1 Profits and Gains from Business or Profession

Charging Section (Except Deduction (Except

Presumptive Taxation) Sectoral Analysis)

Section 28
Section 28(i) :
Profits & Gains
Badridas Daga (SC)
Loss of stock by Fire
Loss of embezzlement of
money by employee
AO : No express Dedn u/s
30-36 &
Sec. 37(i) : Loss ≠
Expenditure
SC : 28(i) : Real Profits
• Real Income Theory (V)
• Profits & gain arrived as
per Comm A/c ing
Principle(C/A/P)
.’. Trading loss 
Revenue field  (V)
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
Section 41
Recovery of Loss or Expenditure already allowed or remission of Liability [Sec.41(1)] : 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
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 of – (i) Amount of
Deduction, or (ii) Sale Proceeds, is chargeable to tax as PGBP in the PY of transfer.
Recovery of Bad debts allowed u/s 36(1)(vii) [Sec. 41(4)] :
1. If recovered amount is greater than the Unallowed amount, then such excess is treated as income u/s 41(4).
2. If recovered amount is lesser than the Unallowed amount, then such deficiency is allowed as 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 set off against Income
u/s 41(1), 41(3), 41(4), 41(4A).
Section 28(v) :
of Business or Profession which carried on by the assessee at any time during the previous year any interest, salary bonus, commission or remuneration, by whatever
any was name called, due to, or received by, a partner of a firm from such firm:
Sec 2(13) : Business includes :  Assessee to carry on B & P Not Necessary Income/exp of one yr not to be taken/ allowed Provided that where any interest, salary, bonus, commission or
 Trade Any adventure during the P.Y. in later yr remuneration, has not been allowed to be deducted u/s 40(b), the
 Commerce in nature of  Assessee himself NOT To Carry Buz .’. PPI specifically shown in Audit Report
(V) income under this clause shall be adjusted to the extent of the amount
 Mfg carrying on still assessee be B&P carried 1. Glass Miniature Bulb Ind Ltd (SC) :
T/C/M not so allowed to be deducted.
 Systematic & organised Charged. through out in PY Assessee following mercantile system of a/c ing to
out the remain in
set of activity with a set Eg : NRI through agent ensure claiming dedn of exp in correct PY, i.e. PY
Section 28(va) :
PY existence
PURPOSE .’. business connection in where there is loss to the buz. & NOT postpone to
(+) Servicing Activities India .’. NRI = assessee .’. Business in AY the point of time when chances of recovery
any sum, whether received or receivable, in cash or kind, under an
.’. Any random trxn = Buz., if Carried on for some becomes negligible, i.e., where there is loss to the
agreement for –
PROFIT Motive (V) Eg : Foreign Co. point of time during assessee. .’. Avoid belated claim of dedn (PPI)
the PY Not Allowed u/s 28(i)
(a) not carrying out any activity in relation to any business; or
Sec 2(36) : Profession Branch (P.E.) Subs Co Exception (b) not sharing any know-how, patent, copyright, trademark, licence,
Occupation + Intellectual Skills/ of F Co 2. Revision of salary 6. Sec 43D : Pub Fin Inst/ franchise or any other business or commercial right of similar
Some degree of learning + F Co’s Control with retrospective Fin Corp/ Banks/ Public Co nature or information or technique likely to assist
Vocation (v) .’. F Co (V) 1 2 effect on higher side. in financing : Interest recd  in the manufacture or processing of goods
Sum Recd on .’. Incremental salary on bad & doubtful debt :
Sec 2(29BA) : Manufacture
for earlier period Taxable in : EARLIER of
 provision for services
Change Transformation of Independently Sham Closure of Buz.
Working .’. S Co accrued in C.Y. (V). a. Yr credited to P & L Provided that sub-clause (a) shall not apply to –
object New & distinct object Entity Which is now no
Domestic Co Not Prior Period Exp. OR Any sum received, in cash or kind, on account of transfer of (i) the right
 Different Name, Character & longer in existence b. Yr of receipt
Use Diff. Chemical Compn
3. Sec 43B : Dedn in to manufacture, produce or process any article, or (ii) right to carry on
F Co’s Control (V) .’. F Co(V)
N.A. to living physical object Capital Receipt PY of actual pymt,
any business, which is chargeable under the head “Capital gains”.
7. Embezzlement of money:
irrespective of PY to PY in which fraud is
Loss of Plant & Mach. Due to which exp relates. discovered
fire (X) (Capital Field Loss)
Sec 41 : Receipt for which In Buz. In Profession
4. Sec 36(1)(iii) : Bad
Section 28(vi) :
 Dedn Claimed & Allowed
debts allowed in PY 8. Provisions :
ITO vs K P Varghese (SC) Earlier  Taxable in the yr Taxable (Where, Cash any sum received under a keyman insurance policy u/s. 10(10D)
in which Debtor
FVC = Actual Selling Price of receipt (even buz not in system of Accounting including the sum allocated by way of bonus on such policy.
w/off. Liability in Liability in
existence) is followed
5. Sec 35D : Dedn of PRAESENTI FUTURO
preliminary exp (V) (V) Section 28(vii) :
Sec 35 : Scientific
research exp – both 9. Advt Exp any sum, whether received or receivable, in cash or kind, on account of
incurred, when any capital asset being demolished, destroyed, discarded or
business is not in transferred, if the whole of the expenditure on such capital asset has
existence
been allowed as a deduction u/s 35AD.

Section 28(ii) : Section 28(iv) :

