2025 (5) TMI 514 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D - HELD THAT - Respectfully following decision of M/s.Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI we direct the Ld. AO to compute disallowance u/s. 14A r.w.Rule 8D by considering only those investments which have yielded exempt income during the year. The ground raised by the assessee is allowed statistical purposes. Disallowance of depreciation on capital subsidy - HELD THAT - Respectfully following the decision of Dayal Steel Limited 2017 (7) TMI 952 - ITAT PATNA we allow the second ground raised by the assessee in regard to depreciation on capital subsidy. Disallowance u/s.14A read with Rule 8D - AO has computed disallowance @1% of investment -A submitted that amendment to Rule 8D came into force w.e.f 02.06.2016 and hence said Rule 8D(2) has no application for AY 2015-16 - HELD THAT - Having heard both the parties and perused the records we find that the Tribunal in assessee s own case for AY 2015-16 2021 (3) TMI 1429 - ITAT CHENNAI has remitted the issue of disallowance u/s. 14A r.w. Rule 8D back to the file of AO to consider whether Rule 8D(2) is applicable to the year under consideration or not and to decide the said issue in accordance with law. Thus we remit the issue of disallowance u/s. 14A read with Rule 8D(2) for the AY 2014-15 also on the similar direction to the AO to consider whether Rule 8D(2) is applicable to the year under consideration or not and to decide the said issue in accordance with law. This ground is allowed for statistical purposes. Depreciation @ 60% on UPS printers and routers etc. - We find that the Tribunal in the assessee s own case for earlier assessment year 2015-16 2021 (3) TMI 1429 - ITAT CHENNAI has allowed depreciation @ 60% on UPS printers and routers etc. Respectfully following the co-ordinate Bench decision of this Tribunal we allow depreciation @ 60% on UPS printers and routers etc. as claimed by the assessee. Disallowance u/s. 14A r.w. Rule 8D - We direct the AO to see whether the interest free funds available to the assessee were sufficient to meet its investment in the light of the judgment of Reliance Industries Ltd 2019 (1) TMI 757 - SUPREME COURT Hence we do so. The first ground raised by the assessee is allowed statistical purposes. Disallowance of weighted deduction u/s. 35(2AB) - AO disallowed the deduction on the ground that certificate of DSIR for the expenditure in Form 3CL is to the extent partly - HED THAT - As decided in case of M/s. Mahindra Electric Mobility Ltd 2019 (1) TMI 20 - ITAT BANGALORE have clearly held that prior to 01.07.2016 Form 3CL has no legal sanctity and it is only w.e.f. 01.07.2016 with the amendment to Rule 6(7A) of the I.T. Rules the quantification of weighted deduction under section 35(2AB) of the Act has significance. We are of the considered opinion that if the power of quantification of weighted deduction already exists with DSIR prior to 01.07.2016 then there was no necessity to make amendment to Rule 6(7A) of the IT Rules. Thus in view of the above facts and circumstances we hold that the deduction as claimed by the assessee under section 35(2AB) of the Act is liable to be allowed instead of restricting it to the quantum of claim. Sub-section (3) of section 35 of the Act has no application to be conjointly read for the purpose of allowance of weighted deduction prior to amendment to Rule 6 of Income Tax Rules for the reason that after amendment to Rule 6 of Income Tax Rules under sub-rule (7A)(b)(ii) of IT Rules the prescribed authority shall furnish electronically its report in Part B of Form No. 3CL towards quantification of expenditure and eligible for weighted deduction under section 35(2AB) of the Act. Prior to amendment to Rule 6 of the IT Rules the provision of section 35(3) of the Act does not provide the scope for referring to DSIR for determining the amount of expenditure eligible for deduction. If at all the DSIR has the authority to decide the eligible expenditure prior to 01.07.2016 then the intention to amend Rule 6 of IT Rules w.e.f. 01.07.2016 does not arise. Thus the contention of the ld. DR stands rejected. Thus we direct the AO to allow the deduction as claimed by the assessee u/s 35(2AB). Disallowance of donation towards CSR expenditure u/s. 80G - According to the AO receipt in respect of Adhiparasakthi Charitable Medical Education Cultural Trust has been issued in the name of Secretary to Managing Director of the company and in the name the company therefore the AO denied deduction claimed u/s. 80G - assessee submitted that the Charity has clarified the matter and acknowledged that payment was received by the Trust and therefore deduction u/s. 80G has to be allowed - HELD THAT - In the light of above clarification given by the Charity AO is directed to verify the assertions made and if found true then allow the deduction u/s 80G. The appeal filed by the assessee is partly allowed for statistical purposes.

