PCIT-15 Vs Strides Arcolab Ltd. (Bombay High Court)
Summary: The Bombay High Court, comprising Justices Akil Kureshi and M.S. Sanklecha, dismissed the Revenue’s appeal against the Income Tax Appellate Tribunal’s decision in the case of M/s. Strides Arcolab Ltd. The Revenue raised five questions concerning weighted deduction for research and development expenditure under Section 35(2AB), disallowance under Section 14A, employees’ provident fund and ESI contributions under Section 36(1)(va), computation of deductions under Sections 80HHC and 80IA/80IB, and allowability of interest expenditure under Sections 36(1)(iii) and 57(iii) of the Income Tax Act, 1961. The Court examined the Tribunal’s findings and relevant judicial precedents but found no question warranting interference.
On the research and development deduction, the Revenue contended that approval of the assessee’s research facility had been granted only in subsequent assessment years. The High Court rejected the objection, observing that several High Courts had held that once the competent authority approved the research and development facility, the approval would relate back to the date of application. It referred to the Gujarat High Court’s decision in CIT Vs Claris Lifesciences Ltd. and the Delhi High Court’s judgment in CIT Vs Sandan Vikas (India) Ltd.. The Court also noted that the Special Leave Petition against the Delhi High Court judgment had been dismissed by the Supreme Court on 9 January 2012. Consequently, the question concerning Section 35(2AB) was not entertained.
Regarding Section 14A, the Tribunal had followed its decision in the assessee’s earlier assessment year and recorded that no fresh investments had been made during the relevant year except for a relatively small investment of Rs.2.52 lakh. The High Court found no error in that factual conclusion. On the issues of employees’ provident fund and ESI contributions and computation of Sections 80HHC and 80IA/80IB deductions, the Court noted that similar questions had already been considered in the assessee’s own case in Income Tax Appeal (L) No. 2111 of 2012, decided on 26 February 2013, when the Revenue’s appeal had been dismissed. Accordingly, these questions were also not entertained.
On the fifth issue, the assessee had contended that sufficient interest-free funds were available for investment. Alternatively, it argued that the dividend income arising from such investment was taxable and the corresponding expenditure was deductible under Section 57(iii). The CIT(A) and the Tribunal had accepted the alternative contention. Since the dividend income was admittedly taxable in the assessee’s hands, the High Court found no error in allowing the expenditure under Section 57(iii). It therefore declined to entertain the fifth question as well and dismissed the Revenue’s tax appeal. The ruling addresses the five issues on the facts and legal position considered in the relevant proceedings.
Cases Discussed
- CIT Vs Claris Lifesciences Ltd. (Gujarat High Court) — (2008) 174 Taxman 113. The Bombay High Court relied upon this judgment concerning the effective date of approval of a research and development facility for Section 35(2AB) deduction. Related TaxGuru coverage: Deduction cannot be denied due to subsequent DSIR approval.
- CIT New Delhi Vs Sandan Vikas (India) Ltd. (Delhi High Court) — 335 ITR 117. Relied upon for the principle that subsequent approval of an R&D facility does not necessarily defeat deduction for expenditure incurred from the relevant application period. The Supreme Court dismissed the SLP against this judgment on 9 January 2012. Read the Delhi High Court decision on TaxGuru.
- Pr. Commissioner of Income Tax Vs Strides Arcolab Ltd. (Bombay High Court) — Income Tax Appeal (L) No. 2111 of 2012; order dated 26 February 2013. The Court referred to the decision in the assessee’s own earlier proceedings concerning the employees’ contribution and deduction computation issues. The source does not provide a reported citation.
FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER
1. The Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal (“the Tribunal” for short) raising following questions for our consideration :-
(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in directing the AO to grant the benefit of deduction u/s 35(2AB) when it was evident from the approval letters that the approval for the R&D activities were given in the subsequent Assessment Years and not for the assessment year under consideration ?
(ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in directing the AO not to make disallowance u/s 14A of the I.T. Act when on perusal of the B/S of the Co. it is established that the assessee had no sufficient funds and has borrowed funds fro investment in shares. These borrowed funds were utilized for the purpose of investments which cannot be said to be the expenses incurred for the purpose of business?
(iii) Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in deleting disallowance u/s 36(1)(va) being employee’s contribution to provident fund and ESI as the same were not deposited within the stipulate time / dates as provided in the respective Act?
(iv) Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in holding that deduction under Section 80HHC has to be computed as the profit of the business as reduced by profit allowed as deduction under Section 80IA/80IB?
(v) Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in holding that deduction disallowed u/s 36(1)(iii) of the I.T. Act should be allowed u/s 57(iii) of the I.T. Act when the primary motive of the assessee company is not earning income from other source?”
2. Question no. (i) relates to the Revenue’s objection to the assessee’s claim of deduction under Section 35(2AB) of the Income Tax Act, 1961 (“the Act” for short) primarily on the ground that the approval for the research facility established by the assessee was granted by the competent authority subsequently. We notice that several High Courts have held that such research and development activity once approved by the competent authority, the approval would relate back to the date of application. Reference in this respect can be made to the decision of the Division Bench of Gujarat High Court in the case of CIT Vs. Claris Lifesciences Ltd. (2008) 174 Taxman 113 and the decision of the Delhi High Court in case of CIT New Delhi Vs. Sandan Vikas (India) Ltd. 335 ITR 117. We are informed that the decision of Delhi High Court in case of Sandan Vikas (India) Ltd. (Supra) was carried in appeal before the Supreme Court and the SLP came to be dismissed by an order dated 09th January, 2012. This question is therefore not entertained.
3. Question no.(ii) relates to the Revenue’s dis-allowance of expenditure under Section 14A of the Act. Perusal of the impugned judgment of the Tribunal would show that in addition to relying on the conclusion in case of this very assessee in earlier assessment year, the Tribunal further noted that during the year under consideration, no fresh investments were made by the assessee except for a small investment of Rs.2.52 lakhs. Such being the fact, we do not see any error in the view of the Tribunal. This question is therefore not entertained.
4. In relation to question nos. (iii) and (iv), we notice that similar questions came up for consideration before this Court in Income Tax Appeal (L) No. 2111 of 2012 in case of this very assessee where by order dated 26th February, 2013 while dismissing the Revenue’s Appeal, these questions came up for consideration. These questions in the present appeal, therefore are not entertained.
5. With respect to question no. (v), the assessee had objected to the Revenue’s proposal for disallowance of expenditure on the ground that there were sufficient interest free funds available with the assessee from which the investment was made. The assessee had raised an alternative contention that in any case the dividend to be received from such investment, was taxable and, therefore, the expenditure under Section 57(iii) of the Act should be granted. It is this alternative contention which the CIT(A) and the Tribunal finally accepted. The undisputed fact is that the dividend income at the hands of the assessee would be taxed. We, therefore, do not find any error in the view of the Tribunal except assessee’s contention. This question is therefore not entertained.
6. In the result, the tax appeal is dismissed.
