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Section 35 Of Income Tax Act: Deduction For Scientific Research Expenditure

Updated on : May 3rd, 2024

Throughout history, the Indian Government has always supported scientific research. Section 35 of the Income Tax Act allows individuals and entities taking part in such activities to claim deductions for the expenses incurred.

Thus, if you conduct scientific research or run a business that does so, keep reading this article. We will cover the applicability of this deduction, eligibility criteria and more.

Section 35 Of Income Tax Act: Applicability

Section 35 of the Income Tax Act allows for deductions while computing taxes for expenses relating to scientific research. It applies to any field of science, including engineering, natural sciences, technology and social sciences.

Furthermore, Section 35 covers a wide range of scientific activities like experimental development, pure research, applied research, etc.

Section 35 Of Income Tax Act: Deductions

Deductions under Section 35 of the Income Tax Act are as follows :

1. Revenue Expenditure

Under revenue expenditure are all the day-to-day expenses incurred in running a business, like wages, salaries, rent, maintenance costs, etc. Section 35 allows a full deduction on such costs in the year in which it was incurred. Expenditure incurred before 3 years immediately preceding the commencement of the business on payment of salary to research personnel engaged in scientific research related to his business or on purchase of material inputs for scientific research will be allowed as a deduction in the year in which the business is commenced.

2. Capital Expenditure

A person can gain tax benefits for any capital expenditures incurred for scientific research. However, these expenses must be related to scientific activities done in the same year of the spending. Moreover, there are a few points to keep in mind:

Section 35 tax exemption is available for any kind of capital expenditure on scientific research.
However, this benefit is not available for land acquisitions.
Any capital spending in this regard done within the last 3 years before the business commenced operations shall be considered as the expense of the year of commencement.
If the company sells these assets without using them for anything other than scientific purposes, the lower net sale price and asset cost, which was earlier deducted under Section 35, will be considered business income for the year in which the sale took place.
Furthermore, any amount above the asset’s original cost price will be applicable for capital gains tax.
Now, if the company sells assets after using them for other activities, its actual costs will be nil, as Section 35 has already provided a full deduction. In this case, the amount from its sale will be deducted from the relevant asset block.
Scientific research assets are not eligible for a depreciation deduction in their year of purchase or in any later year.

3. Payments To Outside Agencies

You can avail of a 100% deduction on the payments made to the following agencies for scientific research purposes under Section 35 of the Income Tax Act:

Institutions/associations for scientific research.
Institutions for research in social sciences or statistics.
Indian Institute of Technology.
National laboratories.
National universities.
Companies taking part in scientific research.

To avail of Section 35 deductions for payments to companies involved in scientific research, a few conditions need to be met. They are as follows:

It must be registered in India.
The organisation’s main objective should be scientific research and development.
Must be approved by the prescribed authority and fulfilling all its conditions.

Section 35 Of Income Tax Act: Eligibility

There are some eligibility criteria which you must meet to avail of the deductions under Section 35 of the Income Tax Act, which are as follows:

You must carry out the scientific research in India.
Your research must be approved by the Department of Scientific and Industrial Research (DSIR), which is the prescribing authority in this case.
Expenses incurred must be exclusively or wholly for the purpose of scientific research.

Benefits Of Section 35

Provides Tax Deductions

Section 35 enables individuals and entities to avail of tax deductions on expenditures in scientific research. Thus, it helps reduce their taxable income, effectively decreasing their R&D costs.

Encourages Companies to Innovate

Such deductions encourage companies to invest in research and development activities, which can help them develop new products, technologies and services.

Facilitates Economic Growth

Increased research and development in the field of science can improve productivity and create new employment opportunities, thus significantly contributing to the economy’s growth.

Denial Of Deductions

The deduction in relation to any sum paid to a National Laboratory, University, Indian Institute of Technology or a specified person shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to,—

(a) such Laboratory or specified person has been withdrawn; or

(b) the programme, undertaken by the National Laboratory, University, Indian Institute of Technology or specified person, has been withdrawn.

To avail of the deduction under Section 35 of the Income Tax Act, you must submit Form 3CK to the DSIR. Furthermore, while filing your returns, you must submit proper records and documents like bills, vouchers, invoices, etc.

Frequently Asked Questions

To be eligible for the deduction under Section 35, the scientific research must be carried out in India, approved by the prescribed authority, and the expenditure must be incurred wholly and exclusively for scientific research.

The prescribed authority for the purpose of Section 35 is the Department of Scientific and Industrial Research (DSIR).

Where, in a scheme of amalgamation, the amalgamating company transfers to the amalgamated company (being an Indian company) any asset representing expenditure of a capital nature on scientific research, the provisions of Section 35 shall apply to the amalgamated company as they would have applied to the amalgamating company had the latter not transferred the asset.

100% of deduction towards revenue expenditure on scientific research
100% of deduction towards capital expenditure on scientific research subject to specified conditions
100% of payments made to the agencies engaged scientific research

Section 35AD allows for deductions while computing taxes for capital expenses relating to specified business. The expenditure must fulfil the criteria mentioned in this section. Click here to read more.

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Section 35(1)(ii) of the Income Tax Act: A Comprehensive Guide to Scientific Research Expenditure Deduction

Section 35(1)(ii) of the Income Tax Act is an important provision that allows businesses to claim deductions for any expenditure incurred on scientific research. This provision encourages businesses to invest in scientific research, which can help drive innovation and growth in the economy.

In this blog, we will take a closer look at Section 35(1)(ii) of the Income Tax Act, and discuss its provisions, benefits, and limitations.

Table of Contents

Introduction to Section 35(1)(ii)

Section 35(1)(ii) of the Income Tax Act allows businesses to claim deductions for any expenditure incurred on scientific research. This provision covers both capital and revenue expenditure, and the deduction can be claimed in the year in which the expenditure is incurred.

What is Scientific Research?

Scientific research refers to any systematic investigation or study that seeks to discover new knowledge or improve existing knowledge in a particular field. This can include research in fields such as science, technology, engineering, medicine, and social sciences.

Expenditure that qualifies for deduction under Section 35(1)(ii)

The following expenditure can qualify for deduction under Section 35(1)(ii):

Expenditure incurred on scientific research
Expenditure incurred on the acquisition of patents or rights to use patents
Expenditure incurred on the development of new products or processes
Expenditure incurred on the acquisition of new technology or technical know-how
Expenditure incurred on the expansion or modernization of existing scientific research facilities

Benefits of Section 35(1)(ii)

Section 35(1)(ii) offers several benefits to businesses that invest in scientific research. These benefits include:

Tax savings : Businesses can claim deductions for any expenditure incurred on scientific research, which can help reduce their tax liability.
Encourages innovation : The provision encourages businesses to invest in scientific research, which can help drive innovation and growth in the economy.
Improves competitiveness : Investing in scientific research can help businesses develop new products and processes that can improve their competitiveness in the market.

Limitations of Section 35(1)(ii)

While Section 35(1)(ii) offers several benefits, there are some limitations to the provision. These limitations include:

Restrictions on deductions : Deductions can only be claimed for expenditure incurred on scientific research that is approved by the prescribed authority.
Limited scope: The provision only covers expenditure incurred on scientific research, and does not cover expenditure incurred on other types of research.

Approval of Scientific Research

As mentioned earlier, deductions can only be claimed for expenditure incurred on scientific research that is approved by the prescribed authority. The prescribed authority is the Department of Scientific and Industrial Research (DSIR), which is under the Ministry of Science and Technology.

