Hi Raunak,
I checked all 3 notes however it did not help. I verified rights on different levels but could not find where its missing
-User group has full control on report folder. There are no inherited rights on report folder
-Granted full control on "Crystal Reports configuration" in CMC>application on usergroup level
-Granted Full control to User on his own Favorites folder
-Tried with granular 'Add Objects to the folder' and 'Edit Objects' to user over the report folder
Please let me know if I am missing anything here.