Weighted deduction allowed under s.35(2AB) despite missing Form 3CM; leave encashment treated as trade liability under s.43B(f) invalidated

ITAT (Pune) allowed the assessee's weighted deduction under s.35(2AB) despite non-receipt of Form No.3CM for three intervening years, holding that recognition by the prescribed authority suffices and the missing form is a procedural lapse not fatal to the claim; AO must verify expenditures but cannot deny deduction once facility is approved. The Tribunal also directed allowance of leave-encashment payments, finding s.43B(f) inapplicable after judicial invalidation of the amendment, so such payments remain trade liabilities, not statutory obligations.

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Issues Involved:
1. Disallowance of weighted deduction under section 35(2AB) of the Income Tax Act, 1961.
2. Alternate plea for deduction under section 35(1)(i) and 35(1)(iv).
3. Disallowance under section 43B on account of delayed payment of leave encashment.

Detailed Analysis:

1. Disallowance of Weighted Deduction under Section 35(2AB):
The primary issue in the appeal is the disallowance of weighted deduction amounting to Rs. 93,45,333 under section 35(2AB) of the Income Tax Act, 1961. The assessee claimed this deduction for its in-house R&D facility, which was approved by the Department of Scientific and Industrial Research (DSIR). However, the Assessing Officer disallowed the claim on the grounds that the assessee did not submit the approval for the expenses in the prescribed form No.3CM from DSIR. The CIT(A) upheld this disallowance, noting that the DSIR had not granted form No.3CM for the period under consideration.

The assessee argued that it had received recognition for its R&D facility for the periods 2006-09 and 2012-15, and had applied for renewal for the period 2010-12. Despite the absence of form No.3CM for the intervening period, the facility was continuously recognized by DSIR. The Tribunal referred to various judicial precedents, including the decisions of the Hon’ble High Courts of Gujarat, Delhi, and Madras, which held that the date of approval by DSIR was not crucial for claiming the deduction, provided the facility was recognized. The Tribunal concluded that the non-receipt of form No.3CM was a procedural lapse and not a ground for denial of the deduction. Therefore, the Tribunal directed the Assessing Officer to allow the deduction under section 35(2AB).

2. Alternate Plea for Deduction under Section 35(1)(i) and 35(1)(iv):
The assessee raised an alternate plea to allow deduction of Rs. 57,64,322 under section 35(1)(i) for revenue expenditure and Rs. 4,65,900 under section 35(1)(iv) for capital expenditure incurred on R&D activities. However, this plea became academic in nature as the Tribunal allowed the primary ground of appeal.

3. Disallowance under Section 43B on Account of Delayed Payment of Leave Encashment:
The assessee contested the disallowance of Rs. 96,311 under section 43B of the Act for delayed payment of leave encashment. The Tribunal noted that clause (f) to section 43B, inserted by the Finance Act, 2002, was struck down by the Hon’ble High Court of Calcutta in Exide Industries Ltd. v. Union of India (2007) as arbitrary and unconstitutional. Consequently, leave encashment was considered a trade liability and not a statutory liability, making section 43B inapplicable. The Tribunal directed the Assessing Officer to allow the deduction for leave encashment.

Conclusion:
The Tribunal allowed the appeal partly by directing the Assessing Officer to grant the deduction under section 35(2AB) and to allow the deduction for leave encashment under section 43B. The alternate plea for deduction under section 35(1) became academic and was not adjudicated.

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