ITAT Deletes R&D Disallowance as AO Exceeded Limited Scrutiny Jurisdiction:

AEON Formulations Pvt. Ltd. is engaged in the research and manufacture of pharmaceutical, nutraceutical and ayurceutical products, filed its return for AY 2018–19 declaring a loss of Rs. 82,11,268. The assessee claimed a deduction of Rs. 3,21,66,010 under Section 35(2AB) of the Income Tax Act for expenditure incurred on its in-house R&D facility. The case was selected for Limited Scrutiny under the CASS system to examine two issues: duty drawback and deduction on account of donation for scientific research.

During assessment proceedings under Section 143(3), the AO examined the assessee’s claim under Section 35(2AB) and relied on Form No. 3CL issued by the Department of Scientific and Industrial Research (DSIR). Based on the eligible R&D expenditure certified in the form, the AO restricted the weighted deduction to Rs. 76.11 lakh and disallowed the balance claim of Rs. 2,45,55,010.

The CIT(A) upheld the disallowance and rejected the assessee’s contention that the AO had exceeded the scope of Limited Scrutiny. The Tribunal held that a donation or contribution to an eligible research institution is materially different from expenditure incurred by a company on its own approved in-house R&D facility. While the former falls under the relevant provisions of Section 35(1), the latter is governed by Section 35(2AB), subject to its applicable conditions. The nature of the transaction, the recipient or beneficiary, and the evidence required to establish eligibility are different.

The Tribunal also noted that the assessee had not claimed any donation or contribution for scientific research under the relevant provisions in Schedule ESR of its return. The amount of Rs. 3,21,66,010 was separately claimed under Section 35(2AB) for its own in-house R&D expenditure.

Accordingly, the fact that both claims fall within the broader framework of Section 35 could not justify treating them as the same issue for Limited Scrutiny purposes. The Tribunal held that Limited Scrutiny is issue-specific and not merely section-specific. Expenditure incurred on an assessee’s own in-house R&D facility under Section 35(2AB) could not be subsumed within the notified issue of donation for scientific research merely because both fall under Section 35.