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What is Form 3CLA?

Form 3CLA is the audit report format prescribed for companies claiming deductions under Section 35(2AB) of the Income Tax Act. It serves as a certification by a qualified Chartered Accountant that:

• • The company has maintained separate accounts for the approved R&D facility

  • The expenditure claimed has been actually incurred on eligible scientific research activities

  • The expenditure does not include costs of land or buildings

  • The facility complies with all conditions prescribed under Rule 6(7A)

Who Must File Form 3CLA?

Form 3CLA must be filed by:

• • Companies engaged in bio-technology business, or

  • Companies engaged in manufacture or production of any article or thing (excluding items in Eleventh Schedule)

  • That have obtained approval from the Secretary, DSIR for their in-house R&D facility

  • That have incurred expenditure on scientific research in the approved facility during the previous year

Filing Timeline and Mode

Due Date: Form 3CLA must be furnished electronically on or before the due date for filing the return of income as specified under section 139(1) of the Income Tax Act. For companies, this is typically:

• • September 30 of the assessment year for companies not required to furnish transfer pricing report

  • November 30 of the assessment year for companies required to furnish transfer pricing report under section 92E

Mode of Filing: Electronic filing to the Secretary, Department of Scientific and Industrial Research. The Principal Director General of Income-tax (Systems) specifies the procedures, formats, and standards for secure capture and transmission of data.

Provisional Requirements

Section 35(2AB) of the Income Tax Act, 1961

Section 35(2AB) forms the statutory foundation for claiming deductions on in-house research and development expenditure. The key provisions of this section include:

Deduction Quantum

The section originally provided for weighted deduction of one and one-half times (150%) of the eligible expenditure. However, an important amendment was introduced through a proviso, which states:

For expenditure incurred in previous years relevant to assessment years beginning on or after April 1, 2021, the deduction is equal to 100% of the expenditure incurred (i.e., the weighted deduction of 150% no longer applies).

Eligible Expenditure

The expenditure must be on scientific research on an in-house research and development facility approved by the prescribed authority. Importantly, the deduction does not cover:

• • Expenditure in the nature of cost of any land

  • Expenditure in the nature of cost of any building

For companies in the drugs and pharmaceuticals sector, the definition of ‘expenditure on scientific research’ is expanded to include:

• • Expenditure incurred on clinical drug trials

  • Costs of obtaining approval from regulatory authorities under Central, State, or Provincial Acts

  • Expenditure on filing applications for patents under the Patents Act, 1970

Exclusivity of Deduction

Section 35(2AB)(2) explicitly provides that no deduction shall be allowed in respect of the expenditure under any other provision of the Income Tax Act. This ensures that companies cannot claim double deductions for the same expenditure under different sections.

Mandatory Conditions

No company shall be entitled to the deduction unless it:

• • Enters into an agreement with the prescribed authority for cooperation in the research and development facility

  • Fulfills conditions regarding maintenance of accounts and audit thereof

  • Furnishes reports in the prescribed manner

Rule 6 of the Income Tax Rules, 1962

Rule 6 provides the operational framework and procedural requirements for implementing Section 35. Sub-rule (7A) specifically deals with the approval of expenditure on in-house R&D facilities under Section 35(2AB).

Prescribed Authority

Under Rule 6(1B), the prescribed authority for Section 35(2AB) purposes is the Secretary, Department of Scientific and Industrial Research (DSIR). This authority is responsible for:

• • Approving in-house research and development facilities

  • Quantifying eligible expenditure for weighted deduction

  • Monitoring compliance with prescribed conditions

Application Process

Rule 6(4) mandates that companies must submit their application in Form 3CK to obtain approval. The prescribed authority must pass an order in Form 3CM if satisfied that the conditions are fulfilled. A reasonable opportunity of being heard must be granted before rejecting any application.

Conditions for Approval – Rule 6(7A)

Clause (a): Nature of Activity Restriction

The R&D facility must not relate purely to:

• • Market research

  • Sales promotion

  • Quality control

  • Testing

  • Commercial production

  • Style changes

  • Routine data collection or activities of a like nature

Clause (b): Reporting Requirements

The prescribed authority must furnish electronically:

• • Part A of Form 3CL – relating to the approval of in-house R&D facility

  • Part B of Form 3CL – quantifying the expenditure incurred during the previous year and eligible for weighted deduction

Clause (ba): Timeline for Form 3CL Submission

Form 3CL must be furnished electronically to the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General of Income-tax having jurisdiction within 120 days of:

• • Grant of approval (for Part A)

  • Submission of audit report (for Part B)

Clause (c): Maintenance of Accounts and Audit Report in Form 3CLA

This is the critical clause that mandates Form 3CLA. The requirements are:

1. 1. The company must maintain separate accounts for each approved facility.

   2. These accounts must be audited annually.

   3. The audit must be conducted by an ‘accountant’ as defined in Explanation below sub-section (2) of section 288 of the Income Tax Act, 1961 (i.e., a Chartered Accountant).

   4. A report of audit in Form 3CLA must be furnished electronically to the Secretary, Department of Scientific and Industrial Research.

   5. The Form 3CLA must be submitted on or before the due date specified in Explanation 2 to sub-section (1) of section 139 of the Act for furnishing the return of income for each succeeding year.