2018 (7) TMI 1559 - HC - Income Tax

Allowability of deduction under section 35(2AB) - Tribunal justification in restoring the matter back to the Assessing Officer - Held that - No hesitation in allowing the assessee s claim for deduction under section 35(2AB) of the Act. Shorn of any controversy, documents on record would suggest that at any rate, the assessee had applied for approval of research and development facility to the prescribed authority on 22.12.2006 and such approval was granted on 22.10.2008. By the very nature of things, research and development is a hit and miss exercise. Much of the efforts, capital as well as human investment may go waste if the research is not successful. The legislature therefore, having granted special deduction for such expenditure, the same should be seen in light of the purpose for which it has been recognised. Research and development facility can be set up only after incurring substantial expenditure. The application for approval of such facility can be made only after setting up of the facility. Once an application is filed by the assessee to the prescribed authority, the assessee would have no control over when such application is processed and decided. Even if therefore, the application is complete in all respects and the assessee is otherwise eligible for grant of such approval, approval may take some time to come by. The claim for deduction cannot be defeated on the ground that such approval was granted in the year subsequent to the financial year in which the expenditure was incurred. No such indication was given by this Court in case of Claris Lifesciences Ltd.(2008 (8) TMI 579 - GUJARAT HIGH COURT), none appears from the judgment of the Delhi High Court in case of Maruti Suzuki India Ltd.(2017 (8) TMI 248 - DELHI HIGH COURT)- Decided in favour of the assessee

Summary

Issues:
1. Interpretation of deduction under section 35(2AB) of the Income Tax Act.
2. Application of precedents in determining the allowability of deduction.
3. Relevance of approval date for claiming deduction on research and development expenditure.

Analysis:
1. The judgment dealt with the interpretation of deduction under section 35(2AB) of the Income Tax Act. The appellant, a company engaged in manufacturing automobile parts, claimed a deduction under this section for expenses related to setting up Research and Development facilities. The Assessing Officer disallowed the deduction for the period before the approval date, leading to appeals and subsequent legal proceedings.

2. The appellant relied on the decision in the case of Claris Lifesciences Ltd. to support their claim for deduction. However, the CIT(Appeals) and the Tribunal distinguished this precedent based on the timing of approval and application. The Tribunal remanded the case to the Assessing Officer for further verification, highlighting contradictory facts regarding the approval date.

3. The judgment discussed the relevance of the approval date for claiming deduction on research and development expenditure. The Tribunal's decision was challenged based on precedents from the Claris Lifesciences Ltd. case and a judgment from the Delhi High Court. The Court emphasized that the approval date is not determinative for claiming the deduction, as long as the expenditure was incurred for the specified purpose and the facility was approved by the prescribed authority.

4. The Court analyzed the legislative intent behind section 35(2AB) to encourage in-house research and development facilities by granting weighted deductions. It emphasized that the approval of the facility by the prescribed authority is a crucial condition for claiming the deduction. The judgment clarified that the period during which approval is granted is not relevant as long as the approval exists and the expenditure was incurred for the designated purpose.

5. Ultimately, the Court allowed the appeal, setting aside the Assessing Officer's decision to restrict the deduction for expenditure incurred before a specific date. The Court emphasized that the purpose of the deduction is to promote research and development activities, acknowledging the uncertainties and time delays involved in obtaining approvals. The Assessing Officer was directed to recompute the deduction for the relevant assessment year based on the Court's interpretation of the law.

6. In conclusion, the judgment provides a detailed analysis of the interpretation of deduction under section 35(2AB) of the Income Tax Act, the application of precedents in determining the allowability of deductions, and the significance of approval dates for claiming deductions on research and development expenditure.