Profit&Gains B P

PROFITS
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GAINS
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BUSINESS
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PROFESSION
175
14 PROFITS AND GAINS OF BUSINESS OR PROFESSION

RELEVENT SECTIONS Section 28 Section 2(13) Section 2(36) Section 145 Section 145A Income to be chargeable under the head Profits and gains of business or profession. Business in relation to Income-tax Act. Profession in relation to Income-tax Act. Provision for method of accounting. Method of accounting in certain cases.
RECEIPTS DEEMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION. Section 41(1) Section 41(2) Section 41(3) Section 41(4) Section 41(4A) Section 176(3A) Receipt of old loss or expenditure. Sale of depreciated assets. Surplus on sale of capital asset for scientific research. Recovery from bad debts. Amount withdrawn from special reserve. Income from discontinued business.
Section 176(4) Income from discontinued profession. PROVISIONS OF DEDUCTION ALLOWABLE IN COMPUTING INCOME FROM BUSINESS OR PROFESSION Section 30 Section 31 Section 32 Section 33AB Section 33ABA Section 33AC Section 35(1) Section 35(2) Section 35 (2AA) Section 35(2AB) Section 35A Section 35AB Section 35ABB Section 35ABB(2) Section 35ABB(3) Rent, rates, taxes, repairs and insurance of buildings Repairs and insurance of building machinery, plant and furniture. Depreciation. Tea development account (coffee and rubber development account) Site Restoration Fund Reserves for shipping business. (No deduction available w.e.f. A.Y. 2005-2006) Revenue expenditure on scientific research Capital expenditure on scientific research Payment to a national laboratory or a university or an Indian Institute of Technology or a specified person on scientific research Expenditure on in-house research and development on scientific research Expenditure on acquisition of patent rights or copyrights Expenditure on know-how Expenditure for obtaining license to operate telecommunication services When sale proceeds are less than the amount of deduction remaining unallowed. When sale proceeds are more than the amount of deduction remaining unallowed. 175
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175
176 Section 35ABB(4) Section 35ABB(6) Section 35ABB(7) Section 35AC Section 35CCA Section 35CCB Section 35D Section 35DD Section 35DDA Section 35E Section 36(1)(i) Section 36(1)(ia) Section 36(1)(ib) Section 36(1)(ii) Section 36(1)(iii) Section 36(1)(iiia) Section 36(1)(iv) Section 36(1)(v) Section 36(1)(va) Section 36(1)(vi) Section 36(1)(vii) Section 36(1)(viia) Section 36(1)(viii) Section 36(1) (ix) Section 36(1)(x) Section 36(1)(xi) Section 36(1)(xii) Section 36(1)(xiii) Section 37(2B) Section 37 Section 40(a) Section 40(b) Section 184(5) Section 40(ba) Section 40A(2) Section 40A(3) Section 40A(7)
PROFITS
AND
GAINS
OF
BUSINESS
OR
PROFESSION
When only a part of the license is transferred and sale proceeds are less than the amount of deduction remaining unallowed. When transfer is made in a scheme of amalgamation. When transfer is made in a scheme of demerger. Expenditure on eligible projects or scheme. Expenditure by way of payments to associations and institutions for carrying out rural development programmes Expenditure by way of payment to associations and institutions for carrying out programmes of conservation of natural resources Amortisation of certain preliminary expenses Amortisation of expenditure in case of amalgamation or demerger Amortisation of expenditure incurred under Voluntary Retirement Scheme Deduction for expenditure on prospecting, etc., of certain minerals Insurance against risk of damage or destruction of stocks and stores. Insurance premium paid by a federal milk co-operative society Insurance premium paid for the health of employees Bonus or commission paid to Interest on borrowed capital Discount offered on Zero coupon Bond Contributions towards recognised provident fund fund Contributions towards an approved gratuity Deductions in respect of Bad debts Provision for bad and doubtful debts made by banks and financial institutions Deduction in respect of any special reserve created and maintained by a Financial Corporation Deduction in respect of expenditure for promoting Family Planning Deduction in respect of contribution towards Exchange Risk Administration Fund Deduction in respect to expenditure incurred for Y2K compliance Deduction in respect of expenditure for the objects of incorporation Deduction against payment of banking cash transaction tax Expenditure on advertisement General deductions OTHER EXPENDITURE NOT DEDUCTIBLE U/S 40 In case of any assessee In case of a firm Disallowance of interest, salary etc., to partners In case of an association of persons or body of individuals EXPENDITURE NOT DEDUCTIBLE U/S 40A Payment to relatives Payments exceeding Rs. 20000 in cash Payment of gratuity. animals used for fund business or profession Employees contribution to staff welfare schemes or an approved superannuation employees
176
PROFITS Section 40A(9) Section 43B Section 43Exp.8 Section 44AA Rule 6F(2)
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GAINS
OF
BUSINESS
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PROFESSION
177
Contributions to non-statutory funds. Certain deductions only on actual payments. Disallowance of capitalisation of interest. Maintenance of accounts by certain persons carrying on profession or business The above professionals will keep the following books of account
Section-44AB Audit of accounts of certain persons carrying on business or profession SPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OF BUSINESSES OR BUSINESS PERSONS Section 43D Income of Public financial institutions, Public Companies etc. Section 44 Section 44A Section 44AD Section 44AE Section 44AF Sections 44B to 44BBA Sections 44BBB & 44D Section 44DA Insurance business Trade, professional or similar association Business of civil contractorship etc. Business of goods carriages Business of retail trade in any goods or merchandise For non-resident assessee Foreign companies Income by way of royalties, etc. in case of non-residents.
Note:- For more details kindly refer Income Tax Act or Garg's CD.
Income to be chargeable under the head "Profits and gains of business or profession" [Section 28]. Under section 28 of the Income-tax Act, the following incomes are chargeable under the head Profits and gains of business or professionthe profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; ii) any compensation or other payment due to or received by any person referred to in section 28(ii). iii) income derived by a trade, professional or similar association from specific services performed for its members; (a) profits on sale of an import licence; (b) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India; (c) any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971; (d) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being Duty Remission scheme under the export and import of policy formulated and announced under section 5 of the Foreign Trade (development and Regulation) Act, 1992; (e) any profit on the transfer of the Duty Free replenishment certificate, being the Duty Remission Scheme, under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992. iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm, provided the same has been disallowed as deduction u/s 40(b) from the income of the firm. vi) any sum received under a keyman insurance policy including the sum allocated by way of bonus on such policy. i)
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PROFESSION
vii) any sum received or receivable in cash or kind, under an agreement for (a) not carrying out any activity in relation to any business [excluding the amount received on transfer of any rights which otherwise is chargeable under the head ''Capital Gains'' and from the multilateral fund. (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. A company becomes a legal entity in the eye of law only when it is incorporated. Hence profit earned by the promoters during the pre-incorporation period cannot be claimed to be that of the company and thus company is not liable to pay tax on it --CIT Vs. City Mills Distributors (P) Ltd. (1996) 131 Taxmann 103 (SC). 2. Business [Section 2(13)]. As defined in section 2(13) of the Income-tax Act, business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The word "business" is of large signification, and in its broadest sense includes nearly all the affairs in which either an individual or a corporation can be actors. The business of a tea-grower and manufacturer is not merely to grow tea-plant but to collect tea-leaves and render them fit for sale. Assessees purchasing a piece of land, carving it into plots and selling the plots for a profit within a short time, transaction is adventure in the nature of trade - [Smt. Indramani Bai & Anr. Vs. Addl. CIT (1993) 112 CTR (SC) 241]. In Barendera Prasad Vs. I.T. Officer, AIR 1981 SC 1047, 1953, it was held that the word "business" is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. Business has no definite technical meaning, but is to be read with reference to the object and intent of the Act in which it occur. [Ex parte Breull, (1881) 16 ChD 481]. 3. Profession [Section 2(36)]. Under section 2(36) of the Income-tax Act, profession includes vocation. The word profession implies professed attainments in special knowledge as distinguished from mere skill; special knowledge which is to be acquired only after patent study and application. Many vocations fall within the ordinary and accepted use of the word profession as those of doctors, lawyers, tax experts, chartered accountants, architects, engineers, journalists, singers, etc. In C.I.T. Vs. Manmohan Das (1966) 59 ITR 699, 710 (SC), it was held that a 'profession' involves the idea of an occupation requiring either purely intellectual skill or if any manual skill, as in painting and sculpture or surgery, skill controlled by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangement for the production or sale of commodities. Share - broker does not come within the definition of Profession under section 2(36) and falls within the expression Business under section 2(13) being engaged in purchase and sale of shares which are marketable commodities and therefore, goods. [CIT Vs. Lallubhai Nagardas & Sons (1993) 114 CTR (Bom) 58]. 4. Method of accounting [Section 145]. The Finance Act, 1995, had clearly specified that w.e.f. A.Y. 1997-98, income under the head "profits and gains of business or profession" or "income from other sources"shall be computed in accordance with either cash or mercantile system of accounting. If the Assessing Officer is not satisfied with the method of accounting employed by the assessee, he can make a best judgement assessment under section 144. In Juggilal Kamlapat Udyog Ltd. Vs. CIT (2005) 278 ITR (Cal), it was held that as long as the income could be reasonably deduced from the accounting system consistently followed by the assessee, it is bound to be accepted in view of the mandate of section -145 of the Act. Even a hybrid system in such circumstances is required to be accepted.
178
PROFITS
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GAINS
OF
BUSINESS
OR
PROFESSION
179
The Central Government has empowered itself to notify relevant accounting standards for the aforesaid purpose. These standards are to be invariably followed by the assessee while maintaining their accounts. The following accounting standards have been notified, for all assessees following mercantile system of accounting vide Notification No. 9949, dated 25.1.1996, w.e.f. A.Y. 1997-98. In CIT Vs. Chandrika Tower [2005] 275 ITR 175 (MP), it was held that in the case of determination of income in a developer case, where closing stock have been added it is only proper that the opening stock should be allowed as a deduction. Method shall of accounting in certain other cases [Section 145A]:-
The valuation of purchases, sales and inventory for the purpose of determining business income be:(i) (ii) in accordance with the method of accounting regularly employed by the assessee; and
further adjusted to include the amount of any tax, duty, cess or fee 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. to be profits and gains of business or profession. business or
Receipts
deemed
The following receipts are deemed to be the profits chargeable to tax even though the profession to which they relate ceased to be in existence in the year of their receipts1 . Profits chargeable to tax. [Section 41(1)].-
(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year. ( a ) some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or ( b ) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person in above clause (a). 2. Sale of depreciated assets [Section 41(2)]. .
Where any building, plant or furniture owned by the assessee for business purposes and depreciated under section 32(1)(i), is sold, discarded or destroyed, the receipt or moneys payable in respect of such an asset together with scrap value, if any, would be chargeable to income tax. The taxable amount would be the amount by which the sale value or moneys payable in respect of such assets exceeds their written down value. Such an excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as business income in the previous year in which the moneys payable becomes due. Such an amount would be taxable even if the business of the assessee is no longer in existence. 3. Surplus on sale of capital asset used for scientific research [Section 41(3)]. sold, without of deduction the amount business or Where an asset representing expenditure of a capital nature on scientific research is having been used for any other purposes and the sale proceeds, together with the amount allowed under section 35, exceeds the amount of the capital expenditure, such surplus or of deduction allowed, whichever is less, will be chargeable to income-tax as income of profession of the previous year in which the sale took place.
179
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GAINS
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BUSINESS
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PROFESSION
instance, For instance an assessee purchases a scientific research equipment for Rs. 1,75,000 during the previous year 1994-95 and claims Rs. 1,75,000 as deduction under section 35 for the assessment year 1995-96. If the assessee sells the equipment, without using it for purposes other than for scientific research, in 1999-2000 for Rs. 1,00,000, then Rs. 1,00,000 will be chargeable to tax for the assessment year 2000-2001 even if the assessees business is not in existence during the previous year 1999-2000. However, if the assessee sells the equipment for Rs. 2,00,000, then Rs. 1,75,000/- will be chargeable to tax, for the assessment year 2000-2001 as business income and Rs. 25,000 will be chargeable to tax as Capital Gain. 4. Recovery from bad debts [Section 41(4)]. Where a deduction has been allowed in respect of bad debt and subsequently any amount is recovered towards the bad debt allowed as deduction, the amount so received shall be deemed to be the profits of business or profession, and charged to income tax as the income of the previous year in which it is recovered. For instance, if Rs. 5,000/- was allowed as deduction towards the bad debt out of a debt of Rs. 10,000/- and subsequently Rs. 6,000/- was recovered towards such debt, only Rs. 1,000/- [6,000(10,000-5,000)] will be deemed to be the profit chargeable to tax. 5. Amount withdrawn from special reserve [Section 41(4A)]. When a deduction has been allowed in respect of any special reserve created and maintained by concerns, engaged in the business of providing long-term finance for industrial, agricultural, infrastructural or residential development, as mentioned under section 36(1) (viii), any amount subsequently withdrawn from such special reserve shall be chargeable to income-tax as business income of the year of withdrawl. Such an amount is taxable even if the business of the assessee is no longer in existence. Discontinuance ( i ) Income of from business discontinued or dissolution. business [Section 176(3A)].
Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and shall be charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person, who carried on the business, had such sum been received before such discontinuance. Amount received under an agreement after termination of distributorship agreement was assessable as business income and not as capital gains - Indian Engg. & Commercial Corpn. (P) Ltd. Vs. CIT (1993) 113 CTR (Bom.) 91. ( i i ) Income from discontinued profession [Section 176(4)]. Where any profession is discontinued in any year on account of the cessation of the profession by, or the retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of that person, had it been received before such discontinuance. Deduction are allowable of in computing computing repairs income from business business or or profession. profession profession, 30]. premises, used for the purposes the following deductions For the purpose allowable:rates, taxable income of from
( i ) Rent,
taxes,
and
insurance
buildings
[Section
Deduction in respect of rent, rates, taxes, repairs and insurance for of business or profession will be allowed to the assessee.
However, where the premises are occupied by the assessee as a tenant, the rent paid for such premises, and if, he has undertaken to bear the cost of repair, taxes etc. of the premises, the actual amount paid on account of such repairs, taxes etc. to the premises, will be allowed as deduction.
180
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GAINS
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BUSINESS
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PROFESSION
181
And, where, the premises are owned by the repairs of the premises, the amount paid on against the risk of damage or destruction of deduction is allowed on account of notional
assessee, the amount paid by him on account of current account of land revenue, local rates and insurance premium the business premises are allowable as deduction. No rent.
The Finance Act, 2003, had clarified that the amount paid on cost of repairs and current repairs which is in the nature of capital expenditure shall not be allowed as deduction. (ii) Repairs and insurance of machinery, used plant for & furniture [Section 31]. the purpose of the business or profession, the When any machinery, plant or following deductions shall be (a) furniture is allowed-
the amount paid on account of current repairs to such respect of
plant, machinery & furniture.
( b ) the amount of any premium paid in of such machinery, plant & furniture. the
insurance against risk of damage or destruction
The Finance Act, 2003, had clarified that the amount paid on account of current repairs which is in nature of capital expenditure shall not be allowed as deduction. [Section account 32]. please refer chapter and on Depreciation development in part II. [Section 33AB]. [coffee rubber account For detailed for provisions, deduction:
( i i i ) Depreciation ( i v ) Tea Eligibility
development
Where the business of the assessee consists exclusively or almost exclusively of growing and manufacturing tea, coffee or rubber in India and the assessee has, 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, deposited any amount or amounts in a special account with the National Bank for Agricultural and Rural Development (NABARD) in accordance with and for the purposes specified in, a scheme approved in this behalf by the Tea, Coffee or Rubber Board or in a Deposit Account opened by the assessee in accordance with and for the purposes specified in, a deposit schemeframed by the Tea Board, Coffee Board or Rubber Board as the case may be, with the previous approval of Central Govt., the assessee shall, subject to the provisions given below be allowed a deduction ofAmount of deduction: or ( a ) a sum equal to the amount or amounts so deposited ;
( b ) a sum equal to 40% of its profits (computed under the head Profits and gains of business or profession before making any deduction under this section), whichever is less: Provided that loss, if any, brought forward from earlier years and set off under section 72 of the Act, is not to be considered for the purpose of computing the amount of deduction under this section. Where the assessee is a firm or an association of persons or body of individuals, no deduction under this section shall be allowed to any partner or member of such firm, association of persons or body of individuals. Where deduction has been allowed in respect of deposit made in such accounts in any previous year, no deduction shall be allowed in respect of such amount in any other previous year. Audit of accounts: a Chartered Accountant and to furnish the and verified by such Chartered Accountant Assessee is required to get his accounts audited by report of such audit in the prescribed form 1 duly signed alongwith the return of income.
Withdrawals from the Special Account or Deposit Account are not admissible except for the purpose specified in the scheme or in the following circumstances : ( i ) Closure ( i i ) Death
1. Form No. 3AC.
of of an
business assessee
181
182 ( i i i ) Partition ( i v ) Dissolution ( v ) Liquidation of of
PROFITS H.U.F. firm the of
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GAINS
OF
BUSINESS
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PROFESSION
company
No deduction under this section shall be allowed to the assessee carrying on the business of growing and manufacturing tea in India where amount is utilised for the purchase of any machinery or plant to be installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest house or any office appliances not being a computer or any machinery whose actual cost has been allowed as deduction in computing income in any previous year or any machinery or plant to be installed in any industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing specified in Eleventh Schedule. [Section 33AB(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, including any accommodation in the nature of a guest-house; ( 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 (whether by way of depreciation or otherwise) in computing the income chargeable under the head Profits and gains of business or profession of any one previous year; ( d ) any new machinery or plant to be installed in an Industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule, 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.; Where any amount is withdrawn from such accounts in the event of closure of business or dissolution of firm, the firm will be liable to tax in the year of withdrawal on the assumption that there has not been a closure of business or a dissolution of the firm. Where any amount withdrawn from such accounts and utilised for the purpose of any expenditure in accordance with the scheme, such expenditure shall not be allowed as deduction in computing the income of the assessee under the head Profits and gains of business or profession. Where amount so withdrawn is not so utilised either in whole or in part, within that previous year, the unutilised amount shall be deemed to be the profits and gains of business and accordingly chargeable to income-tax as the income of that previous year, provided this condition will not apply in the event of death of the assessee, partition of H.U.F. and liquidation of company. Where any asset acquired in accordance with the scheme is sold or otherwise transferred to any person at any time before the expiry of 8 years from the end of the previous year in which it was acquired ,such part of the cost of such asset as is relatable to the deduction allowed under this section shall be chargeable to tax as the income of the previous year in which the asset is sold or otherwise transferred, except: (I) Sale or transfer of asset by the assessee to Government, a local authority, a corporation established by a Central, State or Provincial Act, or a Government Company as defined in Section 617 of Companies Act, 1956, or (II) Sale or transfer in the event of succession of firm by a company of the business or profession carried on by the firm as a result of which the firm sells or transfers to the company any asset and the scheme continues to apply to the company in the manner applicable to the firm, provided the following conditions are fulfilled:
182
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PROFESSION
183
All the properties of the firm immediately before succession become the properties of the company. All the liabilities of the firm immediately before succession become the liabilities of the company. All the partners in the firm before the succession become the share-holders of the company. (v) Site Eligibility Restoration for Fund [Section 33ABA]. deduction:
Deduction under this new section is available to an assessee carrying on business consisting of the prospecting for, or extraction or production of , petroleum or natural gas in India under an agreement with the Central Government. The deduction shall be available against the deposit(s) made by the assessee as under: ( i ) deposit with State Bank of India in an account (hereinafter referred to as special account) maintained by the assessee for the purposes specified in an approved scheme of the Government; or ( i i ) deposit any amount in an account (hereinafter referred to as Site Restoration Account) opened by the assessee in accordance with a scheme framed by the Ministry of Petroleum and Natural Gas. Amount of deduction: The amount of deduction shall be the amount deposited as above, or 20% of the business profits (before deduction under this section) ,whichever is less. The deduction shall be allowed before set off of brought forward loss, if any.
Notes (i) (ii) where assessee is a firm, association of persons or body of individuals, the deduction shall not be allowed in computation of the income of any partner or member of such form, AOPs or BOIs. where any deduction in respect of amount deposited in the special account or Site Restoration Account (as referred above), has been allowed in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.
(iii) The amount credited in the special account or site restoration account by way of interest shall be deemed to be a deposit.
Audit
of
accounts:
No deduction under this section is admissible unless the accounts of the said business have been audited by a chartered accountant and the assessee furnishes the audit report in Form No. 3AD along with the return. However, if the accounts of the assessee are liable to be audited under any other law, the assessee may furnish a further audit report in the form prescribed under this section. Withdrawl of deposits: No amount standing to the credit in special account or Site Restoration Account will be allowed to be withdrawn except for the purposes specified in the scheme. However, no deduction under this section shall be allowed in respect of any amount utilised for the purchase of:( a ) any machinery, plant or office appliances (not being computers) ( b ) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the business income of any previous year. ( c ) any new machinery or plant to be installed in an industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing specified in the list in Eleventh Schedule. Where any amount from the account is withdrawn on closure of the account during any previous year by the assessee, the amount so withdrawn from the account, as reduced by the amount, if any, payable to the Central Government by way of profit or production share as provided in the agreement referred to in section 42, shall be deemed to be the profits and gains of business or profession of that previous year and shall accordingly be chargeable to tax even if the business of the assessee is no longer in existence.
183
184
PROFITS
AND
GAINS
OF
BUSINESS
OR
PROFESSION
Where any amount from the accounts so maintained by the assessee is utilised for any expenditure in accordance with the scheme, such expenditure will not be allowed in computing the business income of the assessee. Where any amount is released by the State Bank of India or is withdrawn from the Site Restoration Account and is not utilised in accordance with the scheme, the whole of such amount shall be deemed to be the profits and gains of business and would be charged to income-tax as income of the year of withdrawl. Where any asset acquired in accordance with the scheme is sold or otherwise previous year before the expiry of 8 years from the end of the previous year in which acquired, such part of the cost of asset as is relatable to the deduction allowed shall be profits and gains of business or profession of the previous year in which the asset is However, the said provisions shall not apply in the following cases :(i) transferred in any such assets were deemed to be the sold or transferred.
Where the asset is sold or transferred to Government, local authority, corporation under Central, State or Provincial Act or a Government Company, or
( i i ) Where the sale or transfer of the asset is made in connection with the succession of a firm by a company in the same business and as a result of which the firm sells to the company any asset and the scheme continues to apply to the Company in the manner applicable to the firm. For this purpose, all the properties and liabilities of the firm should become the properties of the company and all the shareholders of the company should have been the partners of the firm immediately before the succession. ( v i ) Expenditure on scientific research. in respect 35(1)]: of expenditure on scientific research is to be allowed for the Under section 35, deduction following items of expenditure2
(a)
Revenue
expenditure
[Section
( i ) Any expenditure (not being capital expenditure) incurred on scientific research relating to the business of the assessee, is allowable as business expenditure. Any revenue expenditure incurred on payment of any salary [as defined in Explanation 2 of Section 40A(5)] to a person engaged in scientific research or on purchase of materials used in such scientific research, aggregate of such expenditure paid or incurred after 31-3-1973, but within 3 years immediately preceding the commencement of the business, is deemed to have been paid or incurred in the previous year in which the business is commenced to the extent it is certified by the prescribed authority under Rule 6 i.e. the Director General (Income tax Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research, Government of India. (ii) One and one fourth times of the sum paid to a scientific research or other institution to be used for scientific research, provided such association, is approved by the Central Government by notification in the Official Gazette. association, university, college university, college or institution
(iia) an amount equal to one and one-fourth times of any sum paid to a company to be used by it for scientific research: Provided that such company (A) is registered in India, (B) has as its main object the scientific research and development, (C) is, for the purposes of this clause, for the time being approved by the prescribed authority in the prescribed manner, and (D) fulfils such other conditions 01.04.2009]. (iii) One and one fourth times of research in social science or statistical that such university, college or institution in the Official Gazette 1 .
1. 2.
as may be prescribed; [Inserted by the Finance Bill, 2008, w.e.f.

