Deduction for expenditure on scientific research

Introduction

The deduction under Section 45 is allowed for the expenditure incurred on in-house scientific research or for payment to outsiders. If expenditure is incurred on in-house research and development, the deduction is allowed for revenue and capital expenditure provided research is related to business. Deduction is allowed in certain cases if donation is made to outsider for doing scientific research, which may or may not be related to the business.

1. About

Scientific research means any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. The research is said to be related to business if it leads to an extension of the business or if it is research of a medical nature which helps in the welfare of the business employees.

With a view to accelerate scientific research, Income-tax Act allows incentives by way of additional deduction 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. These expenditures are further classified into following:

1.1. In-house research

Expenditure on In-house research shall include following:

(a) Revenue Expenditure [Section 45(1)(a)(ii) & 45(1)(b)];

(b) Capital Expenditure [Section 45(1)(a)(i)]; and

(c) Expenditure on approved in-house research [Section 45(2)].

1.2. Payment to outsiders

Payment to outsiders shall include following

(a) Contribution to an approved research association [Section 45(3)(a)];

(b) Contribution to an approved university or college or other institution [Section 45(3)(a)];

(c) Contribution to an approved national laboratory, etc. [Section 45(3)(c)]; and

(d) Contribution to an Indian scientific research company [Section 45(3)(b)].

2. Deduction for Expenditure on In-house Research

The amount deductible in respect of in-house scientific research may be classified into following.

2.1. Revenue Expenditure [Section 45(1)(a)(ii) & 45(1)(b)]

If assessee himself carries on in-house scientific research and incurs revenue expenditure during the tax year, deduction is allowed for such expenditure only if research is related to the business. Thus, any amount incurred for purchase of material, for research and development, is allowed as deduction, notwithstanding such material is consumed during the tax year or held as closing stock

The deduction shall also be allowed for the expenditure incurred, during 3 years immediately before commencement of business, by way of salary to an employee engaged in such scientific research or for purchasing raw material for scientific research. Such expenditure shall be deemed to have been laid out or expended in the tax year in which the business is commenced and shall be allowed as deduction in the same year. The deduction is limited to an amount certified by the prescribed authority

2.2. Capital Expenditure [Section 45(1)(a)(i)]

2.2-1. Which exp. is allowed as deduction?

Any capital expenditure incurred by the assessee on scientific research, related to business, is allowed as deduction in the tax year in which such expenditure is incurred. However, the capital expenditure incurred on acquisition of land as well as acquisition of any interest in land, whether acquired as such or as a part of any property, is not allowable as deduction.

The deduction shall also be allowed for the capital expenditure incurred, during 3 years immediately before commencement of business, on scientific research related to business. Such expenditure shall be deemed to have been incurred in the tax year in which the business is commenced and shall be allowed as deduction in the same year.

Example, amount incurred to purchase plants and equipments for laboratory or to purchase a building for conducting research shall be allowed as deduction. The Karnataka High Court

2.2-2. No depreciation on capital expenditure

If entire capital expenditure incurred for acquisition of an asset is allowed as deduction, no further deduction shall be admissible by way of depreciation in respect of such asset used in scientific research either in the year in which capital expenditure is incurred or in a subsequent year.

2.2-3. Unabsorbed capital expenditure

If entire capital expenditure on scientific research couldn’t be absorbed due to inadequate profits of the relevant tax year, the unabsorbed expenditure can be set-off and carried forward in accordance with the provisions as are applicable to unabsorbed depreciation.

In that situation, the unabsorbed capital expenditure can be set-off against any other income in the current year. If some expenditure still remains unabsorbed, it can be carried forward to set-off against income of subsequent years. Business losses shall get priority over unabsorbed expenditure in the matter of set off.

If company is amalgamated before claiming full deduction in respect of capital expenditure on scientific research, the aforesaid benefit of carry forward and set-off of unabsorbed expenditure may be claimed by the amalgamated company, if it is an Indian company.

2.2-4. Treatment when asset is transferred?

