DSIR certification rules shift weighted deduction binding limits post-01.07.2016, while balance additional depreciation remains claimable in succeeding years.

By | August 3, 2026
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DSIR certification rules shift weighted deduction binding limits post-01.07.2016, while balance additional depreciation remains claimable in succeeding years.

Issue

  1. R&D Weighted Deduction (Pre & Post-01.07.2016): Whether DSIR quantification in Form 3CL is binding for computing weighted deduction under Section 35(2AB) for AY 2016-17 versus AYs 2017-18 to 2018-19 following the amendment to Rule 6(7A).

  2. Additional Depreciation Carryover: Whether the remaining 50% of additional depreciation under Section 32(1)(iia) on assets used for less than 180 days can be claimed in the immediately succeeding assessment year.

  3. Section 14A / Rule 8D Computation: Whether the “average of total assets” in the denominator under Rule 8D(2)(ii) must be computed using gross assets from the balance sheet rather than written down values or net current assets.

  4. Alternative Claim for Unapproved R&D Costs: Whether R&D expenditure excluded by DSIR for weighted deduction under Section 35(2AB) can still qualify for 100% deduction under Section 35(1)(i) or Section 35(1)(iv).

Facts

  • Ground I (AY 2016-17 R&D): The assessee claimed ₹5.07 crores under Section 35(2AB). DSIR certified ₹4.54 crores in Form 3CL. The AO restricted the deduction to the DSIR figure, disallowing ₹1.07 crores without doubting the expenditure’s genuineness.

  • Ground II (Additional Depreciation): The assessee claimed the balance 50% additional depreciation under Section 32(1)(iia) in AY 2016-17 for plant and machinery put to use for under 180 days in the preceding year. The AO disallowed the claim, citing a lack of explicit statutory provision.

  • Ground III (Rule 8D Denominator): The AO recomputed Section 14A disallowance by taking net current assets and written-down values as the denominator instead of gross total assets per the balance sheet, inflating the disallowance.

  • Ground IV (AYs 2017-18 & 2018-19 R&D): Post the Rule 6(7A) amendment (w.e.f. 01.07.2016), DSIR certified a lower amount in Form 3CL than claimed by the assessee for these assessment years.

  • Ground V (Alternate R&D Deduction): The assessee requested that any R&D expenditure disallowed for weighted deduction under Section 35(2AB) be allowed as normal revenue or capital R&D expenditure under Section 35(1)(i) and Section 35(1)(iv).

Decision

  • Ground I (In favor of Assessee – AY 2016-17): For AY 2016-17, DSIR quantification was not statutorily binding. Full weighted deduction is allowable as long as DSIR approval (Form 3CM) exists and expenditure is genuine.

  • Ground II (In favor of Assessee): The restriction under the second proviso to Section 32(1)(iia) affects only the year of allowance, not the entitlement. The balance 50% additional depreciation is allowable in the succeeding year.

  • Ground III (In favor of Assessee): The denominator for Rule 8D(2)(ii) must strictly adhere to the gross “average of total assets as appearing in the balance sheet.” The AO cannot substitute WDV or deduct current liabilities.

  • Ground IV (In favor of Revenue – AYs 2017-18 & 2018-19): Post the 01.07.2016 amendment to Rule 6(7A), DSIR quantification in Form 3CL is binding on tax authorities for Section 35(2AB) claims.

  • Ground V (Matter Remanded): Exclusion from weighted deduction under Section 35(2AB) does not automatically disqualify expenditure from normal deductions under Section 35(1)(i) or 35(1)(iv). Matter restored to the AO for de novo verification.

Key Takeaways

  • Temporal Cut-off for Form 3CL Binding Nature: Form 3CL certified by DSIR is advisory for assessment years prior to 01.07.2016, but becomes strictly binding on Assessing Officers for AY 2017-18 onwards.

  • Preservation of Unclaimed Additional Depreciation: Additional depreciation under Section 32(1)(iia) does not lapse merely because an asset was used for less than 180 days in the initial year; the unabsorbed 50% carries over automatically.

  • Literal Interpretation of Rule 8D: Assessing Officers cannot alter the statutory formula under Rule 8D by introducing net asset concepts or WDV into the denominator when the rule explicitly specifies gross balance sheet assets.

  • Fallback Provisions for R&D Expenditure: If a deduction fails to qualify for the weighted incentive under Section 35(2AB), the assessee retains the right to claim 100% deduction under general scientific research provisions (Section 35(1)).

