Section 35(2AB) R&D deduction cannot be denied merely because DSIR approval was granted in a subsequent assessment year.

By | September 1, 2026
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Section 35(2AB) R&D deduction cannot be denied merely because DSIR approval was granted in a subsequent assessment year.
Issue
Whether an assessee is entitled to weighted deduction under Section 35(2AB) for in-house R&D expenditure from the current assessment year when the application was submitted during the relevant year but formal DSIR approval was granted in a subsequent year.
Facts
  • Assessee Claim: The assessee claimed a deduction under Section 35(2AB) for expenditure incurred on in-house scientific research and development for AY 2013-14.
  • Timeline of Approval: The assessee applied to the Department of Scientific and Industrial Research (DSIR) for recognition on June 21, 2012 (during AY 2013-14), and DSIR granted approval on October 9, 2013.
  • AO Disallowance: The Assessing Officer (AO) disallowed the deduction on the ground that formal approval from the prescribed authority (DSIR) was not in place during the relevant assessment year.
  • Judicial Precedent: In an identical case, the High Court held that the exact timing of the approval is not determinative, provided approval is eventually granted and the expenditure was genuinely incurred for the specified R&D purpose.
Decision
  • Retrospective/Relating Back Effect: Held that once DSIR approval is granted, it relates back to the period during which the R&D expenditure was incurred following the application.
  • Validity of Claim: Held that the claim for deduction under Section 35(2AB) cannot be defeated merely on the ground that the formal approval order was issued in a subsequent assessment year.
  • Relief to Assessee: Held that the assessee is entitled to the Section 35(2AB) deduction with effect from AY 2013-14, deciding the issue in favour of the assessee.
Key Takeaways
  • Approval Relates Back: DSIR approval under Section 35(2AB) operates retrospectively from the period when the qualifying R&D expenditure was incurred after submitting the application.
  • Substance Over Timing: Delay by the prescribed authority in granting formal approval cannot deprive an assessee of statutory tax benefits for valid scientific research expenses.
HIGH COURT OF GUJARAT
Principal Commissioner of Income-tax
v.
Cadila Healthcare Ltd.
BHARGAV D. KARIA and Pranav Trivedi, JJ.
R/TAX APPEAL NO. 591 of 2022†
JULY  27, 2026 \
Varun K. Patel for the Appellant. Darshan R. Patel and R.K.Patel, LD. Sr. Adv. for the Respondent.
ORDER
Bhargav D. Karia, J. – Heard learned Senior Standing Counsel Mr. Varun K. Patel for the appellant-Revenue and learned Senior Advocate Mr. R.K. Patel assisted by learned advocate Mr. Darshan R. Patel for the respondent-assessee.
2. Learned Senior Standing Counsel Mr. Varun K. Patel for the appellant has tendered a draft amendment to change the name of the respondent in view of the Certificate issued by the Registrar of Companies for change of name with effect from 24th February, 2022. The same is allowed in terms of the draft. To be carried out forthwith.
3. The appellant-Revenue has filed this Appeal under Section 260A of the Income Tax Act, 1961 (for short ‘the Act’) proposing the following substantial questions of law arising out of the order of the Income Tax Appellate Tribunal, Ahmedabad ‘D’ Bench, Ahmedabad (for short ‘the Tribunal’) dated 17th August, 2021 in Cadila Healthcare Ltd. v. Dy. CIT  (Ahd-Trib)//ITA No.213/Ahd/2018 for Assessment Year 2013-14:
[A] Whether on the facts and circumstances of the case and in law the Appellate Tribunal’s decision is ex-facie perverse because Appellate Tribunal has erred in deleting the addition made on account of the guarantee fee charge of Rs.13,96,47,918/- by ignoring the Arms Length Price (ALP) determined by using external Comparable Uncontrolled Price (CUP) Method?
[B] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was justified in deleting the addition made on account of interest on convertible loan to ‘Zydus International Private Ltd.’ of Rs.17,63,42,711/- by holding that the assessee still had the option to convert the same into equity?
[C] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was justified in deleting the addition of Rs.21,07,52,058/- made on account of Product Registration Expenditure considering the same as revenue?
[D] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was justified in deleting the addition of Rs. 6,95,33,042/- made on account of Trademark Registration & Patent Fee considering the same as revenue expense despite of the facts that they are not recurring the nature?
[E] Whether on the circumstances of the case and in law, the Appellate Tribunal was justified in deleting the addition of Rs.22,64,38,000/- made u/s. 35(2AB) of the Act despite the fact that the same was not approved by the prescribed authority i.e. DSIR?
[F] Whether on the facts and circumstances of the case and in law the Appellate Tribunal was justified in deleting the addition of Rs.67,00,09,438/- made on account of expenses incurred outside the approved R & D facility w.r. to 35 [2AB] of the Act?
[G] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was justified in allowing the depreciation of Rs.7,77,048/- on Hummer Car despite the fact that the same was in the name of the Director and there was no evidence to show that the same was used wholly and exclusively for the purpose of business, the provisions of the 32 were thereof not satisfied?
[H] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was justified in excluding the disallowance made under section 14A while computing of Book Profit under Section 115JB ignoring the clause (f) of Explanation-1 to section 115JB(2)?
4. So far as question Nos. A, B, C, D, F and H are concerned, the similar questions are already admitted for consideration by this Court in Tax Appeal No.590 of 2022. Therefore, this Appeal is admitted qua question Nos. A, B, C, D, F and H.
5. So far as question No. E is concerned, the Tribunal has followed the decision of this Court in case of Banco Products (India) Ltd. v. Dy. CIT 405 ITR 318 (Guj) wherein, in similar facts, this Court has held as under, regarding deduction under Section 35(2AB) of the Act :
“8. The assessee has challenged this decision of the Tribunal on the basis of two judgments. One of this Court in case of Claris Lifesciences Ltd. (supra) already referred earlier and other of Delhi High Court in case of Maruti Suzuki India Ltd. v. Union of India [2017] 397 ITR 728  (Delhi). Revenue however contends that both these judgments are distinguishable on facts. It was canvassed that in case of Claris Lifesciences Ltd. (supra), the expenditure, application and approval, all three occurred in the same year which is not the case in the present appeal. With respect to Maruti Suzuki India Ltd. (supra), it was canvassed that point of distinction according to the Revenue is that the application for approval was made in the same year during which the expenditure was incurred, may be order of approval was passed in the later year.
9. Section 35 of the Act Pertains to expenditure on scientific research. Subsection (2AB) thereof grants weighted deduction to a company engaged in the business of biotechnology or manufacture or production of any article or thing, except those specified in the Eleventh Schedule, where it incurs any expenditure on scientific research (excluding the expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority. At the relevant time, such deduction was one and one-half times of the expenditure incurred. Said section contains various conditions subject to which such deduction will be granted. However, the main requirements are that the expenditure should be on scientific research on in-house research and development facility as approved by the prescribed authority. As observed by this Court in case of Claris Lifesences Ltd. (supra) and Delhi High Court in case of Maruti Suzuki India Ltd. (supra), this provision is aimed at encouraging inhouse research and development facilities for specified purposes. The legislature recognised the weighted deduction on such expenditure. The approval of such facility by the prescribed authority is a prime condition.
10. In case of Claris Lifesciences Ltd. (supra), this Court examined a situation where the Tribunal had allowed the assessee’s claim of deduction under section 35(2AB) of the Act when such expenditure was incurred during the period prior to the date of approval by the prescribed authority. The Court noted with approval the conclusion of the Tribunal that the provision is made for giving a boost to research and development facilities in India and once the facility is approved, entire expenditure so incurred in developing the same has to be allowed by way of deduction. It may be that as pointed out by the Revenue, all events i.e. incurring of expenditure, applying for approval and grant of approval happened in the same financial year. However, this was not the basis on which the Court has confirmed the decision of the Tribunal. There is nothing in the said judgment to suggest that had these events fallen in different years, the view of the Court would have been any different.
11. Judgment of this Court in case of Claris Lifesciences Ltd. (supra) was followed by Delhi High Court in case of Maruti Suzuki India Ltd. (supra) in order to grant the assessee’s claim of deduction under section 35(2AB) of the Act. The Court held that for availing deduction under section 35(2AB) of the Act, what is relevant is not the date of recognition or the cut-off date mentioned in the certificate of the prescribed authority or even the date of approval, but the existence of recognition. The Court observed as under:

