2018 (4) TMI 1058 - AT - Income Tax

Disallowance of weighted deduction u/s 35(2AB) - non receipt of form No.3CM - expenditure incurred on Research & Development activity - where facility has been approved by prescribed authority, but no form No.3CM issued, can the assessee be denied deduction? - Held that - Recognition given by the prescribed authority which is mandate of section 35(2AB) is maintained and once the recognition is so maintained, the assessee has to be accorded deduction under section 35(2AB) of the Act. The non receipt of form No.3CM for the intervening three years is at best a procedural lapse and is not fatal for denial of claim of deduction under section 35(2AB) of the Act. Accordingly, we hold so. The prescribed authority in any case under the pre-amended provisions had no authority to look into the nature and quantum of expenditure except in the first year to see investment in land and building. After recognition of facility and approval by DSIR, the Assessing Officer is to allow the claim of assessee after verifying the same. Thus allow deduction claimed under section 35(2AB) of the Act to the facility for the year under appeal. - Decided in favour of assessee Disallowance u/s 43B on delayed payment of leave encashment - Held that - Clause (f) to section 43B of the Act was inserted by the Finance Act w.e.f. 01.04.2002. However, the Hon ble High Court of Calcutta in Exide Industries Ltd. Vs. Union of India (2007 (6) TMI 175 - CALCUTTA High Court) had struck down the said amendment being arbitrary and unconstitutional, applying the ratio laid down by the Hon ble Apex Court in the case of Bharat Earth Movers Vs. CIT (2000 (8) TMI 4 - SUPREME Court). Once the said clause has been struck down, then the payment of leave encashment is a trade liability and not statutory liability, hence, the provisions of section 43B of the Act are not attracted. Direct the Assessing Officer to allow the aforesaid deduction to the assessee.

Summary

Issues Involved:
1. Disallowance of weighted deduction under section 35(2AB) of the Income Tax Act, 1961.
2. Alternate plea for deduction under section 35(1)(i) and 35(1)(iv).
3. Disallowance under section 43B on account of delayed payment of leave encashment.

Detailed Analysis:

1. Disallowance of Weighted Deduction under Section 35(2AB):
The primary issue in the appeal is the disallowance of weighted deduction amounting to ?93,45,333 under section 35(2AB) of the Income Tax Act, 1961. The assessee claimed this deduction for its in-house R&D facility, which was approved by the Department of Scientific and Industrial Research (DSIR). However, the Assessing Officer disallowed the claim on the grounds that the assessee did not submit the approval for the expenses in the prescribed form No.3CM from DSIR. The CIT(A) upheld this disallowance, noting that the DSIR had not granted form No.3CM for the period under consideration.

The assessee argued that it had received recognition for its R&D facility for the periods 2006-09 and 2012-15, and had applied for renewal for the period 2010-12. Despite the absence of form No.3CM for the intervening period, the facility was continuously recognized by DSIR. The Tribunal referred to various judicial precedents, including the decisions of the Hon’ble High Courts of Gujarat, Delhi, and Madras, which held that the date of approval by DSIR was not crucial for claiming the deduction, provided the facility was recognized. The Tribunal concluded that the non-receipt of form No.3CM was a procedural lapse and not a ground for denial of the deduction. Therefore, the Tribunal directed the Assessing Officer to allow the deduction under section 35(2AB).

2. Alternate Plea for Deduction under Section 35(1)(i) and 35(1)(iv):
The assessee raised an alternate plea to allow deduction of ?57,64,322 under section 35(1)(i) for revenue expenditure and ?4,65,900 under section 35(1)(iv) for capital expenditure incurred on R&D activities. However, this plea became academic in nature as the Tribunal allowed the primary ground of appeal.

3. Disallowance under Section 43B on Account of Delayed Payment of Leave Encashment:
The assessee contested the disallowance of ?96,311 under section 43B of the Act for delayed payment of leave encashment. The Tribunal noted that clause (f) to section 43B, inserted by the Finance Act, 2002, was struck down by the Hon’ble High Court of Calcutta in Exide Industries Ltd. v. Union of India (2007) as arbitrary and unconstitutional. Consequently, leave encashment was considered a trade liability and not a statutory liability, making section 43B inapplicable. The Tribunal directed the Assessing Officer to allow the deduction for leave encashment.

Conclusion:
The Tribunal allowed the appeal partly by directing the Assessing Officer to grant the deduction under section 35(2AB) and to allow the deduction for leave encashment under section 43B. The alternate plea for deduction under section 35(1) became academic and was not adjudicated.