Organica Aromatics Private Limited Vs DCIT (ITAT, Bangalore Bench)
Invoices Aren’t Evidence, TDS Isn’t a Passport &; DSIR Gets the Final Word: ITAT Revisits Claims u/s 37(1), 32 &; 35(2AB)
Summary:
Relevant Facts
In Organica Aromatics Pvt. Ltd. v. DCIT, the Bangalore ITAT considered the assessee’s appeal for AY 2017-18. The company manufactured fine chemicals, aromatic chemicals & synthetic perfumery compounds, besides operating a DSIR-approved in-house R&D facility.
It returned income of ₹31,46,380, while the AO completed assessment u/s 143(3) on 18.12.2019 at ₹1,37,76,620. The additions concerned consultancy fees, weighted R&D deduction, depreciation on new machinery & export-rebate receivables written off. The CIT(A) substantially confirmed the disallowances, resulting in the appeal before the Tribunal.
Issues Before the Tribunal
The principal issues were whether consultancy fees paid to the Joint Managing Director were allowable u/s 37(1); whether weighted deduction u/s 35(2AB) could exceed expenditure certified by DSIR in Form 3CL; whether normal & additional depreciation u/s 32 had been correctly computed after verifying actual use of assets; & whether export incentives earlier offered as income could be deducted when subsequently written off.
The assessee also alleged violation of natural justice, improper rejection of additional evidence under Rule 46A & incorrect levy of interest u/s 234A, 234B, 234C & 234D.
Assessee’s Contentions
The assessee claimed consultancy expenditure of ₹28,68,268, including ₹24 lakh paid to Dr. Rattan Sood, Joint Managing Director, at ₹2 lakh per month. It relied upon monthly invoices, deduction of TDS u/s 194J, audited accounts, his signatures on the return & financial statements, & his involvement in daily business. Payments were also made for IT support & production consultancy.
For R&D, it argued that restriction in Form 3CL could not by itself determine deductibility. Even if weighted deduction u/s 35(2AB) was unavailable, the actual scientific-research expenditure should be considered u/s 35(1)(iv) or another appropriate provision.
Regarding depreciation, the assessee relied upon invoices, capitalisation records, tax audit & installation certificates. It argued that acquisition, ownership & business use were not properly disproved. The export-rebate write-off of ₹27,58,665 represented income recognised in earlier years but later found irrecoverable.
Revenue’s Contentions
Revenue maintained that the assessee had failed to prove actual services rendered by Dr. Sood or reconcile consultancy payments with his appointment terms, under which he agreed not to draw salary. Mere invoices, cheque payments or TDS did not establish commercial substance.
Revenue further relied upon Form 3CL, which approved only specified revenue & capital R&D expenditure. For depreciation, complete invoices & independent proof that machinery was installed or put to use were missing. Self-generated installation certificates were considered doubtful. Supporting records for the export-rebate write-off were also not furnished before the lower authorities.
Tribunal’s Findings on Consultancy Fees
The Tribunal found that twelve invoices of ₹2 lakh each were produced, but no agreement explained the nature of services. Dr. Sood’s position as Joint Managing Director, signatures on statutory records, payment through banking channels or TDS deduction could not independently prove that services were actually rendered.
The claim required closer scrutiny because his appointment contemplated no remuneration & the expenditure had apparently been booked under “postage & courier charges.” The assessee also had to establish fairness, reasonableness, business purpose & genuineness. Ground No.1 was therefore remanded to the AO for fresh adjudication after hearing the assessee.
Weighted R&D Deduction u/s 35(2AB)
The assessee claimed weighted deduction on revenue & capital expenditure, while DSIR approved only ₹23.44 lakh of revenue expenditure & ₹4.87 lakh of capital expenditure. In particular, cubicle-partition expenditure of ₹3,30,779 was not approved.
The Tribunal held that section 35(2AB) is not a blanket incentive for every expense incurred inside an approved facility. DSIR is the expert body entrusted to determine expenditure qualifying for the additional weighted benefit. Courts or tax authorities lack technical expertise to substitute their view on that question. The Tribunal found no infirmity in DSIR’s determination & dismissed this ground.
Depreciation & Export-Rebate Write-Off
The AO had disallowed depreciation of ₹36,35,751, while the CIT(A), acting upon a remand report, treated the correct figure as ₹38,53,005. The assessee’s own computation showed normal depreciation of ₹10,21,868 & additional depreciation of ₹13,62,491, aggregating ₹23,84,359.
