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2019 (2) TMI 1918 - AT - Income TaxDeduction u/s 35(1)(iv) - weighted deduction under section 35(2AB) - Disallowance of claim as no approval of expenditure has been received from the DSIR in form No.3CL - claim was not made by the assessee either in the original return of income or in the revised return of income - HELD THAT - The Hon ble High Court of Delhi in Maruti Suzuki India Ltd. Vs. Union of India 2017 (8) TMI 248 - DELHI HIGH COURT had laid down that what was relevant was not the date of recognition or cutoff date mentioned in the certificate of DSIR or even the date of approval, but the existence of recognition. It was further held that if R D centre is not recognized, it is not entitled to deduction; but if it is recognized, it is entitled to the benefit. Tribunal in Cummins India Ltd. 2018 (5) TMI 1314 - ITAT PUNE while deciding the issue of allowability of claim of weighted deduction under section 35(2AB) of the Act on the surmise that the prescribed authority had approved part of expenditure in Form No.3CL had held that once the facility has been recognized by the prescribed authority and an agreement has been entered into between the facility and prescribed authority, then the role of Assessing Officer is to look into and allow the expenditure incurred on in-house R D facility as weighted deduction under section 35(2AB) of the Act. Thus it is not the requirement of law to get any certification / approval of expenditure from the DSIR in form No.3CL, there is no merit in the orders of authorities below in denying weighted deduction under section 35(2AB) of the Act. It may further be pointed out that the assessee on a later date had received the said form No.3CL from the DSIR on 08.04.2013. Accordingly, we direct the Assessing Officer to allow weighted deduction at 150% of expenditure incurred in the hands of assessee under section 35(2AB) of the Act. Hence, revised ground of appeal No.1 raised by assessee is allowed. Disallowance made under section 14A r.w.r. 8D - HELD THAT - We find merit in the plea of assessee in this regard, where the assessee had sufficient own funds to make the aforesaid investments and applying the ratio laid down by the Hon ble Bombay High Court in CIT Vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT we hold that no disallowance is to be made on account of interest expenditure under Rule 8D(2)(ii) of the Rules. Hence, ground of appeal No.4 raised by assessee is allowed. Disallowance of commission paid to liaison representatives - HELD THAT -From the details furnished by assessee it transpires that liaison representatives were involved in technical issues such as quality control, chemical composition as well as day-to-day issues on sample approval, etc. and especially in view of statement recorded during Survey, we find merit in the plea of the learned Departmental Representative for the Revenue that total expenditure on this behalf cannot be allowed in the hands of assessee. The CIT(A) while allowing the claim in the hands of assessee had in turn, relied on the decision of Tribunal in the case of a Limited Company, whereas the assessee before us was a Private Limited Company and the said ratio cannot be applied. Accordingly, in order to plug loopholes and leakage of revenue, we direct the Assessing Officer to disallow 5% out of commission and liaison expenses.
Issues Involved:
1. Deduction under Section 35(1)(iv) of the Income-tax Act. 2. Deduction under Section 35(2AB) of the Income-tax Act. 3. Disallowance under Section 14A of the Income-tax Act. 4. Disallowance of commission paid to liaison representatives. Issue-wise Detailed Analysis: 1. Deduction under Section 35(1)(iv) of the Income-tax Act: The Revenue contended that the Commissioner of Income-tax (Appeals) [CIT(A)] erred in allowing deductions under Section 35(1)(iv) for amounts not claimed in the original or revised returns. The CIT(A) allowed deductions for capital expenditure incurred on R&D facilities, which included costs for building and other items like fans and motor vehicles. The Tribunal upheld the CIT(A)’s decision, noting that the assessee was entitled to these deductions despite the claims not being made in the original or revised returns, referencing the decision in Goetze (India) Ltd vs. CIT (2006) 284 ITR 323 (SC). 2. Deduction under Section 35(2AB) of the Income-tax Act: The assessee claimed a weighted deduction of ?8.56 crores for R&D expenditure. The Assessing Officer (AO) denied this claim due to the absence of approval from the Department of Scientific and Industrial Research (DSIR) in form No.3CL. The CIT(A) also denied the claim but allowed an alternate deduction under Section 35(1)(iv). The Tribunal, however, held that the requirement for form No.3CL was not a pre-condition for claiming the deduction and directed the AO to allow the weighted deduction, referencing several case laws including Minilec India Pvt. Ltd. Vs. ACIT and Cummins India Ltd. Vs. DCIT, which supported the assessee's claim. 3. Disallowance under Section 14A of the Income-tax Act: The AO disallowed ?37,418 under Section 14A read with Rule 8D, in addition to the assessee's suo motu disallowance of ?43,947. The CIT(A) upheld this disallowance. The Tribunal found merit in the assessee’s plea that the investments were made from surplus funds and not borrowed funds. Applying the Bombay High Court decision in CIT Vs. HDFC Bank Ltd., the Tribunal held that no disallowance should be made on account of interest expenditure under Rule 8D(2)(ii) and allowed the assessee's appeal on this ground. 4. Disallowance of commission paid to liaison representatives: The AO disallowed 7.5% of the total commission expenditure of ?2.71 crores, citing non-business purposes. The CIT(A) allowed the entire claim, relying on decisions applicable to Limited Companies. The Tribunal partially agreed with the Revenue, noting the involvement of liaison representatives in technical issues but also recognizing the need to prevent revenue leakage. It directed the AO to disallow 5% of the commission and liaison expenses, thus partly allowing the Revenue's appeal. Conclusion: The appeals by both the assessee and the Revenue were partly allowed. The Tribunal upheld the CIT(A)’s decision on deductions under Section 35(1)(iv) and allowed the weighted deduction under Section 35(2AB). It also ruled in favor of the assessee on the disallowance under Section 14A. However, it modified the CIT(A)’s decision on commission payments, directing a partial disallowance. The judgment emphasized the importance of procedural compliance and factual verification in tax deduction claims.
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