Case Law Details
Deepak Novochem Technologies Ltd. Vs ACIT (ITAT Mumbai)
Introduction: The appeals by Deepak Novochem Technologies Ltd. against the order of the Ld. Commissioner of Income-tax (Appeals)-50, Mumbai, for assessment years 2014-15 to 2018-19, present a complex set of issues. The primary focus revolves around the disallowance of deductions under section 35(2AB) of the Income-tax Act, 1961, pertaining to in-house scientific research and development expenses. The case also touches upon alternative claims, disallowance of brought forward losses, initiation of penalty proceedings, and the levy of interest under various sections. This article aims to comprehensively analyze the key aspects of this legal dispute.
Background: Deepak Novochem Technologies Ltd. initially declared a total loss in its income tax return for the assessment year 2014-15. Subsequently, after a search and seizure action, the Assessing Officer restricted the deduction claimed under section 35(2AB) related to in-house scientific research expenses. The Ld. CIT(A) upheld this decision, leading to the filing of appeals by the assessee. The issues discussed cover multiple assessment years, with common points heard together.
Issue 1: Deduction under Section 35(2AB)
The primary issue in the legal dispute involving Deepak Novochem Technologies Ltd. relates to the interpretation of Section 35(2AB) of the Income-tax Act, 1961, which provides for a weighted deduction of 200% on expenses incurred by the assessee on in-house scientific research and development (R&D). The crux of the matter is the quantification of the eligible deduction, a process overseen by the prescribed authority, namely the Department of Scientific and Industrial Research (DSIR).
The Assessing Officer, in this case, restricted the deduction claimed by the assessee under Section 35(2AB) based on the ‘total cost’ certified by the DSIR. The DSIR’s certification serves as a crucial factor in determining the quantum of deduction available to the assessee for the in-house R&D expenses. The controversy arises from the assessee’s contention that the amended Rule 6 of the Income-tax Rules, 1962, which governs the manner of computing the amount of deduction under Section 35(2AB), applies only from the assessment year 2017-18 onwards.
The Ld. CIT(A) supported the Assessing Officer’s decision to restrict the deduction based on the ‘total cost’ certified by the DSIR. The rejection of the assessee’s argument regarding the applicability of the amended Rule 6 suggests that the authority interpreted the statutory provisions in a manner unfavorable to the assessee.
The Tribunal, in its analysis, emphasized the absence of legal sanctity for Form No. 3CL, a document integral to the quantification of eligible deductions, prior to the amendment in 2016. This indicates that the Tribunal considered the legislative landscape at the relevant time to ascertain the procedural requirements for claiming the deduction.
Crucially, the Tribunal distinguished cases where the prescribed authority had actively restricted R&D expenditure, noting that in the present case, the DSIR had not altered or quantified the expenses but had essentially reproduced the expenses claimed by the assessee. However, the Tribunal highlighted a crucial point—the lack of details regarding the difference in expenditure certified by the auditor and that filed before the prescribed authority.
This lack of specific details proved to be a decisive factor in the Tribunal’s decision to uphold the justified disallowance. The Tribunal’s emphasis on the absence of adequate documentation reinforces the importance of providing comprehensive and transparent information during assessments, particularly in cases involving specialized deductions such as those for in-house scientific R&D.
Issue 2: Alternative Claim under Section 35(1) and Section 37
The second significant issue in the Deepak Novochem Technologies Ltd. vs. ACIT (ITAT Mumbai) case pertains to the assessee’s alternative claim for the disallowed amount under sections 35(1) and 37 of the Income-tax Act, 1961. This alternative claim arises when the primary claim under section 35(2AB) for deductions related to in-house scientific research and development expenses faces challenges. The contention revolves around the rejection of this alternative claim by the Ld. CIT(A), a decision that was subsequently upheld by the Tribunal.
Section 35(2AB) provides for a specific deduction of 200% on expenses incurred by the assessee on in-house scientific research and development activities. In cases where this deduction is disallowed or restricted, the assessee may resort to alternative provisions such as sections 35(1) and 37 to claim deductions for business-related expenditures.
The Ld. CIT(A) rejected the alternative claim made by the assessee under sections 35(1) and 37, asserting that such an alternate claim must be supported by relevant details and evidence. Sections 35(1) and 37 operate on distinct planes – the former deals with expenditures on scientific research, while the latter is a more general provision related to allowable business expenditures.
The Tribunal concurred with the Ld. CIT(A)’s decision, emphasizing the absence of details regarding the nature of the balance expenditure of Rs.2,79,380. The Tribunal’s stance underscores the importance of providing comprehensive and substantiated information when making alternative claims. Mere assertion without supporting evidence may not be deemed legally tenable.
Furthermore, the Tribunal highlighted that the Assessing Officer had the authority to examine and verify the expenses under scrutiny assessment. This underscores the procedural aspect of tax assessments, where the tax authorities are empowered to scrutinize claims and ensure their legitimacy.
