2024 (9) TMI 1737 - AT - Income Tax

Disallowance of weighted deduction on R D expenses u/s 35(2AB) - expenditure not approved by the DSIR in Form 3CL - HELD THAT - Deduction claimed for these approved R D centers was duly audited and certified by statutory auditors in annual report. As noted that DSIR is an authority for approval of R D facility. And once facility is approved expenditure incurred by it qualifies for deduction u/s.35(2AB) irrespective of DSIR approval as per the law in force. As noted the R D Facility has been approved as required by the authority i.e. DSIR. The settled position as per the law in force is that once facility is approved expenditure incurred in this regard qualifies for deduction u/s.35(2AB) of the Act until amendment was brought in Rule 6(7A) of the of the Income Tax Rules 1962 w.e.f. 01.07.2016 (relevant to AY 2017-18). Therefore the AO/Ld.CIT(A) erred in disallowing the weighted deduction u/s.32(2AB) of the Act on the expenditure incurred in an approved in-house R D facility. In other words deduction can t be restricted to the amount of expenditure quantified by the DSIR before the AY 2017-18. We allow this ground of appeal of the assessee and direct the AO to grant/deduction on R D expenditure. Disallowance of software expenditure u/s.40(a)(i) of the Act for non-deduction of tax at source - assessee purchased software (off-the-Shelf application software) for R D centers and capitalized the same in its books of account on which admittedly TDS wasn t deducted - HELD THAT - We find force in the submissions of AR and note that the claim of the assessee for allowing expenditure on account of purchase of software license couldn t have been denied by the AO. It is noted that the AO erred in relying on the amendment brought in by Finance Act 2012 (albeit retrospectively from 01.04.1976) because assessee couldn t have contemplated such a requirement (tax to be deducted at source) when it made payment in the relevant year that it requires deduction of Tax at source due to future amendments with retrospective effect. And since assessee can t be expected to perform an impossible task which came into effect undisputedly by Finance Act 2012 therefore applying the legal maxim lex non cogit ad impossiblia we are of the considered view that retrospective operation of explanation u/s.9(1)(vi) of the Act can t be used to deny the claim of the assessee as held in the case of CIT v. M/s. NGC Networks (India) Pvt. Ltd. 2018 (5) TMI 1148 - BOMBAY HIGH COURT We allow this ground of appeal of the assessee and direct the AO to allow the expenses incurred for purchase of software and other alternate grounds on this issue are left open. Disallowance u/s.14A r.w.r.8D while computing book profit u/s.115JB - HELD THAT - We note that assessee suo-moto disallowed expenditure u/s.14A while computing of book profit u/s.115JB of the Act. According to the Ld.AR provisions relating to normal tax computation can t be imported into sec.115JB of the Act which is a separate code by itself. In other words Rule 8D computation for disallowance u/s.14A can t be used for making adjustment for computation of book profit u/s.115JB of the Act and relied on the decision of Vireet Investment (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI which decision has been upheld by the Hon ble Bombay High Court. He also pointed out that the Ld.CIT(A)/NFAC in the assessee s own case for AY 2018-19 appreciated the aforesaid submissions of the assessee and allowed the claim of the assessee. Disallowance of depreciation and maintenance cost of aircrafts - HELD THAT - We note that the assessee had purchased an aircraft in AY 2007-08 due to it increased business in international circuit. It is noted that at times the assessee has leased the said aircraft to third parties for use on which fees was earned and the same was offered to tax as business income. AO called for the relevant log entries. According to the AO the assessee couldn t give the details regarding specific business activities carried out based on the logbook entries which could prove the business exigency for owning maintaining aircraft. According to the AO the assessee failed to furnish the requisite logbooks which are required to be maintained as per Rule 6 of Aircraft Rules 1937. AR countered the observations made by the AO and submitted that details regarding aircraft movement was duly submitted before the AO. It was pointed out by theAR that the cost of Aircraft in 2006 was allowed as part of the opening WDV as on 01.04.2009 and depreciation allowance on opening WDV therefore is automatically available. It was pointed out by the Ld.AR that in the assessee s own case this Tribunal for AYs 2007-08 2008-09 directed the AO to grant deduction for depreciation on aircraft operating expenditure after examining leasing requirements and the AO pursuant to the order of the Tribunal after verification of the relevant facts vide impugned being convinced allowed the claim for operating expenditure depreciation on aircraft. AR also brought to our notice that the CIT(A) for AY 2009-10 has already allowed the claim of the assessee. In the light of the order of the Tribunal (supra) we set aside the impugned order back to the file of the JAO to examine this issue as directed in the order of the Tribunal 2016 (11) TMI 1152 - ITAT MUMBAI in the assessee s own case and pass order in accordance to law after hearing the assessee. Depreciation on UPS @60% granted by theCIT(A) instead of 15% granted by the AO - HELD THAT - We note that the assessee claimed depreciation @ 80% on UPS stabilizers etc. as part of block of Energy saving equipment since Automatic power cut-off devices mounted on motors/ Automatic voltage controllers were eligible for depreciation @ 80%. Reliance was placed on Godfrey Philips India Ltd. 2012 (12) TMI 865 - ITAT MUMBAI However we note that in the assessee s own case when similar claim came up before this Tribunal in AY 2005-06 2009-10 (supra) this Tribunal allowed depreciation @ 60% since it is part of the computer accessories and which has been granted by the Ld.CIT(A). Therefore we don t find infirmity in the action of the Ld.CIT(A) and uphold his action and dismissed the Ground of the Revenue.

