STEER ENGINEERING PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 6(1)(1), BMTC BUILDING KORAMANGALA

The solitary issue that arises for our consideration pertains to the disallowance of deduction claimed under section 35(2AB) of the Act.

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of manufacturing and selling co-rotating twin screw extruders and parts thereof. For the year under consideration, the assessee filed its return of income on 29/11/2014 declaring a total income of INR 1,63,73,480. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, from the financials of the assessee, it was observed that the assessee has carried out in-house Research and Development to develop different kinds of extruders and natural fibres/polymer-based material at its R&D centre at Pennya Industrial Area, Bangalore. It was further observed that the assessee has claimed deduction under section 35(2AB) of the Act to the tune of INR 5,37,80,979. During the assessment proceedings, the assessee was asked to furnish Form 3CL, which was issued by the Ministry of Science and Technology, Department of Scientific and Industrial Research (“DSIR”), and the same was furnished by the assessee. Upon perusal of the Form 3CL, it was observed that the DSIR has approved only an amount of INR 103.25 lakhs. Accordingly, the deduction claimed by the assessee under section 35(2AB) of the Act was restricted to INR 3,78,55,214, and the balance of INR 1,59,25,765 was added to the total income of the assessee.

During the appellate proceedings before the learned CIT(A), the assessee claimed that the R&D expenditure incurred during the full year is an eligible deduction under section 35(2AB) of the Act, irrespective of the date of approval. In support of its contention, the assessee placed reliance upon the decision of the Hon’ble Delhi High Court in CIT v/s Sadan Vikas India Ltd, reported in (2012) 22 Taxman 19 (Del.), the decision of the Hon’ble Gujarat High Court in CIT v/s Claris Lifesciences Ltd, reported in (2008) 174 Taxman 113 (Guj), and the decision of the Hon’ble Madras High Court in CIT v/s Wheels India Ltd, reported in (2012) 20 Taxman 682 (Mad.).

The learned CIT(A), vide impugned order, held that on careful examination of Form 3CM issued by the DSIR, it is evident that the R&D facility was approved for the purpose of section 35(2AB) from 27/11/2013 to 31/03/2016. Accordingly, the approval is effective only from 27/11/2013 and not retrospectively from the beginning of the financial year. The learned CIT(A) further held that, as per Form 3CL, the DSIR has quantified only INR 103.25 lakh as eligible expenditure. Therefore, the learned CIT(A) held that the assessee is entitled to claim a weighted deduction under section 35(2AB) of the Act only from 27/11/2013 in respect of expenditure amounting to INR 103.25 lakh approved by the DSIR. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute regarding the fact that the assessee is engaged in the business of manufacturing and selling co-rotating twin screw extruders and the parts thereof. It is further undisputed that during the year under consideration, the assessee carried out in-house R&D to develop various types of extruders and natural fibres/polymer-based materials at its R&D centre in Peenya, Bangalore. During the year under consideration, the assessee claimed a deduction of INR 5,37,80,979 under section 35(2AB) of the Act, as follows:–

It is evident from the record that in order to seek approval from the DSIR, the assessee filed an application in Form 3CK on 11/03/2014. Vide Form 3CM dated 18/07/2014, the DSIR granted approval to the assessee for the purpose of section 35(2AB) of the Act from 27/11/2013 to 31/03/2016 in respect of the R&D facility of the assessee at Peenya, Bangalore. Since approval was granted under Form 3CM from 27/11/2013, the deduction claimed under section 35(2AB) of the Act was allowed only in respect of revenue and capital expenditure incurred after 27/11/2013. On the other hand, as per the assessee, the entire R&D expenditure incurred during the year is eligible for deduction under section 35(2AB) of the Act, irrespective of the date from which the approval was granted by the DSIR.

From perusal of the Guidelines for Approval in Form 3CM of In-House R&D Centres issued by the DSIR, we find that in clause 5, it has been provided that the approval to the in-house R&D centres having valid recognition by DSIR is considered from 1st April of the year in which the application is made in Form 3CK. In the present case, as noted above, the assessee made the said application in Form 3CK to the DSIR on 11/03/2014.

We find that in Maruti Suzuki India Ltd v/s Union of India, reported in (2017) 397 ITR 728 (Del.), the Hon’ble Delhi High Court held that for availing the benefit under section 35(2AB) of the Act what is relevant is not the date of recognition or the cut-off date mentioned in the certificate by the DSIR or even the date of approval but the existence of the recognition. It was further held that if a R&D Centre is not recognised, it is not entitled to a deduction, but if it is recognised, it is entitled to the benefit.

