THE DEPUTY COMMISSIONER OF vs M/S TEJAS NETWORKS LIMITED
- Court
- Karnataka High Court
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WA No. 2473 of 2015
TH
RESERVED ON 14 OCTOBER 2026
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
ND
DATED THIS THE 2 DAY OF NOVEMBER, 2026
PRESENT
THE HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE
AND
THE HON'BLE MRS. JUSTICE K.S. HEMALEKHA
WRIT APPEAL NO. 2473 OF 2015 (T-IT)
BETWEEN:
1.
THE DEPUTY COMMISSIONER OF
INCOME TAX, CIRCLE-12(4)
BANGALORE
RASHTROTHANA PARISHAD BHAVAN
TH
(4 FLOOR) NO.14/3A
NRUPATHUNGA ROAD
BANGALORE - 560 001
2. THE DISPUTE RESOLUTION PANEL
BANGALORE
RASHTROTHANA PARISHAD BHAVAN
TH
(6 FLOOR) NO.14/3A
NRUPATHUNGA ROAD
BANGALORE - 560 001
…APPELLANTS
Digitally
signed by K
P SWETHA
Location:
High Court
of Karnataka
(BY SRI E.I. SANMATHI, ADVOCATE)
AND:
1. M/S TEJAS NETWORKS LIMITED
A COMPANY INCORPORATED UNDER
THE COMPANIES ACT, 1956
HAVING ITS OFFICE AT
TH
PLOT NO.25, 5 CROSS
J.P. SOFTWARE PARK
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WA No. 2473 of 2015
ELECTRONIC CITY
PHASE-1, HOSUR ROAD
BANGALORE - 560 100
REPRESENTED BY ITS
MANAGING DIRECTOR
MR. SANJAY NAYAK
S/O SRI SHANKAR NAYAK
AGED ABOUT 49 YEARS
…RESPONDENT
(BY SRI ANNAMALAI S., ADVOCATE &
SRI V. CHANDRASHEKAR, ADVOCATE)
THIS WRIT APPEAL IS FILED UNDER SECTION 4 OF THE
KARNATAKA HIGH COURT ACT PRAYING TO SET ASIDE THE
ORDER PASSED BY THE LEARNED SINGLE JUDGE IN W.P.
NO.7004/2014 DATED 24/04/2015 & ETC.
THIS WRIT APPEAL HAVING BEEN HEARD AND RESERVED
FOR JUDGMENT, COMING ON FOR PRONOUNCEMENT THIS DAY,
JUDGMENT WAS PRONOUNCED AS UNDER:
CORAM: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE
and
HON'BLE MRS. JUSTICE K.S. HEMALEKHA
C.A.V. JUDGMENT
(PER: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE)
1. The Revenue has filed the present intra court appeal
impugning an order dated 24.04.2015 passed by the learned Single
Judge in Writ Petition No.7004/2014 (T-IT). The respondent [ the
Assessee ] had filed the said petition assailing an assessment
order dated 31.01.2014 [ impugned assessment order ] passed by
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WA No. 2473 of 2015
the Assessing Officer [ AO ] under Section 143(3) read with Section
144C(13) of the Income Tax Act, 1961 [ the Act ] for the
Assessment Year [ AY ] 2009-10. The Assessee also impugned the
demand notice dated 31.01.2014, which was issued consequent to
the impugned assessment order.
2. The Assessee is engaged in the business of software
development, manufacturing and trading of networking equipment.
It had filed the return of income for AY 2009-10 on 29.09.2009
₹
declaring nil income and claiming a loss of 7,75,95,922/-. The said
return was selected for scrutiny and a draft assessment order
dated 27.03.2013 was passed.
3. The Assessee filed its objections against the draft
assessment order before the Dispute Resolution Panel [ DRP ]. The
said objections were disposed of by the DRP by an order dated
30.12.2013.
4. The principal controversy relates to the weighted deduction
claimed by the Assessee under Section 35(2AB) of the Act for a
₹
sum of 89,35,48,193/-. In addition to the above, the Assessee
₹
also claimed a deduction of 4,18,08,591/- under Section 35(1)(i)
of the Act. The AO rejected the weighted deduction claimed for
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WA No. 2473 of 2015
research and development [ R&D ] expenditure to the extent of
₹
48,41,82,071/-. Additionally, it also disallowed the sum of
₹
2,63,68,301/- claimed by the Assessee under Section 35(1)(i) of
the Act.
5. The DRP concurred with the AO that any expenditure
incurred for product development which results in patent(s) on
products or processes would be excluded from deductions under
Section 35 of the Act. Additionally, the DRP also concurred with
the AO that the jurisdiction of the 'prescribed authority' under
Section 35 of the Act was limited to certifying as to what extent an
activity would constitute or to what extent an asset was being used
for scientific research. However, the question whether such
expenditure is allowable would be governed by the express
provisions of the Act and the AO's determination of the same was
not overruled by the certificate issued by the 'prescribed authority'.
