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2024 (9) TMI 137 - AT - Income TaxDeduction u/s 35(2AB) - in-house Research and Development (R D) expenses and further R D expenses towards building - Disallowance of deduction/expenses not approved by the DSIR - HELD THAT - Merely because DSIR had quantified the total R D expenditure in the current year, which is prior to 01.04.2016, the same was not binding on the revenue authorities. Therefore, the Revenue was not correct in restricting the deduction u/s. 35(2AB) of the Act on the basis of the amount quantified by the DSIR in their approval. Rather, the AO should have examined the correctness of the R D expense of the assessee than merely relying on the expenditure approved by DSIR. As found that the exact basis of claim of deduction u/s 35(2AB) was not properly explained by the assessee in the case of assessment proceedings. The assessee had filed the details of the R D expenses in the course of assessment, as per which the total expenses was to the extent of Rs. 3,39,16,441/-. If this figure is taken as correct, then the assessee should have claimed deduction of Rs. 6,78,32,882/- @ 200% of the expenditure and not Rs. 6,66,06,663/- as actually claimed. This indicates that the details of R D expenditure as furnished was not correct. Further, the difference of Rs. 25,07,151/- being expenditure not approved by the DSIR was also not properly explained by the assessee. Therefore, the matter is set aside to the file of the AO to correctly verify the expenditure incurred by the assessee on in-house R D center and, thereafter, allow the deduction at the eligible rate, without taking into account the expenditure as certified by the DSIR. The ground taken by the assessee is allowed for statistical purposes. Disallowance of interest expenses u/s 36(1)(iii) - assessee had made huge addition to the fixed assets/CWIP during the year - AO considered the borrowed funds of the assessee vis- -vis CWIP and proportionate interest disallowance on CWIP - HELD THAT - From the Schedule-B of balance sheet it is seen that the assessee had surplus reserve of Rs. 3,392,038,627/- which also would have been deployed towards CWIP. In fact fresh share premium of Rs. 2,356,380,318/- was received during the current year only. Considering this huge interest free funds available with the assessee the presumption of the AO that only the interest bearing funds were utilized towards CWIP, was not correct. Therefore, the disallowance as made by the AO which was based on wrong presumption, can t be held as correct. The disallowance of interest As made by the AO is deleted. The ground taken by the assessee is allowed. Disallowance of capital loss - assessee was unable to establish or reconcile the difference of an amount on account of addition to CWIP. The same was treated as asset written off by the AO and disallowed as capital loss - HELD THAT - The fact remains that the amount in respect of CWIP additions remained unreconciled. As this claim was not on revenue account, but in respect of CWIP which was to be allocated to fixed assets, the claim was certainly not on revenue account and ineligible for deduction u/s 37 - As regards the claim of capital loss, in order to claim the carry forward of the loss, the same has to be first established. This is not the case where the assessee had incurred any capital loss. Rather the addition to CWIP was not fully justified by the assessee and the amount remained unreconciled which cannot be considered as actual capital loss. Therefore, we do not find anything wrong with the treatment as given by the AO. The decision of Ld. CIT(A) on this issue is, therefore, upheld and the ground taken by the assessee is dismissed. Disallowance u/s 40(a)(ia) - commission paid to non-residents - as contended by the assessee that non-residents to whom the commission was paid had rendered services outside India and that their income was not taxable in India - HELD THAT -It is found from the copy of the Form No.35 filed by the assessee that no specific ground was taken before the Ld. CIT(A) in respect of addition of Rs. 11,47,701/- under Section 40(a)(ia) of the Act. Therefore, the Ld. CIT(A) cannot be faulted for not giving any finding on this issue, when the matter was not specifically raised before him. However, considering the fact that this issue was also involved in assessee s own case in A.Y. 2013-14 where the issue was decided in the favour of the assessee, we deem it proper to set aside the matter to the file of the Ld. CIT(A) to examine the matter on the merits of the case. The assessee is also directed to raise a specific ground in this regard before the Ld. CIT(A) in order to enable him to examine the matter on the merits, within a reasonable period of time. The ground of assessee is allowed for statistical purposes. Disallowance of provision of bad debt - AO noticed that the assessee had debited an amount on account of provision of bad debts in its P L account - Claim disallowed by the AO for the reason that the bad debt was not actually written off by the assessee during the year under consideration and the addition as made by the AO was upheld by the CIT(A) - HELD THAT - The deduction in respect of provision for bad and doubtful debt is admissible u/s 36(1)(viia) which is applicable to banking companies, financial institutions, non-banking financial company etc. and the said provision is not applicable in the case of present assessee. Therefore, we have to examine the claim for deduction of the assessee in accordance with the provision of Section 36(1)(vii) of the Act. The basic requirement for claiming deduction under Section 36(1)(vii) of the Act is that the bad debt should be written off as irrecoverable in the accounts of the assessee for the previous year, in which the deduction is claimed. Further that, such claim should not be on account of any provision for bad and doubtful debts . As evident from the above reply of the assessee that the provision for bad debt as debited to the accounts of the current year was not actually written off in the current year. The assessee had itself submitted that these debts were actually written off in the next year and had accordingly requested the AO to allow the deduction for the bad debt in the A.Y. 2012-13. In view of these facts, we do not find anything wrong with the orders of the AO and the CIT(A) on this issue. Decided against assessee.
