Expenses Expressly Allowed as Deductions [Sections 30 to 37] – Complete Guide

Under the Income Tax Act, 1961, the following business/profession expenses are expressly allowed as deductions when computing taxable income:

1. Deductions for Rent, Repairs & Insurance of Business Premises [Section 30]

Section 30 of the Income Tax Act allows deductions for expenses related to business premises under three categories:

1. Rent for Business Premises [Section 30(a)]

✅ Allowed:

• Rent paid for buildings/land used for business or profession
• Includes lease rentals for commercial spaces
• Also covers rent for machinery/equipment if inseparable from premises

❌ Not Allowed:

• Rent for personal use portion of property
• Capital payments for leasehold improvements

Example:
A CA firm paying ₹50,000/month office rent can claim ₹6 lakh annually as deduction.

2. Repairs & Maintenance [Section 30(b)]

✅ Allowed:

• Routine repairs (whitewashing, plumbing, electrical repairs)
• Maintenance contracts (housekeeping, AC servicing)
• Repainting of existing premises

❌ Not Allowed:

• Structural additions/alterations (capital expenditure)
• Initial repairs for newly acquired premises

Judicial Precedent:
CIT vs. Madras Auto Service (1998) – Distinction between repairs (deductible) and renovations (capital in nature)

3. Insurance Premiums [Section 30(c)]

✅ Allowed:

• Fire insurance for business property
• Burglary/theft insurance
• Equipment insurance (if part of premises)

❌ Not Allowed:

• Life insurance of employees/proprietor
• Personal property insurance

Practical Tip:
For mixed-use properties, claim only business portion proportionately.

2. Deductions for Repairs & Insurance of Machinery, Plant and Furniture [Section 31]

Section 31 of the Income Tax Act allows deductions for expenses related to the maintenance and protection of business assets:

1. Repairs of Machinery/Plant/Furniture [Section 31(i)]

✅ Allowed Deductions:

• Routine maintenance and servicing costs
• Replacement of worn-out parts
• Repair labor charges
• Lubricants and consumables for maintenance

❌ Not Allowed:

• Complete overhaul/replacement of machinery
• Upgrades that enhance capacity or efficiency
• Initial repairs for newly purchased assets

Key Tests for Allowability:

1. Preservation Test:Maintains existing functionality
2. Restoration Test:Brings back original condition
3. Improvement Test:Doesn’t add substantial value

Example:

• Allowed: ₹25,000 for replacing a damaged spindle in lathe machine
• Disallowed: ₹2 lakh for installing computerized control system in same lathe

2. Insurance Premiums [Section 31(ii)]

✅ Covered Policies:

• Machinery breakdown insurance
• Fire/theft insurance for equipment
• Electronic equipment insurance
• Furniture insurance (office/workplace)

❌ Excluded Policies:

• Life insurance of employees
• Health insurance
• Transit insurance (covered under Section 36)

Special Case:
For leased equipment, insurance premium paid by lessee is deductible.

3. Deduction of Depreciation Under Section 32 – Comprehensive Guide

Section 32 of the Income Tax Act governs depreciation—a tax deduction for the wear and tear of business assets. It applies to both tangible (e.g., machinery, buildings) and intangible assets (e.g., patents, copyrights). Below is a detailed breakdown:

1. Eligibility for Depreciation [Section 32(1)]

To claim depreciation, the asset must meet these conditions:

• Owned by the assessee(even if under mortgage or hire purchase) .
• Used for business/profession(partially personal use? Deduction is proportional) .
• Put to use in the financial year(even for a single day).
• Exclusions: Land, goodwill, and assets not used for income generation .

Example: A company buys a ₹10 lakh machine on March 30, 2025, and uses it on March 31, 2025 → Eligible for 50% depreciation (if used <180 days) .

2. Depreciation Rates (FY 2024-25)

Depreciation is calculated using the Written Down Value (WDV) method (except for power companies, which may use the Straight-Line Method) .

1. Tangible Assets

ASSET TYPE	DEPRECIATION RATE
Residential buildings	5%
Hotels/boarding houses	10%
Temporary structures	40%
Furniture & fittings	10%
Computers & software	40%
Motor cars (non-hire)	15%
Commercial vehicles (lorries/taxis)	30%
Plant & machinery (general)	15%

1. Intangible Assets

ASSET TYPE	DEPRECIATION RATE
Patents, copyrights, trademarks	25%
Franchises, licenses	25%

Note: Rates may vary for specific assets (e.g., aircraft: 40%) .

3. Key Concepts

(A) Block of Assets

• Assets with the same depreciation rateare grouped into a “block” (e.g., all 15% machinery).
• Depreciation is calculated on the entire block’s WDV, not individual assets .

(B) Additional Depreciation

• 20% extra deductionfor new plant/machinery in manufacturing/production businesses (acquired after March 31, 2005) .
• Exclusions: Second-hand assets, office appliances, and vehicles .

(C) Half-Year Rule

• If an asset is used for <180 daysin the year of purchase, only 50% of the normal depreciation is allowed .

4. Calculation Example

Scenario: A business buys machinery (₹20 lakh) on October 1, 2024 (used for 90 days in FY 2024-25).

• Depreciation rate: 15%
• Depreciation allowed: 50% of 15% = 5%of ₹20 lakh = ₹1.5 lakh .

WDV for next year: ₹20 lakh – ₹1.5 lakh = ₹18.5 lakh.

5. Recent Updates (2024-25)

• Section 179 (US IRS): Not applicable in India.
• ICDS Compliance: Mandatory for businesses under tax audit

(A)   Special Provisions for Depreciation in Certain Cases

Under the Income Tax Act, 1961, certain businesses and assets enjoy special depreciation benefits beyond standard rules. Here’s a breakdown of key scenarios:

1. Power Generation & Distribution (Section 32(1)(i) + Rule 5(1A))

• Option to Choose:SLM (Straight-Line Method) or WDV (Written Down Value).
• Additional Depreciation:20% for new plant/machinery (only under WDV).
• Half-Year Rule:50% depreciation if asset used <180 days.
  (Refer to previous detailed explanation for power sector.)

2. Additional Depreciation for New Plant & Machinery (Section 32(1)(iia))

• Who Can Claim?Manufacturing or production units (not service providers).
• Rate:20% of actual cost (on top of normal depreciation).
• Conditions:
  • Asset must be new(not used).
  • Acquired & installed after 31st March 2005.
  • Excluded Assets:Office equipment, cars, residential buildings.
• Half-Year Rule:If used <180 days, only 10% (half) is allowed in the first year.

Example:
A factory buys new machinery for ₹50 lakhs on 1st December 2024 (used for 120 days).

• Normal depreciation (15% WDV): ₹7.5 lakhs.
• Additional depreciation (10% of ₹50L): ₹5 lakhs.
• Total depreciation claim: ₹12.5 lakhs.

3. Depreciation for Cold Chain & Agricultural Warehousing (Section 32(1)(iib))

• Who Can Claim?Businesses operating cold storage, warehousing for agricultural produce.
• Rate:Additional 15% depreciation (total 30% if combined with normal 15% WDV).
• Conditions:
  • Asset must be newand used for storage of agri-products.
  • Applicable for assets acquired after 1st April 2020.

4. Higher Depreciation for Renewable Energy (Section 32 + Rule 5(2))

ASSET TYPE	NORMAL RATE	SPECIAL RATE
Windmills	15% (WDV)	80% (SLM)
Solar Power Plants	15% (WDV)	40% (SLM)
Biogas Plants	15% (WDV)	40% (SLM)

Conditions:

• Must be used for generation of renewable energy.
• SLM method is mandatoryfor these assets.

5. Depreciation for Intangible Assets (Section 32(1)(ii))

• Assets Covered:Patents, copyrights, trademarks, licenses, franchises.
• Rate:25% WDV (same as software).
• Conditions:
  • Must be owned & usedfor business.
  • No depreciation if fully written down.

6. No Depreciation in Certain Cases

• Assets Not Used for Business(e.g., idle machinery).
• Fully Written-Down Assets(WDV = ₹0).
• Personal Use Assets(e.g., car used for personal travel).

7. Key Takeaways

✅ Power Sector: Can choose SLM or WDV (must stick to one).

✅ Manufacturing Units: Get 20% additional depreciation on new machinery.

✅ Renewable Energy: Higher depreciation (e.g., 80% for windmills).

✅ Cold Storage: Extra 15% for agri-warehousing.

✅ Intangibles: 25% WDV for patents, copyrights.

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

Unabsorbed depreciation arises when the depreciation expense for a financial year exceeds the taxable income, preventing full utilization in that year. Section 32(2) of the Income Tax Act, 1961 governs its treatment, offering flexibility in carry-forward and set-off. Below is a detailed breakdown:

1. Meaning of Unabsorbed Depreciation

• Definition: The portion of depreciation that cannot be deducted due to insufficient profits in a given year.
• Example: If a business has ₹1,00,000 in profits but ₹1,60,000 in depreciation, ₹60,000 becomes unabsorbed depreciation.

2. Key Features of Section 32(2)

A.  Set-Off Rules

• Current Year:
  • First adjusted against business income(PGBP head).
  • Remaining balance can be set off against any other head(except salary and casual income like lottery winnings).
• Subsequent Years:
  • Carried forward indefinitely(no time limit).
  • Treated as part of the next year’s depreciation allowance.

B.   Order of Set-Off

1. Current year depreciation.
2. Brought-forward business losses(limited to 8 years).
3. Unabsorbed depreciation.
4. Continuity of Business

• Unabsorbed depreciation can be claimed even if the business is discontinued.

3. Special Scenarios

A.  Belated Returns

• Unlike other losses, unabsorbed depreciation can be carried forward even if the ITR is filed late.

B.  Change in Ownership

• Generally, only the same assesseecan claim carry-forward. Exceptions include:
  • Amalgamation/demerger of companies.
  • Conversion of a firm to a company or LLP.

C.  Inter-Head Adjustments

• Can be set off against capital gains(short-term or long-term) after adjusting against business income.

4. Practical Example

Scenario:

• AY 2025-26: Business income = ₹5 lakhs; Depreciation = ₹6 lakhs.
• Unabsorbed depreciation: ₹1 lakh (₹6L − ₹5L).
• AY 2026-27: Business income = ₹8 lakhs.
• Set-off: ₹1 lakh (from AY 2025-26) + current year depreciation (if any) reduces taxable income to ₹7 lakhs.

5. Key Takeaways

✅ No Time Limit: Carry forward indefinitely .

✅ Flexible Set-Off: Adjust against any income head (except salary).

✅ No Business Continuity Required: Claimable even if operations cease.

✅ Priority in Adjustment: Applied after current depreciation and business losses.

Note: Maintain proper documentation of asset costs and depreciation calculations to substantiate claims during audits

4. Tea, Coffee, and Rubber Development Accounts [Section 33AB]

Section 33AB of the Income Tax Act, 1961 provides tax deductions to businesses engaged in the cultivation and manufacturing of tea, coffee, or rubber in India. The deduction encourages reinvestment in these sectors by allowing deposits into designated development accounts. Below is a detailed breakdown of the provisions:

1. Eligibility Criteria

To claim deductions under Section 33AB, the assessee must:

• Be engaged in both cultivation and manufacturingof tea, coffee, or rubber in India.
• Deposit funds into approved accountsunder schemes sanctioned by the Tea Board, Coffee Board, or Rubber Board.

2. Designated Accounts for Deposit

Deposits must be made into either:

• A Special Account with NABARD(National Bank for Agriculture and Rural Development).
• A Deposit Accountapproved by the respective commodity board (Tea, Coffee, or Rubber Board) and the Central Government.

3. Quantum of Deduction

The deduction allowed is the lower of:

• The actual amount depositedin the designated account(s), or
• 40% of the profitsfrom the eligible business (computed under “Profits and Gains of Business or Profession” before this deduction).

Example:

• If a business deposits ₹1,20,000 and has a profit of ₹2,00,000, the deduction will be ₹80,000 (40% of ₹2,00,000) since it is lower than the deposit amount.

4. Timeframe for Deposits

The deposit must be made by the earlier of:

• 6 months from the end of the financial year, or
• The due date for filing the income tax returnfor that year.

Example for FY 2024-25:

• Non-audit cases (ITR due date: 31st July 2025)→ Deposit by 31st July 2025.
• Audit cases (ITR due date: 31st October 2025)→ Deposit by 30th September 2025 (6 months from March 31, 2025).

5. Permissible Uses of Deposited Funds

Withdrawn funds must be used for:

• Purchasing new machineryfor cultivation/processing.
• R&D, upgrading facilities, or plantation development.

Non-compliance Penalties:

• If funds are not used as specified, the withdrawn amount is taxed as business income.
• If assets purchased with these funds are sold within 8 years, their cost is added back to taxable income.

6. Audit Requirements

To claim the deduction:

• Accounts must be auditedby a Chartered Accountant.
• Form No. 3AC(audit report) must be submitted with the ITR .

7. Tax Implications of Withdrawals

WITHDRAWAL REASON	TAXABILITY
Business closure/Dissolution	Taxable
Death of assessee/Partition of HUF	Non-taxable
Liquidation of company	Non-taxable

8. Key Benefits of Section 33AB

✅ Tax Savings: Reduces taxable income by up to 40% of profits.

✅ Industry Growth: Encourages modernization in tea, coffee, and rubber sectors

5. Site Restoration Fund [Section 33ABA]

Section 33ABA provides a tax deduction for businesses engaged in petroleum or natural gas operations in India, encouraging them to set aside funds for environmental site restoration. Below is a detailed breakdown of its provisions:

1. Eligibility Criteria

To claim deductions under Section 33ABA, the assessee must:

• Be engaged in prospecting, extraction, or productionof petroleum/natural gas in India.
• Have an agreement with the Central Governmentfor such operations.
• Deposit funds into either:
  • A Special Accountwith the State Bank of India (SBI), or
  • A Site Restoration Account (SRA)approved by the Ministry of Petroleum & Natural Gas.

2. Quantum of Deduction

The deduction is the lower of:

• The actual amount deposited(including interest earned), or
• 20% of profits(calculated before this deduction and excluding brought-forward losses).

Example:

• Profits before deduction: ₹2 crore.
• Deposit: ₹50 lakh.
• Deduction allowed: 20% of ₹2 crore = ₹40 lakh(even if ₹50 lakh was deposited).

3. Permissible Uses of Funds

Withdrawals are allowed only for:

• Site restoration(e.g., land reclamation, pollution cleanup).
• Payment of court-awarded compensationfor environmental damage.
• Government-mandated levies for restoration.

Non-compliance Penalties:

• If funds are misused, the withdrawn amount is taxed as business income.
• If assets bought with these funds are sold within 8 years, their cost is added back to taxable income.

4. Key Conditions

• Deposit Deadline: Must be made by the end of the financial year.
• Audit Requirement: Accounts must be audited, and Form 3ADmust be filed.
• No Double Claims: Deduction cannot be claimed again for the same deposit in another year.

5. Taxability of Withdrawals

SCENARIO	TAX TREATMENT
Funds used for restoration	Not taxable
Funds withdrawn but not used	Taxable as business income
Account closure	Withdrawn amount minus government dues is taxable

6. Expenditure on Scientific Research (Section 35)

Section 35 provides tax deductions for expenses incurred on scientific research, promoting innovation and R&D in India. It covers both revenue and capital expenditures, with varying deduction rates based on the nature of research and the entity conducting it.

1. Types of Deductions Under Section 35

A.  In-House Scientific Research (Section 35(1)(i))

• Revenue Expenditure(salaries, materials, etc.) → 100% deductible in the year incurred .
• Capital Expenditure(excluding land) → 100% deductible in the year of purchase.
  • Pre-commencement expenses(3 years before business starts) are also deductible.

B.  Payments to External Research Agencies

RECIPIENT	DEDUCTION (% OF PAYMENT)	CONDITIONS
National Labs, IITs, Universities (Sec 35(1)(ii))	150% (earlier) → 100% (AY 2021-22 onwards)	Must be approved by DSIR.
Social Science/Statistical Research (Sec 35(1)(iii))	100%	Must be conducted by approved institution.
Approved R&D Companies (Sec 35(1)(iia))	100%	Must be Indian-registered with R&D as primary objective.
Biotech/Manufacturing Companies (Sec 35(2AB))	150% (revenue) / 100% (building) / 150% (other assets)	Requires DSIR approval .

2. Key Conditions for Deduction

✅ Research must be conducted in India.

✅ Approval from DSIR (Department of Scientific & Industrial Research) is mandatory.

✅ Land acquisition costs are NOT deductible.

✅ No depreciation can be claimed on assets already deducted under Section 35.

3. Treatment of Unabsorbed Expenditure & Asset Sales

• Unabsorbed Capital Expenditure(if profits are insufficient) can be carried forward indefinitely (similar to depreciation).
• Sale of Research Assets:
  • If sold without business use→ Lower of sale price or cost is taxed as business income.
  • If sold after business use→ Added to the block of assets (cost = Nil).

4. Special Provisions for Companies (Section 35(2AB))

• 150% deductionfor revenue expenditure on R&D in biotech & manufacturing (excluding land).
• 100% deductionfor building costs if approved by DSIR.

5. Compliance & Documentation

• Form 3CKmust be submitted to DSIR for approval.
• Maintain records of invoices, bills, and project details

7. Expenditure for Obtaining License to Operate Telecommunication Services & Amortization of Spectrum Fees

Under the Income Tax Act, 1961, telecom companies can claim deductions for capital expenditures related to licenses and spectrum fees under Sections 35ABB and 35ABA, respectively. Below is a detailed comparison of the two provisions:

1. Section 35ABB: Expenditure for Obtaining License to Operate Telecommunication Services

Applicability

• Covers license feespaid to operate telecom services (e.g., Unified Access Service License, ISP License).
• Excludes spectrum fees(handled separately under Section 35ABA).

Key Features

✅ Deduction Method:

• Amortized equallyover the remaining license period.
• Formula:

✅ Conditions:

• Must be a capital expenditure.
• Payment must be actually made(not just accrued).

✅ Transfer of License:

• If sold, unamortized balanceis adjusted against sale proceeds.
• Excess proceedsare taxed as business income.

✅ Amalgamation/Demerger:

• Amortization benefits transferto the new entity.

2. Section 35ABA: Expenditure for Obtaining Right to Use Spectrum

Applicability

• Covers spectrum feespaid for airwave rights (e.g., 4G/5G spectrum auctions).
• Excludes annual spectrum usage charges(treated as revenue expenses under Section 37).

Key Features

✅ Deduction Method:

• Amortized equallyover the spectrum validity period.
• Example:
  • If ₹1,000 crore is paid for a 20-year spectrum, the annual deduction = ₹50 crore.

✅ Conditions:

• Must be a capital expenditure(e.g., auction fees, not recurring charges).
• Payment must be actually made(cash basis).

✅ Transfer of Spectrum:

• If sold, unamortized balanceis adjusted against sale proceeds.
• Excess proceedsare taxed as business income.

✅ Amalgamation/Demerger:

• Amortization benefits transferto the new entity.

3. Comparison: Section 35ABB vs. Section 35ABA

ASPECT	SECTION 35ABB (LICENSE FEES)	SECTION 35ABA (SPECTRUM FEES)
Nature of Expense	License to operate telecom services	Right to use spectrum
Deduction Period	Unexpired license term	Spectrum validity period
Annual Usage Charges	Not covered (Section 37 applies)	Not covered (Section 37 applies)
Transfer Rules	Unamortized balance adjusted	Unamortized balance adjusted
Applicability	Pre-2020 spectrum bundled with license	Post-2016 standalone spectrum fees

8. Deduction for Expenditure on Specified Businesses [Section 35AD]

Applicability: AY 2010-11 onwards
Purpose: To boost investment in infrastructure and notified businesses

1. Eligible Businesses (Notified u/s 35AD)

✅ Cold chain facilities

✅ Warehousing for agricultural produce

✅ Cross-country natural gas/pipeline networks

✅ Affordable housing projects (≤60 sqm)

✅ Semiconductor wafer fabrication

✅ Fertilizer production

✅ Bee-keeping & honey production

*(Complete list in Notification No. 4/2010 & subsequent amendments)*

2. Nature of Deduction

• 100% upfront deductionof capital expenditure (excluding land) in the year incurred
• No depreciationallowed on such assets
• Applies to both new projectsand capacity expansion

Example:
If a company spends ₹50 crore on a cold storage facility (excluding land), the entire ₹50 crore is deductible in Year 1.

3. Key Conditions

A.  Expenditure Qualifying for Deduction

✔ Plant & machinery

✔ Building (including civil works)

✔ Furniture/fixtures integral to operations

❌ Excluded: Land, goodwill, financial instruments

B.  Compliance Requirements

• Business must commence operations within 5 yearsof approval
• Maintain separate books of accounts
• Audit report in Form 3ACDmandatory

C.  Restrictions

• No deduction if business is reconstituted(sale/transfer) within 5 years
• Deduction withdrawnif asset sold within 8 years (added back to income)

4. Special Cases

A.  Amalgamation/Demerger

• Successor company can claim balance deductions
• Original 5-year lock-in period continues

B.  Brought Forward Losses

• Unabsorbed deductions can be carried forward indefinitely

5. Comparison with Other Sections

FEATURE	SECTION 35AD	SECTION 80-IA	SECTION 32 (DEPRECIATION)
Deduction	100% upfront	Profit-linked	15-40% yearly
Asset Coverage	No land	Includes land	All assets
Lock-in	5 years	10 years	N/A

6. Compliance Checklist

✔ Obtain CBDT approval for notified businesses

✔ File audit report with ROI

✔ Maintain asset-wise expenditure records

✔ Monitor 8-year holding period for assets

Pro Tip: For projects starting after 1/4/2023, check applicability of Section 115BAB (15% tax rate option).

9. Deduction for Expenditure on Rural Development Programmes [Section 35CCA]

1. Overview

Section 35CCA of the Income Tax Act, 1961 allows a 100% deduction for payments made to approved associations/institutions for rural development programmes. This encourages private sector participation in rural upliftment.

2. Eligible Expenditure

✅ Payments to approved bodies for:

• Agricultural development
• Animal husbandry
• Health & sanitation
• Education & vocational training
• Housing for rural poor

✅ Direct project implementation (with government approval)

❌ Exclusions:

• Political donations
• Religious activities
• Non-notified programmes

3. Approval Process

• Approving Authority: National Committee for Rural Development(Ministry of Rural Development)
• Validity: Projects must be approved before expenditure is incurred
• Documentation:
  • Approval letter from the Committee
  • Utilization certificate from the recipient

4. Deduction Conditions

✔ 100% deduction in the year of payment

✔ Payment must be by cheque/bank transfer (no cash)

✔ Programme must benefit rural areas (not urban/semi-urban)

Example:

• A company donates ₹20 lakh to an approved NGO for building rural schools → Full ₹20 lakh is deductible

5. Key Restrictions

• No double deduction: Cannot claim under both 35CCA and CSR (Section 135 of Companies Act)
• Post-approval audit: Must file Form 10CCAwith ITR
• Revocation: Deduction reversed if funds are misused

6. Comparison with Similar Sections

PARAMETER	SECTION 35CCA	SECTION 80G	CSR SPENDING
Deduction	100%	50-100%	Not deductible
Approval Needed	Yes	Yes	No
Eligible Areas	Rural only	Any	Any

7. Compliance Checklist

✔ Obtain prior approval from the National Committee

✔ Ensure payments are traceable (no cash)

✔ File Form 10CCA with audited accounts

✔ Monitor project implementation for 3 years

Pro Tip: Combine with Section 35CCD (skill development projects) for additional benefits.

10.  Deduction for Agricultural Extension Projects [Section 35CCC]

1. Overview

Section 35CCC of the Income Tax Act, 1961 provides a 150% deduction (increased from 100% pre-2020) for expenses incurred on notified agricultural extension projects. This incentivizes private sector participation in improving farm productivity and sustainability.

2. Eligible Expenditure

✅ Approved projects covering:

• Soil health management
• Organic farming techniques
• Crop diversification
• Post-harvest management
• Farm mechanization training

✅ Direct implementation costs:

• Expert consultancy fees
• Demonstration farm setup
• Farmer training programs

❌ Exclusions:

• Land purchase costs
• Regular business operations
• Non-notified projects

3. Approval Process

• Approving Authority: National Mission on Agricultural Extension(Ministry of Agriculture)
• Pre-approval mandatory: Must obtain notification before incurring expenses
• Documentation required:
  • Project proposal with measurable outcomes
  • MoU with implementing agency (if outsourced)
  • Quarterly progress reports

4. Enhanced Deduction Benefit

PERIOD	DEDUCTION RATE	REMARKS
Before 1/4/2020	100%	Normal deduction
From 1/4/2020	150%	Boosted under Atmanirbhar Bharat

Example:

• ₹10 lakh spent on soil testing labs → ₹15 lakh deduction(150%)

5. Key Conditions

✔ Project duration: Minimum 3 years

✔ Geographical focus: Must benefit small/marginal farmers

✔ Spending deadline: Expenses must be incurred within approved project period

✔ Compliance audit: Mandatory Form 3AE filing with ITR

6. Comparison with Similar Provisions

PARAMETER	SECTION 35CCC	SECTION 35CCD (SKILL DEV.)	CSR SPENDING
Deduction Rate	150%	100%	Not deductible
Approval Body	Agriculture Ministry	NSDC	Not required
Target Group	Farmers	Youth	General public

7. Compliance Checklist

✔ Obtain project notification before spending

✔ Maintain village-wise beneficiary records

✔ Conduct third-party impact assessments

✔ File audit report in Form 3AE

Pro Tip: Combine with Section 80JJAA (employment generation) for additional benefits when creating farm jobs.

11.  Deduction for Expenditure on Skill Development Projects [Section 35CCD]

Applicability: AY 2013-14 onwards | Eligible Entities: Companies only

1. Overview

Section 35CCD provides a deduction for expenditure incurred by companies on notified skill development projects. The deduction was 150% (weighted) till AY 2020-21 and reduced to 100% from AY 2021-22.

Objective: Encourage corporate investment in workforce skill enhancement, aligning with national initiatives like Skill India.

2. Eligible Expenditure

✅ Qualifying Costs:

• Training programs for new/potential employees(excludes existing employees trained after 6 months of recruitment).
• Course fees, trainer salaries, infrastructure (excluding land & buildings).

❌ Exclusions:

• Land/building purchases.
• Reimbursed expenses.

3. Approval Process

Step 1: Project Notification

• Submit Form 3CQto the National Skill Development Agency (NSDA) with:
  • Project details, expected expenditure, and completion timeline.
  • Concurrence letter from the training institute (if outsourced).

Step 2: CBDT Notification

• NSDA evaluates and recommends to CBDT, which issues a Form 3CR

Step 3: Compliance

• Maintain separate books of accountsand submit an audit report (Form 3AE).

4. Deduction Calculation

PERIOD	DEDUCTION RATE	EXAMPLE (₹10L SPEND)
AY 2013-20	150%	₹15L deduction
AY 2021 onwards	100%	₹10L deduction

Note: No double deduction under other sections (e.g., CSR).

5. Key Conditions

✔ Training Institutes: Must be affiliated with NCVT/SCVT or govt-approved.

✔ Audit Requirement: Chartered Accountant must audit project accounts.

✔ Exclusivity: Deduction only for companies (not proprietorships/LLPs).

6. Penalties & Restrictions

• Deduction revokedif:
  • Funds are misused.
  • Project activities cease prematurely.

7. Comparison with Similar Provisions

PARAMETER	SECTION 35CCD	CSR SPENDING	SECTION 35CCC (AGRI EXTENSION)
Deduction Rate	100% (post-2021)	No deduction	150%
Eligible Entities	Companies only	Companies ≥₹5Cr turnover	Companies/Firms

8. Compliance Checklist

✔ Obtain CBDT notification before expenditure.

✔ File Form 3CQ and audit report (Form 3AE).

✔ Ensure training aligns with NSDA guidelines.

Pro Tip: Combine with Section 80JJAA (employment generation) for additional benefits when hiring skilled trainees.

12.  Amortization of Preliminary Expenses [Section 35D & Rule 6AB]

1. Overview

Section 35D allows businesses to amortize (spread deductions over time) certain preliminary and pre-operative expenses incurred before commencing operations. This applies to:

• Indian companies
• Non-corporate taxpayers(if audit applies u/s 44AB)

Amortization Period: 5 equal installments (20% per year)

2. Eligible Expenses

✅ For all businesses:

• Project report/feasibility studycosts
• Legal/accounting feesfor company formation
• Market researchexpenses

✅ Additional for companies:

• Underwriting/issue managementfees for share/debt issuance
• Printing of prospectus& other IPO-related costs

❌ Exclusions:

• Land/building purchases
• Machinery installation costs (covered under depreciation)

3. Deduction Limit

CATEGORY	DEDUCTION CAP
Companies	Lower of: • 5% of project cost or • 5% of capital employed
Non-corporate taxpayers	Lower of: • 5% of project cost or • ₹50,000

Note:

• Project cost= Capital expenditure (excluding land)
• Capital employed= Share capital + Debentures + Long-term borrowings

4. Compliance Requirements (Rule 6AB)

✔ Documentation: Maintain invoices/board resolutions for expenses

✔ Audit: Mandatory if claiming deduction (even if not u/s 44AB)

✔ Disclosure: Specify in Tax Audit Report (Form 3CD)

5. Practical Example

Scenario: ABC Ltd incurs ₹20 lakh in eligible preliminary expenses with ₹10 crore project cost.

• Deduction cap: 5% of ₹10 crore = ₹50 lakh
• Annual deduction (5 years): ₹20 lakh ÷ 5 = ₹4 lakh/year

6. Comparison with Other Provisions

PARAMETER	SECTION 35D	SECTION 35DD (AMALGAMATION)	SECTION 35DDA (VRS)
Purpose	Pre-commencement costs	Amalgamation expenses	Voluntary retirement payments
Amortization	5 years	5 years	5 years
Cap	5% of project cost	No limit	No limit

7. Compliance Checklist

✔ Classify expenses as preliminary (not revenue)

✔ Calculate 5% cap correctly

✔ File Form 3CD with amortization details

✔ Retain feasibility reports/board minutes for 8 years

Pro Tip: For startups, combine with Section 80-IAC tax holidays for maximum benefits.

13.  Amortization of Amalgamation/Demerger Expenses [Section 35DD]

1. Overview

Section 35DD allows Indian companies to amortize expenses incurred for amalgamation or demerger over 5 years (20% per year). This deduction applies to legal, valuation, and other compliance costs.

2. Eligible Expenses

✅ Professional fees (lawyers, CAs, valuers)

✅ Regulatory filing charges (NCLT, ROC)

✅ Scheme documentation costs

✅ Due diligence expenses

❌ Exclusions:

• Stamp duty/registration fees (capitalized)
• Share issuance costs (covered under Section 35D)
• Post-merger integration costs

3. Key Conditions

✔ Only for Indian companies (not LLPs/firms)

✔ Must comply with Companies Act 2013 & Income Tax Act

✔ Amortization starts from the year of approval (NCLT order date)

Example:

• Merger approved on 15-Dec-2023 (PY 2023-24)
• ₹25 lakh spent on legal fees
• Deduction: ₹5 lakh/year from AY 2024-25 to AY 2028-29

4. Compliance Requirements

✔ Documentation:

• NCLT order copy
• Expense invoices with purpose
  ✔Disclosure: Report in Tax Audit Report (Form 3CD)

5. Comparison with Similar Sections

PARAMETER	SECTION 35DD	SECTION 35DDA (VRS)	SECTION 35D (PRELIMINARY EXP.)
Purpose	Merger costs	VRS payments	Pre-commencement expenses
Eligibility	Companies only	Companies only	Cos./Non-cos. (if audited)
Amortization	5 years	5 years	5 years

6. Pro Tips

• Pre-approval costsmay qualify under Section 35D if incurred before NCLT filing
• Demerger expensesmust meet Section 2(19AA) conditions

14.  Amortization of Voluntary Retirement Scheme (VRS) Expenditure [Section 35DDA]

1. Overview

Section 35DDA allows companies to amortize VRS payments over 5 years (20% per year). This applies to expenses incurred for employee separation under an approved VRS.

2. Eligibility Conditions

✅ Applicable to:

• Indian companies(not LLPs/firms)
• Statutory corporations(e.g., PSUs)

✅ Scheme Requirements:

• Must be a voluntaryretirement scheme
• Approved by Central Government(for PSUs) or Board of Directors (for private companies)
• Payments must be as per VRS guidelines

❌ Exclusions:

• Retrenchment compensation (deductible u/s 37(1))
• Golden handshake payments not under formal VRS

3. Deduction Calculation

• Amortization Period: 5 years (20% per year)
• Example:
  • VRS expenditure: ₹50 lakh
  • Annual deduction: ₹10 lakh (₹50L ÷ 5) for 5 consecutive years

4. Key Conditions

✔ Payment Mode: Must be cash/bank transfer (not bonds or other benefits)

✔ Timing: Deduction starts from the year of actual payment (not accrual)

✔ Documentation:

• Copy of VRS approval(Board resolution/Govt. order)
• Employee-wise payment records

5. Comparison with Similar Sections

PARAMETER	SECTION 35DDA	SECTION 37(1)	SECTION 35DD (AMALGAMATION)
Nature	VRS payments	Retrenchment	Merger costs
Deduction	20% × 5 years	100% in 1 year	20% × 5 years
Approval Needed	Yes	No	Yes (NCLT)

6. Compliance Checklist

✔ Obtain Board/Govt. approval before scheme launch

✔ File Form 3CD (Tax Audit Report) with VRS details

✔ Maintain employee acceptance letters

Pro Tip: Combine with Section 80JJAA (employment generation deduction) when hiring new staff post-VRS.

15.  Deduction for Expenditure on Mineral Prospecting [Section 35E & Rule 6AB]

1. Overview

Section 35E allows mining companies to amortize exploration and prospecting expenses over 10 years (10% per year). This applies to specified minerals like coal, lignite, iron ore, bauxite, etc.

2. Eligible Expenditure

✅ Qualifying Costs:

• Geological surveys
• Drilling and sampling
• Laboratory testing
• Feasibility reports
• Environmental impact studies

❌ Exclusions:

• Land acquisition costs
• Mine development expenses (covered under Section 35D)

3. Amortization Rules (Rule 6AB)

• Deduction Rate: 10% per yearfor 10 years
• Commencement Year: Starts from the year when mining operations begin
• Carry Forward: Unabsorbed deductions can be carried forward indefinitely

Example:

• Prospecting expenses: ₹2 crore
• Annual deduction: ₹20 lakh (10% of ₹2 crore) for 10 years

4. Key Conditions

✔ Applicable to:

• Indian companies
• Partnership firms(if audited u/s 44AB)

✔ Approval: Must be certified by a Chartered Accountant (Form 3AE)

✔ Documentation: Maintain detailed records of exploration activities

5. Comparison with Similar Sections

PARAMETER	SECTION 35E	SECTION 35D	SECTION 35AD
Purpose	Mineral prospecting	Preliminary expenses	Specified businesses
Amortization	10 years (10%)	5 years (20%)	100% in Year 1
Eligibility	Mining companies	All businesses	Notified businesses

6. Compliance Checklist

✔ Obtain CA certification (Form 3AE)

✔ File Tax Audit Report (Form 3CD)

✔ Maintain exploration logs and expense proofs

Pro Tip: Combine with Section 80-IA (mining tax holiday) for maximum benefits.