Lack of fresh notice under Section 143(2) after revised return

Lack of fresh notice under Section 143(2) after revised return invalidates assessment proceedings

Issue

Whether an assessment framed without issuing a fresh notice under Section 143(2) after filing a valid revised return under Section 139(5) is without jurisdiction and saved by Section 292BB.
Whether depreciation is allowable on the opening written-down value (WDV) of a trademark acquired in an earlier year where depreciation was already allowed.
Whether professional fees paid to obtain municipal permission for road access to a factory are deductible as revenue business expenditure under Section 37(1).
Whether DSIR recognition and Form 3CL quantification restrict weighted R&D deductions under Section 35(2AB) in pre-2016 regimes.
Whether foreign exchange fluctuation additions, duplicate interest income additions, proportionate interest disallowance on capital advances, and Rule 8D disallowance (under normal provisions and Section 115JB book profits) are legally sustainable.

Facts

Section 143(2) Notice: The assessee filed revised returns under Section 139(5) for AYs 2012-13, 2014-15, and 2015-16. The Assessing Officer (AO) completed assessments taking cognizance of the revised returns, but the Section 143(2) notice preceded the final revised return, and no fresh notice was issued.
Trademark Depreciation: The assessee acquired the ‘CEAT’ trademark in AY 2011-12, and depreciation was granted in appellate proceedings for that year. The AO restricted depreciation in AY 2012-13, contending ownership began only from 01.01.2012.
Access Road Consultancy Fee: Professional fees were paid to a consultant to obtain Municipal Corporation approval for factory access via the Goregaon-Mulund Link Road to reduce operational congestion. The AO treated this as capital expenditure.
Weighted R&D Deduction: Weighted deductions under Section 35(2AB) were restricted/denied for lack of Forms 3CK/3CM/3CL or due to DSIR quantifying a lower amount in Form 3CL for AY 2016-17.
Other Tax Additions: The AO made additions for foreign currency fluctuation losses, duplicate taxation of interest income offered in AY 2011-12, proportionate interest disallowance under Section 36(1)(iii) on capital advances, and imported Rule 8D disallowance into Section 115JB book profits.

Decision

Assessment Quashed (Section 143(2)): Issuance of a fresh notice under Section 143(2) post-filing a revised return is a mandatory jurisdictional requirement. Section 292BB does not cure the complete absence of such a notice. Assessments for AYs 2012-13, 2014-15, and 2015-16 were held to be without jurisdiction and quashed. (In favor of assessee)
Depreciation on WDV Granted: Since the trademark formed part of the opening block of intangible assets post-allowance in AY 2011-12, depreciation is allowable on its opening WDV without restricting use/ownership dates. (In favor of assessee)
Professional Fee Allowed as Revenue: Expenditure to facilitate factory access and ease business operations without acquiring proprietary rights in municipal land is fully deductible under Section 37(1). (In favor of assessee)
R&D Deduction Remanded: Weighted deduction cannot be denied solely for administrative form delays (3CK/3CM) or capped by DSIR Form 3CL in pre-01.07.2016 regimes. Remanded to the AO for limited verification of dates and non-qualifying balance expenditure. (Matter remanded)
Foreign Exchange & Building Depreciation Remanded: Remanded to the AO for factual verification of foreign exchange reconciliations and building block WDV calculations. (Matter remanded)
Duplicate Interest & Disallowances Deleted:
- Duplicate addition of pre-operative interest already taxed in AY 2011-12 was deleted. (In favor of assessee)
- Interest disallowance under Section 36(1)(iii) was deleted as interest-free funds were sufficient and no direct nexus was established. (In favor of assessee)
- Disallowance under Section 14A/Rule 8D was affirmed as deleted due to sufficient own funds and inclusion of taxable investments. The 2022 amendment to Section 14A is prospective. (In favor of assessee)
- Notional Rule 8D disallowances cannot be imported into Section 115JB book profit calculations under clause (f) of Explanation 1. (In favor of assessee)

Key Takeaways

Mandatory Section 143(2) Notice: Filing a revised return under Section 139(5) requires the AO to issue a fresh Section 143(2) notice to assume valid jurisdiction; failure to do so voids the assessment.
Revenue Nature of Access/Infrastructure Expenses: Costs incurred to improve operational access to existing business facilities without acquiring capital assets are deductible business expenses.
Pre-2016 DSIR Form 3CL Scope: Prior to July 1, 2016, lower expense quantification by DSIR in Form 3CL does not act as an absolute legal cap on Section 35(2AB) weighted deductions.
Section 115JB vs. Rule 8D: Formulaic Section 14A / Rule 8D disallowances cannot be automatically added back to computing book profits under Section 115JB without identifying specific expenses debited to the profit and loss account.

IN THE ITAT MUMBAI BENCH ‘C’

Ceat Ltd.

Deputy Commissioner of Income-tax

NARENDER KUMAR CHOUDHRY, Judicial Member
and ARUN KHODPIA, Accountant Member

IT APPEAL Nos. 7441 and 7650 (Mum.) of 2025 and others
[Assessment years 2012-13, 2014-15, 2015-16 and 2016-17]

SEPTEMBER 2, 2026

Vijay Mehta, Ld. A.R. for the Appellant. A.R. Dhyani, Ld. CIT D.R. for the Respondent.

ORDER

1. These cross appeals have been preferred by the Assessee and the Revenue against the orders even dated 19.09.2025, impugned herein, passed by the National Faceless Appeal Centre(NFAC)/Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) u/s 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Ys. 2012-13, 2014-15 to 2016-17.

2. The questions/issues requiring determination as arranged assessment-year-wise, are as follows:

AY 2012-13

AY/Appeal	Questions arising
	Validity of assessment for want of fresh notice u/s. 143(2) after revised return;
2012-13 -Assessee	depreciation on trademark Rs.5,65,90,951/-; professional fees Rs.30,60,000/-; weighted deduction u/s. 35(2AB) Rs.32,17,70,212/-; foreign-exchange adjustment Rs.1,56,02,229/-.

AY 2014-15

	Validity of assessment for want of fresh notice u/s.
2014-15 -Assessee	143(2); weighted deduction u/s. 35(2AB) Rs.16,53,75,419/-; consequential building depreciation Rs.1,87,263/-.

AY 2015-16

2015-16 -Assessee	Validity of assessment for want of fresh notice u/s. 143(2); weighted deduction u/s. 35(2AB) Rs.19,51,96,311/-.
2015-16 -Revenue	Section 14A disallowance and section 115JB adjustment Rs.5,69,30,791/-, including the plea based on the Finance Act, 2022 Explanation.

AY 2016-17

2016-17 -Assessee	Balance weighted deduction u/s. 35(2AB) Rs.20,94,80,553/-, against the total expenditure and DSIR. quantification referred to in the appellate record.
2016-17 -Revenue	Deletion of section 14A disallowance Rs.6,12,61,778/-; scope of Rule 8D; Finance Act, 2022 Explanation; and corresponding section 115JB adjustment.

3. Since the appeals involve overlapping facts and recurring issues, thus they were heard together and are being disposed of by this composite order.

For the sake of brevity, we shall adjudicate these appeals issuewise, by considering the facts and issues involved in the Assessee’s appeal in ITA No. 7441/Mum/2025 for A.Y. 2012-13 as the lead case. The findings recorded therein shall apply mutatis mutandis to the other connected appeals wherever the facts and issues are identical or substantially similar. However, the issues involving distinguishing facts or arising independently in the remaining appeals shall be adjudicated separately.

4. Coming to lead case for A.Y. 2012-13, we observe that the Assessee filed its original return on 26.11.2012 declaring a loss of Rs.1,47,51,93,918/- and book profit of Rs.14,56,02,131/- u/s. 115JB. Thereafter the Assessee revised the original return, by filing 1^st revised return dated 19.03.2013 and subsequently, 2^nd revised return dated 12.02.2014, declaring a loss of Rs.1,54,39,56,729/-.

5. Considering the original return of income, notice u/s. 143(2) was issued on 29.08.2013 and, according to the assessment order, served on 02.09.2013. Thereafter, the assessment was completed u/s. 143(3) on 29.03.2016. The AO made, inter alia, the following additions/disallowances on account of:

pre-operative interest : Rs.28,11,000/-;

ii.

interest u/s. 36(1)(iii) : Rs.19,96,603/-;

iii.

section 14A read with Rule 8D together with the same adjustment under section 115JB; : Rs.2,53,09,368/-,

iv.

trademark depreciation : Rs.5,65,90,951/-;

professional fees : Rs.30,60,000/-;

vi.

weighted deduction u/s. 35(2AB) : Rs.32,17,70,212/-; and

vii.

foreign-exchange fluctuation : Rs.1,56,02,229/-.

The assessed loss under the normal provisions was stated at Rs.1,11,68,16,366/-, while book profit was computed at Rs.17,09,11,500/-.

6. The Ld. Commissioner though deleted the additions of Rs.28,11,000/- pre-operative interest, Rs.19,96,603/- interest u/s. 36(1)(iii), Rs.2,53,09,368/- u/s. 14A and the corresponding MAT adjustment, however confirmed the remaining additions. Hence, the cross-appeals.

