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

What is Section 35AD of the Income Tax Act?

Section 35AD of the Income Tax Act allows taxpayers to claim deductions for specific capital expenditures reserved for specified businesses during a financial year. However, it must fulfill the specific criteria mentioned.

Section 35AD specifies that a taxpayer can claim a deduction for all capital expenditures incurred exclusively on their business operations.

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Eligibility Criteria for Claiming Deductions Under Section 35AD

In order to claim a deduction under section 35AD, the taxpayer needs to fulfill the following conditions -

1. The deduction under section 35AD is available only under the old tax regime. Therefore, this deduction can only be claimed if the return is filed under the old tax regime.
2. When the current infrastructure is not only managed but also built and operated by the company
   • The business must be established and registered in India.
   • It should have a duly signed legal agreement with a statutory organization, state government, local government, and federal government to develop, manage, and run the existing infrastructure.
3. The specified business should not have been set up as a result of renovating/splitting up an existing business.
4. The specified business should not have been established by using second-hand plants and machinery (upto 20% of the machinery can be second-hand).
5. Companies engaged in the business of laying or operating cross-country natural gas or crude or petroleum oil pipeline networks for distribution.
   • The company must be established and registered in India.
   • It must gain approval by the Natural Gas and Petroleum Regulatory Board.
   • The Petroleum and Natural Gas Regulatory Board requires that a minimum portion of the overall pipeline be available for use by other entities on a common carrier basis.
6. When the specified business is developing, operating, and maintaining new infrastructure:
   
   • The company must be established and registered in India.
   • It should have an agreement with the State Government, Central Government, local authority, or any other statutory body to develop, operate, and maintain the new infrastructure facility.
7. Businesses cannot claim a deduction for the expenses incurred on the purchase of land/ goodwill/ financial instruments.
8. Deductions cannot be availed for payments made to a person exceeding Rs.10,000. The payment should be made within a day via cash, crossed cheque, or bearer cheque.
9. The deduction is only available if the assessee’s accounts have been audited by a Chartered Accountant and the audit report is furnished along with the income tax return.
10. Any asset for which a deduction is claimed and allowed under section 35AD and shall be used for specified business for at least a period of 8 years.

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Section 35AD Specified Business List

Given below is the list of specified businesses as per section 35AD of the Income Tax Act -

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What is the Amount of Deduction under Section 35AD?

As per section 35AD of the Income Tax Act, the assessee can claim a deduction from the business income for 100% of the capital expenditure incurred during the previous year, wholly and exclusively for the specified business. However, the expenditure incurred on the acquisition of land, goodwill, and financial instruments will not be eligible for deduction.

Further, the expenditure incurred exclusively for the purpose of the specified business prior to the commencement of operation will be allowed as a deduction during the previous year in which the assessee starts the operations of his specified business.

Here’s a summary of the amount of deduction available under section 35AD of the Income Tax Act and its conditions -

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Provisions for Set-off and Carry-forward of Losses from Specified Business

An assessee claiming a deduction under section 35AD for a specified business can set off the loss only against profits from another specified business.

Losses from a specified business can be carried forward indefinitely and set off against profits from the same or any other specified business as long as the income tax return is filed before the due date.

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Other Important Points Related to Section 35AD

Here are some important points that you need to consider while claiming a deduction under section 35AD -

• From April 1, 2020, the deduction under section 35AD is optional.
• No deduction will be allowed under Section 10AA (Special Economic Zones deduction).
• Deductions under Chapter VI-A, Part-C (related to certain incomes) will not be permitted.
• Deductions claimed and allowed under section 35AD cannot be claimed under any other section.
• Assets for which a deduction is claimed under section 35AD must be used exclusively for the specified business for eight years, starting from the year of acquisition.

Section 35AD allows taxpayers to claim deductions for capital expenditures incurred in specified businesses. Now that you know about the eligibility and conditions for claiming a deduction under section 35AD of the Income Tax Act, you can make sure you never miss out on claiming the deduction.

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