Section 35(1)(i)

Section 35(1)(i) — the law in short

What the courts have decided on section 35(1)(i), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• EID Parry (India) Ltd v DCIT — before 1 July 2016 the DSIR had no power to quantify, so Form 3CL is not a ceiling ITATHelps taxpayerValidity unconfirmed
  The Assessing Officer has cut my client's s.35(2AB) claim down to the figure the DSIR put in Form 3CL for years before 2016. Is he entitled to?
  No, for those years. The Chennai Tribunal held that s.35(2AB) empowers the DSIR to approve the in-house research and development facility, not the expenditure, and that the power to quantify the eligible expenditure came into existence only when Rule 6(7A) was amended by the Income Tax (Tenth Amendment) Rules, 2016 with effect from 1 July 2016. For assessment years 2011-12 to 2014-15 the deduction had to be allowed on the expenditure as recorded in the assessee's books, the Assessing Officer not having disputed that the expenditure was incurred. The Tribunal expressly rejected the Departmental Representative's argument that the rule amendment was merely procedural, holding that it affects a substantive right.
• Anand NVH Products P. Ltd. v DCIT — R&D spend the DSIR would not certify still comes off under s.37(1) ITATHelps taxpayerValidity unconfirmed
  The DSIR certified less than my client spent, and the Assessing Officer has disallowed the excess both under s.35(2AB) and under s.37(1). Is the excess simply lost?
  No. For AY 2017-18 the Delhi Tribunal held that s.37 is the primary basis on which an expense debited in the books falls to be considered before any disallowance under s.35(2AB) arises, and that where part of the expenditure has been allowed on the basis of Form 3CL the remainder should be allowed as revenue expenditure. Both the Assessing Officer and the Dispute Resolution Panel were held to have fallen into error in refusing it, and the grounds were allowed. Note what the assessee did not argue: it did not challenge the restriction of the weighted deduction itself to the DSIR's figure, so the case is authority for the fallback and not for attacking the quantification.
• Embio Ltd v. ACIT 15(1)(2), Mumbai (ITAT Mumbai) — where production falls below fifty per cent of installed capacity, the Rule 9C relaxation is applied for and the withdrawal is confined to the correct year ITATHelps taxpayerValidity unconfirmed
  We got the section 72A set-off in year one, then production collapsed and we fell below fifty per cent of installed capacity. Can the Assessing Officer withdraw the set-off, and if so for which year?
  The Tribunal restored the issue to the Assessing Officer to be decided afresh following the coordinate bench decision in Bayer Material Science, and directed him in terms to consider the assessee's submission that withdrawal of the loss or depreciation, if any, can be only in the year under consideration. The order is therefore a remand on the merits, not a decision that the assessee wins; its value is that it fixes the framework — Rule 9C is to be applied on the Bayer construction, and the year in which the set-off is taken back is a question to be decided, not assumed. The order also records the machinery a taxpayer in this position should use: the assessee had applied to the Central Government under Rule 9C for an extension of the time for achieving the minimum fifty per cent production beyond the stipulated four years, on the ground of labour unrest.
• Statutory position — s.35(1)(i): revenue expenditure on scientific research needs no approval and is allowed in full CBDT Circulars & InstructionsCuts both waysValidity unconfirmed
  The DSIR would not certify part of my client's research spend. Is there a provision that allows it without any approval at all?
  Yes. Section 35(1)(i) allows, in computing business income, "any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business". It carries no approval requirement of any kind — no DSIR approval of a facility, no Central Government approval of an institution — and no weighting: the deduction is the expenditure, at a hundred per cent. It is the natural fallback wherever a weighted claim under s.35(2AB) is cut down to the figure in Form 3CL, and since AY 2021-22 it gives exactly the same number as s.35(2AB) for revenue expenditure, because the s.35(2AB) proviso has taken that deduction down to the expenditure incurred.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.