DSIR Approval Prevails: ITAT Delhi Grants Section 35(2AB) Deduction and Invalidates Reassessment

1. Background and Case Overview

The Delhi Bench of the Income Tax Appellate Tribunal dealt with a group of appeals involving Matrix Clothing Pvt. Ltd. Vs ACIT for Assessment Years (AY) 2016-17, 2018-19 and 2019-20. The litigation covered:

  • Validity of reopening under Section 147/Section 148
  • Alleged excessive manufacturing expenses
  • Treatment of Research & Development (R&D) expenditure
  • Eligibility of weighted deduction under Section 35(2AB)
  • Disallowance of interest and advances to joint ventures
  • Certain ancillary issues like cyber security loss and bad debts

For AY 2016-17, both the assessee and the Revenue were in appeal:

  • The assessee challenged:

    • Reopening under Section 148
    • Denial of deduction under Section 35(2AB) amounting to Rs.2,12,50,158/-

  • The Revenue contested:

    • Deletion of addition for alleged excessive manufacturing expenses of Rs.23,00,93,853/-
    • Deletion of disallowance of R&D revenue expenses of Rs.10,74,07,000/-

The assessee, a company engaged in garment manufacturing, had:

  • Filed its original return for AY 2016-17 declaring income of Rs.11,74,59,910/- on 17.10.2016
  • Filed a revised return on 28.11.2017 revising income to Rs.9,90,56,110/-
  • Faced scrutiny assessment under Section 143(3) on 30.12.2018, wherein certain disallowances (including Section 80JJAA and interest on loans) led to an assessed income of Rs.12,61,52,840/-

Subsequently, a survey under Section 133A was conducted at the assessee’s premises on 27.03.2019. Based on the survey, the Assessing Officer (AO) recorded “reasons to believe” that income had escaped assessment, principally on two grounds:

  1. Excessive manufacturing expenditure (allegedly 17% of receipts of Rs.46.65 crores)
  2. R&D expenditure of Rs.10.74 crores

Reassessment proceedings were initiated under Section 147 read with Section 148, culminating in a reassessment order dated 31.12.2019. The AO made additions and disallowances relating to:

  • Manufacturing expenses
  • R&D revenue expenses
  • Weighted deduction under Section 35(2AB)
  • Depreciation on R&D-related assets

The CIT(A) partly allowed the assessee’s appeal but enhanced the disallowance of Section 35(2AB) deduction to Rs.2,12,50,158/-. Both parties approached the ITAT against different parts of the CIT(A)’s order.

The Tribunal proceeded AY-wise, starting with 2016-17 and then dealing with AYs 2018-19 and 2019-20.

2. Core Issue: Deduction Under Section 35(2AB)

2.1 Approach of CIT(A) for AY 2016-17

For AY 2016-17, the CIT(A) rejected the assessee’s claim for deduction under Section 35(2AB) and even enhanced the disallowance. Instead of independently examining facts and evidence as required under Section 250(6), the CIT(A):

  • Relied entirely on Dispute Resolution Panel (DRP) directions issued in the assessee’s case for AY 2017-18
  • Did not undertake a fresh or detailed factual analysis for AY 2016-17

2.2 ITAT’s Reliance on Earlier Year (AY 2017-18)

The Tribunal examined the status of the same issue in AY 2017-18 in the assessee’s own case. A coordinate bench of ITAT Delhi, in order dated 01.12.2025 in ITA No. 760/Del/2022, had already allowed the assessee’s Section 35(2AB) claim of Rs.3,88,77,284/- after considering:

  • DSIR approval and Form 3CM
  • DSIR certification in Form 3CL quantifying eligible R&D expenditure at Rs.384.88 lakhs
  • Chartered Accountant’s certificate certifying R&D expenditure at Rs.387.37 lakhs

The earlier ITAT bench held that:

  • Once the Department of Scientific and Industrial Research (DSIR), the prescribed authority under the Rules, has certified expenditure as eligible under Section 35(2AB), the AO cannot disregard that certification on his own.
  • If the AO disagrees with DSIR’s quantification or the nature of expenditure, he must follow the statutory mechanism under Section 35(3) by referring the matter to the Board, which in turn may refer it to the prescribed authority.

In reaching this conclusion, the coordinate bench relied on the judgment of the Hon’ble Karnataka High Court in Tejas Network Ltd Vs. DCIT (60 taxmann.com 309), which held:

  • DSIR is the “prescribed authority” under Rule 6(18) for granting approval of in-house R&D facilities.
  • Approval and certification by DSIR, after examination of the assessee’s application and records, is conclusive for the purpose of quantifying eligible deduction.
  • Where the AO has any doubt or dispute regarding such certification, the only lawful route is through Section 35(3)—the AO cannot himself sit in judgment over DSIR’s certification.
  • The role of the AO and even the CBDT is limited; they cannot reassess the correctness of DSIR’s approval or quantification on their own.

The coordinate bench further noted that in the assessee’s case, the AO had not invoked the procedure under Section 35(3) and had directly disallowed part of the claimed deduction, which was impermissible in law.

2.3 Application of Principle to AY 2016-17

Given that:

  • The facts and the nature of R&D claim under Section 35(2AB) were materially similar for AY 2016-17 and AY 2017-18
  • DSIR had issued approval and certification in the assessee’s case
  • The AO had not followed the statutory process under Section 35(3)

the ITAT observed that there was no fresh or distinguishing material justifying a different view for AY 2016-17.