Specified Business Deduction — 100% Capital Expenditure Write-Off

Section 46 of the Income Tax Act, 2025 provides a significant tax benefit for businesses classified as specified businesses. Under this section, an assessee may claim a 100% deduction on eligible capital expenditure incurred for such businesses, subject to the prescribed conditions. The provision is optional — the assessee may choose whether or not to claim the deduction in any given tax year.

Specified businesses are those activities expressly covered under Section 46. If a business falls within the notified list and satisfies the applicable conditions, the capital expenditure incurred for that business may qualify for the deduction. The following table summarises the 14 eligible specified businesses along with their respective commencement dates:

1. 1.The business must not be formed by splitting or reconstruction of an existing business.
2. 2.If any expense has been incurred prior to the commencement of the business and the amount has been capitalised in the books of account on the date of commencement, the deduction under Section 46 shall be allowed in the tax year of commencement of such business for that capital expenditure.
3. 3.Deduction is allowed on all capital expenditures other than: (a) Land; (b) Goodwill; (c) Financial Instruments; and (d) Any capital expenditure where payment exceeding ₹10,000 was made through cash or any other specified medium of payment.
4. 4.The loss from a specified business can be set off only against the profit of another specified business — Section 114.
5. 5.The loss from a specified business can be carried forward for an indefinite number of years.
6. 6.Depreciation is not allowed on any capital expenditure for which a deduction has been claimed under Section 46.
7. 7.If deduction under Section 46 is claimed in respect of any capital expenditure, no deduction under Sections 138–152 shall be allowed for that same expenditure.
8. 8.If the asset on which deduction was claimed under Section 46 is subsequently sold, the entire sale price shall be taxable under the head Profits and Gains of Business or Profession — Section 26.
9. 9.The plant and machinery deployed in the specified business must be new. Exceptions: (a) Imported plant and machinery need not be new; (b) Up to 20% of the total plant and machinery can consist of old equipment.
10. 10.The deduction should be evaluated carefully — once deduction under Section 46 is claimed on a capital expenditure, depreciation on that expenditure is not available in any subsequent year. This is a permanent restriction, not a deferral.
11. 11.For the purposes of this section, 'infrastructure facility' means: (a) Road including toll road, bridge, or a railway system; (b) Water supply, water treatment, irrigation, sanitation, sewage, and waste management; (c) Port, airport, inland waterway, and sea navigational project; (d) Highway project.
12. 12.Audit under Section 63 is mandatory in order to claim deduction under Section 46.
13. 13.The asset must be used exclusively for specified business purposes for a period of 8 years from the date of its acquisition or installation.

If the asset on which Section 46 deduction was claimed is used for non-specified business purposes before the 8-year lock-in period expires, the earlier deduction is partially clawed back. The amount that becomes taxable under the head PGBP is determined as follows:

Further, the cost of acquisition of the asset for the purpose of the non-specified business going forward shall be computed as follows:

Facts of the Case

• XYZ Ltd. is engaged in the business of running hotels. It commenced commercial operations of a new three-star hotel in Madurai, Tamil Nadu on 1 April 2026.
• Capital expenditure of ₹50 lakh was incurred during January 2026 to March 2026 exclusively for this new hotel business and was capitalised in the books of account on 1 April 2026 (date of commencement).
• During Tax Year 2026-27, additional capital expenditure of ₹2 crore (₹200 lakh) was incurred, of which ₹1.50 crore (₹150 lakh) was for acquisition of land exclusively for the hotel business.
• All expenditure during Tax Year 2026-27 was made by account payee cheque or through ECS via a bank account.
• Profits from the new hotel in Madurai (before claiming deduction under Section 46) for Tax Year 2026-27: ₹25 lakh.
• XYZ Ltd. also operates an existing four-star hotel in Coimbatore (commenced approximately 10 years ago), which generated profits of ₹120 lakh for Tax Year 2026-27.
• All conditions prescribed under Section 46 have been fulfilled. No deduction under Chapter VIII (Sections 138–152) has been claimed on any of the above expenditure.

Computation of Profits and Gains of Business or Profession — Tax Year 2026-27

Is claiming deduction under Section 46 mandatory?

No. The deduction is entirely optional. An assessee engaged in a specified business may choose whether or not to claim the deduction under Section 46, depending on the overall tax position and the long-term implications — particularly the permanent trade-off against future depreciation. If the deduction is not claimed, the normal depreciation schedule under the Act will apply to the qualifying asset.

Can depreciation be claimed on an asset after Section 46 deduction has been availed?

No. If a deduction under Section 46 is claimed on a particular capital expenditure, depreciation on that same expenditure is not allowed either in the same year or in any future year. This is a permanent restriction — once the Section 46 route is chosen for an asset, the depreciation benefit is lost for the entire life of that asset.

What happens if the asset is later used for a non-specified business purpose?

If the asset is diverted to non-specified business purposes before the 8-year lock-in period expires, the earlier deduction claimed under Section 46 is partially reversed. The clawback amount — computed as the deduction claimed minus notional depreciation allowable — becomes taxable as PGBP income in the year of diversion. Additionally, the residual amount (after reducing the notional depreciation) is treated as the cost of acquisition of the asset for the non-specified business going forward.

Section 46 can be highly beneficial for eligible businesses because it permits an immediate 100% deduction of qualifying capital expenditure — effectively a full write-off in the year of incurrence or commencement. However, the benefit comes with important restrictions, particularly in relation to depreciation, cash payment limits, asset holding period, and loss set-off rules. For taxpayers engaged in specified businesses, Section 46 may offer significant tax planning opportunities when used judiciously. Before claiming the deduction, it is important to verify whether the business qualifies as a specified business, whether the expenditure falls within the eligible categories, and whether all prescribed statutory conditions have been fulfilled — including mandatory audit under Section 63.