Approval of scientific research company under Section 45

Introduction

An assessee can claim deduction for amount contributed to a company for undertaking scientific research. However, such deduction can be claimed if such Company is approved in this behalf. For getting such approval, such Company is required to make an application in Form 17 and fulfil the conditions prescribed in this behalf.

1. About

Income-tax Act allows incentives by way of additional deduction under Section 45 for the capital expenditure incurred by the organizations on research work. The deduction available under this provision in respect of expenditure incurred on scientific research are classified into In-house research and payment to outsiders.

If an assessee does not himself carry on research but makes contributions to the specified institutions for this purpose, the deduction is allowed for such contribution. However, the deduction for the contribution made to the Indian scientific research company as referred to in Section 45(3)(b) shall be allowed if such institutions are approved by the authorities.

2. Application for approval

2.1. Form for filing application

The company shall file an application for approval in Form 17. Such application shall be made to the Commissioner of Income-tax having jurisdiction over the applicant at any time during the financial year immediately preceding the assessment year from which the approval is sought.

Applicant shall send a copy of the application to the Chief Commissioner of Income-tax having jurisdiction over the applicant. Such copy shall be accompanied by the acknowledgement receipt, as an evidence of having furnished the application form in duplicate in the office of the Commissioner of Income-tax having jurisdiction over the case.

2.2. Time limit for making an application

Application for approval may be made at any time during the tax year.

2.3. Time limit for acceptance or rejection of application

Every notification shall be issued or an order rejecting the application shall be passed within a period of 12 months from the end of the quarter in which the application was received in the Office of the Chief Commissioner of Income-tax.

2.4. Rectification of application

The Commissioner of Income-tax shall serve a deficiency letter on the applicant if:

(a) Any defect is noticed in the application; or

(b) Any relevant document is not attached thereto.

Such deficiency letter should be served within 1 month from the end of the month in which application is received in the office of Commissioner of Income-tax.

The applicant shall remove the deficiency within a maximum period of one month from the end of the month in which the deficiency letter is served. If the applicant fails to remove the deficiency within the specified period, the Commissioner of Income-tax shall send his recommendation for treating the application as invalid to Chief Commissioner of Income-tax. The Chief Commissioner of Income-tax, after examining recommendation, may pass an order treating the application as invalid.

2.5. Grant of approval

If the application form is complete in all respects, the Commissioner of Income-tax may make such inquiry as he may consider necessary regarding the genuineness of the activity of the Company. He shall send his recommendation to the Chief Commissioner of Income-tax for the grant of approval or rejection of the application. Such recommendation shall be sent within 3 months from the end of the quarter in which the application form was received in his office.

The Chief Commissioner of Income-tax may before granting approval shall call for such documents or information from the applicant as it may consider necessary. He may make an inquiry for verification of the genuineness of the activity of the applicant. The Chief Commissioner of Income-tax may issue the notification to be published in the Official Gazette granting approval to the company or reject the application for reasons to be recorded in writing.

2.6. Withdrawal of approval

The Chief Commissioner of Income-tax may withdraw the approval granted if it is satisfied that:

(a) The Company has ceased to carry on its activities;

(b) Its activities are not genuine; or

(c) Its activities are not being carried on in accordance with all or any of the conditions specified in this behalf.

However, order treating the application as invalid or rejecting the application or withdrawing the approval, shall be passed only after giving a reasonable opportunity of being heard.

A copy of the order invalidating or rejecting the application or withdrawing the approval shall be communicated to applicant, Assessing Officer and the Commissioner of Income-tax.

2.7. Validity of order

Any order passed by the Chief Commissioner of Income-tax shall remain effective for the tax year or years specified in the order, subject to a maximum period of five tax years at a time.

The applicant may apply to the Commissioner of Income-tax for a fresh order at least three months before the expiry of the validity period of the order issued.

3. Conditions for approval

3.1. Usage of funds

The applicant shall use the funds received by it for scientific research. Further, such scientific research shall be carried out by        the applicant through its own employees using its own assets.

3.2. Maintenance of books of account and audit

The applicant shall maintain separate books of account in respect of the sum received by it for scientific research. Such books of account shall reflect the amount used for carrying out research.

Such books shall be audited by a Chartered Accountant. The applicant shall furnish the report of such audit duly signed and verified by such accountant to the Commissioner of Income-tax having jurisdiction over the case, by the due date of furnishing the return of income under Section 263(1).

Further, applicant shall maintain a separate statement of donations received and amount used for research. A copy of such statement, duly certified by the auditor, shall accompany the report of audit.

3.3. Furnishing of statement of activities

The applicant shall, subsequent to the approval, furnish a statement (Statement of activities) to Commissioner of Income-tax containing the following information:

(a) A detailed note on the research work undertaken by it during the tax year;

(b) A summary of research articles published in national or international journals during the year;

(c) Any patent or other similar rights applied for or registered during the year;

(d) Programme of research projects to be undertaken during the forthcoming year and the financial allocation for such subjects.

The applicant shall furnish such statement to Commissioner of Income tax by the due date of furnishing return of income under Section 263(1).

3.4. Furnishing of report by Commissioner

The Commissioner of Income tax may, after making appropriate enquiries, furnish a report to the jurisdictional Chief Commissioner of Income-tax if he is satisfied that:

(a) The company is not maintaining separate books of account for research activities;

(b) The company has failed to furnish its audit report;

(c) The company has not furnished its statement of the sums received and the sums applied for research or a statement of activities;

(d) The company has ceased to carry on its research activities, or its activities are not genuine; or

(e) The company is not fulfilling the conditions subject to which approval was granted to it.

The Commissioner of Income tax shall furnish such report to the jurisdictional Chief Commissioner of Income-tax within 6 months from the date of furnishing the return of income under Section 263(1).

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.