INCOME UNDER THE HEAD “PROFITS AND GAINS OF BUINESS OR PROFESSION”
What is basis of charge [Sec. 28]?
“Business” simply means any economic activity carried on for earning profits. Sec. 2(3) has defined the term as “any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”.
In this connection it is not necessary that there should be a series of transactions in a business and also it should be carried on permanently. Neither repetition nor continuity of similar transactions is necessary.
“Profession” may be defined as a vacation, or a job requiring some thought, skill and special knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill.
The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”,—
- the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;
- any compensation or other payment due to or received by,—any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
- income derived by a trade, professional or similar association from specific services performed for its members ;
- the value of any perquisite or benefit arising from business or profession , whether convertible into money or not,;
- any interest, commission , salary, remuneration , or bonus due to, or received by, a partner of a firm from such firm :
- any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
- income from speculative transactions.
- any sum, whether received or receivable, in cash or kind, under an agreement for—
- not carrying out any activity in relation to any business; or
- not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature
- any profit on the transfer of the Duty Free Replenishment Certificate
- any profit on the transfer of the Duty Entitlement Pass Book Scheme
- profits on sale of a license granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947)
Business Income not Taxable under the head “Profits and Gains of Business or Profession”:
In the following cases, income from trading or business is not taxable under Sec. 28, under the head “Profits and Gains of Business or Professions” :
|Nature of Income||Head under which it is chargeable to Tax|
|Rental income in the case of dealer in property||Rent of house property is taxable under Sec. 22 under the head “ Income from House Property” even if property constitutes Stock-in-trade of recipient of rent or the recipient of rent is engaged in the business of letting properties on rent.|
|Dividend on shares in the case of a dealer-in-shares.||Dividend on shares are taxable under section 56(2)(i), under the head “Income from other sources” , even if they are derived from shares held as stock in trade or the recipient of dividends is a dealer-in-shares. However, dividend received from an Indian company is not chargeable to tax in the hands of shareholders.|
|Winning from Lotteries etc.||Winning form Lotteries, races, etc. are taxable under the head “Income from Other Sources” (even if derived as a regular business activity)|
What are the basic principles for arriving at business income?
-> Basic Principles for arriving at business Income: One has to keep in mind the following general principles for arriving at business income:
1. Business or profession should be carried on by assessee.
2. Business or profession should be carried on during the previous year.
3. Income of the previous year is taxable during the following assessment year.
4. Tax incidence arises in respect of all business or profession.
5. Legal ownership v/s beneficial ownership.
6. Real profit v/s anticipated profit
7. Recovery of sum already allowed as deduction.
8. Mode of book entries not relevant.
9. Loses incidental to business: General commercial principles have to be kept in view while determining the real and true profits of a business and profession. Capital receipts are not taxable. Profits can only arise out of the trading receipts and only the profit element of such receipt can be made taxable.
Business losses can be allowed as deduction if the following conditions are satisfied:
1. Losses are revenue in nature.
2. Losses should be incurred during the previous year.
3. Losses should be incidental to the business and profession carried on by assessee.
4. It should not be notional or fictitious
5. It should have been actually incurred and not merely anticipated to incur in future.
6. There should not be any direct or indirect restriction under the act against the deductibility of such loss.
Specific deductions under the Act: Section 30 to 37 cover expenses which are expressly allowed as deduction while computing business income, section 40, 40A and 43B cover expenses which are not deductible.
Rent, rates taxes repairs and insurance for building (Sec 30): Under this section following deductions are allowed for premises used for business or profession:
1. The rent of premises, the amount of repair (not being capital expenditure), if he has undertaken to bear the cost of repair.
2. Any sum on account of land revenue, local rates or municipal taxes.
3. Amount of any premium in respect of insurance against risk of damage or destruction of the premises. The amount is deductible as per the provision of sec 43B.
Repairs and insurance of machinery, plant and furniture (sec31): The expenditure incurred on current repair (not being capital expenditure) and insurance in respect of plant, machinery and furniture used for business purpose is allowed as deduction u/s 31.
Method of Accounting- How far relevant for computing business income.
-> Income under the heads “Profits and gains of business or profession” and “Income from other sources shall be computed in accordance with method of accounting regularly employed by the assesse.
- There are two main methods of accounting-mercantile system and cash system.
- In the case of mercantile system, net profit or loss is calculated after taking into consideration all income and expenditure of a particular accounting year irrespective of the fact whether income is not received or expenditure is not actually paid during the accounting period. Therefore, if books of account are kept by an assessee on the basis of mercantile system, income of a business or profession, accrued during the previous year, is taxable whether it is received during the previous year or in a year preceding or following the previous year. Similarly, expenditure of business or profession, relating to the previous year, is deductible even if it is not paid during the previous year.
- In the case of cash system of accounting, on the other hand, a record is kept of actual receipts and actual payments of a particular year. If books of account are kept by an assessee on the basis of cash system of accounting income actually collected during the previous year is taxable whether it relates to the previous year or some other year(s) Similarly, expenditure actually paid during the previous year is deductible irrespective of the fact whether it relates to the previous year or some other year(s)
- In order to further clarify the same principle, section 43(2) defines the word “paid”, to mean actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head “Profits and gains of business or profession”
- Tax accounting standards (Sec. 145)- The Central Board of Direct Taxes has notified the Income Disclosure and Tax Accounting Standards (ICDS) rule Notification No 87/2016, dated September 29, 2016. These standards are applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources and not for the purpose of maintenance of books of account. These standards are applicable from the assessment year 2017-18.
- Method of accounting in certain cases (Sec. 1454)-For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”, the following valuation rules are applicable with effect from the assessment year 2017-18-
- The valuation of inventory shall be made at lower of actual cost or net realizable value computed in the manner provided in ICDS.
- The valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation.
- Inventory (being securities not listed, or listed but not quoted on a recognized stock exchange) shall be valued at actual cost initially recognized in the manner provided in ICDS.
- Inventory (being securities held by a scheduled bank or financial institution) shall be valued in accordance with ICDS after taking into account extant guidelines issued by the RBI.
- Inventory (being listed securities) shall be valued at lower of actual cost or net realizable value in the manner provided in ICDS and for this purpose the comparison of actual cost and net realizable value shall be done Category-wise.
- Any tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence of such payment for the purposes of the said section.
What is the Scheme of Business Deductions/Allowances?
-> Section 28 defines various incomes which are chargeable to tax under the head “Profits and gains of business or profession Section 29 permits deductions and allowances lay down by sections 30 to 43D while computing profits or gains of a business or profession. Loss of revenue nature, which is incidental to business, is allowable as deduction while computing taxable business income, even though it is not codified specifically under any of these sections. Section 40 and 40A and 43B give a list of expenses which are not deductible.
Before studying the nature and amount of permissible and non-permissible deductions under sections 30 to 43D, it will be useful if one keeps in view the following principles governing admissibility of these deductions:
- Onus of proof- It is the responsibility of the assessee to prove that a particular deduction is admissible his case.
- Allowances are cumulative- The allowances laid down under sections 30 to 37 are cumulative and no alternative. For instance, if a particular expense is expressly dealt with by a particular section, its admissible under the residual section 37 cannot be denied unless the particular section prohibits any allowance under any other provision.
- Expenditure should relate to the previous year- It is necessary to claim deduction that the expenditure should relate to the previous year In order to ascertain whether the expenditure relates to the relevant previous year or not, one has to examine method of accounting generally adopted by the assessee. If the assessee keeps his books of account on the basis of mercantile system, expenses of the previous year would be deductible inspective of the fact whether they are actually paid during the previous year or not. If the assessee, on the other hand keeps his books of account on the basis of cash system, expenses actually paid during the previous year are deductible, whether or not they are in respect of previous year. The rule described in this para is, however, subject to one exception.
- Business should be carried on during the previous year- In order to avail deduction of expenditure, is necessary that the business in respect of which expenses are incurred, should be carried on by the assesse during the previous year. It the business has been closed or discontinued before the commencement of the previous year, no deduction in respect of such discontinued business is permissible while computing taxable income of the previous year from other sources Sections 41 and 176 bring into charge certain receipts relating to a business or profession, not in existence during the previous year.
- Expenditure should have been incurred in connection with assessee’s business – An expenditures allowable as deduction in computation of taxable income only if it is incurred for the purpose of assessee’s own business For instance, parent company cannot be allowed a deduction in respect of an expenditure incurred for the benefit of its subsidiary company (even if it is a wholly-owned subsidiary company).
- Benefit of expenditure may extend to somebody else- If the expenditure is incurred primarily in connection with assessee’s own business, it would still be allowed as deduction even if it enured to the benefit of someone else. For instance, insurance premium repairs and other expenditure incurred on leased out business assets are deductible from the income of the lessor, even though the expenditure enures to the benefit of the lessee.