IN THE ITAT MUMBAI BENCH ‘D’
Deputy Commissioner of Income-tax
v.
Deepak Nitrite Ltd.*
Siddhartha Nautiyal, Judicial Member
and Vikram Singh Yadav, Accountant Member
IT Appeal Nos. 148, 149, 1127 & 1128 (Mum.) of 2026
CO Nos. 193 & 194 (Mum.) of 2026
[Assessment years 2016-17 to 2018-19]
JUNE  25, 2026
Sandeep Lakra, CIT DR for the Appellant. Dilip Bapat for the Respondent.
ORDER
1. These are the appeals filed by the assessee and revenue for A.Y 2016-17, 2017-18 & 2018-19 and cross objections filed by the assessee for A.Ys: 201617, 2017-18. Since common facts and issues for consideration are in involved for various years under consideration before us, all the appeals are being disposed of by way of a common order.
ITA Number 1127/Mum/2026, Assessment Year 2016-17)
The revenue has raised the following Grounds of Appeal
1. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of deduction made by the Assessing Officer under section 35(2AB) of the Income-tax Act, 1961, without properly appreciating the statutory role of the Department of Scientific and Industrial Research (DSIR) in granting approval for eligible expenditure.
2. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that approval by DSIR is a mandatory condition for allowing weighted deduction under section 35(2AB) of the Act and that the Assessing Officer was justified in restricting the deduction to the extent of expenditure not approved, recognized by DSIR.
3. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that DSIR is competent only to recognize the in-house R&D facility and has no authority in 3 relation to approval OR disallowance of R&D expenditure, ignoring the provisions of section 35(2AB) read with Rule 6(7A) and Form No. 3CL, which clearly require quantification and approval of eligible expenditure by DSIR.
4. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has erred in law in allowing the deduction merely on the ground that the assessee had fulfilled the conditions prescribed under section 35(2AB), without appreciating that fulfillment of conditions alone does not entitle the assessee to weighted deduction in the absence of approval of eligible expenditure by the prescribed authority.
5. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance made by the Assessing Officer on account of brought-forward additional depreciation claimed under section 32(1)(iia) of the Income-tax Act, 1961, in respect of assets put to use for less than 180 days in the preceding previous year.
6. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has erred in treating the amendment brought by insertion of the third proviso to section 32(1) by the Finance Act. 2015 with effect from 01.04.2016, as clarificatory and retrospective in nature, whereas the said amendment is prospective and applicable only from Assessment Year 2016-17 onwards, as expressly stated by the legislature.
7. Whether on the fact and circumstances of the case and in law, the I.d. CIT(A) has erred in deleting the addition of made by the 7 Assessing Officer under section 14A of the Income-tax Act, 1961, over and above the disallowance already offered by the assessee in the return of income.
8. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that, for the purposes of computing disallowance under section 14A read with Rule 8D of 8 the Income-tax Rules, 1962, the Assessing Officer was required to consider the gross value of assets, instead of the written down value (WDV) of fixed assets and net current assets after reducing current liabilities, as adopted by the Assessing Officer.
9. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) has erred in interfering with the method adopted by the Assessing Officer, without demonstrating that the computation made by the Assessing Officer was contrary to the provisions of section 14A read with Rule 8D of the Income-tax Rules, 1962.
2. The brief facts of the case are that a search and seizure action under section 132 of the Act was conducted in the Deepak Group on 15.11.2018 and consequent thereto the assessment for A.Y. 2016-17 was completed under section 153A of the Act vide order dated 24.04.2021. During the course of assessment proceedings, the Assessing Officer examined, amongst other things, the assessee’s claim for weighted deduction under section 35(2AB) of the Act, the claim of balance additional depreciation under section 32(1)(iia) of the Act and the computation of disallowance under section 14A read with Rule 8D. The assessee had claimed weighted deduction under section 35(2AB) of the Act in respect of expenditure incurred on approved in-house research and development facilities. On verification of Form 3CL issued by the Department of Scientific and Industrial Research (DSIR), the Assessing Officer observed that while the assessee had claimed weighted deduction on R&D expenditure amounting to Rs. 5.07 crore, DSIR had certified expenditure only to the extent of Rs. 4.54 crore. Accordingly, the Assessing Officer held that the differential expenditure of Rs. 53.33 lakh was not eligible and denied weighted deduction thereon amounting to Rs. 1,06,65,416/- (on the ground that that only expenditure approved by DSIR in Form 3CL qualified for weighted deduction). The Assessing Officer proceeded on the basis that the quantification made by DSIR in Form 3CL was binding for determining the amount eligible for deduction under section 35(2AB) of the Act. The Assessing Officer further noticed that the assessee had claimed additional depreciation of Rs. 2,00,04,913/- being the balance 50% of additional depreciation pertaining to assets acquired and put to use for less than 180 days in the preceding year. According to the Assessing Officer, section 32(1)(iia) of the Act contemplated allowance of additional depreciation only in the year of acquisition and installation of the machinery and there was no express provision which enabled the assessee to claim the unabsorbed balance 50% in the subsequent year. Accordingly, the Assessing Officer disallowed the claim of balance additional depreciation. The Assessing Officer held that since only 50% additional depreciation was allowable in the year in which the assets were put to use for less than 180 days, the remaining 50% lapsed and could not be carried forward to the succeeding year. With regard to disallowance under section 14A of the Act, the Assessing Officer was not satisfied with the suo motu disallowance offered by the assessee and computed the disallowance under Rule 8D. While computing average investments and average assets, the Assessing Officer considered investments in debt-oriented mutual funds and growth funds, also adopted the written down value of fixed assets and net current assets after reduction of liabilities. Accordingly, the Assessing Officer computed a higher amount of disallowance under Rule 8D and made an addition over and above the amount disallowed by the assessee in the return of income.
