2021 (9) TMI 161 - AT - Income Tax

Deduction of research and development expenses u/s. 35(2AB) - Scope of amendment to sub-section (3) of section 35 - grant of approval for deduction u/s. 35(2AB) with the office of DSIR - HELD THAT - As relying on decision of Sun Pharmaceutical Ind. Ltd. 2017 (8) TMI 933 - GUJARAT HIGH COURT and amendment to sub-section (3) of section 35 w.e.f. 1-04-2016 for furnishing of report, we consider that there is nothing before us on hand differs from the cases cited (supra) so as to take a different view on this issue - since the issue on hand being squarely covered following the principle of consistency, we find merit in the submission of the assessee and allowed the claim of deduction. Therefore, this ground of appeal is allowed. Disallowance of commission u/s. 40A(2)(b) - AO disallowed the expenditure incurred on payment of commission to persons specified u/s. 40A(2)(b) stating that assessee has failed to establish the genuineness of the expenditure - HELD THAT - As observed that during the course of assessment, the assessee has explained the specific services rendered by the parties to whom the commission was paid along with the detail of their expenses and TDS on the transaction of commission payment - assessee placed copies of invoices raised by the commission agent, along with ledger account, acknowledgement of income tax return for A.Y. 2013-14 - assessee has also enclosed the copies of I.T. returns filed by these parties showing the amount of commission earned in their return of income - AO has not made any further verification, investigation and examination from the parties to whom the sales were made through the commission agents to disprove the facts reported by the assessee in its submission - AO has not demonstrated any material or information gathered to disprove the genuineness of the expenditure incurred on commission payment - Decided in favour of assessee.

Summary

Issues Involved:
1. Deduction of Research & Development expenses under Section 35(2AB).
2. Disallowance of commission paid to persons covered under Section 40A(2)(b).

Detailed Analysis:

Ground No. 1: Deduction of Research & Development expenses under Section 35(2AB)
During the assessment, the Assessing Officer (AO) noticed that the assessee claimed a deduction of ?66,66,790 under Section 35(2AB). The AO pointed out that the assessee had produced a certificate from the DSIR dated 13th April 2015, which approved revenue expenditure of ?28,10,000 and capital expenditure of ?32,000 for the assessment year 2013-14. The AO restricted the claim of deduction to ?56,84,000 (?56,20,000 for revenue expenditure and ?64,000 for capital expenditure) as against the assessee's claim of ?78,68,842. Consequently, the AO disallowed ?21,84,842 and added it to the total income of the assessee.

The CIT(A) upheld the AO's decision. During the appellate proceedings, the assessee's counsel cited decisions from the ITAT Ahmedabad and Mumbai, arguing that the requirement for quantification of expenditure for claiming deduction was introduced only from 1st July 2016. The Tribunal referred to the case of Sun Pharmaceuticals Industries vs. Pr. CIT and other relevant cases, concluding that prior to the amendment effective from 1st April 2016, the quantification of expenditure was not required. The Tribunal found merit in the assessee's submission and allowed the claim of deduction, thereby reversing the CIT(A)'s decision.

Ground No. 2: Disallowance of commission paid to persons covered under Section 40A(2)(b)
The AO disallowed ?7,50,000 of commission payments to Prakash Udeshi HUF, Ranjeet Sen HUF, and Sushanto Pramanik HUF, stating that the details provided by the assessee were of a general nature and did not establish the genuineness of the expenditure. The CIT(A) restricted the disallowance to ?6,00,000, deleting the disallowance of ?1,50,000 paid to Prakash Udeshi HUF.

During the appellate proceedings, the assessee provided specific details of services rendered by the parties, along with invoices, ledger accounts, and TDS details. The Tribunal noted that the AO did not conduct any further verification or investigation to disprove the assessee's claims. The Tribunal found that the AO had not demonstrated any material to disprove the genuineness of the commission payments. Therefore, the Tribunal concluded that the CIT(A)'s decision to sustain the disallowance was not justified and allowed the appeal of the assessee.

Conclusion:
The Tribunal allowed the appeal of the assessee on both grounds, reversing the CIT(A)'s decisions on the disallowance of Research & Development expenses under Section 35(2AB) and the disallowance of commission payments under Section 40A(2)(b). The order was pronounced in the open court on 31-08-2021.