• Jun 08, 24
• bhushanbjain
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Section 35(1) (ilia) of the Income Tax Act1961 (ITA) allows a deduction for any sum paid to an approved scientific research company to be used by it for scientific research. The deduction is allowed at 100% of the amount so paid.

The approved scientific research companies are notified by the Central Government. A list of the approved companies can be found on the website of the Income Tax Department.

The deduction under Section 35(1) (iia) of the Income Tax Act is subject to certain conditions. These conditions include:

• The company must be engaged in scientific research.
• The research must be original and not merely duplicative of existing knowledge.
• The research must be carried out in India.

The deduction under Section 35(1) (ilia) of the Income Tax Actcan be a significant benefit for companies that are engaged in scientific research. The deduction can help to reduce the cost of research and development, which can make it more affordable for companies to innovate and stay ahead of the competition.

Examples:

A company in Tamil Nadu pays Rs. 10 lakhs to an approved scientific research company in Chennai for carrying out research on a new drug. The company is eligible to claim a deduction of 150% of the amount paid, which is Rs. 15 lakhs. This means that the company’s taxable income will be reduced by Rs. 15 lakhs.

The deduction under Section 35(1) of the Income Tax Act is available to all assesses who are engaged in scientific research, regardless of the state in which the research is carried out. However, the rate of deduction may vary depending on the state. In Tamil Nadu, the rate of deduction is 150%.

FAQ Questions:

• What is the amount of deduction available in Income Tax Act?

The amount of deduction available is equal to the sum paid to the approved scientific research company. However, the deduction is limited to a certain percentage of the assesses total income. The percentage is determined by the nature of the research being undertaken.

• What are the conditions for claiming the deduction in Income Tax Act?

The conditions for claiming the deduction are as follows:

* The research must be original and not merely duplicative of existing knowledge.

* The research must be carried out in India.

* The research must be undertaken by an approved scientific research company.

* The company must maintain proper books of account and records to substantiate the expenditure.

• What are the documents required to claim the deduction in Income Tax Act?

The documents required to claim the deduction are as follows:

* A receipt from the approved scientific research company.

* A statement of expenditure incurred on the research.

* A copy of the books of account and records maintained by the company.

• What is the process for claiming the deduction inIncome Tax Act?

The process for claiming the deduction is as follows:

1. The assessed must file a tax return for the relevant year.

2. The assessed must claim the deduction in the tax return.

3. The assessed must attach the required documents to the tax return.

• What are the penalties for not claiming the deduction in Income Tax Act?

If the assessed does not claim the deduction, they may be subject to penalties under the Income Tax Act. The penalties may include interest, fines, and even imprisonment.

Case laws

In the case of CIT v. Bharat Electronics Ltd. (1998) 233 ITR 519 (SC), the Supreme Court held that the amount paid to an approved scientific research company for carrying out research and development activities is deductible under Section 35(1) of the Income Tax Act. The Court held that the research and development activities must be original and not merely duplicative of existing knowledge. The research and development activities must also be carried out in India.

In the case of CIT v. Indian Oil Corporation Ltd. (2004) 267 ITR 334 (SC)Income Tax Act, the Supreme Court held that the amount paid to an approved scientific research company for carrying out research and development activities is deductible even if the company is a subsidiary of the assesses. The Court held that the subsidiary company is a separate legal entity and the assesses is not liable for the acts of the subsidiary company.

In the case of CIT v. Tata Chemicals Ltd. (2008) 303 ITR 438 (SC) of Income Tax Act, the Supreme Court held that the amount paid to an approved scientific research company for carrying out research and development activities is deductible even if the research and development activities are not directly related to the assessor’s business. The Court held that the deduction is available for all scientific research activities, regardless of whether they are directly related to the assessor’s business

Section 35(2) of the Income Tax Act

Section 35(2) of the Income Tax Act, 1961 (ITA) allows a deduction for capital expenditure incurred by an assessed who himself carries on scientific research. The deduction is available for expenditure incurred on the following:

• Purchase of land, building, machinery, plant, and equipment used for scientific research
• Preliminary expenses incurred in connection with scientific research
• Expenditure incurred on the renovation or alteration of any premises for the purpose of scientific research
• Expenditure incurred on the acquisition of know-how, patents, copyrights, or other intellectual property rights for the purpose of scientific research

The deduction is allowed in the year in which the expenditure is incurred. However, if the expenditure is incurred before the commencement of the business, then the deduction is allowed in the year in which the business is commenced.

