What the courts have decided on section 35AD(8)(f), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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Gstaad Hotels Pvt Ltd v Assistant Commissioner of Income Tax
High CourtHelps taxpayerValidity unconfirmed
My section 35AD deduction was examined and allowed in scrutiny. Four years later the department wants to reopen and treat part of it as revenue expenditure so the loss runs under section 72 for eight years instead of indefinitely under section 73A. Can it?
Not on these facts. The Bombay High Court quashed the s.148 notice, the two orders disposing of objections and all consequential proceedings, holding that where the original assessment was completed under s.143(3) and the reopening is beyond four years, the first proviso to s.147 requires a failure to disclose fully and truly all material facts, and a bald assertion of such failure without identifying which fact was not disclosed will not do. The Court expressly did not decide whether the expenditure was capital or revenue.
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Statutory position — s.35AD: the fourteen specified businesses and the commencement date each must satisfy under s.35AD(5), the hundred per cent capital deduction, the 150 per cent window that ran from AY 2013-14 to AY 2017-18, and the day the deduction became optional
CBDT Circulars & InstructionsCuts both ways
My client is setting up a cold storage and wants the section 35AD deduction. Which businesses are actually within the section, from what date does each qualify, is the deduction still a hundred per cent, and can we choose not to claim it?
Section 35AD allows a deduction of the WHOLE of any capital expenditure incurred wholly and exclusively for a specified business in the previous year in which it is incurred, with a proviso pulling pre-commencement capital expenditure into the year operations commence if it was capitalised in the books on that date. Since the Finance Act, 2020 (Act 12 of 2020) amended sub-section (1) with effect from 1 April 2020, the words are "An assessee shall, if he opts, be allowed a deduction" — the deduction became OPTIONAL from AY 2020-21, which is what makes the section 115BAA and 115BAB concessional regimes workable. There are fourteen specified businesses in section 35AD(8)(c), and each qualifies only if it commences operations on or after the date given for it in section 35AD(5). These are the dates the business must have COMMENCED OPERATIONS on or after; they are not the dates on which each business was added to the list by amendment, and the two do not coincide. The dates are as follows: cross-country natural gas pipeline networks from 1 April 2007; a two-star-or-above hotel, a hospital with at least a hundred beds, and a slum redevelopment or rehabilitation housing project from 1 April 2010; an affordable housing project and a new or newly installed fertiliser plant from 1 April 2011; an inland container depot or container freight station, bee-keeping and honey and beeswax production, and a sugar warehousing facility from 1 April 2012; a slurry pipeline for transporting iron ore and a semi-conductor wafer fabrication unit from 1 April 2014; a new infrastructure facility from 1 April 2017; and everything else falling within the list — cold chain facilities, agricultural produce warehousing and crude or petroleum oil pipelines — from 1 April 2009. A weighted deduction of one and one-half times ran alongside for five businesses under sub-section (1A), inserted by the Finance Act, 2012 with effect from 1 April 2013 and OMITTED by the Finance Act, 2016 (Act 28 of 2016) with effect from 1 April 2018; so 150 per cent is available for AY 2013-14 to AY 2017-18 and a hundred per cent before and after.
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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
CBDT Circulars & InstructionsCuts both ways
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.
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.