TaxTMI 
TaxTMI 
2026 (6) TMI 1501
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.... 35(2AB) of the Income-tax Act, 1961, without properly appreciating the statutory role of the Department of Scientific and Industrial Research (DSIR) in granting approval for eligible expenditure. 2. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that approval by DSIR is a mandatory condition for allowing weighted deduction under section 35(2AB) of the Act and that the Assessing Officer was justified in restricting the deduction to the extent of expenditure not approved, recognized by DSIR. 3. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that DSIR is competent only to recognize the in-house R&D facility and has no authority in 3 relation to approval OR disallowance of R&D expenditure, ignoring the provisions of section 35(2AB) read with Rule 6(7A) and Form No. 3CL, which clearly require quantification and approval of eligible expenditure by DSIR. 4. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has erred in law in allowing the deduction merely on the ground that the assessee had fulfilled the conditions prescribed unde....
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.... Assessing Officer examined, amongst other things, the assessee's claim for weighted deduction under section 35(2AB) of the Act, the claim of balance additional depreciation under section 32(1)(iia) of the Act and the computation of disallowance under section 14A read with Rule 8D. The assessee had claimed weighted deduction under section 35(2AB) of the Act in respect of expenditure incurred on approved in-house research and development facilities. On verification of Form 3CL issued by the Department of Scientific and Industrial Research (DSIR), the Assessing Officer observed that while the assessee had claimed weighted deduction on R&D expenditure amounting to Rs.5.07 crore, DSIR had certified expenditure only to the extent of Rs.4.54 crore. Accordingly, the Assessing Officer held that the differential expenditure of Rs.53.33 lakh was not eligible and denied weighted deduction thereon amounting to Rs.1,06,65,416/- (on the ground that that only expenditure approved by DSIR in Form 3CL qualified for weighted deduction). The Assessing Officer proceeded on the basis that the quantification made by DSIR in Form 3CL was binding for determining the amount eligible for deduction under....
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....tion 35(2AB) as the law stood prior to A.Y. 2017-18. The CIT(A) held that the assessee had fulfilled all conditions prescribed under section 35(2AB) of the Act and deletion the disallowance of Rs.1,06,65,416/-. Thus, the CIT(A) held that the amendment to Rule 6(7A) requiring certification of expenditure by DSIR operated prospectively and could not be applied to A. Y. 2016-17. 4. With regard to additional depreciation under section 32(1)(iia) of the Act, the assessee submitted before the CIT(A) that the machinery in question had been acquired during the second half of the preceding year and, owing to usage for less than 180 days, only 50% additional depreciation had been allowed in that year. The assessee submitted that the restriction to 50% in the year of acquisition was merely a timing restriction and did not result in extinguishment of the balance entitlement. The assessee submitted that section 32(1)(iia) of the Act granted a one-time incentive for acquisition of new plant and machinery and such beneficial provision ought to be construed liberally. The assessee submitted that the amendment brought by Finance Act, 2015 permitting allowance of the balance depreciation in the s....
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....considering WDV of fixed assets and net current assets. 6. Before the CIT(Appeals), the assessee challenged this methodology adopted by the Assessing Officer and submitted that Rule 8D required consideration of "average of total assets as appearing in the balance sheet" and did not consider substitution of gross assets by written down values or reduction of current assets by current liabilities. The assessee submitted that the expression "total assets" in Rule 8D refers to the gross assets appearing in the balance sheet and not the net block or net current assets. The assessee pointed out that the reduction of current liabilities and adoption of WDV had reduced the value of total assets and thereby inflated the disallowance under section 14A. 7. The CIT(Appeals), after considering the submissions, accepted the contention of the assessee. He observed that the difference between the computation made by the Assessing Officer and the one offered by the assessee arose on two counts, firstly, difference in the average value of investments and secondly difference in the average value of total assets. The CIT(A) noted that the Assessing Officer had adopted a methodology which had the....
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....licable for A.Y. 2016-17, mandated that the amount of expenditure should necessarily be quantified and approved by DSIR as a condition precedent for allowability of deduction. The emphasis under the Statute was on approval of the facility and not approval of each item of expenditure. 12. We find that there is no dispute that the assessee possessed valid approval from DSIR in Form No.3CM in respect of its "in-house" R&D facilities. The Assessing Officer has not doubted the genuineness of the expenditure nor has he brought any material on record to suggest that the expenditure claimed by the assessee was not incurred on scientific research activities. The only basis for disallowance by the Assessing Officer was that the amount certified in Form No.3CL was lower than the expenditure claimed by the assessee. In our considered view, such an approach is not sustainable in law. 13. The CIT(Appeals), while deleting the addition, has correctly noticed that prior to the amendment brought in Rule 6(7A), the role of DSIR was confined to granting approval to the facility and Form No.3CL was only a reporting mechanism. 14. In Assistant Commissioner of Income-tax, Central vs.Intas Pharma....
