MINILEC INDIA PRIVATE LTD.,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME-TAX,,

The assessee has raised the following grounds of appeal:- 1. The learned CIT(A)-7, Pune erred in law and on facts in confirming the disallowance of weighted deduction u/s 35(2AB) of the ITA, 1961 amounting to Rs.93,45,333 without appreciating the fact that the in-house R & D facility was approved by DSIR on an in-principle basis and mere lapse in subsequent paperwork does not affect the deductibility of the said weighted deduction amounting to Rs.93,45,333.

The first issue raised in the present appeal is against disallowance of weighted deduction under section 35(2AB) of the Act amounting to ₹ 93,45,333/-.

Briefly, in the facts of the case, the assessee for the year under consideration had furnished return of income declaring total income of ₹ 51,09,560/-. The assessee had undertaken two activities under Research & Development i.e. D & D (or electronics activity) and Bio-Diesel activity. The assessee in the return of income had claimed weighted deduction under section 35(2AB) of the Act only for D & D activity; whereas in the case of Bio-Diesel activity, deduction was claimed under section 35(1) of the Act and no weighted deduction was claimed. The assessee further explained that DSIR had approved for the D & D activity and Research & Development expenses incurred for the year under appeal were submitted. The Assessing Officer asked the assessee to justify its claim of deduction under section 35(2AB) of the Act debited to Profit and Loss Account of ₹ 41,89,369/- and ₹ 57,64,322/-. The Assessing Officer also asked the assessee to furnish copy of approval from the prescribed authority. In reply thereto, the assessee pointed out that under section 35(2AB) of the Act, in order to claim weighted deduction, the same had to be certified by the Competent Authority, that the assessee had undertaken Research & Development activity. The Competent Authority in this behalf was the Department of Scientific and Industrial Research (DSIR). The assessee

The CIT(A) noted that the DSIR had not granted form No.3CM for earlier period including the period under consideration. The CIT(A) the referred to the provisions of section 35(2AB) of the Act and pointed out that application for approval has to be filed in form No.3CK to the Secretary, DSIR and if he was satisfied that the conditions provided in Rule 6(7A) and in section 35(2AB) of the Act were fulfilled, he had to pass an order in writing in form No.3CM. The CIT(A) further holds that the assessee in the present case does not have requisite certificate in form No.3CM from DSIR approving the expenses incurred by it on in-house Research & Development facility as per provisions of the Act. Hence,

The assessee is in appeal against the order of CIT(A).

The learned Authorized Representative for the assessee referred to the chart, under which overall position of in-house R & D expenditure claimed was filed. The first block period related to assessment years 2007-08 to 2009-10, under which the assessee had received recognition of in-house R & D unit established by the assessee from DSIR. The recognition was granted on 01.06.2006 for in-house R & D facility upto 31.03.2009. Form No.3CK was filed on 16.03.2007 and form No.3CM was granted by DSIR on 18.03.2008 for the period 01.04.2006 to 31.03.2009. The learned Authorized Representative for the assessee pointed out that for identical facility, renewal application was submitted by the assessee on 06.02.2009. Vide letter dated 16.06.2009, recognition to the R & D facility was extended upto 31.03.2012 and the certificate of registration was granted by DSIR on 24.06.2009. The assessee claims that it did not receive any certificate in form No.3CM. He further pointed out that on 06.05.2012 an online application was submitted for renewal of R & D facility before the DSIR which was granted by DSIR on 25.06.2012 for the period 01.04.2012 to

The learned Departmental Representative for the Revenue pointed out that the Assessing Officer had disallowed the claim. He further placed reliance on the ratio laid down by the Hon‟ble High Court of Karnataka in Tejas Networks Ltd. Vs. DCIT (2015) 60 taxmann.com 309 (Kar).

The learned Authorized Representative for the assessee further pointed out that the issue now stands covered by the decision of the Hon‟ble High Court of Delhi in Maruti Suzuki India Ltd. Vs. Union of India (2017) 84 taxmann.com 45 (Del), wherein reference was made to the decision of Hon‟ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (2010) 326 ITR 251 (Guj) and the CIT Vs. Sandan Vikas (India) Ltd. (2011) 335 ITR 117 (Del).

