2014 (11) TMI 445 - AT - Income Tax

Disallowance of sales commission accrued but not due Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the assessee has been crediting sales commission as and when the liability has arisen by the sale of goods, but the right to receive would accrue to the recipient only when the sale amount is collected and remitted to the assessee in Assistant Commissioner Of Income-Tax Versus Motor Industries Company 2000 (11) TMI 59 - KARNATAKA High Court - the liability to deduct tax at source would arise only when the recipient would become eligible to receive the money - the assessee s liability to deduct tax would arise in the next financial year when the payment is made Decided in favour of assessee. Disallowance of entire claim u/s 35(2AB) - Inhouse R&D facility approved by the Ministry of Science and Technology - Whether the expenses resulted in acquisition of rights in or arising out of scientific research - Held that - The expenditure incurred by the assessee could not be disallowed as it involved capital expenditure in the form of acquiring any land or building the expenses is sought to be excluded u/s. 43(4)(ii) of the Act is an expenditure which the assessee incurs in acquiring rights in or arising out of scientific research already done by somebody - It is possible that the assessee without carrying out the scientific research, acquires rights in scientific research, acquires rights arising out of scientific research done by somebody else and claims cost of acquisition of such rights as expenditure on scientific research - The idea behind the exclusion clause in section 43(4)(ii) appears to be that expenditure on scientific research should be on the research actually carried out by the assessee in-house and it should not merely spent money in acquiring rights in or arising out of scientific research carried out by some other person - This aspect has been clearly overlooked by the revenue authorities - this interpretation is also a possible interpretation - A perusal of the audit report shows that major part of expenses are towards salary, equipments, materials consumed, consultancy fees and other routine expenses - claim of deduction u/s 35(2AB) of the Act has to be allowed Decided in favour of assessee. Disallowance as deduction towards Research and Development Expenses u/s 35(2AA) and u/s 35(i)(ii) Held that - The expenses is in the nature of expenditure on Scientific Research in Sec.35(1)(ii) and 35(2AA) - the question whether the expenditure is capital or revenue is not relevant as what is given by the Assessee is a contribution and that cannot be said to be capital expenditure - In any event under Sec.35(1)(ii) & 35(2AA) of the Act, there is no distinction as to whether the expenditure is capital or revenue and any amount given as contribution has to be allowed the AO is directed to allow the deduction claimed by the assessee Decided in favour of assessee. Disallowance of amount paid towards lease rentals of vehicles on operating lease allotted to various executives Held that - LPIN finances purchase of the vehicle. The vehicle is purchased as and when the Assessee (client) makes a demand for hiring of vehicle - The ownership of the vehicle is registered in the name of the client only for the purpose of passing the risk of ownership in law on the client - Article 2.2(iii) of the lease deed which has been set out in the earlier part of this order clearly spells out the above purpose and reiterates that LPIN is the owner of the vehicle and that the client is only a lessee - The bifurcation of the monthly payment as partly towards recovery of cost and partly towards interest is only for accounting purposes - It can decide the character of the transaction - Article 3.1 provides for early termination of the lease - On the occurrence of either early termination or on expiry of period, the client is required to return the vehicle to the lessor along with the various documents as mentioned - Thus the de facto ownership and control of the vehicle is always with LPIN - The Assessee (Client) has a right to use the vehicle subject to payment of the hire installments and complying with the other terms of the agreement - The Assessee (client) has no other rights - the lease is an operation lease and therefore the Assessee would be entitled to claim the lease rentals as deduction as revenue expenditure Decided in favour of assessee. Disallowance u/s 14A r.w. Rule 8D Held that - Rule 8D(iii) need not be applied blindly. One has to look at the probable expenses that assessee would have incurred in earning the exempt dividend income - The shares which yielded dividend income were purchased in the year 1997- 98 - It cannot be said that any expenses whatsoever would have been incurred by the assessee to earn this dividend income - the revenue authorities ought to have exercised their discretion in not making a disallowance u/s. 14A of the Act Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of sales commission accrued but not due.
2. Disallowance of entire claim under section 35(2AB) for in-house R&D facility.
3. Disallowance of deduction towards Research and Development Expenses under sections 35(2AA) and 35(1)(ii).
4. Disallowance of provision for leave encashment.
5. Disallowance of lease rentals of vehicles on operating lease.
6. Disallowance under Section 14A read with Rule 8D for exempt dividend income.

