Start with the research deduction history
For FY 2025–26 / AY 2026–27, section 43(1), Explanation 1 of the Income-tax Act, 1961 addresses an asset used in business after it ceases to be used for scientific research related to that business, where depreciation under section 32(1)(ii) is to be considered. Actual cost is reduced by the deduction allowed under section 35(1)(iv), or the corresponding provision of the 1922 Act. A transfer from a research register to a production register does not automatically create a fresh tax basis equal to book value.
Read the applicable text: Income-tax Act, 1961: section 43(1), Explanation 1.
Prove the change in use
Identify the same asset, its original tax actual cost, research use, the date it ceased that use and subsequent business use. Preserve the research-project register, asset identifiers, approval of the operational transfer and evidence of production use. Accounting reclassification and physical relocation may help establish the chronology, but neither alone determines all statutory conditions.
Trace capital deductions rather than every research expense
The reduction refers to the specified capital-expenditure deduction allowed. Reconcile it to filed computations and relevant orders. Do not subtract unrelated recurring research expenditure merely because it appears in the same departmental cost centre. Conversely, do not omit an allowed capital deduction because the amount was charged directly to the profit and loss account and never appeared as a capitalised book asset.
Build an asset-specific bridge
Show original tax actual cost, the relevant allowed deduction, resulting cost and any separate applicable adjustments. Different assets can have different deduction histories, including a nil remaining cost where the entire relevant cost was deducted. Retain supporting allocation where a return reports a research-project total covering multiple assets. A project-level number cannot be subtracted repeatedly from each machine.
Separate cost from the annual allowance
Explanation 1 establishes a cost starting point for its circumstances. The final depreciation claim still needs the applicable block, use and section 32 analysis and consideration of other relevant deduction restrictions. The illustrations isolate cost reconstruction; they do not prescribe depreciation rates, promise an annual deduction or decide disposal treatment. Revaluation does not by itself undo the historical deduction reduction.
Keep the return period and evidence aligned
These section references address FY 2025–26 / AY 2026–27 under the 1961 Act. Do not replace them mechanically with 2025 Act tax-year numbering. If a relevant operative order changes the deduction allowed, reconcile its effect on the asset-cost working and assess any required correction to a return already filed. Maintain the earlier version so that the change is explainable.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Fully deducted capital cost
A machine’s established tax actual cost is ₹20 lakh and the relevant section 35(1)(iv) deduction allowed is ₹20 lakh. Explanation 1 leaves ₹0 for this cost bridge. A later ₹8 lakh accounting carrying amount does not independently restore tax basis.
Illustrative example 2: A partially reduced starting point
Established actual cost is ₹50 lakh and the specified allowed capital deduction is ₹35 lakh. The resulting cost is ₹15 lakh. Record that ₹15 lakh separately from any annual depreciation computation; it is not an immediate ₹15 lakh expense deduction.
Illustrative example 3: Separate two machines
Machine A cost ₹24 lakh with ₹24 lakh relevant deduction allowed; B cost ₹30 lakh with ₹18 lakh allowed. Their resulting costs are ₹0 and ₹12 lakh, totalling ₹12 lakh. Keep both identities: combining the assets into one ledger line obscures A’s nil basis and B’s remaining cost.
Illustrative example 4: Do not deduct unrelated recurring expenses
A machine has actual cost ₹40 lakh and relevant allowed capital deduction ₹28 lakh, giving ₹12 lakh. The research department also incurred ₹6 lakh of unrelated recurring expenses. Subtracting that ₹6 lakh again would produce ₹6 lakh and understate this asset-cost bridge by ₹6 lakh.
Illustrative example 5: Allocate a supported project total once
Two assets cost ₹18 lakh and ₹12 lakh. Evidence allocates the project’s ₹21 lakh allowed capital deduction as ₹13 lakh and ₹8 lakh respectively. Their resulting costs are ₹5 lakh and ₹4 lakh, totalling ₹9 lakh. The allocations sum to ₹21 lakh; subtracting the entire project deduction from each asset would be an unsupported duplicate reduction.
Illustrative example 6: Update an operative correction
Actual cost is ₹36 lakh. The original working uses an allowed deduction of ₹30 lakh and gives ₹6 lakh. A relevant operative order establishes the allowed deduction as ₹27 lakh. The revised bridge gives ₹9 lakh, an increase of ₹3 lakh. Retain the order and assess the proper correction route rather than silently changing a historic spreadsheet.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the original asset | Invoice, serial number and research register. |
| 2 | Confirm relevant research use | Project and business linkage evidence. |
| 3 | Record cessation of that use | Transfer approval and dated chronology. |
| 4 | Establish ordinary business use | Production or operational-use records. |
| 5 | Reconstruct tax actual cost | Original cost and relevant adjustments. |
| 6 | Trace the specified deduction allowed | Filed computation and operative orders. |
| 7 | Separate unrelated research expenditure | Capital/revenue and asset allocation schedule. |
| 8 | Calculate the cost bridge | Asset-wise reduction without duplication. |
| 9 | Compute allowance separately | Block, use and applicable section 32 analysis. |
| 10 | Approve and preserve versions | Evidence, book-to-tax reconciliation and correction history. |
Sixteen practitioner FAQs
1. Does moving an asset out of the laboratory create new tax cost?
No. Apply the statutory cost reconstruction to the established change in use.
2. Which provision supplies this bridge?
Section 43(1), Explanation 1 of the 1961 Act.
3. Which deduction history is relevant?
The specified capital deduction allowed under section 35(1)(iv), or the corresponding older provision.
4. Should all research-department expenses be subtracted?
No. Identify the relevant deduction attached to the asset.
5. Can a revenue-cost-centre label determine the result?
No. Trace the actual nature and allowed deduction.
6. What if the entire relevant cost was deducted?
The illustrated bridge may leave nil remaining cost.
7. Does nil tax cost mean the machine has no physical value?
No. Physical usefulness, book amount and tax basis are different facts.
8. Can accounting revaluation reverse the reduction automatically?
No. It does not by itself undo the specified deduction history.
9. Why retain the date research use ceased?
It supports the chronology and applicability of the provision.
10. Does a project-level deduction justify repeated subtraction?
No. Allocate and reconcile the supported amount once.
11. Does a remaining cost equal an immediate deduction?
No. Annual depreciation requires separate analysis.
12. Are depreciation rates supplied by these examples?
No. The examples isolate the cost bridge.
13. Does this article decide sale or scrapping consequences?
No. Disposal requires its own applicable-provision analysis.
14. What if the deduction allowed changes under an order?
Trace the operative correction into the cost working and consider required return corrections.
15. What is the key closing reconciliation?
Original tax cost less the specified allowed deduction, linked to the asset and later use.
16. Which year’s section numbering is used?
FY 2025–26 / AY 2026–27 under the Income-tax Act, 1961.
Official sources
Income-tax Act, 1961: section 43(1), Explanation 1
Income-tax Department: section 43 actual statutory text
Income-tax Department: earlier-year law and AY 2026–27 transition