Issues Involved:
1. General nature of the impugned Assessment Order. 2. Disallowance under Section 35(2AB). 3. Disallowance of interest expenses under Section 36(1)(iii). 4. Disallowance of capital loss. 5. Disallowance under Section 40(a)(ia) for commission paid to non-residents. 6. Disallowance of provision for bad debts. Issue-wise Detailed Analysis: Ground Number-1: General Nature of the Impugned Assessment Order The first ground raised by the assessee was general in nature and did not require any adjudication. Ground Number-2: Deduction under Section 35(2AB) Ground No.2 pertained to the disallowance of Rs. 50,34,302/- under Section 35(2AB) of the Income Tax Act, 1961. The assessee claimed a weighted deduction of Rs. 6,66,06,663/- for in-house Research and Development (R&D) expenses. The AO restricted the deduction to Rs. 3,13,99,290/- based on the expenditure approved by the DSIR. The Tribunal found that prior to 01/04/2016, there was no requirement for the DSIR to quantify eligible R&D expenditure for claiming deductions. The AO should have examined the correctness of the R&D expenses rather than relying solely on DSIR's approval. The matter was set aside to the AO to verify the R&D expenditure and allow the deduction at the eligible rate without considering DSIR's certification. The ground was allowed for statistical purposes. Ground Number-3: Disallowance of Interest under Section 36(1)(iii) Ground No.3 related to the disallowance of Rs. 2,12,94,836/- as interest expenses. The AO capitalized this amount towards CWIP under Section 36(1)(iii). The Tribunal noted that the assessee had already capitalized Rs. 1,43,41,166/- and that the AO's presumption that all interest-bearing funds were utilized towards CWIP was incorrect. The Tribunal referred to a similar case from A.Y. 2013-14 where the disallowance was deleted. Given the substantial interest-free funds available, the Tribunal deleted the disallowance of interest expenses. The ground was allowed. Ground Number-4: Disallowance of Capital Loss Ground No.4 concerned the disallowance of Rs. 16,35,331/- as capital loss. The AO treated the unreconciled difference in CWIP additions as a capital loss. The Tribunal found that the assessee failed to explain the difference and justify the CWIP additions. Since the claim was not on revenue account but related to CWIP, it was ineligible for deduction under Section 37. The Tribunal upheld the AO's treatment of the amount as a capital loss and dismissed the ground. Ground Number-5: Disallowance under Section 40(a)(ia) Ground No.5 involved the disallowance of Rs. 11,47,701/- for commission paid to non-residents without TDS deduction. The AO disallowed the amount under Section 40(a)(ia), considering the income as deemed to accrue in India. The Tribunal noted that the issue was not specifically raised before the CIT(A). However, given the similar issue in A.Y. 2013-14 where relief was granted, the Tribunal set aside the matter to the CIT(A) for examination on merits. The ground was allowed for statistical purposes. Ground Number-6: Disallowance of Provision for Bad Debts Ground Nos.6 and 7 pertained to the disallowance of Rs. 1,18,87,543/- for provision of bad debts. The AO disallowed the amount as it was not actually written off during the year. The Tribunal found that the provision was not written off in the current year and upheld the AO's disallowance. The Tribunal noted that the reliance on the Vodafone Essar Gujarat Ltd. case was misplaced as it dealt with MAT liability under Section 115JB, not the allowability of bad debt deduction under Section 36(1)(vii). The Tribunal dismissed the ground. Conclusion: The appeal was allowed in part, with the Tribunal providing relief on certain grounds while upholding the disallowances on others. The detailed analysis ensures that the relevant legal terminology and significant phrases from the original text are preserved.
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