A hotel building on which we claimed section 35AD is now being used partly for a different business, and another asset has been sold. What exactly is charged, in which year, and is a sale treated the same way as a change of use?
Section 35AD(7A) imposes a use condition, not a holding condition: any asset in respect of which a section 35AD deduction is claimed and allowed "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". Section 35AD(7B) supplies the consequence of breach. Where such an asset is used for a purpose other than the specified business during that eight-year period, the total deduction claimed and allowed in one or more previous years, AS REDUCED BY the depreciation that would have been allowable under section 32 had no section 35AD deduction been allowed, is deemed to be the assessee's income under "Profits and gains of business or profession" of the previous year in which the asset is so used. Sub-section (7B) expressly carves out a use "by way of a mode referred to in clause (vii) of section 28" — and section 28(vii) charges as business income any sum, whether received or receivable, in cash or kind, on account of any capital asset other than land, goodwill or a financial instrument being demolished, destroyed, discarded or transferred, where the whole of the expenditure on that asset was allowed as a deduction under section 35AD. So a sale, demolition, destruction or discarding is taxed under section 28(vii) on what is received or receivable, and a mere change of use is taxed under section 35AD(7B) on the net deduction. Section 35AD(7C) exempts from sub-section (7B) a company which has become a sick industrial company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 during the eight-year period. Sub-sections (7A), (7B) and (7C) were inserted by the Finance (No. 2) Act, 2014 with effect from 1 April 2015, so the use condition bites from AY 2015-16.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2015-04-01, reported as Section 35AD(7A), (7B) and (7C) with section 28(vii) of the Income-tax Act, 1961, as amended up to 2025. It bears on section 35AD, section 35AD(7A), section 35AD(7B), section 35AD(7C), section 28, section 28(vii), section 32, section 35AD(8)(f) of the Income Tax Act 1961, in Deductions & Disallowances, How Tax Law Is Read and Capital Gains matters.
Three features of this machinery catch people. First, the trigger is USE, not disposal. An assessee who keeps the asset but turns part of the hotel into offices for another business, or lets the warehouse to a third party for something other than the specified business, is within sub-section (7B) even though nothing has been sold and nothing received. Second, the measure is a net figure that has to be computed and can be substantial: the whole deduction taken in one or more years, less the depreciation that section 32 would have allowed had the section 35AD deduction never been given. That reduction is the only relief in the sub-section, and it has to be worked out year by year on the section 32 rates and the written-down value the asset would have had — a computation the assessee must produce, because the department will otherwise charge the gross deduction. Third, the two charging routes do not overlap and must not be confused. A transfer, demolition, destruction or discarding takes the asset out of sub-section (7B) altogether and into section 28(vii), which charges the SUM received or receivable, in cash or in kind, and not the deduction; so a sale at a low price is charged on that low price, while a change of use with no receipt at all is charged on the full net deduction. And note that section 28(vii) applies only where the WHOLE of the expenditure on the capital asset was allowed under section 35AD; land, goodwill and financial instruments are excluded from it, as they are from section 35AD(8)(f). The section 35AD(7C) relief is confined to a company that becomes a sick industrial company under the 1985 Act — a statute since repealed for most purposes — and the sub-section has not been reworded to refer to the insolvency legislation, so its practical reach today is doubtful and should be checked before it is relied on.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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The operative words: "(7A) Any asset in respect of which a deduction is claimed and allowed under this section 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." "(7B) Where any asset, in respect of which a deduction is claimed and allowed under this section, is used for a purpose other than the specified business during the period specified in sub-section (7A), otherwise than by way of a mode referred to in clause (vii) of section 28, the total amount of deduction so claimed and allowed in one or more previous years, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32, as if no deduction under this section was allowed, shall be deemed to be the 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." "(7C) Nothing contained in sub-section (7B) shall 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 (1 of 1986), during the period specified in sub-section (7A)." Section 28(vii): "any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD."
