 Explanations to S.

43(6)-
 Expln. 1- When assessment is made on
the successor u/s. 170(2), the W.D.V. of
any asset or any block of assets shall be
the amount which would have been
taken as W.D.V. in the hands of the
prdecessor.
 Expln. 2- Where any block of assets is
transferred in any P.Y. by-
 (a) a holding company to its subsidiary or vice
versa and the conditions of S.47(iv) or 47(v) are
satisfied, or
 (b) the amalgamating company to amalgamated
company which is an Indian company,
 then notwithstanding anything contained in
S.43(1), the actual cost of the block of assets in
the case of transferee co. or the amalgamated
co. shall be the W.D.V. in the case of transferor
co. or amalgamating co., at the beginning of the
P.Y..
 Expln. 2A- In case of transfer of any
asset forming part of a block of assets
by demerged co. to the resulting co.,
W.D.V. of the block of assets of
demerged co. for the immediately
preceeding P.Y. shall be reduced by the
W.D.V. of the assets transferred to the
resulting co. pursuant to demerger.
 Expln. 2B- In case of transfer of any
asset forming part of a block of assets by
a demerged co. to resulting co., the
W.D.V. of the block of assets in case of
resulting co. shall be the W.D.V. of the
transferred assets in case of demerged
co. immediately before demerger.
 Expln. 3- Any depreciation carried
forward u/s. 32(2) shall be deemed to be
‘actually allowed’.
 Expln. 4- ‘Moneys Payable’ and ‘sold’ shall have the
same meanings as in the Expln. To S.41(4).
 Expln. 5- In case of transfer of any asset forming part of a
block of assets of a recognised stock exchange in India
to a co. under a scheme of corporatisation approved by
the SEBI, the W.D.V. in case of such co. shall be the
W.D.V. of the transferred assets immediately before such
transfer.
 Money payable means actual money payable in cash or
by cheque/draft and not any other thing or benefit which
can be converted inyo money.
 CIT v. Kasturi & Sons Ltd. 103 Taxman 342 (S.C.)
 Actual Cost S. 43(1)-
 Actual Cost means the actual cost of the
assets to the ‘A’, reduced by that portion
of the cost, thereof, if any, as has been
met directly or indirectly by any other
person or authority.
 The following expenses shall be included
in the actual cost of the asset-
 Expenses directly relatable to acquisition of the asset,
expenses necessary to bring the asset to site, install it
and make it fit for use as carriage inwards, installation
charges, etc., expenses incurred to facilitate the use of
the asset such as cost of repairs and modification prior to
use of the asset to make it workable, training expenses of
the staff before the use of the asset.

 If interest is payable on capital borrowed by a concern

which has already commenced business, it has to be
capitalised, if borrowed capital is used to acquire assets
in order to expand business.
 Some Decisions-
 (1) Interest incurred before
commencement of commercial
production shall be capitalised. It cannot
be claimed as deduction u/s. 36(1)(iii).
 Challapalli Sugars Ltd. v. CIT 98 ITR
167(SC)
 (2) Where the ‘A’ has paid interest on borrowed
capital and has received interest on surplus
funds invested during construction period,
interest received is taxable under the head
Income from Other Sources and interest paid
should be capitalised.
 Tutikorin Alkali Chemicals & Fertilisers Ltd. v.
CIT 227 ITR 172 (SC).

