2019 (10) TMI 134 - AT - Income Tax

Disallowance of deduction u/s 35(2AB) - weighted deduction based on the Auditors Certificates and Tax Audit Report - AO after verifying Form Nos. 3CM and 3CL concerning the deduction claimed by the assessee u/s. 35(AB)that the eligible amount as noted by the Department of Scientific and Industrial Research ( DSIR for short) in Form No. 3CL was less as compared to the deduction claimed by the assessee - HELD THAT - The year under consideration is A.Y. 2009-10 and for this year the amendment was not applicable. Therefore the assessee is right in contending that the non approval of the expenditure claimed by CSIR did not entitle the A.O. to make the disallowance and the ld. CIT(A) to confirm the same. This does also take care of a without prejudice contentions raised by the assessee to the fact that deduction of actual expenditure be allowed to the assessee under the provisions of section 35(1)(i) and 35(1)(iv). These provisions of allowing 100% deduction of expenditure on in-house scientific research irrespective of the approval of the unit and the certification of the expenditure where the actual expenditure as in the case of the assessee is verified by the Statutory Auditor and certified by the Independent Auditor and Tax Auditor. The assessee is found correct in contending that the ld. CIT(A) has observed that the extent of the expenditure was never verified by the A.O. Thus according to the assessee it goes to confirms that the A.O. disallowed the claim without due application of mind. This contention of the assessee is correct as evident from the assessment order itself wherein the ground for the disallowance was the non approval of the expenditure claimed by the DSIR. On behalf of the assessee another contention has been raised that the ld. CIT(A) is wrong in observing that during the remand proceedings the assessee has not objected to the action of the A.O. in making the disallowance u/s. 35(2AB). This it has been emphasized that the assessee had always objected to the disallowance before the A.O. as well as the ld. CIT(A). The attention in this regard has been drawn to the grounds taken by the assessee and the submissions raised by the assessee before the ld. CIT(A). It has further been submitted that in the remand proceedings qua this issue no enquiry whatsoever had been made by the A.O. notwithstanding the fact that the remand proceedings were proceedings where the assessee was required to press his claim afresh which could have only be done by way of objecting to the action of the A.O. Finding merit in ground no. 1 raised by the assessee the same is hereby accepted to the reversing order passed by the ld. CIT(A) on this issue and deleting the disallowance made u/s. 35(2AB). Deprecation to the assessee on higher revised opening WDV of the building - HELD THAT - Assessee was not in a position to claim higher depreciation in the return of income by adjusting the opening WDV. There is no provision in law pointed out to us for habiting the assessee from making the claim of such like the present one in the assessment proceedings. Rather it stands well settled that the claims of depreciation need must be allowed by the A.O. irrespective of whether the assessee has himself made such claim or not. However there is no dispute about the entitlement of the assessee to claim of the depreciation. The A.O. ought to have allowed the higher depreciation on the direction issued by the ld. CIT(A) which unfortunately has not come about. Accordingly the A.O. is now directed to upwardly revise the opening WDV and to allow the higher deprecation to the assessee on the part of the building CG house which part was utilized by the assessee for its business purpose Disallowance u/s. 14A read with Rule 8D(2)(ii) - HELD THAT - The assertion of the assessee that except for earning the exempt income is as a practice directly credited electronically to the bank account of the company and the payment is made by the Managers of the Mutual Funds who make the payment directly and manage the investments has nowhere been rebutted by either of the authorities below or even before us. It has not been called any question that the activity of investment did not require any expenditure. A mere perusal of the assessment order makes it explicit that no finding at all had been recorded by the A.O. as to the incurrence of any expenditure by the assessee for earning exempt income. That being so the assessee is correct in contending that no disallowance u/s. 14A was called for. It at all the salary of Rs. 7, 91, 181/- paid to the Treasury Manager Shri Prashant Baliga could be considered for disallowance. This factual assertion of the assessee may be verified at the level of the A.O. and thereafter the disallowance may be computed for which the issue is remitted to the file of the A.O. Fresh claim of the assessee concerning the dividend income u/s.10(35) - HELD THAT - Evidently the claim made by the assessee cannot be shut out in view of the Hon ble Supreme Court decision in the case of Goetze (India) Ltd. v. CIT 2006 (3) TMI 75 - SUPREME COURT as considered by the Mumbai ITAT in the case of APL India(L) Ltd 2012 (7) TMI 492 - ITAT MUMBAI and also referred to in the decision of the ITAT Cochin in the case of Apollo Tyres 2013 (11) TMI 209 - ITAT COCHIN holding that the appellate authorities are not debarred to entertain the fresh claim. No decision contrary to the said decisions as referred to by the ld. CIT(A) amongst others. Therefore it cannot be said that the ld. CIT(A) committed any error in entertaining the claim made by the assessee.

