Section 35(2AB) of the Income Tax Act
Income-tax Act, 2025: s.45
Section 35(2AB) falls under section 35 of the Income-tax Act, 1961, which corresponds to section 45 (Expenditure on scientific research) of the Income-tax Act, 2025.
Read section 45 of the 2025 Act
Correspondence checked against the ICAI tabular mapping of the two Acts and the BharatTax.co section commentary.
The decision most relied on for Section 35(2AB) is CIT v. Everest Kento Cylinders Ltd. (378 ITR 57), cited in 304 of the 842 judgments on BharatTax that turn on this section.
Leading authorities on Section 35(2AB)
Corporate guarantee fees are subject to transfer pricing rules, and adjustments may be needed to account for differences between corporate guarantees and more liquid bank guarantees when determining arm's length price.
Expenditure that provides a commercial advantage of an enduring nature may still be classified as revenue expenditure if its purpose is to facilitate existing trading operations, improve business efficiency, or upgrade existing products, depending on the specific context and objective.
If unabsorbed depreciation or losses from years prior to the initial assessment year for Section 80-IA claim have already been set off against other income, they cannot be notionally carried forward again to reduce the profits of the eligible unit for computing deduction under Section 80-IA. The notional carry forward provision under Section 80-IA(5) applies only to unabsorbed depreciation or losses that have not yet been absorbed.
If approval from the Department of Scientific and Industrial Research (DSIR) for an in-house R&D centre is granted during the previous year, the assessee is entitled to claim weighted deduction under section 35(2AB) for the entire expenditure incurred during that year.
If an assessee possesses interest-free funds exceeding investments in tax-free securities, it is presumed that investments are made from these own funds, precluding disallowance of interest expenditure under Section 14A read with Rule 8D(2)(ii). Additionally, weighted deduction under Section 35(2AB) is computed on the gross expenditure incurred, not net expenditure after reducing income earned.
A corporate guarantee issued to Associated Enterprises (AEs) is an international transaction under Section 92B, requiring adjustments for guarantee commission due to inherent risk. The reasonable arm's length rate for benchmarking such corporate guarantees can be determined using internal or external comparable uncontrolled prices.
Membership rights and business contracts, as 'business or commercial rights of similar nature' to a license or franchise, qualify as intangible assets eligible for depreciation under Section 32(1)(ii) of the Income-tax Act.
Weighted deduction under Section 35(2AB) is allowable for R&D expenditure incurred even if the approval from the DSIR is granted in a subsequent assessment year, provided the application for approval was made in time. The assessee is entitled to the deduction if the approval is based on verification of details submitted.
Business contracts and commercial rights of similar nature qualify as intangible assets under Section 32(1)(ii) and are eligible for depreciation. The decision also affirms that goodwill is an intangible asset eligible for depreciation.
Pure reimbursement of expenditure does not constitute income in the nature of royalty or fees for technical services, therefore eliminating the obligation to deduct tax at source.
