M/S. ANABOND LTD.,CHENNAI vs. DCIT, CORP . CIRCLE-1(1), CHENNAI

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ITA 2825/CHNY/2026Status: DisposedITAT Chennai09 September 2026AY 2017-1813 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that unapproved R&D expenditure is eligible for normal deduction under Section 35(1)(i)/(iv). Disallowances under Section 14A cannot be adjusted against book profits under Section 115JB. The issue regarding Section 40(a)(ii) was remitted back to the AO.

What were the facts?

The assessee claimed weighted deduction for R&D expenses under Section 35(2AB) exceeding DSIR approval. The AO disallowed the excess, and the CIT(A) confirmed most disallowances, except for interest income. The assessee also contested disallowances under Section 14A and Section 40(a)(ii).

What were the issues?

Whether R&D expenditure exceeding DSIR approval is eligible for normal deduction, and if Section 14A disallowances can be adjusted against book profits.

Which sections of the Income-tax Act were involved?

Section 35(2AB),Section 35(1)(iv),Section 37(1),Section 14A,Section 115JB,Section 40(a)(ii),Section 35(1)(i)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI

Before: SHRI ABY T. VARKEY & MS. PADMAVATHY.S

For Respondent: Ms. M.Subashri, Addl. CIT

आदेश / O R D E R

PER PADMAVATHY.S, A.M: These appeals by the assessee are against the separate orders of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, (in short "CIT(A)") passed u/s. 250 of the Income Tax Act, 1961 (in short "the Act") both dated 11.03.2026 for Assessment Years (AYs) 2017-18 & 2018-19. The common issues contended by the assessee in both the AYs are as under: 1. Denial of deduction u/s. 35 (2AB) of the Act in excess of DSIR approval – AY 2017-18 & 2018-19.

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2.

Without prejudice to (1) above the amount disallowed u/s. 35(2AB) of the Act to be allowed under section 35(1)(iv)/37(1) of the Act – AYs. 2017-18 & 2018-19. 3. Disallowance u/s. 14A r.w Rule 8D of the Income Tax Rules – AY 2017-18. 4. Adjustment of disallowance made u/s. 14A r/w Rule 8D of the Rules while computing the book profits u/s. 115JB of the Act – AY 2017-18. 5. Disallowance u/s. 40(a)(ii) of the Act – AY 2017-18.

2.

The assessee is a company and engaged in the business of manufacturing and marketing anaerobic adhesives and sealants for the engineering industry. The assessee filed a return of income for AY 2017-18 on 30.10.2017 declaring total income of Rs.13,69,68,460/-. The case was selected for scrutiny, and the statutory notices were duly served on the assessee. During the course of hearing, the A.O observed that the assessee has claimed a weighted average of deduction of Rs. 5,14,69,618/- being 200% of the research and development expenses of Rs. 2,57,34,809/-. u/s. 35(2AB) of the Act. The AO further noticed that as per the approval granted by DSIR, the eligible R&D expenditure which was approved was only at Rs. 192.42 Lakhs. The AO therefore held that the assessee had claimed excess deduction on unapproved expenditure of Rs. 64.92 Lakhs and accordingly disallowed a sum of Rs. 1,29,84,000/- being 200% of the excess amount. The AO also noted that the assessee has earned an exempt income of Rs. 3,65,555/- and has made a suo-moto disallowance of Rs. 36,555/-. The AO invoked the provisions of Section 14A r.w Rule 8D of the Rules to compute the further disallowance of Rs. 3,29,000/- restricting disallowance to be amount of

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exempt income. The A.O made the adjustment to the book profits computed u/s. 115JB of the Act to the extent of the disallowance made u/s. 14A r/w Rule 8D of the Rules. The AO noticed the difference between interest income accounted in the books of accounts and the interest credited in the bank account. Since the assessee could not provide any satisfactory reconciliation for the difference, the A.O treated the difference of Rs.2,81,850/- as income from other sources. The AO also disallowed a sum of Rs.54,779/- towards TDS payment under the head “rates and taxes” holding that it is not an allowable expenditure and made a disallowance u/s. 40(a)(ii) of the Act. The CIT(A) granted marginal relief to the assessee by remitting the addition made towards interest income back to the AO and the CIT(A) confirmed the rest of the additions/disallowances made by the AO.

