By TIOL News Service

AHEMDABAD, MAY 10, 2018: THE ISSUE IS - Whether setting up of R&D facility demands incurring of certain expenditure and hence prior period expenses should not be disregarded for weigted deduction u/s 35(2AB), once such facility was recognized by Government. YES IS THE VERDICT.

Facts of the case:

The assessee company, engaged in business of manufacturing of automotive gaskets, radiators and similar other automobile parts, had returned its income of Rs.20.23 crores, after claiming deduction of Rs.1.26 crores u/s 35(2AB). The case was then taken up for scrutiny, wherein the assessee pointed out that it had set up Research and Development facilities by incurring expenditure which was duly recognized by the Ministry on Sep 02, 2007. In the meantime, the assessee also applied for approval of the facility, which was approved by the concerned authority on Oct 22, 2008. The assessee thus pleaded that the expenditure incurred even before the grant of approval would be recongnised for deduction u/s 35(2AB). The AO however did not grant such deduction for the period prior to April 01, 2008 on the ground that approval was granted specifically for a period of two years from April 01, 2008 to Mar 31, 2010.

On appeal, the CIT(A) upheld the order of AO by observing that the approval was received only in F.Y 2008-09. On further appeal, the Tribunal thought that the facts were somewhat contradictory as it was not clear when the application for approval was made and when actually approval was granted. The Tribunal therefore, remanded the proceedings for fresh consideration by the AO.

High Court held that,

++ the main requirements of Section 35(2AB) are that the expenditure should be on scientific research on in house research and development facility as approved by the prescribed authority. As observed by this Court in case of Claris Life sciences Ltd. and Delhi High Court in case of Maruti Suzuki India Ltd., this provision is aimed at encouraging in house research and development facilities for specified purposes. The legislature recognised the weighted deduction on such expenditure and the approval of such facility by the prescribed authority is a prime condition. In case of Claris Life sciences Ltd., this Court examined a situation where the Tribunal had allowed the assessee's claim of deduction u/s 35(2AB) when such expenditure was incurred during the period prior to the date of approval by the prescribed authority. The Court noted with approval the conclusion of the Tribunal that the provision is made for giving a boost to research and development facilities in India and once the facility is approved, entire expenditure so incurred in developing the same has to be allowed by way of deduction. It may be that as pointed out by the Revenue, all events i.e. incurring of expenditure, applying for approval and grant of approval happened in the same financial year. However, this was not the basis on which the Court has confirmed the decision of the Tribunal. Then the judgment in case of Claris Life sciences Ltd. was followed by Delhi High Court in case of Maruti Suzuki India Ltd., to hold that, for availing deduction u/s 35(2AB), what is relevant is not the date of recognition mentioned in the certificate of the prescribed authority or even the date of approval, but the existence of recognition;

++ in view of the decisions of Claris Life Sciences and Maruti Suzuki, this Court has no hesitation in allowing the assessee's claim for deduction u/s 35(2AB). Shorn of any controversy, documents on record would suggest that at any rate, the assessee had applied for approval of research and development facility to the prescribed authority and such approval was duly granted. The AO and the FAA restricted the assessee's claim for deduction in relation to such expenditure which was incurred prior to April 01, 2008 on the ground that the approval was granted for two years after such date. A combined reading of the judgment of this Court in case of Claris Life sciences Ltd. and judgment of Delhi High Court in case of Maruti Suzuki India Ltd., would show that period during which the approval is granted is not relevant as long as such approval has been granted and expenditure has been incurred for the specified purpose;

++ as noted, the provision is aimed at promoting development of in house research and development facility which necessarily would require substantial expenditure which immediately may not yield desired results or could be corelated to generation of additional revenue. The legislature therefore, having granted special deduction for such expenditure, the same should be seen in light of the purpose for which it has been recognised. Research and development facility can be set up only after incurring substantial expenditure. The application for approval of such facility can be made only after setting up of the facility. Once an application is filed by the assessee to the prescribed authority, the assessee would have no control over when such application is processed and decided. Even if therefore, the application is complete in all respects and the assessee is otherwise eligible for grant of such approval, approval may take some time to come by. The claim for deduction cannot be defeated on the ground that such approval was granted in the year subsequent to the financial year in which the expenditure was incurred.

(See 2018-TIOL-875-HC-AHM-IT)