Brought-forward R&D losses forgone under section 35(2AB)

Brought-forward R&D losses forgone under section 35(2AB) are independently re-examinable under sections 35(1) or 37(1) for section 115BAA set-off.

Issue

Whether carried-forward R&D expenditure loss, originally claimed under section 35(2AB) with weighted deduction but later forgone to actual expenditure, can be re-examined and allowed under sections 35(1)(i), 35(1)(iv), or 37(1) for set-off under the concessional tax regime of section 115BAA?

Facts

Assessee Profile: The assessee is a tyre and tube manufacturing company that opted for the concessional tax regime under section 115BAA for Assessment Year 2020-21.
Amalgamation: A group company amalgamated with the assessee pursuant to an order passed by the NCLT.
Preceding Year Claim: In the preceding year, the amalgamating company incurred R&D expenditure of ₹7.69 crores and claimed a total deduction of ₹11.54 crores under section 35(2AB) (inclusive of an additional 50% weighted deduction of ₹3.85 crores), resulting in a business loss. The return was processed under section 143(1).
Post-Merger Set-Off Claim: Following the merger, the assessee claimed a set-off of the brought-forward business loss after voluntarily foregoing the 50% weighted deduction, restricting the claim to the actual expenditure of ₹7.69 crores.
Alternative Ground: The assessee contended that the underlying actual expenditure was independently allowable under sections 35(1)(i), 35(1)(iv), or alternatively section 37(1).
AO’s Disallowance: The Assessing Officer disallowed the entire claim, holding that loss originally generated under section 35(2AB) could not be reclassified under other heads in a subsequent year.

Decision

No Bar on Re-examination: Characterization or determination of loss in the year it was incurred does not act as a legal bar against evaluating its allowability and character in the subsequent year when the set-off is claimed.
Independent Examination Mandated: R&D expenditure forming part of carried-forward losses—where the additional weighted deduction is forgone—must be evaluated independently for allowability under sections 35(1)(i), 35(1)(iv), or 37(1).
Matter Remanded: The issue was restored to the Assessing Officer to verify whether the actual expenditure satisfies the statutory conditions under sections 35(1)(i), 35(1)(iv), or 37(1).
Eligibility under Section 115BAA: If the expenditure is independently allowable under sections 35(1)(i), 35(1)(iv), or 37(1), the corresponding loss cannot be treated as a restricted loss attributable to section 35(2AB) under clauses (i) and (ii) of section 115BAA(2).

Key Takeaways

Reclassification Permissible for Set-off: Claiming weighted deduction in a prior year does not permanently estop an assessee from claiming actual, legitimate business expenditure under general or specific research provisions in subsequent set-off years.
Compatibility with Section 115BAA: Opting for section 115BAA restricts specified incentive deductions, but actual research/business expenses allowable under general provisions (sections 35(1) or 37(1)) do not trigger statutory disallowance under section 115BAA(2).
Substance Over Initial Characterization: The true statutory character of an underlying expenditure takes precedence over how it was originally labeled or claimed in earlier assessments.

IN THE ITAT MUMBAI BENCH ‘C’

Ceat Ltd.

Assistant Commissioner of Income-tax

NARENDER KUMAR CHOUDHRY, Judicial Member
and ARUN KHODPIA, Accountant Member

IT Appeal No. 8146 (Mum.) of 2025
[Assessment year 2020-21]

SEPTEMBER 29, 2026

Vijay Mehta for the Appellant. Smt. Esther Ninghauvung Hanghal, CIT DR for the Respondent.

ORDER

Arun Khodpia, Accountant Member. – This appeal is preferred by the assessee, directed against the order of the Commissioner of Income Tax Appeals, National Faceless Appeal Centre (NFAC), Delhi [in short, “the Ld. CIT(A)”], dated 19.09.2025 for the Assessment Year (AY) 2020-21, arises from the assessment order under section 143(3) of the Income Tax Act, 1961 [in short, “the Act”] dated 07.04.2022, passed by ACIT, Circle 6(1)(1), Mumbai [in short, “the Ld. AO”].

2. The grounds of appeal raised by the assessee are as under:

“1. The CIT(A) has erred in upholding the disallowance of set-off of brought forward business loss of Rs. 7,69,19,122/- pertaining to Ceat Speciality Tyres Limited, which got merged with the assessee w.e.f. 01.04.2019.

2. The CIT(A) has erred in not holding that the assessment order passed is invalid and illegal on account of non-mention of DIN in the assessment order as per the CBDT Circular no. 19 of 2019 dated August 14, 2019.

3. The CIT(A) has erred in not holding that the Assessing Officer had no jurisdiction to pass the assessment order as the same ought to have been passed by the National Faceless Assessment Centre in view of CBDT notification no. 18/2022 dated March 29, 2022, thus, rendering the entire assessment order invalid and non-est.

4. The CIT(A) has erred in upholding the assessment order passed u/s. 143(3) of the Act which is illegal and bad in law.”

