissioning basis completion certificates Issued by the relevant engineers on which the deduction under section 35(2AB) is claimed. In this regard, sample commissioning certificates were submitted to the :-45-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 learned AO with respect to non R&D units to showcase the above policy adopted by the Company for capitalization of machineries.
12.8.1 The learned AO in the draft order has referred to the response provided by Mr. AnindhyaKundu as part of the statement recorded pursuant to the survey conducted to state that certain assets were capitalized during FY 2016-17 (relevant to the AV 2017-18) for which acceptance letters were dated subsequently (in FY 2017-18) and hence has arrived at a conclusion that expenditure towards assets cannot be allowed as a deduction under section 35(2AB) of the Act, which was based on the directions of the DRP as given below:
Directions of the Panel: The point contention is that the AO had disallowed certain expenditure after issue of the Form 3CL by the DSIR, the prescribed authority for the quantification of expenditure for claim made U/s 35(2AB). Since the DSIR is the prescribed authority quantification of expenditure for claim of weighted deduction under section 35(2AB), We are of the opinion that the AO has correctly restricted the weighted deduction u/s. 35(2AB)as quantified by the DSIR. Hence we uphold the action of the AO and grounds of objection raised are hereby rejected.
R&D expenses claimed for a building where building was not completed: Findings of the Survey U/s 133 A and the conclusions of the AO It is also seen that as per milestone reports submitted by contractors that the substantial building in Trichy Unit was completed only towards the end of April, 2018. In this regard, Sworn statement u/s. 131 of Income tax act, 1961 was recorded from Shri. Cheriyan Zachariah working as GM Bias Plant and also Administrative Head of R&D Unit, MRF on 21.11.2019 during the course of survey proceedings u/s. 133A of Income Tax Act, 1961 in the office of MRF Ltd. Perambalur. Shri.Cheriyan, in his statement, has dearly mentioned that the entire production started happening in April 2018 and till then there were no new work that was done here. In view of the above, it is dear that :-46-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 the center was started only in Feb 2018. Various other evidences clearly show that the center was not In operations during AY.2017-
18. Now it is very evident that the claim of deduction in AY 2017-18 is not correct and hence weighted deduction claimed u/s. 35(2AB) of Income tax Act, 1961 in respect of capital expenditure incurred in R&D, Trichy to the tune of Rs.63.7 Cr Is disallowed and relevant capital expenditure to the tune of Rs.31.85 Cr Is added back to the total Income of the assessee company for AY.2017-18.
Assessee's submissions: The assessee contended that the expenses filed with the DSIR along with the Audit report in FORM 3CLA. Based on the Information flied, called for and multiple discussions and clarifications, DSIR approved the expenditure Incurred for the R&D facility at Trichy Unit. Form 3CL as issued by the DSIR was also submitted. Hence when the prescribed authority for approval of the expenditure to be quantified for claim of deduction under section 35(2AB) has approved the expenses Incurred, both revenue and Capital, the AO is not empowered to disallow some expenditure on the basis of a Survey conducted that too in an arbitrary manner.
10.4 Panel's Directions: We have perused the submissions of the assessee. We have also perused the contentions of the AO. Although it observed that the Prescribed authority for approval claim of deduction U/s 35(2AB) is the 'DSIR, the facts emerging from the conduct of Survey under section 133A cannot be Ignored. Clearly· emanating from the statements recorded from the survey are facts that the Trichy R&D unit was not in operation during the F.Y.2016-17 relevant to assessment year 2017-18. The unit started Its operations only in April, 2018. The assessee has during the course of hearing before the Panel has not made any efforts to rebut these findings, except saying that the AO was not empowered to disturb the expenditure quantified by DSIR and the statement recorded during the Survey proceedings did not carry any Evidentiary value. However, being factual in nature, the findings of the Survey U/s 133A cannot be ignored. These findings were not available before the DSIR and hence there was no opportunity to examine the same by the DSIR. Hence on the basis of facts presented before us by the AO which were not controverted by the assessee, we are of the opinion that the AO was correct In disallowing weighted deduction claimed u/s. 35(2AB) of Income tax Act, 1961 in respect of capital expenditure incurred in R&D, Trichy to the tune of Rs.63.7 Cr and relevant capital expenditure to the tune of Rs.31.85 Cr for AY.2017-18.
