When assessee had not earned any exempt income during the relevant assessment year, disallowance under section 14A could not be made.
AO noticed that assessee had shown an amount of INR 176.65 Crore under the head ‘investments’ but it had not shown any income from the said investments in its accounts and no income was offered in the computation of income. Thus, AO invoked the provisions of section 14A and disallowed the amount of proportionate interest.
Assessee submitted that it did not incur any expenditure and nor there was any income which was claimed as exemption. It was further contended that there was no nexus between the borrowed funds and investments made.
There is no dividend income received from the investments and claimed as exempt during the year, disallowance per se does not arise. Hon’ble HC in the case of Cheminvest and in the case of Redington has held that the disallowance u/s 14A cannot be made where there is no exempt income during the relevant AY.
FULL TEXT OF THE ITAT JUDGEMENT
These are cross-appeals by Assessee and Revenue for the AY. 2010-11 against the order(s) of the Commissioner of Income Tax (Appeals)-4, Hyderabad, dated 05-02-2016.
2. Brief facts of the case are that, assessee, Mylan Laboratories Limited (formerly known as Matrix Laboratories Ltd) is engaged in the business of manufacture of Pharmaceutical Products. For the AY. 2010-11 in relation to the previous year ended 31st March 2010, assessee filed its return of income on 29-09-2010 declaring total income at Rs. 1,89,54,96,795/- under normal provisions of the Income tax Act (Act), (consisting of Rs. 1,43,47,67,778/- as Income from Business, Long Term Capital Gains of Rs. 46,07,29,018/-) and Book Profit of Rs. 3,00,07,52,895/- u/s 115JB of the Act.
2.1. Since assessee transacted with Associated Enterprises (AE) as defined- in Section 92A of the Act, the case was referred to Transfer Pricing Officer [TPO] who issued Transfer Pricing Order dated 27-01-2014 by making an adjustment of Rs 12,65,12,038/- u/s 92CA of the Act. The AO framed a Draft Assessment Order u/s 143(3) dated 10-03-2014 taking into account the above Transfer Pricing Order. The AO vide his draft order determined the total income at Rs. 2,35,76,34,030/- under normal computation and at Rs.3,00,07,52,895/- u/s. 115JB.
2.2. Assessee vide letter dated 16-04-2014 accepted the Draft Assessment Order (without prejudice to its right of appeal under the Act) in terms of sub-section (2) of Section 144C of the Act. Accordingly, the AO passed the final order u/s. 143(3) r.w.s 144C(3). Aggrieved by the said order assessee preferred an appeal before the CIT(A). Before the Ld.CIT(A), assessee contested various additions and the Ld.CIT(A) allowed the appeal partially. Assessee and Revenue are in appeal before us.
3. We have heard the Ld. Counsel and Ld. CIT DR in detail and perused the paper books placed on record. Their arguments are incorporated issue wise in this order where ever required.
ITA No. 626/Hyd/2016 (assessee’s appeal):
4. Assessee has raised the following grounds:
“2. The CIT(A) while accepting the appellant’s submissions that the provisions of section 14A cannot be invoked in appellant’s case erred in directing the disallowance u/s. 14A to 8.6 lakhs (the amount was wrongly mentioned as Rs. 86 lakhs instead of Rs. 8.6 lakhs for which rectification petition is being filed).
3. The CIT(A) erred in failing to direct AO to allow the deduction of Rs. 24,68,47,978/- claimed u/s. 10B of the Act in respect of Export Oriented Undertaking (hereinafter referred to as EOU) situated at Jeedimetla.
4. The CIT(A) erred in not directing AO to allow the depreciation @25% amounting to Rs. 4,92,188/- on brought forward written down value of Rs. 19,68,750 in respect of non-compete fee of Rs. 40 lakhs paid in Asst. Year 2007-08 to Sudhir Vaid in relation to Concord Biotech Limited”.
Ground Nos. 1 & 5 are general in nature.
