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Facts
The assessee claimed a deduction of Rs. 4,50,37,302/- under Section 35(2AB) for scientific research expenditure. The Assessing Officer (AO) restricted the deduction based on the actual expenditure reported by the Ministry of Science and Technologies, leading to a disallowance of Rs. 37,27,302/-. The assessee also claimed a deduction under Section 14A for expenses related to exempt income.
Held
The Tribunal held that the disallowance on account of Section 35(2AB) should have been restricted to Rs. 12,42,434/-, being 50% of the unallowed revenue expenditure. The remaining revenue expenditure of Rs. 24,84,868/- was allowable under Section 35(1)(i). For the addition under Section 14A, the Tribunal noted that the assessee had not earned any exempt income, and following various High Court decisions, the disallowance was not sustainable.
Key Issues
Whether the disallowance of deduction claimed under Section 35(2AB) for scientific research expenditure was justified, and whether the addition made under Section 14A for expenses relatable to exempt income was sustainable.
Sections Cited
35(2AB), 35(1)(i), 14A, Rule-8D(2)(ii)
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Before: SHRI SANJAY GARG & SHRI BIJAYANANDA PRUSETH
आदेश / O R D E R
PER BIJAYANANDA PRUSETH, AM:
This appeal by the assessee emanates from the order passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) dated 17.01.2025 by the Commissioner of Income-tax (Appeals)-4, Surat [in short ‘Ld. CIT(A)’] for the Assessment Year (AY) 2018-19, which in turn arises out of assessment order passed by Assessing Officer u/s 143(3) r.w.s. 143(3A) r.w.s. 143(3B) of the Act dated 06.04.2021. Grounds of appeal
raised by the assessee are as under:
1. The Ld. AO was not justifying in disallowing and Ld. CIT(A) erred in confirming the deduction of Rs,24,84,867/- (37,27,302 – 12,42,434) claimed u/s 35(2AB) of the Income Tax Act, 1961.
A.Y 18-19 Sahajanand Technologies P. Ltd. 2. The Ld. AO erred in making the addition for Rs.3,19,509/- being expenditure added back to the total income u/s 14A of the Act. 3. The appellant reserves the right to add, alter, amend, or withdraw any grounds of appeal
.”
2. Facts of the case in brief are that assessee filed its return of income for AY 2018-19 declaring total income of Rs.7,37,63,440/- on 20.08.2018. The case was selected for scrutiny under CASS on the issues of claim of deduction on account of donation for scientific research and any other deduction. The assessee had claimed deduction of Rs.4,50,37,302/- u/s 35(2AB) of the Act by claiming expenditure of Rs.3,00,24,868/-. The AO observed that as per Form No.3CL issued by the Ministry of Science and Technologies, the actual expenditure was only Rs.2,75,40,000/- and the allowable deduction u/s 35(2AB) on this amount @ 150% works out to Rs.4,13,10,000/-. Therefore, there was claimed of excess deduction of Rs.37,27,302/- (Rs.4,50,37,302 – Rs.4,13,10,000). The assessee replied that the actual expenditure was Rs.3,00,24,868/- but qualifying amount for eligible deduction u/s 35(2AB) was restricted to Rs.2,75,40,000/-. Therefore, the remaining amount of Rs.24,84,868/-, which has been actually incurred, has to be allowed and the excess weighted deduction of Rs.12,42,434/- is to be disallowed and not the entire amount of Rs.37,27,302/-. The AO did not accept reply of the assessee and disallowed Rs.37,27,302/-. Aggrieved by the addition made by AO, assessee filed appeal before CIT(A). The CIT(A) concurred with the finding of the AO and dismissed the ground without giving any reason.
A.Y 18-19 Sahajanand Technologies P. Ltd.
