35AD of Income Tax Act: Eligibility, Conditions, Provisions

For certain enterprises, Section 35AD provides an investment-linked tax credit. Capital investments made during the preceding year may be entirely and fully deducted from company income under section 35AD. 

One of these defined businesses is constructing and operating a cross-Further, deductions are not applicable when a payment goes beyond Rs. 10,000 to a person within a day and those payments are made through crossed cheque/bearer cheque/cash. country pipeline network to distribute natural gas, crude oil, or petroleum products, including storage facilities that are a crucial component of such a network. The section will offer the advantage in a situation where the firm is constructing and running a national network of natural gas distribution pipelines.

Section 35AD of Income Tax Act

This states that an assessee is entitled to a deduction for the entirety of capital expenditures made solely and exclusively for the scope of enterprises they were made during the prior year in which they were made.

Any one or more of the following businesses are considered to be specified businesses

1. They are establishing and running a cold chain facility; establishing and running a warehouse for the storage of agricultural produce; establishing and running a cross-country natural gas, crude, or distribution network of the petroleum oil pipeline, with storage facilities being a crucial component of such a network.
2.  Any equipment or plant that was utilised outside of India by someone other than the assessee is not considered to have been previously used for anything if:

• Such machinery or plant was not utilised in India at any time before the date of the assessee’s installation. 
• Such machinery or equipment is brought into India from any outside countries; and
• No reduction on account of amortisation in respect of such machinery/plant is permitted under the requirements of section 35AD act.
• The condition above calculates any individual’s total income for any year before the assessee implements the machinery or equipment.

3. The selected business must meet each of the requirements listed below for this section to apply to it:

• It is not established through the dissolution or reconstruction of an existing firm;
• It is not confirmed by the transfer of equipment or plant previously utilised for any purpose to the designated enterprise;

Where the nature of the business can be:

(a) is held by a corporation established or constituted under any central/state act, an authority, a board, or a corporation formed or registered in India under the Companies Act, 1956, or by a group of such corporations;

(b) has been acknowledged in the Official Gazette by the Central Government as having received the approval of the Petroleum and Natural Gas Regulatory Board constituted under subsection (1) of section 3 of the PNGRB Act, 2006 (19 of 2006);

(c) has made at least one-third of its pipeline capacity accessible for everyday carrier use by parties other than the assessee or an associated party; and

(d) satisfies any additional requirements that may be required.

Section 35AD of Income Tax Act: Specified business deduction 

After eight years from the date of acquisition, what happens if a company deducted an asset but used it for a non-specified business? 

In this instance, the deduction from an asset used by an unspecified business is lawful. It implies that a taxpayer will not have any company income. The applicable non-specified business’s acquisition cost for the asset will be zero.

After the launch of a prescribed business, the government may deduct capital expenses from income in the year they are incurred.

Capital outlays required before a specific firm can launch: The deduction is available, and it can write off the entire amount in the first year of operation if it was recorded in the books of accounts when the business was founded.

• From April 1 2020, it is optional to opt for deduction u/s 35AD.
• If a business deducts under this provision, it is not permitted to deduct under Section 10AA (benefits from SEZ unit tax) or Chapter VIA, Part C (profit-based deductions) for the current year or succeeding years.
• A firm cannot make a deduction claim under another provision if it obtains one under section 35AD.
• Under section 35AD, a specific business may deduct an asset. However, it must only use such an asset for eight years, starting with the year you purchased it.

Expenses incurred before the start of the business

In the first year that the company began operations, a deduction of 100% of capital expenditures made before that point is permitted.

The assessee is only permitted to deduct expenses incurred before the specified business began operations if those expenses were capitalised in the Books of Account on that date.

Spending after the start of the business

In the year the capital investment is caused, a deduction of 100% of the payment is permitted. Any costs incurred for acquiring land, goodwill, and financial instruments are not deductible.

Additionally, no deduction shall be permitted for any payment or aggregate of fees for an expense exceeding Rs 10,000 made to a person by any method other than an Account Payee Cheque, Account Payee Draft, an Electronic Clearing System, or any authorised Electronic Mode.

