Introduction

The case of Nath Bio-Genes (India) Limited vs. Pr. Commissioner of Income-tax -1, Aurangabad adjudicated by the Income Tax Appellate Tribunal (ITA) on February 13, 2020, addresses significant issues surrounding the claim of deductions under Section 35(2AB) of the Income Tax Act, 1961. The assessee, engaged in the production, processing, and marketing of hybrid seeds, filed returns declaring substantial agricultural and non-agricultural income. The crux of the dispute revolves around the allowability of R&D expenditures and the procedural compliance concerning specific forms required by the Department of Scientific & Industrial Research (DSIR).

Summary of the Judgment

Nath Bio-Genes (India) Limited filed appeals against revision orders issued by the Principal Commissioner of Income Tax (Pr. CIT-1) in Aurangabad for Assessment Years 2013-14 and 2014-15. The primary contention was the disallowance of deductions under Section 35(2AB) due to the absence of Form No. 3CL, despite possessing approval in Form No. 3CM from DSIR. The Assessing Officer (AO) had initially allowed the deduction but was later overruled by Pr. CIT under Section 263, citing procedural lapses. The Tribunal, however, sided with the assessee, emphasizing that the lack of Form 3CL should not automatically negate the claim, provided the expenditure's genuineness and compliance with other conditions are established.

Analysis

Precedents Cited

The Tribunal referenced several key precedents to bolster its decision:

• Cummins India Ltd. vs. DCIT (ITA No.309/PUN/2014): Affirmed the necessity of proper documentation but recognized procedural lapses could be rectified without denying benefits outright.
• Minilec India Pvt. Ltd. vs. ACIT (ITA No.367/PN/2012 & 417/PN/2012): Highlighted the courts' leniency towards procedural errors when the substantive aspects of expenditure are sound.
• CIT vs. Sun Pharmaceutical Industries Ltd. (Tax Appeal No.541 of 2017): The Gujarat High Court held that the absence of Form No.3CL does not automatically invalidate the R&D deduction, emphasizing a focus on the expenditure's bona fide nature.

Legal Reasoning

The Tribunal's legal reasoning centered on distinguishing between procedural compliance and substantive validity. While acknowledging the absence of Form No.3CL, it recognized that:

• The assessee had obtained the necessary approval in Form No.3CM from DSIR.
• The failure to furnish Form No.3CL was deemed a procedural lapse rather than evidence against the expenditure's legitimacy.
• Precedents indicated that such procedural omissions should not overshadow the genuine intent and actual expenditure on R&D activities.
• The AO and Pr. CIT did not adequately scrutinize the nature and genuineness of the expenses, which are paramount for the deduction under Section 35(2AB).

Consequently, the Tribunal concluded that the deduction should not be denied solely based on procedural deficiencies, provided the substantive conditions are met.

Impact

This judgment reinforces the principle that while procedural compliance is essential, it should not override the substantive legitimacy of claimed benefits. Its implications include:

• Encouraging assessors to focus more on the actual R&D activities and expenditures rather than rigidly enforcing procedural norms.
• Providing clarity and relief to companies engaged in R&D by ensuring that genuine expenditures are not unjustly denied.
• Potentially influencing future cases where procedural lapses occur, promoting a balanced approach between formality and substance.
• Guiding the Department of Scientific & Industrial Research (DSIR) to possibly streamline documentation processes to prevent similar disputes.

Complex Concepts Simplified

Section 35(2AB) of the Income Tax Act, 1961

Section 35(2AB) provides for additional weighted deductions for in-house research and development (R&D) facilities. Companies can claim enhanced deductions on expenditures incurred towards R&D, promoting innovation and technological advancements.

Forms No. 3CM and 3CL

Form No.3CM: Issued by the Secretary of DSIR, it serves as the primary approval for an in-house R&D facility, validating the company's eligibility to claim deductions under Section 35(2AB).

Section 263 of the Income Tax Act

This section deals with the power to reopen assessments. It allows tax authorities to revise previous assessment orders if they find them to be erroneous or detrimental to the revenue's interests.

Conclusion

The Tribunal's decision in Nath Bio-Genes vs. Pr. CIT-1, Aurangabad underscores a balanced judicial approach that weighs both procedural adherence and substantive legitimacy. By permitting the deduction under Section 35(2AB) despite procedural shortcomings, the judgment promotes a fair assessment of genuine R&D activities. This case sets a precedent that encourages assessors to delve deeper into the actual nature of expenditures rather than solely focusing on documentation formalities. Consequently, it fosters an environment conducive to innovation, ensuring that companies committed to R&D receive the intended tax benefits, thereby contributing to broader economic and technological growth.