the sum paid to an approved university, college or other institution for research related to the business carried on by the assessee. Provided is for the time being approved by the Central Government by notification
Vide Notification No. 1/2008 [F.No. 203/83/2004/ITA-II] dated 2-1-2008, Kripa Foundation, Member has been approved by the Central Government. Amended by Finance Bill, 2008
184
PROFITS
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GAINS
OF
BUSINESS
OR
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185
The application required to be furnished by a scientific or industrial research organisation or institution under clause (ii) or (iii) above, shall be in Form No. 3CF. [Deltron Ltd. Vs. CIT (2008) 166 Taxman-73 (Delhi)] ( b ) Capital expenditure [Section 35(2)]: Where the assessee incurs any expenditure of a capital nature on scientific research related to his business, the whole of such expenditure incurred in any previous year is allowable as deduction for that previous year. Where, however, any capital expenditure has been incurred before the commencement of the business, the aggregate of such expenditure so incurred within 3 years immediately preceding the commencement of the business is deemed to have been incurred in the previous year in which the business is commenced. However, no deduction, in respect of land purchased after 29-2-84, will be allowed under section 35(2). Further if the asset is sold without having been used for other purposes, the sale consideration or deduction allowed whichever is less, is chargeable to tax under the head Income from Business or Profession in the year of sale. However, where the amount of sale exceeds the deduction allowed, the excess is chargeable to tax under the head Capital Gains. [Section 41(3)] No depreciation is allowed on assets used in scientific research, for any assessment year. ( c ) Payment to a national laboratory or a university or an Indian Institute of Technology [Section 35 (2AA)]. Where an assessee pays a sum to a National Laboratory or a University or an Indian Institute of Technology or a specified person, with a specific direction that the said sum shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority, then ( a ) there shall be allowed a deduction of a sum equal to one and one-fourth times the sum so paid; and ( b ) no deduction in respect of such sum shall be allowed under any other provision of the Income Tax Act. The application for obtaining approval under section 35 (2AA) shall be made by the applicant in Form No. 3CG. The requisite approval to the programme shall be given by the head of or the University or the I.I.T. In case of a specified person, the approval shall Adviser to the Government of India. However, the approval should be granted the feasibility of carrying out such scientific research and a report to Exemptions) should be submitted in Form No. 3CJ. For detail procedure, refer ( d ) Expenditure on in-house research and development [Section the concerned National Laboratory be given by the Principal Scientific in Form No. 3CH after satisfying the Director General (Income-tax rule 6 of Income-tax Rules, 1962.
35(2AB)].
Where a company engaged in the business of manufacture or production of any drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals, bio-technology or any other article or thing notified by the Board incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority (The Secretary, Department of Scientific and Industrial Research) then, there shall be allowed a deduction of a sum equal to one and one-half times of the expenditure so incurred. The Company shall make the application for approval in Form No. 3CK. No company shall be entitled for deduction as mentioned above 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. The prescribed authority shall submit its report in relation to the approval of the said facility to the Director General in Form No. 3CL within such time as may be prescribed. No deduction shall be allowed in respect of above mentioned expenditure under any other provision of Income-tax Act. No deduction under this clause shall be available in respect of expenditure incurred after 31.3.2007.
As per Finance Act, 2007, this weighted deduction has been extended for a further period of five years, that is, in respect of the expenditure incurred upto 31-03-2012.
(vii) Expenditure on acquisition of patent rights or copyrights [Section 35A]. Any expenditure of capital nature incurred after 28.2.1966 but before 1.4.1998, on the acquisition of patent rights or copyrights used for the purposes of the business shall be allowed in equal instalments spread over a period of 14 years or over the unexpired life of the patent rights or copy right beginning with the previous year in which such expenditure is incurred. Where such expenditure was incurred before the
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commencement of the business, the previous year will be the year in which the business commenced. If at the time of acquisition of a patent right, the right had already commenced, the period of 14 years will be reduced by the number of completed years which elapse between commencement of the right and its acquisition by the assessee. Where, however, the entire period of 14 years had elapsed after the commencement of a patent right but before its acquisition, the entire cost will be written off in one instalment. Any profit or loss on sale of a copyright or patent right is taken into consideration while computing business income. As per sub-section (7) of section 35A where in a scheme of demerger, the demerged company sells or otherwise transfers the rights to the resulting company (being an Indian company), (i) the provisions of sub-sections (3) and (4) shall not apply in the case of the demerged company; and (ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company, if the latter has not sold or otherwise transferred the rights. (viii) Expenditure for obtaining license to operate telecommunication services [Section 35ABB]. The section seeks to provide that any of any right to operate telecommunication telecommunication services or thereafter at allowed as a deduction for each relevant Amount of deduction : The deduction under this section shall be spread over the period starting from the year in which such payment against capital expenditure has been made and ending in the year in which the license comes to an end. The total expenditure shall be divided by the total number of years of validity of such license and the resulting amount would be the allowable deduction in each previous year. Allowable deduction in each previous year (upto the year in which the license ceases to be in force) Deduction in case the license is transferred : a ) When sale proceeds 35ABB(2)]. Where the license sums) are less unallowed amount, previous year in are less than the amount of deduction remaining unallowed [Section = Total capital expenditure --------------------------------------------------------------------------Number of years for which the license is in force capital expenditure actually paid by an assessee on the acquisition services either before the commencement of business to operate any time during the previous year, by obtaining licence, shall be previous year in equal instalments.
is transferred and the proceeds of the transfer (so far as they consist of capital than the expenditure incurred remaining unallowed, a deduction equal to such as reduced by the proceeds of the transfer, shall be allowed in respect of the which the license is transferred. are more than the amount of deduction remaining unallowed [Section
b ) When sale proceeds 35ABB(3)].
Where the whole or any part of the license is transferred and as they consist of capital sums) exceed the amount of unallowed, the amount of such excess shall be chargeable to tax in the previous year in which the license has been transferred. exceed the amount of deduction otherwise allowable upto the took place. Further no deduction shall be allowed under this
the proceeds of the transfer (so far the expenditure incurred remaining as profits and gains of the business Provided, that such excess shall not previous year in which the transfer section in succeeding years.
c ) When only a part of the license is transferred and sale proceeds are less than the amount of deduction remaining unallowed [Section 35ABB(4)]. Where a part of the license is transferred and the proceeds of the transfer (so far as they consist of capital sums) does not exceed the amount of expenditure incurred remaining unallowed, the deduction further allowable under this section shall be computed as follows :( i ) the amount of expenditure remaining unallowed less the amount of sale proceeds shall be divided by the remaining number of previous years which have not expired at the beginning of the previous year during which the license is transferred.
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This amount of deduction shall be available in each previous year for the unexpired period of license. d ) When transfer is made in a scheme of amalgamation. Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the license to the amalgamated company (being an Indian company) :( i ) the provisions of sub-sections (2), (3) and (4) of section 35ABB shall not apply in the case of the amalgamating company; and (ii) the provisions of section 35ABB shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the license.
e ) When transfer is made in a scheme of demerger [Section 35ABB(7)]. Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the resulting company (being an Indian company),(i) the provisions of sub-sections (2), (3) and (4) shall not apply company; and in the case of the demerged
( i i ) the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company if the latter had not transferred the licence. Where a deduction for any previous year is claimed and allowed in respect of the eligible expenditure under this section, no deduction shall be allowed under section 32(1) for the same previous year or any subsequent previous year. ( i x ) Expenditure on eligible projects or schemes [Section 35AC]. of payment of any sum to a public sector institution approved by National Committee for and economic welfare or the uplift of public, An assessee is allowable a deduction for expenditure by way company or a local authority or to an association or carrying out project or scheme for promoting the social incurred during the previous year :
Provided that a company may incur expenditure either by way of payment of any sum as aforesaid or directly on the eligible project or scheme for claiming the deduction. Refer Rule 11K for guidelines to be followed by the National Committee to recommend a project or scheme as eligible under this section. (Vide Notification No. 174/2007 [F.No. NC-274/03/2007], dt. 24-05-2007). Provided further where the payment is to a public sector company or a local authority or an association, (institution) assessee should get a certificate in Form No. 58A from such association, company or local authority and in any other case, from a Chartered Accountant in the Form No. 58B. The National Committee may withdraw its approval given earlier, to association(s) or project(s), as the case may be. However, an opportunity of being heard would be given to the concerned association, company etc. Where the payment is received by an approved PSU, local authority, association or institution and the approval or notification for eligible project or scheme is withdrawn, such payment in respect of which the certificate mentioned under section 35AC(2)(a) has been issued, shall be deemed to be the income of such PSU, authority, association or institution, as the case may be, for the previous year in which such approval or notification is withdrawn and tax shall be charged on such income at the maximum marginal rate in force for that year. ( x ) Expenditure by ment programmes way of [Section payments to 35CCA]. associations and institutions for carrying out rural develop-
An assessee engaged in a business or profession is entitled to a deduction, in the computation of the taxable profits, in respect of expenditure incurred by him during the previous year by way of payment of any sum: ( a ) to an association or institution, to be used for approved by the prescribed authority [Section carrying out any programme of rural development 35CCA(1)(a)]:
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( b ) to an association or institution, which has as its object the training of persons for implementing programmes of rural development [Section 35CCA(1)(b)]. ( c ) to a rural development fund set up and notified by the Central Government in National Fund for Rural Development [Section 35CCA(1)(c) this behalf, i.e.
( d ) to the National Urban Poverty Eradication Fund set up and notified by the Central Government in this behalf. The certificate deductions under section 35CCA(1)(a) will from such association or institution thatnot be allowed unless the assessee furnishes a the prescribed authority before 1-
( a ) the programme of rural development had been approved by 3-1983, and
( b ) where such payment is made after 28-2-1983, such programme involves work by way of construction of any building or other structure (whether for use as a dispensary, school, training or welfare centre, workshop or for any other purpose) or the laying of any road or the construction or boring of a well or tubewell or the installation of any plant or machinery, and such work commenced before 1-3-1983. such The deduction u/s 35CCA(1)(b) will not be allowed unless the assessee furnishes a certificate from association or institution that( a ) the prescribed authority has approved the association or institution before 1-3-1983, and ( b ) the training of persons for implementing any programme of rural development had been started by the association or institution before 1-3-1983. The grounds of rural by the deduction to which the assessee is entitled under this section shall not be denied merely on the that subsequent to the payment of sum by the assessee the approval granted to the programme development or, as the case may be, to the association or institution has been withdrawn. [Inserted Taxation Laws (Amendment) Act, 2006, w.e.f. 1-4-2006].
