ITAT Directs DSIR to Explain Exclusion of Expenses:

The assessee is engaged in the manufacturing and trading of pharmaceutical products, maintained two in-house Research and Development (R&D) facilities at Gotri and Padra in Gujarat. Both facilities were duly approved by the Department of Scientific and Industrial Research (DSIR) under Form 3CM, with the approval remaining valid for the relevant assessment year.

While filing its return of income, the assessee claimed a weighted deduction of Rs. 19,30,60,244 under Section 35(2AB) of the Income Tax Act. The claim comprised revenue expenditure of Rs. 5,10,07,570 and additional weighted deduction of Rs. 14,20,52,674, relating to aggregate R&D expenditure of Rs. 965.29 lakh, including revenue expenditure of Rs. 510.07 lakh and capital expenditure of Rs. 455.22 lakh. The expenditure was also certified by the Tax Auditor in Clause 19 of the Tax Audit Report and reported in Form 3CLA.

However, during the assessment proceedings, the AO noticed that the DSIR, through Form 3CL dated November 22, 2018, had approved eligible R&D expenditure of only Rs. 822.92 lakh, comprising revenue expenditure of Rs. 372.04 lakh and capital expenditure of Rs. 450.88 lakh. Consequently, the AO restricted the weighted deduction and disallowed Rs. 1,46,71,000, consisting of Rs. 1,38,03,000 towards revenue expenditure and Rs. 8,68,000 towards capital expenditure. The disallowance was made solely because the corresponding expenditure had not been certified by the DSIR in Form 3CL. The CIT(A) upheld the disallowance. 

After considering the rival submissions and examining the material on record, the Tribunal observed that the DSIR had reduced the assessee's eligible R&D expenditure without assigning any reasons for excluding the expenditure. Further, there was no evidence to establish that the assessee had been given an opportunity to explain or substantiate the nature of the expenses before they were excluded from Form 3CL.

The Tribunal observed that a quantification having a direct bearing on the assessee's deduction claim cannot be sustained when expenditure is excluded without communicating the reasons or allowing the assessee to furnish an explanation.

The Tribunal also found merit in the alternative claim concerning capital expenditure of Rs. 4.34 lakh. It directed that if the expenditure was ultimately found ineligible for weighted deduction under Section 35(2AB), the assessee's alternative claim under Section 35(1)(iv) read with Section 35(2) should be examined in accordance with law. 

Accordingly, the Tribunal set aside the order of the CIT(A) and restored the matter to the file of the Assessing Officer with directions to obtain a detailed report from the DSIR explaining the reasons for excluding R&D expenditure of Rs. 142.37 lakh, comprising Rs. 138.03 lakh towards revenue expenditure and Rs. 4.34 lakh towards capital expenditure. Resultantly, the appeal filed by BDR Pharmaceuticals International Private Limited was allowed for statistical purposes.