 As per ICAI Guidance Note, interest paid less

interest received shall be capitalised. S.C.
decision is in contradiction to ICAI Guidance
Note.
 (4) If the ‘A’ receives any amounts which are inextricably
linked with the process of setting up its plant &
machinery, such receipts will go to reduce the cost of the
assets. Charges received from contractors for quarters
given for their workers during construction period, interest
charged on advances to contractors during construction
period , hire charges received for letting plant &
machineryto contractor for construction work, royalty
received for escavation and use of stone lying in the
compound of the ‘A’ shall be reduced from the cost of the
assets and not to be treated as income of the ‘A’.
 CIT v. Bokaro Steel Ltd. 236 ITR 315 (SC).
 Similar decisions-
 CIT v. Karnal Coop. Sugar Mill Ltd. 118 Taxman 489
 Bangaigaon Refinery & Petro. Ltd. V. CIT 251 ITR(SC)
 (5) Where liability in respect of an asset
increases on account of exchange rate
fluctuation, cost of the asset shall be increased
by such amount.
 CIT v. Tata Hydro Electric Power Supply Co.
Ltd. 159 ITR 29 (Bom), Pudumjee Pulp & Paper
Mills Ltd. v. CIT 210 ITR 97 (Bom)
 (6) Expenses on trial run of machinery less sale
proceeds of trial run products shall form part of
actual cost of machine. Where such sale
proceeds are more than trial run expenses,
difference to be reduced from actual cost.
 CIT v. Food Specialities Ltd. 136 ITR 203(Del)
 (7) Compensation for delayed delivery of
machinery cannot be reduced from the cost of
the asset as it has nothing to do with the cost.
 Shree Digvijay Cement Co. Ltd. v. CIT 138 ITR
45 (Guj)
 (8) Rebate allowed to the ‘A’ as the machine
supplied was defective cannot be reduced from
the cost of the asset. Rebate was held as
taxable in the hands of the ‘A’.
 CIT v. Rohtas Industries Ltd. 130 ITR 292(Cal).
 Explanations to S. 43(1)-
 Expln. 1- Where an asset is used in business
after it ceases to be used for scientific research,
its actual cost shall be the actual cost to the ‘A’
as reduced by deduction allowed to the ‘A’ u/s.
35(1)(iv).

 Expln. 2- Where an asset is acquired by the ‘A’

by way of gift or inheritance, actual cost to the
‘A’ shall be the cost to the previous owner,
reduced by depreciation that wuold have been
allowable to the ‘A’ as if it was the only asset in
the relevant block.
 Expln. 3- Where before acquisition by
the ‘A’, the assets were used by any
other person for his business or
profession and A.O. is satisfied that the
main purpose of transfer directly or
indirectly to ‘A’ is reduction of tax by
claiming depreciation on enhanced cost,
actual cost shall be the sum determined
by A.O. with previous approval of the
JT.C.I.T.
 Expln. 4- Any asset which once belonged to ‘A’
and used for his business or prof. which ceased
to be his property is reacquired by him, its
actual cost shall be-
 (i) actual cost to him when first acquired less
depreciation that would have been allowable as
if it were the only asset in the relevant block till
the year when it was sold, or
 (ii) actual price at which it is reacquired
 Whichever is less.
 Expln. 4A- In case of sale and lease back of
any asset, actual cost in the hands of the lessor
shall be the W.D.V. of the asset at the time of
transfer by the lessee.
 Some Important Points-
 (1) CBDT Cir. No. 762 dt Feb,18,1998- If asset
forms part of a block, its W.D.V. to be computed
as if it is the only asset in the block and in case
of more than one intermediate sale, in cases of
reacquisition, W.D.V. at the time of first sale
shall be the actual cost.
 (2) In case of sale and lease back, Expln. 4A
has overriding effect over Expln. 3.
 (3) Expln. 4A not applicable, if seller had not
claimed depreciation or asset was not qualified
for depr.. In such a case, Expln. 3 will apply.
 (4) Expln. 4A and Expln. 3 both not applicable
where the seller did not use the asset for his
business or prof..
 (5) While applying Expln. 3 A.O. required to
record a finding that the main purpose of
transfer was to claim higher depr.. No such
finding required to be recorded while applying
Expln. 4A.
 Expln. 5- Where a building previously property
of the ‘A’ is brought to business use, actual cost
shall be the actual cost less depr. That would
have been allowable had the asset been used
for business from the date of acquisition.

 Expln. 6- Where a cap. asset is transferred by

holding co. to subsidiary co. or vice versa and
S. 47(iv) or 47(v) is satisfied, actual cost to
transferee co. shall be the same as it would
have been if trnsferor co. had continued to hold
the asset.
 Expln. 7- In case of transfer of asset by
amalgamating co. to amalgamated co. which is
an Indian co. in a scheme of amalgamation,
actual cost to amalgamated co. shall be the
same as it would have been if the amalgamated
co. had continued to hold the asset.