Disallowance u/s. 35(2AB) of the Act: 3. The Ld. Authorized Representative (AR) of the assessee submitted that the AO is not correct in disallowing the amount claimed in excess of the amount certified by DSIR. The Ld. AR further submitted that it is not in dispute that the assessee has incurred the entire amount towards scientific research and therefore the excess amount should otherwise be eligible for deduction u/s. 35(1)(iv) or Section 37(1) of the Act. The Ld. AR also submitted that the revenue expenditure not certified is to be allowed at 100% under the above sections and the capital expenditure should be allowed depreciation. The Ld. AR in this regard placed reliance on the decision of the Coordinate Bench in the case of Ashok Leyland Ltd. vs. ACIT [2025] 172 taxmann.com 42 (Chennai-Trib.).

4.

The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities.

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5.

We have heard the parties and perused the material available on record. The issue before us whether the uncertified amount excess claimed towards revenue expenditure and capital expenditure to be allowed u/s. 35(1)(i)/(iv) of the Act respectively. In this regard, we notice that the Coordinate Bench in the case of Ashok Leyland (Supra) has considered an identical issue where it has been held that: “4.1 The facts as discernible from the records are that, the assessee had incurred scientific research expenditure, both revenue and capital, at its approved in-house R&D facility. According to the AO, the assessee had claimed weighted deduction of Rs.731,68,77,636/- being 200% of the aggregate expenditure u/s 35(2AB) of the Act. The AO in the course of assessment, had required the assessee to submit the Form 3CL issued by the DSIR, to which the assessee is noted to have submitted that, the DSIR was yet to issue Form 3CL. According to the assessee however, the non-availability of Form 3CL would not prevent it from claiming weighted deduction u/s 35(2AB) of the Act. After considering the submissions of the assessee, the AO is noted to have held that, in absence of Form 3CL, the assessee cannot claim weighted deduction u/s 35(2AB) of the Act. 4.2 The AO thereafter observed that, the assessee had incurred revenue expenditure of Rs.387,57,96,408/-, in relation to which weighted deduction of 200% being Rs.775,50,92,814/- had been claimed as deduction u/s 35(2AB) of the Act. The AO is noted to have held that normal deduction for the revenue expenditure was allowable and therefore disallowed the weighted component of deduction claimed u/s 35(2AB), which was ascertained at Rs.387,57,96,408/-. With regard to the balance R&D expenditure of capital nature of Rs.100,21,22,016/-, the AO noted that, the assessee had claimed weighted deduction at 200% being Rs.200,42,44,032/-. According to the AO, this entire claim was to be disallowed. The AO is noted to have specifically denied the alternate claim raised by the assessee in respect of 100% of capital expenditure u/s 35(1)(iv) of the Act and instead allowed depreciation @ 15% on the capital expenditure being Rs.30,06,36,605/- [Rs.100,21,22,016 X 15%]. The AO accordingly disallowed sum of Rs.557,94,03,835/- (Rs.387,57,96,408/- + Rs.170,36,07,427) u/s 35(2AB) of the Act. Being aggrieved by the order of the AO, the assessee carried the matter in appeal before the Ld. CIT(A). 4.3 It is noted that the Ld. CIT(A) has in principle upheld the action of the AO. However, before the Ld. CIT(A), the assessee brought to his notice that, the AO had made the disallowance u/s 35(2AB) on the

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erroneous presumption that, the assessee had claimed weighted deduction @ 200%, whereas the assessee had actually claimed weighted deduction @ 150%. The assessee accordingly pointed out that, the AO had made excessive disallowance of Rs.314,04,44,623/-. The Ld. CIT(A) is noted to have found this contention of the assessee to be factually correct and accordingly directed the AO to make necessary correction and modify the disallowance figure to Rs.243,89,59,212/- (Rs.557,94,03,835/- minus Rs. Rs.314,04,44,623). Being aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before us.

4.4 Having considered the submissions of the assessee, in light of the findings of the lower authorities, we note that, Section 35(2AB) of the Act, provides that, an assessee shall be allowed weighted deduction in relation to expenditure incurred on the in-house R&D facility as approved by the prescribed authority, i.e. DSIR. Sub-clause (4) of Clause (2AB) of Section 35 provides that, the prescribed authority, i.e. DSIR shall submit its report in relation to the approval of the research facility in such Form as prescribed. Rule 6(7A)(b) of the Income-tax Rules, 1962 as amended by the IT(10th Amendment) Rules, 2016 applicable with effect from 01.07.2016 provides that, the approval of expenditure under 35(2AB) of the Act shall be subject to the condition that, the prescribed authority, i.e. DSIR, shall submit its report in Form 3CL to the PCCIT or CCIT. The relevant Rule is reproduced hereunder:

“(7A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely :—

(a) The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature;

(b)The prescribed authority shall furnish electronically its report,—

(i) in relation to the approval of in-house research and development facility in Part A of Form No. 3CL;

