What is Section 35AD of Income Tax Act? And Deduction towards specified business under Section 35AD

Introduction

The Indian government has identified some commercial sectors as critical to the country’s development and progress. The government provides tax deductions under Section 35AD of the Income Tax Act of 1961 to stimulate such industries. This article will walk you through specified business under Section 35AD, Deduction towards Specified business under Section 35AD, and Eligibility Criteria. But before moving through all these terms let’s have a look at “What is Section 35AD of the Income Tax Act?”

What is Section 35AD of the Income Tax Act?

An assessee shall be permitted a deduction in respect of the whole of any capital expenditure incurred, entirely and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred, according to Section 35AD of Income Tax Act.

Benefits under Section 35AD

For Specified Businesses, Section 35AD provides an investment-linked tax credit. One such specific enterprise is the construction and operation of a cross-country natural gas, cured, or petroleum oil pipeline network for distribution, with storage facilities as a benign component of the network. If your business involves laying and operating a cross-country natural gas pipeline network for distribution, you will be eligible for the incentive.

Section 35AD allows a deduction from company income of 100 percent of capital expenditures made during the preceding year solely and exclusively for those above businesses. Expenses incurred on the acquisition of any land, goodwill, or financial instrument, or payments made in a way other than via A/c payee draught,  A/c payee cheque or through ECS, are not eligible for deduction.

Eligibility Criteria Under Section 35AD of the Income Tax Act

To qualify for deductions under Section 35AD of the Income Tax Act, a firm must meet the following requirements:

• When the prescribed business is the operation and construction of a cross-country petroleum oil/crude oil/natural gas pipeline network for storage or distribution:

1. 1. In India, the entity must be registered and established.

   2. It must be approved by the Petroleum and Natural Gas Regulatory Board (PNGRB).

   3. It must have made not less than a certain percentage of its entire pipeline available for use by any other person on a common carrier basis, as determined by the PNGRB.

   4. It must also meet several other requirements.

• When a prescribed business is operating and managing the current infrastructure facility, developing/operating, and maintaining/developing it:

1. 1. The company must be created and registered in India.

   2. It must have signed a contract to operate and manage, develop/operate, and maintain the current infrastructure with any statutory body/local authority/state or federal government.

Important Note:

• It is not necessary to remodel or split up an existing business in order to start a specified business.

• The establishment of a prescribed business should not require the transfer of machinery or plant that was previously used for other purposes.

Deduction towards Specified business under Section 35AD

• Capital expenditures that are incurred after the start of a prescribed business are eligible for a tax deduction in the year they are incurred.

• Capital expenditures that must be made before a certain business can start: If the expenses are documented in the books of accounts on the business’s start date, the deduction is available, and the entire expenditure can be deducted in the first year of operation in that case.

Points to Keep in mind for Deduction towards Specified business Under Section 35AD

• The deduction under section 35AD is not mandatory with effect from 1st April.

• If a company takes a deduction under this section, it cannot take another deduction under Section 10AA (SEZ unit tax benefits) or Chapter VIA, Part C (profit-based deductions) for that year or the following years.

• If a company receives a deduction under section 35AD, it cannot claim deductions under other provisions.

• A specified business can deduct an asset under section 35AD. It must, however, employ such an asset solely for eight years, commencing with the year in which it was bought.

FAQs on Specified Business under Section 35AD of the Income Tax Act

1. Can a firm claim a deduction under section 80HH if it receives a deduction under section 35AD?

A specified business that has received a deduction under Section 35AD of the Internal Revenue Code cannot claim a deduction under Chapter VIA. This means it is not eligible for a deduction under Sections 80HH-80RRB.

2. What is the Provision of Section 35AD of the Income Tax Act?

The deduction is granted under section 35AD for any capital expenditure incurred solely and exclusively for carrying out a specified business. Notably, the section 35AD deduction does not apply to expenses incurred for the acquisition of land, financial instruments, or goodwill. Furthermore, the deduction is not possible when a single payment/aggregate of payments to a single person exceeds INR 10,000 and is made in cash, bearer cheque, or crossed cheque.

3. What about a specific business’s losses?

A loss from a designated business can be set off against income from specific businesses under Section 73A of the Income Tax Act. Such a loss could be carried forward even if a specific enterprise was discontinued.

4. Assume a company has received a deduction for an asset under section 35AD. What if the taxpayer gets rid of the asset?

An asset against which a tax deduction has been approved under section 35AD may be destroyed, demolished, discarded, or transferred.

In this circumstance, regardless of how long a specific business has used that asset, insurance payout for that asset or receivables from selling that asset will be qualified as business revenue. The asset will have no cost.

Conclusion

The government recognizes new firms from time to time under Section 35AD of the Income Tax Act, which are crucial for the nation’s progress. They are eligible for a 100 percent deduction on all capital expenditures. The government, on the other hand, has included appropriate conditions and made specific adjustments to prevent exploitation and misuse of these laws.