Understanding Income Tax Deductions for Businesses

Understanding Income Tax - Profits &
Gains of Business or Profession
[Sec 35 – Sec 35E]
CA. Divakar Vijayasarathy

Credits and Acknowledgments
Bharathi Priya R D
CA. Jugal Gala

Legends used in the Presentation
AO Assessing Officer
AY Assessment Year
CBDT Central Board of Direct Taxes
CG Central Government
ICDS Income Computation and Disclosure Standards
IIT Indian Institute of Technology
LLP Limited Liability Partnership
PNGRB Petroleum and Natural Gas Regulatory Board
PY Previous Year
SG State Government
VRS Voluntary Retirement Scheme

Presentation Schema
Expenditure on
Scientific Research
Expenditure for
Obtaining Spectrum
Right for
Telecommunication
Services
Expenditure for
Obtaining License to
Operate
Telecommunication
Services
Deduction in
respect of Specified
Businesses
Deduction of Payment for
Rural Development
Programmes
Expenditure on
Agricultural
Extension Project
Expenditure on Skill
Development
Project
Amortisation of
Specified
Preliminary
Expenses
Amortisation of
Expenditure in case of
Amalgamation or
Demerger
Amortisation of
Expenditure incurred
under voluntary
retirement scheme
Deduction for
Expenditure on
prospecting, etc.,
for certain minerals
Judicial Precedents

Sections Covered
Sec Description
35 Expenditure on Scientific Research
35ABA Expenditure for obtaining right to use spectrum for telecommunication services
35ABB Expenditure for obtaining licence to operate telecommunication services
35AD Deduction in respect of expenditure on specified business
35CCA Deduction of payment to associations and institutions for rural development programmes
35CCC Expenditure on agricultural extension project
35CCD Expenditure on skill development project
35D Amortisation of certain preliminary expenses
35DD Amortisation of expenditure in case of amalgamation or demerger
35DDA Amortisation of expenditure incurred under voluntary retirement scheme
35E Deduction for expenditure on prospecting, etc., for certain minerals

Expenditure on Scientific Research – Sec 35
Scientific Research
Sec 43(4)
Any activities for the extension of knowledge in the fields of natural or applied science
including agriculture, animal husbandry or fisheries
Excludes any expenditure incurred in the acquisition of rights in or arising out of scientific research
For the prosecution
of scientific research
Provision of facilities
for the prosecution of
scientific research
Expenditure incurred on
scientific research includes all
expenditure incurred
which may lead to or facilitate an extension
of that business
Medical nature which has a special relation
to the welfare of workers employed
Scientific research related to a
business or class of business
include any scientific research

Amount Eligible for Deductions
Sec Eligible
Assessee
Nature of
Expenditure
Deduction Remarks
35(1)(i) All
assessee
In house revenue
expenditure on
scientific research
100% of the
expenditure
incurred
• All revenue expenditure incurred in the current PY is allowed as
deduction
• Revenue expenditure incurred during 3 immediately preceding PY from
the date of commencement of business will be deemed as expenditure
incurred in the current PY. The following expenses are allowable:
• Salary(excluding perquisites) to employees engaged in scientific
research
• Purchase of materials used in scientific research
• Note: Expenses to the extent certified by the prescribed authority shall
be allowable
35(1)(iv)
read with
35(2)
All
assessee
In house capital
expenditure on
scientific research
100% of the
expenditure
made
• All Capital Expenses incurred in the current PY excluding expenditure
on acquisition of land or interest in land is allowed as deduction
• Capital expenditure, excluding expenditure on acquisition of land or
interest in land, incurred during 3 immediately preceding PY from the
date of commencement of business will be deemed as expenditure
incurred in the current PY is allowed
• Deduction is allowed to the extent of business income. No loss can be
claimed on account of capital expenditure on scientific research.
However unabsorbed expenditure can be carried forward and set-off in
subsequent years in the manner similar to unabsorbed depreciation

