TaxTMI 
TaxTMI 
2026 (5) TMI 675
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....h. Case files perused. We proceed assessment year wise for the sake of convenience and brevity. A.Y. 2016-17 ITA Nos. 2686 & 2842/Del/2022, assessee's and the Revenue's cross appeals 3. A combined perusal of both these assessee's and the Revenue's cross appeals indicates that the former has pleaded it's substantive grounds inter alia challenging validity of reopening as well as claiming section 35(2AB) deduction of Rs. 2,12,50,158/-; disallowed to the extent of Rs. 1,77,08,389/- in assessment order dated 31.12.2019 as enhanced to Rs. 2,12,50,158/- in the lower appellate discussion. 4. The Revenue on the other hand also raises its as many substantive grounds that the learned CIT(A) has erred in law and on facts in reversing the Assessing Officer's action disallowing the assessee's alleged excessive manufacturing expenses of Rs. 23,00,93,853/- and R&D expenses of Rs. 10,74,07,000; respectively. A few relevant facts may be discussed. 5. There is any hardly dispute between the parties that the assessee herein M/s Matrix Clothing Pvt. Ltd. is a company who had filed it's return on 17.110.2016 declaring income of Rs. 11,74,59,910/-. This followed it's revised return dat....
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....01.12.2025 in it's appeal ITA No. 760/Del/2022 has already held it eligible for the very relief; reading as under: "15. Ground Nos. 3.8 to 3.11 raised by the assessee are challenging the confirmation of disallowance of deduction claimed by the assessee of Rs. 3,88,77,284/- u/s 35(2AB) of the Act. 16. We have heard the rival submissions and perused the material available on record. During the year under consideration, the assessee company claimed deduction u/s 35(2AB) of the Act amounting to Rs. 3,88,77,284/- as expenses incurred in Research and Development (R&D). Notice u/s 142(1) of the Act was issued to the assessee company to furnish the details of item-wise expenditure along with nature of expenses for claiming deduction on account of R&D u/s 35(2AB) of the Act. The assessee submitted its reply vide letter dated 31.03.2021. On perusal of the same, the ld. AO noticed that the assessee company has claimed their regular business expenditure such as expenses towards purchase of fabric and processing cost of Rs. 266.60 lakhs; employee cost of Rs. 103.49 lakhs; travelling and convenience cost of Rs. 11.31 lakhs totaling to Rs. 381.40 lakhs on account of revenue expe....
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.... or thing specified in the list of the Eleventh Schedule incurs any expenditure on "Scientific Research" (not being expenditure in the nature of cost of any land or building) on in-house, research and development facility "as approved by the prescribed authority," such assessee would be entitled to a deduction of a sum equal to one and half times of the expenditure so incurred. The word "Scientific Research" has been defined under subsection (4) of Section 43 of the Act, which is extracted supra and same would indicate expenditure incurred in such scientific research includes all expenditure incurred for the prosecution or the provision of facilities for the prosecution of such scientific research. However, it does not include expenditure incurred in the acquisition of rights in or arising out of scientific research. Such expenditure incurred should be approved by the authority prescribed under Section 35(2AB) of the Act read with Rules framed thereunder. The authority prescribed to grant such approval under Rule 6(1B) of the Income Tax Rules, 1961 is the Secretary, Department of Scientific and Industrial Research. 19. A perusal of the above rule would clearly indicate tha....
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....assessee on 07.01.2009 and after calling for documents/information from assessee and on examination and scrutiny of such documents/information furnished by assessee, Order of approval came to be granted in favour of assessee on 18.11.2009 in Form No. 3CM vide Annexure-G. 20. It would be apt to point at this juncture itself that in the event of any question would arise before the assessing officer under Section 35 as to whether amounts certified by the prescribed authority is eligible for being allowed as expenditure and to what extent and whether such activity constitutes or constituted., or any asset is or was being used for scientific research in that regard, then assessing officer has to request the Board to refer such question to the prescribed authority as provided under clause (b) of Section 35(3). In other words, the correctness or otherwise of the order passed by the prescribed authority is not examined by the assessing officer or by the Income Tax Authority and this exercise is outsourced by the Income Tax Department and same is being done by the prescribed authority namely, Department of Scientific and Industrial Research. This is the plain meaning which can be d....