any compensation or other payments received on : the value of any benefit or perquisite, whether convertible into money NOTE: FA 2015: A new clause (xviii) has been introduced to section 2(24) as
or not, arising from business or the exercise of profession. The per which
(a) Termination of management or modification in
terms of management of any Indian company. conditions necessary for invoking sec. 28(iv) are • Subsidy or grant or cash incentive or duty drawback or waiver or
(a) the benefit/perquisite must arise from the business of an assessee concession or reimbursement
(b) of any other business • “other than the subsidy or grant or reimbursement which is taken into
and
(c) Compensation received on termination of (b) There must be nexus or connection between the business of an account for determination of the actual cost of the asset in accordance
managing agency. assessee and the benefit/perquisite sought to be taxed. with the provisions of Explanation 10 to Section 43(1)”
(d) nationalization of any company or business • In cash or in kind
being taken over by the Government. SUBSIDY • to the assesse
• given by the CG or SG or any authority or body or agency
With respect to others
Section 28(iii) : acquisition of
• shall be treated as income.
The scope of section 2(24)(viii) is very vast to cover even LPG subsidy. There
capital asset – OBJECT: OBJECT :
Income derived by trade, professional or similar is nothing in the language of the provision to limit the scope of “subsidy or
Reduce from cost To enable the assessee
association from specified services rendered for its Industrial promotions grant or cash incentive or duty drawback or waiver or concession or
of acquisition to carry the trade or
(expn 10 to sec- E.g. reimbursement” to those received by any person carrying on business or
members. business more profitably
43(1)) OR profession. The above amendment is in line with the notified ICDS.
–
Section 28(iiia) – (iiie) : Revenue receipt taxable Shifting the Expansion of
u/s 28(i) (Sahney steel Industry in its capacities Capital receipt Taxable as the scope of
Profits on sale of Import entitlement licence, cash and press works Ltd) – other locations
“income” has been enlarged .
assistance (cash compensatory support), Duty Eg. Power subsidy,
drawback. refund of taxes etc.
2 Deduction (Except Sectoral Analysis) :
 Basis of Depreciation
Sec. 32(1)(i)
In the case of assets of an
undertaking Engaged in
generation or generation
and distribution of power,
Such percentage on the
actual cost thereof to the
assessee as may be
prescribed
A. Depreciation :
 Additional Depreciation :
PROVISIONS IN RESPECT OF ADDITIONAL DEPRECIATION (SECTION 32(1)(iia)]:
Sec. 32(1)(ii) (1) Applicability : Additional depreciation is available on new machinery or plant (other than ships and aircraft), which has been acquired and
installed.
In case of any block of asset, such percentage on the WDV thereof as may (a) This provision is applicable only in case of an assessee engaged in the business of manufacture or production of any article or thing.
be prescribed. (b) Assessee engaged in the business of generation or generation and distribution of power.
WDV of BLOCK sec. 43(6)(c). r.w. Rule 5 (2) 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.
Date Particulars No. of Amount As inserted by Finance Act, 2015 w.e.f. 1-4-2016:
unit  Additional Depreciation @ 35% instead of 20% shall be allowed, ❖ On any new machinery or plant acquired and installed (other than
1.4.py. OP WDV* (say) 2 xx 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
(+) during p.y. Actual cost (Additions) (say) 1 xx areas notified by Central Govt. (Andhra Pradesh, Bihar, West Bengal or Telangana)
(–) During p.y. Money payable (say) (1) (xx)
(3) 2nd Proviso to Sec. 32(1)(iia) No Deduction: Additional depreciation is not allowed in respect of the following:-
(in respect of asset sold,  Plant and machinery which, was used whether in India or outside India by any other person; ❖ Any office appliance or road transport
discarded, demolished or vehicles; Plant or machinery installed in the office premises or the residential accommodation (including the guest houses);  plant
destroyed during the p.y) and machinery whose whole of the actual cost is deductible (by way of depreciation or otherwise) in any one previous year.
WDV 2 XX
* WDV of the block in immediately preceding p.y. as reduced by the 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
u/s 32(2) shall be deemed to be depreciation “actually allowed”.
 Investment Allowance :  Miscellaneous
In case of succession
of proprietary, firm
❖ Eligible assets & Rate of depreciation : Sec. 32AC (1A) :
Company engaged in manufacture or production of any article or
Sec. 32AD :
Company engaged in manufacture or production of any article or
/LLP by a Co. or
conversion from Co. to
thing acquire & install New assets, Actual cost whereof during any thing set up an undertaking or enterprise on or after 1.4.2015 In LLP or Amalgamation
(1) Explanation 3 to section 32(1) :- or demerger :
PY > ` 25 Crores. notified backward Area (AP, Telangana, Bihar or West Bengal)
For the purpose of this sub-section, the expressions “assets” shall mean – “Depreciation” will be
Deduction : 15 % of Actual Cost Deduction : 15 % of Actual Cost of new asset for that AY
(a) tangible assets, being buildings, machinery, plant or furniture. available to
Except, If deduction allowable u/s 32AC(1), i.e. for investment Deduction is available only upto AY 2020-21. predecessor &
(b) intangible assets, being know-how, patents, Copyrights, trade-marks, licences, upto 31.03.2015, then no deduction is allowed u/s 32AC(1A), for “New Asset” as defined u/s 32AC(1A). successor in the ratio
franchises or any other business or commercial rights of similar nature. of no. of days assets
AY2015-16.
(2) Sec 43(3) :- “plant” includes ships, vehicles, books scientific apparatus and surgical were used by them.
Deduction is available only upto AY 2017-18.
eauipment used for the purposes of business or profession but does not include tea 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 “Depreciation” :
the date of installation. If sold or transferred :
bushes, or livestock or buildings, or furniture and fittings. include the following – Calculate depreciation
Amount of investment allowance will be deemed to be income
Rates of depreciation of Block of assets.
 Used by other person whether in or outside India ❖ Installed at office or under the head “ PGBP” in the year of transfer in addition to on total assets as if no
residential premises including guest house  Office appliance including amalgamation/
capital gain taxed u/s 45 r.w.s. 50.
RATE OF DEPRECIATION IN CASE OF BLOCK OF ASSETS : computer & computer software  Vehicle  Ship or aircraft or any other
Plant & machinery for which whole cost is allowed as deduction Amalgamation/ Demerger/ Business re organisation is exempt. demerger taken place
TANGIBLE ASSETS Rate
(I) Building C/f & set off of depreciation :
(1) Residential Building except hotel and boarding houses. 5 ISSUE: - Unabsorbed depreciation c/f to next yr as
(2) Non-Residential Buildings [office, factory, godown, hotels, boarding, houses 10  Conditions for availing depreciation.
but other than (1) above and (3) below] X Ltd. sets- up an undertaking in a notified backward area in
depreciation : - ROI not reqd to file.
(3) (i) Buildings for installing Plant and Machinery forming part of water supply or 100 Andhra Pradesh. For this purpose, it purpose, it purchases
- B/f losses to be set off first.
water treatment system for infrastructure business U/S 80 IA (4)(i) new plant and machinery(rate of normal depreciation 15%)
(ii) Purely temporary erections such as wooden structures. In respect of depreciation of - Chronology of deduction :
eligible assets as follows-
(II) FURNITURE AND FITTINGS (a) Current year Depreciation
(4) Furniture and Fittings including electrical fittings (“Electrical fittings” include 10 – (owned) wholly or partly, Plant Actual Date of Date of Date when (b) Set off of B/f Buz loss
by the assessee
electrical wiring, switches, sockets, other fittings and fans, etc.) Cost purchase installation put to use (c) Unabsorbed Depreciation
(III) PLANT AND MACHINERY AND
(Rs. in
(5) Motor Cars not used in business of running them on hire; and 15 – (used) for the purpose of  The concept of WDV :- Sec 43(6)
the business or profession crore)
Plant and Machinery other than those covered in other Blocks (GENERAL
the following deductions shall “WDV” means –
RATE). A 18 25/6/2015 1/9/2015 2/11/2015
(6) Ships and Vessels 20 be allowed –
B 8 27/6/2015 1/12/2015 3/12/2015 (a) (b) (c)
(7) Motor buses, lorries and taxis used in business of running on hire; Moulds 30 (i) SLM
(ii) WDV C 20 29/6/2015 20/3/2016 1/6/2016 in the case of in the case of assets in the case of
used in rubber & plastic goods factories; plant & Machinery used in
(iia) Additional depreciation assets acquired before the any block of
Semiconductor industry including circuits; (HIGHER/ACCELERATED RATE) D 7 30/6/2015 1/12/2016 6/12/2016
(8) Aero plane – Aero engines; Life-Saving Medical Equipments (….do…) acquired in previous year:- assets
40 (iii) Terminal depreciation
(9) Glass and plastic containers used as refills: 50 E 35 10/9/2015 21/9/2015 28/9/2015 the P.Y.:-

