Expenses allowed as a Deduction [Sections 30 to 35] -Profits and Gains of Business and Profession

Expenses allowed as a Deduction [Sections 30 to 35]

Section 30 to 35 covers the following expenses Allowed as Deduction while computing Profits and Gains of Business and Profession.

Meaning of the term ‘paid’: Before we discuss the specific expenses, it is necessary to understand the meaning of the term ‘paid’, which will be used in relation to these expenses. According to section 43(2) ‘paid’ means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head ‘Profits and gains of business or profession’. Therefore, where the assessee follows the mercantile system of accounting expenses incurred during the previous year shall be treated to be ‘paid’ irrespective of the fact whether they have been actually paid or not. If the assessee follows the cash system then the expenses shall be treated to be ‘paid’ only when they have been actually paid during the previous year.

Table of Contents

1.  Rent, Rates, Taxes, Repairs and Insurance for Buildings [Section 30]

1.1. Deductions:

In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed:

(a)        where the premises are occupied by the assessee:

(i) as a tenant —

the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs;

(ii) otherwise than as a tenant —

the amount paid by him on account of current repairs to the premises;

(b)        any sum paid (whether as owner or tenant) on account of land revenue, local rates or municipal taxes; However, these are allowable subject to provisions of section 43B i.e. if these expenses are claimed on due basis, the payment of the same must be made on or before the due date of furnishing the return of income under section 139(1);

(c)        any insurance premium paid (whether as owner or tenant) in respect of insurance against risk of damage or destruction of the premises.

The amount paid on account of the cost of repairs referred to clause (a)(i) above and the amount paid on account of current repairs referred to in clause (a)(ii) above shall not include any expenditure in the nature of capital expenditure. [Explanation to section 30]

1.2. Current Repairs:

The expression “current repairs” means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage.

Current repairs indicate repairs which are attended to when the need for them arises from a businessman’s point of view and which are not allowed to fall into arrears or to be accumulated.

Where the business or profession of the assessee is carried on in a building not owned by him but in respect of  which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the  assessee for the purpose of business or profession on the construction of any structure or doing of any work, in  or in relation to, and by way of renovation or extension of, or improvement to, the building, then the assessee  shall be eligible for depreciation for such capital expenditure incurred assuming that such structure or work is  a building owned by the assessee. [Explanation 1 to section 32]

2.  Repairs and insurance of Machinery, Plant and Furniture [Section 31]

In respect of machinery, plant or furniture used for the purpose of business, the following deductions are allowable:

(a) amount paid on account of current repairs,

(b) any insurance premium paid in respect of insurance against risk of damage or destruction of the plant and machinery or furniture.

The amount paid on account of current repairs shall not include any expenditure in the nature of capital expenditure.

3.  Depreciation [Section 32]

Depreciation is the diminution in the value of an asset due to normal wear and tear and due to obsolescence.  There are different methods for calculation of depreciation under financial accounting. The methods commonly used are:

(a)        straight line method;

(b)        written down value method;

The system of claiming depreciation under the Income-tax Act is quite different from financial accounting.

Computation of depreciation: Depreciation is computed on various assets according to the system of classifying the assets into various blocks of assets. The value of each block is computed separately and then depreciation is calculated on the written down value of each block at the end of the year at the rates prescribed for each block.

4.  Carry Forward and Set Off of Unabsorbed Depreciation [Section 32(2)]

Where in the assessment of the assessee, full effect cannot be given to any depreciation allowance in any previous year owing to—

(a)        there being no profits or gains chargeable for that previous year. or

(b)        the profits or gains chargeable being less than the depreciation allowance,

then, subject to the provisions of sections 72(2) (relating to carry forward of business loss) and 73(3) (relating to carry forward of speculation loss), the depreciation allowance or part of the depreciation allowance to which effect has not been given, as the case may be, shall—

(i)         be added to the amount of allowance for depreciation for the following previous year and deemed to be part of that allowance, or

(ii)        if there is no such depreciation allowance for that previous year, be deemed to be the allowance for that previous year,

and so on for the succeeding previous years.

In other words, the depreciation allowance shall be allowed as under: —

(1)        current depreciation is first deductible from the income of business.

(2)        If any balance is left due to income from business being insufficient, it can be set off from any source under any other head of income (except salary) in the same previous year.

(3)        In case there is still a balance left over, it is to be treated as unabsorbed depreciation and is to be taken to the next succeeding year and added to the current depreciation of that year. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year.

However, if there is any carry forward of business loss or speculation loss also, the set off to the succeeding previous year shall be done in the following order.

(a)        Set off current year depreciation.

(b)        Set off brought forward business loss/speculation loss.

(c)        Set off brought forward unabsorbed depreciation.

