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Income from PGBP

FCA

R anjeet K unwar

Profit and gains from business or profession


SECTIONS 28 29 30 31 32(1)(i) 32(1)(ii) 32(1)(iia) 32(1)(iii) 32(2) 33AB 33ABA 35 35A 35ABB 35AC 35AD 35CCA 35D 35DD 35DDA 36(1) 37(1) 37(2B) 38 40(a) 40(b) 40A(2) 40A(3) 40A(7) 41(1)/(2)/(3)/(4) 43(1) with its Explanation 43(6) 43B Meaning of WDV for charging depreciation on WDV method Certain expenses allowed on payment basis only CONTENTS Income chargeable as PGBP Computation sheet of PGBP Deduction for expenses in relation to Building Deduction for expenses in relation to Plant, Machine and furniture Depreciation by SLM for Electricity Company Depreciation by WDV for Other assessee Deduction for Additional Depreciation for Manufacturing concern Deduction for Terminal Depreciation (under SLM) Deduction for unabsorbed depreciation Special Deduction for Tea Growing and Manufacturing Concern Deduction for Site Restoration Fund Deduction for the activities of Scientific Research Deduction for Expenses on Patent and copy right (Old provision) Deduction for acquisition of Tele communication license Deduction in respect of eligible project Deduction in respect of expenditure on specified business Deduction in respect of donation to RDP or NUEF Deduction for preliminary expenditure Deduction for expenses on Amalgamation and demarger Deduction for payment on VRS to employee Other (Revenue) deduction General deduction Disallowance of payment to political party Disallowance of expense on assets not wholly for business Certain Expenditure disallowed Remuneration and Interest allowed to Partner from Firm Disallowance of payment made to related party Disallowance @ 20% on Certain Cash payment Disallowance of provision for Gratuity Certain income chargeable to tax as PGBP Actual cost of Depreciable asset under different situation

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140

Income from PGBP


44AA 44AB 44AD/AE/AF 50 50A 145

FCA
Requirement of Tax Audit Presumptive Taxations

R anjeet K unwar

Requirement of Maintenance of Books of Accounts

Capital Gains on Depreciable Asset (WDV method) Capital Gains on Depreciable Asset (SLM method) Method of Accounting (Cash or Mercantile system)

SEC 28 Chargeability The following incomes shall be chargeable to tax under the head Profit & Gains from Business or Profession 1) 2) 3) 4) 5) 6) 7) 8) Profit and gains of any business or profession carried on by the assessee during the previous year. Income of any trade or professional association from specific services performed to its members. Profit on sale of import entitlements license or EXIM scrip. Cash assistance [CCS] Duty drawback The value of any benefit or perquisite arising from any business or profession. Any interest, salary, bonus, commission or remuneration received/due to a partner from partnership firm. Any sum received under an agreement for (a) not carrying out any activity in relation to any business or (b) not sharing any Know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. Note: Where above receipts are chargeable to tax under the head Capital Gain would not be taxable as profits and gains of business or profession. 9) 10) Any sum receives under Key man insurance policy. Profits and gains derived from any Speculation business are also chargeable to tax under the head PGBP. But as per explanation 2 to section 28, the speculation business shall be deemed to be transaction in which the following conditions are satisfied: (a) The Transaction should be a contract for the purchase or sale of stocks, shares or commodities, (b) This contract is periodically or ultimately settled ; and (c) The settlement would not be by actual delivery or transaction or commodities or script, generally, it is settled through exchanging the difference in prices on the date of delivery. 11) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD; [Sec 28(vii)]

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141

Income from PGBP


Keyman Insurance Policy:

FCA

R anjeet K unwar

Keyman insurance policy is taken by a business concern on the life of an employee(keyman) whose services contribute substantially to the success of the business. The object of the keyman insurance is to indemnify a business concern from the loss of earning resulting from the death of a valuable employee. The amount of keyman insurance can be estimated as the monetary value of the likely setback to profits of the concern due to the death of the keyman. Any sum received under a keyman insurance policy including the sum allocated by way of bonus is also taxable. The exemption under section 10(10D) is not available in respect of such policy. The sum received from such policy will be taxable as under: a) If Nominee is Employer:- taxable for employer as PGBP b) If Nominee is Employee:- Taxable for employee as Salary c) If Nominee is Family of the Employee:- Taxable as IFOS SEC 29 Method of calculating taxable profit: Preparing a statement of profit or loss or income-expenditure adjustment:The profit and loss account or income and expenditure account as prepared by an assessee is adjusted as per previous of the Income-tax Act, Profits or losses as shown by any of these accounts are adjusted as follows:Balance as per profit and loss or Income - expenditure account Add: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) Expenses expressly disallowed but debited to P& A/c Expenses not allowed but debited to P&L A/c Incomes or receipts taxable under this head but not credited to P& L A/c Capital expenses debited to P & L A/c Personal expenses debited to P & L A/c Expenses in excess of the allowed amount, debited to P & L A/c Losses not allowed but debited to P & L A/c Expenses not relating to the previous year but debited to P & L A./c Under-valuation of closing stock or over-valuation of opening stock

Less: (i) Expenses expressly allowed but not debited to P & L A/c (ii) Expenses relating to the previous year but not debited to P & L A/c (iii) Losses allowed but not debited to P & L A/c (iv) Incomes or receipts not taxable under this head but credited to P & L A/c (v) Capital receipts credited to P & L A/c (vi) Incomes or receipts taxable under other head but credited to P & L A/c (vii) Over-valuation of closing stock or under-valuation of opening stock (viii) Profits taxable under the head incomes from business or profession. Income taxable under the head PGBP XXX

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142

Income from PGBP

FCA

R anjeet K unwar

SEC 30 Rent, Rates, Taxes, Repairs and insurance for building In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed (a) where the premises are occupied by the assessee (i) as a tenant, the rent paid for such premises ; and further if he has undertaken to bear the cost of revenue repairs to the premises, the amount paid on account of such repairs ; (ii) otherwise than as a tenant, the amount paid by him on account of current repairs to the premises ; (b) any sums paid on account of land revenue, local rates or municipal taxes ; (c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the premises. Expenditure incurred by Tenant Rent, Revenue Repairs
Taxes, Rates & Insurance

Owner

Revenue Repairs SEC 30 Repairs and insurance of machinery, plant and furniture.

In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed (i) the amount paid on account of current repairs thereto; (ii) the amount of any premium paid in respect of insurance against risk of damage or destruction thereof. Depreciation SEC 32(1)(ii) Depreciation on WDV Method In respect of Tangible [Building, plant & machinery & furniture] Intangible [Know-how, copyright, trademark, franchises etc.]

Assets owned wholly or partly by the assessee And used for the purpose of business Depreciation shall be allowed on WDV Of the Block Of Assets At the prescribed percentage.
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143

Income from PGBP


Rate of depreciation

FCA

R anjeet K unwar

Types of Assets
Buildings

A.Y. 2006-07 onwards


5% 10% 100% 10% 15% 15% 30% 60% 60% 20% 60% 40% 100% 100% 40% 100% 60% 100% 25%

Residential General / Hotel Temporary structure


Furniture and Fittings Machinery and Plant

General Motor cars Motor buses/lorries/taxies used in the business of running on hire Gas cylinders including valves and regulators Plant used in filled operations by mineral oil concerns Ships Computers including computer software Aeroplanes Air pollution control equipment Water pollution control equipment Lifesaving medical equipment Books owned by professional

Annual publications others Books owned by assessee carrying on business in running lending
libraries Intangible Assets

SEC 32(1)(iia) Additional Depreciation In the case of any new machinery or plant, which has been acquired and installed, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed a s deduction u/s 32(1)(ii). Note :- Additional depreciation will not be available on the following plant & machinery. (i) (ii) Any P&M the whole of the actual cost of which is allowed as a deduction (by way of depreciation or otherwise) in computing income under the head PGBP. Ships and aircrafts,

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Income from PGBP


(iii) (iv) (v)

FCA

R anjeet K unwar

P & M which was used by any other person before its installation. Any P&M installed in office premises or residential accommodation (including guest house), Any office appliances or road transport vehicles. SEC 43(6) Written down value [WDV] Opening WDV of the block XXX XXX

Add : Actual cost of assets acquired and put to use during the previous year. Less: Money payable in respect of any assets which is sold, discarded or destroyed WDV for the purpose of depreciation Less: depreciation at the prescribed percentage Closing WDV of the block Note: - Money payable means only cash/cheque/bank overdraft etc.

(XXX) XXX (XXX) XXX

[CIT Vs. Kasturi & Sons Ltd. (1999)] SEC 50 Special Provision for Computation of Capital Gains in case of Depreciable Assets. where the capital asset is an asset forming part of a block of assets in respect o f which depreciation has been allowed the capital gain shall be computed as under :(1) Where the sales consideration arising from the transfer of the any capital asset falling within the block of assets exceeds the aggregate of the following amounts: (a) the WDV of the block of assets at the beginning of the previous year and (b) the actual cost of any assets falling within the block of assets acquired during the previous year, (c) cost of transfer; then such excess shall be deemed to be the short term capital gains (profit) (2) Where any block of assets does not exist for the reason that all the assets in that block are transferred during the previous year, Short term capital gains shall be computed as under:Sales Consideration Less: (a) the WDV of the block of assets at the beginning of the previous year (b) the actual cost of any asset falling within the block of assets acquired during the previous year (c) cost of transfer Short term capital gain (profit/loss) XXX (XXX) (XXX) (XXX)

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145

Income from PGBP


Notes regarding Depreciation:1.

