Section 35D of Income Tax Act: Deduction for Expenditure on Intangible Assets

Section 35D of the Income Tax Act, 1961 is an important provision that deals with the expenses incurred on the acquisition of certain assets such as patents, copyrights, trademarks, know-how, and other similar intangible assets. In this blog post, we will discuss this provision in detail and explore its various aspects.

What is Section 35D of the Income Tax Act?

Section 35D of the Income Tax Act, 1961 provides for the deduction of certain expenses incurred on the acquisition of certain assets, from the taxable income of the assessee. These assets include patents, copyrights, trademarks, know-how, licenses, franchises, and any other similar intangible assets.

This provision was introduced in the Income Tax Act, 1961 to encourage investment in research and development activities by providing tax benefits to businesses that incur expenses on the acquisition of intangible assets.

Expenses allowed under Section 35D

The expenses allowed under Section 35D include the following:

1. The cost of acquiring any patent, copyright, trademark, license, franchise, or any other similar intangible asset.
2. The cost of acquiring the right to use any patent, copyright, trademark, license, franchise, or any other similar intangible asset.
3. The cost of any know-how or technical services utilized for the purpose of manufacturing goods or providing services.

Deduction allowed under Section 35D

The deduction allowed under Section 35D is equal to the aggregate of the following amounts:

1. 1/5th of the total expenditure incurred on the acquisition of the above-mentioned assets in the year of acquisition and the four immediately succeeding years.
2. In case of amalgamation or demerger, the deduction can be claimed in five equal installments over a period of five years, starting from the year in which the amalgamation or demerger takes place.

Conditions for availing deduction under Section 35D

In order to avail the deduction under Section 35D, the following conditions must be satisfied:

1. The asset should have been acquired for the purpose of the assessee’s business or profession.
2. The asset should be used for the purpose of the assessee’s business or profession.
3. The asset should not be used for personal purposes.
4. The expenditure on the acquisition of the asset should not have been claimed as a deduction in any other section of the Income Tax Act.

While Section 35D provides a valuable tax benefit for businesses that invest in acquiring intangible assets, it is important to note that the deduction allowed under this provision is subject to certain restrictions.

For instance, the deduction is not allowed for any amount of expenditure that is not actually incurred by the assessee. Moreover, the deduction is also not allowed for any expenditure that is incurred on the acquisition of any asset that is used outside India.

Additionally, it is important for businesses to maintain proper documentation and records of the expenses incurred on the acquisition of intangible assets. This is because the tax authorities may require such documentation in order to verify the eligibility of the assessee for claiming the deduction under Section 35D.

Furthermore, it is worth noting that Section 35D has undergone some changes in recent years. For instance, the Finance Act 2021 amended Section 35D to provide that the deduction allowed under this provision would not be available for expenditure incurred on or after April 1, 2021, if the asset acquired is used primarily for the purposes of leasing.

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Apart from the deductions allowed under Section 35D, the Income Tax Act provides for various other deductions that businesses can claim to reduce their taxable income. Some of these deductions include:

1. Section 80C: This section allows individuals and HUFs to claim a deduction of up to Rs. 1.5 lakh for investments made in specified instruments such as PPF, NSC, ELSS, etc.
2. Section 80D: This section allows individuals to claim a deduction of up to Rs. 25,000 (or Rs. 50,000 for senior citizens) for health insurance premiums paid for themselves or their family members.
3. Section 80E: This section allows individuals to claim a deduction for the interest paid on education loans taken for higher education.
4. Section 80G: This section allows individuals to claim a deduction for donations made to specified institutions and charitable trusts.
5. Section 80IA: This section provides for deductions for businesses engaged in certain infrastructure projects such as highways, airports, ports, etc.

In addition to the above deductions, businesses can also claim deductions for expenses incurred on research and development activities under Section 35(2AB), and for donations made to political parties under Section 80GGC.

It is important for businesses to carefully review all the deductions available under the Income Tax Act and determine which ones they are eligible for. By claiming all eligible deductions, businesses can significantly reduce their tax liability and increase their profitability.

Conclusion

In conclusion, Section 35D of the Income Tax Act, 1961 provides an important tax benefit to businesses that incur expenses on the acquisition of intangible assets. The provision is aimed at encouraging investment in research and development activities, and it helps businesses to reduce their tax liability. However, it is important for businesses to ensure that they satisfy all the conditions for availing the deduction under Section 35D, and to keep proper records of the expenses incurred on the acquisition of intangible assets.

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Frequently Asked Questions (FAQs)

1. Who is eligible to claim a deduction under Section 35D?

Any business that has incurred expenses on the acquisition of intangible assets specified in Section 35D is eligible to claim a deduction under this provision.

2. What is the maximum deduction allowed under Section 35D?
The maximum deduction allowed under Section 35D is equal to the amount of expenses incurred on the acquisition of the intangible asset, subject to certain restrictions.

3. What expenses are eligible for deduction under Section 35D?
Expenses incurred on the acquisition of specified intangible assets, such as patents, trademarks, copyrights, etc., are eligible for deduction under Section 35D.

4. Is there a time limit for claiming the deduction under Section 35D?
No, there is no time limit for claiming the deduction under Section 35D. However, businesses should ensure that they claim the deduction in the relevant assessment year.

5. Can the deduction under Section 35D be carried forward to future years?
No, the deduction under Section 35D cannot be carried forward to future years. However, any unutilized deduction can be set off against other taxable income in the same assessment year.

6. Are there any conditions for claiming the deduction under Section 35D?
Yes, businesses must satisfy certain conditions to claim the deduction under Section 35D, such as maintaining proper documentation and records, and using the asset for the purpose of business.

7. Can the deduction under Section 35D be claimed for assets used outside India?
No, the deduction under Section 35D is not allowed for any expenditure incurred on the acquisition of any asset that is used outside India.

8. Is the deduction under Section 35D available for leasing assets?
No, the deduction under Section 35D is not available for expenditure incurred on or after April 1, 2021, if the asset acquired is used primarily for the purposes of leasing.

9. Can businesses claim other deductions in addition to the deduction under Section 35D?
Yes, businesses can claim various other deductions under the Income Tax Act, such as deductions for investments in specified instruments, health insurance premiums, education loans, donations, etc.