6. In its directions, the DRP also considered the objections
raised by the Assessee in regard to other grounds. However, it is
not necessary to refer to the same, as the writ petition as well as
the present appeal is confined to the question of allowability of
deduction under Section 35 (2AB) of the Act. Pursuant to the
directions issued by the DRP, the AO passed the final order. As
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WA No. 2473 of 2015
stated above, the Assessee impugned the said order to a limited
extent by filing a writ petition (W.P No.7004/2014), challenging the
final order only insofar as it related to the question regarding
allowability of deduction claimed under Section 35 (2AB) of the Act.
PREFATORY FACTS
7. The Assessee is engaged in developing and selling optical
networking products for its worldwide customers. It claims that it
carries on R&D activities for developing optical transmission
telecommunication equipment. According to the Assessee, the
same is a continuous process. The Department of Scientific and
Industrial Research, Government of India, Ministry of Science and
Technology [ DSIR ] had granted recognition and approval to
Assessee’s two R&D units – one located in JP Nagar, Bengaluru
and the other at Mumbai, Ghatkopur – for the purpose of Section
35(2AB) of the Act in the prescribed form, Form 3CM.
8. During the previous year relevant to AY 2009-10, the
₹
Assessee had incurred an expenditure of 59.57 crores on R&D
activities at the said units. It accordingly claimed a weighted
₹
deduction (150% of actual expenditure) amounting to 89.35
crores.
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WA No. 2473 of 2015
9. The Assessee had furnished details of the expenditure
incurred by the approved R&D units during the relevant previous
year (FY 2008-09) to DSIR. Admittedly, the said audited expenses
were examined by DSIR, which is the 'prescribed authority' under
Section 35(2AB) of the Act. After examining the same, DSIR had
issued a report in the prescribed form (Form 3CL) dated
10.04.2013, addressed to the Director General of Income Tax
(Exemptions), New Delhi. Although the Assessee had incurred an
₹
expenditure of 59.57 Crores, DSIR had, for the purposes of
deduction under Section 35(2AB) of the Act, approved the R&D
expenditure (excluding land and buildings) to the extent of
₹
4601.95 lakhs.
10. Under the head ‘Research and Development Expenses’, the
₹
Assessee had debited a sum of 43,59,46,126/- to its Proft and
₹
Loss Account. Out of the said amount 27,85,19,837/- was shown
₹
as R&D expenses and the remaining amount of 15,74,26,289/-
was booked as an expenditure relating to product development.
The breakup of the said amount as noted in the impugned
assessment order is set out below:
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WA No. 2473 of 2015
PARTICULARS Amount
Design, layout, components & 2,60,10,148
prototypes
Employee cost including salaries & Other 5,75,21,703
benefits – Product development
Employee Cost including salaries & Other 18,18,25,789
benefits (STPI Division)
Less: Capitalized during the year 10,79,31,621
Balance 15,74,26,289
₹
11. Out of the total R&D expenditure of 43,59,46,126/-, the
₹
Assessee had claimed a deduction of 4,18,08,591/- as a
deduction in respect of R&D expenditure under Section 35(1)(i) of
the Act.
12. The Assessee claims that it has four units where it carries on
R&D activities - JP Nagar unit, Jayanagar Unit, Ghatkopar Mumbai
unit and Noida unit. Out of the aforesaid four units, only two units -
units at JP Nagar, Bengaluru and Ghatkopar, Mumbai are
approved and recognised by DSIR. The Assessee claimed that an
₹
amount of 4,18,08,591/- was the expenditure incurred at the
Jayanagar and Noida units which were not approved or recognised
under Section 35(2AB) of the Act and therefore, the expenditure
incurred on scientific research by the said units was not entitled to
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WA No. 2473 of 2015
weighted deduction. However, the said expenditure was allowable
under Section 35(1)(i) of the Act.
13. The Assessee had booked similar expenditure in its return
for the earlier AY 2008-09 which was also disallowed principally on
the ground that the said expenditure was incurred for development
of a new product and the same entails acquiring a distinct
technology and know-how which is an intangible asset of the
Assessee. The said intellectual property right may be either in the
shape of a patent or a secret. Since the R&D expenditure incurred
by the approved units results in the Assessee acquiring know-how,
the AO was of the view that the said expenditure was in the nature
of capital expenditure and thus, not allowable as a deduction. The
AO reasoned that the said expenditure could not be considered as
an expenditure for scientific research as it was specifically
excluded under Section 43(4)(ii) of the Act.
14. The relevant extract of the impugned assessment order
which sets out the amount claimed and disallowed by the AO and
the reasons for the same, is reproduced below:
“4.11 The summary of deduction claimed u/s
35(2AB) in respect of Research and Development
expenditures recorded by the assessee details of
which have been provided vide its written
submission dated 25.03.2013 is as under:
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WA No. 2473 of 2015
Particulars Approved Deduction
Units (Rs.) claimed @
150% (Rs.)
