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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH
Before: Shri P.M. Jagtap & Shri Siddhartha Nautiyal
Revenue by: Shri C.S. Sharma, Sr. D.R. Assessee by: Shri Rushin Patel for Shri M.J. Shah, A.R. Date of hearing : 14-02-2022 Date of pronouncement : 23-02-2022 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-
The captioned appeal has been filed at the instance of the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-1dated 27/11/2017 relevant to assessment year 2014-15.
The assessee has raised following (revised) grounds of appeal:-
Page No. 2 Crest Composites & Plastics Pvt. Ltd. vs. DCIT
“1. The learned C.I.T. (Appeals) erred in law and on facts in disallowing the commission of Rs.4,12,500/- to persons specified u/s.40A(2)(b) of the I.T, Act, 1961.
1.1. The learned C.I.T. (Appeals) failed to appreciate the language of section 40A(2)(b) which in clear terms states that only excessive or unreasonable claim with respect to fair market value requires disallowance and not the whole expenditure.
2. The learned C.I.T. (Appeals) erred in law and on facts in disallowing the deduction claimed to the extent of Rs.11,44,376/- as Research & Development Expenses u/s.35(2AB) of the Act and also in alternatively disallowing the same u/s. 37 of the Act.
The appellant craves liberty to add, amend, alter or delete any of the grounds of appeal, if need be arise.”
The first ground of appeal is in respect of disallowance of commission of Rs. 4,12,500/- to persons specified u/s 40A(2)(b) of the Act.
3. The brief facts of the case are that the assessee company carries on the business of manufacturing of polymer resins and chemicals. During the year, the assessee paid commission to four parties- Prakash Udeshi HUF (Rs. 3,24,000/-), Ami Udeshi (Rs. 3,24,000/-), Ranajit Sen HUF (Rs. 2,64,000/-) and Sushanta Kumar Pramanik HUF (Rs. 1,48,500/-). The Ld. AO during the course of assessment proceedings asked the assessee to justify such commission payment along-with details of services rendered in view of section 40A(2)(b) of the Act. In response thereto, the assessee vide letter dated 22.11.2016 furnished details of services rendered, which were towards commission for collection of old and doubtful debts, sales promotion, commission for loan syndication through SIDBI. The Ld. AO however rejected the assessee’s claim by holding that no documentary evidence was Page No. 3 Crest Composites & Plastics Pvt. Ltd. vs. DCIT furnished in support of recovery of outstanding debt, no details of sales promotion actually materializing has been furnished etc. Accordingly, the Ld. AO disallowed assessee’s claim of commission of Rs. 7,36,500/-. The assessee preferred appeal before CIT(A), in which the assessee obtained part relief in respect of two parties. However, in respect of payment made to Ranajit Sen HUF (Rs. 2,64,000/-sales promotion) and Sushanta Pramanik HUF (Rs. 1,48,500/- Sales promotion), the Ld. CIT(A) held that the assessee has not been able to demonstrate how family members of both these HUF are technically qualified to promote the techno-commercial activities of the family business. Secondly, CIT(A) held that the assessee has failed to furnish documentary evidences in respect of its claim of sales affected by receipt of the commission and thirdly, since the HUF’s are not assessed at the maximum marginal rates for tax purposes, this is a ploy by the assessee to reduce incidence of tax. Accordingly, Ld. CIT(A) allowed part relief to the assessee and confirmed the addition in respect of payment to these two parties amounting to Rs. 4,12,500/- u/s 40A(2)(b) of the Act.
4. Before us, the ld. A.R. of the assessee submitted that the issue has been decided in favour of the assessee on identical set of facts in the immediately preceding year A.Y. 2013-14 in assessee’s own case by ITAT Ahmedabad. The assessee submitted that in the preceding year also the same issue for consideration was before ITAT Ahmedabad in respect of commission paid to same parties to whom similar payments for commission has been made in this year as well. The A. R. of the assessee drew our attention to para 4.3 of the assessment order where the ld. Assessing Officer has himself noted that in the immediately preceding year, the Assessing Page No. 4 Crest Composites & Plastics Pvt. Ltd. vs. DCIT Officer had made disallowance on identical facts which have been confirmed and upheld by the first appellate authority in the preceding year. The assessee drew our attention to para 10 at page no. 8 of ITAT Ahmedabad order of assessee’s own case for the immediately preceding year A.Y. 2013-14. The ld. Departmental Representative placed reliance on the observations of the ld. CIT(A) while confirming the addition for excess commission payments u/s. 40A(2)(b) of the Act.
