R&D Deduction 2026: ITAT Orders 200% Instead of 100% - Section 35(2AB)

Background & Legal Context

Understanding the R&D deduction provisions is crucial for companies engaged in scientific research:

• Section 35(1)(iv) of IT Act 2025: Allows deduction for current scientific research expenditure incurred by companies. This is the basic deduction at 100% of the amount spent.
• Section 35(2AB) of IT Act 2025: Provides an additional weighted deduction of 200% on capital expenditure
• DSIR Certification: This is mandatory for claiming the 200% weighted deduction under section 35(2AB). Without it, you can only claim under section 35(1)(iv).

How it Works:

Suppose your company spent ₹100 lakhs on DSIR-certified capital expenditure for R&D in FY 2025-26:

• Under section 35(2AB): You can deduct ₹200 lakhs (200% of ₹100 lakhs)
• The ITAT ruling confirms this should be allowed in full, not reduced to ₹100 lakhs (100% deduction)

The tribunal noted that Assessing Officers were incorrectly granting only the basic deduction percentage, ignoring the enhanced weighted deduction benefit that Parliament specifically created to incentivize R&D investment in India. This is a major procedural error that the ITAT has now corrected.

What Does This Mean for You?

If You Claimed R&D Deductions in AY 2025-26 or Earlier:

• Your Assessment Was Reduced: If the AO denied or reduced your R&D deduction claim, this ITAT judgment is now precedent in your favor. You can file an appeal or revision application citing this ruling.
• Tax Recovery Possible: If you overpaid tax because the deduction was wrongly denied, you may be eligible for refund of excess tax paid for AY 2025-26 or earlier years (subject to limitation period).
• Future Assessments: For AY 2026-27 onwards, Assessing Officers must follow this ITAT judgment and grant the full 200% weighted deduction on DSIR-certified capital R&D expenditure.

Who Benefits Most:

• Software and IT companies with DSIR-certified R&D centers
• Pharmaceutical and biotech companies investing in drug research
• Manufacturing companies with captive R&D facilities (certified by DSIR)
• Automotive and industrial equipment makers conducting indigenous research

Practical Impact Example:

A Jaipur-based IT company claimed ₹50 crore deduction under section 35(2AB) for DSIR-certified R&D capital expenditure in AY 2024-25. The AO reduced it to ₹25 crore (100% instead of 200%). The company paid additional tax of ₹6.25 crore (at 25% tax rate). With this ITAT ruling, the company can now appeal and recover this excess tax payment.

What Should You Do Now?

Immediate Steps:

1. Review Your Past Assessments: Check your Income Tax assessments for AY 2024-25, AY 2025-26, and AY 2026-27 to see if R&D deductions were reduced by the AO.
2. Gather DSIR Certificates: Locate your DSIR certification letters for R&D projects. Ensure they clearly identify capital vs. current expenditure.
3. Collate Your R&D Records: Prepare detailed schedules showing:
   • Date of DSIR certification
   • Nature of research activity
   • Capital expenditure amount (machinery, building, equipment)
   • Current expenditure amount (salaries, consumables, utilities)
4. File Appeal or Revision: If your assessment order is not yet finalized, request revision under section 264. If finalized, file appeal before ITAT citing this June 2026 judgment.
5. For Open Years: If your AY 2025-26 or AY 2026-27 assessment is still open, ensure you file Form ITR with full 200% deduction claim for DSIR-certified R&D capital expenditure.

Documentation Checklist:

• DSIR certificate of recognition/registration
• Annual reports mentioning R&D activities
• Invoices and payment proofs for R&D capital assets
• Depreciation schedule (if applicable)
• Board resolutions approving R&D projects
• Details of scientists/researchers involved

When Claiming in Future Returns:

For AY 2026-27 onwards, in your ITR Schedule, clearly segregate:

• Current R&D expenditure under section 35(1)(iv) = 100% deduction
• Capital R&D expenditure under section 35(2AB) = 200% weighted deduction (if DSIR-certified)

Key Takeaways

• 200% Not 100%: ITAT Chennai (Jun 2026) rules that Assessing Officers must grant full 200% weighted deduction on DSIR-certified capital R&D expenditure under section 35(2AB), not the reduced 100% rate some AOs were using.
• DSIR Certification Essential: The enhanced 200% deduction applies only to R&D projects with active DSIR certification. Current expenditure without DSIR cert gets only 100% deduction under section 35(1)(iv).
• Appeal Your Old Assessments: If you were denied or had reduced R&D deduction in AY 2024-25, 2025-26, or earlier, cite this ITAT judgment in your appeal. Refund may be possible.
• Impact on Tax Liability: This can reduce your taxable income substantially. On ₹100 crore R&D capital expenditure, you save deduction of ₹100 crore (200% vs 100%), saving ₹25-30 crore in taxes at slab rates.
• Corporate Governance: Ensure your company maintains proper documentation of DSIR certification, separate accounting for capital vs. current R&D spend, and detailed project-wise records.

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