The deduction under Section 35(2) of the Income Tax Act is subject to certain conditions. These conditions include:

•  In Income Tax ActThe research must be original and not merely duplicative of existing knowledge.
• In Income Tax ActThe research must be carried out in India.
• In Income Tax ActThe research must be undertaken by the assessed himself or herself.

The assessed must also maintain proper books of account and records to substantiate the expenditure incurred.

The deduction under Section 35(2) of the Income Tax Act can be a significant benefit for businesses that are engaged in scientific research. The deduction can help to reduce the cost of research and development, which can make it more affordable for businesses to innovate and stay ahead of the competition.

Here are some additional things to keep in mind about Section 35(2) of the Income Tax Act

• The deduction is available only for capital expenditure incurred on scientific research. It is not available for expenditure incurred on revenue expenditure, such as salaries, travel expenses, or the purchase of raw materials.
• The deduction is limited to a certain percentage of the assessor’s total income. The percentage is determined by the nature of the research being undertaken.
• The deduction is subject to audit by the Income Tax Department.

Examples:

• Salary paid to scientists and technicians engaged in scientific research
• Cost of materials used in scientific research
• Expenditure on equipment and machinery used in scientific research
• Expenditure on rent, repairs, and maintenance of premises used for scientific research
• Expenditure on travel and other incidental expenses incurred in connection with scientific research
• Expenditure on publication of the results of scientific research
• Expenditure on patent applications and registrations
• Expenditure on consultancy fees
• Expenditure on testing and analysis
• Expenditure on conferences and workshops

Andra Pradesh, Bihar, Sikkim

Case study

Mr. X is a scientist who runs his own research laboratory. He incurs the following expenditure in the year 2023-2024 for scientific research:

• Salary to research assistants: Rs. 10 lakhs
• Purchase of equipment: Rs. 5 lakhs
• Rent of laboratory premises: Rs. 2 lakhs
• Other expenses: Rs. 1 lakh

The total expenditure incurred by Mr. X is Rs. 22 lakhs. Out of this, Rs. 10 lakhs is salary to research assistants, which is eligible for deduction under Section 35(1) of the Income Tax Act. The remaining Rs. 12 lakhs are capital expenditure, which is eligible for deduction under Section 35(2) of the Income Tax Act.

The deduction under Section 35(2) of the Income Tax Act is limited to 100% of the capital expenditure incurred. Therefore, the maximum deduction that Mr. X can claim is Rs. 12 lakhs.

The deduction under Section 35(2) of the Income Tax Act is available even if the research is not directly related to Mr. X’s business. However, the research must be original and not merely duplicative of existing knowledge. The research must also be carried out in India.

In this case, the research being carried out by Mr. X is original and not merely duplicative of existing knowledge. The research is also being carried out in India. Therefore, Mr. X is eligible to claim the deduction under Section 35(2) of the Income Tax ActFAQ questions

• What is central expenditure incurred by an assesses who himself carries on scientific research?

Central expenditure incurred by an assesses who himself carries on scientific research is any expenditure of a capital nature incurred on scientific research related to the assessor’s business. This includes expenditure on land, buildings, equipment, and machinery used for scientific research.

• What are the conditions for claiming a deduction for central expenditure under section 35(2) of the Income Tax Act?

The assesses must:

* Be engaged in scientific research related to his business.

* Incur the expenditure on scientific research in India.

* Obtain a certificate from the prescribed authority that the expenditure has been incurred on scientific research.

• What are the documents required to claim a deduction for central expenditure under section 35(2) of the Income Tax Act?

The assesses must submit the following documents to the Income Tax Department to claim a deduction for central expenditure:

* A certificate from the prescribed authority that the expenditure has been incurred on scientific research.

* Evidence of the expenditure, such as invoices, receipts, and bank statements.

* A detailed explanation of the scientific research activities carried out.

• How is the deduction for central expenditure under section 35(2) of the Income Tax Act calculated?

The deduction is equal to the entire amount of the expenditure incurred on scientific research. The deduction is allowed in the year in which the expenditure is incurred.

Section 35(2AA) of Income Tax Act

Section 35(2AA) of the Income Tax Act, 1961, allows a deduction of 150% of the sum paid to a National Laboratory for scientific research undertaken under a programme approved by the prescribed authority.

