Section 35AD of Income Tax Act: Eligibility, Conditions, Specified Business List

According to Section 35AD of the Income Tax Act 1961, the government provides tax deductions to promote certain industries involved in specific sectors. This section explains deductions applicable to tax incentives for specified businesses. Let’s overview Section 35AD of the Income Tax Act, eligibility criteria for deductions, the list of specified businesses, and more.

What is Section 35AD of the Income Tax Act?

Section 35AD of the Income Tax Act allows taxpayers to claim deductions for specific types of capital expenditures reserved for specified businesses during any financial year. The expenditure must fulfil the criteria mentioned in this section.

This section specifies that a taxpayer is eligible for deduction for all capital expenditures incurred solely for their business operations during the previous year in which the expenditures were made. Section 35AD of the Income Tax Act allows deductions of certain expenses incurred by a specified business. 

Conditions for Claiming Deductions Under Section 35AD

The following conditions must be fulfilled to claim deductions under Section 35AD:

• The deduction u/s 35AD would be applicable only if the taxpayer opts to file under the old tax regime.
• When a company builds, operates, and maintains the present infrastructure resource apart from managing it:
  • The business must be established and registered in India.
  • It should have signed a legal agreement to develop, manage, run, and uphold the existing infrastructure with a statutory organisation, a state, a local government, or the federal government.
• The specified business must not have been set up by splitting up/ renovating an existing business.
• The specified business must not have been established by  using second-hand plant and machinery (up to 20% of plant and machinery can be second-hand)
• Here are the additional conditions to be met by the business of laying and operating cross-country natural gas or crude or petroleum oil pipeline network for distribution:
  • The company must be established and registered in India 
  • It must gain approval by the Petroleum and Natural Gas Regulatory Board.
  • A certain minimum share of its overall pipeline must be available for use by any other entity on a common carrier basis, according to the Petroleum and Natural Gas Regulatory Board.
• When the specified business is developing/ operating and maintaining/ developing, administering and operating the new infrastructure facility:
  • The company must be established and registered in India.
  • It should have signed an agreement with the State Government, Central Government, local authority, or any other statutory body to develop/operate and maintain/develop, administer, and operate the new infrastructure facility.
• A business can’t claim deductions for expenses incurred towards the purchase of land/financial instrument/goodwill.
• Deductions can’t be availed when a payment exceeds INR ₹10,000 made to a person within a day and received via cash, crossed cheque, or bearer cheque.
• The deduction is allowed only if the assessee's accounts have been audited by a chartered accountant and the audit report is furnished along with the Income tax return.
• Any asset in respect to which a deduction is claimed and allowed under section 35AD shall be used only for the specified business, at least for a period of 8 years.

Section 35AD Specified Business List

The below list showcases the specified businesses as per Section 35AD of the Income Tax Act:

Deduction Amount Under Section 35AD

The deduction of 100% of the capital expenditure incurred during the previous year, wholly and exclusively for the specified business, as mentioned above, would be allowed as a deduction from the business income to the assessee under section 35AD. However, expenditure incurred on the acquisition of land, goodwill, or financial instruments would not be eligible for deduction. Further, the expenditure incurred, wholly and exclusively, for the purpose of the specified business prior to the commencement of operation would be allowed as a deduction during the previous year in which the assessee commences operations of his specified business.

Set-off or Carry Forward of Loss from Specified Business

The loss of an assessee claiming deduction under section 35AD in respect of a specified business can be set-off only against the profit of another specified business.

Losses from a specified business can be carried forward indefinitely to be set off against profits from the same or any other specified business, provided the Income tax return is filed before the due date.

Conclusion

Section 35AD of the Income-tax Act,1961 is revised by the Finance Act of 2023. It allows taxpayers to claim deductions for capital expenditures made in specific businesses. Taxpayers who want to benefit from this provision must understand the corresponding eligibility criteria, compliance requirements, and business categories. Its ability to encourage investment in various sectors makes sure it plays a notable role in the country’s economic growth.