2017 (8) TMI 933 - HC - Income Tax

Claim of deduction under section 35(2AB) - Held that - Undisputedly, the research and development facility set up by the assessee was approved by the prescribed authority and necessary approval was granted in the prescribed format. The communication in Form 3CM was thereafter, between the prescribed authority and the department. If the same was not so, surely, the assessee cannot be made to suffer. To this extent, the Tribunal was perfectly correct and the Commissioner was not, in observing that in absence of such certification, claim of deduction under section 35(2AB) was not allowable. Neither the prescribed authority nor the Assessing Officer has applied the mind as to the expenditure, be it revenue or or capital in nature, actually incurred in developing the inhouse research and development facility. To the limited extent, the Commissioner desired the Assessing Officer to verify such figures, we would allow the Assessing Officer to do so. In principle, we accept the Tribunal s reasons and conclusions. Merely because the prescribed authority failed to send intimation in Form 3CL, would not be reason enough to deprive the assessee s claim of deduction under section 35(2AB) of the Act. However, in facts of the present case, it would be open for the Assessing Officer to verify the actual expenditure incurred by the assessee.

Summary

Issues:
1. Correctness of the view taken by the Tribunal on deductions claimed under section 35(2AB) of the Income Tax Act.
2. Validity of the order passed by the Commissioner of Incometax under section 263 of the Act.
3. Interpretation of the role of the prescribed authority in granting approval for in-house research and development activities.
4. Examination of the actual expenditure incurred by the assessee on developing the research and development facility.

Analysis:
1. The High Court heard the appeal by the Revenue against the Income Tax Appellate Tribunal's judgment regarding deductions claimed under section 35(2AB) of the Income Tax Act. The respondent, a pharmaceutical company engaged in research and development, claimed deductions for in-house research and development facility expenditure. The Assessing Officer initially accepted the claim, but the Commissioner later found the assessment order erroneous and prejudicial to revenue interests. The Tribunal allowed the appeal, emphasizing the approval process and the lack of a role for the assessee in interdepartmental correspondence. The High Court broadly agreed with the Tribunal's view, emphasizing the approval granted by the prescribed authority and the need for the Assessing Officer to verify the actual expenditure incurred.

2. The Commissioner of Incometax passed an order under section 263 of the Act, deeming the assessment order erroneous due to lack of proper verifications. The Commissioner directed the Assessing Officer to re-examine the issues and consider the correct amount of disallowable expenditure. One of the main grounds for the Commissioner's decision was the absence of intimation in Form 3CL to the Revenue. The High Court acknowledged the Commissioner's concerns but ultimately found that the failure to send the intimation should not be a reason to deny the assessee's deduction claim under section 35(2AB).

3. The Tribunal's judgment highlighted the prescribed authority's role in submitting reports for approval of in-house research and development activities. It clarified that the prescribed authority should send an intimation in Form 3CL to the department within a specified period. The Tribunal held that once the research and development activity was approved in Form 3CM, the assessee had no further involvement in interdepartmental correspondence. The High Court concurred with this interpretation, emphasizing that the failure of the prescribed authority to send the intimation should not impact the assessee's entitlement to deductions under section 35(2AB).

4. The High Court noted that neither the prescribed authority nor the Assessing Officer had thoroughly examined the nature of the expenditure incurred in developing the in-house research and development facility. While upholding the Tribunal's decision on the approval process, the Court directed the Assessing Officer to verify the actual expenditure incurred by the assessee. The Court set aside the Tribunal's order to allow for a more detailed examination of the expenditure, ensuring accuracy in determining the allowable deductions under section 35(2AB) of the Act.

In conclusion, the High Court partially set aside the Tribunal's order and directed the proceedings to be placed before the Assessing Officer for a more thorough examination of the actual expenditure incurred by the assessee. The Court upheld the assessee's entitlement to deductions under section 35(2AB) but emphasized the importance of verifying the expenditure details for accurate assessment.