AGAPPE DIAGNOSTICS LTD.,MUMBAI vs. DCIT CIR. - 9(1)(1), MUMBAI

The only effective grounds raised by the assessee reads as under:

Briefly the facts relating to the issue in dispute are that the assessee a company is engaged in the business of manufacturing diagnostic reagents, and equipments, trading and maintenance of equipments. For the impugned assessment year, the assessee filed its return of income on 21.09.2012 declaring total income of Rs.2,47,91,383/-. While computing the income, the assessee claimed deduction of Rs.1,30,32,700/- @ 200% u/s.35(2AB) of the Income Tax Act, 1961. In the course of assessment proceedings, the Assessing Officer called upon the assessee to furnish the details with supporting evidences, including the letter of approval of the prescribed authority for justifying the claim of deduction u/s.35(2AB) of the Act. In response to the query raised by the Assessing Officer, the assessee vide letter dated 16.12.2014 submitted the details of research and development (R & D) expenses along with the supporting evidences and also with an explanatory note justifying its claim of deduction u/s. 35(2AB) of the Act. The assessee also relied upon certain decisions/case laws in support of its claim of deduction. The Assessing Officer after considering the submissions of the assessee and verifying the details furnished, observed that the registration certificate issued by the prescribed authority, Department of Scientific and Industrial Research (DSIR), for the R & D facility of the Agappe Diagnostics Ltd. assessee on 02.06.2011 was specifically for the purpose of availing customs/central exercise duty exemption. Further, referring to paragraph 9 of the said registration certificate, the Assessing Officer observed that the registration certificate does not in any way amount to approval under the Income Tax Act, 1961. Referring to the provision of section 35(2AB), the Assessing Officer observed, the requisite certificate enabling the assessee to claim deduction u/s. 35(2AB) should be in Form 3CM and the quantum of approved expenditure on R & D has to be in Form 3CL. The Assessing Officer observed that Form 3CL was issued by DSIR on 12.11.2014, wherein the approval was granted for assessment year 2013-14 and not for the impugned assessment year. The Assessing Officer observed, had it been the intention of the legislature to allow every claim of R & D expenditure, need of inserting sub section (4) to section 35 would not have arisen. He observed that sub section (4) to section 35 was inserted specifically to allow genuine expenditure, as it requires the prescribed authority to approve R & D facility in the prescribed manner. The Assessing Officer observed, unless the approval is granted by the prescribed authority, i.e., DSIR, the assessee’s claim of deduction u/s. 35(2AB) cannot be allowed. In support of such conclusion, the Assessing Officer relied upon a couple of decisions of the ITAT. Thus, on the aforesaid basis, the Assessing Officer ultimately concluded that since the approval granted by the DSIR is applicable from assessment year 2013- 14, assessee’s claim of deduction u/s. 35(2AB) for the impugned assessment year is not allowable. Accordingly, disallowing assessee’s claim, he restricted the deduction

Being aggrieved of such disallowance, the assessee preferred an appeal before the ld. Commissioner of Income Tax (Appeals).

Before the ld. Commissioner of Income Tax (Appeals), though, the assessee made elaborate submissions reiterating the stand taken before the Assessing Officer, however, the ld. Commissioner of Income Tax (Appeals) after considering the submissions of the assessee observed that the approval/registration granted for the purpose of Central exercise and customs was for purchasing plant and machinery which are prerequisite for establishing the business, whereas, the income is taxed under the Income Tax Act only after the business operation of a concern commences and income is earned. He, therefore, held that the registration granted by the DSIR for the purpose of Central exercise and custom is not sufficient for claiming deduction u/s. 35(2AB).

Finally, the ld. Commissioner of Income Tax (Appeals) referring to the decisions of the Tribunal in the case of Ferment Biotech Ltd., relied upon by the Assessing Officer held that the facts of the said case being identical to the assessee’s case, the ratio laid down therein would apply to assessee’s case and accordingly sustained the disallowance made by the Assessing Officer.