Aggrieved by the order of Ld.CIT(A), appellant filed present appeal before the Tribunal. The Ld. AR has filed paper book and submitted that the Ministry of Science and Technology has allowed whole capital expenditure of Rs.30.15 lakhs for weighted deduction u/s 35(2AB); however, out of total revenue expenditure of Rs.2,70,09,468/-, it allowed Rs.2,45,25,000/-. Hence, the remaining amount of Rs.24,84,868/- was not considered for weighted deduction u/s 35(2AB) of the Act. The Ministry had never said that the above expenses claimed by the assessee are bogus and not incurred for R&D purposes. Hence, the expenses are normal revenue expenditure, allowable u/s 35(1)(i) of the Act.
On the other hand, Ld. CIT-DR for the revenue relied on the orders of the lower authorities.
We have heard both the parties and perused the materials on record carefully. We have also carefully perused the provisions of Sec.35 of the Act. There is no dispute that the appellant incurred revenue expenditure of Rs.2,70,09,468/- and capital expenditure of Rs.30,15,400/- for R&D during the year. Out of the above, the appellant was found eligible for deduction u/s 35(2AB) of the Act in respect of whole capital expenditure and Rs.2,45,25,000/- as revenue expenditure. Therefore, the appellant was eligible for 150% weighted deduction on Rs.2,75,40,000/- i.e., Rs.4,13,10,000/-. The appellant was not eligible for weighted deduction on the remaining amount of Rs.24,84,868/-. Therefore, the disallowance should have been restricted to A.Y 18-19 Sahajanand Technologies P. Ltd. Rs.12,42,434/-, being 50% of Rs.24,84,868/-. The actual expenditure of Rs.24,84,868/- was expenditure of revenue nature, which is allowable u/s 35(1)(i) of the Act. The AO is, therefore, directed to verify the claim of revenue expenditure of Rs.24,84,868/- and allow deduction accordingly. The ground No.1 is allowed for statistical purposes.
The next issue is addition for Rs.3,19,509/- u/s 14A of the Act. The AO has discussed the same at para-25 to 31 of the assessment order and disallowed Rs.3,19,509/- under Rule-8D(2)(ii) of the Income-tax Rule, 1962. The CIT(A) has confirmed the addition made by AO.
The Ld. AR submitted that there was no new investment during the year under consideration and the assessee also did not receive any tax-free or exempt income during the year. The capital and free reserves for the year are much more than the investment made by the assessee. The assessee had also taken interest-free loan of Rs.3,70,90,000/- from the directors of the assessee- company. The assessee has paid interest on loan from the bank or financial institutions for specific purposes. The Ld. AR also submitted that similar addition u/s 14A was deleted by CIT(A) in earlier years i.e., AYs 2012-13 and 2014-15. The Ld. AR relied on the decisions of Hon’ble Supreme Court (i) in the case of South Indian Bank Ltd. vs. CIT in Civil Appeal No.9606 of 2011 and (ii) ACIT vs.M/s Bajaj Resources Ld. [ITA No.4018/Del/2018 dated 24.09.2021]
We have heard the both parties and perused the materials available on record. We have also deliberated the case laws relied upon by Ld. AR for the appellant. The appellant claim that it had not earned any exempt income during assessment year under consideration. The same is not controverted by the Ld. CIT-DR. Therefore, the disallowance is not liable to be sustained as per the decision of the Hon’ble Delhi High Court in cases of PCIT vs. Amadeus India Pvt. Ltd. (2023) 290 Taxman 201 (Del), PCIT vs. Oil Industries Development Board (2019) 103 taxmann.com 325 (Del), (ii) PCIT vs. McDonald (India) Pvt. Ltd. (2019) 101 taxmann.com 86 (Del) and PCIT vs. Vardhman Chemtech (P.) Ltd. (2019) 102 taxmann.com 132/261 Taxman 233 (Punj. & Har.). The SLP was dismissed in PCIT vs. Oil Industries Development Board 262 Taxman 102 (SC). Respectfully following the above decisions, the ground is allowed and AO is directed to delete the addition.
In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in accordance with Rule 34 of ITAT Rules, 1963 on 23/09/2025 in the open court.