If asset, acquired for scientific research, is transferred without having been used for any other purposes and sale proceeds together with the total amount of the deductions claimed under this provision exceed the amount of the capital expenditure, lower of following amounts shall be chargeable to tax as business income of the tax year in which the sale takes place:

(a) difference between the sum of sale proceeds & deduction claimed and capital expenditure incurred; or

(b) deduction already allowed under this provision.

If the sale proceeds realised from transfer of such asset exceeds the cost of acquisition, such excess amount shall be chargeable to tax under the head capital gains.

This provision is applicable only if an asset is sold without using it for any other purposes. If an asset, purchased for purpose of scientific research, is utilized for other business purposes on completion of scientific research, then for the purpose of claiming depreciation the actual cost of such asset to the assessee is taken to be the actual cost to the assessee as reduced by the amount of any deduction allowed under this provision.

2.3. Expenditure on approved in-house research [Section 45(2)(i)]

2.3-1. Who can claim this deduction?

Deduction under this provision is allowed to a company which is engaged in the business of bio-technology or in any business of manufacture or production of any article or thing (except those specified in Schedule XIII). This deduction is allowed for the expenditure incurred on in-house research, other than any expenditure on land or building, and approved

No deduction shall be allowed in respect of this expenditure under any other provision of the Act. Further, where assessee is a company which is approved for the purpose of receipt of donation in respect of which donee can claim deduction under section 45(3)(b), then such company shall not be eligible for claiming deduction under this provision.

However, no deduction is allowed to the companies unless they enter into an agreement with the prescribed authority for co-operation in such research and development facility. Further, it needs to fulfil prescribed conditions with regard to maintenance of accounts and audit thereof and furnishing of its report in prescribed manner. Further the prescribed authority is required to submit its report in relation to approval of said facility to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General.

2.3-2. How much deduction is allowed?

A deduction equal to 100% of the actual expenditure shall be allowable.

The expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial with the approval from any regulatory authority under any Central, State or Provincial Act and filing of an application for a patent under the Patents Act, 1970.

(Also see Procedure to obtain approval under Section 45(3)(c) and Section 45(2)(i))

3. Deduction for Payment to Outside Research Organisations

3.1. Contribution to approved institutions [Section 45(3)(a)]

3.1-1. Who can claim this deduction?

Deduction under this provision is allowed to an assessee if it does not himself carry on research but makes contributions to the specified institutions for this purpose. The research programme may or may not be related to business of assessee.

3.1-2. How much deduction is available?

A deduction equal to 100% of the actual payment shall be allowable for the contribution made to the approved association.

The deduction is calculated on basis of the actual cost incurred by the assessee. The deduction in respect of contribution made by an assessee to the aforesaid institutions shall not be denied merely on the ground that after the contribution, the approval granted to these institutions have been withdrawn. In other words, contribution to these institutions will be qualified for weighted deduction if these institutions are in approved category even if subsequently, the approval granted to these institutions have been withdrawn.

3.1-3. Conditions for claiming deduction

For the purpose of claiming deduction under these provisions, such associations or institutions shall fulfil the following conditions:

(a) It must be approved in accordance with the guidelines in the prescribed manner and conditions; and

(b) It is specified by the Central Government.

3.1-4. Application for approval

Main article: Approval of research association or college or university under Section 45

Such institutions or associations are required to make an application to the Central Government for the purpose of grant of approval or continuance thereof. The central government may, in order to satisfy about the genuineness of their activities, require such institutions or associations to produce such documents including audited annual accounts or information or make such inquiries as it may deem necessary.

3.2. Contribution to National Laboratory or IITs [Section 45(3)(c)]

3.2-1. Who can claim this deduction?

The deduction is allowed to every assessee who makes payment to National Laboratory or a University or Indian Institute of Technology (IITs) or specified person approved by the prescribed authority

An application for approval shall be made in Form 7 in accordance with Rule 29. Before granting of approval, the prescribed authority shall satisfy itself about the feasibility of carrying out the scientific research and shall submit its report to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General in prescribed form.

3.2-2. How much deduction is available?

A deduction equal to 100% of the actual payment shall be allowable.

The contribution which is eligible for deduction under this provision shall not be eligible for deduction under any other provision.

