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What is Section 35(2AB) of the Income Tax Act?

The Income Tax Act, 1961 is the principal legislation that governs the taxation of income in India. Section 35(2AB) is a provision that provides for a weighted deduction for businesses that are engaged in research and development (R&D) activities. The section was introduced by the Finance Act, 2016, and is applicable from the assessment year 2017-18 onwards.

Eligibility Criteria for claiming deduction under Section 35(2AB)

To claim the deduction under Section 35(2AB), a business should fulfill the following criteria:

1. The business should be engaged in the business of manufacturing or production of any article or thing.
2. The business should have incurred expenditure on scientific research in a laboratory approved by the Department of Scientific and Industrial Research (DSIR).
3. The business should have obtained a certificate from the prescribed authority in Form 3CL.
4. The business should not have claimed any deduction under any other provision of the Income Tax Act in respect of the expenditure incurred on scientific research.

Quantum of Deduction under Section 35(2AB)

The deduction under Section 35(2AB) is available at the rate of 150% of the expenditure incurred on scientific research. However, the expenditure should have been incurred on or after 1st April 2017.

Carry forward and set-off of unabsorbed deduction under Section 35(2AB)

If the deduction claimed under Section 35(2AB) exceeds the total income of the business for the relevant assessment year, the unabsorbed deduction can be carried forward for eight assessment years immediately succeeding the relevant assessment year. The unabsorbed deduction can be set-off against the business’s income for those years.

The benefits of Section 35(2AB) are significant for businesses engaged in R&D activities. Some of the key benefits of this provision are:

1. Increased Deduction: Under Section 35(2AB), businesses can claim a deduction of 150% of the expenditure incurred on scientific research. This is higher than the standard deduction available under Section 37(1) of the Income Tax Act.
2. Encourages Innovation: The provision aims to encourage businesses to invest in R&D activities, which can lead to innovation and the development of new products or processes. This, in turn, can improve the competitiveness of Indian businesses in the global market.
3. Lower Tax Liability: The higher deduction under Section 35(2AB) can significantly reduce the tax liability of businesses engaged in R&D activities.
4. Carry Forward of Unabsorbed Deduction: The provision allows businesses to carry forward the unabsorbed deduction for eight assessment years, which can be set-off against the business’s income in those years. This provides additional flexibility and can help businesses manage their tax liabilities.

 Expenditure that qualifies for deduction under Section 35(2AB)

To claim the deduction under Section 35(2AB), businesses should incur expenditure on scientific research in a laboratory approved by the Department of Scientific and Industrial Research (DSIR). The expenditure should be on the following activities:

1. In-house R&D: The expenditure incurred on in-house research and development activities qualifies for deduction under Section 35(2AB).
2. Sponsored R&D: The expenditure incurred on sponsored research and development activities also qualifies for deduction under this provision. However, the sponsor should not have any interest in the results of the research.
3. R&D in collaboration with a university or an Indian Institute of Technology (IIT): The expenditure incurred on R&D activities in collaboration with a university or an IIT also qualifies for deduction under this provision.

Procedure for claiming deduction under Section 35(2AB)

To claim the deduction under Section 35(2AB), businesses should follow the following procedure:

1. Obtain Approval from DSIR: The business should obtain approval from the Department of Scientific and Industrial Research (DSIR) for the laboratory where the scientific research is conducted.
2. Obtain Certificate in Form 3CL: The business should obtain a certificate from the prescribed authority in Form 3CL.
3. Maintain Books of Accounts: The business should maintain books of accounts and other documents to support the expenditure incurred on scientific research.
4. Claim Deduction in Income Tax Return: The business should claim the deduction under Section 35(2AB) in its income tax return.

Conclusion

Section 35(2AB) of the Income Tax Act is a beneficial provision for businesses engaged in scientific research. It provides a higher deduction for expenditure incurred on R&D activities and encourages innovation. However, businesses should ensure that they fulfill all the eligibility criteria and comply with the necessary formalities to claim the deduction under this provision. By promoting R&D activities, the provision aims to boost the competitiveness of Indian businesses and contribute to the growth of the Indian economy.

Read more useful content:

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Frequently Asked Questions (FAQs)

1. What is Section 35(2AB) of the Income Tax Act? Section 35(2AB) of the Income Tax Act provides for a weighted deduction for businesses that are engaged in research and development (R&D) activities.
2. Who is eligible to claim the deduction under Section 35(2AB)? Businesses engaged in the business of manufacturing or production of any article or thing and have incurred expenditure on scientific research in a laboratory approved by the Department of Scientific and Industrial Research (DSIR) are eligible to claim the deduction under Section 35(2AB).
3. What is the quantum of deduction available under Section 35(2AB)? The deduction under Section 35(2AB) is available at the rate of 150% of the expenditure incurred on scientific research.
4. What is the procedure for claiming the deduction under Section 35(2AB)? To claim the deduction under Section 35(2AB), businesses should obtain approval from the Department of Scientific and Industrial Research (DSIR) for the laboratory where the scientific research is conducted, obtain a certificate in Form 3CL from the prescribed authority, maintain books of accounts and other documents to support the expenditure incurred on scientific research, and claim the deduction in their income tax return.
5. Can businesses carry forward the unabsorbed deduction under Section 35(2AB)? Yes, businesses can carry forward the unabsorbed deduction for eight assessment years immediately succeeding the relevant assessment year, and set-off the same against the business’s income in those years.
6. What type of expenditure qualifies for deduction under Section 35(2AB)? Expenditure incurred on in-house research and development activities, sponsored research and development activities, and research and development activities in collaboration with a university or an Indian Institute of Technology (IIT) qualify for deduction under Section 35(2AB).
7. When did Section 35(2AB) become effective? Section 35(2AB) became effective from the assessment year 2017-18 onwards.
8. What are the benefits of Section 35(2AB) for businesses? The benefits of Section 35(2AB) for businesses are increased deduction, encouragement for innovation, lower tax liability, and carry forward of unabsorbed deduction.