7. The Assessee at the outset challenged the validity of assessment for want of fresh notice u/s. 143(2), after filing revised return of income. The Ld. AR submitted that a valid revised return u/s. 139(5) substitutes the earlier return. A notice u/s. 143(2) is return-specific. Since no notice was issued after the last revised returns, thus the assessments for A.Ys. 2012-13, 2014-15 and 2015-16 are without jurisdiction.

8. The Assessee also placed reliance on various judgements rendered in following cases: LIC Mutual Fund Asset Management Ltd. v. CIT(A) [IT Appeal No. 2824 (Mum.) of 2023, dated 26-2-2024], CIT v. IDEB Buildcon (P.) Ltd. [IT Appeal No. 507 of 2014, dated 2-2-2016], Kelvinator of India Ltd. v. CIT 321 ITR 362 (SC).

9. The Ld. AR further submitted that the issue is a pure legal and jurisdictional issue emerging from the returns and the notices issues, already available on record and is admissible in view of the judgement rendered in National Thermal Power Co. Ltd. v. CIT [1998] 97 229 ITR 383 (SC), even though the same was not urged before the Authorities below in the same form.

10. The plausible case of the Revenue as demonstrated by the Ld. CIT DR and gathered from the assessment record and the submissions, is that a valid notice had already been issued after selection under CASS; the revised return only corrected the return and did not require recommencement of scrutiny; further the Assessee participated fully and suffered no prejudice; any defect stood cured by section 292BB; and the additional ground should not be entertained without verification of the assessment record.

11. We have heard the parties on the issue, perused the material available on record and given thoughtful consideration to their rival claims on this issue. We observe that the additional grounds raised for A.Ys. 2012-13, 2014-15 and 2015-16 arise from the dates of filing of the original/revised returns and issuance of notices, which already form part of the assessment record, and the controversy raised thereby goes to the root of the validity of the assessment proceedings. Neither any fresh investigation into disputed facts is required for adjudication of these grounds nor the Revenue is required to meet any new factual case except by reference to, or production of, the statutory notices and related assessment records already within its domain. The same are, therefore, admitted in terms of the decision of the Hon’ble Supreme Court in NTPC Ltd. (supra).

12. Coming to the merits of jurisdictional or legal issue under consideration, we observe that section 139(5), as applicable, permitted an Assessee discovering an omission or wrong statement to furnish a revised return within the prescribed period. A valid revised return substitutes the original return and constitutes the operative return upon, which assessment is completed. Section 143(2) authorises scrutiny, where the AO considers it necessary or expedient to ensure that the Assessee has not understated income, computed excessive loss, or underpaid tax. The statutory notice is thus, the jurisdictional bridge between the operative return and scrutiny assessment.

13. In LIC Mutual Fund Asset Management Ltd. case (supra) the Mumbai Bench considered the precise question. The Assessee had filed a revised return after the notice issued with reference to the original return; the AO accepted the revised return but issued no fresh notice. The Bench held that the notice is specific to the return, that the revised return substitutes the original, and that non-issuance of notice with reference to the revised return, is an incurable jurisdictional defect. The relevant conclusion in LIC Mutual Fund Asset Management Ltd. reads as under:

“Once a valid revised return of income is filed, the original return is deemed to be withdrawn. notice u/s. 143(2) of the Act is specific to the return of income, not the Assessment Year. non-issuance of notice u/s. 143(2) after the Assessee had filed revised return of income is an incurable defect and is fatal to the assessment order.”

14. The Hon’ble Delhi High Court in Kelvinator of India Ltd. case (supra), while considering waiver of interest, recorded that the filing of the second revised return ‘necessitated the issuance of a fresh notice under section 143(2)’, which was in fact issued before the assessment. The observation supports the return-specific character of the notice, though the principal controversy there concerned interest u/s. 215.

15. The Karnataka High Court in IDEB Buildcon (P.) Ltd. case (supra) declined interference, where the Revenue could not produce acknowledgment establishing service of the notice asserted to have been issued with reference to the revised return. The decision therefore supports the consequence of failure to establish the jurisdictional notice on the revised return; it is not treated as laying down a proposition wider than its facts.

16. The Hon’ble Supreme Court in Hotel Blue Moon (supra) has held that issuance of notice u/s. 143(2) is mandatory, where the Assessing Officer proceeds to scrutinize the return of income. The requirement is not a mere procedural formality but a statutory condition governing assumption of jurisdiction for scrutiny assessment. Further, in CIT v. Laxman Das Khandelwal 171/417 ITR 325 (SC), the Hon’ble Apex Court held that section 292BB may cure defects relating to service of notice, but it cannot cure a complete absence of notice. For the deeming fiction under section 292BB to operate, the notice itself must have emanated from the Department.

17. Thus, from the aforesaid statutory and judicial position, it emerges that issuance of notice u/s. 143(2) is a mandatory jurisdictional requirement, where the Assessing Officer proceeds to scrutinize the return of income. Consequently, where a valid revised return has been filed u/s. 139(5) of the Act and the assessment is ultimately framed on the basis of such revised return, the question whether the statutory requirement of notice u/s. 143(2) stood duly complied with, has to be examined with reference to the facts and record of the relevant assessment year.

18. Coming to the cases in hand, the return-and-notice matrix emerging from the collective synopsis is as follows:

A.Y.	Original return	Revised return	Notice u/s. 143(2)	Recorded position
2012-13	26.11.2012	1^st 19.03.2013; 2nd 12.02.2014	29.08.2013 / served on 02.09.2013	No fresh notice after 12.02.2014
2014-15	29.11.2014	20.10.2015	31.08.2015	No fresh notice after 20.10.2015
2015-16	09.11.2015	22.03.2017	25.04.2016	No fresh notice after 22.03.2017

19. For each of these years, the notice preceded the last revised return and the assessment was completed by taking cognizance of that revised return. No fresh notice is shown to have emanated from the Department thereafter. Participation cannot create jurisdiction, which the statute conditions upon issuance of notice with reference to the operative return. Section 292BB consequently has no application to the complete absence of such notice.

20. Thus, the assessments for A.Ys. 2012-13, 2014-15 and 2015-16 are accordingly, held without jurisdiction and, therefore, liable to be quashed. Consequently, the Assessee’s jurisdictional grounds for these three assessment years are allowed.

21. In view of our decision on the aforesaid legal/jurisdictional issue, the Revenue’s appeals for A.Ys. 2012-13, 2014-15 and 2015-16, arising out of the assessments, which have been quashed, do not survive for adjudication. The same are, therefore, dismissed as infructuous.

22. Nevertheless, since both the parties have addressed the issues on merits at length and the record also contains cross-appeals, we consider it appropriate to record our alternative findings on merits as well, so that the controversies involved are adjudicated comprehensively, in the event the aforesaid jurisdictional conclusion does not survive in further proceedings.

23. Coming to the merits of the case pertains to AY 2012-13, we observe 1st issue involved relates to ‘DEPRECIATION ON TRADEMARK’. Brief facts relevant for adjudication of this issue are that the Assessee acquired worldwide rights in the ‘CEAT’ trademark from Pirelli & C.S.P.A. under agreement dated 06.10.2010. The initial consideration of EUR 4.5 million was paid on 22.10.2010 and the bank guarantee was furnished on 12.11.2010, which, under the agreement, constituted the effective date. Pirelli retained, as licensee of the Assessee, limited rights up to 31.12.2011 for specified territories and products.

24. The AO proceeded on the footing that the Assessee became owner and put the trademark to use only on 01.01.2012. He therefore allowed depreciation at 12.5%, amounting to Rs.8,00,05,252/-, on adjusted cost of Rs.64,00,42,013/-, as against the claim of Rs.13,65,96,203/-, and disallowed Rs.5,65,90,951/-.

25. The Ld. Commissioner affirmed the decision of AO, holding that the limited rights continued with Pirelli until 31.12.2011 and that the Assessee had ultimately owned and put the mark to use on 01.01.2012.

25.1 The AO’s material conclusion was:

” The Assessee is eligible for depreciation in AY 2012-13 wherein the Assessee became the owner of the asset on 01.01.2012. the allowable depreciation for AY 2012-13 comes at Rs.8,00,05,252/- whereas the claim. was Rs.13,65,96,203/.”

26. The Ld. Commissioner thus, substantially adopted this premise and confirmed the disallowance of Rs.5,65,90,951/-.

27. The Ld. AR at the outset on the issue under consideration submitted that ownership passed on 12.11.2010; Pirelli’s retained use was expressly as a licensee of the Assessee; the trademark entered the block of intangible assets in A.Y. 2011-12; and the Tribunal, in the Assessee’s own case for that year, upheld depreciation.

28. The Ld. DR on the contrary relied on the agreement’s temporary retained rights and the orders below.

29. We have heard the parties on this issue, perused the material available on record and given thoughtful consideration to the rival claims. The controversy essentially relates to the Assessee’s entitlement to depreciation on the trademark “CEAT” and, more particularly, whether for A.Y. 2012-13 the depreciation could be restricted by proceeding on the basis that the trademark became available to the Assessee only from 01.01.2012, notwithstanding the Assessee’s case that ownership had already vested in it on 12.11.2010.