We have heard rival contentions and perused the order of ITAT in assessee’s own case for immediately preceding year i.e. A.Y. 2013-14. We note that in the immediately preceding year ITAT Ahmedabad deleted the disallowance of commission u/s.40A(2)(b) of Act the with the following observations. “10. Heard both the sides and perused the material on record. During the course of assessment, the Assessing Officer has disallowed the expenditure incurred on payment of commission to persons specified u/s. 40A(2)(b) stating that assessee has failed to establish the genuineness of the expenditure. On perusal of the material on record, it is observed that during the course of assessment, the assessee has explained the specific services rendered by the parties to whom the commission was paid along with the detail of their expenses and TDS on the transaction of commission payment. We have also gone through the different pages of the paper book pertaining to the details of commission expenditure furnished by the assessee. In the paper book submitted, the assessee placed copies of invoices raised by the commission agent, along with ledger account, acknowledgement of Page No. 5 Crest Composites & Plastics Pvt. Ltd. vs. DCIT
income tax return for A.Y. 2013-14. The assessee has also enclosed the copies of I.T. returns filed by these parties showing the amount of commission earned in their return of income. It is noticed that Assessing Officer has not made any further verification, investigation and examination from the parties to whom the sales were made through the commission agents to disprove the facts reported by the assessee in its submission. The Assessing Officer has not demonstrated any material or information gathered to disprove the genuineness of the expenditure incurred on commission payment of Rs. 6 lacs, therefore, we consider the decision of the ld. CIT(A) to sustain the disallowance is not justified. Therefore, we do not find any merit in the decision of ld. CIT(A) and the appeal of the assessee is allowed.”
In our view, since the facts in the immediately preceding year both in respect of the nature of payments i.e. commission paid as well as the parties to whom the payments were made are identical, we accordingly allow the assessee’s appeal and the disallowance on account of commission u/s. 40A(2)(b) is hereby deleted.
In the result, appeal of the assessee is allowed in respect of Ground Number 1.
We shall now deal with Ground Number 2. in respect disallowance of claim of deduction u/s 35(2AB) of the Act.
Page No. 6 Crest Composites & Plastics Pvt. Ltd. vs. DCIT
The brief facts in respect of this Ground is that during the year, the assessee claimed weighted deduction u/s 35(2AB) towards research and development amounting to Rs. 87,38,376/-. During the assessment, the Ld. AO noted that as per certificate issued by DSIR (Department of Scientific and Industrial Research), the amount of expenditure approved is Rs. 36,48,000/- towards revenue expenditure and Rs. 1,49,000/- towards capital expenditure, whereas the assessee has claimed revenue expenditure of Rs. 47,30,129/- and capital expenditure of Rs. 1,49,281/- on which weighted deduction of 200% has been availed. The Ld. AO asked the assessee why the non-approved amount should not be disallowed and added back to income of the assessee. The assessee submitted that expenses incurred on R&D activities are allowable since all these expenses are incurred wholly and exclusively for the purpose of business. In the alternative, the assessee submitted that the deduction may be allowed u/s. 37 or u/s 32 of the Act since all these expenses are incurred wholly and exclusively for the purposes of business of the assessee. The Ld. AO however disallowed the excess claim over and above the amount approved by DSIR and added a sum of Rs. 11,44,376/- to the income of the assessee. The Ld. AO further held that claim of the assessee that these expenses may be considered under other sections is also not tenable since finding of DSIR is limited to certification of the allowable deduction under the respective section and does not certify the eligibility of the claim of the assessee under any other section of the Act. On appeal, the Ld. CIT(A) upheld the order of the Ld. AO by observing that DSIR has approved the expenses after due procedure of verification and the action of AO in disallowing the excess expenditure seems proper.