Contd.
Sec Eligible
Assessee
Nature of Expenditure Deduction Remarks
35(1)(ii) All assessee Contribution to
1.Research association which has as its
object the undertaking of scientific
research
2.University / college / other institution
for undertaking scientific research
• 150% of the
contribution
made
• 100% of the
contribution
made on or
after 1st April,
2020
• The institution is approved in accordance
with the guidelines prescribed
• Such institution is notified by the CG in the
Official Gazette
• Exemption cannot be denied if the
approval granted to the institution is
subsequently withdrawn
35(1)(iia) All assessee Any sum paid to a company for
undertaking scientific research
100% of the
contribution
made
• The company is registered in India
• Its main objectives are scientific research
and development
• It is approved by the prescribed authority
in the prescribed manner
• It fulfills such other conditions as may be
specified
35(1)(iii) All assessee Contribution to
1.Research association which has its
object as undertaking of research in
social science or statistical research
2.University / college / other institution
for undertaking research social science
or statistical research
100% of the
contribution
made
• The institution is approved in accordance
with the guidelines prescribed
• Such institution is notified by the CG in the
Official Gazette
• Exemption cannot be denied if the
approval granted to the institution is

Contd.
Sec Eligible
Assessee
Nature of
Expenditure
Deduction Remarks
35(2AA) All
assessee
Contribution to
1.National
Laboratory
2.University
3.IIT
4.Specified person
with a specified
direction for
scientific research
150% of the contribution
made
100% of the contribution
made on or after 1st April,
2020
No deductions will be allowed
under any other provisions of
the Act
• Contribution must be used for scientific research
undertaken under a programme approved in this behalf
by the prescribed authority
• Exemption cannot be denied if the approval granted to
laboratory or specified person or the programme is
35(2AB) Company
assessee
In house research
and development
150% of the expenditure
incurred
100% of the expenditure
incurred on or after 1st April
2020
- No deductions will be
allowed under any other
provisions of the Act
- Scientific research and
Development facility has to be
approved by the prescribed
authority
• Company is engaged in the business of bio-technology
or manufacture or production of any article or thing,
not being an article or thing specified in the list of the
Eleventh Schedule
• Expenditure on land and building is not eligible for
deduction
• The company has to enter into an agreement of co
operation in research and development facility with the
prescribed authority

Relevant Considerations
Deduction can be claimed even if other person does the research on behalf of the assessee
Capital expenditure on construction is allowable even if building is not completed
Scientific expenditure incurred on capital work-in-progress which was not used by assessee for its business purpose shall
be allowed – no prescribed condition that relevant capital asset should have been actually used by assessee for the
purpose of business

Sale of an Asset Used for Scientific Research
Sold without being used for business purposes Sold after having been used for business
• Net sale price or deduction earlier allowed
under Sec 35, whichever is less shall be treated
as business income
• Excess of sale price over cost shall be Capital
Gains
• Capital Gains shall be long term or short term
depending upon period of holding and Sec 50
shall not apply as the asset has not been
depreciated. Indexation benefit shall be allowed
in the case of long term capital assets
• Actual cost (Cost – deduction under Sec 35 i.e. Nil)
of the asset shall be included in the relevant block
• Where the asset is sold, sale price shall be reduced
from the written down value of the block of assets
In case of
amalgamation
The provisions of this section shall apply to the amalgamated company as they would
have applied to the amalgamating company

Expenditure for Obtaining Spectrum Right for
Telecommunication Services – Sec 35ABA
Where any capital expenditure incurred for acquiring any right to use spectrum for telecommunication services and actually
paid by the assessee either before or after commencement of business deduction shall be allowed as follows:-
Expenditure actually paid before
commencement of business
Expenditure actually paid after
Payment has actually been made
--------------------------------------- (divided by)
No of years between :
Year of Year of
Commencement & Expiry of Right of
Spectrum
Payment has actually been made
---------------------------------------- (divided by)
Year of Year of
Purchase & Expiry of Right of Spectrum
• The actual payment of expenditure irrespective of the PY in which the liability for the
expenditure was incurred according to the method of accounting regularly employed by the
assessee
Full Upfront Payment
of Spectrum Fee has
been made
• The amount which would have been payable by the assessee had it opted for full upfront
payment of spectrum fee irrespective of the PY in which the liability for the expenditure was
incurred according to the method of accounting regularly employed by the assessee
Deferred Payment is
made
Meaning of Payment actually been made – Rule 6A

