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2018 (11) TMI 1413 - AT - Income TaxAllowability of Deduction u/s 35(2 AB) - weighted deduction claimed u/s 35(2AB) in respect of R&D expenditure - assessee was not approved by the prescribed authority u/s 35(2AB) - Held that - Unless the R&D facility is approved by the competent authority, the assessee shall not be eligible for weighted direction u/s 35(2AB). In this case, on perusal of facts available on record, it is abundantly clear that the competent authority has categorically stated that the assessee s R&D facility had not been approved for the impugned assessment year, in a reply filed to the AO, in response to notice issued u/s 133(6). Therefore, we are of the considered view that the assessee is not eligible for weighted deduction u/s 35(2AB) in respect of R&D expenditure. Alternative submission of assessee if it is held that the assessee is not eligible for weighted deduction u/s 35(2AB), at least the deduction should be allowed u/s 37(1) in respect of expenditure incurred towards R&D facility - Held that - We find merit in the argument of the assessee for the reason that if the assessee is not eligible for weighted deduction u/s 35(2AB), the expenditure towards such R&D facility cannot be disallowed when the assessee has filed necessary details to prove genuineness of such expenditure. In this case, on perusal of details, we find that the AO has never doubted the expenditure incurred by the assessee towards its R&D activities. The AO also not doubted the genuineness of such expenditure. Therefore, we are of the considered view that once the assessee has proved expenses with a necessary evidence, there is no reason for the AO to disallow such expenditure u/s 37(1) of the Act. Hence, we direct the AO to allow revenue expenditure incurred by the assessee to the extent u/s 37(1) Disallowance u/s 14A r.w. Rule 8D - suo moto disallowance by assessee - Held that - The assessee has made suo moto disallowance of ₹ 10,000 considering the nature and amount of dividend income earned for the year. Admittedly, the assessee has earned dividend income of ₹ 3,945 as against which it has made disallowance of ₹ 10,000 towards expenditure incurred in relation to exempt income. As in the case of CIT vs Cheminvest Ltd vs CIT 2015 (9) TMI 238 - DELHI HIGH COURT ) held that disallowance contemplated u/s 14A shall not exceed exempt income. Thus disallowance worked out by the AO by invoking Rule 8D(2)(ii) & 8D(2)(iii) is in excess of exempt income earned for the year - we direct the AO to restrict disallowance to the extent of suo moto disallowance of ₹ 10,000 made by the assessee.
Issues Involved:
1. Disallowance of weighted deduction claimed under section 35(2AB) of the Income-tax Act, 1961. 2. Disallowance of expenses incurred in relation to exempt income under section 14A read with Rule 8D. Issue-wise Detailed Analysis: 1. Disallowance of Weighted Deduction Claimed under Section 35(2AB): The core issue was whether the assessee was eligible for a weighted deduction under section 35(2AB) for R&D expenditure for AY 2012-13, despite the approval from the Department of Scientific & Industrial Research (DSIR) being granted from AY 2013-14 onwards. The AO had disallowed the deduction, citing that the R&D facility was not approved for the relevant assessment year. The CIT(A) allowed the deduction, referencing the decisions of the Delhi High Court in Sandan Vikas (India) Ltd. and the Gujarat High Court in Claris Lifesciences Ltd., which held that once the R&D facility is approved, the entire expenditure incurred on its development is eligible for weighted deduction, irrespective of the approval date. The Tribunal, however, upheld the AO's decision, stating that for claiming the benefit under section 35(2AB), the R&D facility must be approved by the competent authority for the relevant assessment year. Since the DSIR's letter clarified that the assessee's R&D facility was not approved for AY 2012-13, the weighted deduction could not be allowed. Nevertheless, the Tribunal accepted the alternative plea of the assessee to allow the R&D expenditure as a deduction under section 37(1) since the genuineness of the expenditure was not in question. The AO was directed to allow revenue expenditure under section 37(1) and verify the nature of capital expenditure for depreciation purposes. 2. Disallowance of Expenses Incurred in Relation to Exempt Income under Section 14A r.w. Rule 8D: The second issue was the disallowance of expenses related to exempt income under section 14A read with Rule 8D. The AO had computed a disallowance of ?32,09,258, while the assessee had made a suo moto disallowance of ?10,000 against a dividend income of ?3,945. The CIT(A) restricted the disallowance to ?10,000, aligning with judicial pronouncements that disallowance under section 14A should not exceed the exempt income. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's rulings in Cheminvest Ltd. and Joint Investment (P) Ltd., which established that disallowance under section 14A cannot exceed the exempt income. Consequently, the AO was directed to restrict the disallowance to the suo moto amount of ?10,000 made by the assessee. Conclusion: The appeal filed by the revenue was partly allowed. The Tribunal upheld the AO's disallowance of the weighted deduction under section 35(2AB) but allowed the R&D expenditure under section 37(1). The disallowance under section 14A was restricted to the amount of ?10,000 as determined by the assessee. Order Pronounced in the Open Court on _____ July, 2018.
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