UNIT I
from winnings from horse races [Sec. 194BB]
When and how tax is to be deducted at source from payments to contractors or sub-contractors [Sec. 194C]
276.2 Meaning of work contract
276.3 Rate of TDS
276.4 When tax is not deductible
277. When and how tax is to be deducted at source from insurance commission [Sec. 194D]
277A. When and how tax is to be deducted at source from payment of life insurance policy [Sec. 194DA]
278. When and how tax is deductible at source from payment to non-resident sportsmen or sports associations [Sec. 194E]
279. When and how tax is deductible from payments in respect of National Savings Scheme [Sec. 194EE]
280. When and how tax is deductible on payments on account of repurchase of units of Mutual Funds or UTI [Sec. 194F]
281. When tax is deductible from commission, etc., on sale of lottery tickets [Sec. 194G]
282. When and how to deduct tax at source from commission or brokerage [Sec. 194H]
282.1 Meaning of commission or brokerage
283. When and how tax is deductible from rent [Sec. 194-I]
283A. When and how tax is deductible from payment on transfer of certain immovable properties under Sec. 194-IA
283B. When and how tax is deductible from rent by certain individuals/HUFs under section 194-IB
283C. When and how tax is deductible from payment under joint development agreement under section 194-IC
284A. When tax is deductible at source in respect of income from units [Sec. 194K]
284B. When and how to deduct tax at source from payment of compensation on acquisition of certain immovable property [Sec. 194LA]
284C. When and how tax is to be deducted at source from Interest payable on Infrastructure debt fund [Sec. 194LB]
284D. When and how tax is to be deducted at source from income from units of business trust [Sec. 194LBA]
284E. When and how tax is deductible from income in respect of units of investment fund [Sec. 194LBB]
284F. When and how tax is deductible from income in respect of investment in securitization fund [Sec. 194LBC]
284G. When and how tax is to be deducted by an Indian Company from Interest to a non-resident/ foreign citizen [Sec. 194LC]
284H. When and how tax is to be deducted from interest on bonds/Government securities under section 194LD
284-I. When and how tax is deductible on certain payments by Individual/HUF [Sec. 194M]
284J. When and how tax is deductible on payment of certain amounts in cash [Sec. 194N]
284K. When tax is deductible at source in respect of payment by e-commerce operator to e-commerce participants [Sec. 194-O]
284L. When and how tax is to be deducted in the case of specified senior citizen [Sec. 194P]
284M. When and how tax is to be deducted on payment for purchase of goods [Sec. 194Q]
284N. When and how tax is deductible on benefit/perquisite pertaining to business/profession [Sec. 194R]
284N.1 Clarifications by CBDT
284-O. When and how tax is deductible from payment on transfer of virtual digital asset [Sec. 194S]
284P. When and how tax is to be deducted by firms from payment of remuneration/interest to partners [Sec. 194T, applicable from April 1, 2025]
285. When and how tax is to be deducted at source from other sums [Sec. 195]
285A. When tax is deductible at source from any income payable to non-resident unitholders [Sec. 196A]
286. When and how tax is deductible from units or long-term capital gain under section 196B
287. When tax is deductible from income or long-term capital gain from foreign currency bonds/Global Depository Receipts [Sec. 196C]
288. When tax is deductible at source from income of Foreign Institutional Investors from securities [Sec. 196D]
(TDS) or collected at source (TCS)
297.1
297.2
UNIT II
315.2 Who can submit updated return
315.3 When updated return cannot be submitted
315.4 Updated return to be accompanied by proof of payment of tax and additional income-tax
315.5 How to calculate tax on updated return [Sec. 140B]
316. What is a defective or incomplete return [Sec. 139(9)]
316.1 When a return is defective
316.2 Clarification from the Board
317 Modified return [Sec. 170A, applicable from April 1, 2022]
318. What is permanent account number (PAN) [Sec. 139A]
332. Submission of statement by a non-resident having liaison office in India [Sec. 285]
Furnishing of information or document by an Indian concern [Sec. 285A]
343.1 Orders appealable to Joint Commissioner (Appeals) [Sec. 246(1)]
343.2 Transfer of appeals pending with Commissioner (Appeals) to Joint Commissioner (Appeals) [Sec. 246(2)/(4)]
Transfer of pending appeals with Joint Commissioner (Appeals) to Commissioner (Appeals) [Sec. 246(3)/(4)]
Scheme, notification, etc. [Sec. 246(4)/(5)/(6)]
350. When an identical question of law is pending before Supreme Court - Procedure for appeal by revenue [Sec. 158AA] (applicable during June 1, 2015 and March 31, 2022)
351. Litigation management when in an appeal by revenue an identical question of law is pending before jurisdictional High Court or Supreme Court [Sec. 158AB]
413.1
413.4
68. Many incentives are available under the Act which are directly co-related in the nature of business. Some of these incentives are as follows :—
