Scientific research may be carried on:
- by the assessee, relating to his business; or
- by making payment to outside agencies engaged in scientific research work.
A. In-house Scientific Research & Development (Research Carried out by Assess):
The expenses incurred on in-house research i.e. research carried out by the assessee are allowed as a deduction, only where the research work relates to the business of the assessee. An assessee can claim the following expenditure as a deduction:
- Revenue Expenses
- Capital Expenses
1. Revenue Expenditure [Section 35(1)(i)]:
All revenue expenses laid out or expended on scientific research during the previous year are fully allowed as a deduction.
It has further been provided that following revenue expenses, expended or laid out during three years immediately preceding the commencement of the business, shall be deemed to be the expenditure of the previous year in which the business commences and therefore, shall be allowable in that year to the extent these are certified by the prescribed authority:
- payment of salary to employees engaged in scientific research;
- purchase of material used in scientific research.
For example, if the assessee commences its business on 15.12.2017 then all revenue expenses on scientific research related to the business incurred, on or after 15.12.2017, will be allowed as a deduction. Further, expenses incurred during the period 15.12.2014 to 14.12.2017 and which are certified by the prescribed authority will be deemed to be expenses of the previous year 2017-18 and will be allowable in that year.
2. Capital Expenditure [Section 35(1)(iv) read with section 35(2)]:
All capital expenses (excepting expenditure on acquisition of land) incurred on scientific research related to the business of the assessee shall be allowed as a deduction in the year in which they are incurred.
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.
B. Payment to Outside Agencies engaged in Scientific Research Work:
(1) Payment made to certain Association/ Institutions for Scientific Research [Section 35(1)(ii) & (iia)]
Any payment made to outside agencies for scientific research, whether related to the business of the assessee or not, is allowed as a deduction @ 150% the amount so paid in the previous year in which the payment is made.
The deduction is allowable only if the payment is made to any of the following agencies:
- a research association which has the object of undertaking scientific research; or
- a university, college or other institutions to be used for scientific research.
(2) Payment mode to certain Institutions for Research in Social Sciences or Statistical Research [Section 35(1)(iii)]
Any payment made by the assessee:
- to a research association which has as its object the undertaking of research in social sciences or statistical research; or
- to a university, college or other institution to be used for research in social sciences or statistical research, shall be eligible for deduction @ 100% of the amount so paid whether such research is related to the business of the assessee or not.
(3) Payment made to a Company to be used for Scientific Research [Section 35(1)(iia)]
Any sum paid to a company to be used by it for scientific research is allowed as a deduction @ 100% of the amount so paid in the previous year in which payment is made.
It shall be allowed to the assessee only if the company satisfies the following conditions:
- it is registered in India,
- it has as its main object the scientific research and development,
- it is, for the purposes of this clause, for the time being approved by the prescribed authority in the prescribed manner, and
- it fulfils such other conditions as may be prescribed.
(4) Payment made to a National Laboratory or a University or an Indian Institute of Technology [Section 35(2AA)]
Where an 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 by the prescribed authority then he shall be allowed a deduction of 150% of the sum so paid.
To claim deduction of 150% under section 35(2AA), the sum should have been paid by the assessee with a specification that the said sum shall be used for scientific research undertaken, under a program approved by the prescribed authority.
(5) Table showing a Deduction ( As a Percentage of Actual Expenditure on Scientific Research to Outsider Agencies)
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—
|Deduction (as a percentage of actual expenditure)||Deduction (as a percentage of actual expenditure)|
To whom contribution can be given.
|For the AYs 2018-19 to 2020-21||For the AY 2021-22 onwards|
|An approved’ scientific association which has, as its object, undertaking of scientific research related or unrelated to the business of assessee [sec. 35(1)(ii)]||150%||100%|
|An approved’ university, college or other institution for the use of scientific research related or unrelated to the business of assessee [sec. 35(1)(ii)]||150%||100%|
|An approved’ university, college or other institution for the use of research in social sciences or statistical research related or unrelated to the business of the assessee [sec. 35(1)(iii)]||100%||100%|
- The above-mentioned research association, university, college or other institution shall make an online application in the prescribed form [i.e., Form No. 3CF-I or 3CF-II] to the CIT or Director of Income-tax having jurisdiction over the applicant, for approval. A copy of application in Form No. 3CF-I or 3CF-II shall be sent to the Member (IT), Central Board of Direct Taxes.
- The prescribed authority may, before granting approval, call for such documents (including audited annual accounts) or information from the scientific research association, etc., in order to satisfy itself about the genuineness of the activities of the research association, etc.
- In the cases mentioned above, order granting the approval or rejecting the application shall be passed within 12 months from the end of the month in which such application is received by the Member (IT), CBDT.
- Notification issued by the prescribed authority shall at one time have effect for not more than three assessment years, including an assessment year or assessment years commencing before the date on which such notification is issued (as maybe specified in the notification). The three-year time-limit is not applicable on or after July 13, 2006.
- If the Assessing Officer is satisfied that the activities of the aforesaid university/college/institution [referred to in section 35(1)(ii)/(iii)] are not being carried out in accordance with all or any of the conditions subject to which approval was given to such institution by the Central Government, he may recommend the Central Government to withdraw the approval given under section 35 [second proviso to section 143(3)].
- Deduction in respect of contribution made by an assessee to the aforesaid institutions shall not be denied (from the assessment year 2006-07) merely on the ground that after the contribution made by the assessee to these institutions, the approval granted to these institutions have been withdrawn. In other words, contribution to these institutions wifi be qualified for deduction even if after the date of making contribution, the approval granted to these institutions have been withdrawn.
C. Sale of an Asset used for Scientific Research
(a) Sold without having been used for other purposes [Section 41(3)]:
Normally gain arising from the transfer of a capital asset is taxable under the head capital gain but where the scientific research asset is sold off without having been used for other purposes, then:
- the net sale price of the assets; or
- the cost of the asset, which was earlier allowed as deduction under section 35,
whichever is less,
shall be treated as business income of the previous year in which such asset is sold. Any excess of sale price over original cost of the asset shall be subject to the provisions of the capital gains. This shall apply even if the business is not in existence in that previous year.
(b) Sold after having been used for Business:
Where the scientific research asset is used in the business after it ceases to be used for scientific research, the actual cost of such asset to be included in the relevant block of asset shall be taken as nil as the full amount has been allowed as deduction under section 35. If this asset is later on sold, the money payable shall be deductible from the block in which such asset was earlier included.
D. Unabsorbed Capital Expenditure on Scientific Research:
For claiming deduction on account of capital expenditure on scientific research, it may be noted that like depreciation, the deduction of such capital expenditure shall be allowed to the extent of the profit from that business. There cannot be business loss due to such deduction.
Therefore, if full effect cannot be given in a previous year on account of deduction of capital expenditure on scientific research owing to there being no profits or gains chargeable for that previous year or owing to profit being less than the expenditure, then such expenditure or part of such expenditure, which could not be claimed, shall be known as unabsorbed capital expenditure on scientific research and subject to the provisions of section 72(2) (relating to business loss) and section 73(3) (relating to speculation loss), it will be deemed to be an expenditure of the following previous years and so on for the succeeding previous year.
There can be a business loss due to deduction of revenue expenditure on scientific research but there cannot be a business loss due to deduction of capital expenditure on scientific research. If capital expenditure on scientific research cannot be claimed as deduction due to insufficiency of business profit, the balance is known as unabsorbed capital expenditure on scientific research and its treatment shall be the same as in case of unabsorbed depreciation.