Finding unresolved mathematical differences & inadequate verification of whether assets were put to use, the Tribunal restored the issue to the AO. Eligible depreciation must be correctly allowed after examining invoices, installation & statutory conditions, with an opportunity of hearing before adopting any adverse remand-report view.
The export-rebate write-off was also remanded. Relief must be allowed if the assessee proves that ₹27,58,665 was taxed in earlier years & subsequently written off as irrecoverable.
Practical Implications
Natural-justice & Rule 46A grounds were dismissed because no arguments were advanced, though the assessee may produce all evidence during remand. Interest was treated as consequential. The appeal was partly allowed for statistical purposes.
The ruling delivers three practical lessons: related-party consultancy requires proof of actual services; weighted R&D benefit follows expert DSIR certification; & depreciation demands reliable evidence of installation & use. TDS, invoices & audited entries support a claim-but never replace its factual proof.
Cases Discussed
- Hero Cycles (P) Ltd. v. CIT
- DCIT v. Enzen Global Solutions Pvt. Ltd.
- CIT v. Mahalakshmi Textile Mills
- LTIMindtree Ltd. v. DCIT
- M/s. Innoviti Payment Solutions Pvt. Ltd. v. ITO
- CIT v. Excel Industries Ltd.
- CIT v. Hotel Blue Moon
- ITO v. Shubhankar Estates Pvt. Ltd.
- CIT v. Pruthvi Brokers & Shareholders (R) Ltd.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE BENCH
1. Organica Aromatics Private Limited (the assessee/appellant) has filed this appeal for assessment year 2017–18 against the appellate order dated 26 September 2025 passed by the Commissioner of Income-tax (Appeals)-15, Bangalore (the learned CIT(A)). By that order, the learned CIT(A) partly allowed the assessee’s appeal against the assessment order dated 18 December 2019 passed under section 143(3) of the Income-tax Act, 1961 by the Assistant Commissioner of Income-tax, Circle-5(1)(2), Bangalore (the learned Assessing Officer), which determined the assessee’s total income at ₹13,776,620 as against the returned income of ₹3,146,380 filed on 29 November 2017.
2. The Assessee has raised the following grounds of appeal:
Ground 1: Disallowance of Professional / Consultancy Fees of 128,68,268.
a) The learned Commissioner of Income-tax (Appeals) erred in sustaining the disallowance of consultancy/retainer fees of Rs. 28,68,268 under section 37(1), including payments to Dr. Rattan Sood (Managing Director), without any finding that the expenditure was fictitious or non-business in nature. The expenditure was incurred in the ordinary course of business, subjected to TDS under section 194J, recorded in audited books of account, and partly accepted as genuine by the Assessing Officer, rendering the disallowance based on mere doubt is unsustainable in law.
b) The impugned disallowance is contrary to the settled legal position laid down by the Hon’ble Supreme Court in Hero Cycles (P) Ltd. v. CIT and followed by the Hon’ble ITAT, Bengaluru Bench in DCIT v. Enzen Global Solutions Pvt. Ltd., wherein it has been held that business expenditure duly recorded in the books of account and compliant with statutory requirements cannot be disallowed merely on suspicion or subjective dissatisfaction, nor can the Revenue question the commercial expediency of such expenditure in the absence of any finding that it is bogus or unrelated to business.
Ground 2: Disallowance of weighted deduction u/s 35(2AB) of 116,74,835.
a) The learned Commissioner of Income-tax (Appeals) has erred in law in sustaining the disallowance of weighted deduction under section 35(2AB) to the extent of Rs. 16,74,835 solely on the basis of restriction in Form 3CL, without recording any finding that the expenditure was not incurred on scientific research or was non-genuine. Without prejudice, the learned CIT(A) further erred in not allowing the said expenditure under section 35(1)(iv) of the Act, even though the same represents expenditure incurred on scientific research and is allowable in law. The impugned disallowance, being based only on certification limits and not on the nature of the expenditure, is therefore unsustainable.
b) In reliance on CIT v. Mahalakshmi Textile Mills, the learned authorities erred in denying the claim in entirety merely on the ground that the deduction under section 35(2AB) was restricted, without examining the allowability of the same expenditure under the appropriate provision of the Act. The impugned action is contrary to settled law that relief cannot be denied solely on account of an incorrect provision being invoked, when the expenditure is otherwise allowable on the facts on record.
c) In view of the facts on record and the settled legal position, the disallowance under section 35(2AB) is unsustainable in law. The expenditure has been incurred for approved in-house R&D activities and no adverse finding has been recorded on its genuineness or business purpose. The Appellant therefore respectfully prays that the impugned disallowance be deleted in full.
