Assessee entitled to weighted deduction under section 35(2AB) despite missing Form 3CM; penalty under 271(1)(c) quashed

ITAT Mum. (AT) held that R&D recognition by the competent authority was valid from 01.04.2001 and, despite absence of Form 3CM for the year, the assessee was entitled to weighted deduction u/s 35(2AB) so AO and CIT(A) were directed/overruled to allow the deduction. The penalty u/s 271(1)(c) was quashed, since the underlying addition was deleted and mere unsuccessful claim did not constitute furnishing of inaccurate particulars. Decision in favour of the taxpayer.

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Issues Involved:

1. Denial of exemption claimed under Section 35(2AB) of the Income Tax Act, 1961.
2. Deletion of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Denial of Exemption Claimed under Section 35(2AB) of the Income Tax Act, 1961:

The assessee, engaged in manufacturing enzymes, had set up in-house Research & Development (R&D) labs and claimed a weighted deduction of Rs. 10,22,18,588/- under Section 35(2AB) of the Income Tax Act, 1961. The R&D facilities were recognized by the Department of Scientific and Industrial Research (DSIR). However, the Assessing Officer (A.O) denied the deduction on the grounds that the necessary approval in form 3CM from the Secretary, DSIR, was not available for the assessment year in question.

The CIT(A) upheld the A.O's decision, emphasizing that approval from the Secretary, DSIR, in form 3CM is mandatory for claiming the deduction under Section 35(2AB). The CIT(A) noted that the initial recognition by DSIR was not sufficient for tax exemption purposes without the form 3CM approval.

Upon appeal, the Tribunal considered the arguments and judicial precedents provided by the assessee. The Tribunal noted that the assessee's R&D facilities were initially recognized by DSIR and that the assessee had continuously claimed and been granted deductions from A.Y 2002-03 to 2008-09. The Tribunal also observed that the competent authority had neither rejected the application for renewal nor communicated any decision regarding the application.

The Tribunal referred to various judicial precedents, including decisions by the Gujarat High Court and the Delhi High Court, which held that once an R&D facility is recognized, subsequent renewals or approvals should not affect the eligibility for deductions. The Tribunal concluded that the initial recognition and the genuine expenditure incurred were sufficient to claim the deduction under Section 35(2AB), despite the absence of form 3CM for the specific period.

The Tribunal directed the A.O to allow the weighted deduction claimed by the assessee under Section 35(2AB).

2. Deletion of Penalty Levied under Section 271(1)(c) of the Income Tax Act, 1961:

The Revenue appealed against the deletion of penalty levied under Section 271(1)(c) on the disallowance of the weighted deduction claimed under Section 35(2AB). The A.O had initially imposed the penalty, but the CIT(A) deleted it, stating that merely making a claim that was not accepted by the A.O does not constitute furnishing inaccurate particulars of income.

Since the Tribunal allowed the deduction under Section 35(2AB) in favor of the assessee, it held that the basis for the penalty no longer existed. Therefore, the penalty levied under Section 271(1)(c) could not survive, and the Tribunal upheld the CIT(A)'s decision to delete the penalty.

Conclusion:

The appeal filed by the assessee was allowed, granting the weighted deduction under Section 35(2AB). The appeal filed by the Revenue regarding the penalty under Section 271(1)(c) was dismissed. The Tribunal's decision emphasized the importance of initial recognition and genuine expenditure over procedural delays in form approvals.

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