2015 (10) TMI 2256 - AT - Income Tax

Disallowance u/s 14A - Held that - We have been informed that the AO has not passed fresh order so far in pursuance to the order of the Tribunal. in AY 2006-07. In our considered opinion, before this issue can be decided in the impugned year i.e. A.Y. 2007-08, it is imperative that it is first decided by Assessing Officer in A.Y. 2006-07. In case, we decide this issue first, it may pre-empt the order of Assessing Officer for A.Y. 2006-07, and it may also close the gates for the Assessing Officer to make proper examination of facts and circumstances in A.Y. 2006-07. Therefore, to avoid this situation, we deem it proper to send this issue of disallowance u/s 14A, in totality, to the file of Assessing Officer. He shall re-decide this issue, after giving adequate opportunity of hearing to the assessee and after considering the facts and circumstances of the case and the law available at the time of deciding this issue. Therefore, ground no.1 of Assessee s appeal and all the grounds of Revenue s appeal are sent back to the file of Assessing Officer. Disallowance u/s 35(2AB)- expenditure for the in-house research facility - Held that - Names of the employees have been given along with their rates per hour. It is further noted that ld. Assessing Officer has shown no doubts about the genuineness of these expenses. It was held by Ld. CIT(A) that since claim of assessee with respect to deduction u/s.35(2AB) has been denied, therefore, these expenses are capital in nature. It was further observed by ld. CIT(A) that Assessing Officer, as well as assessee, have treated these expenses as capital in nature. In our view, the observations of Ld. CIT(A) are misplaced and without any basis. We have gone through details of these expenses. These expenses are apparently revenue in nature. Ld DR also could not point out as to which expenses are capital in nature. Thus, in our view, these expenses are of revenue nature. Software expenses u/s 37(1)- Held that - The mere fact that a deduction was not claimed before the Income-tax Officer, was not of much importance, since if the liability arises then a claim can be made in a bonafide manner at any stage before the higher authority, who is competent to grant relief. Thus, in view of aforesaid discussion, coupled with facts and circumstances of this case and clear position of law, as discussed above, in our opinion there was no reason to deny the claim assessee u/s 37 of the Act. Therefore, the AO is directed to allow these expenses u/s 37 of the Act. Accordingly, ground no.2 of the assessee s appeal is partly allowed. Disallowance of software expenses incurred by treating the same as capital expenditure - Held that - It is noted that full co-operation has been extended by the assessee at all times i.e. during course of assessment proceeding, and also during appellate proceeding before the ld. CIT(A). If the CIT(A) wanted to have one separate petition under Rule 46A, the same could have been very well pointed out to the assessee. Without affording opportunity to the assessee, the valid claim of the assessee should not have been denied to it, merely for some technical reasons. Under these circumstances, we find it appropriate to send this issue back to the file of ld. CIT(A) who shall give opportunity to the assessee to file all the evidences as may be considered appropriate, along with petition under Rule 46A etc. The assessee shall also extend full co-operation to the ld. CIT(A) by providing further details and documentary evidences, as may be required. Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance under section 14A of the Income-tax Act.
2. Disallowance under section 35(2AB) and section 37(1) for R&D expenditure.
3. Disallowance of software expenses under section 37(1) and section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Disallowance under section 14A:

The Revenue's appeal contended that the CIT(A) erred in restricting the disallowance under section 14A to Rs. 1,96,000 without considering the mandatory application of Rule 8D from A.Y. 2008-09 onwards. The Assessee's appeal argued that the disallowance confirmed by the CIT(A) of Rs. 1,65,56,576 was unjustified as it extended to notional expenditure not actually incurred.

Both parties acknowledged that the Tribunal had previously remanded the issue of disallowance under section 14A for A.Y. 2006-07 to the Assessing Officer (AO) for re-adjudication. The Tribunal decided to similarly remand the issue for A.Y. 2007-08 to the AO for a fresh decision, ensuring consistency and avoiding pre-empting the AO's decision for A.Y. 2006-07. Thus, both the Assessee's and Revenue's appeals on this issue were allowed for statistical purposes.

2. Disallowance under section 35(2AB) and section 37(1) for R&D expenditure:

The Assessee contested the disallowance of Rs. 57.66 lakhs out of the claim for deduction under section 35(2AB), which was treated as capital expenditure by the AO. The AO had disallowed the claim on the grounds that the expenditure was not incurred in the 'in-house' research facility but was paid to an external entity, M/s Reliance Clinical Research Services Pvt. Ltd. (RCRS) for clinical trials. The CIT(A) confirmed the disallowance, noting that the amount was capitalized for patent development.

The Assessee withdrew the claim under section 35(2AB) following the Department of Scientific & Industrial Research (DSIR) order, which excluded clinical trial expenses from 'in-house' R&D. However, the Assessee argued for the allowance of these expenses under section 37(1). The Tribunal found the expenses to be genuine and revenue in nature, rejecting the CIT(A)'s view that they were capital expenses. The Tribunal directed the AO to allow the expenses under section 37(1), thus partly allowing the Assessee's appeal on this ground.

3. Disallowance of software expenses under section 37(1) and section 40(a)(ia):

The Assessee claimed software license expenses of Rs. 7,76,132 as revenue expenditure, which the AO disallowed, treating it as capital expenditure and further disallowed under section 40(a)(ia) for non-deduction of TDS. The CIT(A) upheld the disallowance, refusing to admit additional evidence under Rule 46A.

The Tribunal noted that the CIT(A) should have allowed the Assessee to submit evidence under Rule 46A, and thus remanded the issue back to the CIT(A) for re-examination. The Assessee was directed to provide all necessary documents, and the CIT(A) was to reconsider the claim afresh. This ground was allowed for statistical purposes.

Conclusion:

Both the Revenue's and Assessee's appeals were allowed for statistical purposes regarding the disallowance under section 14A. The Assessee's appeal was partly allowed concerning the disallowance under section 35(2AB) and section 37(1), directing the AO to allow the expenses as revenue expenditure. The issue of software expenses was remanded back to the CIT(A) for re-examination, allowing the Assessee to submit further evidence.