Facts of the Case

The present appeal was filed by the Revenue under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal concerning Assessment Year 2003–04.

The respondent-assessee, Panacea Biotec Ltd., filed its return declaring income and claimed a weighted deduction of ₹7.72 crore under Section 35(2AB), being 150% of expenditure incurred on in-house research and development.

However, the Assessing Officer disallowed the deduction on the ground that approval from the Department of Scientific and Industrial Research (DSIR) was not available at the time of assessment (30.03.2006).

Subsequently, the assessee produced DSIR approval dated 20.07.2006 before the Commissioner of Income Tax (Appeals) as additional evidence under Rule 46A of the Income Tax Rules, 1962, which was admitted and deduction allowed.

The Tribunal upheld the CIT(A)’s decision, leading to the present appeal before the Delhi High Court.

 Issues Involved

  1. Whether the Tribunal erred in holding that the Revenue had not challenged admission of additional evidence under Rule 46A.
  2. Whether DSIR approval obtained after the assessment order could be considered for allowing deduction under Section 35(2AB).
  3. Whether the Tribunal’s order was perverse for ignoring alleged additional grounds raised by the Revenue. 

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the CIT(A) wrongly admitted additional evidence (DSIR approval) under Rule 46A.
  • It was argued that such approval was not available at the time of assessment and therefore deduction should not be allowed.
  • The Revenue claimed it had filed amended grounds before the Tribunal challenging admission of additional evidence, but the Tribunal failed to consider them.

Respondent’s Arguments (Assessee)

  • The assessee argued that DSIR approval was eventually granted and therefore the deduction under Section 35(2AB) was valid.
  • It was submitted that no additional grounds were raised by the Revenue before the Tribunal.
  • The assessee also filed affidavits stating that neither any amended grounds were filed nor served, and no such issue was argued before the Tribunal.

Court’s Findings / Order

The Delhi High Court held:

  • There was no conclusive material to establish that the Revenue had raised additional grounds before the Tribunal.
  • In absence of records (which were stated to have been weeded out), presumption of correctness of Tribunal’s record would prevail.
  • The Court observed that the Revenue could have sought rectification under Section 254(2) if there was any mistake in the Tribunal’s order.
  • It was undisputed that DSIR approval was granted on 20.07.2006.
  • The assessee had also been allowed deduction under Section 35(2AB) in earlier and subsequent years.

Accordingly, the Court upheld the Tribunal’s order and ruled in favour of the assessee, dismissing the Revenue’s appeal.

Important Clarification

  • Subsequent approval from DSIR can be considered for allowing deduction under Section 35(2AB), especially when the approval is ultimately granted.
  • Admission of additional evidence under Rule 46A will not be interfered with unless procedural violation is clearly established.
  • Failure of the Revenue to properly raise or substantiate grounds before the Tribunal weakens its case at the High Court stage.

Sections Involved

  • Section 35(2AB), Income Tax Act, 1961 (Weighted deduction for in-house R&D)
  • Section 260A, Income Tax Act, 1961 (Appeal to High Court)
  • Section 254(2), Income Tax Act, 1961 (Rectification of mistake)
  • Rule 46A, Income Tax Rules, 1962 (Additional evidence before CIT(A))

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:7288-DB/SKN10012019ITA752009_133057.pdf

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