(10) (i) Computer including computer software. 60 TOTAL 88   

(ii) Books other than those covered in (12)(i) below. Calculate Normal depreciation, additional depreciation and The ACTUAL The Actual cost to Please refer the
(iii) Gas Cylinders including values and regulators investment allowance . COST the assessee (-) all format below
(iv) Glass Manufacturer – Melting Furnaces; Mineral Oil Concerns; depreciation sec. 32 (1)(ii)
(11) Flour Mills – Rollers; Rolling Mill rolls in Iron and Steel Industry; Energy 80 Notes : actually allowed to
(3) Forex rate fluctuation on acquisition of asset :
renewal and energy saving devices; Rollers in Sugar works. (1) In Tea co him
a. Forex loan specifically to purchase an asset
(12) (i) (a) Books (annual publications) owned by assesse carrying on profession 100 depre. at prescribed  
b. Asset is acquired on credit from vendor in foreign country
and rate deemed to be
Forex rate fluctuation capitalise to cost of asset in PY in which Note 5 to 12 Note 1 to 4
(b) Books owned by assesse carrying on business in running lending libraries. wholly allowed
loan or vendor has been paid
(ii) Plant and machinery in water supply and treatment system for under the Act.
infrastructure U/S 80 IA(4)(i); Wooden part in artificial silk manufacturing (4) Actual Cost of asset as per S. 43(1) = Purchase Price (+) Cost
Plant and Machinery; Cinematograph Films – Bulbs of studio lights; Wooden “inextricably linked with” bringing an asset put to use ( Cost (2) Actual Cost u/s 43(1):
Match frames in Match factories; Mines and Quarries – tubs, ropes, lamps, directly attributable to bring asset in working condition like, Actual cost to the Assessee (-) Portion of cost met directly or indirectly by other party
pipes; Salt Works-clay and salt pans etc.; Air –pollution, Water – Pollution, freight, loading unloading etc. & interest cost on borrowal of = Actual Cost
Solid waste control equipment’s and Solid waste recycling system. capital for acquiring the asset where, interest for the period Expl 10 to S 43(1) : Subsidy, Grant or reimbursement by CG/ SG relatable to the asset
INTANGIBLE ASSETS upto asset first put to use) (-) Rent for housing of worker of acquired to be reduce from the cost.
(13) Know-how, patents, copyrights, trademarks, licenses, franchise or any other contractor, interest on advance to contractor etc. (-) Excise However, above expl does not cover Waiver of Loan then, also it can squarely fall
business or commercial rights of similar nature. 25 or Custom duty Cenvattable (-) “Subsidy” as per note 2 into the trap of above defn. of “Actual Cost” sec. 43(1) i.e. part of cost met by the
𝑇𝑜𝑡𝑎𝑙 𝑆𝑢𝑏𝑠𝑖𝑑𝑦 𝑥 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 other person. Because, in books of accounts treatment would be Cost / WDV Less
= 𝐴𝑚𝑜𝑢𝑛𝑡
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 𝑤ℎ𝑒𝑟𝑒, 𝑠𝑢𝑏𝑠𝑖𝑑𝑦 𝑟𝑒𝑙𝑎𝑡𝑎𝑏𝑙𝑒 Loan Waived.
3 Cases where Actual cost are not so actual :-
Expl. To Mode of Acquisition
Sec. 43(1)
1 Asset acquired for scientific research
subsequently brought into business use
2 Asset acquired by way of gift or
inheritance
3 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
4 Asset once belonged to the assessee
which was used by him for business & is
transferred and reacquired by him
4A 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
5 Building used for private purpose
subsequently brought into business use.
6 & Exp. 2 Asset transferred by a holding Co. to its
to section subsidiary Co. or by a Subsidiary Co, to
43(6) 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.
Expl. 2C to Block of assets transferred by a private
S. 43(6) Company to LLP
7 & Expl. Transfer of asset in a scheme of
2 to Sec amalgamation by amalgamating company
43(6) 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.
7A Asset transferred by a demerged
company to the resulting Indian
Company.
8 Asset acquired out of borrowed funds
9 Asset acquired subject to levy of excise
duty or customs duty in respect of which
CENVAT credit is availed.
10 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 Non-
resident 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 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.
ISSUE :
Posco Ltd. set up a manufacturing unit in Hyderabad of Telangana on 1st April, 2015. The company invested `
20 crore in acquisition of new plant & machinery on 3rd March, 2015 & another ` 20 crore in acquisition of
plant & machinery on 21st 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 ?
Actual Cost
B. Sec 35 D : Preliminary Expenditure
Sec 35D [Quantum of Deduction of Preliminary Expns]
Actual cost less deduction availed u/s. 35
OR
Non-corporate assessee Corporate Assessee
Actual Cost to the previous owner minus  [Not being a foreign Co.]
Specific expenditure (5) Compare
depreciation actually to him. OR = Qualified
5% of cost of Project
Qualified
Actual cost to be determined by the 5% of cost of project Amount
OR amount 
 Higher Lower
Assessing Officer with prior approval of 1/5th  
5% of Capital OR
Joint Commissioner. Qualified Amount 1/5th
Employed
Specified
Expenditure
The WDV at the time of original transfer 1. The deduction u/s 35D depends upon the scalability of the project or the quantum
(5+3)
of the capital employment in the business  higher
or the price paid for reacquiring the asset, the project cost or capital employed shall result into a higher claim of deduction u/s 35D
whichever is less. 2. 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.
The written down value of the asset to
Accordingly advertisement expenditure incurred as a result of the market survey report shall also qualify as deduction u/s 35D.
the transferor at the time of transfer to 3. 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
the assessee. 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 cost of purchase or construction of The above list is only illustrative & not exhaustive.
the building as reduced by the notional
depreciation calculated up to the year of Scope of Section 35D
bringing the asset to business use at the
Phase I AND Phase II
depreciation rate applicable to that year.
 
WDV to the transferor company will be Newly setup business / profession Expansion of business / Profession
adopted as the actual cost to the OR
transferee company. Same line New line
 
e.g.: PA hired agents to know e.g.: Assessee is currently in the business
the no. of students pursuing of steel now proposing to set up a new
CA in Chennai business of cement. For starting the
The report said 50 students  business it incurred Rs.25lakhs towards
PA did not open a branch in feasibility of new project but did not get
Chennai but still had to pay license to operate at the end.
mkt survey expenditure. Such 
expenditure shall be eligible Whether Rs. 25L can be claimed by
for deduction. steel?
 
Yes u/s 37(1) If license not  No cement
recd division will
 claim u/s 35D if
Sunk cost license recd
WDV of the block of assets in the hands Section 35D also applies to expansion of business or profession.
of unlisted Company. The expansion can be either in the same line or a separate line of business. It is an imp. principle of computation that each
WDV to the amalgamating company will business shall be computed separately to arrive at the income even though such sources of income falls under the same head.
be adopted as the actual cost to the  The computation under the head B&P shall be undertaken for each business separately.
amalgamated company.  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. Whether the Capital expenditure
Interest on loan borrowed relating to the expansion is in Yes
Allowed u/s 35D  1/5
period after the asset is first put to use the capital field?
shall never form part of actual cost.
So much of the duty in respect in respect No
of which a claim of credit has been made
and allowed under the Central Excise Not capital in nature 
Rules, 1944 shall not form part of the Expenditure u/s 37(1)
actual cost.
So much of the cost as is relatable to such 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
subsidy or grant or reimbursement shall business could not be commenced. Further it is pertinent to note that the provision of sec 35D is enabling provision & not a
not form part of the actual cost. If subsidy disabling one.  Where a full deduction is otherwise allowed under any other provision of this head then it shall be allowed as
is not directly relatable to the asset deduction in that section. This situation is possible only when the expansion is in the existing business which does not involve an
acquired, but subsidy is with reference to increase in the capital field.
the assets then the subsidy shall be
proportionately reduced from the actual Specified expenditure.
cost of the assets with reference to which
subsidy has been granted. New setup of business Expansion of business

