2021 (6) TMI 1178 - AT - Income Tax

ITAT upholds weighted deduction for in-house R&D facility expenditure under section 35(2AB) against Revenue's challenge

The ITAT PUNE dismissed the Revenue's appeal on weighted deduction u/s 35(2AB) for in-house R&D facility expenditure, upholding CIT(A)'s deletion of ... Disallowance u/s 35(2AB) - expenditure incurred on inhouse R&D facility as weighted deduction - CIT(A) deleted addition holding that before. tenth Amendment Rule, 2016, the Department of Scientific & Industrial Research (DSIR) was having no such power to quantify the expenditure incurred on in-house R & D facility - HELD THAT:- CIT(Appeals) provided relief to the assessee relying on the decision of the Pune Bench of the Tribunal in the case of Cummins India Limited [2018 (5) TMI 1314 - ITAT PUNE] held that for deduction u/s 35(2AB) of the Act, first step was the recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which recognition has been given to the facility, then thereafter the role of AO is to look into and allow the expenditure incurred on inhouse R&D facility as weighted deduction under section 35(2AB) of the Act. Accordingly, we hold so. Thus, we reverse the order of Assessing Officer in curtailing the deduction claimed u/s 35(2AB) - Ground No.1 raised in appeal by the Revenue is dismissed. Disallowance u/s.14A r.w.r.8D - CIT(A) deleted addition - assessee had made suo-moto disallowance - HELD THAT:- AO in the case before us has made detailed analysis in the assessment order regarding the applicability of Section 14A r.w.r.8D of the Rules with the facts of the assessee's case and further that why such disallowance was required that has also been explained by the AO - This findings sans satisfaction is not the case here. That further, he has made disallowance only one half percent of the average value of investment i.e. 0.50% of ₹ 406,47,45,829/- i.e. ₹ 2,03,23,729/-. Therefore, it becomes essential to verify whether the assessee had actually made suo-moto disallowance of ₹ 16.8 lakhs and whether the same had been analyzed by the AO while making disallowance of 0.50% at the time of assessment. For this exercise, in the interest of justice, the issue needs to be remanded back to the file of Assessing Officer for adjudication after detailed verification as indicated hereinabove while complying with the principles of natural justice and as per law. Ground raised in appeal by the Revenue are allowed for statistical purposes. Disallowance u/s.10AA(9) r.w.s.80IA(10) - assessee showed higher profits due to close business connections with associated enterprises, warranting disallowance - CIT(A) deleted addition - HELD THAT:- CIT(Appeals) has recorded his findings on the issue and therein, he observed that the TPO has not drawn any adverse inference in view of healthy margins of 35.04%. AO on the other hand had proceeded to disallow a part of deduction u/s.10AA of the Act on the total sales of ₹ 44,08,91,258/- from Pune SEZ and Hyderabad SEZ to the AEs. This was done without any cogent basis and that further, the Ld. CIT(Appeals) also relied on the decision of his predecessor deleting this addition which was further upheld by the Pune Bench of the Tribunal [2020 (3) TMI 222 - ITAT PUNE] for the assessment year 2013-14. Mere existence of the close connection and earning more than ordinary profits are not enough to assume an arrangement as contemplated u/s.80IA(10) of the Act. The Assessing Officer is also required to prove any such arrangement existing which resulted in more than ordinary profits. In the entire assessment order, the Assessing Officer has not specifically spelled out what exact arrangement existed between the parties in the present case which resulted in more than ordinary profits. Therefore, we do not find any infirmity with the findings of the Ld. CIT(Appeals) and relief provided to the assessee is hereby sustained. Thus, Ground No.4 raised in appeal by the Revenue is dismissed. Additional grounds on the issue of education cess and secondary & higher education cess - HELD THAT:- We observe that the Ld. CIT(Appeals) of his order relying on the decision in assessee's own case for the assessment year 2013-14 (2020 (3) TMI 222 - ITAT PUNE] has decided the issue in favour of the assessee. We agree on principle that the amount