2018 (12) TMI 1497 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Held that - Admittedly, no disallowance has been made on account of interest expenditure by Assessing Officer, accepting the plea of assessee that no interest cost was attributable to tax free investments made by assessee. AO worked out disallowance under Rule 8D(2)(iii) of the Rules after recording satisfaction under section 14A(2). The assessee on its own motion had disallowed ₹ 39,76,231/-, so it is not the case where no disallowance is to be made in the hands of assessee. The provisions of Rule 8D(2)(iii) of the Rules are clearly applicable to the year under appeal and once the same are attracted, then the disallowance, if any, has to be computed as per the said Rule. AO has computed the said disallowance at ₹ 61,34,350/- and disallowed differential amount of ₹ 21,58,119/-. We find no merit in the plea of assessee in this regard and dismissing the same, we uphold the disallowance made by AO. - Decided against assessee Disallowance of weighted deduction of expenditure incurred on in-house research development activities under section 35(2AB) - Held that - The issue arising before us is similar to the issue in Cummins India Ltd. Vs. DCIT 2018 (5) TMI 1314 - ITAT PUNE and following the same parity of reasoning, we hold that where facility has been recognized by the prescribed authority and agreement has been entered into between facility and the prescribed authority and thereafter the role of Assessing Officer is to look into and allow the expenditure incurred on in-house R D facility as weighted deduction under section 35(2AB) - No merit in the orders of authorities below in restricting weighted deduction claimed under section 35(2AB) on the ground that DSIR had not approved the said expenditure. It may be pointed out herein itself that reasons for not approving expenditure have also not been made available to the assessee. Consequently, the same cannot be basis for curtailing deduction claimed under section 35(2AB) of the Act. The Assessing Officer is thus, directed to allow weighted deduction under section 35(2AB)

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
2. Disallowance of weighted deduction of expenditure incurred on in-house research and development activities under Section 35(2AB) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962:

The assessee challenged the disallowance of ?21,58,119/- under Section 14A, arguing that they had already disallowed ?39,76,231/- on a reasonable basis in their tax return. The Assessing Officer (AO) applied Rule 8D, computing the total disallowance at ?61,34,350/-, thus adding the differential amount of ?21,58,119/-. The CIT(A) upheld the AO's decision. The assessee contended that the investments in group companies were strategic and did not incur additional expenditure for earning dividend income. They also argued that similar disallowances in previous years were deleted by CIT(A) and/or ITAT, Pune.

The Tribunal noted that the AO had recorded satisfaction under Section 14A(2) and had not disallowed any interest expenditure, accepting that no interest cost was attributable to tax-free investments. However, the AO computed the disallowance under Rule 8D(2)(iii) and added the differential amount. The Tribunal found no merit in the assessee's plea and upheld the disallowance made by the AO, dismissing the grounds of appeal related to this issue.

2. Disallowance of weighted deduction of expenditure incurred on in-house research and development activities under Section 35(2AB) of the Income Tax Act, 1961:

The assessee claimed a weighted deduction of ?15,04,89,940/- for in-house R&D activities approved by the Department of Scientific and Industrial Research (DSIR). The AO noted that DSIR had not approved ?18.42 lakhs of the total expenditure and disallowed the proportionate deduction. The CIT(A) upheld this decision. The assessee argued that DSIR's rejection lacked reasoning and that once the facility was approved, DSIR had no authority to approve or reject annual expenses.

The Tribunal referred to the case of Cummins India Ltd. Vs. DCIT, where it was held that once the R&D facility is approved by DSIR, the AO's role is to allow the expenditure incurred on the facility as a weighted deduction. The Tribunal found that prior to the amendment in 2016, DSIR had no authority to approve or disapprove expenditure annually. The Tribunal held that the AO's curtailment of the deduction based on DSIR's non-approval was not justified and directed the AO to allow the weighted deduction of ?18,42,000/-. Consequently, the grounds of appeal related to this issue were allowed.

Conclusion:

In summary, the Tribunal dismissed the appeal regarding the disallowance under Section 14A read with Rule 8D but allowed the appeal concerning the disallowance of the weighted deduction under Section 35(2AB). The appeal was thus partly allowed.