Section 45 is the substantive equivalent of 1961 ss. 35 (and partial 35(2AB), 35(2AA), 35(1)(ii)/(iii)) -- the R&D deduction regime under PGBP. The 2025 Act consolidates SIX separate 1961 provisions into a single section. ELEVEN…
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ITA 2025 · Section 45
Section 45 — - EXPENDITURE ON SCIENTIFIC RESEARCH
Section 45 is the substantive equivalent of 1961 ss. 35 (and partial 35(2AB), 35(2AA), 35(1)(ii)/(iii)) -- the R&D deduction regime under PGBP. The 2025 Act consolidates SIX separate 1961 provisions into a single section. ELEVEN sub-sections cover: (1) basic deduction for in-house R&D (capital + revenue) including pre-commencement expenditure; (2) approved in-house R&D for biotech / Schedule-XIII-non-restricted manufacturing; (3) outsourced R&D donations to research associations / Universities / approved companies / national labs / IITs / specified persons; (4) prescribed conditions; (5) post-payment-withdrawal-protection; (6) anti-double-deduction with depreciation; (7) c/f depreciation parity; (8) anti-double-deduction across Act; (9) finality of CG / prescribed-authority decisions on activity-as-research; (10) amalgamation continuity for capital-expenditure-asset; (11) definitions. Note: FA 2024 has DISCONTINUED the weighted 100%-150%-200% deduction regime (1961 s. 35(2AB) erstwhile super-deduction); only 100% straight deduction now applies under 2025 Act s. 45.
STATUTORY ARCHITECTURE
Section 45 organises R&D deductions on TWO axes: (a) WHO conducts the research -- INTERNAL (in-house, sub-s. 1 / 2) vs EXTERNAL (paid to recognised research entity, sub-s. 3); (b) WHEN is expenditure incurred -- POST-COMMENCEMENT (sub-s. 1(a), 2, 3) vs PRE-COMMENCEMENT (sub-s. 1(b), 1(c) -- 3-year window). The 2025 Act's REMOVAL of the 1961 s. 35(2AB) weighted super-deduction (which had stood at 200% till FY 2017-18, reduced to 150% till FY 2019-20, then 100% from FY 2020-21) is the most consequential change -- the 'super-deduction era' of Indian R&D incentive is OVER, and R&D-investment economics now mirror straight-deduction depreciation comparable to other capital. Architecture overview: Sub-s. (1) -- Universal R&D deduction: capital (excl. land) + revenue, related to assessee's own business. Sub-s. (2) -- Approved in-house R&D facility for biotech / non-Schedule-XIII manufacturing -- 100% deduction (post FA 2024 simplification); approved by 'prescribed authority' (DSIR). Sub-s. (3) -- Outsourced R&D: deductible donations to (a) research associations / Universities / colleges / institutions; (b) approved Indian R&D companies; (c) national labs / Universities / IITs / specified persons under approved programme.
SUB-SECTION (1) -- POST + PRE-COMMENCEMENT IN-HOUSE R&D
(a) UNIVERSAL DEDUCTION: (i) CAPITAL EXPENDITURE on scientific research related to own business -- 100% deductible in YEAR INCURRED. EXCLUDES expenditure on acquisition of LAND (whether acquired as such or as part of property). The 'land' definition in sub-s. 11(d) extends to any INTEREST in land. So leasehold rights / sub-leases / development-right-acquisitions are also excluded. (ii) REVENUE EXPENDITURE -- 100% deductible. (b) PRE-COMMENCEMENT REVENUE: salary to employees engaged in R&D + cost of materials used in R&D, INCURRED WITHIN 3 YEARS IMMEDIATELY PRECEDING COMMENCEMENT, to extent CERTIFIED BY PRESCRIBED AUTHORITY. Deemed incurred in year of commencement (so claim in year-1 of business). (c) PRE-COMMENCEMENT CAPITAL: aggregate of capital expenditure on scientific research within 3 years preceding commencement. Deemed incurred in year of commencement. Practitioner: (a) maintain pre-commencement expense ledger; (b) obtain DSIR / prescribed-authority certificate as soon as feasible (often before first return-filing); (c) classify carefully -- only employee salary + materials qualify under (b); other revenue items (rent, utilities, consumables-non-materials) likely don't qualify under pre-commencement window. Pharma / biotech / IT-product startups commonly use (b) and (c) for pre-incorporation R&D salaries and lab equipment.