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.... the scheme of section 35(2AB) as it stood during the year under consideration. Accordingly, we find no infirmity in the order of Ld. CIT (Appeals) so as to call for any interference. 17. In the result, Ground Nos. 1 to 4 raised by the Revenue are dismissed. 18. Ground Numbers 5 to 6: claim of balance additional depreciation under section 32(1)(iia) of the Act. 19. Ground Nos. 5 and 6 of the Revenue's appeal challenge the action of the CIT(Appeals) in allowing the claim of Rs.2,00,04,913/- being the balance 50% of additional depreciation in respect of eligible plant and machinery acquired during the preceding previous year and put to use for less than 180 days. The case of the Revenue is that in the absence of any specific enabling provision under the law as it stood prior to insertion of the third proviso to section 32(1), the balance 50% of additional depreciation could not have been claimed in the subsequent year. For the year under consideration, section 32(1)(iia) provided as under: "(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engag....
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....ently, in CIT v. Aztec Auto Pvt. Ltd. [(2020) 119 taxmann.com 215 (Mad.)], the Hon'ble Madras High Court reiterated that section 32(1)(iia) grants a one-time incentive and the balance 50% cannot be denied merely because the machinery had been put to use for less than 180 days in the year of acquisition. 22 We further note that the Finance Act, 2015 inserted the third proviso to section 32(1) with effect from 01.04.2016, which reads as under: "Provided also that where an asset referred to in clause (iia) is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under clause (iia) in respect of such asset is restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year under the second proviso, then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under clause (iia) in the immediately succeeding previous year in respect of such asset." The Memoran....
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....(2)(ii), as applicable to A.Y. 2016-17, provided that the amount of expenditure by way of interest not directly attributable to any particular income or receipt shall be computed according to the following formula: "A x B/C Where 'A' = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; 'B' = the average of value of investment, income from which does not or shall not form part of the total income, appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year; 'C' = the average of total assets as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year." 28. Thus, the denominator prescribed by the Rule is the "average of total assets as appearing in the balance-sheet". The Rule does not provide for substitution / replacement of gross assets by written down value of assets nor does it specify reducing current liabilities from current assets. The expression used by the Rule is "total assets as appearing in the balance-sheet" and not "net assets", "net curren....
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.... law, the learned Commissioner of Income Tax (Appeals) [ CIT(A)], has erred in upholding disallowance of weighted deduction of Rs 2,07,03,764 under section 35(2AB) of the Act being two times of the expenditure incurred on scientific research on in-house research and development facility. 1.2 Deduction under section 35(1)(i) of the Act: Without prejudice, on the facts and circumstances of the case and in law, the learned CIT(A), has erred in denying deduction of Rs 56,13,495 under section 35(1)(i) of the Act being revenue expenditure incurred on scientific research related to the business of the appellant. 1.3 Deduction under section 35(2) (ia) of the Act: Without prejudice, on the facts and circumstances of the case and in law, the learned CIT(A), has erred in denying deduction of Rs 47,38,387 under section 35(2) (ia) of the Act being capital expenditure incurred on scientific research related to the business of the appellant. 34. The brief facts of the case are that during the course of assessment proceedings, the Assessing Officer examined the assessee's claim of weighted deduction under section 35(2AB) of the Act in respect of expenditure incurr....
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....fication of expenditure incurred on in-house research and development facility eligible for weighted deduction under section 35(2AB) of the Act. According to the CIT(Appeals), with effect from A.Y. 2017-18, the Statutory scheme itself specified the authority of DSIR to determine the quantum of eligible expenditure and therefore the Assessing Officer was justified in restricting the weighted deduction to the amount approved by DSIR. The CIT(Appeals) noted that the assessee's contentions on this issue were similar to those raised in earlier years; however, in view of the amendment to Rule 6(7A), he held that the position of law had undergone a material change from A.Y. 2017-18 onwards. The CIT(Appeals) accordingly held that the Assessing Officer was justified in disallowing weighted deduction under section 35(2AB) amounting to Rs.2,07,03,764/- and thus confirmed the principal addition. 37. The CIT(Appeals) thereafter considered the alternate grounds raised by the assessee. He observed that out of the total expenditure claimed by the assessee, DSIR had declined approval only to the extent of Rs.1,03,51,882/-, comprising revenue expenditure of Rs.56.13 lakh and capital expenditu....