A. Amount recorded under 25,45,64,231/-
research and development
B. Amount recorded under 13,95,73,315/-
Product development
C. Capitalized in the Books
(Lab Equipments and
Product Development
Expenses)
11,00,79,095/-
D. Capital Work-in-Progress 9,14,82,154/-
Total 59,56,98,795/- 89,35,48,193/-
4.12 As discussed in the aforesaid paragraph the
expenditures pertaining to product development
are not eligible for deduction u/s 35(2AB). As seen
from the above table, there are three categories of
product development expenditures in respect of
which the assessee has claimed deduction u/s
35(2AB) which are discussed as under:
a. Rs.13,95,73,315/- which are treated as revenue
expenditures by the assessee but deduction has
been claimed u/s 35(2AB). Since the assessee
has incurred these expenditures in respect of
incompleted projects as the new products have
not yet been developed. These expenditure
actually represents capital work in progress and
does not qualify for deduction as revenue
expenditure. The corresponding weighted
deduction claimed Rs.20,93,59,970/- is disallowed
and added to the total income.
b. Rs.11,00,79,095/- which are treated as capital
expenditure by the assessee and deduction has
been claimed u/s 35(2AB). These amounts
represents Knowhow/Technology ready for use
contributing to Increase in revenue and thereby of
enduring benefit to the assessee. Accordingly, the
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WA No. 2473 of 2015
assessee is eligible for depreciation only @ 25%
on such expenditure representing Knowhow and
such depreciation working out to Rs.2,75,19,770/
But the assessee company has claimed weighted
deduction u/s 35(2AB) amounting to
Rs.16,51,18,640/- which is held to be not an
allowable deduction. Therefore, the balance
amount of Rs.13,75,98,870/- (Rs.16,51,18,640/- -
Rs.2,75,19,770/-) is disallowed and added to the
total income.
c. 2,154/-is treated as capital work in progress by
the assessee company. These are also
expenditures incurred on incomplete projects as
the new products have not yet been developed.
These expenditures also represent capital work-in-
progress and does not qualify for deduction as
revenue expenditure. The corresponding weighted
deduction claimed at Rs.13,72,23,231/- is
disallowed and added to the total income.
4.13 Thus, an amount of Rs.48,41,82,071/- out of
the deduction of Rs.89,35,48,193/- claimed uls
35(2AB) was proposed to be disallowed and
added to the retuned income of the assessee
company in the draft assessment order.
4.14 Similarly, deduction of Rs.4,18,08,591/- in
respect of which the assessee company has
claimed 100% deduction u/s 35(1)(i) includes an
amount of Rs.2,63,68,301/- which is .recorded as
product development expenditure. This amount
also represents Capital Work-In-Progress for
incomplete projects and no deduction can be
allowed now. Therefore, an amount of
Rs.2,63,68,301/- was proposed to be disallowed
and added to the returned income of the assessee
company in the draft assessment order.
4.15 On these two issues, the objections filed by
the assessee company before the Ld:DRP,
Bangalore were rejected. Therefore the aforesaid
amounts of Rs.48,41,82,071/- and
Rs.2,63,68,301/- are disallowed and added to the
returned income of the assessee company.
(Additional of Rs.48,41,82,071 & Rs.2,63,68,301/)”
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WA No. 2473 of 2015
QUESTIONS FOR CONSIDERATION
15. In view of the above, the only questions that fall for
consideration in the present appeal are: (i) whether the expenditure
incurred by the Assessee is required to be excluded from the scope
of Section 35 (2AB) of the Act if the same leads to any intellectual
property in respect to which the Assessee can exercise proprietary
rights; and (ii) whether the AO has the jurisdiction to determine
whether the Assessee has incurred the expenditure on scientific
research, which is approved by the 'prescribed authority'.
REASONS AND CONCLUSION
16. We may at this stage consider it relevant to refer to Section
43 of the Act. The relevant extract of this section is set out below:
“43. In sections 28 to 41 and in this section, unless
the context otherwise requires—
xxxx xxxx xxxx
(4) (i) " scientific research " means any activities
for the extension of knowledge in the fields of
natural or applied science including agriculture,
animal husbandry or fisheries;]
(ii) references to expenditure incurred on scientific
research include all expenditure incurred for the
prosecution, or the provision of facilities for the
prosecution, of scientific research, but do not
include any expenditure incurred in the acquisition
of rights in, or arising out of, scientific research;
(iii) references to scientific research related to a
business or class of business include—
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WA No. 2473 of 2015
(a) any scientific research which may lead to or
facilitate an extension of that business or, as the
case may be, all businesses of that class;
(b) any scientific research of a medical nature
which has a special relation to the welfare of
workers employed in that business or, as the case
may be, all businesses of that class;
17. The relevant extract of Section 35 of the Act as in force in AY
2009-10, is set out below:
“ 35. Expenditure on scientific research. —(1) In
respect of expenditure on scientific research, the
following deductions shall be allowed—
(i) any expenditure (not being in the nature of
capital expenditure) laid out or expended on
scientific research related to the business.
