Section 45(2) of the Income Tax Act, 2025 provides a deduction for expenditure on in-house research and development facility by companies engaged in the business of bio-technology or manufacture or production of any article or thing not specified in Schedule XIII【29†L16-L17】. Understanding the approval process and compliance requirements is essential for companies seeking to claim this deduction.
Scope of the Deduction
Eligible Companies
The deduction under Section 45(2) is available to companies engaged in the business of【29†L16-L17】:
- Bio-technology: Companies engaged in bio-technology business
- Manufacture or production: Companies engaged in manufacture or production of any article or thing not specified in Schedule XIII
Nature of Expenditure
The deduction is available for expenditure on scientific research incurred (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority【29†L18-L19】.
Approved Facility
The facility must be approved by the prescribed authority. For the purposes of Section 45(2), the prescribed authority is the Secretary, Department of Scientific and Industrial Research, Government of India【29†L22-L23】.
Approval Process
Application
The application for entering into an agreement with the prescribed authority shall be made by a company in Form No. 11【29†L25】. The application should be complete in all respects and accompanied by relevant documents.
Scrutiny
The prescribed authority shall, if satisfied that the conditions mentioned in Section 45(2) are fulfilled, pass an order in writing in Form No. 14, approving the facility within four months from the end of the month in which application is received【29†L27-L29】.
Rejection
Where an application is rejected, a reasonable opportunity of being heard shall be granted to the company【29†L30-L31】. A copy of the order shall be furnished to the Chief Commissioner of Income-tax having jurisdiction over such company【29†L32-L33】.
Conditions for Approval
Nature of Facility
The facility should not relate purely to【29†L38-L39】:
- Market research
- Sales promotion
- Quality control
- Testing
- Commercial production
- Style changes
- Routine data collection
- Activities of similar nature
Separate Books of Account
The company shall maintain separate books of account for each approved facility which shall be audited annually【29†L50-L51】.
Audit Report
A report of audit in Form No. 13 shall be furnished electronically to the Secretary, Department of Scientific and Industrial Research on or before the due date specified in section 263(1)(c) for furnishing the return of income, for each succeeding tax year【29†L52-L54】.
Reflection in Financial Statements
The company shall ensure that the capital and revenue expenditure on in-house research and development facility is reflected in the schedules or notes to accounts in the audited financial statement of the company prepared for the purposes of its annual report and for the purposes of computation of income-tax【29†L59-L61】.
Utilisation of Assets
The assets acquired by the approved facility shall be utilised only for the approved purpose and shall not be disposed of without the approval of the Secretary, Department of Scientific and Industrial Research【29†L62-L64】.
Reporting Requirements
Annual Audit Report
The company shall furnish a report of audit in Form No. 13 for each succeeding tax year【29†L52-L54】. The report shall be furnished electronically to the Secretary, Department of Scientific and Industrial Research.
Attachment with Return
The company shall attach a copy of the audited annual account with the return of income to be filed under section 263(1)(a) for each tax year【29†L56-L57】.
Report to Income-tax Authorities
The prescribed authority shall furnish its report electronically in Part A of Form No. 12 in relation to the approval of in-house research and development facility, and in Part B of Form No. 12 quantifying the expenditure incurred on in-house research and development facility by the company during the tax year【29†L41-L45】.
Consequences of Non-Compliance
Withdrawal of Approval
The approval may be withdrawn if the company fails to comply with any of the conditions. The prescribed authority shall furnish a report to the Chief Commissioner of Income-tax having jurisdiction over the company.
Disallowance of Deduction
If the approval is withdrawn, the deduction claimed in any tax year may be disallowed.
Expert Legal Guidance
Understanding the in-house R&D deduction and the approval process is essential for companies engaged in research and development. Anuj Desai & Associates provides expert advisory services on Direct Tax Code compliance, helping companies navigate the approval process and ensure compliance with all conditions.