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Facts
The Revenue appealed against the CIT(A)'s order deleting additions made under Section 14A for disallowance of expenses and also for granting weighted average deduction for R&D expenses. The assessee claimed that the disallowance under Section 14A was made by the AO without proper satisfaction and that the R&D deduction was supported by Form-3CL.
Held
The Tribunal held that the AO erred in making the disallowance under Section 14A without recording proper satisfaction and that the CIT(A) rightly deleted the addition. Similarly, the weighted average deduction for R&D expenses was correctly granted by the CIT(A) as the necessary Form-3CL was subsequently provided.
Key Issues
Whether the AO properly recorded satisfaction before invoking Section 14A for disallowance of expenses and whether the CIT(A) was justified in allowing weighted average deduction for R&D expenses despite the initial non-furnishing of Form-3CL.
Sections Cited
14A, 8D, 115JB, 35(2AB), 139(1)
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Income Tax Appellate Tribunal, PUNE BENCHES “B”, PUNE
Before: DR.MANISH BORAD & SHRI VINAY BHAMORE
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The captioned appeal at the instance of Revenue pertaining to A.Y. 2018-19 is directed against the order dated 25.07.2025 framed by CIT(A), Pune-11 emanating out of Intimation Order dated 08.07.2022 passed u/s.143(1) of the Income Tax Act, 1961.
Revenue has raised following grounds of appeal :
“1. Whether in the facts and circumstances of the case and in law, Hon'ble CIT (A) erred in deleting the addition of Rs.20,78,791/- made by AO u/s 14A r.w.r 8D by holding that the AO failed to record the satisfaction for invoking section 14A while making the disallowance without considering the fact that the AO in para 5.2 of the order, AO has recorded satisfaction while making the disallowance u/s 14A7 2. Whether in the facts and circumstances of the case and in law, Hon'ble CIT(A) erred in not adding the disallowance of Rs. 20,78,791/- made u/s 14A of the Act to the net profit while computing the book profit for the purpose of Section 115JB of the Act.
Whether in the facts and circumstances of the case and in law, Hon'ble CIT(A) erred in granting the weighted average deduction for Research & Development expenses of Rs. 8,04,38,000/- u/s 35(2AB) inspite of the fact that the assessee has not submitted Form-3CL within the time limit prescribed in Rule 6(7A)(ba) of the Income Tax Rules, 1962? 4. The appellant craves leave to add, alter, amend, or withdraw any ground of appeal at the time of hearing.”
3. We will first espouse the issue raised in Ground No.1 u/s.14A of the Act at Rs.20,78,791/-.
At the outset, ld. Counsel for the assessee submitted that the issue stands squarely covered by the decision of this Tribunal in assessee’s own case for A.Y. 2017-18 vide dated 27.06.2024.
On the other hand, ld. Departmental Representative though supported the order of ld. Assessing Officer but failed to controvert the contention that the issue stands squarely covered by the decision of this Tribunal in assessee’s own case.
We have heard the rival contentions and perused the record placed before us. We observe that the assessee is a Limited Company and in the return of income for A.Y. 2018-19 income of Rs.32,89,20,990/- declared in the e-return filed on 30.11.2018 assessment proceedings u/s.143(3) of the Act were carried out. Ld. Assessing Officer (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. Ld.CIT(A) deleted the disallowance placing reliance on the decision of this Tribunal dated 27.06.2024. We find that the relevant finding of this Tribunal on this issue of disallowance u/s.14A of the Act for A.Y. 2017-18 in order dated 27.06.2024 reads as under :
“8. We have considered the rival submissions and perused the records. The assessee company earned dividend income of Rs.4,33,65,925/- from investments in equity mutual funds and claimed it exempt. It made suomoto disallowance of Rs.51,41,522/- u/s 14A of the Act, being administrative expenses which, according to the assessee may be related to exempt income. Sub-section (2) of section 14A mandates that the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed if the AO, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act. The method of calculation is prescribed under Rule 8D of the Income Tax Rules, 1962. The application of Rule 8D of the Rules is subject to fulfillment of the condition precedent that the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the assessee’s claim of such expenditure. 8.1 Perusal of the assessment order would show that the Ld. AO has not recorded his satisfaction having regard to the accounts of the assessee. He has applied Rule 8D to the case of the assessee as in his view if section 14A is attracted, the disallowance has to be made as per Rule 8D. However, this is not so. The Ld. AO has to be satisfied with the correctness of the claim of the assessee having regard to the assessee’s account. The Hon’ble Delhi High Court in the case of CIT Vs. Taikisha Engineering India Ltd. reported in 54 taxmann.com 109 (Del.) has held that it is only when voluntary disallowance made by assessee u/s 14A is found to be unsatisfactory on examination of accounts, that AO is entitled and authorized to compute deduction under Rule 8D. Similar view has been taken by the Hon’ble Bombay High Court in the case of Pr. CIT Vs. Reliance Capital Asset Management Ltd. reported in (2018) 400 ITR 217 (Bom.). We are therefore inclined to accept the claim of the Ld. AR that the Ld. AO has not recorded satisfaction as per mandate of law provided under sub-section (2) of section 14A of the Act. Accordingly, the submission of the Ld. DR in this regard is rejected.
