Weighted deductions are possible for all costs associated with the internal research and development facility
Fact and issue of the case
Present two appeals have been filed by the assessee against orders passed by the ld.Commissioner of Income Tax(Appeals), National Faceless Appeal Centre (NFAC), Delhi[hereinafter referred to as “Ld.CIT(A)”] of even dated 31.10.2022 under section 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act’ for short) for the above two assessment years.
It was common ground that the issue raised in both the appeals was identical, relating to the disallowance of claim of weighted deduction u/s section 35(2AB) of the Act. Since identical grounds have been raised in both the appeals before us, the grounds raised in ITA No.468/Ahd/2022 for Asst.Year 2014-15 are being reproduced for reference as under:
In law and in the facts and circumstances of the appellant’s case, the Ld. CIT (A) has erred in confirming the disallowance u/s. 35 (2AB) to the extent of Rs.27,93,980/-.
In law and in the facts and circumstances of the Appellant’s case, the Ld. CIT ought to have appreciated that the total R&D expenditure incurred by the appellant was of Rs.42,42,490/- and accordingly, the deduction available to the appellant u/s.35 (2AB) was of Rs.84,84,980/-. He has failed to appreciate that as held by the different decisions of ITAT, Ahmedabad and decision of Gujarat High Court cited before him, once the R&D facility is approved by DSIR, the entire expenditure incurred on such facility is eligible for deduction u/s. 35 (2AB). The department has not disputed the incurring of expenditure as shown by the appellant on R&D facility and therefore, there is no question of restricting the amount eligible for deduction.
The Hon’ble ITAT may please direct for allowing the entire deduction as claimed by the appellant.
The appellant craves leave to add to amend or to raise any further grounds of appeal as case may arise
The ld.counsel for the assessee submitted that the facts and the basis for disallowance by the Department are identical and his arguments therefore in both the years were the same. The ld.DR fairly agreed to the same. In view of the same, we take up both the appeals together for adjudication and dispose them by way of this common order.
Drawing our attention to the facts of the case, the ld.counsel for the assessee briefly pointed out that in terms of section 35(2AB) of the Act the assessee is entitled to weighted deduction at the rate of 200% on account of expenditure incurred on scientific research in in-house research and development facility, which facility is approved by the prescribed authority, being Department of Scientific & Industrial Research (“DSIR” for short). He contended that for both the years the assessee claimed weighted deduction of expenditure incurred on scientific research as claimed in its profits and loss account, but the Department restricted the assessee’s claim of weighted deduction to the extent of expenditure which was approved by the prescribed authority i.e. DSIR in Form 3CL.
Observation of the court
It is amply evident from the above, that w.e.f. 1-4-2016, the requirement of law underwent a change to the effect that on entering into agreement with DSIR in Form no.3CK, the assessee was required to submit information of its expenditure incurred in-house research and development facility on land, building, capital and revenue expenditure, every year to the prescribed authority in Annexure-2 of Form no.3CK and prescribed authority was required to quantify the expenditure eligible for weighted deduction in Part-B of the Form No.3CL.
What derives from the above, therefore, is that consequent to amendment to section35(2AB) by the Finance Act, 2015 w.e.f. 1.4.2016, requirement of law was that the prescribed authority had to quantify the quantum of eligible expenditure incurred on in-house research and development facility by the assessee. But prior to that there was no such requirement inlaw and the prescribed authority was the only required to grant approval to the in-house research & development activity.
The impugned assessment year before are Asst.Year 2014-15 & 2015-16. Since these assessments are prior to 1.4.2016, the amendment to section 35(2AB)) are not applicable to the same and in terms of un-amended provisions of section 35(2AB) of the Act, since we have held above that the prescribed authority was not required in law to quantify the amount of expenditure incurred on in-house research and development facility, such quantification, if any done by the prescribed authority in Form No.3CL was not required to be taken cognizance of by the Revenue authorities and the assessee is entitled to claim weighted deduction on all expenditure incurred by it, on in-house research & development facility. Therefore, we agree with the contentions of the ld.counsel for the assessee, before us that in the impugned year involved before us, the Revenue has erred in restricting the claim of weighted deduction under section 35(2AB) of the Act to the extent approved by the prescribed authority i.e. DSIR. In view of the above, we direct the AO to allow full benefit of claim of weighted deduction to the assessee to the extent claimed in the P&L accounts and the disallowance made, therefore, in both the years amounting to Rs.23,45,490/- and Rs.27,31,502/- under section 35(2AB) is directed to be deleted.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 23rd August, 2023 at Ahmedabad.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from herePharmanza-Herbal-Private-Ltd.-Vs-DCIT-ITAT-Ahmedabad-2