The Visakhapatnam Bench of Income Tax Appellate Tribunal ( ITAT ) allowed a weighted deduction under Section 35(2AB) of Income Tax Act,1961 for the assessee, classifying funding received from the Department of Scientific & Industrial Research ( DSIR ) as a soft loan rather than a grant.
Arrdy Engineering Innovations (P.) Ltd., the appellant-assessee, engaged in the production of temperature molten metal and quality measurement equipment, filed its return for the assessment year 2012-13. The assessment, completed under section 143(3) on 26.03.2015, recorded a loss of Rs. 44,92,050, with taxes paid under section 115JB.
Later, it was discovered that the assessee had an Research and Development (R&D) agreement with the DSIR dated 23.11.2010. The assessee claimed R&D expenses of Rs. 1,72,85,369 and sought a weighted deduction of Rs. 3,45,70,738 under section 35(2AB). The AO noted a grant of Rs. 50,00,000 from DSIR, determining that the allowable deduction was Rs. 1,22,85,369 after subtracting the grant, leading to a disallowance of the excess claim of Rs. 1,00,00,000 and reopening the assessment under section 147.
The assessee failed to respond to notices issued under sections 148 and 142(1) in September and November 2018. As a result, the AO concluded by disallowing the additional weighted deduction claim of Rs. 1,00,00,000.
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The assessee, dissatisfied with the AO’s order, appealed to the Commissioner of Income Tax (Appeals)[CIT(A)]. In the appeal, the assessee claimed that the amount received from DSIR was an unsecured loan, repayable in five equal installments, rather than a grant or subsidy.
However, the CIT(A) dismissed the appeal, concluding that the assessee mischaracterized the funds to claim an excessive deduction under section 35(2AB) of the Act. The assessee appealed before the tribunal.
The tribunal heard both parties and reviewed the relevant records and agreements. The Assessing Officer argued that the amount received from DSIR was a grant-in-aid repayable as royalty, thus not qualifying for a weighted deduction under section 35(2AB).
The Authorized Representative (AR) contended that the funds were classified as a soft loan, similar to a previous Rs. 70,00,000 loan received under the same terms. The Ministry of Science and Technology confirmed that the earlier funds were indeed a soft loan, not a grant.
The appellate tribunal noted that the terms of the agreements were identical for both assessment years. The assessee categorized the DSIR amount as an unsecured loan, which the revenue did not dispute. Additionally, an invoice showed interest payments with tax deducted at source.
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The Division Bench of Duvvuru RL Reddy(Judicial Member) and S.Balakrishnan(Accountant Member) based on these findings,determined that the amount was a soft loan, not a grant-in-aid, and allowed the weighted deduction under section 35(2AB), directing the AO to reverse the disallowance.
In conclusion, the appeal was allowed.
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