ITAT Delhi Quashes Reopening and Allows Section 35(2AB) Deduction in Matrix Clothing Case; Revenue’s Appeal Dismissed

Key Facts and Tribunal Findings

The Income Tax Appellate Tribunal (ITAT), Delhi Bench “E”, delivered a consolidated ruling in cross appeals involving Matrix Clothing Pvt. Ltd. for Assessment Years 2016–17, 2018–19, and 2019–20, addressing issues relating to reopening under Section 147 and disallowances of manufacturing and research expenditure.

For AY 2016–17, the Assessing Officer had reopened the assessment pursuant to a survey under Section 133A conducted in March 2019, alleging excessive manufacturing expenses and inadmissible R&D expenditure. Additions were made on account of manufacturing expenses (₹23 crore), R&D expenses (₹10.74 crore), and disallowance of deduction under Section 35(2AB). The Commissioner (Appeals) deleted the additions relating to manufacturing and R&D expenses but sustained the disallowance of deduction under Section 35(2AB).

The Tribunal reversed the disallowance under Section 35(2AB), noting that in the assessee’s own case for a subsequent year, a coordinate bench had already allowed the deduction based on certification by the Department of Scientific and Industrial Research (DSIR). Applying judicial consistency, the Tribunal held that no fresh reasoning justified denial of the claim.

On the Revenue’s appeal, the Tribunal upheld the deletion of additions towards manufacturing and R&D expenses, observing that the Assessing Officer’s conclusions were based on post-survey extrapolation without any demonstrated abnormality in expenditure ratios. The findings of the Commissioner (Appeals) remained unrebutted.

Crucially, the Tribunal held that since the very reasons recorded for reopening—relating to manufacturing and R&D expenses—did not survive, the reassessment itself was unsustainable in law. The reopening under Section 147 was accordingly quashed.

For AYs 2018–19 and 2019–20, the Tribunal granted relief on disallowance of interest and Section 35(2AB) deductions, while remanding certain issues relating to payments to joint venture entities for fresh verification.

The assessee’s appeal for AY 2016–17 was allowed, subsequent appeals were partly allowed, and the Revenue’s cross appeal was dismissed.