Failure to Comply with Conditions
The deduction shall be deemed to have been wrongly allowed
The AO may, notwithstanding anything contained in this Act, re-compute the total income of the assessee for the said PY
and make the necessary rectification
The provisions of Sec 154 shall, so far as may be, apply and the period of 4 years specified in Sec 154(7) for completion
being reckoned from the end of the PY in which the failure to comply with the provisions of this section takes place
Where a deduction has been allowed under this section, the benefit of depreciation under Sec 32 shall not be allowed on
such expenditure

Transfer of Spectrum
Situation Part of the Spectrum is Sold Entire Spectrum is Sold
Sale consideration= unamortized
value
No tax implications No tax implications
Sale consideration (S.C) is less than (<)
unamortized value (UV)
Charge the balance over the
remaining unamortized period
Charge the difference as
Business expenditure
Sale consideration is more than (>)
unamortized value but less than
actual cost (A.C)
Business Income = S.C – UV.
No further amortization
Business Income = S.C – UV
than actual cost
Business Income = A.C – UV
Capital gains = S.C – A.C.
Capital gains = S.C – A.C
• The provisions of this section shall apply to the amalgamated / resulting company as they would have applied to the
amalgamating / demerged company provided the amalgamated or resulting company is an Indian Company
Deduction in Case
of Amalgamation /
Demerger
• Does not contain an express provision which states that where a deduction has been claimed under this
section, no deduction is possible for such expenditure under any other provisions of the Act. Hence where
licenses are sold before the expiry of useful life, the assessee can claim the entire cost of acquisition as
deduction to arrive at short term / long term capital gains as licenses are capital assets.
Deduction under other
provisions except
depreciation
• Unamortised Value – Remaining amount for which deduction cannot be claimed due to transfer
• Unamortised Period - Remaining period for which deduction can be claimed but not possible due to transfer

Expenditure for Obtaining License to Operate
Telecommunication Services – Sec 35ABB
Where any capital expenditure being rights to operate telecommunication services is incurred and actually paid by the
assessee either before or after commencement of business , deduction on such expenditure p.a. is allowed as follows:-
Expenditure actually paid before
Expenditure actually paid after
Amount Actually Paid
--------------------------------------(divided by)
Year of Year of
Commencement & Expiry of License
Amount Actually Paid
---------------------------------------- (divided by)
Year of Year of
Purchase & Expiry of License
• License Fees has to be actually paid by the assessee to avail the benefit under this section irrespective of the method of
accounting employed by the assessee
• Where a deduction has been allowed under this section, the benefit of depreciation under Sec 32 shall not be allowed on
such expenditure

Sale of License
Situation Part of the License is Sold Entire of the License is Sold
Sale consideration= unamortized
value
No tax implications No tax implications
Sale consideration (S.C) is less than (<)
unamortized value (UV)
Charge the balance over the
remaining unamortized period
Charge the difference as
Business expenditure
unamortized value but less than
actual cost (A.C)
Business Income = S.C – UV.
Business Income = S.C – UV
than actual cost
Capital gains = S.C – A.C.
Capital gains = S.C – A.C
• The provisions of this section shall apply to the amalgamated / resulting company as they
would have applied to the amalgamating / demerged company provided the amalgamated
or resulting company is an Indian Company
Deduction in Case of
Amalgamation /
Demerger
• Does not contain an express provision which states that where a deduction has been claimed under this
section, no deduction is possible for such expenditure under any other provisions of the Act. Hence where
licenses are sold before the expiry of useful life, the assessee can claim the entire cost of acquisition as
deduction to arrive at short term / long term capital gains as licenses are capital assets.
Deduction under other
provisions except
depreciation

Deduction in Respect of Specified Businesses - Sec 35AD
Eligible Deduction 100% of capital expenditure, wholly and exclusively, for the purposes of specified business incurred during the PY
Deduction is allowed in year of commencement, if:
• Capital expenditure incurred prior to commencement, and
• amount is capitalised in the books of accounts
Capital expenditure shall not include:
• Acquisition of any land, goodwill, or financial instrument
• Payment or aggregate payment in cash made to one
person exceeding Rs.10,000 in a day
General Conditions for all Specified Business
not set up by splitting up, or the reconstruction, of a business already in existence
not set up by the transfer of machinery or plant previously used for any purpose to the specified business
any machinery or plant which was used outside India by any person other than the
assessee shall not be regarded as machinery or plant previously used for any purpose, if—
• prior to installation by the assessee, it was not used in India
• It is imported into India from any country outside India; and
• no deduction on account of depreciation has been allowed or is allowable under
Income-tax for any person for any period prior to installation
However, transferred plant and
machinery shall be allowed if it
does not exceed 20% total value
of assets used in the business

