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TMI Blog2017 (2) TMI 502X X X X Extracts X X X X X X X X Extracts X X X X ..... For The Assessee : Shri Gaurav Jain and Ms. Bhavita Kumar, Advocates For The Revenue : Shri Anil Kumar Sharma, Senior DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Since common questions of facts and law have been raised in both the aforesaid cross appeals, the same are being disposed off by way of consolidated order to avoid repetition of discussion. 2. The Appellant, Deputy Commissioner of Income-tax, Circle 11(1), New Delhi (hereinafter referred to as 'the revenue') in ITA No.2228/Del/2014 by filing the present appeal sought to set aside the impugned order dated 31.01.2014 passed by the Commissioner of Income-tax (Appeals)-XIII, New Delhi qua the assessment year 2010-11 on the grounds inter alia that :- "1. On the facts and circumstances of the case and in law, the CIT (A) has erred in deleting the addition of ₹ 6,91,42,261/- made u/s 35(2AB) in respect of research and development expenditure. 2. On the facts and circumstances of the case and in law, the CIT (A) has erred in deleting the addition of ₹ 2,10,00,000/- made on account of disallowance of provision for warranty in excess of actual warranty claims being the same as unascertained liability. 3. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to the tune of ₹ 6,91,42,261/- under section 35(2AB). 6. AO, from the P&L account, further noticed that the assessee has made a provision for warranty at ₹ 3.67 crores and the assessee was called upon to explain as to why excess provision of ₹ 3.67 crores should not be disallowed being not ascertained liability. Assessee filed comprehensive reply. AO came to the conclusion that since no scientific basis has been furnished, it is clear that provision was only made on estimate basis and not as an ascertained liability and thereby disallowed the excess actual warranty claims amounting to ₹ 2,10,00,000/-. 7. AO further observed that the assessee has claimed to have earned dividend income of ₹ 15,82,84,580/-. Assessee was called upon to explain as to why the expenses incurred in earning dividend should not be disallowed u/s 14A of the Act and to furnish the working of disallowance in view of Rule 8D of the Income-tax Rules, 1962 (for short 'the Rules'). Ld. AR for the assessee submitted that there is neither any interest nor any administrative expenses relating to the dividend income, as such no disallowance u/s 14A is required. AO has disagreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in controversy, the provisions contained under Rule 6(7A)(a) of the Rules are reproduced as under for ready perusal :- "6. …… (7A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely:- (a) the facility should not relate purely to market sale promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature." 15. Bare perusal of the provisions contained under Rule 6(7A)(a) of the Rules specifically demarcate the area for which inhouse research and development facility is to be used by a company i.e. the expenditure of R&D should not be incurred purely for market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection and activities of a like nature. 16. In the instant case, assessee company claimed to have incurred R&D expenditure to bring down the noise level by redesigning intake and exhaust system; to reduce environmental pollution on account of unburnt gases by combustion chamber redesign, after treatment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certained liability. CIT (A) vide impugned order deleted the disallowance of ₹ 2,10,00,000/-. 20. The ld. AR for the assessee relied upon the order passed by coordinate Bench of the Tribunal in ITA No.2561/Del/2013 order dated 04.01.2016 for AY 2009-10 in assessee's own case and contended that there is no change of circumstances and the said order has not been further challenged by the revenue. For facility of reference, Paras 31, 32 & 33 of the order (supra) are reproduced as under for ready reference :- "31. Undisputedly, assessee is engaged in the business of manufacturing and sale of commercial vehicles, tractors, two wheelers and gears. Ld. A.R. contended that various products of the company are sold along with warranty and assessee is under obligation to replace any component bearing manufacturing defect free of cost and at the end of the relevant previous year, assessee had made aggregate provisions for warranty at ₹ 7,38,00,000/-. 32. Ld. D.R. relied upon the order passed by Assessing Officer. However, Ld. A.R. relied upon the order passed by L. CIT(A) and contended that the assessee only claimed regarding deduction of amount earmarked for provision for warra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tflow of resources will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. The principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of ht items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37. " 33. The coordinate bench of Income tax Appellate Tribunal by relying upon the judgement cited as Rotork Controls India Ltd. (supra) in the assessee's own case for the Assessment Year 2002- 03 held that assessee had estimated the provisions for warranty on the basis of past history. The estimate of warranty made by the assessee on the basis of past history cannot be treated as a provision for any ascertained liability and allowed the provision for warranty as deduction. Following the law laid down by Hon'ble Supreme Court in the judgement (supra), decision of coordinate bench in the assessee's own case, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat ld. CIT (A) have also erred in considering all the aforesaid contentions rather affirmed the addition made by the AO and relied upon judgment cited as Maxopp Investment Ltd. vs. CIT - 347 ITR 272 (Del.), CIT vs. Hero Cycles Ltd. - 320 ITR 518 (P&H) and SIL Investment Ltd. Vs. ACIT - 148 TTJ 213 (Delhi Bench). "12. The ratio of the judgment cited as Maxopp Investments Limited (supra) passed by the Hon'ble jurisdictional High Court is that "under section 14A(2,) it is a condition precedent for Assessing Officer to determine amount of expenditure incurred in relation to exempt income; that he must record his dis-satisfaction with correctness of claim of expenditure made by the assessee or with correctness of the claim made by the assessee that no expenditure has been incurred and that determination of amount of expenditure in relation to exempt income under Rule 8D only come into play when AO rejects claim of assessee in this regard." 24. Hon'ble Punjab & Haryana High Court in judgment cited as Hero Cycles Ltd. (supra) also held that disallowance u/s 14A can only be made if the AO establishes proximate nexus of expenditure with exempt income. ITAT, Delhi Bench in case of SIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im of assessee that "no expenditure has been incurred is incorrect" proceeded to invoke the provisions of section 14A read with Rule 8D. At the same time, AO has not disputed the audited books of account of the assessee in respect of investment and earning dividend income which are available at page 5 to 49 of the paper book. 27. So, when from the balance sheet available at page 16 of the paper book, produced before AO as well as CIT(A), it has come on record that assessee has sufficient cash flow during the year under assessment; the AO has failed to prove any nexus of borrowed funds with various investments held by the assessee; the AO without recording his dissatisfaction of correctness of the claim of expenditure made by the assessee nor AO has rejected the claim of the assessee that no expenditure has been incurred in earning the dividend income, the provisions contained under section 14A read with Rule 8D are not attracted. So, we are of the considered view that AO as well as CIT (A) have erred in disallowing / confirming the disallowance of normal expenses of ₹ 26,97,608/- while computing the book profit u/s 115JB of the Act. Consequently, grounds no.1 & 2 are determi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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