Capital expenditure of specified business.

46 (1)

An assessee, at his option, shall be allowed a deduction of the whole of the capital expenditure incurred, wholly and exclusively, for the purposes of any specified business carried on by him during the tax year in which such expenditure is incurred.

46(2)

Where the expenditure referred to in sub-section (1) is incurred prior to the commencement of its operations and such expenditure is capitalised in the books of account as on the date of commencement of its operations, it shall be allowed during the tax year in which such business is commenced.

46(3)

This section shall apply to the specified business fulfilling the following conditions:—

• (a) it is not set up by splitting up, or the reconstruction, of an already existing business;
• (b) it is not set up by the transfer of machinery or plant previously used for any purpose to the specified business;
• (c) if the business is of the nature referred to in sub-section (11)(d)(iii) and such business— (i) is owned by a company formed and registered in India under the Companies Act, 2013 or by a consortium of such companies or by an authority or a board or a corporation established or constituted under any Central Act or State Act; (ii) has been approved by the Petroleum and Natural Gas Regulatory Board established under section 3(1) of the Petroleum and Natural Gas Regulatory Board Act, 2006 and notified by the Central Government in this behalf; (iii) has made not less than such proportion of its total pipeline capacity as specified by regulations made by the Petroleum and Natural Gas Regulatory Board established under section 3(1) of the Petroleum and Natural Gas Regulatory Board Act, 2006 available for use on common carrier basis by any person other than the assessee or an associated person; and (iv) fulfils any other condition as prescribed;
• (d) if the business is of the nature referred to in sub-section (11)(d)(xiv), such business,— (i) 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 Act or State Act; (ii) entity referred to in sub-clause (i) has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for developing or operating and maintaining or developing, operating and maintaining a new infrastructure facility.

46(4)

No deduction shall be allowed under the provisions of section 144 and Chapter VIII-C in relation to such specified business for the same or any other tax year, if a deduction under sub-section (1) is claimed and allowed.

46(5)

No deduction in respect of the expenditure referred to in sub-section (1) shall be allowed to the assessee under any other section in any tax year or under this section in any other tax year, if the deduction has been claimed and allowed to him under this section.

46(6)

The provisions of this section shall apply to the specified business referred to in column B of the Table below if it commences its operations as specified in column C thereof.

---table---

46(7)

Where the assessee builds a hotel of two star or above category as classified by the Central Government and subsequently, transfers the hotel operation thereof to another person while retaining its ownership, the assessee shall be deemed to be carrying on the specified business referred to in sub-section (11)(d)(iv).

46(8)

The provisions contained in sections 122(6) and 138(18) and (23) shall, so far as may be, apply to this section in respect of goods or services or assets held for the purposes of the specified business.

46(9)

Any asset for which a deduction is claimed and allowed under this section–– (a) shall be used only for the specified business for a period of eight years beginning with the tax year in which such asset is acquired or constructed; (b) is used for the purpose and period other than that referred to in clause (a), and is not chargeable to tax under section 26(2)(k), then the total amount of deduction so claimed and allowed in one or more tax years, as reduced by the amount of depreciation allowable under section 33, as if no deduction under this section was allowed, shall be the income chargeable under the head “Profits and gains of business or profession” of the tax year in which the asset is so used.

46(10)

The provisions of sub-section (9)(b) shall not apply to a company which has become a sick industrial company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, as it stood before its repeal by the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 during the period specified in sub-section (9)(a).

46(11)

In this section,—

• (a) “associated person”, in relation to the assessee, means a person,— (i) who participates, directly or indirectly, or through one or more intermediaries in the management or control or capital of the assessee; (ii) who holds, directly or indirectly, shares carrying at least 26% of the voting power in the capital of the assessee; (iii) 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 (iv) who guarantees at least 10% of the total borrowings of the assessee;
• (b) “cold chain facility” means a chain of facilities for storage or transportation of agricultural and forest produce, meat and meat products, poultry, marine and dairy products, products of horticulture, floriculture and apiculture and processed food items under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce;
• (c) “infrastructure facility” shall have the meaning assigned to it in the Explanation to section 80-IA(4) of the Income-tax Act, 1961;
• (d) “specified business” means any one or more of the following businesses:— (i) setting up and operating a cold chain facility; (ii) setting up and operating a warehousing facility for storage of agricultural produce; (iii) 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; (iv) building and operating, anywhere in India, a hotel of two star or above category as classified by the Central Government; (v) building and operating, anywhere in India, a hospital with at least 100 beds for patients; (vi) developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government as per the guidelines notified by the Board; (vii) developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government as per the guidelines notified by the Board; (viii) production of fertilizer in India; (ix) setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962; (x) bee-keeping and production of honey and beeswax; (xi) setting up and operating a warehousing facility for storage of sugar; (xii) laying and operating a slurry pipeline for the transportation of iron ore; (xiii) setting up and operating a semiconductor wafer fabrication manufacturing unit as per the guidelines notified by the Board; (xiv) developing, or maintaining and operating, or developing, maintaining and operating, a new infrastructure facility;
• (e) 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— (i) such machinery or plant was not, at any time before the date of the installation by the assessee, used in India; (ii) such machinery or plant is imported into India; and (iii) no deduction of depreciation for such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period before the date of installation of the machinery or plant by the assessee;
• (f) if any machinery or plant or its part previously used for any purpose is transferred to the specified business and its total value does not exceed 20% of the total value of the machinery or plant used in such business, then the conditions specified in sub-section (3)(b) shall be deemed to be complied with;
• (g) any expenditure of capital nature shall not include any expenditure–– (i) for which the payment or aggregate of payments made to a person in a day, is not through specified banking or online mode, exceeds ten thousand rupees; or (ii) incurred on the acquisition of any land or goodwill or financial instrument