5.  Deduction in respect of Investment in New Plant and Machinery in Notified Backward Areas in certain States [Section 32AD]

(1) Manufacturing unit eligible for deduction @ 15% of actual cost of new asset being eligible plant and machinery [Section 32AD (1)]

A new section 32AD has been inserted in the Act to provide for an additional investment allowance of an amount equal to 15% of the cost of new asset acquired and installed by an assessee (whether company or noncompany), if the assessee—

(a)        sets up an undertaking or enterprise for manufacture or production of any article or thing on or after 1.4.2015 in any backward area notified by the Central Government in this behalf in the State of Andhra Pradesh, or in the State of Bihar, or in the State of Telangana or in the State of West Bengal; and

(b)        the new assets are acquired and installed for the purposes of the said undertaking or enterprise during the period beginning from 1.4.2015 & ending before 1.4.2020.

The deduction will be available for the assessment year relevant to the previous year in which the new asset is installed. But in order to avail benefit under section 32AD, the new asset must both be acquired and installed on or after 1.4.2015 but on or before 31.3.2020.

This deduction shall be available over and above the existing deduction available under section 32AC of the Act which is allowed only to a company assessee. Accordingly, if an undertaking is set up in the notified  backward areas in the State of Andhra Pradesh, or in the State of Bihar, or in the State of Telangana or in the State  of West Bengal by a company, it shall be eligible to claim deduction under the existing provisions of section  32AC of the Act as well as under the new section 32AD if it fulfils the conditions (such as investment above a  specified threshold of ₹25 crore) specified in the said section 32AC and conditions specified under section 32AD.

 (2) Meaning of new asset [Section 32AD (4)]

“New asset” means any new plant or machinery (other than a ship or aircraft), but does not include—

(a)        any plant or machinery which before its installation by the assessee was used either within or outside  India by any other person;

See also  Exemption in respect of income chargeable to Equalization Levy [Section 10(50)]

(b)        any plant or machinery installed in any office premises or any residential accommodation, including  accommodation in the nature of a guest house;

(c)        any office appliances including computers or computer software;

(d)        any vehicle;

(e)        any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of  depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of  business or profession” of any previous year.

The above “new asset” acquired and installed should not to be sold or otherwise transferred within a period of 5 years from the date of its installation except in connection with amalgamation or demerger.

(3) Consequences if the new asset acquired and installed is transferred within a period of 5 years from the  date of its installation except in connection with the amalgamation or demerger or reorganization of  business [Section 32AD(2)]

If any new asset acquired and installed by the assessee is sold or otherwise transferred except in connection  with the amalgamation or demerger or reorganisation of business referred to in section 47(xiii), (xiiib) or (xiv),  within a period of 5 years from the date of its installation, the consequence of the same shall be as under:

  1. The amount of deduction allowed under section 32AD(1) in respect of such new asset shall be deemed to be income chargeable under the head profit and gains of business and profession of the previous year in  which new asset is sold or otherwise transferred.
  2. In addition to the above, if any capital gain arises under section 50 on account of transfer of such new asset, that too shall become taxable in that previous year.

(4) Consequences if amalgamated company or resulting company or the successor referred to in section  47(xiii), (xiiib) or (xiv), as the case may be, transfers such assets within 5 years from the date of installation  by the amalgamating company or demerged company or the predecessor referred to in section 47(xiii),  (xiiib) or (xiv) [Section 32AD(3)]

If after amalgamation or demerger or reorganisation of business referred to in section 47(xiii), (xiiib) or (xiv),  the amalgamated company or the resulting company or the successor, as the case may be, sells or transfers any  such asset within 5 years from the date of its installation by the amalgamating company or the demerged company  or the predecessor referred to in section 47(xiii), (xiiib) or (xiv), then the amalgamated company or resulting  company or the successor shall be taxed in the same manner as it would have been taxed in the hands of the  amalgamating or demerged company or the predecessor, as the case may be.

6.  Tea Development Account, Coffee Development Account and Rubber Development Account [Section 33AB]

Deduction under section 33AB is available to an assessee who satisfies the following conditions:

A-   Essential Conditions

(i)         the assessee is engaged in the business of growing and manufacturing tea or coffee or rubber in India;

(ii)        the assessee has, within six months from the end of the previous year or before the due date of furnishing return of income whichever is earlier;

(a)        deposited with National Bank for Agriculture and Rural Development (NABARD) any amount(s) in a special account maintained by the assessee with that bank in accordance with and for the purpose specified in a scheme approved in this behalf by the Tea Board or the Coffee Board or the Rubber Board; or

(b)        deposited any amount in the Deposit Account opened by the assessee in accordance with and for the purpose specified in a scheme framed by the Tea Board or the Coffee Board or the Rubber Board with the previous approval of the Central Government;

(iii)       the assessee must get its accounts audited by a Chartered Accountant and furnish the report of such audit in Form No. 3AC, along with the return of income. In a case where the assessee is required by or under any other law to get his accounts audited, it shall be sufficient compliance if such assessee gets the accounts of such business audited under such law and furnishes the report of the audit as required under such other law and a further report in the Form No. 3AC.