FCA

R anjeet K unwar

The lesser who is the legal owner of the assets shall be eligible to claim depreciation for tax purpose. The accounting treatment will have no implication on the allowance of depreciation under the Income Tax Act.

2. In case of Lease Agreement, Lessor can claim depreciation. 3. Plant includes ships, vehicles, books; scientific equipments used for business purpose, but dont include tea bushes or livestock. 4. Theatre building and hotel building are treated as building and cannot be treated as plant for the purpose of claiming depreciation. [CIT Vs. Anand Theatres (2000)](SC.)] 5. Where the assessee has taken the possession of a house in pursuance of an agreement to sell and it is not registered in his name, then he is deemed as owner of the house for claiming depreciation. [Mysore Minerals Ltd. 239 ITR 775 (SC.)] 6. Depreciation on newly acquired assets Any assets which is acquired by assessee during the PY and is put to use for business for a period of less than 180 days in that PY, then the assessee shall be entitled to claim 50% of the normal depreciation allowed.

7. In respect of assets acquired under instalment payment system, the depreciation will be allowed on the entire purchase price as per the agreement. 8. In case of hire purchase transactions, the depreciation will be allowed on amount of cost of the asset; and amount of interest shall be allowed as revenue expenditure. 9. Where the building is specifically designed to function a nursing home with equipments fitted to the wall in operation theatre, then that portion or the building can be regarded as plant. [CIT Vs. Dr. B. Venkata Rao (1999) 243 ITR 81 (SC.)] 10. Actual Cost includes Expenses on test runs of machinery prior to production are part of the actual cost of plant and machinery. [Food Specialties Ltd.] 11. Actual Cost includes Salaries, expenses of guest house maintained for erection staff, travelling, vehicle and general expenses pertaining to setting up of the Plant and Machinery. [Hindustan Polymers Ltd.] 12. Where any depreciable assets are not exclusively used for the business or profession then depreciation u/s32 or expenditure mentioned in sec.30, 31, shall be restricted to a fair proportionate amount which the A.O may determine. [sec.38(2)] 13. Explanation 1 to Sec. 32(1) Capital expenditure incurred on tenanted building:Where any capital expenditure has been incurred by assessee on leasehold building used by the assessee for the business purpose, then such capital expenditure will be treated as the building owned by the assessee. Example:- Mr. RAM is a tenant in a building in which he carries on his business. On 31 -10-07 he incurred an expenditure of Rs. 4 lakh on constructing 3 room set to be used as office on 05 -08-09 he vacated the building and received from the land lord :Case I :- Nil Case II :- 2,50,000 Case III :- 3,50,000

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146

Income from PGBP


SEC 43(1) Actual Cost

FCA

R anjeet K unwar

Actual cost means the actual cost of assets to the assessee, reduced by that portion of cost thereof, if any as has been met directly or indirectly by any other person or authority. Explanation 1 to Section 43(1) :Where an asset is used in the business after it ceases to be used for scientific research the actual cost of the asset will be reduced by the amount of deduction u/s 3 5(1). In other words, actual cost of assets for the purpose of depreciation after the end of use in scientific research shall be taken nil. Explanation 2 to Section 43(1):Assets acquired by gift or inheritance:-Cost of the assets to the assessee :XXX (XXX) XXX

Actual cost to previous owner Less: Depreciation allowed to previous owner Explanation 3 to Section 43(1):- Second Hand Assets Assessee Assets Transfer

Previous Owner

Assets used in Business and the A.O. is satisfied that the main purpose of transfer was the reduction of tax liability; then, Actual cost to the assessee shall be an amount as the A.O. may de termine with the previous approval of joint commissioner. Explanation 4 to Section 43(1):- Re - acquisition of assets Assets Transfer / Gift Assessee Previous Owner

Assets used in business

Assets re-acquired

Actual cost to the assesse shall be A or B whichever is lower

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147

Income from PGBP


Actual cost of assessee when he 1 acquired Less: Dep. allowed to assessee
st

FCA

R anjeet K unwar
XXX (XXX) XXX

A B = Actual price for which the asset is re-acquired

Explanation 5 :- Building brought into use for business purposes subsequent to its acquisition . Actual cost to the assessee shall be . The actual cost of building to the Less: An amount equal to NOTIONAL depreciation XXX (XXX) XXX

Explanation 9 to Section 43(1):- Actual cost where CENVAT is availed. Actual cost of asset shall be reduced by : The amount of excise duty availed as CENVAT credit. Explanation 10 to Section 43(1):- Actual cost of subsidized goods Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by CG/SG, any authority or by any person, in the form or a subsidy or grant or reimbursement, THEN such subsidy/grant/reimbursement shall not be included in the actual cost of the asset to the assessee. Explanation 11 to Section 43(1):Where any asset which was acquired by NR outside India is brought by him to India and used for the purpose of his business, then the actual cost of the asset to the assessee (NR) shall be the actual cost as reduced by the amount of depreciation notionally calculated at the rate in force as if the asset was used in India since the date of acquisition. Explanation 13 to Section 43(1): Where any assets is acquired by assessee covered by section 35AD and deduction has been claimed in respect of whole cost of such asset in the year of acquisition u/s 35AD; the actual cost of such asset in the block of assets shall be taken nil. CBDT Circular Explaining provisions of Finance Act, 2008 Section 32 provides that depreciation shall be allowed on the written down value (WDV) of any block of assets. Section 43(6) provides that written down value means the actual cost less all depreciation actually allowed to him under the Income-tax Act. Some persons were exempt from tax and, therefore, not required to compute their income under the head profits and gains of business or profession. Upon withdrawal of exemption, such persons became liable to income-tax and hence were required to compute their income for income-tax purposes. In this context, dispute has arisen regarding the basis for allowing depreciation under the Income-tax Act in respect of assets acquired during the years when such persons enjoyed tax exemption.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

148

Income from PGBP

FCA

R anjeet K unwar

The Income-tax Appellate Tribunal in the case of Kandla Port Trust v. Asstt. CIT 104 ITD 01 (Rajkot) has held that in the case of such a previously exempt entity, since there was no liability to tax, there was no occasion to compute the income of such person under the provisions of the Income-tax Act. Hence, the depreciation provided in the books in the years when the income was exempt cannot be treated as the depreciation actually allowed. the written down value (WDV) for the purpose of assessment would be the original cost less nil, i.e., the original cost. This interpretation is not in conformity with the intent and purpose of the provisions of depreciation. Accordingly, Explanation 6 has been inserted in sub-section (6) of section 43 to clarify the concerned saturation. Explanation 6 to Section 43(6) Where an assessee was not required to compute his total income for the purposes of this Act for any previous year or years preceding the previous year relevant to the assessment year under consideration, (a) the actual cost of an asset shall be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of account; the total amount of depreciation on such asset, provided in the books of account of the assessee in respect of such previous year or years preceding the previous year relevant to the assessment year under consideration shall be deemed to be the depreciation actually allowed under this Act for the purposes of this clause; and the depreciation actually allowed under clause (b) shall be adjusted by the amount of depreciation attributable to such revaluation of the asset.. SEC 32(1)(i) Depreciation for Power Generating undertakings:1) The undertaking engaged in the business of generation or generation and distribution of power, have the option to claim depreciation on

(b)

(c)

SLM on each asset or WDV on block assets.


2) 3) 4) 5) Provision in respect of assets put to use less than 180 days shall be the same as block of assets. The aggregate amount of depreciation allowed shall not exceed the actual cost of the asset. It is open to such an undertaking to opt the depreciation under WDV method. Where the option is not exercised, the depreciation shall be allowed on the basis of SLM. SEC 32(1)(iii) Terminal Depreciation Where an asset on which depreciation has been claimed u/s 32(1)(i) and which is sold, destroyed or discarded; and If [Sales Consideration] < [Actual cost - Depreciation allowed]

then, difference between above two factors shall be allowed as terminal depreciation in the previous year in which it is sold; destroyed or discarded.

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149

Income from PGBP


SEC 41(2) Balancing Charge

FCA

R anjeet K unwar

Where an asset on which depreciation has been claimed u/s 32(1)(i) and which is sold, destroyed or discarded; and If [Sales Consideration] > [Actual cost - Depreciation allowed] Then, least of following will be treated as income from PGBP as Balancing Charge.

Cost less WDV Sales considerations less WDV


SEC 50A Capital Gain on the transfer of Capital Asset on which SLM depreciation charged Where the sales consideration in respect of assets mentioned above, exceeds the actual Cost of such assets, then Capital gain shall be arise on the above transaction. Capital Gains = Sales Consideration less Actual cost of asset SEC 32(2) Set off and carry forward of Unabsorbed depreciation

The current year depreciation shall be set off against the income from PGBP and the balance, if
any, against the income under any head for that P.Y.

