R&D expenditure incurred in India eligible for weighted deduction under section 35(2AB) despite revenue's objections

ITAT Pune allowed the appeal regarding R&D expenditure deduction under section 35(2AB). The tribunal held that the entire R&D expenditure incurred in India is eligible for weighted deduction under section 35(2AB), contrary to the revenue's contention that deduction should be limited to DSIR-approved amounts. Revenue R&D expenditure incurred outside India was already allowed during assessment, while capital R&D expenditure incurred outside India was held eligible for deduction under section 35(1)(iv). The decision followed the tribunal's earlier ruling in the same assessee's case.

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ISSUES:

• Whether weighted deduction under section 35(2AB) of the Income Tax Act, 1961 is allowable for R&D expenditure incurred outside India and outside the prescribed in-house R&D facility approved by the prescribed authority.
• Whether the amount of weighted deduction under section 35(2AB) can exceed the amount of R&D expenditure quantified and approved by the prescribed authority (DSIR) prior to the amendment of Rules 6 and 7A effective from 1st July 2016.
• Whether capital expenditure of intangible nature qualifies for weighted deduction under section 35(2AB).
• Whether, upon denial of weighted deduction under section 35(2AB) for certain R&D expenditure, deduction under section 35(1)(iv) is allowable for capital expenditure on scientific research incurred outside India.
• Interpretation of the effective date of DSIR approval for in-house R&D facility and its impact on eligibility for weighted deduction under section 35(2AB).

RULINGS / HOLDINGS:

• The weighted deduction under section 35(2AB) is available only in respect of expenditure incurred on in-house R&D facilities approved by the prescribed authority within India; expenditure incurred outside India and outside the approved R&D facility is not eligible for weighted deduction under section 35(2AB).
• For assessment years prior to the amendment of Rules 6 and 7A effective 1st July 2016, the prescribed authority was required only to approve the in-house R&D facility and not to quantify the eligible expenditure; therefore, the amount of weighted deduction claimed cannot be restricted to the amount quantified by the prescribed authority.
• Capital expenditure of intangible nature is not eligible for weighted deduction under section 35(2AB) only from the date of issuance of Guidelines in May 2014; such Guidelines do not apply retrospectively to assessment years prior to their issuance.
• Capital expenditure on scientific research incurred outside India, which does not qualify for weighted deduction under section 35(2AB), is eligible for deduction under section 35(1)(iv) read with section 35(2), allowing full deduction in the year of incurrence.
• DSIR approval for in-house R&D facility is effective from 1st April of the year in which the application is made (per clause (i) of para 6 of the DSIR Guidelines), not merely from the date of formal recognition; hence, expenditure incurred from the start of the relevant financial year is eligible for weighted deduction, subject to other conditions.

RATIONALE:

• The Court applied the statutory provisions of section 35 of the Income Tax Act, 1961, particularly sections 35(1)(iv), 35(2), and 35(2AB), and the relevant Rules 6 and 7A as they stood during the assessment year under consideration.
• It relied on the DSIR Guidelines issued in May 2010 and May 2014 to interpret the scope of approval and eligibility criteria for weighted deduction under section 35(2AB), noting the temporal applicability of such Guidelines.
• The Court distinguished between the pre- and post-amendment regime of Rules 6 and 7A, holding that quantification of eligible expenditure by the prescribed authority was not mandated before 1st July 2016, thus rejecting the Assessing Officer and CIT(A)'s restriction of weighted deduction to the quantified amount in Form 3CL for the assessment year 2012-13.
• The Court followed precedent from a coordinate Bench decision on identical facts for assessment year 2011-12, which held that capital expenditure on scientific research incurred outside India does not qualify for weighted deduction under section 35(2AB) but is eligible for deduction under section 35(1)(iv).
• The Court emphasized that the statutory language of section 35(2AB) requires expenditure to be incurred on an in-house R&D facility approved by the prescribed authority, which excludes expenditure incurred on R&D services obtained from associated enterprises abroad.
• The Court recognized the principle that denial of deduction under one provision does not preclude allowance under another provision if the conditions of the latter are satisfied.
• There was no dissenting or concurring opinion recorded.

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