2016 (4) TMI 1294 - HC - Income Tax

Entitlement to claim the weighted deduction at the specified rate u/s S.35 (2AB) - approval of the in-house research and development facility - quantum of such expenditure - no show cause notice and an opportunity of hearing to the petitioner assessee before cost of purchase of motor vehicles and salary and wages of the trainees and apprentices as disallowed from the category of approved expenditure on scientific research - Held that - Undisputably before reducing the amount of R & D expenditure for these two Assessment Years in question i.e., 2011-12 and 2012-13 to the extent of ₹ 59.69 lakhs and 55.51 lakhs respectively, the said respondent Secretary did not give any prior show cause notice and an opportunity of hearing to the petitioner assessee as to why these two amounts under two different heads namely, cost of purchase of motor vehicles and salary and wages of the trainees and apprentices, be not disallowed from the category of approved expenditure on scientific research . Thus, the assessee was deprived of its valuable right of hearing and rebut and controvert the case against him on the basis of which, the said respondent Secretary passed the impugned order approving the expenditure for scientific research as required under the provisions of S.35 (2AB) at a reduced level. Had such a notice been given by the said authority to the assessee company, perhaps the assessee company could have satisfied the said authority about the genuineness of the claim and rational nexus of these expenses relatable to the scientific research undertaken by it entitling it for claiming the weighted deduction in respect of these expenses also under the category of approved expenditure for scientific research under S.35(2AB) of the Act. The impugned order is thus clearly hit by the vice of non-compliance of the principles of natural justice or audi alterm partem, the applicability of which even to the taxing statute cannot be ruled out. The competent authority passed this order under these provisions certainly exercising a quasi-judicial function when he passed this order approving the expenditure incurred by the assessee on scientific research. No such unilateral action or determination could have been taken by the respondent Secretary particularly when he chose to reduce the amount of expenditure incurred on scientific research as against the amount claimed by the assessee, to the detriment of the assessee company resulting in an adverse double tax effect as per the provisions of the Act. This Court would not like to pronounce upon the includibility of these expenses in the head of approved expenditure for scientific research at this stage and it is considered appropriate that the 1st respondent Secretary himself is allowed to reconsider the case on these issues after allowing a reasonable opportunity of hearing to the assessee in this regard

Summary

Issues:
Dispute over approval of in-house research and development facility expenditure under S.35(2AB) of the Income Tax Act, 1961.

Analysis:
The petitioner, a limited company assessed under the Income Tax Act, applied for approval of in-house research and development facility expenditure under S.35(2AB) of the Act. Approval was granted, but the approved expenditure was lower than claimed for two assessment years. The petitioner requested reconsideration, citing differences in claimed and approved amounts due to expenses like motor vehicles and salary/wages. The petitioner argued that these reasons were not valid for reducing the approved expenditure.

The petitioner contended that the approval of expenditure was done without notice or hearing, and the reasons provided for reduction were insufficient. The respondent argued that the reasons were justifiable and that certain expenses were not eligible for deduction under S.35(2AB). The court noted that the purpose of the provision was to promote scientific research and that any reduction in approved expenditure could impact tax liability significantly.

The court found that the approval process lacked proper explanation and opportunity for the petitioner to contest the reduction. It emphasized the importance of natural justice principles in quasi-judicial functions related to tax matters. The court directed the competent authority to reconsider the case, allowing the petitioner a fair hearing to present their case for inclusion of the disputed expenses in the approved expenditure for scientific research.

The court ordered the petitioner to appear before the authority for a hearing and mandated the authority to issue a reasoned order within six months. The court allowed the petitioner to pursue further legal remedies if unsatisfied with the authority's decision. The case was disposed of with no costs awarded, emphasizing the need for a fair process and proper consideration of the petitioner's contentions.