Expenditure incurred by Asian Paints on research and Development Eligible for Deduction u/s 35 (2AB) of Income Tax Act: ITAT [Read Order]

The two member bench of the Income Tax Appellate Tribunal ( ITAT ) Mumbai has ruled that expenditure incurred by Asian Paints on research and development was eligible for deduction under Section 35 ( 2AB ) of the Income Tax Act, 1961.

 During the assessment proceedings, it was observed that Asian Paints Ltd has claimed weighted deduction under Section 35(2AB) of the Income Tax Act. Accordingly, the assessee was asked to produce the certificate issued by the Department of Science and Industrial Research (“DSIR”) in Form No.3CL and reconciliation for the same. In response thereto, the assessee submitted that it has recognised R&D unit at Turbhe (Navi Mumbai) and during the year claimed weighted deduction under Section 35(2AB) of the Income Tax Act for expenditures other than the land and building

The assessee furnished the copy of approval from DSIR obtained in Form No.3CM during the assessment proceedings. It was further submitted that the certificate in Form No.3CL is expected shortly and will be provided as soon as received from the DSIR. The AO vide order passed under Section 143(3) read with Section 144C(3) of the Income Tax Act held that in the absence of approval by DSIR in Form No.3CL, the claim of weighted deduction under section 35(2AB) of the Act was  not acceptable.

Accordingly, the AO disallowed an amount of Rs.41, 56, 12,570 claimed under section 35(2AB) of the Act and added the same to the total income of the assessee. The AO further directed that the order will be rectifiable as and when the assessee produces the approval in Form No.3CL from the DSIR

 The AO passed the rectification order under section 154 of the Act restricting the weighted deduction under Section 35(2AB) of the Income Tax Act to Rs.35,76,31,000 as against Rs.41,56,12,751 as claimed by the assessee, on the basis that the DSIR has allowed an amount of Rs.5,22,44,000 on account of capital expenditure and Rs.25,31,43,000 as revenue expenditure

The CIT (A), following the decision of the coordinate bench of the Tribunal rendered in assessee’s own case in earlier years directed the AO to verify the nature of expenditure, which has been disallowed by the DSIR and if upon verification, the AO finds that such expenditure was incurred for the purpose of R&D, then the AO is directed to allow such expenditure to the assessee.

The bench observed that the assessee had a recognised R&D unit situated at Bhandup (Mumbai). Subsequently, the assessee built a new R&D facility at Turbhe (Navi Mumbai). Admittedly, this facility was also approved by DSIR, and a certificate in Form No.3 CM was issued. During the year under consideration, the assessee had incurred a revenue expenditure amounting to Rs.30.53 crore and a capital expenditure amounting to Rs.5.51 crore on the in-house R&D facility.

Since at the time of passing of the assessment order, the certificate in Form No.3CL was not available, the AO rejected the entire claim of weighted deduction under Section 35(2AB) of the Income Tax Act. However subsequently on receipt of the certificate in Form No.3CL, the AO granted partial relief to the assessee and restricted the disallowance to Rs.579.81 lakh vide rectification order dated 06/10/2017

The bench of Prashanth Maharishi ( Accountant member) and Sandeep Singh Karhail ( Accountant member) find that while deciding a similar issue the coordinate bench of the Tribunal in assessee’s own case in Asian Paints Ltd v/s Addl. CIT,  for the assessment year 2007-08, restored the issue to the file of the AO with a direction to decide the same afresh after verifying whether the expenditure in question has been incurred by the assessee on research and development, which was  eligible for deduction under Section 35(2AB) of the Income Tax Act.

ITAT found no infirmity in the findings of the CIT (A) on this issue. Accordingly, Revenue’s appeal were dismissed

To Read the full text of the Order CLICK HERE

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