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2015 (3) TMI 982 - AT - Income TaxRectification order U/s 154 - Commissioner of Income Tax passed a rectification order U/s 154 allowing R & D expenditure U/s 35(2AB) on the net expenditure after reducing sales realized - Whether CIT(A) erred in not following the substance of DSIR guidelines which indicates that the sales realization arising out of assets sold should be reduced while claiming the deduction but the he erred in reducing the sale of products out of R & D expenditure? - Held that - DSIR guidelines no. vii has specifically provided that assets acquired if any out of R & D work shall be disposed with approval of DSIR. The assessee has been submitting yearly audit reports & accounts of approved R & D sanction to DSIR. The R & D accounts have been separately maintained and separate P & L Account prepared and the dossier sales have been credited to P & L Account of R & D because these sales are part of normal sales. It is clear from the sample copy of the license and supply agreement filed before us that the product development charges received by the assessee will not be covered under clause 5(vii) of the DSIR guidelines. As we have already seen, these receipts are credited to profit & loss account are part of normal sales. They are, therefore, not to be reduced from the expenditure incurred by the assessee on carrying out scientific research on which deduction u/s. 35(2AB) has to be allowed. We are, therefore, of the view that there is no merit in ground raised by the revenue and that the order passed by the CIT(A) u/s. 154 of the Act cannot be sustained and the same is hereby reversed. - Decided in favour of assessee. Addition to book profit by adding the expenditure u/s 14A to the book profit - CIT(A) deleted the addition - Held that - Identical issue came up for consideration before this Tribunal in DCIT v. Sobha Developers 2015 (2) TMI 940 - ITAT BANGALORE wherein held that there is no difference between the expression expenditure relatable and the expression expenditure incurred by the Assessee in relation to . Both the expressions mean that whatever expenditure are incurred to earn income which does not form part of the total income under the Act, both direct and indirect expenditure, have to be disallowed. There is no basis for the argument u/s. 115JB of the Act, it is only direct expenses that are contemplated as capable of being added to the profits as per P&L account under clause (f) to Expln.1 below Sec.115JB(2) of the Act. Also the quantum of expenditure disallowed by the AO by invoking the provisions of Sec.14A of the Act while computing total income under the normal provisions of the Act has not been challenged by the Assessee and the said disallowance has been accepted by the Assessee. In such circumstances, we do not see any reason why the same disallowance cannot be adopted while arriving at the book profits u/s.115JB (2) of the Act read with Explanation 1(f) thereto. - aforesaid decision will apply to the facts of the present case also, however, with the modification that the quantum of deduction u/s. 14A of the Act which is determined while computing the total income of assessee under normal provisions of the Act and which is ultimately sustained by the Tribunal will be substituted with the sum disallowed by the AO. - Decided in favour of revenue. Disallowance u/s. 14A read with rule 8D - appellant has not produced the evidentiary support in relation to dispersal of loan and utilization of loan - Held that - From the copy of the availability of funds and investments made, it is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income. The Hon ble Bombay High Court in Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - HIGH COURT BOMBAY) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. Also when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. Thus disallowance of interest expenses in the present case of ₹ 49,42,473 made under Rule 8D(2)(ii) of the I.T. Rules should be deleted. - Decided in favour of assessee Disallowance made by the AO under Rule 8D(2)(iii) of the Rules i.e., other expenses are concerned, we find that the assessee had made a claim before the AO that other expenses to be considered for disallowance under Rule 8D(2)(iii) is only ₹ 3,22,426. The assessee had also given a break-up of other expenses also. Without rejecting the claim of assessee, the AO proceeded to make a disallowance invoking Rule 8D of the Rules. In the decision of Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co., (2010 (8) TMI 77 - BOMBAY HIGH COURT), it was held that Rule 8D can be resorted to by the AO only when he rejects the claim made by the assessee regarding expenditure incurred in earning income which does not form part of total income. In the present case, the AO has not done so. We therefore deem it fit and proper to restore this issue of disallowance under Rule 8D(2)(iii) to the AO for fresh consideration - Decided in favour of assessee for statistical purposes. Addition regarding wealth tax liability under the provisions of section 115JB treating the provision for wealth tax as unascertained liability - Held that - We agree with the submission of the learned counsel for the Assessee that wealth tax liability provision is not covered under Expln- 1(a) to Sec.115JB(2) of the Act. Regarding applicability of Expln-1(c ) to Sec.115JB(2) of the Act is concerned, we are of the view that it would be just and proper to remand this issue for fresh consideration to verify the claim of assessee to the extent that the provision for wealth-tax is based on the actual wealth-tax returns filed by the assessee (and if so), then the same cannot be considered as unascertained liability - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Deduction under Section 35(2AB) of the Income Tax Act. 2. Addition to book profit under Section 115JB by including disallowed expenditure under Section 14A. 3. Disallowance under Section 14A read with Rule 8D. 4. Addition of wealth tax liability under Section 115JB. Issue-Wise Detailed Analysis: 1. Deduction under Section 35(2AB) of the Income Tax Act: The assessee, a pharmaceutical company, claimed a weighted deduction under Section 35(2AB) on gross expenditure for scientific research. The Assessing Officer (AO) reduced the deduction by the amount of product development charges received, allowing it on net expenditure. The CIT(A) initially allowed the deduction on gross expenditure, but later rectified the order under Section 154, reducing the deduction by the product development charges based on DSIR guidelines. The Tribunal held that the DSIR guidelines only required offsetting sales realization from assets sold, not from products emanating from R&D. The Tribunal reversed the CIT(A)'s rectification order, allowing the deduction on gross expenditure and dismissing the revenue's appeal. 2. Addition to Book Profit under Section 115JB by Including Disallowed Expenditure under Section 14A: The AO added disallowed expenditure under Section 14A to the book profit for Minimum Alternate Tax (MAT) purposes under Section 115JB. The CIT(A) deleted this addition, stating that Section 14A adjustments are specific to total income computation under normal provisions, not for MAT. The Tribunal, however, reversed the CIT(A)'s decision, holding that the disallowed expenditure under Section 14A should be added to the book profit under Section 115JB, following the precedent set in DCIT v. Sobha Developers. 3. Disallowance under Section 14A Read with Rule 8D: The assessee claimed that no interest-bearing funds were used for investments yielding tax-free income. The AO disallowed a portion of interest and other expenses under Rule 8D. The CIT(A) upheld the disallowance, citing insufficient evidence from the assessee. The Tribunal found that the assessee had sufficient interest-free funds and directed the deletion of the interest disallowance. However, it restored the issue of other expenses disallowance to the AO for fresh consideration, as the AO had not rejected the assessee's claim before invoking Rule 8D. 4. Addition of Wealth Tax Liability under Section 115JB: The AO added the provision for wealth tax to the book profit under Section 115JB, treating it as an unascertained liability. The CIT(A) upheld this addition. The Tribunal agreed that wealth tax is not covered under Explanation 1(a) to Section 115JB but remanded the issue to verify if the provision was based on actual wealth tax returns, in which case it would not be an unascertained liability. Conclusion: The Tribunal allowed the assessee's appeal regarding the deduction under Section 35(2AB) and interest disallowance under Section 14A, while it upheld the revenue's appeal on adding disallowed expenditure under Section 14A to book profit under Section 115JB. The issue of other expenses disallowance under Rule 8D and the addition of wealth tax liability under Section 115JB were remanded for further verification.
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