Section 35(2)(iv)

Section 35(2)(iv) — the law in short

What the courts have decided on section 35(2)(iv), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Escorts Ltd v Union of India Supreme CourtHelps department
  I wrote off the whole cost of a laboratory building and its equipment under the scientific research provision. Can I also take depreciation on the same assets in later years, and can the department deny it for years before 1980 using an amendment made in 1980?
  No to the first, and yes to the second, and the reason for the second is the answer to the first. Section 35(2)(iv) as substituted by the Finance (No.2) Act 1980, with retrospective effect from 1 April 1962, provides that where a deduction is allowed for any previous year under section 35 in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clauses (i), (ii) and (iii) of section 32(1) for the same or any other previous year in respect of that asset. The petitioners said that was a new burden imposed on closed years and attacked it under Articles 14, 19(1)(g) and 300-A. The Supreme Court dismissed the petitions. It held that even before the 1980 amendment the Act did not permit depreciation on the cost of a capital asset acquired for scientific research to the extent that cost had been written off under the scientific research provision, so the amendment effected no change at all except to set out more clearly and categorically what the provision said even earlier. Being clarificatory, it took away no vested right. The reason the pre-amendment law was already to that effect is the sentence the case is now known for: there is an axiom, unwritten but fundamental, that no legislature could have intended a double deduction for the same business outgoing, and if it is intended it will be clearly expressed.
• CIT v Talisma Corporation Pvt Ltd — software development spend is capital expenditure on scientific research deductible under s.35(1)(iv) High CourtHelps taxpayerNo later treatment found
  The Assessing Officer has capitalised my client's product development spend and given it only depreciation. Can we still get it as scientific research expenditure, and can the alternative claim be raised for the first time before the Commissioner (Appeals)?
  The Karnataka High Court held that expenditure on further developing and improving a software product is expenditure on scientific research related to the business, and that even if it is capital in nature it is to be deducted under s.35(1)(iv); it answered both questions of law in favour of the assessee and dismissed the Revenue's appeal. The Court reached that conclusion through the definition in s.43(4), which makes references to scientific research related to a business include any scientific research which may lead to or facilitate an extension of that business. The alternative claim had been raised for the first time before the appellate authority and not before the Assessing Officer, and the Court did not treat that as an obstacle.
• Statutory position — s.35(1)(i): revenue expenditure on scientific research needs no approval and is allowed in full CBDT Circulars & InstructionsCuts both ways
  The DSIR would not certify part of my client's research spend. Is there a provision that allows it without any approval at all?
  Yes. Section 35(1)(i) allows, in computing business income, "any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business". It carries no approval requirement of any kind — no DSIR approval of a facility, no Central Government approval of an institution — and no weighting: the deduction is the expenditure, at a hundred per cent. It is the natural fallback wherever a weighted claim under s.35(2AB) is cut down to the figure in Form 3CL, and since AY 2021-22 it gives exactly the same number as s.35(2AB) for revenue expenditure, because the s.35(2AB) proviso has taken that deduction down to the expenditure incurred.
• Statutory position — the s.35(2AB) and s.35(2AA) weighting: two hundred, then one hundred and fifty, then one hundred per cent CBDT Circulars & InstructionsCuts both ways
  What weighting do I put on my client's in-house R&D spend, and from which assessment year did each rate change?
  For s.35(2AB) the weighting was two hundred per cent, fell to one hundred and fifty per cent from AY 2018-19, and falls to a hundred per cent — that is, no weighting at all — for expenditure incurred in a previous year relevant to an assessment year beginning on or after 1 April 2021. The current text reads "a deduction of a sum equal to one and one-half times of the expenditure so incurred", cut down by a proviso which for AY 2021-22 onwards makes the deduction "equal to the expenditure so incurred". Section 35(2AA), for sums paid to a National Laboratory, University, Indian Institute of Technology or specified person for approved research, follows the same shape: one and one-half times the sum paid, reduced by a second proviso to the sum so paid for an assessment year beginning on or after 1 April 2021.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.