Failed 35(2AB) Claim Due to Missing Form 3CL Still Eligible for 100% R&D Deduction.

By | November 4, 2025
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Failed 35(2AB) Claim Due to Missing Form 3CL Still Eligible for 100% R&D Deduction.

Issue

If a taxpayer’s claim for a weighted R&D deduction under Section 35(2AB) fails due to the non-submission of the mandatory quantification in Form 3CL, can they make an alternative claim for a 100% deduction of revenue R&D expenses (under Section 35(1)(i)) and depreciation on R&D assets (under Section 32)?

Facts

  • The assessee, a chemical manufacturer, claimed a 150% weighted deduction under Section 35(2AB) for its in-house R&D expenses.
  • While the assessee had the DSIR approval (Form 3CM), it failed to obtain the mandatory quantification report (Form 3CL) from the DSIR because it had not submitted the required details.
  • During the assessment, the assessee withdrew its claim under Section 35(2AB) and instead made an alternative claim for:
    1. A 100% deduction for the revenue R&D expenditure (under Section 35(1)(i)).
    2. Depreciation on the capital R&D assets (under Section 32(1)).
  • The Assessing Officer (AO) disallowed the original claim and the alternative claim, arguing that (a) a new claim required a revised return, and (b) the research was not related to the assessee’s business.

Decision

  • The High Court remanded the matter back to the Assessing Officer for fresh factual examination.
  • It held that the AO’s reasoning for disallowing the alternative claim was incorrect. The research conducted by the manufacturer was “scientific research related to the business” as defined in Section 43(4)(iii).
  • Therefore, the assessee was legally entitled to make the alternative claim for a 100% deduction on revenue expenses (under Section 35(1)(i)) and depreciation on capital expenses (under Section 32(1)).
  • However, since the AO had never factually verified the documents and evidences for these expenses (having dismissed the claim on legal grounds), the case was sent back for the limited purpose of factual examination of the expenses.