Not a judgment. The statutory position is that an asset on which a section 35AD deduction has been claimed and allowed must be used only for the specified business for eight years beginning with the previous year of acquisition or construction; that using it otherwise within that period charges, as business income of the year of the changed use, the whole deduction allowed less the depreciation section 32 would have allowed had no section 35AD deduction been given; that a demolition, destruction, discarding or transfer is outside that charge and is instead charged under section 28(vii) on the sum received or receivable, provided the whole of the expenditure on the asset was allowed under section 35AD and the asset is not land, goodwill or a financial instrument; that a company becoming a sick industrial company under section 17(1) of the 1985 Act during the period is outside sub-section (7B); and that the use condition and its consequences apply from AY 2015-16.
Not a judgment; no judicial reasoning is stated for the section itself.
Any asset in respect of which a deduction is claimed and allowed under this section 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.
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Handle my notice → Ask a CA on WhatsAppSection 35AD(7A) imposes a use condition, not a holding condition: any asset in respect of which a section 35AD deduction is claimed and allowed "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". Section 35AD(7B) supplies the consequence of breach. Where such an asset is used for a purpose other than the specified business during that eight-year period, the total deduction claimed and allowed in one or more previous years, AS REDUCED BY the depreciation that would have been allowable under section 32 had no section 35AD deduction been allowed, is deemed to be the assessee's income under "Profits and gains of business or profession" of the previous year in which the asset is so used. Sub-section (7B) expressly carves out a use "by way of a mode referred to in clause (vii) of section 28" — and section 28(vii) charges as business income any sum, whether received or receivable, in cash or kind, on account of any capital asset other than land, goodwill or a financial instrument being demolished, destroyed, discarded or transferred, where the whole of the expenditure on that asset was allowed as a deduction under section 35AD. So a sale, demolition, destruction or discarding is taxed under section 28(vii) on what is received or receivable, and a mere change of use is taxed under section 35AD(7B) on the net deduction. Section 35AD(7C) exempts from sub-section (7B) a company which has become a sick industrial company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 during the eight-year period. Sub-sections (7A), (7B) and (7C) were inserted by the Finance (No. 2) Act, 2014 with effect from 1 April 2015, so the use condition bites from AY 2015-16. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 35AD, section 35AD(7A), section 35AD(7B), section 35AD(7C), section 28, section 28(vii), section 32, section 35AD(8)(f) of the Income Tax Act 1961. It is reported as Section 35AD(7A), (7B) and (7C) with section 28(vii) of the Income-tax Act, 1961, as amended up to 2025. Three features of this machinery catch people. First, the trigger is USE, not disposal. An assessee who keeps the asset but turns part of the hotel into offices for another business, or lets the warehouse to a third party for something other than the specified business, is within sub-section (7B) even though nothing has been sold and nothing received. Second, the measure is a net figure that has to be computed and can be substantial: the whole deduction taken in one or more years, less the depreciation that section 32 would have allowed had the section 35AD deduction never been given. That reduction is the only relief in the sub-section, and it has to be worked out year by year on the section 32 rates and the written-down value the asset would have had — a computation the assessee must produce, because the department will otherwise charge the gross deduction. Third, the two charging routes do not overlap and must not be confused. A transfer, demolition, destruction or discarding takes the asset out of sub-section (7B) altogether and into section 28(vii), which charges the SUM received or receivable, in cash or in kind, and not the deduction; so a sale at a low price is charged on that low price, while a change of use with no receipt at all is charged on the full net deduction. And note that section 28(vii) applies only where the WHOLE of the expenditure on the capital asset was allowed under section 35AD; land, goodwill and financial instruments are excluded from it, as they are from section 35AD(8)(f). The section 35AD(7C) relief is confined to a company that becomes a sick industrial company under the 1985 Act — a statute since repealed for most purposes — and the sub-section has not been reworded to refer to the insolvency legislation, so its practical reach today is doubtful and should be checked before it is relied on. If it applies to you, the first step is this: Diarise eight years from the START of the previous year in which each section 35AD asset was acquired or constructed, and record what the asset is used for at each year end. Sub-section (7A) requires exclusive use for the specified business throughout.
