2025 (1) TMI 1179 - AT - Income Tax

Disallowance of weighted deduction claimed u/s 35(2AB) - expenditure on in-house scientific research expenses - AO made disallowance on expenditure incurred outside India - HELD THAT - As decided in own case of assessee 2021 (9) TMI 139 - ITAT PUNE 2011-12 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) . Allow product development expenses as revenue expense.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment involves several core issues:

Whether the expenditure incurred by the assessee outside India on Research and Development (R&D) is eligible for weighted deduction under Section 35(2AB) of the Income Tax Act, 1961.
Whether the product development expenses incurred by the assessee should be treated as capital or revenue expenditure.
Whether the assessee can claim deduction under Section 35(1)(iv) for capital expenditure incurred on scientific research outside India.
Whether the disallowance of weighted deduction under Section 35(2AB) due to non-receipt of DSIR report is justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility of Expenditure Incurred Outside India for Weighted Deduction under Section 35(2AB)

Legal Framework and Precedents: Section 35(2AB) allows weighted deduction for expenditure on in-house R&D facilities approved by the prescribed authority. The provision mandates that the R&D facility must be approved for the expenditure to qualify for deduction.
Court's Interpretation and Reasoning: The court emphasized that the expenditure incurred outside India did not qualify for weighted deduction as the R&D facilities were neither of the assessee nor approved by the prescribed authority.
Key Evidence and Findings: The assessee incurred costs for availing services from R&D facilities of its Associated Enterprises (AEs) outside India, which were not approved by the prescribed authority.
Application of Law to Facts: The court applied Section 35(2AB) and concluded that only the expenditure incurred in India on approved in-house R&D facilities was eligible for weighted deduction.
Treatment of Competing Arguments: The court acknowledged the assessee's argument but upheld the disallowance based on the statutory requirements of Section 35(2AB).
Conclusions: The court concluded that the expenditure incurred outside India was not eligible for weighted deduction under Section 35(2AB).

Issue 2: Classification of Product Development Expenses

Legal Framework and Precedents: The distinction between capital and revenue expenditure is crucial, with capital expenditure typically resulting in a new asset or enduring benefit.
Court's Interpretation and Reasoning: The court followed precedents that expenditure on upgrading existing products should be treated as revenue expenditure.
Key Evidence and Findings: The expenses were incurred for testing and validation of existing products, without resulting in new assets or products.
Application of Law to Facts: The court applied principles from previous judgments and concluded that the expenses were revenue in nature.
Treatment of Competing Arguments: The court rejected the Revenue's argument that the expenses were capital in nature, emphasizing the lack of new asset creation.
Conclusions: The court allowed the product development expenses as revenue expenditure.

Issue 3: Deduction under Section 35(1)(iv) for Capital Expenditure Outside India

Legal Framework and Precedents: Section 35(1)(iv) allows deduction for capital expenditure on scientific research related to the business, without specific approval requirements.
Court's Interpretation and Reasoning: The court noted that capital expenditure on scientific research outside India qualifies for deduction under Section 35(1)(iv).
Key Evidence and Findings: The court found that the capital expenditure incurred outside India was eligible for deduction under Section 35(1)(iv).
Application of Law to Facts: The court applied the provisions of Section 35(1)(iv) and allowed the deduction for capital expenditure incurred outside India.
Treatment of Competing Arguments: The court dismissed the Revenue's objections, emphasizing the statutory provisions of Section 35(1)(iv).
Conclusions: The court allowed the deduction for capital expenditure incurred outside India under Section 35(1)(iv).

Issue 4: Disallowance due to Non-receipt of DSIR Report

Legal Framework and Precedents: The requirement of DSIR report is procedural, and its absence should not be fatal to the claim if the substantive conditions are met.
Court's Interpretation and Reasoning: The court emphasized that the non-receipt of DSIR report was a technicality beyond the assessee's control and should not negate the claim.
Key Evidence and Findings: The court found that the assessee had complied with the substantive requirements of Section 35(2AB).
Application of Law to Facts: The court applied the principle of substantial compliance and allowed the claim despite the procedural lapse.
Treatment of Competing Arguments: The court rejected the Revenue's argument that procedural non-compliance should negate the claim.
Conclusions: The court allowed the claim for weighted deduction despite the non-receipt of DSIR report.

3. SIGNIFICANT HOLDINGS

Core Principles Established: The judgment reaffirms that procedural lapses should not negate substantive claims if the statutory conditions are met. It also clarifies the distinction between capital and revenue expenditure in the context of product development.
Final Determinations on Each Issue:

The expenditure incurred outside India was not eligible for weighted deduction under Section 35(2AB).
Product development expenses were classified as revenue expenditure.
Capital expenditure incurred outside India was allowed as a deduction under Section 35(1)(iv).
The claim for weighted deduction was allowed despite the non-receipt of DSIR report, emphasizing substantial compliance.

Verbatim Quotes of Crucial Legal Reasoning:

"The fact that the claim of the assessee cannot be entertained under one provision does not oust it from consideration under any other provision, if it is otherwise allowable under such latter provision."
"The expenditure was only incurred for the purpose of facilitating the existing business of manufacturing of automotive components and enabling the management to conduct the business operations more efficiently and productively."

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