2011 (2) TMI 66 - HC - Income Tax

Research and development expenditure deduction under Section 35 (2AB) of the Income Tax Act - entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction - facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by Section 35(2AB) Appeal dismissed

Summary

Issues:
Claim of deduction under Section 35(2AB) of the Income Tax Act for research and development activity.

Analysis:
In the assessment year 2005-2006, the assessee, engaged in manufacturing automotive air conditioning, claimed a deduction of Rs. 3,83,62,003 under Section 35(2AB) of the Income Tax Act to encourage research and development activities by business enterprises in India. The Department of Scientific & Industrial Research (DSIR) certified the assessee's in-house R&D facilities and approved the expenses incurred for R&D. However, the Assessing Officer denied the deduction, stating that the approval was granted in the next assessment year. The CIT(Appeal) upheld this decision, but the Income Tax Appellate Tribunal ruled in favor of the assessee, citing a judgment by the Gujarat High Court. The Gujarat High Court emphasized that once DSIR issues a certificate, the assessee fulfills the conditions for the weighted deduction, regardless of the cut-off date mentioned in the certificate. The Tribunal also highlighted the legislative intention behind the provision to boost R&D facilities in India.

The Tribunal's interpretation of the law was clear - the assessee is entitled to the weighted deduction on all expenditure incurred for developing the R&D facility once it is approved by the prescribed authority, DSIR. The Tribunal's analysis of Rule 6(5A) and Form No. 3CM supported this conclusion, emphasizing that the entire expenditure on R&D facility development should be allowed for weighted deduction under Section 35(2AB). The Tribunal aligned with the legislative intent to promote R&D by providing deductions for the entire expenditure incurred on facility development once approved.

The High Court fully agreed with the reasoning of the Tribunal and the Gujarat High Court, finding no scope for a different interpretation. It concluded that since the approval was granted during the relevant previous year, the assessee was entitled to claim the weighted deduction for the entire expenditure incurred under Section 35(2AB) of the Act. As no substantial question of law arose, the appeal was dismissed.