This article is written by Daisy Jain, a law student at the Institute of Law, Nirma University. This article explains Section 35AD of Income Tax Act, 1961. This article talks about the conditions for claiming deductions under Section 35AD and the eligibility conditions for the same.
Table of Contents
Introduction
Some commercial sectors have been named by the Indian government as being essential to the growth and success of the nation. To promote certain industries that deal with petroleum and gas pipelines, the government offers tax deductions under Section 35AD of the Income Tax Act of 1961. You will learn about the deduction in tax incentive towards the specified business under Section 35AD, the eligibility criteria for authorizing deductions, and the specified business under Section 35AD in this article.
Understanding Section 35AD of Income Tax Act, 1961
According to Section 35AD of the Income Tax Act, 1961, an assessee shall be entitled to a deduction in respect of the entire amount of any capital expenditure accrued, wholly and solely, for the purposes of any specified business undertaken by him during the previous year in which such expenditure is borne. It should be noted that expenses undertaken for the purchase of any land, financial instrument, or asset are not eligible for a deduction under Section 35AD. Furthermore, a deduction is not accessible if a person receives more than INR 10,000 payments in a single day, whether they are made in cash, bearer cheques, or crossed cheques.
Section 35AD offers an investment-linked tax credit for specified businesses. Building and running a cross-country natural gas, cured, or petroleum oil pipeline network for transmission with storage capabilities as a beneficial element of the network is one such specific business. You qualify for the reward if your company installs and maintains a network of cross-country natural gas pipelines for transmission. Section 35AD permits a deduction of 100% of capital expenditures made during the previous year wholly and solely from company income.
Payments made in any other form than with an account (a/c) payee draft, an a/c payee check, or through an Electronic Clearing Service (ECS) are not qualified for deduction. Neither are expenses made on the purchase of any real estate, asset, or financial instrument.
Section 35AD of the Income Tax Act, 1961 is divided into 8 sub-sections which we shall now understand in detail:
Section 35AD (1) of Income Tax Act
A deduction is entitled to the assessee for any expenditure incurred in the nature of capital. The expenditure incurred for the purposes of specified business previously by the assessee wholly or exclusively. But the deduction on expenditure for any specified business is only allowed on one condition, which is for the previous year when the assessee business operations. The two conditions that should be met for the deduction:
- The expense is incurred before the specified business begins operations; and
- On the day that the assessee’s operations began, the amount was capitalized in its books of accounts.
Section 35AD (2) of Income Tax Act
Section 35AD (2) talks about the specified business for which the following conditions should be fulfilled:
- The investment should not be through splitting up or reconstruction.
- The plant and machinery should be new ones and should not be already utilized for any purpose to the designated enterprise.
- The business should be owned by a company registered in India under the statute of Companies Act or by an authority or by a board or by a consortium established under any central act or a statute. Such business should be authorized by the Petroleum and Natural Gas Regulatory Board, and the Central government should make an announcement in the Official Gazette regarding this. The business can be of such a nature that the business entity has entered into an agreement with the state government or any statutory body for developing or maintaining any new infrastructure facility.
Section 35AD (3) of Income Tax Act
No deduction can be allowed under this Section for any specified business if it is for any assessment year. The deduction is not allowed under the provision of Section 10AA and Chapter VIA of the Income Tax Act. This chapter talks about deduction in certains businesses of specified business.
Section 35AD (4) of Income Tax Act
The assessee shall not be entitled to any deduction for the expenses mentioned in sub-section (1) under this Section or pursuant to any other provision in any prior year.
Section 35AD (5) of Income Tax Act
Section 35AD (5) talks about the specified businesses on which this provision shall be applicable. It talks about different types of specified businesses which are entitled to a deduction. For example, the business is in the nature of laying and managing a cross-country natural gas pipeline network or has a nature of the business which is operating a new hospital which has a capacity fo atleast 100 beds for the patients or is builiding a new hotel of atleast two star category or above that.