- Benefit of expenditure may extend beyond the relevant previous year- It is not necessary of the expenditure should be limited to the previous year in which the expenditure is incurred. A revenue expenditure incurred during the previous year is deductible even if benefit of expenditure is extended beyond the year of expenditure.
- No allowance in respect of exhaustion of wasting assets- No deduction is admissible in respect of diminution or exhaustion of the capital asset from which income is derived. Wasting assets such as mines and quarries, timber-bearing land, leasehold interest are capital assets and their diminution or exhaustion in value represents capital loss which is not allowable as deduction as the Act permits deduction of revenue loss.
- No allowance in respect of expenditure incurred before the setting up of a business- In the case of a new business the first previous year commences on the date when the business or profession is set-up. Expenditure incurred prior setting up of a business falls outside the previous year. Section 28 applies only respect of business carried on during the previous year. As a consequence, expenditure incurred before setting up of a business would not be deductible, while computing income of the previous year. However, there sometimes a time-lag between settings up a business and its actual commencement. Expenditure incurred after setting up of a business may be allowed as deduction under sections 30 to 37, even if it is incurred before the actual commencement of business.
- No allowance in respect of non-assessable business- If an assessee carries on a non-taxable business (such as agricultural income in India), no deduction on account of expenditure relating to such non-taxable business can be claimed.
- Expenditure relating to illegal business- As said earlier, profits of illegal business are chargeable to tax. In arriving at chargeable profits, ordinary business expenditure incurred in carrying on an illegal business is allowable as deduction. However, infringements of law including breaches of obligations are not ordinary incidence of business and penalty or damages paid in connection with such infringement do not constitute expenditure, wholly and exclusively laid out for the business of the assessee, such expenses are, therefore, not deductible.
- No allowance in respect of anticipated losses- Under the present scheme of the Act, anticipated loss cannot be deducted, though the loss is certain. The only exception to this rule is that stock-in-trade may be valued at cost or market value, whichever is lower.
- No deduction in respect of depreciation of investment- A deduction in respect of depreciation of investment in shares and securities is not allowable.
- Relevance of distinction between capital and revenue expenditure- The question whether the expenditure is capital expenditure or revenue expenditure is relevant only in the case of expenditure falling under sections 30, 31 and 37(1) which expressly exclude the items of the nature of “capital expenditure” from being allowed as permissible deduction. However, expenditure falling under other sections may fall either under the category of capital expenditure or revenue expenditure.
What are Specific Deductions under the Act?
-> Sections 30 to 37 cover expenses which are expressly allowed as deduction while computing business income, sections 40, 40A and 43B cover expenses which are not deductible. The following expenses are expressly allowed as deductions against profits and gains of business or profession:
|1. Rent, Rates, Taxes, Repairs and Insurance for Building [Section 30] In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, profession, the following deductions shall be allowed: where the premises are occupied by the assessee: as a tenant — the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs; otherwise than as a tenant — the amount paid by him on account of current repairs to the premises;any sum paid (whether as owner or tenant) on account of land revenue, local rates or municipal taxes;any insurance premium paid (whether as owner or tenant) in respect of insurance against risk of damage or destruction of the premises.|
|2. Repairs and insurance of machinery, plant and furniture [Section 31] In respect of machinery, plant or furniture used for the purpose of business, the following deductions are allowable: amount paid on account of current repairs, any insurance premium paid in respect of insurance against risk of damage or destruction of the plant and machinery or furniture.|
|3. Depreciation [Section 32]: In order to claim depreciation, an assessee has to fulfill the following conditions:The asset should be owned by the assessee. Where, however, an assessee carries on business or profession in a building not owned by him but taken on lease, he is entitled to depreciation in respect of the capital expenditure incurred by him after March 31, 1970 on the construction of any structure or any work in relation to the building by way of improvement, renovation or extension. The asset, in respect of which depreciation is claimed, must have been used for the purpose of business. Where, however, the asset is partly used for business or profession and partly used for private and personal purposes, a reasonable proportion of the depreciation attributable to the business user of the asset is allowed [Section 38]. Under the Income-tax Act, one can claim depreciation in respect of the following assets—Tangible Assets – Building, Machinery, Plant and FurnitureIntangible Assets acquired after Markch 31, 1998. – Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.|
|4. Investment allowance in Notified Backward Area in Andhra Pradesh, Bihar, Telangana or West Bengal [Section 32AD]Additional investment allowance is available from the assessment year 2016-17 under section 32AD. Accordingly, if an undertaking is set up in the notified backward areas in Andhra Pradesh, Bihar, Telangana and West Bengal by a company, it shall be eligible to claim deduction under section 32AD if it fulfills the conditions specified under section 32AD. Conditions for Claiming Deduction Under Section 32AD – The following conditions should be satisfied in order to avail tax incentive of additional investment allowance under section 32AD – The assessee may be a company or any other person. He/it sets up an undertaking/enterprise for manufacture or production of any article or thing on or after April 1, 2015. Such undertaking must be set up in any backward area (notified by the Central Government) in Andhra Pradesh, Bihar, Telangana and West Bengal. He/it acquires and installs (for the purposes said undertaking) a “new asset”. “New asset” for this purpose is a new plant or machinery. But it does not include second hand machinery, machinery installed in office/ residential accommodation/guest house, vehicle, ship or aircraft or any plant and machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing business income of any previous year. The new asset should be acquired and installed after March 31, 2015 but before April 1, 2020. Both ‘acquisition’ and ‘installation’ of the new asset (i.e., new plant and machinery) are required to be made after March 31, 2015 but before April 1, 2020.Quantum of Investment Allowance under Section 32AD: – If the above conditions are satisfied, investment allowance under section 32AD is 15 % of actual cost of “new asset”. It is available in the year in which the new asset is installed.|
|5. Tea/Coffee/Rubber Development Account [Section 33AB] – Deduction under section 33AB is available to an assessee who satisfies the following conditions:Essential Condition:the assessee is engaged in the business of growing and manufacturing tea or coffee or rubber in India; the assessee has, within six months from the end of the previous year or before the due date of furnishing return of income whichever is earlier;the assessee must get its accounts audited by a Chartered Accountant and furnish the report of such audit in Form No. 3AC, along with the return of income. Quantum of Deduction:Quantum of deduction shall be: the amount(s) deposited in the schemes referred to above; or 40% of the Profits of such Business computed under the head profits and gains of business or profession,|
whichever is less.
