2021 (9) TMI 972 - AT - Income Tax

Disallowance of deduction claimed u/s. 35(2)(AB) - excessive weighted deduction - HELD THAT - We found substance on the findings recorded by the lower authorities. Even before us, the ld. Authorised Representative could not controvert the findings of the Lower authorities. On perusal of record, we find that the expenditure incurred by the assessee towards professional charges, rent and electricity and maintenance are expenditure incurred by the assessee which has not been disputed by the revenue authorities, therefore in the interest of the justice it can be allowed u/s. 37(1) of the Act. Therefore, we remit the issue back to the file of AO with a direction to allow the expenditure incurred under the said heads u/s. 37(1) in accordance with law after providing reasonable opportunity of being heard to the assessee in the matter. Grounds raised by the assessee on this issue are treated as allowed for statistical purposes. Disallowance u/s. 14A rwr 8D - HELD THAT - We deem it fit and proper to remit the issue back to the file of the AO with a direction to examine the details which will be filed by the assessee before him regarding establishing of having own funds on the particular date of making investments and decide the issue in accordance with law after providing reasonable opportunity of being heard to the assessee. The assessee is directed to substantiate its case that he had sufficient own funds on the particular date of making of investments. Disallowance under rule 8D(2)(iii), the claim of the assessee is that the dividend earned by the assessee was directly credited to its bank account without any effort from it and hence, there was no administrative expenditure warranting disallowance. As per rule 8D(2)(iii), the disallowance is to be made only on the average value of the investment from which the assessee yielded exempt income. Therefore, the issue is remitted to the file of the AO to recalculate the average value of the investment from which the assessee has received exempt income and disallow as per rule 8D(2)(iii) of the Rules. The ground No. 3 is allowed for statistical purposes.

Issues Involved:
1. Disallowance of ?1,08,22,000/- under Section 35(2AB) of the Income Tax Act.
2. Disallowance of ?3,83,231/- under Section 14A read with Rule 8D.

Issue-Wise Detailed Analysis:

1. Disallowance of ?1,08,22,000/- under Section 35(2AB):

The primary issue pertains to the disallowance of ?1,08,22,000/- claimed by the assessee under Section 35(2AB) of the Income Tax Act for Research and Development (R&D) expenses. The Assessing Officer (AO) disallowed the amount on the grounds that the claimed expenses exceeded the approved R&D expenditure as per Form 3CL. The AO noted that the approved R&D expenditure was ?3116.06 lakhs, allowing a weighted deduction of ?6232.12 lakhs, whereas the assessee claimed ?6340.34 lakhs. The excess claim was attributed to professional charges and rent payments not included in Form 3CL.

The CIT(A) upheld the AO's decision, emphasizing the lack of documentary evidence and proper explanation from the assessee. The CIT(A) noted that the assessee did not submit Form 3CM or Form 3CL and failed to provide details regarding the rent, professional charges, and electricity & maintenance expenses.

The Tribunal, upon reviewing the case, observed that the assessee did incur the disputed expenses, which were not contested by the revenue authorities. However, due to the lack of specific evidence linking these expenses exclusively to R&D, the Tribunal directed the AO to allow these expenses under Section 37(1) of the Act, which pertains to general business expenditure. The issue was remitted back to the AO for re-evaluation and allowance of the expenses under Section 37(1) after providing the assessee a reasonable opportunity to present their case.

2. Disallowance of ?3,83,231/- under Section 14A read with Rule 8D:

The second issue involves the disallowance of ?3,83,231/- under Section 14A, which deals with expenses incurred in relation to earning exempt income. The AO noticed that the assessee had made significant investments in equity shares and received dividend income, which is exempt under Section 10(34). The AO applied Rule 8D to calculate the disallowance, considering the assessee had substantial interest-bearing loans.

The assessee contended that it had sufficient own funds to cover the investments, relying on the Bombay High Court's decision in the case of Pr.CIT vs. Shapoorji Pallonji & Co. Ltd., which presumes investments are made from interest-free funds if available. The Tribunal found merit in the assessee's claim but noted that the assessee failed to demonstrate the availability of own funds on the specific dates of the investments. Consequently, the issue was remitted back to the AO to verify the availability of own funds on the dates of investments and re-evaluate the disallowance accordingly.

Regarding the administrative expenses under Rule 8D(2)(iii), the assessee argued that the dividend was directly credited to its bank account without incurring any administrative expenses. The Tribunal directed the AO to recalculate the average value of the investments that yielded exempt income and make the disallowance as per Rule 8D(2)(iii).

Conclusion:

The appeal was allowed for statistical purposes, with both issues remitted back to the AO for re-evaluation in accordance with the Tribunal's directions. The Tribunal emphasized the need for the AO to provide the assessee with a reasonable opportunity to present their case and substantiate their claims with appropriate evidence.

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