Section 35(2AB) DSIR Approval Conditions Binding on Apollo Tyres: Kerala HC

Apollo Tyres Ltd. Vs ACIT (Kerala High Court)

Summary: The Kerala High Court, in Apollo Tyres Ltd. Vs Assistant Commissioner of Income Tax, dismissed two income-tax appeals filed by Apollo Tyres Limited for Assessment Years 2006-07 and 2007-08, affirming the disallowance of weighted deduction claimed under Section 35(2AB) of the Income Tax Act, 1961. The High Court held that the assessee’s entitlement to the additional deduction was governed by the statutory conditions and the approval granted by the Department of Scientific and Industrial Research (DSIR). Since the effective period and conditions of approval had already been examined and upheld by the Delhi High Court in an earlier proceeding involving the same assessee, the appellant could not reopen the identical controversy through subsequent assessment appeals. The Division Bench comprising Justice S.V. Bhatti and Justice Viju Abraham consequently answered the substantial question of law in favour of the Revenue and against Apollo Tyres Limited.

The controversy arose from the assessee’s claim for weighted deduction at 150% of expenditure incurred on its in-house research and development facilities. Apollo Tyres had established two R&D centres, one at Perambra, Cochin, and the other at Limda, Vadodara. Both facilities had been recognised by the Government of India’s Ministry of Science and Technology through DSIR. The Perambra facility was recognised in 1987, while the Limda facility received recognition in 2001. The assessee had been claiming deductions for revenue and capital expenditure incurred in operating these facilities under Sections 35(1)(i) and 35(2)(ia) of the Income Tax Act. However, the present dispute specifically concerned the additional weighted deduction under Section 35(2AB), which required compliance with separate statutory approval conditions.

Apollo Tyres applied to the prescribed authority for approval under Section 35(2AB) on 12 November 2008. DSIR issued an approval letter dated 17 June 2009 granting approval for the period 1 April 2007 to 31 March 2010. However, the approval expressly restricted the deduction for Financial Year 2007-08 to capital expenditure on R&D equipment. The agreement contemplated by Section 35(2AB)(3), requiring cooperation with the prescribed authority concerning the research facility and audit of its accounts, had been entered into on 21 August 2008. The Assessing Officer rejected the weighted deduction claimed for the assessment years under consideration, holding that the assessee had not filed a revised return claiming the deduction and that the statutory agreement had been executed only after the relevant financial year. These findings were affirmed by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, Cochin Bench.

The assessee challenged the disallowance before the Kerala High Court, where both appeals were admitted on the common substantial question whether the Tribunal was justified in confirming the denial of deduction under Section 35(2AB). The Court noted that the principal issue could not be examined in isolation because an earlier judgment dated 20 April 2010 of the Delhi High Court in Apollo Tyres’ own case, W.P.(C) No. 13338 of 2009, had already decided the validity and effective period of the DSIR approval. In that writ petition, Apollo Tyres had sought approval for the period commencing 1 April 2004 rather than 1 April 2007. The Delhi High Court rejected the challenge, holding that the approval conditions and the requirement of entering into the prescribed agreement governed the entitlement to the weighted deduction.

The Kerala High Court reproduced the relevant portions of the Delhi High Court judgment explaining the DSIR guidelines and their operation. Under those guidelines, approval of a recognised in-house R&D facility would normally commence from 1 April of the year in which an application in Form 3CK was made. Where the application was made on 21 August 2008, the ordinary effective date would be 1 April 2008. However, a beneficial guideline permitted approval to extend to the preceding financial year, limited to eligible capital expenditure on R&D equipment, excluding expenditure on land and buildings. Accordingly, the grant of approval from 1 April 2007 was treated as an additional benefit available under the applicable guidelines rather than an unconditional entitlement to weighted deduction for all revenue and capital expenditure from an earlier date.

