The term “scientific research” means “any activity for the extension of knowledge in the fields of natural or applied sciences including agriculture, animal husbandry or fisheries”. With a view to accelerating scientific research, section 35 provides tax incentives. Under this section amount deductible in respect of scientific research may be classified as under:
|Expenditure on research carried on by the assessee
||Contribution to outsiders
|1. Revenue expenditure under section 35(1)(i)
2. Capital expenditure under section 35(2)
3. Expenditure on an approved in-house
research under section 35(2AB)
|1. Contribution to an approved scientific
research association under section 35(1)(ii)/(iii)
2. Payment to National Laboratory under
REVENUE EXPENDITURE INCURRED BY THE ASSESSEE HIMSELF [SEC.35(1) (i)] –
Where the assessee himself carries on scientific research and incurs revenue expenditure, deduction is allowed for such expenditure only if such research relates to the business.
CONTRIBUTION MADE TO OUTSIDERS [SEC. 35(1)(ii)/(iii)] –
Where the assessee does not himself carry on scientific research but makes contributions to other institutions for this purpose, a weighted deduction is allowed. The amount of deduction is equal to one and one-fourth times of any sum paid to a scientific research association or to a university, college or other institution if —
a. the payment is made to an approved scientific research association which has,as its object, undertaking of scientific research related or unrelated to the business of the assessee [sec. 35(1) (ii)];
b. the payment is made to an approved university, college or institution for the use of scientific research related or unrelated to the business of the assessee [sec.35(1) (ii)];and
c. the payment is made to an approved university, college or institution for the use of research for social science or statistical research related or unrelated to the business of the assessee [35(1)(iii)]
CAPITAL EXPENDITURE INCURRED BY AN ASSESSEE HIMSELF [SEC.35(2)]
Where the assessee incurs any expenditure of a capital nature on scientific research related to his business, the whole of such expenditure incurred in any previous year is allowable as deduction for that previous year.
One should note the following points —
1. If an assessee incurs capital expenditure on scientific research related to his business, then deduction is available even if the relevant asset is not put to use for research and development purposes during the previous year.
2. The above expenses may be on plant or equipment for research or constructing building (excluding cost of land) for research or expenses of capital nature connected with research like expenses on purchase of buses to transport research personnel.
3. Where any capital expenditure has been incurred on scientific research related to business before the commencement of business, the amount of such expenditure, incurred within three years immediately preceding the commencement of the business, is deductible in the previous year in which the business is commenced [Explanation to section 35(2)(i)].
4. The aforesaid deduction is not available in respect of capital expenditure incurred on the acquisition of any land.
5. No deduction by way of depreciation is admissible in respect of an asset used in scientific research.
6. If the asset is sold without having been used for other purposes, surplus (i.e., sale price) or deduction already allowed under section 35, whichever is less, is chargeable to tax as business income of the previous year in which the sale took place [section 41(3)]. The excess of sale price over cost of acquisition (or indexed cost of acquisition) is chargeable to tax under section 45 under the head “Capital gains”.
CONTRIBUTION TO NATIONAL LABORATORY [SEC. 35(2AA)] –
The payment is made to National Laboratory; or University; or Indian Institute of Technology; or Specified person as approved by the prescribed authority for undertaking scientific research programme.
AMOUNT OF DEDUCTION – If the aforesaid conditions are satisfied, the taxpayer is eligible for weighted deduction, which is equal to one and one fourth times of actual payment. Such contribution, which is eligible for weighted
deduction, is not eligible for any other deduction under the Act.
EXPENDITURE ON IN-HOUSE RESEARCH AND DEVELOPMENT EXPENSES [SEC. 35(2AB)] –
Section 35(2AB) provides for a weighted deduction in respect of expenditure on in-house research and development expenses subject to the following conditions—
1. The taxpayer is a company.
2. It is engaged in the specified business.
3. It incurs any expenditure on scientific research and such expenditure is of capital nature or revenue nature (not being expenditure in the nature of cost of any land and building).
4. The above expenditure is incurred on in-house research and development facility up to March 31, 2007.
5. The research and development facility is approved by the prescribed authority.
6. The taxpayer gets audit of the accounts maintained for such a facility.
Amount of deduction – If all the above conditions are satisfied, then a sum equal to one and one-half times of the expenditure so incurred shall be allowed as deduction.