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Facts
The assessee, ALP Overseas Pvt. Ltd., filed its return of income for AY 2018-19. The Assessing Officer (AO) made additions on account of disallowance of deduction under Section 35(2AB) and addition for duty drawback. The CIT(A) upheld these additions.
Held
The Tribunal held that the disallowance of revenue expenditure under Section 35(2AB) should be tested under Section 35(1) of the Act, and restored this issue to the AO. Regarding the duty drawback, the Tribunal found that the amount was recognized in a subsequent year and the addition was unsustainable, setting it aside.
Key Issues
1. Whether revenue expenditure disallowed under Section 35(2AB) is eligible for deduction under Section 35(1). 2. Whether addition on account of duty drawback recognized in a subsequent year is sustainable.
Sections Cited
143(3), 143(3A), 143(3B), 115JB, 142(1), 35(2AB), 35(1), 37(1), 145B(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “A”: NEW DELHI
Before: SHRI PRADIP KUMAR KEDIA & SHRI VIMAL KUMAR
PER VIMAL KUMAR, JUDICIAL MEMBER:
The appeal filed by the appellant/assessee is against order dated 22.06.2023 of the Learned Commissioner of Income- Tax(Appeals)-27, New Delhi (hereinafter referred as ‘Ld. CIT(A)’) arising out of assessment order dated 16.04.2021 under Section 143(3) r.w.s. 143(3A) & 143(3B) of the Income-Tax Act, 1961 (hereinafter referred as “the Act”) of the ACIT, Central Circle-20, New Delhi (hereinafter referred as “Ld. AO”) for assessment year 2018-19.
Brief facts of the case are appellant/assessee, a private limited company, filed return of income electronically on 30.11.2018 for assessment year 2018-19, declaring total income of Rs. 17,74,07,840/- under normal computation and deemed total income of Rs. 23,53,42,428/- under Section 115JB of the Income-tax Act, 1961. The case was selected for Complete Scrutiny. Notice under Section 143(2) was issued on 22.09.2019 and notices under Section 142(1) of the Act were issued on 04.09.2020, 15.12.2020, 30.12.2020, 04.02.2021, 11.02.2021, 26.02.2021 and 02.03.2021 and duly served upon the assessee on its registered email ID through ITBA. In response, the assessee has furnished required information and documents vide reply dated 04/09/2020, 06/01/2021, 27/01/2021, 06/02/2021, 28/02/2021 and 06/03/2021. The submission and documents uploaded online by the assessee. Ld. AO vide order dated 16.02.2021 made addition of Rs.21,71,118/- on account of Disallowance of Deduction under Section 35 (2AB) and Rs.5,45,148/- on account of addition of duty draw-back.
Against order dated 16.04.2021 of the Ld. AO, appellant/assessee preferred appeal before the Ld. CIT(A) which was dismissed vide order dated 22.06.2023.
Being aggrieved, the appellant/assessee filed present appeal.
Learned Authorised Representative for the appellant/assessee submitted that in additional ground no.2, it is pleaded “that on the facts and circumstances of the case and in law, the disallowance of revenue expenditure made by the Ld. AO as upheld by the Ld. CIT(A) under Section 35(2AB) of the Act is eligible for business deduction under Section 35(1) of the Act.”
5.1 Ld. CIT(A) grossly erred in rejecting the submission and claim of the assessee that the deduction amounting to Rs.6,23,000/- be allowed under Section 37(1) of the Act. Copy of Form 3CL is at Page 35 to Page 36 of the Paper Book. Copy of details of revenue expenditure incurred under research and development is part of submission dated 06.04.2021 filed before the Ld. AO at Page 37 of the Paper Book.
5.2 The assessee had raised additional grounds of appeal, contending that the disallowance of revenue expenditure under Section 35(2AB) is, in fact, also eligible for a business deduction under Section 35(1) of the Act. It is submitted that all necessary and relevant details regarding the incurrence of the expenses have been duly submitted during the assessment proceedings. These documents provide evidence of the actual occurrence and legitimacy of the expenses, and there has been no dispute raised by the Ld. AO regarding the genuineness or authenticity of such expenses.
5.3 Reliance was placed on decision of ITAT of Delhi in the case of Mankind Pharma vs DCIT [2024] 162 taxmann.com 235 (Delhi - Trib.)[01-05-2024].
Learned Authorised Representative for appellant/assessee submitted that as per ground no.3, Ld. CIT(A) grossly erred in upholding addition of Rs.5,45,148/- on account of difference in duty draw back declared by the appellant in the income tax return. Ld. AO erred in making the addition of Rs. 5,45,148/- pertaining to Duty Drawback income recognition, even though the said amount was duly recognized as income in the subsequent financial year, i.e., FY 2018-19. As per the information available with the income tax department, the total duty drawback for the year under consideration was Rs. 32,16,297/-, out of which the assessee recognized Rs. 26,17,149/- as income in the current year, while the remaining Rs. 5,45,148/- was recognized as income in the subsequent year 4 due to uncertainty in its receipt. The details of the reconciliation of the duty drawback data received from CBEC, along with the ledger account and relevant bank statements, are provided in the Paper Book from pages 53 to 66. The Ld. AO, without rebutting the fact that the amount of Rs. 5,45,148/- was already recognized in the subsequent year and there was no loss to revenue, mechanically made the addition in the year under consideration. The addition was made based on the assertion that, as per Section 145B(2) read with ICDS IV on revenue recognition, "Revenue should be recognized when there is reasonable certainty of its ultimate collection," but the Ld. AO did not provide any reasoning as to why it was considered reasonably certain that the duty drawback amount of Rs. 5,45,148/-would be received during the year under consideration.