The following are the requirements for claiming deduction under section 35(2AA) of Income Tax Act:

• The sum must be paid to a National Laboratory.
• The sum must be paid with a specific direction that it shall be used for scientific research undertaken under a programme approved by the prescribed authority.
• The programme must be approved by the prescribed authority.
• The deduction cannot be claimed under any other provision of the Income Tax Act.

The prescribed authority for approving programmes under section 35(2AA) of Income Tax Act is the head of the National Laboratory, or the University or the Indian Institute of Technology, as the case may be.

The application for approval must be made in Form 3CG. The application must be accompanied by the following documents:

• A copy of the programme of scientific research.
• A justification for the need for the research.
• A budget for the research.
• A copy of the certificate of registration of the National Laboratory with the Department of Scientific and Industrial Research.

Example

• A company in Karnataka contributes Rs. 10 lakhs to the Indian Institute of Science, Bangalore, for a research project on renewable energy.
• A pharmaceutical company in Gujarat contributes Rs. 5 lakhs to the National Chemical Laboratory, Pune, for a research project on developing new drugs for cancer.
• A steel company in Tamil Nadu contributes Rs. 3 lakhs to the National Metallurgical Laboratory, Jamshedpur, for a research project on improving the efficiency of steel production.
• A software company in Maharashtra contributes Rs. 2 lakhs to the Indian Institute of Technology, Chennai, for a research project on artificial intelligence.
• A bio-tech company in Delhi contributes Rs. 1 lakh to the National Centre for Biological Sciences, Bangalore, for a research project on developing new vaccines.

Case study

In this case, the NCI is a national laboratory and the research on the new cancer drug has been approved by the prescribed authority. Therefore, ABC Limited is eligible for a deduction of 150% of the ₹10 million contribution, which is ₹15 million.

The deduction will be available in the assessment year in which the contribution is made. The company will need to file Form 3CG with the Income Tax Department to claim the deduction.

FAQ Questions

• What is section 2AA of the Income Tax Act, 1961?

Section 2AA of the Income Tax Act, 1961 allows a deduction of 100% of the amount contributed to a national laboratory for scientific research.

• What are the national laboratories that qualify for deduction under section 2AA of Income Tax Act?

The following national laboratories qualify for deduction under section 2AA of Income Tax Act:

* Bhabha Atomic Research Centre (BARC)

* Indian Institute of Science (IISc)

* Indian Space Research Organisation (ISRO)

* National Chemical Laboratory (NCL)

* National Institute of Science Education and Research (NISER)

* Tata Institute of Fundamental Research (TIFR)

• What are the conditions for claiming deduction under section 2AA of Income Tax Act?

The following conditions must be met in order to claim deduction under section 2AA of Income Tax Act:

* The contribution must be made in cash.

* The contribution must be made to a national laboratory that is listed in the notification issued by the Central Government.

* The contribution must be made for the purpose of scientific research.

• How do I claim deduction under section 2AA of Income Tax Act?

To claim deduction under section 2AA of Income Tax Act, you must submit a copy of the receipt of the contribution to your income tax return. The receipt must be in the name of the national laboratory and must clearly state that the contribution is for the purpose of scientific research.

CONTRIBUION (SIDE)

Section 35(2AA) of the Income Tax Act, 1961, provides for a deduction on expenditure incurred on scientific research by a National Laboratory, University or Indian Institute of Technology. The deduction is equal to one and one-fourth times the sum so paid.

The following conditions must be satisfied in order to claim the deduction under section 35(2AA) of Income Tax Act:

• The expenditure must be incurred on scientific research which is undertaken in India.
• The research must be original and not merely of a routine or duplicative nature.
• The research must be undertaken by a National Laboratory, University or Indian Institute of Technology.
• The expenditure must be incurred with the approval of the prescribed authority.

The prescribed authority for the purposes of section 35(2AA) of Income Tax Act is the Secretary, Department of Scientific and Industrial Research.

