Tribunal Decision: R&D deduction disallowed, exempt income expenses restricted.

The Tribunal partly allowed the appeal filed by the revenue. It upheld the disallowance of weighted deduction under section 35(2AB) for R&D expenditure but allowed the same under section 37(1). Additionally, the disallowance of expenses related to exempt income under section 14A was restricted to the amount of Rs. 10,000 as determined by the assessee.

---

---

Issues Involved:
1. Disallowance of weighted deduction claimed under section 35(2AB) of the Income-tax Act, 1961.
2. Disallowance of expenses incurred in relation to exempt income under section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Disallowance of Weighted Deduction Claimed under Section 35(2AB):

The core issue was whether the assessee was eligible for a weighted deduction under section 35(2AB) for R&D expenditure for AY 2012-13, despite the approval from the Department of Scientific & Industrial Research (DSIR) being granted from AY 2013-14 onwards. The AO had disallowed the deduction, citing that the R&D facility was not approved for the relevant assessment year. The CIT(A) allowed the deduction, referencing the decisions of the Delhi High Court in Sandan Vikas (India) Ltd. and the Gujarat High Court in Claris Lifesciences Ltd., which held that once the R&D facility is approved, the entire expenditure incurred on its development is eligible for weighted deduction, irrespective of the approval date.

The Tribunal, however, upheld the AO's decision, stating that for claiming the benefit under section 35(2AB), the R&D facility must be approved by the competent authority for the relevant assessment year. Since the DSIR's letter clarified that the assessee's R&D facility was not approved for AY 2012-13, the weighted deduction could not be allowed. Nevertheless, the Tribunal accepted the alternative plea of the assessee to allow the R&D expenditure as a deduction under section 37(1) since the genuineness of the expenditure was not in question. The AO was directed to allow revenue expenditure under section 37(1) and verify the nature of capital expenditure for depreciation purposes.

2. Disallowance of Expenses Incurred in Relation to Exempt Income under Section 14A r.w. Rule 8D:

The second issue was the disallowance of expenses related to exempt income under section 14A read with Rule 8D. The AO had computed a disallowance of Rs. 32,09,258, while the assessee had made a suo moto disallowance of Rs. 10,000 against a dividend income of Rs. 3,945. The CIT(A) restricted the disallowance to Rs. 10,000, aligning with judicial pronouncements that disallowance under section 14A should not exceed the exempt income.

The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's rulings in Cheminvest Ltd. and Joint Investment (P) Ltd., which established that disallowance under section 14A cannot exceed the exempt income. Consequently, the AO was directed to restrict the disallowance to the suo moto amount of Rs. 10,000 made by the assessee.

Conclusion:

The appeal filed by the revenue was partly allowed. The Tribunal upheld the AO's disallowance of the weighted deduction under section 35(2AB) but allowed the R&D expenditure under section 37(1). The disallowance under section 14A was restricted to the amount of Rs. 10,000 as determined by the assessee.

Order Pronounced in the Open Court on _____ July, 2018.

---