Karnataka HC Says Tax Officer Cannot Disallow Tejas Networks’ ₹48.4-Crore DSIR-Approved R&D Spend As “Know-How” Acquisition

Tejas Networks claimed a weighted deduction under Section 35(2AB) of the Income Tax Act, 1961, for expenditure on in-house research and development (R&D) at two DSIR-approved facilities.

DSIR, the prescribed authority, had examined the expenditure and reported the approved amount in Form 3CL.

The Assessing Officer disallowed part of the claim, reasoning that product-development expenditure resulting in know-how or technology was capital expenditure or expenditure excluded by Section 43(4)(ii).

The Dispute Resolution Panel upheld the disallowance. The assessee challenged the assessment order in a writ petition, which the Single Judge allowed; the Revenue appealed.

Section 35(2AB) allows a weighted deduction for expenditure on scientific research incurred in an approved in-house R&D facility, except expenditure in the nature of the cost of land or building; the provision does not exclude other capital expenditure merely because it is capital in nature.

Under Section 35(3), where a question arises as to whether, or to what extent, an activity constitutes scientific research, the Board must refer it to the prescribed authority, whose decision is final.

Rule 6(5A) and Rule 6(7A) of the Income Tax Rules, 1962, govern the prescribed authority’s approval and reporting of eligible R&D expenditure.

Section 43(4)(ii) excludes expenditure incurred to acquire rights in, or arising out of, scientific research; it does not exclude expenditure on research undertaken by the assessee merely because that research produces know-how or technology.

The court relied on DCIT v. Mastek Limited, JK Synthetics Limited v. O.S. Bajpai, and CIT v. F.C.S. International Marketing (P) Limited on the prescribed authority’s role, and on the ITAT decisions in Tata Hitachi Construction Machinery Company Limited v. DCIT and Resil Chemicals (P) Ltd. v. DCIT regarding Section 43(4)(ii).

DSIR had approved and reported the R&D expenditure, and the Assessing Officer’s objection was that the resulting know-how and technology made the expenditure ineligible.

The court held that the Assessing Officer could not revisit the prescribed authority’s determination that the activities constituted scientific research or re-assess the approved expenditure on that basis; any relevant question had to be referred through the Board under Section 35(3).

The Assessing Officer could still verify supporting material, audited accounts, and whether the claim matched the expenditure approved, but could not undertake a merits review of whether the approved activities were scientific research.

Further, internally generated know-how is a purpose and potential outcome of scientific research, not, by itself, an acquisition of existing rights excluded by Section 43(4)(ii).

The Revenue’s appeal was dismissed, leaving the Single Judge’s order undisturbed.