# Expenditure on Specified Business [Section 35AD]

## Eligibility & Amount of Deduction

Deduction is allowed on all capital expenses incurred for a specified business EXCEPT expenditure on:

Land
Goodwill
Financial instruments

When capital expenditure incurred	Deduction
BEFORE commencement of specified business	100% deduction in the year of commencement
AFTER commencement of specified business	100% deduction in the year of expense

## List of Specified Businesses

1. Cold chain facility

2. Hotel of 2-star or above category

3. Hospital with at least 100 beds for patients

4. Housing projects under slum redevelopment scheme

5. Housing projects under affordable housing scheme

6. Production of fertilizers in India

7. Inland container depot

8. Honey production (Bee-keeping)

9. Warehousing facility for storage of sugar

10. Warehousing facility for storage of agricultural produce

11. Cross-country pipeline for natural gas / oil

12. Slurry pipeline for transportation of iron ore

13. Semi-conductor wafer fabrication manufacturing unit

14. Developing, maintaining & operating a new infrastructure facility

## Other Important Conditions

1. The business must be NEW — not formed by splitting up or reconstruction of an existing business.

2. Plant & Machinery must be NEW, except:

Imported old P&M (allowed)
Up to 20% of total P&M can be old

3. Cash payment restriction: Any single-day payment to a person exceeding ₹ 10,000 in cash/bearer cheque/crossed cheque → No deduction allowed for that amount.

4. Profit/loss of specified business is computed separately.

5. Loss from specified business can be set off only against profits of any other specified business (Section 73A), and can be carried forward indefinitely.

6. If a Section 35AD asset is sold, the full sale value is taxable under PGBP.

7. If a Section 35AD asset is converted/transferred to non-specified business within 8 years:

PGBP Income = Deduction allowed (cost of asset) − Depreciation that would have been allowed upto P.Y. preceding transfer year
Actual cost for new (non-specified) business = Cost of asset − Notional depreciation upto P.Y. preceding transfer year

8. No deduction under Section 35AD if assessee opts for Section 115BAC. In that case, normal depreciation is allowed on these capital assets.

Worked example

### Example 1

Example — Hotel (2-star):

Ms. P commences a 3-star hotel on 1.4.2025. Capital expenditure (excluding land):

Building construction: ₹ 50,00,000
Furniture & equipment: ₹ 15,00,000
Land cost: ₹ 80,00,000 (NOT eligible)
Pre-commencement capital expenditure (incurred in F.Y. 2024-25): ₹ 10,00,000

Deduction in P.Y. 2025-26 (year of commencement) = 50,00,000 + 15,00,000 + 10,00,000 = ₹ 75,00,000

Land of ₹ 80,00,000 is NOT eligible for Section 35AD deduction.

### Example 2

Example — Conversion within 8 years:

A cold-chain facility (specified business) capital asset costing ₹ 10,00,000 was given 100% deduction u/s 35AD in P.Y. 2022-23. It is transferred to a non-specified business in P.Y. 2025-26. Applicable rate of depreciation: 15%.

Notional depreciation (15% WDV basis) upto end of P.Y. 2024-25:

2022-23: 10,00,000 × 15% = 1,50,000 → WDV 8,50,000
2023-24: 8,50,000 × 15% = 1,27,500 → WDV 7,22,500
2024-25: 7,22,500 × 15% = 1,08,375 → WDV 6,14,125
Total notional depreciation = ₹ 3,85,875

Taxable as PGBP in P.Y. 2025-26 = 10,00,000 − 3,85,875 = ₹ 6,14,125

Actual cost for non-specified business = ₹ 6,14,125 (normal depreciation now applies)

⚠️ Common exam mistakes

Claiming Section 35AD deduction on land, goodwill, or financial instruments — these are explicitly excluded.
Setting off loss from specified business against profits from any other business — it can be set off ONLY against profits of ANOTHER specified business (Section 73A).
Allowing both Section 35AD deduction AND normal depreciation on the same asset — once 35AD is claimed, NO depreciation can be claimed (asset cost becomes Nil per Section 43(1)).
Treating a 1-star hotel as eligible — minimum is 2-star.
Not applying the 100-bed threshold for hospitals — smaller hospitals don't qualify.
Forgetting that on conversion to non-specified business within 8 years, the deduction is effectively reversed (net of notional depreciation).

Bare-Act text Section 35AD · Income Tax Act, 1961 · click to expand

Section 35AD(1) — An assessee shall, if he opts, be allowed a deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him. Provided that the expenditure incurred, wholly and exclusively, for the purposes of any specified business, shall be allowed as deduction during the previous year in which he commences operations of his specified business, if (a) the expenditure is incurred prior to the commencement of its operations; and (b) the amount is capitalised in the books of account... (3) No deduction shall be allowed in respect of expenditure incurred on the acquisition of any land or goodwill or financial instrument.

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Expenditure on Specified Business under Section 35AD

Worked example

⚠️ Common exam mistakes