B-   Quantum of Deduction:

Quantum of deduction shall be:

(a)        the amount(s) deposited in the schemes referred to above; or

(b)        40% of the profits of such business computed under the head profits and gains of business or profession,

whichever is less.

The profits are to be computed before making any deduction under this i.e. section 33AB and before making adjustment for brought forward losses u/s 72 but after making deduction of current year depreciation.

How to compute Profits from such business:

If separate accounts are maintained in respect of business of growing and manufacturing tea or coffee or rubber in India, it shall be profits from such business before claiming deduction under this section. In case separate accounts are not maintained it will be calculated as under:

 

If a deduction has been allowed u/s 33AB, no deduction shall be allowed in respect of such amount in any other previous year.

Notes. –

  1. If an individual or HUF opts to be taxed under section 115BAC, he/it shall not be entitled to any deduction under section 33AB.
  2. If a company opts to taxed under section 115BAA or 115BAB, as the case may be, is shall not be entitled to any deduction under section 33AB.
  3. If a co-operative society opts to be taxed under section 115BAD, it shall not be entitled to any deduction under section 33AB.

Restriction on utilization of the amount deposited:

The amount standing to the credit of the assessee, in the Special Account of NABARD or the Deposit Account, is released during any previous year by the National Bank or withdrawn by the assessee from the Deposit Account is to be utilised for the business of the assessee in accordance with the scheme specified. However, no deduction shall be allowed in respect of any amount utilised for the purchase of—

(a)        any machinery or plant to be installed in any office premises or residential accommodation, including any accommodation in the nature of a guest house;

(b)        any office appliances (not being computers);

(c)        any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year;

(d)        any new machinery or plant to be installed in an industrial undertaking for purposes of business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.

Withdrawal of deposit:

Any amount deposited in the special account maintained with NABARD or the Deposit Account shall not be allowed to be withdrawn, except for the purposes specified in the scheme or, as the case may be in the deposit scheme. Apart from this, it is allowed to be withdrawn in the circumstances specified below:

  • closure of business;
  • death of an assessee;
  • partition of a Hindu Undivided Family;
  • dissolution of a firm;
  • liquidation of a company.

Where the amount is withdrawn during any previous year on closure of the business or on dissolution of the firm, the amount so withdrawn shall be deemed to be the profits of the previous year in which the amount is withdrawn and chargeable to income-tax as if the business has not closed or as the case may be, the firm had not been dissolved. In other cases, i.e. death of assessee, partition of HUF and liquidation of the company, the amount withdrawn shall not be taxable.

Withdrawal of deduction:

The deduction shall be withdrawn under the following circumstances:

(a)        where any amount which is withdrawn or released during any previous year, for being utilised by the assessee for any purpose in accordance with this scheme, is not so utilised within that previous year, the amount not so utilised shall be treated as the income and charged to income-tax of that previous year.

(b)        where any asset acquired in accordance with the scheme is sold or otherwise transferred before the expiry of 8 years from the end of the previous year in which it was acquired, such part of the cost of the asset as is relatable to the deduction allowed, shall be treated as the income of the previous year in which the asset is sold or otherwise transferred.

The restriction of 8 years will not be applicable in the following cases:

  • where the asset is sold or transferred by the assessee to Government, local authority or a statutory corporation or a Government company;
  • where the sale or transfer of the asset is made in connection with the succession of a firm by a company provided the following conditions are satisfied:
  • all the assets and all the liabilities of the firm relating to the business or profession immediately before the succession become the assets and liability of the company;

(b) all the shareholders of the company were partners of the firm immediately before the succession.

7.  Site Restoration Fund [Section 33ABA]

Deduction under section 33ABA is allowed to an assessee who satisfies the following conditions:

Essential Conditions:

  1. The assessee is carrying on business consisting of prospecting for or extraction or production of petroleum or natural gas or both in India and in relation to which the Central Government has entered into an agreement with such assessee for such business.
  2. The assessee has before the end of the previous year—

(a)        deposited with the State Bank of India any amount(s) in a special account maintained by the assessee with that bank, in accordance with and for the purposes specified in, a scheme approved in this behalf by the Ministry of Petroleum and Natural Gas of the Government of India; or

(b)        deposited any amount in the Site Restoration Account opened by the assessee in accordance with, and for the purpose specified in a scheme framed by the aforesaid Ministry. This scheme is known as Deposit Scheme.

  1. The assessee must get its accounts audited by an Accountant as defined in the Explanation below section 288(2) and furnish the report of such audit in the Form No. 3AD alongwith the return of income. In a case where the assessee is required by or any other law to get its accounts audited, it shall be sufficient compliance if such assessee gets the accounts of such business audited under such law and furnishes the report of the audit as required under such other law and a further report in the form prescribed.