Key Takeaways

  • Alternative Claim is Admissible: A failure to secure the mandatory Form 3CL for a weighted deduction under Section 35(2AB) does not prevent the taxpayer from claiming the actual expenditure (100%) as a regular R&D deduction or as depreciation.
  • No Revised Return Needed: A taxpayer can withdraw a claim and make a new, alternative claim during the assessment proceedings itself. A revised return is not the only mechanism for this.
  • R&D “Related to Business”: R&D conducted by a manufacturer to improve its products or processes is considered “scientific research related to the business,” even if research is not the primary business of the assessee.
  • Remand for Factual Verification: While the legal right to claim the alternative deduction was upheld, the court correctly remanded the case to the AO to perform the factual verification of the expenses, a step that had been skipped earlier.
IN THE ITAT INDORE BENCH
Malwa Oxygen & Industrial Gases (P.) Ltd.
v.
Income-tax Officer, NFAC, Delhi
Paresh M. Joshi, Judicial Member
and B.M. Biyani, Accountant Member
IT Appeal No.713 (Ind) of 2024
[Assessment year 2018-19]
OCTOBER  7, 2025
Pankaj Shah and Soumya Bomb, ARs for the Appellant. Ashish Porwal, Sr. DR for the Respondent.
ORDER
B.M. Biyani, Accountant Member.- Feeling aggrieved by order of first appeal dated 29.07.2024 passed by learned Commissioner of Income-Tax (Appeals)-NFAC, Delhi [“CIT(A)”] which in turn arises out of assessment-order dated 17.04.2021 passed by learned National e-assessment Centre [“AO”] u/s 143(3) r.w.s. 144B of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2018-19, the assessee has filed this appeal on following grounds:
“1. On the facts and circumstances of the case and in law the learned CIT(A) erred in making disallowance of deduction under Section 35(2AB) of the Act amounting to Rs. 78,72,495. The Appellant prays that the said disallowance be directed to be deleted.
2. On the facts and circumstances of the case and in law the learned CIT(A) erred in not allowing the deduction under section 35(2AB) of the Act amounting to Rs. 78,72,495 merely for non-furnishing of Form 3CL. He failed to appreciate and ought to have held that the requirement is mere directory and procedural in nature. The Appellant prays that the said disallowance of deduction under section 35(2AB) be directed to be deleted.
3. Without prejudice to Ground 1 above and on the facts and circumstances of the case and in law the learned CIT(A) erred in not allowing the normal deduction of such expenses under section 35(1) and 37(1) of the Act in respect of revenue expenditure incurred amounting to Rs. 24,79,955/-. The Appellant prays that deduction of expenses be directed to be allowed.
4. Without prejudice to Ground 1 above and on the facts and circumstances of the case and in law the learned CIT(A) erred in not allowing the capitalisation of disallowed capital expenditure claimed under section 35(2AB) of the Act. The Appellant prays that the disallowed capital Research and development expenses be capitalised and consequent depreciation be directed to be allowed.
5. On the facts and circumstances of the case and in law the learned CIT(A) erred in not allowing the consequent deductions and allowances permissible under the Act and assessing the correct income in law. The Appellant prays that the deductions and allowances allowable under law be directed to be allowed.
6. The Appellant craves leave to add, amend any or all grounds at the time of hearing. “
2. The background facts leading to present appeal are such that the assessee-company is engaged in the business of manufacturing intermediates and speciality chemicals. For AY 2018-19, the assessee filed its return of income declaring a total income of Rs. 16,63,99,350/-. The case of assessee was selected for scrutiny-assessment and the AO passed assessment-order u/s 143(3) assessing total income at Rs. 17,42,71,840/-after making certain adjustments. Aggrieved, the assessee carried matter in first-appeal and succeeded partly. Still aggrieved, the assessee has come in next appeal before us.
3. The assessee has raised as many as 6 grounds in Form No. 36 as noted above. But during hearing, Ld. AR for assessee confined his pleadings to the grievances of assessee raised in Ground No. 3 & 4 only. Accordingly, in the discussions to follow, we adjudicate those grounds. Rest of the grounds are dismissed as non-pressed/non-pleaded.
4. The facts apropos to Ground No. 3 & 4 are such that during scrutiny proceeding, the AO found that the assessee had claimed a weighted deduction of Rs. 78,72,495/- u/s 35(2AB) on account of expenditure incurred for ‘scientific research’. The deduction of Rs. 78,42,495/- was claimed at Rs. 24,79,955/- by way of debit in P&L A/c (+) at Rs. 53,92,540/- by way of adjustments in the return of income through necessary additions/deductions. Further, the deduction of Rs. 78,72,495/-was worked out @ 150% of aggregate expenditure of Rs. 52,48,330/-[Revenue expenditure of Rs. 24,79,955/- (+) Capital expenditure of Rs. 27,68,375/-] in terms of provision of section 35(2AB) applicable at the relevant time. The AO asked assessee to furnish various details/ documents/reports/certificates in support of claim and the assessee filed replies [Paras 2, 2.1 to 2.5 of assessment-order]. The assessee, however, could not arrange/furnish Report in Form No. 3CL of prescribed authority i.e. the Secretary, Department of Scientific and Industrial Research, Ministry of Science and Technology, Govt. of India [referred as “DSIR” in short] as required by sub-section (4) of section 35(2AB), although the assessee filed Form No. 3CM [the order of approval of research-project issued by DSIR] & Form No. 3CLA [the report of a CA] to AO. Ultimately, finding inability to arrange/furnish Form No. 3CL, the assessee made following submission vide reply-letter dated 15.03.2021 to AO; the assessee’s letter is re-produced by AO in Para 2.5 of assessment-order reading as under:
“With reference to the above, as brought to our knowledge vide the response by DSIR to the notice u/s 133(6) of the Income Tax Department, that the assessee company could not submit details/documents as per Section “C” of DSIR guidelines, for A.Y. 2018-19 (F.Y. 2017-18) by 31/10/2018 and therefore file could not be processed for issuing report in Form 3CL by DSIR to the Principal Chief Commissioner of Income tax or Chief Commissioner of Income Tax or Principal Director General of Income Tax or Director General of Income Tax having jurisdiction over the company and hence we seek to withdraw our claim of deduction u/s 35(2AB) of Rs. 78,72,495/- in accordance with the law, which was bonafidely claimed earlier in the Income Tax Return relying upon Form 3CL (it should be Form 3CM) issued by the Secretary, DSIR and form 3CL (it should be Form 3CLA) issued by the chartered Accountant.
However, it is also kindly requested to allow the following expenses on account of change in allowability of Research & Development – Revenue Expenditure & Capital Expenditure from the total income of the assessee company as under:-

1. The Research & Development Revenue Expenditure of Rs. 24,79,955/-debited to Profit & Loss account having been incurred in the normal course of business activity.