To claim a deduction under Section 35(1)(ii), the business must obtain approval from the DSIR for the scientific research being conducted. The DSIR evaluates the research proposal and assesses its scientific merit and potential benefits to the industry and the economy.

Once the DSIR approves the research, the business can claim a deduction for the expenditure incurred on that research. The deduction can be claimed for up to 150% of the expenditure incurred on scientific research. This means that if a business incurs Rs. 1 lakh on scientific research, it can claim a deduction of up to Rs. 1.5 lakhs.

Capital and Revenue Expenditure

Section 35(1)(ii) covers both capital and revenue expenditure incurred on scientific research. Capital expenditure refers to expenditure incurred on the acquisition of assets, such as land, buildings, machinery, and equipment. Revenue expenditure, on the other hand, refers to expenditure incurred on day-to-day operations, such as salaries, rent, and utilities.

The deduction for capital expenditure can be claimed over a period of time through depreciation, while the deduction for revenue expenditure can be claimed in the year in which it is incurred.

Tax Incentives for Start-ups

The government has also introduced tax incentives for start-ups that are engaged in scientific research. Under Section 80-IAC of the Income Tax Act, start-ups can claim a deduction of 100% of their profits for the first three years of operation, provided they are engaged in eligible business activities, including scientific research.

The government has also set up several funding schemes and grants to support scientific research and innovation in the country. These include the Technology Development Board, the Biotechnology Industry Partnership Programme, and the Council of Scientific and Industrial Research (CSIR), among others.

Eligible Businesses

Section 35(1)(ii) is available to all businesses, whether they are engaged in manufacturing, trading, or service activities. The provision applies to both domestic and foreign companies operating in India.

To be eligible for deduction under this provision, the business must be engaged in scientific research. This can include research in any field, including natural sciences, social sciences, engineering, and technology.

The business must also maintain proper records and documentation of the expenditure incurred on scientific research. This includes records of the nature and purpose of the research, the amount of expenditure incurred, and the approvals obtained from the prescribed authority.

Exclusions from Deduction

Section 35(1)(ii) excludes certain types of expenditure from the deduction. These include:

Expenditure incurred on the acquisition of land or buildings
Expenditure incurred on the acquisition of plant or machinery
Expenditure incurred on the acquisition of patents or rights to use patents from a related party
Expenditure incurred on the acquisition of any asset that is eligible for depreciation

If the expenditure falls under any of these categories, it will not be eligible for deduction under Section 35(1)(ii).

Procedure for Claiming Deduction

To claim a deduction under Section 35(1)(ii), the business must file its income tax return and provide details of the expenditure incurred on scientific research. The business must also provide the approval received from the prescribed authority for the research.

The income tax authorities may also conduct a review of the records and documentation maintained by the business to ensure that the expenditure claimed is eligible for deduction under Section 35(1)(ii).

In conclusion, Section 35(1)(ii) of the Income Tax Act is an important provision that offers several benefits to businesses that invest in scientific research. The provision encourages innovation and growth in the economy, and can help businesses improve their competitiveness in the market. However, businesses should be aware of the limitations of the provision and ensure that they comply with the requirements set out by the prescribed authority to claim deductions for expenditure incurred on scientific research.

Frequently Asked Questions (FAQs)

What is Section 35(1)(ii) of the Income Tax Act?

Section 35(1)(ii) is a provision in the Income Tax Act that allows businesses to claim a deduction for expenditure incurred on scientific research.

2. Who is eligible to claim a deduction under Section 35(1)(ii)? Any business engaged in scientific research is eligible to claim a deduction under this provision, subject to approval from the prescribed authority.

3. What types of expenditure are eligible for deduction under Section 35(1)(ii)? Expenditure incurred on scientific research is eligible for deduction under this provision, including both revenue and capital expenditure.

4. What is the maximum deduction that can be claimed under Section 35(1)(ii)? The maximum deduction that can be claimed under this provision is 150% of the expenditure incurred on scientific research.

5. Who is the prescribed authority for approving scientific research under Section 35(1)(ii)? The prescribed authority is the Department of Scientific and Industrial Research (DSIR), which is under the Ministry of Science and Technology.

6. What are the exclusions from deduction under Section 35(1)(ii)? Expenditure incurred on the acquisition of land or buildings, plant or machinery, patents, or any depreciable asset is excluded from deduction under this provision.

7. Can start-ups claim a deduction under Section 35(1)(ii)? Yes, start-ups engaged in scientific research can claim a deduction under this provision, subject to approval from the prescribed authority.

8. What records and documentation are required to claim a deduction under Section 35(1)(ii)? Businesses must maintain records and documentation of the nature and purpose of the research, the amount of expenditure incurred, and the approvals obtained from the prescribed authority.

9. Can a business claim a deduction for expenditure incurred on scientific research outside India? No, only expenditure incurred on scientific research conducted in India is eligible for deduction under this provision.

10. What are the penalties for non-compliance with the requirements of Section 35(1)(ii)? Failure to comply with the requirements of this provision can result in the denial of deduction and penalties, including interest and penalties for under-reporting of income.

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Terms & Conditions

Section 35 of Income Tax Act for AY 2023-24

Notes on expenditure on scientific research section 35 of Income Tax Act 1961 as amended by the Finance Act 2022 and Income-tax Rules, 1962.

Amended and updated notes on section 35 of Income Tax Act 1961 as amended by the Finance Act 2022 and Income-tax Rules, 1962. Detail discussion on provisions and rules related to expenditure on scientific research .

Chapter IV (Sections 14 to 59 ) of the Income Tax Act 1961 deals with the provisions related to computation of total income. Section 35 of IT Act 1961-2022 provides for expenditure on scientific research.

Recently, we have discussed in detail section 34A (restriction on unabsorbed depreciation and unabsorbed investment allowance for limited period in case of certain domestic companies) of IT Act 1961.

Today, we learn the provisions of section 35 of Income-tax Act 1961 as amended by the Finance Act 2022. The amended provision of section 35 is effective for financial year 2022-23 relevant to the assessment year 2023-24.

In this article, you will learn detail of the provisions of section 35 of the Income Tax Act, 1961 Bare Act read with the Income-tax Rules, 1962, regulations, notifications, circulars, orders and Press Release by CBDT, Income Tax Department and the Ministry of Law and Justice, Government of India.

Table of Contents

Section-35: Expenditure on Scientific Research

Section 35 (1):.

In respect of expenditure on scientific research, the following deductions shall be allowed—

(i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business.

Explanation: Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of any salary [ as defined in Explanation 2 below sub-section (5) of section 40A ] to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or expended within the three years immediately preceding the commencement of the business shall, to the extent it is certified by the prescribed authority to have been laid out or expended on such scientific research, be deemed to have been laid out or expended in the previous year in which the business is commenced;

(ii) an amount equal to one and one half times of any sum paid to a research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research:

Provided that such association, university, college or other institution for the purposes of this clause—

(A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed; and
(B) such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government:

Provided further that where any sum is paid to such association, university, college or other institution in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the sum so paid;

Notification No. 79/2021, S.O. 2804(E), dated 12-July-2021 : In exercise of the powers conferred by clauses (ii) of sub-section (1) of section 35 of the Income-tax Act, 1961 (43 of 1961) read with rules 5C and 5D of the Income-tax Rules, 1962, the Central Government hereby approves M/s Patanjali Research Foundation Trust, Haridwar (PAN:- AABTP8183E) under the category “ Research Association ” for Scientific Research for the purposes of clauses (ii) of sub-section (1) of section 35 of the Income-tax Act, 1961 read with rules 5C and 5D of the Income-tax Rules, 1962.