3. The brief facts borne out from the records, are that the assessee-company is engaged in the business of manufacturing of tyres and tubes. For the Assessment Year 2020-21, the assessee filed its return of income on 10.02.2021 declaring a total income of Rs. 15,52,78,720/-. The said return of income was processed and the case was subsequently selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS). Accordingly, notice under section 143(2) of the Income-tax Act, 1961, was issued and served upon the assessee on 29.06.2021. Thereafter, notices under section 142(1) of the Act were issued from time to time, calling upon the assessee to furnish the requisite information and details. In response thereto, the assessee furnished its replies and submissions from time to time during the course of the assessment proceedings.

4. During the assessment proceedings, the Assessing Officer examined the assessee’s claim of set-off of brought-forward business loss of Rs.103,62,31,719/- and unabsorbed depreciation of Rs.57,86,39,774/- pertaining to CEAT Specialty Tyres Ltd. (CSTL), which had amalgamated with the assessee during the relevant previous year. Since the assessee had opted for taxation under section 115BAA, the Assessing Officer examined the restrictions contained in section 115BAA (2). On verification of CSTL’s return for A.Y. 2019-20, it was noticed that CSTL had claimed deduction of Rs.11,53,78,684/- under section 35(2AB). The Assessing Officer held that the corresponding loss attributable to such deduction was not eligible for set-off under section 115BAA(2)(iii). The assessee submitted that the weighted portion of Rs.3,84,59,562/- had already been disallowed and that the balance Rs.7,69,19,122/- was eligible for deduction under sections 35(1)(i) and 35(1)(iv). The Assessing Officer did not accept the explanation, observing that CSTL had claimed the expenditure under section 35(2AB) in its return and that the assessment for A.Y. 2019-20 had already been completed. Accordingly, the Assessing Officer disallowed Rs. 7,69,19,122/- under section 115BAA(2)(iii).

5. The Assessing Officer further noticed that the assessee had earned dividend income of Rs.10,24,02,189/- during the year and had investments of approximately Rs.110.80 crore, but had not made any disallowance under section 14A. The assessee contended that the dividend income was taxable under section 115BBD and, therefore, no exempt income had been earned. The Assessing Officer, referring to the amendment made by the Finance Act, 2022, did not accept the contention and computed disallowance of Rs.26,98,271/- under section 14A read with Rule 8D.

6. The assessee had also claimed deduction of Rs.81,31,885/- towards education cess and higher and secondary education cess. During the assessment proceedings, the assessee suo motu withdrew the claim. Accordingly, the Assessing Officer added back the said amount to the total income.

7. The Assessing Officer also examined the treatment of liquidated damages of Rs. 1,34,33,223/- received by the assessee during the year. The assessee had treated the amount as a capital receipt on the ground that the liquidated damages related to fixed assets and, accordingly, had not credited the same to the Profit and Loss Account. Reliance was placed on the decision of the Hon’ble Supreme Court in CIT v. Saurashtra Cement Ltd. 325 ITR 422 (SC) . The Assessing Officer, however, on examination of the details, observed that the liquidated damages arose frequently in the course of the assessee’s regular business activities and proceeded to examine their taxability accordingly. Therefore, the contention that these were capital in nature was not acceptable. The AO treated the same as revenue receipts and added Rs. 1,34,33,223 to the income.

8. In view of the above findings and discussions, the AO recomputed the total income of the assessee by making additions on account of (i) disallowance u/s. 115BAA of Rs. 7,69,19,122, (ii) disallowance u/s. 14A r.w. Rule 8D of Rs. 26,98,271, (iii) withdrawal of education cess claim of Rs. 81,31,885, and (iv) treatment of liquidated damages as revenue receipts of Rs. 1,34,33,223. Aggrieved, the appellant has preferred an appeal before the Ld. CIT(A).

9. Ld. CIT(A) in the appellate proceedings before him had decided the issues as under:

The CIT(A) upheld the disallowance of Rs.7,69,19,122/- attributable to the deduction originally claimed by CSTL under section 35(2AB). It was held that section 115BAA(2)(iii) specifically restricts set-off of losses attributable to deductions referred to in section 115BAA(2)(i), including deduction under section 35(2AB). The contention that the expenditure could subsequently be reclassified under sections 35(1)(i), 35(1)(iv) or 37(1) was not accepted, as CSTL had originally claimed the deduction under section 35(2AB) and its return had already been processed under section 143(1). The CIT(A) further held that the NCLT-approved amalgamation and the provisions of section 72A could not override the specific restriction contained in section 115BAA(2)(iii). Accordingly, the disallowance was upheld and Ground No. 1 was dismissed.

10. CIT(A) found merit in the assessee’s contention that no exempt income had been earned during the year, as the dividend income of Rs.10,24,02,189/- had been offered to tax under section 115BBD. It was further noted that the assessee’s own funds of Rs.2,816.35 crore substantially exceeded its investments of Rs.110.83 crore. The CIT(A) also observed that the AO had neither disputed the absence of exempt income nor properly examined the ledgers furnished by the assessee or recorded the requisite objective satisfaction before invoking Rule 8D. Accordingly, the disallowance of Rs.26,98,271/- under section 14A was held to be unsustainable and was deleted. Ground No. 2 was allowed.