Actual cost as reduced by the amount of
Expenses in connection with issue Existing line New line
depreciation calculated at the rate in of:
force as if the asset was used in India  
since the date of acquisition. Shares Debentures Expenses in issue of Expenses in issue of
The amount, which would have been  
regarded as actual cost, had there been Sec 35D Sec 35D Shares Debentures Shares Debentures
no such corporatization shall be deemed    
to be the actual cost. Sec 35D Sec 37(1) Sec 35D Sec 35D
The actual cost of such asset to the  It can be observed that where there is an increase in the capital field of the business then expenditure incurred is a capital
transferee shall be NIL. 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.
CA Durgesh Singh ©
 4
(iii) In the case of conversion of a firm/proprietorship into a company, for the remaining period.
C. Capital Expenditure (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.
Sec 37(1) Sec. 30, Sec.31
(2) Section 36:- Other deduction
GENERAL DEDUCTION RENT, RATES, TAXES, INSURACE, (ib) ➢ Health Insurance premium paid by any mode of payment other ➢ Such Scheme must be –(a) framed by GIC and approved by central
– Any expenditure REPAIRS OF BUILDING than cash by an employer on health of his employees under a Government, or (b) framed by any other insurer and approved by
Not being capital in Nature Sec.30:- Premises should be occupied scheme. IRDA
by the assessee either as tenant or as (ii) ➢ Bonus or commission paid to an employee for services rendered ➢ Voluntary payments are deductible if it is for services rendered.
shall be allowed as
(not otherwise have been payable to him as profit or dividend). ➢ Any bonus exceeding the statutory amount is allowed if such
deductions provided it is owner (except in case of Rent). Current ➢ Deduction is subject to the provisions of sec. 43B and Sec. 40A excess payment has been made on account of commercial
incurred wholly and repair (not being in the nature of (2). expediency.
exclusively for the purpose capital (expenditure), local taxes, (iv) ➢ Contribution made by employer to recognized provident fund/ ➢ Deduction is subject to the provisions of Section 43B.
of business & profession approved superannuation fund.
municipal taxes, and insurance
(v) ➢ Sum paid by employer towards an approved gratuity fund set up ➢ Deduction is subject to the previous of Section 43B.
premium of building are allowed. for benefit of his employees.
(va) ➢ Sum received by assessee from his employees as contributions to ➢ Such sum should be credited by the assessee to the employee’s
Provident Fund or Employee State Insurance Fund or account in the relevant fund(s) on or before the due date.
Repairs and Insurance of Plant, Superannuation fund of any other employee-welfare fund. ➢ Due Date means date by which the assessee is required as an
➢ Such sum received by the assessee is first treated as income employer to credit an employee’s contribution to his account in
machinery and furniture
under Section 2(24)(x) and thereafter, deduction is allowed in the relevant fund(s) under any law, standing order, award, contract
respect of such sum if the relevant conditions are satisfied. of service or otherwise.
Sec.31:- The asset should be used for
(ix) ➢ Expenditure incurred bona fide by company for promoting family ➢ Any unabsorbed family planning expenditure is carried forward and
purpose of business and profession planning amongst its employees. set off in the same manner as unabsorbed depreciation.
current repairs (not being in the nature ➢ Extent of deduction and period: ➢ No depreciation allowable under section 32 if deduction has been
(a) Where expenditure is of revenue nature: 100% in the previous claimed here.
of capital expenditure) is allowed
year in which it is uncured. ➢ Tax treatment is case of sale of such asset:
(b) Where expenditure is capital in nature: 1/5th of such Same as in Section 35.
expenditure deductible in 5 consecutive previous years
“The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure beginning with the previous year in which the expenditure is
incurred.
but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no
(iva) ➢ Contribution made by employer to employees pension scheme ➢ MAXIMUM amount allowed 10% of salary. Salary shall include DA
touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole referred to in S.80CCD shall qualify for deduction w.e.f. AY 2012- (in terms of employment), but will exclude all other allowances and
operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as 013 perquisites.
they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by
ISSUE:
Lord Cave, in Atheerton v. British Insulated and Helsby Cables Ltd. [1925] to TC 155, 192 (HL) where the learned Law Lord The assessee a listed company wanted some credit facilities from the bank for its business purpose. The banker insisted on personal guarantee of the
stated: 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
“…… When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an
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)
advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to and held that if the amount was not paid to them as commission, the same would have been payable as profits or dividend.
an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.” Decision:
The Delhi HC in Control & Switchgear Contractors Ltd. (2014) observed that the act of providing personal guarantee was clearly beyond the scope of
Is expenditure incurred for Not a Capital Following the principle of law laid down by the SC in Empire Jute Addln. CIT v. the services of the Directors as the employees of the company. The assessee company ,in its commercial wisdom, had agreed to pay commission for
construction of expenditure Mills case, the Allahabad High Court , in held that the expenditure Dhampur such guarantees by passing the resolution to that effect.
transmission lines by the which was incurred by the assessee in the laying of transmission Sugar Mills (P.) In such case the AO only has to determine whether the transactions are real and genuine.
assessee for supply of lines was clearly on the revenue account. The transmission lines, Ltd (2015)
power to UPPCL by the upon erection, VESTED ABSOLUTELY IN UPPCL. The expenditure (All.) 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
assessee deductible as incurred which was incurred by the assessee was for AIDING 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.
revenue expenditure? 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 (3) 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
deduction. retirement or on termination for any reason.
Where the assessee Not a Capital The Karnataka HC observed that expenditure incurred for use of IBM GLOBAL However, the following shall be allowed as deduction:
company came into expenditure customer database DID NOT RESULT IN ACQUISITION OF ANY SERVICES P. “Any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund”.
existence on bifurcation of CAPITAL ASSET. The assessee got the right to use the database LTD (2014) (This is however subject to Sec. 43B).
a joint venture company , AND THE COMPANY WHICH PROVIDED THE DATABASE WAS NOT (Kar.)
(4) Disallowance in respect of contributions to non-statutory funds Sec. 40A(9):
can the amount paid by it PRECLUDED FROM USING SUCH DATABASE. Hence the
Any sum (including contribution) paid to Non-statutory / unrecognized welfare funds is not deductible except where such sum is paid as per
to the JVC for use of expenditure incurred is a revenue expenditure.
provisions u/s 36(1)(iv)/(v) or under any other law for the time being in force.
costumer database and As regards payment for obtaining trained and skilled employees,
ISSUE:
transfer of trained it was held that the joint venture company spent lot of money to Can employees contribution to Provident Fund and ESI be allowed as deduction where the assessee-employer had not remitted the same on or
personnel be claimed as give training to employees who were transferred to the assessee 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)?
revenue expenditure? company. They were trained in the field of software. They have Decision :
opted for employment with the assessee company, and for their The Gujarat HC in Gujarat State Road Transport Corpn (2014) has held that Section 43B(b) pertaining to employer’s contribution cannot be
past services with the joint venture company, expenditure has applied with respect to employees contribution which is governed by Section 36(1)(va) .
been incurred. In effect, the payment made by the assessee- Note: Contrary decision is provided by other HC.
company 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.

