Durgesh singh charts.pdf

Profits and Gains from Business or Profession

1 Charging Section (Except

Deduction (Except

Presumptive Taxation)

Sectoral Analysis)

Section 41 Recovery of Loss or Expenditure already allowed or remission of Liability [Sec.41(1)] : Recovered : Recovered amount shall be deemed to be PGBP for him or successor of Business & chargeable to tax in the PY of receipt. Profit on Sale of assets of Power Sector Unit which has claimed Depreciation under SLM [Sec. 41(2)] : If : If Moneys payable is greater than WDV, then the difference between Actual Cost & WDV shall be chargeable to tax as Business Income in the PY in which the amount is due. Amount realised on sale of capital asset used for scientific research [Sec.41(3)] : Lower : Lower of – of  – (i)  (i) Amount of Deduction, or (ii) Sale Proceeds, is chargeable to tax as PGBP in the PY of transfer.

Section 28 Section 28(i) : Profits & Gains

Recovery of Bad debts allowed u/s 36(1)(vii) [Sec. 41(4)] : 1. If recovered amount is greater than the Unallowed Unallowed amount, then such excess is treated as income income u/s 41(4). 2. If recovered amount is lesser than the Unallowed amount, amount, then such deficiency is allowed as deduction deduction u/s 36(2)(ii). Note : Recovery by Successor of business is not taxable. Set off of Losses incurred in the year of discontinuance of business [Sec. 41(5)] : First : First set off against Income u/s 41(1), 41(3), 41(4), 41(4A).

of any

Badridas Daga (SC) Loss of stock by Fire Loss of embezzlement of money by employee

(V)

AO : No express Ded n u/s 30-36 & Sec. 37(i) : Loss ≠ Expenditure

Business or Profession Sec 2(13) : Business includes :  Trade Any adventure  Commerce in nature of  Mfg TC M  Systematic & organised set of activity with a set PURPOSE (+) Servicing Activities .’. Any random trxn = Buz., if PROFIT Motive (V)

SC : 28(i) : Real Profits

Sec 2(36) : Profession

• Real Income Theory (V) • Profits & gain arrived as per Comm A/c ing Principle(C/A/P) .’. Trading loss  Revenue field  (V)

Occupation + Intellectual Skills/

Applying ratio of above SC verdicts Closing stock as per AS - 2

Dr. T A Qureshi (SC) Loss of stock allowed on account of confiscation by Narcotics dept

which was

Section 28(v) :

carried on by the assessee

at any time

 Assessee to carry on B & P during the P.Y.  Assessee himself NOT carrying on still assessee be Charged.

Not Necessary

Eg : NRI through agent .’. business connection in

Buz

Eg : Foreign Co. Subs Co

Change Transformation of

Independently

Sham

object New & distinct object

Working .’. S Co

Entity

1. Glass Miniature Bulb Bulb Ind Ltd (SC) : Assessee following mercantile system of a/c ing to

out the

remain in

ensure claiming dedn of exp in correct PY, i.e. PY

PY

existence

where there is loss to the buz. & NOT postpone to

in AY

the point of time when chances of recovery

Use Diff. Chemical Comp n

F Co’s Control (V) .’. F Co(V)

Capital Receipt

N.A. to living physical object

Loss of Plant & Mach. Due to fire (X) (Capital Field Loss)

In Buz.

Sec 41 : Receipt for which

In Profession

 Dedn Claimed & Allowed

Taxable (Where, Cash system of Accounting is followed

Earlier  Taxable in the yr

ITO vs K P Varghese (SC) FVC = Actual Selling Price

2

Sum Recd on Closure of Buz. Which is now no longer in existence

Domestic Co

 Different Name, Character &

of receipt (even buz not in existence)

Provided that where any interest, salary, bonus, commission or remuneration, has not been allowed to be deducted u/s 40(b), the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted.

carried

1

(v) .’. F Co (V)

Sec 2(29BA) : Manufacture

Income/exp of one yr not to be taken/ allowed in later yr .’. PPI specifically shown in Audit Report

out in PY

F Co’s Control

Vocation

any interest, salary bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm:

B&P

of F Co

Some degree of learning +

the previous year

through

.’. Business Carried on for some point of time during the PY Exception

India .’. NRI = assessee

Branch (P.E.)

To Carry

during

becomes negligible, i.e., where there is loss to the assessee. .’. Avoid belated claim of ded n (PPI) Not Allowed u/s 28(i)

2. Revision of salary

6. Sec 43D : Pub Fin Inst/

with retrospective

Fin Corp/ Banks/ Public Co

effect on higher side.

in financing : Interest recd

.’. Incremental salary

on bad & doubtful debt :

for earlier period

Taxable in : EARLIER of

accrued in C.Y. (V).

a. Yr credited to P & L OR b. Yr of receipt

Not Prior Period Exp. 3. Sec 43B : Ded n in PY of actual pymt, irrespective of PY to which exp relates.

7. Embezzlement of money: PY in which fraud is discovered

4. Sec 36(1)(iii) : Bad debts allowed in PY

8. Provisions :

in which Debtor w/off.

Liability in

Liability in

5. Sec 35D : Ded n of

PRAESENTI

FUTURO

preliminary exp

(V)

(V)

Section 28(va) : any sum, whether received or receivable, in cash or kind, under an agreement for –  (a) not carr ying out any activity in relation to any business; or (b) not sharing any know-how, patent, copyright, trademark, licence,  franchise or any other business or commercial commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods  provision for for services Provided that sub-clause (a) shall not apply to –   Any sum received, in cash or kind, on account account of transfer of (i) the the right to manufacture, produce or process any article, or (ii) right to carry on any business, which is chargeable under the head “Capital gains”.

Section 28(vi) : any sum received under a keyman insurance policy u/s. 10(10D) including the sum allocated by way of bonus on such policy.

Section 28(vii) :

Sec 35 : Scientific incurred, when

any sum, whether received or receivable, in cash or kind, on account of any capital asset being demolished, destroyed, discarded or

business is not in

transferred, if the whole of the expenditure on such capital asset has

research exp – exp – both  both

9. Advt Exp

existence

Section 28(ii) :

Section 28(iv) :

any compensation or other payments received on : (a) Termination of management or modification in terms of management of any Indian company. (b) of any other business (c) Compensation r eceived on managing agency.

been allowed as a deduction u/s 35AD.

termination o f

the value of any benefit or perquisite, whether convertible into money The or not, arising from business or the exercise of profession. conditions necessary for invoking sec. 28(iv) are (a) the benefit/perquisite must arise from the business of an assessee and (b) There must be nexus or connection between the business of an assessee and the benefit/perquisite sought to be taxed.

(d) nationalizati on of any company or business being taken over by the Government.

NOTE: FA 2015: 2015 : A new clause (xviii) has been introduced to section 2(24) as per which

• Subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement • “other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to Section 43(1)” • In cash or in kind • to the assesse

SUBSIDY

• given by the CG or SG or any authority or body or agency

Section 28(iii) : Income derived by trade, professional or similar association from specified services rendered for its members.

Section 28(iiia) –  (iiie)  (iiie) : Profits on sale of Import entitlement licence, cash assistance (cash compensatory support), Duty drawback.

With respect to acquisition of capital asset  – Reduce from cost of acquisition (expn 10 to sec43(1))

others OBJECT:

OBJECT :

To enable the assessee

Industrial promotions

to carry the trade or

E.g.

business more profitably Revenue receipt taxable

Shifting the

Expansion of

u/s 28(i) (Sahney steel

Industry in

its capacities

and press works Ltd) – Ltd)  –

other locations

Eg. Power subsidy, refund of taxes etc.

grant or cash incentive or duty drawback or waiver or concession or reimbursement” to those received by any person carrying on business or  profession. The above amendment is in line with the notified ICDS.

OR

 –

• shall be treated as income. The scope of section 2(24)(viii) is very vast to cover even LPG subsidy. There is nothing in the language of the provision to limit the sc ope of “subsidy or

Capital receipt Taxable as the scope of “income” has been enlarged .

2

Deduction (Except Sectoral Analysis) : A. Depreciation :  Additional Depreciation :

 Basis of Depreciation Sec. 32(1)(i) In the case of assets of an undertaking

Engaged

PROVISIONS IN RESPECT OF ADDITIONAL DEPRECIATION (SECTION 32(1)(iia)]:

Sec. 32(1)(ii) in

generation or generation

(1)

In case of any block of asset, such percentage on the WDV thereof as may be prescribed. (2)

WDV of BLOCK sec. 43(6)(c). r.w. Rule 5

and distribution of power,

Date

Particulars

No. of unit 2 1 (1)

Such percentage on the actual cost thereof to the assessee as may be  prescribed 

1.4.py. (+) during p.y. ( –) During p.y.

Amount

OP WDV* (say) xx Actual cost (Additions) (say) xx Money payable (say) (xx) (in respect of asset sold, discarded, demolished or destroyed during the p.y) 2 XX WDV * WDV of the block in immediately preceding p.y. as reduced by the

(3)

Applicability : Additional depreciation is available on new machinery or plant (other than ships and aircraft), which has been acquired and installed. (a) This provision is applicable only in case of an assessee engaged in the business of manufacture or production of any article or thing. (b) Assessee engaged in the business of generation or generation and distribution of power. Deduction:  A further deduction of 20% of actual cost of such plant and machinery is allowed. ❖ However, in case the asset acquired put to use for a period of < 180 days then addl. Depre. on such asset will be @ 10% of actual cost. As inserted by Finance Act, 2015 w.e.f. 1-4-2016:  Additional Depreciation @ 35% instead of 20% shall be allowed, ❖ On any new machinery or plant acquired and installed (other than ships and aircraft),  Where any undertaking is set up for manufacturing and production on or after 1-4-2015 and before 1-4-2020,  In areas notified by Central Govt. (Andhra Pradesh, Bihar, West Bengal or Telangana) 2nd Proviso to Sec. 32(1)(iia) No Deduction: Additional depreciation is not allowed in respect of the following: Plant and machinery which, was used whether in India or outside India by any other person; ❖ Any office appliance or road transport vehicles; Plant or machinery installed in the office premises or the residential accommodation (including the guest houses);  plant and machinery whose whole of the actual cost is deductible (by way of depreciation or otherwise)  in any one previous year.