11. The CIT(A) accepted the assessee’s contention that the liquidated damages of Rs.1,34,33,223/- were received from vendors on account of delay in delivery of plant and machinery and other capital assets. On examination of the purchase orders and invoices, it was found that the damages arose under specific contractual clauses relating to delayed delivery of capital assets. Following the decision of the Hon’ble Supreme Court in Saurashtra Cement Ltd. (supra), the CIT(A) held that such receipts were compensatory in nature and constituted capital receipts, to be adjusted against the cost of the relevant assets under section 43(1). The observation of the AO regarding frequency of such receipts was held not to alter their character. Accordingly, the addition was deleted and Ground No. 3 was allowed.

12. With regard to the assessee’s claim for TDS credit of Rs.1,26,06,964/-, the CIT(A) directed the AO to verify the claim with reference to Form 26AS and other relevant documents and to grant credit in accordance with law. The ground was accordingly allowed subject to verification.

13. In respect of the foreign tax credit of Rs.1,81,551/-, the CIT(A), having considered the submissions and documents furnished by the assessee, directed the AO to verify the claim and grant the credit in accordance with law if found in order. The ground was accordingly allowed subject to verification.

14. In view of the above findings, the CIT(A) partly allowed the appeal.

15. Being aggrieved with the aforesaid decision of Ld. CIT(A), the assessee is in appeal before us, assailing the issue of sustain the disallowance of Rs. 7,69,19,122/- under section 115BAA(2)(iii), by denying the claim of expenditure u/s 35(2AB) of the Act included in the carried forward losses, reduced by weighted portion of Rs.3,84,59,562/- to be allowed to the extent of Rs.7,69,19,122/- being eligible for deduction under sections 35(1)(i) and 35(1)(iv).

16. At the outset, the Ld. Counsel for the assessee submitted that Ground Nos. 2 and 3 of the appeal may be permitted to be withdrawn and that Ground No. 4 may be treated as not pressed. Accordingly, Ground Nos. 2 and 3 are dismissed as withdrawn, while Ground No. 4 is dismissed as not pressed.

17. Ground No. 1: Regarding disallowance of set-off of brought forward business loss of Rs. 7,69,19,122/- pertaining to CEAT Speciality Tyres Limited, which got merged with the assessee. On this aspect the Ld. Counsel of the assessee explained the issue, facts and summarised the same under a written submission, which is culled out hereunder for the sake of completeness:

1. On behalf of the above-mentioned client and as per their instructions, we refer to the above matter which was heard on July 2, 2026. At the outset, we would like to place on record our deep gratitude for the patient hearing granted in the above matter. In deference to the directions given by the Hon’ble Bench at the conclusion of the hearing, we are submitting hereinbelow a brief synopsis of our arguments in the above matter.

Background facts

2. The assessee is a company engaged in the business of manufacturing of tyres and tubes. During the year under consideration, a group company viz. M/s. CEAT Specialty Tyres Limited (CEAT Specialty) was merged into the assessee w.e.f. April 1, 2019 (vide order dated March 13, 2020 passed by the Hon’ble National Company Law Tribunal).

3. For A.Y. 2019-20, i.e. immediately preceding assessment year, when CEAT Specialty was an independent entity, it had filed its return of income declaring business loss of Rs. 192,27,45,865/-. The said loss was claimed to be carried forward to subsequent year. This loss was resulted on account of, inter alia, claim of weighted deduction/su/s. 35(2AB) of the Act @ 150% of total scientific research expenditure of Rs. 7,69,19,122/ being aggregate of capital expenditure of Rs. 6,55,53,691/- and revenue expenditure of Rs. 1,13,65,431/-. The claim u/s. 35(2AB) of the Act was of Rs. 11,53,78,683/-(150% of Rs. 7.69 crores)

4. For the year under consideration, i.e. post-merger, the assessee had filed its return of income at Rs. 15,52,78,720/-u/s. 139(1) of the Act on February 10, 2021. The assessee had opted to pay its taxes under newly inserted section 115BAA of the Act i.e. at a flat rate of 22% plus surcharge without availing specified exemptions and incentives. In this return, assessee also claimed benefit of brought forward loss of CEAT Specialty, which included loss arising due to deduction u/s. 35(2AB) of the Act as stated herein above. However, since u/s. 115BAA(2) of the Act, brought forward loss arising on account of weighted deduction u/s. 35(2AB) of the Act is not eligible for set off, the assessee suo moto ignored weighted deduction of 50% (incentive deduction) amounting to Rs. 3.85 crores and restricted the claim only to the extent of 100% of expenditure i.e. 7.69 crores. It is relevant to note that scientific research expenditure is eligible for deduction @ 100% u/s. 35(1)(iv) (capital expenditure) and u/s. 35(1)(i) (revenue expenditure) of the Act.

