ORDER
Siddhartha Nautiyal, Judicial Member. – This appeal is filed by the Assessee against the order of Ld. The Commissioner of Income Tax (Appeals), NFAC, dated 11-Nov-2025 for the Assessment Year 2019-20. The assessee has raised the following grounds of appeal:
1.1 Weighted deduction u/s 35(2AB) of the Act (Act): On the facts and circumstances of the case and in law, the Ld. CIT(A), has erred in upholding disallowance of weighted deduction of Rs. 80,41,254/- u/s 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 u/s 35(1)(i) of the Act.
Without prejudice, on the facts and circumstances of the case and in law, the ld.CIT(A), has erred in denying deduction of Rs. 53,60,836/- u/s 35(1)(i) of the Act being revenue expenditure incurred on scientific research related to the business of the appellant.
Ground Number 1: Weighted deduction u/s 35(2AB) of the Act
1. The facts, in brief, are that during the assessment proceedings, the Assessing Officer disallowed the entire deduction of Rs.13,39,61,590/- claimed by the assessee under section 35(2AB) of the Act, being 150% of the expenditure of Rs.8,93,07,727/- incurred on its in-house Research and Development facility, on the ground that the report in Form No. 3CL from the Department of Scientific and Industrial Research (DSIR) had not been received during the course of assessment proceedings. At the same time, the Assessing Officer specifically observed in the assessment order that the total income would be subject to rectification on receipt of Form No. 3CL from the DSIR.
2. Thereafter, upon receipt of Form No. 3CL from the DSIR, the assessee filed an application under section 154 of the Act on 28.04.2022 seeking rectification of the assessment order. The Assessing Officer disposed of the rectification application vide order dated 17.01.2023. In the rectification order, the Assessing Officer noted that the DSIR, in Form No. 3CL dated 22.03.2022, had certified eligible in-house R&D expenditure of Rs.8,39,46,891/- as against Rs.8,93,07,727/- claimed by the assessee. Accordingly, the Assessing Officer granted partial relief by allowing deduction under section 35(2AB) to the extent of Rs.12,59,20,336/- being 150% of Rs.8,39,46,891/-, while the balance claim remained disallowed.
3. Before us, the learned Counsel for the assessee submitted that after receipt of Form No. 3CL, the assessee had made a representation before the DSIR pointing out discrepancies in the quantification of eligible expenditure and had specifically sought reasons for the difference of Rs.53.61 lakhs between the expenditure claimed by the assessee and the expenditure certified in Form No. 3CL. It was submitted that the representation before the DSIR is still pending and that the DSIR, being the prescribed authority under section 35(2AB) of the Act, is the final authority for certifying the eligible expenditure. The learned Counsel, therefore, prayed that liberty may be granted to the assessee and suitable directions may be issued to the Assessing Officer to grant consequential relief if, pursuant to the assessee’s representation, the DSIR revises or enhances the eligible expenditure certified in Form No. 3CL.
4. We find merit in the limited request made on behalf of the assessee. The dispute now surviving is not regarding the allowability of deduction under section 35(2AB) per se, but only with regard to the quantum of expenditure certified by the DSIR. It is an undisputed fact that the Assessing Officer himself had kept the issue open in the assessment order for rectification upon receipt of Form No. 3CL and, thereafter, granted partial relief on the basis of the certification issued by the DSIR. If, pursuant to the representation already filed by the assessee, the DSIR, being the prescribed authority under section 35(2AB), revises or modifies the amount of eligible expenditure certified in Form No. 3CL, the assessee cannot be denied consequential relief merely because such revision is made subsequent to the assessment or rectification proceedings.
5. Accordingly, in the interest of justice, we restore this limited issue to the file of the Assessing Officer with a direction that, if pursuant to the assessee’s pending representation or any subsequent proceedings, the DSIR revises, enhances or otherwise modifies the expenditure certified in Form No. 3CL, the Assessing Officer shall examine the revised certification and grant consequential relief under section 35(2AB) in accordance with law after affording reasonable opportunity of being heard to the assessee.