We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the claim of deduction under section 35(2AB) of the Act i.e. expenditure incurred on Research & Development activity. For computation of business income under section 35 of the Act, expenditure on

Now, coming to sub-section (2AA) to section 35 of the Act, it talks about granting of approval by the prescribed authority but the approval to the expenditure being incurred is missing under the said section. Similar is the position in sub-section (2A). Further in sub-section (2AB), it is provided that facility has to be approved by the prescribed authority, then there shall be allowed deduction of expenditure incurred whether 100%, 150% or 200% as prescribed from time to time. Clause (2) to section 35(AB) of the Act provides that no deduction shall be allowed in respect of expenditure mentioned in clause (1) under any provisions of the Act. Clause (3) further lays down that no company shall be entitled for deduction under clause (1) unless it enters into agreement with prescribed authority for co-operation in such R & D facility. The Finance Act, 2015 w.e.f. 01.04.2016 has substituted and provided that facility has

Under Rule 6 of Income Tax Rules, 1962 (in short „the Rules), the prescribed authority for expenditure on scientific research under various sub- clauses has been identified. As per Rule 6(1B) of the Rules for the purpose of sub-section 2AB of section 35 of the Act, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research i.e. DSIR. Under sub-rule (4), application for obtaining approval under section 35(2AB) of the Act is to be made in form No.3CK. Under sub-rule (5A) of rule 6 of the Rules, the prescribed authority shall, if he satisfied that the conditions provided in the rule and in sub-section (2AB) being fulfilled, pass an order in writing in form No.3CM. The proviso however lays down that reasonable opportunity of being heard is to be granted to the company before rejecting an application. So, the application has to be made under sub-rule (4) in form No.3CK and the prescribed authority has to pass an order in writing in form No.3CM. Sub-rule (7A) provides that the approval of expenditure under sub-section (2AB) of section 35 of the Act, shall be subject to the conditions that the facilities do not relate purely to market research, sales promotion, etc. Clause (b) to sub-rule (7A) at the relevant time provided that the prescribed authority shall submit its report in relation to the approval of in-house R & D facility in form No.3CL to the DG (Income-tax Exemption) within sixty days of its granting approval. Under clause (c), the company at the relevant time had to maintain separate accounts for each approved facility, which had to be audited annually. Clause (b) to sub-rule (7A) has been substituted by IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016, under which the prescribed authority has to furnish electronically its report (i) in relation to approval of in- house R & D facility in part A of form No.3CL and (ii) quantifying the expenditure

Under the amended provisions, beside maintaining separate accounts of R & D facility, copy of audited accounts have to be submitted to the prescribed authority. These amendments to rules 6 and 7a are w.e.f. 01.07.2016 i.e. under the amended rules, the prescribed authority as in part A give approval of the facility and in part B quantify the expenditure eligible for deduction under section 35(2AB) of the Act.

The issue which is raised before us relates to pre-amended provisions and question is where facility has been approved by prescribed authority, but no form No.3CM issued, can the assessee be denied deduction under section 35(2AB) of the Act.

The Hon‟ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (supra) have held that weighted deduction is to be allowed under section 35(2AB) of the Act after the establishment of facility. However, section does not mention any cutoff date or particular date for eligibility to claim deduction. The Hon‟ble High Court held as under:-

The Hon‟ble High Court of Gujarat held that the intent of the Legislature was to encourage development of facility by providing deduction of weighted expenditure. It was further held that since what was stated to be promoted was development of facility, then the entire expenditure incurred on development of facility, if facility is approved, had to be allowed for the purpose of weighted deduction.

The Hon‟ble High Court of Delhi in CIT Vs. Sandan Vikas (India) Ltd. (supra) on similar issue of weighted deduction under section 35(2AB) of the Act held that the condition precedent was the certificate from DSIR, but the date of certificate was not important, where the objective was to encourage research and development by the business enterprises in India. In the facts before the Hon‟ble High Court of Delhi, the assessee had approached DSIR vide application dated 10.01.2015. The DSIR vide letter dated 23.02.2006 granted recognition to in- house research and development facility of assessee. Further, vide letter dated 18.09.2006, DSIR granted approval for the expenses incurred by the company on in-house research and development facility in the prescribed form No.3CM. The Assessing Officer in that case refused to accord the benefit of aforesaid provision on the ground that recognition and approval was given by DSIR in the next assessment year. The Tribunal allowed the claim of assessee relying on the decision of the Hon‟ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (supra). The Hon‟ble High Court of Delhi taking note of the decision of the Hon‟ble High Court of Gujarat observed that it has been held that cutoff date mentioned in the certificate issued by DSIR would be of no relevance where once the certificate was issued by DSIR, then that would be sufficient to hold that the assessee had fulfilled the conditions laid down in the aforesaid provisions.

