|CORAM:||G. Manjunatha (AM), V. Durga Rao (JM)|
|CATCH WORDS:||approval, scientific research|
|DATE:||October 21, 2016 (Date of pronouncement)|
|DATE:||November 12, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 35(2AB): The AO is bound to grant deduction if the R&D facility is approved by the competent authority. He has no jurisdiction in sit in judgement over the approval. The fact that the competent authority did not file the report with the department as prescribed is a technical lapse for which the assessee is not liable.|
(i) Section 35(2AB) of the Act, with relevant rules, makes it mandatory for the assessee company to file its application for approval of its in house R&D before the Secretary, DSIR, Government of India. The applicant company should also submit an undertaking as per para-C of form no.3CK to maintain separate accounts for each R&D centre approved u/s 35(2AB) of the Act by the prescribed authority and to get accounts duly audited every year by an auditor as defined in sub section(2) of section 288 of the Act. The company should enter into an agreement with the prescribed authority (Secretary, DSIR) for cooperation in such research and development facility and for audit of the accounts maintained for that facility as per form given in para-B of Form 3CK. The Secretary, DSIR after satisfied with the details furnished by the assessee and also after complied with the conditions prescribed under the provisions of section 35(2AB) of the Act and rules there under pass an order of approval in form no.3CM by duly intimating such approval to the Director General of Income Tax (Exemption) in form no.3CL within 60 days of granting approval. Once, the R&D facility is approved by the competent authority and assessee has complied with the prescribed rules, the A.O. is bound to allow the deductions claimed u/s 35(2AB) of the Act, if he is satisfied that the assessee’s facility is approved by the competent authority. In case the A.O. is having any doubt with regard to the goods manufactured by the assessee or expenditure claimed, the A.O. is bound to refer the matter back to the competent authority through appropriate authority i.e. the Central Board of Direct Taxes (CBDT) and seek clarifications. Thus, it would emerge from above analysis that neither the A.O. nor the board was competent to take any decision of any such controversy relating to report and approval granted by the prescribed authority as it involved expert view or opinion. It was prescribed authority alone which would be competent to take decision with regard to the correctness or otherwise and its order of approval granted in form no.3CL as prescribed u/s 35(2AB) of the Act read with rule 7A of the Income Tax Rules, 1962. In the present case on hand, on perusal of the facts available on record, we find that the A.O. without following the procedure laid down under rules, simply disallowed the expenditure claimed by the assessee by holding that the goods manufactured by the assessee are mere office machines and apparatus listed in Eleventh schedule. Therefore, we are of the view that the A.O. is not correct in disallowing the claim made by the assessee u/s 35(2AB) of the Act.
(ii) The next allegation of the A.O. is that the prescribed authority did not submit report in form no.3CL to the Director General, Income Tax (Exemptions) within 60 days of granting approval as required under rule 6(7A)(b) of the Income Tax Rules, 1967, consequently, the assessee is ineligible for claiming exemption u/s 35(2AB) of the Act. The A.O. further observed that the prescribed authority ought to have submitted the approval to the Director General of Income Tax within 60 days, however, the said approval has been submitted to the Director General beyond the time specified under rule, therefore, the assessee is ineligible for exemption. We do not find any merits in the arguments of the assessee for the reason that it is for the competent authority to send the approval to the Director General of Income Tax (Exemptions) within such time as prescribed under the rules. In case such approval is not forwarded to the Director General of Income Tax (Exemptions), it is only a technical mistake for which the assessee cannot be penalized. In the present case on hand, the assessee has fulfilled the conditions prescribed under the provisions of section 35(2AB)(1) of the Act and rules there under, therefore for a technical breach the A.O. cannot disallow the exemption claimed u/s 35(2AB) of the Act.
(iii) In Tejas Networks Ltd. Vs. DCIT (2015) 233 Taxman 426. The Hon’ble High Court of Karnataka, under similar circumstances held that the A.O. had no jurisdiction to sit in judgement over report submitted by prescribed authority in form no.3CL as required u/s 35(2AB) of the Act read with rule (7A)(b).
(iv) In DCIT Vs. Famy Care Ltd. (2015) 67 SOT 85 the coordinate bench of this Tribunal, under similar circumstances held that once facility was approved, entire expenditure so incurred on development and research had to be allowed for such weighted deduction u/s 35(2AB) of the Act and thus it would be sufficient to held that assessee has fulfilled the conditions as laid down in section.
(v) In DCIT Vs. Mastek Ltd. (2013) 263 CTR 671 the Hon’ble Gujarat High Court, under similar circumstances held that if an assessee puts forth a claim of deduction u/s 35(1) of the Act for expenditure incurred on scientific research and if A.O. is not inclined to accept such a claim, he may seek opinion of prescribed authority and the decision of prescribed authority would govern parties. The A.O. not having obtained decision of prescribed authority though a serious question in present case had arisen was not justified in rejecting assessee’s claim for deduction of expenditure incurred for scientific research.