Section 35 of Income Tax Act

Section 35 of the Income Tax Act is a pivotal provision that allows individuals and businesses to claim deductions for expenses related to scientific research and development (R&D). This section is designed to incentivise and support innovation by providing tax benefits for investments in R&D activities. By claiming these deductions, entities can effectively reduce their tax liabilities, making it more financially feasible to engage in research and development efforts.

In this article, we will talk about the key aspects of Section 35, exploring how it benefits taxpayers and the specific types of R&D expenses that are eligible for deductions in the income tax slabs.

What is section 35 of the income tax act?

Section 35 of the Income Tax Act is a provision that allows taxpayers to claim deductions for expenses incurred in scientific research and development. This section aims to promote and support scientific research by providing financial incentives through tax deductions. It encompasses a wide range of scientific fields, including engineering, natural sciences, technology, and social sciences. By enabling deductions for both revenue and capital expenditures related to scientific research, Section 35 helps reduce the overall cost of R&D activities, thus encouraging more investment in innovation and technological advancement.

Applicability of section 35 of the income tax act

Section 35 applies to all entities involved in scientific research activities, irrespective of their field of study, such as engineering, natural sciences, technology, and social sciences. It is relevant for businesses and individuals who incur expenses related to experimental development, pure research, and applied research. The section extends to both revenue and capital expenditures, facilitating a broad range of scientific activities. The deductions can be claimed for expenses incurred in the year of spending or during the three years preceding the commencement of business activities related to scientific research.

Benefits of section 35

• Provides tax deductions: Reduces taxable income by allowing deductions for R&D expenditures, effectively decreasing overall research costs.

• Encourages innovation: Motivates companies to invest in developing new products, technologies, and services.

• Facilitates economic growth: Boosts productivity and creates job opportunities, contributing positively to economic development.

Eligibility for deductions under section 35 of the income tax act

• Scientific research in India: Research activities must be conducted within India.

• Approval by DSIR: The research should be approved by the Department of Scientific and Industrial Research (DSIR).

• Purpose of research: Expenditures must be exclusively for scientific research purposes.

Expenditure on scientific research deductible under section 35

1. In-house scientific research & development

Section 35 allows deductions for both revenue and capital expenditures related to in-house scientific research and development. This includes expenses for conducting research activities and purchasing research materials.

2. Revenue expenditure [Section 35(1)(i)]

Revenue expenditures include routine business costs such as salaries, rent, and maintenance directly linked to scientific research. Full deductions are available in the year the expenses are incurred.

3. Capital expenses

• Scientific equipment: Deductions for capital expenses on equipment used for scientific research.

• Exclusions: Land acquisition costs are not deductible.

• Pre-Business expenditures: Capital expenditures incurred up to three years before the business commenced are deductible in the year of commencement.

• Asset sales: Proceeds from the sale of scientific research assets, if sold for non-research purposes, are subject to tax adjustments.

Payment for scientific research work to outside agencies

Section 35 allows taxpayers to claim deductions for payments made to outside agencies engaged in scientific research. This includes payments to institutions such as national laboratories, IITs, and other approved organizations. By facilitating these deductions, Section 35 encourages collaboration between businesses and research institutions, fostering advancements in science and technology.

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

Section 35(1)(ii) allows for 100% deductions on payments made to national laboratories, universities, and other recognized research institutions for scientific research. Section 35(1)(iia) extends this benefit to payments made to companies engaged in scientific research, provided they meet specific criteria. These sections ensure that financial contributions towards research are fully deductible, supporting both internal and collaborative research efforts.

2. Section 35(1)(iii)

Section 35(1)(iii) provides for deductions on expenditures related to scientific research, not only within the taxpayer's own organization but also when paid to external research agencies. This section covers a broad spectrum of research activities, including those undertaken in collaboration with approved institutions, thus broadening the scope of deductible expenses.

3. Section 35(1)(iia)

Section 35(1)(iia) offers a 100% deduction for payments made to companies engaged in scientific research, provided these companies are registered and approved by the prescribed authority. This section incentivizes businesses to fund research activities by making such payments fully deductible, thereby supporting innovation and technological advancement.

4. Section 35(2AA)

Section 35(2AA) focuses on deductions for payments made to specified institutions and organizations engaged in scientific research and development. These deductions are available only if the institutions meet the criteria set by the government, ensuring that the funds are used effectively for advancing scientific research.

Explore these essential articles on income tax for comprehensive insights

• Income Tax Slabs for FY 24-25

• Income tax return extended date for AY 2024-25

• Section 112A of Income Tax Act

• Section 111A of Income Tax Act

• Section 56 of Income Tax Act

Sale of an asset used for scientific research (Section 41(3))

Section 41(3) deals with the tax implications of selling an asset that was used for scientific research. If the asset is sold, the lower of the sale price and the asset’s original cost, which was previously deducted, is treated as business income. Any amount received over the original cost is subject to capital gains tax. This ensures that the tax benefits previously claimed are adjusted in line with the sale of the asset.

1. Sold after being used for business

When a scientific research asset is sold after being used for business purposes, any previously claimed deductions must be adjusted. The sale proceeds, if exceeding the asset’s original cost, are considered business income. The differential amount, reflecting the actual depreciation or use, will be subject to tax, ensuring accurate tax reporting and compliance.

2. Uninvolved capital expenditure

Capital expenditures not related to scientific research are not eligible for deductions under Section 35. This includes costs associated with purchasing land or assets used for non-research purposes. Only expenditures directly linked to scientific research activities, whether in-house or to outside agencies, qualify for deductions, ensuring that tax benefits are accurately applied to relevant research costs.

3. Procedure for approval

To claim deductions under Section 35, you must obtain approval from the Department of Scientific and Industrial Research (DSIR). The process involves submitting Form 3CK along with detailed documentation, such as bills, vouchers, and invoices, to substantiate the research expenses. Proper filing and documentation are crucial for securing the approval and availing of tax benefits.

4. Denial of deductions

Deductions may be denied if the research institution’s approval is withdrawn or if the research program is discontinued after payment. However, the initial approval at the time of payment is critical. Ensure all necessary documentation and approvals are maintained to avoid issues with claiming deductions. Proper records and adherence to guidelines are essential for successful claims.

Conclusion

Section 35 of the Income Tax Act offers significant tax benefits for scientific research expenditures, supporting both in-house and collaborative research activities. By understanding the applicability, benefits, and procedures for claiming deductions, businesses and individuals can effectively reduce their tax liabilities and promote innovation. Ensure compliance with all requirements and maintain accurate documentation to maximize the advantages of Section 35.

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