2019 (10) TMI 776 - AT - Income Tax

Disallowance u/s.14A - HELD THAT - Where the assessee has itself offered some disallowance with which the AO is not satisfied, it becomes incumbent upon him to record satisfaction, before embarking upon the disallowance as per rule 8D of the I.T. Rules, as to how the apportionment made by the assessee was not correct. We are confronted with a situation in which the assessee suo moto offered a disallowance of ₹ 10.00 lakh. AO without recording any such satisfaction about the incorrectness of the apportionment made by the AO, simply proceeded to compute the disallowance under Rule 8D(2). When we consider the factual panorama prevailing in the instant case in juxtaposition to the mandate of section 14A(2), it becomes manifest that the AO failed to record the mandatory satisfaction before proceeding to make disallowance u/s.14A of the Act, which has resulted in vitiating the addition. Respectfully following the precedent, we order to delete the disallowance sustained in the first appeal. MAT computation u/s 115JB - HELD THAT - Disallowance sustained in the first appeal, we find that, even otherwise also, no addition can be made u/s 14A in computation of book profit u/s 115JB of the Act. The Hon ble Delhi High Court in Pr. CIT Vs. M/s. Bhushan Steel Limited and others 2015 (9) TMI 1424 - DELHI HIGH COURT has held that no disallowance can be made u/s.14A in computation of income u/s.115JB. Similar view has been reiterated by the Special Bench of the Tribunal in ACIT Vs. Vireet Investments (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI . We, therefore, hold that neither the disallowance can be made u/s.14A nor any addition on this score can be made in the computation of income u/s.115JB of the Act. Disallowance of weighted deduction u/s.35(2AB ) - AO disallowed the deduction of such R D expenses - HELD THAT - Having heard both the sides and gone through the relevant material on record, it is noted that section 35(2AB), at the material time, provided for weighted deduction on the basis of report to be submitted in Form 3CL read with Rule 6 of the Income-tax Rules. Clause (b) of Rule 6(7A), at the relevant time provided that The prescribed authority shall submit its report in relation to the approval of in-house Research and Development facility in Form 3CL to the Director General (Income Tax Exemptions) within sixty days of its granting approval . An amendment was carried out to clause (b) of Rule 6(7A) w.e.f. 01-07-2016 providing that The prescribed authority shall furnish electronically its report,- (i) in relation to the approval of in-house Research and Development facility in Part A of Form No. 3CL; (ii) quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Act in Part B of Form No. 3CL . Simultaneous with the amendment in Rule 6(7B), an amendment was also made to Form 3CL. Whereas the earlier Form, being, the Report to be submitted by the prescribed authority to the Director General (IT Exemptions) u/s.35(2AB), talked of recognition granted by DSIR to the in-house Research and Development Centre of the company, the amended Form 3CL, pursuant to amendment in Rule 6(7A)(b), bifurcated the report into two parts, namely, Part-A containing one-time recognition by the DSIR and Part-B containing year-wise details of the expenditure incurred and approval. When we consider the position prevailing as per Rule 6(7A) and Form 3CL before and after the amendment w.e.f. 01-07-2016, it becomes manifest that in the pre-amendment period, the requirement was only for registration with DSIR and not to the grant of the year-to-year approval of the amount spent on Research and Development by a company qualifying for weighted deduction. Such an amendment came into force only from 01-07- 2016, by virtue of which the claim of the assessee for weighted deduction became subject matter of examination by the DSIR and resultantly the AO, on year to year basis. Since it is the position prevailing in the pre-amendment era which governs the years under consideration, once the assessee has been registered and other necessary requirements have been satisfied, the entire amount spent on Research and Development qualifies for weighted deduction u/s.35(2AB) irrespective of the fact that some amount was not approved by the DSIR. Actual amount spent on research and development vis- -vis the approval by the DSIR on year-to-year basis, entitling the assessee to the weighted deduction, has become relevant only after the amendment carried out from 01-07-2016. Since it is not the case of the AO that the assessee did not fulfill all other relevant conditions, we hold that it is entitled to weighted deduction for the full amount of the expenditure incurred on Research and Development irrespective of the fact that a part of the amount so incurred was not approved by the DSIR.

Summary

Issues Involved:
1. Disallowance under section 14A of the Income-tax Act, 1961 for assessment years 2013-14 & 2014-15.
2. Disallowance of weighted deduction under section 35(2AB) of the Act for both assessment years.

Issue 1: Disallowance under section 14A for A.Y. 2013-14:
The appellant contested the addition of &8377; 49,95,140 made by the Assessing Officer (AO) under section 14A of the Income-tax Act, 1961. The AO computed the disallowance under Rule 8D, despite the appellant offering a disallowance of &8377; 10.00 lakh. The Appellate Tribunal observed that the AO failed to record satisfaction before proceeding with the disallowance, as mandated by the law. Citing the Supreme Court's ruling, the Tribunal held that the AO must justify why the appellant's apportionment was incorrect before applying Rule 8D. Consequently, the Tribunal ordered the deletion of the sustained disallowance. Additionally, the Tribunal clarified that no disallowance under section 14A can be made in the computation of book profit under section 115JB of the Act.

Issue 2: Disallowance of weighted deduction under section 35(2AB) for A.Y. 2013-14:
The appellant challenged the disallowance of weighted deduction amounting to &8377; 71,35,914 under section 35(2AB) of the Act. The AO disallowed the deduction based on the DSIR's reduced approval of R&D expenses. The Tribunal noted the requirements under Rule 6(7A) and the relevant Form 3CL. It highlighted the amendment effective from 01-07-2016, which necessitated year-to-year approval by DSIR for weighted deduction. Since the appellant fulfilled all conditions in the pre-amendment period, the Tribunal held that the entire R&D expenditure qualifies for weighted deduction, irrespective of DSIR's approval. Consequently, the Tribunal allowed the ground against the disallowance.

Issue 3: Disallowance under section 14A for A.Y. 2014-15:
For A.Y. 2014-15, the appellant contested the disallowance of &8377; 74,40,373 under section 14A of the Act. The Tribunal noted similarities with the preceding year and ordered the deletion of the disallowance, following the same reasoning as in A.Y. 2013-14. The Tribunal reiterated that no addition can be made under section 14A in the computation of income under section 115JB.

Issue 4: Disallowance of weighted deduction under section 35(2AB) for A.Y. 2014-15:
Similar to A.Y. 2013-14, the appellant challenged the disallowance of weighted deduction under section 35(2AB). The Tribunal, consistent with its decision for the prior year, allowed the ground, emphasizing that the appellant is entitled to weighted deduction for the full R&D expenditure incurred.

In conclusion, the Appellate Tribunal ITAT PUNE ruled in favor of the appellant for both assessment years, directing the deletion of disallowances under section 14A and allowing weighted deductions under section 35(2AB) based on the specific legal interpretations and factual circumstances presented in the cases.