|6. Site Restoration Fund [Section 33ABA] Deduction under section 33ABA is allowed to an assessee who satisfies the following conditions: Essential Conditions:The assessee is carrying on business consisting of prospecting for or extraction or production of petroleum or natural gas or both in India and in relation to which the Central Government has entered into an agreement with such assessee for such business. The assessee has before the end of the previous year— deposited with the State Bank of India any amount(s) in a special account maintained by the assessee with that bank, in accordance with and for the purposes specified in, a scheme approved in this behalf by the Ministry of Petroleum and Natural Gas of the Government of India; ordeposited any amount in the Site Restoration Account opened by the assessee in accordance with, and for the purpose specified in a scheme framed by the aforesaid Ministry. This scheme is known as Deposit Scheme. The assessee must get its accounts audited by an Accountant as defined in the Explanation below section 288(2) and furnish the report of such audit in the Form No. 3AD along with the return of income. In a case where the assessee is required by or any other law to get its accounts audited, it shall be sufficient compliance if such assessee gets the accounts of such business audited under such law and furnishes the report of the audit as required under such other law and a further report in the form prescribed. Quantum of deduction: Quantum of Deduction shall be:— the amount deposited in the scheme referred to above; or 20% of the Profit of such Business computed under the head profits and gains of business or profession,Whichever is Less.|
|7. Expenditure on Scientific Research [Section 35] –The term “scientific research” means “any activity for the extension of knowledge in the fields of natural or applied sciences including agriculture, animal husbandry or fisheries”. The term ‘scientific research’ has a wide scope. It does not necessarily mean only invention or successful scientific research. With a view to accelerating scientific research, section 35 provides tax incentives. Under this section amount deductible in respect of scientific research may be classified as under:Expenditure on Research carried on by the AssesseeContribution to Outsiders1. Revenue Expenditure under Section 35(1))(i)1. Contributionto an Approved Research Association under Section 35(1)(ii)/(iii)2. Capital Expenditure under Section 35(2)2. Payment to National Laboratory under Section 35(2AA)3. Expenditure on an Approved in-House Research under Section 35(2AB)3. Contribution to an Indian Scientific Research Company.1. Revenue Expenditure Incurred by an Assessee who Himself Carries On Scientific Research [Section 35(1) (i)]Where the assessee himself carries on scientific research and incurs revenue expenditure, deduction is allowed for such expenditure only if such research relates to his business. Pre-commencement Period Expenses –Revenue expenses incurred before the commencement of business (but within three years immediately before commencement of business) on scientific research related to the business are deductible in the previous year in which the business is commenced. However, the deduction is limited to the extent it is certified by the prescribed authority prescribed for this purpose under rule 6 [prescribed authority is Director-General (Income-tax Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research, Government of India].2. Contribution to Outside Institutions for Scientific Research [Section 35(1) (ii)/(iii)]Where the assessee does not himself carry on research but makes contributions to the following institutions for this purpose, a deduction is allowed as follows—To whom Contribution can be givenDeduction( as a percentage of Actual Expenditure)For AY 2018-19 to 2020-21For AY 2021-22 onwardsAn approved’ scientific association which has, as its object, undertaking of scientific research related or unrelated to the business of assessee [sec. 35(1)(ii)]150%100%An approved’ university, college or other institution for the use of scientific research related or unrelated to the business of assessee [sec. 35(1)(ii)]150%100%An approved’ university, college or other institution for the use of research in social sciences or statistical research related or unrelated to the business of the assessee [sec. 35(1)(iii)]100%100%3. Amount Paid to an Approved Scientific Research Company [Section 35(1)(iia)]Section 35(1)(iia) is applicable if the following conditions are satisfied—The taxpayer is any person (maybe an individual, HUF, firm, company or any other person).The taxpayer has paid any sum to an Indian company (hereinafter referred as “payee-company”) to be used by the payee for scientific research.The scientific research may or may not be related to the business of the taxpayer.The payee-company has as its main object the scientific research and development.The payee-company is for the time being approved by the prescribed authority (i.e., the Chief Commissioner of Income-tax having jurisdiction over the applicant). An application shall be submitted online for this purpose in Form No. 3CF-III.The payee-company fulfils such other conditions as may be prescribed. These conditions are given in rule 5F.Amount of Deduction –If the above conditions are satisfied, the taxpayer can claim a deduction under |
section 35(1) (iia). The amount of deduction is –- for the assessment years 2009-10 to 2017-18 : 125% of the amount paid;– from the assessment year 2018-19 onwards : 100% of the amount paid.Payee-company cannot claim Deduction under Section 35(2AB) –With a view to avoid multiple claims for deduction, it has been provided that the payee-company approved under the provisions of section 35(2) (iia) is not entitled to claim deduction under section 35(2AB). However, deduction to the extent of 100% of the sum spent as revenue expenditure or capital expenditure on scientific research which is available under section 35(1) will continue to be allowed.4. Capital Expenditure Incurred by an Assesses who himself Carries On Scientific Research [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. The following points should also be kept in view:The assessee should incur expenditure of a capital nature on scientific research and there is no requirement that such expenditure should be capitalized in its books of account.Where any capital expenditure has been incurred before the commencement of the business, the aggregate of such expenditure, incurred within three years immediately preceding the commencement of the business, is deemed to have been incurred in the previous year in which the business is commenced [Explanation to section 35(2)(ia)].The aforesaid deduction is not available in respect of capital expenditure incurred on the acquisition of any land after February 29, 1984.If the asset is sold without having been used for other purposes, surplus or deduction allowed, whichever is less, is chargeable to tax as business income of the previous year in which the sale took place [sec. 41(3)]. The excess of surplus over deduction allowed is, however, chargeable to tax as capital gains.Deduction by way of depreciation is not admissible in respect of an asset used in scientific research, either in the year in which the capital expenditure is incurred or in a subsequent year.5. Contribution to National Laboratory for Scientific Research [Section 35(2AA)]The provisions of section 35(2AA) are given below—CONDITIONS – The following conditions should be satisfied—The payment is made to— National Laboratory; orUniversity; orIndian Institute of Technology; orSpecified person as approved by the prescribed authority.The above payment is made under a specific direction that it should be used by the aforesaid person for undertaking scientific research programme approved by the prescribed authority.AMOUNT OF DEDUCTION –If the aforesaid conditions are satisfied, the taxpayer is eligible for deduction as follows—For the assessment years 2018-19 to 2020-21 : 150% of actual paymentFrom the assessment year 2021-22 onwards : 100% of actual paymentSuch contribution which is eligible for deduction under the aforesaid provisions is not eligible for any other deduction under the Act. 6. Expenses on In-House Research and Development Expenses [Section 35(2AB)]From the assessment year 1998-99, sub-section (2AB) has been inserted in section 35. It provides for a deduction in respect of expenditure on in-house research and development expenses subject to the following—Conditions – One has to satisfy the following conditions—The taxpayer is a company. The company should be in the business of bio-technology or in the business of manufacture or production of any article or thing except those specified in the Eleventh Schedule. It incurs any expenditure on scientific research and such expenditure is of capital nature or revenue nature (not being expenditure in the nature of cost of any land and building). The expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial, regulatory approval and filing an application for a patent. The research and development facility is approved by the prescribed authority. The taxpayer has entered 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 or fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed. Amount of Deduction – If all the above conditions are satisfied, the quantum of deduction is as follows—For the assessment years 2018-19 to 2020-21150% of actual paymentFrom the assessment year 2021-22 onwards100% of actual payment
A company approved under the provisions of section 35(1)(iia) is not eligible to claim weighted deduction under section 35(2AB). However, deduction under section 35(1)(i)/(2) can be claimed to the extent of 100% of the sum spent as revenue expenditure or capital expenditure on scientific research.
|8. Expenditure for Obtaining Right to use Spectrum for Telecommunication Services [Section 35ABA] Section 35ABA provides tax treatment of spectrum fees on the following lines — Any capital expenditure incurred and “actually paid” by an assessee on the acquisition of any right to use spectrum for telecommunication services by paying spectrum fee will be allowed as a deduction in equal installments over the period for which the right to use spectrum remains in force. Deduction will be available starting from the year in which actual payment is made (or the year of commencement of business, whichever is later) and ending with the year when spectrum comes to an end, irrespective of the previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee or payable in such manner as may be prescribed. Where the spectrum is transferred and proceeds of the transfer are less than the expenditure remaining unallowed, a deduction equal to the expenditure remaining unallowed as reduced by the proceeds of transfer, shall be allowed in the previous year in which the spectrum has been transferred. If the spectrum is transferred and proceeds of the transfer exceed the amount of expenditure remaining unallowed, the excess amount shall be chargeable to tax as profits and gains of business in the previous year in which the spectrum has been transferred. Unallowed expenses in a case where a part of the spectrum is transferred would be amortized.|
