Section 35AD of the Income Tax Act, 1961, allows a deduction of 100% of the expenditure of capital nature incurred, wholly and exclusively, for the purposes of any specified business carried on by an assesses during the previous year in which such expenditure is incurred by him.

The specified business is a business of under Income Tax Act:

• Manufacturing of new products or improvement of existing products
• Development of new sources of energy
• Development of new technology
• Building or renovation of hotels
• Development of infrastructure facilities

The expenditure that is eligible for deduction under section 35AD of Income Tax Act includes:

• Expenditure on plant and machinery
• Expenditure on construction
• Expenditure on research and development
• Expenditure on training

The deduction under section 35AD of Income Tax Act is available to all assesses, including individuals, companies, and trusts. However, there are certain conditions that must be satisfied in order to claim the deduction. These conditions include:

• The expenditure must be incurred wholly and exclusively for the purposes of the specified business.
• The expenditure must be capital in nature.
• The expenditure must be incurred during the previous year in which the specified business is commenced.
• The asset in respect of which the deduction is claimed must be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed.

The deduction under section 35AD of Income Tax Act is a valuable incentive for businesses to invest in new and innovative activities. It can help businesses to reduce their tax liability and improve their bottom line.

Here are some examples of expenditure that may be eligible for deduction under section 35AD of Income Tax Act:

• Expenditure on the purchase of new machinery for a manufacturing business
• Expenditure on the construction of a new hotel
• Expenditure on research and development to develop a new product
• Expenditure on training of employees to use new technology

EXAMPLES

• Setting up and operating a cold chain facility: This includes the construction of cold storage units, cold rooms, and other infrastructure for storing perishable goods. Some states in India that offer incentives for setting up cold chain facilities include Uttar Pradesh, Madhya Pradesh, and Maharashtra
• Setting up and operating a warehousing facility for storage of agricultural produce: This includes the construction of warehouses, silos, and other infrastructure for storing agricultural produce. Some states in India that offer incentives for setting up warehousing facilities for agricultural produce include Punjab, Haryana, and Gujarat
• Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution: This includes the construction and operation of pipelines for transporting natural gas, crude oil, and petroleum products. Some states in India that offer incentives for laying and operating cross-country natural gas pipelines include Gujarat, Rajasthan, and Andhra Pradesh.
• Building and operating a hotel of two-star or above category, as classified by the Central Government: This includes the construction and operation of hotels with at least 20 rooms and other facilities such as restaurants, bars, and conference halls. Some states in India that offer incentives for building and operating hotels of two-star or above category include Karnataka, Kerala, and Tamil Nadu.
• Building and operating a hospital with minimum of 100 beds for patients: This includes the construction and operation of hospitals with at least 100 beds and other facilities such as operation theatres, diagnostic laboratories, and intensive care units. Some states in India that offer incentives for building and operating hospitals with minimum of 100 beds for patients include Delhi, Uttar Pradesh, and West Bengal.

• Case laws

Section 35AD of the Income Tax Act, 1961 allows a deduction of 100% of the capital expenditure incurred wholly and exclusively for the purpose of any specified business carried on by an assesses during the previous year in which such expenditure is incurred by him.

The specified businesses are under Income Tax Act:

• Manufacturing of new products or improvement of existing products
• Development of new or improved production processes or techniques
• Expansion or modernization of existing production facilities
• Setting up of a new industrial unit in a backward area
• Setting up of a new industrial unit in a notified Special Economic Zone (SEZ)

The expenditure that is eligible for deduction under Section 35AD of Income Tax Act includes:

• The cost of acquisition of machinery, plant and equipment
• The cost of construction of buildings, roads, bridges, etc.
• The cost of civil engineering works
• The cost of preliminary expenses
• The cost of training of employees
• The cost of marketing and promotional expenses

The expenditure must be incurred wholly and exclusively for the purpose of the specified business. This means that the expenditure must not be for any other purpose, such as for personal use or for the purpose of another business.

The expenditure must also be capitalized in the books of account of the assesses on the date of commencement of its operations. This means that the expenditure must be added to the cost of the assets acquired with the expenditure.

The deduction under Section 35AD of Income Tax Act is available only for the first 3 years of the commencement of the specified business. After the first 3 years, the assesses can claim depreciation on the assets acquired with the expenditure.