Quantum of Deduction:

Quantum of deduction shall be: —

(a)        the amount deposited in the scheme referred to above; or

(b)        20% of the profit of such business computed under the head profits and gains of business or profession,

whichever is less.

The profits are to be computed before making any deduction under this section i.e. section 33ABA and before making adjustment for brought forward losses u/s 72.

1.         Profits from business in this case also is to be calculated in the same manner as is mentioned in section 33AB.

2.         If a deduction has been allowed under section 33ABA, no deduction shall be allowed in respect of such amount in any other previous year.

3.         Any amount credited in the special account or Site Restoration Account by way of interest shall be deemed to be a deposit.

Notes. –

  1. If an individual or HUF opts to be taxed under section 115BAC, he/it shall not be entitled to any deduction under section 33ABA.
  2. If a company opts to taxed under section 115BAA or 115BAB, as the case may be, is shall not be entitled to any deduction under section 33ABA.
  3. If a co-operative society opts to be taxed under section 115BAD, it shall not be entitled to any deduction under section 33ABA.

Restriction on utilisation of the amount deposited:

The amount standing to the credit of the assessee, in the Special Account of State Bank of India or the Site Restoration Account, is to be utilised for the business of the assessee in accordance with the scheme specified. However, no deduction shall be allowed in respect of any amount utilised for the purchase of:

(a)        any machinery or plant to be installed in any office premises or residential accommodation, including any accommodation in the nature of a guest house;

(b)        any office appliances (not being computers);

(c)        any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year;

(d)        any new machinery or plant to be installed in an industrial undertaking for purposes of business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.

Withdrawal of deposit:

Any amount deposited in the special account maintained with State Bank of India or the Site Restoration Account shall not be allowed to be withdrawn, except for the purposes specified in the scheme or, as the case may be, in the deposit scheme.

Withdrawal of deduction:

The deduction will be withdrawn under the following circumstances:

(1)        Where any amount standing to the credit of the assessee in the special account or in the Site Restoration  Account is withdrawn on closure of the account during any previous year by the assessee, the amount so  withdrawn from the account, as reduced by the amount, if any, payable to the Central Government by way of  profit or production share as provided in the agreement referred to in section 42, shall be deemed to be the profits  and gains of business or profession of that previous year and shall accordingly be chargeable to income-tax as the  income of that previous year. Further, if the business carried on by the assessee is no longer in existence, these provisions shall apply as if the business is in existence in that previous year.

(2)        Where any amount, standing to the credit of the assessee in the special account or in the Site Restoration  Account, which is released during any previous year by the State Bank of India or which is withdrawn by the  assessee from the Site Restoration Account for being utilised by the assessee for the purposes of such business in  accordance with the scheme or the deposit scheme is not so utilised, either wholly or in part, within that previous  year, the whole of such amount or, as the case may be, part thereof which is not so utilised shall be deemed to be  profits and gains of business and accordingly chargeable to income-tax as the income of that previous year.

(3)        Where any asset acquired in accordance with the scheme is sold or otherwise transferred before the expiry of 8 years from the end of the previous year in which it was acquired, such part of the cost of the asset as is relatable to the deduction allowed, shall be treated as the income of the previous year in which the asset is sold or otherwise transferred.

The restriction of 8 years will not be applicable in the following cases:

(i)         where the asset is sold or transferred by the assessee to Government, local authority or a statutory corporation or a Government company;

(ii)        where the sale or transfer of the asset is made in connection with the succession of a firm by a company provided the following conditions are satisfied:

(a)        all the assets and all the liabilities of the firm relating to the business or profession immediately before the succession become the assets and liabilities of the company;

(b)        all the shareholders of the company were partners of the firm immediately before the succession.

Where any amount standing to the credit of the assessee in the special account or in the Site Restoration Account is utilised by the assessee for the purpose of any expenditure in connection with such business in accordance with the scheme or the deposits scheme, such expenditure shall not be allowed in computing the income chargeable under the head Profits and gains of business or profession.

8.  Expenditure on Scientific Research (Section 35)

Scientific research may be carried on:

  1. by the assessee, relating to his business; or
  2. by making payment to outside agencies engaged in scientific research work.

(A) In-house Scientific Research & Development (Research Carried out by Assessee):

The expenses incurred on in-house research i.e. research carried out by the assessee are allowed as a deduction, only where the research work relates to the business of the assessee. An assessee can claim the following expenditure as a deduction:

  1. Revenue Expenses
  2. Capital Expenses

1. Revenue Expenditure [Section 35(1)(i)]:

All revenue expenses laid out or expended on scientific research during the previous year are fully allowed as a deduction.

