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Facts
The assessee, engaged in manufacturing automobile parts, filed its return for AY 2015-16. The Assessing Officer made additions including excess R&D expenditure claim, disallowance of miscellaneous expenses, and disallowance under Section 14A. The assessee appealed against these additions.
Held
The Tribunal held that the assessee is entitled to weighted deduction u/s. 35(2AB) for R&D expenditure, and allowed the entire expenditure claimed towards club expenses and membership fees. However, sponsorship expenses were disallowed due to lack of evidence. The disallowance u/s. 14A for MAT provisions was also allowed.
Key Issues
Whether the assessee is entitled to weighted deduction for R&D expenditure, whether club and sponsorship expenses are allowable, and whether disallowances under Section 14A are applicable for MAT computation.
Sections Cited
35(2AB), 14A, 115JB, 143(3), 37
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Income Tax Appellate Tribunal, DELHI BENCH “G”, DELHI
Before: SHRI VIKAS AWASTHY & SHRI M. BALAGANESH
ORDER PER VIKAS AWASTHY, JM: These two appeals by the assessee for AY 2015-16 & 2016-17 are taken up together as in both appeals the assessee has raised identical issues assailing the orders of CIT(A) for respective assessment years. For the sake of convenience, appeal of the assessee in ITA 7168/Del/2019 is taken up as lead case, hence, the facts are narrated from the said appeal.
Shri Salil Kapoor, appearing on behalf of the assessee submitted that the assessee is engaged in the business of manufacturing of automobile parts such as & 7169/Del/2019 (AYs 2015-16 & 2016-17) lock assembly, mirror plate, mirror assembly, wheel assembly, etc. The assessee filed its return of income for AY 2015-16 declaring total income of Rs.42,37,18,910/- under normal provisions and book profit of Rs.53,44,51,020/- u/s. 115JB of the Act. During the period relevant to assessment year under appeal, the asseseee had entered into International Transactions. Reference was made to the Transfer Pricing Officer (TPO) to determine Arm’s Length Price (ALP) of such transactions. The TPO vide order dated 31.10.2018 proposed no addition on the International Transactions. However, the Assessing Officer (AO) in assessment proceedings made following additions:- i. Excess deduction claimed in respect of research and development expenditure u/s. 35(2AB) of the Act, Rs.22,21,247/-; ii. Miscellaneous expenses; a. Disallowance of club expenditure Rs.27,077/- b. Sponsorship expenditure Rs.6,00,000/- c. Charity and donations Rs.1,93,700/- d. Membership others of Rs.7,95,004/- iii. Disallowance u/s. 14A of the Act Rs.3,01,621/-, disallowance u/s. 14A of the Act as part of book profits u/s. 115JB of the Act Rs.14,67,806/-. Aggrieved by the assessment order dated 28.12.2018 passed u/s. 143(3) of the Income Tax Act,1961(hereinafter referred to as ‘the Act’), the assessee carried the issue in appeal before he CIT(A). The CIT(A) granted part relief to the extent of Rs.1,41,824/- in respect of club expenses and membership expenses and confirmed all other additions/disallowances made by the AO.
