Incomplete Verification of Merger-Linked Research and Development Spending: ITAT Directs Fresh Examination of Eligibility [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) directed a fresh examination of the appellant's research and development (R&D) deductions claimed under Section 35(2AB) of the Income Tax Act.

Intas Biopharmaceuticals Ltd. had claimed deductions of ₹3.37 crore under Section 35 and a weighted deduction of ₹87.66 lakh under Section 35(2AB) for research and development (R&D) expenses. The AO disallowed part of the claim, observing that certain expenditures were not approved by the Department of Scientific and Industrial Research (DSIR).

The AO also noted that some figures arose from merger adjustments following Intas’s amalgamation with Indus Biotherapeutics Ltd., and no reconciliation was submitted to confirm whether the merged company’s expenses were eligible under the DSIR approval.

On appeal, the Commissioner (Appeals) upheld the AO’s findings, holding that the assessee had not furnished adequate documentation to establish that all claimed expenses were DSIR-approved or directly incurred on in-house R&D facilities. Aggrieved by the order the assessee filed an appeal before the Tribunal.

The assessee argued before the Tribunal that the disallowance was made without proper verification.

It was submitted that all expenses were incurred in the course of approved R&D activities, and that the DSIR approval was valid for the relevant year.

The merger with Indus Biotherapeutics had resulted in certain accounting entries, but those did not alter the nature or eligibility of expenditure under Section 35(2AB). It further relied on the Tribunal’s order in its own case for AY 2013–14, where a similar deduction was allowed after verification.

The Department contended that reconciliation of expenses and DSIR approval details were not produced before either the AO or the CIT(A). Since the weighted deduction under Section 35(2AB) is conditional on DSIR certification, the burden lay on the assessee to furnish complete records. The Revenue supported the earlier orders, arguing that no verification could be done at the appellate stage for the first time.

The Tribunal observed that both the lower authorities had failed to examine the factual aspects of the claim, particularly the reconciliation of R&D expenses post-merger and the corresponding DSIR approvals. It noted that these details were crucial to determine whether the conditions under Section 35(2AB) were satisfied.

Holding that the issue could not be decided without proper verification, the two-member bench of Suchithra Kamble (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) remanded the matter to the AO with directions to re-examine the claim afresh.

The AO was instructed to verify DSIR approvals, merger-linked reconciliations, and supporting documentation before allowing the deduction. The appeal was partly allowed for statistical purposes, with the Tribunal emphasising that genuine R&D expenditure must not be disallowed for want of procedural verification.

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