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 specified businesses. The approval process is governed by strict timelines and conditions that companies must understand and comply with.
The Prescribed Authority
For the purposes of Section 45(2), the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research, Government of India【29†L22-L23】. This authority is responsible for approving the in-house research and development facility and for monitoring compliance.
Role of the Prescribed Authority
The prescribed authority shall【29†L41-L45】:
- Furnish its report electronically in Part A of Form No. 12 in relation to the approval of in-house research and development facility
- Furnish its report 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
The Four-Month Timeline
Application to Approval
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】.
Timeline Calculation
The four-month timeline is calculated from the end of the month in which the application is received. For example:
- Application received in January: Approval must be passed by end of May
- Application received in March: Approval must be passed by end of July
Consequences of Delay
If the prescribed authority fails to pass an order within the four-month timeline, the application may be deemed to have been approved. However, this is not explicitly stated in the rules and may be subject to interpretation.
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
Agreement for Co-operation
The company shall enter into an agreement with the prescribed authority for co-operation in research and development facility【29†L23-L24】. The agreement shall specify the terms and conditions for co-operation.
Maintenance of 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【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
Report of Audit
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.
Audited Annual Account
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 by Prescribed Authority
The prescribed authority shall furnish its report in Form No. 12【29†L41-L45】:
- Part A: In relation to the approval of in-house research and development facility
- Part B: Quantifying the expenditure incurred during the tax year
Withdrawal of Approval
Grounds for Withdrawal
The approval may be withdrawn if:
- The company fails to comply with any of the conditions
- The facility is not being used for the approved purpose
- The company has furnished false or incorrect information
Procedure for Withdrawal
The prescribed authority shall, before withdrawing the approval, give the company a reasonable opportunity of being heard.
Consequences of Withdrawal
If the approval is withdrawn:
- The deduction claimed in any tax year may be disallowed
- The company may be liable to pay tax on the amount of deduction claimed
Expert Legal Guidance
Understanding the approval process and conditions for scientific research deduction 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.