2018 (5) TMI 940 - AT - Income Tax

Disallowing the claim of weighted deduction u/s.35(2AB) - approval by prescribed authority - Held that - We direct the Assessing Officer to grant deduction under section 35(2AB), as, beyond any dispute or controversy, the R&D Unit is approved by the prescribed authority, and as the date of approval, in the light of the above discussions, is not really material for the present purposes. The disallowance thus stands deleted. - Decided in favour of assessee. Disallowing reimbursement of advertisement expense u/s.40(a)(ia) - non deduction of tds - Held that - Quite clearly, reimbursements of expenses do not require tax deduction at source. The tax deduction liability arises only at the point of time when payment is for carrying out any work in pursuance of a contract for the specified purposes. The payment, in the present case, is not for carrying out any work of the specified nature but only a partial reimbursement of such a payment of specified nature. The distinction is subtle and significant. The lower authorities clearly lost sight of the above aspect of the matter, and proceeded to treat reimbursement of expenses as incurring of expenses. Disallowance to be deleted - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of weighted deduction under section 35(2AB) of the Income Tax Act.
2. Disallowance of reimbursement of advertisement expenses under section 40(a)(ia) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Weighted Deduction under Section 35(2AB):

The main grievance of the appellant was the disallowance of a weighted deduction of ?1,12,84,050/- under section 35(2AB) of the Income Tax Act. The appellant argued that their R&D Centre, which was established on 15th October 2009 and recognized by the Department of Scientific and Industrial Research (DSIR) on 31st March 2010, should be eligible for the deduction. The approval from DSIR was received on 5th July 2011, effective from 1st April 2010.

The Assessing Officer (AO) disallowed the deduction, stating that the approval was effective from 1st April 2010, and thus, the expenses incurred before this date were not eligible. The AO also noted that the appellant failed to submit the required Form 3CL and other documents to DSIR, which were necessary for claiming the deduction.

The CIT(A) upheld the AO’s decision, emphasizing that the approval was granted from 1st April 2010 and the appellant did not meet the conditions for the deduction for the financial year 2009-10, including the requirement of a capital investment of more than ?1 crore.

Upon appeal, the Tribunal referred to the Delhi High Court's rulings in the cases of CIT vs. Sandan Vikas India Limited and Maruti Suzuki India Limited vs. Union of India, which held that the date of approval is not material as long as the R&D unit is approved. The Tribunal concluded that the appellant’s R&D unit was indeed approved, and thus, the disallowance was not sustainable. The AO was directed to grant the deduction under section 35(2AB).

2. Disallowance of Reimbursement of Advertisement Expenses under Section 40(a)(ia):

The appellant also contested the disallowance of ?19,32,177/- as reimbursement of advertisement expenses under section 40(a)(ia) of the Income Tax Act, arguing that these were merely reimbursements and not subject to tax deduction at source (TDS).

The AO had disallowed the expenses, asserting that the appellant failed to deduct TDS on these payments. The CIT(A) initially did not address this issue, but upon rectification, upheld the AO’s decision, stating that the appellant did not provide evidence that TDS was deducted by the intermediary.

The Tribunal found that the payments in question were indeed reimbursements and not income, thus not requiring TDS. The Tribunal cited the Gujarat High Court’s decision in CIT Vs. Gujarat Narmada Valley Fertilizers Co. Ltd, which supported the view that reimbursements do not necessitate TDS. Consequently, the Tribunal directed the AO to delete the disallowance of ?19,32,177/-.

Conclusion:
- The appeal regarding the disallowance of the weighted deduction under section 35(2AB) was allowed, with the Tribunal directing the AO to grant the deduction.
- The appeal concerning the disallowance of reimbursement of advertisement expenses under section 40(a)(ia) was also allowed, with the Tribunal directing the AO to delete the disallowance.