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Facts
The assessee claimed R&D expenses as revenue expenditure. The AO treated these expenses as capital expenditure and disallowed them. The CIT(A) upheld the AO's order. The assessee appealed this decision.
Held
The Tribunal held that since the assessee had not earned any exempt income, the disallowance under Section 14A read with Rule 8D was not warranted. Regarding the R&D expenses, even if treated as capital in nature, they were eligible for deduction under Section 35(1)(vi) of the Act, and depreciation under Section 32.
Key Issues
Whether disallowance under Section 14A r.w. Rule 8D is justified without exempt income? Whether R&D expenses are revenue or capital in nature and eligible for deduction/depreciation?
Sections Cited
14A, Rule 8D, 35(1)(vi), 32
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC, New Delhi dated 01/04/2024 in DIN No. ITBA/NFAC/S/ 250/2024-25/1063826441(1) for the assessment year 2015-16.
The first issue raised by the assessee is that the ld. CIT(A) erred in confirming the order of the AO by substantiating the disallowance of Rs. 26,05,766/- under the provisions of sec. 14A r.w. Rule 8D of Income- tax Rules.
The AO during the assessment proceedings found that the assessee has shown investment in his balance sheet amounting to Rs. 11,22,84,058/- as on 31/03/2015 but the assessee has not made any
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disallowance of expense under the provisions of sec. 14A r.w. Rule 8D of the Income-tax Rules. Thus, the AO invoked the provisions of rule 8D of Income Tax Rules and worked out the amount of disallowance of Rs. 26,05,766/- and added to the total income of the assessee. On appeal, the ld. CIT(A) upheld the finding of the AO.
Being aggrieved by the order of the ld. CIT-A, the assessee is in appeal before us.
The ld. AR before us filed a paper book running from pages 1 to 248 and contended that the assessee has not earned any exempted income in the year under consideration, therefore, there cannot be any disallowance u/s 14A r.w. Rule 8D of Income Tax Rules.
6.1 On the other hand, the ld. DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the assessee has not earned any exempt income in the year under consideration, therefore, in the absence of any exempt income, no disallowance under section 14A r.w.r. 8D of Income Tax Rules is warranted. In holding so, we rely on the judgment of Hon’ble High Court of Gujarat in the case of CIT vs. Corrtech Energy Private Limited reported in 45 taxmann.com 116 where it was held that the provision of section 14A of the Act cannot be applied in the absence of any exempted income. The relevant observation of the Hon’ble Bench reads as under:
Section 14A(1) provides that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the instant case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the Tribunal held that disallowance
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under section 14A could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed that where the assessee did not make any claim for exemption, section 14A could have no application.
Respectfully following the orders of the Hon’ble High Court as mentioned above, we hold that disallowance under the provision of section 14A r.w.r. 8D of Income Tax Rules cannot exceed the exempted income in the given facts and circumstances. As such, there is no dividend income in the year under consideration and therefore, there cannot be any disallowances of the expenses as envisaged under the provision of section 14A r.w.r. 8D of Income Tax Rules. Hence, the ground of appeal of the assessee is allowed.
The second issue raised by the assessee is that the ld. CIT(A) erred in confirming the disallowance made by the AO for Rs. 64,17,825/- treating the same as capital expenses.
8.1 The assessee in the year under consideration has claimed expenditure under the head R&D Division amounting to Rs. 64,17,825/-, which was incurred for the development of new products, up gradation of existing and customization of standard products and services. However, the AO was of the view that the benefit of such expenses is of enduring nature and, therefore, the same should be treated as capital expenditure. Thus, the AO disallowed the same and added to the total income of the assessee.
On appeal, the ld. CIT(A) also confirmed the order of the AO by observing as under:
“2. In ground no.2, assessee objects to treating Rs.6417825 being R&D expenses as Capital expenses. Alternately assessee wants to claim depreciation as well as deduction u/s 35(1)(iv). On verification, it was found that these expenses incurred on R&D, result in customization and upgradation
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of existing products. Upgraded products will be manufactured and sold over the years. Hence, expenses incurred on R&D has enduring benefit and is rightly treated as Capital in nature. Further, assessee did not make any claim of depreciation or deduction u/s 35(1)(iv) in the ITR or before the AO during the course of assessment proceedings and hence considered only as an afterthought. The action of the AO is fully justified. The grounds on this issue are dismissed.” 10. Being aggrieved by the order of the ld. CIT-A, the assessee is in appeal before us.
The ld. AR before us contended that the expenditure incurred under the head R&D is revenue in nature and, therefore, the same cannot be treated as capital in nature. Besides the above, the ld. AR also contended that if such expenses are treated as capital in nature, then the same is also eligible for deduction u/s 35(1)(vi) of the Act. Likewise, if such expenses are treated as capital in nature, then the revenue should have allowed the depreciation thereon.
On the other hand, the ld. DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. As far as genuineness of the expenses is concerned, the authorities below have not doubted. As such, the impugned expenses were treated as capital in nature by the concurrent authorities. Therefore, the disallowance was made by the lower authorities. Assuming the findings of the authorities below are correct, then also the Revenue was bound to allow the depreciation under the provisions of sec. 32 of the Act on such expenses but the Revenue has not done so, despite the assessee has raised its contention before the ld. CIT(A).
13.1 Moving further, the expenses in dispute were incurred for research and development. Accordingly, even if such expenses are
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treated as capital in nature, then these are also eligible for deduction u/s 35(1)(vi) of the Act but Revenue did not do so despite the assessee having made claim before the ld. CIT(A). As such, without going into the merit of the case, we note that the assessee is eligible for the capital expenditure under the provisions of sec. 35(1)(vi) of the Act. The relevant extract of the order reads as under:
11 (1) In respect of expenditure on scientific research, the following deductions shall be allowed— XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(iv) in respect of any expenditure of a capital nature on scientific research 35related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2) :
13.2 In view of the above, we set aside the findings of the ld. CIT(A) and direct the AO to allow the deduction of the expenditure in dispute. Accordingly, the ground of appeal raised by the assessee is allowed.
In the result, the appeal filed by the assessee is hereby allowed.
Order pronounced in court on 22nd day of July, 2024 Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore, Dated, 22nd July, 2024 vms
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Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore
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