ITAT Ahmedabad: Assessee's appeal allowed on commission & R&D expenses.

The ITAT Ahmedabad allowed the appeal of the assessee on both grounds. The disallowance of commission under section 40A(2)(b) was deleted based on the precedent set in the preceding year. Additionally, the disallowance of deduction under section 35(2AB) was overturned, allowing the claimed R&D expenses, as the requirement for DSIR to quantify the expenditure was not applicable for the assessment year in question.

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Issues Involved:
1. Disallowance of commission under section 40A(2)(b) of the Income Tax Act, 1961.
2. Disallowance of deduction claimed under section 35(2AB) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Commission under Section 40A(2)(b):
The first ground of appeal pertains to the disallowance of commission amounting to Rs. 4,12,500/- paid to related parties under section 40A(2)(b) of the Income Tax Act, 1961. The assessee, a company engaged in manufacturing polymer resins and chemicals, paid commissions to four parties. The Assessing Officer (AO) disallowed the commission payments citing lack of documentary evidence supporting the services rendered. The CIT(A) provided partial relief but upheld the disallowance for commissions paid to two parties, reasoning that the assessee failed to demonstrate the technical qualifications of the family members involved, furnish evidence of sales promotion, and noted that the HUFs were not assessed at the maximum marginal rates, suggesting tax avoidance.

The assessee argued that identical issues in the preceding year (AY 2013-14) were decided in their favor by ITAT Ahmedabad. The ITAT, after reviewing the precedent, noted that the AO had not disproved the genuineness of the expenditure nor conducted further verification. Consequently, the ITAT ruled in favor of the assessee, deleting the disallowance of commission under section 40A(2)(b).

2. Disallowance of Deduction under Section 35(2AB):
The second ground of appeal concerns the disallowance of a deduction claimed under section 35(2AB) for research and development (R&D) expenses amounting to Rs. 11,44,376/-. The AO noted that the Department of Scientific and Industrial Research (DSIR) had approved a lower amount of expenditure than claimed by the assessee. The AO disallowed the excess claim and also rejected the alternative claim under sections 37 or 32, stating that DSIR's certification was limited to section 35(2AB). The CIT(A) upheld the AO's decision.

The assessee argued that the law, as it stood during the assessment year, did not require DSIR to approve the quantum of expenditure but only the R&D facility. The ITAT Ahmedabad, in the preceding year, had ruled in favor of the assessee on identical facts, supported by various judicial precedents. The ITAT noted that the amendment requiring DSIR to quantify the expenditure came into effect only from 01/07/2016. Prior to this, the approval of the R&D facility was sufficient for claiming the deduction under section 35(2AB). Consequently, the ITAT ruled in favor of the assessee, allowing the deduction for the R&D expenses.

Conclusion:
The ITAT Ahmedabad allowed the appeal of the assessee on both grounds:
1. The disallowance of commission under section 40A(2)(b) was deleted based on the precedent set in the preceding year.
2. The disallowance of deduction under section 35(2AB) was overturned, allowing the claimed R&D expenses, as the requirement for DSIR to quantify the expenditure was not applicable for the assessment year in question.

Order pronounced in the open court on 23-02-2022.

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