2. The Depreciation on fixed Assets under Research & Development acquired during the year at an amount of Rs. 2,65,234/- being the sum of Depreciation @ 15% on purchase of R&D Assets for Rs. 7,68,075/- on 30/06/2017 (Put to use for more than 180 days) at Rs. 1,15,211/- and Depreciation @ 15% on purchase of R&D Assets for Rs. 20,00,300/- on 03/11/2017 (Put to use for less than 180 days) at Rs. 1,50,023/-.

On account of aforesaid disallowance of Rs. 78,72,495/- and further allowance of Rs. 24,79,955/- & Rs. 2,65,234/-, there is a net addition of Rs.51,27,306/- to the returned income, thereby giving rise to an additional tax demand liability along with interest thereon at Rs. 24,13,290/- after adjusting the refund amount due to the assessee.
In regards to the same, we enclose herewith the copy of tax challan deposited for Rs. 24,13,290/- vide CIN 19105 on date 15/03/2021 with State bank of India BSR code 0013283 towards the payments of regular tax demand as aforesaid.
It is humbly requested to your honour to kindly regularize the tax demand and conclude the assessment proceedings with a prayer not to further initiate any kind of penalty / penalties in respect of the aforesaid additional income assessed as the assessee company acted in bonafide manner relying upon the reports from the authorities.
The company assessee maintained separate books of accounts for the approved facility vide Form 3CM issued by the Secretary, DSIR which had been duly audited annually and a report of Audit in Form 3CLA furnished electronically to the income Tax Department on 08/10/2018 vide e-filing acknowledgement number 327430291081018 i.e. before the due date of furnishing the income tax return on 31/10/2018. The copy of Form 3CLA acknowledgement is enclosed herewith.
And that the company assessee did actually had carried on the activities of Research & Development which is an essential & integral part to run this line of manufacturing business of producing products of chemicals, intermediates & gases etc. in which the company assessee is into.
And also importantly the company assessee eventually co-operated with the income Tax department by promptly depositing the due taxes on being acknowledged. “
5. Thus, through above letter, the assessee consented before AO to disallow the weighted deduction of Rs. 78,72,495/- claimed u/s 35(2AB) but simultaneously requested the AO to grant alternative claim of 100% deduction of revenue expenditure of Rs. 24,79,955/- and depreciation of Rs. 2,65,234/- on capital expenditure of Rs. 27,68,375/-. The assessee agreed for ‘net disallowance’ of Rs. 51,27,306/- [Rs. 78,72,495 (-) Rs. 24,79,955 (-) Rs. 2,65,234]; voluntarily paid differential tax and submitted challan to AO. However, the AO disallowed the deduction of Rs. 78,72,495/- in entirety without giving any benefit of alternative claim requested by assessee. The order passed by AO is re-produced below:
“2.6. Conclusion: In response to details gathered u/s 133(6) from DSIR and notice issued u/s 142(1) on 09/ 03/2021 the assessee admitted that claim made u/s 35(2AB) is not allowable to it and assessee also paid taxes of Rs. 24,13,290/- on 15/03/2021. As clearly admitted by assessee the total claim of assessee of Rs. 78,72,495/- (Rs. 24,79,955/- claimed in Profit & loss account and Rs. 53,92,540/- claimed in return of income under u/s 35(2AB) is disallowed. In the return assessee claimed these expenditure as incurred for inhouse scientific research and claimed deduction u/ s 35(2AB).
The claim of the assessee was not found genuine and same was withdrawn by assessee itself. This means that the expenditure was not incurred as per the claim made by assessee in return. In the return of income, assessee had not claimed that expenditure was incurred for business but had claimed that it was incurred for scientific research. To do a scientific research is not assessee’s business and therefore the expenditure cannot be allowed as business expenditure as claimed by assessee in its submission.
Further any additional claim can be made only by filling revised return within the prescribed time. No such revised return was filed by assessee to claim expenses. Making submission does not permit assessee to revise its claim made in return. The claim of the assessee is only an after-thought when the deduction was disallowed. Therefore, request of the Assessee is rejected.
2.7 Show cause notice alongwith Draft assessment order was sent to the assessee on 10/04/2021 and assessee replied on 11/04/2021. Reply of the assessee is considered carefully but not found acceptable on following ground:
Assessee has claimed that expenses was claimed for in-house research, however claim could not be justified during course of assessment. Since the expenses incurred is not incurred for normal business of assessee as claimed by assessee itself it is not found allowable u/s 37 of IT Act. Section 37 says that expenses incurred wholly & exclusively for business purpose is allowable. In this case it was claimed in the return the expenditure was claimed for research & not for business. Since assessee is not doing business of research and development, therefore the expenditure is not allowable.
