Vildirect: IncomeTax-caselaws-2019-VIL-980-ITAT-CHE

2019-VIL-980-ITAT-CHE

Income Tax Appellate Tribunal CHENNAI

I.T.A. No. 1303/CHNY/2019 (Assessment Year: 2015-16)

Date: 03.12.2019

M/s . PHOENIX MEDICAL SYSTEMS PVT. LTD.

THE ACIT, CORPORATE CIRCLE â 5 (2) , CHENNAI - 34

Appellant by: Shri G. Baskar, Advocate
Respondent by: Shri J. Pavitran Kumar, JCIT

BENCH

SHRI DUVVURU RL REDDY, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER

JUDGMENT

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-3, Chennai in ITA No.99/17- 18/A-3 dated 19.03.2019 for the assessment year 2015-16.

2. M/s. Phoenix Medical Services Pvt. Ltd., the assessee, is engaged in the business of “manufacturing of engineering goods”. While making the assessment for the assessment year 2015-16, the Assessing Officer disallowed Rs. 3,01,754/- under the head travelling expenses, Rs. 10,25,000/- claimed to have been incurred towards donation under the head other expenses U/s.37, Rs. 61,200/- penalty paid on sales tax U/s.37. Thus the Assessing Officer made a total disallowance U/s.37 at Rs. 13,87,954/-. Further, the Assessing Officer observed that the assessee claimed weighted deduction U/s.35(2AB). When he sought particulars, the assessee filed Form 3CM issued by the Competent Authority viz., the DSIR dated 07.07.2015, wherein the research and development facilities were approved w.e.f. 01.04.2013 to 31.03.2015 for the purpose of Section 35(2AB). However for availing the benefit U/s.35(2AB), the pre-requisite is classification and quantification of eligible expenses in Form 3CL, which has to be issued by the competent authority. When the Assessing Officer called for such details, the assessee submitted that they are yet to receive Form 3CL from DSIR. Therefore, the Assessing Officer held that the assessee had neither produced the Form 3CL nor any proof relating to its submission of such expenses as provided in the rule before the competent authority for consideration. Therefore, due to non-availability of quantification of expenditure by the competent authority in Form 3CL, the Assessing Officer disallowed the assessee’s claim and added the same to the returned income. Aggrieved, the assessee filed appeal before the CIT(A) and the ld.CIT(A) dismissed the appeal. Aggrieved against that order, the assessee filed this appeal.

3. The ld.AR submitted that the competent authority issued approval of in-house research and development facility U/s.35(2AB) in Form 3CM dated 07.07.2015 w.e.f. 01.04.2013 to 31.03.2015. Inviting our attention to the copy of letter filed by the assessee dated 22.12.2017, by which the assessee submitted the details of expenditure incurred on R&D centre, and the copies of various e-mail communication sent by the assessee to the Ministry of Science and Technology, Department of Scientific and Industrial Research from 19.01.2018 to 22.03.2019, the ld.AR submitted that the competent authority has not responded to the assessee’s request. Therefore, relying on the decision of the Hon’ble jurisdictional High Court in the case of CIT vs. TVS Electronics Ltd., in TCA Nos.1457 & 1458 of 2008, dated 19.03.2019, the ld.AR submitted that the assessee’s claim be allowed.

3.1 Alternatively, the ld.AR also submitted that even otherwise, the assessee’s claim is entitled to be examined within the scope of Section 37 of the Act. With regard to the disallowances of travel expenditure, donation and sales tax penalty, the ld.AR submitted that the ld.CIT(A) grossly erred in upholding these disallowances. The travel expenditure and the expenditure on donation were incurred purely for the purposes of business in accordance with the business necessities of the assessee and hence they are allowable U/s.37. Therefore, he pleaded that the assessee’s appeal be allowed.

