Section 35 Of Income Tax Act: Deduction For Scientific Research Expenditure

Throughout history, the Indian Government has always supported scientific research. Section 35 of the Income Tax Act allows individuals and entities taking part in such activities to claim deductions for the expenses incurred. 

Thus, if you conduct scientific research or run a business that does so, keep reading this article. We will cover the applicability of this deduction, eligibility criteria and more.  

Section 35 Of Income Tax Act: Applicability 

Section 35 of the Income Tax Act allows for deductions while computing taxes for expenses relating to scientific research. It applies to any field of science, including engineering, natural sciences, technology and social sciences.  

Furthermore, Section 35 covers a wide range of scientific activities like experimental development, pure research, applied research, etc.

Section 35 Of Income Tax Act: Deductions 

Deductions under Section 35 of the Income Tax Act are as follows:

1. Revenue Expenditure

Under revenue expenditure are all the day-to-day expenses incurred in running a business, like wages, salaries, rent, maintenance costs, etc. Section 35 allows a full deduction on such costs in the year in which it was incurred. Expenditure incurred before 3 years immediately preceding the commencement of the business on payment of salary to research personnel engaged in scientific research related to his business or on purchase of material inputs for scientific research will be allowed as a deduction in the year in which the business is commenced.  

2. Capital Expenditure

A person can gain tax benefits for any capital expenditures incurred for scientific research. However, these expenses must be related to scientific activities done in the same year of the spending. Moreover, there are a few points to keep in mind:

• Section 35 tax exemption is available for any kind of capital expenditure on scientific research.  
• However, this benefit is not available for land acquisitions. 
• Any capital spending in this regard done within the last 3 years before the business commenced operations shall be considered as the expense of the year of commencement. 
• If the company sells these assets without using them for anything other than scientific purposes, the lower net sale price and asset cost, which was earlier deducted under Section 35, will be considered business income for the year in which the sale took place. 
• Furthermore, any amount above the asset’s original cost price will be applicable for capital gains tax. 
• Now, if the company sells assets after using them for other activities, its actual costs will be nil, as Section 35 has already provided a full deduction. In this case, the amount from its sale will be deducted from the relevant asset block. 
• Scientific research assets are not eligible for a depreciation deduction in their year of purchase or in any later year. 

3. Payments To Outside Agencies

You can avail of a 100% deduction on the payments made to the following agencies for scientific research purposes under Section 35 of the Income Tax Act:

• Institutions/associations for scientific research.
• Institutions for research in social sciences or statistics.
• Indian Institute of Technology.
• National laboratories.
• National universities.
• Companies taking part in scientific research.

To avail of Section 35 deductions for payments to companies involved in scientific research, a few conditions need to be met. They are as follows:

• It must be registered in India. 
• The organisation’s main objective should be scientific research and development. 
• Must be approved by the prescribed authority and fulfilling all its conditions.   

Section 35 Of Income Tax Act: Eligibility

There are some eligibility criteria which you must meet to avail of the deductions under Section 35 of the Income Tax Act, which are as follows:

• You must carry out the scientific research in India. 
• Your research must be approved by the Department of Scientific and Industrial Research (DSIR), which is the prescribing authority in this case. 
• Expenses incurred must be exclusively or wholly for the purpose of scientific research.  

Benefits Of Section 35

• Provides Tax Deductions

Section 35 enables individuals and entities to avail of tax deductions on expenditures in scientific research. Thus, it helps reduce their taxable income, effectively decreasing their R&D costs. 

• Encourages Companies to Innovate

Such deductions encourage companies to invest in research and development activities, which can help them develop new products, technologies and services.  

• Facilitates Economic Growth

Increased research and development in the field of science can improve productivity and create new employment opportunities, thus significantly contributing to the economy’s growth. 

Denial Of Deductions

The deduction in relation to any sum paid to a National Laboratory, University, Indian Institute of Technology or a specified person shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to,—

(a)  such Laboratory or specified person has been withdrawn; or

(b)  the programme, undertaken by the National Laboratory, University, Indian Institute of Technology or specified person, has been withdrawn.

To avail of the deduction under Section 35 of the Income Tax Act, you must submit Form 3CK to the DSIR. Furthermore, while filing your returns, you must submit proper records and documents like bills, vouchers, invoices, etc.