Section 35AD (6) of Income Tax Act
The assessee operating his business shall get an additional deduction for the prior year pertinent to the assessment year, which begins on April 1, 2010, for an amount of expenditure in the nature of capital. But there are two conditions for this additional deduction:
- The business operation should have its commencement on or after 1st April 2007 and its ending should be on 31st March 2009.
- There should not be any prior deduction allowable to the assesee in the previous year.
Section 35AD (7) of Income Tax Act
Any asset for which a deduction is requested and permitted under this Section must be used exclusively for the identified business for a duration of eight years starting with the year the asset was purchased or built.
Section 35AD (8) of Income Tax Act
Section 35AD (8) deals with the following definitions:
- Associated person
A person who engages in the administration, direction, or capital of the assessee either explicitly or implicitly or through one or more intermediaries; a person who controls more than half of the management board or members of the board of trustees; or one or more executive board members or executive directors of the management committee of the assessee; a person who retains, explicitly or implicitly, shares holding not less than 26% of the votes cast in the capital of the assessee; and a person who assures not less than 10% of the assessee’s total liabilities.
- Cold chain facility
It refers to a network of amenities for the scientifically regulated transportation or storage of agricultural and forestry products; meat and meat items; livestock; marine and milk products; items of horticulture and apiculture; and packaged food items; it also refers to the assessee’s borrowings.
- Specified business
It refers to any one or more of the following activities: establishing and running a cold chain facility; establishing and running a facility for the preservation of agricultural products.
Eligibility conditions under Section 35AD of Income Tax Act, 1961
For a business to be eligible for deductions under Section 35AD of the Income Tax Act, it must meet the requirements listed below:
- The reconstruction or division of a current company should not be necessary to start an authorized business.
- Transferring equipment or plant that was previously used for other purposes should not be a part of starting a specified business.
- When a permitted activity consists of operating and constructing a cross-country pipeline network for the transportation or storage of crude oil, natural gas, or petroleum products:
- The company needs to be founded and registered in India.
- It requires approval from the Petroleum and Natural Gas Regulatory Board (PNGRB).
- It must have made at least a portion of its total pipeline available for use on a common carrier basis in accordance with PNGRB regulations.
- In addition, it needs to meet the requirements that are listed.
- When a specified business manages the current infrastructure resource while also constructing, operating, and sustaining it:
- The company must have been created and registered in India.
- It must have signed a contract with a statutory organization, a local government, the state, or the federal government for the development, management, operation, and maintenance of the current infrastructure.
Amount of deductions granted under Section 35AD of Income Tax Act, 1961
| Parameters | Deductions granted under Section 35AD | Prerequisites, if any |
| Capital expenses made prior to the start of specified business | In the first year after starting, a deduction for 100% of the expense is permitted. | The deduction is possible only if the expense amount is accumulated in the accounts payable books on the day the business began. |
| Capital expenses made after the start of specified business | A deduction of 100% of the expense is permitted in the year that the expense is made. | No such condition |
Specific businesses under Section 35AD of Income Tax Act
The meaning of ‘specified business’ is covered by Section 35AD(8)(c), while the date on which such firms should have started operating is covered by Section 35AD(5). The government occasionally acknowledges new firms in addition to the specified businesses listed under Section 35AD of the Income Tax Act, which are crucial to the development of the country. They are eligible for a 100% deduction for their capital expenses. To prevent the abuse and exploitation of these laws, the government has added the appropriate conditions and made the necessary adjustments. The enterprises that fall under Section 35AD of the Income Tax Act are shown in the following table:
| S.NO. | Specified business | Date of commencement |
| On or after 01.04.2017 | Establishing and running a cold chain facility. | |
| On or after 01.04.2014 | Constructing and running a warehouse facility exclusively for the storage of agricultural products. | |
| On or after 01.04.2014 | Establishing and running a warehouse exclusively for the storage of sugar. | |
| On or after 01.04.2012 | Building a nationwide network of pipelines for delivery of natural gas, crude oil, and petroleum. A storage facility is also part of it. | |
| On or after 01.04.2012 | Establishing and running a hotel of at least two stars anywhere in India. | |
| On or after 01.04.2012 | Constructing and running a hospital in India with at least 100 beds for patients. | |
| On or after 01.04.2011 | Constructing and building a housing project for slum restoration. | |
| On or after 01.04.2011 | Construction and development of an affordable housing project. | |
| On or after 01.04.2010 | Fertilizer output in India. | |
| On or after 01.04.2010 | Establishing and running a container freight terminal or inland container depot. | |
| On or after 01.04.2009 | Beekeeping and the making of beeswax and honey. | |
| On or after 01.04.2009 | Building and running a slurry pipeline for iron ore transportation. | |
| On or after 01.04.2010 | Establishing and running a production facility for the fabrication of semiconductor wafers. | |
| On or after 01.04.2007 | Building, maintaining, and running a new infrastructure facility |
- Expenses made before business commencement – 100% of expenditures made prior to business launch is permitted as a deduction in the first year the company launches its activities.