Explanation

Section Summary:

Section 46 of the new income tax law allows taxpayers engaged in specified businesses to claim a full deduction for capital expenditures incurred during the tax year. This deduction is available for expenses that are wholly and exclusively incurred for the specified business. The section also outlines conditions that must be met for the business to qualify, restrictions on claiming deductions under other sections, and rules for the use of assets for which deductions are claimed.

Key Changes:

1. Full Deduction for Capital Expenditure: Unlike the previous tax regime, where capital expenditures were typically depreciated over time, this section allows for a full deduction in the year the expenditure is incurred.
2. Pre-commencement Expenditure: Capital expenditures incurred before the business begins operations can be claimed in the year the business commences, provided they are capitalized in the books of account.
3. Specific Conditions for Eligibility: The section introduces detailed conditions that businesses must meet to qualify for the deduction, such as not being a reconstruction of an existing business or using previously used machinery beyond a certain threshold.
4. Restrictions on Double Deductions: If a deduction is claimed under this section, no other deductions under sections like 144 or Chapter VIII-C can be claimed for the same expenditure.

Practical Implications:

• For Businesses: Businesses in sectors like cold chain facilities, warehousing, natural gas pipelines, hotels, hospitals, and infrastructure development can benefit significantly from this provision by reducing their taxable income in the year of expenditure.
• For Compliance: Businesses must ensure that their capital expenditures meet the conditions specified, such as not using more than 20% of previously used machinery or plant. They must also maintain proper documentation to substantiate the claim.
• For Asset Usage: Assets for which deductions are claimed must be used exclusively for the specified business for at least eight years. If not, the deduction may be reversed, and the amount claimed may be treated as taxable income.

Critical Concepts:

1. Specified Business: Defined under Section 46(11)(d), it includes businesses like cold chain facilities, warehousing, natural gas pipelines, hotels, hospitals, and infrastructure development.
2. Capital Expenditure: Expenditure incurred for acquiring or constructing assets that provide long-term benefits to the business. It does not include land, goodwill, or financial instruments.
3. Associated Person: Defined under Section 46(11)(a), it includes individuals or entities with significant control or influence over the taxpayer, such as holding 26% of voting power or guaranteeing 10% of borrowings.
4. Common Carrier Basis: In the context of natural gas pipelines, it means making a significant portion of the pipeline capacity available for use by third parties.

Compliance Steps:

1. Identify Eligible Expenditures: Ensure that the capital expenditure is incurred wholly and exclusively for the specified business.
2. Capitalize Pre-commencement Expenditures: If expenses are incurred before operations begin, capitalize them in the books of account as of the commencement date.
3. Maintain Documentation: Keep records of all capital expenditures, including invoices, agreements, and proof of payment through specified banking or online modes.
4. Monitor Asset Usage: Ensure that assets for which deductions are claimed are used exclusively for the specified business for at least eight years.
5. Avoid Double Deductions: Do not claim deductions under other sections (e.g., Section 144 or Chapter VIII-C) for the same expenditure.

Examples:

1. Cold Chain Facility: A company sets up a cold chain facility for storing agricultural produce. It incurs ₹50 lakh in capital expenditure for refrigeration equipment. Under Section 46, the company can claim the entire ₹50 lakh as a deduction in the year the expenditure is incurred, reducing its taxable income for that year.
2. Hotel Construction: A taxpayer builds a three-star hotel and incurs ₹2 crore in capital expenditure. The hotel begins operations in the next tax year. The taxpayer can claim the ₹2 crore as a deduction in the year the hotel starts operations, provided the expenditure is capitalized in the books.
3. Pipeline Network: A company lays a natural gas pipeline and makes 30% of its capacity available to third parties on a common carrier basis. If the company meets all other conditions, it can claim a full deduction for the capital expenditure incurred in laying the pipeline.

This section provides significant tax benefits for businesses in specific sectors, but strict adherence to the conditions and compliance requirements is essential to avoid penalties or reversals of deductions.