SUB-SECTION (2) -- APPROVED IN-HOUSE R&D (BIOTECH / NON-SCHEDULE-XIII MANUFACTURING)
(i) Available to a COMPANY engaged in: (A) biotechnology; OR (B) manufacture or production of any article or thing NOT specified in Schedule XIII (the 'restricted business' negative list -- typically liquor / tobacco / unlisted-products). Coverage: in-house R&D facility expenditure (excluding cost of land or building). Approval: by 'prescribed authority' (DSIR -- Department of Scientific and Industrial Research). DEDUCTION RATE: 100% post FA 2024 (was 200% till FY 2017-18 / 150% till FY 2019-20). Significant reduction from super-deduction era. (ii) NO double dipping: company approved under sub-s. 3(b) (i.e., R&D company receiving donations from others) cannot ALSO claim sub-s. 2 deduction on its own R&D. (iii) Anti-double-deduction across Act for sub-s. 2 expenditure. (iv) Conditions / documentation per Rules. (v) PHARMA-SPECIFIC EXPANSION: 'expenditure on scientific research' for drugs and pharmaceuticals INCLUDES expenditure on (a) clinical drug trial; (b) regulatory approvals under any Act; (c) patent application filing under Patents Act 1970. Codifies post-CCPF and Cipla / Cadila judicial gloss. Practitioner application: pharma companies' clinical-trial costs (often >INR 100 crore for a single drug) are deductible in year incurred; preserve DSIR Form 3CL approval and Form 3CK detail of expenditure.
SUB-SECTION (3) -- OUTSOURCED R&D (DONATIONS)
Three sub-categories of recipient: (a)(i) RESEARCH ASSOCIATION / UNIVERSITY / COLLEGE / INSTITUTION undertaking SCIENTIFIC research; (a)(ii) RESEARCH ASSOCIATION / UNIVERSITY / COLLEGE / INSTITUTION undertaking SOCIAL SCIENCE OR STATISTICAL research; (b) APPROVED INDIAN R&D COMPANY -- registered in India, main object scientific R&D, approved by prescribed authority; (c) NATIONAL LABORATORY / UNIVERSITY / IIT / specified person, with SPECIFIC DIRECTION that the sum is used for scientific research under an APPROVED PROGRAMME. Deduction: 100% of amount paid (post FA 2020 / FA 2024 simplification -- the previous 175%-150%-100% staircase has been phased out for current-year claims). Sub-s. (4)(b): only such association / University / college approved per prescribed manner AND specified by CG by NOTIFICATION are eligible -- maintain CG notification list. Sub-s. (5) DONOR PROTECTION: deduction NOT denied if subsequent to payment, the recipient's approval has been WITHDRAWN. Ratifies Chotatingrai Tea Co (SC, 2002) principle. Donor relies on approval-in-force-at-payment-date.
SUB-SECTIONS (6)-(9) -- ANTI-OVERLAP AND FINALITY
(6) Where deduction allowed under s. 45 represented WHOLLY OR PARTLY BY ASSET, NO depreciation under s. 33(3) on that asset. Prevents double-claim (R&D capex deduction + depreciation on same asset). (7) s. 33(11) c/f-depreciation provision applies to capital R&D under sub-s. 1 -- ensures unabsorbed R&D-capital deduction is c/f similarly to depreciation. (8) For sub-s. 3(c) [national lab / IIT / specified person]: no deduction under any other provision of this Act. Single-claim rule. (9) FINALITY: where question arises whether activity is scientific research or asset is being used for scientific research: (a) for sub-s. 3(a) recipient activities -- CG decision FINAL; (b) for any other case -- prescribed-authority decision FINAL. Effectively ousts judicial review on factual research-character determination -- AO and assessee must accept CG / DSIR ruling. Limited rebound through writ jurisdiction on grounds of procedural violation only.
SUB-SECTION (10) -- AMALGAMATION CONTINUITY
Where amalgamating company sells / transfers any R&D-capital-asset to amalgamated Indian co. in scheme of amalgamation, the section operates on the AMALGAMATED CO. as if amalgamating co. had not transferred. Effect: c/f R&D deduction stream and depreciation continue seamlessly through amalgamation. Coordinated with s. 70(1)(e) tax-neutrality.
