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2017 (2) TMI 502 - AT - Income TaxAddition made u/s 35(2AB) in respect of research and development expenditure - Held that - When the R&D centre at Chennai has been established by assessee company on 11.08.2005 and R&D expenditure have been continuously allowed on the basis of approval accorded by DSIR, no material has come on record to depart from the rule of consistency by the AO. When the AO has himself admitted that the R&D centre at Chennai approved by DSIR is carrying out its research and development activities, by disallowing the weighted deduction at 50%, the remaining expenditure of ₹ 34,57,130/- cannot be disallowed. Moreover, the conjoint reading of section 35(2AB) and Rule 6(7A)(a) leads to the conclusion that the fulfillment of the conditions to carry out R&D activities are to be examined by DSIR and it is not within the purview of AO. So, in case, there is escalation of sales of the product produced by the assessee company, it may be due to the consequence of research and not because of the fact that R&D facilities have been used for market research and sales promotion. So, we are of the considered view that the CIT (A) has rightly and validly deleted the addition Disallowance of provision for warranty in excess of actual warranty claims being the same as unascertained liability - Held that - Following the order passed by the coordinate Bench in assessee s own case for AY 2009-10 by following the judgment in case of Rotork Controls (2009 (5) TMI 16 - SUPREME COURT OF INDIA) wherein held that estimated provisions for warranty are allowable for deduction, thus we find no illegality or perversity in the deletion of disallowance Disallowance u/s 14A computation - work out the disallowance under Rule 8D - Held that - The entire exercise to work out the disallowance under Rule 8D done by the AO is on the basis of imagined expenditure based upon the average value of the investment whereas the expression expenditure incurred refers to actual expenditure and not imagined expenditure. AO without recording his dissatisfaction of the correctness of the claim of expenditure made by the assessee and without arriving at the conclusion that the claim of assessee that no expenditure has been incurred is incorrect proceeded to invoke the provisions of section 14A read with Rule 8D. At the same time, AO has not disputed the audited books of account of the assessee in respect of investment and earning dividend income. So, when from the balance sheet produced before AO as well as CIT(A), it has come on record that assessee has sufficient cash flow during the year under assessment; the AO has failed to prove any nexus of borrowed funds with various investments held by the assessee; the AO without recording his dissatisfaction of correctness of the claim of expenditure made by the assessee nor AO has rejected the claim of the assessee that no expenditure has been incurred in earning the dividend income, the provisions contained under section 14A read with Rule 8D are not attracted. Thus AO as well as CIT (A) have erred in disallowing / confirming the disallowance of normal expenses of ₹ 26,97,608/- while computing the book profit u/s 115JB of the Act. - Decided in favour of the assessee.
Issues Involved:
1. Deletion of addition made under section 35(2AB) for research and development expenditure. 2. Deletion of addition made on account of disallowance of provision for warranty. 3. Disallowance of notional expenses under section 14A related to dividend income. 4. Disallowance of normal expenses under section 14A while computing book profit under section 115JB. Detailed Analysis: Issue 1: Deletion of Addition under Section 35(2AB) for Research and Development Expenditure The Revenue challenged the deletion of an addition of ?6,91,42,261/- made under section 35(2AB) concerning research and development expenditure. The Assessing Officer (AO) disallowed the weighted deduction claimed by the assessee, arguing that the conditions under Rule 6(7A)(a) were not fulfilled. The AO contended that the R&D expenditure was for market sales promotion and commercial production, which are not permissible under the rule. The Tribunal noted that the Department of Scientific and Industrial Research (DSIR) had approved the R&D center at Chennai, and this approval was renewed periodically. The Tribunal emphasized that the AO admitted the R&D center's approval by DSIR and that it is not within the AO's purview to question the DSIR's approval. The Tribunal upheld the CIT(A)'s decision to delete the addition, stating that the R&D activities were not purely for market sales promotion but were for genuine research purposes. Thus, the Tribunal ruled in favor of the assessee on this ground. Issue 2: Deletion of Addition on Account of Disallowance of Provision for Warranty The Revenue also challenged the deletion of an addition of ?2,10,00,000/- made on account of disallowance of provision for warranty. The AO had disallowed this amount, considering it an unascertained liability. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision. The Tribunal referred to its earlier decision in the assessee's case for AY 2009-10 and the Supreme Court's judgment in Rotork Controls India Pvt. Ltd. v. CIT. The Tribunal noted that the provision for warranty was based on historical data and a reliable estimate of the obligation. The Tribunal concluded that the provision for warranty was an ascertained liability and allowable as a deduction under section 37 of the Act. Therefore, the Tribunal ruled against the Revenue on this ground. Issue 3: Disallowance of Notional Expenses under Section 14A Related to Dividend Income The assessee challenged the disallowance of ?26,97,608/- under section 14A related to dividend income. The AO had invoked Rule 8D to compute the disallowance, which was subsequently reduced by the CIT(A). The Tribunal highlighted that the AO did not record any dissatisfaction with the assessee's claim that no expenditure was incurred to earn the exempt dividend income. The Tribunal referred to the judgments in Maxopp Investment Ltd. v. CIT and Hero Cycles Ltd. v. CIT, which emphasized that the AO must establish a proximate nexus between the expenditure and the exempt income to make a disallowance under section 14A. The Tribunal found that the AO had not brought any evidence to prove that any expenditure was incurred by the assessee for earning the exempt income. Consequently, the Tribunal ruled in favor of the assessee on this ground. Issue 4: Disallowance of Normal Expenses under Section 14A while Computing Book Profit under Section 115JB The assessee also challenged the disallowance of normal expenses of ?26,97,608/- under section 14A while computing book profit under section 115JB. The Tribunal noted that the AO had not recorded any dissatisfaction with the correctness of the assessee's claim and had not rejected the claim that no expenditure was incurred in earning the dividend income. The Tribunal emphasized that the provisions of section 14A read with Rule 8D are not attracted unless the AO records dissatisfaction with the assessee's claim. The Tribunal ruled that the AO and CIT(A) had erred in disallowing the expenses while computing book profit under section 115JB. Therefore, the Tribunal ruled in favor of the assessee on this ground. Conclusion: The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, ruling in favor of the assessee on all grounds. The Tribunal upheld the deletion of additions made under section 35(2AB) for R&D expenditure and the provision for warranty and ruled against the disallowance of notional and normal expenses under section 14A.
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