 Expln. 8- Interest payable in connection with

acquisition of an asset for the period after the
asset is put to use shall not be included in the
actual cost of the asset.
 Expln. 9- Actual cost of an asset shall be
reduced by excise duty or additional duty
leviable on the asset which has been allowed
by way of credit to the ‘A’.
 Expln. 10- Where cost of an asset is met
directly or indirectly by the Central or State
Govt. as subsidy or grant or reimbursement,
such amount shall not be included in actual
cost.
 Where subsidy cannot be related to any asset,
proportionate amount of subsidy shall be
excluded from actual cost of all assets for which
subsidy is granted.
 Expln. 11- Where an asset acquired outside
India is brought to India and used by the ‘A’ for
his business or prof., its actual cost shall be
reduced by depreciation that would have been
allowable, if it was used in India from the date
of its acquisition.
 Expln. 12- Where a cap. Asset is acquired
under a scheme of corporatisation approved by
SEBI, actual cost shall be the actual cost had
there been no corporatisation.
 Unabsorbed Depreciation S.32(2)-
 Depreciation of the P.Y. deductible from Income
from Business or Profession.
 Depreciation that could not be fully deducted
under the head Business or Profession because
of absence or inadequecy of profit is deductible
from income under other heads of income.
 Depreciation still unabsorbed shall be carried
forward and shall form part of depreciation for
the succeeding year and can be carried forward
indefinitely.
Tea, Coffee, Rubber Development
Account S.33AB-
 ‘A’ carrying on business of growing and
manufacturing tea or coffee or rubber in India
shall be allowed a deduction before loss, if any,
b/f. from earlier years is set off u/s. 72 of-
 (a) amount deposited with National Bank or
according to a scheme framed by the Tea,
Coffee or Rubber Board or
 (b) 40% of such profit of such business before
deduction under this section
 Whichever is less.
 Conditions to be satisfied-
 1. ‘A’ to deposit any amount with
National Bank according to a scheme
approved by the respective Board or
any account opened according to
scheme framed by the respective Board
as approved by the Central Government
within 6 months from the end of the P.Y.
or before due date of furnishing the
Return of Income.
 (2) Where deduction allowed to a firm or AOP,
deduction shall not be allowed to partner or
member.
 (3) Once deduction in respect of a deposit
allowed under this section, no deduction shall
be allowed under any other section.
 (4) Accounts of the ‘A’ required to be audited
and report in F. No. 3AC to be furnished with
the Return of Income.
 If ‘A’ required to get A/Cs audited under any
other law, report in F.No. 3AC to be furnished.
 (5) Amount in deposit can be withdrawn only for
purposes specified in the scheme, except on
 (a) closure of business
 (b) death of ‘A’
 (c ) partition of H.U.F.
 (d) dissolution of firm
 (e) liquidation of a co.
 In case of (a) & (d), amount withdrawn taxable
under this head.
 (6) If deposit is withdrawn and used for
purchase of
 (a) mach. or plant installed in office or
residence or guest house or
 (b) its cost is fully allowed as deduction,
 (c ) any office appliance other than computer,
 (d) mach. or plant used to manufacture articles
specified in Eleventh Schedule,
 Such amount shall be chargeable under this
head in that P.Y..
 (7) Amount withdrawn & not utilised for
specified purpose taxable in the P.Y. of
withdrawal.
 (8) If asset acquired out of amount
withdrawn from deposit is sold (other
than sale to Govt. or Statutory Corpn.or
succession of a firm by a co.) within 8
years from the end of P.Y. in which
acquired, cost of such asset shall be
taxable in P.Y. in which asset is sold.
 Transfer by firm to co. on its conversion
not to result in withdrawal of deduction,
only if,
 (a) all properties and liabilities of
business of firm transferred to co.
 (b) all shareholders of co. were partners
of firm before transfer.
 The Central Govt. may notify sunset date
for the deduction.
Site Restoration Fund
S.33ABA-
 Deduction allowable subject to following
conditions-
 (a) ‘A’ carrying on business of prospecting for or
extracting or production of petroleum or natural
gas has entered into agreement with Cent.
Govt. ofr such business.
 (b) deposited with SBI any amount according to
scheme approved by Govt. or any amount in
‘Site Restoration A/c’ according to scheme
framed by the Ministry of Petroleum & Natural
Gas.
 Deduction-
 Amount of deposit or 20% of profit of such
business before allowing such deduction
whichever is less.
 Deduction allowed before setting off losses.
 If deduction allowed to firm, AOP or BOI,
deduction not to be allowed to partners or
members.
 Interest credited to Deposit A/c to be treated as
amount deposited.
 Further Conditions-
 Accounts to be audited & audit report to be
submitted with return.
 Amount withdrawn from deposit a/c to be used
for the purpose specified in the scheme except
for installing mach. or plant in office, residence
or guest house or buying office appliances, or
buying mach. or plant cost of which is fully
deductible or mach. or plant for manufacturing
art. Or thing mentioned in Eleventh Schedule.
 Where amount withdrawn from deposit a/c on
its closure, amount withdrawn less payable to
Govt. as its share in profits shall be chargeable
as business income.
 Amount withdrawn and not used as per scheme
taxable as business income of the P.Y. of
withdrawal.
 Asset acquired out of deposit not to be
transferred for 8 years. Provision similar to that
u/s. 33AB.
Expenditure on Scientific
Research S.35-
 Following deductions allowed-
 (i) Revenue expenditure before
commencement of business on salary or
purchase of material certified by
prescribed authority for scientific
research related to ‘A’s business,
 (ii) One & one fourth times of amount
paid to scientific research association,
University or college for scientific res.,
 One & one fourth times of any sum paid to
university, college or other institution for
research in social science or statistical
research,
 Cap. Exp. Related to A’s business other exp. on
land after 29-2-84. Cap. Exp. Incurred within 3
years before commencement of business shall
be deemed to be incurred in the P.Y. of
commencement of business.
 S. R. Asso., university, college should be
approved by the Cent. Govt..
 Where deduction allowed under this section on
cap. Exp., no depreciation to be allowed.
 Amount paid to National Lab., university or I.I.T. under
direction to use for approved programme, deduction of 1
¼ times allowable. No deduction under any other section
to be allowed.

