Treatment of Expenditure incurred on Scientific Research
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.
(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.
(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.
(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.
(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.
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.