Expenditure on scientific research and its treatment under income tax act, 1961

Dear friends, we are going through a very turbulent phase in which we are facing unpresented threat of COVID-19 pandemic, declining pace of economy, lack of foreign reserves and new threat of India -China war position at our borders.

The government has shown firm determination to save sovereignty and unity of India. The government has urged our industrial and business sector to take Make in India concept in all faces of life. They have urged to use Indian local products and Indian manufactured parts to boot Indian economy.

Scientific Researches play important role in development of any country. The industrial houses are encouraged to establish their own research house or to donate in various Universities, IITs and other education institutions.

Section 35 of the Income Tax Act, 1961 deals with expenditure of scientific research and allow such expenditure as revenue expenditure to the business houses.

A. REVENUE EXPENDITURE INCURRED BY AN ASSESSEE ON ITS OWN HOUSE SCIENTIFIC EXPENDITURE [SECTION 35(1)(I)];

If an assessee incurs any expenditure on Scientific Research inside its premises or for development of Scientific Facility for development of its own business then deduction of expenditure is allowed as revenue expenditure.

The most important condition is that the expenditure should be for development of his business or it relates to his business.

Note: where salary has been paid to an employee engaged in scientific research or any expenditure has been incurred on purchase of materials used in scientific research , such salary or expenditure ,paid or incurred after March 31, 1973, but within three years immediately preceding the commencement of business is deemed to have been paid or incurred in the previous year in which the business commenced to the extent certified by the authority prescribed for the purpose under Rule 6 of the Income Tax Rules, 1962 i.e. Director-General ( Income Tax-Exemptions) in concurrence with the Secretary. Department of Scientific Research and Industrial Research, GOI.

Amount Allowed as deduction: whole amount (100%) expended on Scientific Research during previous financial year shall be allowed as revenue expenditure.

B. CONTRIBUTION BY AN ASSESSEE TO OTHER OUTSIDE ITS BUSINESS;

Provisions of Section 35(1)(ii)/(iii) allows deduction of Scientific Expenditure, where an assessee does not carry Scientific Expenditure of its own but makes contribution to below mentioned Universities, IITs and organisations. The government has reduced amount of deduction allowed from AY 2021-22;

CONDITIONS TO BE APPLIED; [SECTION 35(1) (iia): Amount to an Approved Scientific Research Company;

1. The taxpayer may be any person such as Individual, HUF, Firm, LLP, Company, AOP or BOI, etc.;
2. The taxpayer has paid any amount to an Indian Company (Approved Scientific Research Company) to be used in Scientific Research;
3. Scientific Research may or may not related to the business of the taxpayer;
4. The Approved Scientific Research Company must have Scientific Research as its main object;
5. Approved Scientific Research Company must have approval from prescribed authority;
6. The Approved Scientific Research Company fulfils such other rules and regulations as may be prescribed.

SECTION 35(2AB): provides that an Approved Scientific Research Company or other payee company is not entitled to claim deduction of expenditure on Scientific Research. However, Revenue Expenditure 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) of the Income Tax Act, 1961.

C. CAPITAL EXPENDITURE INCURRED FOR OWN SCIENTIFIC RESEARCH; [SECTION35(2)]

Where an assessee has incurred any Capital Expenditure on its own Scientific Research, then such whole expenditure is allowed as deduction during previous year in which it has incurred. Following conditions are required to be complied with;

• The assessee should incurred expenditure of Capital Nature on Scientific Research and there are no requirements that such expenditure should be capitalised in Books of Accounts;
• Where Capital Expenditure incurred before commencement of business of assessee, the aggregate of such expenditure, incurred, within three years immediately preceding commencement of business is deemed to have been incurred in the previous year in which business is commenced;
• Capital expenditure after February 29, 1984 is not allowed if held on purchase of land;
• If the assets acquired 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 take place. The excess of surplus over deduction allowed shall be charges as Capital Gain Tax;
• The depreciation on the assets used in Scientific Research shall not be allowed in any year.

D. CONTRIBUTION TO NATIONAL LABORATORY [SECTION 35(2AA)];

1. If payments made to;

• National Laboratory; or
• University; or
• IITs; or
• Specified Person as approved by Specified Authority.

2. Amount of Deduction: For AY 2018-19 to 2020-21 150% of actual payment

For AY 2021-22 onwards 100% of actual payment

Note 1: above expenditure which is deductible under above previsions of the Income tax Act, 1961 shall not be allowed to be deducted in any other sections of the Act,1961.

Note 2: The aforesaid deduction will not be denied merely on the ground that after assessee has paid the amount to the aforesaid institutions, the Authority has withdrawn the approval granted to those institutions to carry on Scientific Research.

E. EXPENSES ON IN-HOUSE RESEARCH AND DEVELOPMENT [SECTION 35(2AB)]:

1. Provisions of Section 35(2AB) has been inserted in the Income Tax Act, 1961 from AY 1998-99. It provides for a deduction in respect of expenditure on in-house research and development expenses subject to the following;

• Taxpayer is a company;
• The company should engage in the business of bio-technology or any business of manufacture or production of any article or thing except those specified in the XI Schedule;
• The company has incurred expenditure on scientific research (whether it to revenue or capital) during previous year. The expenditure on scientific research in relation to dugs and pharmaceutical shall include expenditure incurred on clinical trial, regulatory approvals and filing application for patent;
• The expenditure should not be held on purchase of land;
• The Company has entered into an agreement with the prescribed Authority for co-operation in such research and development facility for audit of accounts maintained for that facility or fulfil such conditions related to the way of maintenance of accounts and records, audit and submission of report to the Authority;
• The company should apply in Form 3CK, with Research and Development Authority approved the same in Form 3CM. The Prescribed Authority should approve the facility within a period of 120 days from the date of application and if approval not received within prescribed time, then deduction to the company shall not be disallowed;
• The company shall maintain a separate book of account for each Approved Research Facility and same shall be audited every year as may be prescribed by Authority.
• An Audited Report in Form 3CL A shall be filed electronically by the Company with Authority within due date of filing Income Tax Returns as may be prescribed;

2. Amount of Deduction: For AY 2018-19 to 2020-21 150% of actual payment

For AY 2021-22 onwards 100% of actual payment

Note1: A approved under provisions of Section 35(1) (iia): shall not be allowed to claim weighted deduction under Section35(2AB). However, deduction under section 35(1(i)/(ii) can be claimed to the extent of 100% of sum spent as revenue or capital expenditure on Scientific Research during the previous year.

Note 2: Other Points to remember; In respect of above expenditure no deduction is allowed in any other provisions of Income Tax Act, 1961;

DISCLAIMER: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, the author assumes no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.