Section 35AC of Income Tax Act 1961: Expenditure on Eligible Projects or Schemes

Section 35AC was introduced to encourage financial support for approved social and economic welfare projects. It allowed qualifying expenditure or payments for notified eligible projects or schemes to be deducted while computing taxable income, subject to the conditions prescribed in the section.

What did Section 35AC provide?

Historically, Section 35AC allowed an assessee to claim a deduction for expenditure incurred by way of payment of a qualifying sum to a public sector company, local authority, or an association or institution approved for carrying out an eligible project or scheme. A company could, subject to the section, also claim qualifying expenditure incurred directly on such a project or scheme.

The provision was aimed at approved projects serving public welfare objectives. It was not a general deduction for every charitable or social expenditure. The recipient, project or scheme and the supporting documentation had to satisfy the statutory framework applicable to Section 35AC.

Meaning of important terms

National Committee

For Section 35AC, the expression National Committee meant the committee constituted by the Central Government from persons of eminence in public life in accordance with the rules made under the Income Tax Act.

Eligible project or scheme

An eligible project or scheme meant a project or scheme for promoting the social and economic welfare or uplift of the public that was specified by the Central Government through notification in the Official Gazette on the recommendation of the National Committee.

Main conditions under the former deduction

Section 35AC(1) dealt with the qualifying expenditure. Section 35AC(2) required the prescribed certificate supporting the claim. Where payment was made to the specified public sector company, local authority, association or institution, the certificate was to come from that entity. In other cases, the provision referred to certification by an accountant as defined for the purposes of Section 288.

The prescribed particulars could include information about the progress of work relating to the eligible project or scheme during the relevant previous year. The section therefore linked the deduction not merely to payment, but also to an approved project framework and documentary compliance.

Effect of later withdrawal of approval or notification

The Explanation following sub-section (2) protected a deduction otherwise validly available merely because, after the assessee made the qualifying payment, the approval of the association or institution was withdrawn or the notification of the eligible project or scheme was withdrawn. This protection operated subject to the terms of the section applicable to the relevant period.

No double deduction for the same expenditure

Section 35AC(3) provided that where a deduction under Section 35AC had been claimed and allowed for expenditure referred to in sub-section (1), a deduction for the same expenditure could not also be allowed under another provision of the Income Tax Act for the same or any other assessment year.

Withdrawal of approval and consequences

Sub-sections (4) and (5) contained mechanisms for withdrawal of approval or notification where the prescribed conditions were not followed or required reports were not furnished. The statutory framework required a reasonable opportunity to show cause before the relevant withdrawal in the circumstances specified by the section.

Sub-section (6) dealt with tax consequences following specified withdrawals. Broadly, amounts covered by the relevant certificates, or qualifying direct expenditure claimed by a company, could be treated as income in the year in which the approval or notification was withdrawn, with tax consequences governed by the provision.

Section 35AC(7): deduction discontinued from AY 2018-19

This is the most important point for present-day readers. Section 35AC should not be treated as a currently available deduction for new claims relating to AY 2018-19 onward. The historical provisions may nevertheless remain relevant when examining an older assessment year, an earlier claim, legacy proceedings, or the consequences of approvals and notifications issued under the former regime.

Why was the deduction phased out?

The Finance Act, 2016 introduced the sunset provision. The Government's budget material stated that the deduction under Section 35AC would not be available from Financial Year 2017-18, corresponding to Assessment Year 2018-19. The statutory amendment was implemented through the insertion of sub-section (7).

Practical point for taxpayers

If an issue concerns an assessment year before AY 2018-19, the version of Section 35AC, the relevant notification approving the project or scheme, the recipient's approval, the prescribed certificate and the rules applicable to that particular year should be checked. Tax law amendments can affect both the wording of a provision and the authority responsible for approvals or withdrawals.

Note: This article explains the statutory framework and current status of Section 35AC. For a disputed historical deduction, the law and notifications applicable to the specific assessment year should be verified from official records.