1. Exemption in the case of units in Special Economic Zone [Sec. 10AA]1
2. Investment allowance in a notified backward area in Andhra Pradesh, Bihar, Telangana or West Bengal [sec. 32AD]
3. Tea development account [Sec. 33AB].
4. Telecommunication services [Sec. 35ABB].
5. Expenditure on specified business [Sec. 35AD].
6. Expenditure incurred on agricultural extension project [Sec. 35CCC].
7. Expenditure for skill development [Sec. 35CCD].
8. Special provision for deduction in the case of business for prospecting for mineral oil [Secs. 42 and 44BB].
9. Special provisions for computing profits and gains for a business [Sec. 44AD].
10. Special provisions in the case of business of plying, hiring or leasing goods carriages [Sec. 44AE].
11. Profits and gains from industrial undertakings engaged in infrastructure, etc. [Sec. 80-IA]1
12. Profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone [Sec. 80-IAB ]1.
13.Profits and gains in respect of eligible start-up [Sec. 80-IAC]1
14. Profits and gains from certain industrial undertakings other than infrastructure development undertakings [Sec. 80-IB ]1.
15. Profits and gains in respect of housing projects [Sec. 80-IBA]1
16. Profits and gains of certain undertakings in certain special category of States [Sec. 80-IC]1
17. Deduction in respect of employment of new workmen [Sec. 80JJAA]
18. Tonnage Tax Scheme [Secs. 115V to 115VZC—see para 77].
69. Investment allowance under section 32AC is available only for the assessment years 2014-15 to 2017-18. It is not available for the assessment year 2018-19 (or any subsequent year).
1. For these sections, see Chapter 1.
Conditions
70. Additional investment allowance under section 32AD is not available nowadays.
Amount of deduction
71. An assessee can claim deduction under section 33AB as follows—
71.1 The assessee must satisfy the following conditions :
Condition one The assessee must be engaged in tea, coffee or rubber plantation.
Condition two It must make a deposit in “special account”.
Condition three The deposit should be made within specified time-limit.
Condition four The accounts of the assessee should be audited.
Engaged in tea/coffee/rubber plantation - It must be engaged in the business of growing and manufacturing tea or coffee or rubber in India.
Deposit - It must make the following deposit (hereinafter referred to as “special account”)—
a. deposit with National Bank for Agriculture and Rural Development (hereinafter referred to as “NABARD”) any amount (or amounts) in an account maintained by the assessee with that bank in accordance with and for the purpose specified in a scheme approved by the Tea Board or Coffee Board or Rubber Board; or
b. deposit any amount in the Deposit Account opened by the assessee in accordance with, and for the purposes specified in, a scheme framed by the Tea Board or Coffee Board or Rubber Board with the previous approval of the Central Government.
Time-limit - The aforesaid amount shall be deposited within 6 months from the end of the previous year or before the due date of furnishing the return of income, whichever is earlier.
Audit - The accounts of the taxpayer should be audited by a chartered accountant and the report of the auditor in Form No. 3AC is to be uploaded one month prior to the due date of submission of return of income. In cases where the accounts of the taxpayer are required to be audited under any other law, e.g., under the Companies Act, it would be sufficient if the accounts are audited under that law and the audit report as per that law is furnished along with a further report in Form No. 3AC for the purposes of this provision.
71.2 Amount of deduction is :
a. a sum equal to amounts deposited in special account as mentioned in para 71.1 ; or
b. 40 per cent of the profit of such business computed under the head “Profits and gains of business or profession” before making any deduction under section 33AB and before adjusting brought forward business loss under section 72, whichever is less.
The following points should also be kept in mind :
1. Where any deduction is claimed under this section, no deduction shall be allowed in respect of such amount in any other previous year.
2. Where a deduction is claimed and allowed under this section to an association of persons or body of individual, no deduction shall be allowed to any member of the association or body in respect of the same deposit.
3. Any excess deposit in special account made during a previous year is not treated as deposit made in the next year or any other year.