Computers used for date processing in industrial premises are eligible for additional depreciation

depreciation actually allowed in respect of that block. As per explanation 3 to sec. 43(6), any allowance in respect of any depreciation carried forward

 Investment Allowance :

u/s 32(2) shall be deemed to be depreciation “actually allowed”.

Eligible assets & Rate of depreciation : ( 1)

Explanation 3 to section 32(1) :-

Sec. 32AD :

Company engaged in manufacture or production o f any article or

Company engaged in manufacture or production o f any article or

thing acquire & install New assets, Actual cost whereof during any

thing set up an undertaking or enterprise on or after 1.4.2015 In

PY > ` 25 Crores. Deduction : 15 % of Actual Cost

notified backward Area (AP, Telangana, Bihar or West Bengal) Deduction : 15 % of Actual Cost of new asset for that AY

tangible assets, being buildings, machinery, plant or furniture.

Except, If deduction allowable u/s 32AC(1), i.e. for investment

Deduction is available only upto AY 2020-21.

(b)

intangible assets, being know-how, patents, Copyrights, trade-marks, licences,  franchises or any other business or commercial rights of similar nature.

upto 31.03.2015, then no deduction is allowed u/s 32AC(1A), for

“New Asset” as defined u/s 32AC(1A).

AY2015-16.

(2)

Sec 43(3) :- “plant” includes ships, vehicles, books scientific apparatus and surgical eauipment used for the purposes of business or profession but does not include t ea

Deduction is available only upto AY 2017-18.

the date of installation. If sold or transferred :

  Used by other person whether in or outside India ❖  Installed at office or residential premises including guest house    Office appliance including computer & computer software   Vehicle   Ship or aircraft or   any other

Rates of depreciation of Block of assets. RATE OF DEPRECIATION IN CASE OF BLOCK OF ASSETS : TANGIBLE ASSETS

New asset should not be sold or transferred within 5 yrs from

“New asset” for this purpose is a new plant or machinery. But it does not include the following – 

bushes, or livestock or buildings, or furniture and fittings.

Rate

Plant & machinery for which whole cost is allowed as deduction

Residential Building except hotel and boarding houses.

(2)

Non-Residential Buildings [office, factory, godown, hotels, boarding, houses but other than (1) above and (3) below] (3) (i) Buildings for installing Plant and Machinery forming part of water supply or water treatment system for infrastructure business U/S 80 IA ( 4)(i) (ii) Purely temporary erections such as wooden structures. FURNITURE AND FITTINGS (4)

Furniture and Fittings including electrical fittings (“Electrical fittings” include electrical wiring, switches, sockets, other fittings and fans, etc.) (III) PLANT AND MACHINERY (5)

Calculate depreciation on total assets as if no

capital gain taxed u/s 45 r.w.s. 50.

amalgamation/

Amalgamation/ Demerger/ Business re organisation is exempt.

demerger taken place

C/f & set off of depreciation : 10

 Conditions for availing

depreciation : 100 In respect of depreciation of eligible assets

10

–  (owned)  wholly or partly, by the assessee

(8) (9)

Glass and plastic containers used as refills:

50

(10) (i) Computer including computer software.

60

20

Plant

30

40

Actual Cost (Rs. crore)

–  (used)  for the purpose of the business or profession the following deductions shall be allowed – 

- Unabsorbed depreciation c/f to next yr as

- B/f losses to be set off first. - Chronology of deduction : (a) Current year Depreciation (b) Set off of B/f Buz loss (c) Unabsorbed Depreciation

in

The concept of WDV :- Sec 43(6)

A

18

25/6/2015

1/9/2015

2/11/2015

B

8

27/6/2015

1/12/2015

3/12/2015

C

20

29/6/2015

20/3/2016

1/6/2016

(iia) Additional depreciation

D

7

30/6/2015

1/12/2016

6/12/2016

E

35

10/9/2015

21/9/2015

28/9/2015

TOTAL

88

(iii) Terminal depreciation

- ROI not reqd to file.

Date of Date of Date when purchase installation put to use

(ii) WDV

(i) SLM

depreciation.

X Ltd. sets- up an undertaking in a notified backward area in Andhra Pradesh. For this purpose, it purpose, it purchases new plant and machinery(rate of normal depreciation 15%) as follows-

 AND

15

“WDV” means –

(a)

Calculate Normal depreciation, additional depreciation and

(iii) Gas Cylinders including values and regulators

investment allowance .

(ii) Plant and machinery in water supply and treatment system for infrastructure U/S 80 IA(4)(i); Wooden part in artificial silk manufacturing Plant and Machinery; Cinematograph Films  –  Bulbs of studio lights; Wooden Match frames in Match factories; Mines and Quarries  – tubs, ropes, lamps, pipes; Salt Works-clay and salt pans etc.; Air  –pollution, Water  – Pollution, Solid waste control equipment’s and Solid waste recycling system. INTANGIBLE ASSETS (13) Know-how, patents, copyrights, trademarks, licenses, franchise or any other business or commercial rights of similar nature.

100

(3) Forex rate fluctuation on acquisition of asset : a. Forex loan specifically to purchase an asset b. Asset is acquired on credit from vendor in foreign country

in the case of

assets

acquired before the

any block of

acquired in

previous year:-

assets

the P.Y.:-

Forex rate fluctuation capitalise to cost of asset in PY in which loan or vendor has been paid

25

(4) Actual Cost of asset as per S. 43(1)  = Purchase Price (+) Cost “inextricably linked with” bringing an asset put to use ( Cost directly attributable to bring asset in working condition like, freight, loading unloading etc. & interest cost on borrowal of capital for acquiring the asset where, interest for the period upto asset first put to use) (-) Rent for housing of worker of contractor, interest on advance to contractor etc. (-) Excise or Custom duty Cenvattable (- ) “Subsidy” as per note 2       =      ℎ,  





The ACTUAL

The Actual cost to

Please refer the

COST

the assessee (-) all

format below

depreciation

sec. 32 (1)(ii)

actually allowed to

Notes : ( 1)

(c)

in the case of assets

(iv) Glass Manufacturer – Melting Furnaces; Mineral Oil Concerns; 80

(b)

in the case of



(ii) Books other than those covered in (12)(i) below.

(11) Flour Mills  –  Rollers; Rolling Mill rolls in Iron and Steel Industry; Energy renewal and energy saving devices; Rollers in Sugar works. (12) (i) (a) Books (annual publications) owned by assesse carrying on profession and (b) Books owned by assesse carrying on business in running lending libraries.

“Depreciation” :

under the head “ PGBP” in the year of transfer in addition to

ISSUE:

5

Motor Cars not used in business of running them on hire; and Plant and Machinery other than those covered in other Blocks (GENERAL RATE). Ships and Vessels Motor buses, lorries and taxis used in business of running on hire; Moulds used in rubber & plastic goods factories; plant & Machinery used in Semiconductor industry including circuits; (HIGHER/ACCELERATED RATE) Aero plane – Aero engines; Life- Saving Medical Equipments (….do…)

(6) (7)

In case of succession of proprietary, firm /LLP by a Co. or conversion from Co. to LLP or Amalgamation or demerger : “Depreciation” will be available to predecessor & successor in the ratio of no. of days assets were used by them.

Amount of investment allowance will be deemed to be income

Building (1)

(II)

Sec. 32AC (1A) :

(a)

For the purpose of this sub-section, the expressions “assets” shall mean – 

(I)

 Miscellaneous

him

I n T ea co

depre. at prescribed rate deemed to be wholly allowed





Note 5 to 12

Note 1 to 4

under the Act. (2) Actual Cost u/s 43(1): Actual cost to the Assessee (-) Portion of cost met directly or indirectly by other party = Actual Cost Expl 10 to S 43(1) : Subsidy, Grant or reimbursement by CG/ SG relatable to the asset acquired to be reduce from the cost. However, above expl does not cover Waiver of Loan then, also it can squarely fall into the trap of above defn. of “Actual Cost” sec. 43(1) i.e. part of cost met by the other person. Because, in books of accounts treatment would be Cost / WDV Less Loan Waived.

3

Cases where Actual cost are not so actual :Expl. To Sec. 43(1) 1 2 3

4

4A

5

6 & Exp. 2 to section 43(6)

Expl. 2C to S. 43(6) 7 & Expl. 2 to Sec 43(6)

7A

8

9

10

Actual Cost Sec 35D [Quantum of Deduction of Preliminary Exp ns]

Asset acquired for scientific research subsequently brought into business use Asset acquired by way of gift or inheritance Asset acquired at higher price from any other person using the asset for his business or profession with a view to claim depreciation on enhanced cost and reduce tax liability Asset once belonged to the assessee which was used by him for business & is transferred and reacquired by him Asset acquired by an assessee from another person who had claimed depreciation on such asset and the asset is leased back to such other person Building used for private purpose subsequently brought into business use.

Asset transferred by a holding Co. to its subsidiary Co. or by a Subsidiary Co, to holding Co. if the following two conditions are satisfied:(i) Shares of the subsidiary Co. should be wholly owned by the holding co. or its nominees. (ii) The transferee co. should be an Indian company. Note:  If transferor company was not claiming depreciation since it was not used for its business, then the actual cost to the transferee company shall be the actual cost to the transferor Company. Block of assets transferred by a private Company to LLP Transfer of asset in a scheme of amalgamation by amalgamating company to amalgamated Indian Company. Note: If amalgamating Company was not claiming depreciation since it was not used for its business, then actual cost to the amalgamated company shall be the actual cost to the amalgamating company. Asset transferred by a demerged company to the resulting Indian Company. Asset acquired out of borrowed funds

Asset acquired subject to levy of excise duty or customs duty in respect of which CENVAT credit is availed.

