IT : Claim for approval of expenditure incurred on scientific research under section 35(2AB)

cannot be reduced without giving opportunity of hearing to assessee

[2016] 69 taxmann.com 339 (Karnataka)

HIGH COURT OF KARNATAKA
Bosch Ltd.
v.
Secretary, Dept. of Scientific & Industrial Research Ministry of Science & Technology
Government of India*
Dr. Vineet Kothari, J.
Writ Petition nos. 40512-40513/2015 (T-IT)
APRIL 20, 2016

Section 35 of the Income-tax Act, 1961 - Scientific research expenditure (Sub-section

(2AB)) - Assessment years 2011-12 and 2012-13 - Assessee-company applied to competent
authority-respondent 1 in terms of section 35(2AB) for approval of in-house research and
development facility and also to approve expenditure incurred by it for such research and
development work - Authority duly approved research and development facility but claim
for approval of research and development expenditure was reduced by amount of cost of
motor vehicles purchased for testing parts and salary and wages paid to trainees - Before
reducing amount of R&D expenditure, authority did not give any prior show cause notice
and an opportunity of hearing to assessee - Whether impugned order was clearly hit by
vice of non-compliance of principles of natural justice or audi alterm partem - Held, yes
[Paras 11 and 12] [Matter remanded/In favour of assessee]

FACTS

The assessee-company applied

to the competent authorityrespondent 1 in terms of
section 35(2AB) for approval of
the in-house research and
development facility and also to
approve the expenditure
incurred by it for such research
and development work on the
basis of which the assesseecompany would be entitled to
claim the weighted deduction
under section 35(2AB).
Though the research and
development facility was duly
approved by the 1st respondent
in the prescribed approval for
expenditure in Form 3CL, the
total research and development
expenditure (including land and
building) for two R&D units, was
reduced by cost of motor
vehicles purchased for testing
the parts and the salary and
wages paid to the trainees and
apprentices.

The assessee requested the

respondent No. 1 authority to
reconsider the approval for the
reduced amount under the
order impugned and to revise
the same upwardly on the basis
of the amount of R&D
expenditure actually incurred by
it. Since such revision of the
amount was not made by the
respondent authority, the
assessee-company filed the
instant writ petition.
HELD

Section 35(2AB) gives a

weighted deduction of the
amount of expenditure incurred
by the assessee for in-house
research and development as
approved by the prescribed
authority. [Para 10]

Obviously, the purpose of

giving this weighted deduction
under this provision is to
encourage scientific research
by the manufacturing units. The
weighted deduction, as per the
provisions now existing, is to
the extent of two times of the
expenditure actually incurred by
the assessee on such scientific
research. Therefore, obviously
any reduction in the amount
approved for the purpose of this
provision is likely to have a
double effect on the taxability of
profits and gains of the
assessee-company.
Undisputably before reducing
the amount of R&D expenditure
for these two assessment years
in question, the respondent
Secretary did not give any prior
show cause notice and an
opportunity of hearing to the
assessee as to why these two
amounts under two different
heads, namely, cost of
purchase of motor vehicles and
salary and wages of the
trainees and apprentices, be
not disallowed from the
category of 'approved
expenditure on scientific
research'. Thus, the assessee
was deprived of its valuable
right of hearing and rebut and
controvert the case against him
on the basis of which, the said
respondent-Secretary passed
the impugned order approving
the expenditure for scientific
research as required under the

provisions of section 35 (2AB)

at a reduced level. Had such a
notice been given by the said
authority to the assesseecompany, perhaps the
assessee-company could have
satisfied the said authority
about the genuineness of the
claim and rational nexus of
these expenses relatable to the
scientific research undertaken
by it entitling it for claiming the
weighted deduction in respect
of these expenses also under
the category of approved
expenditure for scientific
research under section
35(2AB). [Para 11]

The impugned order is, thus,

clearly hit by the vice of noncompliance of the principles of
natural justice or audi alterm
partem, the applicability of
which even to the taxing statute
cannot be ruled out. The
competent authority passed this
order under these provisions
certainly exercising a quasijudicial function when he
passed this order approving the
expenditure incurred by the
assessee on scientific research.
No such unilateral action or
determination could have been
taken by the respondent
Secretary particularly when he
chose to reduce the amount of
expenditure incurred on
scientific research as against
the amount claimed by the
assessee, to the detriment of
the assessee-company
resulting in an adverse double
tax effect as per the provisions
of the Act. [Para 12]
Be that as it may, this Court
would not like to pronounce
upon the includibility of these
expenses in the head of
'approved expenditure for
scientific research' at this stage
and it is considered appropriate
that the 1st respondent
Secretary himself is allowed to
reconsider the case on these
issues after allowing a
r easonable oppor tuni ty of
hearing to the assessee in this
regard. [Para 13]

K.P. Kumar, Sr. Counsel and T. Suryanarayana, Adv. for the Petitioner. Jeevan Neeralagi
, Adv. for the Respondent.

