2013 (12) TMI 997 - AT - Income Tax

Scientific research expenses Held that - The documents were submitted before the learned CIT(A) to show the objective, purpose and the results of the research and development activity carried on by the assessee - No such evidences were produced before the AO by the assessee - The ld. CIT(A) without referring the matter back to the AO to verify the claims of the assessee in this respect and without giving any opportunity to the AO to rebut the claim of the assessee deleted the additions made by the AO - He solely relied upon the submissions and evidences produced by the assessee before him. A proper course of action to refer the matter back to the AO so that the claim of the assessee could have been genuinely verified was not adopted by the learned CIT(A) The issue was restored for fresh decision. Disallowance u/s. 14A Held that - The assessee company is a zero debt company - The interest expenditure is not at all related to any borrowing or investment in shares and mutual funds Following Godrej & Boyce Mfg. Co. Ltd 328 ITR 81 - Rule 8D r.w.s. 14A(2) is not arbitrary or unreasonable but can be applied only if assessee s method is not satisfactory - The disallowance u/s. 14A has to be made on a reasonable basis - There can be no disallowance of interest under section 14A - The AO has made a disallowance of Rs.1,66,334/- as per rule 8D in respect of administrative expenses which is on a higher side - Rule 8d is not applicable to the current year Only Rs. 1 lakh should be disallowed under section 14A which is around 5% of the dividend income earned Partly allowed in favour of Revenue.

Summary

Issues:
1. Disallowance of deduction under section 35(1)(iv) for scientific research.
2. Disallowance under section 14A and the application of Rule 8D for calculating expenditure.

Issue 1: Disallowance of deduction under section 35(1)(iv) for scientific research:
The appellant, a hardware and networking institute, claimed a deduction under section 35(1)(iv) of the Income Tax Act for capital expenditure on scientific research. The Assessing Officer (AO) found no evidence of research and development activity being carried out by the appellant at its premises in Delhi and Mumbai. The AO added the claimed amount of Rs.96,14,651 back to the appellant's income. The Commissioner of Income Tax (Appeals) deleted this disallowance after considering the appellant's submissions and evidence. However, the ITAT set aside the CIT(A)'s decision, noting that the CIT(A) should have referred the matter back to the AO for verification. The ITAT directed the AO to assess the claim of research and development activity afresh after providing the appellant with an opportunity to present its case.

Issue 2: Disallowance under section 14A and the application of Rule 8D for calculating expenditure:
The AO disallowed Rs.2,58,196 under section 14A based on Rule 8D, concerning the appellant's dividend income. The appellant argued that as a zero-debt company, the interest expenditure was unrelated to investments in shares and mutual funds. The CIT(A) partially allowed the appeal, disallowing Rs.1,00,000 out of the total disallowance. The CIT(A) considered the applicability of Rule 8D and the decision in the case of Godrej & Boyce Mfg. Co. Ltd. The ITAT upheld the CIT(A)'s decision, finding the disallowance of Rs.1,00,000 reasonable given the lack of evidence supporting the full disallowance under Rule 8D. The ITAT concluded that the CIT(A) had appropriately applied the law and dismissed the appeal.

In conclusion, the ITAT partially allowed the appeal, directing a reassessment of the scientific research deduction claim and upholding the partial disallowance under section 14A based on a reasonable basis rather than Rule 8D. The judgment emphasizes the importance of substantiating claims with evidence and applying tax provisions judiciously.