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2016 (11) TMI 1251 - ITAT VISAKHAPATNAM

2016 (11) TMI 1251 - ITAT VISAKHAPATNAM - [2016] 52 ITR (Trib) 497 - Claim of weighted deductions u/s 35(2AB) - disallowance of claim for the reasons that the items manufactured and supplied by the assessee to Indian Railways are in the nature of office machines and apparatus used in Railway stations for office work and for data processing, therefore, these items are clearly falling in Eleventh schedule - Held that:- A.O. was erred in disallowing the weighted deduction claimed by the assessee un .....

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scribed authority and also returns filed annually to the prescribed authority to justify the expenditure incurred towards R&D expenditure. In our considered view, the competent authority has to decide whether a particular expenditure is eligible for deduction u/s 35(2AB) of the Act or not, but not the assessing officer. In the present case, the A.O. without following the due procedure laid down under the provisions of the Act and rules there under, simply disallowed the expenditure claimed by th .....

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e set aside the issue to the file of the A.O. and direct the A.O. to examine the issue paid and payable with reference to books of accounts of the assessee and if the expenditure incurred by the assessee is paid within the same financial year, then the A.O. is directed to delete the additions made u/s 40(a)(ia) of the Act. In other words, the A.O. is directed to restrict the disallowances to the extent the amount remaining payable at the end of the financial year. - TDS u/s 194H - disallowa .....

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understood in common business parlance and in the context of the section 194H. This transaction, in our considered view, is not a transaction between principal and agent so as to attract the tax deduction requirements u/s 194H. - I.T.A.Nos.188/Vizag/2015, I.T.A.Nos.216/Vizag/2015 - Dated:- 21-10-2016 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER For The Appellant : Shri C. Subrahmanyam, AR For The Respondent : Shri G. Gurusamy, CIT(DR) ORDER PER G. MANJUNATHA, A .....

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s and electronic systems, etc. The assessee has filed its return of income for the assessment year 2011-12 on 14.9.2011 admitting total income of ₹ 21,50,620/- under normal provisions and ₹ 2,03,94,650/- under the provisions of section 115JB of the Income Tax Act, 1961 (hereinafter called as the Act ). The return was processed u/s 143(1) of the Act and subsequently, the case has been taken up for scrutiny assessment and accordingly, notice u/s 143(2) of the Act was issued. In respons .....

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tails of R&D facility and nature of research carried out in the R&D facilities along with necessary approvals from the competent authority. 3. In response to show cause notice, the assessee submitted that it is in the business of manufacturing and supply of moving display boards, data loggers and electronic systems, etc. to Indian Railways. The assessee further submitted that it has set up a research and development facility which was approved by the Secretary, Department of Scientific a .....

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were specifically designed for the purpose of Indian Railways. It was further submitted that its facility has been approved by the competent authority after satisfied with the conditions prescribed under the provisions of section 35(2AB) of the Act, therefore, it has rightly claimed weighted deduction of 200% u/s 35(2AB) of the Act. 4. The A.O. after considering the explanations of the assessee held that the goods manufactured by the assessee are listed in the Eleventh schedule, at item no.22 b .....

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weighted deduction u/s 35(2AB) of the Act. But, the assessee is involved in manufacturing of goods listed in Eleventh schedule, therefore, it is not eligible to claim deduction under the provisions of section 35(2AB) of the Act. The A.O. further observed that in view of the above provisions, even if an assessee s in house R&D facility approved by the competent authority, but if such assessee is involved in manufacture or production of an article or thing as specified in 11 schedule it makes .....

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unt of ₹ 3,57,463/- is disallowed under the provisions of section 40(a)(ia) of the Act. Similarly, the A.O. has disallowed bank guarantee charges incurred by the assessee for non-deduction of tax at source under the provisions of section 194H of the Act. 5. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee reiterated the submissions made before the A.O. The CIT(A) for the reasons recorded, confirmed additions made by the .....

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apparatus being used in railway stations. The assessee failed to provide any convincing material facts on record to the claim that the instruments/articles manufactured does not fall under the Eleventh schedule. As regards disallowance of direct expenses under the provisions of section 40(a)(ia) of the Act, the CIT(A) held that the assessee has failed to deduct TDS on payment made to contractors under the provisions of section 194C of the Act. Since, the assessee failed to deduct TDS, the A.O. h .....

