2023 (8) TMI 1178 - AT - Income Tax

Deduction u/s 35(2AB) - revenue expenditure not approved by DSIR - non filing of Form No. 3CL - Till the original assessment proceeding stage, the assessee had not received Form No. 3CL issued by DSIR and therefore the AO disallowed the weighted deduction claimed - assessee though furnished the copy of the order of approval in Form No. 3CM given by DSIR during the assessment proceedings. DSIR issued Form No. 3CL and accordingly, the AO passed an order u/s 154 allowing weighted deduction section 35(2AB) only to the extent of expenditure appearing in Form No. 3CL and remaining revenue expenditure not approved by DSIR disallowed. HELD THAT - AR furnished the break-up of the allocation of expenditure on clinical trials incurred outside the approved in-house R D facility - As expenses incurred in respect of bio-equivalence study for the drugs and pharmaceutical formulations manufactured/traded by the assessee. We find that as decided in v/s Cadila Healthcare Ltd. 2013 (3) TMI 539 - GUJARAT HIGH COURT held that the benefit u/s 35(2AB) is also available in respect of expenditure on clinical trials outside the approved in-house R D facility. Thus assessee is entitled to claim weighted deduction on expenditure u/s 35(2AB) of the Act in respect of the clinical trial expenses incurred outside the approved in-house R D facility. As regards, the balance expenditure as per the assessee the same was in relation to electricity expenses, which are directly related to the R D centre at the Goa unit. Thus, we are of the view that the said expenditure is also eligible for weighted deduction u/s 35(2AB) of the Act in view of the aforesaid findings. Thus AO is directed to grant weighted deduction on the revenue expenditure u/s 35(2AB) as assessee furnish a copy of the order of approval in Form No. 3CM given by DSIR during the assessment proceedings - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of claim of deduction under section 35(2AB) of the Income-tax Act, 1961.
2. Requirement of Form No. 3CL for claiming weighted deduction.
3. Eligibility of expenditure on clinical trials outside the approved in-house R&D facility for deduction under section 35(2AB).

Summary:

Issue 1: Disallowance of claim of deduction under section 35(2AB) of the Income-tax Act, 1961
The assessee, engaged in manufacturing and trading drugs, claimed a weighted deduction under section 35(2AB) of the Income-tax Act for scientific research expenditures. The AO disallowed Rs. 212.85 lakh of the claimed deduction as the assessee did not furnish Form No. 3CL during the assessment proceedings. The CIT(A) upheld this disallowance, relying on the decision in Tejas Networks Ltd v/s DCIT.

Issue 2: Requirement of Form No. 3CL for claiming weighted deduction
The Tribunal noted that prior to the amendment effective from 01/07/2016, Rule 6(7A)(b) of the Income Tax Rules did not mandate the quantification of expenditure in Form No. 3CL for weighted deduction. The Tribunal referenced the decision in Cummins India Ltd v/s DCIT, which held that prior to the 2016 amendment, there was no legal requirement for Form No. 3CL to quantify eligible expenditure. Thus, the AO erred in restricting the deduction based on Form No. 3CL.

Issue 3: Eligibility of expenditure on clinical trials outside the approved in-house R&D facility
The Tribunal, citing the decision in CIT v/s Cadila Healthcare Ltd, held that expenditure on clinical trials outside the approved in-house R&D facility is eligible for deduction under section 35(2AB). The Tribunal found that Rs. 184.95 lakh of the disallowed expenditure was for bio-equivalence studies, which qualifies for deduction. The remaining Rs. 27.90 lakh, related to electricity expenses for the R&D center, was also deemed eligible for deduction.

Conclusion:
The Tribunal set aside the CIT(A)'s order and directed the AO to grant weighted deduction on the entire disallowed expenditure of Rs. 212.85 lakh under section 35(2AB). The appeal by the assessee was allowed.