Section 35(3) Income Tax Notice Received via Email — What You Must Do Immediately

One of my clients recently had a case which I am explaining below and if you are stuck in such similar situation, here is what to do.

Note: Due to attorney-client privilege, I cannot disclose complete case details or identify the actual parties involved. However, I am sharing the essential facts and legal approach so that if you find yourself in a similar situation, you can understand the available solutions and legal remedies.

Arjun Mehta, a small business owner based in Indore, had been running a modest trading firm for several years. Around 18 March 2025, he received an email from the Income Tax Department carrying a notice under Section 35(3) of the Income Tax Act, 1961. The notice flagged that certain scientific research expenditure deductions claimed by his firm were being scrutinised, and he was required to respond within a specified deadline.

Arjun panicked. He reached out to a general civil lawyer he had used earlier for a property matter. That lawyer provided vague advice, drafted a generic reply, and the matter only escalated. The Assessing Officer was unsatisfied with the response, and a follow-up communication arrived within weeks.

A colleague referred Arjun to Advocate Sudhir Rao's chambers. The difference was immediately apparent. The notice was examined in detail, the specific deduction claims were mapped against Section 35(1) and Section 35(2AB) of the Income Tax Act, and a precise, well-documented reply was submitted along with supporting evidence. The Assessing Officer closed the scrutiny without raising a demand. Arjun's case underscores a simple reality: a tax notice is not a general legal matter. It demands focused, domain-specific attention, and getting that early makes all the difference.

Advice in Such Cases

Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation to come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think.

Do not ignore the notice or delay your response: A Section 35(3) notice carries a mandatory response deadline. Missing it can result in ex-parte proceedings before the Assessing Officer, disallowance of your deductions, and a tax demand. Act immediately upon receipt.

Preserve all documentation related to the expenditure claimed: Gather every bill, receipt, approval letter, scientific research certificate, and bank transaction related to the deduction in question. Your response will be only as strong as the documents backing it up.

And here's the thing — this type of matter involves procedural and evidentiary nuances under the Income Tax Act that a general practitioner may simply not be familiar with. Engaging an advocate who regularly handles income tax scrutiny and assessment matters typically leads to a faster and more favourable resolution. A trial-and-error approach, as Arjun discovered early on, costs time and goodwill before the AO.

Applicable Sections of Law

The primary statutory framework governing a Section 35(3) notice includes the following provisions of the Income Tax Act, 1961:

• Section 35(1), Income Tax Act, 1961: Provides deductions for expenditure on scientific research related to the assessee's business.
• Section 35(2AB), Income Tax Act, 1961: Provides weighted deductions for in-house scientific research and development expenditure approved by the Department of Scientific and Industrial Research (DSIR).
• Section 35(3), Income Tax Act, 1961: Empowers the Assessing Officer to disallow deductions under Section 35 if satisfied that the research is not genuine or the expenditure is not properly substantiated.
• Section 143(3), Income Tax Act, 1961: Governs scrutiny assessments where the Assessing Officer examines returns in detail and may raise demands — this section often runs alongside a Section 35(3) proceeding.
• Section 246A, Income Tax Act, 1961: Provides the right to appeal before the Commissioner of Income Tax (Appeals) if an adverse order is passed.

Jurisdiction — Where to File the Case

The initial proceedings under Section 35(3) are before the Assessing Officer (AO) having jurisdiction over the assessee's ward or circle, determined by the Permanent Account Number (PAN) and geographical location of the taxpayer. For Indore-based assessees, this would typically fall under the Income Tax Department's Indore jurisdiction ward.

If the AO passes an adverse order, the first appellate authority is the Commissioner of Income Tax (Appeals). Further appeals lie before the Income Tax Appellate Tribunal (ITAT), then the High Court on substantial questions of law, and finally the Supreme Court. Getting jurisdiction right from the start is critical. An appeal filed before the wrong forum can lapse the limitation period and cause irreversible harm — and I've seen that happen more than once with clients who assumed the process was straightforward.

Limitation Period

Deadlines here are unforgiving. Under the Limitation Act, 1963, read with the Income Tax Act, 1961, strict time limits apply at every stage. An appeal before the Commissioner of Income Tax (Appeals) must be filed within 30 days of receipt of the order. An appeal to the ITAT must be filed within 60 days. Missing these deadlines can be fatal to the case, though condonation of delay may be sought under Section 5 of the Limitation Act, 1963, with sufficient cause shown. Frankly, condonation applications are not guaranteed to succeed, and Assessing Officers and appellate forums take limitation breaches seriously. Don't let a procedural lapse cost you a substantive right.

Interim Reliefs Available

Don't overlook interim reliefs. A stay of demand can be sought before the Commissioner of Income Tax (Appeals) or ITAT under their inherent jurisdiction, preventing coercive recovery action while the appeal is pending. Under Order 39 Rule 1 CPC, read with relevant High Court writ jurisdiction under Article 226 of the Constitution, a stay of assessment order or recovery proceedings may be obtained where irreparable harm is demonstrable.

Now, before you act, understand what's at stake if you skip this step. Attachment of accounts by the Income Tax Department before disposal of an appeal can cripple a business. Seeking interim relief early protects the assessee's financial position in a way that no amount of appellate success later can fully repair.