Work claim of R &D Expenses on large testing items which were not installed at all at Thiruyottiyur :-47-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 As per the AO: It was also found during Survey that R &D expenses at Thiruvottiyur has been claimed on Non R& D work also. It is also seen that work claim of R & D Expenses was made on large testing items which were not Installed at all at Thiruvottiyur. The AO's conclusions were based on the statement recorded of Sri.AnindhyaKundu and Sri. Elavarasan regarding letters of acceptance. On the basis facts gathered during Survey and the statements of the above quoted persons, the AO concluded that Certain assets were capitalized during FY 2016-17 (relevant to the AY 2017-18) for which acceptance letters were dated subsequently {in FY 2017-18) and hence the AO has arrived at a conclusion that expenditure towards such assets cannot be allowed as a deduction under section 35(2AB) of the Act. During the course of survey, it Is also found that R &D unit at Thiruvottiyur is not doing any retreading of tyres but only manufacturing. Shri.MoharKurian, Vice-president, Procurement operation of MRF Ltd., Chennai, stated in his statement recorded u/s. 131 of Income tax Act, 1961 on 22.11.2019 that the R&D Lab were meant mainly for sample testing for various vendors and this resulted in only vendor selection which is against the guidelines laid down by DSIR.
The assessee company was not doing any high end R&D and examination of the man Power clearly indicated that the employees who did not possess technical knowledge formed bulk of the man power. On further verification, it was found that more than 70% of the work related was Non R&D work like testing samples, non routine work etc. In view of above conclusions, the AO disallowed 50% of the weighted deduction claimed u/s. 35(2AB) of Income tax Act, 1961 in respect of R&D Thiruvottlyur Unit I.e. Rs. 131.14 Cr. and 50% of the relevant capital expenditure to the tune of Rs. 65.57 Cr was added back to the total Income of the assessee company for AY.2017-18.
Assessee's Submissions:
The assessee submitted that the AO has erred in not appreciating the meaning assigned to the term 'installation date as per acceptance letter' as provided by Mr. Anindhya Kundu subsequently in his response. The response states that the acceptance letters are issued to the vendors only after the machine has been used for certain period of time (after factoring for minimum learning time of the users) .Hence, it is clearly seen that the said dates of acceptance letters cannot be equated to the date on which the machinery was actually used initially or was ready for use.
10.5 Having perused the submissions of the assessee and the conclusions arrived at by the Assessing Officer, the Panel is of the opinion that although the prescribed Authority for quantification of the expenditure eligible for weighted deduction U/s 35 (2AB) is DSIR, the findings of the Survey carried out by the Department U/s 133 A cannot be ignored.
:-48-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
These are findings of fact and hence are relevant for determining the claim of weighted deduction claimed. The assessee's contention that the survey findings were not shared with it are misplaced as the statement recorded are shared with the persons whose statements are recorded. The statements may not have been recorded on oath as in the case of statements recorded U/s 132(4) but they do throw Information on the activities of the assessee which have been corroborated with the facts gathered during Survey which has not been contradicted by the assessee. Hence, Wefind no reason to interfere with the findings of the AO. Accordingly the Grounds of objection raised on this issue are rejected."
12.8.2 Now, we proceed to understand the provisions of section 35(2AB) based on the judicial precedents relied on by the assessee;
In the case of Tejas Networks Limited [ITA No. 1073 of 2008/ Hon'ble Karnataka High court], the identical issue has been dealt and their lordships held that the assessee's claim of deduction u/s.35(2AB), pursuant to certificate issued by prescribed authority i.e. DSIR, approving such claim, the AO cannot deny weighted deduction in respect of scientific expenditure. Further, the AO cannot sit in judgement over report submitted by prescribed authority. The relevant extract of the decision is given below:
25. Insofar as disallowance under Section 35(2AB) of the Act is concerned, the DRP reiterated its above finding and held that where the express provisions of the Act exclude certain kind of expenditure from the purview of Section 35 of the Act, such expenditure cannot be allowed under Section 35 of the Act when such expenditure does not fall within the scope of Section 3 5 of the Act. Second respondent while issuing direction to first respondent on 30.12.2013 under Annexure - Q has held as under:
"12.1 We have carefully gone through the order passed by the Assessing Officer and by the TPO and objections filed by the assessee as well as the records of the case of the assessee. It has already been decided in para 11 above that where the :-49-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 express provisions of the Act exclude certain kind of expenditure from the purview of section 3 5 of the Act such expenditure cannot be allowed under section 35 of the Act and when certain expenditure does not fall in the scope of section 35 of the Act, the report of prescribed authority cannot be considered as far as such excluded expenditure is considered. The certificate of the prescribed authority cannot overrule the express provisions of the Act. It has also been held that product development expenditure gives rise to patents on products/processes which are intellectual property rights and therefore such expenditure is capital in nature ( capital work in progress as the project is incomplete) and cannot be allowed u/s 35 of the Act. The arguments of the assessee in the said objection are essentially the same as in objection raised in para 11 above. Therefore principle decided while dealing with such objection squarely applies to this objection also."
Accordingly, the assessing officer disallowed the deduction claimed by the assessee under Section 35(2AB) of the Act incurred by assessee in a sum of Rs.48,41,82,071/- as against the total deduction Rs.89,35,48,193/- claimed by the assessee under Section 35(2AB) of the Act.
