Income Tax 2025

Appearance

Expenditure on scientific research. ​

45(1) ​

A deduction shall be allowed for any expenditure, being in the nature of––

  • (a) capital expenditure, but not on acquisition of land, as such or as part of any property; or
  • (b) revenue expenditure; or
  • (c) both, incurred on scientific research related to the business of the assessee subject to provisions of this section.

45(2) ​

  • (a) A deduction shall be allowed under sub-section (1) in respect of the aggregate of expenditure (not being in the nature of capital expenditure), related to business, incurred on— (i) salary to an employee engaged in such scientific research; or (ii) purchase of materials used in such scientific research, where such expenditure is incurred within three years immediately preceding the commencement of business, to the extent certified by the prescribed authority as incurred on such research, expenditure shall be deemed to have been incurred in the tax year in which the business is commenced.
  • (b) For the purposes of sub-section (1), the aggregate of capital expenditure incurred within three years immediately preceding the commencement of business shall be deemed to have been incurred in the tax year in which the business is commenced.
  • (c)(i) A deduction shall be allowed under sub-section (1), in respect of any expenditure incurred (not being expenditure in the nature of cost of any land or building) by a company engaged in the business of— (A) bio-technology; or (B) manufacture or production of any article or thing, which is not specified in Schedule XIII, on in-house research and development facility as approved by the prescribed authority, subject to the conditions and manner, as prescribed; (ii) No deduction shall be allowed under this clause to a company approved under sub-section (3)(b)(ii); (iii) No deduction shall be allowed in respect of the expenditure mentioned in sub-clause (i) under any other provision of this Act; (iv) The expenditure under sub-clause (i) shall be allowed subject to such conditions and on furnishing of documents in such form and manner, as prescribed;
  • (d) For the purposes of clause (c), expenditure on “scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central Act or State Act or Provincial Act and filing an application for a patent under the Patents Act, 1970.

45(3) ​

A deduction shall be allowed for any sum, paid to—

  • (a)(i) a research association having the object of undertaking scientific research or to a University, college or institution to be used for scientific research; or (ii) a research association having the object of undertaking research in social science or statistical research or to a University, college or institution to be used for research in social science or statistical research;
  • (b) a company which is–– (i) registered in India having the main object of scientific research and development; and (ii) approved by such authority, in such manner and subject to such conditions, as prescribed;
  • (c)(i) a national laboratory; or (ii) a University; or (iii) an Indian Institute of Technology; or (iv) a specified person, with a specific direction that the said sum shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority.

45(4) ​

For the purposes of sub-section (3),––

  • (a) the expenditure shall be allowed subject to such conditions and on furnishing of documents in such form and manner, as prescribed; and
  • (b) in respect of clause (a) of the said sub-section, only such association, University, college or other institution shall be eligible for deduction, which for the time being is approved in the manner and subject to such conditions, as prescribed, and is specified by the Central Government, by notification.

45(5) ​

The deduction for any sum under sub-section (3) shall not be denied merely on the ground that subsequent to the payment of such sum by the assessee, the approval granted to such entities or the programme undertaken by entities as mentioned in sub-section(3)(c), has been withdrawn.

45(6) ​

Where a deduction is allowed for any tax year under this section in respect of expenditure, represented wholly or partly by an asset, no deduction shall be allowed under section 33(3) for the same or any other tax year in respect of that asset.

45(7) ​

The provisions of section 33(11) in respect of depreciation shall apply in relation to deductions allowable for capital expenditure under sub-section (1).

45(8) ​

No deduction in respect of the sum mentioned in sub-section (3)(c) shall be allowed under any other provision of this Act.

45(9) ​

If any question arises under this section as to whether, and if so, to what extent any activity constitutes or constituted scientific research, or any asset is or was being used, for scientific research, the Board shall refer the question to—

  • (a) the Central Government, when such question relates to any activity under sub-section (3)(a), and its decision shall be final;
  • (b) the prescribed authority, when such question relates to any other activity, whose decision shall be final.

45(10) ​

When an amalgamating company, in a scheme of amalgamation, sells or otherwise transfers to the amalgamated company (being an Indian company) any asset representing capital expenditure on scientific research, the provisions of this section shall apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not so sold or otherwise transferred the asset.

