2024 (2) TMI 755 - HC - Income Tax

Weighted deductions claimed u/s 35(2AB) - R D expenditure incurred before the date of approval from DSIR - expenditure incurred on the creation and establishment of an in-house Research and Development facility R D facility being restricted to the period - 27 February 2019 to 31 March 2020 - HELD THAT - Both Section 35(2AB) and Rule 6 speak of expenditure which has already been incurred and therefore it would be wholly incorrect to read those provisions as envisaging benefits being extended only to such expenditure that may have been sustained after the facility has been accorded approval. We also find ourselves in agreement with the view expressed in Claris Lifesciences Ltd. 2008 (8) TMI 579 - GUJARAT HIGH COURT when it observed that the provisions of the Act and the Rules nowhere suggest that the date of approval of the R D facility would constitute the cutoff date for the purposes of evaluating eligibility of weighted deductions or for expenses incurred only from that date onwards being liable to be taken into account for the purposes of Section 35(2AB) of the Act. The conditions which have come to be incorporated by the respondent in the impugned communications and which are impugned before us are rendered unsustainable even when one evaluates them on the basis of the Guidelines framed by the DSIR and more particularly Clause 5(v) thereof. As is evident from a reading of Clause 5(v) it clearly contemplates a situation where an applicant may have moved an application for approval under the Rules in respect of an in-house facility which is yet to be accorded recognition by the DSIR. Clause 5(v) while dealing with such a scenario in unambiguous terms speaks of expenditure incurred from the commencement of said preceding year . It also employs the phrase capital investments on R D in the financial year preceding the year in which the firm applied to the prescribed authority for the approval . It is thus manifest that a centre which is yet to be accorded recognition by the DSIR is not prevented from claiming benefits contemplated u/s 35(2AB) of the Act. The only condition which the Guidelines impose for the extension of Section 35(2AB) benefits in such a situation is of the center being subsequently recognized by DSIR . Viewed thus both on the anvil of Rule 6(7A)(b)(ii) of the Rules as well as the Guidelines themselves it is evident that the condition of only such expenditure as was incurred post 27 February 2019 being eligible for deduction u/s 35(2AB) is rendered wholly untenable. We accordingly allow the instant writ petition and quash the communications issued by the respondent. An amended Form 3CM shall consequently be issued to be read as effective from 01 April 2018. We additionally call upon the respondent to frame Form 3CL afresh specifying the expenditure incurred by the petitioner in Financial Year 2018-19 commencing from 01 April 2018 for the purposes of computation of weighted deductions u/s 35(2AB)

Summary

Issues Involved:
1. Legality of restricting weighted deductions under Section 35(2AB) of the Income Tax Act, 1961 to a specific period.
2. Validity of the communications and Form 3CM issued by the respondent.
3. Interpretation of Section 35(2AB) and related Rules for claiming deductions on R&D expenditure.
4. Applicability of the Guidelines framed by DSIR for approval of R&D facilities.

Summary:

Issue 1: Legality of restricting weighted deductions under Section 35(2AB) of the Income Tax Act, 1961 to a specific period.
The petitioner argued that limiting the weighted deductions to the period from 27 February 2019 to 31 March 2020 is illegal and violates Section 35(2AB) of the Income Tax Act, 1961. The petitioner sought deductions for the entire expenditure on the R&D facility for the Financial Year 2018-19, starting from 01 April 2018. The Court noted that Section 35 is a beneficial provision aimed at encouraging scientific research by providing deductions for expenditure incurred on in-house R&D facilities. The Court found that the provision does not restrict deductions to expenditure incurred after the approval date of the R&D facility.

Issue 2: Validity of the communications and Form 3CM issued by the respondent.
The petitioner sought to quash the communications dated 28 February 2020 and 11 May 2020, and the Form 3CM dated 25 November 2019, which limited the period of claim. The Court held that the conditions imposed by the respondent, restricting deductions to the period post-approval, were unsustainable. The Court quashed the impugned communications and directed the respondent to issue an amended Form 3CM effective from 01 April 2018.

Issue 3: Interpretation of Section 35(2AB) and related Rules for claiming deductions on R&D expenditure.
The Court emphasized that Section 35(2AB) and Rule 6 do not suggest that only expenditure incurred post-approval of the R&D facility is eligible for deductions. The provision allows for deductions on expenditure already incurred on scientific research and the creation of in-house R&D facilities. The Court agreed with the Gujarat High Court's interpretation in Claris Lifesciences Ltd., which held that the date of approval is not the cutoff date for eligibility of weighted deductions.

Issue 4: Applicability of the Guidelines framed by DSIR for approval of R&D facilities.
The respondent relied on internal Guidelines, which stipulated that approval would be co-terminus with DSIR recognition. The Court found that the Guidelines themselves, particularly Clause 5(v), allowed for expenditure incurred from the preceding financial year to be considered, provided the R&D center is subsequently recognized by DSIR. The Court held that the Guidelines do not prevent claims for deductions on expenditure incurred before the approval date.

Conclusion:
The Court allowed the writ petition, quashed the impugned communications, and directed the respondent to issue an amended Form 3CM effective from 01 April 2018. The respondent was also instructed to frame Form 3CL afresh, specifying the expenditure incurred by the petitioner from 01 April 2018 for the computation of weighted deductions under Section 35(2AB).