71.3 The amount standing to the credit of the “special account” may be withdrawn only for the purpose specified in approved scheme. Except in the circumstances mentioned in para 71.4, if the amount released from the “special account” in a year is not utilised in the same previous year for the purpose for which it is released, the amount not so utilised will be treated as taxable profits of that year and taxed accordingly.
71.3-P1 X Ltd. is engaged in the business of growing and manufacturing tea in India. During the previous year 2022-23, it deposits Rs. 100 lakh in the “special account” and claims the same as deduction under section 33AB (i.e., 40 per cent of the business profit : Rs. 250 lakh). During 2023-24, the company withdraws Rs. 35 lakh from the “special account” which is utilised as follows —
a. Rs. 25 lakh on December 31, 2023 for the purpose of the scheme framed by the Tea Board ; and b. Rs. 4 lakh for other purpose on January 27, 2024. Rs. 6 lakh is not utilised up to March 31, 2024.
Find out the amount chargeable to tax for the assessment year 2024-25.
For the assessment year 2024-25, Rs. 10 lakh is treated as business income (i.e., Rs. 4 lakh, being the amount misutilised by the company plus Rs. 6 lakh, being the amount which is not utilised by the company during 2023-24). Out of Rs. 10 lakh, 40% (i.e., Rs. 4 lakh) is taken as non-agricultural income and 60% (i.e., Rs. 6 lakh) is deemed as agricultural income.
71.4 Apart from the purposes specified in the approved scheme, the amount standing to the credit of the “special account” may be allowed to be withdrawn in the following circumstances :
When the amount can be withdrawn and it isWhen the amount can be withdrawn and it is treated as taxable profitnot treated as income
1. Closure of business
2. Dissolution of firm
1. Death of the taxpayer
2. Partition of Hindu undivided family
3. Liquidation of company
Where an amount is withdrawn because of closure of business or because of dissolution of firm, the amount withdrawn will be treated as taxable profit and taxed accordingly on the basis as if the business was continuing or the firm had not been dissolved. In all other cases, viz., death of the taxpayer, partition of the Hindu undivided family and liquidation of the company, the amounts withdrawn on closure of account because of the occurrence of any of these events will not be included in the taxable income even though the amounts have not been utilized for any of the purposes specified in scheme.
71.5 The amount withdrawn from the “special account” cannot be utilised for the purpose of purchase of any machinery or plant to be installed in any office premises or residential accommodation including guest houses ; any office appliance (other than computers) ; any other plant or machinery which either is installed in an undertaking producing low priority items specified in the Eleventh Schedule in the Income-tax Act or is an item of plant or machinery entitled to 100 per cent write off by way of depreciation or for any other reason in any one year.
71.6 The deduction allowed under this section shall be withdrawn if the asset acquired out of the money withdrawn from the special account is sold or otherwise transferred. These provisions are given below—
To whom it is transferredTransfer within 8 yearTransfer after 8 from the end of theyears previous year in which the asset is acquired
Transfer to the Central Government, a State Govern-Deduction will not beDeduction will not be ment, a local authority, a statutory corporation or a withdrawnwithdrawn Government company
Transfer in a scheme of succession of a firm by com-Deduction will not beDeduction will not be pany [see Note]withdrawnwithdrawn
Transfer in any other caseDeduction will beDeduction will not be withdrawnwithdrawn
Amount can be withdrawn for the purpose of the scheme
Consequences in the case of closure of business
Withdrawal from the special account cannot be utilised for certain purposes
Consequences if the new asset is transferred within 8 years
Double deduction not permissible
Note: Transfer in a scheme of succession of a firm by company should satisfy the following points—
a. the scheme continues to apply to the company in the manner applicable to the firm;
b. the successor company takes over all the properties and liabilities of the firm; and
c. all the shareholders of the company were partners of the firm before the succession.
71.6-P1 Find out the tax consequences in the following cases —
1. Business profit of X Ltd., a tea growing and manufacturing company, is Rs. 70 lakh for the assessment year 2023-24. It deposits Rs. 25 lakh in the “special account” for claiming deduction under section 33AB. It wants to claim set-off of brought forward business loss of Rs. 12,00,000.
2. By withdrawing Rs. 20 lakh on January 20, 2024 from the “special account”, X Ltd. purchases a nondepreciable asset for Rs. 18 lakh according to the scheme framed by the Tea Board. The remaining amount of Rs. 2 lakh is not utilised up to March 31, 2024.
