Case summary, Income Tax

Whether the Assessee can claim deduction under Section 35(2AB), without complying with all its conditions?

Case name: Phoneix Medical Systems Pvt. Ltd. v. ACIT

Forum: Chennai ITAT

Background

  • The assessee manufactures engineering goods.
  • While assessing the income for AY 2015-16, the AO, disallowed INR 3,01,754 under the head travelling expenses, INR 10,25,000 towards donation under the head other expenses u/S. 37 and INR 61,200 for penalty paid on sales tax. The total disallowance amounted to INR 13,87,954.

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Members:

Lawyers(Assessee): G. Baskar

Applicable Sections:

  • The AO observed that the assessee claimed weighted deduction under section 35(2AB).  On seeking particulars, the assessee submitted Form 3CM, however, for availing benefit under Section 35(2AB), the pre-requisite is classification and quantification of eligible expenses in Form 3CL, which has to be issued by the competent authority. When the Assessing Officer called for such details, the assessee submitted that they are yet to receive Form 3CL from DSIR.
  • Therefore, the AO held that the assessee had neither produced the Form 3CL nor any proof relating to its submission of such expenses. On the basis of this lack of proof, the AO disallowed the assessee’s claim.
  • The assessee appealed to the CIT(A) who confirmed the AO’s order and dismissed the assessee’s appeal.
  • Hence, this appeal before the ITAT.

Revenue’s Arguments

  • While the assessee submitted a copy of Form 3CM before the AO, it had not attached any enclosure containing a list of its in-house R&D facilities. The return for AY 2015-16 was filed on 15.10.2015, but the audit report which is required to be filed before the competent authority on or before 30.09.2015 was filed on 22.12.2017. This amounted to a long delay of 2 years and 3 months.
  • As the entire delay is attributable to the assessee, the assessee cannot rely on the ratio of CIT v. M/s TVS Electronics, wherein bureaucratic delay was the reason for the delay.
  • The assessee did not submit Form 3CL, nor did it provide any proof relating to its submission of such expenses as provided in the Act read with the corresponding rule before the competent authority.
  • No quantification of expenses pertaining to in-house development and research facility was done as mandated under Section 35(2AB).
  • The R&D expenses are grouped under note 18, note 20, note 21 and note 23 as on 31.03.2015, which comprises of 17 items, the total of which is INR 84,57,845/- under various heads. These have not been examined by the AO and hence should be remitted back for due examination.
  • On the assessee’s plea towards disallowance of travel expenses, revenue argued that these expenses were incurred towards the director’s father and family and hence were treated by the AO as personal expenses. No proof to show that these were incurred for business purposes was produced by the assessee. A similar argument was advanced on the issue of disallowance of donation.
  • On the issue of disallowance of sales tax penalty at INR.61,200/-, the ld.DR revenue argued that the penalty paid is not allowed to be deducted under Section 37.

Assessee’s Arguments

  • Approval for in-house research and development facility was issued by the competent authority dated 07.07.2015. The assessee also produced various emails and other communication sent to the authorities and alleged that the authorities delayed in responding to this communication. They relied on the decision of CIT v. TVS Electronics in order to further their argument.
  • Alternatively, the assessee argued that their claim is fit to be examined under the purview of Section 37 and that travel expenditure and the expenditure on donation were incurred purely for business necessities and hence should be allowed under Section 37.
  • The CIT(A) grossly erred in disallowing the expenses pertaining to travel, donations and penalty.

Tribunal’s Judgement

  • Tribunal held that, though the assessee had produced a copy of Form 3CM before the AO, it had not attached any enclosure containing a list of its in-house R&D facilities. While the return for AY 2015-16 was filed on 15.10.2015, the audit report mandated to be filed before the competent authority on or before 30.09.2015 was filed on 22.12.2017 that is with a long delay of 2 years and 3 months. In order to claim an exemption under Section 35(2AB), the assessee needs to comply with the various provisions of the Act and the Rules made thereunder which the assessee has failed to do.
  • Tribunal rejected the application of the case cited by the Assessee to the present fact situation.
  • The required material has also not been laid before the competent authorities by the assessee.
  • The tribunal sent back assessee’s claim of allowing the impugned expenditure to be claimed under Section 37 for re-examination by AO.
  • On the issue of disallowance of expenses pertaining to travel, donation, the tribunal held that the assessee has not laid before any material to prove its contention that these expenses were incurred for business purposes. With regard to disallowance of penalty, the tribunal held that the assessee has failed to prove that the penalty levied under Section 37 was unwarranted.

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