Assessment proceedings

5. The case of the assessee was selected for scrutiny under CASS and a notice u/s. 143(2) of the Act was issued on June 29, 2021. During the course of scrutiny proceedings, the assessee was called upon to explain the correctness of claim of brought forward loss made in its return of income. The Assessing Officer called upon the assessee to explain as to how a sum of Rs. 7,69,19,124/-, being 100% of the expenditure incurred by CEAT Specialty towards its in-house R&D centre, was set-off in its return of income. According to the Assessing Officer, the said expenditure fell within the ambit of S. 35(2AB) of the Act and therefore not allowable for set off in view of sub-section 2 of section 115BAA of the Act.

6. The assessee, inter alia, submitted that

CEAT Specialty had set up its R&D facility at Ambernath (Maharashtra) which was recognized by the Department of Scientific and Industrial Research (DSIR) vide its letter dated November 26, 2018.

During A.Y. 2019-20 (F.Y. 2018-19), CEAT Specialty had incurred expenditure towards its R&D facilities as under:

Sr. No.	Type of expenditure	Amount (Rs.)
1.	Capital (other than land and building)	6,55,53,691
2.	Revenue	1,13,65,431
Total		7,69,19,122
Add: weighted deduction @ 150’%		3,84,59,561
Toted doduction claimed under S. 35(2AB) of the Act during A.Y. 2019-20		11,53,78,683

Out of Rs. 11,53,78,683/-, the weighted portion of Rs. 3,84,59,561/- has already been disallowed by the assessee in its return of income (as explained herein above).

With respect to the remaining claim of Rs. 7,69,19,122/-, the assessee submitted that the same could be claimed u/s. 35(1)(iv) (capital expenditure of Rs. 6,55,53,691/-) and u/s. 35(1)(i) (revenue expenditure of Rs. 1,13,65,431/-) of the Act.

Therefore, although the deduction of Rs. 7,69,19,122/- was not allowable in view of the provisions of section 115BAA(2) of the Act, there was no bar under the Act from claiming the said expenditure as a deduction u/s. 35(1)(iv) and u/s. 35(1)(i) of the Act.

7. The Assessing Officer did not accept the submission. The reasoning given by the Assessing Officer are as under:

CEAT Specialty had filed its return of income for A.Y. 2019-20 on 30 November 2019. In the said return of income, the assessee had claimed Rs. 11,53,78,683/- under section 35(2AB) of the Act. The said return was accepted by the Department vide its intimation dated December 12, 2019 u/s. 143(1) of the Act. There was no scrutiny assessment and therefore, the assessment stood completed.

The assessee was attempting to reclassify the expenditure incurred by CEAT Specialty from section 35(2AB) of the Act to sections 35(1)(iv) and 35(1)(i) of the Act. The same was not permissible in law.

The Assessing Officer was bound by the completed assessment in the case of CEAT Specialty for A.Y. 2019-20.

8. Thus, the Assessing Officer disallowed, inter alia, expenditure of Rs. 7,69,19,122/-. (A.O. Pg. 1-5) Proceedings before the first appellate authority.

9. Aggrieved by the order, an appeal was preferred before the appellate authority. Before the CIT(A), the assessee reiterated its claim made before the Assessing Officer. The assessee also submitted that the said expenditure could also be allowed u/s. 37(1) of the Act if not under any of the provision u/s. 35 of the Act.

10. The CIT(A) however, proceeded to confirm the disallowance made by the Assessing Officer by reiterating the reasonings given by the A.O. [CIT(A) Pg. no. 39-41].

Grounds of appeal

11. Aggrieved by the order of the CIT(A), the assessee had filed the present appeal before Your Honours. The assessee has raised the followings grounds of appeal:

1. “The CITIA) has erred in upholding the disallowance of set-off of brought forward business loss of Rs. 7,69,19,122/-pertaining to Ceat Speciality Tyres Limited, which got merged with the assessee w.e.f. 01.04.2019.

4. The CIT(A) has erred in upholding the assessment order passed u/s. 143(3) of the Act which is illegal and bad in law.”

12. Vide letter dated June 12, 2026 (filed on 16 June 2026) the assessee had stated that grounds at sr. no. 2 and 3 are additional grounds of appeal and it may kindly be admitted. It is, however, submitted that the assessee no longer intends to press the said grounds of appeal. Thus, grounds at Sr. no. 2 and 3 may be treated as withdrawn. Further, it is submitted that ground at sr. no. 4 may be treated as not pressed.

Arguments of the assessee

13. So far as the remaining solitary ground no. 1 is concerned, at the outset attention of Your Honours is invited to the relevant provisions of S. 115BAA of the Act, which is reproduced herein below.

“Tax on income of certain domestic companies.

115BAA. (1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAB, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of twenty-two per cent, if the conditions contained in sub-section (2) are satisfied:

Provided that………………

(2) For the purposes of sub-section (1), the total income of the company shall be computed, (i) without any deduction under the provisions of section 10AA or

clause (ia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or subsection (2AA) or sub-section (2AB) of section 35 or section35AD or section 35CCC or section 35CCD or under any provisions of Chapter VI-A under the heading “C.-Deductions in respect of certain incomes” other than the provisions of section 80JJAA

(ii) without set off of any loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in clause (1);

(iii) without set off of any loss or allowance for unabsorbed depreciation deemed so under section 72A, if such loss or depreciation is attributable to any of the deductions referred to in clause (i); and ………………..