D. Expenditure Relating to Employee

Provisions for employees under B & P.
(1) Sec. 35DDA: Amortization of expenditure incurred under voluntary Retirement.
(2) 36 (1)(ib): Premium on Health insurance of employees paid by the employer.
(3) 36(1)(ii):- Bonus or commission paid to employee.
(4) 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. CA Durgesh Singh ©
(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.
 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.
(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.
(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,  The assessee issued long term debentures to mutual funds and financial Institutions, with a difference between issue
retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal price and amount payable on maturity. Such difference could not be strictly described as interest on borrowing in view
benefit and the aggregate of such sum payable to employee or his heir does not exceed Rs.50,000. of the fact that debentures are freely transferable and there is no lender – borrower relationship between the issuing
 Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax at source, when such institution and the holder of debenture bonds. The amount is also payable only on maturity and not on year to year
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, basis, though accounting requirement would require provision to be made on proportionate basis. If it were treated as
and does not maintain any account in any bank at such place or ship. 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.
Other situations of Rule 6DD
(A) Remote areas:-
 Interest paid on partners capital is allowed as deduction in the hands of the firm u/s 37(1) r.w. & 40(b).
 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.  Interest on unpaid arrears of salary is allowable u/s 37(1).
 where the payment is made in a village or town, which on the date of such payment is not served by any bank
(B) Bank / Govt.:  Interest payable under tax law
 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;
 where the payment made to the Government is required to be made in cash; towards late payment of
 where the payment is made through any bank, including foreign bank, by any of these modes (i) any letter of credit arrangements; TAXES
(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; or
 where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travellers cheques Indirect taxes Direct taxes
in the normal course of his business.
(6) 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 &
Allowed u/s 37(1) Not allowed, since it
profession
Since it is cannot be said for the
Note:
compensating in purpose of business
(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.: nature and profession (*)
(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
(*) However Interest on Direct tax refund is chargeable under the head IFOS.
purpose of business or not.
(3) Staff welfare Expenses
Note 3 :-
Donation of bus Club facility Recreation Travelling exps. Higher exps. Amount borrowed (1) working capital = for the purpose of B & P
to a school where facility Of Spouse borne by Co. on
children of the Sp. employee Subsequently used for – (1) acquiring capital asset = For the purpose of B &
employees’ are
P, subject to the proviso.
enrolled
  X  X
 X (3) Investment in subsidiary :

When the When it is in
Provided to all the Few Necessary No
employees/Substa necessity domain of different domain
specified for purpose To gain effective control For Carrying on
ntial pool of education is altogether, not
employees of B&P in the existing business Independent business
employees in line with related to
the business business  
of the Co. for the purpose of B & No deduction
P, hence deduction

E. Deduction of Interest Expenditure (4) diverted to Sisters concern


Specific deduction u/s 36(1)(iii) Whether commercial expediency could be established by assessee?
1. the amount of the Interest paid in respect of capital borrowed Yes No
2. for the purposes of the business or profession  
3. 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.
in respect of capital borrowed if the money has been
advanced to Sister concern at
for acquisition of an asset
a concessional rate of Interest
for extension or otherwise (SA Builders)
of existing or New business or profession (5) diverted to director / partners  for purpose of
(whether capitalized in the books of account or not); B&P

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) towards payment of statutory dues

shall not be allowed as deduction.

DT IDT
Note 1 Amt borrowed for acquiring asset (Amendment FA 2015)
(x) (v)

