2025 (6) TMI 1858 - AT - Income Tax

Disallowance of deduction u/s 35(2AB) - expenditure incurred on in-house Research and Development facility - non-availability of Form No.3CL issued by the DSIR - HELD THAT - It is an admitted fact that Form No.3CL was issued by the DSIR on 16.12.2022 only after the assessee filed a Writ Petition before the Hon ble Delhi High Court. Since the above certificate was not available either during the course of assessment proceedings or during appellate proceedings and since it has a bearing on the matter therefore we deem it proper to restore the issue to the file of the AO with a direction to adjudicate the issue afresh. Appeal filed by the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the assessee is entitled to claim deduction under section 35(2AB) of the Income Tax Act, 1961, for expenditure incurred on in-house research and development (R&D) activities without furnishing Form No.3CL certificate issued by the Secretary of the Department of Scientific and Industrial Research (DSIR)?

(b) Whether in the absence of Form No.3CL certificate, the deduction claimed under section 35(2AB) can be allowed alternatively under sections 35(1)(i) and 35(1)(iv) of the Act?

(c) Whether the disallowance of deduction under section 35(2AB) on the ground of non-submission of Form No.3CL was justified in the facts and circumstances of the case?

(d) Whether the matter requires restoration to the Assessing Officer for fresh adjudication in light of the subsequent issuance of Form No.3CL certificate by DSIR after the assessment and appellate proceedings?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Entitlement to deduction under section 35(2AB) without Form No.3CL certificate

Relevant legal framework and precedents: Section 35(2AB) of the Income Tax Act provides for deduction of one and a half times the expenditure incurred on in-house R&D facility approved by DSIR. The statutory scheme requires that the assessee must obtain approval of the in-house R&D facility (Form 3CM) and also furnish a certificate from the Secretary DSIR certifying the actual expenditure incurred during the year (Form 3CL). The approval (Form 3CM) alone is not sufficient to claim deduction under section 35(2AB); the certificate (Form 3CL) certifying actual R&D expenditure is mandatory.

Court's interpretation and reasoning: The Assessing Officer and the CIT(A) / NFAC both held that the assessee failed to produce Form 3CL during assessment and appellate proceedings. The approval in Form 3CM only certifies the existence of an in-house R&D facility but does not certify that R&D activities were actually carried out during the relevant year. Form 3CL is the requisite certificate evidencing actual expenditure incurred on R&D activities. Since Form 3CL was not produced, the deduction under section 35(2AB) was rightly disallowed.

Key evidence and findings: The assessee submitted Form 3CM but did not furnish Form 3CL during assessment and appeal. The Assessing Officer disallowed the deduction of Rs. 12,69,17,337/- claimed under section 35(2AB). The CIT(A) / NFAC confirmed this disallowance on identical grounds.

Application of law to facts: The statutory mandate and conditions under section 35(2AB) were not fulfilled by the assessee at the time of assessment and appeal. The absence of Form 3CL certificate is a material non-compliance, justifying disallowance of deduction under section 35(2AB).

Treatment of competing arguments: The assessee contended that the deduction should be allowed despite non-submission of Form 3CL initially, as the certificate was obtained subsequently. The Revenue relied on the statutory requirement and absence of certificate during assessment and appeal.

Conclusions: The Tribunal agreed with the Revenue's position that Form 3CL is mandatory for claiming deduction under section 35(2AB). However, the Tribunal noted that the certificate was issued subsequently and hence restoration for fresh adjudication was warranted.

Issue (b): Allowance of deduction alternatively under sections 35(1)(i) and 35(1)(iv) in absence of Form 3CL

Relevant legal framework and precedents: Sections 35(1)(i) and 35(1)(iv) provide for deduction of revenue and capital expenditure on scientific research, respectively, but do not require DSIR approval or certification. However, the nature of expenditure and original claim made by the assessee are relevant considerations.

Court's interpretation and reasoning: The CIT(A) / NFAC rejected the assessee's alternate claim under sections 35(1)(i) and 35(1)(iv) on the ground that the assessee had not originally claimed these deductions and had only claimed deduction under section 35(2AB). Further, since the assessee had not complied with DSIR certification requirements, the alternate claim was not accepted.

Key evidence and findings: The assessee sought to claim Rs. 5,34,83,768/- as revenue expenditure under section 35(1)(i) and Rs. 3,11,27,790/- as capital expenditure under section 35(1)(iv). These claims were not part of the original return or assessment proceedings.

