Delay in DSIR Approval Cannot Bar Section 35(1)(iv) Capital Expenditure Deduction for R&D Building

ORDER

Smt. Beena Pillai, Judicial Member. – Present appeal is filed by the assessee against the order dated 16/01/2026 passed by the National Faceless Appeal Centre (“NFAC”), Delhi, [hereinafter referred to as “Ld.CIT(A)”] for the Assessment Year 2018-19, on the following grounds of appeal:-

“1.1 The Ld. AO erred in adding the capital expenditure incurred on Research and Development (R&D) building amounting to Rs. 1,12,08,649/- u/s. 35(1) of the Income-tax Act, 1961.

1.2 While doing so, the Ld. AO failed to appreciate that:

2. The Ld. AO erred in not giving an opportunity to the assessee for explaining the facts under the new E-assessment Scheme and not accepting the request of the assessee for Video Conferencing (VC) placed on 09/ 03/2021 against the draft assessment order and passing the final order without any hearing based on the submissions on record on 13/03/2021.

3. The Appellant craves leave to add, amend, alter, modify or delete all or any of the grounds raised in the appeal.”

Assessee is a listed public limited company engaged in the business of manufacturing chemicals, particularly Acrylonitrile Butadiene Styrene (“ABS”) and Styrene Acrylonitrile (“SAN”) resins. The assessee filed its original return of income for the year under consideration on 31/10/2018, declaring total income of Rs. 149,99,56,200/-. Subsequently, the assessee filed a revised return of income on 31/03/2019, declaring total income of Rs. 148,87,47,550/-. The case was selected for complete scrutiny under CASS for examination of the following issues:

2.1. During the assessment proceedings, notices u/s. 143(2) and 142(1) of the Act were issued to the assessee. In response thereto, the assessee furnished various details and explanations vide submissions dated 25/12/2020, 05/01/2021, 18/01/2021 and 19/01/2021. The Ld. AO observed that the assessee claimed deduction of Rs.1,12,08,649/- u/s.35(1)(iv) of the Act in respect of capital expenditure incurred on construction of an R&D building. The assessee furnished approval certificate issued by the Department of Scientific and Industrial Research (“DSIR”), along with copies of the bills and supporting documents in respect of the expenditure incurred. The Ld.AO disallowed the claim for the following reasons:

2.2. The Ld.AO accordingly added Rs.1,12,08,649/- to the returned income. The Ld.AO also disallowed a sum of Rs.3,00,000/- out of the deduction claimed u/s.80G of the Act on account of the assessee’s failure to furnish the receipts and approval particulars in respect of donations made to two institutions. The assessment was completed vide order dated 13/03/2021 passed u/s.143(3) r.w.s. 143(3A) and 143(3B) of the Act, determining the total income at Rs.150,02,56,199/- as against the returned income of Rs. 148,87,47,550/-.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A).

3. Before the Ld.CIT(A), the assessee submitted that section 35(1)(iv) of the Act does not require approval of the research facility by the DSIR. It was submitted that only conditions for claiming deduction under the said provision are that the expenditure should be capital in nature, incurred on scientific research and that such scientific research should be related to the business carried on by the assessee.

3.1. The assessee further submitted that the Ld.AO had not disputed the actual incurrence of expenditure, use of the building for scientific research or the connection of such research with the assessee’s business. It was therefore submitted that the deduction could not be denied merely because the DSIR approval was granted in a subsequent year.

3.1.1. Without prejudice, the assessee submitted that even if DSIR approval were regarded as necessary, subsequent approval of the research facility would be sufficient. Reliance was placed upon the following decisions:

3.2. It was further submitted that Form No. 3CL is prescribed for the purpose of weighted deduction u/s. 35(2AB) of the Act and has no application to a claim made u/s. 35(1)(iv) r.w.s. 35(2) of the Act.

