R&D Deduction Claim Cannot Be Rejected As Delayed When Audit Report Was Filed On Time: Bombay High Court

The Bombay High Court has ruled that an application for the DSIR's report on eligible in-house R&D expenditure (Form 3CL) cannot be treated as delayed where the company had submitted the required audit report (Form 3CLA) within the deadline for filing its income tax return.

“It must therefore be accepted that uploading of Form 3CLA by an Assessee to its e-filing account on the website of the Income Tax Department, on or before the due date of filing of the Return of Income, satisfies the requirement of Rule 6(7A)(c),” the court observed.

A Division Bench comprising Justice B.P. Colabawalla and Justice Firdosh P. Pooniwalla was hearing a petition filed by Sedemac Mechatronics Limited against the Department of Scientific and Industrial Research (DSIR).

The dispute concerned Sedemac's applications for the DSIR report (Form 3CL), which reports on the approval of its in-house research and development facility and quantifies the expenditure eligible for deduction.

Under Rule 6(7A)(c), Sedemac was required to electronically furnish its audit report (Form 3CLA) to the DSIR by the due date for filing its income tax return.

Sedemac had sought Form 3CL for Assessment Years 2018-19, 2019-20 and 2020-21.

The DSIR rejected the applications as delayed under its July 2017 Guidelines. By the time the matter reached the court, however, the dispute remained only for AY 2018-19 and AY 2020-21.

Sedemac told the court that its deduction claimed under Section 35(2AB) for AY 2019-20 had already been accepted.

Section 35(2AB) of the Income Tax Act allows eligible companies to claim a deduction for expenditure incurred on an approved in-house research and development facility, subject to the conditions prescribed under the provision.

One of those conditions under Rule 6(7A)(c) is that the company maintain a separate account for each approved facility and have it audited annually. The audit report (Form 3CLA) must then be furnished electronically to the DSIR by the due date for filing the income tax return.

Sedemac maintained that it had complied with this requirement.

For AY 2018-19, it submitted Form 3CLA on October 30, 2018. The return-filing deadline was October 31, 2018.

For AY 2020-21, it submitted Form 3CLA on December 24, 2020. The extended return-filing deadline was February 15, 2021.

The company also pointed out that the DSIR had registered itself on the Income Tax e-filing website as an external agency to receive Form 3CLA electronically.

The DSIR accepted in its reply that Form 3CLA filed electronically by Sedemac along with its income tax return could be accessed and viewed by the department.

The respondents, however, relied on DSIR records showing January 28, 2020 as the application date for AY 2018-19. The record showed February 25, 2021 as the application date for AY 2020-21.

They also relied on Sedemac's statement in its writ petition that some details had been submitted late after the company received approval.

The court rejected the objection that the applications should be treated as delayed on that basis.

It noted that Rule 6(7A)(c) required the company to electronically furnish the audit report (Form 3CLA) by the due date for filing its income tax return.

The court also noted that the DSIR had itself registered on the Income Tax e-filing website to receive the form electronically. Its reply further accepted that Form 3CLA filed by Sedemac along with its return could be accessed and viewed by the department.

Since Sedemac had submitted Form 3CLA within the respective return-filing deadlines, the court held that it had complied with Rule 6(7A)(c).

There was also an issue concerning further documents sought by the DSIR.

On May 30, 2024, the department gave Sedemac a final opportunity to furnish the required details, clarifications and documents by June 30, 2024.

Sedemac submitted the documents through letters dated June 17, 2024, which were emailed to the DSIR on June 19, 2024.

The court therefore held that the DSIR's October 25, 2024 order, insofar as it rejected Sedemac's applications for AY 2018-19 and AY 2020-21 on the ground of delay, was unsustainable.

It set aside the order to that extent and directed the DSIR to decide the two applications on merits.

The DSIR was also directed to compute the expenditure eligible for deduction under Section 35(2AB) in accordance with law.

No direction was issued for AY 2019-20 since Sedemac's return for that year had already been accepted as filed.

For Petitioner: Advocate Nishant Thakkar, along with Advocates Hiten Thakkar, Jasmin Amalsadvala and Yachika, instructed by Lumiere Law Partners.

For Respondents: Advocate Akhileshwar Sharma.