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ed the A.O. to restrict the disallowance to the extent of amount remains payable at the end of the financial year. Aggrieved by the CIT(A) order, the assessee as well as the revenue are in appeal before us. 6. The first issue that came up for our consideration is rejection of weighted deduction claimed under the provisions of section 35(2AB) of the Act. The facts relating to the issue are that the assessee is in the business of manufacturing of various electronic systems, data loggers and electr .....

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opment facility to continuous improvement of the products manufactured to suit the needs of Indian Railways. The R&D facility is owned by the assessee is approved by the Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India. During the financial year relevant to assessment year 2011-12, the assessee has incurred an amount of ₹ 1,85,88,745/- towards revenue expenditure and a sum of ₹ 25,22,566/- under capital expenditure. The ass .....

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ore, these items are clearly falling in Eleventh schedule. The A.O. further observed that the data loggers, electronic items and electronic moving display boards are nothing but office machines and apparatus, therefore, the assessee is not eligible for claiming deduction u/s 35(2AB) of the Act. The A.O. has made elaborate discussions on the provisions of section 35(2AB) of the Act, Eleventh schedule and items manufactured by the assessee. The A.O. relied upon the letter written by the Railway Ma .....

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splay boards are falling in Eleventh schedule being office machines such as type writers, calculating machines, cash registering machine which can cheque writing machines, intercom machines and tele printers. The A.O. has taken clue from the Eleventh schedule and stated that the expression office machines and apparatus includes all machines and apparatus used in office, shops, factories, workshops, educational institutions, railway stations, hotels and restaurants for doing office work and for d .....

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ertain units to be installed at various railway stations which are assisted in controlling the movement of railways. All the items supplied by us were installed at various railway stations. These items will help the Indian Railways to run the train safely. The data loggers records the signaling relays on a memory and stores events data which is transferred to server installed in signaling test rooms at Divisional Head quarters which are useful for analyzing the failures and accidents. The assess .....

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trains and to coordinate between the pilots for arrival and departure of trains. The coordination is called signaling interlocking. The system provides the status of various digital operations where the signal is ON or OFF, relay is UP or DOWN, the fuse is intact. Further data loggers provides the status of various voltages such as the track circuit voltage, AC voltage, DC voltage or high frequency axle channel voltages with accuracy. It was further submitted that these items were manufactured w .....

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curred towards research and development. Therefore, the A.O. was not correct in holding that the items manufactured by the assessee are listed in the Eleventh schedule, accordingly, not eligible for weighted deduction u/s 35(2AB) of the Act. 10. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. disallowed weighted deduction claimed by the assessee under the provisions of section 35(2AB) of the Act, for the rea .....

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es, railway stations, etc. According to the A.O., these items are primarily a data processing items installed in the railway stations to store the date related to movement of trains. The A.O. further was of the opinion that just because the R&D facility is approved by the prescribed authority, the deductions u/s 35(2AB) of the Act cannot be allowed. The A.O. is required to enquire the correctness of the claim made by the assessee and after satisfied with the explanations offered by the asses .....

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ed in Eleventh schedule. The assessee further contended that the goods manufactured by it are specially designed for Indian Railways to monitor safe movement of trains and also display of arrival and departure details of the trains. It is further contended that its facility is approved by the competent authority, i.e. department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India. Once, the R&D facility is approved by the competent authority, the A. .....

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he goods manufactured by the assessee are mere office machines or apparatus which are listed in Eleventh schedule item no.22 or an electronic equipments eligible for claiming deduction u/s 35(2AB) of the Act. Before we go into the facts of the present case, let us understand the provisions of section 35(2AB) of the Act. As per the provisions of section 35(2AB)(1) of the Act, where a company engaged in the business of bio technology or any business of manufacture or production of any article or t .....

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e said provision, the assessee should be a company and it should be engaged in research and development facility and to incur expenditure towards such facility and the assessee should be engaged in the business of manufacture or production of any article or thing, except those specified in the Eleventh schedule and finally the R&D facility has to be approved by the prescribed authority. Admittedly assessee is a company which is engaged in manufacture of electronic display boards, data logger .....

