Deduction claim under section 35(2AB) curtailing Expenditure not justified

Any curtailment in expenditure and consequent weighted deduction claim under section 35(2AB) of the Income Tax Act prior to IT (Tenth Amendment) Rules w.e.f. 01.07.2016 is not justified and liable to be set aside

The Deputy Commissioner of Income Tax vs M/S Force Motors Ltd. (ITAT Pune); ITA No. 305/PUN/2021; 03.09.2021

The sole grievance of the Revenue in this appeal was with regard to deletion of the disallowance made by the Assessing Officer on account of excess deduction claimed by the assessee over and above the amount approved by the DSIR by holding that before Tenth Amendment Rule, 2010, the DSIR having no such power to quantify the expenditure incurred on inhouse R & D facility and therefore no requirement of approval in form No.3CL.

Facts:

The assessee company is engaged in manufacturing business of manufacturing light commercial vehicles, utility vehicles, tractors and three wheelers.

The assessee filed the return of income on 29.11.2014 declaring total income of Rs. Nil claiming current year loss amounting to Rs.135,16,65,527/-. Subsequently the assesse company revised its return of income on 31.03.2016 declaring total income of Rs. Nil and claiming current year loss amounting to Rs.135,29,85,317/-. The assessee has shown book profit of Rs.62,96,19,121/- u/s.115JB of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟).

The case of the assessee was selected for scrutiny under CASS. Assessment u/s.143(3) of the Act was completed on 20.12.2017 determining total loss at Rs.131,29,58,520/- after making various additions/disallowances

The Assessing Officer held that as prescribed Authority i.e. DSIR is the final authority for approving the claim u/s.35(2AB), the deduction cannot exceed the claims approved by DSIR and accordingly, the excess deduction claimed by the assessee amounting to Rs.2,22,90,095/- was disallowed and added back to the total income of the assessee

Aggrieved with the assessment order, the assessee preferred an appeal before the Ld. CIT(Appeals). The Ld. CIT(Appeals) deleted the disallowance made by the Assessing Officer on account of excess deduction claimed by the assessee amounting to Rs.2,22,90,095/- u/s.35(2AB) of the Act relying on the judgment of the ITAT Pune dated 15.05.2018 in Cummins India Limited Vs. DCIT, ITA No.309/PUN/2014 for the assessment year 2009-10. Hence this appeal.

Observations:

The Ld. ITAT Bench in the present case relied on the judgment passed by the ITAT pune in Cummins(Supra.) and stated that there is categorical finding given by the Tribunal that 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 expenditure and consequent weighted deduction claim under section 35(2AB) of the Act. It further held that the facts and circumstances in case at hand are identical to the facts and circumstances in Cummins (supra.). The key observations by the ITAT, Pune in Cummins(Supra.) are as follows:

• 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.Before granting the approval, the prescribed authority has to satisfy itself about the genuineness of activities and make enquiries in this regard.
• Under sub-section (2B) to section 35 of the Act, a company engaged in the specified business as laid there on, if it incurs expenditure on scientific research or in-house Research & Development facility also needs to be approved by the prescribed authority, is entitled to deduction, provided the same is approved by the prescribed authority.
• Section 35(2AA), talks about granting of approval by the prescribed authority but the approval to the expenditure being incurred is missing under the said section.
• In sub section 35(2AB), it is provided that facility has to be approved by the prescribed authority, then there shall be allowed deduction of expenditure incurred whether 100%, 150% or 200% as prescribed from time to time.
• Rule 6(5A) of Income Tax Rules, 1962 states that the prescribed authority shall, if 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.
• The quantification of expenditure was prescribed vide IT(Tenth Amendment) Rules , 2016 w.e.f. 01.07.2016. Prior to the amendment, no such power was with DSIR i.e. after approval of facility.
• Under the amended provisions, beside maintaining separate accounts of R& D facility, copy of audited accounts have to be submitted to the prescribed authority. These amendments to rules 6 and 7a are w.e.f. 01.07.2016 i.e. under the amended rules, the prescribed authority as in part A give approval of the facility and in part B quantify the expenditure eligible for deduction under section 35(2AB) of the Act.
• It was concluded that, 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 expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL.

Held:

Ld. (CIT) Appeal was found on same parity of reasoning and under the same set of facts and circumstances and there was no reason to interfere with the findings of Ld. CIT(appeal) and therefore, the Appeal by Revenue department was dismissed.