BIOLOGICAL E LIMITED ,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CIRCLE-1(2), HYDERABAD

Brief facts of the case are that the assessee company is engaged in the business of manufacture of vaccines. They have filed their return of income for the assessment year 2015-16 on 30/11/2015 declaring an income of Rs. 3,40,78,69,320/- under the normal provisions of the Income Tax Act, 1961 (for short “the Act”) and book profit of Rs. 4,97,18,42,525/- under section 115 JB of the Act, which was revised on 30/03/2017 declaring an income of Rs. 3,40,44,84,530/- under the normal provisions of the Act and their book profit of Rs. 4,97,18,42,525/- under the provisions of 115 JB of the Act. During the course of assessment, learned Assessing Officer noticed that the assessee had incurred an expenditure of Rs. 74,07,80,093/- towards Research & Development (R&D) and claimed weighted deduction under section 35(2AB) of the Act @ 200% of Rs. 1,47,30,26,932/-.

On a perusal of Form 3CL issued by the DSIR, it was noticed that the DSIR has not certified an amount of Rs. 4,66,80,700/- claimed towards ‘rent, electricity and maintenance ‘and since according to section 35(2AB) of the Act only such amount as certified by DSIR is eligible for weighted deduction, learned Assessing Officer allowed only the certified amounts for weighted deduction and disallowed the noncertified expenditure to the tune of Rs. 4,66,80,700/- under section 35(2AB) of the Act, namely, @ 200% to the tune of Rs. 4,66,80,700/-. Learned Assessing Officer further disallowed a sum of Rs. 1,69,108/- by invoking section 14A of the Act read with Rule 8D of the Income Tax Rules 1962 (“the Rules”).

Assessment under section 143(3) of the Act was completed by order dated 30/12/2017 determining the income of the assessee at Rs. 68,75,09,065/- by making an addition of Rs. 4,66,80,700/- by disallowing

Aggrieved by such an action of the learned Assessing Officer, assessee preferred an appeal before the Ld. CIT(A). Ld. CIT(A) noted that the units in respect of which the expenditure was claimed as deduction under section 35 (1)(2AB) of the Act are approved as R&D units eligible for deduction under section 35(2AB) of the Act as per the letter dated 21/03/2016 issued by DSIR and the learned Assessing Officer allowed the weighted deduction in respect of the expenditure certified by DSIR, but disallowed the expenditure in respect of ‘rent, electricity and maintenance charges‘ not certified by the DSIR. Ld. CIT(A) upheld the disallowance, holding that the expenditure has to be certified by DSIR for claiming weighted deduction under section 35 (1)(2AB) of the Act. Likewise, Ld. CIT(A) also confirmed the addition made by invoking section 14A of the Act read with Rule 8D of the Rules.

Assessee is, therefore, before us in this appeal challenging both the additions. Ld. AR, however, at the time of arguments has given up the challenge to the addition under section 14A of the Act read with Rule 8D of the Rules, but confined only to the disallowance of weighted deduction in respect of such expenditure which is not certified by DSIR. Only argument of the Ld. AR is that under section 35 (1) (2AB) of the Act in respect of the company engaged in the business of biotechnology the in- house R&D facility has to be approved by the prescribed authority but not the expenditure. He placed reliance on the decisions dated 15/05/2018 in Cummins India Limited Vs. DCIT in ITA No. 309/PUN/2014, CIT Vs. Cadila

Per contra, Ld. DR took us through the provisions under section 35(2AB) of the Act and also Rule 6 of the Income Tax Rules, 1962 (“the Rules”) under the caption “prescribed authority for expenditure on scientific research” and to sub Rule 7A thereof. Basing on this, he submits that the approval of expenditure incurred on in-house R&D facility under 35(2AB) of the Act shall be subject to the conditions therein. He also invited our attention to Form 3CL under which a report has to be submitted by the prescribed authority to the Income tax authorities specified under section 35(2AB) of the Act. Basing on these provisions and Form, he argued that not only the R&D facility has to be approved by the prescribed authority, but also the expenditure incurred to be qualified for weighted deduction under section 35(2AB) of the Act has to be approved. He submits that otherwise it would not be possible for the Income tax authorities to deal with the expenditure which is allowable under section 35 (1), 35(2AB) and 37 of the Act separately. His submission is that the expenditure genuinely incurred, but not qualified under section 35(2AB) of the Act being certified by the prescribed authority, would be eligible for deduction under section 35 or section 37 as the case may be. He submits that if no such distinction is maintained, provisions of section 35(2AB) of