(iv) ……………………………………….

(emphasis supplied)

14. The assessee would like to press in to service following proposition. Proposition True nature and character of brought forward loss is to be adjudicated by the Assessing Officer who is seized with the assessment proceedings of the year of set off. The determination of nature and character of loss made in the assessment of the year of carry forward is not conclusive or binding.

15. It is submitted that whether a loss is arising out of weighted deduction u/s. 35(2AB) of the Act or not is to be determined in the year under consideration i.e. A.Y. 2020-21 as that is the year in which set off has been claimed.

16. Before proceeding further, kind attention of Your Honours is invited to the following two facts;

(a)

CEAT Specialty has not received approval quantifying the amount of eligible expenditure in Form 3CL from DSIR, which quantification is mandatory under the amended provisions of S. 35(2AB) of the Act read with Rule 6(7A)(b). An affidavit in support of this fact has been placed on the record. In other words, CEAT Speciality is not eligible for weightage deduction u/s 35(2AB) of the Act.

(b)

No scrutiny assessment has been carried out in the case of CEAT Speciality for A.Y. 2019-20 and return of income has been simply processed, as correctly observed by the A.O., u/s. 143(1) of the Act.

17. From the above it can be seen that although a claim was made for weighted deduction u/s 35(2AB) of the Act, CEAT Specialty is not eligible for the same for want of mandatory approval of quantification of eligible expenditure in Form 3CL. Secondly, there is no finding, and therefore determination, by Departmental authority on correctness of such claim.

18. In light of this, it is submitted that the nature and character of the brought forward loss has to be determined in the year under consideration, more particularly so when there is neither any examination nor any determination of nature of loss in the year of incurring of loss.

19. In support of the proposition canvassed by the assessee, reliance is placed upon following decisions;

(a)

Decision of the Hon’ble Supreme Court in the case of CIT v. Manmohan Das (Deceased) (59 ITR 699) (SC) (copy submitted at the time of hearing).

In this case, the Hon’ble Supreme Court, while deciding the issue of claim in a subsequent year, held that the issue whether the loss was eligible for carry forward and set-off, including the determination of the head under which such income was assessable, is to be decided by the Assessing Officer in the year in which the set-off was claimed, and that the view taken while computing the loss in the earlier year was not binding. Relevant extract is reproduced hereinbelow for ready reference:

“Whether the assessee could claim a set-off of the loss suffered by him in the preceding year 1950-51 against his profits in the year under consideration, i.e., 1951-52, having failed to prefer an appeal against the refusal by the Income-tax Officer making the assessment for the year 1950-51 to allow the assessee to carry forward the loss under section 24(2) of the Act?”

(Pg. 700)

In relation to the said question of law, the Hon’ble Supreme Court held as under:

“3. …………………………..It is for the Income-tax Officer dealing with the assessment in the subsequent year to determine whether the loss of the previous year may be set off against the profits of that year. A decision recorded by the Income-tax Officer who computes the loss in the previous year under section 24(3) that the loss cannot be set off against the income of the subsequent year is not binding on the assessee.

(b)

Decision of Hon’ble Supreme Court in the case of CIT v. Khushal Chand Daga (1961) (Commissioner of Income-tax v. Khushal Chand Daga [1961] 42 ITR 177 (SC)) (copy submitted at the time of hearing).

Relevant extract is reproduced hereinbelow for ready reference:

“As regards the first question, the only contention raised was that the loss which had been determined and ordered to be carried forward must be deemed to have become final, because no appeal was filed against that determination. But it appears that the procedure laid down by section 24(3) under which, the Income-tax Officer has to notify to the assessee by order in writing the amount of the loss as computed by him for the purposes of that section was not followed. No doubt, under section 30 an appeal lies, if the assessee objects to the amount of loss computed and notified under section 24; but inasmuch as the Income-tax Officer had not notified the loss computed by him by order in writing, an appeal could not be taken on that point. In our opinion, the assessee was, therefore, entitled to have the loss re-determined in a subsequent year. Learned counsel for the Commissioner stated that the Department was not very anxious for the decision, because this particular assessee has had only losses in the years following, and no loss would be occasioned to the revenue, if the losses brought forward be re-determined. But that is a matter, with which we are not concerned. In our opinion, the judgment of the High Court impugned before us was correct in the circumstances of the case.”

