TaxTMI 
TaxTMI 
2019 (2) TMI 1918
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....to deduction of Rs. 2,22,21,159/- u/s 35(1)(iv) of the Income-tax Act when such claim was not made by the assessee either in the original return of income or in the revised return of income contrary to the decision of Apex Court in the case of Goetze (India) Ltd vs. CIT(2006) 284 ITR 323 (SC). 3. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in allowing the additional claim of deduction of Rs. 23,70,107/- u/s 35(1)(iv) of the Act when such claim was not made by the assessee either in the original return or in the revised return of income or during the course of assessment proceedings contrary to the decision of Apex Court in the case of Goetze (India) Ltd vs. CIT(2006) 284 ITR 323 (SC). 4. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in allowing the additional claim of deduction of Rs. 8,09,016/- u/s 35(1)(iv) of the Act when such claim was not made by the assessee either in the original return or in the revised return of income or during the course of assessment proceedings contrary to the decision of Apex Court in the cas....
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....he approval for expenditure was not received from the Department of Scientific Industrial Research (DSIR) as required under section 35(2AB) of the Act and in the absence of the same, the assessee's claim of deduction at 150% of Rs. 5.70 crores at Rs. 8.56 crores was denied. 6. The CIT(A) denied the said claim in the absence of non fulfillment of conditions prescribed under clauses (iii) and (iv) of section 35(2AB) of the Act. However, the CIT(A) considered the alternate plea of assessee that deduction of capital expenditure @ 100% be allowed under section 35(1)(iv) of the Act. The assessee had raised an additional ground of appeal before the CIT(A) in this regard and after admitting the same, the CIT(A) held that the assessee was entitled to the benefit of aforesaid deduction under section 35(1)(iv) of the Act in respect of capital expenditure incurred on R&D facility. He further held that cost incurred on building during the year amounting to Rs. 23,70,107/- would be allowed in addition to the R&D expenditure of Rs. 2.22 crores, out of total capital expenditure of Rs. 4.76 crores. The assessee also raised an additional ground of appeal for further claim of capital expenditure o....
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....isallowance made by the Assessing Officer. The Assessing Officer and CIT(A) decided various other issues also, which may be taken up at the relevant time. 8. The assessee is in appeal against the order of CIT(A). 9. The assessee has raised the issue of claim of weighted deduction under section 35(2AB) of the Act on the expenditure incurred on scientific research on in-house R&D facility at Rs. 8.56 crores @ 150% of expenditure incurred of Rs. 5.70 crores under modified ground of appeal No.1 and has raised the issue of disallowance made under section 14A of the Act under original ground of appeal No.4. 10. The learned Authorized Representative for the assessee pointed out that recognition of R&D facility to develop own engines was granted on 30.01.2009. An application in form No.3CK and agreement was filed on 23.05.2009. Vide letter dated 24.08.2010, R&D facility was approved w.e.f. 03.06.2009, which was the date of recognition. Thereafter, the agreement was signed on 24.08.2010. The assessee received form No.3CM w.e.f. 03.06.2009. The Assessing Officer had disallowed the claim of weighted deduction under section 35(2AB) of the Act on the ground that there was no approval o....
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....cognition and approval by the DSIR on 24.08.2010 w.e.f. 03.06.2009. The assessee on 24.08.2010 received form No.3CM for recognition of facility w.e.f. 03.06.2009, copy of which is placed at page 71 of Paper Book. The Assessing Officer has disallowed weighted deduction to the assessee on the ground that no approval of expenditure has been received from the DSIR in form No.3CL. 15. The first issue is whether such an approval is needed from the DSIR in form No.3CL. The Pune Bench of Tribunal in Minilec India Pvt. Ltd. Vs. ACIT (supra) on similar issue of claim of weighted deduction in the absence of any form No.3CL received from the DSIR had held as under:- "10. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the claim of deduction under section 35(2AB) of the Act i.e. expenditure incurred on Research & Development activity. For computation of business income under section 35 of the Act, expenditure on scientific research is to be allowed on fulfillment of certain conditions which are enlisted in the said section. Under various sub-sections of section 35 of the Act, the conditions and the allowability of e....