5. Ground No. 2: AO noticed that assessee has shown an amount of Rs. 176.65 Crores under the head ‘investments’ as on 31-03-2010. Assessee has not shown any income from the said investments in its accounts and no income has been offered in the computation of income. AO invoked the provisions of Section 14A and asked assessee why the proportionate interest cannot be disallowed. Assessee submitted that he did not incur any expenditure and nor there was any income which was claimed as exemption. It was further submitted that there is no nexus between the borrowed funds and investments made. In support, assessee submitted that it has huge reserves of Rs.11,210 Mns from which investments are made. Assessee relied on the principles laid down by the Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd., and other case law to submit that the interest income cannot be considered u/s. 14A r.w.Rule 8D. Without prejudice, assessee has worked out proportionate amount of Rs. 8.6 Lakhs in its submissions which Ld.CIT(A) has confirmed by stating as under:
“6.3 I have carefully considered the assessment order and submissions of the appellant. The appellant has relied on the Gujarat’s High Court decision in the case of CIT v. Hitachi Home and Life Solutions (1) Ltd.(2014) 41 taxmann.com 540 wherein the Hon’ble High Court held that, where assessee’s interest free funds far exceeded investments made for earning exempted dividend income, and AO had also failed to establish nexus between borrowed funds and investments made, no disallowance could be made u/s 14A. Hence, following the Hon’ble High Court’s decision in the above case, the submissions made by the appellant are accepted and also the disallowance worked out under Rule 8D by the appellant are accepted after verifying the same. Therefore, the addition made by the Assessing Officer is confirmed to the extent of Rs. 86 lakhs ( later modified to 8.6 lakhs u/s 154 of the IT Act) and the ground of appeal is partly allowed”.
5.1. It was the contention that assessee has not earned any dividend income and has not claimed any exemption. Therefore, the provisions of Section 14A are not applicable.
5.2. Having considered the rival contentions, we find that assessee has not earned any dividend income during the relevant assessment year. The Co-ordinate Bench in the case of Prathista Industries Ltd., Vs. DCIT in ITA No. 1302/Hyd/2015 dated 29-04-2016, directed to delete the disallowance, since there is no income claiming exemption during the year. The Hon’ble Delhi High Court in the case of Cheminvest Ltd., in (2015) [378 ITR 33] (Del) and the Hon’ble Madras High Court in the case of Redington (India) Ltd., Vs. Addl. CIT in TCA No. 520/2016 dt. 26-06-2015 have held that the disallowance u/s. 14A cannot be made where there is no exempt income during the relevant assessment year. Therefore, we set aside the order of Ld.CIT(A) and direct the AO to delete the addition made by him. Ground is allowed.
6. Ground No.3: With reference to this ground, assessee-company has claimed weighted deduction of expenditure u/s. 35(2AB) which worked out to Rs. 65,73,09,000/-. Assessee has filed necessary certificates for claiming the amounts. AO examined and found that DSIR has certified in Form 3CM and 3CL to an extent of Rs. 36,39,46,000/- being R&D revenue expenditure and Rs. 7,42,60,000/- being R&D capital expenditure. AO issued show cause notice why the balance claim should not be disallowed. Assessee submitted that the expenditure certified is eligible for deduction u/s. 35(2AB) at 150% but the balance expenditure incurred which was not certified is also eligible for deduction u/s. 35(1)/37(1). AO, however, disallowed the claim to an extent of Rs. 1,78,71,547/- u/s. 32(2AB). Ld.CIT(A) following the submissions of assessee, allowed the amount as under:
“7.2 With regard to above issue, the appellant submitted that the expenditure amounting to Rs. 1,19,14,365/- not considered by the DSIR for weightage, is required to be allowed under normal sub-section (1) of section 35 of the Act as expenditure incurred for scientific research in respect of the business carried on by the tax payer. The appellant also submitted that for A.Y. 2008-09, in the appellant’s own case, Hon’ble ITAT vide its order dated 10-01-2014 held that expenditure which is not allowable u/s 35(2AB) by virtue of DSIR certification is allowable u/s 35(1).
7.3 I have carefully considered the submissions of the appellant. The Hon’ble ITAT vide its order in ITA No.66/Hyd/2013 dt. 10-01-2014 for the A.Y. 2008-09 in the appellant’s own case with regard to the above issue held as under:
“Since the entire claim of the assessee was rejected summarily without examining the fact, we are of the opinion that this expenditure o f Rs. 56,85,712/- in respect of R&D Expenditure is to be considered u/s. 85(1), if not for the weighted deduction u/s 85(2AB). Assessing Officer is directed to examine the necessary expenditure and allow the claim. This ground is allowed for statistical purposes”.
