May 107 min read

Section 35 of the Income Tax Act: Deduction for Expenditure on Scientific Research

Curiosity, inventiveness, and teamwork are the driving forces behind scientific study. It seeks to deepen our comprehension of how and why things occur. Science research can address issues, enhance lives, and motivate the next generations. Put differently, scientific research refers to the examination or inquiry aimed at finding novel technologies, techniques, or ways to enhance pre-existing technologies, information, and approaches. The Indian government has consistently backed scientific research throughout its history. Individuals and corporations engaged in such activities may claim deductions for their incurred expenses under Section 35 of the Income Tax Act. It contains guidelines for deducting costs related to scientific research. Continue reading to find out more.

Applicability of Section 35 of the Income Tax Act

Section 35 permits tax deductions for costs associated with scientific research. It is applicable to all scientific disciplines, including engineering, technology, natural sciences, and social sciences. Moreover, a broad spectrum of scientific endeavors, including experimental development, pure research, applied research, etc., are covered by Section 35. Two categories of deductions—revenue expenditure and capital expenditure—are allowed under this clause.

Benefits of Section 35

Tax deductions for expenses incurred in scientific research are available to both individuals and organizations under Section 35. As a result, it lowers their taxable revenue and hence lowers their R&D expenses.
Companies are encouraged to invest in R&D by these deductions, which can aid in the creation of new goods, services, and technology.
Expanded scientific research and development can boost output and generate new job possibilities, which will strongly support economic expansion.

Eligibility for Deductions under Section 35 of the Income Tax Act

To be eligible for the deductions under Section 35 of the Income Tax Act, you must fulfil the following requirements:

The Department of Scientific and Industrial Research (DSIR), which is the prescribing authority in this instance, must approve the scientific research you conduct.
The research must be conducted in India.
All the costs must be incurred with the intention of conducting scientific research.

Expenditure on Scientific Research Deductible under Section 35

The following expenditure on scientific research can be deducted under Section 35 of the Income Tax Act:

In-house Scientific Research & Development

Research-related expenses are deducted if the assessee conducts any research and the findings are relevant to his business. An assessee is eligible to deduct the following amounts:

Revenue Expenditure [Section 35(1)(i)]

You may deduct all of the costs you incurred last year for scientific research from your income. Additionally, the following costs associated with scientific research that were incurred in the three years prior to the business's founding will be recognised as expenses of that year and may be incurred in that year provided the appropriate authority grants approval:

Paying salaries to staff members who do scientific research
Buying supplies for scientific research

Capital Expenses

Any capital expenditures for scientific research that the assessee's business incurs can be written off in the same year that they are incurred, except for land acquisition. Noteworthy are the following points as well:

If any capital spending was completed before the business's founding, it is not required for the assessee to record such expenditures in its books of accounts.
The assessee should allocate resources towards scientific research. In that instance, the entire amount of such expenditures, completed within three years of the business's founding, is deemed to have been completed in the year prior to the business's founding [Explanation of section 35(2)(ia)].
After February 29, 1984, the aforementioned deduction is not available for capital expenditures related to the purchase of land.
If the asset is sold without being put to better use, the smaller surplus or allowable deduction is subject to taxation as business income from the year prior to the sale [sec. 41(3)]. However, the excess over the allowable deduction is subject to capital gains tax.
A depreciation deduction is not allowed for an asset utilized in scientific research either in the year of capital expenditure or in a subsequent year.

Payment for Scientific Research Work to Outside Agencies

Section 35(1)(ii) & (iia):

Whether or not the outside organization is connected to the assessee's business, payments made to it for scientific research are deductible up to 150% of the total amount spent in the year before the transaction.

Section 35(1)(iii):

Any payment from the assessee may be received by a research organization that carries out social scientific or statistical research, or by a university, college, or other organization that uses the funds for social science or statistical research. Whether or not the research is relevant to the assessee's business, the assessee is entitled to a 100% deduction of the total amount paid.

Section 35(1)(iia):

Any money given to a business for scientific research can only be deducted if the business satisfies the following requirements:

It must be formed in India.
Satisfies other requirements
The company's main goal should be scientific research and development.

Section 35(2AA)]:

If an assessee makes a payment for scientific research to a National Laboratory, a University, an Indian Institute of Technology, or a designated individual, section 35(2AA) permits a deduction of 150% of the amount paid by the assessee. A clear statement stating that the funds will only be used for scientific research under a programme that has been authorized by the designated authority should be included with the payment.

