Section 35AD: Income Tax Deductions Guide
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Nilesh RoySection 35AD: Income Tax Deductions Guide
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Nilesh RoyCommon questions
Powered by AIFor capital expenditure incurred prior to the commencement of a specified business, 100% of the expenditure can be deducted in the first year of operation if it is capitalized in the books of account on the date of commencement. For capital expenditure incurred after the commencement, 100% is allowed as a deduction in the year the expenditure is incurred .
Capitalizing expenditures in the books of accounts is crucial for claiming deductions under Section 35AD prior to commencement. This acts as a prerequisite to link the expenditure to the operational assets of the specified business, ensuring that the deduction corresponds directly to the invested capital .
Sums received on account of capital assets, for which a Section 35AD deduction has been claimed and that are subsequently demolished, destroyed, discarded, or transferred, are treated as income under 'Profits and gains of business or profession'. It ensures that prior tax benefits do not result in tax-free capital gain from the disposed assets .
In cases of inter-unit transfer where one unit qualifies for a Section 35AD deduction and another does not, calculations for Section 35AD deductions must be made as if such transactions are conducted at market value. This ensures that the deductions are not inappropriately inflated through internal pricing .
Deductions under Section 35AD are not available for expenditures where payments to a person exceed Rs. 10,000 in a day unless made through an account payee cheque, draft, or electronic clearing system, reflecting the intent to promote transparency and trackability in financial transactions .
If an asset is used for a non-specified business within 8 years of acquisition or construction, the total amount of deduction claimed under Section 35AD is deemed business income for the year in which the asset is used for other purposes .
Machinery or plant previously used outside India by someone other than the assessee does not count as previously used for any purpose under Section 35AD, meaning deductions can still be claimed despite such use, provided other conditions are met, emphasizing the focus on domestic economic activity .
Section 35AD aligns with economic development policies by incentivizing investment in sectors vital to national growth, including cold storage, infrastructure, and housing projects. By offering deductions for capital expenditures in these new businesses, it encourages infrastructural growth, job creation, and improvement of essential services, supporting India's broader development objectives .
Specified businesses under Section 35AD include the setup and operations of a cold chain facility, warehousing for agricultural produce, laying and operating a pipeline for natural gas or petroleum, building and operating hotels of two-star category or above, hospitals, slum redevelopment projects, affordable housing projects, production of fertilizer, bee-keeping and production of honey and beeswax, warehousing for sugar storage, and infrastructure facilities. Key conditions for claiming deductions include that the business must be new and not a reconstruction of existing businesses. Machinery or plant used must not have been previously utilized outside India by any person other than the assessee, and expenditure should be capitalized upon commencement .
Section 35AD emphasizes that a specified business must be new and not a reconstruction of an existing venture to prevent misuse of the deduction, promoting genuine expansion and development of new infrastructure and sectors rather than providing tax breaks for revamped or merged existing entities .