Section 35(2AB)

Section 35(2AB) — the law in short

What the courts have decided on section 35(2AB), 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 taxpayerNo later treatment found
  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.
• Garware Technical Fibres Ltd v DCIT ITATCuts both waysNo later treatment found
  The addition rests on a pen drive seized in the search and no s.65B certificate was drawn at the time. Does that kill it?
  No, not on these facts, and the reason is narrower than the headlines. The Commissioner (Appeals) called for a remand report, the Assessing Officer produced a certificate under s.65B(4) for the pen drive, and the assessee - which had never taken the point before the Assessing Officer - made no counter-comment when the certificate was put to it. On the record as the Commissioner (Appeals) found it the certificates had been drawn at the time of the search and were merely produced late. In the absence of any contrary material the addition based on the pen drive was upheld, for all eight years. The order was not otherwise against the assessee: on quantum it confined the tax to the profit element in the unrecorded receipts and directed year-by-year percentages, and on the weighted deduction it allowed the whole of the revenue expenditure for one year.
• Anand NVH Products P. Ltd. v DCIT — R&D spend the DSIR would not certify still comes off under s.37(1) ITATHelps taxpayerNo later treatment found
  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.
• Statutory position — s.35(1)(i): revenue expenditure on scientific research needs no approval and is allowed in full CBDT Circulars & InstructionsCuts both ways
  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.
• Statutory position — the s.35(2AB) and s.35(2AA) weighting: two hundred, then one hundred and fifty, then one hundred per cent CBDT Circulars & InstructionsCuts both ways
  What weighting do I put on my client's in-house R&D spend, and from which assessment year did each rate change?
  For s.35(2AB) the weighting was two hundred per cent, fell to one hundred and fifty per cent from AY 2018-19, and falls to a hundred per cent — that is, no weighting at all — for expenditure incurred in a previous year relevant to an assessment year beginning on or after 1 April 2021. The current text reads "a deduction of a sum equal to one and one-half times of the expenditure so incurred", cut down by a proviso which for AY 2021-22 onwards makes the deduction "equal to the expenditure so incurred". Section 35(2AA), for sums paid to a National Laboratory, University, Indian Institute of Technology or specified person for approved research, follows the same shape: one and one-half times the sum paid, reduced by a second proviso to the sum so paid for an assessment year beginning on or after 1 April 2021.

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.