6.1 Ld. AO's finding only serves to substantiate the position of the assessee. Out of the total duty drawback of Rs. 32,16,297/-, the amount of Rs. 26,17,149/-was recognized as income in the current year, as there was no uncertainty regarding its receipt, and the amount of Rs. 5,45, 148/- was deferred to the subsequent year due to the uncertainty surrounding its receipt. Furthermore, the accounts of the assessee were duly audited under the provisions of the Companies Act, 2013, and the Income Tax Act, 1961, and revenue was recognized in accordance with the accounting standards and ICDS on revenue recognition.
6.2 Hon'ble Apex Court in Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273, has held that the Assessing Officer can only examine whether the books of accounts have been properly maintained in accordance with the Companies Act and cannot question the net profit shown in the profit and loss account.
6.3 Moreover, the appellant has already recognized the income of Rs. 5,45,148/- in the subsequent year, i.e., FY 2018-19, so, there is no loss to the revenue. It is also herein imperative to state that the assessment for AY 2019-20 has also been completed and no inference has been drawn in that year. Making the addition again would amount to double taxation, which is impermissible. Hon'ble Apex Court in Laxmipat Singhania v. CIT [1969] 72 ITR 291, has held that unless expressly provided, income cannot be taxed twice. This principle has been reiterated by the Hon'ble High Courts, including the decision in T.N.K. Govindaraju Chetty & Co. v. CIT [1964] 51 ITR 731 (Madras) and CIT v. R. Dalmia [1981] 6 Taxman 47 (Delhi), where it was held that repeated taxation of the same income in the hands of the same person is not permissible.
Learned Authorised Representative relied on impugned orders of the departmental authorities.
From examination of record in the light of light of aforesaid rival contentions, it is crystal clear that vide impugned order made addition of Rs.21,71,118/- disallowing deduction claimed under Section 35(2AB) of the Act on account of the fact that less expenditure has been allowed by DSIR in Form 3CL vis a vis the amount of expenditure claimed to have been spent by the assessee.
The additional ground, that disallowance of revenue expenditure under Section 35(1) of the Act is, in fact, also eligible for a business deduction under Section 35(2AB) of the Act.
We find that an identical issue had come up before the Tribunal in the case of Mankind Pharma vs. DCIT [2024] 162 taxmann.com 235 (Delhi –Trib) wherein it was held that as follows:
"57. We advert to first aspect of the issue. Section 35(1) provides for normal deduction in respect of expenditure on scientific research subject to the conditions specified therein. 7 The assessee claims that all the conditions are broadly similar to the eligibility under Section 35(2AB) of the Act and have been fully met to assert claim under s. 35 (1) of the Act. The AO has not tested the claim of expenditure under Section 35(1) and has disallowed the expenditure solely for the reason that such expenditure to the extent of Rs.800,95,000/- has not been approved by the DSIR. As repeatedly echoed in the judicial precedents, the quantification and approval of DSIR is not the condition precedent for the purposes of amount eligible for deduction under s. 35(1) of the Act. We thus see rationale in the plea of the assessee on this score. The disallowance of claim of deduction of Rs. 8,00,95,000 is not justified on the counters of s. 35(1) merely owing to lesser quantification of eligible expenditure by DSIR.”
Section 35(1) provides for normal deduction in respect of expenditure on scientific research subject to the conditions specified therein. The assessee claims that all the conditions are broadly similar to the eligibility under Section 35(2AB) of the Act and have been fully met to assert claim under s. 35 (1) of the Act. The AO has not tested the claim of expenditure under Section 35(1) and has disallowed the expenditure solely for the reason that such expenditure to the extent of Rs.800,95,000/- has not been approved by the DSIR. As repeatedly echoed in the judicial precedents, the quantification and approval of DSIR is not the condition precedent for the purposes of amount eligible for deduction under s. 35(1) of the Act.
It is the contention of the assessee that the disallowance carried out towards house scientific research expenditure e- incurred by assessee is simultaneously eligible under Section 35(1) of the Act and therefore disallowance of Rs. 21,71,118/- requires to be tested on touchstone of section 35(1) of the Act regardless of such expenditure being found ineligible under Section 35(2AB) of the Act. We agree with contention of assessee in light of decision rendered in Mankind Pharma’s case (supra) on first principles. We therefore consider it expedient to restore the issue back to file of Ld. AO for fresh determination of claim of eligibility of such expenditure under Section 35(1) of the Act in accordance with law after giving opportunity to Assessee. It shall be open to assessee to support eligibility of reference to documentary evidences and legal position available on the point.
Ld. CIT(A) upheld the addition of Rs.5,45,148/- on account of difference in its drawback declared by the appellant in Income Tax Report. The amounts have duly been recognised in income in the subsequent financial year. The details of reconciliation of duty drawback received from CBEC along with ledger account and relevant bank statements are in paper books from pages 53 to 56. Ld. AO without rebutting the amount of Rs.5,45,148/- has already recognised in the subsequent year and there was no losses to the Revenue, mechanically, made the conditions, therefore, the addition is unsustainable and is set aside.
In view of above findings, additional ground of appeal no.2 is partly allowed and ground of appeal no.3 is allowed. Additional ground of appeal no.1 and grounds of appeal nos.1 to 2 are left open.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 16/05/2025.