Similarly, the Hon’ble Gujarat High Court in CIT v/s Claris Lifesciences Ltd, reported in [2010] 326 ITR 251 (Guj.) held that since the approval is granted during the previous year relevant to the assessment year in question, the assessee is entitled to claim weighted deduction in respect of the entire expenditure incurred under section 35(2AB) of the Act by the assessee. The relevant findings of the Hon’ble Gujarat High Court, in the aforementioned decision, are reproduced as follows: – “7. The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of (i) development of facility; (ii) incurring of expenditure by the assessee for development of such facility; (iii) approval of the facility by the prescribed authority, which is "DSIR"; and (iv) allowance of weighted deduction on the expenditure so incurred by the Page 5 of 11 assessee. The provisions nowhere suggest or imply that "R & D" facility is to be approved from a particular date and in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which presupposes incurring expenditure in this behalf, application to the prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of section itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered rule 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of "R & D" facility has to be allowed for weighted deduction as provided by section 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up R & D facility in India, the Legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the Legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction. 8. We are in full agreement with the reasoning given by the Tribunal and we are of the view that there is no scope for any other interpretation and since the approval is granted during the previous year relevant to the assessment year in question, we are of the view that the assessee is entitled to claim weighted deduction in respect of the entire expenditure incurred under section 35(2AB) of the Act by the assessee.” 11. Therefore, respectfully following the aforesaid decisions and having considered the guidelines issued by the DSIR, since in the present case the R&D facility of the assessee has already been approved by the DSIR, we are of the considered view that the assessee is entitled to claim deduction under section 35(2AB) of the Act even in respect of the expenditure incurred prior to 27/11/2013, i.e. from 01/04/2013, for the year under consideration.

Further, we find that the learned CIT(A) upheld the allowance of deduction under section 35(2AB) of the Act only in respect of the expenditure, i.e. INR 103.25 lakh approved by the DSIR vide Form 3CL, as against the claim of deduction of INR 5,37,80,979 by the assessee.

Before proceeding further, it is pertinent to analyse certain provisions of the Act and the Rules, which are relevant for the adjudication of the issue raised in this appeal. Section 35(2AB)(1) of the Act, as it stood in the relevant year, reads as follows:-

The relevant rules, so far as they concern deduction under section 35(2AB) of the Act, are provided in Sub-Rule (1B), (4), (5A) and 7A of Rule 6 of the Income Tax Rules, 1962 (“the Rules”). These rules read as follows:-

In the present case, the deduction under section 35(2AB) of the Act was restricted on the basis that the said expenditure was not approved by the DSIR for weighted deduction under section 35(2AB) of the Act. It is pertinent to note that there was an amendment with effect from 01/07/2016 to Rule 6(7A)(b) of the Rules, whereby it has been laid down that the prescribed authority, i.e., DSIR shall quantify the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under section 35(2AB) of the Act in Part-B of Form No. 3CL. Prior to the aforesaid amendment, the provisions of Rule 6(7A)(b) of the Rules merely provided that the prescribed authority shall submit its report in relation to the approval of the in-house R & D facility in Form No.3CL to the DGIT (Exemption) within 60 days of its granting approval. Therefore, prior to 01/07/2016, there was no legal sanctity for Form No.3CL in the context of quantifying the expenditure eligible for weighted deduction under section 35(2AB) of the Act. We find that the Coordinate Bench of the Tribunal in Cummins India Ltd v/s DCIT, reported in [2018] 96 taxmann.com 576 (Pune-Trib.) held that there is no merit in the order of the Assessing Officer in curtailing the expenditure and consequent weighted deduction claimed under section 35(2AB) of the Act on the surmise that the prescribed authority has not approved part of the expenditure in Form No. 3CL, prior to the amendment in 2016. The relevant findings of the Coordinate Bench, in the aforesaid decision, are reproduced as follows: - “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 in-house 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.”

The Coordinate Bench, in the aforesaid decision, further held that for deduction under section 35(2AB) 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 such 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 the in-house R&D facility as a weighted deduction under section 35(2AB) of the Act. As noted above, in the present case, the prescribed authority has already passed an order granting the approval in Form No. 3CM. We find that in various other decisions, the Coordinate Benches of the Tribunal rendered similar findings that prior to the aforesaid amendment from 01/07/2016, once the facility is approved by DSIR, the assessee is entitled to a weighted deduction under section 35(2AB) of the Act, and there is no requirement that expenses also need to be approved by the DSIR in Form No. 3CL. Therefore, since the aforesaid amendment is not applicable to the assessment year under consideration, we are of the view that the AO erred in restricting the weighted deduction under section 35(2AB) of the Act to the expenditure mentioned in Form No. 3CL.

Accordingly, in light of the facts and circumstances as noted above, we direct the AO to grant a weighted deduction to the assessee under section 35(2AB) of the Act in respect of the permissible capital and revenue expenditure incurred by the assessee on the approved in-house research and development facility during the year under consideration.

In the result, the appeal by the assessee is allowed. Order pronounced in the open court on 29th June, 2026