Section 35AD: Businesses Eligible for Tax Incentives


The Government of India has identified certain Business Sectors which are significant for the economic growth and development of the country. In order to encourage these Businesses, the Government has given Special Deduction to such Specified Businesses. From time to time, the Government has added new Businesses under Section 35AD of the Income Tax Act.

Which are the Businesses covered under Section 35AD

The following are the list of 14 Business which come under the purview of Specified Business under 35AD

                            Specified BusinessDate of Commencement
1Business of laying and operating a cross country natural gas or petroleum or crude pipeline network for distribution including being an integral part of such a network.On or after 1/4/2007
2Setting up and Operating Cold Chain Facility for specified products.On or after 1/4/2009
3Setting up and Operating Warehousing Facility for storing Agricultural ProduceOn or after 1/4/2009
4Building and Operating anywhere in India, a hotel of two-star or above as specified by Central GovernmentOn or after 1/4/2010
5Building and Operating a hospital with at least 100 beds for PatientsOn or after 1/4/2010
6Developing and Building a Housing Project under Slum Redevelopment or Rehabilitation under a notified scheme by Central or State GovernmentOn or after 1/4/2010
7Developing and Building Affordable Housing Project under a notified scheme by Central or State GovernmentOn or after 1/4/2011
8Production of FertilizerOn or after 1/4/2011
9Setting up and Operating an Inland Container Depot or a Container Freight Station notified or approved under the Customs Act 1962On or after 1/4/2012
10Bee-keeping and Production of Honey or BeeswaxOn or after 1/4/2012
11Setting up and Operating Warehousing Facility for storage of SugarOn or after 1/4/2012
12Laying and Operating a slurry pipeline for transportation of Iron OreOn or after 1/4/2014
13Setting up and Operating a semiconductor wafer fabrication manufacturing unitOn or after 1/4/2014
14Developing or Operating and Maintaining or Developing, Operating and Maintaining a new Infrastructure FacilityOn or after 1/4/2017

Note: The Deduction under this Section has been made Optional by the Finance Act,2020 with effect from financial year starting on or after 1/4/2020 enabling the Companies to claim Depreciation for those opting for Concessional Rate of Taxes under Section 115BAA and Section 115BAB.

Deduction allowable for such specified businesses

  1. Expenditure incurred before commencement of Business

100% of Capital Expenditure incurred prior to commencement of Business is allowed as deduction in the first year in which the Company commences its operations.

Condition: Deduction to the Assessee for expenditure incurred prior to commencement of the Specified Business is allowed only if the same is capitalised in the Books of Account as on the date of commencement its operations.

  • Expenditure incurred aftercommencement of Business

100% of Capital Expenditure is allowed as deduction in the year in which the Capital Expenditure is incurred.

Exception: No deduction is allowed for any expenditure incurred for the Acquisition of Land, Goodwill and Financial Instrument.

Additionally, if any payment or aggregate of such payments for such expenditure in a single day to a person in excess of Rs 10,000 is made by any mode other than Account Payee Cheque, Account Payee Draft or Electronic Clearing System or such other prescribed Electronic Mode, then no deduction shall be allowed for that particular expenditure.

In other words, in case of any expenditure where such payment or aggregate of such payments is made by Cash, Bearer Cheque or Crossed Cheque in a single day to a person for an amount in excess of 10,000 then no deduction for such payment shall be allowed.  

Double Deduction not allowed

Where a deduction in respect of the Specified Businesses has been claimed and allowed under the Section 35AD, then no deduction shall be allowed for such Specified Businesses under Part C of Chapter VIA (Profit Linked Deductions) or SEZ Unit Tax Incentive under Section 10AA for that particular year or any of the following years under the Income Tax Act.

Once a 100% Deduction in respect of an expenditure is allowed to the Specified Business, no deduction for such expenditure shall not be allowed to be debited to Profit and Loss for that particular year or any of the following years under the Income Tax Act (For eg Depreciation is not allowed on Assets for which 100% Capital Expenditure is allowed).

Conditions to be fulfilled

  1. The Business shall not be formed by splitting up or reconstruction of an already existing Business.
  2. It should not be set up by transfer of Plant or Machinery to the Specified Business which was previously used for any purpose. Plant and Machinery used shall be new. However, 20% of Total Plant and Machinery can be second hand or used previously. Plant and Machinery imported from outside India which at any time has not been previously used in India and on which Depreciation has not been allowed previously prior to the date of installation for the Specified Business and the same shall be considered as new Plant and Machinery.

Certain Important Points

  1. What if the Asset purchased for Specified Business on which full Deduction has been already claimed and allowed to the Assessee is transferred or destroyed?

If the Asset on which Deduction under the section 35AD already allowed is subsequently transferred, discarded, demolished or destroyed, then irrespective of the number of years for which such Asset was used for the Specified Business, the entire amount received on sale of such Asset or insurance compensation received on destruction of such Asset as the case may be, shall be considered as Business Income with Cost of Asset will be taken as Nil.

  • The Capital Expenditure deduction allowed in case of any Asset purchased for the Specified Business shall be exclusively used for only the Specified Business purpose for at least 8 years from the year of acquisition. 
  • What if the Asset purchased for Specified Business on which full Deduction is already claimed and allowed to the Assessee is used for Non-Specified Business within 8 years from the year of acquisition?

If an Assessee uses such an Asset for any other Non-Specified Business purpose within 8 years from the year of acquisition of such asset, then the Deduction already claimed and allowed as reduced by the Depreciation that would have been allowable had the Asset been used for Non-Specified Business from the year of acquisition shall be considered as Business Income of the Assessee. The Business Income so computed on which Tax is already paid shall become the Cost of Acquisition of the transferee and enter the Block of Assets at that value for the Non-Specified Business.

Note: This condition is not applicable to Sick Companies.

If the Assessee uses such an Asset for any other Non-Specified Business purpose after 8 years from the year of acquisition of such asset, the Asset used for Non-Specified Business is permissible and as a result, there shall be No  Business Income in the hands of the Assessee if the said Asset is used for Non Specified Business. The Cost of Acquisition of the Asset for the Non-Specified Business under shall be taken as Nil.

Treatment of Losses (Section 73A)

Loss from Specified Businesses can be set off only against Profit from Specified Business. However, Loss from Non-Specified Business can be set off against Profits from Specified Businesses.

Loss from Specified Business can be carried forward and set off in future even if the Specified Business is discontinued.

Such losses can be carried forward for an indefinite time period subject to the condition thattheAssessee shall file its Income Tax Return on or before the due date.

Conclusion

Although these Specified Businesses are earmarked as crucial to the development of the country and New Businesses identified from time to time have been added by the Government allowing 100% Deduction of the Expenditure incurred, the Government has made relevant amendments and inserted necessary conditions to restrict misuse and abuse of this section.

– Article written by CA Susham Rambhia for Business Guru.

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