3. Aggrieved by the above additions, the assessee preferred an appeal before the CIT(Appeals). After considering the submissions and examining the remand report, the CIT(A) observed that the sole basis of the disallowance under section 35(2AB) of the Act was the lower certification with respect to in Form 3CL and the Assessing Officer had not brought any material on record to suggest that the expenditure was either bogus or not connected with scientific research. The CIT(A) noted that the assessee had a valid approval in Form 3CM and prior to amendment of Rule 6(7A), there was no statutory requirement that the quantum of expenditure had to be approved by DSIR. The CIT(Appeals) placed reliance on the various decisions and held that approval of the facility and not approval of the expenditure was the relevant criterion under section 35(2AB) as the law stood prior to A.Y. 2017-18. The CIT(A) held that the assessee had fulfilled all conditions prescribed under section 35(2AB) of the Act and deletion the disallowance of Rs. 1,06,65,416/-. Thus, the CIT(A) held that the amendment to Rule 6(7A) requiring certification of expenditure by DSIR operated prospectively and could not be applied to A.Y. 2016-17.
4. With regard to additional depreciation under section 32(1)(iia) of the Act, the assessee submitted before the CIT(A) that the machinery in question had been acquired during the second half of the preceding year and, owing to usage for less than 180 days, only 50% additional depreciation had been allowed in that year. The assessee submitted that the restriction to 50% in the year of acquisition was merely a timing restriction and did not result in extinguishment of the balance entitlement. The assessee submitted that section 32(1)(iia) of the Act granted a one-time incentive for acquisition of new plant and machinery and such beneficial provision ought to be construed liberally. The assessee submitted that the amendment brought by Finance Act, 2015 permitting allowance of the balance depreciation in the succeeding year was clarificatory in nature and intended to remove ambiguity. The assessee also pointed out that the Assessing Officer had not disputed the eligibility of the assets or the fact that 50% additional depreciation had already been allowed in the preceding year. The CIT(A) accepted the contentions of the assessee. He observed that the assessee had fulfilled all the conditions prescribed under section 32(1)(iia) and the only dispute related to the timing of allowance of the remaining 50%. The CIT(A) held that the amendment introduced by Finance Act, 2015 was clarificatory and the legislative intent was that the assessee should not be deprived of the full benefit of additional depreciation merely because the assets had been used for less than 180 days in the year of acquisition. Accordingly, the CIT(A) held that the assessee was entitled to claim the balance 50% additional depreciation in the immediately succeeding year. The CIT(Appeals) observed that the assessee’s claim was in fact continuation of the statutory benefit already allowed in the preceding year and therefore deleted the disallowance of Rs. 2,00,04,913/-.
5. With regard to the issue arising under section 14A of the Act, the Assessing Officer observed that the assessee had adopted the average of gross total assets appearing in the balance sheet, whereas the Assessing Officer held that for the purposes of the formula prescribed in Rule 8D, the value of total assets should be taken after reducing depreciation and after considering net current assets, i.e., current assets as reduced by current liabilities. Accordingly, instead of taking the gross value of fixed assets, the Assessing Officer considered the written down value (WDV) of fixed assets and also reduced current liabilities from current assets while arriving at average total assets. Since the denominator in the formula was reduced by adopting WDV and net current assets, the ratio of average exempt investments to average total assets became higher, resulting in a larger amount of interest expenditure being attributed to exempt income and consequently an led to enhancement of disallowance under section 14A over and above the amount voluntarily disallowed by the assessee. The Assessing Officer accordingly held that the assessee’s computation based on gross assets was incorrect and recomputed the disallowance under Rule 8D by considering WDV of fixed assets and net current assets.
6. Before the CIT(Appeals), the assessee challenged this methodology adopted by the Assessing Officer and submitted that Rule 8D required consideration of “average of total assets as appearing in the balance sheet” and did not consider substitution of gross assets by written down values or reduction of current assets by current liabilities. The assessee submitted that the expression “total assets” in Rule 8D refers to the gross assets appearing in the balance sheet and not the net block or net current assets. The assessee pointed out that the reduction of current liabilities and adoption of WDV had reduced the value of total assets and thereby inflated the disallowance under section 14A.
7. The CIT(Appeals), after considering the submissions, accepted the contention of the assessee. He observed that the difference between the computation made by the Assessing Officer and the one offered by the assessee arose on two counts, firstly, difference in the average value of investments and secondly difference in the average value of total assets. The CIT(A) noted that the Assessing Officer had adopted a methodology which had the effect of inflating the disallowance. The CIT(Appeals) accepted the assessee’s contention that average total assets had to be taken with reference to the gross figures appearing in the balance sheet and not on the basis of WDV of fixed assets or net current assets after adjustment of liabilities. The CIT(A) held that the Assessing Officer was not justified in reducing the denominator by considering written down values and net current assets, since Rule 8D considered average total assets as appearing in the balance sheet. Therefore, the methodology adopted by the assessee based on gross assets was accepted by CIT(Appeals) and he deleted the additional disallowance made by the Assessing Officer.
8. The Department is in appeal before us against the order passed by CIT(Appeals) allowing the appeal of the assessee on the aforesaid issues.
9. Ground Numbers 1 to 4 raised by the revenue are with regard to claim for weighted deduction under section 35(2AB) of the Act.
10. The controversy involved in Ground Nos. 1 to 4 of the Revenue’s appeal is whether, for A.Y. 2016-17, the weighted deduction under section 35(2AB) of the Act is to be restricted to the amount quantified by the Department of Scientific and Industrial Research (DSIR) in Form No.3CL or whether once the in-house R&D facility stands approved in Form No.3CM, the entire expenditure incurred by the assessee on such approved facility is entitled to weighted deduction. For the year under consideration, the relevant provisions of section 35(2AB) of the Act as they stood are reproduced below:
“(2AB) Where a company engaged in the business of biotechnology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the Eleventh Schedule, incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to two times of the expenditure so incurred.”
11. Rule 6(7A) of the Income Tax Rules, as applicable for the year under consideration, provided that the prescribed authority shall submit its report in relation to the approval of in-house research and development facility in Form No.3CL. Notably, neither section 35(2AB) nor Rule 6(7A), as applicable for A.Y. 2016-17, mandated that the amount of expenditure should necessarily be quantified and approved by DSIR as a condition precedent for allowability of deduction. The emphasis under the Statute was on approval of the facility and not approval of each item of expenditure.
12. We find that there is no dispute that the assessee possessed valid approval from DSIR in Form No.3CM in respect of its “in-house” R&D facilities. The Assessing Officer has not doubted the genuineness of the expenditure nor has he brought any material on record to suggest that the expenditure claimed by the assessee was not incurred on scientific research activities. The only basis for disallowance by the Assessing Officer was that the amount certified in Form No.3CL was lower than the expenditure claimed by the assessee. In our considered view, such an approach is not sustainable in law.
13. The CIT(Appeals), while deleting the addition, has correctly noticed that prior to the amendment brought in Rule 6(7A), the role of DSIR was confined to granting approval to the facility and Form No.3CL was only a reporting mechanism.
14. In Asstt. CIT v. Intas Pharmaceuticals Ltd.  (Ahmedabad – Trib.), the Ahmedabad ITAT held that prior to 1-7-2016, DSIR’s role was confined to approval of R&D facility and not quantification of expenditure, and deduction could not be restricted merely to amount mentioned in Form 3CL. In Pharmanza Herbal (P.) Ltd. v. Dy. CIT 203 ITD 159 (Ahmedabad – Trib.), the Ahmedabad ITAT held that prior to amendment to section 35(2AB) by Finance Act of 2015, w.e.f. 1-4-2016, prescribed authority, DSIR, was not required in law to quantify amount of expenditure incurred on in-house research and development facility, such quantification, if any done by prescribed authority in Form No. 3CL was not required to be taken cognizance of by Revenue authorities. In Provimi Animal Nutrition India (P.) Ltd. v. Pr. CIT 187 ITD 214 (Bangalore – Trib.), the Bangalore ITAT held that prior to 1-7-2016, Form 3CL granting approval by prescribed authority in relation to quantification of weighted deduction under section 35 (2AB) had no legal sanctity and it was only with effect from 1-7-2016 with amendment to rule 6(7A)(b) that quantification of weighted deduction under section 35(2AB) has significance.
15. We therefore note that the amendment to Rule 6(7A), whereby the prescribed authority was required to certify the quantum of expenditure eligible for deduction, was brought in subsequently. The very fact that the Rule had to be amended validates that no such requirement existed earlier. In the absence of any requirement in the Statute or the Rules that the amendment was retrospective, the same has necessarily to be construed prospectively. The settled principle of law is that unless expressly provided, a provision imposing additional conditions for claiming a deduction cannot be applied retrospectively.
16. We also find merit in the observation of the CIT(Appeals) that the Assessing Officer has not pointed out any defect in the supporting evidence produced by the assessee nor has he disputed that the expenditure was incurred wholly and exclusively on scientific research activities carried on in the approved facilities. In such circumstances, we are of the considered view that denial of weighted deduction merely because DSIR certified a lower amount in Form No.3CL is contrary to the scheme of section 35(2AB) as it stood during the year under consideration. Accordingly, we find no infirmity in the order of Ld. CIT (Appeals) so as to call for any interference.
17. In the result, Ground Nos.1 to 4 raised by the Revenue are dismissed.
18. Ground Numbers 5 to 6: claim of balance additional depreciation under section 32(1)(iia) of the Act.
19. Ground Nos. 5 and 6 of the Revenue’s appeal challenge the action of the CIT(Appeals) in allowing the claim of Rs. 2,00,04,913/- being the balance 50% of additional depreciation in respect of eligible plant and machinery acquired during the preceding previous year and put to use for less than 180 days. The case of the Revenue is that in the absence of any specific enabling provision under the law as it stood prior to insertion of the third proviso to section 32(1), the balance 50% of additional depreciation could not have been claimed in the subsequent year. For the year under consideration, section 32(1)(iia) provided as under:
“(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing., a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii).”
Further, the second proviso to section 32(1) provided as under:
“Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) ………………… is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be.”
20. A plain reading of the above provisions shows that section 32(1)(iia) grants a one-time incentive equal to 20% of the actual cost of eligible machinery and the second proviso merely restricts the quantum allowable in the year of acquisition to 50% where the asset is put to use for less than 180 days. Notably, neither section 32(1)(iia) of the Act nor the second proviso stipulates that the balance 50% shall lapse or stand extinguished. Thus, the restriction imposed by the second proviso is only with regard to the year of allowance and not with regard to the entitlement itself.
21. We find that the controversy raised by the Revenue is no longer res integra. The Hon’ble Karnataka High Court in CIT v. Rittal India (P.) Ltd. 380 ITR 423 (Karnataka) held that additional depreciation is a beneficial provision intended to encourage industrialization and that once the assessee satisfies the conditions prescribed under section 32(1)(iia), the balance 50% of additional depreciation, which could not be allowed in the first year because of the restriction contained in the second proviso, would be allowable in the immediately succeeding year. Similar view has been taken by the Hon’ble Madras High Court in CIT v. Shri T.P. Textiles (P.) Ltd. 394 ITR 483 (Madras). Further, in CIT v. Brakes India Ltd., the Hon’ble Madras High Court held that denial of the balance additional depreciation would defeat the very object of the provision and the SLP filed by the Revenue against the said decision was dismissed by the Hon’ble Supreme Court. Subsequently, in CIT v. Aztec Auto (P.) Ltd. [2020]  (Madras), the Hon’ble Madras High Court reiterated that section 32(1)(iia) grants a one-time incentive and the balance 50% cannot be denied merely because the machinery had been put to use for less than 180 days in the year of acquisition.