26. A perusal of the report submitted by the prescribed authority to the Director General of Income-Tax (Exemptions) under Section 35(2AB) in Form No. 3CL dated 10.04.2013 vide Annexure-M would clearly indicate that as against claim of Rs. 8,935 lakhs made by the assessee for weighted deduction in its return of income, the prescribed authority allowed a sum of Rs. 6,904 lakhs only though the Audit Certificate dated 10.04.2013 - Annexure - E issued by the auditor of the assessee indicated Rs. 7,009 lakhs as weighted deduction.
27. A plain reading of Section 35(2AB) would clearly indicate that where a company is 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) or in-house research and development facility as approved by the prescribed authority, then, they shall be allowed a deduction of a sum equal to one and a half times of the expenditure so incurred. The word used 'shall' in the above said provision ordinarily mean that it should be understood in the context in which it is used and there cannot be departure in this :-50-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 regard. The said provision would also indicate that such expenditure as approved by the prescribed authority would be entitled for being allowed as a weighted deduction. There being no dispute to the fact that DSIR being the prescribed authority in the instant case, had issued the report in Form No. 3CL -Annexure - M certifying the total R&D expenditure (excluding land and buildings) as prescribed under Section 35(:.for a sum of Rs. 4,601.9 lakhs as against the claim of Rs. 5,957 lakhs made by the assessee in the return of income and as such, neither the second respondent nor first respondent could have sat in judgment over said certificate issued by the prescribed authority. In other words, when the prescribed authority had certified the extent of expenditure which would be allowable, the assessing officer could not have sat in appeal over such certification made by the prescribed authority. The allowability or otherwise of such expenditure cannot be the subject matter of scrutiny by the assessing officer. It would also be required to be noticed that assessing officer would be out of bounds to examine as to whether such expenditure as certified by the prescribed authority can be allowed or disallowed under Section 35 of the Act. In other words, the assessing officer is precluded from examining the correctness or otherwise of the certificate issued by the prescribed authority on the ground that it is either being contrary to facts or contrary to the express provisions of the Act. It would not be out of context to state that when assessee files the report issued by the prescribed authority, as indicated under Section 35(2AB), before the jurisdictional assessing officer and seeks for allowability of such expenditure, the Assessing Officer would be exceeding in his jurisdiction, if he were undertake the exercise of examining as to whether the certificate issued by the prescribed authority is within the parameters of statutory provisions of the Act or otherwise. Keeping in mind that such contingency may arise, Parliament has incorporated sub-section (G) to Section 35 of the Act which would be a complete answer to such situations. Thus, if any question arises as to what extent, any activity constitutes or constituted or an asset is or was being used for scientific research, then the Assessing Officer would be red to refer such question to the Board for being referred to the prescribed authority. The decision of the prescribed authority in this regard would be final, inasmuch as, the certification of such expenditure is being examined by an expert body and undisputedly, such exercise has been outsourced by the Revenue under the Act itself, since the prescribed authority being possessed of requisite expertise, it would be in a better position to certify as to whether such expenditure claimed by the assessee under Section 35(2AB) would fall within the said provision or outside. This exercise of examining the correctness of the Certificate :-51-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 issued by the prescribed authority is not available to the Assessing Officer as could be seen from scheme of Section 35 the Act.
28.It is in this background, sub-section (4) of Section 43 will have to be considered, which defines as to what activities would constitute "scientific research" as indicated under the said Section namely, Section 43(4). As to whether any expenditure incurred in the acquisition of rights in or arising out of scientific search as indicated in clause (ii) of sub-section (4) of Section 43 is an issue which requires to be examined the prescribed authority itself and it would not be in the domain of the assessing authority to undertake such an exercise. When Section 35(2AB), Section 35(3) and Section 43(4) of the Act are read harmoniously, the irresistible conclusion that has be drawn would be that assessing officer cannot sit in judgment over the report submitted by the prescribed authority in Form No. 3CL. This view is also supported by the judgment of the High Court of Gujarat in Mastek Ltd.'s case (supra),
29. For the myriad reasons aforestated, Point No. (2) formulated herein above will have to be answered in the affirmative, i.e., in favour of petitioner - assessee and by concluding that the impugned order dated 31.01.2013 - Annexure - R and consequential demand notice dated 31.01.2014; - Annexure - RI are without jurisdiction.