Ground 3 — Disallowance of Depreciation including Additional Depreciation of Rs. 36,35,751
a) The learned Commissioner of Income-tax (Appeals) erred in law and on facts in upholding the disallowance of depreciation and additional depreciation under section 32 on the alleged ground of non-use of plant and machinery, without disputing acquisition, ownership, or capitalisation of the assets and without rejecting the books of account. The claim, including additional depreciation under section 32(1)(iia), stood duly examined in the statutory tax audit by qualified professionals without any adverse remark, and the disallowance sustained by disregarding audited records and professional certification, without verification or specific show-cause notice, is unsustainable in law.
b) The impugned disallowance is contrary to the settled law laid down by the Hon’ble ITAT, Bangalore in LTIMindtree Ltd. v. DCIT and M/s. Innoviti Payment Solutions Pvt. Ltd. v. ITO, wherein it has been held that depreciation, being a statutory allowance, cannot be denied on presumptions, technical objections, or mere disbelief of professional evidence, in the absence of any adverse finding regarding the existence or business use of the assets.
Ground 4 — Disallowance of export rebate receivables written off
a) The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of export incentive / rebate receivables of Rs. 27,58,665 written off by the Appellant, despite the same having been offered to tax as business income in earlier years and their subsequent non-realisation resulting in a genuine business loss. The disallowance has been sustained without any contrary material, notwithstanding audited financial statements and export records on record, and is unjustified in law.
b) The impugned disallowance is contrary to the ratio laid down by the Hon’ble Supreme Court in CIT v. Excel Industries Ltd., which holds that income lacking certainty of realisation cannot be taxed on notional basis, and that write-off of unrealizable export incentives merely reflects commercial reality in accordance with the real income theory.
c) In the absence of any adverse finding on genuineness or business nexus, the write-off represents a revenue loss arising in the ordinary course of business and the impugned disallowance is unsustainable and liable to be deleted.
Ground No. 5 — Violation of Principles of Natural Justice and Section 250 of the Income-tax Act, 1961.
a) The learned Commissioner of Income-tax (Appeals) erred in passing the impugned order in violation of the principles of natural justice and the mandatory provisions of section 250 of the Act, by disposing of the appeal without granting an effective opportunity of hearing and without passing a reasoned and speaking order.
b) The impugned disallowances have been sustained without issuance of any specific show-cause notice or meaningful opportunity of rebuttal, contrary to the settled law laid down by the Hon’ble Supreme Court in CIT v. Hotel Blue Moon and the Hon’ble ITAT, Bangalore in ITO v. Shubhankar Estates Pvt. Ltd., and are therefore liable to be quashed or restored for fresh adjudication after granting reasonable opportunity of being heard
Ground No. 6 – Non-admission of Additional Evidence under Rule 46A
The learned Commissioner of Income-tax (Appeals) erred in law and on facts in rejecting the additional evidence filed by the Appellant, including invoices, agreements, DSIR approvals, installation certificates, and other supporting documents, without appreciating the genuine and sufficient cause which prevented their earlier submission, such as portal-related constraints and changes in the finance personnel. The learned CIT(A) failed to exercise jurisdiction vested under Rule 46A, despite the evidence being crucial for proper adjudication of the issues. It is settled law that appellate authorities are duty-bound to admit such evidence when the assessee is prevented by sufficient cause, as held in CIT v. Pruthvi Brokers & Shareholders (R) Ltd.
Ground No. 7 – Levy of Interest under Sections 234A, 234B, 234C and 234D
The learned Assessing Officer erred in levying interest under sections 234A, 234B, 234C and 234D of the Act. The Appellant submits that the levy of interest under the aforesaid sections is purely consequential and dependent upon the assessed income. Accordingly, in the event the impugned additions and disallowances are deleted or modified, the interest so levied is liable to be deleted or suitably recomputed in accordance with law.
Ground No. 8 – General
The Appellant craves leave to add to, amend, alter, or withdraw any of the above grounds of appeal at or before the time of hearing of the appeal, as may be deemed necessary.
