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2025 (3) TMI 1153 - AT - Income TaxDisallowance made of the deduction claimed in respect of the Research Development expenditure incurred at the approved in-house R D facility u/s 35(2AB) - HELD THAT - Denial of weighted deduction u/s 35(2AB) will not disable the assessee from claiming normal deduction for the said R D expenditure both revenue capital u/s 35(1)(i) and 35(1)(iv) of the Act respectively. R D expenditure including expenditure of capital nature consolidated claim statement details of disclosure of R D expenditure in the notes to audited financial statements along with a reconciliation statement between the amount certified in Form 3CLA and the figures reported in notes to audited financial statements. Details evidencing incurrence of capital expenditure at the approved in-house R D facility was duly disclosed in the notes to the audited financial statements and further the statutory auditor had verified and certified the same being relatable to scientific research in Form 3CLA. According to us therefore these contemporaneous evidences sufficiently establish that the capital expenditure was incurred in relation to scientific research and was therefore eligible for deduction u/s 35(1)(iv) . Hence the order of the lower authorities to that extent stands reversed. We direct the AO to further allow normal deduction for the capital R D expenditure u/s 35(1)(iv) and resultantly delete disallowance accordingly. This ground therefore stands partly allowed. Denial of deduction u/s 80IC for its plant/unit at Pantnagar - AO observed that the books of accounts were maintained against the principles of accounting standards and was being prepared in a manner to create artificial profits with the intention of claiming increased deduction u/s 80-IC - AR contended that the lower authorities were unable to pin-point any specific defect or infirmity in the audited stand-alone accounts of the eligible unit and rather had made sweeping remarks which did not have any cogent basis - HELD THAT - We find that the revenue of the eligible unit was booked on prudent accounting principles and in accordance with provisions of Section 80-IA(8). It is noted that there is no dispute regarding the direct costs debited in the audited stand-alone accounts of the eligible unit. The assessee has further demonstrated that the common/indirect costs have been allocated on sound and reasonable parameters. According to us therefore the resultant profits relatable to the manufacturing unit as reported in the audited financial statements did not suffer from any infirmity as wrongly alleged by the lower authorities in as much as there was no excess or higher profits reported by the assessee in its eligible unit at Pantnagar. AO had not pin-pointed any defect in the working of the profit of the eligible Unit and had instead estimated the margin of the eligible at 10% of cost basis. Thus the action of the lower authorities in assuming that the profits of the eligible unit was artificially higher because the other units or company as a whole had a lower profitability without any relevant evidence or material was baseless and unjustified. It is not in dispute that the assessee had indeed invested and set-up a manufacturing facility in industrially designated backward area in Pantnagar Uttarakhand in which it has investment more than Rs. 2250 crores. The said unit has been in operation for more than nine years and in none of the prior years the authorities are noted to have doubted its existence. It is also not the Revenue s case that the assessee has not fulfilled the conditions precedent in Section 80-IC to avail deduction in respect of profits derived by this eligible unit. We are in agreement with assessee that the assessee is free and entitled to arrange its affairs within the four corners of law to avail tax benefits which the law permits it to claim. According to us therefore the AO grossly erred in alleging tax evasion in the present case. Thus we thus hold that the profits reported in the stand-alone audited financials of the eligible unit as certified in Form 10CCB issued by the auditor was based on sound accounting principles which does not warrant any interference. Accordingly AO is directed to allow the deduction u/s 80-IC as claimed by the assessee in the return of income and therefore delete the disallowance - Decided against revenue. Disallowance of additional depreciation claimed u/s 32(1)(iia) in relation to pollution control and energy saving equipment s - HELD THAT - As the energy saving devices were specifically mentioned at Sl. No. III(8)(ix) renewable energy devices were mentioned at Sl. No. III (8)(xiii) and pollution control devices were mentioned at Sl. No. III(3)(vii) (ix). We are therefore in agreement with the Ld. CIT(A) that these fixed assets were in the nature of plant machinery and hence the assessee had rightly claimed additional depreciation u/s 32(1)(iia) on the same. CIT DR appearing before us are was unable to controvert the same. We therefore do not see any reason to interfere with the order of Ld. CIT(A) in this regard and accordingly dismiss this ground of the Revenue. Disallowance made u/s 14A while computing the book profit u/s 115JB - HELD THAT - This issue stands settled by the decision of Sobha Developers Ltd. 2021 (1) TMI 378 - KARNATAKA HIGH COURT wherein on similar facts and circumstances it was held that the disallowance made u/s 14A cannot be added to book profit u/s 115JB.
ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment include:
ISSUE-WISE DETAILED ANALYSIS 1. Weighted Deduction under Section 35(2AB) The legal framework requires Form 3CL from DSIR for claiming a weighted deduction under Section 35(2AB). The Court noted that the amendment to Rule 6(7A)(b) of the Income-tax Rules, effective from 01.07.2016, mandates this requirement. The assessee's reliance on previous decisions was found inapplicable due to changes in the law. Hence, the Court upheld the denial of the weighted deduction due to the absence of Form 3CL. 2. Normal Deduction under Section 35(1)(iv) The Court examined Section 35(1)(iv) and Section 35(2)(ia), concluding that an assessee is entitled to a normal deduction for capital expenditure on scientific research, irrespective of eligibility for weighted deduction under Section 35(2AB). The Court relied on the Madras High Court's decision in CIT vs Rajapalayam Mills Ltd., supporting the allowance of normal deduction. The Court found the assessee provided sufficient evidence, including audited financial statements, to substantiate the claim for a normal deduction. 3. Deduction under Section 80-IC for Pantnagar Unit The Court analyzed the deduction claimed under Section 80-IC for the Pantnagar unit. The AO had restricted the deduction by estimating profits based on a 3% margin, citing artificial profit creation. However, the Court found the AO's approach lacked a cogent basis and was arbitrary. The Court emphasized the proper linkage of revenues to the manufacturing unit and the sound allocation of common costs. The Court also noted the AO's failure to establish any 'arrangement' under Section 80-IA(10) that would justify altering the profits. The Court directed the AO to allow the deduction as claimed by the assessee, rejecting the AO's estimation of profits. 4. Additional Depreciation under Section 32(1)(iia) The Court considered whether pollution control and energy-saving devices qualify as 'plant & machinery' for additional depreciation. Referring to the New Appendix-I of the Income-tax Rules, the Court found these devices classified under 'plant & machinery' and upheld the assessee's claim for additional depreciation. 5. Disallowance under Section 14A and Section 115JB The Court examined whether the disallowance under Section 14A should be added to the book profit under Section 115JB. The Court relied on the Karnataka High Court's decision in Sobha Developers Ltd., which held that notional disallowance under Section 14A cannot be added back under clause (f) of Section 115JB. The Court distinguished the Calcutta High Court's decision in CIT Vs Jayshree Tea & Industries Ltd., noting the factual differences. The Court concluded that the addition of the disallowance to the book profit was unwarranted. SIGNIFICANT HOLDINGS The Court held that:
The Court directed the AO to allow the deductions as claimed by the assessee, reversing the disallowances made by the AO and upheld by the CIT(A), except where specified otherwise.
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