Explanation. — xxx xxx xxx
(ii) an amount equal to one and one-fourth times of
any sum paid to a scientific research association
which has as its object the undertaking of scientific
research or to a university, college or other
institution to be used for scientific research:
Provided that such association, university,
college or other institution for the purposes of this
clause—
(A) is for the time being approved, in
accordance with the guidelines, in the
manner and subject to such conditions as
may be prescribed; and
(B) such association, university, college or
other institution is specified as such, by
notification in the Official Gazette, by the
Central Government;
(iia) xxx xxx xxx
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WA No. 2473 of 2015
(iii) an amount equal to one and one-fourth times
of any sum paid to a university, college or other
institution to be used for research in social science
or statistical research:
Provided that such university, college or
other institution for the purposes of this clause—
(A) is for the time being approved, in
accordance with the guidelines, in the
manner and subject to such conditions as
may be prescribed; and
(B) such university, college or other
institution is specified as such, by
notification in the Official Gazette, by the
Central Government;
Explanation. — xxx xxx xxx
(iv) xxx xxx xxx
(2), (2A) and (2AA) xxx xxx xxx
(2AB)(1) Where a company engaged in the
business of bio-technology or in the business of
manufacture or production of any drugs,
pharmaceuticals, electronic equipments,
computers, telecommunication equipments,
chemicals or any other article or thing notified by
the Board incurs any expenditure on scientific
research (not being expenditure in the nature of
cost of any land or building) on in-house research
and development facility as approved by the
prescribed authority, then, there shall be allowed a
deduction of a sum equal to one and one-half
times of the expenditure so incurred.
Explanation. —For the purposes of this
clause, “expenditure on scientific research”, in
relation to drugs and pharmaceuticals, shall
include expenditure incurred on clinical drug trial,
obtaining approval from any regulatory authority
under any Central, State or Provincial Act and
filing an application for a patent under the Patents
Act, 1970 (39 of 1970).
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WA No. 2473 of 2015
(2) No deduction shall be allowed in respect of the
expenditure mentioned in clause (1) under any
other provision of this Act.
(3) No company shall be entitled for deduction
under clause (1) unless it enters into an
agreement with the prescribed authority for
cooperation in such research and development
facility and for audit of accounts maintained for
that facility.
(4) The prescribed authority shall submit its report
in relation to the approval of the said facility to the
Director General in such form and within such time
as may be prescribed.
(5) No deduction shall be allowed in respect of the
expenditure referred to in clause (1) which is
incurred after the 31st day of March, 2012.
(6) No deduction shall be allowed to a company
approved under sub-clause (C) of clause (iia) of
sub-section (1) in respect of the expenditure
referred to in clause (1) which is incurred after the
31st day of March, 2008.
(2B) xxx xxx xxx
(3) If any question arises under this section as to
whether, and if so, to what extent, any activity
constitutes or constituted, or any asset is or was
being used for, scientific research, the Board shall
refer the question to—
(a) the Central Government, when such
question relates to any activity under
clauses (ii) and (iii) of sub-section (1), and
its decision shall be final;
(b) the prescribed authority, when such
question relates to any activity other than
the activity specified in clause (a), whose
decision shall be final.
(4) and (5) xxx xxx xxx ”
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WA No. 2473 of 2015
18. It is relevant to refer to the extract of Rule 6 of the Income
Tax Rules, 1962 [ the Rules ]. The same is set out below:
“Prescribed authority for expenditure on
scientific research.
6. (1) For the purposes of clause (i) of sub-section
(1) and sub-section (2A) of section 35, the
prescribed authority shall xxx Government of
India.
(1A) For the purposes of sub-section (2AA) of
section 35, the prescribed authority shall be
(a) in the case xxx case may be;
(b) in the case xxx Government of India.
(1B) For the purposes of sub-section (2AB) of
section 35, the prescribed authority shall be the
Secretary, Department of Scientific and Industrial
Research.
(2) Omitted w.e.f. 30.10.2006
(3) The application for obtaining approval under
sub-section (2AA) of section 35 shall be made by
a sponsor in Form No.3CG.
Explanation : For the purposes of this rule
"sponsor" means a person who makes an
application in Form No.3CG.
(4) The application required to be furnished by a
company under sub-section (2AB) of section 35
shall be in Form No.3CK.
(5) The head of the National Laboratory or the
University or the Indian Institute of Technology [or
the Principal Scientific Adviser to the Government
of India] shall, if he is satisfied that it is feasible to
carry out the scientific research programme then,
subject to other conditions prescribed in this rule
and section 35 (2AA) of the Act, pass an order in
writing in Form No.3CH:
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WA No. 2473 of 2015
Provided that a reasonable opportunity of being
heard shall be granted to the sponsor before
rejecting an application:
Provided further that an order under this rule
shall be passed within two months of the receipt of
the application under sub-rule (1A):]
Provided also that the Principal Scientific Adviser
to the Government of India may authorize an
officer who is not below the rank of a Deputy
Secretary to issue such order, after the scientific
research programme has been approved by him.
(5A) The prescribed authority shall, if he is
satisfied that the conditions provided in this rule
and in sub-section (2AB) of section 35 of the Act
are fulfilled, pass an order in writing in Form
No.3CM:
Provided that a reasonable opportunity of being
heard shall be granted to the company before
rejecting an application.
(6) The National Laboratory, University, Indian
Institute of Technology or specified person] shall
issue a receipt of payment for carrying out an
approved programme of scientific research under
sub-section (2AA) in Form No.3CI.
