Investment Linked Deduction under Section 35AD of Income Tax Act 1961
Under Section 35AD, government intends to give incentive to businesses to foray into certain industries which are critical for the economy as a whole. These are capital incentive industries i.e. there is high capital and high risk involved in setting up a business in these industries and thus, vide this investment linked deduction, government intends to promote these industries. In a nutshell, this section gives 100% deduction of capital expenditure incurred wholly and exclusively for the purpose of 14 “Specified Businesses” in the year in which it is incurred. Let us understand in detail, what are these “Specified Businesses” and what are the other conditions involved for getting the benefit of this section.
- Specified Business
|Sr. No.||Specified Business||Conditions (If Any)|
|1.||Setting up and operating a cold chain facility||Cold Chain Facility means facility for storage or transportation of –
It also includes refrigeration and other facilities necessary for preservation of such products.
|2.||Setting up and operating a warehousing facility for storage of agricultural produce.||There is no special condition prescribed for this.|
|3.||Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network.||
Here, Associated person means a person who,
|4.||Building or operating a new hotel, anywhere in India||
|5.||Building or building and operating, anywhere in India, a hospital||At least 100 beds for patients.|
|6.||Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed||There is no special condition prescribed for this.|
|7.||Developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed||There is no special condition prescribed for this.|
|8.||Production of fertilizer in India||There is no special condition prescribed for this.|
|9.||Setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962 (52 of 1962)||There is no special condition prescribed for this.|
|10.||Bee-keeping and production of honey and beeswax||There is no special condition prescribed for this.|
|11.||Setting up and operating a warehousing facility for storage of sugar||There is no special condition prescribed for this.|
|12.||Laying and operating a slurry pipeline for the transportation of iron ore||There is no special condition prescribed for this.|
|13.||Setting up and operating a semi-conductor wafer fabrication manufacturing unit notified by the Board in accordance with such guidelines as may be prescribed||There is no special condition prescribed for this.|
|14.||Developing or maintaining and operating or developing, maintaining and operating a new infrastructure facility||
- Common condition that are to be fulfilled while claiming any of above deductions:
Now let us look at the other conditions that need to be satisfied to claim deduction under this section –
- Business is not set up by splitting up or the reconstruction of a business already in existence.
- New plant and machinery should be used in the business. However, there are certain exceptions to this condition;
- Imported plant and machinery, even if second hand will be considered new provided it is imported in India for the first time and depreciation on such plant and machinery has not been claimed by an Indian assessee before
- Second hand plant and machinery can be used such that the total value of such second hand plant and machinery shall not exceed 20%of total value of plant and machinery used in such business.
- Any asset for which deduction is allowed under this section shall not be used for any other business for 8 years from the year in which it was first capitalised. If it is so used, then the deduction allowed as reduced by depreciation allowable u/s 32 as if no deduction under this section was availed, shall be taxable as business income of the assessee.
There are certain expenditure which are not eligible as deduction i.e. if entity has incurred expense in relation to
- Expenditure incurred on the acquisition of any land or goodwill or financial instrument will not be eligible and further;
- Expenditure in cash to a person in a day shall not exceed Rs. 10,000.
- Other Important Points
Some other important points to be noted with regard to investment linked deductions under section 35AD are as under:
- Expenditure incurred prior to commencement of the business shall be allowed as deduction in the year in which the business commences operations provided such expenditure is capitalised in the books.
- If deduction u/s 35AD is allowed in respect of any asset than benefit under no other section of Income tax act shall be allowed for such asset like benefit u/s 10AA or income linked deductions under section 80C or even depreciation u/s 32 shall not be allowed.
- If an asset whose cost is allowed as deduction under this section is sold in a “Slump Sale”, then for the purpose of computing “Net Worth” for section 50B, value of such asset shall be taken as “Nil”.
- Loss incurred in a “Specified Business” shall be only be allowed to set off against profit of any other specified business only. Further, unabsorbed loss shall be allowed to be carried forward for infinite period just like unabsorbed depreciation.
- Question that may arise
Question : What if asset is sold or destroyed?
Answer : If the asset for which deduction under this section is allowed,
- Is sold, then the entire sale price is taxable as business income
- Is destroyed/discarded/demolished, then the insurance compensation received is taxable as business income
Question : Whether there is any provision which will be attracted in case where deduction has been availed under section 35AD?
- Answer : In case of Firm/LLP or any non-corporate assessee; they will be liable to pay tax as per the provision of Alternate Minimum Tax at the rate of 18.5% on adjusted total income, arrived after removing deduction under section 80H to 80RRB (except 80P), deductions which allowed under section 35AD as reduced by depreciation and deduction allowed under section 10AA i.e. deduction of profit varying from 100% to 50% is provided to units in Special Economic Zones (SEZs). It is applicable to LLP without any limit however to other non-corporate assessee it will be applicable on in case where there adjusted gross total income exceeds 20 lacs.