The Mumbai Bench of the Income Tax Appellate Tribunal has delivered an important ruling in the batch of appeals involving Deepak Nitrite Limited and the Deputy Commissioner of Income Tax, Central Circle–8(1), Mumbai. The common order, pronounced on 25 June 2026, deals with the allowability of weighted deduction for in-house research and development expenditure under Section 35(2AB), the authority of the Department of Scientific and Industrial Research to quantify eligible expenditure in Form No. 3CL, additional depreciation under Section 32(1)(iia), and the computation of disallowance under Section 14A read with Rule 8D.
Background of the Dispute
A search and seizure action under Section 132 was conducted in the Deepak Group on 15 November 2018. Consequential assessments were completed for the relevant assessment years, during which the Assessing Officer examined the company’s claims relating to in-house scientific research expenditure, additional depreciation and expenditure attributable to exempt income.
The appeals before the Tribunal related to Assessment Years 2016–17, 2017–18 and 2018–19. Since the facts and legal issues were common, the Tribunal disposed of the appeals and cross-objections through a consolidated order.
Weighted Deduction Under Section 35(2AB) for Assessment Year 2016–17
For Assessment Year 2016–17, Deepak Nitrite claimed weighted deduction on expenditure incurred at its approved in-house research and development facilities. The Assessing Officer restricted the deduction to the expenditure quantified by DSIR in Form No. 3CL and disallowed weighted deduction of ₹1,06,65,416 on the difference between the expenditure claimed and the amount certified by DSIR.
The Tribunal observed that, under Section 35(2AB) and Rule 6(7A) as applicable to Assessment Year 2016–17, the statutory emphasis was on the approval of the in-house R&D facility rather than the approval or quantification of every item of expenditure by DSIR.
Deepak Nitrite possessed a valid approval in Form No. 3CM. The Assessing Officer had neither disputed the genuineness of the expenditure nor established that it was unrelated to scientific research carried out at the approved facilities. The only basis for the disallowance was that DSIR had certified a lower amount in Form No. 3CL.
The Tribunal held that, prior to the amendment of Rule 6(7A), Form No. 3CL operated as a reporting mechanism and DSIR’s role was principally confined to approval of the R&D facility. The subsequent amendment requiring DSIR to quantify eligible expenditure could not be applied retrospectively.
Accordingly, the Tribunal upheld the deletion of the disallowance and dismissed the Revenue’s grounds relating to Section 35(2AB) for Assessment Year 2016–17.
DSIR Quantification Binding From Assessment Year 2017–18
The Tribunal drew a clear distinction between the legal position applicable to Assessment Year 2016–17 and that applicable from Assessment Year 2017–18.
With effect from 1 July 2016, Rule 6(7A)(b) specifically required DSIR to quantify, in Part B of Form No. 3CL, the expenditure incurred on an approved in-house R&D facility that was eligible for weighted deduction under Section 35(2AB).
For Assessment Year 2017–18, Deepak Nitrite claimed weighted deduction of ₹7,30,03,882. DSIR approved expenditure of ₹6,26,52,000 and excluded expenditure aggregating to ₹1,03,51,882. The Assessing Officer consequently disallowed weighted deduction of ₹2,07,03,764.
The Tribunal upheld this disallowance. It held that, after the amendment to Rule 6(7A), DSIR’s authority to quantify eligible expenditure had statutory recognition. The Assessing Officer was therefore justified in restricting the weighted deduction to the amount quantified by DSIR.
The Tribunal also rejected the contention that the Income Tax Authorities could independently examine the correctness of DSIR’s technical determination. DSIR was recognised as the specialised expert body entrusted with assessing and quantifying eligible scientific research expenditure. Neither the Assessing Officer nor the appellate authorities could substitute their own technical views for the determination made by DSIR within its statutory domain.
The same reasoning was applied to Assessment Year 2018–19, in which the assessee challenged the disallowance of weighted deduction of ₹84,82,421.
Alternate Deduction for Expenditure Not Approved by DSIR
Although the Tribunal upheld the restriction of weighted deduction under Section 35(2AB) for Assessment Years 2017–18 and 2018–19, it accepted the assessee’s contention that non-approval by DSIR for weighted deduction did not automatically bar a normal deduction under other provisions of Section 35.
The Tribunal explained that Section 35(2AB) grants a weighted deduction for expenditure incurred on an approved in-house R&D facility. Section 35(1)(i), however, independently deals with revenue expenditure on scientific research related to the assessee’s business. Similarly, Section 35(1)(iv), read with Section 35(2), deals with capital expenditure on scientific research related to the business.
