Section 35AD of the Income Tax Act: TDS on Capital Expenditure

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!

About Section 35AD

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.

Eligibility Terms under Section 35AD

A business needs to satisfy the following terms and conditions to avail of deductions u/s 35AD of the Income Tax Act:

The establishment of a prescribed business should not involve the reconstruction/splitting up of an existing business.
The setting up of a prescribed business shouldn’t involve the transfer of machinery/plant that was earlier utilised for other activities.
When a prescribed business is of operating and laying a cross country petroleum oil/crude oil/natural gas pipeline network for storage or distribution:

The entity must be registered and established in India.
The Petroleum and Natural Gas Regulatory Board (PNGRB) must approve it.
It must’ve made not lower than such percentage of its overall pipeline as per guidelines made by the PNGRB applicable for usage by any other person on a common carrier basis.
Further, it must satisfy other specified conditions.

When a prescribed business is operating and managing, developing/operating and maintaining/developing the current infrastructure facility:

The entity must be registered and formed in India.
It must’ve entered into a contract with any statutory body/local authority/the State or Central Government for operating and managing, developing/operating and maintaining the current infrastructure.

Deduction Amount Applicable u/s 35AD

As per the amendment in Section 35AD of the Income Tax Act, the deduction limit will be as follows:

Particulars	Conditions	Deductions Applicable
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.

Specified Businesses under Section 35AD

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

Key Points to Remember about Section 35AD

Note down the following pointers before opting for deductions under Section 35AD:

From April 1 2020, deduction u/s 35AD has been made optional.
If a business avails a deduction under this Section, then it cannot opt for a deduction through Section 10AA (SEZ unit tax benefits) or Chapter VIA, Part C (profit-based deductions) for that year or for the succeeding years.
In case a business receives a deduction u/s 35AD, then it cannot claim such deductions under other sections.
A specified business can claim a deduction against an asset u/s 35AD. However, it must use such an asset exclusively for 8 years, beginning from the preceding year during which it has acquired the asset.

Final Word

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.

FAQs on Section 35AD of the Income Tax Act

Q1. Suppose a business has received a deduction against an asset u/s 35AD. What happens if the taxpayer discards that asset?

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.

Q2. What happens if a business has received a deduction for an asset but it has used it for a non-specified business before eight years from the time of acquisition?

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.

Q3. What happens if a business has received a deduction for an asset but it has used it for a non-specified business after eight years from the time of acquisition?

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.

Q4. What about losses from a specified business?

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.

Q5. If a business gets a deduction u/s 35AD, can it claim a deduction u/s 80HH?

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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