Issue 3: Set-off of Brought Forward Losses
The matter of set-off of brought forward losses in the Deepak Novochem Technologies Ltd. vs. ACIT (ITAT Mumbai) case is a pivotal aspect that garnered the attention of the Tribunal. The contention revolved around the rejection of the set-off of brought forward losses by the Assessing Officer and the subsequent challenge by the assessee, emphasizing that the tax liability under section 115JB should not preclude the allowance of such set-offs.
In the context of income computation, the Income-tax Act, 1961, provides for the set-off of losses incurred in previous years against the current year’s income. This mechanism is intended to mitigate the tax burden on businesses or individuals facing financial downturns, allowing them to adjust losses from prior years against current profits.
However, in cases where the Minimum Alternate Tax (MAT) provisions, specifically under section 115JB, are applicable, there can be complexities in claiming set-offs. Section 115JB mandates the computation of tax liability for companies at a certain percentage of their book profits, irrespective of the regular taxable income. The contention often arises regarding the compatibility of set-off provisions with the MAT framework.
In the Deepak Novochem case, the Assessing Officer initially rejected the claim for the set-off of brought forward losses, possibly citing provisions related to MAT. The assessee contested this decision, arguing that the MAT liability should not serve as a hindrance to the allowance of set-offs as per the general provisions of the Income-tax Act.
The Tribunal’s directive to the Assessing Officer to reconsider the set-off of brought forward losses implies a recognition of the complexity and potential misinterpretation in the initial decision. It signifies that, despite the MAT provisions, the general principles of allowing set-offs should not be undermined. The Tribunal’s order aligns with the overarching objective of the tax laws, which is to ensure fairness and equity in the computation of taxable income.
Issue 4: Initiation of Penalty Proceedings: The ground related to the initiation of penalty proceedings under section 271(1)(c) of the Act was deemed premature at this stage and dismissed as infructuous by the Tribunal.
Issue 5: Interest under Section 234A and Section 234B: The appeal challenged the levy of interest under sections 234A and 234B. While the Tribunal allowed the claim related to interest under section 234A, it dismissed the issue of interest under section 234B as infructuous.
Conclusion: The Deepak Novochem case brings forth intricate challenges surrounding the quantification of deductions for in-house scientific research expenses. The Tribunal’s nuanced approach, considering the absence of legal sanctity before the 2016 amendment and the importance of providing detailed expenditure information, highlights the need for meticulous documentation in such cases. The alternative claim, rejection of brought forward losses, and the premature penalty proceedings also underscore the complexity of the issues at hand. This case serves as a reminder of the importance of compliance and detailed substantiation in tax matters, and it will likely contribute to the evolving jurisprudence in India’s taxation landscape.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These appeals by the assessee are directed against a common order dated 09.06.2023 passed by the Ld. Commissioner of Income-tax (Appeals)-50, Mumbai [in short ‘the Ld. CIT(A)’] for assessment years 2014-15 to 2018-19. A common issue-in-dispute involved in these appeals, therefore same were heard together and disposed off by way of this consolidated order for convenience and avoid repetition of facts.
2. The parties agreed for taking appeal for assessment year 2014 15 as a lead case and decision of the same to be applied mutatis mutandis for other assessment years. Accordingly, we first take up the appeal of the assessee for assessment year 2014-15 for adjudication.
3. The grounds raised by the assessee in the appeal for assessment year 2014-15 are reproduced as under:
Disallowance of deduction under section 35(2AB)
1. On the facts and in the circumstances of the case and in law, both the ld. Commissioner of Income tax (Appeals), (“CIT(A)) and the Ld. Assessing Officer (‘AO’) erred in allowing weighted deduction under section 35(2AB) of the Income Tax Act, 1961 (‘Act’) with reference to expenditure of Rs. 59,38,000 only, as against the Appellant’s claim for weighted deduction with reference to expenditure of Rs. 62,17,380, thereby making partial disallowance of claim for weighted deduction with reference to expenditure of Rs. 2,79,380.
2. On the facts and in the circumstances of the case and in law, both the Ld. CIT(A) and the Ld. AO erred in relying on Form No. 3CL issued by the Department of Scientific and Industrial Research (‘DSIR’), Ministry of Science and Technology, Government of India, ignoring the fact that DSIR was empowered to certify the Research and Development expenditure only vide amended Rule 6(7) of the Income Tax Rules, 1962 (‘Rules’) inserted w.e.f. July 1, 2016 and not from the year under
3. Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the Ld. AO erred in alternatively not allowing deduction under section 35(1) or section 37 of the Act for the expenditure of Rs. 2,79,380 not considered for the purposes of granting weighted deduction under section 35(2AB) of the Act, without appreciating that the said expenditure has not lost its character either as expenditure on scientific research or as business expenditure incurred wholly and exclusively for the purposesof business of the Appellant.
Set off of brought forward losses not allowed under section 72
4. On the facts and in the circumstances of the case, and in law, the Ld. AO erred in not setting off brought forward business losses from the taxable income.
