Section 35AD Deduction towards expenditure on specified business

• Section 35AD provides an investment linked tax incentives on Capital expenditure or expenditure incurred prior to commencement of business by assessee mentioned in point (B) (subject to conditions mentioned in Point (C) below)

• Assessee who carrying on Specified business can avail deduction under 35AD (Amended in FA2020: can avail only if opts)
• List of Specified Business :
  1. Setting up and operating a cold chain facility;

     Note: Cold chain facility means a chain of facilities for storage or transportation of agricultural and forest produce, meat and meat products, poultry, marine and dairy products, products of horticulture, floriculture and apiculture and processed food items under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce

  2. Setting up and operating a warehousing facility for storage of agricultural produce;
  3. Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network;

     Note: This business should fulfil all of following conditions

     • It should be owned

       (i) By a company formed and registered in India under the Companies Act, 1956/2013

       (or)

       (ii) By a consortium of such companies or by an authority or a board or a corporation established or constituted under any Central or State Act;

     • It should have been approved by the Petroleum and Natural Gas Regulatory Board and notified by the Central Government in the Official Gazette in this behalf;
     • It should have made not less than such proportion of its total pipeline capacity available for use on common carrier basis by any person other than the assessee or an associated person; and
     • It should fulfil any other Prescribed condition

     Note: Associated person means a person,—

     • who participates, directly or indirectly, or through one or more intermediaries in the management or control or capital of the assessee;
     • who holds, directly or indirectly, shares carrying > 26% of the voting power in the capital of the assessee;
     • who appoints more than half of the Board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of the assessee; or
     • who guarantees > 10% of the total borrowings of the assessee;
  4. Building and operating, a hotel of two-star or above category anywhere in India

     Note: Subsequently, if assessee transfers the operation of above business to another person but still owned by the same assessee then the assessee is deemed to be carrying on specified business.

     Therefore, Assessee is still eligible to claim deduction u/s 35AD

  5. Building and operating hospital with at least 100 beds for patients at anywhere in India,
  6. Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government, as the case may be.
  7. Developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be.

     Note: Application for notification of affordable housing project as specified business to be made in Form 3CN

  8. Production of fertilizer in India;
  9. Setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962.
  10. Bee-keeping and production of honey and beeswax;
  11. Setting up and operating a warehousing facility for storage of sugar;
  12. Laying and operating a slurry pipeline for the transportation of iron ore;
  13. Setting up and operating a semiconductor wafer fabrication manufacturing unit notified by the Board in accordance with the prescribed guidelines

      Note: Application for notification of semiconductor wafer fabrication manufacturing unit as specified business to be made in Form 3CS

  14. Developing (or) maintaining and operating (or) Developing, maintaining and operating a new infrastructure facility;

      Such business should fulfil following two conditions,

      • It should be owned by a company registered in India or by a consortium of such companies or by an authority or a board or corporation or any other body established or constituted under any Central or State Act;
      • Entity referred in above point has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for developing or operating and maintaining or developing, operating and maintaining, a new infrastructure facility.

      Note: Infrastructure facility means—

      1. a road including toll road, a bridge or a rail system;
      2. a highway project including housing or other activities being an integral part of the highway project;
      3. a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system;
      4. a port, airport, inland waterway, inland port or navigational channel in the sea

1. It should not set up by splitting up, or the reconstruction, of a business already in existence;
2. It should not set up by the transfer to the specified business of machinery or plant previously used for any purpose (Similar to condition in S.80IAC)

   Exception: This condition is not applicable to

   • Machinery or plant which was used outside India by any person other than the assessee if all the following conditions are fulfilled, namely:—
     1. Such machinery or plant was not used in India at any time previous to the date of the installation by the assessee
     2. Such machinery or plant is imported into India;
     3. No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee
   • Machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred < 20% of the total value of the machinery or plant .
3. Once the assessee has claimed the benefit of deduction u/s 35AD for a particular year in respect of a specified business listed above, He cannot claim
   • Benefit under Chapter-VIA part-C (deductions in certain incomes) or
   • Benefit under provisions of Section 10AA
   In relation to such specified business for the same year or any other assessment year
4. Similarly, u/s 80A It has amended that If assessee has claimed any benefit under Chapter-VIA part-C (Deductions in certain incomes) in respect of specified business listed above for any assessment year,

   He cannot claim Deduction u /s 35AD

   In relation to such specified business for the same year or any other assessment year
5. The assessee cannot claim deduction in respect of such expenditure incurred for specified business under any other provision of the income tax act, 1961 in the current year or under this section for any other year. (Amended in FA2020: can’t claim only if opts)
6. Conditions relating to Commencement of Operations : The provisions of this section shall apply to the specified business only if it commences its operations as follows —





7. in all other cases not falling under any of the above, It should commence on or after the 1st day of April, 2009,

• Deduction for capital expenditure :

  If the above conditions are satisfied, 100% of the Capital expenditure incurred during the previous year, wholly and exclusively for the above business would be allowed as deduction from the business income

  Exceptions: In the following cases, Capital expenditure incurred will not be given as deduction

  • capital expenditure incurred on acquisition of any land, goodwill or financial instrument
  • Any expenditure in respect of which payment or aggregate of payment made to a person of an amount > 10,000 in a day other than account payee bank draft or use of electronic clearing system through a bank account or through such other prescribed electronic mode
• Deduction on Expenditure incurred prior to commencement of operations :

  The expenditure incurred wholly & exclusively for the purpose of specified business would be allowed as deduction during the previous year in which the assessee commences operation of his specified business if

  • The expenditure incurred prior to commencement of its operations and
  • The amount incurred prior to commencement should be capitalized in the books of account of the assessee on the date of commencement of its operations.

The loss arises from specified business can be set off against profits of any other specified business (i.e., it cannot be set off against normal business income)

If such loss cannot be set off in that year, it can be carried forward for an indefinite period.

Note: The business to which this loss is setting off need not eligible for claiming 35AD deduction

1. Transfer of goods and services to another business owned by assessee :

   Where any goods or services held for the purposes of the Specified business are transferred to any other business carried on by the assessee or vice versa,

   In either case, if the consideration for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer,

   Then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer had been made at the market value of such goods or services as on that date:

   Note: However, if, in the opinion of the AO, such computation presents exceptional difficulties, the Assessing Officer may compute the profits on such reasonable basis as the Officer may deem fit (Similar to condition in S.80IAC)

2. Close connection between assessee and other persons :

   Where due to the close connection between the assessee and other person or for any other reason,

   If AO finds that profits of Specified business in increased to more than ordinary profits,

   Then AO shall compute profits of such business on reasonable basis for allowing the deduction

3. If any asset on which a deduction u/s 35AD has been claimed and allowed, is demolished, destroyed, discarded, or transferred, the Sum received or receivable for the same is chargeable to tax
4. Any asset in respect of which a deduction is claimed and allowed under this section shall be used only for the specified business, for a period of 8 years beginning with the previous year in which such asset is acquired or constructed.
5. If asset used for any purpose other than specified business during 8 years beginning with the previous year in which such asset is acquired ,

   It is chargeable to tax U/H PGBP in the PY in which the asset is used by treating it as deemed income (as specified below)

   

   Note: This condition is not applicable to a Company which has become a sick industrial company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), during the period of 8 years.

6. Audit of accounts :

   The deduction shall be allowed to the assessee only

   (i) If the accounts of the assessee have been audited by a CA for the relevant PY and

   (ii) The assessee furnishes the audit report in the Form no 10CCB duly signed and verified by CA along with return of income.