2021 (2) TMI 716 - AT - Income Tax

Weighted deduction u/s 35(2AB) denied - case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued - CIT(A) observed that the assessee has not maintained separate books of accounts for R D facility, and hence it is not verifiable as to how much expenditure they actually incurred for research development activity - HELD THAT - CIT(A) has put reliance on form no. 3CL. To our mind this reasoning is not sustainable because the assessee is a company which has returned income of more than ₹ 20.67 cores. It has given list of expenditure, which we have taken cognizance while extracting the submissions of the assessee filed before the ld. CIT(A). The first item in this list is consumption of stores and spare parts. It has been quantified at ₹ 2,82,703/-. This item cannot be an item from overall list of spares and stores of a company whose returned income is more than ₹ 20.67 crores. Thus, according to the assessee, it has submitted complete details during the assessment proceedings as well as before the ld. CIT(A). But none has bothered to look into. After perusal of the details of expenditure, we are of the view that the ld. CIT(A) has failed to analytically examine the claim of the assessee. He simply proceeded on basis of the list of expenditure submitted before the DSIR. Provision nowhere contemplates that assessee would claim deduction only those expenditure whose details has been forwarded to the DSIR for the purpose of availing certificate of approval for organization engaged in research activity. If an assessee independently demonstrates expenditure in the research activity (see the submission extracted above), then their nature is required to be looked into before taking a call for an addition. No such efforts were made by the Revenue authorities. Therefore, orders of the Revenue authorities are not sustainable. - Decided in favour of assessee.

Summary

Issues:
Single issue: Denial of weighted deduction under section 35(2AB) of the Income Tax Act, 1961.

Detailed Analysis:

1. Background and Assessment: The assessee, engaged in manufacturing fine chemicals, appealed against the order denying weighted deduction under section 35(2AB) for the Asstt. Year 2014-15. The AO granted deduction at &8377; 27.17 lakhs instead of the claimed &8377; 55.22 lakhs, resulting in an addition of &8377; 28.05 lakhs. The assessee's appeal revolved around this denial.

2. Contentions of the Assessee: The assessee provided detailed breakdown of R&D expenses, claiming &8377; 59,11,695 as eligible for deduction under section 35(2AB) based on a DSIR-approved figure of &8377; 66,69,257. The appellant argued that the AO's assessment was based on incomplete information and requested deletion of the &8377; 28,05,000 addition.

3. Decision of the CIT(A): The CIT(A) rejected the assessee's contentions, stating that since separate R&D facility accounts were not maintained, only the DSIR-certified figures of &8377; 26.47 lakhs revenue and &8377; 0.35 lakhs capital expenditure were considered eligible for deduction. The CIT(A) upheld the AO's decision to disallow the claimed deduction.

4. Tribunal's Analysis and Decision: The Tribunal found that the nature of the expenditure was not analyzed by the AO or the CIT(A) despite detailed submissions by the assessee. It noted that the assessee, with substantial income, had provided specific expenditure details, including stores, power, employee benefits, etc. The Tribunal held that the authorities failed to assess the actual expenditure incurred for R&D activities. Consequently, the Tribunal allowed the appeal, deleting the addition of &8377; 28,05,000.

5. Conclusion: The Tribunal ruled in favor of the assessee, emphasizing the need for a thorough examination of the nature of expenses claimed under section 35(2AB). It highlighted the importance of independently demonstrating R&D expenditure and analyzing the details provided by the assessee. The Tribunal found the Revenue authorities' orders unsustainable and allowed the appeal, directing the deletion of the disallowed amount.

In conclusion, the Tribunal's decision overturned the CIT(A)'s ruling, emphasizing the necessity of a detailed assessment of R&D expenses for claiming deductions under section 35(2AB) of the Income Tax Act, 1961.