2022 (3) TMI 26 - AT - Income Tax

Disallowance of commission to persons specified u/s 40A(2)(b) - HELD THAT - In our view, since the facts in the immediately preceding year 2021 (9) TMI 161 - ITAT AHMEDABAD both in respect of the nature of payments i.e. commission paid as well as the parties to whom the payments were made are identical as held that AO has not demonstrated any material or information gathered to disprove the genuineness of the expenditure incurred on commission payment - we accordingly allow the assessee s appeal and the disallowance on account of commission u/s. 40A(2)(b) is hereby deleted. Disallowance of claim of deduction u/s 35(2AB) - research and development expenses - HELD THAT - We note that the ITAT, Ahmedabad for the immediately preceding year on identical set of facts has adjudicated the issue in favour of the assessee. The ITAT in the above Ruling held that this issue has been dealt with by the ITAT Ahmedabad in the case of Sun Pharmaceuticals v Pr. CIT 2016 (12) TMI 1539 - ITAT AHMEDABAD which has been approved by the Gujarat High Court 2017 (8) TMI 933 - GUJARAT HIGH COURT We also note that the ITAT Pune Tribunal in the recent case of DCIT v. Force Motors 2021 (9) TMI 244 - ITAT PUNE while dealing with identical issue held that prior to amendment in 2016, section 35(2AB) of the Act does not provide any methodology of approval to be granted by prescribed authority vis-a-vis expenditure from year to year and therefore, order of Assessing Officer in curtailing expenditure and consequent weighted deduction claimed under section 35(2AB) on ground that deduction cannot exceed claims approved by prescribed authority, had rightly been set aside. The position is clear that prior to amendment introduced w.e.f. 01/07/2016, the deduction u/s 35(2AB) of the Act would be available to an assessee having an approved in-house R D facility by the prescribed Authority Act and there is no mention of approval of the quantum of expenditure in the law as it stood prior to that date. The mandate of quantification of expenditure has been put in place only w.e.f. 01.07.2016. In view of the above observations and also the decision of the Ahmedabad Tribunal in assessee s own case for immediately preceding year, where on identical set of facts, the assessee s appeal has been allowed, we allow the appeal of the assessee.

Summary

Issues Involved:
1. Disallowance of commission under section 40A(2)(b) of the Income Tax Act, 1961.
2. Disallowance of deduction claimed under section 35(2AB) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Commission under Section 40A(2)(b):
The first ground of appeal pertains to the disallowance of commission amounting to ?4,12,500/- paid to related parties under section 40A(2)(b) of the Income Tax Act, 1961. The assessee, a company engaged in manufacturing polymer resins and chemicals, paid commissions to four parties. The Assessing Officer (AO) disallowed the commission payments citing lack of documentary evidence supporting the services rendered. The CIT(A) provided partial relief but upheld the disallowance for commissions paid to two parties, reasoning that the assessee failed to demonstrate the technical qualifications of the family members involved, furnish evidence of sales promotion, and noted that the HUFs were not assessed at the maximum marginal rates, suggesting tax avoidance.

The assessee argued that identical issues in the preceding year (AY 2013-14) were decided in their favor by ITAT Ahmedabad. The ITAT, after reviewing the precedent, noted that the AO had not disproved the genuineness of the expenditure nor conducted further verification. Consequently, the ITAT ruled in favor of the assessee, deleting the disallowance of commission under section 40A(2)(b).

2. Disallowance of Deduction under Section 35(2AB):
The second ground of appeal concerns the disallowance of a deduction claimed under section 35(2AB) for research and development (R&D) expenses amounting to ?11,44,376/-. The AO noted that the Department of Scientific and Industrial Research (DSIR) had approved a lower amount of expenditure than claimed by the assessee. The AO disallowed the excess claim and also rejected the alternative claim under sections 37 or 32, stating that DSIR's certification was limited to section 35(2AB). The CIT(A) upheld the AO's decision.

The assessee argued that the law, as it stood during the assessment year, did not require DSIR to approve the quantum of expenditure but only the R&D facility. The ITAT Ahmedabad, in the preceding year, had ruled in favor of the assessee on identical facts, supported by various judicial precedents. The ITAT noted that the amendment requiring DSIR to quantify the expenditure came into effect only from 01/07/2016. Prior to this, the approval of the R&D facility was sufficient for claiming the deduction under section 35(2AB). Consequently, the ITAT ruled in favor of the assessee, allowing the deduction for the R&D expenses.

Conclusion:
The ITAT Ahmedabad allowed the appeal of the assessee on both grounds:
1. The disallowance of commission under section 40A(2)(b) was deleted based on the precedent set in the preceding year.
2. The disallowance of deduction under section 35(2AB) was overturned, allowing the claimed R&D expenses, as the requirement for DSIR to quantify the expenditure was not applicable for the assessment year in question.

Order pronounced in the open court on 23-02-2022.