(ii) quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Act in Part B of Form No. 3CL;

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(ba) The report in Form No. 3CL referred to in clause (b) shall be furnished electronically by the prescribed authority to the Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax or Principal Director General of Income-tax or Director General of Incometax having jurisdiction over such company within one hundred and twenty days,—

(i) of the grant of the approval, in a case referred to in sub- clause (i) of clause (b);

(ii) of the submission of the audit report, in a case referred to in subclause (ii) of clause (b);

(c) The company shall maintain a separate account for each approved facility; which shall be audited annually and a report of audit in Form No. 3CLA shall be furnished electronically to the Secretary, Department of Scientific and Industrial Research on or before the due date specified in Explanation 2 to sub- section (1) of section 139 of the Act for furnishing the return of income, for each succeeding year.”

4.5 In light of the above Rule, as introduced by the IT (10th Amendment) Rules, 2016 applicable with effect from 01.07.2016, the position of law as prevailing in AY 2018-19 is that, furnishing of Form 3CL by DSIR is a pre-requisite to claim the weighted component of deduction u/s 35(2AB) of the Act. The reliance placed by the assessee on the decisions rendered by this Tribunal in their own case in earlier AY 201112 is found to be distinguishable as the AY involved was prior to the insertion of the aforementioned Rule. Accordingly, due to the change in position of law, the aforesaid decision is no longer applicable in the relevant AY 2018-19. For the aforesaid reasons therefore, since the expenditure incurred at the R&D facility was not approved by DSIR in Form 3CL, in light of the restriction set out in Rule 6(7A)(b) of the Income-tax Rules, 1962, the Ld. CIT(A) had rightly denied weighted deduction u/s 35(2AB) of the Act.

4.6 We now come to the alternate claim raised by the assessee for deduction of the capital R&D expenditure of Rs.100,21,22,016/- u/s 35(1)(iv) of the Act. It is noted that, the lower authorities have denied this alternate claim on the ground that, no evidence was provided by the assessee in relation thereto. Before adverting to the facts of the present case, it is noted that Section 35(1)(iv) of the Act, provides that any expenditure of a capital nature on scientific research, related to the business of the assessee shall be admissible as deduction in terms of provision of Section 35(2) of the Act. It is further noted that sub-clause (ia) of Section 35(2) of the Act provides that, where the capital

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expenditure has been incurred after 31.03.1967, the entire value of capital expenditure is eligible for deduction from the profits of the business. Hence, in our considered view therefore, an assessee is entitled for normal deduction i.e. 100% of the capital expenditure incurred at its R&D facility in terms of Section 35(1)(iv) read with Section 35(2)(ia) of the Act, irrespective whether such capital expenditure is eligible for weighted deduction u/s 35(2AB) of the Act or not.

4.7 Our view finds support from the decision of the Hon’ble jurisdictional Madras High Court in the case of CIT vs Rajapalayam Mills Ltd. (265 Taxman 209). In the decided case, the assessee had claimed deduction u/s 35(2AB) of the Act in respect of the expenditure, both revenue and capital, incurred at its R&D facility. Since the assessee was unable to fulfill the conditions prescribed in Section 35(2AB) of the Act, the claim for weighted deduction was denied to it. The assessee had alternatively claimed normal deduction us 35(1)(i) and 35(1)(iv) of the Act in respect of the revenue and capital expenditure respectively. On appeal, this tribunal is noted to have upheld the allowance of deduction at normal rate u/s 35(1) of the Act. On further appeal by the Revenue, we find that the Hon’ble High Court upheld the order of this Tribunal, by holding as under:

“2. The present Appeal has been filed by the Revenue under Section 260-A of the Income Tax Act by raising the following purported substantial questions of law arising from the order passed by the Income Tax Appellate Tribunal dated 31.7.2008, by which the learned Tribunal upheld the order of the learned Commissioner of Income Tax (Appeals) and held that the expenditure incurred by the Assessee on Scientific Research was not entitled to weighted deduction of 1.5 times under Section 35(2AB) of the Act as the Project in question was not duly approved by the Competent Authority, however, the Assessee, was entitled to normal deduction of 100% of expenditure incurred only under Section 35(1)(i) of the Act.

3.

