AO's Disallowance of Weighted Deduction on R&D Expenses in M/s. Tejas Networks Limited Case Overruled; Exclusive Jurisdiction of DSIR Affirmed
In a landmark judgment delivered on November 2, 2026, the Karnataka High Court (Division Bench comprising Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha) has clarified the role of the Assessing Officer (AO) in scrutinizing weighted deduction claims under Section 35(2AB) of the Income Tax Act, 1961, particularly in relation to expenditure on scientific research.
The case arose out of an appeal filed by the Deputy Commissioner of Income Tax against an order of the Single Judge which had quashed the AO's disallowance of a substantial portion of R&D expenditure claimed by M/s. Tejas Networks Limited for Assessment Year 2009-10. The Assessee, engaged in software development and manufacturing of networking equipment, had claimed a weighted deduction of Rs.89.35 crores under Section 35(2AB) for R&D expenditure incurred at its DSIR-approved research units located in Bengaluru and Mumbai. The AO disallowed Rs.48.42 crores of this claim, reasoning that part of the expenditure was capital in nature-specifically, expenditure resulting in acquisition of know-how or technology-and hence excluded under Section 43(4)(ii) of the Act.
The High Court examined the statutory scheme governing scientific research deductions, emphasizing the exclusive jurisdiction of the prescribed authority-namely, the Department of Scientific and Industrial Research (DSIR)-to approve R&D facilities and expenditure eligible for weighted deduction under Section 35(2AB). The Court underscored that once the DSIR, acting as the prescribed authority, grants approval after due audit and verification, the AO is confined to verifying the existence of necessary material and cannot independently question the nature of the expenditure or disallow it on grounds relating to acquisition of rights or intangible assets resulting from scientific research.
The Court relied on the express provisions of Section 35(3) of the Income Tax Act, which mandates that any question regarding the nature and extent of scientific research activities must be referred by the Central Board of Direct Taxes to the prescribed authority, whose decision is final. This statutory mechanism precludes the AO from revisiting or reinterpreting the approval granted by the DSIR.
Furthermore, the Court clarified the scope of Section 43(4)(ii), which excludes expenditure incurred on acquiring rights in or arising out of scientific research from the definition of "expenditure on scientific research." The Court held that this exclusion pertains solely to acquisition of existing rights or patents from third parties, and does not extend to expenditure incurred in in-house scientific research that results in the development of know-how or technology. Such expenditure is precisely the kind encouraged by the statute and hence qualifies for weighted deduction.
The judgment also reaffirmed the maintainability of writ petitions under Article 226 of the Constitution challenging assessment orders on jurisdictional grounds, allowing the High Court to intervene where the AO exceeded or misconstrued his jurisdiction in denying legitimate deductions.
This decision brings clarity and certainty to taxpayers engaged in scientific research and development, ensuring that approvals from the DSIR are respected and that the AO's powers in disallowing approved R&D expenditure are limited to procedural verification rather than substantive re-assessment.
Bottom Line:
Income Tax - Assessing Officer (AO) cannot question or reassess the approval granted by the 'prescribed authority' under Section 35(2AB) of the Income Tax Act, 1961, regarding expenditure on scientific research - AO cannot disallow approved expenditure by interpreting it as an acquisition of rights in or arising out of scientific research under Section 43(4)(ii) of the Act.
Statutory provision(s): Income Tax Act 1961 Sections 35(2AB), 43(4)(ii), 35(3); Income Tax Rules 1962 Rule 6