Initiation of penalty proceedings
5. On the facts and in the circumstances of the case, and in law, the Ld. AO erred in initiating penalty proceedings under section 271 (1)(c) of the Act.
4. Briefly stated, facts of the case are that the assessee filed its original return of income for the assessment year under consideration on 26.11.2014 declaring total loss of Rs.(-)1,09,690/-. Subsequently, assessment was completed u/s 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) vide order dated 26.12.2016 wherein the total loss filed by the assessee was accepted. Subsequently, a search and seizure action u/s 132 of the Act was carried out on the premises of the assessee on 15.11.2018 and consequently, notice u/s 153A of the Act was issued and proceedings were accordingly completed on 20.04.2021, wherein the expenses incurred towards in-house scientific research were restricted to Rs.59.38 lakhs as against the claim of the assessee of Rs.62, 17,380/- thus, corresponding weighted deduction u/s 35(2AB) of the Act @ 200% amounting to Rs.5,58,760/- was declined to the assessee. On further appeal, the Ld. CIT(A) also upheld the finding of the Assessing Officer on the ground that the prescribed authority for approval u/s 35(2AB) of the Act i.e. Department of Scientific and Industrial Research (DSIR) had only certified ‘total cost of expenses’ incurred on research and development amounting to Rs.59.38 lakhs and thus the expenses ‘total cost’ claimed by the assessee cannot exceed as certified by the prescribed authority. Before the Ld. CIT(A), the assessee claimed that in view of amended Rule 6 of the Income-tax Rules,1962 (in short ‘the Rules’) the provision for quantification of scientific in-house research and development expenses has been prescribed by way of Finance Act, 2016, which would apply for assessment year 2017-18 onwards only and prior to that in absence of any quantification prescribed, the Assessing Officer was required to allow the weighted deduction as claimed by the assessee and duly certified by the auditor of the company. The Ld. CIT(A) though accepted that said quantification of deduction u/s 35(2AB) of the Act was applicable from assessment year 2017-18 onwards, however, according to him, the prescribed authority has certified the ‘total cost’ in-house scientific research and development incurred by the assessee in respect of research facility, therefore, he restricted the claim of deduction u/s 35(2AB) of the Act to the extent of the ‘total cost’ which was submitted by the assessee before the prescribed authority. The relevant finding of the Ld. CIT(A) is reproduced as under:
5.2 The issue has been carefully examined after due consideration of the details available on record. It is borne out from the available details that relevant provisions, primarily and importantly Rule 6(7A) of the Rules, have been amended w.e.f. 01.07.2016 which provide for quantification of the expenditure incurred on inhouse research and development facility by the company during the previous year and eligible weighted deduction u/s 35(2AB) of the Act by the prescribed authority (the Secretary, DSIR) in Part B of Form 3CL. These changes have been effected from 01.07.2016 and it is the contention of the appellant that same are applicable from AY 2017-18 and NOT for the year under consideration i.e. AY 20141 5. Hence, for the year under consideration, according to the appellant, only the approval of the prescribed authority in the prescribed form (Form3CL) is mandated for allowing corresponding claim of deduction u/s 35(2AB) of the Act made by it.
However, an examination of the details submitted by the appellant highlight that the issue involved is NOT merely confined to the year of applicability, the facts forthcoming from the details submitted by the appellant themselves highlight something more than that:
The issue of disallowance undisputedly involves two amounts viz.,-
-
- one claimed by the assessee-appellant in the return (Rs.621 7380/-] and
- the other one appearing in the pre-amendment period Form-3CL issued by the prescribed authority for the year under consideration [Rs. 5938000/ which has been submitted by the appellant itself.
It is also NOT in dispute that for the year under consideration the prescribed authority to grant approval for the subject R&D facility was the Secretary, DSIR [Department of Scientific and Industrial Research](Rule 6(1B) of the Rules).
As per the records, the claim of the appellant is for an amount of Rs. 621 7380/- as having been incurred on its approved in-house research and development facility in terms of the provisions of section 35(2AB) of the Act. However, no further details in respect of this. claim/amount of Rs. 621 7380/- [except note 32 of Notes on Account giving mere bifurcation thereof as Capital and Revenue Expenditure have been given. It has been contended that for the year under consideration (AY 2014-15 which pertains to pre-amendment period) if the approval of the prescribed authority is available then the corresponding deduction becomes eligible. Such a contention may be applicable and true if there are no other facts available on record to raise any doubt on such quantum claimed by the appellant.
However, at this juncture, a look at the pre-amendment period FORM 3CL issued in the appellant’s case for the year under consideration, which has been submitted by the appellant itself is necessitated. The relevant extract of the same is reproduced, as under (emphasis supplied)
A bare perusal of the above extract issued by the Prescribed Authority (the Secretary, DSIR) indicates that quantum of Rs.59.38 lakhs specified therein is NOT approved expenditure but it has been UNAMBIGUOUSLY noted as “Total cost of inhouse research facility” and same noting has been again highlighted in the bottom row of the Table as “Total R&D expenditure”.
