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.,-
