Tribunal grants deduction under Section 35(2AB) and sets aside disallowance under Section 14A for fresh adjudication.

The Tribunal directed the Assessing Officer to grant the deduction under Section 35(2AB) of the Income-tax Act, allowing the assessee's ground for all assessment years. The issue of disallowance under Section 14A was set aside for fresh adjudication in accordance with judicial precedents, restricting disallowance to the amount of exempt income earned by the assessee. All other grounds of the assessee were dismissed as not pressed.

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Issues Involved:
1. Deduction under Section 35(2AB) of the Income-tax Act, 1961.
2. Disallowance under Section 14A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deduction under Section 35(2AB) of the Income-tax Act, 1961:

The assessee, a company engaged in the manufacture of chemicals and pharmaceuticals, claimed a deduction under Section 35(2AB) of the Income-tax Act for in-house research and development (R&D). The Assessing Officer (AO) rejected this claim due to the absence of an agreement with the prescribed authority and the lack of Form No. 3CL from the Department of Scientific and Industrial Research (DSIR) certifying the expenditure. The first appellate authority upheld this disallowance, emphasizing the necessity of Form No. 3CL as it certifies the quantum of R&D expenditure eligible for deduction.

The assessee argued that the issue is covered in its favor by various judicial precedents, including decisions from the ITAT Bengaluru Bench in the case of M/s. Mahindra Electric Mobility Ltd. and other cases. The CIT(DR) contended that the assessee did not furnish the required agreement and that the AO did not grant 100% deduction on R&D expenditure.

The Tribunal noted that the CIT(A) improperly differed from the decisions of the ITAT, which is not permissible due to judicial discipline. The Tribunal found that the assessee had indeed furnished the agreement and that the AO had allowed 100% deduction on R&D expenditure as revenue expenditure. The Tribunal referred to the case of M/s. Mahindra Electric Mobility Ltd., which held that the absence of Form No. 3CL does not preclude the allowance of deduction under Section 35(2AB). The Tribunal also cited various judicial precedents supporting this view, including the Hon'ble Delhi High Court in CIT vs. Sadan Vikas (India) Ltd. and the Pune ITAT in Cummins India Ltd. vs. DCIT.

The Tribunal concluded that prior to 1.7.2016, Form 3CL had no legal sanctity, and the deduction under Section 35(2AB) should be allowed based on the approval in Form No. 3CM. The Tribunal directed the AO to grant the deduction under Section 35(2AB) of the Act, allowing the assessee's ground for all assessment years.

2. Disallowance under Section 14A of the Income-tax Act, 1961:

The assessee contended that it had no exempt income from dividends on investments and that the only exempt income was agricultural income. The Tribunal agreed to set aside the issue to the AO for fresh adjudication after verifying the facts. The AO was directed to apply the proposition of law laid down by the Hon'ble Delhi High Court in Cheminvest Ltd. vs. CIT, which restricts disallowance under Section 14A to the amount of exempt income earned by the assessee. This ground was allowed for statistical purposes.

Conclusion:

The Tribunal allowed the appeals for statistical purposes, directing the AO to grant the deduction under Section 35(2AB) and to re-adjudicate the disallowance under Section 14A in accordance with the law and judicial precedents. All other grounds of the assessee were dismissed as not pressed. The order was pronounced in the open court on 19th July 2019.

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