Summary

Issues Involved:
1. Disallowance of deduction under section 35(2AB) of Rs. 42,52,032.
2. Depreciation in respect of Opening W.D.V. of Building on account of depreciation disallowed by AO from AY 2004-05 onwards.
3. Disallowance of expenditure under section 14A of Rs. 64 Lakhs as per Rule 8D(2)(iii).

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 35(2AB) of Rs. 42,52,032:
The assessee claimed a weighted deduction under section 35(2AB) for scientific research expenditure. The AO disallowed Rs. 42,52,032 based on discrepancies between the claimed amount and the amount approved by the Department of Scientific and Industrial Research (DSIR) in Form No. 3CL. The CIT(A) confirmed the disallowance, noting that the appellant did not provide reasons for the DSIR's partial approval. The Tribunal found that section 35(2AB) requires approval for the R&D facility, not the quantum of expenditure. It referenced the case of Sun Pharmaceutical Industries Ltd., which held that prior to amendments effective from 01.07.2016, quantification of expenditure was not mandated. Therefore, the Tribunal reversed the CIT(A)'s order and deleted the disallowance, allowing the assessee's claim.

2. Depreciation in Respect of Opening W.D.V. of Building:
The AO did not allow depreciation on the revised opening WDV of the building, which the assessee claimed should be increased due to past disallowances from AYs 2004-05 to 2008-09. The CIT(A) directed the AO to allow the claim but did not grant the relief directly. The Tribunal observed that the assessee was entitled to higher depreciation due to the Tribunal's earlier orders confirming the disallowance of depreciation for those years. It directed the AO to revise the opening WDV and allow higher depreciation for the part of the building used for business purposes.

3. Disallowance of Expenditure under Section 14A of Rs. 64 Lakhs as per Rule 8D(2)(iii):
The AO disallowed Rs. 64 lakhs under section 14A read with Rule 8D(2)(iii), assuming administrative expenses were incurred for earning exempt income. The CIT(A) confirmed this disallowance. The Tribunal noted that the assessee maintained that no expenditure was incurred for earning exempt income, which was directly credited to the bank account. It found no specific finding by the AO regarding the incurrence of such expenditure. The Tribunal remitted the issue to the AO to verify the factual assertion and compute the disallowance accordingly, limiting it to the salary of the Treasury Manager if applicable.

Revenue’s Appeal:

1. Fresh Claim of Depreciation on CG House:
The Revenue contested the CIT(A)'s direction to allow the fresh claim of depreciation on CG House, which was not claimed in the original return. The Tribunal rejected this ground, aligning with its findings on the assessee's appeal regarding the same issue.

2. Disallowance under Rule 8D(2)(ii):
The Revenue challenged the deletion of Rs. 72 lakhs disallowance under Rule 8D(2)(ii). The CIT(A) had deleted it, presuming investments were made from non-interest-bearing funds as per jurisdictional High Court decisions. The Tribunal sent the issue back to the AO for re-evaluation in light of these decisions and the Tribunal’s order for AY 2008-09.

3. Fresh Claims of Dividend Income and Death Compensation:
The Revenue argued against the CIT(A) allowing fresh claims regarding dividend income under section 10(35) and death compensation, asserting that these claims required fresh examination of facts and violated Rule 46A. The Tribunal upheld the CIT(A)'s decision, noting that appellate authorities can entertain fresh claims if verifiable without in-depth investigation, as supported by various judicial precedents.

Conclusion:
The assessee's appeal was partly allowed, reversing the disallowance under section 35(2AB) and directing the AO to allow higher depreciation. The disallowance under section 14A was remitted for verification. The Revenue's appeal was dismissed, upholding the CIT(A)'s directions on fresh claims and deletion of disallowance under Rule 8D(2)(ii).