A portion of the cost of an asset acquired is met directly or indirectly by Government or any statutory authority or any other person in the form of a subsidy or grant or reimbursement.

11

Asset brought into India by a Nonresident assessee or a foreign company for use in his business or profession.

12

Any capital asset acquired under scheme of corporatization of a recognized stock exchange in India, approved by SEBI.

13

B. Sec 35 D : Preliminary Expenditure

Mode of Acquisition

Actual cost of capital asset has been allowed as deduction under section 35AD and capital asset is transferred by way of transactions referred to in section 47.

Actual cost less deduction availed u/s. 35

OR Non-corporate assessee  Specific expenditure (5) OR 5% of cost of project

Actual Cost to the previous owner minus depreciation actually to him. Actual cost to be determined by the Assessing Officer with prior approval of JointCommissioner.

= Qualified Amount  1/5th

Corporate Assessee [Not being a foreign Co.] Compare Qualified

OR

amount

Higher  Qualified Amount

OR

 Lower  1/5th

Specified Expenditure

The WDV at the time of original transfer or the price paid for reacquiring the asset, whichever is less. The written down value of the asset to the transferor at the time of transfer to the assessee.

1. 2.

3.

The cost of purchase or construction of the building as reduced by the notional depreciation calculated up to the year of bringing the asset to business use at the depreciation rate applicable to that year. WDV to the transferor company will be adopted as the actual cost to the transfereecompany.

The deduction u/s 35D depends upon the scalability of the project or the quantum of the capital employment in the business higher the project cost or capital employed shall result into a higher claim of deduction u/s 35D Section 35D provides for the events or activities in respect of which expenditure incurred shall qualify for deduction u/s 35D  any expenditure incurred as a result of or in connection with such event or activity will qualify as an eligible expenditure u/s 35D. Accordingly advertisement expenditure incurred as a result of the market survey report shall also qualify as deduction u/s 35D. In respect of a Co. the event of issue of shares for public subscription is an eligible activity in relation to which any expenditure incurred shall quality for deduction u/s 35D. for e.g.:- fee paid to the banker to the issue / Merchant Bankers / Share registry transfer agents / underwriting agents towards public subscription process of the shares of the co. shall be eligible for deduction u/s 35D. The above list is only illustrative & not exhaustive.

Scope of Section 35D Phase I  Newly setup business / profession

AND

Phase II  Expansion of business / Profession OR New line 

Same line  e.g.: PA hired agents to know the no. of students pursuing CA in Chennai The report said 50 students  PA did not open a branch in Chennai but still had to pay mkt survey expenditure. Such expenditure shall be eligible for deduction.  Yes u/s 37(1)

WDV of the block of assets in the hands of unlisted Company. WDV to the amalgamating company will be adopted as the actual cost to the amalgamatedcompany.

e.g.: Assessee is currently in the business of steel now proposing to set up a new business of cement. For starting the business it incurred Rs.25lakhs towards feasibility of new project but did not get license to operate at the end.  Whether Rs. 25L can be claimed by steel?  If license not   No cement recd division will claim u/s 35D if  Sunk cost license recd

Section 35D also applies to expansion of business or profession. The expansion can be either in the same line or a separate line of business. It is an imp. principle of computation that each business shall be computed separately to arrive at the income even though such sources of income falls under the same head.  The computation under the head B&P shall be undertaken for each business separately.  Where the specified expenditure is incurred to the new line of business then its deduction shall be available only on the commencement of such new business. Conversely put, if the new business has to be aborted & it was never commenced then the specified expenditure cannot be allowed as deduction from the income of the existing business  they are distinct to each other. However, if the expansion is sought to be in the same line of business then the treatment of such specified expenditure shall be as under: Specified expenditure (5+3)

Actual cost shall be the written down value in the hands of the demerged company. Interest on loan borrowed relating to the period after the asset is first put to use shall never form part of actual cost. So much of the duty in respect in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944 shall not form part of the actual cost. So much of the cost as is relatable to such subsidy or grant or reimbursement shall not form part of the actual cost. If subsidy is not directly relatable to the asset acquired, but subsidy is with reference to the assets then the subsidy shall be proportionately reduced from the actual cost of the assets with reference to which subsidy has been granted. Actual cost as reduced by the amount of depreciation calculated at the rate in force as if the asset was used in India since the date of acquisition. The amount, which would have been regarded as actual cost, had there been no such corporatization shall be deemed to be the actual cost. The actual cost of such asset to the transferee shall be NIL.

Whether the

Posco Ltd. set up a manufacturing unit in Hyderabad of Telangana on 1

st

Allowed u/s 35D  1/5

No Not capital in nature 

Expenditure u/s 37(1)

The deduction in section 35D or sec 37(1) as the case may be shall still be made available even though the expansion in the existing business could not be commenced. Further it is pertinent to note that the provision of sec 35D is enabling provision & not a disabling one.  Where a full deduction is otherwise allowed under any other provision of this head then it shall be allowed as deduction in that section. This situation is possible only when the expansion is in the existing business which does not involve an increase in the capital field. Specified expenditure. New setup of business  Expenses in connection with issue of: Shares

 Sec 35D

Debentures  Sec 35D

Expansion of business Existing line

 Expenses in issue of

New line

 Expenses in issue of

Shares Debentures Shares Debentures     Sec 35D Sec 37(1) Sec 35D Sec 35D  It can be observed that where there is an increase in the capital field of the business then expenditure incurred is a capital expenditure &  an expansion of business or a new setup of business shall be governed by the provision of section 35D towards the eligible expenditure. Money borrowed through issue of debentures to expand the business does not increase the capital field & hence expenditure on its issue shall be allowed as deduction u/s 37(1) if it is in relation to an expansion in the existing line of business.  Although the expenditure on issue of debentures is not capital in nature it cannot be covered u/s 37(1) if it is incurred before the commencement of the new business & hence outside the scope of chargeability u/s 28(i). Its deduction is allowed & regulated by express provision of sec 35D which enables the deduction that was otherwise not allowed.

 April, 2015. The company invested `

rd

 March, 2015 & another ` 20 crore in acquisition of

st

plant & machinery on 21  December, 2015, out of which ` 10 crore was second hand plant & machinery. The new plant & machinery were installed & put to use on the date of acquisition. You are required to calculate the depreciation allowable u/s 32. Discuss whether Posco Ltd. would be eligible for any other benefit in respect of such investment in plant & machinery. What would be the position if such manufacturing unit is set up by Posco & Co., a firm, instead of Posco Ltd ?

Capital expenditure Yes

expansion is in the capital field?

ISSUE : 20 crore in acquisition of new plant & machinery on 3

5% of cost of Project

CA Durgesh Singh ©

4

C. Capital Expenditure Sec 37(1) GENERAL DEDUCTION

 –

Any expenditure

Not being capital in Nature shall be allowed as deductions provided it is incurred wholly and exclusively for the purpose of business & profession

Sec. 30, Sec.31 RENT, RATES, TAXES, INSURACE, REPAIRS OF BUILDING Sec.30: - Premises should be occupied by the assessee either as tenant or as owner (except in case of Rent). Current

repair  (not being in the nature of capital (expenditure), local taxes, municipal taxes, and insurance

Repairs and Insurance of Plant, machinery and furniture Sec.31: - The asset should be used for purpose of business and profession current repairs (not being in the nature of capital expenditure) is allowed

“The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by in Atheerton v. British Insulated and Helsby Cables Ltd. [1925] to TC 155, 192 (HL) where the learned Law Lord

stated: “…… When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an

advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite con clusion) for treating such an expenditure as properly attributable not to revenue but to capital.”  Is expenditure incurred for Not a Capital construction of expenditure transmission lines by the assessee for supply of power to UPPCL by the assessee deductible as revenue expenditure?

Where the assessee Not a Capital company came into expenditure existence on bifurcation of a joint venture company , can the amount paid by it to the JVC for use of costumer database and transfer of trained personnel be claimed as revenue expenditure?

Following the principle of law laid down by the SC in Empire Jute Mills case, the Allahabad High Court , in held that the expenditure which was incurred by the assessee in the laying of transmission lines was clearly on the revenue account. The transmission lines, upon erection, VESTED ABSOLUTELY IN UPPCL. The expenditure incurred which was incurred by the assessee was for AIDING EFFICIENT CONDUCT OF ITS BUSINESS since the assessee had to supply electricity to its sole consumer UPPCL. THIS WAS NOT AN ADVANTAGE OF A CAPITAL IN NATURE. Hence it was allowed as deduction. The Karnataka HC observed that expenditure incurred for use of customer database DID NOT RESULT IN ACQUISITION OF ANY CAPITAL ASSET. The assessee got the right to use the database AND THE COMPANY WHICH PROVIDED THE DATABASE WAS NOT PRECLUDED FROM USING SUCH DATABASE. Hence the expenditure incurred is a revenue expenditure. As regards payment for obtaining trained and skilled employees, it was held that the joint venture company spent lot of money to give training to employees who were transferred to the assessee company. They were trained in the field of software. They have opted for employment with the assessee company, and for their past services with the joint venture company, expenditure has been incurred. In effect, the payment made by the assesseecompany was towards expenditure incurred for their training and recruitment. Therefore the expenditure cannot be termed as capital expenditure though the benefit may be of enduring in nature.

In the case of conversion of a firm/proprietorship into a company, for the remaining period.

(iv)

In case of conversion of company into LLP, for the remaining period.

(v)

No deduction shall be allowed under any other provisions of this Act.

