Commencement of business must be actual for research-deeming provisions; preparatory R&D without commercial exploitation denies the deduction.

Whether capital expenditure on scientific research incurred in the three years preceding commencement can be claimed under the deeming provision depended on the year in which business was actually commenced; the tribunal applied the principle that the deeming provision operates only from the year of actual commencement and that preparatory or continuing in-house R&D without results leading to commercial exploitation does not satisfy that requirement, and on the facts (ongoing R&D, capital work in progress, no manufacture, sale, purchases or revenue) concluded the assessee had not commenced business in the year and the deduction was not allowable.

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Issues: Whether, for the purpose of claiming deduction under Section 35(1)(iv) read with Explanation 1 to Section 35(2) of the Income-tax Act, 1961, the assessee had commenced business in the assessment year 2018-19 so as to allow capital expenditure on scientific research incurred in the preceding three years.

Analysis: The statutory scheme allows capital expenditure on scientific research incurred in the three years immediately preceding the commencement of business to be deemed incurred in the year of commencement. The legal inquiry requires determination of the year in which business was commenced having regard to the nature of activities that necessarily precede commercial exploitation. The assessee's material shows ongoing in-house research, DSIR recognition, capital work in progress and no revenue from operations, no purchases, no closing stock and no manufacture or sale of the researched product during the year under consideration. The admitted facts include that the R&D work and formation of the product formula were still continuing in the relevant year and no product was ready for manufacture or sale. The statutory Explanation 1 requires actual commencement of business for the deeming to operate; mere preparatory or continuing research without proof of results leading to commercial exploitation does not satisfy that requirement. The decisions relied upon concerning commencement in other factual contexts were distinguished on the ground that, in the present case, the R&D had not produced a result or led to manufacture or sale in the relevant year and the conditions of Explanation 1 were therefore not fulfilled.

Conclusion: Deduction under Section 35(1)(iv) read with Explanation 1 to Section 35(2) of the Income-tax Act, 1961 is not allowable for A.Y. 2018-19 because the assessee had not commenced business in that year; the revenue's disallowance of the capital expenditure of Rs. 3,72,88,916 is confirmed.

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