Capitalized R&D expenditure can be claimed u/s 35(1)(iv) if disallowed u/s 35(2AB): ITAT [Read Order]

The Pune Bench of the Income Tax Appellate Tribunal (ITAT) ruled that capitalized R&D expenditure can be claimed under Section 35(1)(iv) of the Income Tax Act, 1961 if disallowed under Section 35(2AB), confirming the assessee’s right to alternative relief.

Mahle Behr India Pvt. Ltd., the assessee, is engaged in manufacturing automotive air conditioning and cooling systems. The company claimed a weighted deduction under Section 35(2AB) for R&D expenses, including certain expenditures incurred outside India for product testing and validation.

The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) disallowed the claim for expenses incurred outside India arguing that Section 35(2AB) allows deductions only for R&D expenditure within an approved in-house facility in India and restricted the deduction to the amount approved by the Department of Scientific and Industrial Research (DSIR).

The assessee contended that the expenditure incurred on R&D, even if disallowed under Section 35(2AB), should be eligible for deduction under Section 35(1)(iv), which allows a 100% deduction for capital R&D expenditure related to the business.

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The assessee relied on the Gujarat High Court in Gujarat Aluminium Extrusions Pvt. Ltd. and ITAT Pune’s ruling in its own case for AY 2011-12, where similar capital R&D expenditures were allowed under Section 35(1)(iv) of the Income Tax Act.

The two-member bench comprising Vice President R.K. Panda and Judicial Member Astha Chandraobserved that Section 35(1)(iv) does not require approval from DSIR and allows a deduction for capital R&D expenses incurred for business purposes, regardless of location.

The tribunal ruled that since the capitalized R&D expenditure disallowed under Section 35(2AB) met the criteria under Section 35(1)(iv), it was eligible for deduction in full. The tribunal dismissed the revenue’s objection that the assessee had not originally claimed the deduction under Section 35(1)(iv) stating that a valid claim under one provision does not prevent relief under another applicable provision.

The tribunal allowed the appeal in favor of the assessee, granting a deduction for capitalized R&D expenses under Section 35(1)(iv) of the Income Tax Act, 1961.

To Read the full text of the Order CLICK HERE

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Mahle Behr India Pvt. Ltd. vs DCIT , 2025 TAXSCAN (ITAT) 449 , ITA No.795/PUN/2017 , 15 January 2025 , Shri R D Onkar , Shri Ramnath P Murkunde