7.4 Hence, respectfully following the Hon’ble ITAT decision on the above said ground, additions made by the Assessing Officer deleted and the ground of appeal is allowed”.
6.1. On this issue, both Assessee and Revenue are in appeal. Assessee is asking for modification of the order, whereas Revenue is in appeal for allowing the ground by the CIT(A).
6.2. We notice that the direction of CIT(A) is to be modified, ITAT vide its order referred to above in the order of CIT(A) has clearly held that expenditure which is not allowable u/s. 32(2AB) by virtue of DSIR certificate (to the extent not certified) is allowable u/s. 35(1), that means to the extent of 100% of the claim, assessee would be eligible for the expenditure, whereas the weighted deduction of balance 50% would not be eligible. However, Ld.CIT(A) directed the entire amount to be allowed without noticing the said difference. Since there is a mistake in the direction of CIT(A), we modify the same and direct the AO to allow the amount to the extent of 100% u/s. 35(1) as directed in AY. 2008-09 and balance of the claim is to be disallowed. AO can modify the order accordingly.
6.3. Coming to the ground of Revenue, the issue is pending before the Hon’ble High Court as Revenue is contesting allowance of the balance amount u/s. 35(1) in earlier year. Since Ld.CIT(A) relied on the order of the Co-ordinate Bench, we do not find any reason to interfere with the direction to allow the amount which was not certified by the DSIR to be considered for allowance u/s. 35(1). With reference to weighted deduction, we have already modified the direction of the CIT(A) in assessee’s appeal. In view of that, ground of Revenue is partially allowed. In nut shell, assessee is entitled to claim uncertified amount at 100% u/s 35(1) and the excess claim of weighted deduction to that extent is to be disallowed. AO is ordered accordingly.
7. Ground No.4: This ground pertain to disallowance of 25% amounting to Rs. 4,92,188/- on WDV of Rs. 19,68,750/- in respect of non-competing fee paid in AY. 2007-08 to Mr. Sudhir Vaid. At the outset, it was fairly admitted that the order of CIT(A) is in compliance to the order of the ITAT in earlier year and the matter is pending before the Hon’ble High Court as far as this claim is concerned. Since the order is in compliance to the order of ITAT in earlier year, we do not find any reason to interfere with the direction of CIT(A). In view of that Ground No. 4 is rejected.
8. Appeal of assessee is partly allowed.
ITA No. 659/Hyd/2016 (Revenue’s appeal):
9. Revenue in its appeal has raised the following grounds:
“2. The Ld.CIT(A) erred in restricting the disallowance u/s. 14A of the Income Tax Act, 1961 to Rs. 8,60,000/- as against disallowance of Rs. 7,04,13,488/- made by the Assessing Officer.
3. The Ld.CIT(A) erred in directing to allow depreciation of Rs. 4,92,188/- on non-compete.
4. The Ld.CIT(A) erred in allowing deduction of Rs. 1,78,71,547/- u/s. 35(2AB) of the Income Tax Act, 1961.
5. The Ld.CIT(A) erred in allowing deduction of Rs. 24,68,47,978/- u/s. 10B of the Income Tax, 1961”
Ground Nos. 1 & 6 are general in nature.
10. Ground No.2: As far as this ground is concerned, this issue is with reference to disallowance u/s. 14A of the Act. Even though Ld.CIT(A) has accepted that there is no nexus between the borrowed funds and investments made, the CIT(A), however, partly confirmed disallowance to an extent of Rs. 8.60 Lakhs [subsequently modified by the order as against Rs. 86 Lakhs confirmed in the order], which was contested by assessee in its appeal. This issue is already discussed in the appeal of assessee and since there is no dividend income received from the investments and claimed as exempt during the year, disallowance per se does not arise. Therefore, assessee’s ground was allowed in assessee’s appeal. Consequent to that, there is no merit in Revenue’s ground contesting the issue. Accordingly, the same is dismissed.
