Section 35AD of Income Tax Act: Deduction for Capital Expenditure in Specified Businesses

Introduction to Section 35AD

Section 35AD lets businesses deduct all money spent on special assets (not land) in selected industries in the same year they buy them.

Objective behind introducing the deduction

This rule encourages investment—when businesses spend on important infrastructure, they don’t worry about taxes.

Importance for businesses and investors

It helps companies grow faster, builds better facilities, and attracts people who want to start new projects.

Meaning of Deduction under Section 35AD

What is capital expenditure?

Capital expenditure is money spent on long–lasting stuff—like machines, equipment, or buildings (though not land).

Difference between revenue and capital expenditure

• Revenue: Everyday costs like electricity or salaries.
• Capital: Big one-time costs for owning things that last years.

Businesses eligible for deduction

Only specified businesses like cold chains, hospitals, semiconductor units, pipelines, and warehousing can claim this.

List of Specified Businesses Covered under Section 35AD

Here’s what qualifies (with start dates):

• Cold chain facilities (from April 1, 2009)
• Warehouses for agricultural produce (from April 1, 2009)
• Hospitals with at least 100 beds (from April 1, 2010)
• Hotels (2-star or more) (from April 1, 2010)
• Fertilizer production in India (from April 1, 2011)
• Affordable housing or slum redevelopment projects under notified schemes (from April 1, 2011–12)
• Sugar storage (from April 1, 2012)
• Inland Container Depots (ICD) or Container Freight Stations (CFS) (from April 1, 2012)
• Honey or beeswax production (from April 1, 2012)
• Slurry pipeline for iron ore (from April 1, 2014)
• Semiconductor wafer fabrication units (from April 1, 2014)
• New infrastructure facilities (from April 1, 2017)
• Cross-country crude oil, petroleum, or natural gas pipelines (from April 1, 2007).

Conditions to Claim Deduction under Section 35AD

• Who can claim it?
  Any business doing one of the specified activities and paying taxes in India.
• Requirement of new assets only
  You can’t use old machinery—you need brand-new items.
• Business commencement timelines
  The business must start after the applicable specified date.
• Books of accounts & audit compliance
  Accounts must be audited—especially to prove where the money was spent. Also, no large cash payments—payment should be via bank or electronic means.

Amount of Deduction Available

• 100% deduction of capital expenditure
  You can deduct the full cost of the asset in the year of purchase or, if before business starts, in the year operations begin.
• Treatment of expenditure before commencement
  If you bought the asset before your business started, you can still deduct the expense in the very first year—if it’s recorded properly.
• Exclusions
  Land, goodwill, or financial instruments (like stocks or bonds) are not deductible.

Benefits of Claiming Deduction under Section 35AD

• Reduce taxable income quickly—less tax on your profits.
• Encourages building of critical infrastructure like cold chains and hospitals.
• Helps new entrepreneurs invest safely—knowing they won’t get taxed heavily at first.

Limitations and Restrictions

• Carry forward of losses under Section 73A
  Losses from these businesses can only be used against profits from the same class of business, indefinitely.
• Reversal of deduction if assets are misused
  If the asset is used for something else within 8 years, deduction can be cancelled and taxed back.
• Impact on depreciation claims
  Since you deduct full cost upfront, you cannot also claim depreciation separately.

Real-Life Examples and Case Studies

Example: Cold storage facility

A company spends ₹10 crore on new cold rooms. Year 1 profit drops by ₹10 crore due to Section 35AD. Taxes shrink immediately.

Example: New hospital project

A hospital spends ₹50 crore on new medical equipment before opening. Once they start operations, they can deduct the entire ₹50 crore at once.

Common mistakes businesses make

• Using second-hand equipment (not allowed)
• Paying in cash above limits
• Skipping audits, leading to claim rejection

Difference Between Section 35AD and Other Provisions

• Comparison with Section 80-IA/80-IB
  Those are for infrastructure or production but often phased out or limited. Section 35AD is more targeted and often more generous for capital spend.
• Comparison with depreciation under Section 32
  Section 32 lets you depreciate assets slowly over years. Section 35AD lets you deduct everything at once.
• Which is more beneficial?
  Section 35AD is better if you want big savings right away and your business qualifies.

Expert Tips for Taxpayers and Businesses

• Plan investments for big deduction
  Time your purchases to fall in the year you’ll start operations to maximize deduction.
• Documentation is everything
  Keep bills, bank records, audit reports ready—especially for new assets and electronic payments.
• Consult a tax expert
  They can help navigate conditions, avoid mistakes, and make sure the deduction works well with your overall tax planning.