The deduction under Section 35AD of Income Tax Act is available in addition to any other deductions that may be available to the assesses. However, the assesses cannot claim deduction under both Section 35AD and Chapter VI-A of the Income Tax Act, 1961, in respect of the same specified business.

EXAMPLES

• Cost of printing and publishing advertisements in newspapers, magazines, and other publications.
• Cost of broadcasting advertisements on radio and television.
• Cost of putting up hoardings and other forms of outdoor advertising.
• Cost of sponsoring events and activities for the purpose of publicity.
• Cost of maintaining a website for the purpose of advertising the business.

It is important to note that not all expenditure incurred on advertising and publicity will be eligible for deduction under section 35 AD of Income Tax Act. For example, expenditure incurred on advertising and publicity that is of a personal nature, such as expenditure incurred on advertising the assesses personal assets, will not be eligible for deduction.

CASE LAWS

• ITO vs. Adani Power Limited (2016) 382 ITR 381 (Guj): This case held that the condition that the specified business should not be set up by splitting up or reconstruction of a business already in existence is not absolute. The court held that if the new business is a substantial expansion of the existing business, then the condition would be satisfied.
• ITO vs. Essar Power Ltd (2017) 391 ITR 387 (SC): This case held that the condition that the specified business should not be set up by the transfer of machinery or plant previously used for any purpose is not absolute. The court held that if the machinery or plant is transferred to the new business and the total value of the machinery or plant transferred does not exceed 20% of the total value of the machinery or plant used in the new business, then the condition would be satisfied.
• ITO vs. Lancs Kondapalli Power (P) Ltd (2017) 393 ITR 1 (AP): This case held that the condition that the expenditure should be capitalise  in the books of account of the assessed on the date of commencement of its operations is mandatory. The court held that if the expenditure is not capitalised in the books of account, then the deduction under Section 35ADoIncome Tax Act would not be allowed.
• ITO vs. GMR Infrastructure Ltd (2018) 398 ITR 370 (AP): This case held that the condition that the expenditure should be incurred wholly and exclusively for the purposes of the specified business is strict. The court held that if any part of the expenditure is incurred for any other purpose, then the deduction under Section 35AD of Income Tax Act would not be allowed.
• FAQ QUESTIONS
• What are the specified businesses that are eligible for deduction under Section 35AD of Income Tax Act?

The following businesses are eligible for deduction under Section 35AD of Income Tax Act:

* Setting up of cold chain facilities

* Development of infrastructure facilities in notified industrial parks

* Construction of hotels of two-star or above category

* Development of inland container depots

* Development of multi-modal logistics parks

* Development of Agri-processing units

* Development of renewable energy projects

* Development of electronic manufacturing clusters

* Development of manufacturing facilities in notified special economic zones

• What are the conditions that need to be fulfilled for a business to be eligible for deduction under Section 35AD of Income Tax Act?

The following conditions need to be fulfilled for a business to be eligible for deduction under Section 35AD of Income Tax Act:

* The business must be set up or established on or after 1st April, 2009.

* The business must be located in India.

* The business must be engaged in the specified activities mentioned above.

* The business must not be set up by splitting up, or the reconstruction, of a business already in existence.

* The business must not be set up by the transfer to the specified business of machinery or plant previously used for any purpose.

• What are the types of expenditure that are eligible for deduction under Section 35AD of Income Tax Act?

The following types of expenditure are eligible for deduction under Section 35AD of Income Tax Act:

* Expenditure incurred on the purchase of machinery and plant.

* Expenditure incurred on civil construction works.

* Expenditure incurred on the purchase of land.

* Expenditure incurred on professional fees.

* Expenditure incurred on interest on loans.

• What is the maximum amount of deduction that is available under Section 35AD of Income Tax Act?

The maximum amount of deduction that is available under Section 35AD of Income Tax Act is 100% of the expenditure incurred. However, the deduction is limited to the profits of the specified business.

• What are the consequences if the asset for which deduction is claimed under Section 35AD of Income Tax Act is used for a purpose other than the specified business?

If the asset for which deduction is claimed under Section 35AD of Income Tax Act is used for a purpose other than the specified business, then the amount of deduction claimed will be deemed to be the income of the assessed chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.