Depreciation which cannot set off shall be carried forward to the next AY and set off against the
income from PGBP and the balance if any against the income under any heads of income. Note: - The unabsorbed depreciation can be C/F for indefinite period. SEC 35 Expenditure on Scientific Research In respect of expenditure on scientific research, the following deductions shall be allowed. Sec. 35(1)
1. Revenue expenditure related to business, however, any revenue expenditure has been incurred before the

commencement of the business within the 3 years immediately preceding the date of commencement of business, shall be allowed as deduction in P/Y in which business is commenced, to the extent certified by the prescribed authority.
2. Capital expenditure on S/R related to business. However, no deduction is admissible in respect of

expenditure incurred on acquisition of any land.


3. Where any capital expenditure is incurred before the commencement of the business, within the 3 years

immediately preceding the commencement of business shall be allowed as deduction in the P/Y in which the business is commenced.

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150

Income from PGBP

FCA

R anjeet K unwar

4. an amount equal to 175% of any sum paid to a Research Association which has as its object the

undertaking of scientific research or to a university, college or other institution to be used for scientific research : Provided that such association, university, college or other institution for the purposes of this clause (A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed; and (B) such association, university, college or other institution is specified as such, by notification61 in the Official Gazette, by the Central Government;
5. An amount equal to 125% of any sum paid to Company to be used by it for research:

Provided that such company (a) (b) (c) is registered in India, has as its main object the scientific research and development, is, for the purposes of this clause, for the time being approved by the prescribed authority in the prescribed manner, and fulfils such other conditions as may be prescribed;

(d)

6. An amount equal to 125% of any sum paid to a research assoc iation which has as its object the

undertaking of research in social science or statistical research or to a university, college, or other institution to be used for research in social science or statistical research . Provided that such association, university, college or other institution for the purposes of this clause(A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such

conditions as may be prescribed; and


(B) such association, university, college or other institution is specified as such, by notification is the

official gazette, by the Central Government. SEC. 35(2AA):An amount equal to 175% of sum paid to any NATIONAL LABORATORY or University for a programme approved in this behalf by the prescribed authority. SEC 35 (2AB):In the case of a company engaged in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule, deduction equal to 200% of the expenditure incurred on research related to business shall be allowed. However Capital expenditure being Land or Building is not covered U/S 35(2AB); but in respect of Building the assessee can claim 100% deduction in section 35(1). No company shall be entitled for deduction under this section unless it enters into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of the accounts maintained for that facility.

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151

Income from PGBP

FCA
THE ELEVENTH SCHEDULE LIST OF ARTICLES OR THINGS

R anjeet K unwar

1. Beer, wine and other alcoholic spirits. 2. Tobacco and tobacco preparations, such as, cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes, chewing tobacco and snuff. 3. Cosmetics and toilet preparations. 4. Tooth paste, dental cream, tooth powder and soap. 5. Aerated waters in the manufacture of which blended flavouring concentrates in any form are used. Explanation.Blended flavouring concentrates shall include, and shall be deemed always to have included, synthetic essences in any form. 6. . Confectionery and chocolates. 7. Gramophones, including record-players and gramophone records. 8. Projectors. 9. Photographic apparatus and goods. 10. Office machines and apparatus such as typewriters, calculating machines, cash registering machines, cheque writing machines, intercom machines and teleprinters. Explanation.The expression office machines and apparatus includes all machines and apparatus used in offices, shops, factories, workshops, educational institutions, railway stations, hotels and restaurants for doing office work 16[and for data processing (not being computers within the meaning of section 32AB 11. Steel furniture, whether made partly or wholly of steel. 12. Safes, strong boxes, cash and deed boxes and strong room doors. 13. Latex foam sponge and polyurethane foam. 14. Crown corks, or other fittings of cork, rubber, polyethylene or any other material. 15. Pilfer-proof caps for packaging or other fittings of cork, rubber, polyethylene or any other material. SEC 41(3) Capital Gain on the Transfer of Scientific Asset Where the scientific research asset has been sold without having been used for other purposes, then least of following shall be charged under PGBP in the year of sale. (i) (ii) Sale proceeds Deductions u/s 35

This shall apply even if the business is not in existence. Notes:1. If the scientific research asset sold without having been used for other purpose, AND Sales Proceeds more than Actual Cost Then; sales proceeds Less Indexed COA/COA 2.

Capital Gains

In respect of the unabsorbed capital expenditure on scientific research, the provisions of set off and carry forward will be applied in the same manner as that of unabsorbed depreciation. [Sec 35(4)]

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152

Income from PGBP 1.

FCA

R anjeet K unwar

Radheshayam Ltd. commenced production of paper on 01-10-2010. The following expenditure has been incurred on scientific research up to the year ending on 31 -03-2011. (I) On 13-10-2010, the company pays Rs. 90,000 to the Indian Agricultural Research Institute, New Delhi, being an approved scientific research institution. (II) On 15-11-2010, the company pays Rs. 60,000 to the Indian Institute on Management, Ahmedabad, being an approved institute u/s 35(1)(iii). (III) On 05-01-2011, the company pays Rs. 55,000 to an National Laboratory f or carrying out programmes of scientific research. (IV) On 22-11-2010, the company purchases a plot of land for Rs. 8,00,000. Later on a laboratory building is constructed (cost of construction Rs. 6,20,000, date of completion of construction 01-02-2011) to start an in house research. (V) Before the commencement of Business, the company had made the following revenue expenditure and Capital expenditure for its research laboratory: Expenditure on salary (Rs. 50,000) and perquisite( Value Rs. 20,000) to research personnel and research material during the 12 months ending on 30 -09-2007. Expenditure on salary of research professional from 01-10-2007 to 30-09-2010 Rs. 96,000 (out of which amount certified by the prescribed authority is Rs. 55,000). Expenditure on providing rent free flat and club facility to research personnel form 01 10-2007 to 30-9-2010 Rs. 28,000. Expenditure on research material from 01-10-2007 to 30-09-2010 Rs. 90,000 (out of which amount certified by the prescribed authority is Rs. 45,000). Capital expenditure on scientific research (not certified by the prescribed authority). Expenditure incurred up to 30-09-2007 Purchase of land for growing herbals for research Purchase of equipments for research Cost of cultivation of herbals 2,70,000 2,50,000 25,000 Expenditure incurred between 01-10-2007 and 30-09-2010 2,50,000 2,50,000 45,000

Determine the amount of deduction available to Radheshyam Ltd. u/s 35(1) for the A.Y. 2011 -12, if the scientific research is:(a) Related to the business of the assessee; and (b) Not related to the business of the assessee.

2.

Sita tel Ltd. is engaged in the business of manufacture of telecommunication equipments. During the P.Y. 2010-11, it incurs the following expenditure on in-house research and development facility:Rs. a. Purchase of land 25,00,000 b. Construction of building 15,90,000 c. Purchase of plant and equipment 6,80,000 d. Research material etc. 5,10,000 Find out the amount of deduction u/s 35 if (a) the research and development facility is approved by the prescribed authority for the purpose of sec 35(2AB); (b) it is not approved by the prescribed authority.

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153

Income from PGBP

FCA

R anjeet K unwar

SEC 35ABB Expenditure for Obtaining license to Operate Telecommunication Services. In respect of any capital expenditure incurred for acquiring any right to operate telecommunication services and for which payment has actually been made to obtain a license, shall be allowed as deduction in equal instalments during the number of years for which the license is in force. Note:- If the payment is made before the commencement of business, the deduction shall be allowed commencing from the year of commencement of business; and in any other case, the deduction shall be allowed commencing from the year of payment. SEC 35AC Expenditure on eligible projects or schemes (1) Where an assessee incurs any expenditure by way of payment to Public Sector Company or a local authority or to an association or institution approved by the National committee for carrying out any eligible project or scheme, the assessee shall be allowed a deduction of the amou nt of such expenditure. The company may, for claiming the deduction, incur expenditure either by way of contribution as aforesaid or directly on the eligible project or scheme.

(2)

Note:- eligible project or scheme means such project or scheme for promoting the social and economic welfare of, or the uplift of, the public as the central Government may, by notification in the Official Gazette, specify in this behalf on the recommendations of the National Committee. (3) The deduction u/s 35AC shall not be allowed unless the assessee furnishes along with his ROI a certificate-

in Form no. 58A from the entity in respect of contribution made. In case where the expenditure is directly incurred (only for co.), a certificate from the
Chartered Accountant. SEC 35CCA Expenditure by way of payment to associations and institutions for carrying out rural development program where an assessee incurs any expenditure by way of contribution made to approved association/institution for implementation of rural development program and contribution to:(i) (ii) National fund for Rural Development National Urban poverty Eradication fund,

The assessee shall be allowed a deduction of the amount of such expenditure incurred during the previous year.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

154

Income from PGBP


SEC 35D Deduction for Preliminary Expenditure

FCA

R anjeet K unwar

Where an Indian company or resident non corporate assessee incurs any expenditure on SPECIFIED PURPOSES, (i) (ii) before commencement of his business, or after commencement of his business ,IN CONNECTION WITH EXTENSION OF HIS INDUSTRIAL UNDERTAKING OR IN CONNECTION WITH SETTING UP NEW INDUSTRIAL UNIT.

the deduction shall be allowed in respect of preliminary expenditure as under : 1/5 th of the least of following will be allowed for each 5 years Actual amount incurred on Specified Purpose 5% of Cost of Project*(in case of Co. COP or Capital Employed whichever is higher) Cost of Project means: actual cost of fixed assets on the last day of P/Y in which business is commenced. Capital Employed means: Share capital + Debentures + Long term borrowings as on the last day of P/Y in which the business is commenced. Specified Purposes for Sec. 35D The expenditure on specified purposes means the following expenditure incurred on:(i) (ii) (iii) (iv) (v) (vi) Preparation of Feasibility report / Project report. Conducting Market survey or any other survey necessary for the business. Legal charges for drafting any agreement/registering the co. Legal charges of drafting MOA/AOA Printing of MOA/AOA In connection with the issue, for public subscription of shares or debenture, underwriting commission. (vi) Engineering services relating to the business of the assessee.

Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved53 in this behalf by the Board;

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

155

Income from PGBP


Example on Section 35D:

FCA

R anjeet K unwar

Ramdeen Ltd. is an Indian company. It commences production on 01-02-2011. The following expenses are incurred by the company before commencement of business:1. Expenses on incorporation, issue of shares, etc Rs. 95,000. 2. Preparation of feasibility report, project report and conducting ma rket survey (the work is completed by the assessee itself) Rs. 1,50,000. 3. Engineering services (work is carried on by a concern which is not approved by the Board) Rs. 1,20,000. Determine the amount of deduction u/s 35D assuming the following figures of fi xed assets and capital on 31-03-2011 (i.e. the last day of the year in which the assessee starts production) : Rs. in lakh Cost of fixed asset 50 Share capital 44 Debentures 11 Long term borrowing from a financial institution 18 SEC 35 DD Expenditure on Amalgamation / Demerger Where an Indian company, incurs any expenditure for the purpose of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to 1/5th of such expenditure for five years. SEC 35DDA Expenditure incurred on compensation under VRS Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, one-fifth 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 instalments for each of the four immediately succeeding previous years. SEC. 35E Deduction for expenditure on prospecting etc. for certain minerals If an Indian company or a resident non-corporate assessee incurs some expenditure, wholly and exclusively in prospecting for any mineral specified in the seventh schedule (Part A or Part B) or on development of a mine or other natural deposit of any such mineral, such expenditure shall be allowed as deduction in 10 equal annual instalments beginning with the previous year in which commercial production of mineral begins. The expenditure eligible for the deduction must be incurred during 5 years period ending with the year of commercially production. But if any portion of such expenditure is met directly or indirectly by any other person or authority and any sale, salvage, compensation of insurance money is realised by the assessee in respect of any property or right brought into existence as a result of such expenditure, the amount of expenditure so met or so realised shall not be allowed as deduction. Thus, deductible expenditure shall be the total expenditure incurred minus the expenditure so met or so realised.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

156

Income from PGBP


SEC 36(1) Other Deduction The following deductions shall be allowed u/s 36 :(i) (ii) Fire insurance premium against the risk of damage of stocks;

FCA

R anjeet K unwar

Any insurance premium paid by paid by any mode of payment other than cash by an employer on the health of employees; Note 1:- Insurance paid on the life of partners is not allowed. It is a personal expenditure. Note 2:- Insurance premium paid under the KEYMAN INSURANCE POLICY will be allowed u/s 37(1).

(iii) Any sum paid to an employee as bonus or commission; Note: - There is no restriction on the amount of bonus. It may exceed the paymen t under bonus Act. (iv) The amount of interest paid in respect of capital borrowed for the purposes of business or profession; (v) Discount on ZERO COUPON BOND will be deductible on pro rata basis.

(vi) Employers contribution to RPF or approved superannuation fund. (vii) Employers contribution to approved gratuity fund. (viii) Any sum received by the assessee u/s 2(24)(x) will be allowed as deduction only if such amount is credited to the employee account in relevant fund on or before the date prescribed under such fund.
Employees contribution to Provident Fund, Superannuation fund and other fund for the welfare of Employees. Sec 2(24)(x) :- Income includes any sum received by the assessee from him employee as contributions to any PF or SAF or any fund set up under the provisions of Employees State Insurance Act or any other fund for the welfare of the employee.

(ix) In respect of animals, which are used for the purpose of business or profession and have died, the actual cost less amount realised on the sale of animal is allowable as deduction. (x) The amount of any bad debt which is written off as irrecoverable in the accounts of the assessee for the previous year; Conditions:a. Particular debtor should be write off; and b. Amount of debts has been treated as income in the year of written off or earlier year. Note 1:- condition no. (b) is not applicable for Banking Co. or Financial institution. Note 2:- Provisions for bad debts is not allowed. (xi) Any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees Provided that where such expenditure or any part thereof is of a capital nature, one-fifth of such expenditure shall be deducted for the previous year in which it was incurred; and the balance thereof shall be deducted in equal instalments for each of the four immediately succeeding previous years (xii) Securities Transaction Tax in respect of the taxable securities transactions entered into in the course of his business will be allowed.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

157

Income from PGBP


SEC 37(1) General Deduction

FCA

R anjeet K unwar

Any expenditure other than specifically mentioned in Sec. 30 to 36 shall allowed as deduction, if the following conditions are satisfied. a) It is not in the nature of capital expenditure; b) It is not in the nature of personal expenses of the assessee, and c) It is laid out wholly and exclusively for the purpose of the business of the assessee; d) It should not have been incurred for any purposes, which is an offence or is prohibited under any law. SEC 37 (2B) :According to this section, any expenditure incurred by an assessee on advertisement in any souvenir, broacher, tract, pamphlet or the like, published by a political party is not allowed. Note : - Donation to political party is not allowed as deduction. Amount Not Deductible SEC 40(a) Expenses Expressly Disallowed The following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession, (i) in the case of any assessee, any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable, (A) outside India; or (B) in India to a non-resident, on which TDS is deductible and such TDS has not been deducted or, after deduction, has not been paid within time allowed in TDS chapter. Provided that where in respect of any such sum, TDS has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. (ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or subcontractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which TDS is deductible and such TDS has not been deducted or, after deduction, has not been paid on or before the due date of ITR; or Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

158

Income from PGBP


(ii) Income tax paid or Provision thereof is not allowable; (iia) Wealth tax paid is not allowable;

FCA

R anjeet K unwar

Note1:- Valuation fees paid for getting the valuation of assets for the purpose of Wealth tax/Income tax is ALLOWABLE as revenue expenses u/s 37(1). Note2:- Litigation exp. in relation to income tax cases and tax audit fees is allowable expenditure u/s 37(1). (iii) any payment which is chargeable under the head Salaries, if it is payable (A) outside India; or (B) to a non-resident, and if the TDS has not been paid thereon nor deducted therefrom. (v) Any tax paid by an employer referred to in section 10(10CC) will not be allowed.

Sec 10(10CC): Exemption of tax paid by employer under the head Salary In the case of an employee deriving income in the nature of a non -monetary perquisite u/s 17(2), the tax on such income actually paid by his employer, at the option of the employ er, on behalf of such employee, will be exempt in hand of employee under the Salary.

SEC 40 (b) Interest and Remuneration to partners (1) Payment of salary, bonus, commission (called as remuneration) is to a working partner, will be allowed as under, (a) on the first Rs. 3,00,000 of the book- Rs. 1,50,000 or at the rate of 90 per cent of the profit or in case of a loss book-profit, whichever is more; (b) on the balance of the book-profit Conditions for allowance of remuneration:(a) The payment should be authorised by partnership deed. (b) It should be for the period falling after the date of the partnership deed. (c) The payment should be made to working partners (2) The payment of interest to a partner (whether working or non-working) will be allowed to the extent of 12% per annum simple interest. Conditions for allowance of Interest (i) The payment should be authorized by the partnership deed at the rate of 60 per cent :

(ii) The payment of interest should relate to a period falling after the date of partnership deed.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

159

Income from PGBP


Explanation 1 to sec. 40 (b):-

FCA

R anjeet K unwar

Where an individual is a partner in a firm on behalf of any other person as a representative capacity, then,
The interest paid to such individual as representative capacity will be allowed to the extent

specified in sec.40 (b)


The interest paid to such individual as otherwise than representative capacity will not be

taken into consideration for sec.40 (b). Explanation 2 to sec. 40 (b):Where an individual is a partner in a firm as otherwise than representative capacity, the interest paid to such individual by firm to such individual shall not be taken into consideration for sec. 40 (b), if such interest is received by such individual on behalf of any other person. Computation of Book Profit Net Profit or the firm as per P & L A/c Add/Less: Adjustment u/s 28 to 44D [Except u/s 40(b)] Add : Interest and salary debited to P & L A/c : Interest allowed u/s 40(b) Book Profit xxx xxx

xxx

Less

xxx xxx

SEC 40(ba):- Any payment of interest, salary, bonus, commission made by AOPs/BOIs to its members is disallowed. Expenditure Not Deductible Under Certain Circumstances SEC 40A (2) Payment to Specified Persons Where the assessee incurs any expenses in respect of which,

Payment had been made to certain specified person the A.O. may disallow so much of the expenses, as he considers to be unreasonable having regard to the, FMV of goods or services.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

160

Income from PGBP


Specified Persons:Assessee Individual Specified Persons

FCA

R anjeet K unwar

* Relatives *Any person in whose business the individual or his relative has substantial interest. * Director * Relatives of director * Person in whose business the company or director or any relative of such director has substantial interest * Partner * Relatives of Partner *Person in whose business the firm or Partner or any relative of such partner has substantial interest * Member * Relative of the member * Person in whose business the AOPs or any member or any relative of such member has substantial interest. * Member * Relative of the member * Person in whose business the HUF or any member or any relatives of such member Has substantial interest. * Individual or HUF or AOPs or firm or co. having Substantial interest in the assessees business or profession. SEC40A (3) Cash expenditure exceeding Rs. 20,000

Company

Firm

AOPs

HUF

Any other Assessee

Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payeee cheque or account payeee bank draft, exceeds Rs. 20,000, no deduction shall be allowed in respect of such expenditure. SEC 40A (3A):Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year, the assessee makes payment in respect thereof, otherwise than by an account payee cheque or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty Rs. 20,000: Provided that no disallowance shall be made under sub-section (3) and (3A), in such cases and under such circumstances as may be prescribed (Rule 6DD).