SUB-SECTION (11) -- DEFINITIONS
(a) NATIONAL LABORATORY = scientific lab functioning at national level under aegis of: ICAR, ICMR, CSIR, DRDO, Department of Electronics, DBT (Department of Biotechnology), DAE (Department of Atomic Energy); approved as 'National Laboratory' by prescribed authority. Examples: BARC, CSIR labs, IISc, IICT. (b) SALARY = same as s. 16 read with s. 18 with two modifications -- s. 16 clauses (e), (j) omitted; s. 18 references to 'assessee' read as 'employee or former employee', references to 'employer or former employer' read as 'the assessee'. Adapts the salary-definition for application to the R&D-employer (the assessee = employer). (c) SPECIFIED PERSON = approved by prescribed authority. (d) LAND = includes any INTEREST in land [for sub-s. 1(a)(i) capital exclusion].
CASE LAW -- LEADING DECISIONS
(i) Cipla Ltd v. CIT (Bom HC) -- DSIR-approval-based 1961 s. 35(2AB) deduction; pharma R&D scope. (ii) Cadila Healthcare Ltd v. CIT (Guj HC) -- pharma clinical-trial costs as scientific research; codified in sub-s. 2(v). (iii) Chotatingrai Tea Co v. CIT (SC, 2002) -- donor-protection on subsequent approval-withdrawal; codified in sub-s. (5). (iv) Deltatech Construction Ltd v. CIT (ITAT) -- pre-commencement R&D salary scope under sub-s. 1(b). (v) ACIT v. Aurobindo Pharma Ltd (ITAT Hyderabad) -- weighted-deduction on R&D capex post-FA 2017 stair-step. (vi) DCIT v. Mastek Ltd (ITAT Ahmedabad) -- in-house R&D for IT software; sub-s. (2)(B) 'manufacture or production' interpretation. (vii) GE India Industrial Pvt Ltd v. ACIT -- approved-programme requirement under sub-s. 3(c). (viii) Pre-FA 2017: Aurobindo Pharma, Sun Pharma, Dr Reddy's Labs -- 200% super-deduction era -- now historic.
PLANNING NOTES (NINE AREAS)
(i) PRE-COMMENCEMENT WINDOW (sub-s. 1(b)/(c)) -- 3 years preceding commencement; for startups in pharma / biotech / SaaS, identify R&D salaries and material costs in pre-incorporation phase; obtain DSIR certificate; deemed incurred in year-1 of business. (ii) DSIR APPROVAL (sub-s. 2) -- in-house R&D facility approval is annual; maintain Form 3CL (DSIR application) and Form 3CK (expenditure detail); ensure facility approval is current at time of expenditure incurrence. (iii) PHARMA EXPANSION (sub-s. 2(v)) -- clinical drug trial / regulatory approvals / patent filings expressly within 'scientific research' for pharma; track these costs separately. (iv) OUTSOURCED R&D (sub-s. 3) -- maintain CG notification list of approved entities; verify approval status BEFORE payment; donor-protection under sub-s. (5) preserves deduction even on subsequent withdrawal. (v) NON-LAND CAP-EXPENDITURE (sub-s. 1(a)(i)) -- 'land' definition extends to interest in land -- exclude leasehold rights for capital R&D deduction; structure as building / civil structure separately. (vi) DEPRECIATION OVERLAP (sub-s. 6) -- if R&D capex claimed under s. 45, NO depreciation under s. 33(3); maintain asset-tagging in fixed-asset register. (vii) AMALGAMATION CONTINUITY (sub-s. 10) -- pair with s. 70(1)(e) tax-neutrality; transferee co. continues unfinished R&D deduction stream. (viii) FA 2024 IMPACT -- super-deduction phased out; R&D economics changed -- model post-tax IRR of R&D investment under straight-100% regime; consider whether incremental R&D investment continues to make economic sense vs alternative tax-saving options. (ix) DOCUMENTATION CHECKLIST -- (a) DSIR Form 3CL / 3CK; (b) approved-entity CG notification copy; (c) board resolution authorising expenditure; (d) employee-engagement-on-R&D records; (e) lab equipment invoice + delivery + commissioning; (f) clinical-trial protocol / regulatory submission documents.
CROSS-REFERENCES