Weighted Income Tax Deduction u/s 35 cannot be Restricted to DSIR-Certified Quantum for Pre-Amendment Years: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) Chennai Bench has recently held that weighted deduction under Section 35(2AB) of the Income Tax Act, 1961 cannot be restricted to the expenditure quantum certified by the Department of Scientific and Industrial Research (DSIR) in Form 3CL for years prior to the amendment of Rule 6(7A).

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​The assessee Rane Brake Lining Ltd. claimed a 200% weighted deduction for capital and revenue expenditure incurred by its in-house R&D unit at Ambattur, Chennai. While the unit was recognized by the DSIR,the Assessing Officer (AO) initially disallowed the claim due to the non-submission of Form 3CL.

However, later via a rectification order under Section 154 the AO allowed the capital expenditure but restricted the revenue expenditure to ₹2,40,61,000 as certified by the DSIR instead of the assessee’s claim of ₹11,05,83,676.

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​The Revenue contended that the CIT(A) erred in granting relief since the DSIR had not approved the full revenue expenditure.

The assessee argued that prior to April 1 2016 there was no legal requirement for the DSIR to quantify expenditure Form 3CL was merely an intimation of the facility's approval. It was highlighted that the restrictive amendment to Rule 6(7A) only became effective from AY 2017-18.

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​The Bench comprising Aby T. Varkey (Judicial Member) and S.R. Raghunatha (Accountant Member) observed that Section 35(2AB) is facility-specific and not expenditure specific. The Tribunal noted that the role of the DSIR prior to the 2016 amendment was limited to recognizing the facility and entering into an agreement with the assessee.

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The Tribunal held that once the R&D facility is approved the expenditure audited and certified by statutory auditors qualifies for deduction irrespective of the DSIR's quantification. The Bench dismissed the Revenue’s appeal and held that the AO lacked the authority to curtail the deduction for AY 2011-12.

Accordingly, the Bench allowed Mark to Market (MTM) losses of ₹18,52,531 treating them as allowable business expenditure under Section 37(1).

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