If You Are the Victim

You've received the notice. Here's what you do next:

• Read the notice carefully and note the exact deadline for your response. Do not assume you have more time than stated.
• Compile all documentation — DSIR approvals, invoices, bank statements, research logs, and any correspondence with scientific research institutions.
• Do not respond without legal counsel. A poorly drafted reply can inadvertently concede points that strengthen the AO's case against you.
• If the AO has already passed an adverse order disallowing your deduction, file an appeal before the Commissioner of Income Tax (Appeals) within 30 days and simultaneously apply for a stay of demand.
• Keep copies of every communication sent and received — email acknowledgements, physical receipts, ITBA portal submissions — as these become critical at the appellate stage.

Documents You Must Keep Ready

• Aadhaar card and PAN card of the assessee (individual or authorised signatory for a company)
• Copy of the Income Tax Return (ITR) for the relevant assessment year
• Copy of the Section 35(3) notice received via email, along with the email headers as proof of receipt
• DSIR approval certificate (for Section 35(2AB) deductions)
• All invoices, bills, and bank statements evidencing the scientific research expenditure claimed
• Research logs, project reports, or scientific documentation establishing the genuineness of the research activity
• Any prior correspondence with the Income Tax Department or AO relating to this deduction or assessment year
• Audited financial statements and tax audit report (Form 3CD) for the relevant year

What Evidence Is Required?

• Primary documentary evidence: DSIR approval letters, research project sanction orders, and weighted deduction computation sheets form the backbone of your defence.
• Financial records: Bank statements and audited accounts corroborating the exact amounts spent on qualifying research expenditure.
• Scientific documentation: Research reports, lab records, progress notes, and final outputs demonstrating that actual research was conducted.
• Vendor/institution records: Invoices and receipts from approved scientific research associations or institutions to whom payments were made.
• Email evidence: Preserve the original email carrying the notice, including the full email header — this establishes the date of service, which is vital for limitation calculations.
• Tax audit report: Form 3CD certifications by the chartered accountant regarding the claim made under Section 35, which carry significant evidentiary weight before the AO and appellate authorities.

How Courts Typically Approach Such Cases

Income Tax Appellate Tribunals and Commissioner of Income Tax (Appeals) forums approach Section 35(3) disallowances with a focus on the genuineness and documentation of the research activity. As held in CIT v. Hira Lal Kalu Ram, 1968 and affirmed through subsequent ITAT benches, the burden of proving the legitimacy of the claimed deduction lies on the assessee. Courts generally don't interfere with factual findings of the AO unless there is perversity, but documented, well-supported appeals do succeed. Make no mistake, delays in responding at the AO stage often prejudice the entire appellate chain that follows. Get your submissions right the first time.

Timeline of Legal Process

• Receipt of Section 35(3) notice: Respond within the specified deadline (typically 15–30 days from notice date) — immediate action required.
• Hearing before Assessing Officer: One or more personal hearings; AO examines documents and submissions. Duration: 1–3 months depending on complexity.
• Assessment Order: AO passes order either accepting or disallowing the claim. Duration: typically within 6–12 months of notice.
• Appeal to CIT(A): Must be filed within 30 days of the assessment order. Hearing and disposal: 6 months to 2 years.
• Appeal to ITAT: Filed within 60 days of CIT(A) order. Disposal: 1–3 years depending on bench workload.
• High Court and Supreme Court: Only on substantial questions of law. These stages can take several years.

Understanding the Costs

The total cost of a matter like this varies significantly from one case to the next — it depends on the complexity of the dispute, the forum involved, the number of hearings, and the specific facts of your situation. There is no single fixed figure that applies to everyone.

A professional advocate can give you an accurate estimate only after reviewing all your facts and documents in a consultation.

Can the Matter Be Settled Out of Court?

Yes, and sometimes that's the smartest path. Income tax disputes are civil in nature and offer structured settlement mechanisms. The Vivad se Vishwas Scheme (when active) allows assessees to settle pending tax disputes by paying a prescribed percentage of the disputed tax demand, with immunity from penalty and interest. Advance Ruling under Section 245R of the Income Tax Act, 1961 is available for future transactions. Under Section 89 CPC and the broader framework of civil mediation, parties in tax-adjacent civil disputes can explore conciliation. For matters already before ITAT or CIT(A), a well-crafted settlement at the AO stage through revised submissions is often the fastest and most cost-effective resolution — provided your documentation is strong enough to compel acceptance.

Common Mistakes People Make

• Ignoring or delaying the response to the notice: Many recipients assume an email notice is less serious than a physical one. It is not. The deadline runs from the date of email receipt, and silence is treated as non-compliance.
• Sending an undocumented or vague reply: A reply that merely states "the deduction is valid" without attaching specific evidence is routinely rejected by AOs and worsens the assessee's position.
• Failing to apply for a stay of demand: If an adverse order is passed and you don't seek a stay promptly, the Income Tax Department can initiate coercive recovery — including attachment of bank accounts — while the appeal is pending.
• Not preserving email evidence correctly: Deleting the original notice email, or failing to note the exact time and date of receipt, can create complications when calculating the limitation period for appeals.
• Engaging an advocate without experience in income tax matters: Tax scrutiny proceedings under Section 35(3) involve specific procedural steps, specialised documentation standards, and forum-specific advocacy strategies. A general practitioner unfamiliar with income tax assessment and appellate practice may miss critical procedural windows or fail to present evidence in the format that AOs expect and that appellate forums find persuasive.

Advocate Sudhir Rao, Supreme Court of India