By TIOL News Service

AHEMDABAD, AUG 23, 2017: THE ISSUE BEFORE THE COURT IS - Whether mere failure of prescribed authority to send intimation in Form 3CL, is enough to deprive a manufacturer's claim of deduction on R&D expenses incurred u/s 35(2AB) of I-T Act. NO is the verdict.

Facts of the case:

The Assessee company is engaged in the business of manufacture and sale of pharmaceutical products. The activities of the assessee included research and development activity for developing new drugs and formulation. On an expenditure incurred by the assessee on in-house research and development facility, the assessee claimed various deductions u/s 35(2AB). For the A.Y 2009-2010, the assessee had filed returns claiming such deduction. The AO passed an order of assessment u/s 143(3) accepting the assessee's claim. The CIT was however of the opinion that the AO had not made proper inquiries before accepting the claim. After giving notice to the assessee, he passed an order u/s 263 and held that the order of assessment was passed without proper verifications, investigation and examination. The same was therefore, erroneous and prejudicial to the interest of the Revenue. He therefore, directed the AO to examine the issues discussed in the order and pass a fresh order of assessment in view of such discussion. One of the main grounds which appealed to the Commissioner was that the prescribed authority had not sent the intimation in Form 3CL to the Revenue, in absence of which, according to the Commissioner, claim could not have been accepted. The assessee approached the Tribunal, who allowed the appeal inter-alia holding that the prescribed authority shall submit its report in relation to the approval of the in-house research and development in Form 3CL to the DGIT (Exemption) within 60 days of its granting approval. In the opinion of the Tribunal, same was merely in form of intimation to be sent by the prescribed authority to the department. In case of assessee, the research and development activity having already been approved in Form 3CM, the assessee thereafter, had no further role to play in the inter-departmental correspondence. The Tribunal therefore, held that the assessee was entitled to deduction on the capital and revenue expenses incurred on in-house research and development amounting to Rs.237,77,05,310/-.

On appeal, the HC held that,

++ undisputedly, the research and development facility set up by the assessee was approved by the prescribed authority and necessary approval was granted in the prescribed format. The communication in Form 3CM was thereafter, between the prescribed authority and the department. If the same was not so, surely, the assessee cannot be made to suffer. To this extent, the Tribunal was perfectly correct and the Commissioner was not, in observing that in absence of such certification, claim of deduction u/s 35(2AB) was not allowable. However, neither the prescribed authority nor the AO has applied the mind as to the expenditure, be it revenue or or capital in nature, actually incurred in developing the in-house research and development facility. To the limited extent, the Commissioner desired the AO to verify such figures, we would allow the AO to do so. In other words, in principle, we accept the Tribunal's reasons and conclusions. Merely because the prescribed authority failed to send intimation in Form 3CL, would not be reason enough to deprive the assessee's claim of deduction u/s 35(2AB) of the Act. However, in facts of the present case, it would be open for the Assessing Officer to verify the actual expenditure incurred by the assessee. To the limited extent, the order of the Tribunal is set aside. The proceedings shall be placed before the AO for passing appropriate order.

(See 2017-TIOL-1625-HC-AHM-IT)