The learned Commissioner of Income Tax (Appeals) had discussed the above aspect in his order dated 31.10.2006 as hereunder: —

3.2 After considering the submissions I find that the assessing officer has rightly rejected the claim of the appellant u/s. 32(2AB) as there was no approval from the prescribed authority as on the date of completion of assessment. Having regard to alternative claim, I find that the assessing officer had no occasion to consider the claim of the appellant. In the circumstances, the assessing officer is directed to consider the claim of deduction u/s. 35(1)(i) for Rs. 55,12,558/- representing

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R&D Revenue Expenditure and deduction u/s. 35(1)(iv) for Rs. 46,387/- representing expenditure incurred for the purchase of Camera used in R&D unit."

4.

However, the Revenue took up the matter before the Tribunal which held against the Revenue on the said aspect of the matter in the following manner:—

"4. After considering the rival submission carefully, we agree that Sec.35(1) as well as Sec.35(2AB) deal with the same expenditure i.e., scientific expenditure consisting of revenue and capital expenditure and only difference is that Sect.35(1) provides for allowance at normal rate i.e., actual expenditure whereas Sec.35(2AB) allows deduction to be claimed at weighted rate of 150% subject to fulfilment of certain conditions. Therefore, we find nothing wrong with the directions of the CIT(Appeals) to the Assessing Officer to allow normal deduction under Sec.35(1) particularly in view of the fact that the Assessing Officer himself has allowed deduction for the Asst. Year 2005-06."

5.

Though there was no issue about the claim of weighted deduction, the Revenue has still preferred the present Appeal under Section 260A of the Act which was admitted by a coordinate Bench of this Court by order dated 9.1.2009, by framing the following substantial questions of law:—

"(i) Whether, on the facts and circumstances of the case, the Tribunal was right in law in entertaining a change of claim of deduction by the assessee from 35(2AB) to 35(1) of the Income Tax Act?

(ii) Whether, on the facts and circumstances of the case, the Tribunal was right in granting relief under Section 35(1) when the Assessee has not produced the relevant approval from the prescribed authorities for the claim of deduction?"

6.

Having heard the learned Senior Standing Counsel for the Revenue, we are satisfied that there is no substance in the present Appeal, since the claim of weighted deduction at 1.5 times of the expenditure incurred by the Assessee on Scientific Research was not even decided against the Revenue by the Appellate Authorities, viz., the Commissioner of Income Tax (Appeals) and the Tribunal and therefore, there was no occasion for the Revenue to prefer any further appeal, as the expenditure was allowed only under Section 35(l)(i) of the Act which does not require any approval by the Competent Authority.

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7.

Since the spending of the amount on Scientific Research itself was not even disputed by the Revenue, in our opinion, the Appellate Authorities have rightly allowed the claim under Section 35(1)(i) of the Act. The Assessee has not preferred any Appeal against that finding and therefore, the question of approval by the Competent Authority for making such claim becomes irrelevant. Therefore, we do not find any substantial question of law to be arising in the present Appeal.

8.

We do not find any merit in the present Appeal filed by the Revenue and the same is liable to be dismissed and accordingly, it is dismissed. No order as to costs. A copy of this judgment may be sent to the Assessee forthwith.”

4.8 In view of the above decision supra, the legal position which emerges is that, the denial of weighted deduction u/s 35(2AB) will not disable the assessee from claiming normal deduction for the said R&D expenditure, both revenue & capital, u/s 35(1)(i) and 35(1)(iv) of the Act respectively. Now reverting back to the facts of the present case, it is noted that the assessee had furnished the details of the expenditure incurred at its approved in-house R&D facility before the lower authorities, which was inter alia included in the audited accounts certified by the statutory auditor in Form 3CLA. It was brought to our notice that the assessee vide letter dated 05.03.2021 had furnished the Form 3CLA, which contained the details of R&D expenditure, including expenditure of capital nature, consolidated claim statement, details of disclosure of R&D expenditure in the notes to audited financial statements along with a reconciliation statement between the amount certified in Form 3CLA and the figures reported in notes to audited financial statements. Having perused these details, we find that the details evidencing incurrence of capital expenditure at the approved in-house R&D facility was duly disclosed in the notes to the audited financial statements and further the statutory auditor had verified and certified the same being relatable to scientific research in Form 3CLA. According to us therefore, these contemporaneous evidences sufficiently establish that the capital expenditure of Rs.100,21,22,016/- was incurred in relation to scientific research and was therefore eligible for deduction u/s 35(1)(iv) of the Act. Hence, the order of the lower authorities to that extent stands reversed.

4.9 In view of our above findings therefore, we direct the AO to further allow normal deduction for the capital R&D expenditure of Rs. 100,21,22,016/- u/s 35(1)(iv) of the Act, and resultantly delete disallowance to the extent of Rs.70,14,85,411/- (Rs.100,21,22,016/- minus Rs.30,06,36,605/-). This ground therefore stands partly allowed.”