Thus, the facts emanating from the documents submitted by the appellant itself [the Form 3CL] are that- as per the prescribed authority the TOTAL COST of such research- activities itself was Rs. 59.38 lakhs as against the claim of Rs. 62.17 lakhs made by the assessee.
Hence, the issue, in the peculiar facts and circumstances, is NOT merely restricted to the year of applicability of the amended provisions (supra) or -amendment period (prior to AY 2017-18) approval of the prescribed authority for quantification of subject deduction is required or not, but it clearly highlights that the quantum of the deduction claimed u/s 35(2AB) by the assessee is higher than the “TOTAL COST” certified by the Prescribed Authority for the same underlying research activities.
It would be pertinent to add here, that after the captioned amendments in Rule 6(7A) of the Rules, the Form3CL contains a specific part i.e. PART-B – which specifies the quantum of Approved Expenditure for the purposes of section 35(2AB)unlike in the case under consideration, wherein the TOTAL COST itself has been certified/specified and the undoubtedly the quantum of underlying deduction cannot exceed such TOTAL COST. For ready reference and ready illustration, the Form 3CL submitted by the appellant in its own case for AY 2018-19 (post-amendment AY) is reproduced as under for better appreciation of the moot point under consideration which clearly shows at Point 5(E) of PART-B-as “R&D Expenditure eligible for deduction u/s 35(2AB)” and NOT the TOTAL COST of in-house research-
With this background and to further illustrate, it is mentioned that it is not the case when the prescribed authority is specifying the TOTAL COST as, say, Rs. 70 lakhs and then certifying the approved expenditure of, say, Rs.59 lakhs out of such total cost of Rs. 70 lakhs. It is purely a clear case of the prescribed authority certifying the TOTAL COST ITSELF which is less than the quantum claimed by the assessee appellant.
At the cost of repetition, it is reiterated that Rs. 59.38 lakhs is NOT the expenditure approved by the prescribed authority but the TOTAL COST specified to be incurred for such research during the captioned period which is evidently less than the expenditure claimed by the assessee on such research activities.
Hence, under such circumstances, there is no reason to interfere with the action of the Ld.
AO in restricting the deduction as per such amount of Rs.59.38 lakhs which has been certified to be the Total Cost or Total R&D expenditure by the prescribed authority as per the documents submitted by the appellant. Accordingly, the ground-1 does not succeed and is, accordingly, DISMISSED. Before parting it is added that the issue has been dealt-with purely on the basis of the peculiar facts of this case, above, hence, the legal issues assume academic nature-in light of such fact based outcome. On the similar lines, the reliance of the appellant on the above mentioned decisions is also not relevant in the peculiar facts and circumstances of the matter, as elaborated above.”
5. Before us, the Ld. Counsel for the assessee filed a Paper Book for containing page 1 to 11. The Ld. Counsel the assessee referred to the prescribed Form No. 3CL issued by the Department of Scientific and Industrial Research providing details of total research and development expenditure which include capital expenditure (other than the land and building) of Rs. 12.64 lakhs and revenue expenditure of Rs.46.74 lakhs. The Ld Counsel also referred to the Auditor certificate and notes to the auditor report along with Director’s Report wherein the expenditure on research and development has been claimed to be Rs.62, 17,380/-. In support of contention that prior to introduction of the amendment to Rule 6(7A)(b) of the Rules, the weighted deduction claimed by the assessee without any quantification by the DSIR was to be allowed to the assessee, the Ld. Counsel relied on the decision of the Coordinate Bench of the Tribunal, Mumbai Bench in the case of Marksans Pharma Ltd. v. DCIT [2023] 155 taxmann.com 59 (Mumbai-Trib.) and decision of the Ahmadabad Bench in the case of Pharmanza Herbal (P.) Ltd. v. DCIT [2023] 155 taxmann.com 56 (Ahmedabad-Trib.).
6. On the contrary, the Ld. Departmental Representative (DR) submitted that section 35(2AB) of the Act prescribe that deduction shall be allowed in respect of expenditure incurred by the assessee on in house Scientific research and development facility as approved by the prescribed authority and thus according to him the reference approved was not only in respect of facility but approval was in respect of expenditure and therefore lower authority had validly restricted the deduction to the extent of expenditure approved by the DSIR i.e. the prescribed authority. The Ld. DR further submitted that before the prescribed authority, the assessee has submitted the details of total cost towards research and development amounting to Rs.59.38 lakhs only and accordingly the said prescribed authority has approved the total cost incurred on R & D expenditure. He submits that it is not the case that the prescribed authority disapproved certain expenses claimed by the assessee but the said prescribed authority has approved the total cost of R & D expenditure. He submitted that in the cases relied upon by the assessee, the prescribed authority has restricted the research and development expenditure, whereas in the present case prescribed authority did not alter or reduced any of the R&D expenditure claimed before the said authority. He submitted that assessee has not provided details of the difference amount between the expenditure certified and the detail of the expenditure filed before the prescribed authority. Further, he submitted that if the prescribed was not empowered to examine the deductibility of the expenses u/s 35(2)(AB) of the Act then the assessee was required to provide entire details of the expenses amounting to Rs.62,17,380/- before the Assessing Officer for verifying whether same were incurred for the purpose of section 35(2AB) of the Act, but no such details had been provided by the assessee before the lower authorities and therefore, the Assessing Officer has reasonably and generously restricted the claim of the assessee u/s 35(2AB) of the Act to the extent of the quantum of the expenses filed before the prescribed authority.
7. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The issue in dispute is in respect of deduction u/s 35(2AB) of the Act , which provides for weighted deduction i.e. @ 200% of the expenses incurred on in-house research and development facility by an assessee. For adjudication of the issue in dispute, the relevant provision of section 35(2AB)(1) of the Act as stood in the relevant year is reproduced as under :
“(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule]] incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on inhouse research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred.
Explanation.- For the purposes of this clause, “expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).”
7.1 Further, the relevant rules under Income-tax Rules, 1962 in short ‘the Rules’) prescribed in section 35(2AB) of the Act are also reproduced as under:
“(1B) For the purposes of sub-section (2AB) of section 35, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research.”;
“(4) The application required to be furnished by a company under sub section(2AB) of section 35 shall be in Form No.3CK.”;
“(5A) The prescribed authority shall, if he is satisfied that the conditions provided in this rule and in sub-section (2AB) of section 35 of the Act are fulfilled, pass an order in writing in Form No. 3 CM:
Provided that a reasonable opportunity of being heard shall be granted to the company before rejecting an application.
“(7A) Approval of expenditure incurred on inhouse research and development facility by a company under sub‑section (2AB) of section 35 shall be subject to the following conditions, namely:-
(a) The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature;
(b) The prescribed. authority shall submit its report in relation to the approval of inhouse Research and Development facility in Form No. 3CL to the Director General (Income Tax Exemptions) within sixty days of its granting approval;
(c) The company shall maintain a separate account for each approved facility; which 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;
Explanation:-For the purposes of this sub-rule the expression “audited” means the audit of accounts by an accountant, as defined in the Explanation below sub- section (2) of section 288 of the Income-tax Act,1961.
(d) Assets acquired in respect of development of scientific research and development facility shall not be disposed off without the approval of the Secretary, Department of Scientific and Industrial Research”
7.3 Further, the said Rule 6(7A) of ‘the Rules’ has been amended w.e.f. 01.07.2016, whereby it has been laid down that the prescribed authority i.e. DSIR shall quantify expenditure incurred on in-house research and development facility by the assessee during the previous year, which is eligible for weighted deduction , in part‑u/s 35(2)(AB) of the Act in-B of Form No. 3CL. Prior to aforesaid amendment, the provision of Rule 6(7A) of the Rules merely provided that the prescribed authority shall submit its report in relation to the approval of house R&D facility in Form No. 3CL to the Director General of Income tax (Exemption) within 60 days of its granting approval. In the case of Marksans Pharma Ltd. (supra), the Tribunal is of the view that prior to 01.07.2016 there was no legal sanctity for Form No. 3CL in context of quantifying eligible deduction weighted u/s 35(2)(AB) of the Act. The Tribunal further relied on the decision of the Coordinate Bench in the case of Cummins India Ltd. v. DCIT (2018) 96 taxmann.com 576 (Pune-Trib.), wherein it is held that there is no merit in the order of the Assessing Officer in curtailing the expenditure and consequent weighted deduction claimed u/s 35(2)(AB) of the Act on the surmise that prescribed has not approved par of the expenditure in Form No. 3CL. The relevant finding of the Co‑ordinate Bench in the case of Cummins India Ltd. (supra) is reproduced as under:
“45. The issue which is raised in the present appeal is that whether where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on inhouse R&D facility, for which the adjudicating authority is the Assessing Officer and whether the prescribed authority is to approve expenditure in form No. 3CL from year to year. Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis-à-vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No. 3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below.”
7.4 The Tribunal in the case of Marksans Pharma Ltd. (supra) further noted that Co-ordinate Bench of the Tribunal in the case of Cummins India Ltd. (supra) held that for deduction u/s 35(2)(AB) of the Act, the first step was the recognition of the facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. It was also held that once an agreement has been executed under which recognition has been given to the facility, then thereafter the role of the Assessing Officer is to look into and allow the expenditure incurred on in-house R&D facility as weighted deduction u/s 35(2)(AB) of the Act. Thus the Tribunal held that prior to amendment the assessee is entitled to weighted deduction u/s 35(2)(AB) of the Act subject verification by the AO and and there is no requirement that expenditure also need to in Form No. 3CL.