The conditions governing these provisions are distinct. Therefore, expenditure excluded by DSIR for the purpose of Section 35(2AB) could still qualify for deduction under Sections 35(1)(i) or 35(1)(iv), provided the statutory conditions under those provisions were independently satisfied.
For Assessment Year 2017–18, the Tribunal restored to the Assessing Officer the examination of revenue expenditure of ₹56,13,495 and capital expenditure of ₹47,38,387. The Assessing Officer was directed to determine afresh whether the amounts qualified under Section 35(1)(i) and Section 35(1)(iv) read with Section 35(2), after giving the assessee an adequate opportunity of hearing.
The corresponding grounds were therefore partly allowed for statistical purposes. The same directions were made applicable to Assessment Year 2018–19.
Balance Additional Depreciation Under Section 32(1)(iia)
Another issue concerned the assessee’s claim of ₹2,00,04,913 representing the balance 50% of additional depreciation on eligible plant and machinery acquired in the preceding year but used for less than 180 days.
The Assessing Officer contended that additional depreciation could be allowed only in the year of acquisition and installation and that, in the absence of an express enabling provision, the remaining 50% could not be carried forward.
The Tribunal rejected this interpretation. It held that Section 32(1)(iia) grants a one-time incentive equal to 20% of the actual cost of eligible machinery. The restriction contained in the second proviso to Section 32(1) merely limits the amount allowable in the year of acquisition where the asset is used for less than 180 days. It does not extinguish the balance entitlement.
The Tribunal further noted that the third proviso to Section 32(1), inserted by the Finance Act, 2015, expressly provided for allowance of the remaining 50% in the immediately succeeding previous year. Since this proviso formed part of the statute for Assessment Year 2016–17, the assessee was entitled to the balance additional depreciation.
The order of the Commissioner of Income Tax (Appeals) allowing the claim was therefore upheld.
Computation of Disallowance Under Section 14A and Rule 8D
The Tribunal also examined the manner in which the Assessing Officer had computed the disallowance under Section 14A read with Rule 8D.
Under the applicable version of Rule 8D(2)(ii), the denominator in the prescribed formula was the average of total assets appearing in the balance sheet. The Assessing Officer had instead adopted the written down value of fixed assets and reduced current liabilities from current assets. This reduced the value of total assets and consequently increased the proportion of interest expenditure attributed to exempt income.
The Tribunal held that this methodology was contrary to the plain language of Rule 8D. The Rule referred to total assets as appearing in the balance sheet and did not authorise the substitution of gross assets with the written down value of fixed assets or the use of net current assets after deducting current liabilities.
A statutory formula must be applied strictly. Neither the Assessing Officer nor the assessee can add to or subtract from the expressions used in the Rule. The Tribunal therefore upheld the Commissioner of Income Tax (Appeals)’s decision accepting the computation based on gross assets and deleting the additional disallowance.
Final Outcome
The Revenue’s appeal for Assessment Year 2016–17 was dismissed. The assessee’s cross-objection for that year was dismissed as not pressed.
For Assessment Year 2017–18, the assessee’s challenge to the restriction of weighted deduction under Section 35(2AB) was dismissed. However, the alternate claims under Section 35(1)(i) and Section 35(1)(iv) read with Section 35(2) were restored to the Assessing Officer for fresh examination. The Revenue’s appeal and the assessee’s cross-objection for that year were dismissed as not pressed.
The same principles were applied to the assessee’s appeal for Assessment Year 2018–19. In the combined result, the assessee’s appeals were partly allowed for statistical purposes.
Why This Judgment Is Important
The ruling clearly identifies the change in DSIR’s statutory role following the amendment to Rule 6(7A). For periods before the amendment, weighted deduction could not be restricted merely to the amount recorded in Form No. 3CL where the approved facility and genuineness of expenditure were not disputed. For later periods, DSIR’s quantification became material and binding for Section 35(2AB). At the same time, the judgment preserves the assessee’s right to establish an alternate deduction under the general scientific research provisions where the weighted deduction is unavailable.
The decision is relevant for Chartered Accountants, tax advocates, corporate tax teams, manufacturing companies and businesses maintaining approved in-house research and development facilities.
, DSIR Form 3CL, additional depreciation and Section 14A in Deepak Nitrite’s case.){kind=link}