(Emphasis supplied)

(c)

Decision of the Hyderabad Bench of the Hon’ble Tribunal in the case of Torsion Products Limited v. ITO (1983) (6 ITD 494) (copy submitted at the time of hearing)

Relevant extract is reproduced hereinbelow for ready reference:

“Courts have held that an order giving effect to an appellate order is also an order under section 143(3) of the Act. Therefore, the order of 27-2-1978 has the status of an assessment order for 1973-74. If there is an error in an assessment order, normally it can be modified only by way of appeal, etc. The quantum determined by the 1TO was one in the assessment and was not a quantum determined by the AAC. The ratio of the judgment of the Supreme Court in the case of Manmohan Das (supra) is authority for the proposition that a finding in an assessment order in an assessment year, relating to the carry forward of loss is not finding on the assessee in the year when set off of loss is to be considered. Whether such finding is given when the ITO makes the assessment originally or he gives a finding in the assessment pursuant to the order of the AAC (where the AAC has himself not fixed the quantum), the finding is the one in assessment by the ITO. The finding by the ITO in the order of 27-2-1978 for the 1973-74 assessment year regarding 80J relief for earlier years, being a finding in the assessment for that year, will not be binding on the assessee in the assessment year 1975-76 where alone the question of set off arises for the first time. Under the circumstances, we hold that the assessee is not bound by the orders of quantification of 80J relief made by the ITO under his orders dated 27-2-1978 passed in the assessment for the year 1973-74. We further hold that from the end of the initial assessment year of 1968-69, the assessment year 1975-76 is the 7th assessment year and, hence, the unadjusted 80J relief can be quantified and adjusted from the profits of that year.” (Emphasis supplied)

(d)

Decision of the Mumbai Bench of the Hon’ble Tribunal in the case of Gajendra Kumar Agarwal v. ITO (2011) (Gajendra Kumar T. Agarwal v. Income-tax Officer, Ward 11(2)(3) 142 TTJ 612 (Mumbai)) (copy submitted at the time of hearing). Relevant extract is reproduced hereinbelow for ready reference:

“20. In our humble understanding, Hon’ble Supreme Court’s judgment in Manmohan Das’s case (supra), read with Hon’ble Bombay High Court’s judgment in the case of Western India Oil Distributing Co. Ltd. (supra), is thus authority for three significant propositions. These propositions are summed up as follows:

First, that the call, as to whether a particular business loss, speculative or non-speculative, incurred by the assessee in an earlier year is eligible for set off against business income in a subsequent year, is to be taken in the course of proceedings subsequent assessment year, i.e. the assessment year in which set off is claimed. Hon’ble Supreme Court has set out this proposition and this proposition was later clarified, in unambiguous words, by Hon’ble jurisdictional High Court in the case of Western India Oil Distributing Co. Ltd. (supra), which was approved by Hon’ble Supreme Court in the judgment reported as Western India Oil Distributing Co. Ltd. (supra).

II.

Second, that section 24(2) of the 1922 Act, which is the same as section 73(2) in all material respects, confers “a statutory right upon the assessee who sustains a loss of profits in any year in any business, profession or vocation to carry forward the loss as is not set off under sub-section (1) to the following year, and to set it off against his profits and gains, if any, from the same business, profession or vocation for that year”. The proposition that is set out is in fact in the words employed by Their Lordships and it does not need any elaboration. Once this statutory right is recognized, itis a natural corollary of that recognition that when an assessee incurs a loss in a business, speculative or non-speculative, in an year, such loss has to be, subject to fulfilment of other preconditions, is to be set off against the profits of the same business in subsequent year.

III.

Third, that in the course of proceedings of the subsequent assessment year, i.e. the assessment year in which set off of loss is claimed, it is open to even decide the true nature and character of loss incurred in the earlier relevant assessment year. In other words, even a finding about the nature of loss, in the assessment year in which loss is incurred, does not bind the assessee, and that aspect of the matter can be decided afresh in the course of proceedings in the assessment year in which setoff is claimed. As noted in third paragraph of Hon’ble Supreme Court’s judgment itself, “In making his order of assessment for the year 1950-51, the Income-tax Officer declared that the loss computed in that year could not be carried forward to the next year under section 24(2) of the Income-tax Act, as it was not a business loss” and yet, while dealing with the assessment proceedings for the assessment year 1951-52, it was held that loss incurred by the assessee in 1950-51 was business loss’ in nature. Similarly, as held by Hon’ble Bombay High Court in the case of Western India Oil Distributing Ltd. (supra) and as confirmed by Hon’ble Supreme Court, losses determined under the head income from other sources, which had attained finality, were subsequently treated as business losses though for the lim against profits from same activity in subsequent years.” (emphasis supplied)

20. From the above decisions, it is evident that the correct nature of loss is to be determined in the year of set off. Once that is accepted, it is obvious that the deduction u/s 35(2AB) of the Act cannot be granted for want of approval of quantification of eligible expenditure in Form 3CL. Consequently, the deduction u/s. 35(1)(i) and 35(1)(iv) of the Act, albeit @100%, is to be granted. The assessee has in fact confined the claim @100% in the return of income and hence the claim needs to be upheld.

21. It is equally important to note that the intention of introducing section 115BAA in the statute book was to reduce the corporate tax burden on the domestic companies while also ensuring that the assessee does not claim exemption or incentive.