12.8.3 In the case of PCIT vs B.A.Reserach India Ltd [2016] 288 CTR 399 (Gujarat), the hon'ble court held that where prescribed authority grants approval to assessee for research activity, the AO cannot disallow deduction of income therefrom for want of satisfaction of any other condition. The relevant extract of the decision is given below:
"17. Thus the statutory scheme envisages the prescribed authority as a body which can minutely examine all these highly technical and scientific requirements in case of a company The prescribed authority is the Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India. It has experts at its :-52-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 command in the field of scientific research to advise it on various extreme! complex scientific issues which may arise while granting, extending or recalling the approval. In this context, the requirements contained in clauses (c) to (e) of rule 18DA(1) would also have to be necessarily examined by the said authority. When these clauses refer to requirement of adequate infrastructure such as laboratory facilities, well formulated research and development programme and engagement of the company exclusively in scientific research and development activities, the same would be within the realm of the said prescribed authority. [Para 17]
18. Under the circumstances, once such authority grants approval and such approval holds the field, it would not be open for the Assessing Officer or any other revenue authority to go behind such approval certificate and re-examine for himself, the fulfilment of the conditions contained in rule 18DA(l). These conditions are prescribed in terms of clause
(iv) of section 80-IB(8A). The Commissioner was, therefore, completely in error in observing that even though the assessee had valid approval issued by the prescribed authority, the Assessing Officer still had to examine whether such company had fulfilled the conditions referred to in clause (iv), as such other conditions as may be prescribed, reference to which we find in rule 18DA. Any other view would create conflict of decision making process. Even revenue could not dispute that many of these requirements prescribed under rule 18DA are to be examined by the prescribed authority. If once the prescribed authority examines such conditions and upon being satisfied that the conditions are fulfilled, grants approval, can the Assessing Officer take a different view? The answer obviously has to be in the negative. First and foremost, the prescribed authority is a specialised body having expertise in the field of scientific research and development. The requirements are extremely complex scientific requirements and have therefore, been rightly placed in the hands of an expert body to judge Secondly, there is no reason why once an authority which is prescribed under the rules for a specific purpose has been invested with statutory functions, the Assessing Officer should be allowed to overrule the decision of the said body. Thirdly, there are multiple indications within the rules themselves. Under rule 18D(2), extension of approval once granted is subject to satisfactory performance of the company, to be judged on periodic review. Further, rule :-53-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 18DA(3) gives wide powers to the prescribed authority to withdraw the approval if it is found that the same was to avoid payment of taxes by its group companies or companies related to its directors or majority of its shareholders or that any provisions or the rules have been violated. Thus once again the task of judging whether the provisions or the rules have been violated or not, has entrusted to the prescribed authority with I matching powers for withdrawal of the approval, if the authority is satisfied about such breach.
19. The word 'may' used while empowering the prescribed authority, according to the revenue, would be of some significance. He contended that even if there has been a violation of the Acts and the Rules, the prescribed authority is not duty-bound to withdraw the approval since the legislature has used the word 'may' and not 'shall'. According to the revenue therefore, it would be open to the Assessing Officer to disallow the deduction on the ground of breach of the provisions and the rules even if the prescribed authority has not withdrawn the approval on that basis. This is not the correct position. Sub-rule (3) is an enabling power empowering the prescribed authority to withdraw the approval, if it finds violation of provisions or the Rules.
However, the Act and the Rules make various provisions, breach of many of them may be purely technical. It is not necessary therefore, in every such breach, irrespective of the nature of the breach, the prescribed authority must withdraw the approval, the moment it is pointed out that there has been a violation of any other provisions or the Rules. It is possibly therefore, that the legislature has while clothing the prescribed authority with sufficient powers to withdraw the approval, used the word 'may' rather than 'shall' giving discretion in appropriate cases to the authority not to withdraw the approval. This however, would not mean that the Assessing Officer would have any role in the context of verifying requirements relatable to grant, extend or withdraw the approval. These issues solely rest within the jurisdiction of the prescribed authority.
20. Judged from such angle, once the approval is granted by the prescribed authority and such approval is valid, it would no longer be open for the Assessing Officer to verify the satisfaction of the conditions prescribed under rule 18DA in order to refuse deduction under section 80-1B(8A). This however, does not mean that other issues relevant to the :-54-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 claim of deduction by the assessee would be taken away from the jurisdiction of the Assessing Officer. For example., in this very case, the Assessing Officer had doubt about the sample storage income being part of the income from eligible business. After hearing the assessee, he disallowed the deduction holding that the same does not form part of the income of the assessee's business of scientific research and development.
21. Before closing, we may refer to the decision cited by Shri. Bhatt for the Revenue. In case of Southern Technologies Ltd (supra), the issue was regarding the taxability of income ignoring the provisions contained in the Companies Act concerning non banking financial company which permitted adjustment of a provision for possible diminution of value of assets of the company allowing the company to show only the net figure in the balance sheet.
22. In the result, while holding in favour of the assessee, it is clarified that the power of the Assessing Officer to verify the claim of deduction is not taken away. He can certainly verify the accounts and refuse deduction which does not form part of section 80-1B(8A) and the income which does not arise out of the eligible business.
He however, cannot ignore the approval granted by the prescribed authority and hold that the prescribed conditions are not fulfilled by the assessee."