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ctured by the assessee. According to the A.O., the goods manufactured by the assessee are nothing but office machines and apparatus as listed in Eleventh schedule. Therefore, the A.O. opined that despite the R&D facility is approved by the competent authority because of goods manufactured by the assessee, the assessee is not eligible to claim deduction u/s 35(2AB) of the Act. 13. The assessee is involved in the business of manufacture of various electronic moving display boards and supplies .....

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, these items are specially designed for Indian Railways as per the specifications given by the Research Designs and Standard Organization (RDSO) of the Indian Railways, which will design the specification required for certain units to be installed at various railway stations which are assisted in controlling the movement of railways. According to the assessee, the data loggers provides study of various digital operations whether the signal is ON or OFF, the relay is UP or DOWN, the fuse is inta .....

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the information to Central place via various types of indication intervention lock wire or wireless and through different interlock methods and at central place, located in the railway station itself different application softwares are provided to perform real time analysis to only railway personnel recording failures happening in the railways, equipments states, real time simulation, etc. for enabling corrections indeed. This has tremendously improved safety, reliability and punctuality in rail .....

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udes all machines and apparatus used in office establishments, factories, workshops, educational institutions, railway stations for doing office work and for data processing, the items manufactured by the assessee cannot be equated with mere data processing machines installed in offices or railway stations. The items manufactured by the assessee are specially designed as per the specification provided by Indian Railways Research Design and Standard Organisation to suit the needs of the railway s .....

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ling the conditions prescribed under the provisions of section 35 (2AB) of the Act. Therefore, the A.O. was not correct in holding that the goods manufactured by the assessee are mere office machines or apparatus listed in Eleventh schedule not eligible for claiming deduction u/s 35(2AB) of the Act. 14. The Ld. A.R. for the assessee submitted that the A.O. was erred in observing that the DSIR is not the competent authority to decide whether the assessee s claim u/s 35(2AB) of the Act is correct .....

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me Tax Rules, 1962 provides that any assessee applied for approval of its R&D facility before the Secretary, DSIR, Government of India in form no.3CK, the Secretary DSIR, if he satisfied about the activities of the assessee of other parameters passes an order of approval in form no.3CM. After according sanction of approval, the Secretary, DSIR sends a report to the Director General, Income Tax (Exemptions) in form no.3CM within 60 days of granting approval. When DSIR passes the order of appr .....

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tum of expenditure incurred towards research and development, but not to approve the goods manufactured by the assessee. 15. Having heard both the parties, we find force in the arguments of the Ld. A.R. for the assessee for the reason that the provisions of section 35(2AB) of the Act, with relevant rules makes it mandatory for the assessee company to file its application for approval of its in house R&D before the Secretary, DSIR, Government of India. The applicant company should also submit .....

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n para-B of Form 3CK. The Secretary, DSIR after satisfied with the details furnished by the assessee and also after complied with the conditions prescribed under the provisions of section 35(2AB) of the Act and rules there under pass an order of approval in form no.3CM by duly intimating such approval to the Director General of Income Tax (Exemption) in form no.3CL within 60 days of granting approval. Once, the R&D facility is approved by the competent authority and assessee has complied wit .....

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bove analysis that neither the A.O. nor the board was competent to take any decision of any such controversy relating to report and approval granted by the prescribed authority as it involved expert view or opinion. It was prescribed authority alone which would be competent to take decision with regard to the correctness or otherwise and its order of approval granted in form no.3CL as prescribed u/s 35(2AB) of the Act read with rule 7A of the Income Tax Rules, 1962. In the present case on hand, .....

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did not submit report in form no.3CL to the Director General, Income Tax (Exemptions) within 60 days of granting approval as required under rule 6(7A)(b) of the Income Tax Rules, 1967, consequently, the assessee is ineligible for claiming exemption u/s 35(2AB) of the Act. The A.O. further observed that the prescribed authority ought to have submitted the approval to the Director General of Income Tax within 60 days, however, the said approval has been submitted to the Director General beyond th .....

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on hand, the assessee has fulfilled the conditions prescribed under the provisions of section 35(2AB)(1) of the Act and rules there under, therefore for a technical breach the A.O. cannot disallow the exemption claimed u/s 35(2AB) of the Act. 17. It is pertinent to discuss the case law relied upon by the assessee. The assessee relied upon the decision of Hon ble High Court of Karnataka, in the case of Tejas Networks Ltd. Vs. DCIT (2015) 233 Taxman 426. The Hon ble High Court of Karnataka, under .....

