2016 (4) TMI 219 - HC - Income Tax

Claim for deduction under Section 35(2AB) - assessing authority adopted the net expenditure for allowing the weighted deduction and same was done on the basis of DSIR guidelines - Tribunal setting aside the computation made by the assessing authority in respect of claim for deduction under Section 35(2AB) - Held that - Tribunal has proceeded on the premise that when the regular work is in the nature of R&D work done and sold, it becomes a business income and chargeable as business income. It is only when the assets acquired in the process of carrying on R&D work, if they are sold, such realization would go to reduce the expenditure of scientific research.In our view, the approach to the issue considered by the Tribunal is appropriate. In any case, no substantial question of law would arise for consideration as canvassed. Addition u/s 14A r.w.r. 8D - Held that - Disallowance of interest expenses in the present case made under Rule 8D(2)(ii) of the I.T. Rules should be deleted as the Hon ble Bombay High Court in Reliance Utilities & Power Ltd.(2009 (1) TMI 4 - BOMBAY HIGH COURT ) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon ble Bombay High Court in CIT v. HDFC Bank Ltd 2014 (8) TMI 119 - BOMBAY HIGH COURT wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made.

Summary

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

Issue-Wise Detailed Analysis:

1. Deduction under Section 35(2AB) of the Income Tax Act:

The appellant challenged the Tribunal's decision to set aside the computation made by the assessing authority regarding the claim for deduction under Section 35(2AB). The Tribunal's observations from paragraphs 12 to 17 were pivotal. The Tribunal noted that the assessee, engaged in scientific research and manufacturing drugs, had claimed a weighted deduction of Rs. 12,57,00,920 under Section 35(2AB) based on an expenditure of Rs. 7,80,52,805. The dispute centered on the DSIR guidelines, particularly guideline 5(vii), which states that sales realization from assets sold should be offset against R&D expenditure claimed under Section 35(2AB).

The Tribunal clarified that only sales realization from assets sold should reduce the R&D expenditure, not the sales of products emanating from R&D work. The Tribunal emphasized that sales of products are treated as business receipts and do not reduce R&D expenditure. The Tribunal concluded that the CIT(A)'s order under Section 154 was unsustainable and reversed it, allowing the assessee's appeal. The Tribunal's approach was deemed appropriate, and no substantial question of law arose for consideration.

2. Disallowance under Section 14A read with Rule 8D(2)(ii) of the Income Tax Act:

The second issue involved the Tribunal's deletion of the addition made under Section 14A, computed under Rule 8D(2)(ii), amounting to Rs. 49,42,473. The Tribunal's observations from paragraphs 32 to 42 were crucial. The assessee contended that the investments yielding tax-free income were made from positive bank balances and not from borrowed funds. The assessing officer, however, disallowed the expenditure, assuming that investments entail direct and indirect expenditure.

The CIT(A) upheld the disallowance, stating that the assessee failed to provide evidence of the utilization of loans for specific purposes. The CIT(A) emphasized the need for a one-to-one correlation to prove the utilization of borrowed funds. The Tribunal, however, referred to the Bombay High Court's decision in Reliance Utilities & Power Ltd., which held that if interest-free funds exceed investments, it should be presumed that investments were made from interest-free funds. The Tribunal found that the assessee's interest-free funds far exceeded the investments, aligning with the Bombay High Court's decision in CIT v. HDFC Bank Ltd. Consequently, the Tribunal ordered the deletion of the disallowance of Rs. 49,42,473 under Rule 8D(2)(ii).

Conclusion:

The appeal was dismissed as the Tribunal's approach on both issues was found appropriate, and no substantial questions of law arose for consideration.