VI MICRO SYSTEMS P LTD.,CHENNAI vs. ACIT, CHENNAI

This is a set of two appeals by the Assessee arising out of the common order by the Commissioner of Income Tax (Appeals)-11, Chennai (‘CIT(A)’ for 2 & 1173/Mds/2017 (AYs 2012-13 & 2013-14 ) VI Micro Systems Pvt. Ltd. v. Asst. CIT/ITO short) dated 28.02.2017, disposing the assessee’s appeals contesting its assessments for two consecutive years, i.e., Assessment Years (AYs) 2012-13 and 2013-14, u/s. 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) dated 10.03.2015 & 10.02.2016 respectively. The common issue arising in these appeals is the admissibility of the assessee’s claim u/s. 35(1) of the Act in respect of the expenditure claimed u/s. 35(2AB), to the extent disallowed there-under. The other issue raised is if the deduction allowed u/s. 35(2AB) is in accordance with the said provision, so that the disallowance effected thereunder is in terms thereof. This becomes also relevant as it is only the amount liable to be disallowed there-under which could be examined for allowance u/s. 35(1). An incidental aspect would be if there is any contravention of clause (2) of s. 35(2AB), the relevant part of which reads as under: Expenditure on scientific research. 35. (1) In respect of expenditure on scientific research, the following deductions shall be allowed— (i) the expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. (2) to (2AA) ….. (2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to two times of the expenditure so incurred. (2) No deduction shall be allowed in respect of expenditure mentioned in clause (1) under any other provision of the Act. (3) ….. (4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Director General in such form and within such time as may be prescribed.’ The assessee is a manufacturer of micro processer based systems, and is approved by the Secretary, Department of Scientific and Industrial Research 3 & 1173/Mds/2017 (AYs 2012-13 & 2013-14 ) VI Micro Systems Pvt. Ltd. v. Asst. CIT/ITO (‘DSIR’), the prescribed authority u/s. 35(2AB) of the Act. For the two years under reference, its’ application thereto (DSIR) in respect of expenditure incurred on research and development (R&D) facility was approved by it for most part. Its claim for a weighted deduction u/s. 35(2AB) was restricted accordingly. Its alternate claim for being allowed the balance, unapproved cost, u/s. 35(1), made for AY 2013-14, was denied by the Assessing Officer (AO) on the ground that no evidence had been produced to show that the amount not certified by the prescribed authority was indeed spent on research. The ld. CIT(A), before whom the matter was carried in appeal, confirmed the disallowance on the same basis, so that the assessee is in further appeal. Surely, it is only the expenditure on scientific research, qualifying u/s. 35(1), as for example where related to the assessee’s business, as specified in s. 35(1)(i), that could be allowed there-under. Also, the burden to prove its return, and the claims preferred thereby, is only on the assessee (refer: CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC); CIT v. R. Venakataswamy Naidu [1956] 29 ITR 529 (SC)), and which the assessee has clearly not discharged. There is, as such, apparently nothing incorrect in the Revenue’s stand. At the same time, however, when the assessee’s audited accounts reflect the impugned expenditure as on a R&D facility, which has been further claimed u/s. 35(2AB), furnishing the relevant details to the prescribed authority, it is ostensibly only on research and, further, related to the assessee’s business. The AO ought to have called for the requisite details and undertaken the necessary verification at his end. Rather, he has not examined the details submitted to DSIR. Likewise, the first appellate authority, whose powers are co-terminus with that of the AO. In our clear view, it is a case to which the decision in Prabhavati v. CIT [1998] 231 ITR 1 (Bom) applies. The assessee’s claim u/s. 37(1) qua the same expenditure, as an alternate to s. 35(1), gets ousted at the threshold in view of the purview of said provision, excluding expenditure of the nature described in 4 & 1173/Mds/2017 (AYs 2012-13 & 2013-14 ) VI Micro Systems Pvt. Ltd. v. Asst. CIT/ITO ss. 30 to 36, while the expenditure is admittedly of the nature covered u/s.35, if not also capital. Continuing further, to say that the deduction u/s. 35(2AB) be allowed on the total sum stated to be expended on in-house research and development (R&D) facility, i.e., irrespective of that certified by the prescribed authority, as the assessee does before the first appellate authority, also raising a ground before us, would render the said approval as of no moment inasmuch as it would imply that the expenditure not approved by said authority is also eligible for deduction u/s. 35(2AB). And which cannot be, remove as it does the very basis of the provision. The words ‘as approved’ occurring in s. 35(2AB)(1) are significant in this regard. The same are with reference to the expenditure, and not the facility on which the same is stated to be incurred. The opening words of Rule 6(7A) (of the Income Tax Rules, 1962), which regulates the procedural aspects of the deduction, including its claim and allowance, i.e., ‘Approval of the expenditure incurred…..’ again make it abundantly clear that the approval is of the expenditure. The said rule provides the conditions subject to which the said approval is to be allowed. R. 6(7A)(b) speaks of the approval of the R&D facility, prescribing the form; the authority to which it is to be submitted; the time limit there-for. Clearly, therefore, the in-house R&D facility is also to be approved by DSIR. The same has its basis in s. 35(2AB)(4). The insertion of sub-clauses (i) and (ii) in r. 6(7A)(b) by IT (Tenth Amdt.) Rules, 2016 w.e.f. 1/7/2016, providing (per sub-clause (ii)) for quantifying the expenditure by the prescribed authority and restricting the deduction u/s. 35(2AB) with reference thereto, is clearly clarificatory in nature, and does not in any manner materially impact the provision, i.e., in substance. The assessee’s legal argument is without basis on facts and in law, and we fully endorse the ld. CIT(A) in the matter. We, accordingly, only consider it proper that the matter is restored for adjudication on merits, i.e., as to validity of the assessee’s claim u/s. 35(1), to 5 & 1173/Mds/2017 (AYs 2012-13 & 2013-14 ) VI Micro Systems Pvt. Ltd. v. Asst. CIT/ITO the file of the AO, making it clear that the onus to substantiate its claim/s is only on the assessee. Further, the copy of Form 3CL, i.e., the form in which the report is submitted by DSIR to the Director General of Income Tax (Exemptions) u/s. 35(2AB)(4) of the Act (PB pgs.2-3) as well as the audited accounts (as at PB pgs. 18-19/AY 2013-14), bear the breakup of the said expenditure. The same is classified under the heads ‘capital expenditure’ and ‘recurring expenditure’. The other grouping of the said expenditure is that debited to the profit and loss account and that carried over in the balance sheet. Surely, these are relevant aspects of the claim, both u/s. 35(2AB) and u/s. 35(1), which need to be examined in the matter. We include s. 35(2AB) as well, as, without doubt, there is no question, therefore, of the capital cost allowed u/s. 35(2A) being claimed under any other provision of the Act, including u/s. 32, a capital allowance in respect of capital expenditure. The AO shall examine the relevant aspects and decide per a speaking order upon allowing due opportunity of hearing to the assessee. We decide accordingly. In the result, the assessee appeals are partly allowed. Order pronounced on August 29, 2017 at Chennai.