Section 35 Deduction for expenditure on scientific research

What all expenditures are done on scientific research?

In-house Scientific Research & Development:

If the assessee executes any research and the research work is related to his business, incurred expenses related to the research are deductible. An assessee can claim the following deductions:

• Revenue Expenses
• Capital Expenses

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

Any money spent on scientific research in the last year can be fully deducted as an expense.

Moreover, the following expenses related to scientific research incurred in the three years before the business started will be considered as expenses of the year when the business began and will be allowed in that year if the relevant authority approves them:

• Salary payments to employees involved in scientific research;
• Purchase of materials for scientific research.

Capital Expenses:

The assessee's business can deduct any capital expenses (except for land acquisition) related to scientific research in the same year they are spent.

The following points should also be noted:

• The assessee should spend capital on scientific research, and it is not necessary that such spending should be shown as an asset in its books of account.
• If any capital spending has been done before the business started. In that case, the total of such spending, done within three years before the business started, is considered to have been done in the previous year when the business started [Explanation to section 35(2)(ia)].
• The deduction mentioned above is unavailable for capital spending on land buying after February 29, 1984.
• If the asset is sold without using it for other purposes. In that case, the lower surplus or deduction allowed is taxable as business income of the previous year when the sale happened [sec. 41(3)]. The surplus over deduction allowed is, however, taxable as capital gains.
• An asset used in scientific research cannot get a depreciation deduction, either in the year when the capital spending is done or in a later year.

Payment to Outside Agencies involved in Scientific Research Work:

Payment made to certain Association/ Institutions for Scientific Research [Section 35(1)(ii) & (iia)]:

Payment made to any other agencies for scientific research is deductible up to 150% of the amount paid in the preceding year in which the transaction was made, whether the outside agency is related to the assessee’s business or not.

Payment mode to certain Institutions for Statistical Research or Research in Social Sciences [Section 35(1)(iii)]:

A research association that conducts research in social sciences or statistical research, or a university, college, or other institution that uses the payment for research in social sciences or statistical research, can receive any payment from the assessee. The assessee can claim a deduction of 100% of the amount paid, irrespective of whether such research is related to the assessee's business or not.

Payment made to a Company to be used for Scientific Research [Section 35(1)(iia)]:

If any amount is paid to a company for the purpose of scientific research, the amount is allowed to be deducted only if the company fulfills the following conditions:

• It is incorporated in India
• The primary Object of the company should be scientific research and development.
• Fulfills other prescribed conditions.

Payment made to a National Laboratory or a University, or an Indian Institute of Technology [Section 35(2AA)]:

A deduction of 150% of the amount paid by an assessee is allowed under section 35(2AA) if the payment is made to a National Laboratory, a University, an Indian Institute of Technology, or a specified person for scientific research. The payment should be accompanied by a specific direction that the amount will be used for scientific research under a program approved by the prescribed authority.

Amount of deduction for the payment made to outside agencies (Table):

Sale of an Asset used for Scientific Research:

If a scientific research asset is sold without being used for anything else [Section 41(3)]:

The sale of a capital asset usually leads to capital gain tax, but in this case, the lower of the net sale price or the cost of the asset, which was previously deducted under section 35, will be counted as the business income of the year when the asset is sold. Any amount above the asset's original cost will be taxed as a capital gain. This will apply even if the business ceased to exist that year.

Sold after being used for business:

When the business uses the scientific research asset after it stops using it for research purposes, the asset's actual cost will be nil for the relevant asset block since section 35 has already given a full deduction for it. If the business sells this asset later, the amount received will be subtracted from the block that had this asset before.

Uninvolved capital expenditure on Scientific Research:

Capital expenditure on scientific research can be deducted from the profit of the business that incurred it. However, unlike depreciation, this deduction cannot exceed the business's profit. If the profit is less than the capital expenditure on scientific research, the excess amount is called unabsorbed capital expenditure on scientific research. This amount can be carried forward to the next year and deducted from the profit of that year, subject to the provisions of section 72(2) (relating to business loss) and section 73(3) (relating to speculation loss). This process can be repeated for subsequent years until the unabsorbed capital expenditure on scientific research is fully deducted.

Revenue expenditure on scientific research can also be deducted from the business's profit, but it can create a business loss if it exceeds the profit. Unabsorbed capital expenditure on scientific research differs from unabsorbed depreciation because it cannot create a business loss.