TaxTMI 
TaxTMI 
2026 (6) TMI 356
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..... The Id. NFAC erred in not granting weighted deduction of 150% of the expenditure relating to inhouse scientific research and development facility of Rs. 2,07,15,034 though the alternate prayer to allow 100% of such expenditure was acceded to subject to verification by the Id. AO. 3. The Id. NFAC failed to appreciate that delay in filing audit report is not the requirement of law and is introduced only by way Rule, and therefore is only directory. At any rate, the Id. NFAC and so also the Id. AO failed to appreciate that when once the appropriate authority in Department of Scientific Research quantifies the eligible deduction in FORM 3CL then, and the Revenue has no authority to go deny the same. 4. The Id. NFAC erred in sustaining the addition of Rs. 3,33,200 in respect of cash deposits in the bank account, on the alleged of not furnishing relevant details. 5. The ld. NFAC erred in sustaining the addition of Rs. 3,81,54,765 being the advance given to suppliers. The authorities below failed to appreciate that the said advances after supplies are made to the Appellant were later offered as purchases in the subsequent year. Without prejudice to the above, ....
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.... the "due date" specified in "Explantion-2" to sub-section (1) of section 139 of the Act for furnishing the return of income, for each succeeding year; (C). that the prescribed authority shall electronically furnish its report, viz., (i) in relation to the approval of In-house and development facility in Part A of Form No.3CL; and (ii) quantify the expenditure incurred on In-house research and development facility by the assessee company during the previous year eligible for weighted deduction under sub-section (2AB) of section 35 of the Act in Part B of Form No.3CL, and shall electronically furnish the report in Form No.3CL to the Principal Chief Commissioner of Income Tax or Chief Commissioner of Income Tax or Principal Director General of Income Tax or Director General of Income Tax having jurisdiction over the assessee company within 120 days of the grant of the approval, in a case referred to in sub-clause (i) of clause (b); or submission of the audit report, in a case referred to in sub-clause (ii) of clause (b); 5. The AO observed that a perusal of the record revealed that the assessee company had uploaded the audit report required to be furnished under section 35(2AB) of....
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...., but in the absence of any material available on record to substantiate its claim that the said cash deposit was sourced from the sale proceeds, he rejected the same. Accordingly, the AO, based on his aforesaid observations, held that the cash deposits of Rs. 3.33 lakhs (supra) made in the above-mentioned bank account of the assessee company were sourced from its unexplained money under section 69A of the Act. 10. Also, the AO, while framing the assessment, observed that the assessee company during the subject year was in receipt of advances of Rs. 10,61,31,002/-. On being queried, the assessee company claimed that the amounts were booking advances received from its dealers and distributors, which were, in turn, adjusted against the sales made to the said parties in subsequent years. Also, the assessee company, to substantiate its claim, had filed with the AO the PANs, addresses, amounts, and nature of the contracts with the parties, etc. However, the AO observing that the assessee company failed to place on record the PANs and addresses of the majority of the parties, thus, held the entire amount of Rs. 10.61 crores (approx.) as unexplained cash deposits under section 68 of th....
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.... 14. The assessee company, aggrieved with the order of the CIT(A) to the extent he has sustained the additions/disallowances made by the AO, has carried the matter in appeal before us. 15. We have heard the Learned Authorized Representatives of both parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. 16. Shri AV Raghuram, Advocate, Learned Authorized Representative (for short, "Ld. AR") for the assessee company, at the threshold of hearing of the appeal submitted that both the authorities below had grossly erred in law and facts of the case in declining the assessee's claim for weighted deduction under section 35(2AB) of the Act. 17. Elaborating on his contention, the Ld. AR submitted that as the assessee company which had incurred the subject expenditure towards scientific research, and in substance satisfied the conditions stipulated in section 35(2AB) of the Act, had been declined the claim for deduction only for the reason that it had not furnished the audit report in Form No.3CLA by the "due....