OR (7) towards payment of Dividend = for the purpose

of business and profession
Existing business New business
. ISSUE
for expansion OR otherwise
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 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
deduction. It may be capitalized as per CSM case or as per Explanation to
assessee was rejected in assessment.
Sec.43(1).
Decision: JK Synthetics Ltd. (2014)(All.)
Thereafter it shall be allowed as deduction, since the apex court in India
The HC made a reference of the Apex court ruling in Madhav Prasad Jatia where the expression “for the purpose of business” occurring
cements Ltd. case has held that the loan obtained has been used for the
purpose of business and profession. in section 36(1)(iii) was held as wider in scope than the expression “ for the purpose of earning of proifts “ . The Apex court 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 deduction is allowable.
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
 (xv) ➢ Securities transaction tax (STT) paid by the assessee in respect of the taxable securities transactions entered
6 F. CERTAIN DEDUCTIONS TO BE ALLOWED ON ACTUAL PAYMENT [Section 43B]:
(xvi)
into in the course of his business during the previous year. (Amdt. By Finance Act, 08 w.e.f. 1-4-2009)
Deduction of Commodity Transaction tax
➢ Consequential to new levy of CIT, FA 2013 allows deduction of sum paid as CTT in respect of the taxable
Notwithstanding anything contained in any other provision of the Act, the following sums shall be allowed as deduction only on actual
commodities transactions entered into in the course of his business during the previous year, if the income
payment irrespective of the previous year in which the liability arose:- arising from such transactions in included in the income computed under PGBP.
(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 Amortization of expenditure in case of amalgamation or demerger:
employee-welfare fund; or 1. Where an assessee, being an Indian Company, incurs any expenditure; on or after the 1st of April, 1999, wholly
(c) Bonus or commission to employees for services rendered, as referred under section 36(1)(ii); or and exclusively for the purpose of amalgamation or demerger of undertaking the assessee shall be allowed a
(d) Sum in lieu of any leave at the credit of his employee (Leave Encashment); or deduction of an amount equal to one-fifth of such expenditure for each of the fifth successive previous year in
(e) Interest on any loan or borrowing or advances from- which the amalgamation or demerger takes place.
(i) Any Public Financial Institution (e.g. ICICI, IFCI, IDBI, LIC, UTI etc.); or 2. No deduction shall be allowed in respect of the expenditure under any provision of this Act.
(ii) State Financial Corporation, or State Industrial Investment Corporation; or
(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 Any Expenditure
into a loan or borrowing or advance shall not be regarded as actually paid and shall not be allowed as deduction. (Explanation)  Not being expenditure of the nature described in section 30 to section 36 and
Manner of deduction: The expenditure shall be allowed as deduction in the following manner:-  Not being in the nature of capital expenditure (Note 1)
Case Year of allowance  Not being in the nature of personal expenses of the assessee (Note 2)
If the sum relates to any previous year for which payment In the previous year to  Laid out or expended wholly and exclusively for the purpose of the business or profession
has been or before the due date of furnishing the Return which it relates Shall be allowed in computing the income chargeable under the head “PGBP”
of Income of that year
In any other case In the year of payment. Explanation 1 :- For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an
Case Laws and Circulars: 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)
(1) 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] Explanation 2:- Finance Act 2014:-
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 For the removal of doubts, it is hereby declared that for the purpose of section 37(1), any expenditure incurred by an
arrangement, the unpaid interest of Rs. 35,90,000 is converted into Funded Interest Term Loan (FITL), which is shown separately assessee on the activities relating to CORPORATE SOCIAL RESPONSIBILTY referred to in section 135 of the companies Act
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 01- 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.
04-2015. Note 1 :- Whether the following expenditure is a capital expenditure?
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 Particulars Court Decision
interest on the original principal of Rs. 2,37,81,000/-, if any, actually paid will be independently allowable under section 43B. 1. Amount paid to clubs for obtaining membership. Kar. HC Not a capital expenditure even though such
amount is capital receipt in the hands of
(2) 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 club.
Section. Further, in case unpaid sales tax is deemed as actually paid and disbursed as loan by the State Government, then, deduction
2. Expenditure towards acquisition of the ISO-9001 Kar. HC Not a capital expenditure.
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]
certification.
(3) Royalty is a tax for all purposes including section 43B. [Gorelal Dubey v. CIT [2001]248 ITR 3 (SC)] 3. Expenditure towards repair of existing road in its P & H Not a capital expenditure.
(4) Advance payment before accrual – deductible on accrual basis only: Advance payment towards sales tax excise duty, before factory premises. HC
incurrence of liability thereof, is deductible in the year in which the same is adjusted towards excise duty and sales tax liability and 4. Amount paid for customizing the software according P & H Not a capital expenditure.
not in year of advance payment. Section 43B is a provisions of disallowance; it doesn’t enable an assessee to claim deduction of an to new requirement which involved only a HC
amount, which was otherwise not deductible. [DCIT. V. Amforge Ind. Ltd.[2001] 79 ITD 49 (ITAT – Mumbai)] modification of the existing software.
(5) Interest on sales tax allowable on payment basis only: Interest accrued on delayed payment of sales tax under the State sales-tax Act 5. Expenditure on display of glow sign and neon sign. P & H Not a capital expenditure.
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 Expenditure on production of a television film for HC
Pipes v. DCIT [2007] 162 Taxman 442 (Raj.) advertisement purpose.
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
G. OTHER DEDUCTIONS ALLOWABLE UNDER SECTION 36(1): 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
In the computing the income referred to in section 28, the deductions provided for in the following clauses of section 36(1) shall also 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,
36(1) Deductions Expenditure Conditions / Remarks provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law
(i) ➢ Insurance premium of stock or stores ➢ Such stock or stores are used for Business or Profession. shall not be allowed as deduction. Needless to state that in all such cases, the question whether there is an infraction of
against damage or destruction thereof. 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
(ia) ➢ Insurance premium paid by Federal paid ➢ Such primary society should be engaged in supplying milk raised authorities.
by Federal Milk Co-Operative Society on by its members to such federal milk co-operative society.
ISSUE 1
life of cattle owned by a member of a
Primary co-operative society. Deduction of secret commission / bribe?
(iiia) ➢ Discount on zero coupon bond calculated ➢ Life of bond = Period starting from the date of issue of the bond Not allowed as being prohibited by law
in prorata manner over the life of such and ending on the date of maturity or redemption of such
bond. bond. ISSUE 2
➢ Discount = Amount payable by issuer on For computing life of the bond, if the month in which bond is issued Deduction of fine, penalties etc ?
maturity / redemption of such bond less 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
Amount received or receivable on issue of shall be rounded off to the nearest one i.e. if such part is 15 days or deductible because the law or the statutory scheme enables incurring of such expenditure in the course of the
the bond.
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.
➢ Zero coupon bond means a notified bond
issued by any infrastructure capital Penalty arising out of contractual liability is again allowed as deduction as being incurred during the course of business
company/ bank or public sector company, & profession.
in respect of which no payment and
benefit is received or receivable before However penalty imposed for an activity which is considered as an offence shall be disallowed since it shall fall within
maturity or redemption. the scope of the explanation.
(vi) ➢ Loss in respect of animals, used for ➢ Deduction allowed = [Actual cost of the animal – Sale proceeds
However interest on arrears or outstanding balance of sales tax is not penal but compensatory in nature and is
business or profession (otherwise than as of carcasses of animals]
therefore an allowable deduction (SC).
stock-in trade), which have died or
become permanently useless. ISSUE 3
(xii) ➢ Revenue expenditure incurred by a ➢ Such expenditure should be incurred for objects and purpose
Loss of stock-in-trade in an illegal business?
notified corporation or a body corporate authorized by the Act under which it was constituted /
constituted or established under any Act. established. Where heroin was seized from a doctor who clandestinely manufactured it, the explanation would not apply, since
(xiii) ➢ Any amount of banking cash transaction tax paid by assessee during the previous year on the taxable banking what the doctor was claiming was not “expenditure” but a “business loss” and heroin formed a part of stock-in-trade of
transactions entered into by him. the doctor. The SC held in Dr. TA Quereshi that morality and law were different and that the case had to be decided on
(xiv) ➢ Any sum paid by Public Financial Institutions by way of contributions to notified Credit Guarantee fund for small legal principles and not one’s moral views. The strange irony of this decision is that expenditure incurred to
industries. manufacture heroin will be disallowed under the Explanation to S.37 but if manufactured heroin is seized, it will be
➢ Public financial institution has the same meaning as U/S 4A of Companies Act, 1956. allowable as a business loss.
 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 this clause, any bad debt or part thereof 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 of ICDS without recording the same in 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 of section 36(1)(iii).

Section 36 (2):- Condition 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 of an earlier previous year or represents money lent in the ordinary course of the business of banking or money lending which is carried on 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. Subsequently the Interest amount is waived off by the bank. What is the tax Implication?

Interest

Bank (Lender) Borrower

 
(1) Income chargeable to tax in p.y. in Interest expenditure accrued / due
which the amount recognized in shall not be allowed as deduction in
the books or the year of receipt view of the condition u/s 43B
whichever is earlier. (Sec. 43D) (allowed only on payment basis).
(2) Subsequent waiver shall qualify Subsequent waiver shall not be
for deduction u/s 36(1)(vii) rw. chargeable u/s 41(1), since no
Sec. 36(2). 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 off 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 longer exists and there are deemed profits as referred to under Section 41(1) or 41(3) or 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 taxable after allowing business losses (other than speculation 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 ©
8 Disallowance
General Disallowance Specific Disallowance

Sec. 14A: Expenditure incurred in relation to Income not Includible in total Income:- Sec. 40(a):
(1)  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. the amount payable is interest, royalty, technical fees or any other sum (but not salary);
 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. If these conditions are satisfied, tax is deductible under the Act. If there is a TDS default, disallowance provision would be attracted from the
assessment year 2015-16 as follows-
“A Ltd., an Investment company received dividend income of Rs.1,00,000 on its investment in shares. It Incurred interest expenditure of Rs.
2,00,000 on the borrowed capital utilized in the Investment in shares: • Case 1 (tax not deducted) – If tax is deductible but not deducted in the current year, the entire expenditure will be disallowed under section
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 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. 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?
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
Answer: CBDT Circular No. 3/2015:
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,
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
 Whether the shares were held as investment or stock-in-trade determine the appropriate portion of the sum chargeable to tax, as mentioned in section 195(1), to ascertain the tax liability on which the
 Whether the dividend income has actually been received or not during the relevant previous year. deductor shall be deemed to be an assessee in default u/s 201 of the Act.
Note 3:- 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
3 mth 3 mth 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
Divid. tax under the Act shall form the of such disallowance and shall be determined by the AO .
Investment Rs.10 Thus whole sum remitted cannot be disallowed if only portion of the such sum is chargeable under this Act.
Record
in shares @ Date Transfer of
Rs.115 shares at COMPLIANCE OF TDS PROVISIONS IN CASE OF A RESIDENT [SEC. 40(a)(ia)] – With a view to augment compliance of TDS provisions, clause (ia)
Rs.100 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.
Note 4:- CIT V/S Kribhco (del.) (2012)
• Whether section 40(a)(ia) is applicable in respect of expenses actually “paid” without TDS – Tax is deductible under sections 193, 194A, 194C,
The respondent – assessee is a Co-operative society. It has claimed deduction u/s 80P(2)(d) on dividend received from another Co-operative 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
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 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
Income of the assessee and, therefore, expenditure under the head “Interest” and 1/8 of the employee benefits and remuneration should be applicable. Section 40(a)(ia) has to be subjected to strict interpretation. Going by the rule of strict interpretation, the default with reference to
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 actual “payment” of expenditure would not entail disallowance. The aforesaid observation has now been upheld by different benches of
disallowed u/s14A. Tribunal –
• 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 Delhi HC observed 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 which are payable at any time during the year. CBDT has clarified that in the context of section 40(a)(ia) the term “payable” would include
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 “amounts which are paid during the previous year”. Where any High Court decides an issue contrary to the ‘Departmental View’. The
entitled to deduction under chapter VIA has to be excluded for the purpose of the said section. ‘Departmental View’ thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court – Circular No. 10/2013, dated
 The words “do not form part of the total Income under this Act” are significant and important. Before allowing deduction under chapter VIA December 16, 2013.
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 • Whether disallowance applicable in case of capital expenditure – If loan is taken to finance the purchase of a capital asset, interest liability
to 80U has to be first included in the total Income of the assessee. (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
 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.).
• Income Tax & Wealth Tax.

