Rule 40 — Conditions subject to which a skill development project is to be notified under section 47(1)(b). Made under s.47 of the Income-tax Act, 2025.
Rule 40 gives effect to Section 47 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
Sub-rule (1) requires the company undertaking a skill development project notified under section 47(1)(b) to maintain separate books of account for the project and to get them audited by an accountant as defined in section 515(3)(b). Sub-rule (2) fixes what the audit report must cover: the auditor's comments on the true and fair view of the books maintained for the project, the genuineness of the activities of the project, and the fulfilment of the conditions specified in the relevant provisions of the Act, the rules, or the conditions mentioned in the notification issued under rule 39.
Sub-rule (3) excludes one class of project from notification altogether: a project in respect of existing employees of the company is not eligible where the training of those employees commences after six months of their recruitment.
Sub-rule (4) defines the deductible base. The expenses eligible for deduction under section 47(1)(b) are all expenses incurred wholly and exclusively for undertaking an eligible project, reduced by the cost of any land or building and by any expenditure on the project that is reimbursed or reimbursable to the assessee by any person, whether directly or indirectly.
Sub-rule (5) requires the company, on or before the due date for furnishing the return of income under section 263(1), to furnish the audited statement of accounts of the project for the tax year, the audit report and the amount of deduction claimed under section 47(1)(b), to the Commissioner of Income-tax having jurisdiction over the company.
Sub-rule (6) lists five findings that oblige the Commissioner to act — no separate books or no audit as required by sub-rule (1); the sub-rule (5) documents not furnished; the company has ceased to carry out the activities of the project; the activities are not genuine; or the activities are not being carried out in accordance with the relevant provisions of the Act, the rules or the conditions of the notification issued under rule 39 — in which case, after making appropriate inquiries, he shall furnish a report on those circumstances to the Board for appropriate action under rule 39(14). Sub-rule (7) gives the National Council for Vocational Education and Training a parallel route: if it is not satisfied about the genuineness of the activities of the notified project, it shall send its recommendation to the Board for the same action.
Sub-rule (8) defines, for this rule and rule 39, "eligible company" — a company engaged in the manufacture or production of any article or thing other than those at serial numbers 1 and 2 of the Thirteenth Schedule, or engaged in providing any of the thirty-one listed services, from accounting, architecture and automobile repair through construction, hospitality, logistics, mining, port and maritime services and private security to telecom and travel and tourism — along with "National Council for Vocational Education and Training", "State Council for Vocational Training" and "training institute", the last covering institutes set up by the Central or a State Government or a local authority, affiliated to a State Council for Vocational Training, or affiliated to, approved by or empanelled by the National Council, or affiliated to, approved by or empanelled by the Central or a State Government and certified by the National Council or a State Council as having equivalent training standards.
Section 47(1)(b) gives a deduction for expenditure on a notified skill development project, and rule 39 notifies the project. What neither settles is how the spending is to be proved and what happens when the project drifts from what was notified. This rule supplies the accounting discipline — separate books, an audit that speaks to genuineness as well as to accounts, and an annual filing with the jurisdictional Commissioner — and the two channels by which a project's notification can be put back before the Board. Sub-rules (3) and (4) close the obvious leaks: routine induction training of new recruits recast as skill development, and expenditure that is really an asset or is being reimbursed by someone else.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Cut-off for training of existing employees | Six months of their recruitment | A project in respect of existing employees is not eligible for notification where the training commences after that period | Sub-rule (3) |
| Due date for furnishing the audited accounts, audit report and amount of deduction claimed | On or before the due date of furnishing the return of income under section 263(1) | Furnished to the Commissioner of Income-tax having jurisdiction over the company, for the tax year | Sub-rule (5) |
The deduction is computed on a net figure, not on gross project spend: sub-rule (4) strips out the cost of any land or building and any expenditure reimbursed or reimbursable by any person, directly or indirectly, so a project funded in part by a customer, a group company or a government scheme yields a deduction only on what the company finally bears. Sub-rule (3) is a timing rule with teeth — for existing employees the training must commence within six months of recruitment, and a project that misses this is not eligible for notification at all rather than merely losing part of its claim. The audit under sub-rule (2) is wider than an accounts audit; the auditor must comment on the genuineness of the activities and on compliance with the notification conditions, which puts those questions on record before the Commissioner sees them. Note where the papers go: the sub-rule (5) filing is to the jurisdictional Commissioner, and it is not satisfied by attaching the report to the return. The consequence of failure is not confined to disallowance either — both the Commissioner under sub-rule (6) and the National Council under sub-rule (7) report to the Board for action under rule 39(14), which is where the notification itself is at risk.
A company in an eligible service listed in sub-rule (8)(a)(ii) runs a notified project and spends Rs 2 crore in the year, of which Rs 50 lakh is the cost of a building put up for the training centre and Rs 30 lakh is reimbursed by a State agency. Under sub-rule (4) the eligible expenditure is Rs 1.2 crore. It maintains separate books for the project, has them audited under sub-rule (1), and furnishes the audited accounts, the audit report and the amount claimed to its jurisdictional Commissioner by the section 263(1) due date. A batch of employees recruited in April and put into training the following December falls outside sub-rule (3), and a project in respect of those existing employees is not eligible for notification.
A company meets it in the annual filing with its jurisdictional Commissioner under sub-rule (5) and in the auditor's comments on genuineness under sub-rule (2). It surfaces again if the Commissioner's report under sub-rule (6), or the National Council's recommendation under sub-rule (7), puts the notification before the Board under rule 39(14).
A project in respect of existing employees of the company shall not be eligible for notification under section 47(1)(b), where the training of such employees commences after six months of their recruitment.
any expenditure on the project that is reimbursed or reimbursable to the assessee by any person, whether directly or indirectly