2025 (5) TMI 1237 - AT - Income Tax

Disallowance of expenditure for scientific research u/s 35(2AB) - totality of the expenditure incurred by the assessee on scientific research - HELD THAT - Assessee as relying on case of Sandan Vikas India Ltd. 2011 (2) TMI 66 - DELHI HIGH COURT submitted that the section 35(2AB)(1) of the Act though prospective would also apply to the pending case as held where such expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility is incurred in a previous year relevant to the assessment year beginning on or after the 1 day of April 2021 the deduction under this clause shall be equal to the expenditure so incurred. Thus without offering any comment on merit of the case and keeping in view the facts in entirety in the interest of justice we deem it fit to remit the matter back to the file of the AO for deciding the appeal on merit afresh after affording reasonable opportunity of being heard to the appellant assessee. Ordered accordingly.

The core legal question considered in the appeal is the allowability and quantum of weighted deduction under section 35(2AB) of the Income Tax Act, 1961, claimed by the assessee for expenditure incurred on scientific research during the Assessment Year 2011-12. Specifically, the issue revolves around whether the weighted deduction should be allowed only on the amount certified by the prescribed authority (DSIR) in Form 3CL or on the entire expenditure claimed by the assessee, and the applicability of relevant judicial precedents to this determination.

Additionally, the Tribunal considered the issue of condonation of delay in filing the appeal beyond the prescribed period under section 253(5) of the Act, examining whether sufficient cause existed to admit the belated appeal.

Issue 1: Condonation of Delay in Filing Appeal

The legal framework governing the condonation of delay is provided under section 253(5) of the Income Tax Act, which empowers the Tribunal to admit an appeal filed beyond the limitation period if it is satisfied that there was sufficient cause for the delay. The Tribunal relied on the principles enunciated by the Hon'ble Supreme Court in Collector, Land Acquisition vs MST Katiji, which emphasize a liberal and elastic approach towards "sufficient cause" to serve the ends of justice. The Court underscored that refusal to condone delay may result in denial of justice on technical grounds, and that there is no presumption of deliberate delay or mala fide intent. Substantial justice is to be preferred over technical considerations.

In the instant case, the assessee cited serious financial crisis, HR difficulties arising from cessation of foreign collaboration, and the death of a director as reasons for delay. The Tribunal found no evidence of culpable negligence or malafide conduct by the assessee. The delay was not to the benefit of the assessee, who risked losing the opportunity to have the matter adjudicated on merits. Applying the cited principles, the Tribunal held that the explanation constituted sufficient cause and condoned the delay, admitting the appeal for adjudication.

Issue 2: Allowability and Quantum of Weighted Deduction under Section 35(2AB)

The legal framework involves Section 35(2AB) of the Income Tax Act, which provides for weighted deduction for expenditure on scientific research incurred on an in-house research and development facility. The deduction is subject to certification of eligible expenditure by the prescribed authority (Department of Scientific and Industrial Research - DSIR) in Form 3CL.

The Assessing Officer (AO) allowed weighted deduction only on the amount certified by DSIR (Rs. 633.53 lakhs), disallowing the balance expenditure claimed by the assessee (total claimed Rs. 1035.85 lakhs). The CIT(A) confirmed this disallowance, relying on the strict interpretation that only the expenditure approved by DSIR in Form 3CL is eligible for weighted deduction.

The assessee challenged this approach, relying on judicial precedents from the Hon'ble Gujarat High Court in CIT vs. Claris Lifesciences Ltd. and the Hon'ble Delhi High Court in CIT vs. Sandan Vikas Ltd. The key legal reasoning from Claris Lifesciences Ltd. emphasized that the provisions do not restrict eligibility of weighted deduction to expenditure incurred only after the date of approval by DSIR. Instead, the entire expenditure incurred in developing the in-house research and development facility, once approved, qualifies for weighted deduction. The Court in Claris Lifesciences held that the legislative intent was to encourage research and development by allowing weighted deduction on the total expenditure incurred, not merely the portion certified at a particular date.

Further, the Sandan Vikas Ltd. decision clarified that the provisions of section 35(2AB)(1), although prospective, apply to pending cases, and that the deduction shall be equal to the expenditure incurred on scientific research (excluding cost of land or building) for assessment years beginning on or after April 1, 2021.

The Tribunal observed that the CIT(A) had overlooked these crucial directions and the broader legislative intent behind section 35(2AB). However, the Tribunal refrained from deciding the issue on merit at this stage. Instead, it remitted the matter back to the AO for fresh adjudication after affording the assessee a reasonable opportunity to be heard. This approach was adopted in the interest of justice, allowing a comprehensive re-examination of the weighted deduction claim in light of the precedents and facts.

Analysis of Competing Arguments

The Revenue's stance was that the weighted deduction must be strictly limited to the amount certified by DSIR in Form 3CL, as per the statutory scheme and the AO's assessment. The CIT(A) concurred with this interpretation, emphasizing the certification as the sole basis for deduction.

The assessee's argument, supported by judicial precedents, challenged this narrow interpretation, asserting that the entire expenditure incurred on the development of the in-house research facility should be eligible once the facility is approved, regardless of the date of certification. The Tribunal found merit in this argument, noting that the legislative intent is to promote research and development and not to limit deductions artificially based on certification dates.

Conclusions

On the issue of condonation of delay, the Tribunal concluded that sufficient cause existed, and delay was condoned to prevent injustice.

On the issue of weighted deduction under section 35(2AB), the Tribunal concluded that the CIT(A)'s order was incomplete for not considering the full scope of judicial precedents and legislative intent. The matter was remitted to the AO for fresh consideration on merits, ensuring that the assessee is given a fair opportunity to establish entitlement to weighted deduction beyond the certified amount.

Significant Holdings

Regarding condonation of delay, the Tribunal reiterated the principle from Collector, Land Acquisition vs MST Katiji:

"The expression 'Sufficient Cause' employed by the legislature is adequately elastic to enable the Courts to apply the law in a meaningful manner to sub-serve the ends of justice... when substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred."

On weighted deduction under section 35(2AB), the Tribunal cited the Claris Lifesciences Ltd. decision verbatim:

"The provisions nowhere suggest or imply that the research and development facility is to be approved from a particular date... the entire expenditure so incurred on development of the research and development facility has to be allowed for weighted deduction as provided by section 35AB(2)... the intention of the Legislature... is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction."

The Tribunal's final determination was to admit the delayed appeal, and remit the matter for fresh adjudication on the weighted deduction claim, thereby allowing the assessee an opportunity to substantiate entitlement in accordance with law and judicial precedents.

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