Condition: The Assessee may deduct expenses paid before the Specified Business began operations only if such expenses were capitalized in the Books of Account on the day the Specified Business began operations.
- Expenditures made following the start of business – In the year that the capital expense is incurred, a deduction of 100% of the expense is permitted.
Exception: no deductions are permitted for costs related to the purchase of land, goodwill, or financial instruments.
Double deduction not permitted
If a deduction for the specified businesses has been requested and approved under Section 35AD, then no deduction under Part C of Chapter VIA (Profit Linked Deductions) or the SEZ Unit Tax Incentive under Section 10AA will be granted for those specified businesses for the current year or any subsequent years under the Income Tax Act. For example, depreciation is not permitted on assets for which 100% capital investment is permitted. Once a 100% deduction in respect of an expense is permitted to the specified business, no tax cut for such expenses shall be permitted to be deducted to profit and loss for that specific year or any of the years that followed under the Income Tax Act.
Remedy for losses incurred due to deductions
Section 73A of the Income Tax Act, 1961, specifies the loss incurred in any specified business due to deductions. Only profit from ‘specified business’ may be balanced with loss from Specified Business. Even if the Specified Business is stopped, losses from it may be carried over and offset in the future. These losses may be continued forward for an indeterminate period of time, provided that the assessee files its income tax return within the deadline provided.
Conclusion
Although the government has introduced additional businesses which it has occasionally recognised and designated these specified businesses as essential to the development of the nation, by allowing 100% deduction of the expense incurred. It has also made necessary amendments and implanted conditions requisite to prevent misuse and abuse of this Section.
Frequently Asked Questions
What does Section 35AD of Income Tax Act say?
Section 35AD allows for the deduction of any capital expenses that are made purely and entirely for operating a particular firm. It should be noted that costs incurred for the purchase of the real estate, financial instruments, or goodwill are not eligible for the deduction under Section 35AD.
How to recover specific business losses?
A loss from a designated business may be offset against income from a specified business under Section 73A of the Income Tax Act. Such a loss might be carried forward even if a specific business was shut down.
Let’s say a business has benefited from a Section 35AD asset deduction. What happens if the taxpayer sells the asset?
A tax deduction for an asset that has been authorised under Section 35AD may be transmitted, demolished, damaged, or disposed of. In this case, any insurance reimbursement for the asset or receivables from selling the asset will be considered business revenue, irrespective of how long a specific business has used the asset. The asset will be free.
References
- https://legislative.gov.in/sites/default/files/A1961-43.pdf
- https://taxguru.in/income-tax/section-35ad-deduction-expenditure-business.html
- https://ebizfiling.com/blog/section-35ad-of-income-tax-act/#
- https://taxguru.in/income-tax/section-35ad-deduction-expenditure-business.html#Amount_of_deduction_available_under_section_35AD
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