This Notification shall apply with effect from the date of publication in the Official Gazette (i.e from the Previous Year 2021-2022) and accordingly shall be applicable for Assessment Year(s) 2022-23 to 2027-28.

(iia) any sum paid to a company to be used by it for scientific research:

Provided that such company—

(A) is registered in India,
(B) has as its main object the scientific research and development,
(C) is, for the purposes of this clause, for the time being approved by the prescribed authority in the prescribed manner, and
(D) fulfils such other conditions as may be prescribed;

(iii) any sum paid to a research association which has as its object the undertaking of research in social science or statistical research or to a university, college or other institution to be used for research in social science or statistical research :

(B) such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government.

Explanation: The deduction, to which the assessee is entitled in respect of any sum paid to a research association, university, college or other institution to which clause (ii) or clause (iii) to which clause (ii) or clause (iii) applies, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to the association, university, college or other institution referred to in clause (ii) or clause (iii) has been withdrawn;

[Explanation was amended w.e.f. 01.04.2021 by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020]

Notification No. 70/2021, S.O. 2175 (E), dated 8-June-2021: In exercise of the powers conferred by clauses (ii) and (iii) of sub-section (1) of section 35 of the Income-tax Act, 1961 (43 of 1961) read with rules 5C and 5E of the Income-tax Rules, 1962, the Central Government hereby approves M/s Indian Institute of Technology, Bhilai (PAN: AABAI0415K) under the category of ‘ University, College or other institution ’ for Scientific Research and Research in Social Science and Statistical Research for the purposes of clauses (ii) and (iii) of sub-section (1) of section 35 of the Income-tax Act, 1961 (43 of 1961) read with rules 5C and 5E of the Income-tax Rules, 1962.

This Notification shall be deemed to have been applied for the assessment year 2021-2022 and shall apply with respect to the assessment years 2022-2023, 2023-2024, 2024-2025 and 2025-2026.

(iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2):

Provided that the research association, university, college or other institution referred to in clause (ii) or clause (iii) shall make an application in the prescribed form and manner to the Central Government for the purpose of grant of approval, or continuance thereof, under clause (ii) or, as the case may be, clause (iii) :

Provided further that the Central Government may, before granting approval under clause (ii) or clause (iii), call for such documents (including audited annual accounts) or information from the research association, university, college or other institution as it thinks necessary in order to satisfy itself about the genuineness of the activities of the research association, university, college or other institution and that Government may also make such inquiries as it may deem necessary in this behalf :

Provided also that any notification issued, by the Central Government under clause (ii) or clause (iii), before the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, shall, at any one time, have effect for such assessment year or years, not exceeding three assessment years (including an assessment year or years commencing before the date on which such notification is issued) as may be specified in the notification:

Provided also that where an application under the first proviso is made on or after the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, every notification under clause (ii) or clause (iii) shall be issued or an order rejecting the application shall be passed within the period of twelve months from the end of the month in which such application was received by the Central Government:

Provided also that every notification under clause (ii) or clause (iii) in respect of the research association, university, college or other institution or under clause (iia) in respect of the company issued on or before the date on which this proviso has come into force, shall be deemed to have been withdrawn unless such research association, university, college or other institution referred to in clause (ii) or clause (iii) or the company referred to in clause (iia) makes an intimation in such form and manner, as may be prescribed, to the prescribed income-tax authority within three months from the date on which this proviso has come into force, and subject to such intimation the notification shall be valid for a period of five consecutive assessment years beginning with the assessment year commencing on or after the 1st day of April, 2022:

Provided also that any notification issued by the Central Government under clause (ii) or clause (iia) or clause (iii), after the date on which the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Bill, 2020 receives the assent of the President, shall, at any one time, have effect for such assessment year or years, not exceeding five assessment years as may be specified in the notification.

[The above fifth and sixth provisos to sub-section (1) of section 35 shall be inserted w.e.f. 01.04.2021 by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020]

Section 35 (1A):

Notwithstanding anything contained in sub-section (1), the deduction in respect of any sum paid to the research association, university, college or other institution referred to in clause (ii) or clause (iii), or the company referred to in clause (iia) of sub-section (1), shall not be allowed [the research association, university, college or other institution referred to in clause (ii) or clause (iii) or the company referred to in clause (iia) of sub-section (1) shall not be entitled to deduction under the respective clauses of the said sub-section], unless such research association, university, college or other institution or company—

[Sub-section (1A) of Section 35 amended ( substituted ) and shall be deemed to have been substituted with effect from the 1st day of April, 2021 by the Finance Act 2022]

(i) prepares such statement for such period as may be prescribed and deliver or cause to be delivered to the said prescribed income-tax authority or the person authorised by such authority such statement in such form, verified in such manner, setting forth such particulars and within such time, as may be prescribed:

Provided that such research association, university, college or other institution or the company may also deliver to the prescribed authority a correction statement for rectification of any mistake or to add, delete or update the information furnished in the statement delivered under this sub-section in such form and verified in such manner as may be prescribed;

(ii) furnishes to the donor, a certificate specifying the amount of donation in such manner, containing such particulars and within such time from the date of receipt of sum, as may be prescribed.

[ The above sub-section (1A) of section 35 inserted w.e.f. 01.04.2021 by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020]

Section 35 (2):

For the purposes of clause (iv) of sub-section (1),—

(i) in a case where such capital expenditure is incurred before the 1st day of April, 1967, one-fifth of the capital expenditure incurred in any previous year shall be deducted for that previous year; and the balance of the expenditure shall be deducted in equal instalments for each of the four immediately succeeding previous years ;

(ia) in a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year :

Explanation-1: Where any capital expenditure has been incurred before the commencement of the business, the aggregate of the expenditure so incurred within the three years immediately preceding the commencement of the business shall be deemed to have been incurred in the previous year in which the business is commenced.

Explanation-2: For the purposes of this clause,—

(a) “land” includes any interest in land; and
(b) the acquisition of any land shall be deemed to have been made by the assessee on the date on which the instrument of transfer of such land to him has been registered under the Registration Act, 1908 (16 of 1908), or where he has taken or retained the possession of such land or any part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), the date on which he has so taken or retained possession of such land or part ;

(ii) notwithstanding anything contained in clause (i), where an asset representing expenditure of a capital nature incurred before the 1st day of April, 1967, ceases to be used in a previous year for scientific research related to the business and the value of the asset at the time of the cessation, together with the aggregate of deductions already allowed under clause (i) falls short of the said expenditure, then—

(a) there shall be allowed a deduction for that previous year of an amount equal to such deficiency, and
(b) no deduction shall be allowed under that clause for that previous year or for any subsequent previous year ;

(iii) if the asset mentioned in clause (ii) is sold, without having been used for other purposes, in the year of cessation, the sale price shall be taken to be the value of the asset at the time of the cessation ; and if the asset is sold, without having been used for other purposes, in a previous year subsequent to the year of cessation, and the sale price falls short of the value of the asset taken into account at the time of cessation, an amount equal to the deficiency shall be allowed as a deduction for the previous year in which the sale took place;

(iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clause (ii) of sub-section (1) of section 32 for the same or any other previous year in respect of that asset;

(v) where the asset mentioned in clause (ii) is used in the business after it ceases to be used for scientific research related to that business, depreciation shall be admissible under clause (ii) of sub-section (1) of section 32 .