Contd.
Specified Business Description Date of Commencement
of Business
Cold chain Setting up and operating a cold chain facility On or after 01-04-2009
Agricultural warehousing Setting up and operating a warehousing facility for storage of agricultural produce On or after 01-04-2009
Pipeline network Laying and operating a cross-country natural gas or crude or petroleum oil
pipeline network for distribution, including storage facilities being an integral part
of such network
On or after 01-04-2007
Hotel Building and operating, anywhere in India, a new hotel of two-star or above
category as classified by the Central Government;
Hospital Building and operating, anywhere in India, a new hospital with at least one
hundred beds for patients
Housing project for
Slums
Developing and building a housing project under a notified scheme for slum
redevelopment or rehabilitation framed by the Central Government or a State
Government.
Affordable housing project Developing and building a notified housing project under a scheme for affordable
housing framed by the CG or a SG
Production of Fertilizer in
India
The benefit shall apply to Capital expenditure incurred in a new plant or in a
newly installed capacity in an existing plant for production of fertilizer.

Contd.
Specified Business Description Date of Commencement
of Business
Inland container Depot/
freight station
Setting up and operating an inland container depot or container freight station
notified or approved under the Customs Act 1962
Bee Keeping Bee- keeping and production of honey and beeswax On or after 01-04-2012
Warehousing for sugar Setting up and operating a warehousing facility for storage of sugar On or after 01-04-2012
Laying and operating a slurry
pipeline
Specified business is in the nature of laying and operating a slurry pipeline for the
transportation of iron ore
Semi-conductor wafer
fabrication manufacturing
unit
Setting up and operating a semi-conductor wafer fabrication manufacturing unit,
and which is notified by the Board in accordance with such guidelines as may be
prescribed
New infrastructure facility Specified business is in the nature of developing or operating and maintaining or
developing, operating and maintaining, any infrastructure facility
Relaxation for
Hotel Business
Sec 35AD(6A)
• Where the assessee builds a hotel of two-star or above category as classified by the Central Govt. and
• subsequently, while continuing to own the hotel, transfers the operation thereof to another person,
• the assessee shall be deemed to be carrying on the specified business

Additional Conditions
Where the business is in the nature of laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for
distribution, including storage facilities being an integral part of such network – Sec 35AD(2)(iii)
• is owned by a company formed and registered in India under the Companies Act, 1956 or by a consortium of such companies or by
an authority or a board or a corporation established or constituted under any Central or State Act
• has been approved by the PNGRB and notified by the CG in the Official Gazette in this behalf
• has not made less than such proportion of its total pipeline capacity as specified by regulations made by PNGRB available for use
on common carrier basis by any person other than the assessee or an associated person
• fulfils any other condition as may be prescribed
who guarantees not less than ten per cent of the total borrowings of the assessee
who appoints more than half of the Board of directors or members of the governing board, or one or more executive directors or
executive members of the governing board of the assessee or
who holds, directly or indirectly, shares carrying not less than 26% of the voting power in the capital of the assessee
who participates, directly or indirectly, or through one or more intermediaries in the management or control or capital of the assessee
Meaning of Associated Person – Sec 35AD(8)(a)
Where the business is of the nature of developing or maintaining and operating a new infrastructure facility – Sec 35AD(2)(iv)
• is owned by a company registered in India or by a consortium of such companies or by an authority or a board or corporation or
any other body established or constituted under any Central or State Act
• entity has entered into an agreement with the CG or a SG or a local authority or any other statutory body for the specified purpose

