2015 (1) TMI 59 - AT - Income Tax

Weighted deduction u/s 35(2AB) of the Act In-house R & D unit - Alternate claim of deduction u/s 37 - Disallowance of 5% of business development expenditure on adhoc basis. - Held that - Following the decision in DCIT, Circle 16(1), Hyderabad Versus M/s. Nagarjuna Agrichem Ltd. 2014 (6) TMI 396 - ITAT HYDERABAD - the statutory formalities for getting approval u/s 35(2AB) are that application in Form No. 3CK and 3CL are to be submitted and an order of approval has to be obtained in Form No. 3CM from the prescribed authority - the assessee has not furnished Form No. 3CM either before the revenue authorities or before us for claiming weighted deduction u/s 35(2AB) - there is justification for reopening of assessment - assessee is entitled for 100% of the allowance at present and as and when received Form 3CM, weighted deduction may be allowed. Restriction placed in Section 35(2AB) will apply only in the case when amount was allowed u/s 35 itself - These two provisions are mutually exclusive but an assessee can claim a particular deduction either u/s 35 or u/s 37 so long as the amount spent is for the purpose of business there was no merit in the AO s contention that the amount once considered u/s 35 cannot be considered u/s 37 Decided in favour of assessee.

Summary

Issues involved:
1. Disallowance of weighted deduction claimed by the assessee under section 35(2AB) for assessment year 2010-11.
2. Appeal by the Department against the order of the CIT(A) granting deduction to R&D expenses under section 37.

Detailed Analysis:
1. The appeal pertains to the disallowance of weighted deduction claimed by the assessee under section 35(2AB) for the assessment year 2010-11. The assessee, engaged in the business of manufacture and trade of drugs and medicines, filed a return of income declaring total income under normal provisions and u/s. 115JB of the IT Act, 1961. The dispute arose when the Assessing Officer proposed to disallow an amount based on the difference between R&D expenses approved by the DSIR and those claimed by the assessee. The AO disallowed an amount higher than what the assessee claimed, leading to an appeal before the CIT(A). The CIT(A) allowed the appeal, emphasizing that the unapproved amount was still incurred in the normal course of business and hence, should be allowable. The Department, aggrieved by this decision, raised grounds of appeal challenging the CIT(A)'s decision on various legal and factual aspects.

2. The Department's grounds of appeal primarily focused on the eligibility of R&D expenses for deduction under section 37, questioning the CIT(A)'s decision to grant such deductions. The Department contended that specific provisions under sections 35(1)(i) and 36(1)(iv) govern the grant of deductions for R&D expenses, and argued against allowing such deductions under section 37. The Department also raised concerns regarding the recognition of expenses as R&D by the competent authority, highlighting the need for adherence to statutory requirements. However, the learned counsel for the assessee argued that the disputed amount was indeed incurred as revenue expenses and should be allowed as per the CIT(A)'s decision. The counsel relied on precedents and tribunal decisions supporting the allowance of deductions under section 37 for unapproved R&D expenses.

3. In the detailed analysis of the tribunal's decision, the judges referred to previous cases involving similar issues, particularly the DCIT vs. Nagarjuna Agrichem Ltd. case. The tribunal emphasized the importance of obtaining necessary approvals and certificates for claiming weighted deductions under section 35(2AB). The judges highlighted the distinction between deductions under section 35 and section 37, noting that the provisions are mutually exclusive but can be claimed based on the purpose of business expenditure. The tribunal directed the AO to allow 100% deduction immediately and weighted deduction upon receipt of the necessary approval form. The decision was based on the principle that the disallowance under section 35(2AB) does not preclude the allowance under section 37 for business-related expenses. Ultimately, the tribunal dismissed the Department's appeal, upholding the CIT(A)'s decision to grant deductions for the disputed R&D expenses under section 37.

In conclusion, the judgment addresses the contentious issue of disallowance of weighted deductions claimed by the assessee under section 35(2AB) and the subsequent grant of deductions under section 37 by the CIT(A). The tribunal's decision provides clarity on the eligibility of R&D expenses for deductions under different sections of the IT Act, emphasizing the need for compliance with statutory requirements and the purpose of business expenditure.