Section 35(2AB) of the Income Tax Act, 1961 allows a weighted deduction of 150% of the amount of expenditure incurred by a company on in-house research and development as approved by the prescribed authority. The prescribed authority is the Secretary, Department of Scientific and Industrial Research (DSIR), Government of India.

The deduction is available to a company that is engaged in the business of biotechnology or in any business of manufacture or production of any article or thing, other than those listed in the Eleventh Schedule to the Act under Income Tax Act.

The expenditure that is eligible for deduction under section 35(2AB) under Income Tax Act includes:

• Salaries and wages paid to employees engaged in scientific research
• Expenses on materials, equipment and consumables used in scientific research
• Expenses on travel, training and conferences related to scientific research
• Expenses on patents, copyrights and other intellectual property rights acquired in the course of scientific research
• Expenses on consultancy fees paid to experts in scientific research

The expenditure must be incurred on an in-house research and development facility that is exclusively used for scientific research. The facility must be approved by the DSIR.

The deduction is available for a period of five years from the date on which the research and development facility is approved by the DSIR.

The following are some of the conditions that must be met in order to claim the deduction under section 35(2AB) under Income Tax Act:

• The company must have entered into an agreement with the DSIR for cooperation in the research and development facility.
• The company must maintain separate books of account for each approved research facility.
• The company must submit an annual report to the DSIR on the activities carried out in the research and development facility.

EXAMPLES ON HOUSE RESEARCH AND DEVPLOMENT [SEC.35(2AB)]

Sure, here are some examples of in-house research and development (R&D) activities that are eligible for deduction under Section 35(2AB) of the Income Tax Act1961 in India:

• Development of new products or processes
• Improvement of existing products or processes
• Testing of new products or processes
• Pilot plant studies
• Design and development of software
• Conducting market research
• Training of R&D personnel
• Acquiring R&D equipment and machinery
• Acquiring patents, copyrights, and other intellectual property

The specific state in India where the R&D activities are carried out does not matter for the purposes of Section 35(2AB) under Income Tax Act. However, the activities must be carried out by the assesses itself, and they must be related to the assesses business.

Here are some specific examples of in-house R&D activities that have been approved by the tax authorities in India:

• A pharmaceutical company developing a new drug
• A software company developing a new software product
• A manufacturing company developing a new production process
• An automobile company testing a new prototype vehicle
• A telecommunications company conducting market research on a new product

The deduction under Section 35(2AB) under Income Tax Act is available for both revenue and capital expenditure incurred on in-house R&D activities. The deduction is limited to 150% of the expenditure incurred.

The assesses must obtain a certificate from the prescribed authority in order to claim the deduction under Section 35(2AB) under Income Tax Act. The prescribed authority is the Director-General (Income-tax Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research, Government of India.

FAQ QUESTIONS

• What is Section 35(2AB) of the Income Tax Act, 1961?

Section 35(2AB) of the Income Tax Act, 1961 allows a deduction of 150% of the expenditure incurred on scientific research on in-house research and development facility in a company engaged in the business of manufacturing or production of articles or things.

• What are the conditions for claiming deduction under Section 35(2AB) under Income Tax Act?

The following conditions must be satisfied in order to claim deduction under Section 35(2AB) under Income Tax Act:

* The company must be engaged in the business of manufacturing or production of articles or things.

* The expenditure must be incurred on scientific research on in-house research and development facility.

* The research must be undertaken for the purpose of developing new products or processes or for improving existing products or processes.

* The research must be carried out by the company’s own employees or by a research association approved by the Central Government.

• Which states in India offer incentives for R&D under Income Tax Act?

A number of states in India offer incentives for R&D, such as:

* Andhra Pradesh: The Andhra Pradesh R&D Policy provides a capital subsidy of 25% for setting up a new R&D facility and a recurring grant of 10% of the annual expenditure on R&D.

* Karnataka: The Karnataka Innovation Policy provides a capital subsidy of 25% for setting up a new R&D facility and a recurring grant of 15% of the annual expenditure on R&D.

* Telangana: The Telangana R&D Policy provides a capital subsidy of 35% for setting up a new R&D facility and a recurring grant of 20% of the annual expenditure on R&D.

* Tamil Nadu: The Tamil Nadu R&D Policy provides a capital subsidy of 20% for setting up a new R&D facility and a recurring grant of 10% of the annual expenditure on R&D.

• How can I claim deduction under Section 35(2AB) under Income Tax Act?

The deduction under Section 35(2AB) can be claimed in the year in which the expenditure is incurred. The taxpayer must submit a statement to the tax authorities, along with supporting documents, in order to claim the deduction.

CASE LAWS QUESTIONS

• In Bharat Biotech International Ltd. v. Department of Income Tax (2013) 358 ITR 289 (SC), the Supreme Court held that a company engaged in the business of biotechnology is eligible for deduction under Section 35(2AB) of Income Tax Act even if it does not have a separate in-house R&D facility. The Court held that the requirement of a separate in-house R&D facility is only for the purpose of obtaining approval from the prescribed authority, and does not affect the eligibility of the company for deduction under Section 35(2AB) of Income Tax Act.
• In Biocon Ltd. v. Commissioner of Income Tax (2015) 375 ITR 329 (Kar.), the Karnataka High Court held that the expenditure incurred on training of employees in R&D activities is eligible for deduction under Section 35(2AB)  ofIncome Tax Act. The Court held that such expenditure is incurred for the purpose of carrying out R&D activities, and is therefore, a necessary expense.
• In Dr Reddy’s Laboratories Ltd. v. Commissioner of Income Tax (2016) 384 ITR 230 (AP), the Andhra Pradesh High Court held that the expenditure incurred on payments to consultants for providing technical assistance in R&D activities is eligible for deduction under Section 35(2AB) of Income Tax Act. The Court held that such expenditure is incurred for the purpose of carrying out R&D activities, and is therefore, a necessary expense.

These are just a few of the case laws on the applicability of Section 35(2AB) of the Income Tax Act. The specific provisions of the Act and the facts of each case will need to be considered in order to determine whether a company is eligible for deduction under this section.

In addition to the case laws mentioned above, there are a few other important points to note about Section 35(2AB) of the Income Tax Act:

• The deduction is available only to a company.
• The company must be engaged in the business of biotechnology or in the manufacture or production of any article or thing (other than those specified in the Eleventh Schedule).
• The research and development facility must be approved by the prescribed authority.
• The company must maintain separate books of account for each approved research facility.
• The deduction is available for expenditure incurred on both capital and revenue nature, except the cost of land and building.

The deduction is available at the rate of 150% of the expenditure incurred