12.9 The next issue raised by the AO / DRP was whether deduction u/s.35 is allowable on capital expenditure which is under construction and is not put to use for R&D purposes. In this regard, the assessee relied on the following decision;
CIT Vs. Gujarat Aluminium Extrusions (P.) Ltd [2003] 184 CTR 297 [Guj HC] In this case, the Hon'ble court held in favour of the assessee that the capital expenditure which is under construction and is not put to :-55-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 use for R&D purposes is allowable for deduction u/s.35. The relevant extract of the decision is given below;
"18. In our opinion, both the appellate authorities have rightly considered the spirit with which Section 35 of the Act has been enacted by the Legislature and the circular referred to hereinabove while allowing deduction to the assessee under the provisions of Section 35 of the Act.
19. We are of the view that when the Legislature has not expected the assessee to put the asset to actual use, it would not be open to the Revenue to deprive the assessee of the benefit of deduction under the provisions of Section 35 of the Act if the asset is not used in the previous year in which the capital expenditure is incurred.
It is also relevant to note that the deduction is given not on the count of user. Had it been so, the assessee would have been given benefit in the nature of depreciation. It cannot be disputed that depreciation is allowed when the asset is used by the assessee and when he suffers loss on account of wear and tear of the asset. Had the intention of the Legislature been to grant additional depreciation, we would have agreed with the submissions made by standing counsel appearing for the Revenue but the position is different in the instant case. Here, the Legislature wants the assessee to spend more amount for scientific research and it also wants the assessee to get the benefit immediately in the year in which he incurs the expenditure in the nature of revenue or capital for scientific research and therefore the Legislature refers to incurring of the expenditure and not the using of the asset.
20. Once it is established that the expenditure was incurred for the purpose of scientific research and the conditions incorporated in Section 35 of the Act are fulfilled, in our opinion, the Revenue cannot expect the assessee to start using the asset immediately. In a given case the assessee might have to go on incurring expenditure for several years before putting the asset to actual use. If the interpretation advanced by standing counsel for the Revenue is accepted, we are afraid, the assessee would not be in a position to avail of the deduction under Section 35 of the Act to the extent to which the Legislature intends to give to the assessee.
:-56-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
It is also pertinent to note that the deduction under the provisions of Section 35 of the Act is given only during the previous year in which the expenditure is incurred. If the assessee has taken several years to construct or acquire a particular asset, the assessee would be deprived of the benefit of Section 35 of the Act because he can put the asset to use only when construction of the asset is completed and it would not be open to him to claim deduction in respect of the expenditure incurred during the earlier previous years because looking to the provisions of Section 35 of the Act, the assessee can avail of the benefit of deduction of the amount of expenditure incurred only during the previous year and not for the earlier period unless his case is covered under the provisions of an exception to Section 35(2)(ia) of the Act.
21. For the reasons stated hereinabove, in our opinion, the Tribunal was right when it confirmed the order passed by the Commissioner of Income-tax (Appeals) who had deleted the disallowance.
22. For the aforestated reasons, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.
23. The reference stands disposed of with no order as to costs."
Navin Fluorine International Ltd [2019] 178 ITD 201 (Mumbai Trib.) In this case also, the Tribunal held in favour of the assessee that 'what is necessary is incurrence of the capital expenditure, which the assessee has incurred and not use of asset during the previous year in which such expenditure is incurred for claiming deduction u/s.35. The relevant extract of the decision is given below;
"20. From the above bare provision of Section 35(l)(iv) of the Act, it is clear that it provides for deduction in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, as may be admissible under the provisions of Subsection (2) of Section 35 of the Act. Clause (iv) of sub-section (2) of Section 35 of the Act provides for deduction of whole of such :-57-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 capital expenditure (other than on land) in the previous year in which it is incurred. Accordingly, for the purpose of availing deduction of capital expenditure U/s. 35(1)(iv) of the Act, an assessee has to incur expenditure of capital in nature on scientific research relating to its business. The language employed in Section 35 of the Act, nowhere provides for the purpose of allowability of capital expenditure U/s. 35(1)(iv) of the Act that the assessee has to use the asset for research and development purposes during the relevant previous year in which such expenditure is incurred. The assessee becomes entitled to deduction even if the asset in question is not actually used, provided it has incurred capital expenditure during the previous year on scientific research.
