2014 (9) TMI 510 - AT - Income Tax

Claim of deduction u/s 35(2)(AB) Weighted deduction under R&D expenses Held that - Approval of DSIR as contemplated is only in respect of weighted deduction to be claimed u/s 35(2AB) of the Act - no material has been brought on record by the department to controvert assessee s claim that it has incurred towards salary and wages of employees engaged in revenue expenditure R&D and capital expenditure on R&D activities - unapproved revenue expenditure if not allowable u/s 35(2AB) of the Act in absence of approval from DSIR certainly can be allowed as deduction u/s 35(1)(i) and 37(1) of the Act as the case may be revenue not disputed the fact that expenditure incurred was towards salary and wages - the expenditure is allowable u/s 35(1)(i) or u/s 37(1). So far as disallowance of capital expenditure is concerned no material has been brought on record by the department to controvert assessee s claim that such expenditure incurred was towards scientific research - Disallowance was only for the reason that it is not approved by DSIR - even in absence of approval from DSIR though assessee may not be eligible for deduction u/s 35(2AB) still assessee can claim the deduction u/s 35(1)(iv) relying upon Tube Investments of India Ltd. Vs. CIT 2002 (9) TMI 45 - MADRAS High Court - assessee is eligible for deduction in respect of revenue expenditure and capital expenditure Decided in favour of assessee. Disallowance made u/s 14A read with Rule 8D Held that - It is the contention of the assessee that the investment in Godavari Fertilizers Ltd. has to be excluded as the company has merged with the assessee in pursuance to scheme of amalgamation approved by the AP High court - So far as interest expenditure is concerned as per the details furnished by assessee total disallowance on account of investments made out of borrowed fund has been worked out - all these facts were available before the departmental authorities as it appears they have not properly applied their mind to these factual issues thus the matter is remitted back to the AO for fresh adjudication Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of deduction claimed under Section 35(2AB) of the Income Tax Act.
2. Disallowance made under Section 14A read with Rule 8D of the Income Tax Rules.

Detailed Analysis:

1. Disallowance of Deduction Claimed Under Section 35(2AB) of the Income Tax Act:

Facts and Background:
The assessee, a company engaged in the manufacture and sale of fertilizers, filed its return of income for AY 2008-09 declaring an income which was revised multiple times. During the scrutiny assessment, the Assessing Officer (AO) noticed that the assessee claimed a weighted deduction of Rs. 6,05,19,532 towards R&D expenses. However, the AO disallowed Rs. 3,02,59,766 due to lack of approval from the competent authority.

CIT(A) Proceedings:
The assessee submitted the approval in Form 3CL from DSIR during the appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) allowed the capital expenditure to the extent approved by DSIR but disallowed the revenue expenditure not approved by DSIR. The CIT(A) ruled that the revenue expenditure should be capitalized and depreciation claimed when the product is capitalized.

Arguments by Assessee:
The assessee argued that the expenditure, even if not approved by DSIR, should be allowed under other provisions such as Section 35(1)(iv) or Section 37(1). The assessee cited decisions from the Hon'ble Madras High Court and ITAT, Delhi Bench to support their claim.

Tribunal's Findings:
The Tribunal agreed with the assessee's contention that DSIR's approval is relevant only for weighted deduction under Section 35(2AB) and not for other provisions. The Tribunal held that the unapproved revenue expenditure of Rs. 1,31,87,576 is allowable under Section 35(1)(i) or Section 37(1). Similarly, the disallowed capital expenditure of Rs. 2,23,215 is allowable under Section 35(1)(iv).

Conclusion:
The Tribunal allowed the assessee's claim for both revenue and capital expenditure, thus overturning the CIT(A)'s disallowance.

2. Disallowance Made Under Section 14A Read with Rule 8D of the Income Tax Rules:

Facts and Background:
The assessee received dividend income of Rs. 3,43,15,864 from mutual fund units and disallowed Rs. 5,05,951 under Section 14A. The AO, applying Rule 8D, computed the disallowance at Rs. 89,60,563, which was upheld by CIT(A).

Arguments by Assessee:
The assessee contended that the AO did not record proper satisfaction before rejecting the assessee's computation. The assessee also argued that the investment in Godavari Fertilizers and Chemicals Ltd. should be excluded from the average value of investments, as the company had merged with the assessee.

Tribunal's Findings:
The Tribunal noted the discrepancies in the AO's and CIT(A)'s consideration of facts, particularly regarding the merger and interest expenditure. The Tribunal remitted the issue back to the AO for fresh consideration, directing the AO to properly evaluate the assessee's working of average value of investment and interest expenditure.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, directing a fresh examination by the AO.

Final Judgment:
The appeal was partly allowed for statistical purposes, with directions for fresh consideration on the disallowance under Section 14A and allowance of deductions under Section 35(2AB).