3. The asset which is purchased for Rs. 18 lakh is sold to Y for Rs. 31 lakh on December 3, 2026.
1. Amount deductible for the assessment year 2023-24 is —
a. Rs. 28 lakh (i.e., 40% of Rs. 70 lakh); or
b. Rs. 25 lakh (being the deposit in the “special account”), whichever is lower.
Rs. 25 lakh is, therefore, deductible under section 33AB. Taxable income of X Ltd. shall be determined as under— (Rs. in lakh) Business income
Less : Deduction under section 33AB25
As per rule 8, 40% of Rs. 45 lakh is taken as non-agricultural income which is chargeable to tax and the balance 60% is treated as agricultural income which is not taxable
Non-agricultural income [i.e., 40% of Rs. 45 lakh]18 Less : Brought
2. Rs. 2 lakh, being the amount not utilised up to March 31, 2024 will be business income (40% of which will be taxable as non-agricultural income) for the assessment year 2024-25.
3. The new asset is transferred within eight years from March 31, 2023. Consequently, the taxable income for the assessment year 2027-28 (i.e., previous year 2026-27 in which the asset is transferred) will be determined as follows —
Business income [40% of which is taxable as non-agricultural income]18,00,000
Short-term capital gain (i.e., Rs. 31 lakh – Rs. 18 lakh)13,00,000
71.7 Where any amount standing to the credit of the assessee in the “special account” is utilised by the assessee for the purpose of any expenditure in accordance with the scheme, such expenditure shall not be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
72. The provisions of section 35ABB are given below :
Conditions
72.1 Deduction under section 35ABB is available if the following conditions are satisfied —
Condition one The expenditure is capital in nature.
Condition two It is incurred for acquiring any right to operate telecommunication services.
Condition three The expenditure is incurred either before the commencement of business or thereafter at any time during any previous year.
Condition four The payment for which has actually been made to obtain licence.
If all the above conditions are satisfied, then one can claim deduction under section 35ABB [see para 72.2]. If, however, these conditions are not satisfied, then deduction under section 35ABB is not available [one may claim deduction under section 37(1)].
72.2 The payment will be allowed as deduction in equal instalments over the period starting from the year in which such payment has been made2 and ending in the year in which the licence comes to an end. It may be noted that the deduction starts from the year in which actual payment of expenditure is made irrespective of the previous year in which the liability for the expenditure is incurred according to the method of accounting regularly employed by the assessee.
72.3 Any profit or loss on sale of telecom licence is taken into consideration while computing business income. The relevant rules are given below. In the table given below, WDV is the written down of value (i.e., the expenditure incurred remaining unallowed) on the first day of the previous year in which telecom licence is transferred—
Different situationsTax treatment
1. Entire telecom licence is transferred
1.1 When sale consideration is less than WDVWDV minus sale consideration is allowed as deduction under section 35ABB in the year of sale.
1.2 When sale consideration is more than WDVThe excess of sale consideration over WDV is taxable as business income in the year of sale (subject to rules given in Notes below).
2. When a part of telecom licence is transferred
2.1 When sale consideration is less than WDVWDV minus sale consideration will be allowed as deduction over the unexpired period.
2.2 When sale consideration is more than WDVSame tax treatment as is given in 1.2 (supra)
Notes -
1. In Situations 1.2 and 2.2, the amount taxable as business income cannot exceed deduction allowed under section 35ABB in the earlier years.
2. The aforesaid amount is taxable whether (or not) business is in existence.
3. In respect of the same expenditure, no further deduction will be allowed under section 35ABB.
72.4 Where, under the scheme of amalgamation, a telecom licence is transferred by the amalgamating company to the amalgamated company (being an Indian company) or by a demerged company to a resulting company (being an Indian company), then deduction will not available under section 35ABB to the amalgamating or demerged company. However, the provisions of section 35ABB continue to apply to the amalgamated company or resulting company, as these would have applied to the amalgamating or demerged company if the latter had not transferred the licence.
72.5 Where a deduction for any previous year is claimed and allowed under section 35ABB, then no deduction of the same expenditure shall be allowed under section 32 for the same previous year or any subsequent previous year.
72-P1 X Ltd., a company providing telecommunication service, obtains a telecom licence on April 20, 2023 for a period of 10 years which ends on March 31, 2033 (licence fee being Rs. 18 lakh). Find out the amount of deduction under section 35ABB if —
a. the entire amount is paid on May 6, 2023 ; or
b. the entire amount is paid on April 1, 2024 ;
c. the entire amount is paid in three equal instalments on April 30, 2023, April 30, 2024 and April 30, 2025.