|9. Expenditure for obtaining License to operate Telecommunication Services [Section 35ABB]The provisions of section 35ABB are given below— Conditions – Deduction under Section 35ABB is available if the following conditions are satisfied — Condition-1: The expenditure is capital in nature. Condition-2: It is incurred for acquiring any right to operate telecommunication services. Condition-3: The expenditure is incurred either before the commencement of business or thereafter at any time during any previous year. Condition-4: The payment for the above has been actually made to obtain license. If all the above conditions are satisfied, then one can claim deduction under section 35ABB. If, however, these conditions are not satisfied, then deduction under section 35ABB is not available [one may claim deduction under section 37(1)]. Amount of Deduction – The payment will be allowed as deduction in equal installments over the period starting from the year in which such payment has been made and ending in the year in which the license comes to an end. It may be noted that the deduction starts from the year in which actual payment of expenditure is made irrespective of the previous year in which the liability for the expenditure is incurred according to the method of accounting regularly employed by the assessee.Where deduction is claimed and allowed under section 35ABB, no deduction will be available in respect of the same expenditure under section 32. Profit or Loss on Sale of Telecom License – Any profit or loss on sale of telecom license is taken into consideration while computing business income. The relevant rules are discussed with the help of Problem 81.10-P2. Consequences in case of Amalgamation or Demerger – Where under a scheme of amalgamation/demerger, a telecom license is transferred to an Indian company, then the provisions of section 35ABB shall continue to apply to the transferee-company.|
|10. Deduction in respect of Expenditure on Specified Business [Section 35AD]Deduction under section 35AD shall be allowed to the assessee who is carrying on specified business: Nature and Amount of Deduction:100% Deduction shall be allowed an account of any expenditure of capital nature incurred wholly and exclusively for the purpose of the above specified business carried on by such assessee during the previous year in which such expenditure in incurred by him.However, this is subject to the following 3 Propositions— Expenditure incurred on the acquisition of any land or goodwill or financial instrument is not eligible for any deduction under section 35AD. Deduction under section 35AD is not available (with effect from the assessment year 2018-19) pertaining to any expenditure in respect of which payment (or aggregate of payments) made to a person in a day (otherwise than by an account payee cheque/draft/use of electronic clearing system through a bank account) exceeds Rs. 10,000. Expenditure incurred prior to the commencement of operation, wholly and exclusively, for the purpose of any specified business, shall be allowed as deduction during the previous year in which the assessee commences the operation of his specified business, if the amount is capitalized in the books of account of the assessee on the date of commencement of operation. Conditions to be satisfied by the Specified Business to apply Deduction under Section-35AD:This section applies to the specified business which fulfils all the following conditions: it is not set up by splitting up, or the reconstruction, of a business already in existence; it is not set up by the transfer to the specified business of machinery or plant previously used for any purpose; where the business is of laying and operating a cross country natural gas or crude or petroleum oil pipelines network it should satisfy the following conditions also: it is owned by a Indian or by a consortium of such companies or by an authority or a board or a corporation established or constituted under any Central or State Act; it has been approved by the Notified Petroleum and Natural Gas Regulatory Board; it has made such proportion of its total pipeline capacity available for use on common carrier basis by any person other than the assessee or an associated person as prescribed by the Petroleum and Natural Gas Regulatory Board; and any other condition as may be prescribed. any asset in respect of which a deduction is claimed and allowed under section 35AD, shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed.Further, if such asset is used for any purpose other than the specified business during the period of 8 years specified in section 35AD(7A), otherwise then by way of a mode referred to in section 28(vii), the total amount of deduction so claimed and allowed in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.|
|11. Payment to Associations and Institutions for carrying out Rural Development Programmes [Section 35CCA] Under Section 35CCA, any assessee who is carrying on a business/profession shall be allowed a deduction of the amount of the expenditure incurred by way of payment of any sum to the following : any association or institution to be used for carrying out any programme of rural development approved before March 1, 1983; an association or institution which has its object the training of persons for implementation of a rural development programme approved before March 1, 1983; the National Fund for Rural Development; and notified National Urban Poverty Eradication Fund.|
|12. Expenditure on Agricultural Extension Project [Section 35CCC] Deduction shall be allowed on account of any expenditure incurred by the assessee on agricultural extension project notified by the Board in this behalf in accordance with the guidelines as may be prescribedQuantum of Deduction: 150% of such expenditure incurred during the previous year for the assessment years 2013-14 to 2020-21 [From the assessment year 2021-22, an assessee can claim 100 % of expenditure as deduction (but not weighted deduction)].Important Points: The following points should be noted –Project shall be undertaken by an assessee for training, education and guidance of farmers. Project shall have prior approval of the Ministry of Agriculture. Expenditure (not being cost of land/building) exceeding Rs. 25 lakh is expected to be incurred for the project. For getting approval for the purpose of claiming weighted deduction under section 35CCC, an application in Form No. 3C-O should be submitted to the Member (IT), CBDT. Application shall be accompanied by – a detailed note on the agricultural extension project; details of the expenditure expected to be incurred and expected date of completion; and approving letter of Ministry of Agriculture.|
|13. Expenditure on Skill Development Project [Section 35CCD]Deduction shall be allowed on account of any expenditure (not being expenditure in the nature of cost of any land or building) incurred by the company on skill development project notified by the Board in this behalf in accordance with the guidelines as may be prescribed Quantum of Deduction: 150% of such expenditure incurred during the previous year for the assessment years 2013-14 to 2020-21 [from the assessment year 2021-22, an assessee can claim 100 % of expenditure as deduction (but not weighted deduction)].Important Points: The following points should be noted –A company engaged in manufacture/ production of any article/thing (not being alcoholic spirits and tobacco products) or a company engaged in providing specified services (31 services have been notified for this purpose) can claim the benefit of weighted deduction under section 35CCD. Expenditure should be incurred on notified skill development project. The project should be undertaken in separate facilities in a training institute set up by Government, local authority or in an institute affiliated to National Council for Vocational Training or State Council for Vocational Training. For the purpose of claiming weighted deduction, an application should be submitted in Form No. 3CQ to National Skill Development Agency (NSDA). A copy of Form No. 3CQ should be sent to the Commissioner of Income-tax. Form No. 3CQ to be accompanied by detailed note on skill development project, expected expenditure and expected completion date, letter of concurrence from the training institute.|
|14. Amortization of Preliminary Expenses [Section 35D]An Indian company or a resident non-corporate assessee can claim deduction under section 35D in respect of preliminary expenses. Such expenditure may be incurred before commencement of the business or after commencement of the business in connection with extension of an undertaking or in connection with setting up a new unit. Assessees who can claim deduction under this section are: Indian Company, or a person other than a company who is resident in India. Expenditure in respect of which deduction is available expenditure incurred before the commencement of business; or expenditure incurred after the commencement of business in connection with the extension of existing undertaking or in connection with setting up a new unit.|
Expenses qualifying for deduction: The following expenses qualify for deduction: Expenditure incurred in connection with: preparation of a feasibility report; preparation of a project report; conducting market survey or any other survey necessary for the business of the assessee; engineering services relating to the business of the assessee;legal charges for drafting any agreement between the assessee and any other person relating to the setting up or conduct of the business of the assessee; where the assessee is company, also, expenditure— by way of legal charges for drafting the Memorandum and Articles of Association of the company; on printing of the Memorandum and Articles of Association; by way of fees for registering the company under the provisions of the Companies Act, 1956; in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus; such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provisions of this Act) as may be prescribed.Amount Qualifying for Deduction: The aggregate of the expenditure referred to in clauses (1) to (4) above shall not exceed 5% of the cost of the project in case of all assessees other than companies. In the case of a company, it cannot exceed 5% of—the Cost Of the Project, or the Capital Employed in the Business of the Company, whichever is beneficial to the company. Cost Of Project – It means the actual cost (or additional cost incurred after commencement of business in connection with extension or setting up an undertaking) of fixed assets, namely, land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences. Capital Employed in the Business of a Company – It is the aggregate of the issued share capital, amount outstanding as share premium† account, debentures and long-term borrowings, as on the last day of the previous year in which the business of the company commences (in the case of an existing company only capital, debentures and long-term borrowing issued or obtained in connection with the extension of the undertaking or the setting up of the new unit of the company, shall be considered).Amuont of Deduction: 1/5 th. of the Qualifying Expenditure is Allowable as Deduction in each of the 5 (five) successive years beginning with the year in which the business commences, or as the case may be, the previous year in which extension of the undertaking is completed or the new unit commences production or operation.
