S.S. Godara, Judicial Member - This assessee's appeal for assessment year 2009-10 arises against the Principal CIT-2, Vadodara's order dated 28.03.2016, in case no. Pr. CIT-2/263/4/2015-16, in proceedings under section 263 of the Income Tax Act, 1961; in short "the Act".
2. We come to assessee's pleadings first. It challenges the PCIT's order in question revising a regular assessment framed on 30.01.2014 by the Assessing Officer on the ground that he had wrongly accepted its claim of weighted deduction u/s. 35(2AB) of the Act involving revenue and capital expenses of Rs. 2,03,86,37,456/- and Rs. 33,90,67,854/-; respectively aggregating to Rs. 237,77,05,310/-. Learned PCIT further directs the Assessing Officer to frame afresh assessment in assessee's case. All this culminates into assessee's grievance as adjudicated in the instant appeal hereunder.
3. We advert to the relevant facts now. The assessee (earlier M/s. Ranbaxy Laboratories Ltd.) is a company manufacturing and trading in pharmaceuticals and bulk drugs. It filed its return on 27.09.2009 stating loss of Rs. 44,14,10,77,665/- along with book loss computed u/s. 115JB amounting to Rs. 29,47,15,15,100/-. The Assessing Officer took up scrutiny. He issued Section 143(2) notice on 23.08.2010 inter alia seeking details of assessee's weighted deduction claim raised hereinabove alongwith necessary approval thereof. The assessee filed reply on 10.09.2010 placing on record the above particulars sought for. It is evident to us that assessee's return filed also contained its notes of accounts statement indicating the factual backdrop of its weighted deduction claim. It transpires that assessee's in house research and development facilities were approved by the prescribed authority on 11.06.2009 qua the impugned expenses incurred during the financial year 2008-09. The Assessing Officer then framed a regular assessment on 30.01.2014 accepting assessee's above weighted deduction claim.
4. This case file indicates that the learned PCIT thereafter sought to revise the above regular assessment by exercising Section 263 revisional jurisdiction. He issued a show cause notice dated 10.03.2016 for the following reasons:
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If was noticed from the records that the assessees had claimed deduction u/s. 35(2AB) of the Act on account of R & D revenue and capital expenditure @ 100% and 150% respectively in the return of Income, without the approval of the prescribed authority i.e. DSIR in Form 3CL, as under : |
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Particulars |
Weighted deduction claimed by the assessee |
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Deduction claimed of R & D Revenue expenditure @ 150% |
Rs. 2,03 ,86,37,456/- |
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Deduction claimed of R & D capital @ 150% |
Rs. 33,90,67,854/- |
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Total weighted deduction claimed |
Rs. 237,77,05,310/- |
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The A.O. white finalising assessment u/s. 143(3) of the Act allowed the weighted deduction u/s. 35(2AB) of the Act of Rs. 237,77,05,310/-, claimed by the assessee (without the approval of the prescribed authority i.e. D.S.I.R. in Form 3CL, though the assessee was not entitled to claim the said deduction in accordance with the provision of section 35(2AB) read with Rule 06 of I.T. Act |
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The Assessing Officer, erred in not appreciating the facts in proper perspective and did not made disallowance of Rs. 237,77,05,310/- to the total income of the assessee., while finalizing assessment u/s. 143(3) of the Act, though the assessee by claiming deduction u/s. 35(2AB) of the Act without fulfilling conditions laid down for claiming deduction, had reduced its taxable income and consequently reduced its tax liability. |
3. |
In view of the above mentioned facts, it is clearly established that the A.O. did not properly examine and had not applied his mind for making addition on the issue of excess claim of weighted deduction u/s. 35(2AB) of the Act, while passing order u/s. 143(3) r.w.s. 144(C) of the Act. Therefore, the order dated 30-01-2014 u/s. 143(3) r.w.s. 144(C) of the Act passed by the Addl. C.I.T. Range-15, New Delhi has been found to be erroneous in so far as it is prejudicial to the interest of the revenue. In view of discussion mentioned in above para, it is proposed to take suitable action u/s. 263 of the Income-tax Act, 1961 in respect of aforesaid order, |
4. |
In the above circumstances, the assessment order passed by the Assessing Officer is considered to be erroneous as well as prejudicial to the interest of revenue. You are, therefore, allowed an opportunity of being heard and show cause as to why an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment within the meaning of section 263 of the I. T. Act may not be passed in the case of Assessee Company." |
