ITAT Decision: R&D Expenses, 80IB Unit Apportionment, Section 35(2AB) Approval &D

The ITAT partly allowed the appeal, remitting the R&D expenses issue for proper verification and dismissing the disallowance under section 14A with Rule 8D. The apportionment of R&D expenses between 80IB and non-80IB units was confirmed based on turnover, emphasizing the necessity of approval in Form 3CL from DSIR to claim deduction under section 35(2AB). The disallowance under section 14A with Rule 8D was upheld due to the commingling of funds and the absence of separate books for investments and manufacturing activities.

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Issues Involved:
1. Apportionment of R&D expenses between 80IB and non-80IB units.
2. Disallowance made under section 14A read with Rule 8D.

Issue 1: Apportionment of R&D expenses:
The appeal concerned the apportionment of R&D expenses between 80IB and non-80IB units. The Assessing Officer observed that while the Pondicherry unit qualified for deduction under section 80IB, others did not. The assessee claimed weighted deduction on R&D expenditure under section 35(2AB) against the income of the Hosur unit. The Assessing Officer apportioned R&D expenses to the Pondicherry unit based on turnover, reducing the eligible profit. The assessee argued that R&D benefits accrue to all units equally. The CIT(A) held that R&D expenses are general business expenditure benefiting all units equally, thus confirming the apportionment. However, the ITAT found the approval in Form 3CL from DSIR essential to claim deduction under section 35(2AB). As the approval was not verified, the ITAT remitted the matter to the Assessing Officer for proper verification, emphasizing the necessity of approval for claiming the deduction.

Issue 2: Disallowance under section 14A with Rule 8D:
The second issue involved the disallowance made under section 14A read with Rule 8D. The Assessing Officer segregated expenses between investment and manufacturing activities due to commingling of funds. Applying Rule 8D, expenses were apportioned against investment income. The CIT(A) upheld this disallowance. The ITAT noted the application of Rule 8D from assessment year 2008-09 onwards. As the assessee did not maintain separate books for investments and manufacturing, the Assessing Officer rightly applied Rule 8D. Citing the case of Godrej & Boyce Mfg. Co. Ltd v. DCIT, the ITAT dismissed the appeal on this issue, finding no error in the CIT(A)'s decision.

In conclusion, the ITAT partly allowed the appeal for statistical purposes, remitting the R&D expenses issue for proper verification and dismissing the disallowance under section 14A with Rule 8D.

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