2014 (6) TMI 396 - AT - Income Tax

Weighted deduction u/s 35(2AB) of the Act in-house R & D unit - reopening of assessment - disallowance of 5% of business development expenditure on adhoc basis. - Held that - Following Nagarjuna Agrichem Ltd. Versus Dy. Commissioner of Income-tax 2014 (6) TMI 316 - ITAT HYDERABAD - the statutory formalities for getting approval u/s 35(2AB) are that application in Form No. 3CK and 3CL are to be submitted and an order of approval has to be obtained in Form No. 3CM from the prescribed authority - the assessee has not furnished Form No. 3CM either before the revenue authorities or before us for claiming weighted deduction u/s 35(2AB) - there is justification for reopening of assessment - assessee is entitled for 100% of the allowance at present and as and when received Form 3CM, weighted deduction may be allowed. Restriction placed in Section 35(2AB) will apply, in our opinion, only in the case when amount was allowed under section 35 itself - These two provisions are mutually exclusive but an assessee can claim a particular deduction either u/s 35 or u/s 37 so long as the amount spent is for the purpose of business there was no merit in the AO s contention that the amount once considered u/s 35 cannot be considered u/s 37 Decided in favour of assessee. Claim of expenses on research and development u/s 35(1)(ii) of the Act Held that - Following Nagarjuna Agrichem Ltd. Versus Dy. Commissioner of Income-tax 2014 (6) TMI 316 - ITAT HYDERABAD - assessee is entitled for necessary deduction u/s 35(1)(ii) - AO can also consider allowing the claim u/s 37(1) as well in case the expenditure is not allowed u/s 35(1), subject to fulfilling the conditions of that provision AO is directed to examine the evidence and allow as per the provisions of the Act, after satisfying himself that the assessee has fulfilled the conditions Decided in favour of assessee. Adhoc disallowance Held that - Following Nagarjuna Agrichem Ltd. Versus Dy. Commissioner of Income-tax 2014 (6) TMI 316 - ITAT HYDERABAD - expenditure under the head is not related exclusively for the business development - he has disallowed 10% of the total expenditure u/s 37(1) - CIT(A) was of the view that the gifts purchased were of complimentary in nature and necessary for the purpose of business - assessee relied on various case law to substantiate that expenditure is wholly and exclusively for the purpose of business and is allowable u/s 37(1) thus, 5% adhoc disallowance of the amount is reasonable Decided in favour of Revenue.

Summary

Issues Involved:
1. Deduction under Section 35(2AB)
2. Deduction under Section 35(1)(ii)
3. Adhoc Disallowance of Business Development Expenditure

Detailed Analysis:

1. Deduction under Section 35(2AB):
The primary issue revolves around the claim of weighted deduction at 150% of amounts spent on scientific research under Section 35(2AB) for the assessment years 2005-06, 2006-07, and 2007-08. The Assessee claimed the deduction for scientific research expenditure, but the Assessing Officer (A.O.) disallowed the claims due to the absence of Form 3CM and 3CL issued by the Prescribed Authority and lack of approval from DSIR. The CIT(A) upheld the disallowance. The Assessee argued that they had obtained DSIR approval for their in-house R&D unit and were awaiting the necessary certificates. The Tribunal directed the A.O. to allow 100% of the actual expenditure and to grant the weighted deduction upon receipt of Form 3CM. The Tribunal also noted that if the deduction under Section 35(2AB) was not allowed, the expenditure could be considered under Section 37(1) as it was for business purposes.

2. Deduction under Section 35(1)(ii):
The Assessee claimed deductions for amounts paid to various universities and research centers for product development under Section 35(1). The A.O. disallowed the claims due to a lack of evidence that these institutions were approved for such deductions. The CIT(A) upheld the disallowance, but the Tribunal referred to previous decisions where similar expenditures were allowed. The Tribunal directed the A.O. to verify the evidence and allow the deduction under Section 35(1)(ii), or alternatively under Section 37(1) if the conditions were met.

3. Adhoc Disallowance of Business Development Expenditure:
In the assessment year 2006-07, the A.O. disallowed 10% of the business development expenditure on an ad hoc basis, citing that some items, particularly gifts, were not exclusively for business purposes. The CIT(A) reduced the disallowance to 5%. The Assessee contended that the entire expenditure was for business purposes, but the Tribunal upheld the 5% disallowance, considering it reasonable due to the nature and non-verifiability of certain claims.

Conclusion:
- The Tribunal allowed the Assessee's appeals for statistical purposes regarding the deductions under Sections 35(2AB) and 35(1)(ii), directing the A.O. to verify and allow the claims as per the provisions.
- The Tribunal upheld the 5% ad hoc disallowance of business development expenditure for the assessment year 2006-07.
- The Revenue's appeal was dismissed.

Order Pronounced:
The order was pronounced in the open court on 28.05.2014.