Section 36:- Other deduction ➢ Health Insurance premium paid by any mode of payment other than cash by an employer on health of his employees under a scheme. (ii) ➢ Bonus or commission paid to an employee for services rendered (not otherwise have been payable to him as profit or dividend). ➢ Deduction is subject to the provisions of sec. 43B and Sec. 40A (2). (iv) ➢  Contribution made by employer to recognized provident fund/ approved superannuation fund. (v) ➢ Sum paid by employer towards an approved gratuity fund set up for benefit of his employees. (va) ➢ Sum received by assessee from his employees as contributions to Provident Fund or Employee State Insurance Fund or Superannuation fund of any other employee-welfare fund. ➢  Such sum received by the assessee is first treated as income under Section 2(24)(x) and thereafter, deduction is allowed in respect of such sum if the relevant conditions are satisfied. ➢ Expenditure incurred bona fide by company for promoting family (ix) planning amongst its employees. ➢ Extent of deduction and period: (a) Where expenditure is of revenue nature: 100% in the previous year in which it is uncured. (b) Where expenditure is capital in nature: 1/5 th  of such expenditure deductible in 5 consecutive previous years beginning with the previous year in which the expenditure is incurred. (iva) ➢ Contribution made by employer to employees pension scheme referred to in S.80CCD shall qualify for deduction w.e.f. AY 2012013

(2) (ib)

premium of building are allowed.

Lord Cave,

(iii)

Addln. CIT v. Dhampur Sugar Mills (P.) Ltd (2015) (All.)

(ii)

In the case of amalgamation or merger of an Indian company, deduction will be available in hands of Transferee Company, for the remaining period.

Such sum should be credited by the assessee to the employee’s account in the relevant fund(s) on or before the due date. ➢  Due Date means date by which the assessee is required as an employer to credit an employee’s contribution to his account in the relevant fund(s) under any law, standing order, award, contract of service or otherwise. ➢ Any unabsorbed family planning expenditure is carried forward and set off in the same manner as unabsorbed depreciation. ➢ No depreciation allowable under section 32 if deduction has been claimed here. ➢ Tax treatment is case of sale of such asset: Same as in Section 35.

➢ MAXIMUM

amount allowed 10% of salary. Salary shall include DA (in terms of employment), but will exclude all other allowances and perquisites.

However, the following shall be allowed as deduction: “Any provision made by the assessee for the purpose o f payment of a sum by way of any contribution towards an approved gratuity fund”. (This is however subject to Sec. 43B). (4)

Disallowance in respect of contributions to non-statutory funds Sec. 40A(9): Any sum (including contribution) paid to Non-statutory / unrecognized welfare funds is not deductible except where such sum is paid as per provisions u/s 36(1)(iv)/(v) or under any other law for the time being in force.

ISSUE: Can employees contribution to Provident Fund and ESI be allowed as deduction where the assessee-employer had not remitted the same on or before the “due date” under the relevant Act but remitted the same on or before the due date for filing of ROI u/s. 139(1)? Decision : The Gujarat HC in Gujarat State Road Transport Corpn (2014) h as held that Section 43B(b) pertaining to employer’s contribution cannot be applied with respect to employees contribution which is governed by Section 36(1)(va) . Note: Contrary decision is provided by other HC.

Provisions for employees under B & P.

1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal installments for each of the 4 immediately succeeding previous years.

Deduction is subject to the previous of Section 43B.

➢

40A(7):- No deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination for any reason.

(1) (2) (3) (4)



➢

As regards Sec. 36(1)(ii), the recipient directors were not entitled to receive the amount as commission in lieu of bonus or dividend . The dividend is paid to all the shareholders and the recipient directors were not the only shareholders of the company. The payment of commission , hence , cannot be taken as payment of dividend.

D. Expenditure Relating to Employee Sec. 35DDA: Amortization of expenditure incurred under voluntary Retirement. 36 (1)(ib): Premium on Health insurance of employees paid by the employer. 36(1)(ii):- Bonus or commission paid to employee. 36(1)(iv)/(iva)/(v): Employers contribution to recognized PF or approved superannuation or gratuity fund. (5) 36(1)(va):- Employee contribution to PF/SA/ESIC deposited before due-date. (6) Sec. 43B:- Deduction allowed on payment basis. (7) 36(1)(ix):-Deduction on family planning expenditure. (8) Rule 6DD:- Exception to sec. 40A(3). (9) 40A(7):- Provision for gratuity disallowed. (10) 40A(9):- Contribution to unrecognized funds disallowed. (11) Sec. 37(1):- General Deductions. (1) 35DDA: Amortization of expenditure incurred under voluntarily retirement scheme:(i) Where an assessee incurs any expenditure in any previous years by way of payment (whole or in installment) of any sum to an employee at the time of his voluntary retirement in accordance with any scheme of voluntary retirement.

Scheme must be  –(a) framed by GIC and approved by central Government, or (b) framed by any other insurer and approved by IRDA ➢ Voluntary payments are deductible if it is for services rendered. ➢  Any bonus exceeding the statutory amount is allowed if such excess payment has been made on account of commercial expediency. ➢ Deduction is subject to the provisions of Section 43B.

ISSUE: The assessee a listed company wanted some credit facilities from the bank for its business purpose. The banker insisted on personal guarantee of the directors as a pre-condition for providing financial assistance to the company. The directors were employees (as well as shareholders) of the company . A resolution was passed for paying commission to the directors and a sum of Rs. 24.37 lakhs each was paid as commission calculated at the rate of 1.5 % of the principal sum, in respect of which personal guarantee was furnished by the directors to the bank. The AO applied Sec. 36(1)(ii) and held that if the amount was not paid to them as commission, the same would have been payable as profits or dividend. Decision: The Delhi HC in Control & Switchgear Contractors Ltd. (2014) observed that the act of providing personal guarantee was clearly beyond the scope of the services of the Directors as the employees of the company. The assessee company ,in its commercial wisdom, had agreed to pay commission for such guarantees by passing the resolution to that effect. In such case the AO only has to determine whether the transactions are real and genuine.

(3)

IBM GLOBAL SERVICES P. LTD (2014) (Kar.)

➢ Such

CA Durgesh Singh ©

5

Rule 6DD:- Exception to section 40A(3):-

(5)

business and profession. The following cases are covered u/s 37(1).



where any payment is made to an employee of assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of g ratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sum payable to employee or his heir does not exceed Rs.50,000.



Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax at source, when such employee is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship, and does not maintain any account in any bank at such place or ship.



The assessee issued long term debentures to mutual funds and financial Institutions, with a difference between issue price and amount payable on maturity. Such difference could not be strictly described as interest on borrowing in view of the fact that debentures are freely transferable and there is no lender  – borrower relationship between the issuing institution and the holder of debenture bonds. The amount is also payable only on maturity and not on year to year basis, though accounting requirement would require provision to be made on proportionate basis. If it were treated as interest, such amount would require tax deduction at source and also to be covered u/s 43B, so as to be deductible only in the year of payment. The CBDT has classified that no tax need be deducted in such cases.



Interest paid on partners capital is allowed as deduction in the hands of the firm u/s 37(1) r.w. & 40(b).



Interest on unpaid arrears of salary is allowable u/s 37(1).



Interest payable under tax law

Other situations of Rule 6DD (A)

(B)

Remote areas:-



where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such product.



where the payment is made in a village or town, which on the date of such payment is not served by any bank

Bank / Govt.:



(6)



where the payment is made to RBI, any banking company, State Bank of India or its subsidiary banks, any co-operative bank or land mortgage bank, any primary agricultural credit society or any primary credit society or the Life Insurance Corporation of India;

towards late payment of



where the payment made to the Government is required to be made in cash;



where the payment is made through any bank, including foreign bank, by any of these modes (i) any letter of credit arrangements; (ii) a mail or telegraphic transfer; (iii) a book adjustment between banks; (iv) a bill of exchange made payable only to a bank; (v) Electronic clearing system; (vi) a credit card; (vii) a debit card;



where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;



where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.

TAXES

or Indirect taxes

37(1): Expenditure not covered u/s 30 to sec. 36 shall be allowed as deduction if, interalia, it is incurred for the purpose of business & profession

Note: (1) If an expenditure is specifically covered u/s 30 to 36 and the conditions therein are not satisfied then such expenditure cannot be qualified for the purpose of deductions u/s 37(1). For e.g.: (2) The deduction u/s 37(1) is in respect of an expenditure which is “wholly and exclusively” for the purpose of Business and profession. The AO disallowed an ex-gratia payment to the employee on the ground that there was no contractual obligation, therefore such expenditure cannot be considered exclusively for the purpose of business & profession. The Apex court in a landmark decision in Sassoon J. David has held that AO should not sit in the chair of assessee & to determine whether particular expenditure is for the purpose of business or not. (3)

(*)

Direct taxes

Allowed u/s 37(1)

Not allowed, since it

Since it is

cannot be said for the

compensating in

purpose of business

nature

and profession (*)

However Interest on Direct tax refund is chargeable under the head IFOS.

Staff welfare Expenses

Note 3 :Donation of bus

Club facility

to a school where

Amount borrowed

Recreation

Travelling exps.

Higher exps.

facility

Of Spouse

borne by Co. on

children of

Subsequently used for –

the Sp. employee

employees’ are enrolled  

Provided to all the

X



X

Necessary

employees/Substa

specified

ntial pool of

employees

for purpose of B&P

No

When the

When it is in

necessity

domain of

different domain

education is

altogether, not

in line with

related to

the business

business

employees

(1) acquiring capital asset = For the purpose of B & P, subject to the proviso. (3) Investment in subsidiary :

X Few

(1) working capital = for the purpose of B & P

of the Co.

To gain effective control

For Carrying on

in the existing business

Independent business

 for the purpose of B &

No deduction



P, hence deduction

E. Deduction of Interest Expenditure

(4)

diverted to Sisters concern

 Whether commercial expediency could be established by assessee?

Specific deduction u/s 36(1)(iii) 1.

the amount of the Interest paid in respect of capital borrowed

2.

for the purposes of the business or profession

3.

