2016 (4) TMI 667 - AT - Income Tax

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

M/s India Nippon Electricals Ltd. Versus Deputy Commissioner of Income Tax

The ITAT partly allowed the appeal, remitting the R&D expenses issue for proper verification and dismissing the disallowance under section 14A with ... Disallowance of apportionment of expenses towards R&D between 80IB and non 80IB units in the ratio of turnover - Held that:- To claim R&D expenses as allowable deduction under section 35(2AB) of the Act, first of all, the DSIR has to recognize the in-house R&D of the company. After obtaining recognition from DSIR, the company has to submit complete report of the R&D activities and expenditure incurred for the same in the prescribed format to the Prescribed Authority i.e., Secretary, DSIR and after assessment of the report furnished by the assessee, the Secretary, DSIR will communicate approval in Form 3CL to the Director General of Income Tax [Exemption]. Based on the approval in Form 3CL, the assessee can claim deduction under section 35(2AB) of the Act. From the assessment order, we find that the assessee vide its letter dated 21.12.2010 has submitted before the Assessing Officer that 'the R&D expenses are accounted entirely in Hosur unit as the DSIR recognized R&D centre is located at Hosur only', which shows that the assessee has obtained only recognition from DSIR. Moreover, there was no mention about the approval in From 3CL communicated by the Secretary, DSIR to DGIT[E]. Mere recognition by DSIR shall not entitle the assessee to claim deduction under section 35(2AB) of the Act. In this case, the DSIR recognized the in-house R&D facility of Hosur unit, as per the written submission dated 21.12.2010 before the Assessing Officer. But, the Assessing Officer failed to call for the approval in Form 3CL to admit the claim of the assessee. Under these facts and circumstances, we set aside the order of the ld. CIT(A) on this issue and remit the matter to the Assessing Officer to call for (1) submission of report in the prescribed format [Form 3CM/3CK] to the Secretary, DSIR and (2) approval in Form 3CL communicated by the Secretary, DSIR to DGIT[E] and after verification of the same, the Assessing Officer should allow the claim of deduction under section 35(2AB) of the Act, if the assessee produces approval in Form 3CL communicated by the Secretary, DSIR to DGIT[E] to the unit(s), which was recognized by the DSIR, otherwise, no claim of deduction under section 35(2AB) of the Act could be allowed. - Decided in favour of assessee for statistical purposes. Disallowance made under section 14A read with Rule 8D - Held that:- In the present case, the assessment year under consideration is 2008- 09 and in view of the decision in the case of Godrej & Boyce Mfg. Co. Ltd v. DCIT (2014 (8) TMI 457 - BOMBAY HIGH COURT ), the application of provisions of Rule 8D, which has been notified with effect from 24.03.2008, shall apply with effect from assessment year 2008-09 onwards. Since the assessee has not maintained any separate sets of books for the investment activity and the manufacturing activities and moreover, all the funds are pooled up and utilized for various activities from a common kitty. Therefore, the Assessing Officer has segregated the probable expenses by way of financial charges and other overhead expenses between the investment activities and manufacturing and export activities. In view of the above, the Assessing Officer has rightly applied the provisions of Rule 8D by invoking section 14 of the Act, which was confirmed by the ld. CIT(A). Therefore, we find no infirmity in the order of the ld. CIT(A) on this issue - Decided against assessee 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.