Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, PUNE“A” BENCH, PUNE
Before: HON’BLE SHRI S.S. VISWANETHRA RAVI & SHRI G. D. PADMAHSHALI
ORDER PER G. D. PADMAHSHALI, AM; This appeal challenges the order of Commissioner of Income Tax (Appeals)-6, Pune [for short “CIT(A)”] dt. 19/02/2019 passed u/s 250 of the Income-tax Act, 1961 [for short “the Act”], partially confirming the order of assessment dt.28/12/2016 passed u/s 143(3) by the Asst. Commissioner of Income Tax, Circle 10, Pune [for short “AO”] for assessment year [for short “AY”] 2014-15. ITAT-Pune Page 1 of 11 M/s Victor Gaskets Pvt. Ltd.
2. Before advancing the matter on facts for adjudication, it is necessary to reproduce grounds challenged by the appellant are; “On the facts and circumstances of the case and in Law 1. The learned CIT(A) erred in confirming the disallowance of the claim of Rs.3,01,83,086/- for weighted deduction of two hundred percent of the expenses incurred by the appellant on in-house research and development (R & D) u/s 35(2AB) of the Income Tax Act 1961. 2. The learned CIT(A) erred in confirming the hyper technical view that the cut-off date as mentioned in Form 3CM by Department of Scientific and Industrial Research (DSIR) was a strict formality and the claim of expenditure incurred prior to the cut-off date had to be perforce disallowed even though the appellant had received the renewal of recognition of the said R & D facility from the same authority viz. DSIR immediately next day and the recognition of the facility had remained in tact on a continued basis without a break covering fully the relevant previous year.
The learned CIT(A) failed to appreciate that the inconsistent and flip flop stance taken by the DSIR as aforesaid was inexplicable and not at all attributable to any non compliance on the part of the appellant and such technicality was not fatal to the appellant's claim for the weighted deduction u/s 35 (2AB). 4. Without prejudice to the above, the learned CIT(A) erred in not allowing alternatives claim for deduction of expenditure of capital nature Rs.37,33,528/- u/s 35(1)(iv) of the Income tax Act to the extent of one hundred percent of the amount incurred on machinery, ITAT-Pune Page 2 of 11 M/s Victor Gaskets Pvt. Ltd. equipments and instruments acquired and used for carrying out scientific research related to the appellant's business. Learned CIT(A) after giving a finding that the alternative claim of the appellant relates to admissible expenditure on R & D misdirected himself in drawing incorrect inference that the said capitalised expenditure viz. equipments might have been utilised or were capable of being utilised for testing and other manufacturing activities. 5. Without prejudice to the above, the learned CIT(A), in the alternative, ought to have allowed depreciation u/s 32 of the Income Tax Act on the capitalised assets viz. machinery, equipments and instruments acquired and used for carrying out scientific research related to the appellant's business. Your appellant craves leave to add to, alter, amend or delete the above Ground of Appeal
.”
3. First three grounds of appeal relates to claim of weighted deduction u/s 35(2AB), whereas balance two grounds relates to allowability of capital expenditure u/s 35(1)(iv) with an alternative claim for depreciation u/s 32.
4. Succinctly stated the facts of the case are; 4.1 The appellant is a company engaged in the business of manufacturing of sealing solutions such as cylinder head gaskets, exhaust manifold gaskets, value cover gaskets, oil pan gaskets, timing gear ITAT-Pune Page 3 of 11 M/s Victor Gaskets Pvt. Ltd. 29/11/2014 for the AY 2014-15 declaring total income of ₹2,58,14,950/-. The case of assessee was selected for scrutiny through CASS pursuant to which the Ld. AO determined the total income at ₹5,59,98,036/- u/s 143(3) of the Act by a solitary disallowance of ₹3,01,83,086/- denying the claim made u/s 35(2AB) of the Act, representing a revenue expenditure of ₹1,13,58,015/- and ₹37,33,528/- expenditure of capital nature incurred on in-house scientific research & development.
4.2 Aggrieved thereby, the assessee carried the matter before first appellate authority [for short “FAA”], however in the event of failure to substantiate the claim, the Ld. CIT(A) echoing the views of Ld. AO confirmed the denial of weighted deduction u/s 35(2AB) with detailed reasoning augmented, nevertheless allowed an alternate claim of the appellant u/s 35(1) for revenue expenditure incurred on scientific research. ITAT-Pune Page 4 of 11 M/s Victor Gaskets Pvt. Ltd. 4.3 Aggrieved by the action of both the tax authorities below [for short “TAB”], the assessee assailed the denial of weighted deduction on the grounds of appeal laid at para 2 hereinbefore and seeking our indulgence with its alternative ground for 100% deduction of capital expenditure u/s 35(1)(iv) or depreciation thereon u/s 32 of the Act.
5. In the course of physical hearing, the learned representative of the assessee [for short “AR”] adverting to page number 1, 12, 14 & 15 of the paper book contended that, the appellant on 28/11/2011 was recognised for In-house R&D unit by the prescribed authority i.e. Govt. of India Department of Scientific & Industrial Research [for short “DSIR”] and ultimately granted an approval for 35(2AB) vide its letter dt 28/08/2015, however same has been brush-aside by the Ld. TAB in dealing with the claim of weighted deduction. Insofar as the alternate claim for capital expenditure is concerned, Ld. AR contended that, if the said capital expenditure is not allowable u/s 35(1)(iv) then denial of eligible depreciation u/s 32 thereon would be injustice to ITAT-Pune Page 5 of 11 M/s Victor Gaskets Pvt. Ltd. the assessee. Au contraire, the learned departmental representative [for short “DR”] strongly contrasted the submission of the appellant and argued that, since the approval by the DSIR is granted for a period of two commencing from 1st April, 2014 upto 31st March, 2016, the question of allowing weighted deduction for the earlier year falls out of consideration.