Issue-wise Detailed Analysis:

1. Disallowance of Sales Commission Accrued but Not Due:
The assessee claimed a deduction for sales commission accrued but not due, amounting to Rs. 47,86,285. The AO disallowed this on the grounds that tax was not deducted at source as per section 192 of the Act. The CIT(A) upheld this disallowance, interpreting the commission as part of the directors' salary and thus subject to TDS. The Tribunal, referencing a previous decision in the assessee's own case for A.Y. 2006-07, held that the liability to deduct tax at source arises only when the recipient is eligible to receive the money. Consequently, the disallowance under section 40(a)(ia) was not warranted, and the assessee's claim was allowed.

2. Disallowance of Entire Claim under Section 35(2AB):
The assessee claimed a deduction of Rs. 1,32,44,186 for expenditure on scientific research under section 35(2AB). The AO disallowed this, arguing that the expenditure resulted in the acquisition of rights in or arising out of scientific research, which is not deductible under section 43(4)(ii). The CIT(A) upheld this view. However, the Tribunal found that the exclusion clause in section 43(4)(ii) applies to expenditure incurred in acquiring rights in scientific research done by others, not in-house research. Therefore, the Tribunal allowed the deduction, emphasizing that the legislative intent was to encourage in-house research.

3. Disallowance of Deduction towards R&D Expenses under Sections 35(2AA) and 35(1)(ii):
The assessee claimed deductions of Rs. 8,75,000 under section 35(2AA) and Rs. 4,37,500 under section 35(1)(ii) for contributions to approved institutions. The AO disallowed these claims, citing the acquisition of rights in scientific research. The Tribunal, applying the reasoning from the previous issue, held that the contributions were deductible as they were for scientific research and not for acquiring rights. The Tribunal directed the AO to allow the deductions.

4. Disallowance of Provision for Leave Encashment:
The assessee claimed a deduction of Rs. 11,45,829 for provision for leave encashment. The AO disallowed this based on section 43B(f), which allows such deductions only on actual payment. The CIT(A) upheld this disallowance, noting the Supreme Court's stay on the Calcutta High Court's decision in Exide Industries, which had declared section 43B(f) unconstitutional. The Tribunal confirmed the CIT(A)'s order, denying the deduction without actual payment.

5. Disallowance of Lease Rentals of Vehicles on Operating Lease:
The assessee claimed Rs. 26,21,184 as lease rentals for vehicles provided to executives. The AO treated this as a finance lease, disallowing the claim and allowing only depreciation. The CIT(A) upheld this view but allowed depreciation. The Tribunal, analyzing the lease agreement, concluded it was an operating lease. Accordingly, the Tribunal allowed the lease rentals as revenue expenditure, rejecting the AO's and CIT(A)'s conclusions.

6. Disallowance under Section 14A Read with Rule 8D for Exempt Dividend Income:
The AO disallowed Rs. 5,213 under section 14A read with Rule 8D, attributing it to the earning of exempt dividend income. The CIT(A) upheld this disallowance. The Tribunal, considering the small amount of dividend and the fact that the investment was old, held that no expenditure was incurred to earn the dividend. Thus, the Tribunal deleted the disallowance.

Conclusion:
The Tribunal allowed the appeals on issues related to sales commission, R&D expenditure, and lease rentals, while upholding the disallowance of provision for leave encashment. The disallowance under section 14A was also deleted. The appeals were partly allowed for ITA 514/B/13 and fully allowed for ITA 1578/B/13.