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Facts
The assessee claimed weighted deduction for scientific research expenditure under Section 35(2AB) of the Income Tax Act for AYs 2018-19 and 2020-21. However, the assessee could not furnish Form 3CL as it was not issued by DSIR within the prescribed time, leading to disallowance by the AO and confirmation by the CIT(A).
Held
The Tribunal held that furnishing Form 3CL within the prescribed time is mandatory for weighted deduction under Section 35(2AB) and Rule 6(7A). Since it was not provided, the rejection of the weighted deduction by the lower authorities was justified. The alternative ground regarding allowing expenditure under other sections was restored to the AO for examination.
Key Issues
Whether the weighted deduction under Section 35(2AB) can be allowed without furnishing Form 3CL within the prescribed time. Whether the alternative claim for deduction under other sections needs examination.
Sections Cited
35(2AB), 35(1)(iv), 37, 35(1)(i), 270A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: JUSTICE (RETD.) SHRI C.V. BHADANG & SHRI B.R. BASKARAN
O R D E R PER B.R. BASKARAN, A.M : Both the appeals filed by the assessee are directed against the order(s) passed by the Ld. Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [‘Ld.CIT(A)’] and they relate to AYs.2018-19 and 2020-21. Since the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order for the sake of convenience.
& 5484/Mum/2024 2. The Grounds raised by the assessee for the AY.2018-19 reads as under: “Disallowance of weighted deduction amounting to INR 21,24,07,277 claimed under section 35(2AB) of the Act. 1. erred in disallowing the weighted deduction amounting to INR 21,24,07,277 claimed under section 35(2AB) of the Act, even though the Appellant has duly complied with all the conditions prescribed under section 35(2AB) of the Act and once the R&D facility is approved, entire expenditure incurred by the unit on scientific research is eligible for weighted deduction. 2. erred in disallowing the entire R&D expenses incurred by the Appellant without appreciating the fact that the delay in issuance of Form 3CL by DSIR is not at the fault of the Appellant infact, the Appellant has made all the required submissions as required by the Department of Scientific and Industrial Research ('DSIR') and has complied with all the regulations; 3. without prejudice to the above, erred in not allowing 100% of capital expenditure amounting to INR 11,01,98,096 under section 35(1)(iv) of the Act and 100% of revenue expenditure amounting to INR 3,14,06,756 under section 37/35(1)(i) of the Act on the ground that Appellant has not established nexus of the expenditure with its business activity without appreciating the fact that the business nature/ business nexus of the said expenditure has been never questioned by the Ld. AO during the course of assessment proceedings Initiation of penalty proceedings under section 270A of the Act 4. erred in initiating penalty proceeding under section 270A of the Act.” The Grounds No.1 and 2 are related to the rejection of weighted deduction claimed u/s 35(2AB) of the Act. The Ground No.3 is the alternative prayer of the assessee.
2.1. Identical grounds have been raised by the assessee for the AY.2020-21 also.
Brief facts of the case are that the assessee-company is primarily engaged in the business of development, manufacture and supply of & 5484/Mum/2024 innovative controller's/ECUs. It is a global supplier of high-volume critical controllers/ECUs having noval motor and engine control technologies, developed in-house. The assessee is operating in various business segments, namely, power generators, automotive, powered equipment etc. The assessee is the key supplier to various established automotive & off highway industry players, locally & globally. The assessee has developed motor controllers and genset controllers that do the job of real time engine management. As a result, the fuel consumption of the engines used in 2/3 wheelers and gensets reduces by 3 to 20%, depending on the engine variety and operating conditions. The assessee is in the field of innovation and is continuously developing technologies in the automobile sector and it has more than 130 employees who are part of R&D team.
The assessee claimed weighted deduction u/s. 35(2AB) of the Income Tax Act, 1961 (‘the Act’) in both the years in respect of scientific research expenditure incurred by it. However, the assessee could not furnish report in Form 3CL since the DSIR, Delhi did not issue the same for these two years. As per the provisions of sub-section (3) to section 35(2AB)of the Act, no company shall be entitled for deduction under that section, unless, inter alia, it fulfills the conditions with regard to the maintenance of account and audit thereof and furnishing of reports in such manner as may be prescribed. Rule 6(7A) prescribes the conditions, as per which, Form 3CL shall be furnished electronically by the prescribed authority to the PCIT or CCIT within 120 days of submission of audit report.
4.1. In the instant case, it is admitted that the prescribed authority i.e., DSIR has not issued Form 3CL within the date. Hence, the AO disallowed & 5484/Mum/2024 the weighted deduction claimed u/s. 35(2AB) of the Act and the Ld.CIT(A) also confirmed the same.
We heard the parties on this issue and perused the record. The Ld.AR admitted that Form 3CL has not been issued by the DSIR till date. We noticed that, as per the provisions of Section 35(2AB) r.w. Rule 6(7A) consideration of certificate in Form 3CL is mandatory, which is required to be issued by DSIR within a prescribed time period. In this case, the Form 3CL has not been issued by the DSIR for these two years, in which case, there is failure to comply with all conditions prescribed for allowing deduction u/s 35(2AB) of the Act. Accordingly, we are of the view that the Ld.CIT(A) was justified in confirming the rejection of weighted deduction claimed by the assessee u/s. 35(2AB) of the Act.
We noticed earlier that the assessee has raised an alternative contention in Ground no.3 that the expenditure incurred by it on scientific research should be allowed under other provisions of the Act, viz., the capital expenditure incurred on scientific research should be allowed as deduction u/s. 35(1)(iv) of the Act and the revenue expenditure should have been allowed deduction either u/s. 37 or u/s 35(1)(i) of the Act, if the weighted deduction is not allowed u/s. 35(2AB) of the Act.
6.1. Since the above said alternative contention of the assessee has not been examined by the tax authorities, we are of the view that the same requires examination at the end of the AO. Accordingly, we restore this alternative contention raised by the assessee in both the years to the file of theAO for examining the same afresh in accordance with law, after affording an adequate opportunity of being heard to the assessee.
& 5484/Mum/2024 7. In Ground No.4, the assessee is contesting the initiation of penalty proceedings u/s. 270A of the Act. Since this ground is pre-mature, it does not require adjudication.
In the result, both the appeals filed by the assessee are treated as partly allowed.