“41. Section 35(2AB) clearly provides that any expenditure incurred by a party on its R&D facility, except, insofar as it relates to land and building is liable to be allowed to be claimed as deduction (twice the amount of expenditure). A perusal of the scheme of the Act especially Sections 35(2AB), 35A and 35AB reveals in no uncertain terms, that the purpose behind these provisions is to provide impetus for research, development of new technologies, obtaining patent rights, copyrights and know-how.”

12. In view of above-referred two decisions and by applying the same to the facts on hand, we have no hesitation in allowing the assessee’s claim for deduction under section 35(2AB) of the Act. Shorn of any controversy, documents on record would suggest that at any rate, the assessee had applied for approval of research and development facility to the prescribed authority on 22.12.2006 and such approval was granted on 22.10.2008. The Assessing Officer and CIT (Appeals) restricted the assessee’s claim for deduction in relation to such expenditure which was incurred prior to 1.4.2008 on the ground that the approval was granted for two years between 1.4.2008 to 31.3.2010. Combined reading of the judgment of this Court in case of Claris Lifesciences Ltd. (supra) and judgment of Delhi High Court in case of Maruti Suzuki India Ltd. (supra), would show that period during which the approval is granted is not relevant as long as such approval has been granted and expenditure has been incurred for the specified purpose. As noted, the provision is aimed at promoting development of in-house research and development facility which necessarily would require substantial expenditure which immediately may not yield desired results or could be co-related to generation of additional revenue. By the very nature of things, research and development is a hit and miss exercise. Much of the efforts, capital as well as human investment may go waste if the research is not successful. The legislature therefore, having granted special deduction for such expenditure, the same should be seen in light of the purpose for which it has been recognised. Research and development facility can be set up only after incurring substantial expenditure. The application for approval of such facility can be made only after setting up of the facility. Once an application is filed by the assessee to the prescribed authority, the assessee would have no control over when such application is processed and decided. Even if therefore, the application is complete in all respects and the assessee is otherwise eligible for grant of such approval, approval may take some time to come by. The claim for deduction cannot be defeated on the ground that such approval was granted in the year subsequent to the financial year in which the expenditure was incurred. No such indication was given by this Court in case of Claris Lifesciences Ltd. (supra), none appears from the judgment of the Delhi High Court in case of Maruti Suzuki India Ltd. (supra).”
6. Applying the above ratio to the facts of the case, it is pertinent to note that the assessee made an application for recognition before the Department of Scientific and Industrial Research (for short ‘the DSIR)’) on 21st June, 2012 which was approved on 9th October, 2013. Therefore, the assessee would be entitled to the deduction under Section 35(2AB) of the Act as per the aforesaid decision of this Court with effect from the year under consideration i.e. from Assessment Year 2013-14.
7. We therefore, dismiss the Appeal qua question No. E and G are concerned.
8. To be heard with Tax Appeal Nos.590 of 2022, 274 of 2018 and 995 of 2018.