PRAYER
In view of the facts stated, the grounds urged, and the legal submissions made, the Appellant most respectfully prays that this Hon’ble Tribunal may be pleased to:
1. Delete the disallowance of professional / consultancy fees amounting to Rs. 28,68,268, holding that the said expenditure was incurred wholly and exclusively for the purposes of business and is allowable under section 37(1) of the Act.
2. Delete the disallowance of weighted deduction under section 35(2AB) amounting to Rs. 16,74,835, and allow the claim as made;
3. Without prejudice, grant deduction under section 35(1)(iv) or any other appropriate provision of law, as may be permissible on the facts on record.
4. Delete the disallowance of depreciation and additional depreciation amounting to Rs. 38,53,005 under section 32, including the portion enhanced by the learned CIT(A), holding that the assets were duly acquired, capitalised and put to use during the relevant previous year
5. Delete the disallowance of export incentive / rebate receivables written off amounting to Rs. 27,58,665, holding that the write-off represents a genuine business loss arising in the ordinary course of business and is allowable in law.
6. Hold that the impugned appellate order is vitiated for violation of principles of natural justice and section 250, and consequently set aside or annul the order to the extent adverse to the Appellant.
7. Direct admission of additional evidence filed by the Appellant, and adjudicate the issues after considering the same on merits.
8. Delete or suitably recompute the levy of interest under sections 234A, 234B, 234C and 234D, as consequential to relief granted.
9. Grant such other or further reliefs, including consequential reliefs, as this Hon’ble Tribunal may deem fit and proper in the facts and circumstances of the case.
The Appellant respectfully submits that it shall place any further material or clarification as may be required and prays for an opportunity of being heard
2. Briefly, the assessee is a private limited company engaged in manufacturing fine chemicals, aromatic chemicals, and synthetic perfumery compounds. It is also engaged in scientific research and development, and its R&D facility is approved by the Department of Scientific and Industrial Research. The assessee filed its return of income on 29 November 2017 declaring total income of ₹3,146,380. The return was selected for scrutiny and notice under section 143(2) dated 24 August 2018 was issued.
3. During assessment, the learned Assessing Officer noted that the assessee had debited ₹4,706,268 under a particular expense head. On being asked to furnish details, the assessee stated that consultancy charges of ₹3,006,268 had been wrongly classified. Of this, ₹24,00,000 was paid to Dr. Rattan Sood, Joint Managing Director, as retainer/consultancy fees, and ₹137,900 was paid to another entity. No details were furnished for the balance ₹468,268. Since the assessee failed to establish the genuineness of the transaction with Dr. Rattan Sood or support the business purpose of the expenditure with evidence, the learned Assessing Officer disallowed ₹2,868,268 under section 37 of the Income-tax Act.
4. The learned Assessing Officer further noted that the assessee had claimed weighted deduction at 200% on R&D expenditure of ₹5,323,900, comprising both revenue and capital expenditure. However, as per the DSIR certificate, the assessee was eligible for deduction only 24.434 lakhs of revenue expenditure and ₹4.87 lakhs of capital expenditure. The assessee had claimed ₹880,069 towards capital expenditure at 200% and ₹3,687,766 at 100%. The learned Assessing Officer therefore disallowed the excess claim of ₹243,776 relating to revenue expenditure and ₹662,138 relating to weighted deduction on capital expenditure.
5. The learned Assessing Officer also observed that the assessee had claimed depreciation and additional depreciation on fixed assets. The assessee was asked to furnish invoices and support details but failed to do so. During the year, the assessee had added assets of ₹3,915,734 stated to have been used for more than 180 days and assets of ₹5,793,442 stated to have been used for less than 180 days. Accordingly, depreciation of ₹3,635,751 was disallowed and added to the assessee’s total income.
6. The learned Assessing Officer also noted that the assessee had claimed ₹2,758,665 towards export incentive/rebate receivables written off. As the assessee did not furnish the required supporting details, the claim was disallowed.