Contd.
Other Conditions
Where deduction under Sec 35AD is claimed and allowed in respect of the specified business for any AY, no deduction shall be allowed
• under the provisions of Sec 10AA (deduction for SEZ units) and
• Chapter VIA under the heading "C.—Deductions in respect of certain incomes" for the same or any other AY
Deduction for the capital expenditure shall not be allowed to the assessee under any other section in any PY or under Sec 35AD in any other PY
Restriction on use for any other purpose
1. 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 8 years beginning with the PY in which such asset is acquired or constructed
2. Where an asset is used for any other purpose within 8 years, the total amount of deduction so claimed
and allowed in one or more PY, as reduced by the amount of depreciation allowable as per Sec 32, as if no
deduction under this section was allowed, shall be deemed to be PGBP of the PY of such use
The condition mentioned in 2 above shall not apply in case of such asset being
demolished, destroyed, discarded or transferred – Any receipt on such event is taxed as
PGBP under Sec 28(vii)
The above Condition No. 2 shall not
apply to a Sick Industrial Company
Transaction between the specified business and any other business of the assessee shall happen at market price
AO shall be entitled to make adjustments to the profit of the specified business, if it appears that it earns
more than ordinary profits from any transaction owing to close relationship with the other person
Audit report in Form 10CCB should be filed

Deduction of Payment for Rural Development
Programmes – Sec 35CCA
Any expenditure incurred by an assessee as contribution towards an Association/Institution involved in following, shall be
fully allowed as deduction
• Undertaking approved rural development program (approval only before 01.03.1983)
• Training of people for implementing rural development programs
• National Fund for rural development setup by CG
• National Urban Poverty Eradication fund setup and notified by CG
Where a deduction under this section is allowed, no deduction under any other provision of this Act for the same or any
other assessment year shall be allowed

Expenditure on Agricultural Extension Project – Sec
35CCC
• Any person having income under the head “Profits and gains of business or profession”Eligible Assessee
• Any expenditure on agricultural extension project notified by the Board in this behalf in
accordance with the guidelines as may be prescribed
Eligible Expenditure
• 150% of the expenditure incurred
• 100% of the expenditure incurred on or after 1st April, 2020
Eligible Deduction
• Where a deduction under this section is claimed and allowed for any AY in respect of any
expenditure, deduction shall not be allowed in respect of such expenditure under any
other provisions of this Act for the same or any other AY
Restriction of Claim of
Deduction

Meaning of Agricultural Extension Project – Rule
6AAD
An expenditure (not being expenditure in the nature of cost of any land or building) exceeding the amount of
₹25 Lakhs is expected to be incurred for the project
The project shall have prior approval of the Ministry of Agriculture, Government of India and
The project shall be undertaken by an assessee for training, education and guidance of farmers
Approval for Agricultural extension project and specified conditions are mentioned in Rule 6AAD and 6AAE respectively

Expenditure on Skill Development Project – Sec 35CCD
• Any Company assesseeEligible Assessee
• Any expenditure (not being expenditure in the nature of cost of any land or building)
on any skill development project notified by the Board in this behalf in accordance
with the guidelines as may be prescribed
Eligible Expenditure
• 150% of the expenditure incurred
• 100% of the expenditure incurred on or after 1st April, 2020
Eligible Deduction
• Where a deduction under this section is claimed and allowed for any AY in respect of
any expenditure, deduction shall not be allowed in respect of such expenditure under
any other provisions of this Act for the same or any other AY
Restriction of Claim of
Deduction

Skill Development Project and Eligible Company
A skill development project should be undertaken by an eligible company and the project is undertaken in separate facilities in
a training institute
Eligible Company
Engaged in the business of manufacture or production of any article or thing, not being an article or
thing mentioned at serial number 1 and serial number 2 of the list of articles or things specified in
the Eleventh Schedule or
Engaged in providing specified services (mentioned in Rule 6AAH)
Approval for skill development project and specified conditions are mentioned in Rule 6AAF and 6AAG respectively

Amortisation of Certain Preliminary Expenses – Sec 35D
• Indian Company
• Person other than Indian Company who is a resident in India
Eligible Assessee
• Expenditure before the commencement of business
• Expenditure incurred after commencement by an Undertaking or Unit in connection
with :
• Extension of existing undertaking
• Setting up a new unit
Nature of Expenditure
• Preparation of Feasibility report
• Preparation of Project Report
• Conducting market / other business survey
• Engineering services related to business
• Legal charges for drafting agreements for setting up or conduct of business
• In the case of a Company:
• Legal charges for drafting Memorandum and Articles of Association
• Registrar of Companies fees for registration
• Expenses in connection with issue of shares for public subscription
• Such other expenditure as may be specified
Types of Qualifying
Expenditure