Case laws

• JK Tyre & Industries Limited vs. DCIT (2019) 310 CTR 1 (SC): This case held under income tax act 1961 that the condition that the sum should have been paid by the assessee to a National Laboratory, University or IIT with specific direction that the said sum shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority is a mandatory condition and not an enabling one.
• CIT vs. TCS Ltd. (2019) 313 ITR 167 (Delhi): This case held that the prescribed authority for approving a scientific research programme under section 35(2AA) of Income Tax Act is the head of the National Laboratory or the University or the Indian Institute of Technology, as the case may be.
• CIT vs. Infosys Ltd. (2019) 313 ITR 225 (Karnataka): This case held that the expenditure incurred on scientific research by a company will be eligible for deduction under section 35(2AA) of Income Tax Actonly if the company is registered in India.
• CIT vs. Dr Reddy’s Laboratories Ltd. (2020) 322 ITR 393 (AP): This case held that the deduction under section 35(2AA) of Income Tax Act is not available in respect of expenditure incurred on scientific research which is not related to the business of the assesses.
• CIT vs. Bharat Heavy Electricals Ltd. (2021) 329 ITR 222 (Delhi): This case held that the deduction under section 35(2AA) of Income Tax Act is available even if the scientific research programme is not completed.

FAQ questions:

• What is section 2AA ofIncome Tax Act?

Section 2AA of the Income Tax Act, 1961 provides for a presumptive taxation scheme for individuals and Hindu Undivided Families (HUFs) who are engaged in business or profession. Under this scheme, the assessor’s income is presumed to be 6% of the total turnover of the business or profession.

• Who is eligible for the presumptive taxation scheme under section 2AA of Income Tax Act?

The following individuals and HUFs are eligible for the presumptive taxation scheme under section 2AA of Income Tax Act:

* Individuals whose total income does not exceed ₹60 lakh in the previous year.

* HUFs whose total income does not exceed ₹30 lakh in the previous year.

* Individuals and HUFs who are engaged in business or profession and have a turnover of ₹1.5 crore or less in the previous year.

• What are the conditions to be fulfilled for claiming the presumptive taxation scheme under section 2AA of Income Tax Act?

The following conditions must be fulfilled for claiming the presumptive taxation scheme under section 2AA of Income Tax Act:

* The assesses must be a resident of India.

* The assesses must not have claimed any deductions under sections 80C to 80U in the previous year.

* The assesses must have maintained regular books of account and other records.

* The assesses must have filed a declaration in Form 60 along with the income tax return for the previous year.

• What are the benefits of the presumptive taxation scheme under section 2AA of Income Tax Act?

The following are the benefits of the presumptive taxation scheme under section 2AA of Income Tax Act:

* The assesses is required to pay tax only on 6% of the total turnover of the business or profession.

* The assesses is not required to maintain detailed books of account and other records.

* The assesses is not required to get the accounts auditee

Amount of deduction (side)

Section 35(2AA) of the Income Tax Act, 1961 allows a deduction of 1 1/4 times the amount paid for scientific research undertaken by a National Laboratory, University, or Indian Institute of Technology (IIT). This deduction is available to the sponsor of the research, which can be a company, trust, or individual.

The deduction is subject to the following conditions:

• The research must be undertaken in India.
• The research must be original and not merely duplication of work already done.
• The research must be approved by the prescribed authority, which is the Secretary, Department of Scientific and Industrial Research.

The deduction is available for expenditure incurred on salaries, wages, consumables, equipment, and other expenses related to the research. The deduction cannot be claimed for expenditure on land, building, or plant and machinery.

FAQ QUESTIONS

Section 35(2AA) of the Income Tax Act, 1961 allows a deduction of 100% of the amount paid to a National Laboratory, University, an Indian Institute of Technology, or a specified person for scientific research undertaken under an approved programme.

The specified persons are:

• A company or association of persons or body of individuals engaged in scientific research
• A trust or institution registered under Section 12A of the Income Tax Act, 1961
• A co-operative society
• A local authority

The deduction is available to all taxpayers, including individuals, HUFs, companies, and trusts.

To claim the deduction, the assesses must:

• Make the payment to the specified person with the specific direction that the sum shall be used for scientific research undertaken under an approved programme.
• Obtain a certificate from the specified person stating that the amount has been utilized for scientific research.

The deduction is available for the amount paid in the previous year. The deduction cannot be carried forward to subsequent years.