7. Accordingly, the assessment order under section 143(3) of the Act was passed on 18 December 2019.
8. Aggrieved, the assessee preferred an appeal before the learned CIT(A). Regarding the disallowance of ₹2,868,268, the assessee submitted that no show-cause notice had been issued and, therefore, the disallowance deserved to be deleted. On merits, it stated that Edkal Business Solutions was paid ₹137,900 for monthly consultancy and IT support services. As regards ₹24 lakhs paid to Dr. Rattan Sood, the assessee submitted that he was the Managing Director responsible for day-to-day business operations and was paid monthly professional fees of ₹2 lakhs. It was further submitted that he had signed the income-tax return and the annual financial statements, demonstrating the genuineness of the payment. The assessee also stated that the balance was paid to Mr. Parameswaran K., a retired person in charge of production, who did not wish to work full-time as an employee and was therefore paid professional fees. The learned CIT(A), in paragraph 6.1 of the order, recorded that the learned Assessing Officer was asked to respond and, by letter dated 6 July 2023, reported that the assessee had been given a specific opportunity to reply but failed to do so. The learned CIT(A) accordingly confirmed the addition of ₹2,868,268.
9. Regarding the disallowance under section 35(2AB), the assessee challenged the disallowance of ₹9,005,915, as against the proposed disallowance of ₹662,000, contending that it was contrary to the instructions and violated principles of natural justice, as no show-cause notice had been issued. The learned CIT(A), while dealing with ground no. 7, held that Form 3CL showed eligible recurring revenue expenditure of only ₹24.434 lakhs and capital expenditure of ₹4.87 lakhs for scientific research. Since the assessee had claimed ₹3,687,766 and ₹818,016 towards revenue and capital expenditure respectively, the learned CIT(A) upheld the disallowance to the extent of the excess claim.
10. With respect to additional depreciation, the learned Assessing Officer submitted a remand report dated 6 July 2023. Relying on that report, the learned CIT(A) held that the assessee had failed to produce invoices for assets amounting to ₹1,957,197 before the Assessing Officer and had agreed to offer depreciation of ₹623,601 to tax. For assets purchased in assessment year 2016–17, on which additional depreciation was claimed, the assessee also failed to produce invoices for assets amounting to ₹2,598,769. In the remand proceedings, the learned Assessing Officer further questioned whether the assets had been put to use. The assessee produced installation certificates for available invoices; however, as these certificates were prepared by the assessee itself and no third-party vendor had certified installation, the learned Assessing Officer treated them as doubtful. He stated that the disallowance of depreciation of ₹2,384,359 for assessment year 2017–18 was in order, and that depreciation of ₹1,468,646 on assets purchased in assessment year 2016–17 was also correctly disallowed. He further noted a typographical error in the depreciation disallowance of ₹3,635,751, which should be corrected to ₹3,853,005. Based on these findings, the learned CIT(A) confirmed the addition of ₹3,853,005 and dismissed this ground of appeal.
11. Regarding export rebate receivables written off of ₹2,758,665, the learned CIT(A) confirmed the disallowance because the assessee had not furnished supporting details or documents either during assessment or appellate proceedings.
12. Accordingly, the assessee’s appeal was dismissed by the learned CIT(A) by order dated 26 September 2025.
13. Aggrieved by the order of the learned CIT(A), the assessee is in appeal before us. Shri Petta Siva Krishna, Advocate and authorized representative for the assessee, filed a paper book comprising 318 pages and was heard. Shri Pradeep S., Additional Commissioner of Income-tax, appeared for the Revenue and was also heard.
14. The first ground of appeal concerns the learned CIT(A)’s confirmation of the disallowance of professional and consultancy fees of ₹2,868,268 under section 37(1) of the Income-tax Act. The learned Assessing Officer made the disallowance on the ground that the assessee had failed to furnish adequate evidence to establish the genuineness of the payment made to Dr. Rattan Sood, Joint Managing Director. The assessee contends that the expenditure was incurred in the ordinary course of business, tax was deducted at source under section 194J, and the payment was duly recorded in its books of account. It has also placed on record a copy of the Board resolution dated 1 May 2017, which states that Dr. Rattan Sood was a director and Joint Managing Director of the company. Under the terms of his appointment, he was not entitled to any salary for holding that office, though he was provided with furnished accommodation, club fees, and use of a company car. The assessee has further placed before us copies of twelve invoices of ₹2 lakhs each raised by Dr. Rattan Sood towards retainer fees. However, no agreement has been produced to show the nature of services rendered by him to the assessee. Merely signing the income-tax return, holding the office of Joint Managing Director, agreeing not to receive remuneration, or deducting tax at source cannot, by itself, justify allowance of ₹2 lakhs per month in the absence of evidence demonstrating that services were actually rendered. Before the learned CIT(A), the assessee also contended that no show-cause notice was issued. The learned CIT(A) rejected this contention and confirmed the disallowance, holding that a separate show-cause notice was not required.