Situation (a) - The payment of Rs. 18 lakh is deductible in 10 instalments over a period of 10 years from the previous years 2023-24 to 2032-33 (the amount deductible each year being Rs. 1.8 lakh).
Situation (b) - The payment is deductible in 9 years starting from the year of payment, i.e., the previous year 2024-25 and ending with the previous year 2032-33 (the amount deductible each year being Rs. 2 lakh).
Situation (c) - The entire payment is made in three instalments. Deduction under section 35ABB is available as under —
2. If the licence fees is actually paid before the commencement of the business to operate telecommunication services, such payment is deductible from the previous year in which the business is commenced.
Amount of deduction
Profit or loss on sale of telecom licence
Consequences in the case of amalgamation or demerger Depreciation under section 32 not available
First instal-Second instal-Third instal-Total mentmentment
Date of paymentApril 30, 2023April 30, 2024April 30, 2025
Period during which deduction is available10 years9 years8 years (2023-24 to(2024-25 to(2025-26 to 2032-33)2032-33)2032-33)
Amount of paymentRs. 6 lakhRs. 6 lakhRs. 6 lakh Rs.Rs.Rs.Rs.
Amount deductible in previous year 2023-2460,000--60,000 2024-2560,00066,667-1,26,667
2025-26 to 2032-33 60,00066,66775,0002,01,667
72-P2 X Ltd., a company which provides telecom services, acquires a telecom licence on April 5, 2023 for a period of 15 years which ends on March 31, 2038 (licence fees being Rs. 15 lakh paid on May 6, 2023). The licence is transferred by X Ltd. on December 20, 2025 for (a) Rs. 6,92,000, (b) Rs. 13,70,000 or (c) Rs. 15,60,000. Compute the amount chargeable to tax.
Cost of licence which is paid on May 6, 202315,00,000
Less : Amount written off during the previous years 2023-24 and 2024-252,00,000
Written down value of telecom licence on April 1, 202513,00,000
Tax treatment when telecom licence is transferred on December 20, 2025
Sale consideration
Rs. 6.92 lakhRs. 13.70 lakhRs. 15.60
Sale proceeds6,92,00013,70,00015,60,000
Less : Written down value on April 1, 202513,00,00013,00,00013,00,000
Surplus (-)6,08,00070,0002,60,000
Amount deductible during the previous year 2025-26 under section 35ABB(2)6,08,000--
Amount chargeable to tax during the previous year 2025-26 as notional business income, it cannot exceed the amount of deduction claimed in earlier years under section 35ABB-70,0002,00,000
Short-term capital gains
Sale proceeds6,92,00013,70,00015,60,000
Less : Cost of acquisition15,00,00015,00,00015,00,000
Short-term capital gain/loss(-)8,08,000(-)1,30,000(+)60,000
Note - It can be seen from the above data that where the telecom licence is transferred for Rs. 6.92 lakh, the taxpayer can claim short-term capital loss of Rs. 8.08 lakh, apart from claiming deduction under section 35ABB. To avoid double deduction, it is suggested to the Government that a suitable amendment should be made in section 35ABB incorporating the following —
“Where a deduction is allowed in respect of capital expenditure under section 35ABB, no deduction shall be allowed in respect of said expenditure under any other provision of the Act in any year”.
72-P3 Suppose in the above problem X Ltd. transfers a part (40 per cent) of telecom licence for (a) Rs. 6,80,000 or (b) Rs. 18,90,000 on May 6, 2025. Compute the amount chargeable to tax.
Sale consideration
Rs. 6.8 lakhRs. 18.90 lakh Rs.Rs.
Written down value on April 1, 2025 13,00,00013,00,000
Less : Sale proceeds on transfer of 40% telecom licence 6,80,00018,90,000
Sale consideration
Rs. 6.8 lakhRs. 18.90 lakh Rs.Rs.
Remaining written down value6,20,000 (-)5,90,000
Deduction under section 35ABB for remaining 13 years [i.e., Rs. 6,20,000/13]47,692-
Amount taxable as business income for the previous year 2025-26 (subject to the maximum of deduction allowed earlier) -2,00,000
Short-term capital gain
Sale proceeds 6,80,00018,90,000
Less : Cost of acquisition of 40% licence [40% of Rs. 15,00,000] 6,00,0006,00,000
Short-term capital gain 80,00012,90,000
73. Section 35AD provides investment-linked tax incentive. From the assessment year 2020-21, the benefit under section 35AD is available at the option of the assessee.