22. We further note that the Finance Act, 2015 inserted the third proviso to section 32(1) with effect from 01.04.2016, which reads as under:
“Provided also that where an asset referred to in clause (iia) is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under clause (iia) in respect of such asset is restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year under the second proviso, then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under clause (iia) in the immediately succeeding previous year in respect of such asset.”
The Memorandum explaining the provisions of the Finance Bill, 2015 stated as under:
“As a result, the balance fifty per cent of the additional depreciation is not available in subsequent years. This has created discrimination in respect of an asset which is installed and put to use for less than one hundred and eighty days in comparison to an asset which is installed and put to use for more than one hundred and eighty days. In order to remove this discrimination, it is proposed to amend section 32 of the Act so as to provide that the balance fifty per cent of the additional depreciation on new plant and machinery acquired and used for less than one hundred and eighty days, which has not been allowed in the year of acquisition and installation, shall be allowed in the immediately succeeding previous year.”
23. Therefore, as on A.Y. 2016-17, the third proviso specifically formed part of the Statute and specifically recognized the assessee’s entitlement to the balance 50% additional depreciation in the immediately succeeding year. Even otherwise, the above judicial pronouncements have consistently held that the amendment merely removes an anomaly and is declaratory of the legislative intent underlying section 32(1)(iia) of the Act. Thus, whether viewed from the standpoint of the statutory provision as applicable to A.Y. 2016-17 or from the settled judicial position laid down by various High Courts, the assessee is entitled to the balance 50% additional depreciation.
24. Accordingly, we find no infirmity in the order passed by the CIT(Appeals), we uphold the same and dismiss Ground Nos. 5 and 6 raised by the Revenue.
25. Ground Numbers 7 to 9: Deletion of disallowance under section 14A of the Act.
26. Ground Nos. 7 to 9 of the Revenue’s appeal challenge the action of the CIT(Appeals) in deleting the disallowance made by the Assessing Officer under section 14A read with Rule 8D. The principal controversy before us is with regard to the mechanism of computation under Rule 8D and, specifically \, whether while computing the average total assets for the purposes of Rule 8D(2)(ii), the Assessing Officer was justified in considering the written down value of fixed assets and net current assets after reducing current liabilities instead of taking the gross value of assets appearing in the balance sheet.
27. For the year under consideration, Rule 8D(2)(ii), as applicable to A.Y. 2016-17, provided that the amount of expenditure by way of interest not directly attributable to any particular income or receipt shall be computed according to the following formula:
“A x B/C
Where ‘A’ = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year;
‘B’ = the average of value of investment, income from which does not or shall not form part of the total income, appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year;
‘C’ = the average of total assets as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year.”
28. Thus, the denominator prescribed by the Rule is the “average of total assets as appearing in the balance-sheet”. The Rule does not provide for substitution / replacement of gross assets by written down value of assets nor does it specify reducing current liabilities from current assets. The expression used by the Rule is “total assets as appearing in the balance-sheet” and not “net assets”, “net current assets” or “written down value of fixed assets”.
29. In the present case, we find that the Assessing Officer, while computing the denominator ‘C’ in the above formula, reduced depreciation from fixed assets and adopted the written down value thereof and also reduced current liabilities from current assets. By adopting such methodology, the average value of total assets got reduced, thereby increasing the ratio B/C and thereby inflating the amount of interest attributable to exempt income.
30. In our considered view, the approach adopted by the Assessing Officer is contrary to the plain language of Rule 8D(2)(ii). Once the Rule specifically refers to “average of total assets as appearing in the balance-sheet”, neither the Assessing Officer nor the assessee can any different expression into the Rule. The computation mechanism prescribed by Rule 8D is mandatory and has to be applied strictly in accordance with the formula provided therein. It is well settled that while applying a statutory formula, nothing can be added to or subtracted from the words expressly prescribed therein.
31. In our view, once Rule 8D itself prescribes that the denominator shall be the average of total assets “as appearing in the balance sheet”, the Assessing Officer was not justified in replacing the gross figures appearing in the balance sheet by written down values or by reducing current liabilities from current assets. The statutory formula cannot be rewritten by the Assessing Officer on the basis of his own understanding of what constitutes “assets”. Any such exercise would amount to modifying the Rule itself, which is impermissible.
32. Accordingly, we uphold the order passed by the CIT(Appeals). Ground Nos. 7 to 9 raised by the Revenue are accordingly dismissed.
In the result, the appeal filed by the revenue is dismissed.
Assessee’s Cross Objection for assessment year 2016-17 (CO Number 193/Mum/2026)
33. Before us, the Counsel for the assessee submitted that he shall not be pressing for CO for the impugned assessment year.
Accordingly, the same is dismissed as “Not Pressed”.
Assessment year 2017-18 (the assessee’s appeal in ITA Number 148/Mum/2026
The assessee has raised the following Grounds of Appeal
1.1 Weighted deduction under section 35(2AB) of the Income Tax Act (Act):
On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [CIT(A)], has erred in upholding disallowance of weighted deduction of Rs 2,07,03,764 under section 35(2AB) of the Act being two times of the expenditure incurred on scientific research on in-house research and development facility.
1.2 Deduction under section 35(1)(i) of the Act:
