DEDUCTION IN RESPECT OF EXPENDITURE ON SPECIFIED BUSINESS

M. GOVINDARAJAN

Chapter IV of the Income Tax Act deals with the computation of total income. Section 35 of the Income Tax Act dealt with the deductions available for the assesses from the total income. The deductions are dealt with as follows:

>Section 35 - Expenditure on scientific research;

>Section 35A - Expenditure on acquisition of patent rights or copy rights;

>Section 35AB - Expenditure on know how;

>Section 35 ABB - Expenditure for obtaining licence to operate telecommunication services;

>Section 35 AC - Expenditure on eligible projects or schemes.

Clause 13 of the Finance (No.2) Bill, 2009 seeks to insert a new section 35 AD in the Income Tax Act which relates to deduction in respect of expenditure on specified business. This newly proposed section will come into effect with effect from 01.04.2010. The proposed amendment provides for allowing expenditure of capital nature incurred, wholly and exclusively, during the year for specified business.

The proposed new Section 35AD (1) provides that an assessee shall be allowed a deduction in respect of whole of any expenditure of capital nature incurred, wholly and exclusively, for the purpose of any specified business carried on by him during the previous year in which such expenditure is incurred by him. However any expenditure of capital nature shall not include any expenditure incurred on the acquisition of any land or goodwill or financial instrument.

Section 35AD (8) (c) defines the term 'specified business' as the any one or more of the following business, namely:

> Setting up and operating a cold chain facility;

> Setting up and operating a warehousing facility for storage of agricultural produce;

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

The term 'cold chain facility' is defined under Section 35AD (8) (b) as 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 agriculture and processed food items under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce.

Any machinery or plant which was outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if-

> Such machinery or plant was not, at any time prior to the date of installation by the assessee used in India;

> Such machinery or plant is imported into India from any country outside India; and

> No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of installation of the machinery or plant by the assessee.

Where in the case of a specified business, any machinery or plant or any part thereof previously used for any purpose is transferred to the specified business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in such business, then, the conditions specified shall be deemed to have been complied with.

This section applies to the specified business which fulfils 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 the nature of laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network, such business:

> Is owned by a company and registered in India under the Companies Act, 1956 or by a consortium of such companies or by an authority or a board or a corporation established or continued under any Central or State Act;

> Has been approved by the Petroleum and Natural Gas Regulatory Board established under sub section (1) of Section 3 of the Petroleum and Natural Gas Regulatory Board Act, 2006 and notified by the Central Government in the Official Gazette in this behalf;

> Has made not less than one third of its total pipeline capacity available for use on common carrier basis by any person other than the assessee or an associated person; and

> Fulfils any other condition as may be prescribed.

The provisions of this section shall apply to the specified business if it commences its operations:

> On or after the 1st day of April, 2007, where the specified business is in the nature of laying and operating a cross-country natural gas pipeline network for distribution, including storage facilities being an integral part of such network; and

> On or after the 1st day of April, 2009, in all other cases not falling under the above.

The assessee shall not be allowed any deduction in respect of a specified business under the provisions of Chapter VI-A under the heading -'C-Deduction in respect of certain incomes'. No deduction in respect of the expenditure shall be allowed to the assessee under any other section in any previous year or under this section in any other previous year.

The assessee carrying on the business commencing its operation on or after 1st day of April, 2007 where the specified business is in the nature of laying and operating a cross country natural gas pipeline work for distribution, including storage facilities being an integral part of such network shall be allowed in addition to deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, a further deduction in the previous year relevant to the assessment year beginning on the 1st day of April, 2010 of an amount in respect of expenditure of capital nature incurred during any earlier previous year if-

> The business has commenced its operation at any time during the period beginning on or after the 1st day of April,2007 and ending on the 31st day of March 2009; and

> No deduction for such amount has been allowed or is allowable to the assessee in any earlier previous year.

The provisions contained in sub-section (6) of Section 80A and the provisions of sub-section (7) and (10) of Section 80-1A shall, so far as may be, apply to this section in respect of goods or services or assets held for the purposes of specified business.

For the purpose of this section an 'associated person' in relation to the assessee, means a person-

* Who participates, directly or indirectly, or through one or more intermediaries in the management or control or capital of the assessee;

* Who holds, directly or indirectly, shares carrying not less than twenty six per cent, of the voting power in the capital of the assessee;

* Who appoints more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of the assessee; or

* Who guarantees not less than ten per cent of the total borrowings of the assessee.