2016 (2) TMI 418 - AT - Income Tax

Tribunal directs reassessment, deletes disallowances, upholds deductions, and interest levy.

The Tribunal partially allowed the appeal, directing reassessment and deletion of certain disallowances. The disallowance under S.35(2AB) for scientific ... Disallowance of deduction claimed under S.35(2AB) - disallowance on the ground as approval granted is by a Scientist of DSIR and not the Secretary - Held that:- It is observed that for claiming deduction under S.35(2AB), assessee has relied on two letters issued by Scientist G, referred to hereinabove. It is seen that one letter, as placed at page 13 of the paper-book, relates to Certificate of Registration for availing customs duty exemption. Second letter, placed at page 14 of the paper-book, is in respect of renewal of recognition granted to the Inhouse R & D facility till 31.3.2015. The assessee neither before the departmental authorities nor before us has produced any approval in Form 3CM, even from a Scientist of DSIR. Therefore, in our view, only on the basis of either the letter issued for renewal of recognition of In-House R&D unit or certificate granted for customs duty exemption, assessee would not be entitled to claim deduction under S.35(2AB). therefore, we are inclined to remit the matter back to the Assessing Officer for giving an opportunity to the assessee to furnish the report in prescribed form, of the prescribed authority, i.e. either Scientist G of DSIR or any other authority from DSIR, as required in S.35(2AB) of the Act, and redecide the matter in accordance with law, and after giving reasonable opportunity of hearing to the assessee. - Decided in favour of assessee for statistical purposes. Disallowance made under S.36(1)(iii) out of bank interest and financial charges - Held that:- Hon'ble Bombay High Court in the case of C.I.T. vs. Reliance Utilities & Power Ltd., (2009 (1) TMI 4 - BOMBAY HIGH COURT ) has held that when the assessee has mixed funds, i.e. both interest free and interest bearing funds, presumption would be interest free advances are from interest free funds available with the assessee. Applying the same principle, it has to be held that the investment in equity shares were made from out of surplus interest free funds available with the assessee. Further, it is a fact on record that investments in equity shares have been made during the period from 8.10.2005 to 21.1.2007 and not in the previous year relevant to the assessment year under dispute. The Department also has not controverted the contention of the assessee that no disallowance out of interest expenditure was made during the assessment year in which the investment was actually made. In view of the aforesaid factual position, we hold that the disallowance of interest expenditure is not sustainable. - Decided in favour of assessee. Disallowance of interest on Foreign Currency Convertible Bonds(FCCB) - Held that:- It is well settled principle of law that if the payments on which tax is sought to be deducted is not chargeable to tax in India, provisions of S.195 would not apply. In the present case, it is not controverted by the Learned Departmental Representative with cogent evidence that not only the bonds were raised outside India, but the interest payments were also made to non-resident Indians outside India from a bank account held by the assessee outside India. Therefore, since no part of the transaction relating to payment of interest has taken place in India, it cannot be said that interest payment made to non-residents has accrued or arisen in India in terms of S.9 of the Act. In our view, therefore, the provisions of S.195 would not apply to such payments, thereby requiring the assessee to deduct tax at source. We are supported in our view by the decisions cited by the learned counsel for the assessee. Accordingly, we direct the Assessing Officer to delete the disallowance made in this behalf - Decided in favour of assessee Levy of interest under S.234B and S.234C - Held that:- On a perusal of the material available on record, it is seen that in the computation of income filed alongwith the return of income, assessee itself has calculated interest under S.234B and S.234C, which is more than the interest computed by the Assessing Officer. - Decided against assessee Issues Involved:1. Disallowance of deduction claimed under S.35(2AB) of the Act.2. Disallowance under S.36(1)(iii) of the Act out of bank interest and financial charges.3. Direction regarding deduction claimed under S.80G.4. Disallowance of interest on Foreign Currency Convertible Bonds (FCCB).5. Levy of interest under S.234B and S.234C of the Act.Issue-wise Detailed Analysis:1. Disallowance of Deduction Claimed under S.35(2AB) of the Act:The assessee challenged the disallowance of Rs. 1,77,03,533 claimed under S.35(2AB) for expenditure incurred on scientific research. The Assessing Officer (AO) disallowed the deduction as the assessee failed to furnish approval in Form No.3CM from the Department of Scientific and Industrial Research (DSIR). The CIT(A) confirmed the disallowance but directed the AO to verify if the expenditure could be allowed under S.35(1)(i) or S.35(1)(iv). The Tribunal noted that the statutory provisions require approval in Form 3CM from DSIR and observed that the assessee had not produced such approval. The Tribunal remitted the matter back to the AO to allow the assessee to furnish the necessary approval and redecide the matter.2. Disallowance under S.36(1)(iii) of the Act out of Bank Interest and Financial Charges:The AO disallowed Rs. 17,85,000 out of bank interest and financial charges, noting that the assessee made investments in equity shares of two companies from which dividend income is exempt. The assessee contended that the investments were made from internal accruals and not borrowed funds. The CIT(A) upheld the disallowance. The Tribunal, however, found that the investments were made from internal accruals and sufficient interest-free funds were available. It also noted that the investments were made in earlier years, not in the assessment year under consideration. The Tribunal deleted the disallowance, allowing the grounds of the assessee on this issue.3. Direction Regarding Deduction Claimed under S.80G:The AO disallowed the deduction of Rs. 1 lakh claimed under S.80G for a donation to TTD, as the assessee could not establish that the trust was exempt under S.80G. The CIT(A) directed the AO to allow the deduction if the assessee could produce the exemption certificate. The Tribunal found no infirmity in the CIT(A)'s directions, dismissing the ground.4. Disallowance of Interest on Foreign Currency Convertible Bonds (FCCB):The AO disallowed Rs. 86,88,000 claimed as interest on FCCBs, invoking S.40(a)(ia) due to non-deduction of tax at source under S.195. The CIT(A) upheld the disallowance. The assessee argued that the payments were made outside India to non-residents, thus S.195 did not apply. The Tribunal agreed, noting that the bonds were raised and paid from a bank account abroad, and no part of the transaction took place in India. The Tribunal directed the AO to delete the disallowance.5. Levy of Interest under S.234B and S.234C of the Act:The assessee challenged the levy of interest under S.234B and S.234C, arguing that it paid tax under S.115JB. The Tribunal noted that the assessee had itself calculated interest under these sections in its return, and the interest computed by the AO was less than that calculated by the assessee. The Tribunal upheld the CIT(A)'s decision, declining to interfere.Conclusion:The appeal was partly allowed, with specific directions for reassessment and deletion of certain disallowances.