Without prejudice, on the facts and circumstances of the case and in law, the learned CIT(A), has erred in denying deduction of Rs 56,13,495 under section 35(1)(i) of the Act being revenue expenditure incurred on scientific research related to the business of the appellant.
1.3 Deduction under section 35(2) (ia) of the Act:
Without prejudice, on the facts and circumstances of the case and in law, the learned CIT(A), has erred in denying deduction of Rs 47,38,387 under section 35(2) (ia) of the Act being capital expenditure incurred on scientific research related to the business of the appellant.
34. The brief facts of the case are that during the course of assessment proceedings, the Assessing Officer examined the assessee’s claim of weighted deduction under section 35(2AB) of the Act in respect of expenditure incurred on approved in-house research and development facilities. The assessee had claimed deduction under section 35(2AB) of the Act amounting to Rs. 7,30,03,882/-, comprising revenue expenditure of Rs. 5,58,72,495/- and capital expenditure of Rs. 1,71,31,387/-. On verification of Form No. 3CL issued by the Department of Scientific and Industrial Research (DSIR), the Assessing Officer observed that the prescribed authority had approved only Rs. 6,26,52,000/-, consisting of revenue expenditure of Rs. 5,02,59,000/- and capital expenditure of Rs. 1,23,93,000/-. Thus, according to the Assessing Officer, expenditure aggregating to Rs. 1,03,51,882Z- comprising revenue expenditure of Rs. 56,13,495/-and capital expenditure of Rs. 47,38,387/- had not been approved by DSIR.
35. The Assessing Officer was of the view that by virtue of section 35(2AB) read with Rule 6(7A) of the Income-tax Rules, deduction under section 35(2AB) could be granted only to the extent the expenditure was quantified and approved by the prescribed authority in Form No. 3CL. The Assessing Officer observed that the Secretary, DSIR, being the prescribed authority under Rule 6(1B), was empowered not only to approve the research and development facility but also to quantify the expenditure eligible for weighted deduction. According to the Assessing Officer, once the prescribed authority had approved expenditure only to the extent of Rs. 6,26,52,000/-, the excess expenditure claimed by the assessee amounting to Rs. 1,03,51,882/- was not eligible for weighted deduction. Accordingly, the Assessing Officer disallowed weighted deduction at 200% on the aforesaid differential amount and made an addition of Rs. 2,07,03,764/- to the return of income filed by the assessee. While rejecting the submissions of the assessee, the Assessing Officer held that approval of expenditure in Form No. 3CL was a mandatory precondition for claiming deduction under section 35(2AB) of the Act.
36. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(Appeals). The CIT(Appeals) examined the issue in the light of the amended provisions of Rule 6(7A), which had come into force with effect from 01.07.2016. The CIT(Appeals) observed that unlike the earlier years, clause (b) had been inserted in Rule 6(7A), which specifically required the prescribed authority (DSIR) to furnish in Part B of Form No. 3CL the quantification of expenditure incurred on in-house research and development facility eligible for weighted deduction under section 35(2AB) of the Act. According to the CIT(Appeals), with effect from A.Y. 2017-18, the Statutory scheme itself specified the authority of DSIR to determine the quantum of eligible expenditure and therefore the Assessing Officer was justified in restricting the weighted deduction to the amount approved by DSIR. The CIT(Appeals) noted that the assessee’s contentions on this issue were similar to those raised in earlier years; however, in view of the amendment to Rule 6(7A), he held that the position of law had undergone a material change from A.Y. 2017-18 onwards. The CIT(Appeals) accordingly held that the Assessing Officer was justified in disallowing weighted deduction under section 35(2AB) amounting to Rs. 2,07,03,764/- and thus confirmed the principal addition.
37. The CIT(Appeals) thereafter considered the alternate grounds raised by the assessee. He observed that out of the total expenditure claimed by the assessee, DSIR had declined approval only to the extent of Rs. 1,03,51,882/-, comprising revenue expenditure of Rs. 56.13 lakh and capital expenditure of Rs. 47.39 lakh. The CIT(Appeals) noted that neither the Assessing Officer nor the prescribed authority had recorded any adverse finding regarding the genuineness of the expenditure. There was also no dispute regarding the nexus of the expenditure with the business carried on by the assessee. However, according to the CIT(Appeals), once the competent authority had not approved the expenditure as qualifying research and development expenditure, the assessee could not seek deduction of the same under sections 35(1)(i) and 35(2), since those provisions also dealt with expenditure incurred on scientific research. The CIT(Appeals), therefore, rejected the assessee’s alternate claim under sections 35(1)(i) and 35(2) of the Act. At the same time, CIT(Appeals) held that in the absence of any adverse findings regarding the genuineness and business nexus of the expenditure, the same could not be disallowed altogether. Accordingly, the CIT(Appeals) held that the revenue expenditure of Rs. 56,13,495/- should be allowed as normal business expenditure under section 37(1) of the Act. In respect of the capital expenditure of Rs. 47,38,387/-, the CIT(Appeals) upheld the disallowance as revenue deduction but directed the Assessing Officer to capitalize the said amount to the relevant block of assets and allow depreciation thereon in accordance with section 32(1) of the Act. Thus, while sustaining the disallowance of weighted deduction under section 35(2AB) of the Act amounting to Rs. 2,07,03,764/-, the CIT(Appeals) granted consequential relief by allowing revenue expenditure of Rs. 56.13 lakh under section 37(1) and directing allowance of depreciation on capital expenditure of Rs. 47.39 lakh. Accordingly, the appeal of the assessee was partly allowed.
38. The assessee is in appeal before us against the order passed by the CIT(Appeals) sustaining the disallowance of weighted deduction under section 35(2AB) amounting to Rs. 2,07,03,764/- and rejecting the assessee’s alternate claims under sections 35(1)(i) and 35(2), though granting consequential relief under section 37(1) and section 32(1) of the Act.
39. We have heard the rival contentions and perused the material on record. We find that the assessee had claimed weighted deduction under section 35(2AB) of the Act amounting to Rs. 7,30,03,882/- in respect of expenditure incurred on approved in-house research and development facilities. The prescribed authority, namely the Department of Scientific and Industrial Research (DSIR), approved expenditure only to the extent of Rs. 6,26,52,000/- and consequently expenditure aggregating to Rs. 1,03,51,882/-, comprising revenue expenditure of Rs. 56,13,495/- and capital expenditure of Rs. 47,38,387/-, was excluded by DSIR while issuing Form No. 3CL. Accordingly, the Assessing Officer disallowed weighted deduction of Rs. 2,07,03,764Z- and the said action was confirmed by the CIT(Appeals).
