Revenue directed to reconsider Section 35(2AB) approval for past years, apply Maruti Suzuki ratio, issue reasoned decision

HC held that there was no legal or "in principle" impediment to granting the assessee approval under Section 35(2AB) of the IT Act for FYs 2015-16 and 2016-17, especially as approval in Form 3CM had already been granted for FY 2017-18. The impugned communication was found deficient for not considering eligibility for the earlier years. The writ petition was disposed of with directions to the revenue authorities to re-examine the assessee's claim for issuance of Forms 3CM/3CL for FYs 2015-16 and 2016-17 within four weeks, applying the ratio of the Division Bench judgment in Maruti Suzuki, and, if rejecting, to pass a reasoned, speaking order.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, in view of Section 35(2AB) of the Income Tax Act, 1961 and the applicable judicial precedents, there is any legal impediment to considering the assessee's applications for recognition and approval of its R&D facility, and issuance of Forms 3CM and 3CL, for FY 2015-16 and FY 2016-17.

1.2 Whether the respondents acted lawfully in declining or omitting to consider the assessee's claim for recognition/approval and issuance of requisite certificates for FY 2015-16 and FY 2016-17, despite subsequent recognition of the R&D facility and grant of approval with effect from 01.04.2017.

1.3 Whether the respondents are required to reconsider the assessee's applications for FY 2015-16 and FY 2016-17 in light of the binding interpretation of Section 35(2AB) laid down in the cited Division Bench judgment.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legal impediment to considering recognition/approval and issuance of Forms 3CM/3CL for FY 2015-16 and FY 2016-17

(a) Legal framework (as discussed)

2.1 The Court noted the legal position as declared in the Division Bench decision interpreting Section 35(2AB) of the Income Tax Act, 1961, and approving the reasoning in earlier decisions which held:

(i) Section 35(2AB) is intended to encourage innovation, research and development in India.

(ii) For availing weighted deduction, the essential elements are: (a) development of the R&D facility; (b) incurring of expenditure on such facility; (c) approval of the facility by the prescribed authority (DSIR); and (d) allowance of weighted deduction on the expenditure so incurred.

(iii) The provisions do not stipulate that weighted deduction is confined only to expenditure incurred from the date of recognition/approval or any "cut-off" date mentioned in the DSIR certificate.

(iv) A plain and harmonious reading of Section 35(2AB), Rule 6(5A) and Form 3CM indicates that once the facility is approved, the entire expenditure incurred on development of the approved R&D facility is eligible for weighted deduction, except expenditure on land and building.

(b) Interpretation and reasoning

2.2 Relying on the Division Bench judgment, the Court recorded the settled position that, for claiming benefit under Section 35(2AB):

- What is relevant is the existence of recognition/approval of the R&D facility, and

- It is not permissible to restrict the benefit only from the date of recognition or from any cut-off date mentioned in Form 3CM, as such restriction would amount to "reading more in the law which is not expressly provided".

2.3 The Court noted the petitioner's contention that there was no "in principle" impediment to granting approval under Section 35(2AB) for FY 2015-16 and FY 2016-17, particularly as:

- The petitioner's R&D unit had been granted recognition on 26.10.2016; and

- Approval under Section 35(2AB) had been granted with effect from 01.04.2017 and Form 3CM had been issued for FY 2017-18.

2.4 The Court observed that neither the communication dated 02.08.2021 nor the subsequent communication dated 30.01.2021 (received during the pendency of the petition) reflected a consideration of the petitioner's eligibility for Forms 3CM and 3CL for FY 2015-16 and FY 2016-17 in the light of the above legal position.

(c) Conclusions

2.5 The Court concluded that there is, in principle, no legal bar under Section 35(2AB), as interpreted by the Division Bench, against considering the petitioner's applications for recognition/approval and issuance of requisite certificates for FY 2015-16 and FY 2016-17 merely because recognition/approval came later.

Issue 2: Validity of the respondents' omission/refusal and necessity of reconsideration

(a) Interpretation and reasoning

2.6 The Court found that the respondents' prior communications had not addressed the petitioner's entitlement to approval and issuance of Forms 3CM and 3CL for FY 2015-16 and FY 2016-17 in accordance with the binding legal position laid down in the Division Bench judgment.

2.7 The Court emphasised that the legislative intent behind Section 35(2AB) is to incentivise research and development and that non-grant of benefit on a restrictive reading of dates of recognition or approval would defeat that intent, as recognised in the cited precedents.

(b) Conclusions

2.8 The Court did not itself grant the certificates or approve the expenditure, but held that the matter required fresh examination by the respondents in accordance with law.

2.9 The petition was disposed of with the following operative directions:

(i) The respondents shall examine the matter afresh and consider grant of the requisite certificate/issuance of Forms (including Forms 3CM and 3CL) for FY 2015-16 and FY 2016-17.

(ii) This exercise shall be completed as expeditiously as possible and preferably within four weeks.

(iii) If the petitioner's request/application is to be rejected, the respondents shall pass a reasoned order under intimation to the petitioner.

(iv) While undertaking this exercise, the concerned authorities shall consider and apply the Division Bench judgment interpreting Section 35(2AB).

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