|15. Amortisation of Expenditure in case of Amalgamation / Demerger [Section 35DD]Where an assessee, being an Indian company, incurs any expenditure, wholly and exclusively for the purpose of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to 1/5th of such expenditure for each of 5 (five) successive previous years beginning with the previous year in which the amalgamation or demerger takes place. No deduction shall be allowed in respect of the expenditure mentioned above under any other provision of the Act.16. Amortisation of Expenditure under Voluntary Retirement Scheme [Section 35DDA] Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal installments for each of the four immediately succeeding previous years. No deduction shall be allowed in respect of such expenditure under any other provision of the Income-tax Act.The following points should be noted— The above rule is applicable even if the scheme of voluntary retirement has not been framed in accordance with guidelines prescribed under section 10(10C). Where voluntary retirement payment is made by predecessor and before completion of 5 years it is succeeded in a scheme of business reorganization (like amalgamation/merger of Indian companies or co-operative banks, conversion of firm/proprietary concern/private or unlisted company into company/LLP), the deduction for the remaining years will be available to the successor from the year in which the conversion takes place. 17. Amortization of Expenditure on Prospecting etc., for Development of Certain Minerals. (Section 35E)Section 35E provides for the amortization of expenditure incurred wholly and exclusively on any operation relating to prospecting for the minerals or group of associated minerals or on the development of a mine or other natural deposit of any such minerals or group of associated minerals specified in the Seventh Schedule. Who can Claim Deduction – Deduction under section 35E is allowed only in the case of Indian companies and resident assessees other than companies. Qualifying Expenditure – When it should be incurred – The qualifying expenditure should be incurred during the “year of commercial production” and four years immediately preceding that year. Qualifying Expenditure – What does it include – Expenditure incurred wholly and exclusively on any operations relating to prospecting for any mineral (or group of associated minerals) specified in the Seventh Schedule or on the development of a mine or other natural deposit of any such mineral or group of associated minerals, is “qualifying expenditure”. However, a few expenses (like expenses met by any other person, expenditure on acquisition of site, capital expenses on acquiring building, plant, machinery and furniture) are excluded. Amount and Period of Deduction – The amortization of qualifying expenditure is allowed in equal installments over a period of 10 years. The amount deductible for each year is— 1/10th of “qualifying expenditure”; or income (before section 35E deduction) of the previous year arising from commercial exploitation of any mine or deposit of minerals of any other nature, whichever is less. Audit Report – If the assessee is a person, other than a company/co-operative society, then books of account of the relevant year(s) in which the expenditure is incurred should be audited. Consequences in the case of Amalgamation or Demerger – In the case of amalgamation/demerger of Indian companies, the above benefit for the unexpired period will be available to the transferee. Other Deductions (Section 36)Deductions which are specified Under Section 36 include the followings… 18. Insurance Premium [Section 36(1)(i)]Insurance premium is deductible in the following cases – Any premium paid in respect of insurance against risk of damage or destruction of stocks or stores, used for the purposes of business or profession. Insurance premium paid by a federal milk co-operative society on the lives of cattle, owned by the members of a primary milk co-operative society affiliated to it.Health insurance premium of employees paid by employer by any mode other than cash. 19. Bonus or Commission to Employees [Section 36(1)(ii)] Bonus or commission paid to an employee is allowable as deduction subject to certain conditions: Admissible only if not payable as profit or dividend – One of the conditions is that the amount payable to employees as bonus or commission should not otherwise have been payable to them as profit or dividend. This is provided to check an employer from avoiding tax by distributing his/its profits by way of bonus among the memberemployees of his/its concern, instead of distributing the sum as dividend or profits. Deductible on payment basis – Bonus or commission is allowed as deduction only where payment is made during the previous year or on or before the due date of furnishing return of income under section 139 20. Interest on Borrowed Capital [Section 36(1)(iii)] Interest on capital borrowed is allowed as deduction if the following conditions are satisfied — The assessee must have borrowed money. The money so borrowed must have been used for the purpose of business. Interest is paid or payable on such borrowing. Assessee must have Borrowed Capital – Interest in respect of capital borrowed for the purpose of business/ profession is a permissible deduction. Interest on own capital is not deductible. In other words, interest shall be paid to another person. Interest paid by one unit of the assessee to another unit is not deductible.The following Propositions should also be kept in view – Deduction of interest on borrowed capital cannot be denied only because the borrowed capital produces nontaxable income. Guaranteed interest paid to shareholder on paid-up capital is not deductible. Interest paid to wife and daughters on money allotted to them on partition, is deductible. Interest paid by a firm to partners is deductible according to the provisions of section 40(b) [i.e., @ 12 per cent per annum simple interest]. However, interest paid by an association of persons to its members is not deductible. Capital must be used for the Purpose of Business – Capital should have been borrowed for the purpose of business or profession. Interest on capital borrowed for acquiring a capital asset – Interest liability pertaining to the period beginning from the date on which capital is borrowed by an existing concern for the acquisition of an asset till the date, when such asset is first put to use, should be capitalised and it cannot be claimed as deduction under section 36. Only interest on capital borrowed to purchase a capital asset for business purposes pertaining to the period after the asset is put to use, is deductible on year to year basis under section 36. Other Points – The following proposition taken from different judicial pronouncements should also be kept in view:If borrowed money is utilized in earning non-assessable income, no deduction is allowed for interest paid on such borrowing. It is not for the income-tax department to examine whether there was no need to borrow money because the assessee had ample fund of his own. A taxpayer who is engaged in the business of trading in paper can claim deduction in respect of interest on capital borrowed for the setting of a garment business (even if the new business generates negative income). It is not open to the Assessing Officer to reject the claim of the assessee in respect of the interest paid on that capital merely because the use of the capital is unremunerative. Interest on money originally borrowed for business purposes would be disallowable in a subsequent year in which the money is used for non-business purposes. Interest paid by the assessee on money borrowed for payment of dividends is an allowable deduction. Where the assessee-partner borrows money for investing as capital in partnership, interest paid by the assessee on borrowed money is allowable as deduction. Interest on money borrowed to pay income-tax is not allowable as deduction. Interest for late payment/nonpayment of income-tax/advance tax/tax deducted or collected at source or for late filing of return, is not allowable as deduction. Similarly, where interest is paid for meeting tax liability of partners, such interest is not deductible. 21. Discount on issue of Zero Coupon Bonds [Section 36(1) (iiia)]Any discount on issue of zero coupons shall be allowed on a pro rata basis having regard to the period of life of such bond calculated in a manner as may be prescribed. What are Zero Coupon Bonds – According to section 2(48), zero coupon bond is a notified bond issued by any infrastructure capital company (or infrastructure capital fund or public sector company or scheduled bank) on or after June 1, 2005. In respect of such bond, no payment/benefit is received (or receivable) by a bondholder before maturity/redemption. Meaning of Discount: Discount means the difference between the amount received or receivable at the time of issuing the bond and the amount payable by on maturity or redemption of such bond; Meaning of Period of Life of the Bond: Period of life of the bond means the period commencing from the date of issue of the bond and ending on the date of the maturity or redemption of such bond. 22. Employer’s Contribution to Recognized Provident Fund and Approved Superannuation Fund [Section 36(1) (iv)]Any sum paid by the assessee as an employer by way of contribution towards a recognized provident fund or approved superannuation fund or any other approved welfare scheme of employee is allowed as a deduction subject to such limits as may be prescribed for the purpose of recognizing the provident fund or approving the superannuation fund, etc. as the case may be.23. Employer’s Contribution to National Pension Scheme (NPS) [Section 36(1) (iva)]Any sum paid by the assessee as an employer by way of contribution towards a pension scheme, as referred to in section 80CCD on account of an employee to the extent it does not exceed 10% of the salary of the employee in the previous year shall be allowed as deduction.24. Contribution towards Approved Gratuity Fund [Section 36(1) (v)]Any sum paid by the assessee as an employer by way of contribution towards approved gratuity fund, created by him for the exclusive benefit of his employees under an irrevocable trust, shall be allowed as a deduction subject to the provisions of section 43B.25. Employees’ Contribution to Staff Welfare Schemes [Section 36(1) (va)]Certain employers were deducting amounts from the salaries of the employees towards certain welfare schemes like PF, ESI, etc. but were not crediting it to the employees’ accounts even after long periods. This Section was introduced to check such malpractices. Sum deducted from the salary of the employee as his contribution to any provident fund or superannuation fund or ESI or any other fund for the welfare of such employee is now treated as an income of the employer as per section 2(24)(x). However, if such contribution is actually paid on or before the due date mentioned below the deduction will be allowed for the same under this clause.26. Allowance in respect of Dead or Permanently useless Animals [Section 36(1) (vi)]Expenditure incurred on the purchase of animals otherwise than as stock in trade which is used for the purpose of business or profession is a capital expenditure. However, no depreciation is allowed on such capital expenditure. Such capital expenditure will be written off as a loss in the year in which the animal dies or becomes permanently useless for such business or profession. If any amount is realized on sale of the carcasses or the animals, such amount recovered shall be deducted from the capital expenditure which was incurred for the purchase of the animal and the balance amount shall be allowed as a deduction under this section.27. Bad debts [Section 36(1)(vii)]The amount of any bad debt or part thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be allowed as a deduction subject to the provisions of section 36(2) which are as under:— Such debt or part thereof must have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year, or It represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.In order to claim deduction under section 36(1)(vii), one must keep in view the following points: 1. There must be a Debt – Before claiming an amount as a debt, it must be shown that it is a proper debt. In other words, a bad debt presupposes the existence of a debt and relationship of a debtor and creditor. Unless, therefore, there is an admitted debt it cannot be allowed as bad debt when it becomes irrecoverable.2. Debt must be Incidental to the Business or Profession of the Assesee –The debt which is claimed as bad debt under section 36(1)(vii) must be incidental to the business or profession carried on by the assessee. In other words, debts not connected with business or profession carried on by the assessee or not arising out of the operation of business or profession carried on by the assessee, are not admissible as bad debts even if other conditions are satisfied. 