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. The Tribunal confirmed that once DSIR recognizes the facility and executes an agreement, the AO must allow the weighted deduction. On disallowance u/s 14A r.w.r.8D, the matter was remanded to AO for verification of assessee's suo-moto disallowance against AO's 0.50% disallowance. The Tribunal dismissed Revenue's appeal on s.10AA(9) disallowance, finding no specific arrangement proving more than ordinary profits from associated enterprises. Education cess issue was remanded for amount verification.

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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.

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