A research-asset sale has a specific prior-deduction test
Section 38(1)(c) of the Income-tax Act, 2025 applies to an asset representing scientific-research capital expenditure referred to in section 45(1)(a)(i), sold without having been used for other purposes. Where sale proceeds plus deductions allowed exceed the capital expenditure, the excess or the deduction allowed, whichever is less, is business income in the sale year. This guide checks the Act as amended by Finance Act, 2026 on 27 October 2026. 2025 Act: sections 38(1)(c), 38(2)(c), 38(5) and 45.
Establish the right asset and allowance history
Identify the asset, capital expenditure and deduction actually allowed under the relevant provision. Section 45(1)(a)(i) excludes acquisition of land. Do not combine research donations, ordinary depreciation, an accounting research expense and this capital deduction merely because all appear under an R&D budget. Retrieve returns, computations and orders supporting the allowed amount, rather than replacing it with a claimed figure. 2025 Act: sections 38(1)(c), 38(2)(c), 38(5) and 45.
Check intervening use before applying the formula
The sale-without-other-use condition is essential. An asset first transferred into ordinary commercial production may need a different analysis. Keep the research-use register, movement records and sale agreement. Section 38(2)(c) reinforces that the asset must not have been used for other purposes; the examples assume that condition and the allowance basis are established, rather than deciding disputed scientific-research status. 2025 Act: sections 38(1)(c), 38(2)(c), 38(5) and 45.
Calculate the excess and its cap
For qualifying facts, let E be capital expenditure, D deductions allowed and S sale proceeds. The charge under this limb is the smaller of D and the positive excess of S plus D over E. Keep each asset’s figures separate. A negative arithmetic excess is not negative recapture income, and this calculation alone does not establish a fresh deduction or loss. The cap prevents this limb from recapturing more than the deduction allowed. 2025 Act: sections 38(1)(c), 38(2)(c), 38(5) and 45.
Do not turn a cap into an exemption
Sale proceeds above the amount charged under section 38(1)(c) are not automatically tax-free. Examine any separate applicable capital-gains and cost provisions, including the asset’s precise history. Likewise, an accounting gain calculated using book carrying amount need not equal the statutory recapture. Prepare a bridge from the book disposal result already in profit to the tax income, without adding proceeds twice. 2025 Act: sections 38(1)(c), 38(2)(c), 38(5) and 45.
Preserve period and cessation distinctions
Section 38(5) states that the relevant provision can apply even when the business no longer exists. Earlier-law deductions and their transition into a later sale need their governing provisions separately verified; this guide does not mechanically renumber FY 2025–26 / AY 2026–27 returns. The fictional illustrations isolate the stated recapture rule and do not calculate final tax rates, loss set-off or a complete capital-gains computation. 2025 Act: sections 38(1)(c), 38(2)(c), 38(5) and 45.
Applicable primary references
2025 Act: sections 38(1)(c), 38(2)(c), 38(5) and 45
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Full earlier allowance
All amounts are ₹ lakh. Qualifying capital expenditure E is 100, deduction allowed D is 100 and sale proceeds S are 70. Excess is 70 + 100 − 100 = 70; the smaller of 70 and D is 70. That is the income under this limb.
Illustrative example 2: Partial allowance and positive excess
E is 100, D is 60 and S is 50. Excess is 10, below the allowed deduction 60. Recapture is 10, not all sale proceeds of 50.
Illustrative example 3: No positive excess
E is 100, D is 60 and S is 30. S + D is 90, which does not exceed E. Recapture under this limb is zero; the negative difference of 10 does not itself establish an allowable loss.
Illustrative example 4: Apply the deduction cap
E is 100, D is 60 and S is 140. The excess is 100, but the recapture under this limb is capped at D of 60. Separate tax consequences for the remaining proceeds require analysis.
Illustrative example 5: Keep two assets separate
Asset A has E 100, D 100, S 40: recapture 40. Asset B has E 200, D 120, S 110: excess 30 and recapture 30. Combined recapture is 70, with both histories retained.
Illustrative example 6: Replace the book result correctly
Use E 100, D 100 and S 70, giving recapture 70. Assume book carrying amount is independently 50, so book disposal gain already included in profit is 20. The recapture-only bridge adds 50 to replace that 20 with 70; it does not add another full 70 without removing the existing book gain.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the disposed asset | Asset and research-use register |
| 2 | Confirm statutory population | Section 45(1)(a)(i) basis |
| 3 | Establish capital expenditure | Cost records and exclusions |
| 4 | Verify deduction allowed | Returns and orders |
| 5 | Check intervening use | Movement and commercial-use evidence |
| 6 | Establish sale proceeds and year | Agreement and disposal evidence |
| 7 | Calculate positive excess | S plus D less E |
| 8 | Apply the deduction cap | Compare excess with D |
| 9 | Bridge the book result | No duplicate disposal income |
| 10 | Review remaining tax questions | Transition, cessation and other consequences |
Sixteen practitioner FAQs
1. Does every R&D-related sale use this rule?
No. Identify the asset representing the specified scientific-research capital expenditure and its allowance history.
2. Do donations to a research institution automatically fit?
No. Do not substitute a donation deduction for the asset-specific capital expenditure condition.
3. Is land included in section 45(1)(a)(i)?
The provision excludes acquisition of land.
4. Does the calculation use the deduction claimed or allowed?
The amount allowed must be established from the actual tax history.
5. Why does intervening commercial use matter?
Sale without other-purpose use is an express condition of this limb.
6. Can an asset label prove scientific-research use?
No. Preserve the actual activity, use and movement evidence.
7. What creates the positive excess?
Sale proceeds plus deductions allowed must exceed the relevant capital expenditure.
8. What is the cap on this recapture?
The amount of deduction allowed, where it is lower than the excess.
9. Does a negative excess create a tax loss automatically?
No. Any deduction or loss requires its own applicable statutory analysis.
10. Can I pool assets before checking the formula?
Keep each asset’s history and computation separately before aggregating the charge.
11. Does the cap exempt all other proceeds?
No. Other applicable tax consequences remain a separate question.
12. Does book carrying amount replace E or D?
No. It is relevant to the accounts bridge, not a substitute for statutory cost and allowance evidence.
13. Should book gain be taxed twice?
No. Reconcile what is already included in the starting profit before making the adjustment.
14. Does closure of the business automatically prevent recapture?
Section 38(5) preserves application even when the business no longer exists.
15. Does this guide change section numbers in an older-year return?
No. Apply the enactment and transition rules relevant to the actual period and allowance.
16. What is the final review document?
An asset-wise history of cost, allowed deduction, use, sale, recapture and book-to-tax adjustments.
Conclusion
Calculate scientific-research asset sale income under section 38(1)(c), checking earlier capital deductions, intervening use, the recapture cap and book adjustments.