No certificate of the nature referred above, shall be issued by any association or institution unless such association or institution has obtained from the prescribed authority authorisation in writing to issue certificate of such nature. Where a deduction under this section is allowed for any assessment year in respect of any expenditure, no deduction shall be allowed in respect of such expenditure under any other provisions of this Act for the same or any other assessment year. (xi) Amortisation of certain preliminary expenses [Section 35D]. Section 35D provides that for the amortisation of certain preliminary expenses incurred after 31-3-1998 by an Indian company or a resident assessee other than a company before the commencement of his business or after the commencement of the business, in connection with the extension of his industrial undertaking or the setting up of a new industrial unit, 1/5th (one-fifth) of such expenditure will be allowed as deduction in each of the 5 successive years beginning from the year of commencement of business or in the case of an existing industrial undertaking from the year in which extension of such undertaking is completed or the year in which the new industrial unit, set-up by such undertaking, commences production or operation [Section 35D(1)].
The Finance Bill, 2008 w.e.f. 2009 substituted the words ''Industrial undertaking with "undertaking" and "Industrial unit' with unit."
Where the aggregate amount of the expenditure, incurred after 31.3.1998 exceeds 5% of the cost of the project or where the assessee is an Indian company, at the option of the company, of the capital employed in the business of the company, the excess will be ignored for the purpose of computing the deduction allowable. [Section 35D(3)] . For expenditure incurred upto 31.3.1998, the amortisation shall be made @10% in each of the ten successive years. Similarly the expenditure in excess of the 2.5% of the cost of project or the capital employed as the case may be, shall be ignored the compution of deduction.
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189
Where the assessee is a non-corporate assessee, no deduction will be admissible u/s 35D(1), unless the accounts of the assessee for the relevant year in which the expenditure is incurred, have been audited by a chartered accountant. The assessee is also required to furnish, alongwith the return of income for the first year, in which the deduction is claimed, the audit report in Form No. 3AE [See rule 6AB). Where a deduction under this section is allowed for any assessment year in respect of any expenditure, no deduction shall be allowed in respect of such expenditure under any other provisions of this Act for the same or any other assessment year. The Finance Act, 1999 had laid down the provisions for a case of demerger applicable w.e.f. A.Y. 2000-2001. Henceforth, where the undertaking of an Indian company which is entitled to the deduction under section 35D(1) is transferred, before the expiry of the period specified in sub-section (1), to another company in a scheme of demerger,(i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous year in which the demerger takes place; and (ii) the provisions of this section shall, as far as may be, apply to the resulting company, as they would have applied to the demerged company, if the demerger had not taken place. (xii) Amortisation of expenditure in case of amalgamation or demerger [Section 35DD]. Where an 1999, wholly assessee shall five successive takes place. (xiii) assessee, being an Indian and exclusively for the be allowed a deduction of previous years beginning company, incurs any expenditure, on or after the 1st day of April, purposes of amalgamation or demerger of an undertaking, the an amount equal to one-fifth of such expenditure for each of the with the previous year in which the amalgamation or demerger
No deduction shall be allowed in respect of said expenditure under any other provision of this Act. Amortisation of expenditure incurred under Voluntary Retirement Scheme [Section 35DDA]. Where an assessee incurs any expenditure by way of payment made to an employee in connection with his voluntary retirement, in accordance with any such related scheme, a deduction of 20% of such amount so paid shall be made while computing the profits and gains of the business for that previous year. The balance 80% shall be deducted in 4 equal instalments in four immediately succeeding previous years. Moreover, the deduction available under this section for 5 consecutive years shall amalgamated company, in case of an amalgamation, to the resulting company, in case a company who has succeeded a proprietory concern or a firm, in case of such succession. that no deduction shall be allowed to the amalgamating or demerged company, or to the concern, in the year in which the undertaking is transferred. (xiv) Deduction for expenditure on prospecting, etc., Section 35E provides for amortisation of expenses incurred after or a resident assessee other than a company, on any operation relating or production of any mineral, 1/10th (one-tenth) of such expenditure will one of the relevant previous years i.e. 10 years beginning with the year 35E(1)] pass on to the of a demerger, to It is also provided firm or proprietory
for certain minerals [Section 35E]. 31-3-1970 by an Indian company to prospecting for or extraction be allowed as deduction for each of commercial production. [Section
Where the assessee is a non-corporate assessee, no deduction will be admissible u/s 35E(1) unless the accounts of the assessee for the relevant year in which the expenditure is incurred, have been audited by a chartered accountant. Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period of 10 years specified in sub-section (1), to another company in a scheme of demerger,(i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous year in which the demerger takes place; and
( i i ) the provisions of this section shall, as far as may be, apply to the resulting company, as they would have applied to the demerged company, if the demerger had not taken place.
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190 )Insurance ( x v ) Insurance against
PROFITS risk of
AND damage
GAINS or
OF
BUSINESS of stocks
OR and
PROFESSION stores [Section 36(1)(i)].
destruction
The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks used for the purposes of the business or profession, is allowable as deduction. (xvi) Insurance premium paid by a federal milk co-operative society [Section 36(1)(ia)]. The amount of any premium paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk raised by its members to such federal milk co-operative society. (xvii) Insurance premium paid for the health of employees [Section 36(1)(ib)]. The amount of any premium paid by any mode of payment other than cash instead of paid by cheque only by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme framed in this behalf by the General Insurance Corporation of India and approved by the Central Government or any other insurer and approved by Insurance Regulatory and Development Authority established under section 3(1) of Insurance Regulatory and Development Authority Act, 1999. (xviii) Bonus or commission paid to employees [Section 36(1)(ii)]. Any sum paid to an employee as bonus or commission for services rendered is allowable as deduction provided it is not payable to him as profit or dividend if it had not been paid as bonus or commission. (xix) Interest on borrowed capital [Section 36(1)(iii)]. Interest paid on capital borrowed for the purposes of business or profession is allowable as deduction.
The Finance Act, 2003, had clarified that deduction under this clause shall not be available on the amount of interest paid, in respect of capital borrowed for acquisition of new asset for extension of existing business or profession, for any period from the date of capital borrowed till the date on which asset was first put to use. The provisions are applicable from A.Y. 2004-2005. (xx) Discount offered on Zero coupon Bond [Section 36(1)(iiia)]. The infrastructure capital company or infrastructure capital fund or public sector company issuing the bond may claim a deduction equal to the 'pro rata' amount of discount on a zero coupon bond with regard to the period of life of such bond. The discount is the amount of difference between the amount received or receivable against issue of the bond and the amount payable on maturity or redemption of such bond. (xxi) Contributions 36(1)(iv)]. towards recognised provident fund or an approved superannuation fund [Section
Any sum paid by an assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund will be allowable as deduction , subject to the limits and conditions prescribed in rules - 75, 87 & 88 and in Fourth Schedule. (xxii) Contributions towards an approved gratuity fund [Section 36(1)(v)]. Any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust is allowable as deduction. (xxiii) Employees contribution to staff welfare schemes [Section 36(1)(va)]. Any sum received by the assessee from his employees as contribution towards any provident fund or superannuation fund or any fund set up under the provisions of the Employees State Insurance Act, 1948 or any other fund for the welfare of such employees, will be allowed as deduction, if such sum is credited by the assessee to the employees account in the relevant fund or funds on or before the due date, under the relevant Act, rules, orders or notifications, etc. (xxiv) Deductions in respect of animals used for business [Section 36(1)(vi)]. In respect of animals used for the purposes of business or profession otherwise than as stockin-trade and have died or become permanently useless for such purposes, the difference between the actual cost to the assessee of the animals and the amount, if any, realised in respect of the carcasses or animals will be allowed as deduction.
190
PROFITS (xxv) Bad debts [Section
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PROFESSION
191
36(1)(vii)].
A deduction will be allowed in respect of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year, subject to the provisions of section 36(2): Provided that the deduction shall be limited to an amount by which such debt or part thereof exceeds the credit balance in the provisions for bad an doubtful debts account made under section 36(1)(viia). For the purpose of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. Interest due on 'sticky' advances should be treated as income but in the event of its becoming bad debt, the assessee would be entitled to refund of the tax paid on such interest - Kerala Financial Corporation Vs. CIT (1994) 119 CTR 164 (SC). In CIT Vs. Micromax Systems (P) Ltd. [2005] 277 ITR 409 (Mad)- It was held that for a bad debt in order to be eligible for deduction should be written off in the book of the assessee. Merely making provision for it is not sufficient. (xxvi) Provision 36(1)(viia)]. for bad and doubtful debts made by banks and financial institutions [Section
A deduction shall be allowed in respect of any provision for bad and doubtful debts made by a scheduled bank, not being a bank incorporated by or under the laws of a country outside India, or a nonscheduled bank, an amount not exceeding 7.5% of the total income (computed before making any deductions under this clause and Chapter VI-A) and an amount, not exceeding 10% of the aggregate average advances made by the rural branches of such banks computed in the prescribed manner. The Finance Act, 1999, had given an option, to the scheduled banks or a non-scheduled bank referred above, to avail a deduction in respect of any provision made by the bank for any assets classified by the Reserve Bank of India as 'doubtful or loss assets' as per its guidelines. The amount of deduction is limited to 10% of the amount of such 'doubtful or loss assets as shown in the books of account of the bank on the last day of the previous year. The deduction is available for five consecutive assessment years from A.Y. 2000-2001 to A.Y. 2004-2005. The Finance Act, 2003, had given the option to scheduled bank or a non scheduled bank for further deduction in excess of the limits specified in above provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government. The bill has also required that to claim deduction it is essential that such income has been disclosed in the return of income under the head ''Profits and gains of business or profession. The provisions are applicable from A.Y. 2004-2005. In respect of provisions made by a bank, being a bank incorporated by or under the laws of a country outside India, or a Public Financial Institution or a State Financial Corporation or a State Industrial Investment Corporation, an amount not exceeding 5% of the total income (computed before making any deduction under this clause and Chapter VI-A) will be allowed as deduction. The Finance Act, 2002, had given an option to such foreign banks, financial institution etc to avail a deduction in respect of any provision made on any assets classified by the Reserve Bank of India as 'doubtful or loss assets'. The amount of deduction is limited to 10% of the amount of such assets as shown in the books of account. The deduction is allowed in any of the two consecutive years commencing on or after 1.4.2003 and ending upto 31.3.2005.
From A.Y. 2008-2009, deduction in respect of any provision for bad and doubtful debts also to be allowed to the Co-operative Banks. [Inserted by the Finance Act, 2007].
