Section 35AD

Section 35AD — the law in short

What the courts have decided on section 35AD, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Gstaad Hotels Pvt Ltd v Assistant Commissioner of Income Tax High CourtHelps taxpayerNo later treatment found
  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.
• Jaybhole Cold Storage v Pr. CIT — s.35AD(7) imports s.80-IA(7), so a specified business must file the accountant's report, and an Assessing Officer who never asked about it leaves the order open to s.263 ITATHelps departmentNo later treatment found
  The Principal Commissioner has revised my client's assessment under section 263 because no accountant's report was filed with the section 35AD claim for its agricultural warehouse. The section itself says nothing about a form. Can the revision stand?
  On this Tribunal's view, yes. On 31 July 2024 the ITAT Ahmedabad held that section 35AD(7), which applies section 80A(6) and section 80-IA(7) and (10) to section 35AD in respect of goods, services or assets held for the specified business, carries with it the obligation to furnish the report required by section 80-IA(7); and that an assessee claiming section 35AD is "required under law to furnish requisite form, duly certified by Chartered Accountant in terms of Section 80-IA(7) of the Act". The assessee, a firm operating a warehousing facility for storage of agricultural produce, had claimed Rs 7,75,12,899 under section 35AD for AY 2017-18. The Principal Commissioner revised the assessment under section 263 on the ground that no report in Form No. 10CCB had been filed and that the Assessing Officer had neither called for it nor verified it. The assessee's answer was that Form 10CCB and rule 18BBB make no reference to section 35AD, and that the auditors had certified the deduction in Form 3CD. The Tribunal did not decide whether the filing is mandatory or merely procedural. It rested on the failure to enquire: no specific query about the section 35AD claim had been raised in the assessment, the claim was substantial, and the Assessing Officer had not enquired whether the requisite form had been furnished. On that ground it held that the assessment order was erroneous in so far as it was prejudicial to the interests of the Revenue.
• International Fresh Farm Products (India) Ltd v ITO ITATHelps taxpayerNo later treatment found
  CPC has refused to let me carry forward my s.35AD specified-business loss because the return went in late. Can the officer of the loss year decide that at all?
  On this Tribunal's view, no. Carry forward and set off are two separate stages: the officer of the loss year determines and notifies the loss, and it is the officer of the later year, when set-off is actually claimed, who decides whether s.80 read with s.139(3) bars it. The Bench set aside the CIT(A)'s order and directed the AO/CPC to remove the direction denying carry forward, expressly leaving the due-date objection alive for the year of set-off.
• Sarovar Hotels P Ltd v DCIT ITATHelps taxpayerNo later treatment found
  We run hotels out of leased buildings and one unit is loss-making. The AO says only a newly constructed hotel is a specified business, so there is nothing to set off under s.73A. Is he right?
  No, on this Tribunal's reading. 'Building and operating' a hotel in s.35AD(8)(c) means creating a facility and operating it, and creating the facility includes occupying an existing building on lease and making suitable modifications to run the hotel - so a leased-building hotel is a specified business and its loss can be set off under s.73A against the profits of another specified business. But a unit where the assessee only manages hospitality services for someone else's institution, without control of the facility, is not a specified business.
• M/s Divya Creation v Pr. CIT — AMT under s.115JC is not attracted where the deduction claimed is under s.10A ITATHelps taxpayerNo later treatment found
  The Commissioner has revised my assessment under s.263 saying the Assessing Officer never examined AMT. My only deduction is under s.10A. Does s.115JC even apply to me?
  It does not. Section 115JC(2) is a closed list: adjusted total income is the total income increased only by deductions under Chapter VI-A heading C other than s.80P, by a deduction under s.10AA, and by a deduction under s.35AD net of the notional depreciation. A deduction under s.10A is not in that list, so where that is the only claim the provisions of s.115JC are clearly not applicable and the Assessing Officer was under no duty to enquire into them.
• ACIT v River View Hotels — s.35AD is not lost because the star classification came after the year of commencement ITATHelps taxpayer
  My hotel started operating in the year and I claimed the s.35AD deduction, but the three-star certificate was issued two years later. The Assessing Officer has withdrawn the deduction. Can he?
