Tribunal Decision: Sales Commission, R&D Expenses, Lease Rentals Appeals Allowed; Disallowance for Leave Encashment Upheld.

The Tribunal allowed the appeals related to sales commission, R&D expenditure, and lease rentals, while upholding the disallowance of provision for leave encashment. The disallowance under section 14A for exempt dividend income was deleted. The appeals were partly allowed for ITA 514/B/13 and fully allowed for ITA 1578/B/13.

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Issues Involved:
1. Disallowance of sales commission accrued but not due.
2. Disallowance of entire claim under section 35(2AB) for in-house R&D facility.
3. Disallowance of deduction towards Research and Development Expenses under sections 35(2AA) and 35(1)(ii).
4. Disallowance of provision for leave encashment.
5. Disallowance of lease rentals of vehicles on operating lease.
6. Disallowance under Section 14A read with Rule 8D for exempt dividend income.

Issue-wise Detailed Analysis:

1. Disallowance of Sales Commission Accrued but Not Due:
The assessee claimed a deduction for sales commission accrued but not due, amounting to Rs. 47,86,285. The AO disallowed this on the grounds that tax was not deducted at source as per section 192 of the Act. The CIT(A) upheld this disallowance, interpreting the commission as part of the directors' salary and thus subject to TDS. The Tribunal, referencing a previous decision in the assessee's own case for A.Y. 2006-07, held that the liability to deduct tax at source arises only when the recipient is eligible to receive the money. Consequently, the disallowance under section 40(a)(ia) was not warranted, and the assessee's claim was allowed.

2. Disallowance of Entire Claim under Section 35(2AB):
The assessee claimed a deduction of Rs. 1,32,44,186 for expenditure on scientific research under section 35(2AB). The AO disallowed this, arguing that the expenditure resulted in the acquisition of rights in or arising out of scientific research, which is not deductible under section 43(4)(ii). The CIT(A) upheld this view. However, the Tribunal found that the exclusion clause in section 43(4)(ii) applies to expenditure incurred in acquiring rights in scientific research done by others, not in-house research. Therefore, the Tribunal allowed the deduction, emphasizing that the legislative intent was to encourage in-house research.

3. Disallowance of Deduction towards R&D Expenses under Sections 35(2AA) and 35(1)(ii):
The assessee claimed deductions of Rs. 8,75,000 under section 35(2AA) and Rs. 4,37,500 under section 35(1)(ii) for contributions to approved institutions. The AO disallowed these claims, citing the acquisition of rights in scientific research. The Tribunal, applying the reasoning from the previous issue, held that the contributions were deductible as they were for scientific research and not for acquiring rights. The Tribunal directed the AO to allow the deductions.

4. Disallowance of Provision for Leave Encashment:
The assessee claimed a deduction of Rs. 11,45,829 for provision for leave encashment. The AO disallowed this based on section 43B(f), which allows such deductions only on actual payment. The CIT(A) upheld this disallowance, noting the Supreme Court's stay on the Calcutta High Court's decision in Exide Industries, which had declared section 43B(f) unconstitutional. The Tribunal confirmed the CIT(A)'s order, denying the deduction without actual payment.

5. Disallowance of Lease Rentals of Vehicles on Operating Lease:
The assessee claimed Rs. 26,21,184 as lease rentals for vehicles provided to executives. The AO treated this as a finance lease, disallowing the claim and allowing only depreciation. The CIT(A) upheld this view but allowed depreciation. The Tribunal, analyzing the lease agreement, concluded it was an operating lease. Accordingly, the Tribunal allowed the lease rentals as revenue expenditure, rejecting the AO's and CIT(A)'s conclusions.

6. Disallowance under Section 14A Read with Rule 8D for Exempt Dividend Income:
The AO disallowed Rs. 5,213 under section 14A read with Rule 8D, attributing it to the earning of exempt dividend income. The CIT(A) upheld this disallowance. The Tribunal, considering the small amount of dividend and the fact that the investment was old, held that no expenditure was incurred to earn the dividend. Thus, the Tribunal deleted the disallowance.

Conclusion:
The Tribunal allowed the appeals on issues related to sales commission, R&D expenditure, and lease rentals, while upholding the disallowance of provision for leave encashment. The disallowance under section 14A was also deleted. The appeals were partly allowed for ITA 514/B/13 and fully allowed for ITA 1578/B/13.

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