2022 (8) TMI 1287 - AT - Income Tax

Deduction of research and development expenditure claimed by the appellant under section 35(2AB) - HELD THAT - Scientific research expenses incurred at approved in-house R D facility are eligible for weighted deduction u/s 35(2AB) of the Act, whether incurred prior to or post the date of such approval by DSIR mentioned in Form 3CM - See Claris Lifesciences Ltd., Sandan Vikas India and Maruti Suzuki India Ltd. vs Union of India Anr. 2017 (8) TMI 248 - DELHI HIGH COURT Deduction under section 35(2AB) cannot be denied in respect of recognized in-house R D centre even though approval in Form 3CM for the relevant years was under consideration or awaited - See CIT vs TVS Electronics Ltd. 2019 (5) TMI 112 - MADRAS HIGH COURT and Minilec India (P.) Ltd. 2018 (4) TMI 1058 - ITAT PUNE Expenditure eligible for deduction under section 35(2AB) of the Act cannot be restricted to the amount of expenditure certified by Department of Scientific and Industrial Research ( DSIR ) in Form 3CL - See ACIT vs Torrent Pharmaceuticals 2009 (11) TMI 819 - ITAT AHMEDABAD , Coromandel International Ltd. 2014 (9) TMI 510 - ITAT HYDERABAD , Cummins India Ltd. vs DCIT 2018 (5) TMI 1314 - ITAT PUNE Deduction under section 35(2AB) cannot be denied merely on the ground that prescribed authority has not submitted report in Form 3CL - See Sun Pharmaceutical Industries Ltd. 2016 (12) TMI 1539 - ITAT AHMEDABAD Sri Biotech Laboratories India Ltd. and STP Ltd. 2014 (10) TMI 171 - ITAT HYDERABAD Amendment in Rule 6(7A) of IT Rules, 1962 regarding quantification of weighted deduction under section 35(2AB) in Form 3CL applies prospectively w.e.f. 01.07.2016 - See Provimi Animal Nutrition India Pvt. Ltd. 2020 (12) TMI 177 - ITAT BANGALORE Crompton Greaves Ltd. and Force Motors 2019 (10) TMI 134 - ITAT MUMBAI Learned Departmental Representative could not controvert that the issue stands covered in favour of the assessee by aforesaid decision of the Hon ble High Courts. It is settled law that decisions of High Court prevails over lower courts and Tribunals. Hence, we hold that as per extant provision, the claim is allowable. Accordingly, we set-aside the orders of authorities below and decide the issue in favour of the assessee. Allowability of ESOP expenses - Additional Ground of appeal - HELD THAT - We admit this additional ground. In this, the Ld. Counsel for the assessee submitted that he shall be relying on ITAT Special Bench decisions in case of Biocon Limited 2013 (8) TMI 629 - ITAT BANGALORE which was affirmed by the Hon ble Karnataka High Court 2020 (11) TMI 779 - KARNATAKA HIGH COURT However, he fairly agreed that these decisions were not there when the matter was considered by revenue authorities. Hence, he prayed that this issue may be remitted to the file of the AO to decide as per the ratio arising in these case laws.

Summary

Issues Involved:
1. Disallowance of deduction of research and development expenditure under section 35(2AB) of the Income Tax Act, 1961.
2. Competency of the Department of Scientific and Industrial Research (DSIR) to approve expenses for claiming weighted deduction under section 35(2AB).
3. Authority of DSIR to approve the quantum of expenditure for deduction under section 35(2AB).
4. Requirement for DSIR approval for in-house Research and Development facility expenses.
5. Allowability of ESOP expenses under section 37(1) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Deduction of Research and Development Expenditure:
The assessee's claim for weighted deduction under section 35(2AB) was restricted by the Assessing Officer to the amount certified by DSIR, leading to the disallowance of Rs. 52,69,000. The CIT(A) upheld this decision, referencing cases like Electronic Corporation India Ltd. vs ACIT and Coromandel International Ltd vs. ADIT, which emphasized that only expenses approved by DSIR in Form 3CL are eligible for weighted deduction.

2. Competency of DSIR to Approve Expenses:
The CIT(A) held that DSIR is the competent authority to approve expenses for the purpose of claiming weighted deduction under section 35(2AB). This was supported by previous ITAT decisions, which stated that neither the tax officer nor the appellate authority could decide on the expenditure entitled to weighted deduction under this section.

3. Authority of DSIR to Approve the Quantum of Expenditure:
The CIT(A) concluded that DSIR's approval is necessary for the quantum of expenditure claimed under section 35(2AB). The assessee contended that DSIR's role is limited to approving the R&D facility, not the expenses. However, the CIT(A) and the ITAT decisions referenced, such as Coromandel International Ltd vs. ADIT, supported the view that DSIR's certification in Form 3CL is crucial for claiming the deduction.

4. Requirement for DSIR Approval for In-house R&D Facility Expenses:
The CIT(A) and subsequent ITAT decisions consistently held that the approval of DSIR is a prerequisite for claiming weighted deduction on R&D expenses. The assessee's argument that approval is only required for the facility and not for expenses was rejected. The ITAT cited decisions from various High Courts, including CIT vs Claris Lifesciences Ltd. and CIT vs Sandan Vikas India Ltd., which clarified that once the R&D facility is approved, all related expenditures are eligible for deduction, regardless of the date of approval.

5. Allowability of ESOP Expenses:
The assessee raised an additional ground regarding the allowability of ESOP expenses under section 37(1). This ground was admitted for consideration, and the ITAT decided to remit the issue back to the Assessing Officer for reconsideration in light of the ITAT Special Bench decision in Biocon Limited vs DCIT, which was affirmed by the Karnataka High Court.

Conclusion:
The appeals were partly allowed for statistical purposes. The ITAT set aside the orders of the lower authorities regarding the disallowance of R&D expenses, directing that the claims be allowed based on the extant provisions and relevant High Court decisions. The issue of ESOP expenses was remitted to the Assessing Officer for reconsideration. The same order applied mutatis mutandis to the appeal for the Assessment Year 2014-15.