  No, on this decision. The Ahmedabad Bench held that clause (iv)(c) of s.35AD(8) requires the building and operating of a hotel of two-star or above category as classified by the Central Government, and prescribes no time limit for obtaining the star classification certificate. Where the assessee applied in due time, the department inspected and the certificate was issued, the deduction on the capital expenditure could not be withdrawn and the Revenue's appeal was dismissed.
• 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.
• Statutory position — section 80AC and section 115JC: a late return destroys the section 80LA claim, and AMT still bites at nine per cent CBDT Circulars & InstructionsCuts both ways
  We missed the section 139(1) due date by a week and the IFSC unit's whole income is covered by section 80LA. Is the deduction still available, and does alternate minimum tax apply on top?
  On the first question, no. Section 80AC provides that for an assessment year commencing on or after 1 April 2018, where any deduction is admissible under any provision of Chapter VI-A under the heading 'C.—Deductions in respect of certain incomes', no such deduction shall be allowed unless the assessee furnishes a return of his income for that assessment year on or before the due date specified under section 139(1). Section 80LA sits in that Part of Chapter VI-A, so a return filed even a day late costs the whole deduction. On the second, alternate minimum tax under section 115JC does apply to a person other than a company, and section 115JC(2)(i) adds back deductions claimed under any section in that same Part C — but section 115JC(4)(i) substitutes nine per cent for eighteen and one-half per cent where the person is a unit located in an International Financial Services Centre deriving its income solely in convertible foreign exchange.
• Statutory position — s.35AD(3) and (4): claim s.35AD and you lose s.10AA and every Chapter VI-A 'C' deduction for that business, for that year and every other year CBDT Circulars & InstructionsCuts both ways
  We claimed section 35AD on a hotel and also want a Chapter VI-A deduction on the profits of the same hotel in a later year. The Assessing Officer says we cannot have both. Is that right, and does it affect only the year of the section 35AD claim?
  The Assessing Officer is right, and the bar is wider than most people expect. Section 35AD(3) provides that where a deduction under section 35AD is claimed AND ALLOWED in respect of a specified business for any assessment year, no deduction shall be allowed under section 10AA or under Chapter VI-A under the heading "C.—Deductions in respect of certain incomes" in relation to that specified business "for the same or any other assessment year". So one year's section 35AD claim closes off the profit-linked deductions for that business permanently, not merely for that year. Section 35AD(4) is the companion rule and works on the expenditure rather than the profits: no deduction of the expenditure referred to in sub-section (1) is allowed under any other section in any previous year, or under section 35AD itself in any other previous year, if the deduction has been claimed or opted by the assessee and allowed under section 35AD. Section 35AD(3) did not always include section 10AA — those words were added by the Finance (No. 2) Act, 2014 with effect from 1 April 2015, so for AY 2014-15 and earlier the bar reached only Chapter VI-A heading C; and the words "or opted" in sub-section (4) came in with the Finance Act, 2020 (Act 12 of 2020) with effect from 1 April 2020, when the deduction itself became optional.
• 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.
• Statutory position — s.73A: a specified business loss can only be set off against another specified business, and it carries forward indefinitely CBDT Circulars & InstructionsCuts both ways
  My client's section 35AD hotel has thrown up a large loss because the whole capital cost was written off. Can that loss be set against the profits of its other, ordinary business, and for how many years can it be carried forward?
  No, it cannot. Section 73A(1) provides that any loss computed in respect of any specified business referred to in section 35AD "shall not be set off except against profits and gains, if any, of any other specified business". Section 73A(2) then allows the unabsorbed part — or the whole loss where there is no other specified business — to be carried forward to the following assessment year, subject to the other provisions of Chapter VI, to be set off against the profits of any specified business carried on by the assessee assessable for that year, and if it still cannot be wholly set off, to be carried forward to the following assessment year "and so on". There is no limit on the number of years, which is the one respect in which section 73A is more generous than the ordinary eight-year rule for business losses in section 72. The section was inserted by the Finance (No. 2) Act, 2009 with effect from 1 April 2010 — the same Act and the same date as section 35AD itself — so it governs AY 2010-11 onwards.

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.