2026 (1) TMI 350 - AT - Income Tax

Section 14A disallowance and MAT book-profit adjustment, plus Section 35(2AB) R&D deduction-rejected without AO satisfaction, Form 3CL later accepted

Disallowance under s.14A was examined on whether the AO could reject the assessee's working without recording satisfaction as mandated by s.14A(2). As the ... Disallowance u/s.14A - expenditure incurred for earning the exempt income - non-recording of the satisfaction - CIT(A) deleted the disallowance - HELD THAT:- We observe that the assessee is a Limited Company and in the return of income for A.Y. 2018-19 income declared in the e-return filed on 30.11.2018 assessment proceedings u/s.143(3) of the Act were carried out. AO observed that the assessee has earned dividend income of Rs. 3,04,43,499/- but only a meager amount of Rs. 48,10,464/- has been disallowed u/s.14A of the act as an expenditure incurred for earning this income. Though the assessee has provided complete details and working for calculating the sum of disallowance of Rs. 48,10,464/- but ld. AO without controverting those submissions and without recording proper satisfaction on the basis of examining the books of accounts and relevant details had made the impugned disallowance. MAT Computation on addition u/s 14A - Addition to the net profit while computing the book profit for the purpose section 115JB of the Act also deserves to be dismissed as CIT(A) in assessee’s own case for A.Y. 2017-18 has held that amount disallowed u/s.14A cannot be added to the net profit while computing the book profit for the purpose of section 115JB of the Act and the said observation of ld.CIT(A) is supported by plethora of decisions including that of judgment of J.J. Glastronics (P.) Ltd. [2022 (4) TMI 1187 - KARNATAKA HIGH COURT] Weighted Average deduction for Research and Development expenses u/s.35(2AB) - only reason for the alleged disallowance u/s.35(2AB) of the Act was non-availability of Form No.3CL (to be issued by DSIR) during the course of assessment proceedings - HELD THAT:- Since the said form has been issued at subsequent date which was not in the control of the assessee and relief has been claimed in the income tax return which is required to be filed within the time limit prescribed u/s.139(1) and therefore, assessee had to make a claim. However, since certificate from DSIR in Form No.3CL dated 05.01.2025 has been issued we find that CIT(A) has rightly considered the said form issued by Govt. of India, Ministry of Science and Technology and the said Form No.3CL has duly incorporated the details of Capital and Revenue expenditure for A.Y. 2018-19, 2019-10 and 2020-21. We therefore fail to find any infirmity in the finding of ld.CIT(A). Thus Revenue fails to succeed. ISSUES PRESENTED AND CONSIDERED 1) Whether disallowance under section 14A read with Rule 8D could be sustained when the Assessing Officer did not record satisfaction, after examining the accounts, about the incorrectness of the assessee's own disallowance. 2) Whether any disallowance under section 14A could be added back to net profit while computing book profit under section 115JB, in the facts where the section 14A disallowance itself was deleted. 3) Whether weighted deduction under section 35(2AB) for Research & Development expenditure could be allowed when Form 3CL was not available during assessment but was issued later by the competent authority and produced in appeal as additional evidence. ISSUE-WISE DETAILED ANALYSIS 1) Section 14A r.w. Rule 8D disallowance-requirement of recording satisfaction Legal framework: The Tribunal treated section 14A(2) as requiring the Assessing Officer to determine expenditure under the prescribed method (Rule 8D) only if, having regard to the assessee's accounts, the officer is not satisfied with the correctness of the assessee's claim. Interpretation and reasoning: The assessee had earned dividend income and had made a suo motu disallowance with supporting working and details. The Tribunal found that the Assessing Officer made the higher disallowance without controverting the assessee's submissions and without recording proper satisfaction based on examination of the books and relevant details. The Tribunal relied on its own earlier decision in the assessee's case on identical reasoning, and noted that the Revenue did not place any binding contrary precedent or effectively controvert the applicability of that earlier finding. Conclusion: The disallowance made under section 14A read with Rule 8D was held not warranted on the facts due to absence of the mandated satisfaction; deletion of the disallowance was upheld and the Revenue's challenge failed. 2) Addition of section 14A disallowance while computing book profit under section 115JB Interpretation and reasoning: The Tribunal held that the Revenue's grievance regarding addition of the section 14A amount to net profit for section 115JB computation could not survive, because the appellate authority had already held (in line with the approach followed in the assessee's own earlier year and supported by judicial view referred to in the order) that disallowance under section 14A cannot be added to net profit for computing book profit under section 115JB. The Tribunal found no infirmity in that conclusion in the given facts and circumstances. Conclusion: The Revenue's ground seeking inclusion of section 14A disallowance in book profit under section 115JB was dismissed; the appellate view that such addition was not required was affirmed. 3) Section 35(2AB) weighted deduction-admission and effect of subsequent Form 3CL Interpretation and reasoning: The Tribunal noted that the only reason for disallowance by the Assessing Officer was non-furnishing of Form 3CL during assessment. The appellate authority admitted Form 3CL as additional evidence because it was issued after completion of assessment and therefore could not have been filed earlier, and because it went to the root of the disallowance. The Tribunal accepted that issuance of the form was not within the assessee's control, that the claim had been made in the return filed within the statutory time, and that the subsequently issued Form 3CL contained the relevant particulars of eligible capital and revenue expenditure for the relevant year. Conclusion: Since Form 3CL was subsequently issued by the competent authority and satisfactorily addressed the sole basis of disallowance, the Tribunal upheld the appellate deletion of the disallowance and confirmed allowance of the weighted deduction under section 35(2AB); the Revenue's ground was dismissed.