Summary

The core legal questions considered in this judgment pertain to the following issues:

1. Whether weighted deduction under section 35(2AB) of the Income Tax Act, 1961, can be disallowed on R&D expenditure not quantified or approved by the Department of Scientific & Industrial Research (DSIR) prior to the amendment of Rule 6(7A) of the Income Tax Rules, 1962.

2. Whether expenditure on purchase of software licenses without deduction of tax at source (TDS) can be disallowed under section 40(a)(i) of the Act for failure to deduct TDS, considering retrospective amendment clarifying software as royalty.

3. Whether disallowance under section 14A read with Rule 8D of the Income Tax Rules can be made while computing book profit under section 115JB of the Act.

4. Whether depreciation and maintenance costs claimed on aircraft can be disallowed due to lack of requisite logbooks and absence of non-schedule operator license from the Director General of Civil Aviation (DGCA) for the relevant assessment year.

5. Whether depreciation on Uninterruptible Power Supply (UPS) equipment should be allowed at 60% (as part of computer accessories) or restricted to 15% (as per the AO's view that UPS is not an energy-saving device).

Issue-wise Detailed Analysis:

1. Weighted Deduction on R&D Expenditure under Section 35(2AB)

The legal framework involves section 35(2AB) of the Income Tax Act, which grants weighted deduction for scientific research expenditure incurred by an approved in-house R&D facility, with the DSIR as the prescribed approval authority. The relevant Rules, specifically Rule 6(7A) of the Income Tax Rules, were amended effective 01.07.2016 to require DSIR to quantify expenditure for approval.

The AO disallowed weighted deduction beyond the expenditure approved by DSIR in Form 3CL, restricting the claim to Rs.15,901.80 lakhs of revenue expenditure and Rs.4,306.28 lakhs of capital expenditure. The Ld. CIT(A) upheld this restriction, emphasizing that the AO cannot grant weighted deduction beyond DSIR's quantified approval.

The Tribunal noted that for AY 2010-11, the amendment mandating DSIR to quantify expenditure was not yet in force. Prior to this amendment, DSIR's role was limited to approving the R&D facility, not quantifying expenditure. The Tribunal relied on precedents including the Tribunal's decision in M/s. Sundaram Fasteners Ltd. and Crompton Greaves Ltd., which held that before the 2016 amendment, once the facility was approved, all expenditure incurred qualified for deduction under section 35(2AB), regardless of DSIR's quantification.

The Tribunal concluded that the AO and CIT(A) erred in restricting the weighted deduction to the quantum approved by DSIR. The disallowance of Rs.34,92,94,618/- was therefore set aside, and the AO was directed to grant weighted deduction on the full R&D expenditure incurred by the approved in-house facilities.

2. Disallowance of Software Expenditure under Section 40(a)(i) for Non-Deduction of TDS

The AO disallowed Rs.1,03,21,040/- spent on purchase of software licenses due to non-deduction of TDS, relying on the retrospective amendment by Finance Act, 2012, which inserted Explanation (4) to section 9(1)(vi) of the Act, clarifying that payments for transfer of rights to use software constitute "royalty."

The CIT(A) upheld the disallowance, holding that the amendment was clarificatory and thus applicable retrospectively, making the software purchase payments subject to TDS under the definition of royalty.

The Tribunal examined the facts and noted that the software was capitalized as an asset and that the assessee had not deducted TDS as the amendment was not in force at the time of payment. The Tribunal relied on the legal maxim "lex non cogit ad impossibilia" (law does not compel the impossible) and held that the assessee could not be expected to comply with a retrospective amendment that was unknown at the time of payment.

The Tribunal further distinguished the retrospective amendment under the Income Tax Act from the provisions of the Double Taxation Avoidance Agreement (DTAA), noting that DTAA's definition of royalty does not encompass software purchase as royalty for TDS purposes.

