ITAT allows R&D expenses under section 35(2AB), estimates 8% profit on bogus purchases, deletes section 14A interest disallowance

ITAT Mumbai partially allowed the assessee's appeal in a case involving bogus purchases and R&D expense disallowances. For alleged bogus purchases, the tribunal estimated profit at 8% of the disputed amount due to supplier's contradictory statements and documentary deficiencies. Regarding R&D expenses under section 35(2AB), the tribunal allowed clinical trial expenses, building repairs related to R&D, and exhibit batch expenses as eligible for weighted deduction, following Gujarat HC precedent in Cadila Healthcare. Foreign consultancy expenses were remanded for fresh examination. Under section 14A, interest disallowance was deleted following HDFC Bank precedent, while expenditure disallowance under Rule 8D(2)(iii) was directed to be recomputed considering only exempt income-yielding investments.

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Issues:
1. Addition of alleged bogus purchases
2. Disallowance of R&D expenses claimed under section 35(2AB) of the Act
3. Deduction claimed under sections 80IB/80IC/10B on scrap sales
4. Disallowance made under section 14A of the Act

Issue 1: Addition of alleged bogus purchases

The Tribunal considered the appeal challenging the addition of Rs. 38,80,657 for alleged bogus purchases made by the pharmaceutical company. The supplier, M/s Globe Pharma, initially confessed to providing only accommodation bills without supplying materials but later changed its stand before the AO. The Tribunal noted the discrepancies in the documents but also acknowledged the stock records provided by the assessee. Due to conflicting statements and deficiencies in documents, the Tribunal estimated a profit of Rs. 3,10,452 (8% of alleged bogus purchases) and directed the AO to restrict the disallowance accordingly.

Issue 2: Disallowance of R&D expenses claimed under section 35(2AB) of the Act

The Tribunal analyzed various expenses claimed by the assessee under section 35(2AB) of the Act. It scrutinized expenses such as Clinical Trial expenses, Building Repairs, Foreign Consultancy expenses, R&D Exhibit Batches, and the salary of CMD allocated to R&D activity. The Tribunal referred to relevant case laws and principles to determine the eligibility of each expense for weighted deduction. It directed the AO to verify the discrepancies in the disallowed amount and the expenses claimed, and further examine the nature and relationship of foreign consultancy charges for fresh assessment.

Issue 3: Deduction claimed under sections 80IB/80IC/10B on scrap sales

The Tribunal noted that the deduction claimed on scrap sales under sections 80IB/80IC/10B was not pressed by the Ld A.R. Consequently, the ground related to this issue was dismissed as not pressed.

Issue 4: Disallowance made under section 14A of the Act

Regarding the disallowance made under section 14A of the Act, the Tribunal observed that the AO disallowed interest expenses and expenses under Rule 8D(2)(ii) and (iii) of the IT Rules. The Tribunal directed the AO to delete the interest disallowance based on the available own funds of the assessee. It also instructed the AO to compute the disallowance under Rule 8D(2)(iii) by considering only investments that yielded exempt income. The Tribunal partially allowed the appeal of the assessee, providing specific directions for the AO to re-examine the issues related to disallowances under section 14A of the Act.

This detailed judgment by the Appellate Tribunal ITAT Mumbai addresses multiple issues including alleged bogus purchases, R&D expenses disallowance, deduction claims on scrap sales, and disallowances under section 14A of the Act. The Tribunal meticulously analyzed each issue, considered relevant legal principles and case laws, and provided specific directions for the AO to re-evaluate the claims and disallowances.

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