(7) xxx
(7A) Approval of expenditure incurred on in-house
research and development facility by a company
under sub-section (2AB) of section 35 shall be
subject to the following conditions, namely:-
(a) The facility should not relate purely to
market research, sales promotions, quality control,
testing, commercial production, style changes,
routine data collection or activities of a like nature;
(b) The prescribed authority shall submit its
report in relation to the approval of in-house
Research and Development facility in Form
No.3CL to the Director General (Income-tax
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WA No. 2473 of 2015
Exemptions) within sixty days of its granting
approval;
The company shall maintain a separate
(c)
account for each approved facility; which shall be
audited annually and a copy thereof shall be
furnished to the Secretary, Department of
Scientific and Industrial Research by 31st day of
October of each succeeding year.
Explanation: For the purposes of this sub-rule the
expression "audited" means the audit of accounts
by an accountant, as defined in the Explanation
below subsection (2) of section 288 of the Income-
tax Act, 1961;
(d) Assets acquired in respect of development of
scientific research and development facility shall
not be disposed of without the approval of the
Secretary, Department of Scientific and Industrial
Research.”
19. The AO proceeded on the basis that, since the expenditure
incurred resulted in the Assessee generating/developing know-how
and technology that would contribute to increasing revenue, it could
not be considered as expenditure on scientific research as
allowable under Section 35(2AB) of the Act. The AO reasoned that
the Assessee would be entitled to depreciation on such
expenditure representing know-how. It is thus apparent that the AO
does not dispute that the Assessee had incurred the expenditure
for scientific research, which was approved by the 'prescribed
authority' under Rule 6(7A) of the Rules. However, according to the
AO such expenditure could not be considered as expenditure on
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WA No. 2473 of 2015
scientific research as it was excluded by virtue of Section 43(4)(ii)
of the Act.
20. The learned Single Judge rightly held that the AO could not
question whether the expenditure incurred by the Assessee, which
was approved by the DSIR (‘prescribed authority’) was for scientific
research.
21. Rule 6(5A) of the Rules expressly provides that the
'prescribed authority' shall pass an order in Form 3CM if it is
satisfied that the conditions provided in the said Rule and in
Section 35(2AB) of the Act are fulfilled. Thus, the authority for
determining whether the conditions for claiming a weighted
deduction under Section 35(2AB) are satisfied is the 'prescribed
authority'. The AO cannot review or revisit the approval granted.
However, if any question arises as to whether, and if so, to what
extent, any activity constitutes or constituted, or any asset is or was
being used for, scientific research, the Central Board of Direct
Taxes [ the Board ] is required, in terms of Section 35(3) of the Act,
to refer the question to the Central Government, if such question
relates to any activity under Clauses (ii) and (iii) of Section 35(1) of
the Act, and to the ‘prescribed authority’ if such question relates to
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WA No. 2473 of 2015
any activity other than the activities specified under Clauses (ii) and
(iii) of Section 35(1) of the Act.
22. Section 35(3) of the Act also expressly provides that the
decision of the Central Government or the 'prescribed authority', as
the case may be, would be final. Thus, concededly, if the AO seeks
to raise any issue as to what extent an activity constitutes scientific
research, the only recourse available for the AO is to seek a
reference through the Board to the 'prescribed authority' under
Section 35(3) of the Act.
23. It is also apposite at this stage to note that the Revenue does
not dispute that the 'prescribed authority' has the exclusive
jurisdiction to decide whether any activity, and to what extent,
constitutes scientific research. However, the Revenue contends
that the 'prescribed authority' cannot decide the correctness and
genuineness of the expenditure and that the AO alone must do so.
Following this contention, it is contended that the 'prescribed
authority' has no jurisdiction to examine the exclusion of certain
expenditure under Section 43(4)(ii) of the Act on the ground that
the same has been incurred towards acquisition of rights in or
arising out of scientific research.
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WA No. 2473 of 2015
24. We find no merit in the contention that the 'prescribed
authority' has no jurisdiction to examine whether certain
expenditure is required to be excluded by virtue of Section 43(4)(ii)
of the Act on the ground that it is for acquisition of rights in or
arising out of scientific research.
25. Rule 6 of the Rules sets out an exhaustive procedure for
determining whether the conditions provided under Section
35(2AB) of the Act are satisfied. An Assessee seeking to claim a
deduction under Section 35(2AB) of the Act is required to make an
application in Form 3CK. The Assessee has to provide all details,
including annual production for the past three years, the annual
expenditure on scientific research of the company during the past
three years, and the breakup of the expenditure on the land and
building. Additionally, the Assessee has to disclose the proposed
objects of the scientific research and give details of the nature of
the existing in-house research and development facilities.
26. Part B of the said Form 3CK contains an agreement between
the Assessee and the DSIR, inter alia, recording the Assessee's
commitment to provide full co-operation to DSIR in carrying out
research and development work relating to biotechnology or
manufacture or production of the eligible article or thing under
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WA No. 2473 of 2015
Section 35(2AB) of the Act. The Assessee also undertakes to
maintain accounts for both revenue and capital expenditure on
scientific research which is required to be annually audited.