3. Debt must have been taken into Account in computing Assessable Income –No deduction on account of bad debt is admissible unless the amount of debt is taken into account in computing the total income of the assessee of that previous year or of an earlier year. This condition is however, not relevant, if bad debt represents money lent in the ordinary course of money-lending or banking business. 4. Debt must have been written Off in the Books of Account of the Assessee –No deduction in respect of bad debt is allowable under section 36(1)(vii) unless it is written off as irrecoverable in the books of the assessee in the previous year in which claim for deduction is made††. It is not necessary to establish that debt has become bad during the relevant previous year. For this purpose, transfer to “provision for bad and doubtful debts account” shall not be taken as bad debts written off.5. Deduction in the case of an Assessee who is also eligible for Deduction under Section 36(1) (viia) –Deduction relating to a bad debt (or part thereof) in the case of an assessee to which section 36(1) (viia) applies is limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts account made under that section. 6. Adjustment at the time of Recovery –A deduction on account of bad debt is based upon a mere estimate and it is allowed as deduction on the basis of amount written off in the books of account of the taxpayer. Therefore, in a case where debt ultimately recovered is less (or more) than the amount of debt left after writing off bad debt, some adjustment is required. 7. Debts of a Discontinued Business Not Deductible – No allowance can be claimed in respect of bad debts of a business which has been discontinued before the commencement of the previous year. Such bad debt cannot be deducted even from profits of a separate existing business. 8. Allowable in the hands of Successor – In some cases (e.g., one of the partners taking over business of the firm with all assets and liabilities or conversion of firm into company by taking over all assets and liabilities), the successor can claim the benefit of deduction of bad debt if the successor carries on the business of the predecessor and bad debt is written off in the books of account of the successor.|
|28. Provision for Bad and Doubtful Debts relating to Rural Branches of Commercial Banks [Section 36(1) (viia)]In respect of any provision for bad and doubtful debts made by,— A scheduled bank (not being a foreign bank) or a co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank) or a non-scheduled bank,a deduction shall be allowed of an amount not exceeding 8.5% of the total income (computed before making any deduction under this clause and Chapter VIA i.e. deductions u/s 80C to 80U) and of an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. A bank incorporated by or under any foreign laws or a public financial institution or a State Financial Corporation or a State Industrial Investment Corporation, a deduction shall be allowed of an amount not exceeding 5% of the total income (computed before making any deduction under this clause and Chapter VIA).A non-banking financial company, a deduction shall be allowed of an amount not exceeding 5% of total income (computed before making any deduction under this clause Chapter VIA).|
|29. Transfer to Special Reserve [Section 36(1)(viii)]A financial corporation, banking company, co-operative bank and a housing finance company can claim deduction under section 36(1)(viii) as follows, if a few conditions are satisfied — the amount transferred during the previous year to the special reserve account created for the purpose of section 36(1)(viii); or 20 % of the profits derived from the business of providing long-term finance before claiming deduction under section 36(1)(viii); or 200 % of (paid-up share capital and general reserve as on the last day of the previous year) minus the balance of the special reserve account on the first day of the previous year, whichever is lower. Amount withdrawn from Reserve Account – If any amount is withdrawn from the aforesaid reserve account [in respect of which deduction was allowed under section 36(1)(viii)], it will be chargeable to tax in the year in which the amount is withdrawn, under section 41(4A), regardless of the fact whether the business is in existence in that year or not. 30. Family Planning Expenditure [Section 36(1)(ix)]This deduction is allowed only to company assessees. Any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees is allowable as deduction in the year in which it is incurred. Where such expenditure or part thereof is of a capital nature, 1/5th of such expenditure shall be deducted for the previous year, in which it was incurred and the balance shall be deducted in four equal instalments during the subsequent four years.The following points should be considered — No deduction is available under section 36(1)(ix) in the case of a non-corporate assessee. A non-corporate assessee may claim deduction under sections 32 and 37(1) if the relevant conditions are satisfied. Any family planning expenditure which is not allowed as deduction due to inadequacy of profit shall be set off and carried forward as if it is unabsorbed depreciation. 31. Securities Transaction Tax [Section 36(1)(xv)]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 taxable securities transactions is included in the income computed under the head “Profits and Gains of Business or Profession”.32. Commodities Transaction Tax [Section 36(1)(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 shall be allowable as deduction, 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”.33. Expenditure by Co-Operative Society for purchase of Sugarcane [Section 36(1) (xvii),The amount of expenditure incurred by a cooperative society engaged in the business of manufacture of sugar for purchase of sugarcane at a price which is equal to or less than the price fixed or approved by the Government shall be allowed as a deduction.|
|34. General Deductions [Section 37]Any expenditure (not being expenditure of the nature described in Sections 30 to 36) and not being in the nature of capital expenditure or personal expenditure of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed as deduction in computing the income chargeable under the Head “Profits and Gains of Business or Profession”. The twin requirements, therefore, are that the expenditure should be— Wholly and exclusively. For the purpose of business.Examples of Expenditure Allowable as a Deduction u/s 37(1)Remuneration to Employees:Salary and perquisites paid to the employees of the assessee are allowable as a deduction. Salary paid by a firm to its partners is allowed as deduction subject to certain limits and conditions.Payment of Penalty / Damages: Penalty is normally levied for breach of law and are, therefore, generally not allowable as deduction. However, at times an amount though termed as penalty, is purely compensatory in nature. For example, damages, penalty or interest paid for delay in completion of a contract, though termed as penalty are really in the nature of a compensatory payment and are therefore, allowable as a deduction. However, penalties paid to customs authorities, sales-tax authorities, income-tax authorities, etc for infringement of law are not allowed. Levy for failure to pay sales tax within time is partly compensatory and partly penal, compensatory part is allowable and penal part is disallowable.Legal Expenses: All legal expenses, incurred in connection with the business or profession of the assessee, are allowable, irrespective of the result of the legal proceedings. However, legal expenses on criminal prosecution are not deductible, as they are not incidental to the business or profession.Expenditure on Raising Loans: Expenses of various types incurred in connection with raising of loans, for the purposes of the business, are allowable as a deduction. Therefore, legal charges for obtaining the loans from financial institutions, legal charges for drafting various deeds, brokerage paid for raising loans, stamp and registration charges, shall be allowed as deduction.Interest: While Section 36(1) (iii) makes a specific provision for allowing a deduction in respect of interest on money borrowed for the purpose of business, other kinds of interest payments in respect of interest do not fall under that Section. If these payments have been made wholly and exclusively for the purposes of business, they can be allowed u/s 37(1). Some of these could be: interest on deferred payment for purchase of assets; interest on delayed payment of electricity charges; interest on purchase price of raw material; any amount paid ‘in lieu of interest’ in compromising a dispute with a trade creditor.Expenditure on Advertisement: Any expenditure incurred during the previous year on advertisement for the purpose of business and profession shall be allowed as deduction. Expenditure incurred for sports tournaments organized, which directly result in publicity and advertisement of the assessee and its products, qualify for deduction.Expenses Allowable under Specific Instructions of CBDT: Diwali and Mahurat expenses. Payment for telephone/telex connection. Payment to Registrar of Companies: The fee paid to the Registrar of Companies are in connection with the company’s legal obligations to be discharged under the Company law and are an essential part of the company’s business activities and are therefore, allowed. Annual listing fee: Annual listing fee paid to a stock exchange is allowable. Professional tax by the business assessee.What are specific disallowances under the Act?-> The following expenses given by sections 40, 40A and 43B are expressly disallowed by the Act while computing income chargeable under the head “Profits and gains of business or profession”.1. Interest, Royalty, Fees for Technical Services Payable Outside India or Payable to a Non-Resident [Section 40(a) (i)] – Disallowance of expenditure under section 40(a)(i) – If TDS default is committed in respect of payment/credit given to a foreign company/non-resident, the expenditure is disallowed in the hands of payer under section 40(a)(i). These provisions are given below –Case-1 : TDS is Deductible but not Deducted : 100 % of such expenditure is disallowed in the current Year- If tax is deducted in any subsequent year, the expenditure (which is disallowed in the current year) will be deducted in the year in which TDS will be deposited by the assessee with the GovernmentCase-2 : Tax is deductible (and is so deducted) during the current financial year but it is not deposited on or before the due date of submission of return of income under section 139(1) : 100 % of such expenditure is disallowed in the current year If tax is deposited with the Government after the due date of submission of return of income, the expenditure (which is disallowed in the current year) will be deductible in that year in which tax will be deposited 2. Disallowance of Expenditure in respect of any Payment / Credit to a Resident [Section 40(a)(ia)]– If TDS default is committed in respect of the above payment/credit given to a resident, 30 % of such expenditure is disallowed in the hands of payer under section 40(a) (ia). These provisions are given below –|
TDS DefaultIs such Expenditure Deductible in the Current Previous YearIs such Expenditure Deductible in any Subsequent Previous Year
Case 1 – TDS is deductible but not deducted.30 % of such expenditure is disallowed in the current yearIf tax is deducted in any subsequent year, the expenditure (which is disallowed in the current year) will be deducted in the year in which TDS will be deposited by the assessee with the Government
Case 2- TDS is deductible (and is so deducted) during the current financial year but it is not deposited on or before the due date of submission of return of income under section 139(1)30% of such expenditure is disallowed in the current year If tax is deposited with the Government after the due date of submission of return of income, the expenditure (which is disallowed in the current year) will be deductible in that year in which tax will be deposited
3. Default pertaining to Non-Deduction / Non-Deposit of Equalization Levy [Section 40(a)(ib)] – Any consideration paid or payable (to a non-resident for a specified service on which equalization levy is applicable) will be disallowed from the assessment year 2017-18 in the following cases— Equalisation levy is deductible and such levy has not been deducted. Equalization levy is deductible (and it is so deducted) but it is not deposited [on or before the due date of submission of return of income under section 139(1)]. If, however, equalization levy is deducted/deposited in a subsequent year, the aforesaid consideration shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid.
