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: (i) Whether the disallowance of Rs. 20,78,791/- under section 14A read with Rule 8D was tenable where the Assessing Officer did not record requisite satisfaction; (ii) Whether the disallowed amount under section 14A is required to be added back to net profit for computing book profit under section 115JB; (iii) Whether the assessee is entitled to weighted average deduction under section 35(2AB) where Form No.3CL from DSIR was not available during assessment but was obtained subsequently.Issue (i): Whether the disallowance of Rs. 20,78,791/- under section 14A r.w. Rule 8D was tenable where the AO did not record requisite satisfaction.Analysis: The Assessing Officer applied Rule 8D without recording satisfaction as mandated by sub-section (2) of section 14A after examining the assessee's accounts. Tribunal's earlier reasoned decision in the assessee's own case for A.Y. 2017-18 addressed similar facts and concluded that Rule 8D cannot be applied unless the AO is satisfied that the assessee's claim regarding expenditures related to exempt income is incorrect. No binding contrary precedent was placed to distinguish the present facts from that decision.Conclusion: The disallowance of Rs. 20,78,791/- under section 14A r.w. Rule 8D is not warranted; the finding deleting the disallowance is upheld in favour of the assessee.Issue (ii): Whether the disallowed amount under section 14A must be added back to net profit for computing book profit under section 115JB.Analysis: The tribunal and the appellate authority in the assessee's earlier decision considered whether a section 14A disallowance can be added to net profit for computing book profit under section 115JB and relied upon authoritative decisions holding that such disallowance cannot be added to book profit. The appellate authority's view on this point was supported by higher court authority cited in the record.Conclusion: The disallowance under section 14A is not to be added to net profit for purpose of computing book profit under section 115JB; the finding in favour of the assessee is confirmed.Issue (iii): Whether the assessee is entitled to weighted average deduction under section 35(2AB) where Form No.3CL from DSIR was obtained after completion of assessment.Analysis: The only deficiency noted by the Assessing Officer was non-availability of Form No.3CL during assessment. The assessee produced Form No.3CL issued by DSIR after assessment completion; the appellate authority admitted this certificate in the interest of natural justice because the certificate was issued subsequently and was not within the assessee's control at the assessment stage. The certificate incorporated requisite details for the years concerned and thereby addressed the root cause of disallowance.Conclusion: The weighted average deduction under section 35(2AB) is allowable based on the subsequently issued Form No.3CL; the deletion of the addition is upheld in favour of the assessee.Final Conclusion: The appeal filed by the Revenue is dismissed and the appellate findings deleting the additions under section 14A and allowing deduction under section 35(2AB) are upheld.Ratio Decidendi: Rule 8D cannot be applied and a disallowance under section 14A cannot be computed unless the Assessing Officer records satisfaction, after examining the accounts, that the assessee's claim regarding expenditures related to exempt income is incorrect; a post-assessment statutory certificate (Form No.3CL) issued by DSIR may be admitted where it was not available during assessment and its unavailability was not within the assessee's control.