The ld. Departmental Representative strongly relying upon the observations of the Assessing Officer and the ld. Commissioner of Income Tax (Appeals) submitted that the fact on record clearly establish that the assessee has not obtained approval in the prescribed manner from the DSIR applicable to the impugned assessment year. He submitted, the approval granted in Form 3CM by DSIR clearly states that such approval is effective from 01.04.2012 to 31.03.2014. That being the case, assessee’s claim of deduction u/s. 35(2AB) of the Act for the impugned assessment year cannot be allowed. The ld. Departmental Representative submitted, the registration certificate granted by the DSIR on 02.06.2011 is for the limited purpose of availing customs and central exercise duty exemption, which may be necessary for importing plant and machinery for setting up R & D facility. However, the registration certificate does not comply with the requirement of section 35(2AB) r/w Rule 6. He submitted, since there is no approval by the prescribed authority in Form 3CM for the impugned

We have patiently and carefully heard the parties and considered the rival submissions. We have also perused the material on record as well as the decisions cited before us. As could be seen from the facts on record, the assessee has in-house R & D facility and has claimed the expenditure incurred in respect of such R & D facility, both revenue and capital, as weighted deduction u/s. 35(2AB) of the Act. A reading of section 35(2AB) makes it clear that any expenditure incurred by a company engaged in the business of specified biotechnology or manufacturing or production of specified article, on scientific research in in-house research and development facility approved by the prescribed authority, shall be eligible for deduction of a sum equivalent to two times of the expenditure incurred. However, sub section (3) of section 35 postulates that the prescribed authority shall submit its return in relation to the approval of the facility to the concerned authority in such form and within such time as may be prescribed. Rule 6 of the Income Tax Rules provides that the assessee for availing deduction u/s. 35(2AB) shall seek an approval from the prescribed authority by filing an application in Form 3CK. Upon filing of such an application, the prescribed authority if is satisfied that the conditions provided in Rule 6 and section Agappe Diagnostics Ltd. 35(2AB) are fulfilled, shall grant approval in Form No. 3CM. From the facts on record, it is evident that, though, the R & D facility of the assessee was registered with DSIR on 02.06.2011, however, that registration is only for the purpose of availing customs and central exercise duty exemption. This registration certificate granted by DSIR on 02.06.2011 is not in compliance to the conditions prescribed either u/s. 35(2AB) or under Rule 6. It is further evident, in terms of Rule 6 of the Income Tax Rules, the assessee on 27.03.2012 made an application in Form No. 3CK for grant of approval u/s. 35(2AB) of the Act.

In due consideration of the afore-said application of the assessee, Sientist G, DSIR, granted approval in Form No. 3CM for the research and development facility w.e.f 01.04.2012 upto 31.03.2014 for the purpose of section 35(2AB) of the Act. It is relevant to note that the Assessing Officer in para 5.7 of his order has referred to certificate issued by the prescribed authority in Form 3CL dated 12.11.2014 granting approval for assessment year 2013-14. Thus, as could be seen from the facts on record, the departmental authorities have denied assessee’s calim on the reasoning that for the impugned assessment year the assessee has not obtained approval from the prescribed authority in Form No. 3CM which is a condition precedent for availing deduction u/s .35(2AB) of the Act. In case of Ferment Biotech Ltd. (supra), the Co- ordinate Bench while considering identical issue has held even if for subsequent assessment years the approval in Form No. 3CM is available in respect of the Agappe Diagnostics Ltd. Research and Development facility of the assessee then also the assessee has to show that order of approval for in-house R & D facility has been granted by the DSIR covering the impugned assessment year. Following the afore-said decision, the ITAT Hyderabad Bench in the case of Vivimed Labs Ltd. (supra), has held that the assessee has to obtain approval in Form 3CM for the assessment year for which it has claimed u/s.35(2AB) of the act. However, as could be seen, the Hon’ble Gujarat High Court in the case of Claris Lifesciences Ltd.(supra) held that the provision of section 35(2AB) of the Act nowhere suggest or imply that the R & D facility is to be approved from a particular date. The Hon’ble High Court held that as per the plain reading of the provision, if the assessee has developed R & D facility it pre-supposes incurring of expenditure. In this behalf the assessee has to make an application to the prescribed authority who after following the proper procedure will approve the facility or otherwise. Thus, it was held, once the R & D facility is approved by the prescribed authority, all expenditures incurred in respect of the R & D facility will be eligible for weighted deduction. In the case of Sadan Vikas (India) Ltd. (supra), the Hon’ble Delhi High Court following the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Claris Lifesciences Ltd. (supra) has held that the provision of section 35(2AB) nowhere suggest or imply that the Research and Development facility is to be approved from a particular date. In other words, it is no where suggested that the date of approval will be the cut off date from which assessee will be eligible to claim deduction on the expenses incurred on research and development facility. The Agappe Diagnostics Ltd. Hon’ble High Court has held, once the R & D facility is approved, the expenditure incurred on development of R & D facility has to be allowed as weighted deduction u/s. 35(2AB) of the Act. In the facts of the present case, there is no dispute that the in- house R & D facility of the assessee has been approved by the DSIR in Form 3CM.