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 35(2AB) without verifying DSIR's Form 3CL. Post-2016 amendments and Rule 6(7A) mandate DSIR quantification and cap weighted deduction at 150% of approved in-house R&D expenditure from AY 2018-19. The AO's allowance beyond the Form 3CL amount was set aside and the assessment directed to be reopened for proper verification; assessee's 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.

---