30. The Assessee has consistently contended that, under the Trademark Assignment Agreement, the entire right, title and interest in the trademark stood assigned to it on the stipulated effective date. In this regard, the expression “Assigned Trademark Rights” has been defined in the agreement as under:

“Assigned Trademark Rights” (or “ATR”) shall mean all the right, title and interest owned by Assignor on the Effective Date in and to (a) the Trademark, (b) the Domain Names, (c) registrations and applications for registration of the Trademark, as set forth on Schedule B hereto, including renewals and extensions of such registrations, (d) common law rights in the Trademark and (e) goodwill symbolized by the Trademark.”

The agreement further defines the “Effective Date” in the following terms: “Effective Date shall mean the date when the Assignor has received both the Initial Consideration and the Bank Guarantee.”

31. According to the Assessee, the initial consideration of Euro 4.5 million was paid on 22.10.2010 and the stipulated bank guarantee was issued on 12.11.2010. On that basis, it is contended that the assignment became effective on 12.11.2010 itself.

32. We further observe that the agreement also specifically deals with the limited rights retained by Pirelli after the assignment. Clause 5, insofar as relevant, provides as under:

“As of the Effective Date Assignor has, for the term as hereinafter contained, free of charge, the following rights:

The exclusive right to use, as a licensee of the Assignee, and to grant exclusive sub-licenses to its Affiliates to use, the Trademark for a limited period commencing as of the Effective Date up to December 31, 2011, in relation to radial tyres in Europe, Latin America, Turkey and Mexico.

The exclusive right to use, as a licensee of the Assignee, and to grant exclusive sub-licenses to its Affiliates to use, the Trademark for a limited period commencing as of the Effective Date up to December 31, 2011, in relation to cross-ply tyres in Latin America, Turkey and Mexico.”

33. The aforesaid stipulation is significant. The rights retained by Pirelli were expressly exercisable “as a licensee of the Assignee” and only for a limited period, specified territories and specified products. Thus, the agreement itself proceeds on the basis that, from the effective date, the Assessee had become the owner of the trademark and Pirelli thereafter continued to use it only in the capacity of a licensee. Such limited licensed use cannot be construed as postponing or negating the transfer of ownership; rather, it presupposes the title of the Assessee as licensor.

34. More importantly, the very same agreement and the question of ownership of the trademark had already been examined in the Assessee’s own case for A.Y. 2011-12. The Ld. Commissioner, after considering the terms of the agreement, the nature of the rights transferred and the surrounding material, accepted that the Assessee had acquired ownership of the brand “CEAT” during the relevant previous year and allowed depreciation thereon at the applicable half rate.

35. We further observe that the Tribunal, in the Assessee’s own case for A.Y. 2011-12 inDy. CIT v. CEAT Ltd. [IT Appeal No. 679 (Mum.) of 2017, dated 13.03.2019], while affirming the said conclusion, recorded as under:

“After taking all the facts and circumstances into account, we find that in this case the Assessee became owner of the trade mark CEAT immediately upon the signing of trade mark agreement when the Assessee has also made the payment of 9 million Euro. We are therefore in complete agreement with the conclusion drawn by the Ld. CIT(A) who has passed a very comprehensive and detailed order taking into account various legal and factual aspects of the matter. In our considered view, the Assessee has rightly claimed the depreciation on the trade mark and therefore we are inclined to uphold the order of the Ld. CIT(A).”

36. Thus, the acquisition and ownership of the very same trademark under the very same agreement already stood accepted in A.Y. 2011-12. No distinguishing fact, alteration in the agreement or subsequent event having the effect of divesting the Assessee of ownership has been brought to our notice for A.Y. 2012-13. Once the trademark stood acquired and depreciation thereon was allowed in the preceding year, it necessarily formed part of the opening block of intangible assets for the year under consideration.

37. The proviso to section 32(1), restricting depreciation to 50% where an asset is acquired and put to use for less than 180 days, operates in the year in which such asset is first acquired and put to use. The said restriction cannot be reapplied to an asset already forming part of the opening written-down value in the subsequent assessment year. Any such approach would, in effect, reopen the conclusion regarding acquisition and user already accepted in A.Y. 2011-12.

38. Thus, in view of the above, particularly the express terms of the agreement and the Tribunal’s decision in the Assessee’s own case for A.Y. 2011-12, we find no justification for restricting depreciation in A.Y. 201213 by treating the trademark as though it had been newly acquired or first put to use during the year under consideration. The Assessee is, therefore, in our considered view, entitled to depreciation on the opening written-down value of the trademark at the rate applicable under section 32 of the Act.

39. Accordingly, the disallowance of Rs.5,65,90,951/- is deleted and the Assessee’s ground on this issue is allowed.

40. Coming to the 2nd issue, which pertains to professional fees for road access for A.Y. 2012-13, we observe that the Assessee paid Rs.30,60,000/- to Trans Salgaonkar Project Management Services Pvt. Ltd. towards professional assistance for obtaining the requisite NOC/permission from the Municipal Corporation of Greater Mumbai for access to the Goregaon-Mulund Link Road. The stated business purpose of the expenditure was to facilitate smoother ingress and egress to the existing factory premises and to reduce the traffic congestion at Subhash Road, which was affecting movement to and from the factory.

41. The AO treated the aforesaid expenditure as capital in nature on the premise that it was a one-time payment, which resulted in an enduring right of access. The AO, inter alia, recorded as under:

“The payment was made for getting access from additional road. The Assessee has got a right of access from MCGM land which is of enduring advantage.”

42. The Ld. Commissioner concurred with the AO and held that the facility obtained by the Assessee through such payment was enduring in nature. The alternative claim of depreciation was also rejected on the ground that the facility so obtained did not constitute a depreciable asset within the meaning of section 32 of the Act. Consequently, the disallowance of Rs.30,60,000/- was confirmed.

43. The Ld. AR, on the other hand, contended that the expenditure did not result in acquisition of any road, land or proprietary interest in favour of the Assessee. According to the Assessee, the payment was merely incurred to facilitate access to the existing factory and thereby improve the efficiency of the existing business operations. It was specifically contended that ownership of the road and the underlying land continued to vest with the municipal authority and no transferable, exclusive or alienable right was acquired by the Assessee.

44. The Assessee also placed reliance on the judgment of the Hon’ble Bombay High Court in CIT v. Sociedade De Fomento Industrial (P.) Ltd. [2020] 429 ITR 358 (Bombay), wherein expenditure incurred towards a bridge used for transportation was held to be revenue in character, inter alia, because the bridge was not owned by the Assessee and the expenditure did not result in acquisition of any proprietary asset or permanent right in its favour. The Revenue, however, supported the orders of the authorities below and emphasised the enduring nature of the benefit and the non-recurring character of the payment.

45. We have heard the parties on this issue, perused the material available on record and given thoughtful consideration to the rival claims. It is well settled that the test of enduring benefit, though relevant, is not conclusive by itself. The real enquiry is whether the expenditure has brought into existence an asset or advantage in the capital field, or whether it has merely facilitated the carrying on of the existing business more efficiently and profitably without creating any independent capital asset or proprietary right in favour of the Assessee.

46. In the present case, the material available on record does not indicate that the Assessee acquired ownership over any part of the Goregaon-Mulund Link Road or the underlying municipal land. The title continued to vest with the municipal authority. Equally, nothing has been brought on record to demonstrate that the Assessee acquired any alienable, exclusive or transferable proprietary interest in the road or land. What was obtained was permission or facilitation of access to the existing factory premises.

47. The nature and object of the expenditure are also significant. The expenditure was not incurred for setting up a new business, establishing a new source of income or acquiring a new profit-making apparatus. Its object was to improve access to the Assessee’s already existing factory and to reduce congestion affecting its day-to-day business operations. The advantage obtained, therefore, was integrally connected with the efficient conduct of the existing business.

48. Merely because the benefit of improved access may continue over a period of time, the expenditure cannot, for that reason alone, be regarded as capital expenditure. What is material, is the character of the advantage in a commercial sense. Where no capital asset or proprietary interest is acquired and the expenditure merely facilitates the conduct of an existing business, the enduring nature of the benefit by itself does not convert the expenditure into capital expenditure.

49. The principle laid down by the Hon’ble Bombay High Court in Sociedade De Fomento Industrial (P.) Ltd. (supra) is apposite to the facts before us. In that case also, the expenditure facilitated transportation and business operations, while ownership of the infrastructure did not vest with the Assessee. In the present case as well, the road and land remained the property of the municipal authority and the Assessee acquired no proprietary or transferable interest therein.

50. Accordingly, having regard to the nature, purpose and effect of the expenditure, we hold that the payment of Rs.30,60,000/- was incurred wholly for facilitating the existing business operations and did not result in acquisition of any asset or advantage in the capital field. The expenditure is, therefore, revenue in nature and allowable u/s. 37(1) of the Act.