It has further been provided that following revenue expenses, expended or laid out during three years immediately preceding the commencement of the business, shall be deemed to be the expenditure of the previous year in which the business commences and therefore, shall be allowable in that year to the extent these are certified by the prescribed authority:

  1. payment of salary to employees engaged in scientific research;
  2. purchase of material used in scientific research.

For example:,

if the assessee commences its business on 15.12.2022 then all revenue expenses on scientific research related to the business incurred, on or after 15.12.2022, will be allowed as a deduction. Further, expenses incurred during the period 15.12.2019 to 14.12.2022 and which are certified by the prescribed authority will be deemed to be expenses of the previous year 2022-23 and will be allowable in that year.

2. Capital Expenditure [Section 35(1)(iv) read with section 35(2)]:

All capital expenses (excepting expenditure on acquisition of land) incurred on scientific research related to the business of the assessee shall be allowed as a deduction in the year in which they are incurred.

Further, capital expenditure incurred during 3 years immediately preceding the commencement of the business shall be deemed to be expenses of the previous year of commencement of business and allowed in that year. Capital expenses may be incurred on acquisition of plant and machinery, construction of building, acquisition of vehicles, etc. for the purpose of scientific research.

1.         No deduction shall be admissible under this clause in respect of any expenditure incurred on the acquisition of land, whether the land is acquired as such or as part of any property.

2.         According to section 43(4), Scientific Research means any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. Besides Scientific Research, donation for research in social sciences like human behaviour and marketing research work are also covered under this section. This is an expenditure where the Government intends to provide encouragement and therefore, specific provisions have been enacted for the treatment of this expenditure.

(B) Sale of an asset used for scientific research

(a)  Sold without having been used for other purposes [Section 41(3)]:

Normally  gain arising from the transfer of a capital asset is taxable under the head capital gain  but where the scientific research asset is sold off without having been used for other  purposes, then:

  • the net sale price of the assets; or
  • the cost of the asset, which was earlier allowed as deduction under section 35,

whichever is less,

shall be treated as business income of the previous year in which  such asset is sold. Any excess of sale price over original cost of the asset shall be  subject to the provisions of the capital gains. This shall apply even if the business is  not in existence in that previous year.

(b)   Sold after having  been used for business:

Where the scientific  research asset is used in  the business after it  ceases to be used for  scientific research, the  actual cost of such asset  to be included in the  relevant block of asset  shall be taken as nil as  the full amount has been  allowed as deduction  under section 35. If this  asset is later on sold, the  money payable shall be  deductible from the  block in which such  asset was earlier  included.

(C) Unabsorbed capital expenditure on scientific research:

For claiming deduction on account of capital expenditure on scientific research, it may be noted that like depreciation, the deduction of such capital expenditure shall be allowed to the extent of the profit from that business. There cannot be business loss due to such deduction.

Therefore, if full effect cannot be given in a previous year on account of deduction of capital expenditure on  scientific research owing to there being no profits or gains chargeable for that previous year or owing to profit  being less than the expenditure, then such expenditure or part of such expenditure, which could not be claimed,  shall be known as unabsorbed capital expenditure on scientific research and subject to the provisions of section  72(2) (relating to business loss) and section 73(3) (relating to speculation loss), it will be deemed to be an  expenditure of the following previous years and so on for the succeeding previous year.

There can be a business loss due to deduction of revenue expenditure on scientific research but there cannot be a business loss due to deduction of capital expenditure on scientific research. If capital expenditure on scientific research cannot be claimed as deduction due to insufficiency of business profit, the balance is known as unabsorbed capital expenditure on scientific research and its treatment shall be the same as in case of unabsorbed depreciation.

(D) Payment to Outside Agencies engaged in Scientific Research Work:

1.    Payment made to research association, university, college or other institution for scientific research [Section 35(1)(ii)]

Conditions if any to be satisfied

The deduction shall be allowed only if such association, university, college or other institution—

(A)    is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed [See Rules 5C and 5CAJ; and

(B)    such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government.

Amount Allowed w.e.f. A.Y. 2021-22 : 100%

2.    Deduction in case payment is made to a company to be used for scientific research [Section 35(1)(iia)]

Conditions if any to be satisfied

The company should satisfy the following conditions:

(a)      it is registered in India,

(b)     it has as its main object the scientific research and development,

(c)      it is, for the purposes of this clause, for the time being approved by the prescribed authority in the prescribed manner, and

(d)     it fulfils such other conditions as may be prescribed.

Amount Allowed w.e.f. A.Y. 2021-22 : 100%

3.    Payment made to research association, university, etc. for research in social sciences or statistical research [Section 35(1)(iii)]

Conditions if any to be satisfied

The deduction shall be allowed only if such association, university, college or other  institution—

  • is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed [See Rules 5C and 5CA]; and
  • such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government.

