2020 (9) TMI 814 - AT - Income Tax

Disallowance of claim of interest payable on sales tax, excise duty and customs duty - HELD THAT - We notice that an identical issue has been considered by the coordinate bench in the assessee s own case 2017 (12) TMI 570 - ITAT BANGALORE and it was decided against the assessee. Disallowance of interest payable to micro, small and medium enterprises by invoking section 23 of MSMED Act - A.R submitted that the Income tax Act does not provide for any such disallowance - HELD THAT - We notice that an identical issue has been considered by the coordinate bench in the assessee s own case and it was decided against the assessee in assessment year 2008-09 2017 (12) TMI 570 - ITAT BANGALORE Weighted deduction made by the assessee u/s 35(2AB) - assessee had claimed weighted deduction on the gross amount of expenditure incurred by it on R D activities - As per AO reduction is allowable on the net amount of expenditure, i.e., expenditure as reduced by related income - HELD THAT - Following the order passed by the coordinate bench in 2008-09, we set aside the order passed by Ld CIT(A) on this issue and direct the A.O. to allow the deduction u/s 35(2AB) of the Act on the gross amount of expenditure. Disallowance u/s 14A - Interest disallowance made under rule 8D(2)(ii) of the I.T. Rules - HELD THAT - Admittedly, the own funds available with the assessee is more than the value of investments as at the beginning and end of the financial year. Accordingly, the presumption is that the assessee has used his own funds for making the investments, in which case no disallowance out of interest expenditure as per rule 8D(2)(ii) of the I.T. Rules is called for. In this regard, we derive support from the decision rendered in the case of Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT . Accordingly, we direct the A.O. to delete the interest disallowance made under rule 8D(2)(ii) of the I.T. Rules. Disallowance made out of administrative expenses, under rule 8D(2)(iii) - Since the factual aspects relating to this issue require examination, we restore the issue of making disallowance under rule 8D(2)(iii) of the I.T. Rules to the file of the A.O. by following the principle laid down in the case of Vireet Investments P Ltd 2017 (6) TMI 1124 - ITAT DELHI - However, if the disallowance worked out by the A.O. turns out to be lower than the amount of disallowance made by the assessee in the return of income, then the disallowance made by the assessee should be restored. Disallowance of provision for bad and doubtful debt u/s 36(1)(vii) - HELD THAT - We notice that the Hon ble Karnataka High Court has considered an identical issue in the case of Sandvik Asia Limited 2013 (2) TMI 900 - KARNATAKA HIGH COURT and it has been decided in favour of the assessee by following the decision rendered by Hon ble Supreme Court in the case of Vijaya Bank 2010 (4) TMI 46 - SUPREME COURT As noticed earlier that the assessee has reduced the amount of provision for doubtful debts from the amount of sundry debtors in the balance sheet. Accordingly, respectfully following the decision rendered by Hon ble Karnataka High Court, we direct the A.O. to delete the impugned disallowance.

Issues Involved:
1. Disallowance of expenditure on the purchase of application software.
2. Disallowance of provision made towards interest payable to Central Excise Department.
3. Disallowance of interest expenditure payable to micro, small, and medium enterprises.
4. Disallowance of part of the weighted deduction claimed u/s 35(2AB) of the Act.
5. Disallowance made u/s 14A of the Act.
6. Disallowance of the claim of provisions for bad and doubtful debts.

Detailed Analysis:

1. Disallowance of Expenditure on Purchase of Application Software:
The revenue's appeal challenging the decision regarding the disallowance of expenditure on the purchase of application software was dismissed in limini due to the tax effect being less than ?50 lakhs, as per CBDT circular no.17/2019 dated 08-08-2019.

2. Disallowance of Provision Made Towards Interest Payable to Central Excise Department:
The assessee claimed ?51,49,959 as interest payable towards sales tax and customs duty demands, debited to the profit & loss account but not paid. The A.O. disallowed this amount under section 43B of the Act. The Ld. CIT(A) upheld this disallowance, following the precedent set by the Bengaluru bench of ITAT in the assessee's own case for prior assessment years. The Tribunal confirmed this disallowance, noting that the issue had been consistently decided against the assessee in previous years.

3. Disallowance of Interest Expenditure Payable to Micro, Small, and Medium Enterprises:
The assessee claimed ?33,83,134 as interest payable to micro, small, and medium enterprises. The A.O. disallowed this claim under section 23 of the MSMED Act, which prohibits the deduction of such interest for income computation under the Income Tax Act. The Ld. CIT(A) confirmed this disallowance, and the Tribunal upheld the decision, citing the overriding effect of section 23 of the MSMED Act over the Income Tax Act.

4. Disallowance of Part of Weighted Deduction Claimed u/s 35(2AB) of the Act:
The assessee claimed ?40.96 crores as a weighted deduction for R&D expenditure under section 35(2AB). The A.O. restricted the deduction to the net expenditure (after deducting related income), resulting in an addition of ?29.03 crores. The Ld. CIT(A) confirmed this addition. However, the Tribunal, following its decision in the assessee's case for the assessment year 2008-09, directed the A.O. to allow the deduction on the gross amount of expenditure.

5. Disallowance Made u/s 14A of the Act:
The assessee received exempt income of ?38.81 crores and disallowed ?10.08 lakhs u/s 14A. The A.O. computed the disallowance as per rule 8D, resulting in an additional disallowance of ?3.25 crores. The Ld. CIT(A) confirmed this. The Tribunal, noting that the assessee's own funds exceeded investments, directed the A.O. to delete the interest disallowance under rule 8D(2)(ii). The issue of administrative expenses disallowance under rule 8D(2)(iii) was restored to the A.O. for re-examination, following the principle laid down in the case of Vireet Investments P Ltd.

6. Disallowance of Claim of Provisions for Bad and Doubtful Debts:
The assessee claimed ?12.04 crores as a provision for doubtful debts, reduced from sundry debtors in the balance sheet. The A.O. disallowed this claim, stating that mere provision without actual write-off does not comply with section 36(1)(vii). The Ld. CIT(A) confirmed this disallowance. The Tribunal, citing the Supreme Court's decision in Vijaya Bank and the Karnataka High Court's decision in Sandvik Asia Limited, directed the A.O. to delete the disallowance, as the reduction from sundry debtors amounted to a write-off.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, with specific directions for re-examination and deletion of certain disallowances. The Tribunal upheld the decisions on disallowances related to interest payable to Central Excise and MSME, while providing relief on the weighted deduction for R&D expenditure and the provision for doubtful debts. The disallowance under section 14A was partly upheld, with directions for re-computation.

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