21. In view of the above, we noted that for the purpose of claiming deduction of capital expenditure U/s. 35(1)(iv) read with Section 35(2) of the Act, what is necessary is incurrence of expenditure, which the assessee company has incurred and not the user of the asset during the previous year in which such expenditure is incurred. Further, the eligible year of claiming deduction is the year of incurrence of such expenditure. In view of above, it will be observed that as per Section 35(I)(iv) read with Section 35(2) of the Act, deduction for capital expenditure incurred is allowable under the said section, as under:
"(i) Deduction under the provisions of Section 35 of the Act is given only during the previous year in which the expenditure is incurred;
(ii) Accordingly, an assessee cannot be deprived off the benefit of deduction in respect of capital expenditure under the provisions of Section 35 of the Act if the asset is not used in the previous year in which the capital expenditure is incurred;
(iii) Consequently, once it is established that the capital expenditure has been incurred for the purpose of scientific research, the same is allowable in the year of incurrence."
22. We also noted that the Central Board of Direct Taxes vide their Circular No. 5-P (LXXVI63) of 1967 also endorses the above proposition. The relevant extract of the said Circular as quoted by the Hon High Court of Gujarat in the matter of CIT v. Gujarat Aluminium Extrusions Private Limited, reported in 263 ITR 453, is as under: -
"(ii) The amount of capital expenditure incurred by an assessee after March 31, 1967, on scientific research related to his business will be allowed to be deducted in full in computing his business profits of the year in which such expenditure is incurred"
:-58-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
23. Even, the circular issued by the Central Board of Direct Taxes are legally binding on the Revenue authorities as held by the Hon. Supreme Court in the case of UCO Bank Vs. CIT 237 ITR 889. Hence, we are of the view that this issue is allowable on merits and we accordingly, reverse the revision order of CIT on this issue."
12.9.1 In the present facts and circumstances of the case and by respectfully following the decisions of hon'ble courts (supra), we are of the view that the AO/DRP have stretched their jurisdiction in disallowing the claim of the assessee U/s.35(2AB) of the Act, by rejecting the eligible amount as certified by the DSIR in Form 3CL dated 08/04/2021. Further the claim of weighted deduction of expenditure on scientific research by the assessee has been denied by the AO/DRP merely relying on the statements of employees recorded during the survey proceedings u/s.133A of the Act cannot be countenanced. Hence, we are of the view that the claim of the assessee is in accordance with section 35(2AB) is allowable as per the Form 3CL issued by the DSIR and direct the AO to recompute the income by allowing the claim of assessee U/s.35(2AB) of the Act. Thus, we allow the ground Nos.33 to 44 of the assessee's appeal.
13. Issue 9: Short credit of DDT paid by the Appellant and consequential interest u/s 115P of the Act (GroundNos. 45 and 46) Contention of AO/DRP:
:-59-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
The AO has not given full credit of the DDT paid by the assessee for the subject year and has levied consequential interest under section 115P of the Act.
13.1 The Ld.AR stated that the assessee is eligible for the credit of the DDT paid for the subject year. The AO to be given a direction to allow the credit of the full DDT paid by the assessee and to delete the consequential interest under section 115P of the Act.
13.2 Per contra the Ld.DR stated that the issue may be remitted back to AO for verification.
13.3 Since, the details of DDT paid by the assessee needs to be verified for giving credit, we remit back this issue to the files of the AO for verification of the DDT Paid by the assessee and the credit of the same be given in accordance with law. Thus, the ground Nos.45 & 46 of the assessee is allowed for statistical purpose.
14. Issue 10: Additional claim on deduction under section 115-O(1A) of the Act for the purpose calculation of DDT payable (Ground Nos. 47 and 48) 14.1 The Ld.AR stated that the assessee has received an amount of Rs.11,48,306/- from its foreign subsidiary (M/s. MRF Sri Lanka).
The assessee had duly paid tax on such dividend received from MRF Sri Lanka under section 115BBD of the Act. In the return of income :-60-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 filed for the subject year, the assessee had inadvertently claimed deduction under section 115-O(1A) of the Act only to the extent of Rs.10,02,000/- instead of Rs.11,48,306/-. The additional claim made by the assessee to be verified and allowed to the assessee.
14.2 Per contra the Ld.DR stated that the issue may be remitted back to AO for verification.
14.3 Since, the details of dividend received by the assessee from its foreign subsidiary (M/s. MRF Sri Lanka) needs to be verified before allowing the deduction, we remit back this issue to the files of the AO for verification tax paid on such dividend received from MRF Sri Lanka under section 115BBD of the Act and then the additional claim be given in accordance with law. Thus, the ground Nos.47& 48 of the assessee is allowed for statistical purpose.
15. Issue 11: Transfer Pricing adjustment on account of fees towards issue of letter of comfort (Ground Nos. 49 and
50) 15.1 The assessee has signed BAPA with the CBDT covering the transaction and has filed a letter withdrawing the grounds of the appeal as the same is academic.
15.2 The ground Nos.49 & 50 are dismissed as not pressed.
:-61-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
16. Issue 12: Others (Ground Nos. 51 and 52):
The Assessee raised ground No.51 on initiating penalty proceedings u/s.274 r.w.s.271AA and 270A of the Act.