27. Clause (iv) of Part B of Form 3CK, which contains the terms
of the agreement, is set out below:
"(iv) the First Party shall maintain separate
accounts for both revenue and capital expenditure
on scientific research including that on in-house
Research and Development facility, which shall be
annually audited by an accountant as defined in
section 288(2) of the Income-tax Act, 1961, and a
copy of which has to be attached with the return of
income under sub-section (1) of section 139 to
claim deduction under section 35(2AB)"
28. Rule 6(7A) of the Rules expressly provides that the approval
of expenditure incurred for in-house research and development
would be subject to the condition that the 'prescribed authority'
1
submits a report in the prescribed Form 3CL. Part B of Form 3CL
is set out below:
"Part B
1. Assessment year
2. Previous year
3. Location of the research and development facility
4. Annual production of the eligible products during the year
5. Details of expenditure: (in Rs. Lakhs)
1
as applicable with effect from 01.07.2016
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WA No. 2473 of 2015
A.(i) Land
( ii ) Buildings
B. Capital expenditure:
( i ) Equipment
( ii ) Others
( iii ) Total
C. Revenue expenditure:
( i ) Expenditure directly related to research and
development
( a ) ……………….
( b ) ……………….
( c ) ……………….
( ii ) Total
D. Total expenditure on the approved research and
development centre (excluding land and building)
E. Details of assets disposed of/transferred
I certify that the above details are true and correct to the best of my
knowledge and belief.
………………………
Signature of Secretary, Department
of Scientific and Industrial Research
Date:………..
Place:……….”
29. The relevant extract of the report in Form 3CL dated
10.04.2013 issued by DSIR in the present case is set out below:
“9. Total cost of in-house research facility, giving break-up of
expenditure on land and buildings
AY 2009-10
(from 01.06.2008 to
31.03.2009)
AY 2010-11 AY 2011-12
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WA No. 2473 of 2015
J.P. Nagar
(Bangalore)
Mumba Noida
i
Mumbai J.P.
Nagar
(Bangal
ore)
Mumbai J.P.
Nagar
(Bangal
ore)
229.44 - 338.08 1.29 500.12 - 3.50
Capital
expenditure
(other than
land and
buildings)
Recurring 4245.51 127.00 5448.92 180.30 6981.88 213.88 254.8
expenditure 7
Total R & D
expenditure
(excluding
land &
buildings)
4601.95 5968.59 7954.25
10. Whether agreement for co-operation and Research and
Development facility and for audit of the accounts maintained for
that facility entered into Yes .
Certified that the above information is true to the best of our
knowledge and belief.”
30. It is apparent from the above that the 'prescribed authority' is
required to report specific details of the expenditure incurred on
scientific research, including the break-up of the expenditure on
land and building, capital expenditure and revenue (recurring)
expenditure.
31. Plainly, there is no scope for the AO to review the
expenditure incurred as approved by the 'prescribed authority'.
32. The plain language of Section 35(3) of the Act makes it
amply clear that any question as to whether an activity constitutes
scientific research, and to what extent, must be decided by the
'prescribed authority'. The use of the word 'shall' indicates that it is
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WA No. 2473 of 2015
mandatory for the Board to refer such a question, if it arises, to the
'prescribed authority'. It follows that the AO cannot determine
whether the expenditure is for scientific research within the
definition of Section 43(4) of the Act, or the extent to which it would
be eligible for weighted deduction under Section 35(2AB) of the
Act.
33. Section 35(2AB) of the Act allows weighted deductions for
expenditure on scientific research, except for expenditure in the
nature of the cost of any land or building, subject to certain
conditions being satisfied.
34. A plain reading of Section 35(2AB)(1) of the Act indicates
that a weighted deduction is admissible for all expenditure incurred
on scientific research in an in-house research and development
facility as approved by the 'prescribed authority', other than
expenditure in the nature of the cost of any land or building. Thus,
the assumption that capital expenditure other than land and
building is excluded is not sustainable on a plain reading of Section
35(2AB) of the Act.
35. The AO is not permitted to undertake a merits review of the
approved expenditure to determine whether the same is allowable.
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WA No. 2473 of 2015
The contention that the AO can re-examine whether the
expenditure approved by the 'prescribed authority' falls within the
definition of Section 43(4) of the Act is plainly unmerited. The
'prescribed authority' has jurisdiction to decide whether the
expenditure is incurred on scientific research for which a weighted
deduction is allowed under Section 35(2AB) of the Act. The role of
the AO in regard to such approved expenditure is limited.
36. In The Deputy CIT (ASSTT) v. Mastek Limited : Tax Appeal
No.242/2000 and connected matters, decided on 21.08.2012 and
28.08.2012, the Division Bench of the Gujarat High Court
considered the question whether the expenditure incurred was for
scientific research. In this regard, the court observed as under:
"28. We are, however, of the opinion that insofar
as the second aspect of the matter is concerned,
the Tribunal was perfectly justified in holding in
favour of the assessee. Section 35(3) of the Act as
noticed requires a reference to be made by the
Board to the prescribed authority when a question
arises as to whether and if so to what extent, any
activity constitutes or constituted or any asset is or
was being used for scientific research. The
decision of the prescribed authority on such a
question would be final. In our opinion, therefore,
whenever any such question arises, the Assessing
Officer cannot decide the issue but must place the
issue before the Board who, in terms of section
35(3) of the Act, would refer the question to the
prescribed authority. The decision of the
prescribed authority would govern the parties.