The operative words: "(7A) Any asset in respect of which a deduction is claimed and allowed under this section 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." "(7B) Where any asset, in respect of which a deduction is claimed and allowed under this section, is used for a purpose other than the specified business during the period specified in sub-section (7A), otherwise than by way of a mode referred to in clause (vii) of section 28, the total amount of deduction so claimed and allowed in one or more previous years, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32, as if no deduction under this section was allowed, shall be deemed to be the 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." "(7C) Nothing contained in sub-section (7B) shall 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 (1 of 1986), during the period specified in sub-section (7A)." Section 28(vii): "any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD." The matter was decided on 2015-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that an asset on which a section 35AD deduction has been claimed and allowed must be used only for the specified business for eight years beginning with the previous year of acquisition or construction; that using it otherwise within that period charges, as business income of the year of the changed use, the whole deduction allowed less the depreciation section 32 would have allowed had no section 35AD deduction been given; that a demolition, destruction, discarding or transfer is outside that charge and is instead charged under section 28(vii) on the sum received or receivable, provided the whole of the expenditure on the asset was allowed under section 35AD and the asset is not land, goodwill or a financial instrument; that a company becoming a sick industrial company under section 17(1) of the 1985 Act during the period is outside sub-section (7B); and that the use condition and its consequences apply from AY 2015-16.
Not a judgment; no judicial reasoning is stated for the section itself. In the words reproduced by the source cited on this page: "Any asset in respect of which a deduction is claimed and allowed under this section 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."
It was decided by the CBDT Circulars & Instructions on 2015-04-01 and is reported as Section 35AD(7A), (7B) and (7C) with section 28(vii) of the Income-tax Act, 1961, as amended up to 2025. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 35AD, section 35AD(7A), section 35AD(7B), section 35AD(7C), section 28, section 28(vii), section 32, section 35AD(8)(f), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that an asset on which a section 35AD deduction has been claimed and allowed must be used only for the specified business for eight years beginning with the previous year of acquisition or construction; that using it otherwise within that period charges, as business income of the year of the changed use, the whole deduction allowed less the depreciation section 32 would have allowed had no section 35AD deduction been given; that a demolition, destruction, discarding or transfer is outside that charge and is instead charged under section 28(vii) on the sum received or receivable, provided the whole of the expenditure on the asset was allowed under section 35AD and the asset is not land, goodwill or a financial instrument; that a company becoming a sick industrial company under section 17(1) of the 1985 Act during the period is outside sub-section (7B); and that the use condition and its consequences apply from AY 2015-16. It arises in Deductions & Disallowances, How Tax Law Is Read and Capital Gains matters, on section 35AD, section 35AD(7A), section 35AD(7B), section 35AD(7C), section 28, section 28(vii), section 32, section 35AD(8)(f) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If use has changed, compute the charge properly: total deduction claimed and allowed under section 35AD, less the depreciation that would have been allowable under section 32 as if no section 35AD deduction had been given, and charge it in the year of the changed use. Prepare that notional depreciation schedule yourself; it is the only reduction the sub-section allows. Separate transfers from changes of use. A sale, demolition, destruction or discarding falls under section 28(vii) and is charged on the sum received or receivable, not on the deduction, and is expressly outside section 35AD(7B). Check that the whole of the expenditure on the asset was allowed under section 35AD before accepting a section 28(vii) charge. The clause applies only in that case, and it excludes land, goodwill and financial instruments. Do not rely on section 35AD(7C) without checking its footing. It relieves only a company that has become a sick industrial company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 during the eight-year period, and that Act has been repealed for most purposes, and how the sub-section is applied today has not been verified. For assessment years before AY 2015-16 there was no use condition in section 35AD at all — sub-sections (7A) to (7C) were inserted with effect from 1 April 2015 — so do not apply them to an earlier year.