22. In this regard, attention is drawn to the Press release issued by the CBDT dated September 20, 2019 wherein it has been explained that the amendment is introduced to reduce the corporate tax rate to 22% for domestic companies. Relevant extract is reproduced hereinbelow for ready reference:

“The government has promulgated the Taxation Laws (Amendment) Ordinance, 2019, to make certain amendments to the Income Tax Act, 1961, and the Finance (No. 2) Act, 2019. Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman, stated this during a press conference in Goa today. The Finance Minister outlined the salient features of these amendments, which are as follows:

a. To promote growth and investment, a new provision has been inserted in the Income Tax Act, effective from the 2019-20 fiscal year. This provision allows domestic companies the option to pay income tax at a 22% rate, provided they do not avail themselves of any exemptions/incentives. Including surcharges and cess, the effective tax rate for these companies will be 25.17%. Such companies will also not be required to pay the minimum alternate tax.”

(emphasis supplied)

23. Thus, the intention of the legislature is to only restrict the benefit of any exemption or incentive which is given to the assessee under the old regime of taxation. The intent is not to deny any deduction in respect of expenditure actually incurred. While additional 50% deduction is certainly incentive in case of a person who claims weighted deduction @ 150%, there is no incentive attributable in deduction @ 100% u/s 35(1)(i) or 35(1)(iv) of the Act (otherwise S. 35(1)(i) or 35(1)(iv) would have been covered in S. 115BAA(2) of the Act). In other words, actual expenditure of Rs. 7,69,19,122/- is not an “incentive” and hence the same is not governed by section 115BAA(2) of the Act. The same is eligible for allowance under the new tax regime as well.

24. Therefore, it is humbly prayed that the disallowance of Rs. 7,69,19,122/ made by the Assessing Officer may kindly be deleted.

18. The Ld. Sr. DR, representing the Revenue, supported the orders of the lower authorities and submitted that section 115BAA(2)(iii) of the Act expressly prohibits the set-off of any brought-forward loss attributable to deductions specified under section 115BAA(2)(i), which includes the deduction claimed under section 35(2AB) of the Act. It was submitted that the assessee’s request for reclassification of the expenditure under the alternative provisions was impermissible, as the same would effectively amount to revising a concluded assessment.

19. With regard to the carry forward of losses, the Ld. Sr. DR submitted that although section 72A of the Act permits carry forward of losses in cases of amalgamation, such losses remain subject to the restrictions and conditions prescribed under other provisions of the Act, including section 115BAA(2)(iii). It was further submitted that the analogy of additional depreciation was not applicable to the facts of the present case, since the deduction under section 35(2AB) in respect of weighted scientific research expenditure is specifically covered by the restriction contained in section 115BAA(2)(iii), irrespective of the assessment year to which the loss relates.

20. The Ld. Sr. DR further submitted that the scope of the relevant Circular is limited and cannot be extended to all deductions referred to in section 115BAA(2)(i) of the Act. Accordingly, it was submitted that the findings recorded by the Ld. AO and affirmed by the Ld. CIT(A) were in accordance with the statutory provisions and, therefore, deserved to be sustained.

21. We have considered the rival submissions, perused the material available on record and examined the statutory provisions applicable to the issue. The controversy essentially relates to the manner in which the brought-forward loss attributable to deduction under section 35(2AB) is to be dealt with upon the assessee exercising the option under section 115BAA of the Act.

22. The Ld. Counsel for the assessee submitted that CEAT Specialty Tyres Ltd., which merged with the assessee w.e.f. 01.04.2019, had incurred scientific research expenditure of Rs.7,69,19,122/- comprising capital expenditure of Rs.6,55,53,691/- and revenue expenditure of Rs.1,13,65,431/-, and had claimed weighted deduction of Rs. 11,53,78,683/- under section 35(2AB) in A.Y. 2019-20. Since the assessee opted for taxation under section 115BAA in the year under consideration, it suo motu forgone the additional 50% weighted deduction of Rs.3,84,59,561/- and claimed only 100% of the actual expenditure. It was contended that the actual expenditure was independently allowable under sections 35(1)(iv) and 35(1)(i), and alternatively under section 37(1).

23. It was further submitted that the true nature and character of the brought-forward loss is required to be examined in the year in which its set-off is claimed and that the position adopted in the earlier year is not conclusive. Reliance was placed on Commissioner of Income-tax v. Manmohan Das (Deceased) [1966] 59 ITR 699 (SC), Commissioner of Income-tax v. Khushal Chand Daga [1961] 42 ITR 177 (SC) , Torsion Products Ltd. v. ITO [1983] 6 ITD 494 (Hyderabad) and Gajendra Kumar Agarwal 142 TTJ 612 (Mumbai). The assessee also submitted that CEAT Specialty had not obtained Form 3CL quantifying the eligible expenditure and that its return for A.Y. 2019-20 was merely processed under section 143(1), with no adjudication regarding eligibility under section 35(2AB). Accordingly, the loss could be examined afresh in the year of set-off.

24. The assessee contended that section 115BAA(2) was intended to deny specified incentives and exemptions and not deduction of actual expenditure. Since the additional 50% weighted deduction had already been forgone, the remaining 100% represented only actual expenditure and was not an incentive. Hence, the restriction under section 115BAA(2) was stated not to apply to the deduction claimed under sections 35(1)(i) and 35(1)(iv).