Expenditure in excess of Rs. 20,000 AGGREGATE IN A DAY paid otherwise than by account payee cheque
Issue -1 drawn on a bank or account payee bank draft – Not allowable [Section 40A(3): In case- (a) assessee incurs an
The Net Profit of ‘Simran Ltd’ for the year ended 31.3.2016 is arrived at Rs.50 lacs after debit of the following : 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),
1. Amount of Rs.1,50,000 contributed to Employees Welfare Trust. 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 excess 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 tax as income of the year in such payment is made. [Amendment by the Finance Act, 2007 w.e.f. 1-4-2008]
of the Trade and Commerce, London
LATEST AMENDMENT –
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
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
to the suppliers of machinery.
carriages.
Following further information are also provided by the company.
W.e.f. 1st October 2009, in case of payment made for plying, hiring or leasing goods carriage, disallowance will be made if the payment is made
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. 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
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 limit of Rs. 20,000 for all other persons shall continue.
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.
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 accounts have already been audited under any other law, then only a further report in
"Profits and gains of business or profession". prescribed form is to be furnished along with such Audit Report.

PART (A)
PHASE I Research Revenue : Salary to scientist Particulars Quantum of Deduction TREATMENT  SCIENTIFIC RESEARCH ASSET
expenses Capital : Equipment 
(1) Expenditure 3 years before commencement of business
Ceases to be used for said purpose
Direct Indirect (a) Capital Exp. (excl land) u/s 35(2):100%
Success (b) Salary (excl perquisites) Revenue Option I Option II
 transfer such asset without using transfer to business division
(c) Purchase of materials exp. 100% u/s 35(1)(i)
PHASE II Activity if for B & P
(2)(a) Revenue exp. on research 100% u/s 35(1)(i)
Research Division Business Division Surplus to the extent of Surplus over & above the
(After commencement of business)
  the deduction allowed u/s 35 cost /deduction allowed
Research Revenue Production of medicine & sale (b) Capital expenditure on research (except cost of land) 100% u/s 35(1)(iv)  
Expenses capital  (3) Expenditure (Revenue or capital but not having cost Deemed Income u/s 41(3) CG u/s 48
Receipts xx of land & Bldg) on specified research of 200% u/s35(2AB)  
Direct Indirect (–) Expenses (xx) manufacturing activity approved by prescribed (B) (C)
Assesse based deduction  (i) Sec. 35 (xx) authority
(ii) Sec 35(Phase 1) (xx)
PGBP Xx

PART B

Donation

Tax treatment in the Tax treatment in the

hands of the donor hands of donee.

Assessee (Donor) Assessee (Donor) Taxation of trust & specified Institution /
engaged in B & P not engaged in B & P fund (Discussed later)

Deduction of amt donated (*) 80G 80GGA (*) Sec.80GG(*)

80GGB
   
1.75 1.25 2 • To Scientific Political / Political parties /
   specified research Party / Electoral Trust
University / (a) social National fund institution Electoral
college / science or laboratory / Trust
institution for statistical university / • To   Donor
scientific research to IIT charitable 100% Donor Other Assessee
research research  trust Indian Co.
association Sec 35 (2AA)
   
Sec 35(ii) Sec 35(iii) 100% or 100% or
(b) sum paid 50% 50% of 100 100
to COMPANY of amt Qualifying
having main donated amount
object
“scientific Family planning Chartiable trust
research” Sec  
35(iia)
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
10 DEDUCTION IN RESPECT OF SPECIFIED BUSINESS [SEC. 35AD]
No. Specified business Who should the Approval (if any) Date of
business commencement of
business
1. Setting up and operating a Any person Not required On or after April 1,
cold chain facility [see 2009
Note 1]*
2. Setting up and operating a Any person Not required On or after April 1,
warehousing facility for 2009
storage of agricultural
produce*
3. Laying and operating a An Indian Should be approved •On or after April 1,
cross-country natural gas company or a by Petroleum and 2007 in the case of
or crude or petroleum oil consortium of Natural Gas laying and operating a
pipeline network forIndian Regulatory Board cross-country natural
distribution, includingcompanies or an and notified by the gas pipeline network
storage facilities being an authority / Central Government for distribution or
integral part of such Board / [see Note 2] storage.
network corporation •In other cases, on or
established after April 1, 2009.
under any
Central or State
act
4. Building and operating Any person No approval On or after April 1,
anywhere in India a hotel required; however, 2010
of 2 star or above category hotel should be
(applicable from the classified by the
assessment year 2011-12, Central Government
see also Note 3) as 2 star hotel or
above category
5. Building and operating Any person No approval On or after April 1,
anywhere in India, any required 2010
hospital with at least 100
beds for patients
(applicable from the
assessment year 2011-12)*
6. Developing and building a Any person Developing and On or after April 1,
housing project (applicable building housing 2010
from the assessment year project should be
2011-12) under a scheme for
slum re-
development or
rehabilitation
framed by the
Central Government
/ State Government
and notified by the
Board in accordance
with prescribed
guidelines
7. Developing and building a Any person Developing and On or after April 1,
housing project (applicable building the housing 2011
from the assessment year project should be
2012-13)* under a scheme for
affordable housing
framed by the
Central Government
or a State
Government and
notified by the
Board [see Rule 11-
OA]
8. Production of fertilizer in Any person Not required On or after April 1,
India (applicable from the 2011
assessment year 2012-13)*
9. Setting up and operating Any person As notified or On or after April 1,
an inland container depot approved under the 2012
or a container freight Customs Act
station
10. Bee-keeping and Any person No approval On or after April 1,
production of honey and 2012
beeswax
11. Setting up and operating a Any person No approval On or after April 1,
ware-housing facility for 2012
storage of sugar
12. Laying and operating a Any person No approval On or after April 1,
slurry pipeline for the 2014
transportation of iron ore
13. Setting up and operating a Any person As notified by the On or after April 1,
semi-conductor wafer Board in 2014
fabrication manufacturing accordance with
unit such guidelines as
may be prescribed
 Trade, professional or similar associations - Sec. 44A