73.1 The following conditions should be satisfied to avail of the benefit of deduction under section 35AD—
73.1-1 Deduction under section 35AD is available only in the case of a “specified business” given below—
Specified businessWho should own theApproval (if any)Date of commencebusinessment of business
1. Setting up and operating a coldAny personNot requiredOn or after April 1, chain facility [see Note 1] 2009
2. Setting up and operating a ware-Any personNot requiredOn or after April 1, housing facility for storage of agri-2009 cultural produce
3. Laying and operating a cross-An Indian company or aShould be approved by On or after April 1, 2007, country natural gas or crude orconsortium of IndianPetroleum and Naturalin the case of laying and petroleum oil pipeline network forcompanies or an autho-Gas Regulatory Boardoperating a cross-country distribution, including storage facili-rity/Board/corporationand notified by the Cen-natural gas pipeline netties being an integral part of suchestablished under anytral Governmentwork for distribution or networkCentral or State Act[see Note 2]storage.
In other cases, on or after April 1, 2009.
4. Building and operating anywhereAny personNo approval required;On or after April 1, 2010 in India a new hotel of 2 star or abovehowever, hotel should be category (see Note 3)classified by the Central Government as 2 star hotel or above category
5. Building and operating, anywhereAny personNo approval requiredOn or after April 1, 2010 in India, any hospital with at least 100 beds for patients
6. Developing and building a housingAny personDeveloping and buildingOn or after April 1, 2010 projecthousing project should be under a scheme for slum redevelopment or rehabilitation framed by the Central Government/State Government and notified by the Board in accordance with prescribed guidelines
7. Developing and building a housingAny personDeveloping and buildingOn or after April 1, 2011 projecta housing project should be under a scheme for affordable housing framed by the Central Government or a State Government and notified by the Board [see Rule 11-OA]
Conditions SPECIFIED BUSINESS
Specified businessWho should own theApproval (if any)Date of commencebusinessment of business
8. Production of fertilizer in IndiaAny personNot requiredOn or after April 1, 2011
9. Setting up and operating an inlandAny personAs notified or approvedOn or after April 1, 2012 container depot or a container freightunder the Customs Act station
10. Bee-keeping and production ofAny personNo approvalOn or after April 1, 2012 honey and beeswax
11. Setting up and operating aAny personNo approvalOn or after April 1, 2012 warehousing facility for storage of sugar
12. Laying and operating a slurryAny personNo approvalOn or after April 1, 2014 pipeline for the transportation of iron ore
13. Setting up and operating a semi-Any personAs notified by the Board inOn or after April conductor wafer fabrication manu-accordance with such1, 2014 facturing unitguidelines as may be prescribed [see Notification No. 80/2014 dated December 12, 2014]
14. Developing or maintaining andAn Indian companyThe eligible entity hasOn or after April 1, 2017 operating or developing, maintain-or a consortium ofentered into an agreeing and operating a new infra-Indian companiesment with Central/ structure facilityor an authority/State Government/ board/corporation/local authority/any any other bodyother statutory body established or cons-for developing, maintituted under anytaining, etc., of new Central or State Actinfrastructure facility
Note 1 - “Cold chain facility” means a chain of facilities for storage or transportation of agricultural and forest produce, meat and meat products, poultry, marine and dairy products, products of horticulture, floriculture and apiculture and processed food items under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce.
Note 2 - This business should make not less than one-third (for a natural gas pipeline network) or one-fourth (for petroleum product pipeline network) of its total pipeline capacity available for use on common carrier basis by any person other than the assessee or an associated person. Associated person is a person who participates in the management of the assessee; holds at least 26 per cent voting power in the assessee; appoints more than half of the board of directors or who guarantees not less than 10 per cent of the total borrowing of the assessee.
Note 3 - Where an assessee builds a two-star (or above category) hotel and, subsequently, while continuing to own the hotel, transfers the operation thereof to another person, the assessee shall be deemed to be carrying on the specified business of building and operating hotel for the purpose of section 35AD.
Note 4 - Infrastructure facility means—
a. a road including toll road, a bridge or a rail system;
b. a highway project including housing or other activities being an integral part of the highway project;
c. a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system;
d. a port, airport, inland waterway, inland port or navigational channel in the sea.
73.1-2 The specified business should not be set up by splitting up, or the reconstruction, of a business already in existence. Moreover, it should not be set up by the transfer of old plant and machinery.
20 per cent old machinery is permitted - If the value of the transferred assets does not exceed 20 per cent of the total value of the machinery or plant used in the business, this condition is deemed to have been satisfied.
Second-hand imported machinery is treated as new - Any machinery or plant which was used outside India by any person (other than the assessee) shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled—
1. Such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India.
2. Such machinery or plant is imported into India from any country outside India.
3. No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.
73.1-3 Books of account should be audited and audit report should be uploaded one month prior to the due date of submission of return of income.
73.2 100 per cent of capital expenditure incurred wholly and exclusively for the purpose of specified business carried on by an assessee is deductible in the previous year in which the expenditure is incurred. Moreover, deduction under section 35AD is subject to the following propositions—
1. Expenditure incurred on the acquisition of any land or goodwill or financial instrument is not eligible for any deduction under section 35AD.
2. Moreover, deduction under section 35AD is not available pertaining to any expenditure in respect of which payment (or aggregate of payments) made to a person in a day [otherwise than by an account payee cheque/draft/use of electronic clearing system through a bank account (or through prescribed electronic mode)] exceeds Rs. 10,000.
3. Expenditure incurred prior to the commencement of operation, wholly and exclusively, for the purpose of any specified business, shall be allowed as deduction during the previous year in which the assessee commences the operation of his specified business, if the amount is capitalized in the books of account of the assessee on the date of commencement of operation.
4. If operation of the business of laying and operating a cross-country natural gas distribution network is commenced during April 1, 2007 and March 31, 2009, the capital expenditure (not being for acquiring land or goodwill or financial instrument) incurred before April 1, 2009 (to the extent not allowed as deduction under any section earlier) will be allowed as additional deduction under section 35AD for the assessment year 2010-11.
73.3 The following consequences should be noted—
1. The assessee shall not be allowed any deduction in respect of the specified business under the provisions of Chapter VIA under sections 80HH to 80RRB for the same or any other assessment year. Moreover, no deduction shall be allowed under the provisions of section 10AA in respect of a specified business when deduction is claimed under section 35AD.
2. No deduction in respect of the expenditure in respect of which deduction has been claimed shall be allowed to the assessee under any other provisions of the Income-tax Act.
3. Any sum received or receivable on account of any capital asset, in respect of which deduction has been allowed under section 35AD, being demolished, destroyed, discarded or transferred shall be treated as income of the assessee and chargeable to income-tax under the head “Profits and gains of business or profession”.
4. Any loss computed in respect of the specified business shall not be set off except against profits and gains, if any, of any other specified business. To the extent the loss is unabsorbed, the same will be carried forward for set off against profits and gains from any specified business in the following assessment year and so on.
5. If the assessee owns two units one of them qualifies for deduction under section 35AD and the other one is not eligible for the same and there is inter-unit transfer of goods or services between the two units, then for the purpose of section 35AD calculation will be made as if such transactions are made at the market value.
6. Any asset in respect of which a deduction is claimed and allowed under section 35AD, shall be used only for the specified business for a period of 8 years beginning with the previous year in which such asset is acquired or constructed. If such asset is used for any purpose other than the specified business, the total amount of deduction so claimed and allowed in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the
Amount of deduction
Consequences of claiming deduction under section 35AD
provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be business income of the assessee of the previous year in which the asset is so used.
73-P1 On April 1, 2023, X Ltd. commences the operation of a warehousing facility in Andhra Pradesh for storage of agricultural produce. The following information is available from the records of company—
Expenses incurred prior to April 1, 2023
Purchase of land for warehouse50,00,000
Construction cost of warehouse8,00,000 Purchase of know-how for warehouse10,00,000
These expenses are capitalized on March 31, 2023.
Expenses incurred during 2023-24
Construction cost of warehouse60,00,000
Purchase of old plant and machinery (from domestic market)2,00,000
Purchase of old plant and machinery (from Germany)4,00,000
Purchase of new plant and machinery9,00,000
Purchase of goodwill
Profit and loss account for the year 2023-24
Depreciation of building (@ 5%)3,40,000Amount collected from persons
3,50,000
Depreciation of machinery (@ 23.333%)3,50,000 using warehouse 78,00,000
Cost of know-how (amount written off)10,00,000
Other operating expenses7,51,000
Donation to a political party10,000
Net profit53,49,000 78,00,00078,00,000
Out of other operating expenses, a payment of Rs. 40,000 is made in cash. Other operating expenses are deductible under section 37. Find out the taxable income of X Ltd. for the assessment year 2024-25 on the assumption that X Ltd. has the following income from other sources - income from the business of commission agency: Rs. 20,15,000 (computed under the provisions of the Income-tax Act) and dividend from an Indian company: Rs. 50,000.