7.5 We find that in the instant case, the prescribed authority has not altered or quantified the expenses for approval towards in‑house research and development facility, but has merely reproduced the expenses which have been claimed by the assessee as incurred towards research and development expenditure including capital and revenue expenditure. The assessee in its audit total expenditure on in‑house research facility amounting to Rs.62,17,380/-. As far as claim of capital expenditure is concerned, there is no dispute between the auditor and the prescribed authority but, in respect of revenue expenditure, in the annexure to director report along with auditor certificate revenue/recurring expenses has been shown at Rs.49 lakhs whereas revenue expenditure claimed before the prescribed authorities only was of Rs.46.74 lakhs only. The Ld. Arguing Counsel was asked to provide details of the difference of Rs.2,79,380/- between revenue expenditure certified by the auditor and the revenue expenditure claimed before the prescribed authority but no such details were either filed before the lower authorities or before us. In absence of any such details, the action of the lower authorities in disallowing the weighted deduction corresponding to the said amount is justified and accordingly, the contentions of the assessee are rejected. The case laws relied upon by the assessee are not applicable to the facts of the case as in those cases the prescribed authority has quantified research and development expense for the assessment year prior to the amendment in the rules, whereas in the instant case the prescribed authority has approved entire expenses claimed by the assessee itself. In our opinion, the finding of ld CIT(A) on the issue in dispute is justified and no interference is required at our end, accordingly, we uphold the same. The Ground Nos. 1 and 2 of the appeal of the assessee are accordingly dismissed.
8. The ground No. 3 of the appeal of the assessee relates to alternative claim of the expense of Rs.2,79,380/- u/s 35(1) of the, Act or section 37 of the Act which was not considered for the purpose of granting weighted deduction u/s 35(2AB) of the Act.
8.1 The Ld. CIT(A) has considered the contention of the assessee regarding the alternative claim but rejected observing as under:
“7.1 The matter has been examined. The alternate contention of the appellant is that the differential amount of Rs.279380/which had not been allowed u/s 35(2AB) of the Act ought to have been allowed either as per the provisions of section 35(1) or the provisions of section 37 of the Act. However, it is noted that such an alternate contention suffers from several shortcomings/infirmities, thus making it far short of merit for consideration. It is not apparently discernible if the appellant had taken such contentions before the Ld. AO during the subject-assessment proceedings and if not, then the reasons for such omissions have also NOT been specified in the present appellate proceedings while making such alternate contentions/claims. Thus, in case the same is true, then at the inception stage itself such alternate contentions fail for consideration by virtue of the appellant’s own conduct, as mentioned above Without prejudice to the above, it is mentioned that such alternate contention is not legally tenable. To explain this point, it would be gainful here to reproduce a relevant extract of the provisions of section 37 of the Act, as under (emphasis supplied)-
37. Any expenditure (not being expenditure of the nature described in sections 30 to 361. and not being in the nature of expenses capital expenditure or personal assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession.
A mere perusal of the provisions of section 37 clearly bars allowing any expenditure in the nature of the expenditure described in sections 30 to 36 of the Act which also include the expenditure specified in section 35(2AB) of the Act. It is a trite law that when a specific provision is stipulated then alternatively a general provision cannot be resorted to. The provisions of section 37 of the Act unambiguously cater to such expenditure which is not specifically provided for/mentioned in provisions of sections 30 to 36 of the Act. If the alternate contention of the appellant is accepted then it will make the provisions of section 30 to 36 of the Act redundant. Same discussion holds true for the provisions of section 35(1) vis-a-vis the provisions of section 35(2AB) of the Act as undisputedly these provisions clearly stipulate the specifics of the expenditure that would be covered within their respective ambits.
Inter-sections fungibility of expenditure is not provided within all these provisions of the Act.
In addition to this and without prejudice to the above two issues, it is relevant here to reiterate, as elaborated in earlier part of this order, that the quantum of the deduction claimed u/s 35(2AB) by the assessee in the present matter is higher than the “TOTAL COST” certified by the Prescribed Authority for the same underlying research activities. It is added that even though the assessee appellant had made such claim but it had not even provided any details of this balance expenditure of Rs.279380/- in terms of its nature viz., whether for manpower expenses, material expenses, fees, etc. It is incorrect to assume that the provisions of sections 35(2AB), 35(1) and 37 of the Act operate on the same plane as far as allowability of expenses is concerned and same would get automatically allowed by merely making a claim without any supporting relevant details/evidences. The assessee ought to have substantiated such claim/s by providing specific details and cogent evidences as per the requirements of the respective specific section/s and also to show that any component of such balance expenditure is not hit by the provisions of section 40,40A, 43B,etc. of the Act. In other words. it cannot be assumed that an expense which is allowable u/s 35(2AB) of the Act would automatically and seamlessly stand allowable u/s 35(1) or section37 of the Act merely by virtue of its being allowable u/s 35(2AB). Further, if the expenses are liable for TDS, then allowability of such expenses would be subjected to provisions of section 40 of the Act.
These are just a few illustrations to highlight that the alternate contention of the appellant to automatically allow the balance amount of Rs.279380/- either u/s 35(1) or u/s 37 of the Act totally lacks merit for consideration.
