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