5. The assessee filed reply to the above show cause notice on 21.03.2016. It first of all raised a legal contention that the above assessment sought to be revised was neither erroneous nor prejudicial to interest of the Revenue as per hon'ble Apex Court's land mark decision in Malabar Industrial Co. v. CIT [2000] 243 ITR 83/109 Taxman 66. It then pleaded to have placed all necessary documents of having carried out in house research and development for the purpose of claiming the above weighted deduction u/s. 35(2AB) of the Act since having filed notes to return of income, computation of income along with clause 15 of tax audit report as followed by its reply to the scrutiny notice hereinabove. The assessee would highlight the fact of having obtained Form 3CM approval from the prescribed authority. The assessee's case thereafter was that it fulfilled each and every condition for claiming the impugned weighted deduction as prescribed u/s. 35(2AB) of the Act read with Rule 6 of the Income Tax Rules. It further quoted a catena of case law to buttress all its submissions. We find that all this failed to impress learned Principal Commissioner of Income Tax. He declines assessee's various pleas in the order under challenge extracted as follows:
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I have considered the facts of the case and the submission of the assessee. The contention of the assessee is not acceptable. It is an undisputed legal position that where the A.O, has not computed the correct total income or allowable claim or deduction and where no proper enquiries, investigations or examination of the materials has been carried out, such assessment order is erroneous in so far as prejudicial to the interest of the revenue and that calls for action u/s. 263 of the Act. If the A.O had done so, the computation of income or allowance would have been in conformity of facts as well as in law. It is noticed that the assessee has claimed deduction u/s, 35(2AB) on account of R & D Revenue and capital expenditure @ 50% & 150% respectively. The assessee has wrongly claimed and was allowed weighted deduction for R & D expenditure by the A.O, though the assessee did not submit report of the prescribed authority i.e. D.S.I.R. In form 3CL. This shows that the AO has failed to take notice of the claim of the assessee and erroneously allowed the wrong claim made by the assessee, which means that the order so passed is erroneous within the meaning of section 263 of the Act. Further excess weighted deduction allowed was not in accordance with law as laid down by Act and judicial pronouncement. Therefore the order passed by the AO is prejudicial to the interest of revenue. Thus the twin condition as laid down in the decision of Malabar Industrial case (supra) are satisfied in this case. Hence, the order sought to be revised is erroneous as well prejudicial to the interest of revenue. Hence, the contention of the assessee is not tenable in law. |
6. |
With regards to the submissions on merit on weighted deduction claimed by the assessee u/s. 35(2AB). It was submitted by the assessee that it was not a deviation from the law, out was in accordance with the provision of section 35(2AB) r.w.r. 6 of the Income tax Rules. Relying on the provisions of section 35(2AB) of the Act and various judicial decisions, the assessee contended that the A.O after verifying the annual accounts, return of income and tax audit report, the Assessing Officer had decided to accept the contention of the assessee. It was the assessee's view that there is no requirement under the Income tax Act or the Income Tax Rules for either the assessee to produce Form 3CL and the A.O. to allow deduction only on the production of Form 3CL. The assessee also contented that the issuance of Form 3CL was not the obligation of the assessee and it cannot be denied of benefits which it was 3CL was not the obligation of the assessee and it cannot be denied of benefits which it was otherwise entitled to because of non issuance of Form 3CL which was the responsibility of the DSIR. It was the assessee's contention that the Assessing Officer after considering all the relevant factual details and after considering the judicial precedents on the subject had decided to allow deduction u/s. 35(2AB) even where the assessee had not received Form 3CL. The assessee further contended that it had fulfilled all the conditions for claiming deduction u/s. 35(2AB) of the Act. The assessee company vide its above referred letter dated 21-03-2016, has filed Form No. 3CH (Order of approval of in house Research and Development Facility) issued by Secretary, D.S.R.I.R, New Delhi on 11-06-2009. |
6.1 |
I have considered the facts of the case on merit and of the view that the contention of the assessee is not acceptable. On a plain reading of section 35(2AB), of the Act, it is crystal clear that expenditure on scientific research or in house research facility as approved by the prescribed authority i.e.. D.S.I.R shall be allowed as deduction. Further Rule 6(7A) of the I.T. Rules read as under : |
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"Rule 6(7A) Approval of expenditure incurred on in house research and development facility by a company under sub-section 2(AB) of section (1AB) shall be subject to the following conditions namely : |
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(a) The facility should not relate purely to market research, sales promotion quality control, testing, commercial production, style changes, routing data collection or activities of a like nature |