Yes

No

provided that (Amended FA 2015)

 Int. on borrowed money shall

 Int. shall be

any amount of the interest paid,

be allowed as deduction even

disallowed.

if the money has been

in respect of capital borrowed

advanced to Sister concern at

for acquisition of an asset

a concessional rate of Interest

for extension or otherwise

r (5) diverted to director / partners  for purpose of B&P

of existing o r New business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use,

(6)

shall not be allowed as deduction . Note 1 Amt borrowed for acquiring asset (Amendment FA 2015 )

for expansion

OR

DT

IDT

(x)

(v)

(7) towards payment of Dividend = for the purpose of business and profession

OR

Existing business

towards payment of statutory dues

New business . otherwise

ISSUE The assessee is a public limited company engaged in the manufacture and sale of synthetic yarn and cement It stood as guarantor to the loans taken by its subsidiary company. The subsidiary company incurred heavy losses and as a result became a defaulter in paying its

Proviso.to section 36(1)(iii)

debts. The assessee was a guarantor to the loans taken by the subsidiary company for the purpose of protecting its own business interest. Since the subsidiary company could not adhere to the repayment of its liabilities, the assessee-holding company started repayment of

Up till the asset is put to use the Int. exps. shall be not be allowed as deduction. It may be capitalized as per CSM case or as per Explanation to Sec.43(1).

loan installment on behalf of subsidiary company and claimed Rs. 8 lakhs, being interest paid, as deduction u/s. 36(1)(iii). The claim of the assessee was rejected in assessment. Decision: JK Synthetics Ltd. (2014)(All.)

Thereafter it shall be allowed as deduction, since the apex court in India cements Ltd. case has held that the loan obtained has been used for the purpose of business and profession.

The HC made a reference of the Apex court ruling in Madhav Prasad Jatia where the expression “for the purpose of business” occurring in section 36(1)(iii) was held as wider in scope than the expression “ for the purpose of earning of proifts “ . The Apex cou rt observed that where a holding company has a deep interest in its subsidiary and the same is used by the subsidiary for its business purposes, the lending-holding company would be entitled to deduction of interest on its borrowed loans. It was thus held by the HC that the claim for

Note 2 :  Section 36(1)(iii) provides for deduction of Interest in respect of capital borrowed. However Interest exps. incurred otherwise than by way of borrowings shall be governed by the provision of sec. 37(1), which allows deduction of any expenditure not being capital in nature; not being personal in nature; and incurred wholly & exclusively for the purpose of

deduction is allowable.

6

(xv)

➢

(xvi)

Deduction of Commodity Transaction tax

F. CERTAIN DEDUCTIONS TO BE ALLOWED ON ACTUAL PAYMENT [Section 43B]: ➢

Notwithstanding anything contained in any other provision of the Act, the following sums shall be allowed as deduction only on actual payment irrespective of the previous year in which the liability arose:(a)

Any tax, duty, cess or fee, for which assessee incurred liability in the previous year, under any law; or

(b)

Contribution by assessee-employer to any Provident Fund or Superannuation or gratuity or other

35DD

Bonus or commission to employees for services rendered, as referred under section 36(1)(ii); or

(d)

Sum in lieu of any leave at the credit of his employee (Leave Encashment); or

(e)

Interest on any loan or borrowing or advances from(i)

Any Public Financial Institution (e.g. ICICI, IFCI, IDBI, LIC, UTI etc.); or

(ii)

State Financial Corporation, or State Industrial Investment Corporation; or

Consequential to new levy of CIT, FA 2013 allows deduction of sum paid as CTT in respect of the taxable commodities transactions entered into in the course of his business during the previous year, if the income arising from such transactions in included in the income computed under PGBP.

Amortization of expenditure in case of amalgamation or demerger: 1. Where an assessee, being an Indian Company, incurs any expenditure; on or after the 1 st of April, 1999, wholly and exclusively for the purpose of amalgamation or demerger of undertaking the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the fifth successive previous year in which the amalgamation or demerger takes place.

employee-welfare fund; or (c)

Securities transaction tax (STT) paid by the assessee in respect of t he taxable securities transactions entered into in the course of his business during the previous year. (Amdt. By Finance Act, 08 w.e.f. 1-4-2009)

2. No deduction shall be allowed in respect of the expenditure under any provision of this Act.

(iii) Scheduled bank

General deduction Sec 37(1)

No deduction for interest converted into loan / borrowing / advance : Any interest falling under (e) above, which has been converted into a loan or borrowing or advance shall not be regarded as actually paid and shall not be allowed as deduction. (Explanation) Manner of deduction: The expenditure shall be allowed as deduction in the following manner:Case If the sum relates to any previous year for which payment has been or before the due date of furnishing the Return of Income of that year In any other case Case Laws and Circulars: (1)

Year of allowance In the previous year to which it relates In the year of payment.

Interest converted into loan / borrowing shall not be allowed as deduction. However, when such interest converted into loan / borrowing is actually paid, the same shall be allowed as deduction. [Circular No. 7/2.006 dtd. 17-7-2006] Eg: A had taken loan of Rs. 2,37,81,000 on 31-3-2008, on which interest unpaid upto 31-3-2010 is Rs. 35,90,000. In restructuring arrangement, the unpaid interest of Rs. 35,90,000 is converted into Funded Interest Term Loan (FITL), which is shown separately from original loan and no interest is chargeable on FITL. This FITL is to be paid in eleven instalments of Rs.3,26,364/- each from 0104-2015. In this case, instalment of FITL of Rs. 3,26,364/- shall be allowed u/s 43B in the relevant assessment year when it is actually paid. The interest on the original principal of Rs. 2,37,81,000/-, if any, actually paid will be independently allowable under section 43B.

(2)

(3)

If the sales tax laws of the state provide that deferred sales tax is to be treated as actually paid, it will be treated as such under this Section. Further, in case unpaid sales tax is deemed as actually paid and disbursed as loan by the State Government, then, deduction will be allowed in the previous year in which such conversion is permitted. [Circulars No. 496 dt. 25-9-1987, and 674 dt. 29-12-1993] Royalty is a tax for all purposes including section 43B. [Gorelal Dubey v. CIT [2001]248 ITR 3 (SC)]

(4)  Advance payment before a ccrual  –  deductible on accrual basis only:  Advance payment towards sales tax excise duty, before incurrence of liability thereof, is deductible in the year in which the same is adjusted towards excise duty and sales tax liability and not in year of a dvance payment. Section 43B is a provisions of disa llowance; it doesn’t enable an assessee to claim deduction of an amount, which was otherwise not deductible. [DCIT. V. Amforge Ind. Ltd.[2001] 79 ITD 49 (ITAT –  Mumbai)] (5)

Interest on sales tax allowable on payment basis only: Interest accrued on delayed payment of sales tax under the State sales-tax Act is a part of ‘tax’ within the meaning of section 43B and, hence, the same is allowable only when the same is actually paid – Shree Pipes v. DCIT [2007] 162 Taxman 442 (Raj.)

G. OTHER DEDUCTIONS ALLOWABLE UNDER SECTION 36(1): In the computing the income referred to in section 28, the deductions provided for in the following clauses of section 36(1) shall also

Any Expenditure 

Not being expenditure of the nature described in section 30 to section 36 and



Not being in the nature of capital expenditure (Note 1)



Not being in the nature of personal expenses of the assessee (Note 2)



Laid out or expended wholly and exclusively for the purpose of the business or profession

Shall be allowed in computing the income chargeable under the head “PGBP” Explanation 1 :- For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction shall be made in respect of such expenditure. (Note 3) Explanation 2:- Finance Act 2014:For the removal of doubts, it is hereby declared that for the purpose of section 37(1), any expenditure incurred by an assessee on the activities relating to CORPORATE SOCIAL RESPONSIBILTY referred to in section 135 of the companies Act 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. Note 1 :- Whether the following expenditure is a capital expenditure? Particulars Court 1. Amount paid to clubs for obtaining membership . Kar. HC

2. Expenditure towards acquisition of the ISO-9001 certification. 3. Expe nditure towards repair of existing road in its factorypremises. 4. Amount paid for customizin g the software according to new requirement which involved only a modification of the existing software. 5. Expenditure on display of glow sign and neon sign. Expenditure on production of a television film for advertisement purpose.

Kar. HC

Decision Not a capital expenditure even though such amount is capital receipt in the hands of club. Not a capital expenditure.

P & H Not a capital expenditure. HC P & H Not a capital expenditure. HC P & H Not a capital expenditure. HC

Note 2:- Legal expense / cost incurred in Civil cases (e.g. defending a show cause notice under excise) shall be allowed as deduction. However expenses incurred by a person exercising a trade or profession in defending him in a Criminal prosecution, which arises out of his business or professional activities, cannot be deducted as business expenditure in computation of his business income (SC). It is pertinent to note that CBDT has issued a circular whereby legal cost incurred in defending the assessee in an Income tax proceeding shall be allowed as deduction.

be allowed in respect of the matters dealt with therein  – Note 3 :- Explanation to sec. 37(1), was inserted by the Finance Act 1998 with retrospective effect from 1-4-1962, provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be allowed as deduction. Needless to state that in all such cases, the question whether there is an infraction of law, or whether the expenditure is incurred for any purpose which is an offence or which is prohibited by law is to be decided by the authority or the court empowered to do so under the respective law and not by the income-tax authorities.

36(1) (i)

Deductions Expenditure

Conditions / Remarks

➢ 

Insurance premium of stock or stores against damage or destruction thereof.

➢

Such stock or stores are used for Business or Profession.

(ia)

➢

Insurance premium paid by Federal paid by Federal Milk Co-Operative Society on life of cattle owned by a member of a Primary co-operative society.

➢

Such primary society should be engaged in supplying milk raised by its members to s uch federal milk co-operative society.

➢

Discount on zero coupon bond calculated in prorata manner over the life of such bond.