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

161

Income from PGBP

FCA

R anjeet K unwar

Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words twenty thousand rupees, the words thirtyfive thousand rupees had been substituted. RULE 6DD Exceptional Circumstances for Section 40(A)(3)/(3A) (a) Where the payment is made to (i) (ii) the Reserve Bank of India or any banking company as defined in section 5(c) of the Banking Regulation Act, 1949; the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959;

(iii) any co-operative bank or land mortgage bank; (iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949 ; (v) the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956: (b) (c) Where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender; Where the payment is made by (i) (ii) any letter of credit arrangements through a bank, a mail or telegraphic transfer through a bank;

(iii) a book adjustment from any account in a bank to any other account in that or any other bank; (iv) a bill of exchange made payable only to a bank; (v) the use of electronic clearing system through a bank account; (vi) a credit card; (vii) a debit card. Explanation.For the purposes of this clause and clause (g), the term "bank" means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank [not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949, whether incorporated or not, which is established outside India; (d) (e) Where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee; Where the payment is made for the purchase of (i) (ii) agricultural or forest produce; or the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or

(iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; (f) 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 products;

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

162

Income from PGBP


(g)

FCA

R anjeet K unwar

Where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; Where any payment is made to an employee of the 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 gratuity,' retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed fifty thousand rupees; Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee (i) (ii) is temporarily posted for a continuous period of fifteen 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;

(h)

(i)

(j) (k) (l)

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 any person to his agent who is required to make payment in cash for goods or services on behalf of such person; Where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.

Explanation.For the purposes of this clause, the expressions "authorised dealer" or "money changer" means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force. SEC 40A (7) Provision for Gratuity will not allowed No deduction shall be allowed in respect of any provision made for gratuity. Exceptions:1. Payment towards an approved gratuity fund is allowed subject to Sec. 43B. 2. Provision for gratuity actually became payable during the P/Y. Note:1- Contribution to unapproved gratuity fund is not allowed. Note:2- If a policy is taken from LIC to provide for gratuity of employees, the actual as revenue expenditure u/s 37 (1). SEC. 145:- Method of Accounting Income chargeable under the head PGBP or Income from Other Sources shall be computed in accordance with either CASH or ACCRUL system of accounting regularly employed by the assesee. Note 1:- The assessee can adopt cash system for one business and accrual system for [Same is applicable for IFOS]. another business premium paid is allowed

Note 2:- An assessee can change the method of accounting followed by him provided that the change is for a BONAFIDE REASON and the changed method is followed consistently by the assessee.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

163

Income from PGBP


Accounting Standards Notified u/s 145

FCA

R anjeet K unwar

The following accounting standards are notified to be followed by all assessee following mercantile system of accounting namely:1. 2. Accounting standard I relating to disclosure of accounting policies. Accounting standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies. SEC 43B Certain Deductions to be Only on Actual Payment. The following expenses shall be allowed only in that previous year in which such sum is actually paid by assessee. (a) any tax, duty, or fee under any law for the time being in force, or (b) employer to any provident fund or superannuation fund or gratuity fund or any ot her fund for the welfare of employees, or (c) any sum payable to an employee as bonus or commission, or (d) any interest on any loan from any public financial institution or a State financial corporation or a State industrial investment corporation, or (e) any interest on any loan and advance from a scheduled bank, or (f) any sum in respect of any leave encashment, Note:- If any sum referred above is actually paid by the assessee on or before the due date for furnishing the return of income under section 139(1) in respect of the previous year in which the liability and the evidence of such payment is furnished by the assessee along with such return, then it shall be allowed in that P.Y. in which such liability incurred. Note:- Where any interest covered under section 43B is covered into fresh loan, it will not be treated as payment of interest and therefore interest will not be allowed as deduction. SEC 41(1) Profit Chargeable to Tax (a) Where any loss or expenditure has been allowed as deduction and subsequently any amount is received, then the amount so received shall be deemed to be the Income of the P/Y in which such amount is received. (b) Where a deduction has been allowed in respect of a trading liability and subsequently there is a remission or cessation of the trading liability then the amount of trading liability so ceased shall be deemed to be the income of the P/Y in which such remission or cessation took place. The above provisions shall apply even if the business is not in existence

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

164

Income from PGBP


SEC 41 (4) Recovery of bad debts

FCA

R anjeet K unwar

Where a deduction has been allowed in respect of bad debts and the bad debts is subsequently recovered, then the amount so recovered shall be deemed to be the income of P/Y in which the amount is recovered. This shall apply even if business is not in existence. SEC 44A Special provisions regarding Mutual Concern Mutual Concern Trade/Professional Other

Specific services to members taxable

General services to members exempt

General/ Specific services to non-members taxable

General/ Specific services to members exempt

General/ Specific services to non- members taxable

Note : - The tax rate applicable to a mutual concern shall be the same as applicable to an individual (except where the Mutual Concern is incorporated as a company). SEC 44AA Maintenance of Accounts by certain persons carrying on profession or business. (1) Any assessee carrying on business or profession other than the profession notified under Rule 6F, the books of accounts are required to be maintained, If, (a) Where income from business or profession exceed Rs.120000 in any of the 3 preceding previous year or likely to exceed during current year, OR (b) Where the turnover or sales or gross receipts exceed Rs.10 lacs in any of the preceding 3 year or likely to exceed during the current year, OR (c) Where the assessee has claimed lower income than as prescribed u/s 44AE/44BB/44BBB. OR (d) where the assessee has claimed such income to be lower than as prescribed u/s 44AD and his income exceeds the maximum amount which is not chargeable to income-tax during such previous year.. Note:- The assessee whose covered above are required to maintain such books of account and documents as may enable the A.O. to compute the total income in accordance with the provisions of the Income Tax Act, 1961.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

165

Income from PGBP

FCA

R anjeet K unwar

(2) Any assessee carrying on the profession of law, medicine, accountancy, architecture, interior decoration, authorised representative, film artist, engineering, technical consultancy or IT, the specified books of account are required to be maintained, If, the gross receipts have exceeds Rs.1,50,000 in all the 3 P.Y. immediately preceding the PY or is likely to exceed Rs.1,50,000 during the current previous year (where the profession is newly setup) Specified Books to be maintained:(a) (b) (c) (d) (e) (f) Cash book Ledger Journal Bills and vouchers in respect of expenses incurred Copies of bills issued exceeding Rs.25 For medical practitioner, the following additional books are to be maintained: Daily case register (Form 3C) Medicine Inventory Register

Note:- The above books of account are required to be kept at the principal place of business and for a period of 6 years from the end of the relevant A.Y. SEC 271A Failure to keep, maintain or retain books of account, documents, etc. If any person fails to keep and maintain any such books of account and other documents as required by section 44AA or the rules made thereunder, in respect of any previous year or to retain such books of account and other documents for the period specified in the said rules, the Assessing] Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum of ` 25,000. SEC 44AB Tax Audit Every person, (a) Carrying on business shall, if his total sales, turnover or gross receipts as case may be, in business exceeds Rs.60 lakhs in any P.Y. OR (b) Carrying on profession shall, if his gross receipts in profession exceeds Rs.15 lakhs in any P.Y. OR (c) Carrying on the business referred to in Sec. 44AE and claiming his income from any such business to be lower than the income computed in accordance with relevant section; (d) Where the assessee has claimed such income to be lower than as prescribed u/s 44AD and his income exceeds the maximum amount which is not chargeable to income-tax during such previous year. get his accounts of such relevant previous year audited by a chartered accountant before the specified date and the audit report obtained under this provision is required to be furnished by that date.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

166

Income from PGBP


Notes:(1) Specified date means 30th September of the relevant A.Y.