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(b) The prescribed authority shall submit its report in relation to the approval of in house Research and Development facility in Form No. 3CL to the Director General (Income tax Exemption) within 60 days of its granting approval |
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(c) The company shall maintain a separate account for each approved facility, shall be audited annually and a copy thereof shall be furnished to the Secretary, Department of Scientific and Industrial Research by 31st day of October of each succeeding year |
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(d) Assets acquired in respect of development of scientific research and development facility shall not be disposed of without the approval of the Secretary, Department of Scientific and Industrial Research |
6.2. |
The assessee Company, vide its above referred letter dated 21-03-2016 has submitted copy of Order of approval of in-house Research and Development facility in Form 3CM, but has not filed Form No. 3CL i.e. approval of expenditure issued by the Secretary, D.S.I.R. |
6.3 |
From the above it is clear that approval of expenditure on in house research and development facility by D.S.I.R, is a pre condition for claiming deduction u/s. 35(2AB) of the Act. It thus implies deduction u/s. 35(2AB) of the Act is determined and allowable to the extent of expenditure on scientific research or on in house research and development facility approved by D.S.I.R. Had it not been so, when words "expenditure incurred" would not have find place in the contents of Rule 6(7A) of I.T. Rules. The provision of section 35(2AB) mandates that approval of D.S.I.R., is the appropriate authority vested with the powers to determine the extent to which approval of expenditure can be accorded to an assessee who has incurred expenditure on R & D Facility, after considering all the issues involved, after pursuing the report of the assessee in the matter. The intention of the legislature in introducing the concept of approval of expenditure on R & D in section 35(2AB) r.w.r 6 of the Act is to enable the assessee to achieve the objective of enjoying fruits of R & D facility for furtherance of its business activity and at the same time to ensure that the assessee is not allowed to claim excess weighted deduction u/s. 35(2AB) of the Act. Thus the approval of expenditure accorded by D.S.I.R. in form 3CL is a guiding factor to the A.O. to determine as to whether the assessee had correctly claimed weighted deduction u/s. 35(2AB) of the Act or not. In the instant case, the assessee has not produced any evidence to prove that it had filed all requisite documents and submitted report for purpose of certification of claim of R & D expenditure by its Statutory Auditor to the D.S.I.R. to enable the D.S.I.R. to issue order of approval of said expenditure in Form 3CL. The assessee company cannot be allowed to claim weighted deduction u/s. 35(2AB) of the Act, without production of approval of expenditure on R & D in form No. 3CL. |
6.4. |
The assessee has claimed weighted deduction for R & D expenditure of capital expenditure mentioned hereunder |
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Deduction claimed of R & D Expenditure @ 50% of Revenue debited in P & L A/c. Revenue expenditure |
Rs. 2,03,86,37,456/- |
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Deduction claimed of R & D Capital expenditure 150% |
Rs. 33,90,67,854/- |
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Total, weighted deduction claimed |
Rs. 2,37,77,05,310/- |
6.5 |
The A.O. had simply accepted the assessee's contention on claim of weighted deducted u/s. 35(2AB) of the Act pertaining to R & D capital expenditure as well as revenue expenditure on face value without going into merits of assessee's submission in this regard. The above facts reveal that the A.O. by not making disallowance of weighted deduction u/s. 35(2AB) of the Act to the tune of Rs. 2,37,77,05,3107- in his order u/s. 143(3) r.w.s. 144C of the Act, failed to analyse the facts correctly in proper perspective. Therefore, the order of the A.O. is erroneous in so far as prejudicial to the interest of the revenue |
6. We have heard both the parties. Case file perused. There does not appear to be any dispute that the assessee is admittedly an entity running the specified in house research and development facilities. The prescribed authority in the instant case is the "DSIR" i.e. Department of Scientific & Industrial Research, Ministry of Science & Technology, Government of India. This prescribed authority has undisputedly issued "Order of approval of in house Research & Development Facility u/s. 35(2AB) of the Income Tax Act, 1961" in Form 3CM on 11.06.2009 as pertaining to the previous year relevant to the impugned assessment year. It further contains a list of assessee's various in house research & development facilities. Ld. PCIT's case as made out in his above extracted findings is that the assessee has failed to produce Form 3CL with respect to approval of its impugned revenue and capital expenses. His view is that the Assessing Officer ought not to have accepted assessee's weighted deduction in absence of the above approval Form 3CL.