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WA No. 2473 of 2015
Therefore, if an assessee puts forth a claim of
deduction under section 35(1) for expenditure
incurred on scientific research and if the
Assessing Officer is not inclined to accept such a
claim, the question can be stated to have arisen.
In such a situation, the Assessing Officer cannot
take a decision but must seek the opinion of the
prescribed authority, We may hasten to add that
only when such a question arises that the
reference would be competent. For example, if in
a given case, the assessee lodges a claim without
any supporting material, it cannot be stated that
the question has arisen which would require a
reference by the Board. Similarly, if the Assessing
Officer accepts the claim of the assessee, no such
question can be stated to have arisen. We are,
however, unable to accept Shri Bhatt's contention
that such a question would arise only when the
assessment is finally framed and that thereafter
the onus would be on the assessee to seek a
reference. No such intention is emerging from
section 35(3) of the Act. Whenever an Assessing
Officer is not inclined to accept the assessee's
case for deduction, we fail to see how at that very
stage, the question cannot be stated to have
arisen."
37. A similar view is also taken by the Allahabad High Court in
2
JK Synthetics Limited v. O.S.Bajpai, Income Tax Officer . In
that case, the Assessee had claimed a deduction, out of its total
income, of the expenditure incurred on scientific research. The
court had referred to Section 35(3) of the Act and observed as
under:
2
1976 105 ITR 864 All
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WA No. 2473 of 2015
"21. …. It is apparent that if the Income-tax Officer
does not accept the claim of the assessee under
Section 35, he has to refer the matter to the
Central Board of Direct Taxes and the Board in
turn will make a reference to the prescribed
authority. The decision of the prescribed authority
shall be final. This shows very clearly that neither
the Income-tax Officer nor the Board is competent
to take a decision on any such controversy. The
controversy has to be referred to the prescribed
authority which alone is competent to give a
decision. Now, in the instant case, the claim of the
assessee was referred to the Board and the Board
referred the same to the prescribed authority.
Admittedly, the prescribed authority had not given
its decision before the impugned assessment
order was passed. The Income-tax Officer took
upon himself to decide the controversy and held
that the expenditure claimed by the company was
of an ordinary capital nature and did not relate to
any research work. Clearly, the Income-tax Officer
had no jurisdiction to adjudicate upon the
controversy, particularly when the controversy had
already been referred to the prescribed authority
He was conscious of this difficulty and that is why
he added the following rider in paragraph 47 of his
order:
"The matter has already been referred to the
prescribed authority under Section 35(3) and this
disallowance is subject to the finding of the said
authority as was in the assessment year 1971-72."
In our opinion, the procedure adopted by the
Income-tax Officer was wholly unjustified and
without jurisdiction. If, under the law, he has no
jurisdiction to adjudicate upon a matter, he cannot
take a decision final or provisional and make it
subject to the decision of the competent authority.
This situation appears to have arisen because of
the negligence of the Income-tax Officer to refer
the matter to the appropriate authority in time."
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WA No. 2473 of 2015
3
38. In CIT v. F.C.S International Marketing (P) Limited , the
Punjab and Haryana High Court observed that if any question
arises as to whether, and to what extent, any activity constitutes or
constituted scientific research, the AO is duty-bound to refer the
matter to the 'prescribed authority'.
39. In the present case, the AO has disallowed the expenditure
incurred on scientific research approved by the 'prescribed
authority' on the ground that the expenditure had resulted in the
acquisition of rights in or arising out of scientific research. The AO
has reasoned that the Assessee is not entitled to deduction on the
ground that the expenditure resulted in the acquisition of rights in or
arising out of scientific research. As discussed above, the
jurisdiction to determine whether an expenditure incurred on
scientific research is allowable under Section 35(2AB) of the Act is
required to be examined by the 'prescribed authority', and the AO
cannot undertake a review of the same.
40. We may now examine the merits of the AO’s decision that
the expenditure approved by DSIR is excluded from the scope of
expenditure on scientific research by virtue of Section 43(4)(ii) of
3
(2006) 155 taxmann.com 362 (Punjab & Haryana)
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WA No. 2473 of 2015
the Act. The AO's reasoning that any expenditure in scientific
research that results in the development of know-how or any
technology is excluded from the definition of expenditure in
scientific research is plainly erroneous. The purpose of conducting
scientific research is to acquire know-how and make technological
advancements. An Assessee which is engaged in business would
incur such expenditure only for the purposes of advancement of its
business.
