2019 (10) TMI 185 - AT - Income Tax

Tribunal directs recalculation of disallowance under Section 14A and permits weighted deduction for R&D expenses.

The Tribunal partially allowed the appeal, directing the Assessing Officer to recalculate the disallowance under Section 14A, excluding investments not ... Disallowance u/s. 14A r.w. Rule 8D - HELD THAT:- The Special Bench of Tribunal in the case of ACIT Vs. Vireet Investments (P) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] has held that only those investments are to be considered while computing average value of investments, which yielded exempt income during the year. Thus, in the light of decision of Special Bench we concur with the contentions of assessee. The issue is restored back to the file of Assessing Officer for recalculation of disallowance u/s. 14A r.w. Rule 8D after excluding those investments on which the assessee has not earned any exempt income during the period relevant to the assessment year under appeal. Assessee has stated at the Bar that if amount of disallowance u/s. 14A after recomputation is reduced below suo-moto disallowance made, the assessee would not claim refund/adjustment of excess suo-moto disallowance already made. Thus, ground No. 1 raised in the appeal by the assessee is allowed for statistical purpose. Disallowance of weighted deduction of expenditure incurred on in-house research & development activities u/s. 35(2AB) - HELD THAT:- As decided in own case [2018 (12) TMI 1497 - ITAT PUNE] where facility has been recognized by the prescribed authority and agreement has been entered into between facility and the prescribed authority and thereafter the role of Assessing Officer is to look into and allow the expenditure incurred on in-house R&D facility as weighted deduction under section 35(2AB) - no merit in the orders of authorities below in restricting weighted deduction claimed under section 35(2AB) of the Act by ₹ 18,42,000/- on the ground that DSIR had not approved the said expenditure. It may be pointed out herein itself that reasons for not approving expenditure have also not been made available to the assessee. Consequently, the same cannot be basis for curtailing deduction claimed under section 35(2AB) - Ground No. 2 raised in the appeal by the assessee is allowed Issues Involved:1. Confirming disallowance under Section 14A read with Rule 8D.2. Confirming disallowance of weighted deduction of expenditure incurred on in-house research and development activities under Section 35(2AB) of the Income Tax Act.Issue-wise Detailed Analysis:1. Confirming disallowance under Section 14A read with Rule 8D:The assessee challenged the disallowance confirmed by the Commissioner of Income Tax (Appeals) under Section 14A read with Rule 8D. The assessee had earned exempt income of Rs. 22 crores and made a suo-moto disallowance of Rs. 51,39,625/-. However, the Assessing Officer (AO) invoked Rule 8D and computed the disallowance at Rs. 81,41,319/-, considering all investments, regardless of whether they generated dividend income.The assessee argued that only those investments that yielded exempt income should be considered for disallowance under Section 14A, based on the Special Bench decision in ACIT Vs. Vireet Investments (P) Ltd. and the Pune Bench decision in M/s. Quick Heal Technologies Ltd. Vs. DCIT. The Tribunal concurred with the assessee's contention and restored the issue to the AO for recalculating the disallowance, excluding investments that did not yield exempt income. The Tribunal also noted that if the recomputed disallowance is below the suo-moto disallowance, the assessee would not claim a refund or adjustment of the excess amount.2. Confirming disallowance of weighted deduction under Section 35(2AB):The assessee also contested the disallowance of weighted deduction claimed for expenditure on in-house research and development activities under Section 35(2AB). The AO had disallowed Rs. 18,42,000/- on the grounds that the Department of Scientific and Industrial Research (DSIR) had not approved the expenditure. The Tribunal referred to its decision in the assessee's case for the previous assessment year (2011-12), where a similar disallowance was overturned, and the assessee was deemed eligible for the weighted deduction.The Tribunal reiterated that once the R&D facility is recognized by DSIR, the AO's role is to allow the expenditure incurred on the facility as a weighted deduction. The Tribunal found no merit in the AO's order to curtail the deduction based on DSIR's non-approval of the expenditure, especially when the reasons for non-approval were not provided to the assessee. Consequently, the Tribunal directed the AO to allow the weighted deduction of Rs. 18,42,000/- under Section 35(2AB).Conclusion:The Tribunal allowed the appeal partly, directing the AO to recompute the disallowance under Section 14A excluding non-income-generating investments and to allow the weighted deduction under Section 35(2AB) for the expenditure incurred on the recognized R&D facility. The appeal was thus allowed for statistical purposes on the first ground and fully on the second ground.