2025 (6) TMI 1141 - HC - Income Tax

Eligibility for the benefits extended u/s 35 (2AB) (1) - a per 2nd respondent petitioner has merely made expenditure however the work with respect to the afore expenditure was only being carried on and not finalised and hence in the nature of work-in-progress and therefore ineligible for the benefits under the afore sections HELD THAT - A Company engaged in the business of manufacture of any article or a thing not being an article or a thing specified in the list of the 11 th Schedule incurs any expenditure on scientific research on in-house research and development facility and the same is being approved by the 2nd respondent herein is eligible for extension of a deduction of a sum equal to 200% of the expenditure incurred. The provisions of Section 35 (2AB) (1) as noticed afore only speaks about expenditure being incurred by the Company. There is no differentiation as regards ineligibility with respect to work-in-progress . Unless and until the statute disentitles an assessee from claiming the benefits with respect to work-in-progress the stand taken in the last paragraph by Ext. P10 minutes which led to the ultimate confusion is not to be accepted. As in Belpahar Refractories Ltd. 1993 (11) TMI 52 - ORISSA HIGH COURT wherein a position which was just the reverse was considered by the Court. Division Bench of the Orissa High Court came to the finding that in such a case the assessee ought to have claimed the benefits with respect to the year in which the expenditure was incurred. Also notice the judgment in Rane Brake Linings Ltd. 2001 (12) TMI 44 - MADRAS HIGH COURT wherein a Division Bench of the Court with reference to provisions of Section 35(1) (iv) also took a similar view. Petitioner ought to have been extended the benefits with respect to the actual year in which the expenditure was incurred. Petitioner submitted solely on account of the advice they received as seen recorded in Ext. P10 - When such an advice was received and the petitioner acted on that basis the petitioner cannot be found fault with if ultimately it is found that it is for the petitioner to claim the benefits with reference to the actual year in which the expenditure was incurred. In that view of the matter the ultimate findings contained in Exts. P12 and P14 are not to be sustained. I also notice that the petitioner had submitted Ext.P7 with reference to the claims for the financial year 2013-14 without including the expenditure made for the Maharashtra unit essentially on the basis of the advice that it originally received. The petitioner cannot be found fault for making such a claim also. Therefore the petitioner is entitled to succeed.

Summary

The core legal questions considered in this judgment revolve around the interpretation and application of Section 35(2AB)(1) of the Income Tax Act, 1961, particularly concerning the eligibility and timing of deductions claimed by the petitioner for expenditures on scientific research and development activities. The key issues are:

• Whether expenditures incurred on scientific research qualify for deductions under Section 35(2AB)(1) when they are in the nature of "work-in-progress" and not finalized during the relevant assessment year.
• The proper year or assessment year in which such expenditures should be claimed for deduction-whether in the year of actual expenditure or in a later year when the expenditure is capitalized or converted.
• The binding effect of admissions or agreements made by the petitioner's Managing Director during meetings with the approving authority (the 2nd respondent) regarding claims and revisions of deductions.
• The legality and correctness of the impugned orders (Exts. P7, P12, and P14) issued by the 2nd respondent denying or restricting the petitioner's claims under the said section.

Issue-wise Detailed Analysis:

1. Eligibility of "Work-in-Progress" Expenditure for Deduction under Section 35(2AB)(1)

The relevant statutory provision, Section 35(2AB)(1), allows a company engaged in biotechnology or manufacturing (excluding items specified in the Eleventh Schedule) to claim a deduction equal to twice the expenditure incurred on scientific research in an approved in-house R&D facility. The statute expressly refers to "expenditure" incurred without any express exclusion of "work-in-progress" expenditures.

The 2nd respondent initially took the position that expenditures which were "work-in-progress" and not finalized were ineligible for deduction in the year incurred, as reflected in the minutes of the meeting (Ext. P10). This position led to the suggestion that the petitioner should claim benefits only when the expenditure was capitalized or converted in a subsequent year.

The Court noted that the statutory language does not differentiate or exclude "work-in-progress" expenditures from the ambit of eligible deductions. The absence of any statutory bar means that expenditures incurred, even if work-in-progress, should be eligible for deduction in the year they are incurred.

