ITAT Mumbai allows education cess deduction & directs quantification of R&D expenditure claim under Income-tax Act

The ITAT Mumbai allowed the appeal in favor of the assessee for both issues. It directed the Ld. AO to allow the deduction of education cess, ruling that it is allowable as a deductible expenditure under the Income-tax Act. Regarding the quantum of deduction u/s 35(2AB) for scientific research and development expenditure, the ITAT held that the assessee should be entitled to claim deduction based on actual expenditure incurred, instructing the Ld. AO to quantify the claim accordingly.

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Issues:
1. Denial of deduction of education cess
2. Quantum of deduction u/s 35(2AB)

Denial of deduction of education cess:
The appeal pertains to the denial of deduction of education cess for Rs.51.02 Lacs. The assessee raised this issue during appellate proceedings through an additional ground. The deduction was disallowed by the Ld. CIT(A) under section 40(a)(ii) in the computation of income. However, the assessee claimed that education cess should be allowed as a deductible expenditure. The ITAT Mumbai, citing a decision of the Hon’ble Bombay High Court, held that the legislative history and provisions of the Income-tax Act, 1961, do not include "cess" in Section 40(a)(ii), making education cess paid by the assessee allowable as a deduction. Therefore, the ITAT directed the Ld. AO to allow the deduction of education cess, ruling in favor of the assessee.

Quantum of deduction u/s 35(2AB):
The assessee claimed a deduction under section 35(2AB) for Rs.150.19 Lacs for scientific research and development expenditure. Discrepancies arose regarding the allowable deduction amount as per Form 3CL approval. The ITAT noted that the prescribed authority's approval in Form 3CL was relevant only post the amendment in Rule 6(7A)(b) from 01/07/2016. Prior to this amendment, the deduction had to be allowed as claimed by the assessee and certified by the Auditors. Referring to a decision of the Pune Tribunal, the ITAT held that the assessee was entitled to claim deduction based on actual expenditure incurred. The ITAT directed the Ld. AO to quantify the exact claim and allow the deduction accordingly. Relying on previous decisions, the ITAT allowed the appeal, emphasizing that the assessee should be entitled to the deduction based on actual expenditure incurred.

In conclusion, the ITAT Mumbai allowed the appeal in favor of the assessee for both issues, directing the Ld. AO to allow the deduction of education cess and quantify the deduction u/s 35(2AB) based on actual expenditure incurred by the assessee.

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