2019 (6) TMI 32 - AT - Income Tax

Deduction u/s 35(2AB) - claim of weighted deduction on Research Development expenditure - HELD THAT - As decided in EICHER MOTORS LTD. VERSUS CIT 2017 (9) TMI 1043 - DELHI HIGH COURT u/s 35 (2AB), both revenue and capital expenditure are allowable in their entirety, excluding expenditure in the nature of cost of any land or building. There was going to be no purpose served in analysing whether the expenditure was of revenue or capital nature. In fact, the AO himself had allowed 100% of the expenditure both of revenue and capital nature and the disallowance was only the additional 50% amount which, again, the CIT (A) had found and correctly so, in the opinion of this Court, ought not to have been disallowed - no hesitation in holding that the Assessee is entitled to the full benefit of Section 35 (2AB) . Also confirmed by EICHER MOTORS LTD 2018 (9) TMI 1328 - SC ORDER - Decided in favour of assessee. Addition on account of provision for warranty - HELD THAT - We find that similar disallowances were made by the Assessing Officer in A.Ys 2003-04 to 2009-10 and in A.Y 2010-11. The disallowances were deleted by the CIT(A) and the revenue did not prefer any appeal till A.Y 2008-09. In A.Ys 2009-10 and 2010-11, dispute relating to similar disallowances travelled upto the Tribunal and the Tribunal has decided the issue in favour of the assessee and against the revenue in 2016 (1) TMI 1076 - ITAT DELHI assessee had estimated the provisions for warranty on the basis of past history. The estimate of warranty made by the assessee on the basis of past history cannot be treated as a provision for any ascertained liability and allowed the provision for warranty as deduction. Thus no infirmity or perversity in the findings returned by Ld. CIT(A) in allowing the ascertained liability as allowable expenditure u/s 37( 1).- Decided in favour of assessee.

Summary

Issues Involved
1. Deletion of addition made on account of excess deduction claimed under Section 35(2AB) of the Income-tax Act, 1961.
2. Deletion of addition made on account of provision for warranty.

Detailed Analysis

Issue 1: Excess Deduction Claimed under Section 35(2AB)
The Revenue challenged the deletion of an addition of ?7.60 crores made by the Assessing Officer (AO) due to an excess deduction claimed by the assessee for Research & Development expenditure under Section 35(2AB) of the Income-tax Act, 1961. During the scrutiny assessment, the AO observed that the assessee claimed a deduction of ?8,83,57,145 at 150% of the total expenses under the nomenclature "weighted deduction."

The AO disallowed the excess claim of ?7.60 crores, stating that the conditions under Rule 7A(a) were not met. The AO argued that the R&D activities were aimed at increasing business profits through market research, sales promotions, and product improvements, which do not qualify for the deduction under Rule 7A(a).

Upon appeal, the CIT(A) deleted the addition, which was upheld by the Tribunal. The Tribunal noted that similar issues were previously decided in favor of the assessee by the Hon'ble High Court of Delhi and the co-ordinate bench. The High Court had ruled that under Section 35(2AB), both revenue and capital expenditure are allowable, and the legislative intent is to encourage innovation and R&D in India. The Supreme Court also dismissed the Revenue's SLP, affirming the High Court's decision.

Issue 2: Provision for Warranty
The Revenue also contested the deletion of an addition of ?3.92 crores made by the AO on account of provision for warranty. The AO disallowed the provision, considering it an unascertained liability and provisional in nature.

The CIT(A) deleted this disallowance, and the Tribunal upheld the CIT(A)'s decision. The Tribunal referred to similar cases from previous assessment years (2003-04 to 2010-11), where such disallowances were deleted by the CIT(A) and upheld by the Tribunal. The Tribunal also cited the Supreme Court's judgment in Rotork Controls India Pvt. Ltd. vs. CIT, which held that estimated provisions for warranty are allowable for deduction if they are based on a reliable estimate and historical trends.

The Tribunal found no infirmity in the CIT(A)'s decision to allow the provision for warranty as an allowable expenditure under Section 37(1) of the Act, following the precedent set by the Supreme Court and the co-ordinate bench.

Conclusion
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s deletion of the additions made on account of excess deduction claimed under Section 35(2AB) and provision for warranty. The decisions were based on precedents from the Hon'ble High Court of Delhi, the Supreme Court, and the co-ordinate bench, which supported the assessee's claims.