Section 35 (2A):

Where, before the 1st day of March, 1984, the assessee pays any sum (being any sum paid with a specific direction that the sum shall not be used for the acquisition of any land or building or construction of any building) to a scientific research association or university or college or other institution referred to in clause (ii) of sub-section (1) or to a public sector company to be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India, then,—

(a) there shall be allowed a deduction of a sum equal to one and one-third times the sum so paid; and
(b) no deduction in respect of such sum shall be allowed under clause (ii) of sub-section (1) for the same or any other assessment year.

Explanation: For the purposes of this sub-section, “ public sector company ” shall have the same meaning as in clause (b) of the Explanation below sub-section (2B) of section 32A .

Section 35 (2AA):

Where the assessee pays any sum to a National Laboratory or a University or an Indian Institute of Technology or a specified person with a specific direction that the said sum shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority, then—

(a) there shall be allowed a deduction of a sum equal to one and one-half times the sum so paid; and
(b) no deduction in respect of such sum shall be allowed under any other provision of this Act:

Provided that the prescribed authority shall, before granting approval, satisfy itself about the feasibility of carrying out the scientific research and shall submit its report to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General in such form as may be prescribed:

Provided further that where any sum is paid to such National Laboratory or university or Indian Institute of Technology or specified person in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this sub-section shall be equal to the sum so paid.

Explanation-1: The deduction, to which the assessee is entitled in respect of any sum paid to a National Laboratory, University, Indian Institute of Technology or a specified person for the approved programme referred to in this sub-section, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to,—

(a) such Laboratory, or specified person has been withdrawn; or
(b) the programme, undertaken by the National Laboratory, University, Indian Institute of Technology or specified person, has been withdrawn.

Explanation-2: For the purposes of this section,—

(a) “ National Laboratory ” means a scientific laboratory functioning at the national level under the aegis of the Indian Council of Agricultural Research, the Indian Council of Medical Research, the Council of Scientific and Industrial Research, the Defence Research and Development Organisation, the Department of Electronics, the Department of Bio-Technology or the Department of Atomic Energy and which is approved as a National Laboratory by the prescribed authority in such manner as may be prescribed;
(b) “ University ” shall have the same meaning as in Explanation to clause (ix) of section 47 ;
(c) “ Indian Institute of Technology ” shall have the same meaning as that of “Institute” in clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961);
(d) “ specified person ” means such person as is approved by the prescribed authority.

Section 35 (2AB):

Clause(1): Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred:

Provided that where such expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility is incurred in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the expenditure so incurred.

Explanation: For the purposes of this clause, “expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).

Clause(2): No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act.

Clause(3): No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed.

Clause(4): The prescribed authority shall submit its report in relation to the approval of the said facility to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General in such form and within such time as may be prescribed.

Clause(5): [Omitted]

Clause(6): No deduction shall be allowed to a company approved under sub-clause (C) of clause (iia) of sub-section (1) in respect of the expenditure referred to in clause (1) which is incurred after the 31st day of March, 2008.

Section 35 (2B):

(a) Where, before the 1st day of March, 1984, an assessee has incurred any expenditure (not being in the nature of capital expenditure incurred on the acquisition of any land or building or construction of any building) on scientific research undertaken under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India, he shall, subject to the provisions of this sub-section, be allowed a deduction of a sum equal to one and one-fourth times the amount of the expenditure certified by the prescribed authority to have been so incurred during the previous year.

(b) Where a deduction has been allowed under clause (a) for any previous year in respect of any expenditure, no deduction in respect of such expenditure shall be allowed under clause (i) of sub-section (1) or clause (ia) of sub-section (2) for the same or any other previous year.

(c) Where a deduction is allowed for any previous year under this sub-section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed in respect of that asset under clause (ii) of sub-section (1) of section 32 for the same or any subsequent previous year.

(d) Any deduction made under this sub-section in respect of any expenditure on scientific research in excess of the expenditure actually incurred shall be deemed to have been wrongly made for the purposes of this Act if the assessee fails to furnish within one year of the period allowed by the prescribed authority for completion of the programme, a certificate of its completion obtained from that authority, and the provisions of sub-section (5B) of section 155 shall apply accordingly.

Section 35 (3):

If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to—

(a) the Central Government, when such question relates to any activity under clauses (ii) and (iii) of sub-section (1), and its decision shall be final;
(b) the prescribed authority, when such question relates to any activity other than the activity specified in clause (a), whose decision shall be final.

Section 35 (4):

The provisions of sub-section (2) of section 32 shall apply in relation to deductions allowable under clause (iv) of sub-section (1) as they apply in relation to deductions allowable in respect of depreciation.

Section 35 (5):

Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company (being an Indian company) any asset representing expenditure of a capital nature on scientific research,—

(i) the amalgamating company shall not be allowed the deduction under clause (ii) or clause (iii) of sub-section (2); and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not so sold or otherwise transferred the asset.

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Under this section amount deductible in respect of scientific research may be classified as under:

1. Revenue Expenditure Incurred by an Assessee who Himself Carries On Scientific Research [Section 35(1)(i)]

Where the assessee himself carries on scientific research and incurs revenue expenditure, deduction is allowed for such expenditure only if such research relates to his business.

 Pre-commencement Period Expenses -

Revenue expenses incurred before the commencement of business (but within three years immediately before commencement of business) on scientific research related to the business are deductible in the previous year in which the business is commenced.

However, the deduction is limited to the extent it is certified by the prescribed authority prescribed for this purpose under rule 6 [prescribed authority is Director-General (Income-tax Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research, Government of India].

2. Contribution to Outside Institutions for Scientific Research [Section 35(1)(ii)/(iii)]

Where the assessee does not himself carry on research but makes contributions to the following institutions for this purpose, a deduction is allowed as follows—

3. Amount Paid to an Approved Scientific Research Company [Section 35(1)(iia)]

Section 35(1 )(iia) is applicable if the following conditions are satisfied—

The taxpayer is any person (maybe an individual, HUF, firm, company or any other person).

The taxpayer has paid any sum to an Indian company (hereinafter referred as “payee-company”) to be used by the payee for scientific research.

The scientific research may or may not be related to the business of the taxpayer.

The payee-company has as its main object the scientific research and development.

The payee-company is for the time being approved by the prescribed authority (i.e., the Chief Commissioner of Income-tax having jurisdiction over the applicant). An application shall be submitted online for this purpose in Form No. 3CF-III.

The payee-company fulfils such other conditions as may be prescribed. These conditions are given in rule 5F.

Amount of Deduction –

If the above conditions are satisfied, the taxpayer can claim a deduction under section 35(1)(iia). The amount of deduction is –

- for the assessment years 2009-10 to 2017-18 : 125% of the amount paid;

- from the assessment year 2018-19 onwards : 100% of the amount paid.

Payee-company cannot claim Deduction under Section 35(2AB) –

With a view to avoid multiple claims for deduction, it has been provided that the payee-company approved under the provisions of section 35(2)(iia) is not entitled to claim deduction under section 35(2AB). However, deduction to the extent of 100% of the sum spent as revenue expenditure or capital expenditure on scientific research which is available under section 35(1) will continue to be allowed.

4. Capital Expenditure Incurred by an Assesses who himself Carries On Scientific Research [Section 35(2)]

Where the assessee incurs any expenditure of a capital nature on scientific research related to his business, the whole of such expenditure incurred in any previous year is allowable as deduction for that previous year.

The following points should also be kept in view:

The assessee should incur expenditure of a capital nature on scientific research and there is no requirement that such an expenditure should be capitalized in its books of account .

Where any capital expenditure has been incurred before the commencement of the business, the aggregate of such expenditure, incurred within three years immediately preceding the commencement of the business, is deemed to have been incurred in the previous year in which the business is commenced [Explanation to section 35(2)(ia)].

