Pharmanza Herbal Pvt. Ltd Vs PCIT (ITAT Ahmedabad)
PCIT Was Right! AO’s “Allow First, Verify Never” Approach Invites 263- Form 3CL is Non-Negotiable – AO Can’t Grant 35(2AB) on Assumptions, 263 Sustained
AO Allowed R&D Deduction Without Verifying Form 3CL – ITAT Confirms 263 as AO Ignored Mandatory Law!
Assessee Company filed its return declaring income of ₹4.81 Cr. AO completed scrutiny assessment u/s 143(3) r.w.s. 143(3A) & 143(3B) accepting returned income. During assessment, AO allowed deduction of ₹1,80,11,055 u/s 35(2AB), being 150% of in-house R&D expenditure of ₹1,20,07,370. However, on examination of records, PCIT noticed that as per Form 3CL issued by DSIR, only ₹112.25 lakh was approved as eligible expenditure. Therefore, weighted deduction allowable was ₹1,68,37,500, but AO allowed excess deduction of ₹11,73,555 without verifying DSIR quantification or amended Rule 6(7A).
PCIT held that post Finance Act 2015 amendment (effective 01.04.2016) & corresponding amendment in Rule 6(7A) (effective 01.07.2016), quantification of eligible R&D expenditure by DSIR in Part B of Form 3CL is a mandatory precondition for weighted deduction. As AO failed to examine this statutory requirement, the order was both erroneous & prejudicial to revenue. Accordingly, PCIT invoked section 263.
Assessee argued that AO had verified the claim, that section 35(2AB) did not mandate DSIR quantification, that unapproved R&D expenses were allowable u/s 37, & that two views were possible as per Max India & NDTV decisions. PCIT rejected these contentions stating that after amendments, there is no scope for dual interpretation, DSIR quantification is binding, & AO cannot ignore Form 3CL. PCIT relied on earlier ITAT decisions in Assessee’s own cases for pre-amendment years where DSIR approval was not mandatory, but clarified that present year falls in post-amendment regime.