2.8 In view of the above facts, the claim u/s 35(2AB) of Rs. 78,72,495/- is not allowable and is hereby disallowed and added to the total income of the assessee for the year under consideration. I am satisfied that the assessee committed a default as per the provision of section 270A(9)(a) of the act for misrepresentation or suppression of facts. Therefore, the penalty provision of section u/s 270A(9)(a) are initiated separately.
[Disallowance of Rs. 78,72,495/-]”
6. During first appeal, the CIT(A) upheld AO’s action by passing following order:
“6.1 From the above discussion, it is clear that the appellant failed to produce supporting evidences for claim of expenditure incurred towards scientific research before the Secretary DSIR, Government of India. As a result, the Secretary DSIR, Government of India did not submit Form 3CL to the Director General (Income tax Exemption) and to the Principal Chief Commissioner of Income Tax. This fact is also admitted by the appellant. Therefore, the essential condition required for allowing deduction u/s 35(2AB) of the Act could not be met by the appellant. Thus, I do not find any reason to differ from the finding of Ld. AO. Ground of the appellant is dismissed.
7.0 Third, fourth and fifth ground of the appellant relates to the allowability of Research and Development Revenue Expenditure of Rs. 24,79,955 debited to Profit and Loss account on the ground that same has been incurred in the normal course of business activity. The appellant also claims that it is entitled to claim of depreciation of Rs. 2,65,234/- on the fixed assets acquired for the purposes of research and development. The submission of the appellant in this respect is considered. I find that the appellant has not produced any evidence in support of revenue expenditure of Rs. 24,79,955/- and purchase of equipment for research and development to strengthen its claim that such expenses has been incurred. It is also seen that this evidence was also never produced before the Secretary DSIR, Government of India because of which the deduction u/s 35(2AB) was denied to the appellant. If the necessary evidence was available with the appellant, same should have been produced before the secretary, DSIR. Ld. AO in the assessment order has discussed that to do scientific research is not the business of the appellant, therefore the expenditure even if found genuine cannot be allowed as business expenditure. Thus, based on fact and circumstances discussed, I do not find any merit in the submission of the appellant and these grounds are dismissed. “
7. Accordingly, the controversy to be adjudicated by us is whether or not the assessee should be granted 100% deduction of revenue expenditure of Rs. 24,79,955/- and depreciation of Rs. 2,65,234/- for capital expenditure of Rs. 27,68,375/-.
8. We have heard learned Representatives of both sides and carefully perused the case record including the orders of lower authorities and the documents filed in Paper-Book to which our attention has been drawn in the light of applicable provisions of law.
9. The AO has cited two reasons for disallowing assessee’s claim. The first reason given by AO is that the assessee did not file any revised return making alternative claim. Although the AO has not specifically mentioned but this reasoning seems to be in tune with Goetze (India) Ltd. v. CIT ITR 323 (SC) wherein the Hon’ble Apex Court has held that a fresh claim can be made only by filing a revised return. However, in the set of facts of present assessee, we are of the view that the reasoning given by AO is not valid in as much as the assessee had already made claim of deduction in the P&L A/c and return of income filed. The only problem was that the assessee claimed deduction u/s 35(2AB) but could not arrange/furnish Report of DSIR in Form No. 3CL as required by section 35(2AB). Consequently, there arose a necessity to deny weighted deduction of 150% u/s 35(2AB) but then the assessee becomes eligible to get 100% deduction u/s 35(1)(i) for revenue expenses and depreciation u/s 32 for capital expenses. Thus, the alternative claim arises due to shifting from section 35(2AB) to sections 35(1)(i)/32 and it is not a case of making a new or fresh claim before AO so that Goetz India will come in the way. Even otherwise, various courts have already analysed Goetze India and held that that Goetz India will apply to AO but not hamper appellate authority’s power to accept and allow legal claims of assessee. Therefore, we reject the first reasoning given by AO.