11 Prospecting of mining of coal, limestone, iron, zinc etc. : 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.
Foreign company doing civil
construction business, etc. - Sec.
Maintenance of books of account by certain persons carrying on profession or business - Sec. 44AA 44BB
Sec. 35E Assessee Criteria Conditions
In the case of a foreign company
Carrying on business or Income Exceeded Rs.1,20,000 in any of the three preceding previous years or likely engaged in the business of civil
profession to exceed Rs. 1,20,000 during the current previous year in case of newly set construction or the business of
up. erection of plant or machinery or
testing or commissioning thereof in
Turnover/ Exceeded Rs. 10,00,000 in any of the three preceding previous years or connection with turnkey power
sales/ likely to exceed Rs. 10,00,000 during the current previous year in case of project approved by the Central
receipts newly set up. Government, income is determined at
10% of the gross amount paid or
Governed by Sec. 44AE, Profits & Profits & Gains claimed is lower than the income prescribed u/s. 44AE, 44BB, payable to the assessee.
44BB,44BBB Gains 44BBB.
Head office expenditure - Sec. 44C
Governed by Sec. 44AD Profits & Profits & Gains claimed is lower than the income prescribed u/s. 44AD and
Gains his income exceeds basis exemption limit In the case of a non-resident,
Notified professions Gross Exceeded Rs. 1,50,000 in all of the three preceding previous year or likely to deduction for the head office
Receipts exceed Rs. 1,50,000 during the cum previous year in case of newly set up. expenditure incurred outside India and
attributable to the business or
The 'Notified Professions" are law, medicine, accountancy, architecture, interior decoration, authorised profession carried on in India cannot
representative, film artist, engineering, technical consultancy, information technology or company secretaryship. exceed the LOWER of the following
limits:

Audit of accounts - Sec. 44AB a) An amount equal to 5% of adjusted

total income; or
Criteria Conditions b) Actual head office expenditure
attributable to the business or
Assessee carrying on business Total sales, turnover or gross receipts exceeds Rs. 1 crore in the PY
profession of the assessee in India.
Assessee carrying on profession Gross receipts exceeds Rs. 25 lakhs in the PY
"Adjusted total income" means the
Assessee covered under sections Claims that income from such business is lower than the total income computed in accordance
44AD/44AE/44BB/44BBB presumptive rate computed under the relevant sections with the provisions of this Act before
allowing deduction u/s. 44C or
Agent earning only commission Commission exceeds Rs. 1 crore
unabsorbed depreciation or brought
income
forward losses or deductions under
The requirement of audit u/s. 44AB does not apply to a person who derives income of the nature Chapter VI-A or deduction u/s.
referred to in the sections 44B and 44BBA. 36(l)(ix).
Due Date: Due date of furnishing the return of income u/s. 139(1) of the relevant assessment year (30th "Head office expenditure" means the
September or 30th November, as the case may be). executive and general administration
Penalty u/s. 271B: Failure to get accounts audited or furnish audit report as required u/s. 44AB will expenditure incurred by the assessee
result in a levy of penalty of 0.5% of total sales, turnover or gross receipts or Rs. 1,50,000, whichever is outside India.
less.
Special provision for computing
income by way of royalties, etc., in
Presumptive taxation - Sec. 44AD
case of non-residents - Sec. 44DA
a) Eligible Assessee: Resident individual, HUF or a firm other than a LLP, carrying on any business
Applicability
whose gross receipts from such business does not exceed Rs. 1 crore
b) Non-Applicability: Sec. 44AD shall not apply to - (i) a person carrying on any profession referred to Income by way of royalty or fees for
in Sec. 44AA; (ii) a person earning income in the nature of commission or brokerage; (iii) a person technical services received from
carrying on any agency business; (iv) business of plying, hiring or leasing goods carriage referred to Sec. Government or an Indian concern
44AE.; (v) an assessee who has availed deduction u/s. 10AA or any other deductions claimed under received by a non-resident.
Chapter VI-A specifically relating to income based deductions.
c) Presumptive Income: A sum equal to 8% of the gross receipts paid or payable to the assessee or Condition
such higher sum as declared by the assessee in the return of income shall be deemed to be the income
from such business. Non-resident should carry on
business in India through a
d) Benefits: Such assessees are neither required to pay advance tax nor maintain books of account as required u/s.
permanent establishment(PE)
44AA. situated therein or perform
e) Declaration of Lower Income: Where the assessee has claimed his income lower than the income professional services from a fixed
prescribed u/s. 44AD and during such previous year his income exceeds the basic exemption limit, he place of profession
shall maintain books of account as per Sec. 44AA and get the same audited u/s. 44AB.
Computation of Income
Sec. 44AE - Business of plying, hiring or leasing goods carriages
Royalty: Income shall be computed
a) Eligible Assessee: Assessee who carries on the business of plying, hiring or leasing goods carriage and who owns under the head "Profits and Gains of
not more than 10 goods carriages at any time during the year. Business or Profession".
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 Fee for Technical Services: It shall
be computed either u/s. 44DA or
income by the assessee.
u/s. 115A, irrespective of the
c) Declaration of Lower Income: Where the assessee has claimed his income lower than the income prescribed u/s. business to which it relates.
44AE, he shall maintain books of account as per Sec. 44AA and get the same audited u/s. 44AB.
Special provision for computing
Common points for Sec. 44AD and Sec. 44AE
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 operative banks - Sec. 44DB
allowed. Successor co-operative bank shall be
c) In the case of an assessee which is a firm to which the provisions of Sec. 44AD or Sec. 44AE are applied, the entitled to deduction u/s. 32, 35D,
salary and interest paid to its partners shall be deducted from the income computed under these provisions. The 35DD and 35DDA in the previous year
allowance of the salary and interest shall be subject to the conditions and limi t specified in Sec. 40(b). in which change of ownership takes
d) Since unabsorbed depreciation is brought forward and set -off using the provisions of Sec. 32(2), the same cannot place on time proportionate basis
be set off against the presumptive income u/s. 44AD or 44AE. However, brought forward business loss can be set-off
and in the subsequent years.
against the same.
Special provisions for non-residents and foreign companies
Section Business of Non-Resident Profit - % On
Sec 42 : Computation of Income in the case of business of prospecting for extraction or Turnover
production of Mineral Oil
44B Shipping business 7.5%
a) Eligible Assessee: Any person carrying on the business of prospecting for extraction or production of mineral oil with whom the 44BB Business of providing services or facilities in connection with or 10%
Central Government has entered into an agreement for association participation duly approved by the Parliament. supplying plant and machinery on hire used in the prospecting for
b) Deductions/Allowances: (a) Infructuous or abortive exploration expenses incurred prior to commencement of or extraction or production of mineral oils
commercial production; (b) expenditure in relation to drilling or exploration activity or in respect of physical assets used (except
44BBA Business of operation of aircraft 5%
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. 44BBB Civil Construction Business 10%
c) Transfer of Business
Situation Treatment
Sale Value <; Expenditure not yet Difference allowed as deduction in the previous year in which the
allowed business/interest is transferred
Sale Value >Expenditure not yet Excess amount shall be chargeable to tax under the head
allowed "Profits and Gains of Business or Profession" of the previous year
in which such business is wholly/partly transferred.

CA Durgesh Singh ©