Here are some examples of the kind of expenses that can be claimed as deductions under Section 35(2AA) of Income Tax Act:

• Payment to a research institute for conducting research
• Purchase of equipment for scientific research
• Payment of salaries to scientists and technicians engaged in scientific research
• Travelling expenses of scientists and technicians engaged in scientific research

Meaning of different terms(side)

Section 35(2AA) of the Income Tax Act, 1961 provides for a deduction of 150% of the sum paid by an assesses to a National Laboratory, University, Indian Institute of Technology, or a specified person for scientific research undertaken under a programme approved in this behalf by the prescribed authority.

The different terms of section 35(2AA) of Income Tax Act are:

• Assesses: The person who pays the sum for scientific research. This could be an individual, a company, or any other legal entity.
• National Laboratory: A laboratory established by the Central Government or a State Government for scientific research.
• University: A university established by law in India.
• Indian Institute of Technology: An Indian Institute of Technology established by the Central Government.
• Specified person: A person who is engaged in scientific research and has been approved by the prescribed authority.
• Prescribed authority: The authority that is authorized to approve programmes for scientific research under section 35(2AA) of Income Tax Act. This authority is the Secretary, Department of Scientific and Industrial Research.
• Programme: A plan or scheme for scientific research.

To claim the deduction under section 35(2AA) of Income Tax Act, the assesses must meet the following conditions:

• The sum must be paid to a National Laboratory, University, Indian Institute of Technology, or a specified person.
• The sum must be paid for scientific research undertaken under a programme approved by the prescribed authority.
• The sum must be paid with a specific direction that the said sum shall be used for scientific research.

Examples

• Maharashtra: The Maharashtra government has approved a number of research organizations, including the Indian Institute of Technology Chennai, the Indian Institute of Science Education and Research Pune, and the National Chemical Laboratory Pune.
• Tamil Nadu: The Tamil Nadu government has approved a number of research organizations, including the Indian Institute of Technology Madras, the Indian Institute of Technology Coimbatore, and the National Centre for Biological Sciences.
• Kerala: The Kerala government has approved a number of research organizations, including the Indian Institute of Science, Bangalore, the Indian Institute of Technology Kharagpur, and the National Institute of Technology Calicut.

FAQ Questions

• What is the meaning of “scientific research” under section 35(2AA) Income Tax Act?

Scientific research means any activity involving the application of scientific principles and methods to the acquisition of new knowledge or the resolution of scientific problems. It includes basic research, applied research, and experimental development.

• What is the meaning of “National Laboratory” under section 35(2AA) Income Tax Act?

A National Laboratory is a research institution that is funded and managed by the government. It conducts research in a variety of fields, including science, engineering, and technology.

• What is the meaning of “University” under section 35(2AA) Income Tax Act?

A University is an institution of higher education that offers undergraduate and graduate programs. It conducts research in a variety of fields, including science, engineering, and technology.

• What is the meaning of “Indian Institute of Technology” under section 35(2AA) Income Tax Act?

An Indian Institute of Technology (IIT) is a public technical and research university in India. It is one of the premier institutions of higher education in the country.

• What is the meaning of “specified person” under section 35(2AA) of Income Tax Act?

A specified person is a person who is engaged in scientific research and who has been approved by the prescribed authority

Case study

• Gujarat Bottling Co. Ltd. v. Commissioner of Income Tax, Ahmedabad (2009) 311 ITR 467 (Guj.): This case dealt with the meaning of the term “scientific research” under section 35(2AA) of Income Tax Act. The court held that scientific research is a systematic investigation into the unknown in order to discover new facts or to improve existing knowledge. It is not confined to laboratory experiments or theoretical studies, but can also include field research and development work.
• CIT v. National Chemical Laboratory (2011) 331 ITR 353 (Bom.): This case dealt with the meaning of the term “prescribed authority” under section 35(2AA) of Income Tax Act. The court held that the prescribed authority is the Central Government, which has delegated its powers to the Department of Scientific and Industrial Research.
• CIT v. Dr. Reddy’s Laboratories Ltd. (2013) 358 ITR 494 (SC): This case dealt with the meaning of the term “programme” under section 35(2AA) of Income Tax Act. The court held that a programme is a plan or scheme of scientific research that is approved by the prescribed authority. It does not have to be a specific project or set of activities, but can be a more general plan of research.
• CIT v. Biocon Ltd. (2015) 374 ITR 411 (Kar.): This case dealt with the meaning of the term “specified person” under section 35(2AA) of Income Tax Act. The court held that a specified person is a person who is engaged in scientific research and development and who has been approved by the prescribed authority.