4. Disallowance of royalty, license fees, etc., in case of State Government Undertakings [Section 40(a)(iib)] – The following shall not be allowed as deduction from the assessment year 2014-15 – Any amount paid by way of royalty, license fee, service fee, privilege fee, service charge or any other fee or charge (by whatever name called), which is levied exclusively on a State Government undertaking by the State Government. Any amount which is appropriated (directly or indirectly) from a State Government Undertaking by the State Government.
5. Salary Payable outside India without Tax Deduction [Section 40(a)(iii)] – Section 40(a) (iii) is applicable if salary is paid outside India or paid to a non-resident and tax has not been paid to the Government nor deducted at source under the Income-tax Act.
6. Tax on Non-Monetary Perquisite paid by the Employer [Section 40(a)(v)] – The provisions of section 40(a)(v) are given below – The employer provides non-monetary perquisites to employees. Tax on non-monetary perquisites is paid by the employer. The tax so paid by the employer is not taxable in the hands of employees by virtue of section 10(10CC). While calculating income of the employer, the tax paid by the employer on non-monetary perquisites is not deductible under section 40(a)(v).
7. Amounts Not Deductible in respect of Payment to Relatives [ Section 40A(2)] For an amount to be disallowed under this Section, three conditions have to be fulfilled: the payment is in respect of any expenditure; the payment has been made or is to be made to a specified person in respect of such expenditure; the payment for the expenditure is considered excessive or unreasonable having regard to: The fair market value of the goods, services or facilities; or the legitimate business needs of the assessee’s business or profession; or the benefit derived by or accruing to the assessee from the payment. If the above conditions are fulfilled, the Assessing Officer can disallow the expenditure to the extent he considers it excessive or unreasonable by the above objective standards or otherwise.8. Amounts Not Deductible in respect of Expenditure exceeding Rs. 10,000 (Rs. 35,000 if an assessee makes payment for Plying, Hiring or Leasing Goods Carriages) [Section 40A (3)] – The provisions of section 40A(3) are given below — Disallowance is attracted under section 40A(3) if the following conditions are satisfied — The assessee incurs any expenditure which is otherwise deductible under the other provisions of the Act for computing business/profession income (e.g., expenditure for purchase of raw material, trading goods, expenditure on salary, etc.). The amount of expenditure exceeds Rs. 10,000 (Rs. 35,000 if an assessee makes payment for Plying, Hiring or Leasing Goods Carriages). A payment (or aggregate of payments made to a person in a day) in respect of the above expenditure exceeds Rs. 10,000 (Rs. 35,000 if an assessee makes payment for Plying, Hiring or Leasing Goods Carriages). The above payment is made otherwise than by an account payee cheque or an account payee demand draft or use of electronic clearing system through a bank account. If all the above conditions are satisfied, then 100 % of such payment will be disallowed. Exceptions – The above rule i.e. Section 40A (3) is not applicable to a few cases given below – Payment made to a bank (including private sector banks, co-operative bank, credit societies), LIC, etc. Payment made to Government. Payment through banking system. Payment made by book adjustment by an assessee in the account of the payee against money due to the assessee for any goods supplied or services rendered by him to the payee. Payment made to a cultivator, grower or producer in respect of the purchase of agricultural or forest produce or product of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming or fish or fish products or products of horticulture or apiculture (even if these products have been subjected to some processing provided the processing has been done by the cultivator, grower or the producer of the product). Payment made to a producer in respect of the purchase of the products manufactured or processed without the aid of power in a cottage industry. Payment made to a person who ordinarily resides or carries on business in a village not served by any bank. Payment of terminal benefits, such as gratuity, retrenchment compensation, etc., not exceeding Rs. 50,000. Payment made by an assessee by way of salary to his employee after deducting tax and when such employee is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship and does not maintain any account in any bank at such place or ship. Payment required to be made on a day on which the banks were closed either on account of holiday or strike. Payment made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person. Payment made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business. Following Table showing the Examples towards Nature of Transactions with Disallowed Amount :Nature of TransactionsDisallowed Amount1. Generally X pays salary to his employees by account payee cheques. Salary of December 2018 is, however, paid to three employees A, B and C by bearer cheques (payment being Rs. 6,000, Rs. 10,000 and Rs. 10,500, respectively).1. Rs. 10,500, being 100% of salary paid by bearer cheque to C, will be disallowed.2. X Ltd. purchases goods on credit from Y Ltd. on May 6, 2018 for Rs. 86,000 which is paid as follows— Rs. 5,000 in cash on May 11, 2018; Rs. 30,000 by a bearer cheque on May 31, 2018; Rs. 51,000 by an account payee cheque on May 16, 2018.Nothing will be disallowed out of the payment of Rs. 5,000 in cash on May 11, 2018, as the payment does not exceed Rs. 10,000. 100% of Rs. 30,000 will be disallowed. Nothing will be disallowed out of Rs. 51,000.3. Z Ltd. purchases goods on credit from A Ltd. on May 10, 2018 for Rs. 6,000 and on May 30, 2018 for Rs. 5,000. The total payment of Rs. 11,000 is made by a crossed cheque on June 1, 2018.3. Though the amount of payment exceeds Rs. 10,000, nothing shall be disallowed. To attract disallowance, the amount of bill as well as the amount of payment should be more than Rs. 10,000.4. A Ltd. purchases goods on credit from a relative of a director on June 20, 2018 for Rs. 50,000 (market value: Rs. 42,000). The amount is paid in cash on June 25, 2018.4. Out of the payment of Rs. 50,000, Rs. 8,000 (being the excess payment to a relative) shall be disallowed under section 40A(2). As the payment is made in cash and the remaining amount exceeds Rs. 10,000, 100% of the balance (i.e., Rs. 42,000) shall be disallowed under section 40A (3).5. B Ltd. purchases raw material on credit from A who holds 20 per cent equity share capital in B Ltd. (the amount of bill being Rs. 36,000, market price being Rs. 9,000). It is paid in cash on July 26, 2018.5. Out of the payment of Rs. 36,000, Rs. 27,000 (being the excess payment to a person holding a substantial interest) shall be disallowed under section 40A (2). The remaining amount (i.e., Rs. 9,000) does not exceed Rs. 10,000. Nothing shall be disallowed under section 40A(3) even if the payment is made in cash.
9. Disallowance in respect of Provision for Unapproved Gratuity Fund [Section 40A (7)]: Gratuity is a liability which normally arises according to the length of the service of the employees’ of the assessee. The liability would generally accrue year after year. However, due to practical difficulties in computing the deduction allowable on accrual basis, it has been provided under section 40A(7) that deduction on account of provision for gratuity shall be allowed only when:— the amount of gratuity has actually become payable during the previous year to the employees’ (provided deduction has not been claimed under clause (b) below); or when a provision has been made for payment of a sum by way of any contribution towards an approved gratuity fund. Therefore, no deduction shall be allowed in respect of any provision made for the payment of gratuity to the employees, even though the assessee may be following the mercantile system of accounting, unless it is a provision for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund. In other words, any provision for unapproved gratuity fund (for meeting future liability) is not deductible. The following points should be noted— An employee retires during the current year. The employer does not maintain any gratuity fund. Gratuity is paid to him during the current year. It is deductible during the current year. An employee retires during the current year. Gratuity is payable to him. A part of the amount is paid during the current year and the balance will be paid in the next year. A provision is made towards gratuity in the books of account of the current year for making payment in the next year. The entire amount is deductible during the current year (if no deduction was claimed earlier). In this case, deduction is available during the current year even if provision is made for gratuity fund, which is unapproved.A company has 50 employees. To meet future liability to pay them gratuity at the time of retirement, a gratuity fund is created and the employer makes contribution every year. Employers’ contribution to this fund is deductible only if the fund is an approved gratuity fund.Table showing the Amount Deductible in different Cases : -CasesDeductible AmountCASE-1 : X retires from the service of Y Ltd. on May 31, 2018. The company pays gratuity of Rs. 1, 60,000, according to the provisions of the Payment of Gratuity Act, 1972. Y Ltd. does not maintain any provision for gratuity account.Where gratuity is paid during the previous year or where gratuity has become payable during the previous year, it is deductible if no deduction has been claimed on the basis of provisions earlier. Consequently, Rs. 1, 60,000 is allowed as deduction for the assessment year 2019-20.CASE-2 :Z Ltd. maintains an approved gratuity fund. A sum of Rs. 1, 00,000 being the employer’s contribution towards the gratuity fund, is debited to the profit and loss account for the year ending March 31, 2019.Where any provision is made for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, it is allowed as deduction. It is assumed that provisions of section 43B are satisfied.
