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2020 (2) TMI 143 - AT - Income Tax


Issues Involved:
1. Restriction of weighted deduction under section 35(2AB) of the Income Tax Act, 1961.
2. Confirmation of disallowance under section 14A read with Rule 8D.

Detailed Analysis:

Issue 1: Restriction of Weighted Deduction under Section 35(2AB)
The primary contention revolves around the restriction of weighted deduction under section 35(2AB) of the Income Tax Act, 1961. The assessee claimed a weighted deduction for research and development (R&D) expenditure, which was disallowed by the Assessing Officer due to the absence of a certificate from the Department of Scientific and Industrial Research (DSIR). The DSIR subsequently issued a certificate quantifying the eligible deduction, which was lower than the amount claimed by the assessee.

Arguments by Assessee:
The assessee argued that the DSIR's authority to restrict claims under section 35(2AB) was only effective from 01.07.2016, applicable from the assessment year 2017-18 onwards. Therefore, the assessee contended that the full deduction as claimed in the return should be allowed for the assessment year 2014-15.

Arguments by Revenue:
The Revenue countered that the amendment to the Income Tax Rules, 1962, effective from 01.07.2016, mandated the DSIR to quantify the eligible R&D expenditure. The Revenue relied on the decision in the case of Electronic Corporation of India Ltd. v. ACIT, which supported the DSIR's role in determining the quantum of allowable deduction.

Tribunal's Findings:
The Tribunal upheld the Revenue's stance, emphasizing that the DSIR is the prescribed authority for quantifying eligible R&D expenditure under section 35(2AB). The Tribunal referenced several judicial precedents, including the Hyderabad Bench's decision in Electronic Corporation of India Ltd. v. ACIT and the Karnataka High Court's decision in Tejas Networks Ltd. v. DCIT, which affirmed that the DSIR's certification is final and binding on the quantum of deduction. Consequently, the Tribunal dismissed the assessee's claim for a higher deduction and upheld the CIT(A)'s direction to allow the deduction as per the DSIR certificate.

Issue 2: Confirmation of Disallowance under Section 14A read with Rule 8D
The second issue pertains to the disallowance of expenditure under section 14A read with Rule 8D. The Assessing Officer disallowed ?18,40,430/- as expenditure related to exempt income, despite the assessee not earning any exempt income during the assessment year.

Arguments by Assessee:
The assessee argued that no disallowance under section 14A is warranted in the absence of exempt income. The assessee relied on the decision of the Madras High Court in CIT v. Chettinad Logistics (P.) Ltd., which held that disallowance under section 14A is not applicable when no exempt income is earned. The Supreme Court had dismissed the Revenue's Special Leave Petition (SLP) against this decision.

Tribunal's Findings:
The Tribunal observed that the Assessing Officer had not recorded any satisfaction or analyzed the assessee's modus operandi before invoking Rule 8D. The Tribunal cited the Madras High Court's decisions in CIT v. Chettinad Logistics (P.) Ltd. and Redington (India) Limited v. Addl. CIT, which established that no disallowance under section 14A is permissible in the absence of exempt income. Accordingly, the Tribunal deleted the disallowance made by the Assessing Officer under section 14A.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee. The restriction of weighted deduction under section 35(2AB) was upheld as per the DSIR certificate, while the disallowance under section 14A read with Rule 8D was deleted due to the absence of exempt income. The order was pronounced on 26th December 2019 in Chennai.

 

 

 

 

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