FCA

R anjeet K unwar

(2) This section does not apply to persons who derived income referred u/s 44B or 44BBA. (3) In case of an agent who earns only commission income, the audit of account is required only if the gross commission exceeds Rs. 60 lakhs. (4) Consequence of non-compliance of sec. 44AB. (i) Defective return: - where the audit report obtained u/s 44AB is not filed along with the return of income then the A.O. may treat the return as defective return. (ii) Penalty u/s 271B:@ 0.5% of the gross turnover or Rs.1,50,000, whichever is less. (5) The audit report shall be submitted in the following forms:(i) In case of a person who carries on business or profession and who is required by or under any law to get his accounts audited * Audit Report * Statement particulars (ii) Form No. 3CA Form No. 3CD

In case of person who carries on business or profession but not being a person referred to point no. (i) * Audit Report * Statement particulars Form No. 3CB Form No. 3CD

SEC 44AD Deemed income from Eligible business (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to 8% of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and gains of business or profession. Provided further that the provisions of section 44BB shall not apply in respect of the income referred to in this section. (2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed; Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in section 40(b). (3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

167

Income from PGBP

FCA

R anjeet K unwar

(4) The provisions of Chapter XVII-C (Advance Tax) shall not apply to an eligible assessee in so far as they relate to the eligible business. (5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to incometax, shall be required to keep and maintain such books of account and other documents as required under section 44AA(2) and get them audited and furnish a report of such audit as required under section 44AB. Explanation.For the purposes of this section, (a) eligible assessee means, (i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under section 2(1)(n) of the Limited Liability Partnership Act, 2008; and (ii )who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading C Deductions in respect of certain incomes in the relevant assessment year; (b) eligible business means, (i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and (ii) whose total turnover or gross receipts in the previous year does not exceed an amount of Rs. 60 lakhs. SEC 44AE Deemed income from Transport operation business (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee, who owns not more than ten goods carriages at any time during the previous year and who is engaged in the business of plying, hiring or leasing such goods carriages, the income of such business chargeable to tax under the head Profits and gains of business or profession shall be deemed to be the aggregate of the profits and gains, from all the goods carriages owned by him in the previous year, computed in accordance with the provisions of sub-section (2). (2) For the purposes of sub-section (1), the profits and gains from each goods carriage, (i) being a heavy goods vehicle, shall be an amount equal to five thousand rupees for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher; other than a heavy goods vehicle, shall be an amount equal to four thousand five hundred rupees for every month or part of a month during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher.

(ii)

(3)

Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed:

Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.

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Income from PGBP


(4)

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R anjeet K unwar

The written down value of any asset used for the purpose of the business referred to in sub-section (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. The provisions of sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in sub-section (1) and in computing the monetary limits under those sections, the gross receipts or, as the case may be, the income from the said business shall be excluded. Nothing contained in the foregoing provisions of this section shall apply, where the assessee claims and produces evidence to prove that the profits and gains from the aforesaid business during the previous year relevant to the assessment year commencing on the 1st day of April, 1997 or any earlier assessment year, are lower than the profits and gains specified in sub-sections (1) and (2), and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the assessee on the basis of assessment made under sub-section (3) of section 143. Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in sub-sections (1) and (2), if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.

(5)

(6)

(7)

Explanation.For the purposes of this section, (a) (b) The expression Heavy goods vehicle means any goods carriage the gross vehicle weight of which exceeds 12000 kgs. an assessee, who is in possession of a goods carriage, whether taken on hire purchase or on instalments and for which the whole or part of the amount payable is still due, shall be deemed to be the owner of such goods carriage. Memorandum Explaining Finance Bill, 2009 Special provision for computing profits and gains of business on presumptive basis The existing provisions of the Income-tax Act, provide for taxation of income on presumptive basis in the case of construction business, income from goods carriages and business of retail trade. Section 44AD prescribes a method of presumptive taxation for assessees engaged in the business of civil construction or supply of labour for civil construction in which a sum equal to eight percent of the gross receipts is deemed to be the profits and gains from business. Section 44AE provides presumptive provisions for the assessees engaged in the business of plying, hiring or leasing upto ten goods carriages in which a prescribed sum per vehicle is deemed to be the presumptive income of the assessee. Section 44AF prescribes a method of presumptive taxation for retail trade, under which the presumptive income is computed at the rate of a sum equal to five per cent of the total turnover. There has been a substantial increase in small businesses with the growth of transport and communication and general growth of the economy. A large number of businesses and service providers in rural and urban areas who earn substantial income are outside the tax-net. Introduction of presumptive tax provisions in respect of small businesses would help a number of small businesses to comply with the taxation provisions without consuming their time and resources. A presumptive income scheme for small taxpayers lowers the compliance cost for such taxpayers and also reduces the administrative burden on the tax machinery. In view of the above, it is proposed to expand the scope of presumptive taxation to all businesses by substituting a new section 44AD. The salient features of the proposed presumptive taxation scheme are as under: (a) The scheme shall be applicable to individuals, HUFs and partnership firms excluding Limited liability partnership firms. It shall also not be applicable to an assessee who is availing deductions under sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading "C.Deductions in respect of certain incomes" in the relevant assessment year.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

169

Income from PGBP

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(b) The scheme is applicable for any business (excluding a business already covered under Sec. 44AE) which has a maximum gross turnover /gross receipts of 40 lakhs. (c) The presumptive rate of income is prescribed at 8% of gross turnover /gross receipts. (d) An assessee opting for the above scheme shall be exempted from payment of advance tax related to such business under the current provisions of the Income-tax Act. (e) An assessee opting for the above scheme shall be exempted from maintenance of books of accounts related to such business as required under section 44AAof the Income-tax Act.

R anjeet K unwar

(g) An assessee with turnover below Rs 40 lakhs, who shows an income below the presumptive rate prescribed under these provisions, will, in case his total income exceeds the taxable limit, be required to maintain books of accounts and also get them audited. (h) The existing section 44AF is proposed to be made inoperative for the assessment year beginning on or after 1st day of April, 2011. The proposed amendment will take effect from 1 st April, 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years. [Clauses 18,19,20,21,22] Presumptive income for truck owners under section 44AE Under the existing provisions of section 44AE, a presumptive scheme is available to assessees engaged in business of plying, hiring or leasing goods carriages. The scheme applies to an assessee, who owns not more than 10 goods carriages at any time during the previous year. Under this scheme, which is optional to the assessee, a fixed amount of income per vehicle is taken at the rate of Rs.3,500/ - per month per vehicle for owners of heavy goods vehicle, and Rs.3,150/- per month per vehicle for the owners of light goods vehicles. An assessee opting for this scheme is exempted from maintaining books of account to substantiate the income. It is proposed to enhance the presumed income per vehicle for the owners of-(i) heavy goods vehicle to Rs.5,000/- per month; and (ii) other than heavy goods vehicles to Rs.4,500/- per month. It is further proposed to provide an anti-avoidance clause stating that a prescribed fixed sum or a sum higher than the aforesaid sum claimed to have been earned by the assessee shall be deemed to be profits and gains of such business. The proposed amendment will take effect from the 1 st April, 2011 and will, accordingly, apply in relation to assessment year 2011-12 and subsequent years. [Clause 21] SEC 44B Special provisions for computing profits and gains of Shipping Business in the case of Non-Residents Notwithstanding anything contained in sec.28 to 43A in the case of an assessee being a non-resident engaged in the business of operation of ships, a sum equal to 7% of the aggregate of the (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India.

(ii)

shall be deemed to be the profits and gains of such business.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

170

Income from PGBP

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R anjeet K unwar

SEC 44BBA Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents. Notwithstanding anything contained in sec. 28 to 43A, in the case of an assessee being a non-resident. , engaged in the business of operation of aircraft, a sum equal to 5% of (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of goods, passengers, livestock, mail from any place in India; and (b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods from any place outside India. shall be deemed to be the profits and gains of such business. SEC 44BBB Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc. in certain turnkey power projects.

Notwithstanding anything contained in sec. 28 to 44AA in the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery, or testing and commissioning thereof in connection with a turnkey power project approved by the Central Government in this behalf and financed under international aid programme, a sum equal to 10% of the amount paid or payable to the assessee or any person on his behalf in this connection whether in India or outside India. shall be deemed to be profits and gains of business or profession. SEC 33AB Tea Development Account, coffee development account and rubber development account .

(1) If an assessee who is carrying on the business of growing and manufacturing tea or coffee or rubber in India has deposited any amount with National Bank ( special account ) under a scheme approved by Tea Board or the Coffee Board or the Rubber Board ; or deposited any amount in Tea Deposit Account opened under the scheme approved by Tea Board ( deposit scheme ) with previous approval of Central Government.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

171

Income from PGBP

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R anjeet K unwar

before the expiry of 6 months from the end of the previous year or before the due date of furnishing the return of his income, whichever is earlier. then he shall be liable to allowed a deduction of amount, equal to:Amount Deposited or 40% of PGBP before allowing 33AB (2) whichever is lower

The account should be audited by a Chartered Accountant and certificate should be filed along with return of income. Any amount standing in the special account or the Deposit Account shall not be allowed to be withdrawn except for the purposes specified in the scheme or, in the circumstances specified below:(a) (b) (c) (d) (e) Closure of the business. Death of assessee. Dissolution of partnership firm. Partition of HUF. Liquidation of company.