The Delhi High Court had also held that execution of the agreement stipulated by Section 35(2AB)(3) was a condition precedent for obtaining approval relevant to the deduction. As Apollo Tyres executed the prescribed agreement only on 21 August 2008, the company could not claim that it was automatically entitled to approval from 1 April 2004 merely because its research facilities had been recognised by DSIR in earlier years. The Delhi High Court therefore rejected both the claim for retrospective approval from 2004 and the contention that the restriction concerning Financial Year 2007-08 was legally unsustainable. For that earlier financial year, the extended approval was confined to eligible capital expenditure, while the broader benefit for both revenue and eligible capital expenditure was available only during the period supported by the applicable approval conditions.

Before the Kerala High Court, the assessee’s senior counsel informed the Bench that a Special Leave Petition had been filed against the Delhi High Court judgment. However, the Supreme Court had declined to condone the delay, resulting in dismissal of the SLP. The Kerala High Court therefore proceeded on the basis that the Delhi High Court’s adjudication remained operative and governed the assessee’s entitlement under the approval. It noted that Apollo Tyres had already pursued an independent writ remedy challenging the period stipulated by DSIR and had failed to obtain the broader approval sought. The assessee could not invite another High Court to reach a different conclusion on the same effective period and eligibility conditions through the assessment appeal proceedings.

The assessee also referred to other judicial decisions in support of the argument that once an R&D facility was recognised, separate approval should not be treated as indispensable for claiming the deduction. The Kerala High Court declined to examine that argument independently because the assessee’s own earlier litigation had conclusively addressed the relevant approval conditions. The Court emphasised that Section 35(2AB) granted an additional statutory incentive, but entitlement depended on satisfying the requirements of that provision. Recognition of a research facility and approval for a weighted tax deduction were not treated as interchangeable in the circumstances before the Court. The assessee’s attempt to obtain a different result regarding the same approval period was therefore rejected.

In ITA No. 225 of 2019, relating to Assessment Year 2006-07, the High Court agreed with the findings recorded by the Assessing Officer, Commissioner of Income Tax (Appeals) and Tribunal. It held that the substantial question of law stood governed by the Delhi High Court’s judgment dated 20 April 2010 in the assessee’s own case. The question was consequently answered against Apollo Tyres and in favour of the Revenue. Applying the same reasoning to ITA No. 238 of 2019, concerning Assessment Year 2007-08, the High Court similarly upheld the disallowance.

Accordingly, both income-tax appeals were dismissed without any order as to costs. The decision underscores that a weighted deduction under Section 35(2AB) must be supported by compliance with the prescribed approval and agreement requirements, and that an assessee cannot reopen an issue concerning the effective period and scope of DSIR approval where that issue has already been adjudicated against it in earlier proceedings involving the same parties. The ruling must be read in the context of the approval conditions and the prior Delhi High Court judgment applicable to Apollo Tyres, rather than as an unconditional determination that every delay in DSIR approval necessarily defeats all claims for weighted R&D deduction.

Cases Discussed

1. Apollo Tyres Ltd. Vs Department of Scientific and Industrial Research / Revenue — W.P.(C) No. 13338 of 2009; 20/04/2010 (Delhi High Court). Relied upon and followed. The Delhi High Court rejected Apollo Tyres’ challenge to the effective period of DSIR approval under Section 35(2AB). It held that execution of the prescribed agreement was a condition precedent and that the approval granted for Financial Year 2007-08 was validly restricted to eligible capital expenditure. The Kerala High Court treated this earlier adjudication as governing the controversy raised in the subsequent income-tax appeals.

FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT

Heard Senior Counsel Mr Joseph Markos and Standing Counsel Mr Christopher Abraham for parties.

2. M/s. Apollo Tyres Ltd Kochi/Assessee is the appellant. The Assistant Commissioner of Income Tax, Circle-1(1), Kochi/Revenue is the respondent in both the appeals.

2.1 The assessee, being aggrieved by the order of the Tribunal and the authorities under Section 35(2AB) of the Income Tax Act, 1961 (for short ‘the Act’) filed the instant two appeals. The details of the Assessment Years, Orders etc are stated in the following tabular form:

2.2 The appeals are admitted on the following substantial question of law.

“Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in confirming the disallowance of deduction under Section 35(2AB) of the Income Tax Act?”

