The Government of India has recognised certain business sectors that are crucial for the country’s development and economic growth. To promote such sectors, the government offers tax deductions under Section 35AD of the Income Tax Act, 1961.
Read on to get the details of this Section!
According to Section 35AD of the Income Tax Act for AY 2023-24, deductions are applicable to the capital expenditure (exclusively and wholly) incurred by the prescribed businesses.
However, a business cannot avail deductions for expenditure towards the acquisition of goodwill/financial instrument/land. Further, deductions are not applicable when a payment goes beyond Rs. 10,000 to a person within a day and those payments are made through crossed cheque/bearer cheque/cash.
A business needs to satisfy the following terms and conditions to avail of deductions u/s 35AD of the Income Tax Act:
As per the amendment in Section 35AD of the Income Tax Act, the deduction limit will be as follows:
|Capital expenditure applicable after a prescribed business has commenced||–||The entire expenditure is available as a tax deduction during the year it is incurred.|
|Capital expenditure applicable before a prescribed business has commenced||Such a deduction is applicable if the expenses are recorded in the books of accounts on the business commencement date.||During the first year of business commencement, the entire expenditure is available as a deduction.|
The following chart showcases the specified businesses under Section 35AD of the Income Tax Act:
|Sl. No.||Date of Commencement||Specified Business|
|1||On or post 01.04.2017||Maintaining and operating, developing or maintaining and operating a current infrastructure facility|
|2||On or post 01.04.2014||Establishing and operating a wafer fabrication (semiconductor) plant|
|3||On or post 01.04.2014||Operating and laying a sludge pipeline to transport iron ore|
|4||On or post 01.04.2012||Establishing and operating a warehousing service to store sugar|
|5||On or post 01.04.2012||Production and bee-keeping of beeswax or honey|
|6||On or post 01.04.2012||Establishing and operating a CFS (Container Freight Station) or an Inland Container Depot approved or notified through the Customs Act, 1962|
|7||On or post 01.04.2011||Production of fertiliser|
|8||On or post 01.04.2011||Building and developing affordable housing projects through a specified scheme offered by state or Central Government|
|9||On or post 01.04.2010||Establishing and managing a hospital, having 100 beds (minimum) for the patients|
|10||On or post 01.04.2010||Setting up and operating a hotel of 2-star or more in India as the Central Government has notified|
|11||On or post 01.04.2009||Establishing and managing a warehousing facility to store agricultural produce|
|12||On or post 01.04.2009||Establishing and managing a cold chain service for certain products|
|13||On or post 01.04.2010||Building and developing a housing project for slum rehabilitation or redevelopment under a scheme that the state or Central Government has notified|
|14||On or post 01.04.2007||Operating and laying a cross country crude/petroleum /natural gas pipeline network (being a network’s integral part) for distribution|
Note down the following pointers before opting for deductions under Section 35AD:
The specified businesses under Section 35AD of the Income Tax Act are essential for the nation’s growth, and the government recognises new businesses from time to time. They can avail 100% deduction on the capital expenditure incurred.
However, the government has incorporated necessary conditions and made specific amendments to restrict the abuse and misuse of these provisions.
Ans: A case may arise when an asset against which tax deduction has been allowed u/s 35AD is eventually destroyed, demolished, discarded or transferred.
In the case of this situation, the insurance compensation for that asset or receivables from selling that asset will be eligible as business income, regardless of the duration for which a specified business has used that asset. The asset’s cost will be Nil.
Ans: In this case, a deduction received as minimised by the depreciation, which could’ve been applicable had that asset been utilised for a non-specified business starting from the time of acquisition, will be eligible as a taxpayer’s business income.
The estimated business income on which tax has been paid will become the acquisition cost of a transferee. Furthermore, it’ll enter the group of assets for the relevant non-specified business at that value.
Ans: In this situation, the deduction received from an asset that a non-specified business uses is allowable. This means that there’ll be no business income in a taxpayer’s hands. The asset’s acquisition cost for the relevant non-specified business will be Nil.
Ans: As per Section 73A of the Income Tax Act, a loss through a specified business could be set off against gains from specified businesses. Even in case of discontinuation of a specified business, such a loss could be carried forward.
Ans: If a specified business has received a deduction under Section 35AD of the IT Act, it cannot claim a deduction through Chapter VIA provisions. This means that it is not eligible for deduction through Sections 80HH-80RRB.
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