51. Consequently, the disallowance of Rs.30,60,000/- is deleted and the Assessee’s ground on this issue is allowed.

52. Coming to the 3^rd common issue arising in the Assessee’s appeals for A.Ys. 2012-13, 2014-15 and 2015-16 pertains to the restriction of deduction in respect of scientific research expenditure to 100%, instead of allowing the weighted deduction at 200% claimed u/s. 35(2AB) of the Act. Since the basic legal controversy and substantial factual matrix are common, we take A.Y. 2012-13 as the lead year, while the distinguishing features arising in A.Ys. 2014-15 and 2015-16 are dealt with separately.

53. The year-wise expenditure, deduction claimed and additional weighted deduction disallowed are as under:

A.Y.	Capital expenditure	Revenue expenditure	Total expenditure	Deduction claimed @ 200%	Additional deduction disallowed
2012-13	Rs.22,67,98,517 /-	Rs.9,49,71,695/-	Rs.32,17,70,212/-	Rs.64,35,40,424/-	Rs.32,17,70,212/-
2014-15	Rs.37,56,282/-	Rs.16,16,19,137/-	Rs. 16,53,75,419/-	Rs.33,07,50,838/-	Rs.16,53,75,419/-
2015-16	Rs.69,32,563/-	Rs. 18,82,63,748/-	Rs.19,51,96,311/-	Rs.39,03,92,622/-	Rs.19,51,96,311/-

54. Coming to A.Y. 2012-13 — Lead year, we observe that the material placed on record shows that the Assessee had established an in-house Research and Development facility at Bhandup, Mumbai, which had been recognised by the Department of Scientific and Industrial Research (“DSIR”). The recognition was renewed vide certificate dated 23.06.2010 up to 31.03.2014. Subsequently, the R&D facility was shifted from Bhandup, Mumbai to Halol, Gujarat and the shifting was specifically approved by the DSIR vide letter dated 05.08.2011.

55. During the relevant previous year, the Assessee incurred aggregate scientific research expenditure of Rs.32,17,70,212/-, comprising capital expenditure of Rs.22,67,98,517/- and revenue expenditure of Rs.9,49,71,695/-. Against such expenditure, the Assessee claimed weighted deduction at 200% amounting to Rs.64,35,40,424/- u/s. 35(2AB) of the Act.

56. The AO did not dispute the actual incurrence of the scientific research expenditure and allowed the expenditure to the extent of 100%. However, the additional weighted component of Rs.32,17,70,212/- was disallowed principally on the ground that the Assessee had not furnished Forms 3CK, 3CM and 3CL. Thus, the expenditure itself was not rejected as non-genuine or unrelated to scientific research; rather, the additional deduction was denied essentially for want of the prescribed approval/documentation.

57. The Ld. Commissioner affirmed the action of the AO. The Ld. Commissioner was principally influenced by the absence of Form 3CM and Form 3CL, the view that Form 3CL was necessary for quantification of eligible expenditure, the fact that the expenditure approved by the DSIR in A.Y. 2016-17 was substantially lower than the amount claimed in the present year and the alleged absence of a clear bifurcation of expenditure between the Bhandup and Halol facilities.

58. Before us, the Ld. Counsel contended that the in-house R&D facility had remained continuously recognised by the DSIR and that even the shifting of the facility from Bhandup to Halol was expressly approved by the prescribed authority. Thus, the existence and genuineness of the R&D activity stood accepted by the Revenue itself, as the entire expenditure had been allowed at 100%.

59. The Ld. Counsel further submitted that Forms 3CK had subsequently been filed for all three assessment years along with petitions seeking condonation of delay and those applications remained pending before the concerned authority. Thus, an otherwise admissible substantive deduction ought not to be denied merely because the requisite prescribed forms were delayed or were not issued by the authority within the relevant period.

60. The Assessee principally relied upon CIT v. Claris Lifesciences Ltd. [2010] 326 ITR 251 (Gujarat) and CIT v. Sandan Vikas (India) Ltd. [2011] 335 ITR 117 (Delhi) to contend that, where the prescribed approval substantively exists, weighted deduction cannot be denied merely because the approval was communicated subsequently or mentioned a later date.

61. On the contrary, the Ld. DR supported the orders of the authorities below and submitted that mere general recognition of an R&D facility by the DSIR was not equivalent to approval specifically contemplated u/s. 35(2AB). It was contended that approval of the facility by the prescribed authority and the agreement contemplated under sub-section (3), read with Rule 6, constituted substantive statutory requirements. Therefore, according to the Revenue, absence of the requisite approval could not be cured merely by showing general recognition of the R&D facility.

62. We have heard the parties on the issue, perused the material available on record and given thoughtful consideration to the rival claims. Section 35(2AB)(1), as applicable to the assessment years under consideration, provided weighted deduction in respect of eligible expenditure incurred on an in-house R&D facility “as approved by the prescribed authority”. Further, section 35(2AB)(3) contemplated an agreement with the prescribed authority for cooperation in the R&D facility and for audit of the accounts maintained for such facility. Rule 6 prescribed Form 3CK for making the application and Form 3CM for communicating approval.

63. At the same time, the procedural regime applicable to the present assessment years cannot be equated with the amended regime introduced subsequently. Section 35(2AB)(4), as it then stood, required the prescribed authority to furnish a report relating to approval of the facility. The express requirement that Form 3CL should separately quantify the expenditure incurred during the previous year and eligible for weighted deduction was introduced by the Income-tax (10th Amendment) Rules, 2016 with effect from 01.07.2016.

64. Therefore, insofar as A.Ys. 2012-13, 2014-15 and 2015-16 are concerned, annual quantification of the eligible expenditure in Form 3CL cannot be treated as a statutory precondition in the manner contemplated under the subsequently amended Rules. To that extent, the reasoning of the Ld. Commissioner cannot be sustained.

65. InClaris Lifesciences Ltd. (supra), the Hon’ble Gujarat High Court considered the entitlement to weighted deduction where the R&D facility stood approved by the prescribed authority. The Court held, in substance, that once the facility was approved, the benefit of weighted deduction could not be curtailed merely with reference to the date mentioned in the approval certificate. The significance of the decision lies in the distinction between the existence of substantive approval and the date or form, in which such approval is communicated.

66. The Hon’ble Delhi High Court in Sandan Vikas (India) Ltd. (supra) followed the principle laid down in Claris Lifesciences Ltd. and held that where the facility stood approved, the weighted deduction could not be denied merely by restricting the benefit to the date specified in the certificate issued by the prescribed authority.

67. The aforesaid authorities proceed on the existence of substantive approval by the prescribed authority. They do not dispense with the statutory requirement of approval contemplated u/s. 35(2AB) or the agreement contemplated under sub-section (3). A distinction must, therefore, be maintained between delayed communication of an existing approval and complete absence of the substantive approval itself.

68. In Apollo Tyres Ltd. v. Asstt. CIT (Kerala), the agreement contemplated under section 35(2AB)(3) was treated as material to the statutory entitlement. Further, even in Claris Lifesciences Ltd. and Sandan Vikas (India) Ltd., approval by the prescribed authority was in existence and the controversy primarily concerned its effective period.

69. Thus, procedural deficiencies cannot be elevated, so as to defeat a substantive entitlement, where the prescribed approval otherwise exists; equally, the substantive statutory requirement itself cannot be presumed in the complete absence of material establishing such approval.

70. Thus, applying the aforesaid principles to the lead year A.Y. 201213, we find that the Assessee’s R&D facility stood recognised during the relevant period and its shifting from Bhandup to Halol was expressly approved by the DSIR vide letter dated 05.08.2011. The AO also accepted the actual incurrence of the scientific research expenditure by allowing deduction to the extent of 100%. These circumstances substantially support the Assessee’s case regarding the existence and genuineness of its in-house R&D facility and the corresponding scientific research activity.

71. However, the material presently before us does not conclusively establish the precise date and operative period of the agreement contemplated u/s. 35(2AB)(3), the final status of the Assessee’s Form 3CK application and whether any approval subsequently communicated in Form 3CM operates from the date of the original/continued recognition.

72. Further, since the facility was shifted during the relevant period from Bhandup to Halol, the expenditure relatable to the recognised facility during the respective periods requires factual verification. Equally, expenditure representing the cost of land or building, or any other expenditure specifically excluded by section 35(2AB), cannot form part of the weighted deduction.

73. We are, however, unable to sustain the Ld. Commissioner’s reliance upon the expenditure quantified by the DSIR for A.Y. 2016-17 as determinative of the claim for A.Y. 2012-13. The quantification in a subsequent year governed by a different procedural regime cannot mechanically be imported into an earlier assessment year.

74. Accordingly, for A.Y. 2012-13, the claim requires limited verification of whether the approval contemplated u/s. 35(2AB), the agreement contemplated under sub-section (3) and their respective operative periods covered the relevant previous year. If these substantive conditions stand satisfied, the AO shall quantify and allow the eligible additional weighted deduction, after excluding expenditure expressly barred by the statute.

75. Coming to A.Y. 2014-15 case, we observe that the Assessee incurred aggregate R&D expenditure of Rs.16,53,75,419/-, comprising capital expenditure of Rs.37,56,282/- and revenue expenditure of Rs.16,16,19,137/. The Assessee claimed weighted deduction of Rs.33,07,50,838/-, whereas the AO allowed deduction only to the extent of the actual expenditure and disallowed the additional weighted component of Rs.16,53,75,419/-.