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....g approval under section 35(2AB) of the Act is to be made in form No.3CK. Under sub-rule (5A) of rule 6 of the Rules, the prescribed authority shall, if he satisfied that the conditions provided in the rule and in sub-section (2AB) being fulfilled, pass an order in writing in form No.3CM. The proviso however lays down that reasonable opportunity of being heard is to be granted to the company before rejecting an application. So, the application has to be made under sub-rule (4) in form No.3CK and the prescribed authority has to pass an order in writing in form No.3CM. Sub-rule (7A) provides that the approval of expenditure under sub-section (2AB) of section 35 of the Act, shall be subject to the conditions that the facilities do not relate purely to market research, sales promotion, etc. Clause (b) to sub-rule (7A) at the relevant time provided that the prescribed authority shall submit its report in relation to the approval of in-house R & D facility in form No.3CL to the DG (Income-tax Exemption) within sixty days of its granting approval. Under clause (c), the company at the relevant time had to maintain separate accounts for each approved facility, which had to be audited annual....
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....bility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which presupposes incurring expenditure in this behalf, application to the prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of section itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered r. 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of Rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by s. 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up R&D facility in India, the legislature has provided this provision to encourage the development of the facility by providing deduc....
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....Gujarat observed that it has been held that cutoff date mentioned in the certificate issued by DSIR would be of no relevance where once the certificate was issued by DSIR, then that would be sufficient to hold that the assessee had fulfilled the conditions laid down in the aforesaid provisions. 18. The Hon‟ble High Court of Madras in CIT Vs. Wheels India Ltd. (2011) 336 ITR 513 (Mad) had also held that the assessee was entitled to weighted deduction for whole year and not merely from the date of notification. It was held by the Hon‟ble High Court that Once the prescribed authority approves the existence of a research and development facility and the expenditure incurred on such scientific research, the assessee would be entitled to the expenditure incurred for the whole of the assessment year and it cannot be granted in a truncated manner. 19. The Pune Bench of Tribunal in Nath Biogenes India Ltd. Vs. ACIT in ITA No.367/PN/2012, relating to assessment year 2008-09, order dated 27.01.2014 held that where the prescribed authority i.e. DSIR had given recognition, then such a facility is recognized for claiming deduction under section 35(2AB) of the Act. T....
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....e within the ambit of that period. Therefore, mere mentioning of 1.4.2007 in the order dated 28.8.2008 was of no consequence and the approval granted in Form 3CM was also applicable for A.Y. 2005-06. In this regard, it is further noticeable that while granting of approval on 28.8.2008, the prescribed authority has, inter alia, observed in para 5 as under:- "Ref.No. and Date of the application : Ref NBil dated 16.8.2007 The above Research & Development facility is further approved for the purpose of section 35(2AB) from 1.4.2007 to 31.3.2011 subject to the conditions underlined therein." The term "further‟ makes it clear that the approval was not limited to 1.4.2007 to 31.3.2011 but was in addition to periods already approved. It is further noticeable that information obtained under RTI clearly showed that the assessee‟s applications were processed for earlier years also but no orders have been passed with reference to earlier assessment years. At the same time, the assessee has not been given any opportunity of being heard as required under proviso to Rule 6 (5A) before rejecting the said application. Therefore, impliedly, the application for the entir....
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....eld that since the Petitioner had omitted to obtain the approval under Form 3CK, it is not entitled to the benefit of Section 35(2AB) since 2004. The facts of the present case are different and there has been no omission by the Petitioner herein to obtain approvals. The stage for approval arises after the recognition is granted by the DSIR, for which the application was filed right at inception by the Petitioner. Upon obtaining recognition, which was granted on 26th March 2014, the Form 3CK was filed on 31st March 2014. There has been no lapse of time, unlike in Apollo Tyres (supra) wherein the recognition was granted on 31st March, 2004 and the Form 3CK application was made only on 21st August, 2008. Thus the present case is clearly distinguishable from the facts in Apollo Tyres (supra)." 24. The assessee was held to be entitled to the claim of deduction under section 35(2AB) of the Act in the said case by the Hon‟ble High Court of Delhi. 25. The learned Departmental Representative for the Revenue has placed reliance on the ratio laid down by the Hon‟ble High Court of Karnataka in Tejas Networks Ltd. Vs. DCIT (supra), wherein it was first held that un....
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....ognized, it is entitled to the benefit. 17. Further, the Tribunal in Cummins India Ltd. Vs. DCIT (supra) while deciding the issue of allowability of claim of weighted deduction under section 35(2AB) of the Act on the surmise that the prescribed authority had approved part of expenditure in Form No.3CL had held that once the facility has been recognized by the prescribed authority and an agreement has been entered into between the facility and prescribed authority, then the role of Assessing Officer is to look into and allow the expenditure incurred on in-house R&D facility as weighted deduction under section 35(2AB) of the Act. The relevant paras are as under:- "33. The assessee by way of grounds of appeal No.10.1, 10.2 and 10.3 has raised the issue against disallowance of deduction under section 35(2AB) of the Act. 34. Brief facts relating to the issue are that the assessee during the year under consideration had claimed deduction of Rs. 3.89 crores under section 35(2AB) of the Act being 150% of expenditure incurred of Rs. 2.594 crores. The Assessing Officer vide draft assessment order had short granted deduction under section 35(2AB) of the Act by Rs. 6,75,00....