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.... Edgeverve Systems Ltd. vs. Assistant Commissioner of Income Tax (2026) 240 TTJ (Bang) 490. 18. Apropos the addition made by the AO under section 69A of the Act towards unexplained cash deposits of Rs. 3,33,200/-, the Ld. AR failed to provide any explanation, let alone documentary evidence, to substantiate the nature and source of the subject cash deposits. 19. Coming to the addition of the amounts advanced by the assessee company to suppliers aggregating to Rs. 3,81,54,765/-, which the AO had added under section 69B of the Act, and the said addition was thereafter sustained by the CIT(A), the Ld. AR submitted that both the authorities below had grossly erred in law and the facts of the case in making/sustaining the impugned addition. Elaborating on his contention, the Ld. AR submitted that, as it was the case where the assessee company had given advances to its suppliers from its regular books of accounts, there was no justification for the AO to have treated the same as a suppressed investment under section 69B of the Act. 20. Coming to the merits of the addition made by the AO under section 69B of the Act, the Ld. AR submitted that the assessee company had advanced the ....
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....port his contention had drawn our attention to section 35(2AB) of the Act. Also, the Ld. Sr-DR had pressed into service the order of the ITAT, Mumbai in the case of PCP Chemicals Private Limited vs. ITO, 8(2)(4), Mumbai (2017) 88 taxmann.com 5 (Mumbai), wherein it is held that for claiming weighted deduction under section 35(2AB) of the Act, approval of R&D facility by the competent authority in prescribed form is mandatory. Also, the Ld. DR had relied upon the judgment of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. ACIT, [2025] 178 taxmann.com 659 (SC), wherein approving the order of the Hon'ble High Court of Kerala, it was observed that as the assessee company before them had entered into an agreement with DSIR as per the provisions of section 35(2AB) of the Act, on 20/08/2008, it was not entitled for claiming weighted deduction for AY 2006-07 and AY 2007-08, i.e., the preceding years. Further, reliance was placed upon the order of the ITAT, Mumbai in FDC Ltd. Vs. Principal Commissioner of Income-tax (2023) 157 taxmann. com 387 (Mumbai - Trib.), wherein it is, inter alia, observed that allowing deduction under section 35(2AB) of the Act without obtaining Form N....
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....conditions regarding maintenance of accounts, audit thereof and furnishing of reports in the prescribed manner; therefore, the delayed furnishing of Form No.3CLA constituted failure of a mandatory statutory condition disentitling the assessee company from claiming the weighted deduction. 30. We find that the CIT(A) concurred with the aforesaid view of the AO, and upheld the disallowance of the weighted deduction claimed by the assessee company under Section 35(2AB) of the Act. 31. Before us, the Ld. AR has vehemently assailed the aforesaid view of the lower authorities on the ground that the assessee company had duly complied with all substantive conditions contemplated under section 35(2AB) of the Act, viz. (i). the assessee company had entered into the requisite agreement with DSIR;(ii) the in-house R&D facility stood duly approved in Form No.3CM;(iii) separate books of account had been maintained; (iv) the accounts had been duly audited; (v) audit report in Form No.3CLA had ultimately been furnished before DSIR; and (vi) DSIR thereafter issued Form No.3CL quantifying the eligible expenditure. It was submitted by the Ld. AR that the only lapse attributable to the assessee c....
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....ture so incurred.] 87[Explanation. For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).] (2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act. (3) No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for cooperation in such research and development facility and [fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed]. (4) The prescribed authority shall submit its report in relation to the approval of the said facility to the [Principal Chief Commissioner or Chief Commissioner or] [Principal Director General or] Director General in such form and time as may be prescribed.] (5) [(6) No deduction shall be allowed to a company....
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....ore us is not one of noncompliance, but of delayed compliance. 38. We are not oblivious of the fact that section 35(2AB)(3) employs mandatory phraseology by providing that "no company shall be entitled for deduction......." unless the prescribed conditions are fulfilled. We are further conscious of the fact that Rule 6(7A)(c) specifically prescribes furnishing of Form No.3CLA before the "due date" contemplated under "Explanation 2" to section 139(1) of the Act. However, in our considered view, once the prescribed authority itself had accepted the audit report furnished by the assessee company and thereafter acted upon the same by issuing Form No.3CL quantifying the eligible expenditure, then it cannot be held that the statutory conditions contemplated under section 35(2AB)(3) remained unfulfilled. We say so because the prescribed authority itself, despite the delayed furnishing of Form No. 3CLA, did not reject it as invalid or non est in law. Rather, DSIR accepted the report, processed it, and quantified the eligible expenditure in Form No. 3CL. Thus, the prescribed authority, i.e., DSIR, had itself acted upon and treated the audit report furnished by the assessee company in For....
