Section 35(2AB) weighted deductions for R&D expenditure allowed for pre-DSIR approval expenses from facility establishment date

Delhi HC held that weighted deductions under Section 35(2AB) for R&D expenditure are not restricted to expenses incurred only after DSIR approval date. The court ruled that expenditure incurred before approval (from April 1, 2018) is eligible for deduction, provided the facility is subsequently recognized by DSIR. The court quashed the respondent's communications restricting benefits to post-approval expenditure and directed issuance of amended Form 3CM effective from April 1, 2018, allowing the petitioner to claim weighted deductions for pre-approval R&D facility establishment costs.

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Issues Involved:
1. Legality of restricting weighted deductions under Section 35(2AB) of the Income Tax Act, 1961 to a specific period.
2. Validity of the communications and Form 3CM issued by the respondent.
3. Interpretation of Section 35(2AB) and related Rules for claiming deductions on R&D expenditure.
4. Applicability of the Guidelines framed by DSIR for approval of R&D facilities.

Summary:

Issue 1: Legality of restricting weighted deductions under Section 35(2AB) of the Income Tax Act, 1961 to a specific period.
The petitioner argued that limiting the weighted deductions to the period from 27 February 2019 to 31 March 2020 is illegal and violates Section 35(2AB) of the Income Tax Act, 1961. The petitioner sought deductions for the entire expenditure on the R&D facility for the Financial Year 2018-19, starting from 01 April 2018. The Court noted that Section 35 is a beneficial provision aimed at encouraging scientific research by providing deductions for expenditure incurred on in-house R&D facilities. The Court found that the provision does not restrict deductions to expenditure incurred after the approval date of the R&D facility.

Issue 2: Validity of the communications and Form 3CM issued by the respondent.
The petitioner sought to quash the communications dated 28 February 2020 and 11 May 2020, and the Form 3CM dated 25 November 2019, which limited the period of claim. The Court held that the conditions imposed by the respondent, restricting deductions to the period post-approval, were unsustainable. The Court quashed the impugned communications and directed the respondent to issue an amended Form 3CM effective from 01 April 2018.

Issue 3: Interpretation of Section 35(2AB) and related Rules for claiming deductions on R&D expenditure.
The Court emphasized that Section 35(2AB) and Rule 6 do not suggest that only expenditure incurred post-approval of the R&D facility is eligible for deductions. The provision allows for deductions on expenditure already incurred on scientific research and the creation of in-house R&D facilities. The Court agreed with the Gujarat High Court's interpretation in Claris Lifesciences Ltd., which held that the date of approval is not the cutoff date for eligibility of weighted deductions.

Issue 4: Applicability of the Guidelines framed by DSIR for approval of R&D facilities.
The respondent relied on internal Guidelines, which stipulated that approval would be co-terminus with DSIR recognition. The Court found that the Guidelines themselves, particularly Clause 5(v), allowed for expenditure incurred from the preceding financial year to be considered, provided the R&D center is subsequently recognized by DSIR. The Court held that the Guidelines do not prevent claims for deductions on expenditure incurred before the approval date.

Conclusion:
The Court allowed the writ petition, quashed the impugned communications, and directed the respondent to issue an amended Form 3CM effective from 01 April 2018. The respondent was also instructed to frame Form 3CL afresh, specifying the expenditure incurred by the petitioner from 01 April 2018 for the computation of weighted deductions under Section 35(2AB).

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