 S. 35(2AA) Deduction not to be denied, if subsequently,

approval to National Lab., etc. is withdrawn.

 S. 35(2AB) Exp. on inhouse research by a co. engaged

in bio technology, manufacture of pharma., drugs,
electronic equip.,computers, telecom. Equip, chem, or
articles or things notified by the Board allowed deduction
of 1 ½ times the exp.. No other deduction on such exp..
 S. 32(2) shall apply for carry forward of exp.
u/s. 35(1)(iv).
 Where cap. Asset transferred by amalgamating
co. to amalgamated co., deduction to be
allowed to amalgamated co., not to
amalgamating co..
 Some Decisions-
 Any sum paid to foreign co. which carried out
research on behalf of ‘A’, related to business
carried on by ‘A’, allowable.
 CIT v National Rayon Corpn. Ltd. 140 ITR
1434(Bom)
 Payment to reimburse other person for
exp. Incurred by that other person not
allowable.
 CIT v Ciba of India Ltd. 69 ITR 692(SC).
 Exp. on approach road to laboratory
building regarded as exp. Related to A’s
business.
 CIT v Sandoz (I) Ltd. 74 Taxman
225(Bom).
Expenditure on Licence to operate
Telecom. Services S.35ABB
 Cap. Exp. actually paid to acquire right to
operate telecom. services during any P.Y.,
deduction of appropriate fraction of exp. for
each P.Y. during relevant P.Y.s.
 If licence is transferred, exp. remaining
unallowed less proceeds of transfer shall be
allowed in the P.Y. of transfer.
 If whole or any part of the licence is transferred
and proceeds of transfer exceed exp. remaining
unallowed, the excess to the extent of
difference between exp incuurred and exp
remaining unallowed shall be taxable under this
head.
 If licence is transferred after closer of business,
bus. shall be deemed to be in existence.
 Where whole or a part of licence is transferred
for price not below amount remaining
unallowed, no deduction under this section shall
be allowed in P.Y. of transfer or any
subsequent P.Y..
 In case of transfer of part of the licence for sum
less than exp remaining unallowed, balance
remaining unallowed less proceeds realised, to
be aloowed over remaining no of years.
 Where amalgamating co transfers the
licence to amalgamated co, the latter
shall be entitled to deduction for the
balance period of the licence. Similarly,
in case of demerger, resulting co shall
be allowed deduction for the balance
period.
 Where deduction is allowed under this
section, no depreciation shall be allowed
u/s. 32 on the same exp.
Expenditure on Eligible Project
or Scheme S. 35AC-
 Payment of any sum to a public sector co., local
auth., asso., or instn. Approved by National
Comm. For an eligible project or scheme-100%
deduction allowed.
 A co. may pay any sum as above or incure exp.
Directly on eligible project or scheme.
 A certificate from the donee for payment of any
sum or in case of a co. which incurred exp.
Directly from an accountant required to be
attached with return of income.
 Where deduction allowed under this
section, no deduction to be allowed
under any other provision of the Act.
 National Com. may withdraw approval, if
it is satisfied that project is not being
carried on according to conditions of
approval or report required to be
submitted to National Com has not been
submitted.
 The P.Y. in which approval of the
National Com. is withdrawn,amount
received by pub. Sector co., local auth.,
asso. or instn. Shall be treated as its
income.
 Guidelines for recommending projects.
Payment to aso. or instn. for
carrying out Rural Dev.
Programme S.35CCA-
 Payment of any sum by an ‘A’ to-
 (a) an asso or instn for carrying out any rural
dev. prog. Approved by the prescribed
authority, or
 (b) an asso or instn for training of persons for
implementing rural dev. prog., or
 (c ) a rural development fund set up & notified
by the Cent. Govt.,or
 (d) the National Urban Poverty Eradication
Fund set up & notified by the Cent. Govt.
 Shall be allowed as deduction subject to the
following conditions.