In Mrs. Gita Sanghi Vs. CIT [2005] 277 ITR 388 - It was held that the analogy of the allowance for bad and doubtful debts for banking companies under section 36(1)(viia) would not help other classes of tax payers. Where the amount is actually written off, because the debtor was declared a sick company. (xxvii) Deduction in respect of any special reserve created and maintained by a Financial Corporation [Section 36(1)(viii)]. In respect of any special reserve created and maintained by a specified entity, an amount not exceeding 40% of the profits derived from eligible business of providing long term Finance computed under the head "profits and gains of business or profession" (before making any deduction under this clause) carried to such reserve account:
191
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GAINS
OF
BUSINESS
OR
PROFESSION
Provided that 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 i.e. 200% and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess. From A.Y. 2008-2009, deduction relating the special reserve created by Financial Corporation and public companies has been reduced from 40% to 20%. However, the overall limit of 200% remains the same. Further, the provision has also been restructed to provide for different categories of entities (which also includes co-operative banks). (xxviii) Deduction in respect of expenditure for promoting Family Planning [Section 36(1) (ix)]. Any bonafide expenditure incurred by a company for the purpose of promoting family planning amongst its employees is allowable as deduction. However, where, such expenditure is of capital nature, 1/5th of such expenditure will be allowed as deduction for the previous year in which it was incurred and the balance is deductible in equal instalments in the next four years. However, no depreciation is allowed in respect of such capital assets. (xxix) Deduction in respect of contribution towards Exchange Risk Administration Fund [Section 36(1)(x)]. [From A.Y. 2008-2009, section 36(1)(x) Omitted by the Finance Act, 2007, w.e.f. 1-4-2008]. (xxx) Deduction in respect to expenditure incurred for Y2K compliance [Section 36(1)(xi)]. Any expenditure incurred by the assessee, between 1.4.1999 to 31.3.2000, wholly and exclusively for making a computer system as 'Y2K compliant' computer system, shall be allowed as a deduction, subject to fulfilment of the following conditions :a) b) c) the computer system is owned by the assessee and is used for his business purposes. the computer system is a 'non-Y2K compliant' system before incurring such expenditure. the assessee furnishes the report of a chartered accountant, in Form No. 3BA, certifying that the deduction has been correctly claimed as per provisions of this clause. The certificate should be furnished alongwith the return of income of the assessee.
No deducation shall be allowed in respect of such expenditure under any other provisions of the Income-tax Act. Definitions"Y2K compliant computer system" means a computer system capable of correctly processing, providing or receiving data elating to date within and between the twentieth and twenty-first century. (xxxi) Deduction in respect of expenditure for the objects of incorporation [Section 36(1)(xii)]. Any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate constituted or established by a Central, State or Provincial Act for the objects and purposes authorised by the Act under which such corporation or body corporate was constituted or established, shall be allowed as a deduction
From A.Y. 2008-09 the deduction shall be allowed only if such corporation or body corporate is notified by the Central Government in the official Gazette. [Inserted by Finance Act, 2007].
(xxxii) Deduction against payment of banking cash transaction tax [Section 36(1)(xiii)]. Any amount of banking cash transaction tax paid by the assessee during the previous year on the taxable banking transactions entered into by him, shall be allowed as deduction. [For detail see chapter Banking cash transaction tax]. (xxxiii) Deduction against payment to credit guarantee Fund trust for small industries [Inserted by Finance Act, 2007] [Section 36(1)(xiv)]. Any sum paid by a public financial institution by way of contribution to such credit guarantee fund trust for small industries as the Central Government may, by notification in the Official Gazette, specify in this behalf. (xxxiiia) Deduction in respect of the income arising from taxable securities transaction [Section 36(1)(xv) [Inserted by the Finance Bill, 2008].
An amount equal to the securities transaction tax paid by the assessee in respect of the taxable securities transactions entered into in the course of his business during the previous year, if the income arising from such
192
PROFITS
AND
GAINS
OF
BUSINESS
OR
PROFESSION
193
taxable securities transactions is included in the income computed under the head Profits and gains of business or profession.. Explanation.For the purposes of this clause, the expressions securities transaction tax and taxable securities transaction shall have the meanings respectively assigned to them under Chapter VII of the Finance (No. 2) Act, 2004. (xxxiiib) Deduction in respect of the income arising from taxable commodities transaction [Section 36(1)(xvi) [Inserted by the Finance Bill, 2008]. (xvi) an amount equal to the commodities transaction tax paid by the assessee in respect of the taxable commodities transactions entered into in the course of his business during the previous year, if the income arising from such taxable commodities transactions is included in the income computed under the head Profits and gains of business or profession. Explanation.For the purposes of this clause, the expressions commodities transaction tax and taxable commodities transaction shall have the meanings respectively assigned to them under Chapter VII of the Finance Act, 2008.
(xxxiv) Expenses Agents. deductible from commission earned by life insurance, post office, UTI/Mutual Funds
Vide Circular No. 648 dt. 30.3.93 w.e.f. 1.4.93 , the benefit of adhoc deduction, to Insurance agents of LIC having total commission (including first year commission, renewal commission and bonus commission) of less than Rs. 60,000/- for the year, and not maintaining detailed accounts for the expenses incurred by them, may be allowed as follows:(i) Where separate figures of first year and renewal commission are available. ( a ) 50% of first year commission and ( b ) 15% (ii) of the renewal commission. Where separate figures as above are not available, 33 1 / 3 % of the gross commission.
In both the above cases, the adhoc deduction will be subject to a ceiling limit of Rs. 20,000/-.
Notes :1 ) 2) 3) The gross commission in (ii) above will include first year commission as well as renewal commission but will exclude bonus commission. The complete amount of bonus commission is taxable and will be taken into account for purposes of computing the total income, and no adhoc deduction will be allowed from this amount. The benefit of adhoc deduction will not be available to the agents who have earned total commission of more than Rs. 60,000/- during the year. The admissibility of the expenditure claimed by such agents will be decided by the Assessing Officers as per the provisions of the Income Tax Act, 1961.
Agents of UTI, Mutual Funds, etc.: Board vide circular no. 594 dt. 27.2.1991 and corrigendum dated 15.5.1991 has granted an adhoc deduction for expenses @ 50% of the gross receipts of commission to the agents of Unit Trust of India and agents of the following securities :(i) NSC VIII issue, (ii) Social Securities Certificates, (iii) Post - Office Time Deposit Accounts, (iv) PostOffice Recurring Deposit Accounts, (v) NSS, (vi) Post-Office Monthly Income Account Scheme, (vii) Kisan Vikas Patra, (viii) PPF Accounts, and (ix) Deposit Scheme for retiring Government Employees, 1989.
, Vide Circular No. 677, dt. 28.1.1994, the Board has included the agents of Mutual Funds, notified u/s 10(23D), as eligible to get adhoc deduction as specified above.
The above benefit would only be available if the following conditions are satisfied :(i) No detailed accounts are maintained by the agents; and
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( i i ) Total gross commission received (including commissions as agents of LIC, UTI , other securities as mentioned above and Mutual Funds) does not exceed Rs. 60,000. (xxxv) General deductions [Section 37]. Any other expenditure not specifically covered by sections 30 to 36 and which is not in the nature of capital expenditure or personal expenses of the assessee is allowable as a deduction, if it is laid out or expended wholly and exclusively for the purpose of business or profession. For instance the following expenditure are deductible u/s 37(1): ( a ) Expenditure on advertisement in souvenirs by trade, commerce and industry, including more than one souvenir published by the same organisation or institution [Circular No. 200 dated 28-6-1976 and Circular No. 203 dated 16-7-1976] ( b ) Revenue expenses incurred by the industrial undertakings in connection with industrial home-guard units [Circular F. No. 10/80/64-IT(A-1) dated 26-2-1965] maintenance of
( c ) Expenditure (other than that of enduring nature) on civil defence measures [Circular No. 316 dated 30-9-1981] ( d ) Recurring expenses incurred on imparting of basic training to the apprentices under the Apprentices Act, 1961 [Circular No. 192 dt. 10-3-1976] ( e ) Annual listing fee payable to stock-exchanges [F.No. 10/67/65-IT(A-1) dated 26-8-1965] (f) Commitment charges paid by the borrower on the unused portion of loan which has not been drawn but kept in readiness by lender for disbursement. [Circular No. 2-P(XI-6) F.No. 10/67/65-IT(A-1) dated 23-8-1965]
( g ) Managerial subsidy paid in connection with setting up of consumer co-operative stores for industrial workers. [F.No. 10/16/63-IT(A1) dated 14-5-1963] ( h ) Rebate or bonus allowed by a consumer co-operative stores, on purchases made by member [Circular No. 117 dt. 22-8-73] (i) (j) Customary expenses in respect of Diwali and Mahurat, excluding expenses of a personal, social or religious nature [F.No. 13A/20/68-ITA II dated 3-10-1968] Reasonable remuneration paid by a company to its registrars for performing the duties in connection with companys legal obligations under the Company Law [F.No. 10/25/63-IT(A-1), dated 18-6-1964]
( k ) Interest payable on unpaid purchase price of plant and machinery [F.No. 10/92/64-IT(A) dated 13-91965] (l) Membership fee for the Indian Institute of Foreign Trade [F.No. 9/56/66-IT(A-1) dated 17-1-1967] ( m ) Membership subscription paid to Indian Institute of Packaging [F.No. 9/23/67-IT(A1) dated 6-7-1967] ( n ) The salaries and wages paid to the employees for the period of training in the courses organised by the Central Board of Workers Education [F.No. 27(3)-IT/59 dated 6-7-1959] ( o ) Legal expenses incurred in connection with the renewal of a lease, provided that the renewal is for a period of less than 50 years [Circular No. 22 of 1943 dated 23-6-1943] ( p ) Customary Legal contributions paid to trade [Circular No. 5-P(XIV-1) dated 28-8-1963] associations for utilisation for charitable purposes.
( q ) Deposit made under own your telephone scheme [F.No. 204/70/75-A-IT(A-II) dated 10-5-1976] ( r ) Deposit under Tatkal Telephone Deposit Scheme vide Circular No. 671 dated 27.10.1993. ( s ) Expenditure on renewal of registration of a trade mark as also litigation expenses incurred in connection with infringement of trade mark [Circular No.33 of 1943 dated 12-11-1943] (t) Payments made to the employees under profit sharing 27-10-1951] schemes [Circular No. 64(XI-2) of 1951 dated
( u ) Professional tax paid by a person carrying on profession. [Circular No. 16 dated 18-2-1969]
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OR
PROFESSION or
195
( v ) Security deposit of Rs. 10,000 required to be made No. 420 dated 4-6-1985]
an existing
new telex connection [Circular etc. before the Income-tax
( w ) Expenditure incurred for services in connection with any proceeding Authorities.
( x ) Contribution to unrecognised Executive Staff Provident Fund [- CIT Vs. Aspinwall & Co. Ltd [(1993) 115 CTR (Ker.)85] ( y ) Payment though referred to as penalty, but in fact made in exercise of option available under statutory scheme, in course of assessee's business, is allowable business expenditure - CIT Vs. Ahmedabad Cotton Mfg. Co. Ltd. & Ors. (1993) 115 CTR (SC) 401. ( z ) Statutory impost paid as damages , penalty or interest, if compensatory in nature, it is allowable as business expenditure, if penal, it is disallowable - Parkash Cotton Mills (P) Ltd. Vs. CIT (1993) 111 CTR (SC) 389. In Addl. CIT Vs. Rajasthan Spinning and Weaving Mill Ltd. [2005] 274 ITR 465 - It was held that, contribution to export promotion fund to promote export of textiles could not be disallowed. The provision made by assessee company for meeting liability towards leave encashment, proportionate to entitlement earned by employees of company subject to ceiling on accumulation as applicable on relevant date, is entitled for deduction out of gross receipts for accounting year during which the provision was made for liability in as much as liability was not a contingent liability Bharat Earth Movers Vs. CIT [2000] 112 Taxmann 61 (SC). However, section 43B has been amended w.e.f. A.Y. 2002-2003, so as to cover the deduction against any sum payable in lieu of any leave at the credit of the employee, on actual payment only. Assessee carried on business of processing cashewnuts in ten units, four of Due to some labour problems assessee shut down these four units and certain unions of such units. It was held by the Supreme Court that this expenditure has business and, thus, allowable under section 37 K. Ravindranathan Nair Vs. CIT which were situated in Kerala. payments were made to trade been incurred in regard to such [2000] 114 Taxmann 53 (SC).