41. Section 43(4)(ii) of the Act is required to be understood in the
correct perspective. It seeks to exclude expenditure that is incurred
on acquiring an existing right. Thus, if an Assessee incurs any
expenditure on acquiring a patent or rights in a patent from another
patentee, which is a result of scientific research, the said
expenditure would not be considered expenditure incurred by an
Assessee on scientific research. This is so because the
expenditure is for acquisition of an asset simpliciter without the
Assessee undertaking any scientific research. The expenditure on
scientific research is to be understood as expenditure incurred by
an Assessee on scientific research and not for acquisition of rights
arising out of scientific research. The exclusion under
Section43(4)(ii) of the Act covers expenditure for acquisition of
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WA No. 2473 of 2015
those rights without the Assessee undertaking any scientific
research.
42. In Tata Hitachi Construction Machinery Company
4
Limited v. DCIT, Circle 12 (4), Bangalore , the learned Income
Tax Appellate Tribunal (ITAT) had observed as under:
"4.5.3 ...In our considered view, the objective
behind the exclusion clause in Sec. 43(4)(ii) of the
Act appears to be that expenditure on scientific
research should be incurred on research actually
carried out by the assessee in-house and it should
not spend money in acquiring rights in or arising
out of scientific research carried on by some other
person. If the interpretation sought to be urged by
Revenue is to be accepted, then the benefit
sought to be conferred by the provisions of Sec.
35(1)(iv) of the Act would virtually be denied in all
cases by invoking the exclusion clause in Sec.
43(4)(ii) of the Act. Such a consequence would
never have been intended by the Legislature. As
already stated, the object behind the provisions of
Sec. 35 of the Act is to encourage scientific
research."
43. In Resil Chemicals (P) Ltd v. DCIT, Circle-12(4),
5
Bangalore , the learned ITAT had observed as under:
"18. ...The expenditure that is sought to be
excluded u/s. 43(4)(ii) of the Act is an expenditure
which the assessee incurs in acquiring rights in or
arising out of scientific research already done by
4
[2018] 93 Taxmann.com 339 (Bangalore-Trib.)
5
[2014] 51 Taxmann.com 250 (Bang-ITAT)
- 31 -
WA No. 2473 of 2015
somebody. It is possible that the assessee without
carrying out the scientific research, acquires rights
in scientific research, acquires rights arising out of
scientific research done by somebody else and
claims cost of acquisition of such rights as
expenditure on scientific research. It is this kind of
expenditure that is sought to be excluded u/s.
43(4)(ii) in its exclusion clause as “expenditure
incurred in acquiring rights in or arising out of
scientific research”. It is such type of expenditure
carried out by somebody else and such right is
acquired by the assessee, such expenditure is
sought to be disallowed. The idea behind the
exclusion clause in section 43(4)(ii) appears to be
that expenditure on scientific research should be
on the research actually carried out by the
assessee in-house and it should not merely spent
money in acquiring rights in or arising out of
scientific research carried out by some other
person".
44. We concur with the learned ITAT's interpretation of the
exclusion clause under Section 43(4)(ii) of the Act.
45. The learned counsel appearing for the Revenue had
earnestly contended that the observations in the impugned order
are wide and would preclude the AO from examining the
Assessee's claim for deduction on account of expenditure incurred
for scientific research. However, this apprehension is also
unfounded. The AO is clearly entitled to examine the claim once
the Assessee put forth the claim for deduction under Section
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WA No. 2473 of 2015
35(2AB) of the Act. The AO is required to verify that the necessary
material for making the claim exists. The Assessee has to produce
audited accounts evidencing that the expenditure as claimed was
incurred. In terms of Rule 6(7A) of the Rules, the 'prescribed
authority' is required to submit a report in relation to the approval in
the prescribed form to the Director General Income Tax
(Exemptions) within sixty days of granting the said approval. The
AO is also required to verify that the claim is confined to
expenditure for scientific research as approved by the 'prescribed
authority'. However, it is not open for the AO to take a view that the
activities undertaken do not constitute scientific research. It is
clearly not open for the AO to disallow the expenditure incurred for
the scientific research by re-examining whether the activities
undertaken by the Assessee fall within the definition of scientific
research under Section 43(4) of the Act.
46. It is also contended on behalf of the Revenue that the writ
petition was not maintainable against an order of the AO and,
therefore, the learned Single Judge erred in entertaining it. The
said contention is unmerited. There is no basis to contend that the
court lacked the jurisdiction to entertain the petition under Article
226 of the Constitution of India, impugning an assessment order.
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WA No. 2473 of 2015
The High Courts refrain from exercising jurisdiction where statutory
remedies are provided as a matter of self-restraint and not because
the court lacks the jurisdiction to entertain such petitions. In the
present case, the Assessee may have been relegated to avail of its
statutory remedies. However, the learned Single Judge considered
it apposite to entertain the petition considering that the question
raised involved the AO's jurisdiction to examine whether the
expenditure incurred was for scientific research and to disallow the
same on the premise that it was anticipated to yield revenue in
future years.
47. In view of the above, the impugned order cannot be set aside
on the ground that the writ petition was not maintainable.
48. The appeal is, accordingly, dismissed.
Sd/-
(VIBHU BAKHRU)
CHIEF JUSTICE
Sd/-
(K.S. HEMALEKHA)
JUDGE
AHB/KPS