6. After hearing to rival contentions of both the parties; and subject to the provisions of rule 18 of Income Tax Appellate Tribunal Rules, 1963 [for short “ITAT-Rules”] perused the material placed on record, case laws relied upon by the appellant as well the respondent and duly considered the facts of the case in the light of settled legal position and forewarned to parties present.
7. As discernible from records that, it remained an undisputed fact that, the appellant company initiated to set-up an In-house Research & Development facility [for short “R&D”] at 152/223, Mahalunge, Chakan, Talegaon Road, Tal. Khed, Pune which initially vide letter dt. 28/11/2011 was recognised by the DSIR upto the period ITAT-Pune Page 6 of 11 M/s Victor Gaskets Pvt. Ltd. 31/03/2014 and subsequently vide letter 05/06/2014 was renewed upto 31/03/2016, the said recognition entitled the appellant company to set-up the R&D facility in accordance with the DSIR guidelines and subject to condition laid therein. Pursuant to first recognition, the appellant undertook setting up of R&D facilities by incurring expenditure in compliance with the guidelines & condition enumerated and then applied to DSIR in Form 3CK for approval of R&D facility so created, which the prescribed authority by letter dt. 04/06/2014 rejected for the reason that “the R & D facilities are not isolated from production” & being violative of DSIR guidelines and condition envisaged u/s 35(2AB). It is also pertinent to note that, subsequently on the removal of aforestated deficiency, the appellant reapplied to DSIR on 22/01/2015 for grant of approval wherein same was accepted & approved w.e.f. 01/04/2014 upto 31/03/2016 as evident and can be accentuated from Form 3CM placed at page 14 of the paper book. In this factual background let us consider the eligibility of claim for weighted deduction u/s 35(2AB) of the Act.
ITAT-Pune Page 7 of 11 M/s Victor Gaskets Pvt. Ltd.
A close examination of process of DSIR in relation to claim of deduction u/s 35(2AB) postulates that, it is a two stage process; in the first stage, the applicant company is accorded a recognition thereby authorising it to setup a R&D facility & incurring of expenditure in accordance with the guidelines and condition, and in the second stage, on the receipt of application in Form 3CK from the recognised company (accompanied by auditors certificate), the DSIR carries out in-depth inspection of R&D facility so created and approves the same by an order in Form 3CM setting forth therein the details of R&D expenditure to be incurred (Annexure-I) or already incurred (Annexure-II) by the recognised company qualifying for claim of deduction u/s 35(2AB). It shall be worthy to note that, upon the issue of order in Form 3CM to the recognised company, the prescribed authority also intimates to the IT-Department by a report in Form 3CL detailing the qualifying amount of R&D expenditure incurred which recognised company eligible for deduction u/s 35(2AB) in relation to financial year relevant to assessment year.
ITAT-Pune Page 8 of 11 M/s Victor Gaskets Pvt. Ltd.
Nota bene, in the light of aforestated discussion, it is evinced that, the first stage recognition by the DSIR ispo- fact do not entitle the appellant company for deduction u/s 35(2AB), but the evidential documents issued in the second stage, like Form 3CM and 3CL individually can establish and validly substantiate the claim for deduction u/s 35(2AB). It shall be apposite to note that, either of the Form 3CM or 3CL would discretely be sufficienso evidential document in establishing the entitlement for claim of deduction u/s 35(2AB) of the Act. In the instant case, however we find that, the appellant company for the impugned AY in support of its claim, did neither produce an order of DSIR in Form 3CM with Annexure I and Annexure II, nor a copy of Form 3CL in support of its claim for weighted deduction u/s 35(2AB) of the Act. As the Ld. TAB is bound by the order of DSIR in allowing the deduction u/s 35(2AB) as held by the Hon’ble High Court of Karnataka in “Tejas Network Limited Vs DCIT” reported in 91 ITR 52, and in the absence of any such order from the DSIR in Form 3CM for the impugned AY or an intimation to IT-Department ITAT-Pune Page 9 of 11 M/s Victor Gaskets Pvt. Ltd. Form 3CL with respect to expenditure incurred, the Ld. TAB have rightly rejected the claim of the assessee for not substantiating the claim with either of the evidential document subject to which no weighted deduction u/s 35(2AB) could be granted, resultantly the ground number 1 to 3 merits dismissal, ergo we order accordingly.
Coming to ground number 4 and 5, the appellant alleges that both the Ld. TAB erred in appreciating the facts that the capital expenditure ₹37,33,528/- incurred on machinery, equipment and instrument are not utilized or capable of being utilized for testing and other manufacturing activities, hence capable for being deductible u/s 35(1)(iv) of the Act or alternatively a claim for depreciation thereon u/s 32 of the Act.
Keeping in mind the conditions prescribed for claim of deduction u/s 35(2AB) cannot be hauled to make applicable to any claim for deduction u/s 35(1) of the Act, we find that, in the evince of recognition by the DSIR, the appellant has incurred certain capital expenditure and ITAT-Pune Page 10 of 11 M/s Victor Gaskets Pvt. Ltd. Ld. TAB. For the reason we concede with the Ld. AR to the effect that, the expenditure of capital nature incurred on scientific research related to business carried on by the appellant by virtue of section 35(1)(iv) is eligible for deduction under the provisions of section 35(2)(ii) of the Act, which entitles the appellant for 100% deduction in the year in which such capital expenditure is incurred, ergo we order accordingly and allow the ground number 4, resultantly ground number 5 rendered infructuous.
Resultantly, the appeal of the assessee is PARTLY ALLOWED in aforestated terms. In terms of rule 34 of ITAT Rules, the order pronounced in the open court on this Thursday, 1st day of December, 2022.