7. We have given our thoughtful consideration to rival contentions as well as ld. PCIT's concern expressed in order revising the above regular assessment. 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 v. Torrent Pharmaceuticals [IT Appeal No. 3569/AHD/2004, dated 13.11.2009] 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 v. Claris Lifesciences Ltd. [2010] 326 ITR 251/[2008] 174 Taxman 113 (Guj.) 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 amounting to Rs. 237,77,05,310/-. The Assessing Officer had rightly held it entitled for the above weighted deduction after verifying all necessary particulars during the course of scrutiny.
8. We make it clear before parting that the ld. Departmental Representative has referred to various case laws i.e. Addl. CIT v. Mukur Corpn. [1978] 111 ITR 312 (Guj.), Tejas Networks Ltd. v. Dy. CIT [2015] 60 taxmann.com 309/233 Taxman 426 (Karnataka), Electronics Corpn. of India Ltd. v. Asstt. CIT [2012] 28 taxmann.com 280/[2013] 140 ITD 221 (Hyd.), Dy. CIT v. Mastek Ltd. [2012] 25 taxmann.com 133/210 Taxman 432 (Guj.) & EIMCO K.C.P. Ltd. v. CIT [2000] 242 ITR 659/109 Taxman 151 (SC). We however find that the first one of the above decision defines the scope of CIT's jurisdiction vested u/s. 263 of the Act. We refer facts of the instant case when once again wherein the ld. PCIT has observed in preceding paragraphs that the said jurisdiction is triggered if any Assessing Officer does not frame an assessment as per law. We have already held that the assessee's weighted deduction claim raised u/s. 35(2AB) of the Act is very much allowable. The first decision cited at Revenue's behest is accordingly distinguished. Next juridical precedent is EIMCO KCP Ltd. (supra) wherein ambit of Section 263 jurisdiction in case pendency of appeal preferred before the CIT (A) is discussed. The same is once again not relevant. Third case law is that of Mukul Corporation (supra) once again throwing light on nature and scope of Section 263 jurisdiction. We have no reason to disagree with the same except the fact that the assessee has already made out its case for claiming the impugned weighted deduction. Ld. Departmental Representative then invites our attention to MASTEK case laws involving Section 35 deduction claim vis-à-vis Section 43(4) of the Act defining scientific research which is not germane to the issue involved before us. Ld. Departmental Representative at last cites hon'ble Karnataka high court's Tejas Networks Ltd. (supra) involving Section 35 deduction claim in light of Section 43 once again. We have already observed that hon'ble jurisdictional high Court has settled the very proposition in Claris case (supra). We therefore find no reason for not following on hon'ble jurisdictional high court's decision binding upon us. Ld. Departmental Representative then invites our attention of this tribunal's Hyderabad bench's decision in Electronics Corporation of India Ltd. not taking into consideration the above hon'ble jurisdictional high court's decision which is accordingly distinguished. We thus decline Revenue's arguments.
9. This assessee's appeal is allowed.
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