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of the Eleventh Schedule incurs any expenditure on "Scientific Research" (not being expenditure in the nature of cost of any land or building) on in-house, research and development facility "as approved by the prescribed authority," such assessee would be entitled to a deduction of a sum equal to one and half times of the expenditure so incurred. The word "Scientific Research" has been defined under subsection (4) of Section 43 of the Act, which is extracted supra a .....

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3) of the Act would clearly indicate that where the assessing officer does not accept the claim of the assessee made under Section 35(2AB), he has to refer the matter to the Board, which inturn, will refer the question to the prescribed authority. The decision of the prescribed authority would be final as could be seen from clause (b) of subsection (3) of Section 35. Thus, it would emerge from above analysis that neither the assessing officer nor the Board is competent to take any decision on an .....

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ranted in Form No. 3CL as prescribed under Section 35(2AB) of the Act read with Rule 7A of the Rules. (Para 21) A plain reading of Section 35(2AB) would clearly indicate that where a company is engaged in the business of bio-technology or in any business of manufacture or product/on of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building .....

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entitled for being allowed as a weighted deduction, There being no dispute to the fact that DSIR being the prescribed authority in the instant case, had issued the report in Form No. 3CL - Annexure - M certifying the total R&D expenditure (excluding land and buildings) as prescribed under Section 35(2A6) for a sum of ₹ 4,601.9 lakhs as against the claim of ₹ 5,957 lakhs made by the assessee in the return of income and as such, neither the second respondent nor first respondent co .....

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out of bounds to examine as to whether such expenditure as certified by the prescribed authority can be allowed or disallowed under Section 35 of the Act. In other words, the assessing officer is precluded from examining the correctness or otherwise of the certificate issued by the prescribed authority on the ground that it is either being contrary to facts or contrary to the express provisions of the Act. It would not be out of context to state that when assessee files the report issued by the .....

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ction 35 of the Act which would be a complete answer to such situations. Thus, if any question arises as to what extent, any activity constitutes or constituted or an asset is or was being used for scientific research, then the Assessing Officer would be required to refer such question to the Board for being referred to the prescribed authority. The decision of the prescribed authority in this regard would be final, inasmuch as, the certification of such expenditure is being examined by an exper .....

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heme of Section 35 of the Act. It is in this background, sub-section (4) of Section 43 will have to be considered, which defines as to what activities would constitute "scientific research" as indicated under the said Section namely, Section 43(4). As to whether any expenditure incurred in the acquisition of rights in or arising out of scientific research as indicated in clause (ii) of sub-section (4) of Section 43 Is an issue which requires to be examined by the prescribed authority i .....

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the prescribed authority in Form No. 3CL as required under Section 35(2AB) of the Act read with Rule (7A)(b) of Income Tax Rules, 1961, it has to be held that the issue of entertaining the writ petition on the ground of alternate remedy would recede to background and it has to be held that present writ petition would be maintainable in the facts obtained in the present case as discussed herein above and writ petition cannot be dismissed on the ground of petitioner having alternate remedy of appe .....

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er is extracted hereunder: It was noted that for granting approval u/s 35(2AB) of the Act, the Assessee made application, with the prescribed authority, in accordance with section 35(2A8)(3) r. w Rule 6(4) of the Income-tax Rules, 1962 on 11/12/2007. The prescribed authority approved/granted in-house research and development facility u/s 35(2AB) of the Act on 04/032009 for a period from October 19, 2007 to 31st March 2010 in Form no. 3CM, in accordance with Rule 6(5A) of the Rules. This approval .....

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he Act. If the aforesaid section was analyzed then the deduction shall be a//owed of a sum equal to two times of the expenditure so incurred and the prescribed authority is to submit its report of such approval/facility to the Director General on a prescribed form within specified time, meaning thereby, the authority concerned had to submit the report to the Director General. However, if the totality of facts are analyzed, as mentioned earlier, the assessee made application for such approval on .....

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because, it was beyond the control of the assessee to direct the authority to submit the prescribed form on Form no.3CL to the Department. Section 35(2AB) of the Act, nowhere suggest that the date of approval of research and development facility would be cut off date for eligibility of weighted deduction under this section on expenses incurred from that date onwards; Once facility was approved, entire expenditure so incurred on development of research and development facility had to be allowed .....

