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Facts
The assessee claimed weighted deduction under Section 35(2AB) for in-house R&D expenditure. The Assessing Officer (AO) allowed the claim after detailed inquiry. However, the Principal Commissioner of Income Tax (PCIT) revised the assessment, setting it aside on the ground that Form 3CL, quantifying the expenditure, was not submitted by DSIR.
Held
The Tribunal held that the assessee fulfilled its obligations by obtaining DSIR approval (Form 3CM) and filing the audit report (Form 3CLA). The delay in submitting Form 3CL by DSIR is beyond the assessee's control and cannot be a ground to deny the deduction. The PCIT's assumption of jurisdiction under Section 263 was found unsustainable.
Key Issues
Whether the PCIT rightly assumed jurisdiction under Section 263 to revise the assessment order, where the AO had made due inquiries, and the delay in submission of Form 3CL by DSIR was beyond the assessee's control?
Sections Cited
263, 143(3), 144B, 35(2AB), 133(6), 142(1)
AI-generated summary — verify with the full judgment below
Order PER LALIET KUMAR, J.M: This is an appeal filed by the Assessee against the order of the Ld. Pr. CIT, Patiala dt. 27/03/2025 pertaining to Assessment Year 2020-21. 2. In the present appeal Assessee has raised the following grounds:
1. That Ld. PCIT Patiala has erred in assuming the jurisdiction u/s 263 and thereby setting aside the assessment as framed by the AO by passing the order u/s 143(3) r.w.s. 144B vide his order dated 27.09.2022.
2. That the Ld. PCIT Patiala has failed to appreciate that requisite/adequate inquiries have been made by the AO concerned with regard to the claim of the assessee u/s 35(2AB) amounting to Rs.29,30,17,001/-. 3. That the Ld. PCIT has failed to appreciate that the assessee had met all the obligations for the claim of the deduction u/s 35(2AB), in as much as, it had filed form no 3CLA to the Competent Authority, DSIR and any delay on the part of the independent and separate Government Organization, namely DSIR, not furnishing the prescribed form 3CL to the concerned Chief Commissioner of the Income Tax cannot be fatal for the disallowance of deduction u/s 35(2AB). in 4. That the PCIT has failed to appreciate that the AO concerned had made requisite inquiries u/s 133(6) during the course of assessment proceedings from DSIR and had also received reply in that context and since the concerned department had replied to the AO concerned, no fault can be attributed to the assessee.
5. That the PCIT has failed to appreciate that assessee has no control over the functioning of the Government Department, namely DSIR and, as such, non communication of the requisite form by the DSIR to the concerned Chief Commissioner of the assessee cannot be a ground for setting aside the order as passed u/s 143(3) vide order dated 27.09.2022 by the AO concerned who, had passed the order after due application of mind.
6. That the Ld. PCIT has failed to appreciate that the said deduction u/s 35(2AB) have been claimed by the assessee, while filing the return of the income year after year and the same have been allowed after through scrutiny u/s 143(3) and thus it was the Bonafide claim and merely on some technical ground by the independent Government Department, the assessee cannot be faulted, sincе, it has no control vis a vis non-intimation by the DSIR to the concerned Chief Commissioner of the assessee. 7. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed of.
3. The assessee company filed its return of income on 15.02.2021 declaring income of Rs. 87,19,13,370/-. The return was selected for scrutiny and assessment under section 143(3) read with section 144B was completed on 27.09.2022 at an income of Rs. 88,33,66,370/-, after making two additions. During the course of assessment, the Assessing Officer noticed that the assessee had claimed deduction of Rs.1,96,88,965/- under section 35(1)(i) and weighted deduction of Rs. 29,30,17,001/- under section 35(2AB) on in- house R&D expenditure of Rs.19,53,44,667/-. In this connection, the Assessing Officer issued specific queries vide notice under section 142(1) dated 30.12.2021 calling upon the assessee to furnish complete details of the deduction claimed under section 35(1)(i) and 35(2AB) along with supporting evidences, approval of DSIR, copy of Form 3CM, audit report, details of in- house R&D facilities and justification for weighted deduction. In response, the assessee submitted detailed explanations on 04.03.2022, enclosing the DSIR recognition in Form 3CM valid for the relevant period, copies of audited R&D accounts maintained separately as per Rule 6(7A), and justification that section 35(2AB)(1) allows weighted deduction of 150% of expenditure on scientific research carried on in approved in-house R&D facilities. It was further explained that the statutory condition stood satisfied once the facility was approved in Form 3CM and expenditure was incurred, and that the subsequent quantification in Form 3CL is a ministerial act of DSIR, the delay of which cannot prejudice the assessee.
