Deduction available towards expenditure on specified business under section 35AD of the Income Tax Act is briefly explained in the current article.

Article explains Provisions of section 35AD of the Income Tax Act, Conditions for claiming deduction under section 35AD, Amount of deduction available under section 35AD and List of specified business covered under section 35AD of the Income Tax Act.

Provisions of section 35AD of Income Tax Act

As per provisions of section 35AD, the deduction is available towards any capital expenditure, wholly and exclusively, incurred for carrying on a specified business.

Notably, deduction under section 35AD is not available towards expenditure incurred for acquisition of any land or financial instrument or goodwill. Additionally, the deduction is also not available when payment/ aggregate of payment exceeds INR 10,000 to a person in a single day and such payment is done via cash or bearer cheque or crossed cheque.

Conditions for claiming deduction under section 35AD-

Deduction under section 35AD of the Income Tax Act is available only if the following conditions are satisfied-

1. The specified business should not have been set up by splitting up/ reconstruction of the already existing business.

2. The specified business should not have been set up by the transfer of plant/ machinery which was previously used for other purposes.

3. Additional condition, when specified business is of laying and operating a cross country natural gas/ crude/ petroleum oil pipeline network for distribution or storage-

a. The company should be formed and registered in India,

b. It should be approved by the Petroleum and Natural Gas Regulatory Board,

c. It should have made not less than such proportion of its total pipeline as per regulations made by the Petroleum and Natural Gas Regulatory Board available for use on common carrier basis by any other person., and

d. It should fulfil any other prescribed conditions.

4. Additional condition, when specified business is developing/ maintaining and operating/ developing, managing and operating the new infrastructure facility-

a. The company should be formed and registered in India, and

b. It should have entered into an agreement with the Central Government/ State Government/ local authority/ any other statutory body for developing/ maintaining and operating/ developing, managing and operating the new infrastructure facility.

Amount of deduction available under section 35AD-

Particulars Deduction available under section 35AD Conditions, if any
Capital expenditure incurred prior to commencement of the specified business 100% of the expenditure is allowed as a deduction in the first year of commencement. The deduction is available only if the expenditure amount is capitalized in the books of accounts on the date of commencement of the business.
Capital expenditure incurred after the commencement of the specified business 100% of the expenditure is allowed as a deduction in the year the expenditure is incurred. _

List of specified business covered under section 35AD of the Income Tax Act

Provisions of section 35AD(8)(c) cover the definition of ‘specified business’, whereas, provisions of section 35AD(5) covers the date from which such businesses should have commenced the operations-

Specified business Date of commencement of business operations
Setting up as well as operating a cold chain facility. On or after 1st April 2009
Setting up as well as operating a warehousing facility, specifically, for storing of agricultural produce. On or after 1st April 2009
Setting up as well as operating a warehousing facility, specifically, for storage of sugar. On or after 1st April 2012
Laying as well as operating a cross country natural gas/ crude/ petroleum pipeline network for distribution. It also includes a storage facility. On or after 1st April 2007
Building as well as operating a hotel of category two-star and above anywhere in India. On or after 1st April 2010
Building as well as operating a hospital with minimum of 100 beds for patients in India. On or after 1st April 2010
Building as well as developing a housing project for slum redevelopment/ rehabilitation. On or after 1st April 2010
Building as well as developing a housing project for affordable housing. On or after 1st April 2011
Production of fertilizers in India. On or after 1st April 2011
Setting up as well as operating an inland container depot/ a container freight station. On or after 1st April 2012
Bee-keeping as well as the production of honey and beeswax. On or after 1st April 2012
Laying as well as operating a slurry pipeline for the transportation of iron ore. On or after 1st April 2014
Setting up as well as operating a semi-conductor wafer fabrication manufacturing unit. On or after 1st April 2014
Developing/ maintaining and operating/ developing, maintaining and operating a new infrastructure facility. On or after 1st April 2017

Other important points worth nothing related to Section 35AD-

1. With effect from 1st April 2020, deduction under section 35AD is made optional.

2. No deduction shall be allowed under provisions of Section 10AA of the Income Tax Act (i.e. Special Economic Zones deduction).

3. No deduction will be allowed under Chapter VI-A under part-C ‘Deductions in respect of certain incomes’.

4. Deduction already claimed and allowed under section 35AD will not be allowed under any other section.

5. The asset against which deduction is claimed under section 35AD should be used exclusively for the specified business for a period of eight years starting from the previous year in which the asset is acquired.

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