involved in “education cess' is an allowable expenditure and it is in favour of the assessee. However, assessee submitted that the amount involved in “education cess‟ needs to be verified by the Assessing Officer. Therefore, as per aforesaid observation, we set aside the order of the Ld. CIT(Appeals) on this issue and remand the same to the file of the Assessing Officer for verification of the amount of expenditure on education cess and re-adjudicate while complying with the principles of natural justice and as per law. Thus, additional grounds raised by the Revenue are allowed for statistical purposes. Issues Involved:1. Deletion of disallowance under Section 35(2AB) of the Income Tax Act, 1961.2. Deletion of disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.3. Deletion of disallowance under Section 10AA(9) read with Section 80IA(10) of the Income Tax Act, 1961.4. Adjudication of additional grounds on the issue of education cess and secondary & higher education cess.Detailed Analysis:1. Deletion of Disallowance under Section 35(2AB):The Revenue challenged the deletion of disallowance under Section 35(2AB) of the Income Tax Act, arguing that prior to the Tenth Amendment Rule, 2016, the Department of Scientific & Industrial Research (DSIR) lacked the authority to quantify in-house R&D expenditure. The assessee had claimed a deduction based on DSIR approval, which was partially disallowed by the Assessing Officer, restricting the claim to the approved amount. The CIT(Appeals) allowed the deduction relying on the Pune Bench Tribunal's decision in Cummins India Limited, which held that pre-2016 amendments, DSIR's role was limited to recognizing facilities, not approving yearly expenditures. The Tribunal upheld the CIT(Appeals)' decision, dismissing the Revenue's appeal on this ground.2. Deletion of Disallowance under Section 14A r.w.r.8D:The Revenue contested the deletion of disallowance under Section 14A read with Rule 8D, arguing that the assessee's claim lacked correctness. The assessee had invested in mutual funds and bonds, earning tax-free income without disallowing related expenses. The Assessing Officer applied Rule 8D, disallowing 0.50% of the average investment value. The CIT(Appeals) provided relief based on the assessee's case in the previous year, where the Tribunal found no satisfaction recorded by the Assessing Officer for such disallowance. The Tribunal remanded the issue back to the Assessing Officer for verification of the assessee's suo-moto disallowance and detailed analysis, allowing the Revenue's appeal for statistical purposes.3. Deletion of Disallowance under Section 10AA(9) r.w.s. 80IA(10):The Revenue challenged the deletion of disallowance under Section 10AA(9) read with Section 80IA(10), arguing that the assessee showed higher profits due to close business connections with associated enterprises, warranting disallowance. The CIT(Appeals) provided relief, citing the Tribunal's decision in the assessee's previous year case, which held that mere existence of close connection and higher profits are insufficient without proving an arrangement causing more than ordinary profits. The Tribunal upheld the CIT(Appeals)' decision, dismissing the Revenue's appeal on this ground.4. Adjudication of Additional Grounds on Education Cess:The Revenue raised additional grounds regarding the admissibility of education cess as a deductible expense. The CIT(Appeals) allowed the deduction, relying on the Tribunal's decision in the assessee's previous year case, which followed the Rajasthan High Court's ruling that education cess is not a tax and is an allowable expenditure under Section 40(a)(ii). The Tribunal agreed with the CIT(Appeals) on the principle but remanded the issue for verification of the cess amount by the Assessing Officer, allowing the Revenue's appeal for statistical purposes.Conclusion:The Tribunal dismissed the Revenue's appeals on the grounds related to Sections 35(2AB) and 10AA(9) r.w.s. 80IA(10), upholding the CIT(Appeals)' decisions. For the disallowance under Section 14A r.w.r.8D and the education cess issue, the Tribunal remanded the matters for further verification, allowing the appeals for statistical purposes. The overall outcome resulted in the Revenue's appeals being partly allowed for statistical purposes.