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....Court of Bombay in CIT vs. Shivanand Electronics (1994) 75 taxmann.com 93 (Bom), wherein it was observed that filing of an audit report before completion of assessment proceedings would constitute sufficient compliance, and deduction cannot be denied merely because the report was not furnished within the prescribed timeline. Likewise, the Hon'ble High Court of Madras in CIT vs. AKS Alloys (P) Ltd. (2012) 18 taxmann.com 25 (Madaras) [which thereafter has been approved by the Hon'ble Supreme Court CIT, Maharashtra vs. G.M. Knitting Industries (P) Ltd. (2016) 71 taxmann.com 35 (SC)], has held that procedural delay in furnishing an audit report cannot defeat substantive deduction where the report had been furnished before completion of assessment proceedings. We find that the principle emerging from the aforesaid judicial pronouncements is that where substantive eligibility conditions stand fulfilled and prescribed audit reports are ultimately furnished during the course of assessment proceedings, procedural delay by itself would not defeat the claim for deduction. 41. We may herein observe that the aforesaid principle assumes greater significance in the present case because the pre....
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....rivate Limited vs. ITO (2017) 88 taxmann.com 5 (Mumbai) and FDC Ltd. vs. Principal Commissioner of Income-tax (2023) 157 taxmann.com 387 (Mumbai) are also distinguishable on the facts, as the controversy therein pertained to the absence of the requisite approval/certification itself. 44. We thus, in the backdrop of our aforesaid deliberations, are of the considered view that though section 35(2AB)(3) r.w Rule 6(7A) mandates furnishing of Form No.3CLA within the prescribed timeline, however, where the assessee company had admittedly furnished the said report before the prescribed authority during the course of assessment proceedings and the DSIR, after considering the same, had issued Form No.3CL quantifying eligible expenditure during the pendency of the assessment proceedings, then the statutory conditions contemplated under Sub-section (3) of Section 35(2AB) r.w. Rule 6 is to be held to have been substantially fulfilled. 45. In our considered view, once the prescribed authority itself had accepted the audit report filed by the assessee company in Form 3CLA and acted upon the same, the AO could not independently treat the assessee company as disentitled from claiming weighte....
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....the details of the contract/sale against which revenue was received, which, thus, revealed that the genuineness of the advances made by the assessee could not be proved. Accordingly, the AO, based on his aforesaid observations, had made the addition of Rs. 3,81,54,765/- under section 69B of the Act. 50. On appeal, we find that though it was the claim of the assessee company that the subject amounts were the advances given to the suppliers in their running accounts in the course of its business and the same were adjusted against the purchase of seeds made from them in the immediately succeeding year, but the same did not find favor with him. Ostensibly, the assessee company had also submitted copies of the ledger accounts of advances to suppliers and, to support the veracity of the transactions, had stated that the respective transactions were carried out through the banking channel; however, the CIT (A) did not find this satisfactory. Accordingly, the CIT(A) finding no infirmity in the view taken by the AO had upheld the addition of Rs. 3,81,54,765/- made by him under section 69B of the Act. 51. We have given thoughtful consideration to the subject issue before us, i.e., the ....
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....d amounts aggregating to Rs. 3,81,54,765/- through the banking channel from its books of account to the suppliers; by what means, then, has the AO brought this amount within the meaning of section 69B of the Act? Apart from that, we find that the CIT(A) had, in a stereotypical manner, merely endorsed the view taken by the AO. In our view, as it is not a case that the assessee had suppressed any investment or is found to be the owner of any bullion, jewellery or other valuable article, and such investments or amount expended in acquiring such bullion, jewellery or other article exceeds the amount recorded in its books of accounts, there could have been no justification for the authorities below to have made/sustained the impugned addition under section 69B of the Act. 55. Be that as it may, we are even otherwise on merits unable to subscribe to the impugned addition made by the AO. We say so, for the reason that as the assessee company had advanced the amounts to its suppliers, i.e., as trade advances; therefore, it is incomprehensible that on what basis the AO could have drawn adverse inferences by observing that the assessee company had failed to prove the identity, creditworth....