Page No. 7 Crest Composites & Plastics Pvt. Ltd. vs. DCIT
Before us, the Ld. AR of the assessee argued that this issue has been decided in favour of the assessee by ITAT Ahmedabad in the assessee’s own case for the immediately preceding assessment year, AY 2013-14, where on identical sets of facts, the Tribunal has decided the issue in favour of the assessee. The assessee submitted that the law as it stood for the captioned assessment year provided that the deduction would be available if the in- house ‘facility’ has been approved by the prescribed authority (being DISR) and there is no mention of approval of ‘quantum’ of expenditure by the authority u/s 35(2AB) of the Act. It is only with effect from 01/07/2016 that the prescribed authority is required to ‘quantify’ the approved amount of expenditure. Therefore, the weighted deduction on the expenditure incurred on in-house research is allowable u/s 35(2AB) of the Act.
The Ld. Departmental Representative relied upon the observations of Ld. CIT(Appeals) and submitted that once the prescribed authority has quantified the approved amount of expenditure, there is no scope of allowability of any expenditure over and above such amount approved amount.
We have heard the rival contentions and perused the judgment on which reliance has been placed by the AR of the assessee. We note that the ITAT, Ahmedabad for the immediately preceding year on identical set of facts has adjudicated the issue in favour of the assessee. The ITAT in the above Ruling held that this issue has been dealt with by the ITAT Ahmedabad in the case of Sun Pharmaceuticals v Pr. CIT 164 ITD 484 which has been approved by the Gujarat High Court vide reported decision Page No. 8 Crest Composites & Plastics Pvt. Ltd. vs. DCIT in 250 taxmann 270 (Guj). The ITAT Ahmedabad also placed reliance on the Mumbai ITAT Ruling in the case of M/s. Crompton Greaves Ltd. vs. ACIT dated 27.09.2019 vide & 5390/Mum/2017, wherein on identical set of facts, the issue of weighted deduction has been allowed in favour of the assessee. The ITAT Ahmedabad in the assessee’s own case allowed the appeal with the following observations: “In the above cited findings, the ITAT has also referred the decision of the ITAT, Ahmedabad in the case of Sun Pharmaceutical Ind. Ltd. Vs. Pr. CIT (2017) 162 ITD 484 as upheld by the Hon'ble Gujarat High Court vide its decision reported at 250 taxman 270. In the light of the findings as supra and amendment to sub-section (3) of section 35 w.e.f. 1-04-2016 for furnishing of report, we consider that there is nothing before us on hand differs from the cases cited (supra) so as to take a different view on this issue. Therefore, since the issue on hand being squarely covered following the principle of consistency, we find merit in the submission of the assessee and allowed the claim of deduction. Therefore, this ground of appeal is allowed.”
10.1 We may also state that this principle has been reiterated in various judgments passed by Tribunal on several occassions. The Pune ITAT in the case of Cummins India Ltd. v. DCIT [2018] 96 taxmann.com 576 (Pune - Trib.) made the following relevant observations, while deciding the issue on identical facts in favour of the assessee:
Page No. 9 Crest Composites & Plastics Pvt. Ltd. vs. DCIT
“Clause (b) to sub-rule (7A) has been substituted by IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016, under which the prescribed authority has to furnish electronically its report (i) in relation to approval of in-house R & D facility in part A of form No.3CL and (ii) quantifying the expenditure incurred on in-house R & D facility by the company during the previous year and eligible for weighted deduction under sub-section 2AB of section 35 of the Act in part B of form No.3CL. In other words the quantification of expenditure has been prescribed vide IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016. Prior to this amendment, no such power was with DSIR i.e. after approval of facility.
Under the amended provisions, beside maintaining separate accounts of R & D facility, copy of audited accounts have to be submitted to the prescribed authority. These amendments to rules 6 and 7a are w.e.f. 01.07.2016 i.e. under the amended rules, the prescribed authority as in part A give approval of the facility and in part B quantify the expenditure eligible for deduction under section 35(2AB) of the Act.
