ITAT Approves Rs. 4.41 Crore Deduction u/s 37 for R&D Unit Operations u/s 35(2)(AB) of  Income Tax Act

The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) granted deduction under Section 37 as Rs. 4.41 crore expenditure justified for Research and Development ( R&D ) unit operations under Section 35 (2) AB of the Income Tax Act, 1961.

The revenue- assessee Deputy Commissioner of Income Tax had e-filed its return of income on 30.11.2016, declaring total income of INR 14,22,64,180/-. The case was selected for scrutiny assessment and the assessment under Section 143(3) of the Income Tax Actwas framed on 22.12.2018 at Rs. 16,14,72,606/- by making disallowance of INR 15,21,372/- by invoking the provision of section 40(a)(i) of the Income Tax Act; disallowance under Section 35(2)(AB) of the Act at Rs. 1,76,87,054/- and relief claimed under Section 90 of the Income Tax Act of Rs. 24,37,344/- was restricted to NIL.

Thereafter, the Assessing Officer (AO) initiated penalty proceedings under Section 271(1)(c) of the Income Tax Act and vide order dated 28.06.2019, imposed penalty in respect of disallowance of INR 1,76,87,054/- for furnishing inaccurate particulars of income. Thus, the AO imposed a penalty of Rs. 60, 11,830/-.

Mr. Vivek Vardhan representing the appellant submitted that the assessee had wrongly claimed deduction under Section 35(2)(AB) of the Income Tax Act hence, he furnished inaccurate particulars of income. He contended that under the facts, the AO was justified in imposing the impugned penalty. Had the case of the assessee been not taken up for scrutiny, the correct figure of claim would have gone unnoticed. The AO correctly held that the assessee is guilty of furnishing inaccurate particulars of income. He prayed for sustaining the impugned penalty. As the CIT (A) was not justified in deleting the penalty under the facts of the present case

Mr Ved Jain, representing the assessee reiterated the submissions as made in the Synopsis. He submitted that it is not the case of concealment or furnishing of inaccurate particulars of income. In fact, the assessee had incurred expenditure of INR 4.41 crores for running/operation of Research & Development activities. However, the Department of Scientific and Industrial Research (“DSIR”) in respect of expenditure of INR 4.41 crores claimed by the assessee, restricted it to the extent of INR 2.85 crores. It was contended that the AO has not disallowed the expenditure as not being genuine. The expenditure was disallowed on the basis that DSIR had restricted this expenditure to INR 2.85 crores

The bench noticed that the assessee had claimed deduction of Rs.4,41, 39,054/- under Section 35(2) AB of the Income Tax Act, 1961. The assessee was asked to produce the relevant approval of the competent authority. In response, the assessee explained that amount of Rs. 4.41 crores was spend for the running/operation of R&D unit established as per provisions of Section 35(2) AB of the Income Tax Act.

Further the assessee has also admitted that the Secretary DSIR had restricted/confirmed this expenditure to Rs. 2.85 crores. Assessee had also submitted that the additional deduction of Rs. 4.41 crores claimed under Section 35(2) AB of the Income Tax Act stands restricted to 2.85 crores and the basic expense of Rs. 4.41 crores is eligible expenditure under Section 37(1) of the Income Tax Act.

It was observed by the AO that as the competent authority had approved only amount of Rs. 2,64,52,000/- against the expenditure of Rs. 4,41,39,054/- claimed by the assessee, thus, the assessee was  not entitled to the differential amount of Rs. 1,76,67,054/- and the same was disallowed by adding back to the income of the assessee.

It was submitted that section 35(2) AB provides for 200% deduction of the amount spent by assessee on R&D activities. During the year the Appellant had spent Rs. 4, 41, 39,054/- on R&D units approved by DSIR under Section 35(2)(AB) of Income Tax Act and accordingly claimed 200% deduction on the said amount. But DSIR approved only Rs. 2,64,52,000/- out of the above amount and the appellant accordingly reduced its deduction under Section 35(2)(AB) by Rs. 1,76,87,054/-during the assessment proceedings.  The two member bench of the tribunal comprising Balaganesh (Accountant member) and and Kul Bharat (Judicial member) concluded that the genuineness of expenditure of basic amount of Rs. 4, 41, 39,054/- had never been in question during the assessment proceedings, the AO had verified these expenses during the assessment proceedings and allowed them as deduction under Section 37 of the Income Tax Act

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