2020 (2) TMI 654 - AT - Income Tax

Revision u/s 263 - allowability of deduction claimed u/s 35(2AB) of the Act when Form No.3CL is absent on record and issued show cause notice proposing to revise the said order of AO - as per CIT no evidence on record to decipher that the AO examined the contents i.e. expenditure incurred on R D as claimed u/s 35(2AB) - HELD THAT - We find the failure to file Form No.3CL to the authority does not make orders erroneous. The claim is very much allowable provided the expenditure portion is examined and found allowable under the said provisions. In any case, such expenditure can also be allowable u/s 37 of the Act, provided the conditions are met. Further, we also examined the judgment in the case of CIT Vs. Sun Pharmaceutical Industries Ltd. 2017 (8) TMI 933 - GUJARAT HIGH COURT Claim of deduction u/s 35(2AB) of the Act cannot be denied merely for want of Form No.3CL subject to fulfilment of other conditions under Rule 7 of IT Rules. It is merely a procedural lapse. Further, it is also a decided issue that the expenditure which is claimed under the said section is allowable after due process of verification by the concerned authorities. Therefore, the Hon ble High Court directed the AO to verify the actual expenditure incurred by the assessee in that case. Neither the AO nor Pr.CIT gave finding of fact on the R D nature of expenditure under consideration. There, we cannot examine them and give a finding of fact. Ld. AR also requested for remand for verification. Considering the above settled nature of the issue, we are of the opinion that the deduction u/s 35(2AB) of the Act cannot be denied merely for the procedural lapses. Therefore, the order of the PCIT needs modification. Modification include (1) the judgment of Hon ble High Court of Gujarat in the case of CIT Vs. Sun Pharmaceutical Industries Ltd. (supra) and other judgments, if any, on the subject, are required to be following by the PCIT; and (2) Due verification of the expenditure and the allowability of expenditure u/s 35(2AB) of the Act has to be examined by the PCIT too. We modify the orders of Pr.CIT accordingly, for both assessment years. PCIT is directed to pass consequential order after hearing the assessee. The assessee is directed to demonstrate the allowability of the said expenditure. Appeals of the assessee is partly allowed.

Summary

Issues Involved:
1. Validity of the revision order under Section 263 of the Income Tax Act.
2. Allowability of weighted deduction under Section 35(2AB) of the Income Tax Act.
3. Procedural requirements and compliance regarding Form Nos. 3CM and 3CL.

Detailed Analysis:

1. Validity of the Revision Order under Section 263:

The primary issue was whether the Principal Commissioner of Income Tax (Pr.CIT) was justified in invoking Section 263 of the Income Tax Act, which allows for the revision of orders considered erroneous and prejudicial to the interests of the revenue. The Pr.CIT contended that the Assessing Officer (AO) had not properly examined the allowability of the deduction claimed under Section 35(2AB) due to the absence of Form No.3CL. The Tribunal analyzed whether the AO's order was indeed erroneous and prejudicial to the revenue. It was noted that the AO had allowed the deduction without verifying the expenditure in detail, which justified the Pr.CIT's action under Section 263. The Tribunal upheld the Pr.CIT's direction to reassess the expenditure but emphasized that the deduction could not be denied merely due to procedural lapses.

2. Allowability of Weighted Deduction under Section 35(2AB):

The assessee claimed a weighted deduction under Section 35(2AB) for in-house research and development (R&D) expenses. The AO initially allowed the deduction, but the Pr.CIT questioned the absence of Form No.3CL, which is an intimation from the Secretary, DSIR to the DG (Exemption). The Tribunal referenced multiple judgments, including the Hon’ble High Court of Gujarat's decision in CIT Vs. Sun Pharmaceutical Industries Ltd., which held that the absence of Form No.3CL should not be a ground to deny the deduction if other conditions are met. The Tribunal directed that the deduction should be allowed after verifying the actual R&D expenditure, aligning with the principle that procedural lapses should not invalidate substantive claims.

3. Procedural Requirements and Compliance Regarding Form Nos. 3CM and 3CL:

The Tribunal noted that Form No.3CM, which signifies the approval of the in-house R&D facility by the DSIR, was available, but Form No.3CL was not furnished because the assessee failed to submit the financial statements to the DSIR. The Tribunal reiterated that the absence of Form No.3CL is a procedural lapse and should not result in the denial of the deduction. The Tribunal emphasized the need for verification of the actual R&D expenditure by the AO or Pr.CIT. The Tribunal modified the Pr.CIT's order to ensure compliance with judicial precedents and directed the Pr.CIT to re-examine the expenditure's allowability under Section 35(2AB) after providing the assessee an opportunity to present their case.

Conclusion:

The Tribunal concluded that the revision order under Section 263 was valid to the extent that it required verification of the R&D expenditure. However, it clarified that the deduction under Section 35(2AB) should not be denied solely due to the absence of Form No.3CL. The Tribunal directed the Pr.CIT to re-assess the expenditure's allowability, ensuring compliance with relevant judicial precedents. The appeals were partly allowed, modifying the Pr.CIT’s order to align with the principles established in previous judgments.