Amount Allowed w.e.f. A.Y. 2021-22 : 100%

4.    Deduction for contribution to a National Laboratory or a University or an Indian Institute of Technology or a specified Person [ Section 35(2AA)]

Conditions if any to be satisfied

(1)     The assessee should have paid any sum to such institutions with a specific direction that the said sum shall be used for scientific research undertaken under a programme approved by the prescribed authority.

(2)       Such institutions shall issue a receipt of payment for carrying out such approved programme in Form 3C1. if deduction is allowed under this section.

(3)        The prescribed authority shall before granting approval, satisfy itself about the feasibility of carrying out this scientific research and shall submit its report to the Principal Chief Commissioner or Chief
Commissioner or Principal Director General or Director General of Income-tax (Exemptions) in Form No. 3CJ within a period of 3 months from the date of granting approval.

Amount Allowed w.e.f. A.Y. 2021-22 : 100%

5.    Weighted deduction on in house research and development to a company assessee in certain cases [Section 35(2AB)]

Explanation. —For the purposes of this clause, “expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure ‘incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970.

1.     If deduction is allowed under this section, it will not be allowed under any other provision of the Act.

2.      The expenditure incurred on the acquisition of building (excluding cost of land) shall be allowed @ 100% under section 35(1)(iv) read with section 35(2).

3.      The deduction under section 35(2AB) shall not be allowed to a company who has its main object the scientific research and development.

Conditions if any to be satisfied

(1)     The company—

(a)      is engaged in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule of the Act,, and

(b)     has incurred expenditure (excepting on land and building) on in-house scientific research and development facility approved by the prescribed authority.

(2)       No company shall be entitled to this deduction unless it enters into an agreement with the prescribed authority for cooperation in such research and development facility and fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed.

Amount Allowed w.e.f. A.Y. 2021-22:      100%

 

1.      Exemption not to be denied if the approval granted to the association, university, etc. is subsequently withdrawn: The deduction, to which the assessee is entitled in respect of any sum paid to a research association, university, colLege or other institution to which clause (ii) or clause (iii) or to a company to which clause (iia) applies, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to the association, university, college or other institution referred clause (ii) or clause (iii) or to a company referred to in clause (iia) has been withdrawn. [Explanation]

2.      Exemption not to be denied if the approval granted to the above specified institutions is subsequently withdrawn: The deduction, to which the assessee is entitled in respect of any sum paid to a National Laboratory, University, Indian Institute of Technology or a specified person for the approved programme referred to in this sub-section, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to,—

(a)   such Laboratory, or specified person has been withdrawn; or

(b)   the programme, undertaken by the National laboratory, University, Indian institute of Technology or specified person, has been withdrawn.

9.  Deduction in respect of expenditure on Specified Business [Section 35AD]

(1). To whom deduction shall be allowed:

Deduction under section 35AD shall be allowed to the assessee who is carrying on any of the following specified business:

(i)         setting up and operating a cold chain facility;

(ii)        setting up and operating a warehousing facility for storage of agricultural produce;

(iii)       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;

(iv)       the business of building and operating anywhere in India, a hotel of two-star or above category, as classified by the Central Government;

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

(vi)       developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed;

(vii)      developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed;

(viii)     production of fertiliser in India;

(ix)       setting up and operating an Inland Container Depot or Container Freight Station notified and approved under the Customs Act, 1962;

(x)        bee-keeping and production of honey and beeswax; and

(xi)       setting up and operating a warehousing facility for storage of sugar.

(xii)      laying and operating a slurry pipeline for the transportation of iron ore;

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

(xiv)     developing or maintaining and operating or developing maintaining and operating a new infrastructure facility

Business mentioned in clause (xii) or (xiii) above should commence its operation on or after 1-4-2014.

(2). Nature and Amount of Deduction:

100% deduction shall be allowed an account of any expenditure of  capital nature incurred wholly and exclusively for the purpose of the above specified business carried on by such  assessee during the previous year in which such expenditure in incurred by him.

1.         In case of specified business of production of fertilizer in India, the deduction for capital expenditure shall  be allowed not only for production in a new plant but it shall also be allowed for a newly installed capacity  in an existing plant for production of fertilizer.

2.         Where the assessee builds a hotel of two star or above category and subsequently, while continuing to own  the hotel, transfers the operation thereof to another person, the assessee shall continue to be allowed the  deduction although operations are carried on by other person.

Notes. –

  1. If an individual or HUF opts to be taxed under section 115BAC, he/it shall not be entitled to any deduction under section 35AD.
  2. If a company opts to taxed under section 115BAA or 115BAB, as the case may be, is shall not be entitled to any deduction under section 35AD.
  3. If a co-operative society opts to be taxed under section 115BAD, it shall not be entitled to any deduction under section 35AD.