10. The second reason given by AO is such that the expenditure was not incurred for business. To strengthen his observation, the AO has also mentioned ”to do a scientific research is not assessee’s business”. Therefore, Ld. AR was asked to give a detailed explanation as to how the expenditure or research was ‘related to assessee’s business’? In response, Ld. AR referred following documents filed in Paper-Book:
(i)Page 3 of Paper-Book – Form No. 3CM dated 16.10.2017 which is an order issued by DSIR for approving research-project undertaken by assessee. This order clearly contains:
“2. Nature of business of the company – Production of Drug Intermediates and Speciality Chemicals.
3. Objectives of scientific research to be conducted by inhouse Research and Development facility – (a) To develop & design eco-friendly novel process to produce safer product, (b) To covert hazardous by-products into non-hazardous inputs”
(ii)Page 4-5 of Paper-Book – A synopsis titled “Details on R&D Activities” filed by assessee-company to DSIR for obtaining Form No. 3CM wherein it is clearly mentioned that the assessee-company developed more than 50+ new products, etc. and it is continuing to develop more advanced products.
(iii)Page 11-13 of Paper-Book – Form No. 3CL which is a Report issued by CA giving certification as to the details of research and the expenses incurred by assessee.
(iv)Page 14-18 of Paper-Book – Documents of earlier year (including Form No. 3CM) wherein similar research was carried by assessee. Ld. AR also narrated that the deduction was allowed to assessee in earlier years.
11. The above documents were deliberated during hearing and it is found that the research conducted by assessee satisfies the definition of ‘scientific research related to business’ as prescribed in section 43(4)(iii) of the Act for the purpose of section 35(1)(i):
“43(4)
(iii) references to scientific research related to a business or class of business include –
(a) any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all businesses of that class;
(b) XXX”
Ld. DR for revenue could not show as to how the research undertaken by assessee as substantiated by Ld. AR with reference to various documents discussed earlier, does not satisfy the requirement of section 43(4)(iii). Therefore, after a careful consideration, we arrive at a conclusion that the research undertaken by assessee is related to assessee’s business. Therefore, we reject the second reasoning given by AO also.
12. Having rejected the twin-reasons assigned by AO for denial of assessee’s claim, we now proceed to examine whether or not the assessee’s alternative claim of 100% deduction of revenue expenses u/s 35(1)(i) and depreciation u/s 32 is in order?
13. So far as the claim of revenue expenses u/s 35(1)(i) is concerned, we refer the provision of section reading as under:
“35. Expenditure on scientific research:
(1) In respect of expenditure on scientific research, the following deductions shall be allowed –
(i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business.”
We have already accepted in foregoing para that the research undertaken by assessee is related to business. There is no further condition of any report/certification of any authority for admissibility of deduction u/s 35(1)(i). Thus, in principle, we agree that the assessee is entitled to 100% deduction of revenue expenses u/s 35(1)(i).
14. Coming to the claim of depreciation u/s 32(1) for capital expenses, we refer the provision of section reading as under:
“32. Depreciation:
(1) In respect of depreciation of –
(i) Building, machinery, plant or furniture, being tangible assets;
(ii) Know-how, patents., being intangible assets.
Owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deduction shall be allowed.”
We agree that the conditions imposed in this section for allowability of depreciation are also satisfied. Thus, in principle, we agree that the assessee is entitled to deduction of depreciation u/s 32(1) for capital expenditure.
15. In view of above discussion, we accept, in principle, that the assessee is entitled to 100% deduction of revenue expenses u/s 35(1)(i) and appropriate amount of depreciation u/s 32(1) for capital expenses. However, from the order of AO as well as CIT(A), it is clearly discernible that the complete details of various expenses incurred by assessee were either not filed before AO or have not been examined by AO. Therefore, we are inclined to refer this matter to the file of AO to allow deduction u/s 35(1)(i) or depreciation u/s 32(1) after factual examination of documents/evidences of expenses. Needless to mention that the AO shall give necessary opportunities to assessee and the assessee shall also file the details/ documents/evidences required by AO so that the issue is finally closed and does not invite further proceedings. With this, the ground No. 3 & 4 are allowed for statistical purposes.
16. Resultantly, this appeal is partly allowed for statistical purposes.