Specific contention of the Ld. DR is that in Electronics Corpn. of India Ltd. Vs. ACIT [2012] 28 taxmann.com 280 (Hyd.), a Coordinate Bench of this Tribunal, for the Assessment Year 2007-08, after considering the relevant provisions under section 35(2AB) and 35(3) of the Act held that the expenditure as approved by the DSIR in the certificate given by them in Form 3CL alone is to be granted weighted deduction, and this order dated 25/09/2012 was not brought to the notice of the Bench in the case of Cummins India Ltd (supra) and subsequent decisions following Cummins India Ltd (supra). Ld. DR submitted that the question involved in CIT Vs. Cadila Healthcare Ltd (supra) was whether the explanation to section 35(2AB)(1) of the Act does not require that the expenses included in the said explanation are essentially to be incurred inside and approved in- house research facility. This question was answered in the affirmative by the Hon’ble Bombay High Court. He further submitted that the context of the cases in Claris Lifesciences Ltd (supra) and Sandan Vikas (India) Ltd (supra), that the allowability of the weighted deduction for the period between the agreement of the company with the DSIR and the approval of the DSIR by passing order under Form 3CM of the Rules. He submitted that in this context, the Hon’ble court held that when once the approval is given, the entire expenditure incurred by the assessee on development of

Ld. DR, therefore, submits that in the light of Rule 6 of the Rules the question that needs to be considered is what would amount to “entire expenditure so incurred by the assessee” for the purpose of weighted deduction under section 35(2AB) of the Act, namely, whether it is the expenditure approved by the prescribed authority under Rule 6(7A) of the Rules and reflected in Form 3CL, or it shall include the expenditure incurred by the assessee other than the one on scientific research on in- house R&D facility? At this juncture, he further submitted that in the case of CIT Vs. Vegetable Products Ltd., (1973) 88 ITR 192, the Hon'ble Apex Court held that the duty of the court is to read the section, understand its language and give effect to the same; that if the language is plain the consequences of giving effect to it are not factors to be taken into account in interpreting the provision; that it is for the legislature to step in and remove the absurdity if any; and that if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted. Basing on this, he submitted that it is only when the language of the provision is ambiguous or capable of various interpretations than one, then only the adoption of interpretation which favours the assessee, more particularly in cases of imposition of penalty, will occasion. According to him, the decision of the Hyderabad Bench of the Tribunal in the case of in Electronics Corpn. of India (supra) is in consonance with the provisions of law and the provision under section 35(2AB) of the Act read with Rule 6 of the Rule, as a matter of fact, is very plain.

We have gone through the record in the light of the submissions made on either side. The facts are admitted. The in-house R&D facility of the assessee is approved by the DSIR, which is the prescribed authority under Rule 6 of the Rules. Assessee incurred the impugned expenditure in respect of the R&D facility as approved by DSIR. Only dispute is in relation to certain amounts of expenditure incurred by the assessee towards rent, electricity and maintenance charges to the tune of Rs. 4,66,80,700/- which is not reflected in Form 3CL for the assessment year 2015-16. While allowing the expenditure that is reflected in Form 3CL for weighted deduction, learned Assessing Officer disallowed such expenditure which is not there in Form 3CL approved by the DSIR for weighted deduction. According to the assessee, the requirement of law under section 35(2AB) of the Act is that, if the in-house R&D facility is approved by the prescribed authority, there is no further approval required in respect of expenditure.

Ld. AR submits that it could be seen from Rule 6 (7A) of the Rules, originally sub Rule 7A (b) thereof, did not speak of quantification of expenditure incurred on in-house R&D facility by the DSIR, and such a question of quantification of the expenditure incurred on in-house R&D facility by the company during the previous year and eligible for weighted deduction under section 35(2AB) of the Act had arisen only subsequent to the amendment of this provision by IT (10th amendment) Rules, 2016 with effect from 01/07/2016. He submitted that prior to 01/07/2016, there was no power vested in the DSIR to quantify the expenditure after approval of the facility. Basing on this, he developed the argument that the approval that is required under section 35(2AB) of the Act is only in relation to the in-house R&D facility, but not in respect of the expenditure. This argument

Section 35(2AB) of the Act, at relevant time, reads that, -

Under sub Rule 5A of the Rules, the prescribed authority shall, if he was satisfied that the conditions provided in Rule 6 and in Rule 35(2AB) of the Act are fulfilled, pass an order in writing in Form 3CM. This order

It is pertinent to note that all these requirements under Rule 6 (7A) of the Rules are the conditions prescribed for approval of expenditure. If it is the intention of the legislature that once the in-house R&D facility is approved, no approval of the expenditure is necessary, then there is no need of incorporating Rule 6(7A) of the Rules at all. It is only after the facility is approved and an order under Form 3CM was passed under Rule 6 (5A) of the Rules, the question of approval of expenditure incurred on in- house R&D facility under Rule 6 (7A) of the Rules arises.