Summary

Issues presented and considered in these appeals primarily relate to the following core legal questions:

1. Whether disallowance under section 14A read with Rule 8D of the Income Tax Rules is justified, and the correct method for computing such disallowance, particularly whether only investments yielding exempt income should be considered.

2. Whether depreciation on capital subsidy received by the assessee can be disallowed by reducing the subsidy amount from the actual cost of capital assets for depreciation calculation.

3. Applicability of Rule 8D(2) for disallowance under section 14A for assessment years prior to its amendment and enforcement.

4. Entitlement to depreciation at the rate of 60% on assets such as UPS, printers, and routers that form an integral part of computer systems.

5. Whether weighted deduction under section 35(2AB) of the Income Tax Act should be allowed on the entire expenditure incurred on in-house R&D facilities approved by the prescribed authority (DSIR), particularly prior to amendment of Rule 6(7A) of the Income Tax Rules in 2016.

6. Whether disallowance of weighted deduction under section 35(2AB) is justified when the DSIR certificate quantifies expenditure at a lower amount than claimed by the assessee.

7. Whether donations made to a charitable trust are eligible for deduction under section 80G, considering issues of receipt acknowledgment and proper documentation.

Issue-wise detailed analysis:

1. Disallowance under section 14A read with Rule 8D:

The legal framework involves section 14A which disallows expenditure incurred in relation to income not includible in total income, and Rule 8D prescribing the method for computing such disallowance. The Tribunal considered precedents including the Special Bench decision in ACIT vs. Vireet Investments Pvt. Ltd., which held that disallowance under section 14A read with Rule 8D should be computed considering only those investments which actually yielded exempt income during the year.

The Court noted that the Assessing Officer (AO) had made disallowance based on the volume of investments without segregating those yielding exempt income. The assessee contended that it had sufficient interest-free funds and no borrowing cost to earn exempt dividend income, and only a small portion of investments yielded exempt income.

Respectfully following the Special Bench ruling, the Tribunal directed the AO to compute disallowance under section 14A read with Rule 8D by considering only investments yielding exempt income. This approach was applied consistently for all relevant assessment years, including AY 2010-11 and AY 2018-19, with the issue remitted for fresh consideration in AY 2014-15 and AY 2016-17 to verify applicability of Rule 8D(2).

Competing arguments included the Revenue's reliance on lower authorities' orders for broader disallowance, but the Tribunal favored the assessee's position based on authoritative precedents.

Conclusion: Disallowance under section 14A read with Rule 8D is to be computed only on investments yielding exempt income, and applicability of Rule 8D(2) must be examined based on the assessment year.

2. Depreciation on capital subsidy:

The issue concerns whether the capital subsidy received should be reduced from the cost of capital assets for depreciation computation. The AO reduced the cost of plant and machinery by the subsidy amount, leading to disallowance of depreciation.

The assessee relied on a coordinate Bench decision in M/s. Dayal Steel Limited, which held that subsidies granted to promote industrial development cannot be treated as reducing the cost of capital assets for depreciation purposes. The Tribunal also cited the ITAT Vishakhapatnam decision in Sasisri Extractions Ltd., which supported this view.

The Court reasoned that the subsidy is an incentive to promote industry and does not constitute a payment towards the cost of the asset. Therefore, it falls outside the scope of Explanation 10 to section 43(1) of the Act.

Conclusion: The subsidy amount cannot be reduced from the actual cost of capital assets for depreciation calculation; depreciation disallowance on this ground is reversed.

3. Applicability of Rule 8D(2) for disallowance under section 14A:

The Tribunal noted that Rule 8D(2) was amended with effect from 02.06.2016 and thus its applicability to earlier assessment years was questionable. The assessee contended that Rule 8D(2) should not apply to AY 2014-15 and earlier years.

Following a coordinate Bench decision in the assessee's own case for AY 2015-16, the Tribunal remitted the issue to the AO to determine whether Rule 8D(2) applies to the year under consideration and to decide accordingly.

Conclusion: Applicability of Rule 8D(2) must be examined year-wise, and the issue remitted for fresh consideration.

