ITAT Chennai on Section 35(2AB) R&D Deduction, Software TDS Disallowance & Aircraft Depreciation in Ashok Leyland Ltd. Vs DCIT

1. Background of the Appeals

The Chennai Bench of the Income Tax Appellate Tribunal dealt with cross appeals in the case of Ashok Leyland Ltd. Vs DCIT arising from the order of the Commissioner of Income Tax (Appeals)-16, Chennai, dated 15.12.2023, for Assessment Year 2010-11.

  • ITA No.361/Chny/2024 – filed by the assessee
  • ITA No.482/Chny/2024 – filed by the Revenue

The Tribunal examined:

  • Eligibility and quantum of weighted deduction under Section 35(2AB) on R&D expenditure
  • Disallowance under Section 40(a)(i) on software purchase due to alleged non-deduction of TDS on royalty under Section 9(1)(vi)
  • Application of Section 14A read with Rule 8D in determining book profit under Section 115JB
  • Depreciation and operating expenditure on an aircraft
  • Rate of depreciation allowable on UPS

The assessee’s appeal was partly allowed, while the Revenue’s appeal was dismissed, except that the aircraft depreciation issue was remanded for fresh examination.

2. Weighted Deduction on R&D Expenditure under Section 35(2AB)

2.1 Disallowance by the Assessing Officer

The assessee operated three in-house R&D centres, duly recognized by the Department of Scientific and Industrial Research (DSIR) as required under Section 35(2AB) of the Income Tax Act 1961.

The assessee claimed weighted deduction on R&D expenditure amounting to Rs.35,92,94,618/-. The Assessing Officer restricted the claim by relying solely on figures mentioned in Form 3CL, observing that:

  • As per DSIR’s Form 3CL,
    • Scientific research capital expenditure approved: Rs.4306.28 lakhs
    • Revenue expenditure approved (net of income): Rs.11901.80 lakhs
  • Based on this, the AO curtailed the weighted deduction to the level of expenditure quantified by DSIR and disallowed the balance.

2.2 View of the CIT(A)

The CIT(A) upheld the AO’s approach, holding that:

  • Section 35(2AB) permits weighted deduction only on expenditure approved by DSIR
  • Form 3CL is the operative basis for quantifying eligible expenditure
  • The AO has no independent authority to allow weighted deduction beyond what DSIR records in Form 3CL

Accordingly, the assessee’s plea to allow weighted deduction on the entire audited R&D expenditure was rejected.

2.3 Tribunal’s Analysis

The Tribunal noted the following undisputed facts:

  • The assessee’s three in-house R&D facilities were formally approved by DSIR as required under Section 35(2AB)
  • R&D costs claimed for these approved centres were audited and certified in the statutory financial statements
  • DSIR’s role under the law as it then stood was to approve the facility, not necessarily to quantify or certify the amount of expenditure for the purpose of deduction, prior to a later amendment

The key legal benchmark applied by the Tribunal was the law before the amendment of Rule 6(7A) of the Income Tax Rules 1962, which took effect from 01.07.2016 (applicable from AY 2017-18).

Pre-amendment position:
For the period prior to 01.07.2016, the “prescribed authority” (DSIR) was required to report on the approval of the in-house R&D facility in Form 3CL, but there was no statutory requirement that it quantify the eligible expenditure in that form as a binding condition for deduction.

The Tribunal referred to its earlier ruling in M/s. Sundaram Fasteners Ltd. and the decision cited therein in the case of Crompton Greaves Ltd., where it was held that:

  • Before the 2016 amendment to Rule 6(7A), DSIR’s quantification of R&D expenditure in Form 3CL was not a condition precedent for the assessee to claim weighted deduction on actual approved in-house R&D spend.
  • Once the R&D facility is approved, the assessee’s duly supported and audited expenditure on that facility qualifies for deduction under Section 35(2AB) for those years, even if DSIR’s approval of quantum is not specifically recorded.

Applying this settled position, the Tribunal concluded that:

  • For AY 2010-11, the Assessing Officer and CIT(A) were not justified in restricting the assessee’s weighted deduction strictly to the amount quantified in Form 3CL.
  • Non-approval or partial quantification of expenditure by DSIR in Form 3CL for that period does not, by itself, bar the assessee from claiming deduction on the full eligible R&D outlay incurred on an approved facility.

2.4 Tribunal’s Direction

The Tribunal allowed the assessee’s ground on this issue and directed:

  • The AO shall grant weighted deduction under Section 35(2AB) on R&D expenditure amounting to Rs.35,92,94,618/-.

3. Disallowance of Software Expenditure under Section 40(a)(i)

3.1 Basis of Disallowance by AO

The next dispute concerned a disallowance of Rs.1,03,21,040/- representing amounts paid for acquisition of software from abroad, without deduction of tax at source.

Key facts:

  • The assessee had acquired off-the-shelf application software for its R&D centres.
  • These payments were capitalised in the books as software assets.
  • No TDS was deducted on these remittances.

The AO: