“INVESTMENT-LINKED TAX INCENTIVES”
FOR SPECIFIED BUSINESSES [SECTION 35AD]

With the specific objective of creating rural infrastructure and environment friendly alternate means for transportation of bulk goods, investment- linked tax incentives have been introduced for specified businesses, namely –

• setting-up and operating ‘cold chain’ facilities for specified products;

• setting-up and operating warehousing facilities for storing agricultural produce;

• laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network;

• building and operating a hotel of two-star or above category, anywhere in India;

• building and operating a hospital, anywhere in India, with at least 100 beds for patients;

• developing and building a housing project under a notified scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government.

• developing and building a housing project under a notified scheme for affordable housing framed by the Central Government or State Government;

• production of fertilizer in India;

• setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962;

• bee-keeping and production of honey and beeswax;

• setting up and operating a warehousing facility for storage of sugar;

• laying and operating a slurry pipeline for the transportation of iron ore;

• setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines;

• developing or maintaining and operating or developing, maintaining and operating a new infrastructure facility.

Deduction for Capital Expenditure:- 100% of the capital expenditure incurred during the previous year, wholly and exclusively for the above businesses would be allowed as deduction from the business income to the assessee opting for deduction under section 35AD.

However, expenditure incurred on acquisition of any land, goodwill or financial instrument would not be eligible for deduction.

Further, any expenditure in respect of which payment or aggregate of payment made to a person of an amount exceeding Rs. 10,000 in a day otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through such other prescribed electronic mode would not be eligible for deduction. The prescribed electronic modes include credit card, debit card, net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay [Notification No. 8/2020 dated 29.01.2020].

Expenditure prior to commencement of operation: Further, the expenditure incurred, wholly and exclusively, for the purpose of specified business prior to commencement of operation would be allowed as deduction during the previous year in which the assessee commences operation of his specified business.

The amount incurred prior to commencement should be capitalized in the books of account of the assessee on the date of commencement of its operations.

Conditions to be fulfilled: For claiming deduction under section 35AD, the specified business should fulfill the following conditions –

General Conditions:

To be fulfilled by every specified business

(i) it should not be set up by splitting up, or the reconstruction, of a business already in existence;

(ii) it should not be set up by the transfer to the specified business of machinery or plant previously used for any purpose;

In order to satisfy this condition, the total value of the plant or machinery so transferred should not exceed 20% of the value of the total plant or machinery used in such specified business.

For the purpose of this condition, machinery or plant would not be regarded as previously used if it had been used outside India by any person other than the assessee provided the following conditions are satisfied:

(a) such plant or machinery was not used in India at any time prior to the date of its installation by the assessee;

(b) the plant or machinery was imported into India from a foreign country;

(c) no deduction in respect of depreciation of such plant or machinery has been allowed to any person at any time prior to the date of installation by the assessee.

Conditions required to be fulfilled by certain specified businesses:

I. Business of laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network

(i) Such business should be owned by a company formed and registered in India under the Companies Act, 19567 or by a consortium of such companies or by an authority or a board or a corporation established or constituted under any Central or State Act;

(ii) It should have been approved by the Petroleum and Natural Gas Regulatory Board and notified by the Central Government in the Official Gazette

(iii) It should have made not less than such proportion of its total pipeline capacity available for use on common carrier basis by any person other than the assessee or an associated person.

(iv) It should fulfill any other prescribed condition.

II. Business of developing or operating and maintaining or developing, operating and maintaining a new infrastructure facility

(i) The business should be owned by a company registered in India or by a consortium of such companies or by an authority or a board or corporation or any other body established or constituted under any Central or State Act.

(ii) The entity should have entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for developing or operating and maintaining or developing, operating and maintaining, a new infrastructure facility.

No deduction under section 10AA or Chapter VI-A under the heading “C.-Deductions in respect of certain incomes”: Where a deduction under this section is claimed and allowed in respect of the specified business for any assessment year, no deduction under the provisions of Chapter VI-A under the heading “C - Deductions in respect of certain incomes” or section 10AA is permissible in relation to such specified business for the same or any other assessment year.

Correspondingly, section 80A has been amended to provide that where a deduction under any provision of this Chapter under the heading “C – Deductions in respect of certain incomes” is claimed and allowed in respect of the profits of such specified business for any assessment year, no deduction under section 35AD is permissible in relation to such specified business for the same or any other assessment year.

In short, once the assessee has claimed the benefit of deduction under section 35AD for a particular year in respect of a specified business, he cannot claim benefit under Chapter VI-A under the heading “C.-Deductions in respect of certain incomes” or section 10AA, for the same or any other year and vice versa.

No deduction allowable under the Act in respect of expenditure for which deduction allowed under this section: The assessee cannot claim deduction in respect of such expenditure incurred for specified business under any other provision of the Income-tax Act, 1961 in the current year or under this section for any other year, if the deduction has been claimed or opted by him and allowed to him under section 35AD.

Date of Commencement of specified businesses: 

Set-off or carry forward and set-off 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 against the profit of another specified business under section 73A, irrespective of whether the latter is eligible for deduction under section 35AD.

Such loss can, however, be carried forward indefinitely for set-off against profits of the same or any other specified business but the assessee has to file return of income on or before the due date of filling return of income under section 139 for carry forward of losses from specified business.

Transfer of hotel built by the assessee: Where the assessee builds a hotel of two-star or above category as classified by the Central Government and subsequently, while continuing to own the hotel, transfers the operation of the said hotel to another person, the assessee shall be deemed to be carrying on the specified business of building and operating a hotel. Therefore, he would be eligible to claim investment-linked tax deduction under section 35AD.

Therefore, in effect, the assessee shall be deemed to be carrying on the specified business of building and operating hotel if –

(i) The assessee builds a hotel of two-star or above category;

(ii) Thereafter, he transfers the operation of the hotel to another person;

(iii) He, however, should continue to own the hotel.