The aforesaid deduction is not available in respect of capital expenditure incurred on the acquisition of any land after February 29, 1984.

If the asset is sold without having been used for other purposes, surplus or deduction allowed, whichever is less, is chargeable to tax as business income of the previous year in which the sale took place [sec. 41(3)]. The excess of surplus over deduction allowed is, however, chargeable to tax as capital gains.

Deduction by way of depreciation is not admissible in respect of an asset used in scientific research, either in the year in which the capital expenditure is incurred or in a subsequent year.

5. Contribution to National Laboratory for Scientific Research[Section 35(2AA)]

The provisions of section 35(2AA) are given below—

CONDITIONS - The following conditions should be satisfied—

The payment is made to—

National Laboratory; or

University; or

Indian Institute of Technology; or

Specified person as approved by the prescribed authority.

The above payment is made under a specific direction that it should be used by the aforesaid person for undertaking scientific research programme approved by the prescribed authority.

AMOUNT OF DEDUCTION –

If the aforesaid conditions are satisfied, the taxpayer is eligible for deduction as follows—

For the assessment years 2018-19 to 2020-21 : 150% of actual payment
From the assessment year 2021-22 onwards : 100% of actual payment

Such contribution which is eligible for deduction under the aforesaid provisions is not eligible for any other deduction under the Act.

6. Expenses on In-House Research and Development Expenses [Section 35(2AB)]

From the assessment year 1998-99, sub-section (2AB) has been inserted in section 35. It provides for a deduction in respect of expenditure on in-house research and development expenses subject to the following—

Conditions - One has to satisfy the following conditions—

The taxpayer is a company.

The company should be in the business of bio-technology or in the business of manufacture or production of any article or thing except those specified in the Eleventh Schedule.

It incurs any expenditure on scientific research and such expenditure is of capital nature or revenue nature (not being expenditure in the nature of cost of any land and building). The expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial, regulatory approval and filing an application for a patent.

The research and development facility is approved by the prescribed authority.

The taxpayer has entered into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of the accounts maintained for that facility or fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed.

Amount of Deduction -

If all the above conditions are satisfied, the quantum of deduction is as follows—

A company approved under the provisions of section 35(1)(iia) is not eligible to claim weighted deduction under section 35(2AB). However, deduction under section 35(1)(i)/(2) can be claimed to the extent of 100% of the sum spent as revenue expenditure or capital expenditure on scientific research.

Other points -

In respect of the aforesaid expenditure, no deduction shall be allowed under any other provisions of the Act. The prescribed authority shall furnish electronically its report, —

in relation to approval of in-house research facility in Part A of form No. 3CL;

quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under section 35(2AB) in Part B of Form No. 3CL.

The above report shall be furnished electronically by the prescribed authority to the Principal CIT/Chief CIT/ Principal Director General/Director General having jurisdiction over such company within 120 days of grant of approval or submission of audit report.

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Section 35 EXPENDITURE ON SCIENTIFIC RESEARCH

PART 1: Scientific Research NOT Carried on by the Assessee - Deductibility of Donations

➢ Note 1: The person to whom donation is given can utilize the donation for the prescribed research. There is no condition that such research should be related to the business of the assessee.

➢ N o t e 2 : W h e r e th e a ss e s s e e is n ot c a rr y i n g a n y b u s i n e ss / p r ofe ss io n , s u c h do n a t i o n s a r e a ll o w e d a s de du c tio n u / s 80GGA to the extent of 100% of the amount of donation.

PART 2: Scientific Research Carried on by Assessee – Deduction of Expenses Provisions Generally Applicable

Where any assessee carries out any research of scientific nature related to the business carried on by him, expenses are deductible in the following manner:

Case (a) - Expenditure incurred BEFORE the commencement of business:

• Capital Expenditure:

❑ Capital expenditure (other than expenditure on acquisition of land) incurred during three years immediately preceding the date of commencement of business shall be allowed as an expense in the year in which the business commences.

Example: If an assessee commences his business on 15.12.2017, entire 100% capital expenditure incurred during the period from 15.12.2014 to 14.12.2017 shall be allowed as an expense during PY 2017-18.

❑ Such capital expenditure can be incurred on acquisition of P&M, construction of building, acquisition of vehicles, etc for the purpose of scientific research.

❑ Where any assessee has purchased any land & building, expenditure is allowed only for the building portion and not for the land portion.

• Revenue Expenditure:

❑ Following revenue expenditure incurred during three years immediately preceding the date of commencement of business shall be allowed as an expense in the year in which the business commences:

➢ Salary paid to employees engaged in scientific research (excluding perquisites)

➢ Purchase of materials used in scientific research

❑ Pre-commencement revenue expenditure is allowed only to the extent it has been certified by the prescribed authority.

❑ Example: An assessee commences his business on 15.12.2018, revenue expenditure incurred during the period from 15.12.2015 to 14.12.2018 was Rs 10 lakhs but the prescribed authority certified only Rs 8 lakhs. In this case, Rs 8 lakhs shall be allowed as an expense during PY 2018-19. Any expenditure incurred prior to 15.12.2015 shall not be allowed as deduction.

Case (b) - Expenditure incurred AFTER the commencement of business:

• Capital Expenditure:

❑ 100% of the capital expenditure incurred by an assessee on scientific research in ir relation to his business is allowed as an expense in the year in which the capital expenditure is incurred by the assessee.

❑ Capital expenditure incurred on acquisition of land is not allowable as deduction Where any assessee has purchased any land & building, expenditure is allowed only for the building portion and not for the land portion.

• Revenue Expenditure:

Entire revenue expenditure incurred by an assessee on scientific research in relation to his business is allowed as an expense in the year in which such expenditure is incurred. (Certification from prescribed authority not required)

Special Provision for Some Companies [Section 35(2AB)]

• This special provision applies only to those companies which are engaged in the business of bio-technology or in any business of manufacture or production of any article/thing other than those specified in the Eleventh Schedule. Following conditions are also required to be fulfilled:

❑ Research and development facility should be approved by a prescribed authority.

❑ The company has entered into an agreement with the prescribed authority for audit of accounts maintained for such facility.

• Deduction for post-commencement expenditure:

Special Points

• Depreciation not allowed:

No depreciation can be claimed u/s 32 in respect of those assets for which deduction has been claimed u/s 35.

• Treatment of unabsorbed capital expenditure on scientific research:

❑ The rules for set-off & carry-forward of unabsorbed capital expenditure on scientific research are similar to set-off & carry-forward of unabsorbed depreciation.

❑ Unabsorbed capital expenditure on scientific research of a particular year is allowed to be set-off in the same year against income under any other head except casual income.

❑ If unabsorbed capital expenditure on scientific research cannot be adjusted in the same year, it is allowed to be carried forward for indefinite period of time (le for an unlimited period) and in the subsequent years, such unabsorbed expenditure shall be allowed to be set off against any income other than casual income.