In our view, the assessee must explain the nature of services rendered by Dr. Rattan Sood as Joint Managing Director and reconcile the payment of retainer/consultancy fees with the terms of appointment under which he had agreed not to draw remuneration. These issues require examination by the learned Assessing Officer. We therefore restore ground no. 1 to the file of the learned Assessing Officer with directions to the assessee to substantiate the services rendered by Dr. Rattan Sood and to explain why payments should be allowed under section 37(1), notwithstanding the terms of appointment. Deduction of tax at source, or payment by cheque, is not conclusive for allowance of expenditure under section 37(1). The onus remains on the assessee to establish the business purpose, genuineness, and allowability of the expenditure. It is also relevant that the payment to the Joint Managing Director appears to have been booked under the head “postage and courier charges” and was identified only on further enquiry by the Assessing Officer. The assessee is therefore also required to demonstrate that the remuneration paid to Dr. Rattan Sood was fair and reasonable. Since these aspects were not adequately examined either by the learned Assessing Officer or by the learned CIT(A), the matter is restored to the learned Assessing Officer for fresh adjudication in accordance with law after giving the assessee reasonable opportunity of being heard.
15. The second ground of appeal relates to the disallowance of ₹1,674,835 under section 35(2AB) of the Income-tax Act. The assessee claimed deduction of ₹5,323,904 under that provision. This comprised revenue expenditure of ₹3,687,766, on which weighted deduction at 200% was claimed, resulting in a claim of ₹7,375,532, and capital expenditure of ₹818,069, on which weighted deduction at 200% was claimed, resulting in a claim of ₹1,636,138. In the books of account, however, only the actual revenue expenditure of ₹3,687,766 was debited, while the balance represented the weighted deduction component. During assessment, Form 3CL issued by the Department of Scientific and Industrial Research certified that only ₹2,344,000 of revenue expenditure and ₹487,000 of capital expenditure were eligible for weighted deduction. Based on this certification, the learned Assessing Officer issued a show-cause notice proposing disallowance. According to the assessee, the proposed disallowance was only ₹6.62 lakhs, but the learned Assessing Officer ultimately disallowed ₹1,905,940. Before the learned CIT(A), the assessee submitted that the difference in the weighted deduction on revenue expenditure was ₹1,343,766 and the difference on capital expenditure was ₹331,069; therefore, the disallowance could not exceed ₹1,674,835. It was also contended that Form 3CL could not conclusively determine the amount of expenditure allowable to the assessee and that the disallowance had been made in violation of Instruction No. 20/2015 dated 29 December 2015, as no proper show-cause notice had been issued. The learned CIT(A), however, held that Form 3CL clearly recorded eligible scientific research expenditure of ₹23.44 lakhs on revenue account and ₹4.87 lakhs on capital account, and accordingly upheld the disallowance made by the learned Assessing Officer. In support of its claim for weighted deduction under section 35(2AB) of the Act, the assessee placed before us Form No. 3CL and Form No. 3CM, along with details of its research and development expenditure appearing at pages 235 to 238 of the paper book.
16. We have considered the rival submissions and perused the orders of the lower authorities, along with the details of revenue and capital expenditure claimed by the assessee. The assessee claimed revenue expenditure of ₹3,687,766, consisting of electricity charges of ₹54,583, salary of research and development staff of ₹2,768,829, chemicals consumed of ₹158,645, consumables of ₹39,400, laboratory appliances of ₹124,473, packing material of ₹126,623, and repairs of ₹65,212. On examining these details, the Department of Scientific and Industrial Research allowed weighted deduction only on eligible revenue expenditure of ₹23.44 lakhs.
The assessee also incurred capital expenditure of ₹818,069, comprising a water-cooling unit of ₹402,900, split air conditioner of ₹44,690, cubicle partition work of ₹330,779, and computer of ₹39,700. The Department of Scientific and Industrial Research allowed the claim only to the extent of ₹4.87 lakhs. Thus, the expenditure of ₹330,779 on cubicle partition work was not approved by the Department of Scientific and Industrial Research.
Approval of such expenditure rests with the competent authority under the Ministry of Science and Technology, which has prescribed detailed guidelines for evaluating approved research and development facilities. We therefore find no infirmity in the findings of the Department of Scientific and Industrial Research.