45(11) ​

In this section,—

  • (a) “National Laboratory” means a scientific laboratory functioning at the national level under the aegis of the Indian Council of Agricultural Research, the Indian Council of Medical Research, the Council of Scientific and Industrial Research, the Defence Research and Development Organisation, the Department of Electronics, the Department of Bio-Technology or the Department of Atomic Energy and which is approved as a National Laboratory by such authority and in such manner, as prescribed;
  • (b) “specified person” means such person approved by the prescribed authority;
  • (c) “land” includes any interest in land.
Explanation

Section Summary: ​

Section 45 of the Income Tax Act provides deductions for expenditures incurred on scientific research related to the taxpayer's business. It covers both capital and revenue expenditures, with specific conditions and exclusions. The section also allows deductions for payments made to approved research institutions, universities, and laboratories for scientific research. The aim is to encourage businesses to invest in research and development (R&D) by offering tax benefits.

Key Changes: ​

  1. Expanded Scope of Deductions: The section now explicitly includes deductions for clinical drug trials, regulatory approvals, and patent filings in the pharmaceutical sector under the definition of "scientific research."
  2. Pre-commencement Expenditure: Deductions are now allowed for scientific research expenses incurred up to three years before the business commences, provided they are certified by the prescribed authority.
  3. In-House R&D Facilities: Companies in biotechnology or manufacturing (excluding items listed in Schedule XIII) can claim deductions for in-house R&D facility expenses, subject to approval and conditions.
  4. Amalgamation Provisions: The section clarifies that deductions for scientific research assets transferred during amalgamation will continue to apply to the amalgamated company.
  5. Finality of Decisions: Disputes regarding what constitutes scientific research are to be resolved by the Central Government or a prescribed authority, whose decisions are final.

Practical Implications: ​

  1. For Businesses: Companies engaged in R&D can claim deductions for both capital and revenue expenditures, including salaries for research staff and material costs. This incentivizes innovation and reduces taxable income.
  2. Pharmaceutical Companies: Expenditures on clinical trials, regulatory approvals, and patent filings are now explicitly deductible, reducing the tax burden for drug development.
  3. Startups and New Businesses: Pre-commencement R&D expenses (up to three years before starting operations) can be claimed as deductions in the year the business begins, easing cash flow pressures.
  4. Compliance Requirements: Taxpayers must ensure that expenditures are certified by the prescribed authority and meet the conditions outlined in the section.
  5. Amalgamated Companies: Companies acquiring R&D assets through amalgamation can continue to claim deductions as if they were the original owners.

Critical Concepts: ​

  1. Scientific Research: Includes activities aimed at acquiring new knowledge or creating new products/processes. For pharmaceuticals, it explicitly includes clinical trials, regulatory approvals, and patent filings.
  2. Capital Expenditure: Spending on assets like equipment or facilities used for research, excluding land.
  3. Revenue Expenditure: Day-to-day operational costs like salaries and materials used in research.
  4. Prescribed Authority: A government-approved body responsible for certifying eligible expenditures and approving research programs.
  5. National Laboratory: A government-recognized lab under organizations like CSIR, DRDO, or ICMR, approved for scientific research.

Compliance Steps: ​

  1. Documentation: Maintain detailed records of all R&D expenditures, including salaries, material costs, and capital expenses.
  2. Certification: Obtain certification from the prescribed authority for pre-commencement and in-house R&D facility expenses.
  3. Approval for Payments: Ensure payments to research institutions, universities, or laboratories are made to approved entities and are used for approved programs.
  4. Form and Manner: Submit required documents in the prescribed format to claim deductions.
  5. Avoid Double Deductions: Ensure that the same expenditure is not claimed under multiple sections of the Income Tax Act.

Examples: ​

  1. Pre-commencement Expenditure: A biotech startup incurs ₹50 lakh on R&D three years before starting operations. If certified by the prescribed authority, this amount can be deducted in the year the business commences.
  2. In-House R&D Facility: A manufacturing company spends ₹1 crore on setting up an in-house R&D facility. If approved, this expenditure can be claimed as a deduction, reducing taxable income.
  3. Pharmaceutical Clinical Trials: A drug company spends ₹2 crore on clinical trials and ₹50 lakh on patent filings. Both amounts are deductible under this section.
  4. Amalgamation: Company A, engaged in R&D, merges with Company B. The R&D assets transferred to Company B remain eligible for deductions under this section.

This section provides significant tax benefits for businesses investing in scientific research, promoting innovation and development across industries.