• Treatment of scientific research asset no longer used for scientific research:

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Section 35 of the Income Tax Act : Expenditure on Scientific Research

This article showcases the various provisions of Section 35 of the Income Tax Act under which, deduction on expenditure incurred by the assessee in respect of Scientific research is given. It gives a detailed explanation of the aspects covered under Section 35 (Applicable to AY 2014-15)

Scientific Research : The word Scientific Research has been defined as 'an activity for the extension of knowledge in the fields of natural or applied sciences including agriculture, animal husbandry or fisheries'. Such an activity may result in an improved efficiency and this in turn increases the productivity of the process. So, in order to encourage people to enhance the productivity, government has provided certain tax incentives under this section by way of deduction for expenditure incurred in respect of Scientific Research. Such Scientific research may be carried out for the purpose of (a) Extension of business; (b) Providing medical facilities to the employees. Deduction under this section is allowed in two ways (A) When assessee takes up scientific research on his own (B) When assessee contributes amount for carrying out scientific research to an approved body. (A) When assessee takes up scientific research on his own When assessee carries on any scientific research, the expenditure incurred by him for such may be (a) Revenue expenditure or (b) Capital expenditure. The treatment of above is as follows. (a) Revenue expenditure Any revenue expenditure incurred by the assessee in respect of Scientific research within 3 years immediately preceding the year of commencement of business shall be allowed deduction in the year of commencement. Such revenue expenditure may be in respect of salaries (excluding any perquisites) payable to the staff involved in the research; for acquiring the inputs required to carry out the research or any such eligible expenditure. (b) Capital expenditure Any Capital expenditure incurred by the assessee is deductible 100% in the year it is incurred. Conditions: (1) No deduction will be allowed on the capital expenditure incurred on acquisition of land on or after 29/02/1984 whether the land is acquired as such or as a part of property. (2) The Capital asset shall be used for the purpose of scientific research only. Any question on the usage of the asset shall be referred to the Central Government or prescribed authority. (3) Any Capital expenditure allowed as deduction, if it is not absorbed in the current year, shall be carried forward for indefinite period, until it is set off. (4) If any deduction in respect of capital expenditure is claimed under this section, Depreciation under Section 32 cannot be claimed again on the same capital asset. In these ways, expenditure incurred by the assessee on scientific research carried on by him is deductible. It is worthwhile to mention Section 35(2AB) here. Section 35(2AB): Expenditure on In-house research and development expenses (This also comes under (A) Assessee takes up scientific research on his own.) Under this section, a weighted deduction of 2 times is given to a Company engaged in the manufacture of any article or thing (other than those mentioned in Eleventh Schedule), which incurs any capital or revenue expenditure on In-house research and development facility up to 31/03/2012. Conditions: (1)The assessee who incurs such expenditure shall be a Company (2)Capital expenditure in the nature of land or building is not allowed weighted deduction under this section. The cost of building (excluding the cost of land) shall be given deduction of 100% as mentioned in(b)Capital expenditure above. (3)To claim this deduction, the company shall enter into an agreement with the prescribed authority for co-operation in the R&D facility and for the audit of accounts of the company. (B) When assessee contributes amount for carrying out scientific research to an approved body A weighted deduction of such amount contributed is given in the following cases. (1) Amount paid to a University/College/School/Research association: Any amount contributed by the assessee to any of the above mentioned institutions shall be given a weighted deduction of 1.75 times , even if the field of research of such institution is different from that of the assessee. Conditions: (a) Such institution should have 'scientific research' as its main objective. (b) Such institution should be approved by the Central Government for this purpose. (2) Amount paid to a Company registered in India: Any amount contributed by the assessee to a Company registered in India shall be given a weighted deduction of 1.25 times , even if the field of research of such Company is different from that of the assessee. Conditions: (a) Such Company should have 'scientific research and development' as its main objective. (b) Such Company should be approved by the prescribed authority for this purpose. (3) Amount paid to a University/College/School/Research association carrying out Social or Statistical research: Any amount contributed by the assessee to such institutions shall be given a weighted deduction of 1.25 times , even if the field of research of such institution is different from that of the assessee. (a)Such institution should have 'social or statistical research' as its main objective (b)Such institution should be approved by the Central Government for this purpose. (4) Amount contributed to National Laboratory [Section 35(2AA)]: Any amount contributed by the assessee to a National laboratory* or University or IIT or to a specified person (approved by prescribed authority) with a specific direction that the amount shall be used for the purpose of scientific research, shall be given a weighted deduction of 2 times . *National Laboratory Any laboratory functioning at national level under the aegis of (1) Indian Council of Agricultural Research (2) Indian Council of Medical Research (3) Council of Scientific and Industrial Research (4) Defence Research and Development Organisation (5) Department of Electronics (6) Department of Bio-technology (7) Department of Atomic Energy In all the above cases, deduction shall not be denied on the ground that subsequent to such contribution by the assessee, approval granted to the donee has been withdrawn by the prescribed authorities.

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Section 35 of Income Tax Act - A Student's Guide

With roughly 4 months left for May 2016 exams, it is high time the students taking up the exams to start their preparations. Direct taxes are arguably the most voluminous of all papers. And In Direct Taxes, Profits and Gains from Business and Professions seem to be one of the most important areas.

Here I have taken up an important Section which is covered in 'Profits and Gains from Business and Profession' which would be useful for May 2016 aspirants - Section 35 that deals with expenditure on scientific research which is one of examiner's favourite area.

With a view to encourage investment in scientific research in the country, Section 35 as introduced which provided for tax benefits on expenditure towards scientific research.

What type of expenditure the Section covers

For broader understanding, the expenditure, which is deductible u/s 35, can be divided into 2:

A. In house research

1. Revenue expenditure 2. Capital expenditure 3. Expenditure on approved in house research

B. Payment to outsiders

1. Contribution to approved research association 2. Contribution to approved national laboratory etc. 3. Contribution to Indian scientific research company

Let us discuss in detail one by one.

(i) Revenue expenditure related to business [Section 35(2)]

As per Section 35(1), any revenue expenditure laid out or expended on scientific research related to the business is deductible.

Pre-commencement expenses

Where any revenue expenditure has been incurred before the commencement of the business on payment of any salary to an employee engaged in such scientific research (perquisites paid to employees is not covered) or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or expended within the 3 years immediately preceding the commencement of the business shall, be allowed in the previous year in which the business is commenced.

But it should be certified by the prescribed authority to have been laid out or expended on such scientific research.

(ii) Capital expenditure related to business [Section 35(2)]

If capital expenditure incurred on scientific research related to business, the whole of such capital expenditure incurred shall be deducted.

But no deduction shall be admissible in respect of expenditure incurred on the acquisition of any land.

Where any capital expenditure has been incurred before the commencement of the business, the aggregate of the expenditure so incurred within 3 years immediately preceding the commencement of the business shall be allowed in the previous year in which the business is commenced. But no deduction shall be admissible in respect of expenditure incurred on the acquisition of any land.

(iii) Expenditure on in house research and development -Section 35(2AB)

Where a COMPANY engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, (except Eleventh Schedule article) incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building ) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal 200% of the expenditure so incurred.

- This deduction is only for COMPANIES specified above. - Cost of BUILDING is eligible for 100% deduction u/s 35(2)

A. (i) Contribution to outsiders: Section 35(1)(ii)/(iii)

The deduction, to which the assessee is entitled in respect of any sum paid to a research association, university, college or other institution, shall not be denied merely on the ground that, subsequent to the payment of such sum, the approval granted to the association, university, college or other institution has been withdrawn.

B. (ii) Contribution to National Laboratory, IIT etc. [Section 35(2AA)]

- Where the assessee pays any sum to - A National Laboratory or - A University or - An Indian Institute of Technology or - A specified person as approved

with a specific direction that the said sum shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority, then—

(a) there shall be allowed a deduction of a sum equal to 200% of the sum so paid ; and

(b) no deduction in respect of such sum shall be allowed under any other provision of this Act.

Note: The deduction, to which the assessee is entitled in respect of any sum paid to above institutions, shall not be denied merely on the ground that, subsequent to the payment of such sum, the approval granted to such institution has been withdrawn.