25. The Ld. Sr. DR, on the other hand, submitted that section 115BAA(2)(iii) specifically prohibits set-off of brought-forward losses attributable to deductions covered by section 115BAA(2)(i), including section 35(2AB). It was contended that reclassification of the expenditure under sections 35(1)(i) and 35(1)(iv) would amount to impermissibly revisiting the position of the earlier year. The Revenue further submitted that even losses carried forward pursuant to section 72A remain subject to the restrictions under section 115BAA, and that the specific restriction relating to section 35(2AB) could not be circumvented by treating the expenditure as eligible under alternative provisions. Accordingly, the orders of the AO and CIT(A) were supported.

26. The issue that arises for our consideration is whether the assessee is entitled, in the year in which the brought-forward loss is sought to be set off, to claim the expenditure forming part thereof under a provision of the Act different from the provision under which it was originally claimed in the earlier year. In this regard, the principle laid down by the Hon’ble Supreme Court in Manmohan Das (supra) is apposite. The Hon’ble Supreme Court held that the question whether a loss is eligible for carry forward and set-off, including determination of its true nature and character, is to be examined in the assessment year in which the set-off is claimed. It was further held that the view taken by the Income-tax Officer while computing the loss in the previous year is not binding in the subsequent year in which the set-off is claimed. The aforesaid principle has also been followed in Khushal Chand Daga, Torsion Products Ltd. and Gajendra Kumar Agarwal (supra).

27. Consistent with the aforesaid judicial principle, we find that there is no statutory embargo upon examining the allowability of the underlying expenditure under any other applicable provision of the Act in the year in which the set-off of the carried-forward loss is claimed, particularly where such expenditure is otherwise eligible for deduction under the relevant provision of the Act and the benefit of section 35(2AB), though originally claimed, has not ultimately been availed by the assessee. The fact that the assessee had initially claimed the expenditure under section 35(2AB), but subsequently foregone the benefit of the additional weighted deduction thereunder, would not, in our considered view, preclude examination of the allowability of the underlying expenditure under another otherwise applicable provision of the Act.

28. Further, having regard to the legislative intent underlying the provisions of section 115BAA(2), which seeks to deny specified incentives, deductions and exemptions in consideration of the concessional rate of tax, the same cannot, in the absence of an express statutory prohibition, be construed as extending to the denial of a deduction in respect of actual expenditure otherwise allowable under the relevant provisions of the Act. This aspect also lends support to the assessee’s contention.

29. The aforesaid position finds further support from the decision of the coordinate Bench of the Tribunal, Mumbai, in Gajendra Kumar Agarwal (supra), wherein it was observed that, in the course of proceedings for the subsequent assessment year, i.e., the assessment year in which the set-off of the carried-forward loss is claimed, it remains open to examine the true nature and character of the loss incurred in the earlier year. Thus, the determination of the nature of the loss in the year in which such loss was incurred does not, by itself, operate as a bar against examining the allowability and character of such loss in the subsequent year in which the set-off thereof is claimed.

30. In view of the foregoing discussion and upon an overall consideration of the facts on record, the applicable jurisprudence and the statutory scheme, we are of the considered view that the expenditure forming part of the carried-forward losses, which was originally claimed under section 35(2AB) of the Act, but in respect of which the assessee had subsequently forgone the additional 50% weighted deduction (incentive) available thereunder, requires examination with reference to its independent allowability under sections 35(1)(i), 35(1)(iv) and/or 37(1) of the Act.

31. Accordingly, the matter is restored to the file of the Assessing Officer for the limited purpose of examining and verifying whether the underlying expenditure otherwise satisfies the statutory conditions prescribed under the aforesaid provisions of the Act. Upon such verification, the Assessing Officer shall determine, in accordance with law, the quantum of expenditure, if any, which is otherwise allowable under the relevant provisions and the corresponding amount of carried-forward loss eligible for set-off, without granting the additional weighted deduction under section 35(2AB) of the Act.

32. It is clarified that the exercise shall be confined to verification of the allowability of the underlying expenditure under the aforesaid provisions and the consequential re-computation of the eligible carried-forward loss. As such expenditure is allowable under sections 35(1)(i), 35(1)(iv) and/or 37(1) of the Act, the corresponding loss cannot, merely on account of its having originally been claimed under section 35(2AB), be regarded as a loss attributable to the deductions referred to in clauses (i) and (ii) of section 115BAA(2) of the Act.

33. In the backdrop of the aforesaid observations, we, in principle, concur with the contentions of the assessee, accordingly, set aside the impugned order of the Ld. CIT(A) and direct the Assessing Officer allow brought-forward loss available for set-off, after due factual verification of the assessee’s claim regarding the independent allowability of the underlying expenditure under sections 35(1)(i), 35(1)(iv) and/or 37(1) of the Act, as the case may be.

34. In result the appeal of assessee is allowed, in above terms.