The object of the deduction is to promote the development of in-house research and development capability of assesses. It is not a blanket deduction for every expenditure incurred within the premises of an approved facility, nor is expenditure necessarily disallowable merely because it is incurred outside those premises. Each item of expenditure must be examined to determine whether it contributes to the assessee’s own research and development capability. The Department of Scientific and Industrial Research is the expert authority entrusted with this determination, and its findings deserve due weight. So far as the issue of the allowance of the hundred percent of expenditure falls into the domain of the income tax authorities and the courts, however, so far as to determine whether such research and development expenditure incurred by the assessee in consonance with the public policy of the government of India to grant them a weighted deduction of hundred percent more solely rest with the export body of Department of scientific and industrial research. Neither can the courts decide whether these expenditures are entitled to weighted deduction nor if the DSIR has approved and granted such deductions, can the court reduce. This is for the simple reason that the courts do not have the expertise to identify what is research and development expenditure which should be granted a weighted deduction of 200% to the assessee is to develop their own capability, this job is assigned to an expert body. Due respect must be granted to such an expert authority. The courts have repeatedly held that the opinion of the expert should not be disturbed or upset on flimsy reasons. Thus, in view of the above facts, we find no merit in the assessee’s appeal on this ground. Accordingly, Ground No. 2 of the assessee’s appeal is dismissed.
17. Ground No. 3 concerns the disallowance of depreciation, including additional depreciation, of ₹3,635,751. The assessee made additions to plant and machinery during the year amounting to ₹9,709,176. Of this, assets of ₹3,915,734 were stated to have been used for more than 180 days, while assets of ₹5,793,442 were stated to have been used for less than 180 days. On the first category, the assessee claimed normal depreciation at 15% amounting to ₹587,360 and additional depreciation at 20% amounting to ₹783,147. On the second category, the assessee claimed normal depreciation of ₹434,508 and additional depreciation of ₹579,344. Thus, according to the assessee, it was entitled to normal depreciation of ₹1,021,868 and additional depreciation of ₹1,362,491, aggregating to ₹2,384,359.
However, the learned Assessing Officer disallowed ₹3,635,751. During the appellate proceedings, the learned CIT(A) called for a remand report from the Assessing Officer and also considered a further letter submitted by him. Based on these materials, the learned CIT(A) enhanced the depreciation disallowance. We find that the issue requires a mathematical verification as well as examination of whether the assets were actually put to use, which has not been properly verified. Accordingly, we restore the matter to the file of the learned Assessing Officer to recompute the depreciation and additional depreciation after verifying all conditions for eligibility. If the assessee is found eligible, the correct depreciation allowance shall be granted. If the Assessing Officer proposes to take the view stated in his letter before the learned CIT(A), he shall first grant the assessee a reasonable opportunity of being heard. The onus shall remain on the assessee to establish its entitlement to normal depreciation of ₹1,021,868 and additional depreciation of ₹1,362,491. In the result, Ground No. 3 of the assessee’s appeal is allowed as indicated above.
18. Ground No. 4 relates to the disallowance of export rebate receivables written off amounting to ₹2,758,665. The assessee did not furnish the relevant details before the lower authorities. Before us, however, the assessee has referred to the ledger placed at pages 223 to 228 of the paper book, which, according to it, shows that the said amount had been offered to tax in the year of accrual and was written off in a later year when it became irrecoverable. If the assessee establishes that the export rebate receivable of ₹2,758,665 was offered to tax in earlier years and was subsequently written off as not recoverable, it would be entitled to relief. Since this factual position requires verification, we restore this ground to the file of the learned Assessing Officer. The assessee shall substantiate that the amount was taxed in earlier years and that it has been written off as irrecoverable. The learned Assessing Officer shall examine the claim and allow the deduction if these conditions are satisfied. In the result, Ground No. 4 of the assessee’s appeal is allowed as indicated above.
19. Ground No. 5 concerns the alleged violation of the principles of natural justice. As no arguments were advanced by the assessee on this ground, it is dismissed.
20. Ground No. 6 concerns the non-admission of additional evidence under Rule 46A of the Income-tax Rules, 1962. Since no arguments were advanced before us on this ground, it is dismissed. In any event, as the relevant issues have been restored to the file of the learned Assessing Officer for verification, the assessee is at liberty to place all such evidence before the learned Assessing Officer, who shall examine the same while deciding the matter afresh.
21. Ground No. 7 relates to the levy of interest under sections 234A, 234B, 234C, and 234D of the Act. Since the levy is consequential in nature, this ground is dismissed.
22. In the result, appeal filed by the Assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 31st August, 2026.
