Section 35E – Deduction towards expenditure incurred on prospecting for or extraction/ production of certain minerals

An amount of eligible expenditure incurred on prospecting for or extraction or production of certain minerals or group of associated minerals are available as a deduction under section 35E of the Income Tax Act. The deduction provisions of said section 35E are briefly explained in the current article.

Deduction provisions of section 35E of Income Tax Act

Conditions for claiming deduction under section 35E

1. An assessee, incurring the expenditure, should be-

a. An Indian company; or

b. A person resident in India (other than a company).

2. An assessee should be engaged in any operations relating to-

a. Prospecting for any mineral; or

b. Extraction of any mineral; or

c. Production of any mineral.

Other provisions governing the deduction under section 35E

1. Eligible expenditure-

a. Expenditure incurred for prospecting, extraction or production of minerals/ group of associated minerals during the following period is allowed as a deduction under section 35E

i. Expenditure incurred during the year of commercial production; and

ii. Expenditure incurred during one or more of the four years immediately prior to the year in which commercial production is started.

Notably, deduction is available if the expenditure is incurred after 31st March 1970.

b. Above referred eligible expenditure should have been wholly and exclusively used towards-

i. Operations of prospecting for minerals/ group of associated minerals specified in Part A or Part B of the Seventh Schedule; or

ii. Development of a mine/ other natural deposit of any mineral/ group of associated minerals.

2. Ineligible expenditure-

The following type of expenditure will not be eligible for deduction under section 35E of the Income Tax Act

a. Expenditure incurred towards the acquisition of the site of the source of mineral or group of associated minerals;

b. Expenditure incurred towards acquiring any rights in and over the site of the source of mineral or group of associated minerals;

c. Expenditure incurred towards the acquisition of the deposits of the minerals/ group of associated minerals including expenditure incurred for acquiring rights in or over such deposits;

d. Capital expenditure in respect of any building, plant, machinery or furniture against which depreciation is allowed under section 32 of the Income Tax Act.

Amount of deduction available under section 35E

Eligible expenditure is allowable as a deduction under section 35E in ten equal instalments. However, available deduction, during any previous year, would be lower of the following-

  • Instalment amount (i.e. one-tenth of the expenditure which is allowed as a deduction); or
  • An amount sufficient to reduce the total income (arising from the commercial exploitation of any mine/ other natural deposit of the mineral or group of associated minerals) of the previous year to ‘NIL’.

Other important points related to deduction under section 35E

1. The consequence of amalgamation/ demerger of the assessee company, claiming deduction under section 35E, before the expiry of ten years of available deduction-

a. Deduction under section 35E will not be available to the amalgamating/ demerged company in the year in which amalgamation/ demerger took place.

b. Deduction provisions of section 35E will apply to the amalgamated/ resultant company. Accordingly, the deduction will also be available to the amalgamated/ resultant company.

2. For claiming deduction under section 35E, an assessee (other than the company and co-operative society) needs to-

a. Get the books of accounts audited by the practising chartered accountant; and

b. Furnish audit report in Form No. 3AE.

3. The deduction allowed and claimed under section 35E of the Income Tax Act will not be allowed as a deduction under any other provisions of the Act.

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