Sale of an Asset used for Scientific Research

Section 41(3):

This section applies to a scientific research asset sold without being used for any other purpose. The lower of the net sale price or the asset's cost, which was previously deducted under section 35, will be included as the business income of the year the asset is sold in this scenario instead of the capital gain tax that is typically incurred upon the sale of a capital asset. Capital gains are subject to taxation on any amount exceeding the asset's initial cost. This will hold true even if the company closes its doors that year.

Sold after being used for business:

Since section 35 has already provided a full deduction for the scientific research asset, when the business uses it after it stops using it for research purposes, the asset's true cost for the relevant asset block will be $0. The money received will be deducted from the block that originally owned this item if the business decides to sell it later.

Uninvolved Capital Expenditure

A business's earnings can be subtracted from its capital investment in scientific research. This deduction, in contrast to depreciation, is limited to the company's profit. The surplus amount is referred to as unabsorbed capital expenditure on scientific research if the profit is less than the capital expenditure. Subject to section 72(2) (business loss) and section 73(3) (speculation loss), this amount may be carried over to the following year and subtracted from that year's profit. This procedure can be carried out year after year until the entire amount of unabsorbed capital expenditure on scientific research has been subtracted.

Procedure for Approval

The research project needs to be approved by the designated authority to be eligible for the deduction under Section 35. By applying Form 3CK to the designated authority, one can gain approval. The research project's specifications, an estimate of its cost, and the anticipated benefits of the study must all be included in the application. The type of cost incurred determines the amount of deduction allowed under Section 35. The revenue expenditure can be written off in full the year it is incurred. Depreciation is a tax deduction that is applied to capital expenses over time. The assessee is required to keep accurate documentation and records of the costs paid on scientific research to claim the deduction under Section 35. Invoices, bills, vouchers, and any supporting documentation must be included in the records.

Denial of Deductions

No National Laboratory, University, Indian Institute of Technology, or specified person may have any amount paid to them withheld from their deduction simply because the assessee paid the amount and the approval was later withdrawn for one of the following reasons:

the Laboratory or the specified person;
the National Laboratory, University, Indian Institute of Technology, or specified person's programme has been discontinued.

You must submit Form 3CK to the DSIR in order to be eligible for the deduction under Section 35 of the Income Tax Act. In addition, you need to include accurate records and paperwork, such as invoices, bills, and vouchers, when preparing your returns.

Conclusion

To sum up, one significant clause that motivates companies to fund scientific research and development is Section 35 of the Income Tax Act of 1961. This section's deduction lowers the assessee's tax obligation while fostering economic expansion, productivity, and innovation. To be eligible for the deduction, the research project needs to be conducted in India, get approval from the relevant authority, and only involve expenses that are directly related to scientific research. Maintaining accurate records and paperwork is necessary to back up the deduction claim.

FAQ

Q1. Which section of the Income Tax Act is applicable to scientific research?

The Income Tax Act's Section 35 permits tax deductions for costs associated with scientific research. It is applicable to all scientific disciplines, including engineering, technology, natural sciences, and social sciences.

Q2. What are the eligibility criteria to claim a deduction under Section 35?

The scientific study must be conducted in India and approved by the designated authority, and the expenses must be expended entirely and only for scientific research to qualify for the deduction under Section 35.

Q3. What is the prescribed authority for Section 35?

For the purposes of Section 35, the Department of Scientific and Industrial Research (DSIR) is the mandated authority.

Q4. What is the amount admissible under section 35?

100% of the deduction for capital expenditures on scientific research, subject to certain circumstances
100% of the deductible for revenue expenditures on scientific research
All funds given to organizations that conducted scientific studies

Q5. Can foreign companies claim a deduction under Section 35?

If a foreign company establishes a permanent establishment in India and conducts research there, they are eligible to claim a deduction under Section 35.

Q6. What is Section 35 AD Income Tax Act?

Tax deductions for capital costs related to specific company expenses are permitted under Section 35AD. The expense must meet the requirements outlined in this section.

Q7. What is Section 35(4) of the Income Tax Act?

The Income Tax Act's Section 35(4) allows for the deduction of costs related to scientific research and development from the taxpayer's total income. This clause permits a deduction of 150% of the actual costs incurred.

Q8. What is Section 35(1)(ii) of the Income Tax Act?

Businesses can deduct any costs related to scientific research under the Income Tax Act's Section 35(1)(ii). Both capital and revenue expenses are covered by this provision, and the deduction can be used in the year that the expense is incurred.

Q9. Are there any restrictions on the deduction claimed under Section 35?

The assessee's entire income cannot be greater than the deduction sought under Section 35. You have up to eight years to carry forward any unclaimed deductions.