Court Upholds Weighted Deduction for R&D Expenses, Even for Uninstalled Machinery

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Case Name: 

Commissioner of Income Tax (LTU) and Another Vs Biocon Ltd. (High Court of Karnataka)

ITA No.435 of 2014

Date: 1st June 2015

Key Takeaways:

1. Section 35(2AB) (of Income Tax Act, 1961) does not require machinery to be installed before the end of the relevant financial year for weighted deduction.

2. The entire expenditure incurred for R&D facilities is eligible for weighted deduction.

3. Courts should interpret tax laws based on plain reading without adding words not present in the statute.

Issue:

Does Section 35(2AB) (of Income Tax Act, 1961) require machinery to be installed and commissioned before the end of the relevant financial year for the assessee to claim weighted deduction on R&D expenses?

Facts:

1. The case pertains to the assessment year 2003-04.

2. Biocon Ltd. is engaged in manufacturing enzymes and pharmaceutical ingredients.

3. The company incurred capital expenditure of Rs.7,82,25,431/- on machinery for R&D.

4. This amount included Rs.2,72,59,589/- for three items of machinery not yet installed or commissioned.

5. The Assessing Officer disallowed weighted deduction for the uninstalled machinery.

6. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal disagreed with the Assessing Officer's decision.

Arguments:

Assessing Officer's Argument:

- Machinery must be installed and commissioned before the end of the financial year to qualify for weighted deduction under Section 35(2AB) (of Income Tax Act, 1961).

Biocon Ltd.'s Argument:

- Section 35(2AB) (of Income Tax Act, 1961) doesn't specify a requirement for installation or commissioning of machinery within the financial year.

- The entire expenditure incurred for R&D should be eligible for weighted deduction.

Key Legal Precedents:

The judgment doesn't mention specific legal precedents but emphasizes the importance of interpreting tax laws based on their plain meaning without adding words not present in the statute.

Judgement:

1. The High Court agreed with the Income Tax Appellate Tribunal's decision.

2. The court held that Section 35(2AB) (of Income Tax Act, 1961) doesn't require machinery to be installed and commissioned before the end of the financial year. 

3. The entire expenditure incurred for R&D facilities is eligible for weighted deduction under Section 35(2AB) (of Income Tax Act, 1961).

4. The court emphasized that reading additional requirements into the statute creates absurdity and goes against principles of statutory interpretation. 

FAQs:

1. Q: What does Section 35(2AB) (of Income Tax Act, 1961) cover?

  A: It covers weighted deduction for expenditure on scientific research and development facilities.

2. Q: Does the machinery need to be functional by the end of the financial year to claim deduction?

  A: No, the court ruled that installation and commissioning are not required within the financial year.

3. Q: What's the significance of this judgment for companies investing in R&D?

  A: It allows companies to claim weighted deduction on R&D expenses even if machinery is not yet operational, potentially encouraging more R&D investment.

4. Q: How did the court interpret Section 35(2AB) (of Income Tax Act, 1961)?

  A: The court used a plain reading approach, focusing on what the law explicitly states without adding implied conditions.

5. Q: Was there any evidence of machinery installation in this case?

  A: Yes, the judgment mentions that an installation certificate was issued on 31.3.2004 for three scientific machines, though this wasn't the basis of the court's decision. 

1. The assessee is engaged in the business of manufacture of enzymes and pharmaceutical ingredients.

The matter pertains to return of income for the assessment year 2003-04. The records reveal that during the relevant assessment year, the assessee has incurred certain expenditure on capital towards cost of machinery for a sum of Rs.7,82,25,431/-. The assessing Officer noticed that the said amount included a sum of Rs.2,72,59,589/- incurred towards three items of machinery. The assessing Officer also noticed that the said three items of machinery have not been installed and commissioned and therefore the assessee is not entitled for weighted deduction under Section 35(2AB) (of Income Tax Act, 1961) (‘Act’ for short) and hence held that such expenditure does not amount to expenditure incurred during that period. The Commissioner of Income Tax (Appeals), Bangalore as well as the Income Tax Appellate Tribunal disagreed with the said conclusion reached by the assessing Officer and have held that the assessing Officer is not justified in not allowing weighted deduction under Section 35(2AB) (of Income Tax Act, 1961), inasmuch as the words which are not provided in the statute are sought to be read into, by the assessing Officer.

2. We do not find any ground to disagree with the conclusion reached by the Commissioner of Income Tax (Appeals) and the appellate Tribunal. What Section 35(2AB) (of Income Tax Act, 1961) speaks of is (a) development of facilities; (b) incurring of expenditure by the assessee for development of such facilities; (c) approval of facility by the prescribed authority, which is ‘DSIR’; and (d) allowance of weighted deduction on the expenditure so incurred by the assessee.

3. On plain reading of the said provision makes it amply clear that the assessee has to develop facility by incurring expenditure for scientific research and he will have to file application before the prescribed authority, who after following the proper procedure, will allow the application or otherwise and the assessee would be entitled for weighted deduction in respect of all expenditure so incurred. The provision nowhere suggests or implies that machinery is required to be installed and commissioned before the expiry of the relevant previous year. The provision postulates approval of ‘R & D’ facility, which implies that a development facility shall be in existence, which in turn, presupposes that the assessee must have incurred expenditure in this behalf. The appellate Tribunal has rightly concluded that in case if the interpretation of the assessing Officer is accepted, it creates absurdity in the provision, inasmuch as the words which are not provided in the statute are to be read into, which is against the settled proposition of law with regard to plain and simple meaning of the provision. The plain and homogenous reading of the provisions would suggest that the entire expenditure incurred in respect of ‘R & D’ has to be allowed for weighted deduction under Section 35(2AB) (of Income Tax Act, 1961).

Even on facts, it has been found by the assessing Officer that an installation certificate had been issued on 31.3.2004 by one Mr.Virupaksha (concerned officer) evidencing that three scientific machines were installed. Hence, we do not find any ground to interfere with the orders passed by the Income Tax Appellate Tribunal and no substantial question of law is involved in this appeal.

Accordingly, appeal fails and same stands dismissed.

Sd/-

JUDGE

Sd/-

JUDGE