The Hon‟ble High Court of Madras in CIT Vs. Wheels India Ltd. (2011) 336 ITR 513 (Mad) had also held that the assessee was entitled to weighted deduction for whole year and not merely from the date of notification. It was held by the Hon‟ble High Court that Once the prescribed authority approves the existence of a research and development facility and the expenditure incurred on such scientific research, the assessee would be entitled to the expenditure

The Pune Bench of Tribunal in Nath Biogenes India Ltd. Vs. ACIT in ITA No.367/PN/2012, relating to assessment year 2008-09, order dated 27.01.2014 held that where the prescribed authority i.e. DSIR had given recognition, then such a facility is recognized for claiming deduction under section 35(2AB) of the Act. The Tribunal further held that if the approval was not in prescribed form No.3CM was not a serious discrepancy, which would result in disallowance of deduction to the assessee under section 35(2AB) of the Act. Where the Competent Authority had granted approval / recognition after verification of all the details, then the claim of assessee for deduction under section 35(2AB) of the Act cannot be ruled out only on the ground that the approval in the prescribed form No.3CM was not received by the assessee.

The Pune Bench of Tribunal in the case of same assessee in ITA No.1115/PN/2013, relating to assessment year 2009-10, vide order dated 28.05.2014 had on similar ground allowed the claim of assessee in succeeding year also.

The Mumbai Bench of Tribunal in ACIT Vs. Meco Instruments (P.) Ltd. (2010) 7 taxmann.com 24 (Mum) vide order dated 20.08.2010 had also decided the issue of approval of facility and consequent claim of deduction under section 35(2AB) of the Act. In the facts of said case also, the assessee had the approval of prescribed authority but did not have the approval in the prescribed form as the same was never brought to his notice. When the assessment proceedings

The Tribunal concluded by holding that at best it was only a procedural defect and merely on the ground of technicalities of the procedure, the benefit bestowed by the Legislature could not be denied. It was also held that When it

The Hon‟ble High Court of Delhi in Maruti Suzuki India Ltd. Vs. Union of India in Writ Petition dated 04.08.2017 had analyzed the provisions of section 35(2AB) of the Act and had also applied the ratio laid down by the Hon‟ble High Court of Delhi in CIT Vs. Sandan Vikas (India) Ltd. (supra) and the Hon‟ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (supra) and held that for availing the benefit under section 35(2AB) of the Act, what was relevant was not the date of recognition or cutoff date mentioned in the certificate of DSIR or even the date of approval, but the existence of recognition. It was further held that if R&D centre is not recognized, it is not entitled to deduction; but if it is recognized, it is entitled to the benefit. It was further observed that the Hon‟ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (supra) had rightly observed that the date of approval of R&D centre, not being part of provision, extending benefit only from the date of recognition “amounts to reading more in the law which is not expressly provided”. Distinguishing the ratio laid down by the Hon‟ble High Court of Delhi itself in Apollo Tyres Ltd. Vs. Union of India (supra), it was observed as under:- “42. Insofar as the Apollo Tyres (supra) is concerned, in the said case, the Petitioner had omitted to apply for approval under Form 3CK, though recognition was granted to its R&D Centre. The said Form 3CK consists of the Agreement to be entered into with the DSIR, in Part B. The omission by the Petitioner was held against it and this Court held that since the Petitioner had omitted to obtain the approval under Form 3CK, it is not entitled to the benefit of Section 35(2AB) since 2004. The facts of the present case are different and there has been no omission by the Petitioner herein to obtain approvals. The stage for approval arises after the recognition is granted by the DSIR, for which the

The assessee was held to be entitled to the claim of deduction under section 35(2AB) of the Act in the said case by the Hon‟ble High Court of Delhi.

The learned Departmental Representative for the Revenue has placed reliance on the ratio laid down by the Hon‟ble High Court of Karnataka in Tejas Networks Ltd. Vs. DCIT (supra), wherein it was first held that under section 35(2AB) of the Act, the prescribed authority was the Secretary, DSIR. Further, under sub-section (3) of section 35(2AB) of the Act provides that no company would be entitled for deduction under clause (1) unless and until it enters into agreement with the prescribed authority. The Hon‟ble High Court of Karnataka further goes on to hold that if the prescribed authority is satisfied that the conditions provided under section 35(2AB) of the Act are satisfied, then it would pass an order in writing in form No.3CM. In the facts of the said case, order of approval was granted in form No.3CM. Thereafter, the question was whether the Assessing Officer can look into the allowability of expenditure and as to what expenditure. The Hon‟ble High Court held that where he does not accept the contention of assessee made under section 35(2AB) of the Act, he has to refer the matter to the Board, which in turn, would refer the matter to the prescribed authority. The Hon‟ble High Court thus, has approved the procedure for recognition of facility. Further, the issue before the Hon‟ble High Court was in respect of provisions of section 35 r.w.s. 43 of the Act. The Hon‟ble High Court of Karnataka in view of section 43(4) of the Act observed that the said sub- section defines as to what activities would constitute scientific research and it

The Hon‟ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (supra), the Hon‟ble High Court of Delhi in CIT Vs. Sandan Vikas (India) Ltd. (supra) and the Hon‟ble High Court of Madras in CIT Vs. Wheels India Ltd. (supra) have clearly held that for accord of deduction under section 35(2AB) of the Act, first step is the recognition of facility by the prescribed authority and the entering of agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which recognition has been given to the facility, then merely because the approval in the prescribed form has been granted or not granted would not de-recognize recognition granted by the prescribed authority and would not disentitle the assessee from claiming the deduction under section 35(2AB) of the Act.

