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 workshop
• 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 Act

FAQ 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