The circumstances noted by the Assessing Officer in ITA No.225/2019 in respect of the present controversy are referred to and the same would be sufficient for consideration and disposing of the other appeal as well.

ITA No.225/2019

3. The assessee has set up two in-house Research and Development (R&D) facilities, one at Perambra (Cochin) and another at Limda (Vadodara). The facilities are recognized by the Government of India, Ministry of Science and Technology, and Department of Scientific and Industrial Research (DSIR). The R&D facility at Perambra was granted recognition by DSIR in 1987 and the R&D facility at Limda was granted recognition in the year 2001. The assessee has been claiming admissible deduction, i.e., the revenue and capital expenditure incurred by the assessee for maintaining and running the R&D facilities, under Section 35(1)(i) and (2)(ia) of the Act. The issue now turns us to the entitlement of weighted deduction at 150% under Section 35(2AB). The assessee, on 12.11.2008, applied to the competent authority for approval. The DSIR, vide letter dated 17.06.2009, granted approval for the period 01.04.2007 to 31.03.2010 by incorporating the following condition:

“The above Research and Development facility is approved for the purpose of Section 35(2AB) from 01.04.2007 to 31.03.2010, subject to the conditions underlined therein (approval for Financial Year 2007-08 is recommended only for the purpose of claiming weight deduction on capital expenditure on R&D equipment).”

3.1 The Assessing Officer noted that on 21.08.2008 the agreement stipulated by clause (iii) of Section 35(2AB) of the Act was entered into by the assessee. Therefore, the important stipulation for availing weighted deduction has been complied with on 21.08.2008. The Assessing Officer for two reasons declined the deduction claimed by the assessee under Section 35(2AB), namely the assessee has not filed revised return claiming the weighted deduction for the subject Assessment Year, and that the agreement with the Department, which is a condition precedent, was entered into subsequent to the Financial Year during which the deduction is claimed. Therefore, the assessee is not entitled to the weighted deduction of 150% under Section 35(2AB). The Commissioner of Income Tax (Appeals) and the Tribunal have confirmed the findings recorded by the Assessing Officer. Hence the Tax Appeal.

4. Before adverting to other circumstances, it is contextual to refer to the judgment dated 20.04.2010 of Delhi High Court in assessee’s own case in W.P.(C) No.13338/2009, which has bearing on the consideration of the substantial question raised in the appeal. Briefly referred, the assessee in the said writ petition prayed for quashing the order dated 15.06.2009 wherein the approval was given with effect from 01.04.2007 to 31.03.2010 as against the claim for approval for the period 01.04.2004 to 31.03.2010. In other words, the assessee, after appreciating the effect of the order of the Department in granting the approval for the period 01.04.2007 to 31.03.2010, questioned the said order independently and invited the judgment dated 20.04.2010. The operative portion of the judgment reads thus:

“8. From the aforesaid two provisions of the said guidelines, it was pointed out by Mr Chandhiok that, in the first instance, the approval to in-house research and development centres having valid recognition by the Department of Scientific and Industrial Research, would, as a normal rule, be considered from the first of April of the year in which the application is made in Form 3CK. He submitted that in the present case, the application in Form 3CK was made on 21.08.2008 and, therefore, in terms of these guidelines, the approval would normally have been granted from 01.04.2008. However, in view of the guideline prescribed in Clause (vi) of para 6, a beneficial provision has been made so as to extend the approval of an in-house research and development centre to the previous year, but limited only to capital expenditure (excluding any capital expenditure on land and buildings). It is for this reason, according to Mr Chandhiok, that the approval in Form 3CM granted on 15.06.2009 has been given with effect from 01.04.2007. It was also pointed out that it is because of these provisions, which are beneficial to the petitioner, that the benefit of weighted tax deduction for the year 2007-08, which is the year prior to the year of application, has been limited to capital expenditure (excluding expenditure on land and building). However, for the period subsequent to 01.04.2008, the petitioner would be entitled to the entire benefit as stipulated under Section 35(2AB), both on the capital expenditure as well as on revenue expenditure, excluding, of course, the capital expenditure on land and building.