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....elopment facilities. The prescribed authority, namely the Department of Scientific and Industrial Research (DSIR), approved expenditure only to the extent of Rs.6,26,52,000/- and consequently expenditure aggregating to Rs.1,03,51,882/-, comprising revenue expenditure of Rs.56,13,495/- and capital expenditure of Rs.47,38,387/-, was excluded by DSIR while issuing Form No. 3CL. Accordingly, the Assessing Officer disallowed weighted deduction of Rs.2,07,03,764/- and the said action was confirmed by the CIT(Appeals). 40. With respect to Ground Number 1.1 of the assessee's appeal, we observe that as the law as it stood for A. Y. 2017-18, Rule 6(7A)(b), inserted with effect from 01.07.2016, specifically provided for furnishing of a report in Form No. 3CL containing, inter alia, the quantification of expenditure incurred on in-house research and development facility eligible for weighted deduction under section 35(2AB). Therefore, unlike the position prevailing in earlier years, the authority of DSIR to quantify eligible expenditure was Statutorily recognized. The Assessing Officer merely adopted the quantification made by the prescribed authority and restricted the deduction accord....
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....e field of scientific research and development and the requirements under the statutory scheme are highly technical in nature and have therefore been consciously entrusted to an expert body. The Hon'ble High Court categorically held that once the prescribed authority examines the conditions and grants approval, the Revenue authorities cannot sit in judgment over the decision of such authority, since any contrary view would create a conflict in the decision-making process and render the role assigned to the expert body otiose. The Court further held that while the Assessing Officer may verify the accounts and the eligibility of the claim from the standpoint of the Act, he cannot ignore or override the determination made by the prescribed authority on matters falling within its domain. The Hon'ble High Court made the following observations: 17. Thus the Statutory scheme envisages the prescribed authority as a body which can minutely examine all these highly technical and scientific requirements in case of a company. We may recall that the prescribed authority is the Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of In....
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....to overrule the decision of the said body. Thirdly, there are multiple indications within the Rules themselves. We may recall, under sub-rule (2) of rule 18D, extension of approval once granted is subject to satisfactory performance of the company, to be judged on periodic review. Further, sub-rule (3) of Rule 18DA gives wide powers to the prescribed authority to withdraw the approval if it is found that the same was to avoid payment of taxes by its group companies or companies related to its directors or majority of its shareholders or that any provisions of the Act or the Rules have been violated. Thus once again the task of judging whether the provisions of the Act or the Rules have been violated or not, has entrusted to the prescribed authority with matching powers for withdrawal of the approval, if the authority is satisfied about such breach. 44. In the case of Commissioner of Income Tax-III Bangalore vs. Quintiles Research (India) (P.) Ltd. [2020] 121 taxmann.com 241 (Karnataka)/[2021] 276 Taxman 10 (Karnataka)/[2020] 429 ITR 4 (Karnataka)[14-10-2020], the Hon'ble High Court held that if prescribed authority grants approval to assessee-company as a research and develo....
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....ein are independently satisfied. 47. We notice that neither the Assessing Officer nor the CIT(Appeals) has examined whether the revenue expenditure of Rs.56,13,495/- satisfies the requirements of section 35(1)(i) of the Act or whether the capital expenditure of Rs.47,38,387/- satisfies the conditions prescribed under section 35(1)(iv) of the Act read with section 35(2) of the Act. The alternate claim has been rejected merely because the expenditure was not approved by DSIR under section 35(2AB) of the Act. In our view, such an approach is not legally sustainable. Accordingly, in the interest of justice, we restore this limited issue to the file of the Assessing Officer for de novo consideration. The Assessing Officer shall verify whether the revenue expenditure of Rs.56,13,495/- qualifies for deduction under section 35(1)(i) and whether the capital expenditure of Rs.47,38,387/- qualifies for deduction under section 35(1)(iv) read with section 35(2) of the Act. If the assessee is found to satisfy the conditions prescribed under the aforesaid provisions, appropriate relief shall be granted in accordance with law after affording adequate opportunity of hearing to the assessee. Thus....