2010 (4) TMI 48 - HC - Income Tax

Expenditure on Scientific Research under section 35(2AB) Research and development facility the petitioner sought an amendment of the recognition granted to the in-house Research and Development units under Section 35 (2AB) of the said Act. In the said letter, the petitioner stated that, while it had complied with all the requirements and conditions laid down in the earlier approval and renewals granted, it had inadvertently omitted to make an application for approval of the in-house Research and Development units by filing the prescribed form No. 3CK as provided under Rule 6(4) of the Income-tax Rules, 1962 (hereinafter referred to as the said Rules ). Consequently, alongwith the said letter dated 21.08.2008, the petitioner attached an application in Form 3CK alongwith the latest annual report for the purposes of grant of approval under Section 35 (2AB) of the said Act in respect of the in-house Research and Development units for which approval had earlier been granted - The petitioner seeks the extension of the approval to operate from the date of 01.04.2004. The learned counsel for the petitioner also submitted that the said weighted tax deduction could be claimed on all expenditure on the in-house Research and Development facility and should not have been limited only to the capital expenditure on the research and development equipment for the financial year 2007-08. - held that - in view of the guideline prescribed in clause (vi) of para 6, a beneficial provision has been made so as to extend the approval of an in-house research and development centre to the previous year, but limited only to capital expenditure (excluding any capital expenditure on land and buildings) capital expenditures allowed from 2007-08 onwards revenue expenditures allowed from the financial year 2008-09 i.e. the year in which agreement was entered into.

Issues:
1. Quashing of order under Section 35(2AB) of the Income-tax Act, 1961.
2. Approval of in-house Research and Development units.
3. Interpretation of guidelines for approval under Section 35(2AB).
4. Extension of approval period and eligibility for tax deduction.
5. Opportunity of hearing before rejecting application.

Analysis:

Issue 1: Quashing of order under Section 35(2AB) of the Income-tax Act, 1961
The petitioner sought to quash an order dated 15.06.2009, which granted approval under Section 35(2AB) of the Income-tax Act, 1961, from 01.04.2007 instead of the requested date of 01.04.2004. The court examined the provisions of Section 35(2AB) and the application process for approval, emphasizing the requirement of an agreement with the prescribed authority for cooperation in research and development. The court held that the approval date was correctly determined based on the application date and compliance with the agreement condition, dismissing the petitioner's plea for an earlier approval date.

Issue 2: Approval of in-house Research and Development units
The petitioner had sought approval for in-house Research and Development units under Section 35(2AB) by submitting an application in Form 3CK along with the required agreement with the Department of Scientific and Industrial Research. The court noted that the approval was granted subject to specific conditions, including limited tax deduction for capital expenditure on R&D equipment for the financial year 2007-08. The court upheld the approval decision based on the guidelines and provisions of Section 35(2AB), rejecting the petitioner's argument for a broader tax deduction eligibility.

Issue 3: Interpretation of guidelines for approval under Section 35(2AB)
The court analyzed the guidelines for approval of in-house Research and Development centers under Section 35(2AB), highlighting the policy for approval and conditions for granting benefits such as tax deductions. The court considered the timeline for approval based on the application date and capital expenditure criteria, emphasizing the importance of complying with the prescribed procedures outlined in the guidelines.

Issue 4: Extension of approval period and eligibility for tax deduction
Regarding the extension of the approval period and eligibility for tax deduction, the court clarified that the approval date was correctly determined based on the application date and compliance with the prescribed agreement requirement. The court upheld the decision to limit tax deduction for the financial year 2007-08 to capital expenditure, excluding expenditure on land and buildings, in line with the guidelines and beneficial provisions under Section 35(2AB).

Issue 5: Opportunity of hearing before rejecting application
The petitioner claimed that no reasonable opportunity of hearing was provided before the impugned order was made, citing the proviso to Rule 6(5A). However, the court ruled that the proviso applied to cases where applications are rejected, not when applications are approved following the prescribed procedure. The court dismissed this claim, affirming that the petitioner's application was allowed after due process.

In conclusion, the court dismissed the writ petition, upholding the impugned order granting approval under Section 35(2AB) from 01.04.2007 to 31.03.2010, subject to the specified conditions. The judgment emphasized compliance with the agreement requirement, adherence to guidelines, and the limited tax deduction eligibility based on the application date and capital expenditure criteria.

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