ORDER

1. The petitioner, Bosch Limited is a limited company and assessed under the provisions of
the Income Tax Act, 1961. The controversy involved in the present case is that the assessee
company applied for approval to the competent authority-respondent 1 in terms of S.35 (2AB) of
the Income Tax Act, 1961 (hereinafter referred to as the Act) for approval of the in-house research
and development facility and also to approve the expenditure incurred by the petitioner company
for such research and development work on the basis of which the petitioner company would be
entitled to claim the weighted deduction at the specified rate against its income for the relevant
year under the aforesaid provisions of the Act.
2. Though the research and development facility were duly approved by the 1st respondent,
Mr R. R. Abhyankar, Scientist G for and on behalf of the Secretary Department of Scientific &
Industrial Research (DSIR), Ministry of Science and Technology, Government of India, New Delhi
vide Annexure A dated 13.8.2009, but in the prescribed approval for expenditure vide Annexure C
in Form 3CL given by the successor-in-office on 20.1.2014 by Mr K V S P Rao, Scientist G of the
same Department, the total research and development expenditure (including land and building)
for two R & D Units, was approved by the said authority to the extent of Rs.6855.52 lakhs for the
Assessment Year 2011-12 (as against Rs. 6915.18 lakhs claimed by the assessee) and Rs.
3842.88 lakhs (as against Rs.3898.39 lakhs claimed by the assessee) for the Assessment Year
2012-13.
3. The assessee filed a representation to the said Department vide Annexure F on 4.3.2015
that the assessee found certain differences on the amount of expenditure as claimed by the
assessee as the amount of expenditure entitled for approval and deduction under S.35(2AB) of the
Act and the amount approved by the said authority, and that as inquired by them over telephone
and as orally communicated to them, though no such reason for deduction was assigned in writing
in the impugned order Annexure C dated 20.1.2015 and therefore, the assessee company was of
the belief that the capital expenditure other than land and building (motor vehicles) and recurring
expenses (salary and wages) paid to the trainees and apprentices was the amount of difference in
the aforesaid two assessment years to the extent of Rs.59.69 lakhs for the Assessment Year
2011-12 and Rs.55.51 lakhs for the Assessment Year 2012-13. The assessee, therefore,