B. (iii) Contribution to a company to be used by such company for scientific research [Section 35(1)(iia)]

An amount equal to 125% of any sum paid to a company to be used by it for scientific research:

Provided that such payee company—

- is registered in India, - has as its main object the scientific research and development, - is approved by the prescribed authority, and - fulfills such other conditions as may be prescribed.

An important thing to be kept in mind here is that if a taxpayer is allowed deduction u/s 35(1)(iia), the payee company referred to in the same section shall not claim any weighted deduction of 200% u/s 35(2AB) (Section 35(2AB) has already been discussed). But such payee company can claim deduction to the extent of 100% of the sum-spent u/s 35(1).

What happens when asset purchased for scientific research is sold ?

Let me explain the provisions with an illustration.

Harvard Limited a manufacturing company purchases a machine on 01 March 2005 for Rs.5,00,000 for its lab to make improvements in its quality of manufacturing.

Since the scientific research is related to its business, Rs. 5,00,000 is deductible u/s 35(2).

Lets assume that the research is ceased in 2014 and machine is brought into business-proper on 01 November 2014. Market value of machine is Rs. 2,30,000. Depreciated value of block on 01st April 2014 is Rs.10,00,000. This machine is sold for Rs. 1,90,000 04th April 2015.

Then, tax treatment is as under:

Hence no capital gain as block exists.

If in the above example, the machine was NOT USED for any other purpose but was sold for Rs. 1,90,000, tax treatment is as under:

## As per Section 41(3), if capital asset used in scientific research is sold, without having been used for other purposes, and the proceeds of the sale together with the total amount of the deductions made under section 35 exceed the amount of the capital expenditure, the excess or the amount of the deductions so made, whichever is the less, shall be chargeable to income-tax as income of the business or profession of the previous year in which the sale took place.

In other words, if capital asset used in scientific research is sold, without having been used for other purposes, the following is taxed u/s 41(3):

Surplus i.e. sale proceeds or
Deduction allowed earlier u/s 35,

whichever is lower.

Excess of sale price over cost/indexed cost is taxed as capital gains (deficiency shall be capital loss).

That is the reason as to why in the above illustration Rs. 190000 was taxed u/s 41(3), being lower of Rs.190000 (sale proceeds) and Rs.500000 (deduction allowed earlier).

Carry forward and Set off of deficiency:

If deduction u/s 35 relating to capital expenditure is not fully allowed due to absence/ inadequacy of profits, it shall be carried forward for unlimited years and set off in any subsequent year. Business loss already brought forward will have precedence over this deficiency.

What happens when there is amalgamation?

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Tabulation of expenditure incurred on scientific research u/s 35 of Income Tax Act 1961

Tabulation of expenditure incurred on scientific research under section 35 of Income Tax Act 1961- Paid to research association having object of under taking scientific research or university, college or other institutes to be used for scientific research , Paid to research association having object of under taking scientific research or university, college or other institutes to be used for social science or statistical research, Paid to National Laboratory or a University or an Indian Institute of Technology, Other specified persons and Company engaged in business of bio-technology or manufacture of articles (not being in 11 th Schedule)

Tabulation of expenditure incurred on scientific research u/s 35 of ITA

Thank you for the patient reading. Hope this document to be relevant. For feedback or comments, may please write to [email protected]

{Disclaimer: This document had been written to provide Income Tax provisions in a simple manner. The author shall not be responsible for any of the decision made based on the contents of this document.}

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What is Expenditure on scientific research? Section 35 of Income Tax Act 1961

Expenditure on scientific research is defined under section 35 of income tax act 1961. provisions under this section is:.

Section 35 of Income Tax Act "Expenditure on scientific research"

35. (1) In respect of expenditure on scientific research, the following deductions shall be allowed- (i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. Explanation.-Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of any salary [as defined in Explanation 2 below sub-section (5) of section 40A] to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or expended within the three years immediately preceding the commencement of the business shall, to the extent it is certified by the prescribed authority to have been laid out or expended on such scientific research, be deemed to have been laid out or expended in the previous year in which the business is commenced ; (ii) an amount equal to one and one half times of any sum paid to a research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research : Provided that such association, university, college or other institution for the purposes of this clause- (A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be pres-cribed; and (B) such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government : Provided further that where any sum is paid to such association, university, college or other institution in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the sum so paid; (iia) any sum paid to a company to be used by it for scientific research:

Provided that such company- (A) is registered in India, (B) has as its main object the scientific research and development, (C) is, for the purposes of this clause, for the time being approved by the prescribed authority in the prescribed manner, and (D) fulfils such other conditions as may be prescribed; (iii) any sum paid to a research association which has as its object the undertaking of research in social science or statistical research or to a university, college or other institution to be used for research in social science or statistical research : Provided that such association, university, college or other institution for the purposes of this clause- (A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be pres-cribed; and (B) such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government. Explanation.-The deduction, to which the assessee is entitled in respect of any sum paid to a research association, university, college or other institution to which clause (ii) or clause (iii) 63[63a[to which clause (ii) or clause (iii)]] applies, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to the association, university, college or other institution referred to in 63b[63c[clause (ii) or clause (iii)]] has been withdrawn; (iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2) : Provided that the research association, university, college or other institution referred to in clause (ii) or clause (iii) shall make an application in the prescribed form and manner to the Central Government for the purpose of grant of approval, or continuance thereof, under clause (ii) or, as the case may be, clause (iii) : Provided further that the Central Government may, before granting approval under clause (ii) or clause (iii), call for such documents (including audited annual accounts) or information from the research association, university, college or other institution as it thinks necessary in order to satisfy itself about the genuineness of the activities of the research association, university, college or other institution and that Government may also make such inquiries as it may deem necessary in this behalf : Provided also that any notification issued, by the Central Government under clause (ii) or clause (iii), before the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President�, shall, at any one time, have effect for such assessment year or years, not exceeding three assessment years (including an assessment year or years commencing before the date on which such notification is issued) as may be specified in the notification: Provided also that where an application under the first proviso is made on or after the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, every notification under clause (ii) or clause (iii) shall be issued or an order rejecting the application shall be passed within the period of twelve months from the end of the month in which such application was received by the Central Government: 64[***] Following fifth and sixth provisos shall be inserted after fourth proviso to sub-section (1) of section 35 by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, w.e.f. 1-4-2021 : Provided also that every notification under clause (ii) or clause (iii) in respect of the research association, university, college or other institution or under clause (iia) in respect of the company issued on or before the date on which this proviso has come into force, shall be deemed to have been withdrawn unless such research association, university, college or other institution referred to in clause (ii) or clause (iii) or the company referred to in clause (iia) makes an intimation in such form and manner, as may be prescribed, to the prescribed income-tax authority within three months from the date on which this proviso has come into force, and subject to such intimation the notification shall be valid for a period of five consecutive assessment years beginning with the assessment year commencing on or after the 1st day of April, 2022: Provided also that any notification issued by the Central Government under clause (ii) or clause (iia) or clause (iii), after the date on which the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Bill, 2020 receives the assent of the President, shall, at any one time, have effect for such assessment year or years, not exceeding five assessment years as may be specified in the notification. (1A) 64a[***] Following sub-section (1A) shall be inserted after sub-section (1) of section 35 by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, w.e.f. 1-4-2021 : (1A) Notwithstanding anything contained in sub-section (1), the research association, university, college or other institution referred to in clause (ii) or clause (iii) or the company referred to in clause (iia) of sub-section (1) shall not be entitled to deduction under the respective clauses of the said sub-section, unless such research association, university, college or other institution or company- (i) prepares such statement for such period as may be prescribed and deliver or cause to be delivered to the said prescribed income-tax authority or the person authorised by such authority such statement in such form, verified in such manner, setting forth such particulars and within such time, as may be prescribed: Provided that such research association, university, college or other institution or the company may also deliver to the prescribed authority a correction statement for rectification of any mistake or to add, delete or update the information furnished in the statement delivered under this sub-section in such form and verified in such manner as may be prescribed; (ii) furnishes to the donor, a certificate specifying the amount of donation in such manner, containing such particulars and within such time from the date of receipt of sum, as may be prescribed. (2) For the purposes of clause (iv) of sub-section (1),- (i) in a case where such capital expenditure is incurred before the 1st day of April, 1967, one-fifth of the capital expenditure incurred in any previous year shall be deducted for that previous year; and the balance of the expenditure shall be deducted in equal instalments for each of the four immediately succeeding previous years ; (ia) in a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year :

