2025 (5) TMI 873 - AT - Income Tax

Disallowance of deduction@ 200% u/s 35(2AB) in respect of the R D expenditure claimed - CIT(A) s action of allowing the normal deduction for the balance capital expenditure u/s 35(1)(iv) which was not allowed for weighted deduction u/s 35(2AB) of the Act by the DSI - HELD THAT - We find this particular issue to be squarely covered in the favour of the assessee by the decision rendered in their own case for AY 2018-19 2025 (3) TMI 1153 - ITAT CHENNAI wherein it was held that the deduction for capital expenditure incurred by the assessee for scientific research at its approved R D facility if not approved for weighted deduction u/s 35(2AB) is otherwise allowable as normal deduction u/s 35(1)(iv) of the Act. No reason to interfere with the reasoning given by the Ld. CIT(A) for deleting the impugned disallowance made by the AO. Overall therefore all the grounds raised by the Revenue are dismissed.

Summary

The core legal questions considered in this appeal revolve around the allowability and quantum of deduction claimed by the assessee under Sections 35(2AB), 35(1)(i), and 35(1)(iv) of the Income Tax Act, 1961, specifically concerning expenditure incurred on scientific research at an approved R&D facility. The principal issues are:

1. Whether the entire claim for weighted deduction at 200% under Section 35(2AB) is allowable in the absence of Form 3CL issued by the Department of Scientific and Industrial Research (DSIR) certifying the R&D expenditure incurred.

2. Whether the Assessing Officer (AO) was justified in disallowing the normal deduction under Section 35(1)(iv) for capital expenditure incurred on scientific research that was not certified for weighted deduction under Section 35(2AB).

3. Whether the Commissioner of Income Tax (Appeals) erred in allowing the entire deduction claimed without providing the AO an opportunity to verify the eligibility of the balance R&D expenditure not certified by DSIR.

4. The legal effect of subsequent rectification orders and certifications (Form 3CL) on the quantum of allowable weighted deduction and the interplay between weighted deduction under Section 35(2AB) and normal deduction under Sections 35(1)(i) and 35(1)(iv).

Issue-wise Detailed Analysis

Issue 1: Allowability of Weighted Deduction under Section 35(2AB) in Absence of Form 3CL Certification

The legal framework mandates that weighted deduction under Section 35(2AB) is available only if the scientific research expenditure is certified by DSIR through Form 3CL. The AO disallowed weighted deduction in the original assessment due to the absence of Form 3CL but allowed normal deduction under Section 35(1) for both revenue and capital expenditure.

The assessee subsequently obtained Form 3CL certifying a portion of the expenditure, and filed a rectification application under Section 154, which was allowed by the AO, permitting weighted deduction to the extent certified. The Tribunal noted a calculation infirmity in the rectification order, where the AO allowed the full 200% weighted deduction instead of the incremental 100% weighted component over the normal 100% deduction. Nonetheless, the principle that weighted deduction is allowable only to the extent certified by DSIR was undisputed.

This issue was resolved by accepting the rectification order allowing weighted deduction for Rs.212.13 crores (revenue and capital expenditure combined) as certified by DSIR in Form 3CL.

Issue 2: Allowability of Normal Deduction under Section 35(1)(iv) for Capital Expenditure Not Certified for Weighted Deduction

The crux of the appeal is the disallowance by the AO of normal deduction for the balance capital expenditure of Rs.7.57 crores not certified by DSIR for weighted deduction. The CIT(A) allowed this deduction, which the Revenue challenged.

The Tribunal extensively relied on a precedent from the assessee's own case for AY 2018-19, where it was held that capital expenditure on scientific research at an approved R&D facility, even if not eligible for weighted deduction under Section 35(2AB), is allowable as a normal deduction under Section 35(1)(iv). The Tribunal cited the Madras High Court decision in CIT vs Rajapalayam Mills Ltd., which upheld that denial of weighted deduction does not preclude allowance of normal deduction for capital expenditure under Section 35(1)(iv).

The Court emphasized that Section 35(1)(iv) read with Section 35(2)(ia) allows 100% deduction for capital expenditure incurred on scientific research related to the business, regardless of weighted deduction eligibility. The Court observed that the assessee had furnished contemporaneous evidence, including audited financial statements and certification by the statutory auditor in Form 3CLA, establishing the incurrence of capital expenditure for scientific research.