6. Subject to these directions, this ground of appeal is treated as allowed for statistical purposes.
Ground Number 1.2 Deduction u/s 35(1)(i) of the Act:
7. Ground No. 1.2 has been raised by the assessee without prejudice to Ground No. 1. The alternate contention of the assessee is that even if the expenditure excluded by the Department of Scientific and Industrial Research (DSIR) while issuing Form No. 3CL is held to be ineligible for weighted deduction under section 35(2AB) of the Act, such expenditure cannot be denied deduction altogether. It is the case of the assessee that the expenditure is revenue expenditure incurred on scientific research related to its business and, therefore, the same is independently allowable under section 35(1)(i) of the Act. Accordingly, the assessee has claimed that the expenditure which has not been approved by the DSIR for the purposes of section 35(2AB) should be examined independently under section 35(1)(i) of the Act and, if the conditions prescribed therein are satisfied, the deduction ought to be granted notwithstanding the disallowance under section 35(2AB) of the Act.
8. We have heard the rival submissions and perused the material available on record. Since Ground No. 1 relating to the assessee’s claim under section 35(2AB) has already been adjudicated against the assessee, while dealing with this issue is assessee’s own case for AY 2017-2018 in ITA Nos. 148 &149/Mum/2026 vide order dated 25.06.2026, the surviving issue for our consideration is whether the expenditure, which has not been approved by the Department of Scientific and Industrial Research (DSIR) for the purposes of section 35(2AB), is in the alternative eligible for deduction under section 35(1)(i) of the Act.
9. The Assessing Officer disallowed the assessee’s alternate claim solely on the ground that the expenditure had not been approved by the DSIR while issuing Form No. 3CL. The CIT(A) affirmed the action of the Assessing Officer by holding that once the expenditure did not qualify for weighted deduction under section 35(2AB) of the Act, the assessee was not entitled to deduction under section 35(1)(i) of the Act.
10. In our considered opinion, the aforesaid approach adopted by the Revenue authorities cannot be sustained. Section 35(2AB) and section 35(1)(i) operate in different fields and prescribe distinct conditions for allowability of deduction. Section 35(2AB) grants weighted deduction in respect of expenditure incurred on an approved in-house research and development facility, whereas section 35(1)(i) allows deduction in respect of revenue expenditure laid out on scientific research related to the business carried on by the assessee. Therefore, merely because a part of the expenditure has not been approved by the DSIR for the limited purpose of weighted deduction under section 35(2AB) of the Act, it does not automatically follow that such expenditure is disentitled to deduction under section 35(1)(i) of the Act, provided the statutory conditions prescribed therein are otherwise fulfilled.
11. We find that this precise issue has been considered by the Coordinate Bench of the Mumbai Tribunal in Deepak Nitrite Ltd. v. DCIT [IT Appeal Nos. 148 & 149 (Mum) of 2026, dated 25-6-2026] for Assessment Years 2017-18 and 2018-19. The Tribunal held that although the quantification made by the DSIR in Form No. 3CL is binding for the purposes of deduction under section 35(2AB) of the Act after the amendment to Rule 6(7A), the rejection of a portion of the expenditure by the DSIR does not automatically result in denial of deduction under sections 35(1)(i) or 35(1)(iv) read with section 35(2). The Tribunal observed that these provisions constitute separate and independent statutory provisions operating in distinct fields and that the alternate claim has to be examined independently on its own merits. While passing the order, Hon’ble ITAT made the following observations:
“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.
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.”
12. We respectfully concur with the aforesaid view. In the present case, neither the Assessing Officer nor the CIT(A) has examined whether the expenditure claimed by the assessee satisfies the conditions prescribed under section 35(1)(i) of the Act. The alternate claim has been rejected solely because the expenditure was not approved by the DSIR for the purposes of section 35(2AB) of the Act.
13. Accordingly, in the interest of justice, we restore this limited issue to the file of the Assessing Officer for fresh adjudication. The Assessing Officer shall independently examine whether the expenditure claimed by the assessee satisfies the requirements of section 35(1)(i) of the Act. If, upon such examination, the assessee is found to fulfil the conditions prescribed under the said provision, the Assessing Officer shall allow deduction in accordance with law after affording adequate opportunity of hearing to the assessee.
14. In the result, the appeal of the assessee is allowed for statistical purposes, subject to observations as given above.