8.2 We also do not find any substance in the contention of the Ld. DR that the details of employees handling the investments of the company were not furnished. We notice that in its note (copy at page 92 of the paper book) the assessee has stated that the company had identified the expenses which are attributed to the activities of the investments in mutual funds. It was pointed that the company has a separate Treasury Department operated by four qualified employees under the guidance of Chief Financial Officer. Considering that certain administrative expenses may be related to exempt income, the assessee disallowed Rs.49,41,522/- being gross salary of employees working in Treasury Department and Rs.2,00,000/- out of general administrative expenses aggregating to Rs.51,41,522/-. The suggestion of the Ld. DR to send back the matter to the Ld. AO is without any merit as, in our opinion, no useful purpose would be served by doing so.
9. Before the Ld. AO, the assessee had asserted that all investments in relation to exempt income are made by company with its internal accruals/surplus funds. Company’s reserves as on 31.03.2017 were stated to be Rs.678.99 crores. The details of interest expenses incurred during the year were furnished (copy of which is at page 95 of the paper book). It was the contention of the assessee that interests bearing borrowed funds were used for business purpose only. It was also submitted that no investments were made out of borrowings from the banks or any financial institutions. No adverse comment has been made either by the Ld. AO or by the Ld. CIT(A). The claim of the assessee that in the preceding year suo-moto disallowance made by the assessee has been accepted, has not been refuted by the Revenue.
We, therefore, hold that the impugned disallowance of Rs.33,20,874/- u/s 14A of the Act r.w. Rule 8D is not warranted in the case of assessee. It is hereby deleted.”
The above finding of this Tribunal stands uncontroverted by ld. DR by placing any binding precedence in its favour. Also the issue raised by the Revenue in Ground No.2 that ld.CIT(A) erred in adding the disallowance of Rs.20,78,791/- of the Act to the net profit while computing the book profit for the purpose section 115JB of the Act also deserves to be dismissed as ld.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 Hon’ble High Court of Karnataka in the case of PCIT v. J.J. Glastronics (P.) Ltd.. (2022) 139 taxmann.com 375 (Karnataka) where the Hon’ble Court has held that disallowance u/s.14A could not be added to net profit while computing book profit u/s.115JB of the Act. Under these given facts and circumstances, we fail to find any infirmity in the finding of ld.CIT(A) and the same needs no interference. Grounds of appeal No.1 and 2 raised by the Revenue are dismissed.
8. Ground No.3 raised by the Revenue is against the finding of ld.CIT(A) granting Weighted Average deduction for Research and Development expenses at Rs.8,04,38,000/- u/s.35(2AB) of the Act.
We have heard the rival contentions and perused the record. We observe that the assessee during the course of assessment proceedings could not furnish Form No.3CL issued by DSIR which is mandatory for claiming the Weighted Average deduction u/s.35(2AB) of the Act for Research and Development expenses at Rs.10,32,98,892/- and the same has been added to the income of the assessee by ld. AO. However, ld.CIT(A) has deleted the impugned addition observing that assessee has received Form No.3CL issued by DSIR on 05.01.2025 and that was the only requirement which remained to be fulfilled by the assessee before ld.AO. Relevant finding of ld.CIT(A) dealing with disallowance u/s.35(2AB) of the Act and giving relief to the assessee on due consideration of Form No.3CL issued by DSIR on 05.04.2025 reads as under:
“8.5 I have perused the additional evidence filed by the appellant and found that it is a copy of Form-3CL issued by DSIR which is the root cause of disallowance made by the Assessing Officer. Further, the said certificate in Form-3CL was issued by DSIR only on 05/01/2025 i.e. after the completion of assessment. Therefore, the appellant could not have filed the same during the assessment proceedings. Considering the facts of the case as well as the fact that the evidence now furnished by the appellant, goes to the root of the issue to be decided, the same is being admitted in the interest of natural justice.”
10. The above finding of ld.CIT(A) remains uncontroverted by ld. DR and admittedly 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. 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) of the Act and therefore, assessee had to make a claim. However, since certificate from DSIR in Form No.3CL dated 05.01.2025 has been issued (placed at paper book 152 to 153 of the paper book) we find that ld.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. Ground No.3 raised by the Revenue is dismissed.
Ground No.4 is general in nature and needs no adjudication.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced on this 14th day of November, 2025.