Expenditure incurred on foreign tour of director and his wife in connection with the medical treatment of director is allowable as business expenditure on account of commercial expediency. CIT Vs. Steel Ingots Pvt. Ltd. (1996) 200 ITR 552 (MP). It was held that reserve to be an allowable business expenditure of profits. Since the assessee has no to deduction. CIT Vs. Bhopal Sugar In termination Organisation cannot be be created for business purposes under the Molasses Control Order would even though the amount has been set apart from sales and not out control over the fund represented by the reserve, the assessee is entitled Industries Ltd. (1996) 134 CTR 409 (MP).
TI Diamond Chain Ltd. Vs. CIT [2005] 274 ITR 59 (MAD) It was held that, compensation paid on of selling agency as part of an arrangement by which the assessee took over the sale Marketing network and trained Manpower could be only taken to be on capital account and allowed as Revenue Expenditure.
Expenditure incurred for laying a new pipeline, which does belong to the assessee, for supply of water to the factory premises is held to be a revenue expenditure. CIT Vs. Chowgule Chemicals (P) Ltd. (1995) 128 Taxation 328 (Bom.) Assessee materialise. ITO and bring into existence Tribunal was correct 420 (Cal.) paid CIT any and fees to a consultancy firm for preparation of project report but the project did (A) held the expenditure as capital in nature. Tribunal held that expenditure did asset of enduring nature and therefore, deleted the disallowance. It was held matter was decided against revenue. CIT Vs. Graphite India Ltd. (1996) 221 not not that ITR
Embezzlement of amount from assessees current account by way of securing basis of a letter with forged signatures of assessee - companys secretary, is allowable Dandekar Machine Works Ltd. Vs. C.I.T. (1993) 114 CTR (Bom.) 190 . Compensatory local sales tax law is an allowable deduction. However, no deduction is available for penal in nature - Standard Batteries Ltd. Vs. CIT (1995) 211 ITR 444 (SC).
demand draft on the business loss - G.G. penalty levied under the penalty which is
195
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GAINS
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BUSINESS
OR
PROFESSION
The assessee write off the cost of feature film on the basis of a circular permitting it. Later the circular was modified during the pendency of the assessment proceedings. The benefit cannot be denied. Shakti Raj Films Distributors Vs. CIT (1995) 213 ITR 20 (Bom). In Shree Annapurna Financing Co. (P) Ltd. Vs. CIT [2005] 273 ITR 284 (Cal) - It was held that merely because a payment is made to sister concern, it does not lease to be deductible, if it is in the course of business. Amounts not deductible from business or profession u/s 40 income: The business following amounts are not admissible as deductions or profession: (i) for the purpose of computing income from
( a ) In case of any assessee [Section 40(a)]. Any interest, royalty, fees for technical services or other sum chargeable under this Act which is payable outside India, or in India to a non resident not being a company, or to a foreign company on which tax has not been deducted or after deduction has not been paid before the expiry of the time prescribed under section 200(1) and in accordance with other provisions of Chapter XVII-B, shall not be allowed as deduction. In case, such sum 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 under section 200(1), then such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. ( i a ) any interest, commission or brokerage,rent, royalty fees for professional/technical services payable to a resident, or amounts payable to a contractor or sub-contractor for carrying out any work, on which tax has not been deducted or paid within the time prescribed under section 200(1) In case, such sum 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 under section 200(1), then such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
( i b ) any sum paid on account of securities transaction tax on purchase or sale of equity shares, derivatives or units of equity oriented fund on or after 1-10-2004. The Finance Bill, 2008 Omitted sub-clause (ib) w.e.f. 01-04-2009.
( i c ) any sum paid on account of fringe benefit tax under chapter XII-H ( i i ) amount paid on account of any rate or tax levied on the profits or gains of any business or profession. Such amount of tax paid shall be deemed always to have included any sum eligible for tax relief under section 90 or any deduction from tax payable under section 91. It also includes any sum eligible for tax relief under section 90A. ( i i a ) amount paid on account of wealth-tax chargeable under the Wealth-tax Act, 1957; ( i i i ) any payment chargeable under the head Salaries if it is payable outside India or to a non-resident and if the tax has not been paid thereon or deducted at source; ( i v ) any payment to a provident fund or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax, will be deducted at source from any payments made from the fund which is chargeable to tax under Salaries; ( v ) any tax actually paid by an employer referred to in section 10(10CCC) ( b ) In case of a firm [Section 40(b)] : The following expenses are not allowed for deduction if the same exceed the following limits :I) Interest paid to partners at the maximum rate of 12% simple interest will be allowed as a deduction. I I ) Payment of salary, bonus, commission or remuneration by whatever name called to the working partners shall be allowed as a deduction as under :-
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PROFESSION
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In case of a firm engaged in profession, on the first Rs. 1,00,000 of the book profit or in case of a loss, a salary of Rs. 50,000 or @ 90% of the book profit whichever is more shall be allowed. On the next Rs. 1,00,000 of the book profit @ 60% and on the balance of the book profit @ 40% shall be allowed. In the case of any other firm, on the first Rs. 75,000 of the book profit or in case of a loss, a salary of Rs. 50,000 or @ 90% of the book profit whichever is more shall be allowed. On the next Rs. 75,000 of the book profit @ 60% and on the balance of the book profit @ 40% shall be allowed. (For further details please refer to our chapter Income - tax on Partnership Firms
ii)
It is also provided the payment of salary etc. to working partners or interest to partners will be allowed as a deduction, which is authorised by and is in accordance with the terms of partnership deed. Terms of partnership deed will not have retrospective effect in this respect. Disallowance of interest, salary etc., to partners [Section 184(5)]. The provisions stated that firm does not comply with the no deduction by way of any of such firm shall be allowed where there is a failure on part of the firm as is mentioned in section 144 or the provisions of section 184, the firm shall be assessed in the capacity of firm but payment of interest, salary, bonus, commission or remuneration made to partners in computing the income of the firm.
Circular No. 739, dt. 25.3.1996 has clarified that with effect from A.Y. 1997-98, no deduction for remuneration to partners will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.
( c ) In case of an association of persons or body of individuals [Section 40(ba)] : Any payment of interest [otherwise than in representative capacity] salary, bonus, commission or remuneration, by whatever name called, made by such association or body to its member is disallowed under section 40(ba). The amount of interest to be disallowed will be limited to the amount by which the payment of interest by the association or body to the member exceeds the payment of interest by the member to the association or body. ( i i i ) Expenditure ( a ) Payment to be not to deductible relatives u/s 40A: 40A(2)]: [Section
Where the assessee incurs any expenditure in respect of which payment has been or is to be made any of the following persons, so much of the expenditure as is considered by the Assessing Officer to excessive or unreasonable will be disallowed. (i) any relative of the assessee where assessee is an individual; ( i i ) any director of the company, partner of the firm or member of the association or family, or any relative thereof, where the assessee is a company, firm or association or H.U.F.; ( i i i ) any individual who has a substantial relative of such person; interest in the business or profession of the assessee or any
( i v ) a company, firm, association of persons or H.U.F. having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm or association or family, or any relative of such director, partner or member; ( v ) any company, firm, association of persons or H.U.F. of which a director, partner or member, has a substantial interest in the business or profession of the assessee ; or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; ( v i ) any person in whose business or profession the assessee has a substantial interest, directly or indirectly.
197
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PROFESSION
( b ) Payments exceeding Rs. 20,000 in cash [Section 40A(3)] : Where the assessee incurs any expenditure in respect of which payment is made, of a sum exceeding Rs. 20,000, otherwise than by a crossed cheque or by a crossed bank draft, such expenditure will not be allowed as a deduction. The Finance Act, 2007, provides 100% of the amount claimed as deduction shall be disallowed if the payment is made by a mode other than account payee cheque or account payee draft. Where any liability for any expenditure incurred is allowed as a deduction on accrual basis in the relevant assessment year and subsequently during any previous year, the assessee makes any payment in respect of such liability in a sum exceeding Rs. 20,000 otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the deduction originally allowed will be deemed to have been wrongly allowed and will be withdrawn by rectifying that assessment u/s 154(7) within 4 years reckoned from the end of the assessment year next following the previous year in which the payment is so made. Rule 6DD prescribes the cases and circumstances under which no disallowance will be made even if, payment of a sum in excess of Rs. 20,000 is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft.
Note : It is further clarified that the above circumstances are not exhaustive but illustrative. There could be cases other than those falling within the above categories which would also meet the requirements of Rule 6DD(j). (3) 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 drawn on a bank or account payeee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. (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 (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank 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 thousand rupees: Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payeee bank draft, exceeds twenty thousand rupees, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. [The Finance Bill, 2008 w.e.f. 01.04.2009 substituted the section 40A(3)] : ( c ) Provisions for payment of gratuity [Section 40A(7)]: No deduction will be allowed in respect of any provision made by the assessee in his books of account for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. This restriction will however not apply in relation to any provision made for the purpose of payment of a sum by way of contributions towards an approved gratuity fund that has become payable during the previous year, or for the purpose of meeting actual liability in respect of payment of gratuity to the employees, arisen during the previous year.
: ( d ) Contributions to non-statutory funds [Section 40A(9)]: No deduction will be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860, or other institution, for any purpose, except where the sum so paid is required to be paid by or under any other law for the time being in force. Certain deductions only on actual payments [Section 43B]: Deduction in respect of the following sums will be allowed only when such sum is actually paid by the assessee. In other words deduction is made allowable only on payment basis: ( a ) any sum payable by the assessee by way of tax, duty, cess any law for the time being in force, or or or fees, by whatever name called, under
( b ) any sum payable by the assessee as an employer by way of contribution to any provident fund superannuation fund or gratuity fund or any other fund for the welfare of employees, or
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199
( c ) any sum payable as bonus or commission for services rendered; or ( d ) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State Financial Corporation or a State Industrial Investment Corporation; or (e) any sum payable by an assessee as interest on any type of loan or advances from a scheduled bank, in accordance with the terms and conditions of the agreement governing such loan or advances; or. (f) any sum payable by the assessee as an empoyer in lieu of any leave at the credit of his employee. The Finance Act, 2003, payment of the sum referred to under section 139(1). Thus contribution to provident fund 2004-2005. had clarified that deduction under section 43B shall in clauses (a) to (f) is made before the due date of the differential treatment given to allowance of or super annuation fund is removed. The provisions be available where the filing of return of income payment made against are applicable from A.Y.