Section 35AD of Income Tax Act: Eligibility

• Note that the entity must be registered and formed in India.
• A contract with a statutory organisation, a local government, state or the government should be signed for the development, management, operation and maintenance of the current infrastructure.

Transfer of products and services to a different assessee-owned company:

• When goods or services held for the benefit of the specified business are transferred to any other company operated by the assessee,
• The consideration for the transfer, as recorded in the accounts of the eligible company, does not correspond to the market value of goods or services as of the transfer date.
• The earnings and gains of qualified businesses will calculate for the deduction of section 35 AD.
• The above condition is if the enterprises made the transfer at the market value of such goods or services as of that date.

A firm must fulfil the conditions specified below to be qualified for deductions under Section 35AD of Income Tax Act:

• Launching an authorised firm should not be necessary to split or reconstruct an existing corporation.
• Transferring machinery or other assets utilised for other reasons should not be a requirement when beginning a particular type of business.
• The amount paid or payable for any asset for which a deduction under Section 35AD has been requested and approved is subject to taxation if it is destroyed, disposed of, transferred, or demolished.
• The corporation must have been established and registered in India if the approved activity entails running and building a nationwide network of pipelines for storing or transporting crude oil, fossil fuels, or petrochemical products.
• The Petroleum and Natural Gas Regulatory Board (PNGRB) must approve it.
• According to PNGRB regulations, it had to have made at least a portion of the entire pipeline accessible for everyday carrier use.
• Any property for which a credit is sought and permitted under this section shall be used primarily for the indicated enterprise for eight years beginning with the year the resource was acquired or constructed.

Conditions for claiming deductions

When a particular company builds, runs, and maintains the present infrastructure resource in addition to managing it:

• The business has to be founded and registered in India.
• It must have entered into a legal agreement to create, manage, operate, and maintain the current infrastructure with a statutory organisation, a local government, a state, or the federal government.

Section 35AD of Income Tax Act: Benefits

For specified organisations, Section 35AD provides a tax credit connected to the capital. One such activity is constructing and operating a cross-country transit network to supply natural gasoline, crude oil, or petrochemical oil, with warehouses serving as an advantageous system feature. You qualify for the incentive if your company instals and maintains a network of cross-country natural gas pipelines for distribution.

Time limits for incurring expenses

Section 35AD allows a reduction of 100% of capital expenditures made during the prior year wholly and exclusively for specific firms, as mentioned above, from company income. Payments paid in any other form than with an a/c payee draught, an a/c payee check, or through an ECS are not eligible for deduction. Neither are expenses incurred on purchasing any real estate, goodwill, or financial instrument.

Consider a situation in which a firm has benefited from a Section 35AD asset deduction. If the taxpayer sells the asset, what happens?

An asset granted a tax deduction under Section 35AD may be transferred, destroyed, damaged, or disposed of. No matter how long a particular firm has used the purchase, any insurance reimbursement for the acquisition or receivables from selling the investment will be regarded as business revenue. It will be a free resource.

Section 35AD of Income Tax Act: Provisions

The deduction is applicable for any capital expenses that are entirely and exclusively incurred for operating a specified business following the provisions of section 35AD. You should note that costs incurred for acquiring any land, financial instrument, or goodwill are not eligible for a deduction under section 35AD. When a person receives more than Rs 10,000 in payments in a single day, whether made in cash, bearer checks or crossed checks, the deduction is also not possible.

Provisions related to carry forward of losses

Loss from business specified under Section 35AD can be carried forward only if the return of income/loss of the year in which loss is incurred is furnished on or before the due date of furnishing the return as prescribed under Section 139(1).

Is section 80HH claim deduction available if a firm avails deduction under section 35AD?

If a firm  avails deduction under 35AD of the Internal Revenue Code, it cannot avail deduction under Chapter VIA. Thus, the firm cannot avail deduction under Sections 80HH-80RRB.

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