3.3. The assessee also challenged the validity of the assessment order on the ground that its request for personal hearing through video conferencing, made on 09/03/2021, was not accepted. It was submitted that the assessment order was passed on 13/03/2021 without affording an effective opportunity of being heard.

3.4. The Ld.CIT(A) accepted the assessee’s contention that approval from the DSIR was not a prerequisite for claiming deduction u/s.35(1)(iv) of the Act. The Ld.CIT(A) further agreed that Form No. 3CL was relevant to a claim u/s.35(2AB) and had no application to a deduction claimed u/s.35(1)(iv) of the Act. However, the Ld.CIT(A) confirmed the disallowance on a ground different from those adopted by the Ld.AO. The Ld.CIT(A) proceeded on the basis that section 35(1)(iv) specifically excluded expenditure “in the nature of cost of any land or building” and held that expenditure incurred on construction of an R&D building was not eligible for deduction.

3.5. In reaching the aforesaid conclusion, the Ld.CIT(A) placed reliance upon the decision stated to be of the Hon’ble Bombay High Court in Hindustan Lever Ltd. v. R.B. Wadkar  268 ITR 332 (Bombay). The Ld.CIT(A) accordingly confirmed the disallowance of Rs.1,12,08,649/-. The Ld.CIT(A) also rejected the assessee’s challenge based on the alleged denial of personal hearing and confirmed the disallowance of Rs.3,00,000/- made u/s. 80G of the Act.

Aggrieved by the order passed by the Ld. CIT(A), the assessee is in appeal before this Tribunal.

4. The Ld.AR reiterated the submissions advanced before the authorities below. He submitted that the Ld.CIT(A) misread the provisions of section 35(1)(iv) r.w.s. 35(2) of the Act. The phrase “not being expenditure in the nature of cost of any land or building” does not form part of section 35(1)(iv). The said restriction appears in section 35(2AB), which deals with weighted deduction for expenditure incurred on an approved in-house R&D facility.

4.1. The Ld.AR submitted that section 35(1)(iv) allows deduction in respect of capital expenditure incurred on scientific research related to the business carried on by the assessee, subject to section 35(2). Section 35(2)(ia) allows the whole of such capital expenditure in the previous year in which it is incurred. The restriction in the proviso to section 35(2)(ia) applies only to expenditure incurred on acquisition of land and does not exclude expenditure on construction of a building used for scientific research.

4.2. The Ld.AR further submitted that the decision relied upon by the Ld. CIT(A) in Hindustan Lever Ltd., (supra), concerned the validity of reassessment proceedings and did not hold that expenditure incurred on an R&D building was excluded from section 35(1)(iv) of the Act. It was thus submitted that, the reliance placed by the Ld.CIT(A) on the said decision was wholly misplaced. The Ld.AR submitted that the Ld.AO had not disputed the actual incurrence of expenditure, its capital nature, use of the building for scientific research or the nexus of such research with the assessee’s business. Therefore, all the conditions prescribed u/s.35(1)(iv) r.w.s. 35(2) stood satisfied. He accordingly prayed that the disallowance be deleted.

4.3. The Ld.DR relied upon the orders passed by the authorities below. The Ld.DR submitted that the DSIR approval was not operative during the year under consideration and that the assessee had not furnished Form No. 3CL certifying the eligible expenditure. The Ld. DR accordingly prayed for confirmation of the disallowance.

We have perused the submissions advanced by both sides in light of the record placed before us.

5. The principal issue for our consideration is whether the assessee is entitled to deduction u/s. 35(1)(iv) r.w.s. 35(2) of the Act in respect of capital expenditure of Rs. 1,12,08,649/- incurred on construction of an R&D building used for scientific research related to its business.

6. For the year under consideration, section 35(1)(iv) of the Act provided as under:

“(iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2).”

6.1. Section 35(2)(ia), insofar as relevant, provided that where capital expenditure was incurred after 31/03/1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year. The proviso thereto excluded only expenditure incurred on the acquisition of land after 29/02/1984, whether the land was acquired as such or as part of any property, to the extent attributable to the land.