Amount deductible under section 35AD
Expenditure incurred prior to the commencement of operation (to the extent these are capitalized)
Purchase of land (not qualified for deduction) Nil
Construction cost of warehouse8,00,000
Purchase
during the previous year
Purchase of machinery (Rs. 2,00,000 + Rs. 4,00,000 + Rs. 9,00,000)15,00,000
Total 93,78,000
Amount deductible under section 35AD93,78,000
Computation of income from warehouse Net profit as per profit and loss account53,49,000
Add: Depreciation of building (not deductible as cost of building is eligible for deduction under section 35AD) 3,40,000
Add: Depreciation of machinery (not deductible as cost of machinery is qualified for deduction under section 35AD)3,50,000
Add: Cost of know-how (not deductible as deduction is available under section 35AD)10,00,000
Add: Amount paid in cash (operating expenses)40,000
Add: Donation to political party10,000
Less: Deduction under section 35AD(-) 93,78,000
Loss from warehouse (-) 22,89,000
Computation of income
Commission agency business20,15,000
Warehouse(-) 22,89,000
Business income (loss from operating warehouse, being a specified business under section 35AD cannot be set off against any other income except income from a specified business)20,15,000
Income from other sources (dividend from an Indian company)50,000
Gross
Less: Deduction under section 80GGB (donation to a political party)10,000 Net income
Notes—
1. Second hand imported machinery is taken as new machinery. The business of operating warehouse is formed by using new machinery of Rs. 13,00,000 and old machinery of Rs. 2,00,000. Value of old plant and machinery does not exceed 20 per cent of the total value of plant and machinery. Other conditions of section 35AD are satisfied. X Ltd. is, therefore, eligible for deduction under section 35AD.
2. Loss from operating warehouse (by virtue of section 73A) can be set off only against profit and gains, if any, of any other business specified under section 35AD. In this case, X Ltd. does not have any other specified business. Loss will be carried forward (without any time-limit) for being set off against income from operating warehouse or any other specified business under section 35AD.
3. Minimum alternate tax provisions will be applicable. Tax liability will be 31.2% of Rs. 20,55,000 or 19.24% of book profit (i.e. Rs. 53,49,000+Rs. 20,15,000 + Rs. 50,000), whichever is more.
74. The provisions of section 44AD will be applicable only if the following conditions are satisfied—
1. Eligible assessee - The assessee should be an eligible assessee. Eligible assessee for this purpose is a resident individual, a resident Hindu undivided family or a resident partnership firm (not being a limited liability firm).
2. Has not claimed some deductions - The assessee has not claimed any deduction under sections 10A, 10AA, 10B, 10BA, 80HH to 80RRB in the relevant assessment year.
3. Eligible business - The assessee should be engaged in any business (whether it is retail trading or wholesale trading or civil construction or any other business). However, the following persons are not eligible to avail any benefit under section 44AD –
a. a person carrying on profession as referred to in section 44AA(1);
b.a person earning income in the nature of commission or brokerage;
c.a person carrying on any agency business; or
d.a person who is in the business of plying, hiring or leasing goods carriages.
4. Turnover - Total turnover/gross receipt in the previous year of the business should not exceed the limit given below -
Up to the assessment year 2023-24Rs. 2 crore
From the assessment year 2024-25 -
-If the amount (or aggregate of amounts) received during the previous year in cash/ bearer or crossed cheque/draft does not exceed 5 per cent of the total turnover/ gross receipts of the previous yearRs. 3 crore
-In any other case Rs. 2 crore
74.1 If the above conditions are satisfied, the income from the eligible business is estimated at 8 per3 cent of the gross receipt or total turnover. The following points should be noted—
1. The assessee can voluntarily declare a higher income in his return.
3. 6 per cent in respect of total turnover or gross receipts received by an account payee cheque/draft or use of electronic clearing system through a bank account (or through prescribed electronic mode) during the previous year or before the due date of submission of return of income under section 139(1).
Consequences if the above conditions are satisfied
