2020 (1) TMI 917 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - HELD THAT - As decided in own case 2019 (10) TMI 185 - ITAT PUNE only those investments are to be considered while computing average value of investments, which yielded exempt income during the year. Thus we concur with the contentions of assessee. The issue is restored back to the file of Assessing Officer for recalculation of disallowance u/s. 14A r.w.r. 8D after excluding those investments on which the assessee has not earned any exempt income during the period relevant to the assessment year under appeal. Assessee has stated at the Bar that if amount of disallowance u/s. 14A after recomputation is reduced below suo-moto disallowance made, the assessee would not claim refund/adjustment of excess suo-moto disallowance already made. Thus, ground No. 1 raised in the appeal by the assessee is allowed for statistical purpose. Denial of claim of weighted deduction u/s 35(2AB) - HELD THAT - As decided in own case 2019 (10) TMI 185 - ITAT PUNE AO 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) - Appeal of assessee is allowed

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Denial of claim of weighted deduction 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:

During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had claimed exempt dividend income of ?39.35 crores and had worked out a disallowance under Section 14A at ?64,73,000/-. The AO, however, recalculated the disallowance as ?91,77,567/- using Rule 8D of the Income Tax Rules, 1962, and made an additional disallowance of ?27,04,567/-. The CIT(A) upheld this disallowance.

The assessee argued that the issue was covered in its favor by the ITAT Pune's decision for A.Y. 2012-13, where it was held that disallowance under Section 14A should be made only in respect of investments that yielded exempt income. The Tribunal in the current appeal followed this precedent, directing the AO to rework the disallowance by excluding investments that did not yield any exempt income, in line with the Special Bench decision in Vireet Investments P. Ltd. The AO was instructed to provide a reasonable opportunity of hearing to the assessee.

2. Denial of claim of weighted deduction under Section 35(2AB) of the Income Tax Act, 1961:

The AO noticed that the assessee had claimed a weighted deduction of ?49,09,03,622/- under Section 35(2AB) for its in-house R&D facility approved by the DSIR. However, the DSIR did not approve ?4.05 lakhs of the total expenditure, leading the AO to disallow the proportionate weighted deduction. The CIT(A) upheld this disallowance.

The assessee contended that the issue was covered by the ITAT Pune's decision for A.Y. 2012-13, which held that once the R&D facility is approved by the DSIR, the AO's role is to allow the expenditure incurred on the in-house R&D facility as a weighted deduction under Section 35(2AB). The Tribunal in the current appeal agreed, noting that the DSIR's role was only to approve the facility, not the expenditure. The Tribunal directed the AO to allow the weighted deduction as claimed.

Conclusion:

The appeal was allowed in favor of the assessee on both issues. The Tribunal directed the AO to rework the disallowance under Section 14A by excluding investments that did not yield exempt income and to allow the weighted deduction under Section 35(2AB) as claimed by the assessee. The AO was also instructed to provide a reasonable opportunity of hearing to the assessee.