➢

➢

Discount = Amount payable by issuer on maturity / redemption of such bond less Amount received or receivable on issue of the bond.

For computing life of the bond, if the month in which bond is issued

Deduction of fine, penalties etc ?

or is redeemed / matured is a part of the month, then such month

Penalty paid by the assessee in exercise of the option given to such assessee by the law or the statutory scheme is

shall be rounded off to the nearest one i.e. if s uch part is 15 days or

deductible because the law or the statutory scheme enables incurring of such expenditure in the course of the

more, it will be taken as one month, otherwise it will be ignored.

assessee’s business (SC). For example redemption fine paid to clear the goods from the customs port.

(iiia)

➢

(vi)

Life of bond = Period starting from the date of issue of the bond and ending on the date of maturity or redemption of such bond.

Not allowed as being prohibited by law ISSUE 2

Penalty arising out of contractual liability is again allowed as deduction as being incurred during the course of business & profession. However penalty imposed for an activity which is considered as an offence shall be disallowed since it shall fall within the scope of the explanation.

Loss in respect of animals, used for business or profession (otherwise than as stock-in trade), which have died or become permanently useless.

➢

➢

Revenue expenditure incurred by a notified corporation or a body corporate constituted or established under any Act.

➢

(xiii)

➢

Any amount of banking cash transaction tax paid by assessee during the previous year on the taxable banking transactions entered i nto by him.

what the doctor was claiming was not “expenditure” but a “business loss” and heroin formed a part of stock -in-trade of

(xiv)

➢

Any sum paid by Public Financial Institutions by way of contributions to notified Credit Guarantee fund for small industries.

legal principles and not one’s moral views. The strange irony of this decis ion is that expenditure incurred to

➢

Public financial institution has the same meaning as U/S 4A of Companies Act, 1956.

allowable as a business loss.

(xii)

➢ 

Zero coupon bond means a notified bond issued by any infrastructure capital company/ bank or public sector company, in respect of which no payment and benefit is received or receivable before maturity or redemption.

ISSUE 1 Deduction of secret commission / bribe?

Deduction allowed = [Actual cost of the animal  – Sale proceeds of carcasses of animals]

However interest on arrears or outstanding balance of sales tax is not penal but compensatory in nature and is therefore an allowable deduction (SC). ISSUE 3

Such expenditure should be incurred for objects and purpose authorized by the Act under which it was constituted / established.

Loss of stock-in-trade in an illegal business? Where heroin was seized from a doctor who clandestinely manufactured it, the explanation would not apply, since the doctor. The SC held in Dr. TA Quereshi that morality and law were different and that the case had to be decided on manufacture heroin will be disallowed under the Explanation to S.37 but if manufactured heroin is seized, it will be

H. BAD DEBTS

7 Treatment of Bad debts and its recovery.

Section 36(1)(vii) :- Subject to the provision of section 36(2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year shall be allowed as deduction in that previous year. Explanation:- For the purpose of t his clause, any bad debt or part t hereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.

2nd Proviso to Sec. 36(1)(vii) Amendment FA 2015 : The second proviso has been inserted in section 36(1)(vii) .It provides that if a debt becomes irrecoverable on the basis o f ICDS without recording the same i n the accounts, it shall be allowed as deduction in the previous year in which such debt becomes irrecoverable and it shall be deemed that such debt has been written off as irrecoverable in the accounts for the purpose o f section 36(1)(iii). Section 36 (2):- Conditio n for deduction u/s 36(1)(vii):- No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or o f an earlier previous year or represents money lent in the ordinary course of the business of banking or money lending which is carried o n by the assessee.

ISSUE 1:The assessee has paid advances to the raw material supplier, which was forfeited on cancellation of the contract . Whether the assessee would be entitled for deduction of such loss u/s 36(1)(vii)? Will your answer be different if the advances were towards supply of plant & machinery?

ISSUE 2:The Interest on bad and doubtful debt was recognized as income in the books of scheduled bank. S ubsequently the Interest amount is waived off by the bank. What is the tax Implication?

Interest

Bank (Lender)  (1) Income chargeable to tax in p.y. in which the amount recognized in the books or the year of receipt whichever is earlier. (Sec. 43D) (2) Subsequent waiver shall qualify for deduction u/s 36(1)(vii) rw. Sec. 36(2).

Borrower  Interest expenditure accrued / due shall not be allowed as deduction in view of the condition u/s 43B (allowed only on payment basis). Subsequent waiver shall not be chargeable u/s 41(1), since no deduction was allowed earlier.

41(4):- Deemed Income: Where a deduction has been allowed in respect of a bad debt or part of debt u/s 36(1)(vii), then, if the amount subsequently recovered on any such debt or part is greater than the difference between the debt or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income -tax as the income of the previous year in which it is recovered, whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not.

Case laws (1)

PK Kaimal (SC) An assessee, who claims bad debts and who recovers, must be same for application of section 41(4).

(2)

T veerabhadra Rao K Koteshwara Rao (SC) The deduction of bad debts is a deduction to the business and hence Bad debts of the predecessor in business can be written o ff and claimed by the successor as bad debts if it becomes irrecoverable after the successor has taken over. Appendix Section 41(5)

Set off of loss against incomes u/s.41[Section 41(5)]: If the business no lo nger exists and there are deemed profits as referred to under Section 41(1) or 41(3) o r 41(4) or 41 (4A) in respect of that business, any loss (not being speculation loss ) which arose in that business and profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year shall be set off against such deemed profits to the extent of such profits. ISSUE:Set off of losses against deemed income: Mr. X who’s all trading and speculation businesses were discontinued in previous year 2006-07 submits the following details for AY – 2009-10 (a)

Bad debts recovered Rs. 45,000 (out of which Rs. 20,000 relates to speculation business);

(b)

Mr. S, from whom he had obtained unsecured loan of Rs. 10,000 has remitted the same.

(c)

Trading business loss for AY 2006-07 and AY 2007-08 were Rs. 50,000 and Rs. 15,000 respectively.

Compute the income of Mr. X for the AY 2009-10. Solution: Remission of unsecured loans of Rs. 10,000 is not taxable, as unsecured loans were not allowed as deduction in any year. Bad Debts recovered of Rs. 45,000 will be t axable after allowing business losses (other than speculatio n losses) incurred in the year of discontinuance of business i.e. assessment year 2007-08 relevant to previous year 2006-07. Hence, income of Mr. X = 45,000 – 15,000 (being trading losses of assessment year 2007-08) = Rs. 30,000.

CA Durgesh Singh ©

Disallowance

8 General Disallowance

Specific Disallowance

Sec. 14A: Expenditure incurred in relation to Income not Includible in total Income:(1)

Sec. 40(a):



For the purpose of computing the total Income under this chapter (Note 1)

(1) PROVISIONS APPLICABLE FROM THE ASSESSMENT YEAR 2015-16  – If the following conditions are satisfied, the payer is supposed to deduct



No deduction shall be allowed (Note 2)

tax at source  –



In respect of expenditure incurred by the assessee (Note 3)

a.



In relation to (Note 4)

b.

in the hands of the recipient, it is chargeable to tax in India; and



Income which does not form part of total income under this Act. (Note 5)

c.

the aforesaid sum is payable outside India or to a non-resident/foreign company.

To highlight the above principle, let’s consider the following case.

the amount payable is interest, royalty, technical fees or any other sum (but not salary);

If these conditions are satisfied, tax is deductible under the Act. If there is a TDS default, disallowance provision would be attracted from the

“A Ltd., an Investment company received dividend i ncome of Rs.1,00,000 on its investment in shares. It Incurred interest expe nditure of Rs. 2,00,000 on the borrowed capital utilized in the Investment in shares: In the above case the dividend received of Rs. 1,00,000 from Investment in shares is exempt u/s 10(34). Section 10(34) provides that dividend

assessment year 2015-16 as follows-

• Case 1 (tax not deducted) – If tax is deductible but not deducted in the current year, the entire expenditure will be disallowed under section 40(a)(i). If tax is deducted in a subsequent year, the expenditure would be allowed as deduction in the year in which TDS is deposited.

referred to in section 115-O i.e. on which corporate Dividend Tax has been paid by the Domestic company is exempt in the hands of the shareholders.

• Case 2 (tax deducted but not deposited) – If tax is deductible (and if is so deducted) during the current year but TDS is not deposited till the due date of submission of return of income under section 139(1), the entire expenditure will be disallowed for the current previous year. If

Further u/s 14A(1), the interest expenditure of Rs.2,00,000 is not deductible in computation of total Income since such expenditure is incurred i.r.t.

tax is deposited in a subsequent year, expenditure will be deductible in the year in which TDS is deposited.

Income which does not form part of total Income. ISSUE: Note 1 Sec.14A is applicable to all heads of income. Note 2 The special bench of the Tribunal in cheminvest Ltd. V. ITO (Del.) has held that where the dividend is exempted u/s 10(34) of the Act and the interest is paid on borrowed capital utilized for purchase of shares, deduction is hit by section 14A of the Act, irrespective of the fact,



Whether the shares were held as investment or stock-in-trade



Whether the dividend income has actually been received or not during the relevant previous year.

Note 3:-

3 mth

3 mth

Divid. Investment

Record

in shares @

Date

Rs.115

Whether “other sum chargeable” refers to the whole sum being remitted or only the portion representing the sum chargeable to income-tax under relevant provisions of the Act? Answer: CBDT Circular No. 3/2015: As per Circular dated 2/2014, the board has clarified that in cases where tax is not deducted at source u/s. 195 of the Act, the AO shall determine the appropriate portion of the sum chargeable to tax, as mentioned in section 195(1), to ascertain the tax liability on which the deductor shall be deemed to be an assessee in default u/s 201 of the Act. As disallowance of amount u/s. 40(a)(i) of the Act in case of a deductor is interlinked with the sum chargeable under the Act as mentioned in section 195 of the Act for the purposes of TDS, the CBDT, in exercise of powers conferred u/s. 119 of the Act, hereby clarifies that for the purposes of making disallowance of “ other sum chargeable “ u/s. 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the of such disallowance and shall be determined by the AO . Thus whole sum remitted cannot be disallowed if only portion of the such sum is chargeable under this Act.