(3)

(4) where any amount standing to the credit of the assessee in the special account or in the Deposit Account is released during any previous year by the National Bank or withdrawn by the assessee from the Deposit Account and such amount is utilised for the purchase of (a) any machinery or plant to be installed in any office premises or residential accommodation; (b) any office appliances (not being computers); (c) any machinery or plant, the whole of the actual cost of which is allowed as a deduction; the whole of such amount so utilised shall be deemed to be the profits and gains of business of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year. (5) Where any amount, standing in the special account or in the Deposit Account, is withdrawn during any previous year by the assessee in the circumstance specified in clause (a) or clause (c) of sub-section (3), the whole of such amount shall be deemed to be the profits and gains of business or profession of that previous year. (6) Where any amount, standing in the special account or in the Deposit Account, which is released during any previous year is not so utilised, within that previous year, such amount which is not so utilised shall be deemed to be profits and gains of business of that previous year. If any asset acquired in accordance with the scheme is transferred in any previous year before the expiry of 8 years from the end of the previous year such part of the cost of asset shall be deemed to be the PGBP of the previous year in which asset is transferred except in the following cases:-

(7)

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R anjeet K unwar

(i) Where assets is transferred to Government or Govt. Company or Local Authority. (ii) Where assets is transferred at the time of takeover of a firm by a company.

Explanation 7 to Section 43(6) For the purposes of this clause, where the income of an assessee is derived, in part from agriculture and in part from business chargeable to income-tax under the head Profits and gains of business or profession, for computing the written down value of assets acquired before the previous year, the total amount of depreciation shall be computed as if the entire income is derived from the business of the assessee under the head Profits and gains of business or profession and the depreciation so computed shall be deemed to be the depreciation actually allowed under this Act.. Memorandum Explaining Finance bill 2009, Definition of written down value under section 43(6) Clause (ii) of sub-section (1) of section 32 provides that depreciation is to be allowed and computed at the prescribed percentage on the written down value (WDV) of any block of assets. Sub-clause (b) of clause (6) of section 43 provides that WDV in the case of assets acquired before the previous year shall be computed by taking the actual cost to the assessee less all depreciation "actually allowed" to him under the Income-tax Act. Rules 7A, 7B and 8 of the Income tax Rules, 1962, deal with the computation of composite income where income is derived in part from agricultural operations and in part from business chargeable to tax under the Income tax Act, 1961 under the head "Profits & Gains of Business". These rules prescribe the method of computation in the case of manufacture of rubber, coffee and tea. In such cases, the income which is brought to tax as "business income" is a prescribed fixed percentage of the composite income. The Hon'ble Supreme Court in the case of CIT Vs. DoomDooma India Ltd (222 CTR 105) has held that in view of the language employed in sub-clause (b) of clause (6) of section 43 regarding depreciation "actually allowed", where any income is partially agricultural and partially chargeable to tax under the Income tax Act, 1961 under the head "Profits & Gains of Business", the depreciation deducted in arriving at the taxable income alone can betaken into account for computing the WDV in the subsequent year. For instance, Rule 8 prescribes the taxability of income from the manufacture of tea. Under the said rule, income derived from the sale of tea grown and manufactured by seller shall be computed as if it were income derived from business, and 40% of such income shall be deemed to be income liable to tax. Asa result of the Court decision on depreciation to be "actually allowed" for computing WDV, the resultant computation of depreciation is as per the following illustration: Sale proceeds of made tea Less : Expenses Depreciation -(10% of Rs. 1,000) Others expensesComposite income Income subject to charge under the IT. Act, 1961 by application of Rule 8 (40% of 600) Income not chargeable to income-tax (60% of 600) Rs. 1,000 (100) (300) 600 240 360

According to the interpretation of the Court, the W.D.V. of the fixed asset forthe immediately succeeding year is to betaken at Rs.960/- (Rs.1,000 minus Rs.40 being depreciation allocated for business income) and not Rs.900/- (Rs.1,000 minus depreciation of Rs.100/- allowed for determining composite income). Thus the depreciation for which deduction is allowed to the assessee while computing its agricultural income is to be ignored for computing the W.D.V. of the asset according to the Court ruling. The above interpretation is not in accordance with the legislative intent. WDV is required to be computed by

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173

Income from PGBP

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deducting the full depreciation attributable to composite income. Hence in the above illustration, the WDV of the fixed asset forthe immediately succeeding year is to be taken at Rs.900/- and not 960/- as held by the Supreme court. The ambiguity in this case has arisen on account of the interpretation of the meaning of the phrase "actually allowed" in sub-clause (b) of clause (6) of section 43. It is therefore proposed to provide that in the cases of 'composite income', notwithstanding that the assessee was not required to compute a part of his income for the purposes of Income-tax Act for any previous year, depreciation shall be computed as if the total composite income of the assessee is chargeable under the Income-tax Act and such depreciation shall be deemed to have been "actually allowed" to the assessee. This amendment will take effect from the 1st April, 2010 and will, accordingly, apply in relation to assessment year 2010-11 and subsequent years. [Clause 17]

R anjeet K unwar

SEC 33ABA Site Restoration Fund (1) If an assessee who is carrying on business, consisting of prospecting or extracting or production of petroleum or natural gas in India, and in respect of which the Central Government has entered into an agreement with the assessee. and the assessee has before the end of the previous year deposited with (a) State Bank of India in a scheme approved by Ministry of Petroleum and Natural Gas ;or (b) Site Restoration Fund account. then, the assessee shall be liable to allowed a deduction of amount equal to Amount Deposited Or 20% of current year profit of such business (2) Rest provisions are same as section 33AB 35AD. Deduction in respect of expenditure on specified business 1. Section 35AD provides 100% deduction in respect of the any capital expenditure (excluding Land, Goodwill and Financial Instruments) incurred by assessee engaged in specified business, during the previous year in which such expenditure is incurred. Specified Business: (a) setting up and operating cold chain facilities for specified products; (b) setting up and operating warehousing facilities 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. 2. The benefit will be available (c) Whichever is lower

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174

Income from PGBP

FCA

R anjeet K unwar

(a) in a case where the business relates to laying and operating a cross country natural gas pipeline network for distribution, if such business commences its operations on or after the 1st day of April, 2007 and (b) in any other case, if such business commences its operation on or after the 1st day of April, 2009. 3. This section applies to the specified business which fulfills all the following conditions, namely : (i) it is not set up by splitting up, or the reconstruction, of a business already in existence; (ii) it is not set up by the transfer to the specified business of machinery or plant previously used for any purpose; (iii) where the specified business is of the nature of poin (c), (a) it is owned by a Indian company; (b) It has been approved by the Petroleum and Natural Gas Regulatory Board; (c) It has made not less than such proportion of its total pipeline capacity as specified by regulations made by the Petroleum and Natural Gas Regulatory Board established under sub-section (1) of section 3 of the Petroleum and Natural Gas Regulatory Board Act, 2006 available for use on common carrier basis by any person other than the assessee or an associated person; and 4. The assessee shall not be allowed any deduction in respect of the specified business under the provisions of Chapter VIA; 5. No deduction in respect of the expenditure in respect of which deduction has been claimed shall be allowed to the assessee under any other provisions of the Income-tax Act. 6. Any sum received or receivable on account of any capital asset, in respect of which deduction has been allowed under section 35AD, being demolished, destroyed, discarded or transferred shall be treated as income of the assessee and chargeable to income tax under the head Profits and gains of business or profession. 7. Any loss computed in respect of the specified business shall not be set off except against profits and gains, if any, of any other specified business. To the extent the loss is unabsorbed the same will be carried forward for set off against profits and gains from any specified business in the following assessment year and so on. cold chain facility means a chain of facilities for storage or transportation of agricultural and forest produce, meat and meat products, poultry, marine and dairy products, products of horticulture, floriculture and apiculture and processed food items under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce; SEC 36(1)(viii) Deduction of special reserve for certain financial institutions or company Where any Specified entity creates and maintain any special reserve, the deduction not exceeding 20% of PGBP from eligible business will be allowed as deduction from computing PGBP. Where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess.

Explanation.in this section Specified entity and eligible business means, (a) Financial Corporation, banking company and any co-operative bank (other than a primary agricultural credit society) or primary co-operative agricultural and rural development bank.

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Income from PGBP

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R anjeet K unwar

Eligible business: the business of providing long-term finance for:(i) (ii) (iii) (b) Industrial or agricultural development; development of infrastructure facility in India; or development of housing in India;

Housing finance company; Eligible business: the business of providing long-term finance for the construction or purchase of houses in India for residential purposes

(c)

Any other financial corporation including a public company; Eligible business: - the business of providing long-term finance for development of infrastructure facility in India.

long-term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;
Deduction: According to Different Judicial Judgements: The following expenses are covered under Sec 37(1) as per general commercial and accounting principles and decisions in different leading cases:(1) (2) (3) (4) (5) Expenses incurred for purchasing the raw materials and manufacturing the goods. Expenses in connection with safe and distribution of manufactured goods. Labour welfare expenses. Pension, gratuity and other payment to the employee. Expenditure incurred by an assessee on the hospitality of any person whether underage terms of a contract or otherwise or under the ordinary customs or usage of business or profession. It includes the provision for food provided by the assessee to his employees in office, factory or other place of their work. Advertisement expenditure incurred in connection with the business or on the maintenance of Glow sign board, Neon sign board and Hoardings are allowable deduction as per the provisions of this section. Loss due to embezzlement will be admitted u/s 37 (1) as it is incurred in carrying out the business and is incidental to the Operation of business, It is a loss of revenue nature, incurred during previous year. It is not a notional or fictitious loss. Compensation paid due to negligence of the assessee or his employee during the course of business. Compensation paid to a customer for injuries caused due to defective goods.

