Section 35(1)(ii) of the Income Tax Act is an important provision that allows businesses to claim deductions for any expenditure incurred on scientific research. This provision encourages businesses to invest in scientific research, which can help drive innovation and growth in the economy.
In this blog, we will take a closer look at Section 35(1)(ii) of the Income Tax Act, and discuss its provisions, benefits, and limitations.
Introduction to Section 35(1)(ii)
Section 35(1)(ii) of the Income Tax Act allows businesses to claim deductions for any expenditure incurred on scientific research. This provision covers both capital and revenue expenditure, and the deduction can be claimed in the year in which the expenditure is incurred.
What is Scientific Research?
Scientific research refers to any systematic investigation or study that seeks to discover new knowledge or improve existing knowledge in a particular field. This can include research in fields such as science, technology, engineering, medicine, and social sciences.
Expenditure that qualifies for deduction under Section 35(1)(ii)
The following expenditure can qualify for deduction under Section 35(1)(ii):
- Expenditure incurred on scientific research
- Expenditure incurred on the acquisition of patents or rights to use patents
- Expenditure incurred on the development of new products or processes
- Expenditure incurred on the acquisition of new technology or technical know-how
- Expenditure incurred on the expansion or modernization of existing scientific research facilities
Benefits of Section 35(1)(ii)
Section 35(1)(ii) offers several benefits to businesses that invest in scientific research. These benefits include:
- Tax savings: Businesses can claim deductions for any expenditure incurred on scientific research, which can help reduce their tax liability.
- Encourages innovation: The provision encourages businesses to invest in scientific research, which can help drive innovation and growth in the economy.
- Improves competitiveness: Investing in scientific research can help businesses develop new products and processes that can improve their competitiveness in the market.
Limitations of Section 35(1)(ii)
While Section 35(1)(ii) offers several benefits, there are some limitations to the provision. These limitations include:
- Restrictions on deductions: Deductions can only be claimed for expenditure incurred on scientific research that is approved by the prescribed authority.
- Limited scope: The provision only covers expenditure incurred on scientific research, and does not cover expenditure incurred on other types of research.
Approval of Scientific Research
As mentioned earlier, deductions can only be claimed for expenditure incurred on scientific research that is approved by the prescribed authority. The prescribed authority is the Department of Scientific and Industrial Research (DSIR), which is under the Ministry of Science and Technology.
To claim a deduction under Section 35(1)(ii), the business must obtain approval from the DSIR for the scientific research being conducted. The DSIR evaluates the research proposal and assesses its scientific merit and potential benefits to the industry and the economy.
Once the DSIR approves the research, the business can claim a deduction for the expenditure incurred on that research. The deduction can be claimed for up to 150% of the expenditure incurred on scientific research. This means that if a business incurs Rs. 1 lakh on scientific research, it can claim a deduction of up to Rs. 1.5 lakhs.
Capital and Revenue Expenditure
Section 35(1)(ii) covers both capital and revenue expenditure incurred on scientific research. Capital expenditure refers to expenditure incurred on the acquisition of assets, such as land, buildings, machinery, and equipment. Revenue expenditure, on the other hand, refers to expenditure incurred on day-to-day operations, such as salaries, rent, and utilities.
The deduction for capital expenditure can be claimed over a period of time through depreciation, while the deduction for revenue expenditure can be claimed in the year in which it is incurred.
Tax Incentives for Start-ups
The government has also introduced tax incentives for start-ups that are engaged in scientific research. Under Section 80-IAC of the Income Tax Act, start-ups can claim a deduction of 100% of their profits for the first three years of operation, provided they are engaged in eligible business activities, including scientific research.
The government has also set up several funding schemes and grants to support scientific research and innovation in the country. These include the Technology Development Board, the Biotechnology Industry Partnership Programme, and the Council of Scientific and Industrial Research (CSIR), among others.
Eligible Businesses
Section 35(1)(ii) is available to all businesses, whether they are engaged in manufacturing, trading, or service activities. The provision applies to both domestic and foreign companies operating in India.
To be eligible for deduction under this provision, the business must be engaged in scientific research. This can include research in any field, including natural sciences, social sciences, engineering, and technology.
The business must also maintain proper records and documentation of the expenditure incurred on scientific research. This includes records of the nature and purpose of the research, the amount of expenditure incurred, and the approvals obtained from the prescribed authority.
Exclusions from Deduction
Section 35(1)(ii) excludes certain types of expenditure from the deduction. These include:
- Expenditure incurred on the acquisition of land or buildings
- Expenditure incurred on the acquisition of plant or machinery
- Expenditure incurred on the acquisition of patents or rights to use patents from a related party
- Expenditure incurred on the acquisition of any asset that is eligible for depreciation
If the expenditure falls under any of these categories, it will not be eligible for deduction under Section 35(1)(ii).
Procedure for Claiming Deduction
To claim a deduction under Section 35(1)(ii), the business must file its income tax return and provide details of the expenditure incurred on scientific research. The business must also provide the approval received from the prescribed authority for the research.
The income tax authorities may also conduct a review of the records and documentation maintained by the business to ensure that the expenditure claimed is eligible for deduction under Section 35(1)(ii).
Conclusion
In conclusion, Section 35(1)(ii) of the Income Tax Act is an important provision that offers several benefits to businesses that invest in scientific research. The provision encourages innovation and growth in the economy, and can help businesses improve their competitiveness in the market. However, businesses should be aware of the limitations of the provision and ensure that they comply with the requirements set out by the prescribed authority to claim deductions for expenditure incurred on scientific research.
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Frequently Asked Questions (FAQs)
- What is Section 35(1)(ii) of the Income Tax Act?
Section 35(1)(ii) is a provision in the Income Tax Act that allows businesses to claim a deduction for expenditure incurred on scientific research.
2. Who is eligible to claim a deduction under Section 35(1)(ii)?
Any business engaged in scientific research is eligible to claim a deduction under this provision, subject to approval from the prescribed authority.
3. What types of expenditure are eligible for deduction under Section 35(1)(ii)?
Expenditure incurred on scientific research is eligible for deduction under this provision, including both revenue and capital expenditure.
4. What is the maximum deduction that can be claimed under Section 35(1)(ii)?
The maximum deduction that can be claimed under this provision is 150% of the expenditure incurred on scientific research.
5. Who is the prescribed authority for approving scientific research under Section 35(1)(ii)?
The prescribed authority is the Department of Scientific and Industrial Research (DSIR), which is under the Ministry of Science and Technology.
6. What are the exclusions from deduction under Section 35(1)(ii)?
Expenditure incurred on the acquisition of land or buildings, plant or machinery, patents, or any depreciable asset is excluded from deduction under this provision.
7. Can start-ups claim a deduction under Section 35(1)(ii)?
Yes, start-ups engaged in scientific research can claim a deduction under this provision, subject to approval from the prescribed authority.
8. What records and documentation are required to claim a deduction under Section 35(1)(ii)?
Businesses must maintain records and documentation of the nature and purpose of the research, the amount of expenditure incurred, and the approvals obtained from the prescribed authority.
9. Can a business claim a deduction for expenditure incurred on scientific research outside India?
No, only expenditure incurred on scientific research conducted in India is eligible for deduction under this provision.
10. What are the penalties for non-compliance with the requirements of Section 35(1)(ii)?
Failure to comply with the requirements of this provision can result in the denial of deduction and penalties, including interest and penalties for under-reporting of income.