requested the said respondent No.1 authority to reconsider the approval for the reduced amount
under the order impugned and to revise the same upwardly on the basis of the amount of R & D
expenditure actually incurred by them. Since such revision of the amount was not made by the
respondent authority, the petitioner company has filed the present writ petition before this Court.
4. Mr. K P Kumar, learned Senior counsel for the petitioner assessee urged that the
determination of the amount of R & D expenditure by the 1st respondent was done in the
impugned order - Annexure C dated 20.1.2014 without giving any prior show cause notice to the
petitioner assessee and also without giving an opportunity of hearing to the petitioner assessee
and secondly, the alleged reasons, as orally informed to the petitioner company, for the reduction
of the said R & D expenditure was on account of cost of motor vehicles of different brands
purchased by the petitioner company to test the original equipments supplied by the petitioner
company to those auto manufacturing companies to test as to whether the parts and components
supplied by the petitioner company were working properly or not and secondly, on account of the
salary and wages paid to the trainees and apprentices were no good ground for making any such
reduction of R & D expenditure for the purpose of S.35 (2AB) of the Act and therefore, a direction
deserves to be issued to the respondent to revise the said approval of expenditure and revise the
same upwardly to the extent claimed by the petitioner assessee.
5. On the other hand, Mr Jeevan Neeralgi, learned counsel for the Revenue submitted that it
is true that no reasons as such were assigned in writing in the impugned communication annexure
C Form 3CL itself for the amount of R & D expenditure approved by the said authority, but the
aforesaid reasons were narrated in the said writ petition and controverted in the reply filed on
behalf of the respondents and the same are justifiable reasons. Learned counsel, also urged that
the purchase cost of motor vehicles cannot be construed to be R & D expenditure and likewise,
the salary and wages paid to the trainees and apprentices while they are temporarily working in
the said company and are not regular employees of the said company, cannot be held to be a part
of the R & D expenses and therefore, the assessee would not be entitled to deduction under S.35
(2AB) of the Act of the said expenditure and thus, the impugned order deserves to be sustained.
6. I have heard the learned counsel for the parties at some length and perused the record.
7. The provisions of S.35(2AB) which provides for a weighted deduction under Chapter IV of
the Income Tax Act, 1961 in respect of 'Expenditure on Scientific Research' to promote such
research by the industry is reproduced below for ready reference.
"S:35(2AB) (1)
Where a company engaged in the business of biotechnology or in any business of manufacture or
production of any article or thing, not being an article or thing specified in the list of the Eleventh
Schedule 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 two times of the
expenditure."
8. It is not in dispute before this Court that the petitioner company had undertaken the
research work and had spent certain amount during the relevant assessment years on scientific
research, not being the capital expenditure in the nature of land and building and the conditions for
availing deduction under this provision were satisfied by the assessee, which would be clear from
the approval given by the 1st respondent himself in the prescribed Form 3CL - Annexure A dated
13.8.2009 and Annexure B dated 24.8.2012 and such R & D facilities were approved by the said
authority - Scientist G of the DSIR.
9. In the present case, the only dispute which arose for consideration by this Court is about
the quantum of such expenditure during these two relevant Assessment Years. It is apparent from
a bare perusal of the impugned order Annexure C in prescribed Form 3CL that no detailed
discussion about the reasons for determining the amount of R & D expenditure has been given,
comparing the same with the claim of the petitioner assessee in this regard. It is only after this
approval was given on 20.1.2014 that the assessee found that the amount approved is somewhat
less than the amount of expenditure claimed by it and thus tallying the same with its claim, the
assessee made a representation vide Annexure F dated 4.3.2015. The two reasons for the
reduction of the said amount were as indicated above namely, the cost of motor vehicles
purchased for testing the parts and the salary and wages paid to the trainees and apprentices.
10. Chapter IV of the Income Tax Act deals with computation of income under the provisions
of the Income Tax Act, 1961 and Part D relates to 'Profits and gains of business or profession'. In
that Part D of Chapter IV, S.35 provides for 'Expenditure on Scientific Research' and S.35 (2AB)
gives a weighted deduction of the amount of expenditure incurred by the assessee for in-house
research and development as approved by the prescribed authority who is the Secretary,
Department of Scientific and Industrial Research (DSIR), Government of India, is allowed while
computing the income under the head Profits & Gains from business.
11. Obviously, the purpose of giving this weighted deduction under this provision is to
encourage scientific research by the manufacturing units. The weighted deduction, as per the
provisions now existing, is to the extent of two times of the expenditure actually incurred by the
assessee on such scientific research. Therefore, obviously any reduction in the amount approved
for the purpose of this provision is likely to have a double effect on the taxability of profits and
gains of the assessee company. Undisputably before reducing the amount of R & D expenditure
for these two Assessment Years in question i.e., 2011-12 and 2012-13 to the extent of Rs.59.69
lakhs and 55.51 lakhs respectively, the said respondent Secretary did not give any prior show
cause notice and an opportunity of hearing to the petitioner assessee as to why these two
amounts under two different heads namely, cost of purchase of motor vehicles and salary and
wages of the trainees and apprentices, be not disallowed from the category of 'approved
expenditure on scientific research'. Thus, the assessee was deprived of its valuable right of

hearing and rebut and controvert the case against him on the basis of which, the said respondent
Secretary passed the impugned order approving the expenditure for scientific research as required
under the provisions of S.35 (2AB) of the Act at a reduced level. Had such a notice been given by
the said authority to the assessee company, perhaps the assessee company could have satisfied
the said authority about the genuineness of the claim and rational nexus of these expenses
relatable to the scientific research undertaken by it entitling it for claiming the weighted deduction
in respect of these expenses also under the category of approved expenditure for scientific
research under S.35(2AB) of the Act.
12. The impugned order is thus clearly hit by the vice of non-compliance of the principles of
natural justice or audi alterm partem, the applicability of which even to the taxing statute cannot be
ruled out. The competent authority passed this order under these provisions certainly exercising a
quasi-judicial function when he passed this order approving the expenditure incurred by the
assessee on scientific research. No such unilateral action or determination could have been taken
by the respondent Secretary particularly when he chose to reduce the amount of expenditure
incurred on scientific research as against the amount claimed by the assessee, to the detriment of
the assessee company resulting in an adverse double tax effect as per the provisions of the Act.
13. Be that as it may, this Court would not like to pronounce upon the includibility of these
expenses in the head of 'approved expenditure for scientific research' at this stage and it is
considered appropriate that the 1st respondent Secretary himself is allowed to reconsider the case
on these issues after allowing a reasonable opportunity of hearing to the assessee in this regard. It
is needless to say that the assessee would be entitled to make out its case for such aforesaid
inclusion of these expenses in the category of approved expenditure on scientific research and
rely upon all relevant material and case laws, if any, in this regard before the said respondent
Secretary.
14. The assessee may, in the first instance, appear before the said authority for this purpose
on 6th June, 2016 and it is expected from the 1st respondent to pass appropriate, speaking order
dealing with all the contentions raised by the assessee in this regard, within a period of six months
from today. It is needless to add that in case any adverse order is passed against the assessee
company by the 1st respondent Secretary or the competent authority in DSIR, the assessee
company would be free to avail further legal remedies in accordance with law.
15. With the above observations and directions, both the writ petitions are finally disposed of
at this stage. No order as to costs. Copy of this order be supplied to the parties forthwith.
VARSHA

*Matter remanded/In favour of assessee.