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6.

We notice that the ratio laid down by the Coordinate Bench in the above case is that once it is not disputed that the actual expenditure incurred by the assessee is towards scientific research, the amount not certified as eligible for weighted deduction u/s. 35(2AB) of the Act is nevertheless eligible for normal deduction, being u/s. 35(1)(i) of the Act in respect of revenue expenditure and u/s. 35(1)(iv) of the Act in respect of capital expenditure. We further notice that in the present case, contention of the assessee is that the entire amount claimed by the assessee is incurred towards scientific research. We are therefore of the view that when the above ratio is applied to the facts of the present case, there is merit in the claim of the assessee that the uncertified/excess amount disallowed u/s. 35(2AB) of the Act, being revenue expenditure, is eligible for deduction u/s. 35(1)(i) of the Act, and the uncertified amount towards capital expenditure is eligible for deduction u/s. 35(1)(iv) of the Act. We accordingly remit the issue back to the AO with a direction to verify the eligibility of impugned amounts and allow the claim u/s. 35(1)(i)/(iv) of the Act in accordance with law. The assessee is directed to file the required details in this regard before the AO. It is ordered accordingly.

Disallowance u/s. 14A of the Act: 7. The Ld. AR submitted that the disallowance u/s. 14A of the Act made in the computation of income under the Act is not contended considering the smallness of the amount. The ld. AR however submitted that the disallowance cannot be adjusted against the book profits computed u/s. 115JB of the Act.

8.

We have heard the Ld. AR and the Ld. DR and perused the material on record. The issue for our consideration is whether the disallowance computed

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u/s. 14A r.w. Rule 8D of the Rules can be added to the book profit computed u/s. 115JB of the Act. We notice that this issue stands settled by the decision of the Special Bench of the Delhi Tribunal in ACIT vs. Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415 (Delhi Trib.)(SB) where it is held that the computation under clause (f) of Explanation 1 to Section 115JB(2) of the Act is to be made without resorting to the computation as contemplated u/s. 14A read with Rule 8D of the Rules. Respectfully following the above decision, we hold that the addition made by the AO to the book profit u/s. 115JB of the Act, being the disallowance computed u/s. 14A r.w. Rule 8D of the Rules, cannot be sustained, and we accordingly direct the AO to delete the said addition.

Disallowance u/s. 40(a)(ii) of the Act:

9.

We have heard the parties, and perused the material available on record. The Ld. AR submitted that the A.O has disallowed the amount claimed under rates and taxes on the ground that the said amount is towards TDS and hence not allowed. The ld. AR however submitted that the entire amount is not TDS and that there are other payments which cannot be disallowed. Considering that the breakup of rates and taxes claimed by the assessee needs to be verified on facts before allowing the contention of the assessee, we are remitted the impugned issue back to the AO with a direction to examine the contention based on the breakup of the rates and taxes and decide the allowability in accordance with law. The assessee is directed to submit the breakup/ledger account of rates and taxes and other relevant details in support of the claim. It is ordered accordingly.

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Assessment Year 2018-19: 10. The assessee filed a return of income for AY 2018-19 on 29.09.2018 declaring total income of Rs.15,24,14,580/-. The AO during the course of hearing disallowed the deductions claimed u/s. 35(2AB) of the Act to the extent of the amount not approved by the DSIR. We have while deciding an identical issue for Ay 2017-18 has held that the amount not allowed u/s. 35(2AB)of the Act to the extent not approved by DSIR is eligible for deduction u/s. 35(1)(i)/(iv) of the Act and have remitted the issue back to the AO to examine if the assessee is otherwise eligible. Considering that the facts in AY 2018-19 is identical to AY 2017-18, our decision in AY 20217-18 is mutatis mutandis applicable to AY 2018-19 also. Accordingly, we remit the issue back to the AO with similar directions for AY 2018-19 also.

11.

In the result, the appeals of the assessee for AY 2017-18 is partly allowed and for AY 20218-19 is allowed for statistical purposes.

Order pronounced on 09th day of September, 2026 at Chennai.

Sd/- Sd/- (एबी टी. वक�) (पदमावती यस) (ABY. T. Varkey) (Padmavathy.S) �याियक �याियक सद�य �याियक �याियक सद�य सद�य / Judicial Member सद�य लेखा सद�य /Accountant Member

चे�नई/Chennai, �दनांक/Dated: 09th September, 2026. EDN, Sr. P.S

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आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF

PRASANNA Digitally signed by PRASANNA VANI JETTY VANI JETTY Date: 2026.09.11 14:34:35 +05'30'

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