Income tax law / Historical deduction
Section 35A Income Tax Act: Patent Rights and Copyrights Deduction
Section 35A of the Income-tax Act, 1961 governed the deduction of capital expenditure incurred on acquiring patent rights or copyrights used in a business. It is a historical provision: qualifying expenditure had to be incurred after 28 February 1966 but before 1 April 1998. This article explains the original rules, the treatment of sales and transfers, and the distinction between those rules and depreciation for newer intellectual-property acquisitions.
1. Scope of Section 35A(1)
Sub-section (1) covered capital expenditure on acquiring patent rights or copyrights that were used for the purposes of the business, where the expenditure was incurred in the statutory period. The expenditure was deducted over the relevant previous years, rather than being deducted entirely in the year of acquisition.
Meaning of key terms
- Patent rights
- Legally enforceable rights arising from a patent, subject to the applicable patent law and the rights actually acquired.
- Copyrights
- Rights protected under copyright law in qualifying works, to the extent acquired and used in business.
- Relevant previous years
- Ordinarily, 14 previous years starting with the year in which expenditure was incurred, or with commencement of the business if the expenditure preceded business commencement. The period was shortened where the rights had already become effective before acquisition, subject to the statutory minimum of one year.
- Appropriate fraction
- One divided by the number of relevant previous years. That fraction of qualifying expenditure was deductible in each relevant year.
- Cost remaining unallowed
- The portion of the qualifying acquisition cost not yet deducted under the provision.
2. Deduction calculation
Where the full 14-year period applied, the annual deduction was qualifying capital expenditure divided by 14. For example, expenditure of Rs. 14,00,000 would ordinarily yield Rs. 1,00,000 per relevant previous year, subject to the statutory conditions. If the rights became effective before acquisition, the number of eligible years was adjusted under the explanation to sub-section (1).
3. Rights ending or being sold: Section 35A(2) and (3)
Sub-section (2): Where the rights ended without revival, or where all or part of the rights was sold for capital proceeds not less than the unallowed acquisition cost, the normal annual deduction ceased for that year and later years, as applicable.
Sub-section (3): Where rights ended without revival, or were sold in their entirety for less than the unallowed cost, the unallowed cost (less the relevant sale proceeds, where applicable) was deductible in the year of termination or sale.
4. Excess sale proceeds: Section 35A(4)
If all or part of the rights was sold and capital proceeds exceeded the unallowed acquisition cost, the excess was chargeable as business income up to the amount of deductions previously allowed. The provision also applied where the business had ceased, treating it as existing for this limited purpose.
5. Partial sale: Section 35A(5)
Where only part of the rights was sold and sub-section (4) did not apply, the remaining unallowed acquisition cost was reduced by capital sale proceeds and divided by the number of relevant previous years unexpired at the beginning of the sale year.
6. Amalgamation and demerger: Section 35A(6) and (7)
Amalgamation: Where rights passed from an amalgamating company to an Indian amalgamated company under a qualifying scheme, sub-sections (3) and (4) did not apply to the amalgamating company; the successor generally continued the applicable deduction treatment.
Demerger: Comparable continuity applied where a demerged company transferred the rights to an Indian resulting company under a qualifying scheme. These provisions are relevant to historical expenditure and should not be read as allowing fresh Section 35A deductions on modern acquisitions.
7. Treatment of newer patent and copyright acquisitions
For rights acquired outside Section 35A's historical expenditure window, businesses should examine the intangible-asset provisions applicable to the relevant tax year. Section 32(1)(ii) of the Income-tax Act, 1961 expressly addressed depreciation on specified intangible assets, including patents and copyrights, acquired on or after 1 April 1998. Eligibility, actual cost, ownership, business use and prescribed depreciation rates must be checked independently.
For tax years governed by the Income-tax Act, 2025, use the applicable depreciation and transition provisions rather than assuming Section 35A continues unchanged.
8. Official legal resources
- Income Tax Department: Income-tax Act, 1961
- India Code: central legislation and statutory texts
- Income Tax Department: e-filing portal
9. Original statutory material and amendment history
The following historical material is retained from the original webpage for reference. Its wording and amendment notes should be read alongside the applicable official statute for the relevant assessment year.
Read the original Section 35A text and amendment notes
1(1) In respect of any expenditure of a capital nature incurred after the 28th day of February, 1966 2 but before the 1st day of April, 1998, on the acquisition of patent rights or copyrights (hereafter, in this section, referred to as rights) used for the purposes of the business, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.