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....thority to the Department, nowhere under the Act, it was stipulated that the deduction under section 35(2AB) of the Act was allowable year after year after approval by DSIR in form No.3CL. The learned Authorized Representative for the assessee further referred to the amended form No.3CL by the IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016, wherein column for certified amounts of expenditure had been inserted in the said form No.3CL. The learned Authorized Representative for the assessee further placed reliance on the ratio laid down by the Ahmedabad Bench of Tribunal in Sun Pharmaceutical Industries Ltd. Vs. Pr.CIT (2017) 162 ITD 484 (Ahmedabad - Trib.), wherein it has been held by the Tribunal that form No.3CL is merely a report in the form of intimation regarding approval of in-house R&D facility to be sent from prescribed authority‟s end to the Department and once the facility is approved in form No.3CM, the expenses incurred within the notified period have to be allowed under section 35(2AB) of the Act. He further pointed out that the said decision has been affirmed by the Hon‟ble High Court of Gujarat in CIT Vs. Sun Pharmaceutical Industries Ltd. (2017) 250 Ta....
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....nt of section. He further referred to old form placed at page 21 of Paper Book and the new form which is placed at page 22 of Paper Book and pointed out that differences between the two and stressed that the requirement to go into the expenditure incurred by the facility, by the prescribed authority only arises after the form has been amended and not before that. 38. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the claim of deduction under section 35(2AB) of the Act i.e. expenditure incurred on Research & Development activity. For computation of business income under section 35 of the Act, expenditure on scientific research is to be allowed on fulfillment of certain conditions which are enlisted in the said section. Under various sub-sections of section 35 of the Act, the conditions and the allowability of expenditure vary. Sub-section (1) to section 35 of the Act deals with expenditure on scientific research, not being in the nature of capital expenditure, is to be allowed to research association, university, college or other institution; for which an application in the prescribed form and manner is to....
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....ver lays down that reasonable opportunity of being heard is to be granted to the company before rejecting an application. So, the application has to be made under sub-rule (4) in form No.3CK and the prescribed authority has to pass an order in writing in form No.3CM. Sub-rule (7A) provides that the approval of expenditure under sub-section (2AB) of section 35 of the Act, shall be subject to the conditions that the facilities do not relate purely to market research, sales promotion, etc. Clause (b) to sub-rule (7A) at the relevant time provided that the prescribed authority shall submit its report in relation to the approval of in-house R & D facility in form No.3CL to the DG (Income-tax Exemption) within sixty days of its granting approval. Under clause (c), the company at the relevant time had to maintain separate accounts for each approved facility, which had to be audited annually. Clause (b) to sub-rule (7A) has been substituted by IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016, under which the prescribed authority has to furnish electronically its report (i) in relation to approval of in-house R & D facility in part A of form No.3CL and (ii) quantifying the expenditure inc....
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....pproval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which presupposes incurring expenditure in this behalf, application to the prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of section itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered r. 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of Rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by s. 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up R&D facility in India, the legislature has provided this provision to encourage the dev....
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....that whether where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on in-house R&D facility, for which the adjudicating authority is the Assessing Officer and whether the prescribed authority is to approve expenditure in form No.3CL from year to year. Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis-à-vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditur....
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....e CIT(A) would not survive. Consequently, the ground of appeal raised by Revenue in this regard, stands allowed. 21. Similarly, the claim allowed by CIT(A) on vehicle expenses of Rs. 8,09,016/- under section 35(1)(iv) of the Act would not survive. Hence, grounds of appeal No.2 to 4 raised by Revenue in this regard are allowed. The ground of appeal No.1 raised by Revenue is general in nature and hence, does not need any adjudication. 22. Now, coming to ground of appeal No.4 raised by assessee i.e. disallowance under section 14A of the Act. 23. The learned Authorized Representative for the assessee pointed out that the assessee himself had disallowed 0.5% of expenses under Rule 8D(2)(iii) of the Rules. However, the Assessing Officer has in addition disallowed interest expenditure relatable to the investments made, on which the income was exempt under Rule 8D(2)(ii) of the Rules. The learned Authorized Representative for the assessee in this regard pointed out that the assessee had sufficient own funds to make the investments of Rs. 88 lakhs only. The reserves itself were sufficient to take care of the same. We find merit in the plea of assessee in this regard, where the asse....