Section 35: Scientific Research

The Income Tax Act, through its Section 35, delineates a comprehensive set of provisions governing the deductions applicable to expenditures incurred on scientific research. These provisions aim to encourage and incentivize businesses to invest in the pursuit of scientific knowledge and technological advancement. By offering deductions for both revenue and capital expenditures related to scientific research, the legislation recognizes the pivotal role that innovation plays in fostering economic growth. In this article, we will navigate through the intricacies of Section 35, unpacking its various clauses and shedding light on the conditions businesses must adhere to in order to avail themselves of these deductions.

We are going to discuss this article in two parts; first will be about deduction on In house research and second on donation to others:

Part A: Inhouse Research:

Section 35(1) provides for 100% deductions for revenue expenditures on scientific research connected to the business. The Section also allows businesses to claim deductions for expenditures incurred on payment of salaries to employees engaged in scientific research or the purchase of materials within three years before the commencement of business.

Also, 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.

Therefore, capital expenditure incurred before the commencement of the business is also allowed as a deduction under this section. But, 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.

Section 35(1)(iv) allows deduction in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee.

However, 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

It is noteworthy that for assesses which are "Companies" engaged in the business of manufacturing of any article or thing, or engaged in the business of biotechnology, shall claim a deduction for all revenue and capital expenditures (except for land and building) incurred for in-house research u/s 35(2AB) during the course of business. However such an assessee can claim a deduction on acquisition of building for the same cause, under section 35(1)(iv).

Part B: Payment to outsiders:

1. Assessee can claim deduction on account of any sum paid to a company to be used by it for scientific research. The deduction can be claimed on 100% of the amount paid to the company.

Provided that such company—

• is registered in India,

• has as its main object the scientific research and development,

• is, for the purposes of this clause, for the time being approved by the prescribed authority in the prescribed manner, and

• fulfils such other conditions as may be prescribed;

2. Assessee can also claim deduction under this section for any sum paid to be used for research in social science or statistical research to a:

• Research Association

• University

• College or

• Any other institution

3. 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 there shall be allowed a deduction of a sum equal to the sum so paid.

An intimation by a research association, university, college or other institution or the company mentioned above (hereinafter referred to as `the applicant`) shall be made in Form No.10A to the Principal Commissioner of Commissioner authorised by the Board.

The application mentioned above shall be accompanied by the following documents, as required by Form No.10A, namely:—

(a) where the applicant is created or established under an instrument, self-certified copy of the instrument;

(b) where the applicant created or established otherwise than under an instrument, self-certified copy of the document evidencing the creation or establishment of the applicant;

(c)  self-certified copy of registration with Registrar of Companies or Registrar of Firms and Societies or Registrar of Public Trusts or other registration document, as the case may be;

(d) self-certified copy of registration under Foreign Contribution (Regulation) Act, 2010 (42 of 2010), if the applicant is registered under such Act;

(e) self-certified copy of existing Notification granting approval under section 35.

Form No. 10A shall be furnished electronically, —

(i)  under digital signature, if the return of income is required to be furnished under digital signature;

(ii) through electronic verification code in a case not covered under clause (i).

Some points to be noted:

1. No depreciation is allowed on assets if deduction on such asset claimed under section 35.

2. If land and building are acquired through a composite agreement, the cost of both the assets shall be bifurcated on the basis of fair market value.

3. Unabsorbed research capital expenditure can be carried forward and set off same as unabsorbed depreciation.