Expenditure incurred prior to commencement of operation to be allowed in the year of commencement of  operation:

The expenditure incurred, wholly and exclusively, for the purposes of any specified business, shall be  allowed as deduction during the previous year in which he commences operations of his specified business, if—

(a) the expenditure is incurred prior to the commencement of its operations; and

(b) the amount is capitalized in the books of account of the assessee on the date of commencement of its  operations.

(3)  Conditions to be satisfied:

This section applies to the specified business which fulfils all the following conditions:

  • it is not set up by splitting up, or the reconstruction, of a business already in existence;
  • it is not set up by the transfer to the specified business of machinery or plant previously used for any purpose;
  • where the business is of laying and operating a cross country natural gas or crude or petroleum oil pipelines network it should satisfy the following conditions also:

(a) it is owned by a Indian 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;

(b) it has been approved by the Notified Petroleum and Natural Gas Regulatory Board;

(c) it has made 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 as prescribed by the Petroleum and Natural  Gas Regulatory Board; and

(d) any other condition as may be prescribed.

  • 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 eight years beginning with the previous year in which such asset  is acquired or constructed.

Further, if such asset is used for any purpose other than the specified business during the period of 8 years  specified in section 35AD(7A), otherwise then by way of a mode referred to in section 28(vii), 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 provisions of section 32 as if no deduction  had been allowed under section 35AD, shall be deemed to be income of the assessee chargeable under the  head “Profits and gains of business or profession” of the previous year in which the asset is so used.

Section 28(vii) provides that If any asset on which a deduction under section 35AD has been allowed, is  demolished, destroyed, discarded or transferred, the sum received or receivable for the same is chargeable to  tax under clause (vii) of section 28.

 EXAMPLE :

Deduction claimed under section 35AD on a capital asset:   ₹ 100

Depreciation eligible on such asset under section 32:           ₹ 15

Profit chargeable to tax in accordance with the proposed section 35AD(7B):          ₹ 85

(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.

(2)        Any expenditure of capital nature shall not include—

(i) any expenditure in respect of which the payment or aggregate of payments made to a person 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 such other electronic mode as may be  prescribed, exceeds ₹10,000

or

(ii) any expenditure incurred on the acquisition of any land or goodwill or financial instrument.

(3)        Where a deduction under section 35AD is claimed and allowed for any assessment year, no deduction  shall be allowed under section 10AA and sections 80-IA to 80RRB.

10. Expenditure by way of payments to associations and institutions for carrying out Rural Development Programmes [Section 35CCA]

Under section 35CCA, any assessee who is carrying on a business/profession shall be allowed a deduction of  the amount of the expenditure incurred by way of payment of any sum:

(a)        to National Fund for Rural Development set up by the Central Government;

(b)        to the National Urban Poverty Eradication Fund set up and notified by the Central Government.

If deduction is claimed u/s 35CCA, it shall not be allowed under any other provision of the Act.

11. Weighted deduction of 150% for expenditure incurred on agricultural extension project [Section 35CCC]

1. To whom deduction shall be allowed u/s 35CCC:

Any assessee

2. Purpose for which deduction shall be allowed:

Deduction shall be allowed on account of any expenditure  incurred by the assessee on agricultural extension project notified by the Board in this behalf in accordance with  the guidelines as may be prescribed

3. Quantum of deduction:

150% of such expenditure incurred during the previous year

4. Deduction not to be allowed under any other section if claimed under this section:

Where a deduction  under section 35CCC is claimed and allowed for any assessment year in respect of such expenditure, deduction  shall not be allowed in respect of such expenditure under any other provisions of this Act for the same or any  other assessment year.

Notes. –

  1. If an individual or HUF opts to be taxed under section 115BAC, he/it shall not be entitled to any deduction under section 35CCC.
  2. If a company opts to taxed under section 115BAA or 115BAB, as the case may be, is shall not be entitled to any deduction under section 35CCC.
  3. If a co-operative society opts to be taxed under section 115BAD, it shall not be entitled to any deduction under section 35CCC.

12. Deduction for Expenditure incurred by a Company on skill development project [Section 35CCD]

(1). To whom deduction shall be allowed u/s 35CCC:

A company assessee only

(2). Purpose for which deduction shall be allowed:

Deduction shall be allowed on account of any expenditure  (not being expenditure in the nature of cost of any land or building) incurred by the company on skill  development project notified by the Board in this behalf in accordance with the guidelines as may be prescribed

(3). Quantum of deduction:

150% of such expenditure incurred during the previous year

(4). Deduction not to be allowed under any other section if claimed under this section:

Where a deduction  under section 35CCD is claimed and allowed for any assessment year in respect of such expenditure, deduction  shall not be allowed in respect of such expenditure under any other provisions of this Act for the same or any  other assessment year.

Note.- If a company opts to be taxed under section 115BAA or 115BAB , as the case may be, it shall not be entitled to any deduction under section 35CCD.

13. Amortisation of certain preliminary expenses [Section 35D and Rule 6AB]

Assessees who can claim deduction under this section are:

(i)         Indian Company, or

(ii)        a person other than a company who is resident in India.

Expenditure in respect of which deduction is available

(a)        expenditure incurred before the commencement of business; or

(b)        expenditure incurred after the commencement of business in connection with the extension of existing  undertaking or in connection with setting up a new unit.

Expenses qualifying for deduction:

The following expenses qualify for deduction:

(a)        Expenditure incurred in connection with:

(i)         preparation of a feasibility report;

(ii)        preparation of a project report;

(iii)       conducting market survey or any other survey necessary for the business of the assessee;

(iv)       engineering services relating to the business of the assessee;

(b)       legal charges for drafting any agreement between the assessee and any other person relating to the setting  up or conduct of the business of the assessee;

(c)        where the assessee is company, also, expenditure—

(i)         by way of legal charges for drafting the Memorandum and Articles of Association of the company;

(ii)        on printing of the Memorandum and Articles of Association;

(iii)       by way of fees for registering the company under the provisions of the Companies Act, 1956;

(iv)       in connection with the issue, for public subscription, of shares in or debentures of the company, being  underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of  the prospectus;

(d)        such other items of expenditure (not being expenditure eligible for any allowance or deduction under any  other provisions of this Act) as may be prescribed.

In addition to the expenses claimable by all eligible assessees, Indian companies are entitled to claim  amortisation in respect of expenditure mentioned in clause (c) above.

Amount qualifying for deduction:

The aggregate of the expenditure referred to in clauses (a) to (d) above  shall not exceed 5% of the cost of the project in case of all assessees other than companies.

In the case of a company, it cannot exceed 5% of—

(i)         the cost of the project, or

(ii)        the capital employed in the business of the company,

whichever is beneficial to the company.

Quantum of deduction:

The amount qualifying, as per the limits specified above, shall be allowed as a  deduction in 5 equal annual instalments beginning with the previous year of commencement of business or the  previous year in which the extension of undertaking is completed or the new unit commences production or  operation.

14. Amortisation of Expenditure in case of Amalgamation or Demerger [Section 35DD]

Where an assessee, being an Indian company, incurs any expenditure, wholly and exclusively for the purpose of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to 1/5th of such expenditure for each of five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. No deduction shall be allowed in respect of the expenditure mentioned above under any other provision of the Act.

15. Amortisation of expenditure incurred under voluntary retirement scheme [Section 35DDA]

Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years. No deduction shall be allowed in respect of such expenditure under any other provision of the Income-tax Act.

It may be noted that if such expenditure is incurred by way of payment in more than one year, the deduction shall be allowed in five equal instalments for payment made in each previous year.

16. Deduction for Expenditure on Prospecting, etc., for certain Minerals [Section 35E and Rule 6AB]

Where an assessee, being an Indian company or a person (other than a company) who is a resident of India, is engaged in any operations relating to prospecting for, or extraction or production of specified minerals (mentioned in Seventh Schedule) and incurs, after the 31st day of March, 1970, any specified expenditure, the assessee shall be allowed to amortise such expenditure.

Quantum of deduction:

The deduction to be allowed for any relevant previous year shall be:

(a)        an amount equal to 1/10th of the expenditure (hereinafter referred to as the instalment); or

(b)        such amount as is sufficient to reduce to nil, the income (as computed before making the deduction under this section) of that previous year arising from the commercial exploitation of this mine or any other mine, or other natural deposit of mineral in respect of which the expenditure was incurred,

whichever amount is less. 

However, the amount of the instalment relating to any relevant previous year, to the extent to which it remains unallowed, shall be carried forward and added to the instalment relating to the previous year next following and deemed to be part of that instalment, and so on, for succeeding previous years, so, however, that no part of any instalment shall be carried forward beyond the 10th previous year as reckoned from the year of commercial production.

What is specified expenditure:

The expenditure should be incurred by the assessee at any time during the year of commercial production and any one or more of the 4 years immediately preceding that year, wholly and exclusively on any operations relating to prospecting for any mineral or group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule or on the development of a mine or other natural deposit of any such mineral or group of associated minerals:

What is not included in specified expenditure:

There shall be excluded from such expenditure any portion thereof which is met directly or indirectly by any other person or authority and by any sale, salvage, compensation or insurance moneys realised by the assessee in respect of any property or rights brought into existence as a result of the expenditure.

The following expenditure shall not be eligible for deduction under this section: 

  • Expenditure on the acquisition of the site of the source of any mineral or group of associated minerals referred to above or of any rights in or over such site;
  • Expenditure on the acquisition of the deposits of such mineral or group of associated minerals or of any rights in or over such deposits; or
  • Expenditure of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way of depreciation is admissible under section 32.
Scroll to Top