Identify the claimant, expenditure and statutory event
An Indian company that incurs expenditure on or after 1 April 1999 wholly and exclusively for an amalgamation or demerger of an undertaking can deduct one fifth for each of five successive previous years, starting with the year the amalgamation or demerger takes place. Apply section 35DD of the Income-tax Act, 1961 to FY 2025–26 and AY 2026–27. Check the transitional provisions and law applicable to any later year separately. Test the transaction against the applicable definitions in sections 2(1B) and 2(19AA). Do not start the clock on the invoice, board approval or petition date alone. Document how the sanctioned scheme, conditions and operative facts establish the relevant transaction year.
Read the applicable text: Income-tax Act, 1961: sections 2 and 35DD CBDT Form 3CD, clause 19 Notified ITR-6, AY 2026–27 ITR-6 corrigendum CBDT AY 2026–27 validation rules CBDT Circular 7/2026 Official AY utilities and schema.
Trace each rupee to the transaction
Use the engagement letter, scope of work, invoices and project records to identify the expenditure the Indian company actually incurred and why. A transaction-specific legal or valuation invoice can be a candidate, but an invoice caption alone is insufficient. Analyse ordinary recurring advisory work, aborted alternatives and mixed mandates separately. Allocate only on supportable evidence; an unsupported portion does not become eligible through a percentage estimate. Consider reimbursement, another group entity's costs, later invoices and succession on their facts; do not transfer an allowance based solely on a ledger transfer or group consolidation.
Keep a separate record for each deal
Record claimant, eligible expenditure, operative previous year, instalment count, historic allowances and remaining balance for each deal. Combine current instalments only after each cohort is tested. Check past returns and subsequent orders, and investigate any difference between deduction claimed and determined. The fifth year ends the ordinary schedule: a missed claim does not create a sixth year or automatically increase a later instalment. Analyse available correction routes separately. Section 35DD(2) prevents a deduction for the same expenditure under another provision; do not apply the ceiling for section 35D or assume the succession wording of section 35DDA applies.
Reconcile the book starting point to the allowable instalment
For a tax audit, reconcile both columns of Form 3CD clause 19 for the section 35DD row: the amount debited to profit and loss and the amount admissible. In notified AY 2026–27 ITR-6, where the supported instalment is not deducted elsewhere, Schedule BP A item 32 is the residual field for other allowable deductions. Use it only to the extent the instalment is not already reflected in the computation. Item 29 is specifically for section 35, 35CCC or 35CCD and is not the 35DD deduction field. If the starting profit includes a book expense and it is separately reversed for tax, retain the reversal and allowable instalment as separate reconciled movements. If the correct tax instalment is already reflected in the starting profit and retained, do not deduct it again.
Check the filing class and utility
For companies covered by serial number 2 of CBDT Circular 7/2026, the return deadline moved from 31 October to 21 November 2026 and the specified audit report deadline moved from 30 September to 21 October 2026. A company required to furnish a section 92E report falls under its separate statutory 30 November return date; do not assume the serial number 2 extension applies to it. Confirm subsequent applicable orders, use the AY 2026–27 schema, and reconcile the final utility computation to the tax ledger before signing.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: First-year merger
A qualifying transaction takes place in FY 2025–26 and the Indian claimant incurs ₹25 lakh of eligible expenditure. The current instalment is ₹5 lakh; ₹20 lakh remains on the statutory schedule across four later years, subject to the law applicable to those years.
Illustrative example 2: Third instalment
A deal took place in FY 2023–24 with an eligible base of ₹18 lakh. Two supported instalments total ₹7.2 lakh. The FY 2025–26 third instalment is ₹3.6 lakh and ₹7.2 lakh remains after it.
Illustrative example 3: Parallel cohorts
A qualifying FY 2025–26 deal has a ₹15 lakh base and an FY 2022–23 deal a ₹40 lakh base. Instalments of ₹3 lakh and ₹8 lakh total ₹11 lakh this year. After the first and fourth instalments respectively, ₹20 lakh remains across the two schedules.
Illustrative example 4: Mixed advisory engagement
Of a ₹12 lakh invoice, work records support ₹7.5 lakh exclusively for the qualifying transaction; the rest concerns routine advisory services. The first 35DD instalment is ₹1.5 lakh. Assess the other ₹4.5 lakh independently.
Illustrative example 5: Full expense debited to books
Starting profit of ₹80 lakh already reflects a ₹20 lakh charge, all qualifying. Reverse ₹20 lakh and deduct the ₹4 lakh instalment. Profit after these adjustments is ₹96 lakh before other tax adjustments.
Illustrative example 6: Expired cohort
A FY 2020–21 transaction with a ₹10 lakh eligible base had five ₹2 lakh instalments through FY 2024–25. For FY 2025–26 its current deduction and scheduled balance are both zero; check a missed historical claim through the remedy for the original year.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify each claimant and transaction | Scheme, company identity and project ledger |
| 2 | Confirm statutory classification | Sections 2(1B) or 2(19AA) analysis and scheme |
| 3 | Fix the transaction year | Sanction order, dates and operative facts |
| 4 | Trace qualifying costs | Invoice, engagement and work evidence |
| 5 | Separate routine and mixed items | Allocation and competing claims review |
| 6 | Reconcile prior instalments | Filed returns, intimations and orders |
| 7 | Calculate each current fifth | Deal-wise annual amortisation register |
| 8 | Reconcile book charges | Opening P&L and adjustment bridge |
| 9 | Tie clause 19 to Schedule BP | Filed audit report and ITR-6 working |
| 10 | Check final computation and preserve evidence | AY utility output and sign-off |
Sixteen practitioner FAQs
1. Can any company in the group claim?
Identify the Indian company that incurred the qualifying expenditure.
2. Is every merger label enough?
Test the statutory definition and facts of the transaction.
3. Does the engagement date start the five years?
The statute starts with the previous year in which the amalgamation or demerger takes place.
4. Which amount is divided by five?
The documented qualifying expenditure of the claimant.
5. Can routine retainers enter the pool?
Only an amount supported as wholly and exclusively for the transaction can enter.
6. How should an aborted project be treated?
Analyse separately; do not assume a completed statutory event or a 35DD instalment.
7. Does a scheme-appointed date settle every timing question?
Reconcile it with the scheme terms, order, conditions and operative facts.
8. Can several cohorts contribute in one year?
Yes, test and compute each independently.
9. Can the next year's fifth absorb a missed claim?
No automatic catch-up applies; evaluate a remedy for the affected year.
10. Where is it reported in Form 3CD?
The section 35DD row in clause 19 separates the book debit and admissible amount.
11. Does clause 19 replace the tax adjustment?
No. Reconcile its figures to the actual computation.
12. Can the same expenditure also be deducted under section 37?
Section 35DD(2) bars a second deduction under another provision for the same expenditure.
13. What if the entire cost was charged in the books?
Reconcile the book charge and replace it with the applicable tax instalment in the computation.
14. Does BP item 29 cover section 35DD?
No. Check residual BP item 32 for a supported deduction not already reflected in the tax computation.
15. Can a buyer assume it inherits an old schedule?
Establish legal entitlement separately; a ledger transfer alone is insufficient.
16. What evidence anchors the remaining balance?
The verified base, transaction year, prior returns and orders, and the annual cohort roll-forward.
Official sources
Income-tax Act, 1961: sections 2 and 35DD CBDT Form 3CD, clause 19 Notified ITR-6, AY 2026–27 ITR-6 corrigendum CBDT AY 2026–27 validation rules CBDT Circular 7/2026 Official AY utilities and schema