Still good law. The text of sub-sections (7A), (7B) and (7C) is verified on the current text of the section and appears in the same words in five earlier texts. Section 28(vii) is verified in two texts of that section, which print it identically, and is corroborated as operative by the cross-reference to it inside section 35AD(7B). The later of those two texts runs (v), (va), (vi), (vii) and stops, so there is no clause (viia) in section 28 on that evidence. The practical reach of sub-section (7C) is doubtful because the Sick Industrial Companies (Special Provisions) Act, 1985 has been repealed for most purposes and the sub-section has not been reworded; that has not been investigated and it is not stated here as anything other than an open question. Judicial treatment of these provisions has not been checked. Two further points about the reach of the sub-sections. Sub-section (7A) fixes an eight-year period beginning with the previous year in which the asset is acquired or constructed, and it requires the asset to be used ONLY for the specified business throughout; it is not a test applied at the end of the period but a condition running through it. And sub-section (7C) relieves only a company that has BECOME a sick industrial company under s.17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 during that period — a statute since repealed for most purposes, with the sub-section not reworded. How the relief is applied today has not been established here, and the what-to-do steps say so. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Sub-sections (7A), (7B) and (7C) are taken from the current text of the section, headed "Deduction in respect of expenditure on specified business" in the Income-tax Act, 1961. Their insertion date rests on three things taken together, and they are set out here because no single footnote on the current text establishes it: the three sub-sections are ABSENT from the 2013 text, which lists sub-sections (1), (1A), (2), (3), (4), (5), (6), (6A), (7) and (8) and nothing between (7) and (8); they are PRESENT in the 2014 text, whose footnote list contains a note in the prospective form "The italicised words shall be inserted by the Finance (No. 2) Act, 2014, w.e.f. 1-4-2015"; and in the 2015 and 2016 texts they carry footnotes reading "Inserted by the Finance (No. 2) Act, 2014, w.e.f. 1-4-2015" and "Ins. by Act No. 25 of 2014 (w.e.f. 1-4-2015)". Individual footnote numbers could NOT be mapped to individual sub-sections, so the attribution of (7A), (7B) and (7C) specifically to that Act is an inference from the bracketing and the footnote text, and not a direct reading of a footnote against each sub-section; it should be confirmed against the Finance (No. 2) Act, 2014 itself before it is relied on. SECTION 28(vii) has been read in unbroken sequence with the other charging clauses, under the heading "Profits and gains of business or profession" in the Income-tax Act, 1961, in a text that prints clause (vii) in the words given here. The same clause appears in the same words in an earlier text. It is corroborated as still operative by the cross-reference to "clause (vii) of section 28" inside section 35AD(7B) in the current text of that section. NO clause (viia) has been found in section 28 in any text read, so a reference to "s.28(vii)/(viia)" is not borne out here; anyone wanting to state a section 28(viia) position must find a current text of section 28 first. Two points of structure worth setting out, because the interaction between the two provisions decides what is charged. Sub-section (7B) charges the deduction back only where the asset is used otherwise than for the specified business 'otherwise than by way of a mode referred to in clause (vii) of section 28'. A demolition, destruction, discarding or transfer is therefore taken OUT of sub-section (7B) and dealt with by s.28(vii), which charges the sum received or receivable rather than the deduction allowed. The two produce different figures in different years. And the measure in sub-section (7B) is net: the deduction allowed, REDUCED by the depreciation allowable under s.32 as if no s.35AD deduction had been given. A charge on the gross deduction is wrong. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that an asset on which a section 35AD deduction has been claimed and allowed must be used only for the specified business for eight years beginning with the previous year of acquisition or construction; that using it otherwise within that period charges, as business income of the year of the changed use, the whole deduction allowed less the depreciation section 32 would have allowed had no section 35AD deduction been given; that a demolition, destruction, discarding or transfer is outside that charge and is instead charged under section 28(vii) on the sum received or receivable, provided the whole of the expenditure on the asset was allowed under section 35AD and the asset is not land, goodwill or a financial instrument; that a company becoming a sick industrial company under section 17(1) of the 1985 Act during the period is outside sub-section (7B); and that the use condition and its consequences apply from AY 2015-16.
TaxSphere, “Statutory position — s.35AD(7A), (7B) and (7C) with s.28(vii): the asset must serve the specified business for eight years, and on breach the deduction comes back net of notional depreciation”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-35ad-7a-7b-7c-and-28-vii-the-eight-year-use-condition-and-what-is-charged-on-breach/ (validity last checked 2026-09-09)
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