The aforesaid deduction will not be denied merely on the ground that after the payment made by the assessee to these institutions, the approval granted to donee has been withdrawn or approval granted to scientific research programme of donee has been withdrawn.

(Also see Procedure to obtain approval under Section 45(3)(c) and Section 45(2)(i))

3.3. Contribution to a company [Section 45(3)(b)]

3.3-1. Who can claim this deduction?

This deduction has been introduced with an objective to encourage outsourcing of scientific research, particularly by small companies which are not capable in making investment for building an in-house scientific facility. The deduction is allowed to every assessee who makes payment to a company for scientific research, which may or may not be related to the business of the taxpayer.

3.3-2. Conditions for claiming deduction

Deduction under this provision shall be allowed if donee/recipient fulfils the following conditions:

(a) It is registered in India;

(b) It has scientific research and development as its main object;

(c) It is approved by the prescribed authority

(d) It fulfills other prescribed conditions.

The application for such approval is submitted in accordance with Rule 35 in Form 17.

3.3-3. How much deduction is available?

A deduction equal to 100% of the actual payment shall be allowable.

The deduction in respect of contribution made by an assessee to the aforesaid company shall not be denied merely on the ground that after the contribution, the approval granted to such company have been withdrawn. In other words, contribution to these companies will be qualified for weighted deduction if these companies are in approved category even if subsequently, the approval granted to these companies have been withdrawn.

4. Conditions to be fulfilled by the recipient/donee

4.1. Additional conditions

The deduction available under the following provision in respect of payment made to outsiders shall be available if additional conditions are satisfied by the donee/recipient:

(a) Contribution to an approved research association [Section 45(3)(a)];

(b) Contribution to an approved university or college or other institution [Section 45(3)(a)];

(c) Contribution to an Indian scientific research company [Section 45(3)(b)].

4.2. Furnishing of statement and issue of certificate

Main article: Filing of statement and issue of certificate for donation made to research institutions

4.2-1. Statement of donation

No deduction shall be available unless research association, University, college or other institution referred to in section 45(3)(a) or the company referred to in section 45(3)(b) prepares and deliver or causes to deliver a statement of donation to the Director General of Income-tax (Systems) or person authorised by it.

The statement shall be filed in Form 15 as per procedure laid down under Rule 31.

4.2-2. Certificate of donation

Research association, University, college or other institution or the company referred to in section 45(3)(a)/(b) is required to furnish a certificate to donor specifying the amount of donation.

The certificate shall be issued in Form 16 as per procedure laid down under Rule 31.

4.2-3. Consequence of default

If such research association, university, college, other institution or company fails to furnish such statement or certificate, it shall be liable for payment of fee under Section 429. Further, penalty under Section 464 shall also be levied.

5. Other Provisions

5.1. Determination of relevant portion

Where any question arises as to whether an activity constitutes or constituted or any asset is or was being used for scientific research or determination of the extent for the same then the board shall refer the question to the following:

(a) In case such question is in respect of the contribution made to a scientific research association, a university, college or other institution having scientific research as its main object or other institution or association, university, college for research in social science or statistical research, reference shall be made to the Central Government whose decision shall be final; and

(b) In any other case, reference shall be made to the prescribed authority whose decision shall be final.

6. Summary

References

Balaji Amines Ltd. v. CIT [2015]153 ITD 20 (Pune)

Director General (Income-tax Exemptions) in concurrence with Secretary, Department of Scientific and Industrial Research, Government of India

CIT v. Smith Kline & French (India) Ltd. [1994] 77 Taxman 153 (Kar.)

CIT v. Sandoz (India) Ltd. [1994] 74 Taxman 225 (Bom.).

Prescribed Authority for such approval is the Secretary, Department of Scientific and Industrial Research, Government of India

Prescribed authority in the case of a National Laboratory or a University or an Indian Institute of Technology is the head of the National Laboratory or the University or the Indian Institute of Technology, as the case may be and in the case of a specified person prescribed authority is the Principal Scientific Adviser to the Government of India.

Chief Commissioner of Income-tax having jurisdiction over the applicant

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