Section 35AD of the Income Tax Act: Eligibility, Specified Business & Deductions
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
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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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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