2025 (10) TMI 698 - AT - Income Tax

Revision under s.263 upholds disallowance of excess weighted deduction u/s 35(2AB) per Rule 6(7A) and Form 3CL &D

ITAT AHMEDABAD upheld the Principal CIT's revision under s.263, finding the AO's assessment erroneous and prejudicial for allowing weighted deduction u/s ... Revision u/s 263 - assessee had claimed deduction u/s 35(2AB) - HELD THAT:- It would be useful to refer to some recent case laws on the subject. In the case of FDC Ltd. [2023 (10) TMI 191 - ITAT MUMBAI] ITAT held that Assessment order passed by AO allowing deduction u/s 35(2AB) without obtaining Form 3CL was erroneous and prejudicial to interest of Revenue. ITAT held that provisions of section 35(2AB) read with Rule 6 clearly mandate filing of Form 3CL and limit weighted deduction to 150 per cent of eligible expenditure incurred on in-house research and development from assessment year 2018-19 onwards. Therefore, since AO allowed deduction at 200 per cent in clear contravention of law, and without verifying whether basic condition of submission of Form 3CL by DSIR quantifying eligible expenditure had been fulfilled, Principal Commissioner was justified in invoking revisionary powers u/s 263 and setting aside assessment order with a direction to AO to frame a fresh assessment after conducting proper verification and affording reasonable opportunity to assessee. The undisputed facts of the case show that the assessee had claimed deduction u/s 35(2AB) amount being 150% of its in-house R&D expenditure whereas the prescribed authority, i.e., DSIR, had approved only ₹112.25 lakh as eligible R&D expenditure in Form 3CL. Consequently, the deduction allowable u/s 35(2AB) ought to have been restricted to ₹1,68,37,500/-, but the AO without verifying the DSIR quantification, allowed the full claim made by the assessee. The Principal CIT, after detailed examination, rightly invoked the provisions of section 263 on the ground that the assessment order passed by the AO was both erroneous and prejudicial to the interests of the Revenue. We find that post the amendment brought by the Finance Act, 2015, effective from 01.04.2016, and the corresponding amendment in Rule 6(7A) of the Income-tax Rules, 1962, effective from 01.07.2016, the quantification of eligible R&D expenditure by DSIR in Part B of Form 3CL has become a mandatory precondition for the purpose of claiming weighted deduction under section 35(2AB). Thus, the Assessing Officer is duty-bound to restrict the deduction to the extent of expenditure approved and quantified by DSIR. Failure to do so renders the assessment order erroneous and prejudicial to the interests of the Revenue within the meaning of section 263 of the Act. The reliance placed by the assessee on the decision of Max India Ltd [2007 (11) TMI 12 - SUPREME COURT] is misplaced since the statutory amendments made post 01.04.2016 have removed any ambiguity and there is no longer any scope for two possible views on this issue. Similarly, the decision of the Hon’ble Supreme Court in NDTV [2020 (4) TMI 133 - SUPREME COURT] has no application to the facts of the present case where the legal position stands settled and the Assessing Officer has failed to make the necessary verification mandated by law. Tribunal categorically observed that even though furnishing of Form 3CL is the responsibility of the prescribed authority, it is incumbent upon the Assessing Officer to verify its existence and contents before granting deduction under section 35(2AB) of the Act. In the recent decision of Gujarat Metal Cast Industries (P.) Ltd. [2025 (4) TMI 159 - ITAT AHMEDABAD] it was held that the provisions of section 35(2AB) read with Rule 6(7A) clearly mandate that the deduction be restricted to 150% of the amount approved in Form 3CL from AY 2018-19 onwards, and any allowance of higher deduction or allowance without verification of Form 3CL constitutes a clear contravention of law justifying exercise of revisionary powers under section 263. In the present case, the assessment order was passed without verification of the DSIR quantification and in disregard of the binding provisions of law as amended. Therefore, we find no infirmity in the action of the Principal Commissioner of Income Tax in invoking his revisionary jurisdiction u/s 263 of the Act. The contention of the assessee that the AO had made adequate enquiry is devoid of merit, as mere calling for details of expenditure does not amount to verification of statutory compliance under Rule 6(7A). Accordingly, following the ratio laid down in Malabar Industrial Co. Ltd. [2000 (2) TMI 10 - SUPREME COURT] and Gabriel India Ltd. [1993 (4) TMI 55 - BOMBAY HIGH COURT] and in FDC Ltd. [2023 (10) TMI 191 - ITAT MUMBAI] and Gujarat Metal Cast Industries (P.) Ltd. [2025 (4) TMI 159 - ITAT AHMEDABAD] we hold that the order passed by the AO dated 16.04.2021 is erroneous and prejudicial to the interests of the Revenue. We therefore uphold the order passed by the Principal Commissioner of Income Tax u/s 263 of the Act. Assessee appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner was justified in invoking revisionary jurisdiction under section 263 on the ground that the assessing officer's order was erroneous and prejudicial to the interests of revenue for allowing excess deduction under section 35(2AB) without verifying the quantification by the prescribed authority in Form 3CL as required by Rule 6(7A). 2. Whether Rule 6(7A) and the requirement of DSIR quantification in Form 3CL operate as procedural/mandatory conditions for claiming weighted deduction under section 35(2AB) post-amendment, and whether compliance with the Rule can be treated as a substantive fetter on the deduction allowed under the Act. 3. Whether the existence of two possible views on the matter (or reliance on pre-amendment decisions and on the submission that furnishing Form 3CL is the prescribed authority's responsibility) precludes exercise of power under section 263 in view of the settled principle that revision should not be invoked where two views are possible. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of invoking section 263 for alleged erroneous and prejudicial assessment (excess allowance under section 35(2AB)). Legal framework: Section 35(2AB) grants weighted deduction for in-house R&D subject to conditions; section 263 permits revision where an assessment order is erroneous and prejudicial to the interests of revenue. Rule 6(7A) prescribes the mechanism (including Form 3CL) for quantification of eligible R&D expenditure by the prescribed authority. Precedent Treatment: The Tribunal followed recent coordinate decisions holding that failure by the AO to verify compliance with Rule 6(7A) and DSIR quantification renders an assessment order erroneous and prejudicial (referenced decisions of the Tribunal benches applying the Malabar Industrial twin-condition test). Interpretation and reasoning: The Tribunal examined the assessment records and found that the AO allowed deduction at 150% of declared R&D expenditure without verifying DSIR's Part B quantification in Form 3CL; DSIR had approved a lower amount, resulting in an excess allowance. The Tribunal held that the AO's omission to restrict deduction to DSIR-quantified expenditure was contrary to the statutory-regulatory scheme post-amendment and amounted to lack of due inquiry and incorrect application of law. Ratio vs. Obiter: Ratio - Where statutory/regulatory provisions (section 35(2AB) read with Rule 6(7A)) mandate DSIR quantification, an assessing officer's failure to verify such quantification and consequent allowance in excess of the approved amount renders the assessment order both erroneous and prejudicial within the meaning of section 263. Obiter - Illustrative references to coordinated bench decisions employed to buttress the holding. Conclusions: The Tribunal upheld invocation of section 263 and sustained the Principal Commissioner's direction to set aside the assessment for fresh adjudication after proper verification of Form 3CL; the appeal was dismissed. Issue 2 - Effect and character of Rule 6(7A) and Form 3CL requirement vis-à-vis section 35(2AB). Legal framework: Post-amendment (Finance Act, 2015 effective 01.04.2016; Rule amendment effective 01.07.2016) section 35(2AB)(3) requires fulfillment of prescribed conditions regarding accounts, audit and reports 'in such manner as may be prescribed,' while Rule 6(7A) prescribes DSIR's quantification in Form 3CL as a mechanism to operationalize the statutory requirement. Precedent Treatment: The Tribunal treated the Rule as a procedural but mandatory precondition for claiming the weighted deduction after the statutory amendment and relied on coordinate bench authorities to the same effect. Interpretation and reasoning: The Tribunal rejected the contention that rules cannot curtail a substantive statutory entitlement, observing there was no conflict between section 35(2AB) and Rule 6(7A); rather the Rule prescribes the manner in which statutory conditions must be satisfied. Since the statutory provision itself (as amended) contemplates fulfillment of prescribed conditions, the Rule's requirement of DSIR quantification in Form 3CL is binding for post-amendment assessment years. Ratio vs. Obiter: Ratio - Where a statute requires fulfillment of conditions 'in such manner as may be prescribed,' the corresponding rules prescribing a mechanistic/quantificatory procedure become mandatory conditions precedent for availing the statutory benefit; such rules do not impermissibly override the statute but implement its conditionality. Obiter - Discussion rejecting the assesssee's reliance on pre-amendment authorities and on the general principle that 'Act prevails over Rules' as inapplicable where the statute itself contemplates rules-based conditions. Conclusions: The Tribunal held that Rule 6(7A) and Form 3CL quantification are mandatory for assessment years falling in the post-amendment regime; AO is duty-bound to verify the existence and contents of Form 3CL before allowing deduction under section 35(2AB). Issue 3 - Application of the 'two views' doctrine and whether its existence bars exercise of section 263. Legal framework: Jurisprudence establishes that section 263 should not be invoked where two bona fide views are possible; conversely, where the statutory scheme and amended rules leave no scope for two reasonable views, revisionary power is available if the AO failed to apply the correct legal requirement. Precedent Treatment: The Tribunal applied the Malabar Industrial test (erroneous and prejudicial) and distinguished reliance on pre-amendment cases or decisions permitting two views, noting post-amendment clarity reduced scope for divergent views. Interpretation and reasoning: The Tribunal found that the amendment to section 35(2AB) and the subsequent Rule 6(7A) amendment removed ambiguity by mandating prescribed conditions including quantification by DSIR; accordingly, the AO's failure to verify Form 3CL was not a matter of two reasonable views but a clear omission of a statutory-regulatory requirement. Mere production difficulty (Form 3CL furnished by prescribed authority) does not absolve the AO from ensuring statutory compliance before allowing the deduction. Ratio vs. Obiter: Ratio - Exercise of section 263 is justified despite the 'two views' principle where the statutory and rule framework post-amendment unambiguously prescribes mandatory procedures which the AO failed to follow; such failure makes the order erroneous and prejudicial. Obiter - Observations on the inapplicability of certain earlier decisions rendered for pre-amendment years. Conclusions: The Tribunal held that the 'two views' doctrine did not protect the assessment order because the post-amendment statutory-regulatory regime left no room for alternate interpretive conclusions; accordingly, revision under section 263 was warranted. Cross-references and consequential directions Where an assessment is set aside under section 263 for failure to verify DSIR quantification under Rule 6(7A), the assessing officer is to frame fresh assessment after conducting proper verification of Form 3CL and affording reasonable opportunity to the assessee. The Tribunal's view aligns with coordinate bench authorities emphasizing AO's duty to verify statutory compliance notwithstanding that Form 3CL is issued by the prescribed authority.