Rs.10 Transfer of shares at Rs.100

Note 4:- CIT V/S Kribhco (del.) (2012)

COMPLIANCE OF TDS PROVISIONS IN CASE OF A RESIDENT [SEC. 40(a)(ia)]  – With a view to augment compliance of TDS provisions, clause (ia) has been inserted in section 40(a). Any sum payable to a resident disallowed30 % of Exps case 1 & case 2of sec 40(a)(i) shall apply.

disallowed. He observed that the aforesaid expenditure had been incurred for earning of income u/s 80P of the Act and, therefore, has to be

• Whether section 40(a)(ia) is applicable in respect of expenses actuall y “paid” without TDS –  Tax is deductible under sections 193, 194A, 194C, 194H, 194-I and 194J either at the time of payment or at the time of giving credit to the recipient. However, section 40(a)(ia) is applicable only in respect of TDS defaults if amount is payable. If amount is actually paid and tax is not deducted under the above sections, section 40(a)(ia) is not applicable. Section 40(a)(ia) has to be subjected to strict interpretation. Going by the rule of strict interpretation, the default with reference to actual “payment” of expenditure would not entail disallowance. The aforesaid observation has now been upheld by different ben ches of

disallowed u/s14A.

Tribunal –

The Delhi HC observed that

• CBDT’s opinion on the aforesaid rulings of tribunal –  After careful examination of the aforesaid issue, the Board is of the considered view that the provision of section 40(a)(ia) would cover not only the amounts which are payable as on March 31 of a previous year but also amounts



Section 14A States that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is entitled to deduction under chapter VIA has to be excluded for the purpose of the said section.

which are payable at any time during the year. CBDT has clarified that in t he context of section 40(a)(ia) the term “payable” would include



The words “do not form part of the total Income under this Act” are significant and important. Before allowing deduction under chapter VIA we have to compute the Income and Include the same in the total Income. In this manner, the income which qualifies for deductions u/s 80C to 80U has to be first included in the total Income of the assessee.

December 16, 2013.



Section 80B(5) defines “gross total Income” to mean total Income computed in accordance with the provisions of this Act, before making any

on the interest component (which is part of “actual cost”) cannot be denied by invoking the provisions of section 40(a)(ia)— Sonic Biochem

deduction under this chapter (VIA). Therefore they form part of the total income but are allowed as deduction and reduced.

Extractions (P.) Ltd. v. ITO [2013 59 SOT 4 (Mum.).

The respondent – assessee is a Co-operative society. It has claimed deduction u/s 80P(2)(d) on dividend received from another Co-operative society. The AO did not disturb the said deduction u/ s 80P but relying upon sec. 14A held that the aforesaid income were not included in the total Income of the assessee and, therefore, expenditure under the head “Interest” and 1/8 of the employee benefits and remuneratio n should be

“amounts which are paid during the previous year”. Where any High Court decides an issue contrary to the ‘Departmental View’.   The ‘Departmental View’ thereon shall not be operative in the are a falling in the jurisdiction of the relevant High Court  – Circular No. 10/2013, dated

• Whether disallowance applicable in case of capital expenditure – If loan is taken to finance the purchase of a capital asset, interest liability (pertaining to the period till the asset is put to use) can be capitalised. If there is a TDS default under section 194A for such interest, depreciation

• Income Tax & Wealth Tax.

Issue -1

Expenditure in excess of Rs. 20,000 AGGREGATE IN A DAY paid otherwise than by account payee c heque drawn on a bank or account payee bank draft  – Not allowable [Section 40A(3):   In case- (a) assessee incurs an

1.

Amount of Rs.1,50,000 contributed to Employees Welfare Trust.

expenditure over Rs. 20,000, which is allowable & claimed as deduction, and (b) payment of which is made in a day otherwise than by way of account payee cheque drawn on a bank or account payee bank draft (i.e. by way of cash or bearer cheque / draft or crossed cheque / draft), then, whole of such expenditure shall not be allowed as deduction.

2.

Amount of Rs.15,00,000 paid for college fee and hostel expense for the MBA course of a close relative of a director.

Subsequent Payment: If any expenditure has been claimed as deduction on accrual basis in any previous year and subsequently, in any previous

3.

Amount of Rs. 3,00,000 incurred on installation of a traffic signal, so as to facilitate its employees coming to office to overcome traffic jam

year, payment thereof is made otherwise than by way of account payee cheque drawn on a bank or account payee bank draft in ex cess of Rs.

4.

Amount of Rs. 5,00,000 on the gift articles distributed to various dealers under sale incentive scheme.

20,000, then the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-

5.

Expenses of Rs. 5,00,000 incurred on the travelling of the wife of Managing Director who accompanies him on a tour to U.K. on the invitation of the Trade and Commerce, London

tax as income of the year in such payment is made. [Amendment by the Finance Act, 2007 w.e.f. 1-4-2008]

6.

Amount of Rs. 3,00,000 paid on 11.5.2015 consequent upon change in currency rate due to exchange fluctuation in excess of the amount due to the suppliers of machinery.

The Net Profit of ‘Simran Ltd’ for the year ended 31.3.2016 is arrived at Rs.50 lacs after debit of the following :

Following further information are also provided by the company. a.

Both the employees and employers contribution towards PF amounting of Rs. 2 lacs each for the month of March, 2016 were deposited on 1.7.2016.

b.

Provision for audit fees of Rs. 5 lakhs made in the books for the year ended 31.03.2015 was paid to the auditors in September, 2015 after deduction tax u/s 194J and the tax so deducted was remitted by 7.10.2015.

c.

A contractor who carried out repairing work in the office was paid In cash on 25.9.2015 by two vouchers No. 175 of Rs. 17,000 and No. 180 of Rs. 8,000.

d.

TDS made out of payment of interest of Rs. 1 lakh in February, 2016 and of Rs. 2 lakhs in March, 2016 was remitted to the Government in July, 2016.

LATEST AMENDMENT  – Disallowance u/s 40A (3) for cash payments exceeding Rs.35,000 in case of assessee engaged in the business of plying. Hiring of leasing goods carriages. W.e.f. 1 st October 2009, in case of payment made for plying, hiring or leasing goods carriage, disallowance will be made if the payment is made in excess of Rs.35,000 otherwise than by way of account payee cheque or account payee bank draft in a day to any person. However the existing limit of Rs. 20,000 for all other persons shall continue.

Compute the income chargeable to tax in A.Y. 2016-17 and work out the amount of tax payable on such income.

CA Durgesh Singh ©

9

(1) Withdrawals of amount: Amount can be withdrawn only for the purposes

(2) Audit: The Accounts of assessee’s are required to be audited by a Chartered

specified in the scheme. The amount utilized out of such deposit account in accordance with

Accountant and a report thereof is to be furnished along with the return of income. If

the scheme shall not be allowed as deduction in computing income chargeable under head "Profits and gains of business or profession".

accounts have already been audited under any other law, then only a further report in prescribed form is to be furnished along with such Audit Report.

PART (A) PHASE I

Research expenses Direct

Revenue : Salary to scientist Capital : Equipment

Particulars (1)

Indirect

Success  PHASE II

Activity

Quantum of Deduction

Expenditure 3 years before commencement of business (a)

Capital Exp.

(excl land)

(b)

Salary

(excl perquisites)

(c)

Purchase of materials

u/s 35(2):100% Revenue exp.

(2)(a) Revenue exp. on research Research Division  Research Revenue Expenses capital Direct Indirect Assesse based deduction 

Business Division  Production of medicine & sale  Receipts xx ( –) Expenses (xx) (i) Sec. 35 (xx) (ii) Sec 35(Phase 1) (xx) PGBP Xx

(b) Capital expenditure on research (except cost of land) (3) Expenditure (Revenue or capital but not having cost of land & Bldg) on specified research of manufacturing activity approved by prescribed authority

PART B

Tax treatment in the hands of donee. 

Assessee (Donor) engaged in B & P

Assessee (Donor) not engaged in B & P

Deduction of amt donated

1.75  University / college / institution for scientific research

 Sec 35(ii)

1.25  (a) social science or statistical research to research association  Sec 35(iii) (b) sum paid to COMPANY having main object “scientific research” Sec 35(iia)

2  National laboratory / university / IIT  Sec 35 (2AA)

Taxation of trust & specified Institution / fund (Discussed later)

(*) 80G

80GGA

(*) 80GGB







Sec.80GG(*) 

• To specified fund

Scientific research institution

Political parties / Electoral Trust

• To charitable trust

 100%

Political / Party / Electoral Trust  Donor Indian Co.

100% or 50% of amt donated

100% or 50% of Qualifying amount

Donor Other Assessee





100

100

Family planning 

Chartiable trust 

100% of Qualifying amt

50% of Qualifying amt

Qualifying amount : [Amount Donated OR 10% Adjusted Total Income  Adjusted Total Income = Total Income before deduction (-) Special income chgd u/s 111A/112

SCIENTIFIC RESEARCH ASSET

Ceases to be used for said purpose Option I transfer such asset without using if for B & P

Option II transfer to business division

100% u/s 35(1)(i)

(After commencement of business)

Donation Tax treatment in the hands of the donor

100% u/s 35(1)(i)

TREATMENT

100% u/s 35(1)(iv) 200% u/s35(2AB)

Surplus to the extent of the deduction allowed u/s 35  Deemed Income u/s 41(3)  (B)

Surplus over & above the cost /deduction allowed  CG u/s 48  (C)

DEDUCTION IN RESPECT OF SPECIFIED BUSINESS [SEC. 35AD]

10 No. Specified business

Who should the Approval (if any) business

1.