16.1 Since, penalty proceedings are consequential to the quantum assessment and hence the same is not adjudicated and hence the ground no.51 is dismissed. Ground Nos.1 &52 are general and needs no adjudication.
17. In the result the appeal of the assessee is partly allowed.
IT(TP)A No.65/Chny/2022 for A.Y. 2018-19 and IT(TP)A No.41/Chny/2023 for A.Y.2019-20
18. Issue 1: Disallowance of depreciation/ expenses on retention money payable (Ground Nos. 2 to 6 - A.Y. 2018-19 & 2019-20) 18.1 Since, the facts are similar and the same has been adjudicated in para nos. 5.5 to 5.6 in favour of the assessee for the A.Y.2017-18 in IT(TP)A No.64/Chny/2022, is applicable mutatis mutandis to the grounds raised by the assessee in these A.Y.2018-19 & 2019-20 and hence these grounds of the assessee are allowed in terms of para Nos.5.5 to 5.6(Supra).
19. Issue 2: Disallowance of premium charges on forward contract on import of raw materials and foreign exchange loss incurred (Ground Nos. 7 to 11 - A.Y. 2018-
19):
:-62-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
19.1 Since, the facts are similar and the same has been adjudicated in para nos. 6.3 to 6.4 in favour of the assessee for the A.Y.2017-18 in IT(TP)A No.64/Chny/2022, is applicable mutatis mutandis to the grounds raised by the assessee in the A.Y.2018-19 and hence these grounds of the assessee are allowed in terms of para Nos .6.3 to 6.4(Supra).
20. Issue 3: Disallowance u/s. 14A of the Income-tax Act, 1961 ('the Act') (Ground Nos. 12 to 14 for A.Y. 2018- 19 &Ground Nos. 7 to 11 for 2019-20) 20.1 Since, the facts are similar and the same has been adjudicated in paranos. 7.3 to 7.4 in favour of the assessee for the A.Y.2017-18 in IT(TP)A No.64/Chny/2022, is applicable mutatis mutandis to the grounds raised by the assessee in these A.Y.2018-19 & 2019-20 and hence these grounds of the assessee are allowed in terms of para Nos. 7.3 to 7.4(Supra).
21. Issue 4: Disallowance of excess provision of warranty (Ground Nos. 15 to 19 for A.Y. 2018-19 &Ground Nos. 12 to 16 for A.Y. 2018-19) 21.1. Since, the facts are similar and the same has been adjudicated in para nos. 8.3 to 8.4 in favour of the assessee for the A.Y.2017-18 in IT(TP)A No.64/Chny/2022, is applicable mutatis mutandis to the grounds raised by the assessee in these :-63-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 A.Y.2018-19 & 2019-20 and hence these grounds of the assessee are allowed in terms of para Nos. 8.3 to 8.4(Supra).
22. Issue 5: Disallowance of expenses relating to international transaction entered with MRF SG Pte Limited, Singapore (Ground Nos. 20 to 28 for the A.Y. 2018-19) 22.1 Since, the facts are similar and the same has been adjudicated in para nos. 9.1 to 9.2 in favour of the assessee for the A.Y.2017-18 in IT(TP)A No.64/Chny/2022, is applicable mutatis mutandis to the grounds raised by the assessee in the A.Y.2018-19 and hence these grounds of the assessee are allowed in terms of para Nos. 9.1 to 9.2(Supra).
23. Issue 6: Disallowance of entrance and club service fee paid by the Appellant (Ground no. 29 for the A.Y. 2018-19 & Ground no. 19 for the A.Y. 2019-20) 23.1 Since, the facts are similar and the same has been adjudicated in para 10.3 in favour of the assessee for the A.Y.2017-18 in IT(TP)A No.64/Chny/2022, is applicable mutatis mutandis to the grounds raised by the assessee in these A.Y.2018-19 & 2019-20 and hence these grounds of the assessee are allowed in terms of para No.10.3(Supra).
24. Issue 7: Disallowance of claim made by the Appellant under section 35(2AB) of the Act (Ground Nos.
:-64-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
30 to 39 for 2018-19 &Ground No.20 to 29 for the A.Y. 2019-20) 24.1 Since, the facts are similar and the same has been adjudicated in para 12.9.1 in favour of the assessee for the A.Y.2017-18 in IT(TP)A No.64/Chny/2022, is applicable mutatis mutandis to the grounds raised by the assessee in these A.Y.2018-19 & 2019-20 and hence these grounds of the assessee are allowed in terms of para No.12.9.1(Supra).
25. Issue 8: Short credit of DDT paid by the Appellant and consequential interest u/s 115P of the Act (Ground Nos. 40 and 41 for 2018-19 & Ground No.30 to 31 for the A.Y. 2019-20) 25.1 Since, the facts are similar and the same has been adjudicated in para 13.3 in favour of the assessee for the A.Y.2017-18 in IT(TP)A No.64/Chny/2022, is applicable mutatis mutandis to the grounds raised by the assessee in these A.Y.2018-19 & 2019-20 and hence these grounds of the assessee are allowed for statistical purpose in terms of para No.13.3(Supra).