Explanation.-For the purposes of this section,- (i) "relevant previous years” means the fourteen previous years beginning with the previous year in which such expenditure is incurred or, where such expenditure is incurred before the commencement of the business, the fourteen previous years beginning with the previous year in which the business commenced :
Provided that where the rights commenced, that is to say, became effective, in any year prior to the previous year in which expenditure on the acquisition thereof was incurred by the assessee, this clause shall have effect with the substitution for the reference to fourteen years of a reference to fourteen years less the number of complete years which, when the rights are acquired by the assessee, have elapsed since the commencement thereof, and if fourteen years have elapsed as aforesaid, of a reference to one year;
(ii) "appropriate fraction” means the fraction the numerator of which is one and the denominator of which is the number of the relevant previous years.
(2) Where the rights come to an end without being subsequently revived or where the whole or any part of the rights is sold and the proceeds of the sale (so far as they consist of capital sums) are not less than the cost of acquisition thereof remaining unallowed, no deduction under sub-section (1) shall be allowed in respect of the previous year in which the rights come to an end or, as the case may be, the whole or any part of the rights is sold or in respect of any subsequent previous year.
(3) Where the rights either come to an end without being subsequently revived or are sold in their entirety and the proceeds of the sale (so far as they consist of capital sums) are less than the cost of acquisition thereof remaining unallowed, a deduction equal to such cost remaining unallowed or, as the case may be, such cost remaining unallowed as reduced by the proceeds of the sale, shall be allowed in respect of the previous year in which the rights come to an end, or, as the case may be, are sold.
(4) Where the whole or any part of the rights is sold and the proceeds of the sale (so far as they consist of capital sums) exceed the amount of the cost of acquisition thereof remaining unallowed, so much of the excess as does not exceed the difference between the cost of acquisition of the rights and the amount of such cost remaining unallowed shall be chargeable to income-tax as income of the business of the previous year in which the whole or any part of the rights is sold.
Explanation.-Where the whole or any part of the rights is sold in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.
(5) Where a part of the rights is sold and sub-section (4) does not apply, the amount of the deduction to be allowed under sub-section (1) shall be arrived at by-
(a) subtracting the proceeds of the sale (so far as they consist of capital sums) from the amount of the cost of acquisition of the rights remaining unallowed; and
(b) dividing the remainder by the number of relevant previous years which have not expired at the beginning of the previous year during which the rights are sold.
3 (6) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the rights to the amalgamated company (being an Indian company),- (i) the provisions of sub-sections (3) and (4) shall not apply in the case of the amalgamating company; and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not so sold or otherwise transferred the rights.
4 (7) Where in a scheme of demerger, the demerged company sells or otherwise transfers the rights to the resulting company (being an Indian company),-
(i) the provisions of sub-sections (3) and (4) shall not apply in the case of the demerged company; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company, if the latter had not sold or otherwise transferred the rights. --------------------
1. Ins. by Act 13 of 1966, s. 10 (w.e.f. 1-4-1966). 2. Ins. by Act 21 of 1998, s. 12 (w.e.f. 1-4-1999). 3. Ins. by Act 26 of 1967, s. 14 (w.e.f. 1-4-1967). 4. Ins. by Act 27 of 1999, s. 16 (w.e.f. 1-4-2000).
2. Ins. by Act 21 of 1998, s. 12 (w.e.f. 1-4-1999). 3. Ins. by Act 26 of 1967, s. 14 (w.e.f. 1-4-1967). 4. Ins. by Act 27 of 1999, s. 16 (w.e.f. 1-4-2000).
3. Ins. by Act 26 of 1967, s. 14 (w.e.f. 1-4-1967). 4. Ins. by Act 27 of 1999, s. 16 (w.e.f. 1-4-2000).
4. Ins. by Act 27 of 1999, s. 16 (w.e.f. 1-4-2000).
Frequently asked questions
Is Section 35A available for new patent purchases?
No. Section 35A applies to qualifying capital expenditure incurred before 1 April 1998, subject to its other conditions.
How many years did Section 35A allow for deduction?
Ordinarily 14 relevant previous years, reduced in certain circumstances when the rights had already become effective before their acquisition.
Can patent and copyright costs qualify for depreciation?
They may qualify under the applicable intangible-asset depreciation provisions, subject to statutory requirements and the tax year involved.