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2017 (4) TMI 1030 - AT - Income TaxDisallowance of scientific Research and Development expenses not eligible for weighted deduction u/s.35(2AB) - Held that - In this case, there is no dispute that the assessee incurred a sum of ₹ 4,19,14,375/- for the purpose of R&D, which is capital in nature to the extent of Ld.CIT(A) agreed. However, since it is a capital expenditure, he disallowed the same. In our opinion, a part of expenditure incurred by the assessee towards unapproved R&D facilities was not entitled for deduction u/s.35(2B) of the Act and that itself cannot be a reason to disallow the same u/s.35(1)(iv) of the Act. 100% of the deduction on the capital expenditure incurred on the R&D activity was to be allowed. Once the Revenue authorities accepted that the expenditure was incurred towards R&D and it was disallowed u/s.35(2AB) of the Act on the reason of non-approval by the DSIR, then it should be considered u/s.35(1)(iv) of the Act, Being so, in our opinion, the Ld.CIT(A) is not justified in disallowing the same. For this purpose, we placed reliance in the judgement of Co-ordinate Bench of Hyderabad in the case of Dy. CIT v. Reliance Celulose Products Ltd. 2013 (8) TMI 762 - ITAT HYDERABAD wherein held that Merely because part of the expenditure incurred by the approved R&D facilities is not considered for weighted deduction u/s.35(2AB) of the Act would not render that expenditure is not towards R&D or not for the purposes of the business. Allowability of such expenditure u/s.35(1) or under other appropriate provisions will have to be considered. In view of the judgements, we hold that unapproved R&D capital expenditure of ₹ 11,73,074/- and revenue expenditure of ₹ 3,95,68,226/- is not entitled for weighted deduction u/s.35(2AB) of the Act, However, unapproved R&D capital expenditure of ₹ 11,73,074/- to be considered u/s.35(1)(iv) of the Act. If the assessee fulfills the condition in terms of explanation below the provisions 35(1) of the Act as held by the P&H High Court in the case of CIT v. FCS International Marketing (P.) Ltd. 2005 (8) TMI 60 - PUNJAB AND HARYANA High Court . Accordingly, we hold that the matter is required to be referred by the AO to the prescribed authority and only on the basis of such order from the prescribed authority, as may be passed, that the AO has to make any disallowance. Disallowance made u/s.14A of the Act r.w.r. 8D - Held that - we direct the Assessing Officer to disallow the expenditure u/s.14A to the extent of exempted income only. See Redington (India) Ltd. v. Addl. CIT 2017 (1) TMI 318 - MADRAS HIGH COURT . This ground of appeal of assessee is partly allowed. Partly confirming the disallowance u/s.37(1) being gift of gold coins to doctors/medical practitioners - Held that - The Medical Council (professional Conduct, Etiquette and Ethics ) Regulations, 2002 prohibits the distribution of gift to the doctors and medical practitioners. Accordingly, this ground raised by the assessee is dismissed and the by the Revenue is allowed. Allowing the differential interests on borrowed funds diverted for non business purposes - Held that - The view that where the amount is advanced from a mixed account or share capital or sale proceeds or profits, it would not be deemed as diversion of borrowed capital or that the Revenue had not been able to establish nexus of the funds advanced to group concern with the borrowed funds is not correct. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to its group concern or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) of the Act. Accordingly, we are of the opinion that the assessee used certain amounts to advance group concern as interest free and that portion of interest cannot be allowed while computing the business income of the assessee. Being so, we confirm the order of the AO and reverse the order of the Commissioner of Income-tax(Appeals) on this issue.
Issues Involved:
1. Disallowance of scientific Research and Development expenses under Section 35(2AB) of the Income Tax Act. 2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules. 3. Disallowance under Section 37(1) of the Income Tax Act for gift of gold coins to doctors/medical practitioners. 4. Allowance of differential interest on borrowed funds diverted for non-business purposes under Section 36(1)(iii) of the Income Tax Act. Detailed Analysis: 1. Disallowance of Scientific Research and Development Expenses: The first issue pertains to the disallowance of scientific Research and Development (R&D) expenses amounting to ?4,19,14,375/- claimed under Section 35(2AB) of the Income Tax Act. The Assessing Officer (AO) disallowed this amount on the grounds that the Department of Scientific and Industrial Research (DSIR) had not approved the revenue expenditure claimed by the assessee, although it had approved the capital expenditure. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, stating that the weighted deduction under Section 35(2AB) is available only for expenses approved by the DSIR. However, the Income Tax Appellate Tribunal (ITAT) held that while the unapproved R&D capital expenditure is not eligible for weighted deduction under Section 35(2AB), it should be considered for normal deduction under Section 35(1)(iv) of the Act. The ITAT remitted the matter back to the AO for further action in accordance with the law. 2. Disallowance under Section 14A read with Rule 8D: The second issue involves the disallowance made under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules, relating to expenses incurred for earning exempt income. The AO disallowed ?8,75,216/- as expenses related to exempt income. The CIT(A) confirmed this disallowance. However, the ITAT directed the AO to restrict the disallowance to the extent of the exempt income earned by the assessee, in line with the jurisdictional High Court’s decision in the case of Redington (India) Ltd. v. Addl. CIT. 3. Disallowance under Section 37(1) for Gift of Gold Coins to Doctors: The third issue concerns the disallowance of sales promotion and other selling expenses amounting to ?5,19,37,891/- under Section 37(1) of the Income Tax Act. The AO disallowed these expenses on the grounds that they were prohibited under the Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. The CIT(A) upheld the AO’s decision, stating that the prohibition applies not only to pharmaceutical products but also to allied products. The ITAT agreed with the CIT(A) and dismissed the assessee’s appeal, confirming that the expenses incurred towards distribution of gold coins to doctors and medical practitioners are disallowed. 4. Allowance of Differential Interest on Borrowed Funds: The fourth issue involves the disallowance of proportionate interest amounting to ?33,15,053/- under Section 36(1)(iii) of the Income Tax Act. The AO disallowed this amount on the grounds that the assessee had diverted interest-bearing funds to its group concerns at a lower interest rate. The CIT(A) deleted the disallowance, stating that the assessee had sufficient interest-free funds to cover the inter-corporate deposits. However, the ITAT reversed the CIT(A)’s decision, holding that the interest paid on borrowed funds used for non-business purposes should be disallowed. The ITAT confirmed the AO’s action of disallowing the proportionate interest. Conclusion: The ITAT partly allowed the assessee’s appeal for statistical purposes and allowed the Revenue’s appeal, confirming the disallowance of expenses under Sections 35(2AB), 14A, 37(1), and 36(1)(iii) of the Income Tax Act. The matter was remitted back to the AO for further action in accordance with the law.
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