Romancing with Interpretation of Sec.35AD

Romancing with Interpretation of Sec.35AD

Clause No. 13 of the Finance Bill, 2009 proposes to insert sec­tion 35AD in the Income-tax Act, 1961, allowing deduction for investment in specified industries. Here is an attempt to analyse this budget initiative.

The proposed scheme is an initiative for deduction of invest­ment in a new business from the income of the assessee. It proposes to give deduction of investment made in a specified business. The proposed section is not part of ‘Chapter III: Incomes Which Do Not Form Part of Total Income' or ‘Chapter VI-A: Deduction To Be Made In Computing Total Income'. It forms part of ‘Chapter IV: Computation of Total Income' under ‘Part-D: Profits and Gains of Business or Profession'. Sub-section 3 specifically disallows double deduction under section 35AD and under Chapter VI-A of the Act. The proposed section is a beginning in relegating income based exemptions/deductions into the oblivion.

it seems that the Government has changed its priority from ‘investment for indus-trialization' to ‘invest-ment made'.

On allowing deduction under section 35AD, the assessee will not be able to claim depreciation under section 32 of the Act. This is also evident from the fact that Explanation 13 is being inserted under section 43(1), whereby the concept of block of assets is by-passed in respect of assets for which deduction is allowed under section 35AD. As per this Explanation, ‘The actual cost of any capital asset on which deduction has been allowed or is allowable to the assessee under section 35AD, shall be treated as ‘nil'.

As per sub-section (1), eligible investment is ‘whole of any expenditure of capital nature incurred, wholly and exclusively, for the purpose of any specified business carried on by him during the previous year in which such expenditure is incurred by him.' Deduction can be claimed in respect of any capital expendi­ture incurred for the specified business. The investment may be in tangible assets and intangible assets. However, as per sub-section 8(f), an assessee cannot claim deduction of certain expenditure even if incurred in respect of the specified activi­ties: ‘any expenditure of capital nature shall not include any expenditure incurred in the acquisition of any land or goodwill or financial instrument'. The section has not defined as to what is capital expenditure. Hence, all the capital expenditures (subject to a small negative list) incurred in respect of a new business are deductible, e.g.:

(a) Tangible Assets - Building, plant & machinery, electri­cal equipment, pollution control equipment, electrical equipment, office equipment, furniture & fixtures, vehicles, computers, etc.

(b) Intangible Assets - Technical know-how, patents, copy right, trade mark, brand value, computer software, etc.

Of all the tangible assets, only ‘land' is kept out of the purview of deduction. This is perhaps because depreciation is not allowed on land. It is debatable whether cost of land includes land develop­ment. Of the intangible assets ‘goodwill' is kept out of allowing deduction under the section, whether the goodwill is purchased, acquired, or generated. The section does not allow deduction of ‘expenditure incurred towards financial instruments'. However, the Act has not defined as to what is ‘expenditure for financial instruments'. By usual business parlance, it is cost incurred towards issue of deben­tures, bonds, etc