Any person

Not required

Any person

Not required

On or after April 1, 2009

Should be approved by Petroleum and Natural Gas Regulatory Board and notified by the Central Government [see Note 2]

•On or after April 1, 2007 in the case of laying and operating a cross-country natural gas pipeline network for distribution or storage. •In other cases, on or after April 1, 2009.

No approval required; however, hotel should be classified by the Central Government as 2 star hotel or above category No approval required

On or after April 1, 2010

Developing and building housing project should be under a scheme for slum redevelopment or rehabilitation framed by the Central Government / State Government and notified by the Board in accordance with prescribed guidelines Developing and building the housing project should be under a scheme for affordable housing framed by the Central Government or a State Government and notified by the Board [see Rule 11OA] Not required

On or after April 1, 2010

2.

3.

4.

5.

6.

Setting up and operating a cold chain facility [see Note 1]* Setting up and operating a warehousing facility for storage of agricultural produce* Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network

An Indian company or a consortium of Indian companies or an authority / Board / corporation established under any Central or State act Building and operating Any person anywhere in India a hotel of 2 star or above category (applicable from the assessment year 2011-12, see also Note 3) Building and operating Any person anywhere in India, any hospital with at least 100 beds for patients (applicable from the assessment year 2011-12)* Developing and building a Any person housing project (applicable from the assessment year 2011-12)

7.

Developing and building a Any person housing project (applicable from the assessment year 2012-13)*

8.

Production of fertilizer in India (applicable from the assessment year 2012-13)* Setting up and operating an inland container depot or a container freight station Bee-keeping and production of honey and beeswax Setting up and operating a ware-housing facility for storage of sugar Laying and operating a slurry pipeline for the transportation of iron ore Setting up and operating a semi-conductor wafer fabrication manufacturing unit

9.

10.

11.

12.

13.

Any person

Date of commencement of business On or after April 1, 2009

On or after April 1, 2010

On or after April 1, 2011

On or after April 1, 2011

Any person

As notified or On or after April 1, approved under the 2012 Customs Act

Any person

No approval

On or after April 1, 2012

Any person

No approval

On or after April 1, 2012

Any person

No approval

On or after April 1, 2014

Any person

As notified by the On or after April 1, Board in 2014 accordance with such guidelines as may be prescribed

Trade, professional or similar associations - Sec. 44A

Prospecting of mining of coal, limestone, iron, zinc etc. :

11

Sec. 35E

The excess of expenditure incurred on behalf of members over and above subscriptions from member shall be allowed as deduction subject to a maximum of 50% of Total Income. Maintenance of books of account by certain persons carrying on profession or business - Sec. 44AA Assessee

Criteria

Carrying on business or profession

Income

Exceeded Rs.1,20,000 in any of the three preceding previous years or likely to exceed Rs. 1,20,000 during the current previous year in case of newly set up.

Turnover/ sales/ receipts

Exceeded Rs. 10,00,000 in any of the three preceding previous years or likely to exceed Rs. 10,00,000 during the current previous year in case of newly set up.

Governed by Sec. 44AE, 44BB,44BBB

Profits & Gains

Profits & Gains claimed is lower than the income prescribed u/s. 44AE, 44BB,

Governed by Sec. 44AD

Profits & Gains

Profits & Gains claimed is lower than the income prescribed u/s. 44AD and

Gross Receipts

Exceeded Rs. 1,50,000 in all of the three preceding previous year or likely to exceed Rs. 1,50,000 during the cum previous year in case of newly set up.

Notified professions

Foreign company doing civil construction business, etc. - Sec. 44BB

Conditions

44BBB.

his income exceeds basis exemption limit

The 'Notified Professions" are law, medicine, accountancy, architecture, interior decoration, authorised representative, film artist, engineering, technical consultancy, information technology or company secretaryship.

Head office expenditure - Sec. 44C In the case of a non-resident, deduction for the head office expenditure incurred outside India and attributable to the business or profession carried on in India cannot exceed the LOWER of the following limits: a) An amount equal to 5% of adjusted total income; or

Audit of accounts - Sec. 44AB Criteria

In the case of a foreign company engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof in connection with turnkey power project approved by the Central Government, income is determined at 10% of the gross amount paid or payable to the assessee.

Conditions

b) Actual head office expenditure

Assessee carrying on business

Total sales, turnover or gross receipts exceeds Rs. 1 crore in the PY

Assessee carrying on profession

Gross receipts exceeds Rs. 25 lakhs in the PY

Assessee covered under sections 44AD/44AE/44BB/44BBB

Claims that income from such business is lower than the presumptive rate computed under the relevant sections

Agent earning only commission income

Commission exceeds Rs. 1 crore

attributable to the business or profession of the assessee in India. "Adjusted total income" means the

The requirement of audit u/s. 44AB does not apply to a person who derives income of the nature referred to in the sections 44B and 44BBA. Due Date: Due date of furnishing the return of income u/s. 139(1) of the relevant assessment year (30 th September or 30th November, as the case may be). Penalty u/s. 271B: Failure to get accounts audited or furnish audit report as required u/s. 44AB will result in a levy of penalty of 0.5% of total sales, turnover or gross receipts or Rs. 1,50,000, whichever is less.

total income computed in accordance with the provisions of this Act before allowing deduction u/s. 44C or unabsorbed depreciation or brought forward losses or deductions under Chapter VI-A or deduction u/s. 36(l)(ix). "Head office expenditure" means the

executive and general administration expenditure incurred by the assessee outside India.

Special provision for computing income by way of royalties, etc., in

Presumptive taxation - Sec. 44AD a) Eligible Assessee: Resident individual, HUF or a firm other than a LLP, whose gross receipts from such business does not exceed Rs. 1 crore

carrying on any business

case of non-residents - Sec. 44DA Applicability

b) Non-Applicability: Sec. 44AD shall not apply to - (i) a person carrying on any profession referred to in Sec. 44AA; (ii) a person earning income in the nature of commission or brokerage; (iii) a person carrying on any agency business; (iv) business of plying, hiring or leasing goods carriage referred to Sec. 44AE.; (v) an assessee who has availed deduction u/s. 10AA or any other deductions claimed under Chapter VI-A specifically relating to income based deductions.

Income by way of royalty or fees for technical services received from Government or an Indian concern received by a non-resident.

c) Presumptive Income: A sum equal to 8% of the gross receipts paid or payable to the assessee or such higher sum as declared by the assessee in the return of income shall be deemed to be the income from such business.

Condition

d) Benefits: Such assessees are neither required to pay advance tax nor maintain books of account as required u/s. 44AA.

e) Declaration of Lower Income: Where the assessee has claimed his income lower than the income prescribed u/s. 44AD and during such previous year his income exceeds the basic exemption limit, he shall maintain books of account as per Sec. 44AA and get the same audited u/s. 44AB.

Non-resident should carry on business in India through a permanent establishment(PE) situated therein or perform professional services from a fixed place of profession Computationof Income

Sec. 44AE - Business of plying, hiring or leasing goods carriages a) Eligible Assessee: Assessee who carries on the business of plying, hiring or leasing goods carriage and who owns not more than 10 goods c arriages at any time during the year. b) Presumptive Income: Income shall be deemed to be Rs. 7,500 for every month or part of the month during which such goods vehicle is owned by the assessee in the previous year or such higher sum as declared in the return of income by the assessee. c) Declaration of Lower Income: Where the assessee has claimed his income lower than the income prescribed u/s. 44AE, he shall maintain books of account as per Se c. 44AA and get the same audited u/s. 44AB.

a) Eligible Assessee: Any person carrying on the business of prospecting for extraction or production of mineral oil with whom the Central Government has entered into an agreement for association participation duly approved by the Parliament. b) Deductions/Allowances: (a) Infructuous or abortive exploration expenses incurred prior to commencement of commercial production; (b) expenditure in relation to drilling or exploration activity or in respect of physical assets used (except those assets which qualify for depreciation allowable u/s. 32 incurred before or after such commercial production; (c) for the depletion of mineral oil in the mil area in the previous year in which commercial production has begun.

Fee for Technical Services: It shall be computed either u/s. 44DA or u/s. 115A, irrespective of the business to which it relates. Special provision for computing

Common points for Sec. 44AD and Sec. 44AE

Sec 42 : Computation of Income in the case of business of prospecting for extraction or production of Mineral Oil

Royalty: Income shall be computed under the head "Profits and Gains of Business or Profession".

deductions in the case of

a) All deductions u/s. 30 to 38 including depreciation shall be deemed to have been allowed.

business reorganisation of co-

 b) WDV of assets used for the purposes of such business shall be calculated as if the depreciation has been actually allowed.

operativebanks - Sec. 44DB

c) In the case of an assessee which is a firm to which the provisions of Sec. 44AD or Sec. 44AE are applied, the salary and interest paid to its partners shall be deducted from the income computed under these provisions. The allowance of the sala ry and interest shall be subject to the conditions and limi t specified in Sec. 40(b).

entitled to deduction u/s. 32, 35D,

d) Since unabsorbed depreciation is brought forward and set-off using the provisions of Sec. 32(2), the same cannot be set off against the presumptive income u/s. 44AD or 44AE. However, brought forward business loss can be set-off against the same. Special provisions for non-residents and foreign companies

place on time proportionate basis

Section

Business of Non-Resident

Successor co-operative bank shall be 35DD and 35DDA in the previous year in which change of ownership takes and in the subsequent years.

Profit - % On Turnover

44B

Shipping business

7.5%

44BB

Business of providing services or facilities in connection with or supplying plant and machinery on hire used in the prospecting for or extraction or production of mineral oils

10%

44BBA

Business of operation of aircraft

5%

44BBB

Civil Construction Business

10%

c) Transfer of Business

Situation

Treatment

Sale Value Expenditure not yet allowed

Excess amount shall be chargeable to tax under the head "Profits and Gains of Business or Profession" of the previous year in which such business is wholly/partly transferred.

CA Durgesh Singh ©