Application of law to facts: The Tribunal noted that the alternate claim was raised only in appeal and was not part of the original return or assessment. The statutory scheme and procedural fairness require that claims be made timely and supported by evidence.

Treatment of competing arguments: The assessee argued that in absence of Form 3CL, the alternate claims should be allowed. The Revenue and CIT(A) rejected this as belated and not in accordance with law.

Conclusions: The Tribunal upheld the rejection of alternate claims under sections 35(1)(i) and 35(1)(iv) since they were not originally claimed and the assessee failed to comply with DSIR certification requirements.

Issue (c): Justification of disallowance of deduction under section 35(2AB) on ground of non-submission of Form 3CL

Relevant legal framework and precedents: The statutory requirement under section 35(2AB) and Rule 5 of the Income Tax Rules mandate submission of Form 3CL issued by DSIR certifying actual R&D expenditure for claiming deduction.

Court's interpretation and reasoning: Both the Assessing Officer and CIT(A) / NFAC held that non-submission of Form 3CL justifies disallowance of deduction. The Tribunal agreed with this legal position but took note of the fact that the certificate was issued subsequently.

Key evidence and findings: The certificate in Form 3CL was issued by DSIR on 16.12.2022, after the assessment and appellate orders were passed. The assessee had filed a writ petition before the Delhi High Court to obtain this certificate.

Application of law to facts: The Tribunal observed that since the certificate was not available during assessment and appeal, the disallowance was justified at that stage. However, the subsequent issuance of Form 3CL changes the factual matrix.

Treatment of competing arguments: The assessee requested restoration for fresh adjudication in light of the certificate. The Revenue did not object to restoration.

Conclusions: The Tribunal held that in the interest of justice, the matter should be restored to the Assessing Officer for fresh adjudication after verification of the Form 3CL certificate.

Issue (d): Restoration of matter to Assessing Officer for fresh adjudication

Relevant legal framework and precedents: It is a settled principle that where new material or certificate is obtained after assessment and appeal, the matter can be restored for fresh adjudication to ensure justice and proper application of law.

Court's interpretation and reasoning: The Tribunal noted that the Form 3CL certificate was issued after the assessment and appeal orders and was not available for consideration earlier. Since the certificate directly affects the entitlement to deduction, fresh adjudication is necessary.

Key evidence and findings: The assessee produced Form 3CL dated 16.12.2022 after filing a writ petition. Both parties agreed to restoration.

Application of law to facts: The Tribunal restored the issue to the Assessing Officer with directions to verify the certificate and decide the claim afresh after giving the assessee an opportunity of hearing.

Treatment of competing arguments: Both sides concurred with restoration. The Tribunal emphasized the interest of justice.

Conclusions: The appeal was allowed for statistical purposes with directions for fresh adjudication by the Assessing Officer.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Form 3CM is only an approval from secretary DSIR for the assessee in house research facility, this approval does not certify that the assessee has actually carried out any research and development activities during the period. Only in form 3CL, where the secretary, DSIR is certifying the actual research and development work taken place during the year."

"Since the assessee has confirmed that so far they have not obtained the certificate in Form 3CL, therefore, in the absence of form 3CL from the Secretary DSIR, the claim of deduction of Rs. 12,69,17,337/- u/s 35(2AB) of the income Tax Act, 1961 is disallowed and added back to the total income."

"The assessee has requested to allow Rs. 5,34,83,768/- u/s.35(1)(i) as revenue expenditure on research and development and Rs. 3,11,27,790/- u/s 35(1)(iv) as expenditure in nature of capital expenditure is considered and cannot be accepted since, the assessee has not claimed these originally."

"Since the above certificate was not available either during the course of assessment proceedings or during the course of appellate proceedings and since it has a bearing on the matter, therefore, considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to adjudicate the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee."

Core principles established include the mandatory nature of Form 3CL certification for claiming deduction under section 35(2AB), the inadmissibility of alternate claims under sections 35(1)(i) and 35(1)(iv) if not originally claimed, and the procedural fairness in restoration of matters for fresh adjudication upon availability of new material.

Final determinations:

- Deduction under section 35(2AB) was rightly disallowed in absence of Form 3CL certificate during assessment and appeal.

- Alternate claims under sections 35(1)(i) and 35(1)(iv) were not allowable as they were not originally claimed.

- The subsequent issuance of Form 3CL certificate warranted restoration of the matter to the Assessing Officer for fresh adjudication.

- The appeal was allowed for statistical purposes with directions for fresh adjudication consistent with the law and facts.