When the assessee carries on research in his own premises, he has to incur various types of expenses. Such expanses can further be divided into 2 parts.
(A-I) Revenue expenditure incurred by assessee himself [Sec. 35(1)(i)]
When an assessee sets up a research laboratory of his own to carry on research which may be helpful in his business, he has to incur various types of revenue expenses and all such expenses incurred by the assessee are allowed as a deduction. Such expenses are usually on the purchase of raw materials required for research, salary etc. given to workers engaged in research and such other expenses which are incidental to research activities related to assessee’s business. In case assessee is engaged in a business of textiles, so research expenses related to textiles business only are allowed.
In case assessee has incurred such type of expenses within three years immediately preceding the commencement of his business, all such expenses (except expenses to provide perquisites to employees) shall be deemed to be have been incurred in the previous year in which the business commences and allowed to be debited to the profit and loss account of that year and all such expenses must be certified by the prescribed authority.
(A-2) Capital expenditure incurred by the assessee himself to set up research project [Sec. 35 (2)]
Any expenditure of capital nature on scientific research carried on by the assessee himself and related with assessee’s business or profession, shall be allowed as deduction in full. Capital expenditure means expenses incurred to construct a building to set up research laboratory, purchase of plant and machinery, computer etc. for research work etc. but the cost of land shall be excluded.
Any capital expenditure incurred within three years immediately proceeding the commencement of business shall be deemed to have been incurred in the previous year in which business is commenced.
Regarding capital expenditure on research, following points are to be kept in mind—
(a) Capital expenditure on research should be related to assessee’ s business.
(b) Capital expenditure so incurred shall be allowed as deduction even if the asset so constructed or acquired has not been put to use in assessee’ s business in that previous year.
(c) No depreciation shall be allowed as whole cost of the asset so purchase or constructed shall be allowed to be debited to Profit and Loss account.
(d) In case the above mentioned asset is sold, transferred etc. without having been used for any other purpose, any surplus realized over the cost (or indexed cost) shall be taxable as capital gain u/s 45 but amount realized upto deduction already allowed u/s 35 shall be taxable under the head business.
(A-3) ExpendIture on in-house research to company engaged in manufacturing except those mentioned in 11th Scheduled [Section 35(2AB)]
Under section 35(2AB), a weighted deduction @ 200% of the expenditure incurred on in-house research and development shall be allowed as under.
1. This deduction shall be. allowed only to a company assessee.
2. This deduction shall be allowed to 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 of the Income Tax Act [w.e.f. 1-4- 2010.]
Note. Upto Assessment Year 2009-10, the deduction under aforesaid section was available to companies engaged in the manufacture or production of any drugs, pharrriaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any other article or thing notified by the Board.
3. This deduction shall be allowed in respect of any expenditure on in-house research and development facility approved by the prescribed authority.
4. This deduction shall not be allowed in case of any expenditure in the nature of cost of any land or building. However, deduction regarding capital expenditure on building (excluding cost of land) shall be allowed u/s 35(i).
5. This deduction shall be allowed in respect of this type of expenditure incurred upto 31st March, 2012 (Extended upto 31-3-2017).
6. In case any deduction is allowed under this section, no deduction under any other section can be claimed for such expenditure.
With effect from assessment year 2010-11 with a view to promote research and development in all sectors of the economy the benefit of weighted deduction has been extended to companies engaged in the business of manufacture or production of an article or thing except those specified in the list of the Eleventh Schedule of the Income Tax Act.
Any expenditure incurred on scientific research for the above purpose shall include expenditure incurred on clinical drug trail, obtaining approved from any regulatory authority under the central, state or Provincial Act and filing of application for patent.
Extract from the Eleventh Schedule (List of Articles or Things)
1. Bear, wine and other alcoholic spirits.
2. Tobacco and tobacco preparations such as cigar and cheroots, cigarettes, bins, smoking mixtures for pipes and cigarettes chewing tobacco and snuff.
3. Cosmetics and toilet preparations.
4. Toothpaste, dental cream, tooth powder and soap.
5. Aerated waters in the manufacture of which blended flavouring concentrates in any form are used.
6. Confectionery and chocolates.
7. Gramophones, including record players and gramophone records.
9. Photographic apparatus and goods.
10. Office machines and apparatus such as typewriters, calculating machines, cash registering machines, cheque writing machines, intercom machines and teleprinters.
11. Steel furniture, whether made partly or wholly of steel.
12. Safes, strong boxes, cash and deed boxes and strong room doors.
13. Latex foam sponge and polyurethane foam.
14. Crown corks, or other things of cork rubber, polyethylene or any other material.
15. Pilfer-proof caps for packaging or other fittings of cork, rubber, ployethylene or any other material.