The Tribunal concluded that these evidences were sufficient to allow normal deduction for the capital expenditure not certified for weighted deduction, thereby reversing the AO's disallowance to that extent.

Issue 3: Opportunity to AO to Verify Eligibility of Balance R&D Expenditure

The Revenue contended that the CIT(A) erred in allowing deduction without affording the AO an opportunity to verify the eligibility of the balance R&D expenditure of Rs.7.52 crores. The Tribunal did not find merit in this argument, as the assessee had provided detailed disclosures and auditor certifications, and the principle of allowing normal deduction under Section 35(1)(iv) for capital expenditure was well settled. The Tribunal did not disturb the CIT(A)'s order on this ground.

Issue 4: Effect of Subsequent Rectification and DSIR Certification on Deduction Quantum

The Tribunal acknowledged that the AO's rectification order under Section 154 allowed weighted deduction to the extent certified by DSIR, but also noted calculation errors in allowing the full 200% deduction instead of the incremental 100% weighted component. However, the Tribunal clarified that its findings do not affect the rectification order's correctness or the quantum of weighted deduction allowed therein.

The Tribunal emphasized that the dispute before it was limited to the normal deduction for the balance capital expenditure not certified for weighted deduction, which was allowed. The rectification order and DSIR certification thus settled the weighted deduction quantum.

Significant Holdings

The Tribunal's key legal reasoning includes the following verbatim excerpt from the precedent relied upon:

"Section 35(1)(iv) of the Act, provides that any expenditure of a capital nature on scientific research, related to the business of the assessee shall be admissible as deduction in terms of provision of Section 35(2) of the Act. It is further noted that sub-clause (ia) of Section 35(2) of the Act provides that, where the capital expenditure has been incurred after 31.03.1967, the entire value of capital expenditure is eligible for deduction from the profits of the business. Hence, in our considered view therefore, an assessee is entitled for normal deduction i.e. 100% of the capital expenditure incurred at its R&D facility in terms of Section 35(1)(iv) read with Section 35(2)(ia) of the Act, irrespective whether such capital expenditure is eligible for weighted deduction u/s 35(2AB) of the Act or not."

Further, the Tribunal cited the Madras High Court's ruling:

"The learned Commissioner of Income Tax (Appeals) had discussed the above aspect in his order dated 31.10.2006 as hereunder: ... The assessing officer has rightly rejected the claim of the appellant u/s. 32(2AB) as there was no approval from the prescribed authority as on the date of completion of assessment. Having regard to alternative claim, I find that the assessing officer had no occasion to consider the claim of the appellant. In the circumstances, the assessing officer is directed to consider the claim of deduction u/s. 35(1)(i) for Rs. 55,12,558/- representing R&D Revenue Expenditure and deduction u/s. 35(1)(iv) for Rs. 46,387/- representing expenditure incurred for the purchase of Camera used in R&D unit."

"After considering the rival submission carefully, we agree that Sec.35(1) as well as Sec.35(2AB) deal with the same expenditure i.e., scientific expenditure consisting of revenue and capital expenditure and only difference is that Sect.35(1) provides for allowance at normal rate i.e., actual expenditure whereas Sec.35(2AB) allows deduction to be claimed at weighted rate of 150% subject to fulfilment of certain conditions. Therefore, we find nothing wrong with the directions of the CIT(Appeals) to the Assessing Officer to allow normal deduction under Sec.35(1) particularly in view of the fact that the Assessing Officer himself has allowed deduction for the Asst. Year 2005-06."

These holdings establish the core principle that denial of weighted deduction under Section 35(2AB) does not preclude allowance of normal deduction under Section 35(1)(iv) for capital expenditure on scientific research.

On the final determinations:

- The Tribunal dismissed all grounds raised by the Revenue, affirming the CIT(A)'s order allowing normal deduction for the balance capital expenditure not certified for weighted deduction.

- The Tribunal upheld the rectification order allowing weighted deduction to the extent certified by DSIR.

- The Tribunal directed the AO to allow normal deduction under Section 35(1)(iv) for the capital R&D expenditure not eligible for weighted deduction, reversing the disallowance to that extent.