76. Unlike A.Y. 2012-13, there was no shifting of the R&D facility during the relevant previous year. The Halol facility had already been approved for shifting on 05.08.2011 and the recognition relied upon by the Assessee continued up to 31.03.2014. Therefore, the question of allocating expenditure between Bhandup and Halol, does not arise in the same manner, as in the lead year.

77. The verification for this year shall therefore remain confined to whether the recognition subsisting up to 31.03.2014, read with the approval for shifting, covered the Halol facility throughout the relevant previous year and whether the agreement contemplated u/s. 35(2AB)(3) operated during the relevant period.

78. If the substantive approval and agreement are found to cover the relevant previous year, the AO shall quantify and allow the eligible additional weighted deduction, after excluding expenditure expressly barred by the statute.

79. Coming to A.Y. 2015-16 case, we observe that the Assessee incurred aggregate R&D expenditure of Rs.19,51,96,311/-, comprising capital expenditure of Rs.69,32,563/- and revenue expenditure of Rs.18,82,63,748/. Against the weighted deduction claimed at Rs.39,03,92,622/-, the AO restricted the deduction to Rs.19,51,96,311/-and disallowed the additional weighted component of Rs.19,51,96,311/-.

80. For this assessment year, the distinguishing feature is that the earlier recognition had expired on 31.03.2014, whereas the Assessee claims that the very same Halol facility was again recognised for the period 01.04.2014 to 31.03.2018. Thus, the recognition relied upon commences from the first day of the relevant previous year, which supports the Assessee’s contention regarding continuity of the facility. Nevertheless, the operative status of Form 3CM and the agreement contemplated u/s. 35(2AB)(3) for the relevant period still requires verification.

81. The subsequent issuance of Form 3CM for the same Halol facility for later assessment years is a relevant circumstance demonstrating continued existence and recognition of the facility. However, such subsequent approval cannot, without examining its terms and any order passed upon the Assessee’s pending applications/condonation petitions, automatically be treated as retrospective for A.Y. 2015-16.

82. Accordingly, for A.Y. 2015-16 also, the renewed recognition, the approval contemplated u/s. 35(2AB), the statutory agreement and their operative periods require verification. If these substantive conditions stand satisfied for the relevant previous year, the AO shall quantify and allow the eligible additional weighted deduction, after excluding expenditure expressly barred by the statute.

83. In the light of the foregoing discussion, we hold that the weighted deduction for the three assessment years cannot be denied merely on the ground of absence or non-production of annual quantification in Form 3CL by applying the amended procedural requirement effective from 01.07.2016. The Assessee has substantially demonstrated the existence of a recognised in-house R&D facility and the genuineness of the expenditure, which has already been accepted by the AO to the extent of 100%.

84. At the same time, the substantive requirements relating to approval of the facility and the agreement contemplated u/s. 35(2AB)(3) require limited factual verification.

85. We, accordingly, remand the cases to the file of the AO for the limited verification of:

(i)

the DSIR recognition certificates and their respective operative periods;

(ii)

the letter dated 05.08.2011 approving shifting of the R&D facility from Bhandup to Halol, wherever relevant;

(iii)

Forms 3CK filed for the respective years and the status/outcome of the condonation petitions;

(iv)

any Form 3CM subsequently issued and its operative date;

(v)

the agreement contemplated u/s. 35(2AB)(3) and the period covered thereby;

(vi)

facility-wise audited details of capital and revenue expenditure, wherever required; and

(vii)

whether any part of the expenditure represents the cost of land or building or otherwise falls outside the ambit of section 35(2AB).

86. We clarify that the remand is confined to the substantive approval, the statutory agreement, their operative periods and consequential quantification of eligible expenditure. The AO shall not insist upon annual quantification in Form 3CL by applying the amendment effective from 01.07.2016 to these assessment years. The actual incurrence of expenditure already accepted and allowed at 100% shall not be reopened, except for identifying duplication or expenditure expressly excluded by the statute.

87. Where the verification establishes that the substantive approval and agreement covered the relevant period, including where any subsequently issued approval is found to operate from the date of recognition, the corresponding additional weighted deduction shall be allowed.

88. The issue, therefore, is remanded to the file of the AO for the aforesaid limited verification and consequential quantification alone, suffice to say, by affording a reasonable opportunity of being heard to the Assessee and considering the material and submissions placed/to be placed on record. The AO shall pass a speaking order separately for each assessment year and shall not travel beyond the limited scope of verification specified hereinabove.

89. Thus, the impugned findings of the Ld. Commissioner for A.Ys. 2012-13, 2014-15 and 2015-16 on this issue are set aside and the respective grounds are allowed for statistical purposes, subject to the limited verification directed hereinabove.

90. Coming to A.Y. 2016-17 case on this issue, the record states that the AO initially allowed only 100% of total expenditure of Rs.49,00,78,678/-; Form 3CL dated 29.11.2019 quantified Rs.28,05,98,125/-; and a rectification order dated 29.10.2020 granted weighted deduction to that extent. The balance dispute is Rs.20,94,80,553/- made by the AO and affirmed by the Ld. Commissioner.

91. The facts relevant for adjudication of this issue are that the Assessee had established an in-house Research and Development facility, initially at Bhandup, Mumbai, which was recognised by the Department of Scientific and Industrial Research (“DSIR”). The said facility was subsequently shifted to Halol, Gujarat with the approval of the DSIR and its recognition continued during the relevant period. For A.Y. 2016-17, the Assessee incurred aggregate expenditure of Rs.49,00,78,678/- on its in-house R&D facility, comprising capital expenditure of Rs.88,96,125/-and revenue expenditure of Rs.48,11,82,553/-, and claimed weighted deduction thereon at the applicable rate u/s. 35(2AB).

92. In the assessment proceedings, the AO initially proceeded on the premise that the requisite Forms 3CK, 3CM and 3CL had not been furnished. The AO, inter alia, observed that since the Assessee did not have the mandatory approval in Form 3CM and had also not furnished Form 3CL mentioning the quantum of allowable expenditure, the claim for additional weighted deduction was liable to be rejected. At the same time, the AO himself clarified that in case Form 3CL was received subsequently, the deduction u/s. 35(2AB) would be allowable after due verification.

93. However, the aforesaid factual premise was thereafter corrected by the AO through corrigendum dated 31.12.2018, whereby it was clarified that the Assessee had in fact furnished Form 3CK as well as the approval of the prescribed authority in Form 3CM, and that the deficiency was confined to non-furnishing of Form 3CL. Thus, the controversy thereafter ceased to be one concerning absence of approval of the R&D facility and stood confined to the effect of quantification of expenditure in Form 3CL.

94. Subsequently, DSIR issued Form 3CL dated 29.11.2019, quantifying eligible expenditure at Rs.28,05,98,125/-, comprising capital expenditure of Rs.88,96,125/- and revenue expenditure of Rs.27,17,02,000/-. The Assessee thereafter moved an application u/s. 154 and the AO, vide rectification order dated 29.10.2020, allowed weighted deduction on the expenditure quantified by DSIR. Consequently, as against the aggregate expenditure of Rs.49,00,78,678/- claimed by the Assessee, weighted deduction stood recognised only with reference to Rs.28,05,98,125/-, leaving the balance expenditure of Rs.20,94,80,553/-in dispute.

95. The Ld. Commissioner affirmed the restriction principally on the reasoning that even prior to the amendment to Rule 6(7A), Form 3CL constituted the DSIR’s report in relation to the approved R&D facility and the expenditure connected therewith. The Ld. Commissioner further held that DSIR, being the prescribed authority, was competent to determine the eligible expenditure and that the AO could not grant deduction beyond the amount certified in Form 3CL.

96. The Ld. Commissioner also noticed that while DSIR had accepted the entire capital expenditure of Rs.88,96,125/-, it had restricted the eligible revenue expenditure from Rs.48,11,82,553/- to Rs.27,17,02,000/-. On that basis, it was inferred that a part of the revenue expenditure did not qualify for weighted deduction. It was further noticed that though the Assessee had approached DSIR for reconsideration, no revised Form 3CL had been issued and, therefore, the existing quantification was treated as binding. Consequently, the disallowance of Rs.20,94,80,553/- was confirmed.

97. Before us, the Ld. Counsel contended that the Assessee had fulfilled the substantive statutory requirements for claiming deduction u/s. 35(2AB), inasmuch as the in-house R&D facility stood duly recognised and approved, Form 3CK had been furnished and approval in Form 3CM had admittedly been obtained. It was further submitted that the specific statutory requirement empowering DSIR to quantify the eligible expenditure in Form 3CL was introduced only with effect from 01.07.2016. Since the previous year relevant to A.Y. 2016-17 ended on 31.03.2016, it was contended that the subsequently introduced mechanism of quantification could not be applied retrospectively so as to restrict the Assessee’s claim.

98. The Assessee principally relied upon Asstt. CIT v. Crompton Greaves Ltd. [2020] 181 ITD 40 (Mumbai – Trib.) and Garware Technical Fibres Ltd. v. Dy. CIT (Pune – Trib.).