 Conditions-
 (1) ‘A’ shall furnish certificate from the asso or
instn that rural dev. prog. Had been approved
before 1-3-1983 and
 If payment is made after 28-2-1983, work
commenced before 1-3-1983.
 (2) In case of (b) above, ‘A’ shall furnish
certificate from asso or instn that it was
approved by the prescribed auth. before 1-3-
1983 & training of persons had been started
before 1-3-1983.
 Asso or Instn issuing certificate
mentioned above shall obtain
authorisation from prescribed authority in
writing to issue certificate of such nature.
 Preliminary Expenses S. 35D-
 (1) An Indian co. or a res. person who incurs
any exp specified in sub s. (2)
 (a) before commencement of bus., or
 (b) after commencement of bus, in connection
with extension of his undertaking or setting up
new industrial unit
 shall be allowed deduction of 1/5th of such exp.
for 5 successive P.Y.s from the P.Y. in which
bus commences or extension is comleted or
new unit commences prod or operation.
 (2) Preliminary exps.-
 (a) Exp for preparation of feasibility report, project report,
conducting market or any other survey or engineering
services necessary for bus..
 The above work should be carried out by the ‘A’ or a
concern approved for the purpose.
 (b) Legal charges for any agreement for setting up or
conduct of the bus..
 (c ) In case of a co., exp on legal charges for drafting &
printing of M.A. & A.A., fees for regn. of the co., on issue
of shares or debentures being underwriting comm.,
brokerage & exps for drafting, printing & advt of the
prospectus & any other exp that may be prescribed.
 (3) Total deduction allowable shall be
restricted to 5% of
 (a) the cost of the project, or
 (b) in case of a co., at its option of cap
employed.
 Explanation-
 (a) Meaning of Cost of the Project
 (b) Capital Employed
 (c ) Long term borrowing.
 (4) In the case of an ‘A’ other than a co. or a co op soc.,
no deduction shall be allowed unless the A/cs of the ‘A’
for the year/years in which exp is incurred are audited &
audit report is filed with the return of income.
 (5) In case of amalgamation or demerger of an Indian co.
entitled to deduction under this section before expiry of 5
years specified in sub sec (1), amalgamated co or
resulting co shall be entitled to deduction for the balance
period left out of 5 years.
 (6) Where deduction in respect of any exp is claimed
under this section, no deduction under any other
provision shall be allowed for any year on the same exp..
Expenditure on
Amalgamation/Demerger S.35DD
 (1) An Indian co. which incurs exp on
amalgamation/demerger of an
undertaking on or after 1-4-1999, shall
be allowed a deduction of 1/5th of such
exp for 5 successive P.Y.s beginning
with the P.Y. in which the
amalgamation/demerger takes place.
 (2) No deduction shall be allowed in
respect of such exp under any other
provision of this Act.
Exp. under Voluntary
Retirement Scheme S. 35DDA
 Exp incurred by an ‘A’ in connection with
voluntary retirement of an employee under any
scheme of voluntary retirement, 1/5th of such
sum shall be deducted for that P.Y. and the
balance in 4 succeeding P.Y.s equally.
 (2) In case of amalgamation, amalgamated co.
shall be entitled to the deduction for the balance
no. of years left in the 5 years.
 (3) In case of demerger, resulting co. shall be
entitled to the deduction for the balance no. of
years left in the 5 years.
 (4) In case of bus. reorganisation, whereby, a
firm or a proprietory concern is succeeded by a
co., fulfilling conditions laid down in S. 47(xiii) or
47(xiv), this section shall apply to the successor
co. as it would have applied to the firm or the
proprietory concern.
 (5) No deduction shall be allowed to
amalgamating co, demerged co, or firm or
proprietory concern in the year of
amalgamation, demerger or bus reorganisation.
 (6) No deduction shall be allowed in respect of
the exp under any other provisions of the Act.