11. Ground No. 3: This ground is wrongly taken by Revenue, whereas it should have taken the ground on the other amount of Rs. 5,00,565/- pertaining to depreciation in respect of non-competing fee paid in AY. 2002-03 to M/s Medicorp Technologies ltd allowed by the ITAT in those years. Following the Co-ordinate Bench decision in that year, ITAT is consistently allowing the depreciation on the WDV on this amount which Ld.CIT(A) has allowed. Revenue should have taken the amount on the issue which was allowed, whereas it has taken the ground on an issue which was confirmed by the Ld.CIT(A) in favour of revenue. Since the issue does not arise, Ground No. 3 is dismissed.
12. Ground No. 4: This ground pertains to deduction of Rs. 1,78,71,547/-. This issue was discussed against Ground No. 4 in assessee’s appeal, wherein we have modified the order of CIT(A), directing the AO to allow 100% of the claim u/s. 35(1) and to withdraw 50% claim i.e., weighted deduction to that extent on the un-certified amount. Consequently, the ground is considered partly allowed.
12.1. With reference to the main contention that un-certified amount cannot be allowed, we were informed that the matter is pending before the Hon’ble High Court. However, since Co-ordinate Bench direction in earlier years is in favour of assessee to that extent, there is no merit in Revenue grounds. Accordingly the ground is considered partly allowed.
13. Ground No. 5: This ground pertains to the issue of claim u/s. 10B. Assessee has claimed deduction u/s. 10B to an extent of Rs. 24,68,47,978/- in respect of Export Oriented Undertaking situated at Jeedimetla. The claim was questioned in proceeding u/s. 263 for AY.2005-06 and assessee has filed Writ Petition before the Hon’ble High Court. AO, consistent to the stand taken in earlier years, disallowed the claim. Ld.CIT(A) following the order of ITAT in assessee’s own case for AY. 2008-09 has allowed the claim, by stating as under:
“8.3 I have carefully considered the assessment order and the submissions of the appellant. In this regard, the Hon’ble ITAT vide its order in ITA No.66/Hyd/2013 dt.10-01-2014 in the appellant’s own case for the A.Y. 2008-09 held as under:
“The Assessing Officer following the orders u/s 263 for the A. Y. 2005-06 held that the unit is not newly established undertaking and was existing prior to the incorporation of provisions of section 10B and the conditions are not fulfilled and further that unit is not located in export process zone. Even though the Hon’ble AP High Court merely directed the CIT(A) to examine the approvals granted to the eligible units of the assessee in terms of the policy regulations laid down by Central government, the CIT-IV, however, seems to have raised new ground for denying exemption and the same has been once again disputed by the assessee before the Hon’ble High Court in WP No.1398 of 2011. The Assessing Officer following the orders in earlier years did not allow the claim of the assessee u/s. 10B. The DRP, however, noticed that the issue is subject to revisiona l proceedings by the CIT and the writ petition is pending before the Hon’ble High Court of AP. Since the matter is contested at the Higher Forum legally, the DRP considered it fit not to interfere with the stand of the Assessing Officer but however, directed the Assessing officer to follow the judgment of the Hon’ble High Court of AP as and when issue was decided. It further suggested that demand on account of disallowance of deduction be kept in abeyance till the decision of the Hon’ble High Court of AP. The assessee has raised this issue before us but submitted that the matter is subjudice. Since the DRP has already given clear directions on this issue, we uphold the directions of the DRP with an observation that the AO should follow the same as and when that issue is decided by the Hon’ble High Court of AP. This ground is considered as allowed for statistica l purposes”.
8.4 Since the Hon’ble ITAT has allowed the above said ground and directed the Assessing Officer to follow the decision of the Hon’ble High Court of A.P., by respectfully following the decision of the Hon’ble ITAT, the ground of appeal is allowed and the addition made by the Assessing Officer on this issue is deleted”.
13.1. After considering the rival contentions, we are of the opinion that there is no need to interfere with the direction of the CIT(A). Since the matter is subjudice, the AO is directed to follow the decision of the Hon’ble High Court as when it is rendered. Till such time, the claim of 10B will be considered allowed and the demand if any cannot be claimed from assessee. Since the order of CIT(A) is in tune with the findings of the ITAT in earlier year, there is no need to interfere with the said order. Ground of Revenue on this issue stands rejected.
14. In the result, appeal of Revenue is partly allowed.
15. To sum-up, both the appeals are partly allowed.