Precedents were considered, including a Division Bench judgment of the Orissa High Court in a case involving Section 35(2)(ia), which held that deductions should be claimed in the year of expenditure rather than the year of capitalization. Similarly, the Madras High Court's Division Bench decision interpreting Section 35(1)(iv) supported this approach. These precedents reinforce the principle that the timing of the claim should correspond to the year in which the expenditure is actually made.

Therefore, the Court concluded that the 2nd respondent's stand excluding "work-in-progress" expenditures was not sustainable and inconsistent with the statutory scheme.

2. Timing of Claim for Deduction: Year of Expenditure vs. Year of Capitalization

The petitioner had originally claimed deductions for the respective years in which the expenditures were incurred. However, following the 2nd respondent's initial position, the petitioner submitted claims (Ext. P11) for a later year based on advice recorded in Ext. P10, which suggested claiming benefits in the year of capitalization.

The 2nd respondent subsequently reversed this approach (Exts. P12 and P14), asserting that claims must be made in the year the expenditure was incurred and not in subsequent years. The Court found this reversal inconsistent and unfair, especially since the petitioner's claim in Ext. P11 was made on the basis of the 2nd respondent's own advice.

Applying the legal framework, the Court held that the petitioner is entitled to claim deductions in the year the expenditure was incurred, as Section 35(2AB)(1) requires no further qualification or delay until capitalization. The petitioner's reliance on the 2nd respondent's advice to submit claims in a later year does not preclude the petitioner from asserting its statutory right to claim deductions in the correct year.

3. Effect of Admissions Made by the Petitioner's Managing Director

The minutes of the meeting (Ext. P10) record that the Managing Director agreed not to seek revision of quantification for certain assessment years. The 2nd respondent relied on this admission to deny claims.

The Court held that such admissions must be read in the context of the entire discussion, including the suggestions and advice given by the 2nd respondent. The petitioner cannot be bound by an admission that was made in the course of negotiations or advice that ultimately proved incorrect or inconsistent with the law. The Court viewed the admission as non-binding and not a waiver of the petitioner's statutory rights.

4. Legality of the Impugned Orders (Exts. P7, P12, and P14)

The impugned orders denied or restricted the petitioner's claims based on the reasoning that "work-in-progress" expenditures or expenditures not capitalized in the relevant year are not eligible for deduction. The Court found this reasoning flawed for the reasons discussed above.

Additionally, the petitioner's initial claim for the financial year 2013-14 (Ext. P7) excluded expenditures for the Maharashtra unit based on the advice received. The Court held that the petitioner cannot be faulted for relying on such advice.

Accordingly, the Court set aside Exts. P7 (to the extent it relates to 2013-14), P12, and P14, and directed the petitioner to file fresh claims in accordance with the correct legal interpretation, i.e., claiming deductions in the year the expenditure was incurred.

Significant Holdings:

"A reading of the afore section would show that a Company engaged in the business of manufacture of any article or a thing, not being an article or a thing specified in the list of the 11th Schedule, incurs any expenditure on 'scientific research on in-house research and development facility' and the same is being approved by the 2nd respondent herein, is eligible for extension of a deduction of a sum equal to 200% of the expenditure so incurred."

"The provisions of Section 35 (2AB) (1), as noticed afore only speaks about 'expenditure' being incurred by the Company. There is no differentiation as regards ineligibility with respect to 'work-in-progress'. Unless and until the statute disentitles an assessee from claiming the benefits with respect to 'work-in-progress', I am of the opinion that the stand taken in the last paragraph by Ext. P10 minutes which led to the ultimate confusion, is not to be accepted."

"The petitioner cannot be found fault for making such a claim also. Therefore the petitioner is entitled to succeed."

"The petitioner to file a fresh claim before the 2nd respondent in tune with the directions contained in this judgment with reference to the actual years during which the expenditures were incurred within a period of six weeks from today."

The Court established the core principle that deductions under Section 35(2AB)(1) must be allowed in the year the expenditure is actually incurred, regardless of whether the expenditure is "work-in-progress" or capitalized later. Further, admissions or procedural agreements made during the administrative process cannot override the statutory entitlement of the assessee.

Ultimately, the Court set aside the impugned orders and directed fresh adjudication consistent with the statutory provisions and the principles elucidated in the judgment, ensuring the petitioner's entitlement to claim the benefit in the appropriate years is protected.