2025 (1) TMI 902 - AT - Income Tax

Disallowance of claim u/s 35(2AB) of the R D expenditure - appellant is not eligible to claim deduction for the amount which is in excess of the amount approved by DSIR - HELD THAT - Respectfully following the decision of the Co-ordinate Bench of the Tribunal in assessee s own case 2021 (9) TMI 139 - ITAT PUNE we hold that the entire amount of R D expenditure incurred in India is eligible for weighted deduction u/s 35(2AB); revenue R D expenditure incurred outside India as claimed by the assessee got allowed in the assessment itself; total of capital R D expenditure incurred outside India will be eligible for deduction u/s 35(1)(iv) of the Act. Appeal filed by the assessee is allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the assessee is entitled to claim a weighted deduction under Section 35(2AB) of the Income Tax Act, 1961, for R&D expenditures incurred outside the approved R&D facility and outside India.
Whether the disallowed R&D expenditures can alternatively be claimed under Section 35(1)(iv) of the Income Tax Act, 1961, at 100% deduction.
Whether the assessee can claim depreciation on capitalized R&D expenditures that have been disallowed under Section 35(2AB).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Weighted Deduction under Section 35(2AB)

Relevant Legal Framework and Precedents: Section 35(2AB) of the Income Tax Act allows a weighted deduction for expenditures on in-house R&D facilities approved by the prescribed authority. The key requirement is that the expenditure must be incurred on the approved R&D facility.
Court's Interpretation and Reasoning: The Tribunal noted that the provisions of Section 35(2AB) require that the R&D facility be approved by the prescribed authority, and the expenditures must be incurred on such facility. The Tribunal found that expenditures incurred outside India and not on the approved facility do not qualify for the weighted deduction.
Key Evidence and Findings: The Tribunal observed that the assessee incurred R&D expenditures outside India, specifically for product testing and validation at facilities in Germany, which were not part of the approved in-house R&D facility.
Application of Law to Facts: The Tribunal applied the legal requirement that the R&D expenditures must be incurred on the approved facility and within India to qualify for the weighted deduction under Section 35(2AB).
Treatment of Competing Arguments: The assessee argued that the expenditures should be allowed under Section 35(2AB) since they were incurred in the course of product development. The Tribunal rejected this argument, noting the specific requirement of the law.
Conclusions: The Tribunal concluded that the expenditures incurred outside the approved R&D facility and outside India do not qualify for the weighted deduction under Section 35(2AB).

Issue 2: Deduction under Section 35(1)(iv)

Relevant Legal Framework and Precedents: Section 35(1)(iv) allows for a 100% deduction of capital expenditures on scientific research related to the business of the assessee.
Court's Interpretation and Reasoning: The Tribunal noted that Section 35(1)(iv) does not require the expenditures to be incurred on an approved facility or within India, unlike Section 35(2AB).
Key Evidence and Findings: The Tribunal found that the capital expenditures incurred by the assessee outside India were related to its business and thus could qualify for a deduction under Section 35(1)(iv).
Application of Law to Facts: The Tribunal applied Section 35(1)(iv) to allow the deduction of capital expenditures incurred outside India, as these were related to the assessee's business.
Treatment of Competing Arguments: The Department argued that expenditures outside India should not be allowed. The Tribunal held that the law permits such deductions under Section 35(1)(iv).
Conclusions: The Tribunal concluded that the capital R&D expenditures incurred outside India are eligible for deduction under Section 35(1)(iv).

Issue 3: Depreciation on Capitalized R&D Expenditures

Relevant Legal Framework and Precedents: The Income Tax Act allows for depreciation on capitalized assets, including intangible assets, under certain conditions.
Court's Interpretation and Reasoning: The Tribunal accepted the assessee's alternative plea for depreciation on the capitalized R&D expenditures that were disallowed under Section 35(2AB).
Key Evidence and Findings: The Tribunal considered the capitalized R&D expenditures as intangible assets, eligible for depreciation.
Application of Law to Facts: The Tribunal applied the depreciation provisions to allow the assessee to claim depreciation on the capitalized R&D expenditures.
Treatment of Competing Arguments: The Department's objections were overruled, as the Tribunal found the depreciation claim to be in line with the law.
Conclusions: The Tribunal allowed the assessee to claim depreciation on the capitalized R&D expenditures.

3. SIGNIFICANT HOLDINGS

Core Principles Established: The judgment reaffirms that for weighted deduction under Section 35(2AB), expenditures must be incurred on an approved facility within India. It also clarifies that capital expenditures on scientific research related to business can be deducted under Section 35(1)(iv) without the geographical limitation.
Final Determinations on Each Issue:
- The weighted deduction under Section 35(2AB) was denied for expenditures incurred outside the approved R&D facility and outside India.
- The deduction under Section 35(1)(iv) was allowed for capital R&D expenditures incurred outside India.
- Depreciation was allowed on capitalized R&D expenditures disallowed under Section 35(2AB).
Verbatim Quotes of Crucial Legal Reasoning: "The key words in the provision are incurring of expenditure on in-house R&D facility as approved by the prescribed authority. Unless a particular R&D facility is approved by the prescribed authority, no weighted deduction can follow."