After considering the assessee’s submissions and evidences, the Assessing Officer accepted the claim. The PCIT, however, on verification of record, noticed that Form 3CL quantifying the expenditure was not available on record and that DSIR had, in its communication dated 05.11.2024, intimated that the file for issuance of Form 3CL for AY 2020-21 was still under process. He therefore held that the Assessing Officer did not make proper enquiries and had erroneously allowed the weighted deduction. Relying upon Explanation 2(a) to section 263, the PCIT set aside the assessment with a direction to redo the same after obtaining Form 3CL and carrying out verification.
Against the order of the Ld. Pr. CIT the assessee preferred an appeal before the Tribunal.
Before us, it was submitted that the present appeal challenges the assumption of jurisdiction by the Ld. PCIT u/s 263 of the Income-tax Act, 1961, whereby the order passed by the Assessing Officer (AO) u/s 143(3) r.w.s. 144B has been set aside on the ground that deduction u/s 35(2AB) was wrongly allowed in absence of Form 3CL. It is respectfully submitted that the impugned order suffers from lack of jurisdiction and is liable to be quashed. It was submitted that the Assessing Officer had conducted the detailed enquiry in respect to weighted deduction of Rs. 29.30 crores u/s 35(2AB). The AO issued detailed questionnaires u/s 142(1), raising specific queries (vide Q. No. 10 & Q. No. 4) regarding the R&D facility, DSIR approvals, Form 3CM, and audit reports. In response, the assessee filed:
Copy of Form 3CM approval granted by DSIR for the relevant period. Copy of Audit Report in Form 3CLA duly filed electronically. DSIR recognition certificate of the R&D unit. Explanations with supporting evidences on expenditure incurred. 6.1 The AO even issued notice u/s 133(6) to DSIR for independent verification. After such detailed scrutiny, the AO accepted the claim. Thus, Ld. AR submitted that this is not a case of “lack of enquiry” or “non- application of mind”. At best, the PCIT has a different opinion, which is insufficient to invoke Section 263. 6.2 The Ld. AR submitted for the purposes of invoking the jurisdiction under section 263 it is necessary to satisfy both the conditions i.e; “The order is erroneous, and it is prejudicial to the interest of revenue.”
6.3 In the present case, Ld. AR submitted that the AO conducted full enquiry and adopted a plausible view. Hence, the order is neither erroneous nor prejudicial. Reliance is placed on:
Malabar Industrial Co. Ltd. v. CIT (243 ITR 83, SC) – Twin conditions must co-exist. CIT v. Gabriel India Ltd. (203 ITR 108, Bom HC) – When AO makes enquiries and takes a view, revision u/s 263 is not permissible. PCIT v. V-Con Integrated Solutions Pvt. Ltd. (P&H HC, 12.09.2024) – Mere allegation of inadequate enquiry is not enough.
6.4. In addition to the above the Ld. AR had submitted that the only reason cited by the PCIT is non-submission of Form 3CL by DSIR. The ld. AR submitted that the assessee’s obligations end with:
Filing application for approval (Form 3CM). Filing audit report (Form 3CLA). 6.5 Thereafter, it is the statutory duty of DSIR to forward Form 3CL to the Department. The assessee has no control over this process. The principle of “lex non cogit ad impossibilia” (the law does not compel a man to do that which he cannot possibly perform) applies. It was submitted that the order of the Ld. PCIT is required to be quashed.
On the other hand, the Ld. DR supported the order of the PCIT and submitted that Form 3CL is a mandatory requirement under Rule 6(7A) post 01.07.2016 and in the absence of such quantification by DSIR, the claim could not have been allowed.
We have given thoughtful consideration to the rival submissions and perused the record. It is evident from the notices issued under section 142(1) and the assessee’s replies that the Assessing Officer did conduct enquiries specifically on the issue of deduction under section 35(2AB). The assessee placed on record DSIR approval in Form 3CM, separate audited accounts of R&D facility, and details of expenditure. We have also examined the scheme of Section 35(2AB) along with the applicable Rules. The statutory scheme of section 35(2AB) read with Rule 6(7A) makes it clear that once an assessee sets up an in-house Research and Development facility and obtains recognition from the prescribed authority (DSIR) through Form 3CM, it becomes eligible for a weighted deduction. The assessee’s obligation under law is confined to two steps: firstly, filing the application in the prescribed form for approval of its in-house R&D facility, and secondly, filing the audit report in Form 3CLA within the prescribed time. Thereafter, it is the statutory duty of the prescribed authority to issue its report in Form 3CL to the Income-tax Department. This process is entirely outside the control of the assessee.