We may also refer to the decision of the Pune Bench of Tribunal in Advik Hi tech (P.) Ltd. Vs. Addl. CIT (2014) 51 taxmann.com 245 (Pune – Trib.), wherein the issue was decided following the ratio laid down by the Hon‟ble High Court of Delhi in Apollo Tyres Ltd. Vs. Union of India (supra). However, we have already referred to the decision of the Hon‟ble High Court of Delhi in Maruti

Now, for adjudication, we may have to look at the events date-wise i.e. correspondence between the assessee and DSIR for three different phases of recognition of in-house R&D facility. The assessee has filed the relevant documents in Paper Book. However, we are making reference to the date-wise events in this regard, which are placed in Paper Book at pages 43 to 166. The first set of correspondence between the assessee and DSIR relates for the first phase year 2006-09. The second set of correspondence between the assessee and DSIR relates for second phase year 2010-2012 and the third set of correspondence between the assessee and DSIR relates to the third phase year 2013-15. The perusal of said details would reflect that the assessee had made an application for recognition of in-house R&D unit as early as 10.02.2006. The recognition was granted by DSIR on 01.06.2006 upto 31.03.2009. The copy of said document is placed at page 47 of Paper Book. Thereafter, an agreement was entered into with DSIR, which is referred in the application filed by the assessee for approval of R&D centre under section 35(2AB) of the Act. The said agreement was enclosed with form No.3CK. The assessee received form No.3CM from DSIR for the period 01.04.2006 to 31.03.2009 vide certificate dated 18.03.2008. A reminder was sent by DSIR to renew the recognition of R&D unit beyond 31.03.2009 vide communication dated 05.12.2008. The assessee duly filed the application for renewal of recognition on 06.02.2009 and the facility was recognized by the prescribed authority vide letter dated 16.06.2009 upto 31.03.2012. In this regard, certificate of registration was granted by DSIR dated 24.06.2009 for recognition of R&D facility upto 31.03.2012.

Further, next reminder was sent by DSIR to renew recognition of R&D unit beyond 31.03.2012 vide letter dated 02.01.2012. The assessee did file online application for renewal of R&D facility before DSIR on 06.05.2012. The renewal of recognition was granted by DSIR upto 31.03.2015 vide letter dated 25.06.2012. Form No.3CM was granted on 05.11.2013 by DSIR for the period from 01.04.2012 to 31.03.2015. The perusal of above said documents reflect that the assessee was for the first time given recognition by DSIR on 01.06.2006. The said recognition was granted upto 31.03.2009. The assessee and DSIR entered into an agreement recognizing in-house R&D facility of the assessee, which entitles the facility to be eligible for grant of deduction under section 35(2AB) of the Act. The assessee also filed form No.3CK along with copy of agreement and received form No.3CM granted by DSIR for the period 01.04.2006 to 31.03.2009. The recognition of facility was further granted for the period upto 31.03.2012 vide certificate of registration dated 24.06.2009. However, the assessee did not receive form No.3CM for the period 01.04.2009 to 31.03.2012 as the application in form No.3CK was filed along with application filed for the next period of three years ending 31.03.2015. The assessee received form No.3CM from DSIR for the period 01.04.2012 to 31.03.2015 but no such form No.3CM was granted for the period 01.04.2009 to 31.03.2012.

The issue which arises is whether the assessee can be denied deduction under section 35(2AB) of the Act for non receipt of form No.3CM. The assessee admittedly, had received recognition in the initial period and thereafter, it is case of renewal of recognition of in-house R&D facility, which was also granted by the prescribed authority for the period ending 31.03.2012 and also for the period ending 31.03.2015. The correspondence between the assessee and DSIR for the third phase reflects a reminder being sent by DSIR to renew the recognition

The alternate plea of assessee becomes academic in nature, in view of our allowing ground of appeal No.1.

The issue in ground of appeal No.3 raised by the assessee is against disallowance of ₹ 96,311/- under section 43B of the Act on account of delayed payment of leave encashment.

Clause (f) to section 43B of the Act was inserted by the Finance Act w.e.f. 01.04.2002. However, the Hon‟ble High Court of Calcutta in Exide Industries Ltd. Vs. Union of India (2007) 292 ITR 470 (CAL.) had struck down the said

In the result, appeal of assessee is partly allowed.