Scientific Research Deduction Cannot Be Denied for Procedural Delay When DSIR Approval Exists: ITAT Deletes ₹2.07 Crore Disallowance [Read Order]

In a recent ruling, the Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) held that a company cannot be denied scientific research deduction merely due to procedural delay in filing audit reports when the Department of Scientificand Industrial Research (DSIR) has already approved the expenditure.

The assessee, Sri Rama Agri Genetics (India) Pvt. Ltd engaged in production and marketing of genetically improved seeds, claimed a weighted deduction of ₹2.07 crore under Section 35(2AB) of the Income Tax Act for in‑house research and development expenses.

The Assessing Officer disallowed the claim, citing a delay in uploading the audit report (Form 3CLA) beyond the due date prescribed under Rule 6(7A)(c). The Commissioner of Income Tax (Appeals) upheld the disallowance, prompting the company to approach the Tribunal.

Appearing for the company,  A.V. Raghuram argued that the authorities had erred in denying the deduction solely on the ground of procedural delay. He stated that the assessee had fully complied with all substantive requirements under Section 35(2AB) of the Income Tax Act.

The company had executed the requisite agreement with the Department of Scientific and Industrial Research (DSIR), obtained approval for its in‑house R&D facility in Form 3CM, maintained separate audited accounts, and duly furnished the audit report to DSIR. He also pointed out that DSIR had subsequently issued Form 3CL, quantifying the eligible expenditure, thereby confirming that the assessee had met every material condition for claiming the deduction.

Senior Departmental Representative defended the AO’s order. He maintained that Section 35(2AB)(3) clearly states that no company is entitled to a deduction unless prescribed conditions, maintenance of accounts, audit, and timely furnishing of reports are fulfilled.

Revenue counsel relied on precedents including PCP Chemicals Pvt. Ltd. (ITAT Mumbai) and Apollo Tyres Ltd. v. ACIT (Supreme Court, 2025) to argue that compliance with procedural requirements is mandatory. Regarding the cash deposits, he noted that the assessee failed to substantiate its claim that the deposits were sourced from sales. On the supplier advances, he contended that the assessee did not furnish PANs, addresses, or confirmations for most parties, justifying the addition under Section 69B.

The bench comprising Judicial Member Ravish Sood and Accountant Member Manjunatha G. examined whether delayed filing of Form 3CLA disentitled the assessee from claiming deduction under Section 35(2AB).

The Tribunal observed that the company had met all substantive conditions and that DSIR had accepted the audit report and issued Form 3CL quantifying the eligible expenditure.

It held that procedural delay cannot override substantive compliance, stating that once DSIR certifies the expenditure, the Revenue cannot deny the deduction merely because the audit report was filed late.

The bench distinguished between mandatory substantive conditions and directory procedural requirements, concluding that the latter should not defeat genuine claims.

On the supplier advances, the tribunal found that the payments were genuine business transactions recorded in books and later adjusted against purchases in the next year. Hence, the addition of ₹3.81 crore under Section 69B was deleted.

Accordingly, the appeal filed by the assessee company was partly allowed in terms of our aforesaid observations.

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