Considering the above discussion, the alternate contention cannot be accepted and the accordingly, the ground-2 is DISMISSED.”
8.2 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. In Ground raised, the assessee has raised that in respect of amount of Rs.2,79,380/- the lower authorities have not allowed the deduction u/s 35(2)(AB) of the Act and therefore, alternatively the said of section 37 amount should be considered for deduction u/s 35(1) of the Act. The Ld. CIT(A) has declined the relief to the assessee mainly for the reasons firstly, no such contentions were taken before the AO, secondly expenditure dealt u/s 35(2AB) cannot be claimed u/s 37(1) or 35(1) of the Act, thirdly, the cost claimed is higher than total cost certified by the DSIR, fourthly, no details of the expenditure had been provided, lastly, the allowability of the balance expenditure was to be tested applying other provisions of the Act such as 40, 40A, 43B etc.
8.3 Before us, the Ld. Counsel for the assessee has submitted that total expenditure has been certified by the statutory and auditor also in the audit report u/s 35(2)(AB) of the Act and the auditor has also certified compliance with other provisions of the Act i.e. section 43AB of the Act. He submitted that expenditure remains in the genre of the expenditure on scientific research only and additional attributes there of entitled for deduction u/s 35(2)(AB) of the Act and therefore, expenditure is allowable for deduction either u/s 3 5(1) of the Act or section 37 of the Act. The Ld. Counsel in support of relied on the decision of the Mahindra Two wheelers Ltd vs DCIT in ITA No. 519/Mum/2018.
8.4 During the course of hearing, the assessee was asked to provide the details of the expenditure of Rs.2,79,380/- which has been claimed for alterative deduction u/s 37 or 35(1) of the Act, however, the assessee failed to provide any such details of the said expenses. Though the assessee has claimed that entire expenses debited to profit and loss account including expenses attributable to in-house research facility have been duly audited by an Auditor, but in our opinion, the Assessing Officer under the scrutiny assessment procedure is duly authorised to examine and verify those expenses and without any details of the expenditure, the Assessing Officer cannot examine the allowability of the claim u/s 35(1) or 37 of the Act irrespective of the fact that the expenses had certified by the auditor. In absence of identification of the said expenses of Rs.2,79,380/-, the action of ld CIT(A) in disallowing the alternative deduction claimed is justified. The ground No. 3 of the appeal of the assessee is accordingly dismissed.
9. In ground No. 4 the assessee has claimed setting off of brought forward losses. The Ld. CIT(A) has upheld the rejection of the setting off brought forward losses for the reason that tax liability was raised under section 115JB of the Act and therefore, said set off cannot be allowed.
9.1 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The contention of the assessee is for setting off of the brought forward or the year losses against profit and gains or business or profession for the year under consideration which the assessee is eligible irrespective whether the final income has been taxed under the MAT provisions or under the regular provisions of the Act. Accordingly, we direct the Assessing Officer to consider the said setting off of brought forward losses in accordance with law. The ground No. 4 of appeal of the assessee is accordingly allowed for statistical purposes.
10. The ground No. 5 relates to initiation of penalty proceedings u/s 27 1(1)(c) of the Act ,which being premature at this stage, same is dismissed as infructuous.
11. In the appeal for assessment year 2015-16 and 2016-17, the ground Nos. 1 to 3 are identical to ground Nos. 1 to 3 raised in assessment year 2014-15 except change of amount, therefore, same are decided mutatis mutandis.
11.1 The ground No. 4, in assessment year 2015-16 and 2016-17 relates to initiation of penalty proceedings u/s 271(1)(c) of the Act, which being premature at this stage, same are dismissed as infructuous.
12. The grounds raised in assessment year 2017-18 are reproduced as under:
“Disallowance of deduction under section 35(2AB)
1. On the facts and in the circumstances of the case and in law, both the Commissioner of Income- tax (Appeals), (“CIT(AY) and the Ld. Assessing Officer (‘AO”) erred in not allowing deduction under section 35(1) or section 37 of the Income Tax Act, 1961 (‘Act’) for the expenditure of Rs. 2,54,837, not considered for the purposes of granting weighted 35(2AB) of the Act, without deduction under section appreciating that the said expenditure has not lost its character either as expenditure on scientific research or as business expenditure incurred wholly and exclusively for the purposes of business of the Appellant.
Levy of interest under section 234A of the Act
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO to levy interest of Rs. 61,670 under section 234A of the Act, without appreciating the fact that the Appellant duly filed its return of income in response to notice under section 153A for other block AYs 2013-14 to 2016-17 & AY 2018-19 in time, however, due to technical error, the Appellant could not upload the return for the year under appeal, for which the Appellant raised a grievance and after resolution of the grievance, the return of income could be filed on March 9, 2020.
Addition of excess set-off of brought forward losses.
3. On the facts and in the circumstances of the case, and in law, the Ld. AO erred in adding the alleged excess setoff of brought forward business losses of AY 2012-13 (Rs. 68,51,063), AY 2014-15 (Rs. 1,09,789) and AY2015-16 (Rs. 18,54,948), to the taxable income of the Appellant.
