Decoding the Section 35AC of Income Tax Act, 1961

Section 35AC of Income Tax Act, 1961 as Amended for the Financial Year 2022-23

Section 35AC of the Income Tax Act, 1961, commonly known as “Scheme for Deductions in Regard to Certain Projects and Schemes” is applicable from 01.04.2022 to 31.03.2023 (Financial Year 2022-23). This provision allows for the deduction of a certain percentage of the eligible sums paid or deposited for any eligible project or scheme. This article will discuss, analyze and explain the salient features of Section 35AC in detail.

Introduction to Deduction under Section 35AC of Income Tax Act, 1961 

Section 35AC of the Income Tax Act, 1961, provides a deduction in respect of income derived, or any sum of money paid or deposited, out of the gross total income of an assessee who has entered into any eligible project or scheme approved by the Central Government under this Section. The deduction is normally the same as the amount of such expenditure or amounts, but in some cases, it could be the lower of the two.

The primary purpose of this deduction is to encourage and support the economic development of some of the eligible projects or schemes and to induce different sectors of the economy to do their bit for the overall progress in our country. This provision ultimately incentivises and facilitates the corporate entities, which are expected to take lead role in development sectors, and makes investment in such approved activities more financially viable.

Eligibility for Deduction under Section 35AC of Income Tax Act, 1961

In order to be eligible for the deduction, the taxpayer must have entered into an eligible project or scheme as approved by the Central Government for the Financial Year 2022-23. The assessee can claim the deduction of such amount from its taxable income of the Financial Year 2022-23. Furthermore, the deduction should not exceed the amount or the expenditure incurred or deposited on account of the eligible project or scheme.

Moreover, the assessee can only avail the deduction in respect of the expenditure or deposit made out of the gross total income of the assessee in the Financial Year 2022-23. In other words, if any deduction is declared under any other provision of the Income Tax Act, 1961, the taxpayer can make a deduction only after considering such a deduction in its gross total income.

Types of Approved Projects or Schemes under Section 35AC of Income Tax Act, 1961

The Central Government may approve various types of projects or schemes under Section 35AC of the Income Tax Act, 1961. Such approved projects or schemes must be beneficial to the public in general and must be intended to meet any of the following objectives:

1. The construction or maintenance of industrial training centers and capital intensive institutions.

2. The strengthening of capital intensive industries or for the purposes of expansion and modernization of its existing units.

3. The promotion of research in specified forms of economic activities and knowledge.

4. The training and development of disadvantaged groups.

5. The training of local artisans and craftsmen in traditional and traditional-like professions.

6. The promotion of rural agro-economic activities.

7. The promotion of tourism and development of tourist spots or places.

8. The improvement in or restructuring of small scale industries and cottage industries.

9. The development of infrastructure for small scale industries or cottage industries.

10. The promotion of rural health services and health centres in rural areas.

11. Any other activity as may be prescribed by the Central Government from time to time.

The eligible project or scheme must conform to the standards and norms prescribed by the Central Government. Such standards and norms may be amended from time to time in consultation with the Reserve Bank of India or the National Bank for Agriculture and Rural Development.

The details of any eligible project or scheme must be published in the Wide Official Gazette of India and such details must be notified by the Central Government in the Income Tax Act.

Rate of Deduction under under Section 35AC of Income Tax Act, 1961

The rate of deduction shall be the amount or expenditure incurred or deposited in the Financial Year 2022-23 in respect of the eligible project or scheme subject to a maximum of an amount approved by the Central Government. In other words, the rate of deduction shall be same as the amount or expenditure incurred or deposited, but cannot exceed the amount approved by the Central Government.

Cases where Deduction under Section 35AC of Income Tax Act, 1961 can be Reduced

The amount of deduction allowed shall be reduced to the extent it exceeds the specified amount, if the eligible project or scheme is prematurely wound up or abandoned or is not completed in accordance with the memorandum of understanding between the Central Government and the assessee. Such reduced amount of deduction shall be equal to the amount of deduction allowed for the Financial Year 2022-23 or the specified amount or the amount approved by the Central Government, whichever is less.

Condition for Deduction under Section 35AC

The expenditure or deposit must be incurred or made by the assessee after the receipt of approval of the Central Government and such approval must be received before the date of the commencement of such eligible project or scheme. Further, any deduction claimed in respect of the expenditure or deposit should not have been claimed in any assessment year prior to the Financial Year 2022-23.

Certificate from Assessing Officer for Deduction under Section 35AC

The assessee is also required to obtain a certificate from the Assessing officer to the effect that the amount described in the return of income is eligible for deduction. This certificate must be issued at least seven days prior to the date of the filing of the return of income. Further, the assessee should submit the certificate to the Assessing Officer along with the return of income.

Conclusion

In conclusion, Section 35AC of the Income Tax Act, 1961 provides taxpayers with an incentive to invest in approved projects and schemes that are beneficial to the public in general. The benefits are provided in the form of a deduction, calculated on the basis of the amount or expenditure incurred or deposited, subject to a maximum of an amount approved by the Central Government. Additionally, certain conditions are applicable for the deduction to be valid, such as receipt of prior approval from the Central Government and obtaining a certificate from the Assessing Officer. This provision ultimately incentivises and facilitates the corporate entities, which are expected to take lead role in the development sectors, and makes such investments financially viable.