ITAT Bangalore Clarifies R&D Deduction, Director Consultancy & Depreciation: Organica Aromatics Private Limited Vs DCIT

1. Background of the Dispute

The decision in Organica Aromatics Private Limited Vs DCIT (ITAT, Bangalore Bench) relates to AY 2017-18 and examines multiple contentious issues under the Income Tax Act 1961.

The assessee, Organica Aromatics Private Limited, is engaged in manufacturing:

  • Fine chemicals
  • Aromatic chemicals
  • Synthetic perfumery compounds

It also runs an in-house R&D centre approved by the Department of Scientific and Industrial Research (DSIR).

Key return and assessment figures:

  • Returned income: ₹31,46,380 (filed on 29.11.2017)
  • Assessed income u/s 143(3) (order dated 18.12.2019): ₹1,37,76,620

The disputes before the authorities and later before the Tribunal related mainly to:

  • Consultancy / professional fees claimed u/s 37(1)
  • Deduction for R&D expenditure u/s 35(2AB)
  • Normal and additional depreciation u/s 32
  • Write-off of export incentive / rebate receivables
  • Alleged violations of natural justice and rejection of additional evidence
  • Consequential interest u/ss 234A, 234B, 234C, 234D

The CIT(A) largely upheld the Assessing Officer’s conclusions, prompting the assessee’s appeal before the ITAT Bangalore Bench.

2. Issues Examined by the Tribunal

The Tribunal had to adjudicate the following central questions:

  1. Professional / consultancy fees u/s 37(1)

    • Whether consultancy / retainer fees of ₹28,68,268 (including ₹24,00,000 to Dr. Rattan Sood, Joint Managing Director) were allowable as business expenditure.

  2. R&D weighted deduction u/s 35(2AB)

    • Whether the assessee could claim weighted deduction beyond the revenue and capital expenditure amounts certified by DSIR in Form 3CL.
    • Whether, in the alternative, disallowed amounts could be allowed u/s 35(1)(iv) or any other section.

  3. Depreciation including additional depreciation u/s 32

    • Whether the disallowance of depreciation amounting to ₹36,35,751 (enhanced by CIT(A) to ₹38,53,005) was justified, considering issues of invoices, installation and “put to use” conditions.

  4. Export incentive / rebate receivables written off

    • Whether write-off of export rebate receivables of ₹27,58,665 was allowable where such amounts were allegedly taxed in earlier years.

  5. Procedural and consequential matters

    • Alleged breach of principles of natural justice and non-compliance with Section 250.
    • Non-admission of additional evidence under Rule 46A.
    • Levy of interest under Section 234A, Section 234B, Section 234C, Section 234D.

3. Assessee’s Core Submissions

3.1 Consultancy / Professional Fees u/s 37(1)

The assessee claimed:

  • Total consultancy expenses: ₹28,68,268
    • ₹24,00,000 to Dr. Rattan Sood (Joint Managing Director) at ₹2,00,000 per month
    • Balance to other consultants, including payments for IT support and production consultancy

Key arguments:

  • The payments were:

    • Supported by monthly invoices
    • Made through banking channels
    • Subjected to TDS u/s Section 194J
    • Reflected in audited books

  • Dr. Rattan Sood:

    • Was Joint Managing Director involved in day-to-day operations
    • Had signed the return of income and financial statements
    • Was engaged on professional / consultancy basis, not as salaried employee

  • Reliance was placed on Hero Cycles (P) Ltd. v. CIT and DCIT v. Enzen Global Solutions Pvt. Ltd., to argue that:

    • Business expenditure documented in books and compliant with statutory provisions cannot be rejected on suspicion alone.
    • The Revenue is not entitled to question commercial expediency absent a finding of bogus or non-business nature.

3.2 R&D Deduction u/s 35(2AB) & Alternative Claim

On R&D:

  • The assessee claimed weighted deduction on:

    • Revenue expenditure
    • Capital expenditure

  • DSIR, in Form 3CL, certified only:

    • Revenue expenditure of ₹23.44 lakhs
    • Capital expenditure of ₹4.87 lakhs

  • Disallowance related notably to cubicle partition expenditure of ₹3,30,779, which DSIR did not approve.

Assessee’s stand:

  • Restriction in Form 3CL should not be treated as conclusive for overall allowability.
  • Even if weighted deduction u/s 35(2AB) is curtailed based on Form 3CL, the underlying actual expenditure on scientific research should be allowed u/s 35(1)(iv) or another appropriate provision.
  • Cited CIT v. Mahalakshmi Textile Mills to contend that correct relief cannot be denied merely because the claim was raised under an incorrect section.

3.3 Depreciation u/s 32

The assessee contended:

  • Assets were duly:

    • Acquired
    • Owned
    • Capitalised in the books

  • Statutory tax audit was conducted by qualified chartered accountants with no adverse remark on depreciation, including additional depreciation u/s Section 32(1)(iia).

  • Invoices, capitalisation details and installation certificates were available and produced in part.

  • The Revenue had not conclusively established non-use of assets; mere doubts about installation certificates (prepared by the assessee) were insufficient.