Contd.
• 1/5th of the maximum permissible expenditure for 5 years beginning with the year of
Quantum of Deduction
• Accounts of the assessee (other than a company, co operative society or any other
assessee whose accounts are required to be audited) will have to be audited and
report by a Chartered Accountant shall be furnished in Form 3AE for the 1st year in
which deduction under this section is claimed
Compulsory Audit of
Accounts
• The provisions of this section shall apply to the amalgamated / resulting company as
they would have applied to the amalgamating / demerged company, provided
resulting and amalgamated company is an Indian Company
Deduction in Case of
Amalgamation /
Demerger
Indian Company Resident non-corporate assessee
Lower of actual expenditure and (A)
(A) - Higher of :
5% of Cost of Project or 5% of Capital Employed
Lower of actual expenditure or 5% of Cost of Project
Cost of Project (COP): Actual Cost of fixed assets as at the last day of the PY in which business commences/ extension of the industrial
undertaking was completed. Fixed Assets for COP = land and building + P&M, furniture and fittings and railway sidings including development
expenditure on land and buildings. Capital Employed - (Issued share capital + Debenture+ Long term borrowing) as at the last date of the
previous year in which the business of the company commences/ extension is completed.
Maximum Deduction
Where a deduction under this section is allowed, no deduction under any other provision of this Act for the same or any other assessment
year shall be allowed

Expenditure incurred on refunding excess money received owing to over-subscription of share shall be eligible expenditure
Premium collected on subscribed capital is not capital employed in the business
A foreign company, whose place of effective management is in India, though considered as a resident of India, would still
not be eligible for deduction under Sec 35D since it is not an Indian Company.

Amortisation of Expenditure in case of Amalgamation
or Demerger – Sec 35DD
Nature of Expenditure
Expenditure incurred wholly
and exclusively for
amalgamation or demerger
Eligible Assessee Indian Company
Amount of Deduction
1/5th of the amount incurred
in 5 equal annual
installments
Year of Allowability
Commencing from the
previous year of
amalgamation or demerger
Assessee Remarks
Amalgamating Company Deduction can be claimed only in the year of
amalgamation since the company ceases to
exist post amalgamation
Amalgamated / Demerged /
Resulting Company
Deduction can be claimed for five consecutive
previous years beginning from the year of
incurrence
No deduction shall be allowed in respect of the expenditure under any other provision of this Act

Amortisation of Expenditure Incurred under
Voluntary Retirement Scheme – Sec 35DDA
• All assessees
Eligible
Assessee
• Retirement scheme is in accordance with any Voluntary Retirement Scheme (VRS) schemeCondition
• Allowable only on payment basis
• In case of Part payment - The benefit shall be available only on part payment amount
Allowability
• 1/5th of the amount incurred in 5 equal annual installments commencing from the year of
such payment/part payment
Deduction
In the case of amalgamation / demerger / succession under Sec 47(xiii), or 47(xiv), the benefit under this section shall be
available to the amalgamated / resulting / successor company from the year of such reorganization
In the case of conversion of an unlisted public company or a private company into a limited liability partnership (LLP),
the benefit of deduction for the unexpired period, beginning from the year of conversion, shall be allowed for the
successor LLP as if no such conversion had taken place
In the year of conversion, no deduction shall be available to the predecessor Company
The scheme of VRS need not be approved under Sec 10(10C)