Where a deduction in respect of the aforesaid sums is allowed in any earlier year on accrual basis, the same will not again be allowed as deduction on payment basis. As duty, above, Officer per provisions of the section, the assessee is required to furnish the evidence of payment of tax, bonus, etc., alongwith the return to get deduction under this section. However in cases (a), (c) & (d) if the evidence of payment had been omitted to be furnished alongwith the return, the Assessing can entertain applications u/s 154 -vide Circular No. 669 dt. 25.10.93. Disallowance of capitalisation of interest [Section 43 expl. 8]: Where any amount is paid or is payable as interest in connection with the acquisition of an asset, that amount which is related to any period after such asset is first put to use will not be included in the actual cost of such asset. In other words, such interest will not form part of the actual cost of asset to claim the depreciation and investment allowance but will be treated as a business expenditure. Maintenance of accounts by certain persons carrying on profession or business [Section 44AA]: profession or the profession 1 . Every person carrying on legal, medical, engineering or architectural of accountancy or technical consultancy or interior decoration or any other profession as notified by the Board in the Official Gazette, will keep and maintain such books of account and other documents as will enable the Assessing Officer to compute his total income [Section 44AA (1)] The Central Board of Direct Taxes has notified the following professions in exercise of powers vested in it u/s 44AA(1) of the Income-tax Act, vide notification No. S.O. 17(E), dated, 12-1-1977. ( a ) the profession of authorised representative: ( b ) the profession of film artist: It has been provided in the proviso to sub-rule (1) of rule 6F that the aforesaid professional persons are not required to keep and maintain books of account and other documents as prescribed under rule 6F, if their gross receipts in the profession do not exceed Rs. 1,50,000 in any one of the three years immediately preceding the previous year, or, where the profession has been newly set up in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount. RULE 6F(2): The above professionals will keep the following books of account(i) a cash book; It means a record of all cash receipts and payments, kept and maintained from day-to-day and giving the cash balance in hand at the end of each day or at the end of a specified period not exceeding a month; ( i i ) a journal, if the accounts are maintained according to (iii) a ledger; the mercantile system of accounting;
(iv) carbon copies of bills, whether machine numbered or otherwise serially numbered, wherever such bills are issued by the person and carbon copies or counterfoils of machine numbered or otherwise serially numbered receipts issued by him. However, nothing in this clause shall apply in relation to sums not exceeding Rs. 25/- (Rupees Twenty Five only).
199
200
PROFITS (v) original bills wherever person or, where such exceed Rs. 50, payment as to the preparation and maintained by the person
AND
GAINS
OF
BUSINESS
OR
PROFESSION
issued to the person and receipts in respect of expenditure incurred by the bills and receipts are not issued and the expenditure incurred does not vouchers prepared and signed by the persons. However, the requirements signing of payment vouchers shall not apply in a case where the cash book contains adequate particulars in respect of the expenditure incurred by him. books of account and other documents
A person carrying on medical profession in addition to the mentioned above, keep and maintain the following, namely: (i) a daily cash register in Form No. 3C
(ii) an inventory (under the broad heads) as on the first and the last day of the previous year, of the stocks of drugs, medicines and other consumable accessories used for the purpose of his profession. Every person carrying on business or profession (not being a profession mentioned in sec. 44AA(1) 2. will keep and maintain such books of account and other documents as will enable the Assessing Officer to compute his total income, if his business income exceeds Rs. 1,20,000/- or his total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds Rs. 10,00,000 in any one of the three immediately preceding previous years or where the business is newly set-up in any previous year, if his business or profession income is likely to exceed Rs. 1,20,000 or his total sales, turnover or gross receipts, as the case may be, in business or profession are or is likely to exceed Rs. 10,00,000 during such previous year. [Section 44AA(2)] The Finance Act, 1997, had made it essential to maintain books of account for assessees carrying on the business referred under sections 44AD, 44AE or 44AF or section 44BB or section 44BBB, provided the assessee has claimed his income to be lower than the profits or gains so deemed to be the profits & gains of his business under the above mentioned sections. These businesses are :( i ) Business of civil construction, etc. [Section 44AD] ( i i ) Business of plying, hiring or leasing goods carriages [Section 44AE] ( i i i ) Business of retail trade in any goods or merchandise [Section 44AF ] ( i v ) Non resident providing services or supplying plant and machinery on hire used in exploration etc of mineral oils. [Section 44BB]. ( v ) Business of Foreign company engaged in civil construction, erection of plant or machinery testing or commissioning [Section 44BBB].
Note :
1. The above books of account are required to be kept and maintained for a period of 6 years the relevant assessment year including cash book and ledger. However, where the assessment in assessment year has been reopened u/s 147 of the Act within the period specified in section 149, account and other documents which were kept and maintained at the time of re-opening of the continue to be so kept and maintained till the assessment so reopened has been completed. 2. The books of account and other documents specified above has come to an end will be kept and maintained by the person at or, where the profession is carried on in more places than one, person keeps and maintains separate books of account in respect such books of account and other documents may be kept and profession is carried on. from the end of relation to any all the books of assessment will
other than those relating to a previous year which the place where he is carrying on the profession at the principal place of profession. And where the of each place where the profession is carried on, maintained at the respective places at which the
Audit of accounts of certain persons carrying on business or profession [Section-44AB]: Section 44AB in the Income-tax business or profession, provides: Act relating to audit of accounts of certain persons carrying on
( A ) Where the accounts are not required to be audited under obligatory that(i) every person carrying on business will, if his in any previous year, or
any other law, this section makes it
total sales in the business exceed Rs. 40 lakhs
200
PROFITS
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GAINS
OF
BUSINESS if his
OR
PROFESSION
201
( i i ) every person carrying on profession will, lakhs in any previous year, or
gross receipts in profession exceed Rs. 10
(iii) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD or section 44AE or section 44AF or section 44BB or section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year. get his accounts of such previous year audited by a Chartered Accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such Chartered Accountant and setting forth such particulars as may be prescribed. The 'specified date', in relation to the accounts of the previous year relevant to an assessment year, means the 31st day of October of the assessment year. Due date for submission of audit report - October 31st of assessment year. Due date for getting book audited - 31st October of the assessment year. The Finance Act, 1997, had extended the provisions for audit of accounts of the following businesses, subject to certain conditions :( i ) Business of civil construction, etc. as referred in section 44AD (ii) Business of plying, hiring or leasing goods carriages as referred in section 44AE plant and machinery on hire used in ( i i i ) Business of retail trade in any goods or merchandise as referred in section 44AF. ( i v ) Non resident assessee providing services or supplying exploration etc of mineral oils. [Section 44BB] (v)
Foreign company engaged in business of civil construction, erection of plant or machinery, testing or commissioning [Section 44BBB] Condition of audit:
The audit of accounts is obligatory if the assessee carrying on the above mentioned business claims his income to be lower than the profits or gains presumed under the above mentioned sections. (B) Where the accounts are required to be audited under any other law, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnish by that date report of the audit as required under such other law and a further report in the form prescribed under this section. The said further report shall be furnished by a chartered accountant. On failure to furnish such audit report penalty is chargeable under section 271B. With effect from 1.7.1995, it is compulsory to furnish the audit report required u/s 44AB within the specified date so as to avoid penalty u/s 271B: Provided that this section shall not apply to the person, who derives income of the nature referred to in sections 44AC or section 44BB or section 44BBA or section 44BBB, on and from 1-4-1985, or, as the case may be, the date on which the relevant section came into force, whichever is later. BUSINESS SPECIAL PROVISION OF COMPUTATION OF INCOME OF CERTAIN TYPE OF BUSINESSES OR PERSONS
Income of Public financial institutions, etc [Section 43D]: The income by way of interest in relation to such categories of bad and doubtful debts as may be prescribed by the guidelines issued by Reserve Bank of India, shall be chargeable to tax in the previous year in which it is credited by the following assessees to their profit and loss account, or as the case may be, in the previous year in which it is actually received, whichever is earlier :(i) public financial bank, institution, ( i i ) scheduled
201
202 ( i i i ) State ( i v ) State
PROFITS financial industrial
AND or
GAINS
OF
BUSINESS
OR
PROFESSION
corporation investment
corporation.
The Finance Act, 1999 had extended the provisions to the income by way of interest on bad and doubtful debts of a public company having its main object of providing long-term finance for construction or purchase of houses in India for residential purposes and is registered under National Housing Bank Act, 1987. The income by way of interest on such bad and doubtful debts shall be governed by the guidelines issued by the National Housing Bank. [For more details, please refer rule 6EB]. Insurance business [Section 44]: Notwithstanding anything to the contrary contained in the Act, the profit and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule to Income Tax Act. Also refer rule 6E of the Income-tax Rules, 1962. Trade, professional or similar association [Section 44A]: Where the amount received during a previous year by any trade,professional or similar association from its members, falls short of the expenditure incurred by such association solely for the purpose of protection or advancement of common interests of its members, the amount of shortfall shall be allowed as deduction in computing the income under the head "Profits and gains of business or profession and if the income under this head is nil or less than the deduction allowable , the whole or balance of the shortfall shall be allowed as deduction under any other head. However, the allowable deduction shall be restricted to 50% of the total profits of the association before making such deduction. Business of civil construction [Section 44 AD] : Notwithstanding anything to the contrary contained in sections 28 to 43C, if an assessee is engaged in the business of civil construction or supply of labour for civil construction ,a sum equal to 8% of the gross receipts paid or payable to the assessee in the previous year on account of such business or a sum higher than the aforesaid sum as declared by the assessee in his return of income shall be deemed to be the Profits & gains of business or profession" and no deduction under sections 30 to 38 shall be allowed assuming that it had already been given full effect. However, these provisions will not apply if the gross receipts paid or payable to the assessee exceed Rs. 40,00,000/- . In case the assessee opts for the to have availed the depreciation on the firm, the income estimation should be partners subject to the conditions and applicability of the provisions mentioned above, he shall be deemed written down value of the assets used in his business. In case of a made after giving deduction(s) on account of salary/interest to the limits specified in section 40(b).
The provisions of section 44AA regarding maintenance of accounts and of section 44AB regarding audit of accounts, shall not apply in relation to business to which the section applies and monetary limits under those sections shall be computed after excluding therefrom the gross receipts or as the case may be, income of such business. The Finance Act, 1999, had provided that an assessee, covered under this section may claim his income to be lower than the profits and gains presumed under the provisions of this section. However, he shall have to maintain books of account as mentioned under section 44AA and shall also be liable to get the accounts audited and furnish the audit report as required under section 44AB. The amended provisions are applicable with retrospective effect from A.Y. 1998-99. Business of goods carriages [Section 44 AE] : Notwithstanding anything contained in sections 28 to 43C, in case of an assessee who owns not more than 10 goods carriages at any time during the 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 professional shall be deemed to be the aggregate of the following : (a) In case of a heavy goods vehicle income shall be Rs. 3,500 per month for every month or part of a month during which the vehicle is owned by the assessee.
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203
