2016 (12) TMI 1539 - AT - Income Tax

Claim of weighted deduction u/s.35(2AB) involving revenue and capital expenses - Held that - We deem its appropriate at this stage to throw some light on the nature and ambit of Form 3CL. The same comes under Rule 6(7A) of the Income Tax Rules, 1962 framed under the provisions of the Act. The above sub rule is relevant for approval of expenditure incurred on in house research & development facility by a company u/s.35(2AB). Sub clause (b) thereof is the specific provision thereto stipulating that the prescribed authority shall submit its report in relation to the approval of in house Research & Development facility in Form No.3CL to the Director General (Income Tax Exemptions) within 60 days of its granting approval. The same is merely in the form of intimation to be sent from prescribed authority s end to the department. An assessee engaged in such Research & Development activity having already obtained Form 3CM approval of its facility has no role to play in such correspondence. We notice that a co-ordinate bench of this tribunal in ACIT vs. M/s. Torrent Pharmaceuticals 2009 (11) TMI 819 - ITAT AHMEDABAD holds that the impugned weighted deduction is not to be restricted to the extent of the amount of the necessary expenditure incurred stated in such Form 3CL. We further find that hon ble jurisdictional high court s decision in CIT vs. CLARIS LIFESCIENCES Ltd. (2008 (8) TMI 579 - Gujarat High Court) upholds this tribunal s decision in the very assessee s case observing that expenses incurred before Form 3CM approval cannot be denied for the purpose of Section 35(2AB) weighted deduction. We follow the very reasoning to opine that facts of the instant case rather go a step further wherein the appellant has only claimed those expenses which relate to the time period as approved in the Form 3CM. We accordingly hold that the assessee is very much entitled for claiming the above capital and revenue expenses incurred on in house research and development. The Assessing Officer had rightly held it entitled for the above weighted deduction after verifying all necessary particulars during the course of scrutiny. We have no reason to disagree that the assessee s weighted deduction claim raised u/s.35(2AB) of the Act is very much allowable - Decided in favour of assessee

Summary

Issues Involved:
1. Legality of the Principal CIT's order under Section 263 of the Income Tax Act, 1961.
2. Validity of the assessee’s weighted deduction claim under Section 35(2AB) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Legality of the Principal CIT's Order under Section 263 of the Income Tax Act, 1961:
The Principal CIT invoked Section 263 to revise the regular assessment framed by the Assessing Officer (AO) on the grounds that the AO had wrongly accepted the assessee’s weighted deduction claim under Section 35(2AB) without the requisite approval from the Department of Scientific and Industrial Research (DSIR) in Form 3CL. The Principal CIT issued a show cause notice stating that the AO had erred in not disallowing the deduction, which led to a reduction in the assessee's taxable income and tax liability. The assessee contended that the assessment was neither erroneous nor prejudicial to the interest of the Revenue, citing the Supreme Court's decision in Malabar Industrial Co. vs. CIT. The Principal CIT, however, held that the AO had not properly examined the claim and that the order was erroneous and prejudicial to the Revenue's interest.

2. Validity of the Assessee’s Weighted Deduction Claim under Section 35(2AB) of the Income Tax Act, 1961:
The assessee, a pharmaceutical company, claimed a weighted deduction for revenue and capital expenses incurred on in-house research and development (R&D) facilities, which were approved by the DSIR in Form 3CM. The Principal CIT argued that the deduction was wrongly allowed as the assessee did not produce Form 3CL, which is required for the approval of the expenditure. The assessee countered that Form 3CL is a report submitted by the DSIR to the Income Tax Department and that it had no role in this process. The Tribunal noted that Form 3CL is merely an intimation from the DSIR to the tax authorities and that the assessee had already obtained the necessary approval in Form 3CM. The Tribunal referred to the Gujarat High Court's decision in CIT vs. CLARIS LIFESCIENCES Ltd., which held that expenses incurred before the approval in Form 3CM could not be denied for the purpose of Section 35(2AB) deduction.

The Tribunal concluded that the assessee was entitled to the weighted deduction for the expenses incurred on in-house R&D facilities, as the AO had verified all necessary particulars during the scrutiny. The Tribunal also distinguished various case laws cited by the Revenue, noting that the jurisdictional High Court's decision in CLARIS LIFESCIENCES Ltd. was binding and supported the assessee’s claim.

Conclusion:
The Tribunal allowed the assessee’s appeal, holding that the Principal CIT’s order under Section 263 was not justified as the assessee’s weighted deduction claim under Section 35(2AB) was valid and allowable. The Tribunal emphasized that the AO had correctly accepted the claim after due verification, and the absence of Form 3CL did not invalidate the deduction. The decision was pronounced in the open court on December 22, 2016.