Start with the asset’s deduction history
For FY 2025–26 and AY 2026–27 use the Income-tax Act, 1961. Section 35AD(7A) restricts use of an asset for which a deduction was claimed and allowed to the specified business for eight years beginning with the previous year of acquisition or construction. Count financial years starting with that year, rather than eight anniversaries from first use. Section 35AD(7B) can deem business income when the asset is used for another purpose during that period, except through a mode referred to in section 28(vii). Separately test any cash or in-kind amount received or receivable on demolition, destruction, discarding or transfer of a qualifying capital asset where the whole expenditure was allowed under section 35AD; section 28(vii) excludes land, goodwill and financial instruments.
Read the applicable text: Income-tax Act, 1961: sections 28, 32, 35AD and 43 CBDT: notified ITR-6 for AY 2026–27.
Compute the diversion income from tax records
Sum the deduction actually claimed and allowed for that asset across years. Subtract section 32 depreciation that would have been allowable as if section 35AD deduction had not been allowed. Rebuild the counterfactual from acquisition, qualifying use, asset classification, applicable depreciation and block information. Do not use book depreciation or a ledger carrying amount as a substitute. Attribute income to the previous year of the change in use.
Keep recapture and tax cost distinct
Explanation 13 to section 43(1) generally treats actual cost as nil for an asset on which a section 35AD deduction has been allowed or is allowable. Its proviso addresses actual cost where section 35AD(7B) income arises: reduce the original actual cost to the taxpayer by depreciation at the applicable rate that would have been allowable had the asset been used for business since acquisition, rather than taking the deemed income as the new cost. If the allowed deduction differs from actual cost, these calculations need not produce the same amount. The examples use stipulated counterfactual depreciation amounts and do not prescribe a rate or resolve a real block calculation.
Make the return tie out
Preserve the allowed-deduction history, acquisition and change-of-use evidence and the separate cost bridge. For an amount properly included in the ordinary business computation, notified ITR-6 Schedule BP Part A item 23 is the residual addition row under sections 28 to 44DB. If an addition belongs in the specified-business computation, check Part C item 45 instead. Select the line after classifying the income and reconciling the books. Reconcile the amount already recognised in the accounts so only the required net addition flows through. Confirm business and loss classification separately. Schedule BP’s specified-business deduction computation is not a second opportunity to deduct the recaptured amount. Section 35AD(7C) refers specifically to a company that became a sick industrial company under section 17(1) of the former Sick Industrial Companies (Special Provisions) Act, 1985, during the eight-year period. Check applicable repeal and savings provisions if this historical exception is asserted; the examples assume it does not apply.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Eight-year clock
Equipment acquired in FY 2018–19 remains within the eight-year use period through FY 2025–26 inclusive. A change in use on 15 February 2026 is in year eight.
Illustrative example 2: Diversion beyond the clock
Equipment acquired in FY 2017–18 reaches year eight in FY 2024–25. A change on 2 April 2025 is in year nine and does not trigger subsection (7B) on the stated facts.
Illustrative example 3: Ordinary recapture
Allowed deduction is ₹80 lakh; supported counterfactual depreciation is ₹28 lakh. For diversion within the eight-year period that falls under subsection (7B), the deemed business income is ₹52 lakh.
Illustrative example 4: Separate tax cost
Assume actual cost of ₹100 lakh, a supported deduction history of ₹85 lakh, and a separately verified hypothetical depreciation amount of ₹30 lakh for each calculation. Deemed income is ₹55 lakh; the actual cost under the Explanation 13 proviso is ₹70 lakh, subject to the applicable facts.
Illustrative example 5: Multiple allowed years
Allowed deductions attributable to one asset are ₹32 lakh and ₹18 lakh. With counterfactual depreciation of ₹14 lakh, the deemed income is ₹36 lakh.
Illustrative example 6: Separate unaffected equipment
Asset A is diverted and yields ₹24 lakh allowed deduction less ₹8 lakh depreciation, or ₹16 lakh of deemed income. Asset B remains exclusively in its specified business, so its ₹40 lakh prior deduction contributes nothing to this diversion calculation.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify each asset and the specified business | Tax fixed asset register and activity evidence |
| 2 | Confirm the acquisition or construction year | Vendor, project and capital records |
| 3 | Trace the deduction actually claimed and allowed | Returns, computations and orders |
| 4 | Count the eight previous years inclusively | Asset-specific use calendar |
| 5 | Establish the date and type of change | Operational records and authorisations |
| 6 | Test whether section 28(vii) applies instead | Transfer or disposal evidence |
| 7 | Rebuild section 32 counterfactual depreciation | Block, cost and tax-rate working |
| 8 | Compute deemed income and actual cost separately | Sections 35AD and 43 worksheets |
| 9 | Tie deemed income to the return once | Book-to-tax and Schedule BP bridge |
| 10 | Review future depreciation and preserve evidence | Updated asset records and sign-off |
Sixteen practitioner FAQs
1. Does the clock start on the deduction claim date?
It starts in the acquisition or construction previous year under subsection (7A).
2. Does book depreciation reduce recapture?
Use section 32 depreciation allowable in the statutory counterfactual.
3. Can all plant deductions be pooled for a single diversion?
Trace deduction and use to the affected asset.
4. Does purchase approval establish acquisition?
Use actual acquisition or construction evidence.
5. What if a change is only planned?
Review actual use and its date rather than relying on the plan alone.
6. Is a sale analysed under the same provision?
Examine section 28(vii) and the express distinction in subsection (7B).
7. What if use changes after year eight?
That timing is outside subsection (7A)’s period; review other rules on the facts.
8. Does a pre-existing accounting gain establish the tax amount?
No. Calculate statutory deemed income and reconcile any book recognition.
9. What if the deduction was claimed but never allowed?
Subsection (7B) requires the asset’s deduction to have been claimed and allowed.
10. What if earlier relief was later changed by order?
Use the supported deduction history and document any pending dispute separately.
11. Does recapture equal revised actual cost?
They are separate statutory calculations and may differ.
12. Can the new tax cost be copied from accounting net book value?
Apply Explanation 13’s proviso and verify the tax inputs.
13. Can the resulting income be moved to a later return?
Subsection (7B) identifies the previous year of the relevant use.
14. Does the article establish an actual depreciation rate?
No. Use the prescribed rate and conditions applicable to the underlying asset and period.
15. Should a second expense be claimed just because deemed income arises?
Review the statutory basis independently; do not offset by an invented expense.
16. Which evidence supports the change of use?
Retain operational records, dates, location and documents showing the asset’s actual activity.
Official sources
Income-tax Act, 1961: sections 28, 32, 35AD and 43 CBDT: notified ITR-6 for AY 2026–27 Income Tax Department: section 35AD text