6.2. A conjoint reading of section 35(1)(iv) and section 35(2)(ia) shows that the entire capital expenditure incurred on scientific research related to the business of the assessee is allowable in the year in which it is incurred, except expenditure incurred on acquisition of land. The provision does not exclude expenditure incurred on construction or acquisition of a building used for scientific research.

6.3. The Ld.CIT(A), while reproducing the provision, incorporated the words “not being expenditure in the nature of cost of any land or building” into section 35(1)(iv). These words do not form part of section 35(1)(iv) applicable to the year under consideration. The said expression appears in section 35(2AB), which governs weighted deduction in respect of expenditure incurred on an approved in-house R&D facility.

It is noted that the assessee’s claim, however, is for deduction of the actual capital expenditure u/s. 35(1)(iv) r.w.s. 35(2) and not for weighted deduction u/s.35(2AB). The statutory restrictions governing section 35(2AB) cannot be imported into section 35(1)(iv), particularly when the latter provision is governed by its own conditions and by the specific mechanism prescribed in section 35(2).

6.4. We further note that the decision relied upon by the Ld. CIT(A), namely, Hindustan Lever Ltd. (supra) concerns the validity of reasons recorded for reopening an assessment u/s. 147 of the Act. It does not lay down any proposition that expenditure incurred on construction of a building used for scientific research is excluded from the scope of section 35(1)(iv). The ratio attributed to the said decision in the impugned order is therefore not borne out from the judgment.

6.5. On the contrary, the Hon’ble Bombay High Court in CIT v. Sandoz (India) Ltd.   206 ITR 385 (Bombay), considered the scope of section 35(1)(iv) in relation to capital expenditure incurred on construction of an approach road to the assessee’s research and development laboratory. The decision recognises that capital expenditure on an asset integrally connected with scientific research related to the assessee’s business falls within the ambit of section 35(1)(iv).

6.6. In the present case, the following facts stand undisputed:

6.7. The Ld.AO did not dispute the genuineness or quantum of the expenditure. The claim was disallowed only because the DSIR approval was granted subsequently and Form No. 3CL was not available for the year under consideration. We agree with the finding of the Ld.CIT(A) that approval from the DSIR is not a statutory precondition for claiming deduction u/s.35(1)(iv) of the Act. The requirement of approval of the in-house R&D facility by the prescribed authority is contained in section 35(2AB), whereas no such requirement has been incorporated in section 35(1)(iv) r.w.s.35(2). Likewise, Form No.3CL is prescribed in connection with deduction u/s.35(2AB) and has no application to a claim of actual capital expenditure u/s. 35(1)(iv). Therefore, both the grounds on which the Ld.AO disallowed the claim are legally unsustainable.

6.8. The alternative basis adopted by the Ld.CIT(A), namely, that expenditure on an R&D building is expressly excluded from section 35(1)(iv), proceeds from an incorrect reading of the statutory provision. The only relevant exclusion under section 35(2)(ia) is in respect of expenditure attributable to acquisition of land. It is not the case of the Revenue that any portion of the disputed expenditure of Rs.1,12,08,649/- relates to acquisition of land.

7. In view of the above, we hold that the assessee satisfied the conditions prescribed u/s.35(1)(iv) r.w.s.35(2) of the Act. The assessee is accordingly entitled to deduction of Rs.1,12,08,649/-in respect of capital expenditure incurred on construction of the R&D building. The Ld. AO is directed to delete the disallowance.

8. Ground No.2 concerns the alleged denial of an opportunity of personal hearing through video conferencing during the assessment proceedings. Since we have adjudicated the substantive issue on merits in favour of the assessee, this ground has become academic and does not require separate adjudication.

9. Ground No. 3 is general in nature and does not require adjudication.

In the result, the appeal filed by the assessee stands partly allowed.