8.1 It is a settled proposition of law that no assessee can be asked to perform an impossibility. Once the assessee has duly complied with its statutory obligations by applying in Form 3CM and filing audit report in Form 3CLA, the subsequent act of DSIR forwarding Form 3CL is purely administrative and lies beyond the assessee’s domain. The assessee cannot compel DSIR to expedite its internal procedure. Therefore, to deny deduction merely because DSIR did not furnish Form 3CL to the Department would be both unjust and contrary to law.
8.2 In the present case, the assessee’s R&D facility was duly approved by DSIR through Form 3CM for the relevant period by the order dt. 01/04/2021. The assessee incurred expenditure of Rs.19.53 crores on such approved facility and claimed weighted deduction at 150% in accordance with law. The audit report in Form 3CLA was also filed electronically within the prescribed date. The sole grievance of the PCIT is that DSIR did not submit Form 3CL. However, this omission is an act attributable solely to the statutory authority and not to the assessee, who had no role in the matter once the requisite application and reports were filed.
8.3 In our considered opinion the Ld. Assessing Officer has discharge his duties and is not possible for him to do whatever he had alrady done. In fact this issue is no more res-integra as the Hon’ble Madras High Court in CIT v. TVS Electronics Ltd. [2019] 105 taxmann.com 36 held that weighted deduction under section 35(2AB) cannot be denied merely because approval of DSIR was under consideration or awaited, as the assessee cannot be punished for bureaucratic delay. Similarly, in CIT v. Sun Pharmaceutical Industries Ltd. [2017] 85 taxmann.com 80, the Hon’ble Gujarat High Court observed that approval in Form 3CM is sufficient and non-submission of Form 3CL by DSIR does not disentitle the assessee. The ITAT Ahmedabad in Schaeffler India Ltd. v. PCIT [2023] 150 taxmann.com 528 has taken the same view, holding that once Form 3CM is available, failure of DSIR to send Form 3CL cannot be a ground to deprive the assessee of deduction. Likewise, the ITAT Mumbai in Rallis India Ltd. v. ACIT (ITA No. 4210/Mum/2024) held that communication between DSIR and the Department is an inter-departmental matter, for which the assessee cannot be penalized. The Hyderabad Tribunal in Sri Biotech Laboratories India Ltd. v. ACIT [2016] 69 taxmann.com 361 and the Hon’ble Bombay High Court in Astec Lifesciences Ltd. v. ACIT [2024] 155 taxmann.com 284 have also held that denial of deduction solely on the ground of non-submission of Form 3CL is unjustified.
8.4 Applying these principles to the present case, it is evident that the assessee has fulfilled all legal obligations—obtaining approval in Form 3CM, incurring expenditure on the approved R&D facility, and filing audit report in Form 3CLA. There is no failure on the part of the assessee. The only missing link is Form 3CL, which was to be issued by DSIR and is outside the assessee’s control. To hold the assessment order as erroneous and prejudicial to the interests of the revenue merely because Form 3CL was not submitted would be to impose upon the assessee a responsibility which the statute itself does not cast. It is further submitted that denial of deduction in such circumstances defeats the benevolent object of section 35(2AB), which was enacted to encourage investment in research and development. Where approval in Form 3CM exists and compliance in Form 3CLA has been duly made, it would be against the doctrine of fairness and equity to penalize the assessee for inaction of DSIR. Thus, it cannot be said that the Assessing Officer failed to enquire or that there was lack of application of mind. The ratio laid down in Gabriel India Ltd. (supra) squarely applies that once enquiries were made, the adequacy thereof cannot be gone into by invoking section 263. Further, as held in Malabar Industrial Co. Ltd. (supra), the twin conditions of the order being erroneous and prejudicial must co-exist. In the present case, the Assessing Officer had adopted a possible view consistent with various judicial precedents which hold that the assessee cannot be denied deduction merely because DSIR delayed Form 3CL. Therefore, the assessment order is neither erroneous nor prejudicial to the revenue's interests.
8.5 In light of the above discussion, we hold that the assumption of jurisdiction by the PCIT under section 263 is not sustainable. The order dated 27.03.2025 passed under section 263 is accordingly quashed and the assessment order dated 27.09.2022 is restored.
In the result, the appeal of the assessee is allowed.