4. Per contra, the ld.DR submitted that as per the provisions of Section 35(2AB) r.w.r. 6 of the Income Tax Rules, 1962, the competent authority, being the Principal Scientific Advisor or such authorized officer of the DSIR, shall have to pass an order in writing in Form 3CM that the conditions prescribed in sub-section 2AB of Section 35 r.w.r.6 of the Rules are fulfilled. In this case, the assessee filed Form No.3CM dated 07.07.2015 before the Assessing Officer which mentions that the research and development facilities are approved from 01.04.2013 to 31.03.2015 for the purpose of Section 35(2AB), subject to the conditions underlined therein. This form does not have any enclosure specifying a list of assessee’s various in-house research and development facilities etc. Therefore, this is the first time, the assessee has sought the approval. Further, the assessee filed the return of income for the assessment year 2015-16 on 15.10.2015. Therefore, it accounts must have been audited any date before this date. As per item (c) of Sub-Clause 7A of Rule 6 of the Income Tax Rules, 1962, the company should have maintained a separate account for each approved facility, which shall be audited annually and a report of audit in Form 3CLA shall have to be furnished electronically to the Secretary, DSIR on or before the due date specified in Explanation 2 to Sub-Section (1) of Section 139A of the Act for furnishing the return of income, for each succeeding year. In the assessee’s case, such due date is 30.09.2015. Ongoing through the copy of the assessee’s letter dated 22.12.2017, filed before this Tribunal, the ld.DR submitted that the assessee has furnished such particulars to DSIR, very belatedly i.e., after a long gap of about 2 years 3 months. Probably for that reason, the assessee’s claim might not have been entertained / approved by the prescribed authority. In this regard, the ld.DR inviting our attention to the Hon’ble Jurisdictional High Court’s observation in the case of CIT vs. M/s. TVS Electronics Ltd., supra, that “the assessee cannot be punished for the bureaucratic delay in giving such approval for the year in question, which was in the hands of the Department concerned of the Central Government itself”, cannot be applied in this case, because the entire delay is attributable to the assessee in complying with the requirements of Section 35(2A) r.w.r. 6 of the IT Rules, 1962. Therefore, the above facts distinguish the assessee’s case vis-a-vis the facts of the case relied on by the assessee and hence, the ld.DR submitted that the assessee neither produced Form 3CL nor any proof relating to its submission of such expenses as provided in the Act read with corresponding rule before the competent authority. Further, the competent authority has not quantified the expenditure incurred on in-house research and development facility by the assessee during the previous year, which is sine qua non, and therefore, the lower authorities cannot be found fault with when the assessee has not complied with the terms and conditions of deduction claimed under sub-section 2AB of Section 35. Therefore, the ld.DR, supported the orders of the lower authorities.

4.1 With regard to the assessee’s alternate claim U/s.37, the ld.DR submitted that from the particulars filed by the assessee before the Tribunal, it is seen that the R&D expenses are grouped under note 18, note 20, note 21 and note 23 as on 31.03.2015, which comprises of 17 items, the total of which is Rs. 84,57,845/- under various heads. Since the Assessing Officer has not examined them, this issue may be remitted back for due examination. On the assessee’s plea towards disallowance of travel expenses, the ld.DR submitted that these amounts were incurred towards Director’s father and his family and therefore, the Assessing Officer treated them as personal. Since, the assessee has not produced any material that they were incurred towards business purposes either before the ld.CIT(A) nor before the Hon’ble Tribunal, the ld.DR supported the disallowance. With regard to the disallowance of donation also, the ld.DR took similar plea. On the issue of disallowance of sales tax penalty at Rs. 61,200/-, the ld.DR submitted that the penalty paid is not allowable U/s.37 and hence he supported the orders of the lower authorities.

5. We heard the rival submissions and gone through the relevant material. The assessee claimed deduction under sub-section 2AB of Section 35. Though, the assessee has produced a copy of Form 3CM before the Assessing Officer, it has not attached any enclosure specifying a list of assessee’s various in-house research and development facilities, etc. Though, the assessee filed its return of income with the Revenue for the assessment year 2015-16 on 15.10.2015, it has not filed the required audit report before the competent authority with DSIR on or before 30.09.2015, as required under the provisions. From the material available on record, it is clear that the assessee filed certain particulars before the competent authority with DSIR on 22.12.2017 only, i.e., after a long gap i.e. about 2 years 3 months after the due date and almost at the end of the assessment proceedings U/s.143(3) for the assessment year 2015-16, which was completed on 26.12.2017. In order to claim the exemption from payment of Income Tax, the assessee has to comply with the provisions of the Act as well as the Rules made there under and establish it [35 ITR 312(SC)] before the Income Tax Authorities. In this case, it is clear from the above facts and circumstances that the assessee has not laid the required material before the competent authorities in time and probably because of that they could not entertain/consider it, etc. Therefore, the facts and circumstances of this case, as extracted above, are totally different from the case in the Hon’ble jurisdictional High Court’s decision, supra. Since the assessee has not complied with the provisions as required and has not laid the required material before the authorities concerned, the disallowance made is justified. The corresponding grounds of the assessee fail.

5.1 With regard to the assessee’s alternate claim that the impugned expenditure may be considered and allowed U/s.37, we find merit in the assessee’s claim. However, since the lower authorities have not examined this issue, we deem it fit to remit this issue back to the Assessing Officer for a fresh examination. The assessee shall lay all materials in support of its contention before the Assessing Officer and comply with the requirements of the Assessing Officer in accordance with law. The Assessing Officer is also free to conduct appropriate enquiry as deemed fit, however, he shall furnish due opportunity to the assessee on the materials etc., to be used against the assessee and on due consideration of the assessee’s clarification / explanation shall pass the order in accordance with law.

5.2 With regard to the disallowances made U/s.37 towards travelling expenses and donation, since, the assessee has not laid any material in support of its contention either before the ld.CIT(A) or before us, we do not find any reason to interfere with the order of the ld.CIT(A). With regard to the disallowance of sales tax penalty, since the assessee has not laid any material to say that this disallowance is not warranted U/s.37, we confirm the order of the ld.CIT(A). The corresponding grounds of the assessee on these issues fail.

6. In the result, the assessee’s appeal is treated as partly allowed for statistical purposes.

Order pronounced in the court on the 3rd December, 2019 at Chennai.

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