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Income Tax Appellate Tribunal, ‘B‘ BENCH
Before: SHRI VIKAS AWASTHY & SHRI M.BALAGANESH
आदेश / O R D E R PER M. BALAGANESH (A.M):
This appeal in for A.Y.2014-15 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-24, Mumbai in appeal No.CIT(A)-24/ACIT-15(2)(1)/IT-633/2016-17 dated 01/03/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act)
M/s. Nirmal Industrial Control Pvt.Ltd., dated 19/12/2016 by the ld. Asst. Commissioner of Income Tax-15(2)(1), Mumbai (hereinafter referred to as ld. AO).
The ground Nos. 1 and 6 raised by the assessee are general in nature and does not require any specific adjudication.
The ground No.3 raised by the assessee was stated to be not pressed by the ld. AR. The same is reckoned as a statement made from Bar and accordingly, the ground No.3 raised by the assessee is dismissed as not pressed.
The ground Nos. 2 & 5 raised by the assessee are challenging the disallowance made u/s.14A of the Act r.w.r. 8D(2) of the Rules both under normal provisions of the Act as well as in the computation of book profits u/s. 115JB of the Act respectively.
We have heard rival submissions and perused the materials available on record. The assessee is a company engaged in the business of manufacturing of industrial valves. The assessee electronically filed its return of income for the A.Y.2014-15 on 07/04/2014 declaring total income of Rs.8,44,68,280/-. We find that assessee had earned dividend income of Rs.18,50,218/- and claimed the same as exempt. We find that assessee had made suo-moto disallowance of expenses u/s.14A of the Act amounting to Rs.3,78,562/- both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act treating the same as expenses incurred for the purpose of earning exempt income in the return of income filed. The ld. AO however, disregarded the same and proceeded to make disallowance by applying the computation mechanism provided in Rule 8D(2) of the Rules as under:-
M/s. Nirmal Industrial Control Pvt.Ltd., i) Under Rule 8D(2) (ii) - Rs.13,41,480/- ii) Under Rule 8D(2)(iii) - Rs.10,31,354/- Total Rs.23,72,834 ========= 5.1. The ld. AO disallowed the aforesaid sum of Rs.23,72,834/- u/s.14A of the Act r.w.r. 8D(2) of the Rules both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act. While doing so, the ld. AO did not reduce the suo moto disallowance of Rs.3,78,562/- made by the assessee.
5.2. Before the ld. CIT(A), assessee pleaded that it has got sufficient own funds in the form of share capital and reserves and surplus to the tune of Rs.38,60,64,566/- which is much more than the investments made by the assessee and hence, no disallowance of interest in terms of Rule 8D(2)(ii) of the Rules is warranted, With regard to disallowance made u/s.14A in the computation of book profits u/s.115JB of the Act, the assessee placed reliance on the Special Bench of Delhi Tribunal in the case of ACIT vs. Vireet Investments Pvt. Ltd., reported in 165 ITD 27 wherein it was held that computation mechanism provided in Rule 8D(2) of the Rules cannot be imputed in Clause (f) of Explanation 2 to Section 115JB(2) of the Act for the purpose of making disallowance of expenses incurred for earning exempt income. However, the ld. CIT(A) did not heed to these contentions of the assessee and upheld the disallowance made by the ld. AO.
5.3. We find that from perusal of the audited balance sheet of the assessee that it has sufficient interest free funds in its kitty which is much more than the investments made by it and hence, it could be safely
M/s. Nirmal Industrial Control Pvt.Ltd., presumed that the investments were made by the assessee out of own funds and not with the borrowed funds. Hence, by respectfully following the decision of the Hon’ble Jurisdictional High Court in the case of HDFC Bank reported in 366 ITR 505, we direct the ld. AO to delete the disallowance of interest under Rule 8D(2)(ii) of the Rules. With regard to disallowance of administrative expenses under Rule 8D(2)(iii) of the Rules, we direct the ld. AO to consider only those investments which had actually yielded dividend during the year and apply 0.5% on the average value of such investments alone for the purpose of disallowance under Rule 8D(2)(iii) of the Rules. This would be in consonance with the decision of Special Bench of Delhi Tribunal in the case of Vireet Investments reported in 165 ITD 27. From the disallowance figures so arrived, the ld. AO is hereby directed to reduce the voluntary disallowance made by the assessee in the return of income under normal provisions of the Act.