The ld. Counsel for the assessee submitted that in so far as the issue of excess deduction claimed in respect of research and development expenditure u/s. 35(2AB) of the Act, the issue is squarely covered by the order of Tribunal in & 7169/Del/2019 (AYs 2015-16 & 2016-17) assessee’s own case in AY 2014-15. He placed on record copy of Tribunal order in for AY 2014-15 decided on 25.01.2024. 3.1. In respect of club expenditure and membership expenses he submitted that the AO has disallowed the expenditure holding it to be personal in nature. Referring to the decision in the case Sayaji Iron & Engg. Co. vs CIT 253 ITR 749 (Guj), the ld. Counsel submits that the nature of expenditure claimed is not personal, in any case the company being a juristic person cannot incur any expenditure on personal account. The ld. Counsel further pointed that the CIT(A) has given part relief amounting to Rs.1,41,824/-. The expenditure was purely out of business exigencies and is allowable. 3.2. With regard to sponsorship expenditure Rs. 6,00,000/-, the ld. Counsel submits that sponsorship expenses are akin to advertisement expenses which are allowable in accordance with the decision rendered in the case of CIT vs. Delhi Cloth & General Mills Co. Ltd. 115 ITR 659 (Del.) and decision in the case of CIT vs. Lake Place Hotels and Motels P. Ltd. 293 ITR 281 (Raj.). 3.3. The ld. Counsel made a statement at Bar that he is not pressing ground no. 10 and 11 assailing disallowance u/s. 14A of the Act under normal provisions. 3.4. With regard to disallowance u/s. 14A as part of book profit u/s. 115JB of the Act assailed by way of ground of appeal
1. no. 12 to 15, the ld. Counsel furnished written submissions, the same reads as under:- “1. A bare perusal of the provisions under section 115JB would signify that sub- section (1) prescribes the mode and manner for computing the total income of the assessee under section 115JB. However, clause (f) of Explanation 1 only alludes to the amounts of expenditure relatable to any income to which section 10. (excluding provisions contained in clause 38 thereof) or section 11 or section 12 & 7169/Del/2019 (AYs 2015-16 & 2016-17) apply. Thus, the said explanation nowhere mentions or denotes any mandate to import the disallowance as per section 14A for computing MAT under section 115JB. 2. 115JB is a self-contained code. It applies notwithstanding other provisions of the Act. There is no scope for any allowances or deductions under any other section from what is deemed to be the total income of the company (the assessee) as held by Hon'ble Supreme Court in case of Indo Rama Synthetics I) Ltd. v CIT [2011] 330 ITR 363.” The ld. Counsel to further buttress his submissions on this issue placed reliance on the following decisions: (i) PCIT vs. Moon Star Securities Trading & Finance Co. (P.) Ltd. 161 axmann.com 158 (Delhi); (ii) PCIT vs. Artia Power Coporation Ltd. 142 taxmann.com 314 (SC); & (iii) Vireet Investment (P) Ltd. 82 taxmann.com 412 [Delhi Trib.].
4. Per contra, the ld. DR vehemently defended the impugned order and placed reliance on the findings of the Assessing Officer and order of the CIT(A).
We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also considered the decisions on which, the ld. Counsel for the assessee has placed reliance. The assessee in appeal has raised as many as 16 grounds of appeal
. The ground no. 1 and 2 of appeal are general, hence, require no separate adjudication.
6. In ground no. 3 to 5 of appeal, the assessee has assailed disallowance of Rs.22,21,243/- on weighted deduction claimed u/s.35(2AB) of the Act. The AO has rejected assessee’s claim of weighted deduction in respect of expenditure on research and development facility. According to the AO the expenditure should have been approved by the DSIR. The AO observed that as against the assessee’s & 7169/Del/2019 (AYs 2015-16 & 2016-17) claim of weighted deduction of Rs.2,58,50,247/- (Revenue expenditure Rs.2,11,05,971/- and capital expenditure Rs.47,44,276/-), the DSIR has approved weighted deduction u/s. 35(AB) of the Act to the extent of Rs.2,36,29,000/- comprising of Revenue expenditure Rs.1,88,85,000/- and capital expenditure of Rs.47,44,000/-. Accordingly, the AO disallowed remaining amount Rs.22,21,247/-. The ld. Counsel for the assessee has pointed that in AY 2014-15, the AO had made similar disallowance of weighted deduction u/s. 35(2AB) of the Act. The assessee carried the issue in appeal before the Tribunal in ITA No. 2960/Del/2018. The Tribunal vide order dated 25.01.2024 decided the issue in favour of the assessee. We find that the co-ordinate Bench after considering the decision rendered in the case of CIT v. Claris Lifesciences Ltd. 174 Taxman 113 (Guj.) in principle allowed the claim of assessee, however, for the purpose of verification and quantification of the actual expenses incurred by the assessee towards scientific research, restored the issue to AO. In the instant case the facts are identical, therefore, respectfully following the decision of Coordinate Bench, we hold that assessee is entitled for weighted deduction u/s. 35(2AB) on the entire amount of expenditure towards scientific research and development. In the impugned assessment year, the AO has not doubted quantum of expenditure, therefore, this ground of appeal is allowed for parity of reasons.