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....nt of disparity in the ratio of Manufacturing Expense to Turnover when compared to the Period 1st April 18 thru 27th March 19. 7.1 This addition has been made on estimation basis by applying the ratio of Manufacturing Expense to Turnover when compared to the Period 1st April 18 to 27th March 19 to the whole AY 2016-17. 7.2 Similar action was also taken for AY 2014-15 &. 2015-16 and notices u/s 148 were issued. 7.3 The appellant filed the WP No. 13418/2019 and 13495/2019 challenging the reopening of cases u/s 148 of the IT Act in Hon'ble Delhi High Court. 7.4 Hon'ble Delhi High Court while staying the above proceeding u/s 148 observed that "Prima facie, we find merit: in. the submission of the Petitioner that the aforesaid reasoning cannot justify the reopening of the proceedings." 7.5 Now in case of the AY 2016-17, the arguments of the appellant are as under: "A table has been prepared based on Audited Financials of Financial Year 2015-16, 2016- 17, 2017-18 and 2018-19 (Survey Year) giving details of Manufacturing Expenses and computing the ratio of Manufacturing Expenses to Turnover in both the years. The chart is as under: ....
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....e that the Manufacturing Expenses were far less in Financial Year 2018-19 as compared to Financial Year 2015-16. This premise is proved to be incorrect. It is thus evident that the basis of the addition made by the Assessing Officer was based on presumptions of the survey team on 27th March 2019. Whereas the assessment of AY 2017-18, 2018-19 and 2019-20 were done by the Assessing officer after thorough scrutinizing the findings of the survey and thorough investigation and after being satisfied with the trading results for Financial Year 2018-19, passed an order u/s 143(3) without making any additions on account of the excessive claim of Manufacturing expenses. The basis on which such addition was made by the Assessing Officer in Assessment Year 2016-17 has thus been proved to be incorrect The addition of Rs 23,00,93,853 may therefore be deleted." 7.6 The contention of the appellant is found to be correct. The Id. AO has not made any addition by applying the ratio of Manufacturing Expense to Turnover when compared to the Period 1st April 18 to 27th March 19 to AY 2017-18, 2018-19 & 2019-20. On the other hand, the reopening on this basis for AY 2014-15 & 20....
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.... as Annexures 1, 2, and 3 for your perusal. The above shows a clear contradiction in the statement of learned AO. In view of the above-stated facts, the addition of Rs. 10,74,07,000 may therefore be deleted." 8.2 The contention of the appellant is found to be correct. The Id. AO has not made any addition by disallowing the expenses incurred on claimed R&D activity though he has established that there was no R&D activity taking place in the company as per the findings of the survey conducted on 27.03.2019. He is of the opinion that though these expenses have taken place but not towards R&D work and therefore the appellant is not eligible for deduction u/s 35(2AB) of the Act. By applying this logic, he had disallowed the deduction claimed as Scientific Research & Development expenditure u/s 35(2AB) of the Income Tax Act, 1961 in excess of the amount debited to the profit and loss account, for AY, 2017-18, 2018-19 and 2019-20 amounting to Rs. 3,88,77,284/- Rs. 4,65,48,203/- and Rs. 5,25,78,131/- respectively and added back the same to the total income of the assessee-company. In other words, he has accepted that these expenditures have actually been incurred....
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....f Rs. 4,65,48,203/-, amount of Rs. 17,17,115/- given to it's JV company and amount of loss to the tune of Rs. 4,70,000/- incurred on cyber crime security etc. respectively, made in both the lower proceedings. Learned senior counsel submits very fairly that the assessee no more wish to press for the foregoing last substantive ground keeping in mind smallness thereof. Rejected in very terms subject to a rider that the same shall not be treated as a precedent. 15. We next notice that both the learned lower authorities have disallowed the assessee's interest claim of Rs. 27,00,000/- paid to M/s Avail Financial Services Pvt. Ltd. for the sole reason that the corresponding loans coming from the very party stood added as unexplained cash credits in A.Y. 2017-18. Learned counsel has invited our attention to paragraph 10 to 14 therein (supra) that this tribunal has already deleted the same against the department. We thus delete the impugned interest expenditure disallowance involving the very entity therefore. 16. Coming to the assessee's second substantive ground claiming section 35(2AB) deduction disallowance of Rs. 4,65,48,203/-, we note that the learned CIT(A) has followed the DRP....