Deduction for Expenditure on Prospecting, etc.,
for Certain Minerals – Sec 35E
• Indian Company
• Resident non corporate assessee
Eligible
Assessee
• Engaged in any operations relating to the prospecting for or extraction or production of specified
minerals as per Seventh Schedule
Nature of
Assessee’s
Business
• Expenditure incurred wholly and exclusively for the purposes of:
• Prospecting for any mineral or group of associated minerals specified in Seventh Schedule
• Development of a mine or other natural deposit of any such mineral or group of associate minerals
Nature of
Expenditure
• During the year of commercial production, and
• Any one or more of the 4 immediately preceding years
Period of
Incurrence
• Such part of the expenditure met directly or indirectly by any other person or authority
• Proceeds of any
• Sale
• Salvage
• Compensation or insurance moneys realized in respect of any property or rights brought into
existence as a result of the expenditure
• Expenditure on acquisition of a site / rights over a site
• Expenditure on acquisition of deposits / rights over deposits
• Capital expenditure for which depreciation under Sec 32 is allowable
Expenditure
Not
Deductible

Contd.
• For any relevant previous year deduction shall be the Least of the following:
• 1/10th of the expenditure, or
• Such amount as is sufficient to reduce to nil, the income of the previous year arising from
commercial exploitation of this mine/deposit or any other mine/deposit in respect of which the
expenditure was incurred
Deduction
• The amount of allowable expenditure to the extent it is disallowed in any relevant PY, shall be
carried forward and added to the allowable expenditure of the next previous year and shall be
deemed to be part of the allowable expenditure of that previous year
• However no unallowed expenditure shall be carried forward beyond the 10th PY from the year of
commercial production
Carry forward
of unabsorbed
expenditure
• Accounts of the assessee other than Company or Co-operative Society will have to be audited and
report by a Chartered Accountant in Form 3AE and such form should be furnished in the first year in
which such deduction is claimed
Compulsory
Audit
• In the case of amalgamation / demerger, the benefit under this section shall be available to the
Amalgamated / Resulting company from the year of such reorganization till the expiry of the ten
year period, provided the amalgamated/resulting company is an Indian Company
Amalgamation
/ Demerger
Where a deduction under this section is allowed, no deduction under any other provision of this Act for the same or any other
assessment year shall be allowed

Expenditure on acquisition is not allowed as deduction under Sec 35E
Deduction under Sec 35E cannot exceed available profits
Unabsorbed deduction at the end of 10th year cannot be carried forward and shall lapse

Judicial Precedents
Where approval granted under section 35(1)(ii) to scientific research society was cancelled subsequently with retrospective
effect, weighted deduction claimed by assessee donor under section 35(1)(ii) could not be denied, if there was valid and
subsisting approval when donation was given - Urnish Jewellers vs. Assistant Commissioner of Income-tax, Circle-19 (3),
Mumbai [2019] 107 taxmann.com 19 (Mumbai - Trib.)
Where assessee claimed deduction of licence fee paid to Government for providing telecommunication services, in view
of fact that a part of licence fee was payable to acquire an 'asset' i.e. right to establish cellular telephone service, and
remaining part of payment was attributable to yearly licence fee on revenue sharing basis for carrying on business as
cellular telephone operator, payment in question was to be regarded as partly revenue and partly capital in nature -
Commissioner of Income-tax vs. Bharti Hexacom Ltd. [2013] 40 taxmann.com 40 (Delhi)
Assessee's claim for deduction under section 35(1) could not be allowed where it did not maintain separate books of
account in respect of its research and development activity Nivo Controls (P.) Ltd. vs. Commissioner of Income Tax,
Mumbai [2018] 90 taxmann.com 271 (Mumbai - Trib.)

Contd.
For purpose of claiming deduction of capital expenditure under section 35(1)(iv) read with section 35(2), what was
necessary was incurrence of expenditure, which assessee-company had incurred and not use of asset during previous year
in which such expenditure was incurred Navin Fluorine International Ltd. vs. Commissioner of Income-tax-7, Mumbai
[2019] 108 taxmann.com 171 (Mumbai - Trib.)
Where AO rejected assessee's claim for deduction under section 35AD(5)(aa) on ground that assessee had obtained
classification as a three star category hotel only during next AY, in view of fact that revenue had not disputed operation of
new hotel from relevant FY and, moreover, assessee had filed application for classification of hotel in three star category in
AY in question itself, impugned order passed by AO was to be set aside Commissioner of Income Tax, Chennai-34 vs.
Ceebros Hotels (P.) Ltd. [2019] 101 taxmann.com 173 (Madras)

Understanding Income Tax Deductions for Businesses

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Understanding Income Tax Deductions for Businesses