The Tribunal relied on the Bombay High Court decision in CIT v. M/s. NGC Networks (India) Pvt. Ltd., which held that retrospective amendments cannot be used to disallow expenditure where the assessee could not have anticipated the amendment at the time of payment.

Consequently, the Tribunal allowed the claim of software expenditure and directed the AO to permit the deduction of Rs.1,03,21,040/-.

3. Disallowance under Section 14A read with Rule 8D for Computation of Book Profit under Section 115JB

The AO disallowed Rs.11,64,109/- under section 14A read with Rule 8D while computing book profit under section 115JB, without detailed discussion.

The CIT(A) upheld the disallowance, reasoning that section 115JB is a separate code but permits additions as per Explanation I of section 115JB(2)(f), which includes expenditure relatable to exempt income.

The Tribunal considered the assessee's submission that Rule 8D disallowance under normal tax computation provisions cannot be mechanically applied to book profit computation under section 115JB. The Tribunal relied on the Special Bench decision in ACIT v. Vireet Investment (P) Ltd., upheld by the Bombay High Court, which held that Rule 8D disallowance is not applicable for book profit computation under section 115JB.

The Tribunal observed that the assessee had itself made a disallowance under section 14A in normal computation and that the AO's addition under section 115JB was thus unnecessary. Accordingly, the Tribunal directed deletion of the addition of Rs.11,64,109/-.

4. Disallowance of Depreciation and Maintenance Cost of Aircraft

The AO disallowed depreciation and operating expenses on aircraft for AY 2010-11, citing absence of logbook entries as per Rule 67 of Aircraft Rules, 1937, and lack of non-schedule operator license from DGCA for the relevant year. The AO contended that without proof of exclusive business use and compliance with licensing and logbook maintenance, the claim was not allowable.

The CIT(A) allowed the claim relying on the Tribunal's earlier orders in the assessee's own case for AYs 2007-08 and 2008-09, which had directed the AO to verify licensing and usage details. The CIT(A) noted that the AO had subsequently allowed the claim for those years after verification.

The Tribunal noted that the assessee had purchased the aircraft to support its expanding international business and had leased it to third parties, earning taxable income. The Tribunal observed that while the AO emphasized lack of logbooks and license for non-schedule operator status during the relevant year, the assessee contended that DGCA permission is not required for own use of aircraft, only for leasing.

The Tribunal held that if the aircraft was kept ready for business use, the assessee is entitled to depreciation. However, the question of whether DGCA license is necessary for own business use must be examined afresh by the AO. The Tribunal remanded the matter to the AO for fresh consideration after hearing the assessee, thus partly allowing the ground for statistical purposes.

5. Depreciation on UPS Equipment

The AO allowed depreciation on UPS at 15%, rejecting the assessee's claim for 80% depreciation on the ground that UPS regulates electricity supply but does not save energy and thus is not eligible for higher depreciation as an energy-saving device.

The CIT(A) allowed depreciation at 60%, relying on the Tribunal's earlier decisions in the assessee's own case for AYs 2005-06 to 2007-08 and 2009-10, which treated UPS as part of computer accessories eligible for 60% depreciation.

The Tribunal upheld the CIT(A)'s decision, finding no infirmity in granting 60% depreciation as per established precedents, and dismissed the Revenue's appeal on this issue.

Significant Holdings:

On weighted deduction for R&D expenditure, the Tribunal held: "The settled position as per the law in force is that once facility is approved, expenditure incurred in this regard qualifies for deduction u/s.35(2AB) of the Act until amendment was brought in Rule 6(7A) of the Income Tax Rules, 1962 w.e.f. 01.07.2016... Therefore, the AO/Ld.CIT(A) erred in disallowing the weighted deduction u/s.35(2AB) of the Act on the expenditure incurred in an approved in-house R & D facility."

Regarding software expenditure, the Tribunal applied the principle of "lex non cogit ad impossibilia" and stated: "We are of the considered view that retrospective operation of explanation u/s.9(1)(vi) of the Act can't be used to deny the claim of the assessee."

On disallowance under section 14A for book profit computation, the Tribunal relied on the Special Bench ruling: "Rule 8D computation for disallowance u/s.14A can't be used for making adjustment for computation of book profit u/s.115JB of the Act."

On depreciation of aircraft, the Tribunal emphasized the need for factual verification: "Whether specific licence to use the Aircraft for assessee's own business purpose is required or not to be required to be examined by Assessing Officer to so as to grant depreciation."

On UPS depreciation, the Tribunal upheld prior precedents granting 60% depreciation, stating: "We don't find infirmity in the action of the Ld.CIT(A) and uphold his action."