5.4. With regard to disallowance of expenses u/s.14A in the computation of book profits u/s.115JB of the Act, we find that the Special Bench of Delhi Tribunal had already held that the computation mechanism provided in Rule 8D(2) of the Rules cannot be imputed for the purpose of making disallowance in terms of Clause (f) of Explanation-2 to Section 115JB(2) of the Act. Hence, only actual expenses incurred by the assessee for the purpose of earning exempt income would be liable for disallowance in terms of Clause (f) referred to thereon. Since, assessee itself, has voluntarily disallowed by identifying actual expenses in the sum of Rs.3,78,562/- in the computation of book profits u/s.115JB of the Act, the same is hereby directed to be adopted and no further disallowance is warranted thereon. Accordingly, the ground No.2 raised by the assessee is partly allowed and ground No.5 raised by the assessee is allowed.
M/s. Nirmal Industrial Control Pvt.Ltd.,
The ground No.4 raised by the assessee is with regard to disallowance made u/s.35(2AB) of the Act in the sum of Rs.1,07,722/-.
6.1. We have heard the rival submissions and perused the materials available on record. We find that assessee had incurred expenditure related to research and development activities as follows:-
Expenditure related to research & development activities are as follows :- Revenue expenditure on research & development - Particulars Amount Bonus salary Rs 3,57,000/- Conveyance Rs 30,736/- expenses Employee welfare Rs 13.715/- expenses Incentive Rs 19,302/- Leave encashment Rs 11,286/- Leave travel Rs 40,463/- allowance Materials Purchased Rs 4,89,9997- Salary Rs 40,34,482/- Telephone exp Rs 24,100/- Testing charges Rs 4,04,395/- Travelling expenses Rs 3,49,133/- TOTAL Rs 57,74,611/-
M/s. Nirmal Industrial Control Pvt.Ltd.,
Capital expenditure on research & development- Particulars Amount Plant & machinery Rs 20,66,642/- purchased TOTAL Rs 20,66,642/- 6.2. The total of aforesaid Revenue as well as capital expenditure comes to Rs.78,41,253/-. We find that assessee had claimed weighted deduction @200% thereon in the sum of Rs.1,56,82,506/- u/s.35(2AB) of the Act in the return of income. There is no dispute that during the year under consideration, that assessee company was involved in the activities of in- house research and development disallowed and is eligible for deduction u/s.35(2AB) of the Act. The research and development activity carried out by the assessee is duly approved by the Department of Scientific and Industrial Research (DSIR), New Delhi. The assessee also submitted a report in Form 3CL approved by the DSIR, New Delhi. We find that the ld. AO on perusal of Form 3CL report observed that recognition has been granted in respect of capital expenditure to the tune of Rs.20.67 lakhs and Revenue expenses to the tune of Rs.57.21 lakhs. The total expenditure approved comes to Rs.77.88 lakhs and that assessee would be effectively eligible for weighted deduction u/s.35(2AB) of the Act only to the extent of Rs.1,55,76,000/- (Rs.77,88,000/- * 200%). Since assessee had claimed weighted deduction u/s.35(2AB) of the Act in the sum of Rs.1,56,82,506/- in the return, the excess sum representing difference of Rs.1,07,222(Rs.15,62,506–Rs.1,55,76,000/-) was sought to be disallowed by the ld. AO in the assessment. This was upheld by the ld. CIT(A).
M/s. Nirmal Industrial Control Pvt.Ltd., 6.3. We find that once an expenditure is approved as incurred for development of R & D facility (both Revenue and capital expenditure) and such R & D facility is also approved by DSIR, New Delhi, the assessee would be entitled for weighted deduction u/s.35(2AB) of the Act. Considering the plain reading of the said Section, coupled with its intention of granting weighted deduction to the assessee for encouraging development of R & D facility, we hold that assessee would be entitled for weighted deduction of Rs.1,07,222/- u/s.35(2AB) of the Act in the facts and circumstances of the instant case. Accordingly, the ground No.4 raised by the assessee is allowed.
In the result, appeal of the assessee is partly allowed.
Order pronounced on 16/08/2021 by way of proper mentioning in the notice board.