Provided that no deduction shall be admissible under this clause in respect of any expenditure incurred on the acquisition of any land, whether the land is acquired as such or as part of any property, after the 29th day of February, 1984. Explanation 1.-Where any capital expenditure has been incurred before the commencement of the business, the aggregate of the expenditure so incurred within the three years immediately preceding the commencement of the business shall be deemed to have been incurred in the previous year in which the business is commenced. Explanation 2.-For the purposes of this clause,- (a) "land" includes any interest in land ; and (b) the acquisition of any land shall be deemed to have been made by the assessee on the date on which the instrument of transfer of such land to him has been registered under the Registration Act, 1908 (16 of 1908), or where he has taken or retained the possession of such land or any part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), the date on which he has so taken or retained possession of such land or part ; (ii) notwithstanding anything contained in clause (i), where an asset representing expenditure of a capital nature incurred before the 1st day of April, 1967, ceases to be used in a previous year for scientific research related to the business and the value of the asset at the time of the cessation, together with the aggregate of deductions already allowed under clause (i) falls short of the said expenditure, then- (a) there shall be allowed a deduction for that previous year of an amount equal to such deficiency, and (b) no deduction shall be allowed under that clause for that previous year or for any subsequent previous year ; (iii) if the asset mentioned in clause (ii) is sold, without having been used for other purposes, in the year of cessation, the sale price shall be taken to be the value of the asset at the time of the cessation ; and if the asset is sold, without having been used for other purposes, in a previous year subsequent to the year of cessation, and the sale price falls short of the value of the asset taken into account at the time of cessation, an amount equal to the deficiency shall be allowed as a deduction for the previous year in which the sale took place ; (iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clause (ii) of sub-section (1) of section 32 for the same or any other previous year in respect of that asset ; (v) where the asset mentioned in clause (ii) is used in the business after it ceases to be used for scientific research related to that business, depreciation shall be admissible under clause (ii) of sub-section (1) of section 32..

(2A) Where, before the 1st day of March, 1984, the assessee pays any sum (being any sum paid with a specific direction that the sum shall not be used for the acquisition of any land or building or construction of any building)] to a scientific research association or university or college or other institution referred to in clause (ii) of sub-section (1) or to a public sector company to be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India, then,- (a) there shall be allowed a deduction of a sum equal to one and one-third times the sum so paid ; and (b) no deduction in respect of such sum shall be allowed under clause (ii) of sub-section (1) for the same or any other assessment year. Explanation.-For the purposes of this sub-section, "public sector company" shall have the same meaning as in clause (b) of the Explanation below sub-section (2B) of section 32A. (2AA) Where the assessee pays any sum to a National Laboratory or a University or an Indian Institute of Technology or a specified person with a specific direction that the said sum shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority, then- (a) there shall be allowed a deduction of a sum equal to one and one-half times the sum so paid ; and (b) no deduction in respect of such sum shall be allowed under any other provision of this Act : Provided that the prescribed authority shall, before granting approval, satisfy itself about the feasibility of carrying out the scientific research and shall submit its report to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General in such form as may be prescribed: Provided further that where any sum is paid to such National Laboratory or university or Indian Institute of Technology or specified person in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this sub-section shall be equal to the sum so paid. Explanation 1.-The deduction, to which the assessee is entitled in respect of any sum paid to a National Laboratory, University, Indian Institute of Technology or a specified person for the approved programme referred to in this sub-section, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to,- (a) such Laboratory, or specified person has been withdrawn; or (b) the programme, undertaken by the National Laboratory, University, Indian Institute of Technology or specified person, has been withdrawn. Explanation 2.-For the purposes of this section,- (a) "National Laboratory" means a scientific laboratory functioning at the national level under the aegis of the Indian Council of Agricultural Research, the Indian Council of Medical Research, the Council of Scientific and Industrial Research, the Defence Research and Development Organisation, the Department of Electronics, the Department of Bio-Technology or the Department of Atomic Energy and which is approved as a National Laboratory by the prescribed authority in such manner as may be prescribed ; (b) "University" shall have the same meaning as in Explanation to clause (ix) of section 47 ;

(c) "Indian Institute of Technology" shall have the same meaning as that of "Institute" in clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961); (d) "specified person" means such person as is approved by the prescribed authority. (2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred: Provided that where such expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility is incurred in a previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, the deduction under this clause shall be equal to the expenditure so incurred. Explanation.-For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970). (2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act. (3) No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed. (4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General in such form and within such time as may be prescribed. (5) [***] (6) No deduction shall be allowed to a company approved under sub-clause (C) of clause (iia) of sub-section (1) in respect of the expenditure referred to in clause (1) which is incurred after the 31st day of March, 2008. (2B)(a) Where, before the 1st day of March, 1984, an assessee has incurred any expenditure (not being in the nature of capital expenditure incurred on the acquisition of any land or building or construction of any building) on scientific research undertaken under a programme approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of India, he shall, subject to the provisions of this sub-section, be allowed a deduction of a sum equal to one and one-fourth times the amount of the expenditure certified by the prescribed authority to have been so incurred during the previous year. (b) Where a deduction has been allowed under clause (a) for any previous year in respect of any expenditure, no deduction in respect of such expenditure shall be allowed under clause (i) of sub-section (1) or clause (ia) of sub-section (2) for the same or any other previous year. (c) Where a deduction is allowed for any previous year under this sub-section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed in respect of that asset under clause (ii) of sub-section (1) of section 32 for the same or any subsequent previous year. (d) Any deduction made under this sub-section in respect of any expenditure on scientific research in excess of the expenditure actually incurred shall be deemed to have been wrongly made for the purposes of this Act if the assessee fails to furnish within one year of the period allowed by the prescribed authority for completion of the programme, a certificate of its completion obtained from that authority, and the provisions of sub-section (5B) of section 155 shall apply accordingly. (3) If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to- (a) the Central Government, when such question relates to any activity under clauses (ii) and (iii) of sub-section (1), and its decision shall be final; (b) the prescribed authority, when such question relates to any activity other than the activity specified in clause (a), whose decision shall be final. (4) The provisions of sub-section (2) of section 32 shall apply in relation to deductions allowable under clause (iv) of sub-section (1) as they apply in relation to deductions allowable in respect of depreciation. (5) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company (being an Indian company) any asset representing expenditure of a capital nature on scientific research,- (i) the amalgamating company shall not be allowed the deduction under clause (ii) or clause (iii) of sub-section (2); and (ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalga-mating company if the latter had not so sold or otherwise transferred the asset.

Income Tax Act 1961

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COMMENTS

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