40. With respect to Ground Number 1.1 of the assessee’s appeal, we observe that as the law as it stood for A.Y. 2017-18, Rule 6(7A)(b), inserted with effect from 01.07.2016, specifically provided for furnishing of a report in Form No. 3CL containing, inter alia, the quantification of expenditure incurred on in-house research and development facility eligible for weighted deduction under section 35(2AB). Therefore, unlike the position prevailing in earlier years, the authority of DSIR to quantify eligible expenditure was Statutorily recognized. The Assessing Officer merely adopted the quantification made by the prescribed authority and restricted the deduction accordingly. In these circumstances, we are of the considered opinion that the CIT(Appeals) was justified in confirming the disallowance of weighted deduction amounting to Rs. 2,07,03,764Z- under section 35(2AB). We accordingly uphold the order of the CIT(Appeals) on this issue and dismiss the grounds raised by the assessee challenging the disallowance under section 35(2AB) of the Act.
41. Before us, the learned Counsel for the assessee further submitted (while arguing Ground Number 1.1) that no specific reasons had been furnished by DSIR while excluding expenditure aggregating to Rs. 1,03,51,882Z- and therefore the correctness of such exclusion should be examined by the Tax Authorities including Appellate Authorities under the Income-tax Act. We are unable to accept the aforesaid contention. Section 35(2AB) read with Rule 6(1B) and Rule 6(7A), as applicable to A.Y. 2017-18, contemplates a complete Statutory mechanism whereby the prescribed authority (DSIR) acts as an expert body for approval and quantification of expenditure incurred on in-house research and development facilities. By virtue of the amendment brought in Rule 6(7A) with effect from 01.07.2016, the prescribed authority has been specifically empowered to quantify in Part B of Form No. 3CL the expenditure eligible for weighted deduction under section 35(2AB). Therefore, once the Statute itself entrusts such quantification to a specialized authority, neither the Assessing Officer nor the Appellate Authorities can substitute their own views in place of the opinion of the prescribed authority, who are the subject matter experts on the subject.
42. The assessee was admittedly interacting directly with DSIR and had furnished all details and explanations before the prescribed authority. Therefore, it cannot now be contended that the quantification made by DSIR should be reopened before the Income-Tax Authorities. Acceptance of such a proposition would lead to anomalous consequences because every determination made by DSIR would become subject to scrutiny by the Assessing Officer and the CIT(Appeals), thereby rendering the role assigned to the prescribed authority otiose.
43. The Hon’ble Gujarat High Court in Pr. CIT v. B.A. Research India Ltd.  (Gujarat) has elaborately explained that the DSIR is a specialized body having expertise in the field of scientific research and development and the requirements under the statutory scheme are highly technical in nature and have therefore been consciously entrusted to an expert body. The Hon’ble High Court categorically held that once the prescribed authority examines the conditions and grants approval, the Revenue authorities cannot sit in judgment over the decision of such authority, since any contrary view would create a conflict in the decision-making process and render the role assigned to the expert body otiose. The Court further held that while the Assessing Officer may verify the accounts and the eligibility of the claim from the standpoint of the Act, he cannot ignore or override the determination made by the prescribed authority on matters falling within its domain. The Hon’ble High Court made the following observations:
17. Thus the Statutory scheme envisages the prescribed authority as a body which can minutely examine all these highly technical and scientific requirements in case of a company. We may recall that the prescribed authority is the Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India. It has experts at its command in the field of scientific research to advise it on various extremely complex scientific issues which may arise while granting, extending or recalling the approval. In this context, the requirements contained in clauses (c) to (e) of sub-rule (1) of rule 18DA would also have to be necessarily examined by the said authority. When these clauses refer to requirement of adequate infrastructure such as laboratory facilities, well formulated research and development programme and engagement of the company exclusively in scientific research and development activities, the same would be within the realm of the said prescribed authority.
18. Under the circumstances, once such authority grants approval and such approval holds the field, it would not be open for the Assessing Officer or any other revenue authority to go behind such approval certificate and re-examine for himself, the fulfilment of the conditions contained in sub-rule (1) of rule 18DA. These conditions are prescribed in terms of clause No.(iv) of sub-section (8A) of section 80-IB of the Act. The Commissioner was therefore, completely in error in observing that even though the assessee company had valid approval issued by the prescribed authority, the Assessing Officer still had to examine whether such company had fulfilled the conditions referred to in clause (iv), as such other conditions as may be prescribed, reference to which we find in rule 18DA. Any other view would create conflict of decision making process. Even counsel for the Revenue could not dispute that many of these requirements prescribed under rule 18DA are to be examined by the prescribed authority. If once the prescribed authority examines such conditions and upon being satisfied that the conditions are fulfilled, grants approval, can the Assessing Officer take a different view? The answer obviously has to be in the negative. First and foremost, the prescribed authority is a specialised body having expertise in the field of scientific research and development. The requirements are extremely complex scientific requirements and have therefore, been rightly placed in the hands of an expert body to judge. Secondly, there is no reason why once an authority which is prescribed under the Rules for a specific purpose has been invested with statutory functions, the Assessing Officer should be allowed to overrule the decision of the said body. Thirdly, there are multiple indications within the Rules themselves. We may recall, under sub-rule (2) of rule 18D, extension of approval once granted is subject to satisfactory performance of the company, to be judged on periodic review. Further, sub-rule (3) of Rule 18DA gives wide powers to the prescribed authority to withdraw the approval if it is found that the same was to avoid payment of taxes by its group companies or companies related to its directors or majority of its shareholders or that any provisions of the Act or the Rules have been violated. Thus once again the task of judging whether the provisions of the Act or the Rules have been violated or not, has entrusted to the prescribed authority with matching powers for withdrawal of the approval, if the authority is satisfied about such breach.