(6) (7)

(8) (9)

(10) Loss incurred due to theft or burglary in factory premises during or after working hours. (11) Cash shortage found in business at the end of a day. (12) Compensation paid for termination of selling agency agreement. (13) Compensation paid to an agent for termination of the agency agreement. (14) Sales-tax and expenses in connection with the appeal against Sales tax.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

176

Income from PGBP

FCA

R anjeet K unwar

(15) Any other compensation or damages in connection with the business or profession. (16) Royalty or Minimum rent payable in connection with mines, copyrights or patent rights. (17) Legal and other expenses in connection with Income-tax assessment. (18) Legal and other expenses in connection with appeal against income-tax. (19) Compensation payable on the breach of a business contract. (20) Damages paid for breach of forwarding contracts. (21) Damages paid for failure to fulfil the contract in time. (22) Loss of stock-in-trade by enemy bombing. (23) Loss of stock by fire. (24) Litigation expenses incurred by a director in order to defend the validity of his election to the directorship (25) Payment made to secure extension of time for performing a trading contract. (26) Payment made in pursuant to a decree a against the company for misfeasance committed by its directors. (27) Insurance premium against loss of profit or stoppage of output caused by strike. (28) Expenditure incurred to secure overdraft facilities for business purposes. (29) LoSS due to forfeiture of security deposit for non-performance of a trading contract. (30) Interest paid on unpaid balance of purchase consideration. (31) Expenditure incurred by a professional man to study the advancement made in the country or to attend a professional conference abroad. (32) Expenditure incurred for improvement of leasehold assets. (33) Money paid to competitors to prevent them to bid at auction sale to enable the assessee to secure goods at lower price. (34) Initial payment under 'Own Your Telephone Scheme' [Circular No 204 dated 10-5-1976]. The refund of the said amount, if any will be taxed as deemed income u/s 41 (1) [Circular No. 671, dated 27-10-1993]. (35) Payment of retrenched employee in lieu of notice. (36) Payment of excise duty. (37) Payment made to remove a director when his removal is beneficial for the company. (38) Reasonable expenses of gifts and presents in connection with Dewali and Muhurta subject to satisfaction of the ITO that the expenses are not for personal, social or religious nature [Circular dated 3-10-1968]. (39) Pension paid to the widow of an employee murdered while on surety out of human consideration, though such payment was never made on similar occasions previously. (40) Damages due to non-acceptance of the delivery of goods by the assessee.

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177

Income from PGBP


(41) Expenses on registration of trade mark [CIT. v. Finlay Mills Ltd. (1951)].

FCA

R anjeet K unwar

(42) Interest on deferred payments for purchase of machinery is allowable as revenue expenditure. (43) Loss arising as a result of fluctuations in the rates of exchange arising in the course of repayment of loans or repaying installments of foreign loan should be allowed as a revenue deduction DISALLOWED EXPENSES/ DAMAGES/LOSSES: The following expenses, damages or losses shall not be deducted in computing the taxable profits from business or profession:(1) Loss due to destruction of a capital asset and capital expenditure. (2) (3) (4) (5) (6) (7) (8) Any such loss or damage which is not related to the business or profession, Loss on sale of shares and other securities which are kept as investment, Notional future losses. Loss, on account of change in the exchange rate to the amount kept for purchasing a capital asset, Personal expenses and drawings of the owner/partner, Every reserve or provision except the reserve specially dealt within this chapter, Any amount paid as donation or charity or subscriptions and any gifts or presents etc are disallowed. But if gifts and presents (not being donation or subscription) are made in kinds for advertisement purpose, such gifts and presents shall be allowed accordingly as advertise went expenses, Penalty Paid for illegal acts,

(9)

(10) Income tax, wealth tax and any other tax on income. (11) Interest payable on delayed payment of income-tax, (12) Interest paid on money borrowed for payment of Income-tax. (13) Damages paid to Government authorities on account of infraction of law are not allowable business expenditure. (14) Fines paid for traffic offences are not deductible Income from Undisclosed Sources Following shall be treated as income of business or profession from undisclosed sources:(1) Unexplained cash credit [Sec. 68] :- If any sum is found credited in the books of account of an assessee maintained for any previous year, and the assessee does not give any explanation about the nature and source thereof or the explanation given by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee for that previous year. (2) Unexplained Investments [Sec. 69]:- If in the financial year immediately preceding the assessment year the assessee has made investments which are recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

178

Income from PGBP

FCA

of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory the value of investments may be deemed to be the income of the assessee of such financial year. (3) Unexplained money [Sec. 69A]:- If in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable articles and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable articles, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory the money and the value of the bullion, jewellery, or other valuable articles may be deemed to be the income of the assessee for such financial year. (4) Investments not fully disclosed [Sec. 69B] :- If in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable articles, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in the books of account maintained by the assessee for any source of income, and the assessee offers on explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year. (5) Unexplained expenditure [Sec. 69C] :- If in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory the amount of such expenditure or part thereof may be deemed to be the income of the assessee for such financial year. Provided that such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. (6) Amount borrowed or repaid on hundi [Sec. 69D]:- If any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account payee cheque, the amount so borrowed or repaid shall be deemed to be the-income of the person borrowing or repaying such amount for the previous year in which the amount was borrowed or repaid, as the case may be. But it must be noted that if any amount borrowed on a hundi has been deemed as income, it shall not be deemed as income again when such amount is repaid. Valuation of Closing Stock The valuation of closing stocks plays a very important role in computing the profits of a business. Excess value of closing stock increases the profits whereas undervaluation will certainly decrease the profits. It is therefore, essential that a proper and correct valuation of stock be done in order to arrive at the correct profits. The assessee will never like to overvalue it, and the Assessing Officer will never accept a undervaluation. Thus, it should be valued correctly. An assessee may adopt any of the following methods for valuation of closing stocks:(i) at cost price (ii) at marke price, (iii) at cost or market price whichever is less. The businessmen are free to adopt any method, but once one method is adopted, the same is to be continued from year to year and the assessee cannot change the method of valuation to suit his own purposes. If can only be changed with the prior approval of the Assessing Officer. Another point to be noted in this case is that the value of closing stock must be the value of opening stock in the succeeding year.

R anjeet K unwar

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

179

Income from PGBP

FCA

R anjeet K unwar

Under or over-valuation of stock: Generally the opening and closing stocks are not valued at cost price. They are either under-valued or over-valued. In such cases the profit of the year is affected by such undervaluation or over-valuation. To remove the effect of such valuation we adopt the following method:Get the stock to real value in the following manner: In case of Under-valuation = v Value of stock x 100 (100- rate of under valuation)

In case of Over-valuation =

v Value of stock x 100 (100 + rate of Over valuation)

According to Section 145 A, the valuation of purchase and sale of goods and inventory, for determining the profits and gains of business or profession, shall be :(a) in accordance with the method of accounting regularly employed by the assessee; and (b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. For the purposes of this Section, any tax, duty cess or fee (by whatever name called) under any law, for the time being in force, shall include all such payments notwithstanding any right arising as a consequence to such payments.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

180

Income from PGBP

FCA
Section 10AA Deduction for Undertakings Established in SEZ

R anjeet K unwar

Eligible Assessee: Any enterprises which has begun to manufacture / produce articles or things or provided any services on or after 01-04-2006, in any Special Economic Zone; Amount of Deduction (only in respect of export profits) During first 5 years Next 5 years Next 5 years = = = 100% of export profit 50% of export profit Amount profit transferred to SEZ re-investment allowance reserve A/c or 50% of export profit; whichever is lower Calculation of Export profits for computing deduction:Profits from Business Notes: 1. 2. export in relation to the Special Economic Zones means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode.; export turnover means the consideration in respect of export of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services outside India; Export turnover shall be taken only to the extent of Sale proceeds are receive in, or brought into, India in convertible foreign exchange, within a period of 6 months from the end of the previous year or, within such further period as the competent authority (RBI) may allow in this behalf. The deduction during the last 5 years shall be allowed only if the following conditions are fulfilled: (a) the amount credited to the SEZ Re-investment Reserve Account shall be utilized only for the following purposes: (i) for acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; and (ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or for the creation of any asset outside India; (b) Assessee shall furnish the particulars of machinery during the assessment year in which it was first put to use. (3) Where the assessee does not comply with above conditions the following consequences shall be done; If SEZ Re-investment Reserve Account is utilized for any purpose other than the specified above; The amount so utilized shall be chargeable to tax in the year of such utilization. If SEZ Re-investment Reserve Account is not utilized before the expiry of 3 years from the end of the previous year in which reserve is created; The amount of unutilised reserve shall be deemed to be the profits in the year immediately followings the period of 3 years. Export Turnover of the unit

Total Turnover of the business carried on by the assessee

3.

4.

Bright Professionals (P) LTD. 1/53, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458

181

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