Research and Development is one of the most important contributors
to the growth of the company. It’s because of such continuous research and
development, ISRO was able to successfully undertake Mars Orbiter Mission, aka
“MangalYaan.” Indian Government has always appreciated and encouraged people to
undertake research and development in their business.
Encouragement is not just by words but by providing special
provisions under Section 35 of Income
Tax Act. The special provision states that expenditure incurred for the
research and development by the businesses can be deducted while calculating the Income tax.
Deduction under section 35 of income tax act has
specifically been provided for people who are engaged in research and
development related to the businesses. Such involvement in scientific research
may be directly or indirectly
·
Direct involvement includes incurring
expenditure on own research and development process.
·
Indirect involvement includes making
contributions or donations made to universities or institutions conducting
research programs.
Direct Involvement
Deduction is allowed for
1.
Research & Development expenditure before
commencement of business
2.
Research & Development expenditure during
the running of business
Expenditure before commencement of business includes-
i.
Revenue expenditure [Section 35(1)(i)]
Revenue expenditure is allowed as deductions only if such
research is directly related to business and the amount allowed as deduction
include any expenditure related to research including raw materials cost &
wages paid incurred within 3 years prior to the commencement of the business in
the year which the business commences
ii.
Capital expenditure [Section 35(2)(ia)]
Even capital expenditure is allowable as deduction only if
the research and development is related to the business. However it doesn’t
matter if the asset is used for the said purpose within the previous year.
Expenditure incurred within 3 years prior to the commencement of the business
is allowed as deduction in the year which the business commences.
Other important point is to note that any purchase and
acquisition of land is not allowed as deductions under this section. Also, no
separate deduction for depreciation is allowed
Expenditure during the running of business include
i.
In house research expenditure [Section 35(2AB)]
a)
In-house research expenditure can be allowed as
deduction if the organization has an in-house facility for research and development.
b)
Allowable deductions include all expenditure
which is directly related to research and development.
c)
To avail these deductions, company setting up
research centers must be involved in manufacturing or production of computers
or drugs or any product as notified by the Central Board of Direct Taxes.
d)
Only expenditures recognized as related to
scientific research under section 35 (2AB) can be claimed for deductions.
e)
Research and development work should be related
to scientific research only.
The business centres conducting in-house R&D have to
fulfill below mentioned conditions to claim income tax deduction under section
35 of Income tax Act for expenditure on scientific research
Ø
Should be approved by DSIR
Ø
Should be exclusively conducting scientific
research in the areas or products as notified by Central Board of Direct Taxes
(These notified areas include drugs, pharmaceuticals, electronic equipments,
computers, chemicals etc.)
Ø
Research centre must be located in a separate
area provided exclusively for R & D.
Ø
Must have separate manpower
The total deduction available
under this section is two times the
amount of expenditure incurred on the research and development activity.
Indirect involvement -
Any contributions or expenses incurred by business to any
approved scientific research association or universities or institutions. It
shall be allowed weighted deduction of 125% of the expenses incurred or
contribution made under Section 35(1)(ii)/(iii), Section 35(2)(iia) and Section
35(2AA)
Conditions to claim Deduction
under section 35(1) (ii)/ (iii)
·
Deduction allowed is only for revenue
expenditure.
·
The payment is made to the approved organization,
universities, institutions or associations.
·
The main objective of the organization or
association to which contribution is made should either be scientific research
or research for social sciences.
·
Purpose of scientific research or research for
social sciences may or may not be related to the business. Also, it need not be
approved by any authority.
·
125% deduction shall be allowed as deduction for
the amount of revenue expenditure incurred for the purpose of research.
Conditions to claim Deduction
under section 35(1) (iia) of Income Tax Act
·
Deduction allowed is only for capital
expenditure.
·
The payment is made to the approved organizations,
universities, institutions or associations are registered in India.
·
The main objective of the organization or
association to which contribution is made should either be scientific research
or research for social sciences.
·
Purpose of scientific research or research for
social sciences may or may not be related to the business. Also, it need not be
approved by any authority.
·
125% deduction shall be allowed as deduction for
the amount of capital expenditure incurred for the purpose of research.
Deduction under section 35(2AA)
Deduction is allowed if the payment is made to the below notified
institutions:
·
National Laboratory
·
Universities
·
Indian Institute of Technology
·
Specified persons as approved by the prescribed
authority
One has to make sure that the contributed amounts are used
for scientific research approved by prescribed authority.
The organizations, universities, institutions or
associations approved under section 35 of Income Tax Act for receiving
contributions are required to file their return of income under section 139(4).
Any unabsorbed expenditure can be carried forward to set off
with the further income for an infinite period of time. By such provisions
business houses are motivated to invest heavily in Research and Development
which in turn helps humanity with latest technologies.
