Section 35(2) of Income Tax Act: Deduction on Capital Expenditure for Scientific Research

India’s growth story has always been linked to innovation and development. To encourage industries and individuals to invest in research and development (R&D), the Income Tax Act provides various deductions. One of the most important among them is Section 35(2), which deals with capital expenditure on scientific research.

This section not only motivates businesses to allocate funds for creating knowledge & technology but also provides a tax shield on investments. It specifically covers capital expenditure such as setting up laboratories, purchasing scientific equipment, or funding institutions that focus on scientific research.

Let us explore the meaning, scope, and benefits of Section 35(2) in detail.

What is Section 35(2) of Income Tax Act?

Section 35(2) of the Income Tax Act provides a deduction to taxpayers who incur capital expenditure on scientific research. This may include direct investment in setting up infrastructure, laboratories, or giving funds to recognized research associations.

Key points to note:

• The deduction applies only to capital expenditure & not revenue expenditure.
• The expenditure must be directly related to scientific research and development.
• If the research is discontinued or abandoned, the deduction can still be claimed for the year in which the expenditure was made.
• Any sum paid to a scientific research association or institution recognized by the prescribed authority is also eligible.

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Understanding Capital Expenditure under Section 35(2)

The term capital expenditure generally refers to expenses incurred to acquire or upgrade assets that will generate long-term benefits. Under Section 35(2), the following types of expenses are covered:

1. Cost of land and building used for research purposes.
2. Cost of equipment, machinery, & scientific instruments.
3. Investment in setting up laboratories and R&D centers.
4. Any sum paid to a scientific research association approved by the government.

👉 However, expenditure on land is specifically excluded from the deduction. Only the building & equipment used for scientific research qualify.

Purpose of Section 35(2)

The purpose of Section 35(2) is to promote:

• Scientific innovation in India.
• Private sector participation in R&D.
• Long-term economic growth through technology-driven enterprises.
• Partnerships between businesses & scientific research associations.

By offering a deduction for capital expenditure, the government reduces the financial burden on businesses, encouraging them to invest more aggressively in scientific development.

Also Read: 100% Deduction on Capital Expenditure for Specified Businesses

How Deduction Works under Section 35(2)?

Let’s take a simple example:

Suppose a pharmaceutical company invests ₹1 crore in setting up a laboratory for research. This amount qualifies as capital expenditure under Section 35(2). The company can claim the entire ₹1 crore as a deduction while calculating its taxable income.

Similarly, if the company contributes ₹50 lakh to a scientific research association, the deduction can also be claimed for this expenditure.

This way, the taxable profits reduce significantly, leading to lower tax liability.

Eligibility for Claiming Deduction under Section 35(2)

To claim the deduction:

1. The taxpayer must be engaged in business or profession."
2. The expenditure should be in the nature of capital expenditure (excluding land).
3. Payments must be made to an approved scientific research association or university.
4. The research should be related to the business of the taxpayer.

Benefits of Section 35(2)

1. Tax Savings – Capital expenditure deductions directly reduce taxable profits.
2. Encourages Innovation – Businesses are motivated to fund R&D projects.
3. Support for Research Institutions – Contributions to universities & associations get recognized.
4. Long-term Economic Growth – Boosts industrial competitiveness by supporting innovation.

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Section 35(2) vs Other Research Deductions

This shows that Section 35(2) specifically focuses on capital expenditure, while other provisions cover revenue expenses or weighted deductions.

Case Law Reference

Courts have repeatedly emphasized that deductions under Section 35(2) should be interpreted liberally to promote research in India. For instance, in several judgments, expenses incurred on acquiring scientific equipment have been allowed, even if the research project was not fully successful.

This highlights the government’s intention: reward the effort towards scientific research, not just the results.

Practical Examples

1. IT Company – Setting up an AI research lab & claiming deductions.
2. Pharma Sector – Funding universities for vaccine research."
3. Manufacturing Sector – Investing in green energy R&D units.

Each of these can benefit from capital expenditure deductions under Section 35(2).

Also Read: Deduction for Capital Expenditure on Scientific Research

Common Misconceptions

1. Land Cost is Deductible – False. Land is excluded.
2. Only Large Companies Benefit – Not true. Even small businesses funding research can claim.
3. Only Direct Research is Covered – Contributions to research institutions are also eligible.

Importance in Today’s Economy

With India focusing on becoming a global R&D hub, provisions like Section 35(2) are crucial. They encourage companies to spend more on developing technology, improving products, and innovating in areas like AI, pharmaceuticals, and renewable energy.

Conclusion

Section 35(2) of the Income Tax Act is a forward-looking provision that allows taxpayers to claim deductions for capital expenditure on scientific research & development. Whether it is building a lab, buying equipment, or paying a recognized research association, these expenses qualify for tax benefits. By reducing the cost of innovation, this section plays a vital role in encouraging businesses to take bold steps toward scientific advancement.

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