26. Issue 9: Additional claim on deduction under section 115-O(1A) of the Act for the purpose of calculation of DDT payable (Ground Nos. 42 and 43for 2018-19) 26.1 Since, the facts are similar and the same has been adjudicated in para 14.3 in favour of the assessee for the :-65-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 A.Y.2017-18 in IT(TP)A No.64/Chny/2022, is applicable mutatis mutandis to the grounds raised by the assessee in the A.Y.2018-19 and hence these grounds of the assessee are allowed for statistical purpose in terms of para No.14.3(Supra).
27. Issue 10: Short-credit of TDS granted in the final order (Ground No. 44for 2018-19 & Ground No.32 for the A.Y. 2019-20) The fact that the AO has not given full credit of the TDS credit eligible to the assessee for the A.Y. 2018-19 & 2019-20.
27.1 The Ld.AR stated that the Assessee is eligible for the credit of the entire TDS claimed by the Assessee in the return of income filed for the A.Y. 2018-19 & 2019-20 and hence he prayed for issuing a direction to allow the entire credit of the TDS eligible to the assessee.
27.2 Per contra the Ld.DR stated that the issue may be remitted back to AO for verification.
27.3 Since, the details of TDS credit available to the assessee needs to be verified for giving credit and we remit back this issue to the files of the AO for verification of the TDS to the assessee and the credit of the same be given in accordance with law. Thus, the :-66-: IT(TP) A. No: 64 & 65/Chny/2022 & 41/Chny/2023 ground No.44 for the A.Y.2018-19 and Ground No.32 for the A.Y. 2019-20 of the assessee is allowed for statistical purpose.
28. Issue 11: Transfer Pricing adjustment on account of fees towards issue of letter of comfort (Ground Nos. 45 and 46 for A.Y. 2018-19& Ground No.34 & 35 for the A.Y. 2019-20) The assessee has signed BAPA with the CBDT covering the transaction and has filed a letter withdrawing the grounds of the appeal as the same is academic.
28.1 The ground No.45 & 46 for the A.Y. 2018-19 and ground Nos.34 & 35 for the A.Y. are dismissed as not pressed.
29. Issue 12: Disallowance of provision for litigation and related disputes (Ground Nos. 17 and 18) Contention of AO/DRP:
The provision created on the disputed liability on cess on own generation of power of Rs.49,998/- is disallowed for not providing any documentary evidence.
Relevant extracts of the final order:
"The assessee, vide letter dated 04.01.2023, was requested to furnish the relevant details. No documentary evidence had been produced in respect of the payment of cess. Considering the same, the sum of Rs.49,988/- is disallowed and added to the total income of the assessee for A.Y. 2019-20." - (Para No. 5. 7 in Pg No. 14 of the final order)
:-67-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
Relevant extracts of the DRP order:
"The AO is directed to obtain the supporting document for payment of cess. If not provided by the assessee, the disallowance is confirmed." (Para No. 7.3 in Pg No. 17 of the DRP order) 29.1 The Ld.AR stated that the provision being an ascertained liability is an eligible expenditure. Where the provision is reversed the same would duly be offered to tax in the year of reversal. The Appellant wishes to rely on its grounds of appeal. 29.2 Per contra the Ld.DR stated that the assessee has not provided any basis or evidence for creating the provision for the said expenditure and hence prayed for confirming the addition. 29.3 We note that, the assessee has not furnished any evidence before the lower authorities and also before us for creation of provision or the payment proof for having paid the same in subsequent assessment years. Therefore, considering the facts of the case, we confirm the disallowance provision for cess of Rs.49,988/-. Thus, we dismiss the assessee's ground No.17 & 18 of the appeal.
:-68-: IT(TP) A. No: 64 & 65/Chny/2022
& 41/Chny/2023
30. In the result, the assessee's appeals for the A.Ys. 2017- 18, 2018-19 and 2019-20 are partly allowed.
Order pronounced on 20th September, 2024 at Chennai.
Sd/- Sd/-
(महावीरिसं ह ) (एस.आर.रघुनाथा)
(MAHAVIR SINGH) (S. R. RAGHUNATHA)
उपा /Vice President लेखासद /Accountant Member
चे ई/Chennai,
th
दनांक/Dated, the 20 September, 2024
JPV
आदे शकी ितिलिपअ ेिषत/Copy to:
1. अपीलाथ /Appellant
2. थ /Respondent
3.आयकर आयु /CIT- Chennai
4. िवभागीय ितिनिध/DR
5. गाड फाईल/GF