Initiation of penalty proceedings
4. On the facts and in the circumstances of the case, and in law, the Ld. AO erred in initiating penalty proceedings under section 270A(2) of the Act, without appreciating that while filing return of income on October 28, 2017, amount of expenditure granted by the Department of Scientific and Industrial Research (“DSIR’) in Form No.3CL was not available with the Appellant, which was issued only on October 1, 2018.
Levy of interest under section 234B of the Act
5. On the facts and in the circumstances of the case, and in law, the Ld. AO erred in levying interest u/s 234B of the Act.”
13. The ground No.1 raised in appeal for alternative claim of the deduction u/s 35(1) and 37(1) of the Act in relation to expenditure of Rs.2,54,837/- which had been claimed u/s 36(2)(AB) of the Act by the assessee but denied by the AO.
Since, the identical ground has been dismissed while adjudicating appeal for assessment year 2014-15, therefore, this ground of appeal of the assessee is also dismissed.
14. The ground No. 2 of the appeal of the assessee relates to levy of interest u/s 234A of the Act amounting to Rs.61,670/-. It is contended by the assessee that return of income u/s 153A of the, for the year Act was filed on time however due to technical error under consideration, the assessee could not file return of income on time and therefore, raised the grievance before income-tax department and after resolution, the return of income was filed on March 2020. The Ld. CIT(A) dismissed the claim of the assessee observing as under:
“18.1 The matter has been examined and it is noted that undisputedly the ground solely relates to the issue of very levy of interest u/s 234A of the Act. In this respect it is mentioned that as regards levy of interest under section 234A, 234B and 234C of the Act, there cannot be second opinion that such levy is mandatory and automatic as per the respective provisions of the Act. The Hon’ble Apex Court in the case of CIT Vs. Anjum M.H. Ghaswala (2001) 252 ITR 1 (SC) has held that-
26….
Sections 234A, 2348 and 234C in clear terms impose a mandate to collect interest at the rates stipulated therein. The expression ‘shall’ used in the said section cannot by any stretch of imagination be construed as ‘may. There are sufficient indications in the scheme of the Act to show that the expression ‘shall’ used in sections 234A, 234B and 234C is used by the Legislature deliberately and it has not left any scope for interpreting the said expression as ‘may. This is clear from the fact that prior to the amendment brought about by the Finance Act, 1987, the Legislature in the corresponding section pertaining to imposition of interest used the expression ‘may thereby giving a discretion to the authorities concerned to either reduce or waive the interest. The change brought about by the Amending Act (Finance Act, 1987) is a clear indication of the fact that the intention of the legislature was to make the collection of statutory interest mandatory……..
Thus, it is clear that the levy of interest us 234A is mandatory and automatic on the part of the AO and powers for waiver and reduction in this respect have been vested with Competent Authorities, other than AO, vide orders/notifications issued by the Board by virtue of powers conferred u/s 119(2) of the Act. In view of the above, the Ground 3 is held as non-maintainable in terms of the provisions of section 246A of the Act and the same is dismissed without going into merits or any other issue.”
14.1 Before us, the Ld. Counsel of the assessee has relied on the decision of the Hon’ble Delhi High Court in the case of Dr Prannoy Roy vs CIT (2002) 121 taxmann.com 314 (Delhi), wherein it is held that interest u/s 234A can’t be levied where tax due on income was already paid but an assessee could not file return for reasons beyond his control. It was contended by the assessee before us that in the case also return could be filed for technical error though self assessment tax was already paid.
14.2 We have heard rival submission of the parties and perused the relevant material on record. In view of the contention of the assessee that self assessment tax was already paid and the control, we assessee failed to file return for reasons beyond his restore the issue of levy of interest u/s 234A back to the file of the Assessing Officer for deciding in accordance with law. The ground No.2 of appeal of the assessee is accordingly allowed for statistical purposes.
15. The ground No. 3 of the appeal of the assessee relates to set off of the brought forward losses. The identical issue has been restored by us in assessment year 2014-15 for examining and allowing in accordance with law. Accordingly following our finding in earlier assessment year 2014-15, the issue in dispute in the year under consideration is also restored to the file of the Assessing Officer for verification and allowing in accordance with law.
16. The ground No. 4 of the appeal of the assessee relates to, initiation of penalty proceedings which being premature at this stage, same is dismissed as infructuous.
17. The ground No. 5 of the appeal of the assessee relates to interest u/s 234B of the Act, which being consequent to income determined under appellate order, we are not required to adjudicate upon, therefore, same is dismissed as infructuous.
18. Now, we take up the appeal for AY 2018-19. The grounds raised in the appeal for AY 2018-19 are identical to the grounds raised for assessment year 2017-18 except difference of the amount for additions/levy of interest etc. and therefore, same are decided mutatis mutandis.
19. allowed In the result, the appeals filed by the assessee are partly for statistical purposes.
Order pronounced in the open Court on 28/11/2023.
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