99. On the contrary, the Ld. DR supported the impugned order and contended that once DSIR itself had quantified the eligible expenditure at Rs.28,05,98,125/-, the AO could not allow deduction beyond the amount certified by the prescribed authority.

100. We have heard the parties on this issue, perused the material available on record and given thoughtful consideration to the rival claims. The distinction between the pre-amended and amended provisions of Rule 6(7A) assumes significance. Under the pre-amended provision, the prescribed authority was required to furnish a report in Form 3CL in relation to approval of the in-house R&D facility. The specific requirement to quantify the expenditure incurred during the previous year and eligible for weighted deduction was expressly introduced only with effect from 01.07.2016. Therefore, the material question is whether the amount subsequently quantified by DSIR in Form 3CL could operate as an absolute ceiling for an assessment year governed by the pre-amended regime.

101. In Crompton Greaves Ltd. (supra), the Coordinate Bench, after comparing the preamended and amended provisions, held that prior to 01.07.2016 there was no requirement for DSIR to quantify the eligible expenditure and that such mandate was introduced only by the amended Rule. Similarly, in Garware Technical Fibres Ltd. (supra), the Tribunal specifically considered A.Y. 2016-17 and held that the amended requirement of quantification by DSIR would not govern that assessment year in the same manner as subsequent years.

102. Applying the aforesaid legal position to the facts of the present case, we find that the Assessee’s R&D facility admittedly stood recognised and approved by DSIR, and the availability of Form 3CM is no longer in dispute after the corrigendum issued by the AO. Further, the underlying scientific research expenditure has already been accepted to the extent of 100%. Thus, this is not a case where the facility itself was unapproved or where the expenditure was rejected in entirety as non-genuine or unrelated to scientific research.

103. At the same time, the fact remains that DSIR subsequently quantified a lesser amount in Form 3CL and the balance expenditure of Rs.20,94,80,553/- has not been examined item-wise by the AO to determine whether the entire amount was actually incurred on the approved in-house R&D facility and whether any component thereof falls within the statutory exclusions, including expenditure on land, building or any other non-qualifying item.

104. In these circumstances, we are of the considered view that the claim of the Assessee cannot be rejected merely because DSIR quantified a lower amount in Form 3CL, particularly when the relevant previous year ended on 31.03.2016, whereas the specific quantification mechanism was introduced with effect from 01.07.2016. However, the Assessee’s entitlement to weighted deduction on the balance expenditure of Rs.20,94,80,553/- would necessarily remain subject to verification that such expenditure was actually incurred on the approved R&D facility and was otherwise eligible u/s. 35(2AB).

105. Thus, we accordingly, remand the matter to the file of the AO for the limited verification of the balance expenditure of Rs.20,94,80,553/-. The AO shall verify whether the said expenditure:

(i)

was actually incurred on the approved in-house R&D facility at Halol;

(ii)

is supported by the relevant books of account, audit records and other contemporaneous material;

(iii)

does not include expenditure on land or building or any other item specifically excluded from the ambit of section 35(2AB); and

(iv)

does not represent any expenditure otherwise unrelated to the approved scientific research activity.

106. The AO shall not restrict the deduction merely on the basis of the amount quantified in Form 3CL, but shall verify the eligibility of the disputed expenditure in accordance with the provisions applicable to A.Y. 2016-17. If any question arises as to whether an activity constitutes scientific research, the procedure prescribed u/s. 35(3) shall be followed.

107. The issue is, therefore, remanded to the file of the AO for the aforesaid limited verification, suffice to say, by affording a reasonable opportunity of being heard to the Assessee and considering the material and submissions placed/to be placed on record. If the balance expenditure of Rs.20,94,80,553/-, or any part thereof, is found to have been incurred on the approved in-house R&D facility and otherwise satisfies the requirements of section 35(2AB), the corresponding weighted deduction shall be allowed.

108. Thus, the findings of the Ld. Commissioner on this issue are set aside and Ground No. 1 is allowed for statistical purposes, subject to the limited verification directed hereinabove.

109. Coming to the 4th issue, which pertains to foreign-exchange fluctuation u/s. 43A for A.Y. 2012-13, we observe that the Assessee claimed a loss of Rs.60,76,984/- in the return of income. Subsequently, the Assessee sought to reconcile the foreign-exchange fluctuation entries and contended that, apart from the aforesaid loss, a revenue gain of Rs.22,18,145/- ought to have been offered to tax and, therefore, the correct aggregate adjustment worked out to Rs.82,95,129/-. The AO, however, made an addition of Rs.1,56,02,229/-, which was confirmed by the Ld. Commissioner on the ground that the Assessee had failed to furnish sufficient material to controvert the computation made by the AO.

110. Before us, the Assessee contended that the addition made by the AO exceeded the correct adjustment by Rs.73,07,100/-. The AO, disallowed Rs.1,56,02,229/-, and the Ld. Commissioner confirmed the amount because, in his view, no material was produced to controvert the AO.

Particular	Amount
Loss claimed in return	Rs.60,76,984/-
Profit ought to be offered	Rs.22,18,145/-
Correct aggregate adjustment	Rs.82,95,129/-
Addition made by AO	Rs.1,56,02,229/-
Excess addition / relief	Rs.73,07,100/-

111. The Ld. DR also did not seriously dispute the arithmetical reconciliation placed before us. However, we find that before the authorities below, the Assessee had failed to furnish the complete supporting details and documents and had also failed to properly reconcile the relevant entries. Therefore, merely on the basis of the reconciliation now furnished before us, it would not be appropriate to finally determine the correct amount of adjustment without factual verification.

112. Accordingly, the findings of the Ld. Commissioner on this issue are set aside and the case is remanded to the file of the AO for limited factual verification of the foreign-exchange fluctuation entries and the reconciliation furnished by the Assessee. The Assessee is directed to furnish before the AO all relevant details, ledger accounts, supporting documents and a complete reconciliation of the amount claimed in the return vis-a-vis the amount now stated to be correctly adjustable.

113. The AO shall verify the aforesaid material and determine the correct amount of adjustment in accordance with law, without being influenced by the earlier computation of Rs.1,56,02,229/-, suffice to say, by affording a reasonable opportunity of being heard to the Assessee and considering the material and submissions placed/to be placed on record.

114. Thus, the respective ground raised by the Assessee on this issue, is allowed for statistical purposes.

‘Revenue’s appeal A.Y. 2012-13’

115. Coming to 5th issue, which relates to ‘PRE-OPERATIVE INTEREST – REVENUE’S APPEAL, A.Y. 2012-13’, and challenged by the Revenue, we observe that the AO noticed Rs.28,11,000/- reduced from pre-operative expenditure of the Halol project and taxed it as income from other sources, substantially following the assessment for A.Y. 2011-12.

116. The Ld. Commissioner deleted the addition, following the predecessor’s order and the principles in Addl. CIT v. Indian Drugs & Pharmaceuticals Ltd. , CIT v. Bokaro Steel Ltd 236 ITR 315 (SC) and International Seaports (Haldia) (P.)Ltd. v. ITO. The Ld. Commissioner held as under:

“In view of these facts and respectfully following the earlier decision, I am of the considered opinion that addition of Rs.28,11,000/- is not maintainable. The addition made by the AO is, therefore, deleted.”

117. The Revenue submitted that the Ld. Commissioner overlooked Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT 502/227 ITR 172 (SC), under which interest earned by temporary deployment of surplus funds before commencement is taxable as income from other sources unless the investment is inextricably linked to project implementation. It was also urged that the earlier-year order was followed without examining the nexus.

118. The Assessee’s answer is narrower and factual. In A.Y. 2011-12, project-related interest of Rs.107.25 lakh and dividend of Rs.86.72 lakh, aggregating Rs.193.97 lakh, arose. Of this, Rs.165.86 lakh was adjusted against project cost in that year and the balance Rs.28.11 lakh was carried into the project-cost capitalisation in A.Y. 2012-13. The entire interest of Rs.107.25 lakh had already been offered to tax under income from other sources in A.Y. 2011-12.

119. Tuticorin Alkali judgement, determines the head and year of taxation when interest first arises; it does not authorise taxing the same receipt twice. The Revenue has not displaced the factual assertion, supported by the documents references, that the entire interest was already offered in A.Y. 2011-12. The appearance of the residual amount in the later project-cost reconciliation cannot create a second accrual.

120. We therefore deem it appropriate to affirm deletion of Rs.28,11,000/- on the sufficient ground that the amount formed part of income already offered in the earlier year. Thus, the revenue’s respective grounds on this issue for A.Y. 2012-13, are dismissed.

121. Coming to 6^th issue which pertains to ‘INTEREST U/S. 36(1)(iii) – Revenue’s Appeal, A.Y. 2012-13′, we observe that the AO made a proportionate disallowance of Rs.19,96,603/- with reference to capital advances of Rs.139.58 lakh, total interest expenditure of Rs. 15,317.26 lakhs, and aggregate borrowed funds. The Assessee had already capitalised borrowing cost of Rs. 1,095.38 lakhs relating to capital workin-progress. The Ld. Commissioner deleted the further disallowance, following the order for A.Y. 2011-12.