44. In the case of CIT v. Quintiles Research (India) (P.) Ltd. 429 ITR 4 (Karnataka), the Hon’ble High Court held that if prescribed authority grants approval to assessee-company as a research and development company, AO could not disallow deduction u/s. 80-IB(8A) for reason that assessee hadn’t fulfilled satisfaction required under rule 18DA. The Hon’ble High Court made the following observations:
The prescribed authority is a specialized body having expertise in the field of scientific research and development and the requirements being extremely complex, scientific requirements have therefore, being rightly placed in the hands of the expert body. There appears to be no plausible reason as to why Assessing Officer should be allowed to sit in appeal over the decision of a body, which is prescribed under the Rules.
45. Therefore, in our view, the Income-Tax Authorities are not equipped to sit in judgment over the technical determination made by DSIR. If the proposition canvassed by the assessee is accepted, every determination made by DSIR would become open to challenge before the Income-Tax Authorities, which is neither contemplated by the Statute nor consistent with the legislative scheme.
46. Coming to the alternate contention of the learned Counsel for the assessee (in Ground Numbers 1.2 and 1.3), we find force in the submission that the CIT(Appeals) was not justified in holding that once expenditure was not approved by DSIR for the purposes of section 35(2AB), the assessee automatically became disentitled from claiming deduction under sections 35(1)(i) and 35(1)(iv) read with section 35(2) of the Act. In our considered view, section 35(2AB) of the Act operates in a distinct field and grants weighted deduction in respect of expenditure incurred on approved in-house research and development facilities. On the other hand, section 35(1)(i) of the Act grants deduction in respect of revenue expenditure laid out on scientific research related to the business carried on by the assessee and section 35(1)(iv) read with section 35(2) deals with capital expenditure incurred on scientific research related to the business. The conditions governing these provisions are not identical. Therefore, merely because expenditure aggregating to Rs. 1,03,51,882/- was not approved by DSIR for the purpose of weighted deduction under section 35(2AB) of the Act, it does not automatically follow that the said expenditure is disentitled to deduction under sections 35(1)(i) and 35(1)(iv) read with section 35(2) of the Act, provided the conditions prescribed therein are independently satisfied.
47. We notice that neither the Assessing Officer nor the CIT(Appeals) has examined whether the revenue expenditure of Rs. 56,13,495/- satisfies the requirements of section 35(1)(i) of the Act or whether the capital expenditure of Rs. 47,38,387/- satisfies the conditions prescribed under section 35(1)(iv) of the Act read with section 35(2) of the Act. The alternate claim has been rejected merely because the expenditure was not approved by DSIR under section 35(2AB) of the Act. In our view, such an approach is not legally sustainable. Accordingly, in the interest of justice, we restore this limited issue to the file of the Assessing Officer for de novo consideration. The Assessing Officer shall verify whether the revenue expenditure of Rs. 56,13,495/- qualifies for deduction under section 35(1)(i) and whether the capital expenditure of Rs. 47,38,387/- qualifies for deduction under section 35(1)(iv) read with section 35(2) of the Act. If the assessee is found to satisfy the conditions prescribed under the aforesaid provisions, appropriate relief shall be granted in accordance with law after affording adequate opportunity of hearing to the assessee. Thus, while upholding the disallowance of weighted deduction amounting to Rs. 2,07,03,764/- under section 35(2AB) of the Act, we restore the alternate claims to the file of the Assessing Officer for fresh adjudication. The grounds raised by the assessee are partly allowed for statistical purposes.
48. Accordingly, Ground Numbers 1.1 is dismissed and Ground Numbers 1.2 and 1.3 are allowed for statistical purposes.
Assessment year 2017-18 (Departments appeal in ITA Number 1128/Mum/2026)
49. Before us, Ld. DR submitted that the appeal has been mistakenly filed and the Department wishes to withdraw the same.
Accordingly, the appeal of the Department is dismissed as “Not Pressed”.
Assessee’s CO for assessment year 2017-18(CO Number 194/Mum/2026)
50 Before us, the Counsel for the assessee submitted that he shall not be pressing for CO for the impugned assessment year.
Accordingly, the same is dismissed as “Not Pressed”.
Assessment year 2018-19 (the assessee’s appeal in ITA Number 149/Mum/2026
The assessee has raised the following Grounds of Appeal:
1.1 Weighted deduction under section 35(2AB) of the Income Tax Act (Act):
On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [CIT(A)], has erred in upholding disallowance of weighted deduction of Rs 84,82,421 under section 35(2AB) of the Act being one and one-half times of the expenditure incurred on scientific research on in-house research and development facility.
1.2 Deduction under section 35(1)(i) of the Act:
Without prejudice, on the facts and circumstances of the case and in law, the learned CIT(A), has erred in denying deduction of Rs 56,18,713 under section 35(1)(i) of the Act being revenue expenditure incurred on scientific research related to the business of the appellant.
1.3 Deduction under section 35(2) (ia) of the Act:
Without prejudice, on the facts and circumstances of the case and in law, the learned CIT(A), has erred in denying deduction of Rs 31,234 under section 35(2) (ia) of the Act being capital expenditure incurred on scientific research related to the business of the appellant.
51. We observe that the Grounds and issue for consideration for assessment year 2018-19 are common to assessment year 2017-18 and accordingly, our observations for assessment year 2017-18 would apply to assessment year 201819 as well. Accordingly, Grounds of Appeal raised by the assessee are disposed of accordingly.
52. In the combined result, the appeal of the assessee are partly allowed for statistical purposes.