The issue which is raised before us relates to pre-amended provisions and question is where the facility has been approved by the prescribed authority, can the deduction be denied to the assessee under section 35(2AB) of the Act for non issue of form No.3CL by the said prescribed authority or the power is with the Assessing Officer to look into the nature of expenditure to be allowed as weighted deduction under section 35(2AB) of the Act. The first issue which arises is the Page No. 10 Crest Composites & Plastics Pvt. Ltd. vs. DCIT recognition of facility by the prescribed authority as provided in section 35(2AB) of the Act.
…..The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below.”
10.2 We also note that the ITAT Pune Tribunal in the recent case of DCIT v. Force Motors 133 taxmann.com 71 (Pune - Trib.) while dealing with identical issue held that prior to amendment in 2016, section 35(2AB) of the Act does not provide any methodology of approval to be granted by prescribed authority vis-a-vis expenditure from year to year and therefore, order of Assessing Officer in curtailing expenditure and consequent weighted deduction claimed under section 35(2AB) on ground that deduction cannot exceed claims approved by prescribed authority, had rightly been set aside. The Pune ITAT, while passing the order, observed as below:
Page No. 11 Crest Composites & Plastics Pvt. Ltd. vs. DCIT
“10. Therefore, there is categorical finding given by the Tribunal that the amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 1-7-2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No. 3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure/methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act. The case before us pertains to FY 2013-14 relevant to AY 2014-15 and therefore, facts and circumstances are absolutely identical in assessee’s case also. Therefore, respectfully, following the order of the Tribunal (supra.) on the same parity of reasoning and under same set of facts and circumstances, we find no reason to interfere with the findings of the Ld. CIT(Appeal) and relief provided to the assessee is hereby sustained. Thus, grounds raised by the Revenue are dismissed.”
10.3 The Kolkota Tribunal in recent case of DCIT v. STP Ltd.[2021] 125 taxmann.com 97 (Kolkata - Trib.) held that prior to 1-6-2016, only requirement to claim deduction under section 35(2AB) was to receive recognition from prescribed authority since said recognition was obtained by assessee on 26-3-2013, deduction could not be denied merely because prescribed authority failed to send intimation in Form 3CL in respect of expenditure incurred by R&D unit for relevant assessment year.
Page No. 12 Crest Composites & Plastics Pvt. Ltd. vs. DCIT 10.4 In the case of ACIT v. Crompton Greaves Ltd.[2019] 111 taxmann.com 338 (Mumbai - Trib.), the Mumbai Tribunal held that since the mandate of approval of quantum of expenditure had been put in place only with effect from 1-7-2016, hence, non-approval of quantum of expenditure for assessment year 2009-10 did not entitle Assessing Officer to make disallowance under section 35(2AB) of the Act. The Mumbai ITAT in the above case made the following observations: “9. The operative phrase here is "on in-house research and development facility as approved by the prescribed authority …….", the word "facility" has been hereby show us to emphasis the point that it is the unit which requires approval of the prescribed authority under this provision. Further, in the memorandum, explaining the provision of section and the notes on the clauses issued at the time of insertion of section 35(2AB) in the Act, copies of both of which have been filed on record before us by the assessee, it has been clearly provided that the deduction would be available to the assessee's having an approved in-house R & D facility by the prescribed authority. Undisputedly, there is no mention or approval of the quantum of expenditure.
10.4 In our view, on a perusal of the various Rulings, the position is clear that prior to amendment introduced w.e.f. 01/07/2016, the deduction u/s 35(2AB) of the Act would be available to an assessee having an approved in-house R&D facility by the prescribed Authority Act and there is no mention of approval of the ‘quantum’ of expenditure in the law as it stood prior to that date. The mandate of quantification of expenditure has been put Page No. 13 Crest Composites & Plastics Pvt. Ltd. vs. DCIT in place only w.e.f. 01.07.2016. In view of the above observations and also the decision of the Ahmedabad Tribunal in assessee’s own case for immediately preceding year, where on identical set of facts, the assessee’s appeal has been allowed, we allow the appeal of the assessee.
10.5 In the result, appeal of the assessee is allowed in respect of Ground Number 2.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 23-02-2022 Sd/- Sd/- (P.M. JAGTAP) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 23/02/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद