Deduction in respect of capital expenditure on specified business

I. Under the existing provisions of section 35AD of the Act, investment-linked tax incentive is provided by way of allowing a deduction in respect of the whole of any expenditure of capital nature (other than expenditure on land, goodwill and financial instrument) incurred wholly and exclusively, for the purposes of the “specified business” during the previous year in which such expenditure is incurred. Currently, the following “specified businesses” are eligible for availing the investment-linked deduction under section 35AD as enumerated in clause (c) of sub-section (8) of the said section:-

     (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) 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 one hundred 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 accordance with the prescribed guidelines;

      (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 accordance with the prescribed guidelines;

      (viii) production of fertilizer in India;

      (ix) setting up and operating an inland container depot or a container freight station notified or 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;

     It is proposed to include two new businesses as “specified business” for the purposes of the investment-linked deduction under section 35AD so as to promote investment in these sectors, which are :-

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

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

     It is also proposed to provide that the date of commencement of operations for availing investment linked deduction in respect of the two new specified businesses shall be on or after 1st April, 2014.

II. The existing provisions of section 35AD do not provide for a specific time period for which capital assets on which the deduction has been claimed and allowed, are to be used for the specified business. With a view to ensure that the capital asset on which investment linked deduction has been claimed is used for the purposes of the specified business, it is proposed to insert sub-section (7A) in section 35AD to provide that 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.

     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. This does not take into account a case where asset on which deduction under section 35AD has been claimed is used for any purpose other than the specified business by way of a mode other than that specified above. Accordingly, it is proposed to insert sub-section (7B) to provide that if such asset is used for any purpose other than the specified business, the total amount of deduction so claimed and allowed in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the assesse chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.

     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 sub-section (7B) of section 35AD	: ₹ 85

     The provisions contained in the proposed sub-section (7B) of the said section would, however, not apply to a company which has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 within the time period specified in sub-section (7A).

III. The existing provisions of sub-section (3) of the aforesaid section provide that where any assessee has claimed a deduction under this section, no deduction shall be allowed under the provisions of Chapter VIA for the same or any other assessment year. As section 10AA also provides for profit linked deduction in respect of units set-up in Special Economic Zones, it is proposed to amend section 35AD so as to provide that where any deduction has been availed of by the assessee on account of capital expenditure incurred for the purposes of specified business in any assessment year, no deduction under section 10AA shall be available to the assessee in the same or any other assessment year in respect of such specified business.

     As a consequence of this amendment, section 10AA is also proposed to be amended so as to provide that no deduction under section 35AD shall be available in any assessment year to a specified business which has claimed and availed of deduction under section 10AA in the same or any other assessment year.

     These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.

[Clauses 6 & 12]

Investment-linked deduction expanded to include slurry pipelines and wafer fabrication, subject to eight-year exclusive-use and recapture rules. The proposal adds slurry pipelines for iron ore transport and semiconductor wafer fabrication units to the list of specified businesses eligible for the investment linked deduction, effective for operations commencing on or after 1 April 2014. It requires assets on which the deduction is claimed to be used solely for the specified business for eight years, and provides a recapture mechanism treating the previously allowed deduction, less hypothetical depreciation, as business income if the asset is used otherwise; an exception exists for companies declared sick. It also precludes concurrent claims under the SEZ profit linked deduction and the investment linked deduction, with reciprocal amendment effective 1 April 2015.