6. In ground no. 6 to 8 of appeal, the assessee has assailed disallowance of club expenses and membership expenses. The assessee had made payment of Rs.27,077/- towards club expenditure incurred by the Director of the assessee company. The contention of the assessee is that the expenditure was incurred for the purpose of business, as the Director of the company had to entertain various persons in connection with the business. The AO has disallowed the expenditure & 7169/Del/2019 (AYs 2015-16 & 2016-17) on the premise that club expenditure is not wholly and exclusively for the purpose of business and there is element of personal nature. The assessee has also claimed Rs.7,95,004/- in respect of membership. The AO has disallowed the expenditure holding that the assessee has failed to show that the expenditure was incurred wholly and exclusively for the purpose of business. In First Appellate proceeding, the CIT(A) in principle agreed with the argument of the assessee that the payment towards club expenditure and membership fee are incurred on account of business expediency, but restricted the claim of assessee to Rs.1,41,824/- After perusal of bills, the CIT(A) confirmed the addition to the extent of Rs.6,80,257/-. The CIT(A) held that payments are made for individual membership and not as corporate membership. The CIT(A) after having accepted that the club expenditure and membership fee is wholly for the purpose of business has erred in creating distinction of individual membership and corporate membership to disallow assessee’s claim. Once the expenditure is held to be incurred for the purpose of business the nature of membership, individual or corporate makes no difference. We see no valid reason to disallow the remaining amount. Thus, the entire expenditure claimed towards club expenditure and membership fee is allowed. In the result, ground no. 6 to 8 of appeal are allowed.
7. In ground no. 9 of appeal, the assessee has assailed disallowance of Rs.6,00,000/- claimed towards sponsorship expenses. The ld. Counsel has contended that sponsorship expenses are akin to advertising expenses which are allowable u/s. 37 of the Act. The ld. Counsel for assessee in support of his submissions placed reliance on the decision in the case of CIT vs. Delhi Cloth & General Mills Co. Ltd. (supra). In the said case, the Hon’ble Jurisdictional High Court held that where the assessee company conducted Hockey and Football & 7169/Del/2019 (AYs 2015-16 & 2016-17) tournaments, the expenditure for conducting/sponsoring said tournaments brought name of the assessee in to prominence with consequent advertising value of company and made name of the company a household expression. In the instant case, the assessee has incurred expenditure of Rs.6,00,000/- on sponsorship of Tennis player Samriti Joon for participating in various tennis events. However, it is not emanating from records that the player to whom assessee had sponsored was wearing name/logo of the assessee during tennis tournaments. The expenditure on sponsorship would be considered akin to advertising only if the name of the assessee as a sponsor is displayed in the sports arena where sports event has taken placed or at least on the sportswear of the player. In the absence of any evidence to substantiate that the assessee had sponsored Samriti Joon, we see no infirmity in the findings of authorities below in disallowing the expenditure. Hence, ground no. 9 of appeal is dismissed.
Ground no. 10 & 11 of appeal is with respect to disallowance of Rs.3,01,621 u/s. 14A of the Act. The ld. Counsel for the assessee made statement at Bar that on account of smallness of the amount involved, the assessee is not pressing these grounds. In light of the statement made by ld. Counsel for the assessee, ground of appeal
no. 10 & 11 is dismissed as not pressed.
9. In ground no. 12 to 15 of appeal, the assessee has assailed disallowance of Rs.14,67,806/- u/s. 14A of the Act under MAT provisions. The said issue is squarely covered by the decision of Special Bench in the case of Vireet Investment P. Ltd. (supra). The question before the Special Bench for adjudication was:- “Whether the expenditure incurred to on exempt income computed u/s. 14A could not be added while computing book profit u/s. 115JB of the Act.”
& 7169/Del/2019 (AYs 2015-16 & 2016-17) The Special Bench while answering the aforesaid question held that computation under clause (f) of Explanation 1 to section 115JB(2) of the Act is to be made without resorting to the computation as contemplated u/s. 14A r.w.r 8D of the Income Tax Rules, 1962. Thus, in light of the decision rendered by Special Bench, ground no. 12 to 15 of appeal are allowed.