9. After having considered the arguments advanced by the counsel for the parties, we are inclined to accept the submissions made by Mr Chandhiok on behalf of the respondent. While it may be true that, initially, the petitioner had obtained approval right upto 31.03.2010, but that approval would be relatable only to Section 35(2AB) Before a company is entitled for deduction under the said Sub-section (1), it must also enter into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of accounts maintained for that facility. This is specifically stipulated in Clause (3) of Section 35(2AB) of the said Act. We find that the agreement was entered into only on 21.08.2008 when the petitioner made the application in Form 3CK. We have already mentioned that part ‘B’ of the said form comprises of the said agreement. Such an agreement is a condition precedent to the kind of approval, for the purposes of deduction, which the petitioner is seeking. This condition was only met on 21.08.2008. Therefore, the petitioner’s plea that it ought to have been granted approval with effect from 01.04.2004 and not with effect from 01.04.2007 is not acceptable.

10. Insofar as the plea that the approval has been granted for the financial year 2007-2008 only for capital expenditure and not revenue expenditure, is concerned, we agree with the submissions made by Mr Chandhiok that the benefit would not have normally accrued to the petitioner for the financial year 2007-2008 because the approval would normally have been granted only in the year in which the application in form 3CK is made. If that were to be the case, then the petitioner could have got approval only with effect from 01.04.2008, It is only because of the beneficial provisions indicated in the guidelines that the benefit has been extended to the earlier year, being the financial year 2007-08, subject to the condition that such benefit would be limited only to the capital expenditure (excluding the capital expenditure on land and building). Thus, on this ground also, we feel that the petitioner has no case.”

5. The learned Senior Counsel appearing for the assessee informs the Court that the Special Leave Petition (SLP), filed against the judgment in W.P.(C) No.13338/2009 with delay condonation petition, was pending during the assessment proceedings. Subsequently, the Supreme Court since did not condone the delay, the SLP was dismissed. Therefore, we are of the view that, for all purposes, the entitlement of assessee for availing benefit from 01.04.2004 is covered by the order dated 15.06.2009 of DSIR and the adjudication of the Delhi High Court in assessee’s own case, W.P.(C) No.13338/2009. A few judgments are referred to for bringing home the argument that once recognition is granted, approval is not very essential and need not be considered for the reason that Section 35(2AB) is an additional incentive or deduction provided by the Act. The claim is dependent on fulfilling the requirements of the Section. This argument need not be considered for the reasons that the assessee, on the strength of a right in its favour or infirmity in the stipulation of period by DSIR, availed the writ remedy. The prayers of assessee were rejected. The result is that the conclusion recorded against the assessee by the judgment in W.P.(C) No.13338/2009 bars the assessee from re-agitating the same issue in subject assessment proceedings. The request of the assessee was to give approval with effect from 01.04.2004. For available reasons, and now approved by the judgment in W.P.(C) No.13338/2009, it has been granted with effect from 01.04.2007 to 31.03.2010. This conclusion is confirmed by the Delhi High Court. The effort of the assessee again is in respect of the very same Assessment Year for which a different conclusion is attempted to be invited from this Court. The argument for weighted depreciation is rightly rejected by all the authorities under the Act.

5.1 We are in agreement with the findings recorded by all the three authorities and are of the view that the substantial question of law, by following the judgment dated 20.04.2010 of the Delhi High Court in assessee’s own case in W.P.(C) No.13338/2009 is answered in favour of the Revenue and against the assessee.

ITA No.238/2019

6. By following the aforementioned discussions and the reasons, the substantial question framed in this appeal is answered in favour of the Revenue and against the Assessee.

Income Tax Appeals fail, accordingly dismissed. No order as to costs.