Section 35(2AB) of the Act speaks of the allowability of weighted deduction in respect of the expenditure incurred on scientific research on in-house R&D facility as approved by the prescribed authority. It specifically reads that there shall be allowed a weighted deduction of the expenditure so incurred. The expression ‘so incurred‘ has a definite relationship with the approved expenditure incurred in relation to the in- house R&D facility. A perusal of Rule 6 of the Rules clearly indicates that it relates to the prescribed authority for expenditure on scientific research.

Further the approval of the in-house R&D facility ends with issuance of Form 3CM under sub Rule 5A of Rule 6. If really the intention of the legislature, even prior to 01/07/2016, was to confine to the requirement of approval of the in-house facility, then there is no further need to refer to the approval of expenditure incurred on in-house R&D facility under section 35(2AB) of the Act by way of Rule 6 (7A) of the Rules. By virtue of Rule 6(7A) of the Rules the prescribed authority is put under an obligation to verify whether certain conditions are satisfied before approving the expenditure. Rule 6 speaks of the expenditure and its approval and Form 3CL is only a Form of communication. Section 35(2AB) of the Act deals with the quantum of deduction that is allowable in respect of expenditure on scientific research and in respect of the business of biotechnology.

The essence of section 35(2AB) of the Act read with Rule 6 (5A) of the Rules is approval of the in-house R&D facility, whereas 35(2AB) of the Act read with Rule 6(7A) of the Rules is in relation to approval of the expenditure incurred on in-house R&D facility by a company, for weighted deduction. If the approval of the prescribed authority has nothing to do with the expenditure, but its role is confined only in respect of the in-house R&D facility, then the exercise of the prescribed authority under Rule 6(7A) of the Rules would be a redundant exercise because, if we go by the

The argument of the assessee that the moment the approval is granted by the DSIR to the R&D facility and Form 3CM is issued, the role of DSIR comes to an end, does not come out of the provisions. At the cost of repetition, we would like to emphasise that the technical competency about the need to incur the expenditure or the corresponding benefit derivable by the company rested with the prescribed authority only, and that the reason why Rule 6 and more particularly sub Rule 7A thereof

Even in respect of Form 3CL, even prior to the amendment thereof by the IT (10th amendment) Rules, 2016 w.e.f. 01/07/2016, vide item No. 9, the report to be submitted by the prescribed authority to the Director General (Income tax exemptions) under section 35(2AB) of the Act, shall contain the total cost of in-house research facility. By way of amendment for the purpose of electronic submission, the Form is made in a detailed manner for incorporation of the total cost of in-house research facility. There are no path breaking changes either in Rule 6(7A) of the Rules or in Form 3CL by way of the IT (10th Amendment) Rules, 2010, so as to impact the powers and duties of the prescribed authority or the right, liability or disability of the companies incurring expenditure on scientific research on in-house R&D facility.

When the entire exercise of section 35(2AB) of the Act read with Rule 6 particularly sub sections 5A and 7A thereof is in respect of the expenditure on scientific research which is allowable with weighted deduction, and the purpose of the prescribed authority is to have the

At this juncture, we deem it just and necessary to refer to the observations of the Co-ordinate Bench of this Tribunal in Electronics Corpn. of India (supra), which clinches the issue in our opinion.

Since we are of the view that the decision of Hyderabad Bench of the Tribunal in the case of Electronics Corpn. of India (supra) is applicable to the facts of the case which was not brought to the notice of the Bench at the time of deciding the case in Cumins India Ltd., (supra), and the provisions under sub Rule 6 of the Rules do not admit of any ambiguity, we find it difficult to hold that the requisite approval under section 35(2AB) of the Act is, therefore, only in respect of the in-house R&D facility but not in respect of expenditure and consequently, once the R&D facility is

With this view of the matter, we are of the considered opinion that the Act and the Rules are very clear on this aspect and on this premise, we do not find any illegality or irregularity in the findings of the authorities below.

In the result, appeal of the assessee is dismissed.