4. Depreciation on UPS, printers, and routers:

The assessee claimed depreciation at 60% on these assets, contending they are integral parts of computer systems. The Tribunal referred to its own coordinate Bench decision for AY 2015-16 and relevant High Court judgments that upheld depreciation at 60% for such assets.

The Revenue relied on lower authorities' orders disallowing this claim, but the Tribunal followed the coordinate Bench ruling allowing 60% depreciation.

Conclusion: Depreciation at 60% on UPS, printers, and routers forming integral parts of computer systems is allowable.

5. Weighted deduction under section 35(2AB) on entire R&D expenditure:

This issue involved whether weighted deduction should be allowed on the entire expenditure incurred on in-house R&D facilities approved by DSIR, especially prior to the amendment of Rule 6(7A) of the Income Tax Rules effective 01.07.2016.

The Tribunal examined the statutory language of section 35(2AB)(1), which provides weighted deduction for expenditure incurred on in-house R&D facilities approved by the prescribed authority. It noted that the approval pertains to the facility and not the expenditure amount. The amendment to Rule 6(7A) introduced a requirement for DSIR to quantify expenditure eligible for deduction, effective only from 01.07.2016.

Precedents from ITAT Mumbai, Bangalore, Ahmedabad, and Pune Benches were considered, which uniformly held that prior to the 2016 amendment, DSIR's approval of the facility sufficed and no separate quantification of expenditure was required. The Tribunal rejected the Revenue's argument that section 35(3) mandates DSIR approval of expenditure, holding that section 35(3) is not applicable for this purpose before the amendment.

Conclusion: Weighted deduction under section 35(2AB) must be allowed on the entire expenditure incurred on DSIR-approved in-house R&D facilities for assessment years prior to the 2016 amendment, without restriction based on DSIR quantification.

6. Disallowance of weighted deduction due to non-availability of DSIR certificate or lower quantification:

In AY 2018-19, the AO and CIT(A) disallowed the entire weighted deduction claim for want of DSIR certificate quantifying the expenditure. The assessee submitted that application to DSIR was pending.

The Tribunal remitted the issue to the AO to await DSIR's response and to proceed in accordance with section 35(3) of the Act.

Conclusion: Disallowance of weighted deduction for want of DSIR certificate is premature; issue remitted for consideration after DSIR's response.

7. Deduction under section 80G for donations:

The AO disallowed deduction claimed for donation to a charitable trust on the ground that receipts were issued in the name of the Secretary to Managing Director and the company, not the assessee itself. The assessee produced clarification from the trust acknowledging receipt of payment.

The Tribunal directed the AO to verify the assertions made by the trust and if found true, allow deduction under section 80G.

Conclusion: Deduction under section 80G is allowable subject to verification of receipt and acknowledgment by the donee trust.

Significant holdings:

"Respectfully following decision of Special Bench of Tribunal in the case of M/s.Vireet Investments Pvt. Ltd., we direct the Ld. AO to compute disallowance u/s. 14A r.w.Rule 8D by considering only those investments which have yielded exempt income during the year."

"For the purpose of computing depreciation allowable to the assessee, the subsidy amount cannot be reduced from the actual cost of the capital asset."

"Once the R & D facility was approved by the DSIR, the expenses incurred by the assessee have to be allowed under section 35(2AB) of the Act. If the law wanted the expenditure to be approved by the prescribed authority, same would have been expressly provided."

"Prior to the amendment w.e.f. 01.07.2016, Form 3CL had no legal sanctity and it is only w.e.f. 01.07.2016 with the amendment to Rule 6(7A) of the I.T. Rules, the quantification of weighted deduction under section 35(2AB) of the Act has significance."

"The deduction under section 35(2AB) of the Act is to be allowed on the basis of the expenditure as recorded by the assessee in the books of account and not restricted to the quantum certified by DSIR prior to 01.07.2016."

"Depreciation @ 60% on UPS, printers and routers etc. which form an integral part of computer system is allowable."

"Deduction under section 80G shall be allowed if the donation receipt is verified and found genuine."

Final determinations include partial allowance of appeals with directions to recompute disallowances under section 14A read with Rule 8D considering only investments yielding exempt income, reversal of depreciation disallowance on capital subsidy, allowance of depreciation at 60% on specified assets, allowance of weighted deduction under section 35(2AB) on entire R&D expenditure prior to 2016 amendment, remand of certain issues for fresh consideration in light of DSIR certification status, and conditional allowance of deduction under section 80G.