(b) In case of a vehicle other than a heavy goods vehicle, income shall be Rs. 3,150 per month for every month or part of a month during which the vehicle is owned by the assessee and no deduction under sections 30 to 38 shall be allowed assuming it had already been given full effect. However, the assessee may show an income higher than the aforesaid amount in his return of income. In case the assessee opts for the to have availed the depreciation on the firm, the income estimation should be partners subject to the conditions and applicability of the provisions mentioned above, he shall be deemed written down value of the assets used in his business. In case of a made after giving deduction(s) on account of salary/interest to the limits specified in section 40(b).
The provisions of section 44AA regarding maintenance of accounts and of section 44AB regarding audit of accounts, shall not apply in relation to business to which the section applies and monetary limits under those sections shall be computed after excluding therefrom the gross receipts or as the case may be, income of such business. The Finance Act, to be lower than the to maintain books of audited and furnish 1999, had provided that an assessee, covered under this section may claim his income profits and gains presumed under the provisions of this section. However, he shall have account as mentioned under section 44AA and shall also be liable to get the accounts the audit report as required under section 44AB.
Business of retail trade in any goods or merchandise [Section 44AF]: Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee engaged in retail trade in any goods or merchandise, a sum equal to 5% of the total turnover in the previous year, 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. The assessee may declare a higher rate of profit on the total turnover. However, the provisions of this section shall not apply where the total turnover exceeds Rs. 40 lakh. No deduction under the provisions of sections 30 to 38 shall be allowable to the assessee. Such deductions shall be deemed to have been already given full effect (including depreciation on assets). In case of a firm, the income estimation should be made after giving deduction(s) on account of salary/interest to the partners subject to the conditions and limits specified in section 40(b). The provisions of section 44AA regarding maintenance of accounts and of section 44AB regarding audit of accounts, shall not apply in so far as they relate to the business referred above. In computing the monetary limits referred in section 44AA & 44AB, the total turnover or income referred in this section shall be excluded. The Finance Act, 1999, had provided that an assessee, covered under this section may claim his income to be lower than the profits and gains presumed under the provisions of this section. However, he shall have to maintain books of account as mentioned under section 44AA and shall also be liable to get the accounts audited and furnish the audit report as required under section 44AB. The amendment is applicable with retrospective effect from A.Y. 1998-99. For non-resident assessee [Sections 44B to 44BBA]: i) 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 amounts received or receivable shall be deemed to be the profits and gains of such business chargeable to tax under Profits & gains of business or profession. [Section 44B]. In the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to 10% of the aggregate of the amounts received or receivable shall be deemed to be the profits and gains of such business chargeable to tax under Profits and gains of business or profession. [Section 44BB] other audit total A.Y.
ii)
An assessee may claim lower profits and gains if it keeps and maintains such books of account and documents as required under section 44AA and gets his accounts audited and furnishes a report of such as required under section 44AB. The Assessing Officer shall proceed to make an assessment of the income or loss of the assessee and determine the sum payable by, or refundable to, the assessee w.e.f. 2004-2005.
203
204
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i i i ) In the case of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to 5% of the aggregate of the amounts received or receivable shall be deemed to be the profits and gains of such business [Section 44BBA] The meaning of amounts referred to in (i), (ii) & (iii) above shall be the following, namely :( a ) the amount on account or shipped, facilities in prospecting paid or payable (whether in or out of India) to the assessee or to any person on his behalf, of the carriage of passengers, live stock, mail or goods, from any place in India by aircraft, at any port in India, as the case may be, or on account of provision of services and connection with, or supply of plant and machinery on hire, used or to be used, in the for or extraction or production of mineral oil 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 by aircraft, or shipped, at any port outside India, as the case may be, or on account of the provisions of services and facilities in connection with or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of mineral oils outside India.
Note :- For the purpose of clause (i) above, the amount chargeable to tax shall include an amount accrued or received by way of demurrage charges or handling charges or any other amount of similar nature.
Foreign companies [Sections 44BBB & 44D] : 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 or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf and financed under any international aid programme, a sum equal to 10% of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under Profits & gains of business or profession. [Section 44BBB] The Finance Act, 2003 had withdrawn the condition of the project to be financed under any international aid programme, for the purpose of applicability of provisions of this section. It is also provided that an assessee may claim lower profits and gains if it keeps and maintains such books of account and other documents as required under section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB. The Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under section 143 and determine the sum payable by or refundable to the assessee. The provisions are applicable from A.Y. 2004-2005. In case of income of a foreign company from royalty or fees for technical services received from Government or an Indian concern under an agreement before 1.4.1976, deductions under sections 28 to 44C shall not exceed 20% of the specific amount of royalty or fees received. However, in cases where agreement is made after 31.3.1976 [but before 1.4.2003] , no deduction under the said sections is allowable. [Section 44D] Income by way of royalties, etc. [Section 44DA]. In case of income of a non Government or an Indian concern resident (not being a company) establishment situated therein, or therein, and the right, property or paid is effectively connected with may be, shall be computed under the provisions of this Act : Provided that no deduction resident assessee from royalty or fees for technical services received from under an agreement after 31st day of March, 2003, where such non or foreign company carries on business in India through a permanent performs professional services from a fixed place of profession situated contract in respect of which the royalties or fees for technical services are such permanent establishment or fixed place of profession as the case the head ''Profits and gains of business or profession'' in accordance with shall be allowed,
( i ) in respect of any expenditure or allowance which is not wholly and exclusively incurred for the business of such permanent establishment or fixed place of profession in India; or ( i i ) in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to its head office or to any of its other offices.
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Every non resident (not being a and other documents in accordance audited by an accountant and furnish 3CE duly signed and verified by
company) or foreign company shall keep and maintain books of account with the provisions contained in section 44AA and get his accounts along with the return of income, the report of such audit in Form No. such accountant.
Special provision for computing deductions in the case of business reorganization of co-operative banks. [Section 44DB](Inserted by Finance Act, 2007) (1) The deduction under section 32, section 35D, section 35DD or section 35DDA shall, in a case where business reorganization of a co-operative bank has taken place during the financial year, be allowed in accordance with the provisions of this section. (2) The amount of deduction allowable to the predecessor co-operative bank under section 32, section 35D, section 35DD or section 35DDA shall be determined in accordance with the formula B A x C where A = B= C= the amount of deduction allowable to the predecessor co-operative bank if the business reorganisation had not taken place; the number of days comprised in the period beginning with the 1st day of the financial year and ending on the day immediately preceding the date of business reorganisation; and the total number of days in the financial year in which the business reorganisation has taken place.
(3) The amount of deduction allowable to the successor co-operative bank under section 32, section 35D, section 35DD or section 35DDA shall be determined in accordance with the formula B A x C where A = B= C= the amount of deduction allowable to the predecessor co-operative bank if the business reorganisation had not taken place; the number of days comprised in the period beginning with the date of business reorganisation and ending on the last day of the financial year; and the total number of days in the financial year in which the business reorganisation has taken place.
(4) The provisions of section 35D, section 35DD or section 35DDA shall, in a case where an undertaking of the predecessor co-operative bank entitled to the deduction under the said section is transferred before the expiry of the period specified therein to a successor co-operative bank on account of business reorganisation, apply to the successor co-operative bank in the financial years subsequent to the year of business reorganisation as they would have applied to the predecessor co-operative bank, as if the business reorganisation had not taken place. Taxation of foreign telecasting companies
[Circular
No.
765,
dated
15.4.1998]:
The Assessing Officer shall compute the income in the case of foreign telecasting companies, which are not having any branch office or permanent establishment in India or are not maintaining countrywise accounts, by adopting a presumptive rate of profit. The presumptive rate of profit shall be 10% of the gross receipts meant for remittances abroad or the income as per the return filed by such companies, whichever is higher. Consequently the existing income-tax rate shall be applied on such profit to arrive at the tax liability of the company. The gross receipts shall not include the amount retained, by the advertising agent and the Indian agent of the non-resident foreign telecasting company, as their commission/charges. It is also clarified that the above guidelines would be applicable to all pending cases, irrespective of the assessment year involved. Also refer Circuler No. 742, dated 2.5.1996 .
205
206
Illustration 1:
PROFITS
AND
GAINS
OF
BUSINESS
OR
PROFESSION
V & S is a partnership firm in the business of trading the goods and also doing some construction work on contract basis. During the financial year 2007-2008 the receipts from the contracts were Rs. 16,27,680 and the sales were Rs. 1,87,114. As per partnership deed the partners V and S shall be allowed salary of Rs. 45000/ - p.a. each and interest on their capital @18%. The interest on capital for V and S is Rs. 16,373.00 and 15,960.00 respectively. Calculate the taxable income as per section 44AD and 44AF for the A.Y. 2008-2009.
Solution:
(a) Receipts from contracts 16,27,680 1,30,214.40 1,87,114 9,355.70 (i) . Less : Salary to partners S V 45,000 45,000 90,000 1,39,570.10
Deemed income @8% u/s 44AD (b) Sale Receipts from Trading
Profit @5% u/s 44AF
: Interest on capital S Less : Disallowed 15,960 5,320 10,640
(See Note 2) V Less : Disallowed 16,373 5,458 10,915 21,555 (ii) (i-ii)=(iii) Add : Inadmissible Salary u/s 40(b) (see Note 1) Taxable Income (iv) (iii+iv)=(v) .1 , 1 1 , 5 5 5 . 0 0 . 28,015.10 . 3,158.00
. 31,173.10 31,170.00
Rounded off to nearest Rupee Note 1. : Allowable salary on first Rs. 75,000 @90% Balance Rs. 32,237 @60% Allowable salary Excess paid salary paid salary
67,500 19,342 86,842 90,000 3158
Note 2 : The maximum allowable interest on capital has been reduced from 18% to 12% w.e.f. A.Y. 2003-2004.
206

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PROFITS

14 PROFITS AND GAINS OF BUSINESS OR PROFESSION

the amount paid on account of current repairs to such respect of

plant, machinery & furniture.

insurance against risk of damage or destruction

( i i i ) Depreciation ( i v ) Tea Eligibility

182 ( i i i ) Partition ( i v ) Dissolution ( v ) Liquidation of of

PROFITS H.U.F. firm the of

as may be prescribed; [Inserted by the Finance Bill, 2008, w.e.f.

b ) When sale proceeds 35ABB(3)].

( a ) the programme of rural development had been approved by 3-1983, and

190 )Insurance ( x v ) Insurance against

PROFESSION stores [Section 36(1)(i)].

PROFITS (xxv) Bad debts [Section

new telex connection [Circular etc. before the Income-tax

( w ) Expenditure incurred for services in connection with any proceeding Authorities.

any other law, this section makes it

total sales in the business exceed Rs. 40 lakhs

( i i ) every person carrying on profession will, lakhs in any previous year, or

gross receipts in profession exceed Rs. 10

202 ( i i i ) State ( i v ) State

PROFITS financial industrial

Profit @5% u/s 44AF

: Interest on capital S Less : Disallowed 15,960 5,320 10,640

67,500 19,342 86,842 90,000 3158

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