122. The Revenue contended that the Assessee had not demonstrated one-to-one utilisation of interest-free funds and that the AO’s proportionate method was appropriate. The Assessee submitted that all identifiable capital borrowing cost had already been capitalised; the AO found no specific diversion; and the corresponding deletion in A.Y. 201112 was not challenged further.

123. On the contrary the Assessee stated that under the proviso to section 36(1)(iii), borrowing cost attributable to acquisition of a capital asset for the period up to first use is to be capitalised. Thus, the Assessee followed this requirement and capitalised Rs. 1,095.38 lakhs. A further disallowance requires a demonstrated nexus between interest-bearing borrowing and a non-allowable capital advance. A formula based only on aggregate figures does not establish such nexus.

124. We observe that judgements in CIT v. Reliance Utilities & Power Ltd. 313 ITR 340 (Bombay) and South Indian Bank Ltd. v. CIT 438 ITR 1 (SC) recognise that, where mixed funds exist and interest-free funds are sufficient, the investment/advance may be presumed to come from interest-free funds; the statute does not impose a universal one-to-one tracing requirement. No contrary cash-flow or direct nexus is identified here.

125. Thus, considering that the identifiable borrowing cost relating to capital work-in-progress had already been capitalised, no direct nexus with the capital advances was established and the Revenue brought no material to displace the findings of the Ld. Commissioner, the deletion of Rs.19,96,603/- is affirmed.

126. Resultantly, the Revenue’s respective grounds on this issue, for A.Y. 2012-13 are accordingly dismissed.

127. Coming to 7th issue, which relates to Disallowance u/s 14A read with Rule 8D – as involved in Revenue’s Appeal for A.Y. 2012-13′, we observe that the Assessee earned total dividend of Rs.7,81,92,492/-. Foreign dividend of Rs.6,46,40,772/- was taxable; only Rs.1,35,51,720/-was exempt u/s. 10(34). The Assessee thus, made a suo motu disallowance of Rs.2,26,833/-.

128. The AO however computed the disallowance at Rs.2,55,36,201/-under Rule 8D and, after credit for the voluntary amount, added Rs.2,53,09,368/-, comprising Rs.2,33,32,316/- under then Rule 8D(2)(ii) and Rs.22,03,885/- under Rule 8D(2)(iii).

129. The Ld. Commissioner found that the Assessee’s own funds of Rs.64,914.52 lakh, substantially exceeded investments of Rs.8,652.98 lakh, that most dividend was taxable foreign dividend, and that the AO had not linked borrowed funds to investments. Following the Assessee’s own cases for A.Ys. 2009-10 to 2011-12 and the judgment in CIT v. Reliance Industries Ltd. 410 ITR 466 (SC), the Ld. Commissioner deleted the addition of Rs.2,53,09,368/-, holding as under:

‘The AO has failed to bring on record any evidence to link borrowed funds with these investments. disallowance of Rs.2,53,09,368/-u/s. 14A read with Rule 8D is not sustainable.’

130. The Ld. DR contended that the AO had recorded dissatisfaction and thus Rule 8D became mandatory, and the Assessee failed to establish one-to-one utilisation of own funds. Thus, the AO rightly invoked CBDT Circular No.5/2014 and the Explanation inserted in section 14A by the Finance Act, 2022.

131. The Assessee on the contrary, relied on sufficient own funds, exclusion of taxable foreign-dividend investments, the adequacy of its employee-cost disallowance, and consistent orders in its own case.

132. We have heard the parties on the issue, perused the material available on record and given thoughtful consideration to their rival claims. The AO made a net disallowance of Rs.2,53,09,368/- under section 14A read with Rule 8D. The Ld. Commissioner deleted the disallowance after examining the availability of the Assessee’s own funds, the nature of the investments and the computation made by the AO. The Revenue is aggrieved by the said deletion.

133. Section 14A(2) requires the AO to examine the accounts of the Assessee and record proper satisfaction as to why the claim made by the Assessee regarding expenditure attributable to exempt income is incorrect. Resort to the computational mechanism prescribed under Rule 8D is not automatic. A general or formulaic observation, without demonstrating any defect in the Assessee’s claim with reference to its accounts, does not satisfy the statutory requirement.

134. The Hon’ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. v. Dy. CIT 361/394 ITR 449 (SC) and Maxopp Investment Ltd. v. CIT 402 ITR 640 (SC) has held that the AO must examine the accounts and record an objective satisfaction regarding the correctness of the Assessee’s claim before applying Rule 8D. There must also be a proximate relationship between the expenditure sought to be disallowed and the earning of income which does not form part of the total income.

135. In the instant year, the Ld. Commissioner found that the Assessee possessed sufficient non-interest-bearing own funds to cover the relevant investments. The AO did not establish any direct nexus between the borrowed funds and the investments which yielded exempt income. In Reliance Industries Ltd. and South Indian Bank Ltd. (supra), it has been held that where interest-free own funds are sufficient to cover the investments, a presumption arises that the investments have been made out of such own funds. The Assessee was, therefore, not required to establish a one-to-one correspondence between each investment and a particular source of funds.

136. We further notice that the AO’s computation included investment of Rs. 4,357.46 lakhs in foreign subsidiaries. Dividend arising from the foreign subsidiaries was taxable in India and did not constitute exempt income. Section 14A applies only to expenditure incurred in relation to income which does not form part of the total income. Consequently, an investment yielding taxable income could not have been included in the value of investments for computing the disallowance under Rule 8D.

137. The AO neither established any nexus between the borrowed funds and the exempt-income-yielding investments nor excluded the investments which yielded taxable income. The AO also did not point out, with reference to the accounts, any specific defect in the expenditure identified by the Assessee as attributable to the earning of exempt income. The application of Rule 8D was, therefore, not justified.

138. Thus, considering the availability of sufficient own funds, the inclusion of investments yielding taxable dividend and the absence of the satisfaction contemplated under section 14A(2), we find no infirmity in the decision of the Ld. Commissioner. The deletion of Rs.2,53,09,368/- is affirmed and the Revenue’s ground on the issue in hand for A.Y. 201213, is thus, dismissed.

139. Coming to the identical disallowance u/s. 14A read with Rule 8D for the A.Y. 2015-16, we observe that the Assessee received total dividend income of Rs.16,94,70,956/-, comprising foreign dividend of Rs.9,50,59,676/-, which was taxable, and domestic dividend of Rs.7,44,11,280/-, which was exempt. The Assessee made a suo motu disallowance of Rs.1,19,916/- under section 14A.

140. The AO was not satisfied with the disallowance offered by the Assessee and invoked Rule 8D. He computed a disallowance of Rs.4,90,59,107/- under Rule 8D(2)(ii) towards interest expenditure and Rs.79,91,600/- under Rule 8D(2)(iii) towards administrative expenditure. After reducing the suo motu disallowance of Rs.1,19,916/-, the AO made a net addition of Rs.5,69,30,791/-.

141. At the outset, the assertion in Revenue Ground No. 2 that no exempt income was earned during the year is factually inconsistent with the assessment record. The Assessee had earned exempt domestic dividend of Rs.7,44,11,280/-. Therefore, the controversy for this year is not whether section 14A could apply in the absence of exempt income. The actual questions are whether the AO recorded the satisfaction required under section 14A(2), whether any part of the interest expenditure was attributable to the relevant investments and whether the Rule 8D computation included investments yielding taxable income.

142. The Ld. Commissioner examined the financial position of the Assessee and found that its own non-interest-bearing funds were sufficient to cover the investments relevant for the purpose of section 14A. The Revenue has not brought on record any direct nexus between the borrowed funds and the investments which yielded exempt dividend. In the absence of such nexus, the presumption laid down in Reliance Industries Ltd. and South Indian Bank Ltd. applies in favour of the Assessee.

143. Merely because the Assessee maintained common or mixed funds would not justify an interest disallowance where the available own funds exceeded the relevant investments. The Revenue’s contention that the presumption regarding utilisation of own funds ceases to apply once the AO records dissatisfaction is misconceived. Recording of satisfaction under section 14A(2) permits the AO to proceed to the prescribed method only when such satisfaction is based upon an examination of the accounts. It does not displace the settled presumption regarding utilisation of sufficient own funds.

144. The AO was also required to segregate investments yielding taxable income from those capable of yielding exempt income. The foreign dividend of Rs.9,50,59,676/- was taxable. Therefore, investments in foreign subsidiaries yielding taxable dividend could not have been included in the Rule 8D computation. The character of an asset as an “investment” is not decisive; what is material is whether the income arising therefrom does not form part of the total income.

145. As regards administrative expenditure, the Assessee had identified an amount of Rs.1,19,916/- and offered the same for disallowance. Before rejecting that computation, the AO was required to point out, having regard to the accounts, why the expenditure identified by the Assessee was inadequate or incorrect. No specific expenditure having a proximate connection with the exempt dividend was identified. The statutory requirement could not be satisfied merely by reproducing the language of section 14A and thereafter applying the Rule 8D formula.