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dismissed. 19. The assessee relied upon the decision of Hon ble High Court of Gujarat, in the case of DCIT Vs. Mastek Ltd. (2013) 263 CTR 671. The Hon ble High Court, under similar circumstances held that if an assessee puts forth a claim of deduction u/s 35(1) of the Act for expenditure incurred on scientific research and if A.O. is not inclined to accept such a claim, he may seek opinion of prescribed authority and the decision of prescribed authority would govern parties. The A.O. not having .....

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h scientific research resulted into the ultimate aim for which such research was undertaken. What the Legislature desired to encourage by granting deduction under section 35(1) of the Act was a scientific research and not necessarily only the successful scientific research undertaken by an assessee. (para 25) Tribunal without discussing full materials on record came to such conclusion which, in our opinion, ought not to have been done. These are matters of extreme scientific complexities. What w .....

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complexities, should not be decided without referring to the full materials on record and appreciating the complexities of the issue on hand. (para 27) Section 35(3) of the Act as noticed requires a reference to be made by the Board to the prescribed authority when a question arises as to whether and if so to what extent, any activity constitutes or constituted or any asset is or was being used for scientific research. The decision of the prescribed authority on such a question would be final. I .....

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claim, the question can be stated to have arisen. In such a situation, the Assessing Officer cannot take a decision but must seek the opinion of the prescribed authority, We may hasten to add that only when such a question arises that the reference would be competent. (para 28) The AO not having obtained such a decision of the prescribed authority though a serious question in the present case had arisen, in our opinion, was not justified in rejecting the assessee's claim for deduction of ex .....

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rs of the revenue authorities rejecting the Assessee's claim for deduction. 20. Considering the facts and circumstances of this case and also respectfully following the ratios of decisions discussed above, we are of the view that the A.O. was erred in disallowing the weighted deduction claimed by the assessee under the provisions of section 35(2AB)(1) of the Act, despite the assessee s R&D facility was approved by the competent authority. We further was of the view that the goods manufac .....

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t authority has to decide whether a particular expenditure is eligible for deduction u/s 35(2AB) of the Act or not, but not the assessing officer. In the present case, the A.O. without following the due procedure laid down under the provisions of the Act and rules there under, simply disallowed the expenditure claimed by the assessee. Therefore, we direct the A.O. to allow the weighted deduction claimed by the assessee under the provisions of section 35(2AB)(1) of the Act. 21. The next issue tha .....

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e same financial year and in view of the special bench decision of ITAT, Visakhapatnam in the case of Merilyn Shipping & Transports Vs. ACIT (supra), no disallowance can be made, if the amounts have been fully paid within the same financial year. We find force in the arguments of the assessee for the reason that the coordinate bench of this Tribunal, in the case of Merilyn Shipping & Transports (supra) under similar circumstances held that no disallowance can be made under the provisions .....

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nd Contractors Vs. ACIT, has considered the issue and after considering the revenue objection with regard to the special bench decision of M/s. Merilyn Shipping & Transports (supra) and also considering the ratio of Hon ble A.P. High Court in the case of Janapriya Engineering Syndicate decided the issue in favour of the assessee. The relevant portion is reproduced hereunder: We have carefully considered the rival submissions and perused the record. Consistent with the view taken by the ITAT .....

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In this view of the matter and also respectfully following the ratio of the coordinate bench, we are of the view that no disallowance can be made u/s 40(a)(ia) of the Act, for the amounts which have been already paid during the financial year. However, the facts relating to paid and payable are not emerging from the records, therefore, we set aside the issue to the file of the A.O. and direct the A.O. to examine the issue paid and payable with reference to books of accounts of the assessee and .....

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ct. The ld. A.R. for the assessee, at the time of hearing submitted that this issue is covered by the decision of ITAT, Visakhapatnam in assessee s own case for the assessment year 2009-10 and submitted that the coordinate bench of this Tribunal, under similar circumstances deleted the additions made by the A.O. We find that the coordinate bench of this Tribunal in ITA No.205/Vizag/2013 for the assessment year 2009-10 by following the decision of ITAT Mumbai in the case of Kotak Securities Ltd. .....

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