Disallowance of R&D Expense Deductions due to Missing DSIR Form 3CL: ITAT allows Full Deduction for 2016-17 [Read Order]

The Pune Bench of Income Tax Appellate Tribunal ( ITAT ) allowed full R&D expense deduction for the assessment year 2016-17, despite the assessee’s failure to submit the required Department of Scientific and Industrial Research ( DSIR ) Form 3CL, as the rule in place for that year did not mandate DSIR’s quantification, while dismissing the grounds for the later years.

Garware Technical Fibres Limited,appellant-assessee,manufactured aquaculture cage nets, fishing nets, sports nets, safety nets, and other related products. It filed its original return of income on October 31, 2018, declaring ₹124.08 crore.

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A search and seizure operation was conducted on November 14, 2019. In response to a Section 153A notice, it filed a return on January 18, 2021, declaring the same income. Statutory notices were issued, and its representative appeared before the Assessing Officer ( AO ), submitting the required details.

During a search at the assessee’s head office on November 14, 2019, authorities found a pen drive in the Head-Cashier’s cabin containing Excel sheets of unaccounted cash transactions. These included receipts from scrap sales and payments for business development, sales incentives, and other expenses. The Head-Cashier admitted the transactions were unaccounted.

The AO calculated unrecorded cash receipts of ₹31.65 crore and payments of ₹32.27 crore for assessment years 2013-14 to 2020-21. The assessee argued that no unaccounted cash was found and that the Excel sheets were only cash flow estimates. It also claimed that, even if genuine, only net profit should be taxed, not the total cash receipts.

The AO rejected these claims, stating that Section 292C presumed the seized documents were authentic. Since the records showed illegal payments, related expenses were disallowed under Section 37(1). The AO treated ₹4.20 crore as unaccounted income and added it to the total income.

The AO also disallowed a deduction under Section 35(2AB) for R&D expenses, as the assessee failed to submit Form 3CL from DSIR.

The two member bench comprising Rama Kanta Panda ( Vice President ) and Astha Chandra ( Judicial Member ) after hearing both sides, examined the claim for deduction under section 35(2AB) amounting to Rs.13,81,70,841/- for capital and revenue expenditure incurred on in-house R&D activities.

During assessment, the assessee was asked to provide details of the expenditure, and while they submitted relevant documents, they failed to furnish the required Form 3CL report from the DSIR. Despite multiple reminders, the Form 3CL was not submitted, leading to the disallowance of the deduction.

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Before the Commissioner of Income Tax (Appeals)[CIT(A)], the assessee argued that they had completed all formalities but had no control over the issuance of Form 3CL, which was later issued by the DSIR. The CIT(A) allowed the deduction for capital expenditure but restricted the revenue expenditure to Rs.7,17,38,000/- as per the DSIR’s quantification, disallowing the difference of Rs.40,41,335/-.

The appellate tribunal considered the arguments, reviewed the relevant orders, and looked at the documents provided by the assessee. It noted that the rule applicable from 01-07-2016 required the DSIR to quantify the eligible expenditure for the R&D facility to determine the deduction under section 35(2AB).

Read More: Departmental Authorities cannot Disallow Deduction u/s 35(2AB) of IT Act by ignoring Form 3CL issued by Competent Authority: ITAT

The tribunal agreed with the CIT(A) that the deduction could only be based on the amount quantified by the DSIR for the assessment years 2017-18, 2018-19, and 2019-20.

However, for assessment year 2016-17, the ITAT pointed out that the earlier rule did not require DSIR’s quantification, and the full revenue expenditure was eligible for deduction. Therefore, the bench directed the AO to allow the full deduction for 2016-17, while the grounds for the later years were dismissed.

To Read the full text of the Order CLICK HERE

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