146. The consistent decisions rendered in the Assessee’s own case for the preceding assessment years also support the conclusion reached by the Ld. Commissioner. No distinguishing feature in the facts or in the applicable law has been brought to our notice by the Revenue.

147. Thus, considering the sufficiency of the Assessee’s own funds, the absence of any established nexus between borrowed funds and the relevant investments, the inclusion of investments yielding taxable foreign dividend and the failure of the AO to record an account-based satisfaction, we find no reason to interfere with the impugned decision. Thus, the deletion of Rs.5,69,30,791/- is affirmed and the Revenue’s ground for A.Y. 2015-16 is dismissed.

148. Coming to the identical disallowance of Rs.6,12,61,778/-under section 14A read with Rule 8D, made in A.Y. 2016-17 case, we observe the AO made such disallowance under section 14A read with Rule 8D, which was deleted by the Ld. Commissioner.

149. The Revenue has challenged the deletion principally on the grounds that the AO recorded the requisite satisfaction; that the presumption regarding utilisation of own funds was no longer available after recording such satisfaction; that the Explanation inserted in section 14A by the Finance Act, 2022 is retrospective; and that Rule 8D covers investments whose income “does not or shall not form part” of the total income.

150. The contention that the own-funds presumption becomes unavailable merely because the AO has recorded dissatisfaction cannot be accepted. The two principles operate in different fields. Satisfaction under section 14A(2) concerns the correctness of the Assessee’s claim regarding expenditure, whereas the own-funds presumption determines the source from which the investments are treated as having been made. Even after recording satisfaction, the AO must establish, on the basis of the accounts, that borrowed funds were utilised for making the relevant investments.

151. The Revenue has not identified any material showing that borrowed funds were directly utilised for making investments which yielded exempt income. It has also not demonstrated that the factual finding of the Ld. Commissioner regarding the availability of sufficient own funds was contrary to the audited accounts or other material on record. The mere application of the Rule 8D formula does not establish the required nexus.

152. The Revenue’s reliance upon the Explanation inserted in section 14A by the Finance Act, 2022 is also misplaced for the year under consideration. The amendment was expressly made effective from 01.04.2022. In Pr. CIT (Central) v. Era Infrastructure (India) Ltd. 448 ITR 674 (Delhi), the Hon’ble Delhi High Court held that, notwithstanding the expression “shall be deemed to have always applied”, the amendment alters the existing position of law and operates prospectively from A.Y. 2022-23. The said Explanation, therefore, cannot govern A.Y. 2016-17.

153. Rule 8D cannot be applied to every investment appearing in the balance sheet without considering the nature of the income arising therefrom. Only investments, income from which does not form part of total income, can be considered in accordance with the Rule applicable to the relevant year. Investments yielding taxable income cannot be included merely because they are classified as investments in the accounts.

154. In the present case, the Revenue has not demonstrated that the Ld. Commissioner included any impermissible investment while examining the availability of own funds or excluded any expenditure having a direct or proximate connection with exempt income. The grounds raised by the Revenue substantially rest upon the automatic application of Rule 8D after recording satisfaction. Such an approach is contrary to section 14A(2) and the principles laid down in Godrej & Boyce Manufacturing Co. Ltd., Maxopp Investment Ltd. and South Indian Bank Ltd.

155. Thus, in the absence of any material displacing the factual findings recorded by the Ld. Commissioner, we find no reason to interfere with the deletion of Rs.6,12,61,778/-. The impugned order is thus, affirmed to the extent challenged by the Revenue; no relief beyond the impugned order is being granted to the Assessee in the Revenue’s appeal.

156. Accordingly, the decision of the Ld. Commissioner deleting the addition/disallowance of Rs.6,12,61,778/- is affirmed and the Revenue’s respective ground for A.Y. 2016-17 on this issue is dismissed.

157. Coming to 8^th issue, which pertains to ‘Adjustment made u/s section 115JB, relating to section 14A of the Act’, we observe that the AO added the Rule 8D disallowance to book profit under clause (f) of Explanation 1 to section 115JB. The Ld. Commissioner however deleted such adjustments.

158. The Revenue thus argued that expenditure relatable to exempt income must be added back and relies on Ajanta Pharma Ltd. v. CIT 327 ITR 305 (SC).

159. On the contrary, the Assessee relies on Asstt. CIT v. Vireet Investment (P.) Ltd. 165 ITD 27 (Delhi – Trib.) and the Bombay High Court orders referred to in the appellate record.

160. We have heard the parties on the issue, perused the material available on record and given thoughtful consideration to their rival claims. Section 115JB is a self-contained computational code. Clause (f) authorises addition of the amount of expenditure relatable to exempt income, which is debited to the profit-and-loss account. It does not incorporate section 14A or the Rule 8D formula. The Special Bench in Vireet Investment accordingly held that the computation under clause (f) must be made, without resort to the section 14A disallowance mechanism. The Bombay High Court in CIT v. Bengal Finance & Investments (P.) Ltd. [IT Appeal No. 337 of 2013, dated 10-2-2015], noticed that the Revenue’s appeal against the same view in Essar Teleholdings Ltd. had been dismissed.

161. Ajanta Pharma Ltd. judgement, concerned the extent of export profit deductible under clause (iv) of Explanation 1 read with section 80HHC. It did not concern clause (f), section 14A or Rule 8D. Far from authorising import of an external computational formula, the judgment emphasises that section 115JB is a self-contained code and that adjustments are confined to those enumerated in the Explanation. The Revenue’s stated proposition is therefore not borne out by that judgment.

162. The AO has not identified, with reference to the profit-and-loss account, any further expenditure actually debited therein as relatable to exempt income. A notional Rule 8D figure cannot automatically be added to book profit. The deletion of the adjustments of Rs.2,53,09,368/-for A.Y. 2012-13, Rs.5,69,30,791/- for A.Y. 2015-16 and the corresponding adjustment made for A.Y. 2016-17 is accordingly affirmed.

163. Resultantly, the Revenue’s respective grounds qua ‘Adjustment made u/s section 115JB, relating to section 14A of the Act’, are, therefore, dismissed.

164. Coming to 9^th issue, which relates to ‘Consequential building depreciation involved in A.Y. 2014-15 case’ we observe that the AO disallowed depreciation of Rs.1,87,263/- claimed on the freehold building capitalised at Rs.43,68,294/-, following the finding recorded in A.Y. 2011-12 that the underlying expenditure represented a non-genuine transaction.

165. The Ld. Commissioner affirmed the disallowance, observing that the capital expenditure had already been held to be non-genuine in A.Y. 2011-12 and that the Assessee had not produced any fresh material to controvert the said finding.

166. Before us, the Assessee submitted that the present claim is consequential to the determination of the qualifying cost/opening written-down value of the relevant block of assets in A.Y. 2011-12 and should, therefore, follow the final outcome of the corresponding issue for that year.

167. We observe that the disallowance for A.Y. 2014-15 has been made solely as a consequence of the findings recorded in A.Y. 2011-12, without any independent basis peculiar to the year under consideration. Accordingly, the AO is directed to recompute and allow the consequential depreciation for A.Y. 2014-15, based on the final determination of the qualifying cost/opening written-down value in A.Y. 2011-12, after due verification. Thus, respective Ground raised by the Assessee on this issuer, is allowed for statistical purposes.

168. Our appeal-wise result, is summarized below:

Appeal	A.Y.	Result
ITA No.7441 /Mum/2025	2012-13	Assessee’s appeal allowed on the jurisdictional issue; alternatively, the trademark-depreciation and professional-fee grounds are allowed, while the section 35(2AB) and foreign-exchange grounds are allowed for statistical purposes, subject to the limited verifications directed.
ITA No.7650 /Mum/2025	2014-15	Assessee’s appeal allowed on the jurisdictional issue; alternatively, the section 35(2AB) and consequential building-depreciation grounds are allowed for statistical purposes, subject to the limited verifications directed.
ITA No.8213 /Mum/2025	2015-16	Assessee’s appeal allowed on the jurisdictional issue; alternatively, the section 35(2AB) ground is allowed for statistical purposes, subject to the limited verification directed.
ITA No.8145 /Mum/2025	2016-17	Assessee’s appeal is allowed for statistical purposes on the section 35(2AB) issue, subject to the limited verification as directed.
ITA No.8210 /Mum/2025	2012-13	Revenue’s appeal dismissed as infructuous consequent to quashing of the assessment order on the legal issue; the alternative grounds on merits are also dismissed.
ITA No.8211 /Mum/2025	2015-16	Revenue’s appeal dismissed as infructuous consequent to quashing of the assessment order on the legal issue; the alternative grounds on merits are also dismissed.
ITA No.8212 /Mum/2025	2016-17	Revenue’s appeal dismissed on merits.

169. In the result, the Assessee’s appeals for A.Ys. 2012-13, 2014-15 and 2015-16 are allowed on the jurisdictional issue and the Assessee’s appeal for A.Y. 2016-17 is allowed for statistical purposes.

The Revenue’s appeals for A.Ys. 2012-13 and 2015-16 are dismissed as infructuous and its appeal for A.Y. 2016-17 is dismissed on merits.

The alternative findings on merits shall operate in the manner stated hereinabove.