Research and development approval, software expense, and DEPB profit computation shape deduction treatment and remand outcome.

Weighted deduction for in-house research and development depended on prescribed approval: the Vapi unit was allowed subject to verification of Form 3CM, while the Thane unit claim failed for want of approval. Software expenditure incurred for an SAP replacement package that was later scrapped was treated as revenue expenditure because it did not yield an enduring asset and was incurred for business purposes. Deduction under section 80HHC on DEPB income had to be recomputed on the basis of the real profit element, not the full face value. Interest and rental income were sent back for fresh examination in light of earlier directions and the applicable export deduction principles.

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Issues: (i) Whether weighted deduction under section 35(2AB) was allowable in respect of the assessee's research and development units, (ii) whether computer software expenditure was revenue in nature, (iii) whether deduction under section 80HHC on DEPB income was to be recomputed, and (iv) whether the interest and rental income issue required fresh examination.

Issue (i): Whether weighted deduction under section 35(2AB) was allowable in respect of the assessee's research and development units.

Analysis: The statutory scheme required recognition of the in-house R&D facility and approval by the prescribed authority. The record showed formal approval in Form 3CM for the Vapi unit, though not for the Thane unit. Since the approval for Vapi was received after the Commissioner (Appeals)'s order, the matter was restored only for verification. In the absence of Form 3CM for Thane, the claim for that unit was not sustainable.

Conclusion: Weighted deduction was allowed for the Vapi unit subject to verification, and disallowed for the Thane unit.

Issue (ii): Whether computer software expenditure was revenue in nature.

Analysis: The expenditure was incurred for SAP accounting software intended to replace the existing package, but the new package did not work and was scrapped. No material was brought to show that the expenditure was not genuine or not incurred for business purposes. The outlay did not result in an enduring benefit on the facts found.

Conclusion: The expenditure was held allowable as revenue expenditure.

Issue (iii): Whether deduction under section 80HHC on DEPB income was to be recomputed.

Analysis: The issue was covered by the binding principle that, for DEPB transfers, only the profit element is relevant and the face value is not to be treated as taxable profit in full. The deduction under section 80HHC therefore had to be recalculated in accordance with the settled legal position.

Conclusion: The deduction under section 80HHC was directed to be recomputed and the assessee succeeded on this issue.

Issue (iv): Whether the interest and rental income issue required fresh examination.

Analysis: The issue had been dealt with earlier in the assessee's own case and required reconsideration by the Assessing Officer in the light of the Tribunal's earlier directions and the applicable legal position, including the treatment of gross income for section 80HHC purposes.

Conclusion: The matter was restored to the Assessing Officer for fresh decision.

Final Conclusion: The appeal succeeded in part. Relief was granted on the software expenditure and DEPB-related deduction, partial relief was granted on the weighted deduction claim, and one issue was remanded for verification and fresh adjudication.

Ratio Decidendi: A statutory deduction linked to in-house research and development depends on the prescribed approval mechanism, while business expenditure remains revenue in character where the related software project is abandoned without yielding an enduring asset, and DEPB profits for export deduction must be computed only to the extent of the real profit element.

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