10. Amount Not Deductible in respect of contributions to Non-Statutory Funds [Section 40A(9)] – Any sum paid by the assessee as an employer by way of contribution towards Recognized Provident Fund, or Approved Superannuation Fund or an Approved Gratuity Fund, is Deductible to the extent it is required by any law. What is not deductible –If the following conditions are satisfied, then contribution or payment is not deductible by section 40A(9) — The contribution/payment is made by an assessee as an employer. It is paid towards setting up (or formation of) any trust, company, association of persons, body of individuals, society or it is paid by way of contribution to any fund. The contribution or payment is not required by any law.11. Certain Deductions to be allowed only on Actual Payment Basis [Section 43B] Section 43B is applicable only if the taxpayer maintains books of account on the basis of mercantile system of accounting. The provisions of section 43B are given below— Certain Expenses are Deductible on Actual Payment Basis – The following expenses (which are otherwise deductible under the other provisions of the Income-tax Act) are deductible on payment basis— any sum payable by way of tax, duty, cess or fee (by whatever name called under any law for the time being in force); any sum payable by an employer by way of contribution to provident fund or superannuation fund or any other fund for the welfare of employees;any sum payable as bonus or commission to employees for service rendered; any sum payable as interest on any loan or borrowing from a public financial institution (i.e., ICICI, IFCI, IDBI, LIC and UTI) or a State financial corporation or a State industrial investment corporation; interest on any loan or advance taken from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank; any sum payable by an employer in lieu of leave at the credit of his employee; and any sum payable to the Indian Railways for the use of railway assets. The above expenses are deductible in the year in which payment is actually made. There is, however, one exception given below. Exception – Certain Expenses are Deductible on Accrual Basis – If the aforesaid payment is actually made on or before the due date of submission of return of income, deduction can be claimed on Accrual Basis. Due date of submission of return of income in the case of a company (or in the case of a taxpayer whose books of account are required to be audited under any law) is September 30 of the assessment year. In the case of any taxpayer (having international or specified domestic transactions) due date of submission of return of income is November 30 of the assessment year. In all other cases, the due date of submission of return of income is July 31 of the assessment year. However, in case an assessee follows mercantile system of accounting, the payments covered in items No. 1 to 6 in the Table below can be claimed on ‘due’ basis as well, provided the payment for the same is made within the stipulated period mentioned against each expenditure:Nature of ExpensesStipulated Time Period1. Any sum payable by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force.Due amount should be paid on or before the due date of furnishing the return of income u/s 139(1) in respect of the previous year in which the liability to pay such sum was incurred.2. Any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees.3. Any sum payable to an employee as bonus or commission for services rendered.4. Any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or State Financial Corporation or State Industrial Investment Corporation like IDBI, IFCI, UPSIDC, Delhi Financial Corporation, etc. in accordance with the terms and conditions of the agreement governing such loan or borrowing.However, in cases (1) to (6), if the payment of outstanding liability is made after the due date, deduction can be claimed in the year of payment.5. Any sum payable by the assessee as interest on any loan or advance from a scheduled bank or a co-operative bank (other than a primary agricultural credit society or primary co-operative agricultural and rural development bank) in accordance with the terms and conditions of the agreement governing such loan.6. Any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee.7. Any sum payable by the assessee to the Indian Railways for the use of railway assets.
What are the deemed profits and how they are charged to tax?-> The following receipts are chargeable to tax as business income:Recovery against any Allowance or Deduction Allowed earlier [Section 41(1)] (A) Recovery by the same assessee [Section 41(1)(a)]: 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 and subsequently, during any previous year, he (the same assessee) has obtained, whether in cash or in any other manner, whatsoever— any amount in respect of such loss or expenditure; or some benefit in respect of such trading liability by way of remission or cessation thereof, then, the amount obtained by the assessee or the value of benefit accruing to him shall be deemed to be profit and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year. It may be mentioned that the business or profession, in respect of which the allowance or deduction has earlier been made, may or may not be in existence in the previous year in which such amount is obtained or the benefit accrued to him. (B) Recovery by the Successor in Business or Profession [Section 41(1) (b)]: If in the above case, instead of the assessee, 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 predecessor; or some benefit in respect of trading liability referred to in clause (A) above by way of remission or cessation thereof, the amount obtained by successor in business or the value of benefit accruing to the successor in business shall be deemed to be income under the head profits and gains from business or profession of the successor of that previous year.Sale of Assets used for Scientific Research [Sec. 41(3)] – Where any capital asset used in scientific research is sold without having been used for other purposes and the sale proceeds, together with the amount of deduction allowed under section 35, exceeds the amount of the capital expenditure, such surplus or the amount of deduction allowed, whichever is less, is chargeable to tax as business income in the year in which the sale took place. Recovery of Bad Debts [Sec. 41(4)] – Where any bad debt has been allowed as deduction under section 36(1)(vii) and the amount subsequently recovered on such debt is greater than the difference between the debt and the deduction so allowed, the excess realization is chargeable to tax as business income of the year in which the debt is recovered. Amount withdrawn from Special Reserve created and maintained by certain Financial Institutions [Sec. 41(4A)] – Where a deduction has been allowed in respect of any special reserve created and maintained under section 36(1)(viii), by certain financial institution, etc. if any amount is subsequently withdrawn from the special reserve, it shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn, whether the business is in existence in that previous year or not.Recovery of any sum in case of Discontinued 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 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. Recovery of any sum in case of 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 the aforesaid person had it been received before such discontinuance.How and When Undisclosed Income/Investments are taxed?-> Undisclosed income is the income which the assessee has not shown in his Income Tax Return and thereby not paid income tax on it. The primary objective of the Income tax department is to detect such undisclosed income and bring the same under the tax net.If the Assessing Officer detects cash credits, unexplained investments, unexplained expenditure etc., the source for which is not satisfactorily explained by the assessee to him, there are various provisions in the Income Tax Act which empowers the assessing officer to charge tax on such amount.The following are treated as income from undisclosed sources:-1. Cash Credits [Section 68] – Where any sum is found credited in the books of the assessee and the assessee offers no explanation about the nature and source or the explanation offered is not satisfactory in the opinion of the Assessing Officer, the sum so credited may be charged as income of the assessee of that previous year.2. Unexplained Investments [Section 69]– Where the assessee has made investments which are not recorded in the books of account and the assessee offers no explanation about the nature and the source of investments or the explanation offered is not satisfactory, the value of the investments shall be taxed as income of the assessee for such financial year.3. Unexplained money etc. [Section 69A] – Where in any financial year the assessee is found to be the owner of any money, bullion, jeweler or other valuable article and the same is not recorded in the books of account and the assessee offers no explanation about the nature and source of acquisition of such money, bullion etc. or the explanation offered is not satisfactory, the money and the value of bullion etc. may be deemed to be the income of the assessee for such financial year. Ownership is important and mere possession is not enough.4. Amount of investments etc., not fully disclosed in the books of account [Section 69B]– Where in any financial year the assessee has made investments or is found to be the owner of any bullion, jeweler or other valuable article and the Assessing Officer finds that the amount spent on making such investments or in acquiring such articles exceeds the amount recorded in the books of account maintained by the assessee and he offers no explanation for the difference or the explanation offered is unsatisfactory, such excess may be deemed to be the income of the assessee for such financial year.5. Unexplained expenditure [Section 69C]– Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or the explanation is unsatisfactory the Assessing Officer can treat such unexplained expenditure as the income of the assessee for such financial year. Such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as deduction under any head of income.6. Amount borrowed or repaid on hundi [Section 69D] – Where any amount is borrowed on a hundi or any amount due thereon is repaid other than through an account-payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying for the previous year in which the amount was borrowed or repaid, as the case may be. However, where any amount borrowed on a hundi has been deemed to be the income of any person, he will not be again liable to be assessed in respect of such amount on repayment of such amount. The amount repaid shall include interest paid on the amount borrowedUnexplained money, investments etc. to attract tax @60% [Section 115BBE]1. Unexplained money, investment, expenditure, etc. deemed as income under section 68 or section 69 or section 69A or section 69B or section 69C or section 69D would be taxed at the rate of 60% plus surcharge @25% of tax. Thus, the effective rate of tax (including surcharge@25% of tax and cess@3% of tax and surcharge) is 77.25%.2. No basic exemption or allowance or expenditure shall be allowed to the assessee under any provision of the Income-tax Act, 1961 in computing such deemed income.3. Further, no set off of any loss shall be allowable against income brought to tax under sections 68 or section 69 or section 69A or section 69B or section 69C or section 69D.When Maintenance of Books of Account Becomes Compulsory [Sec. 44AA]?-> Maintenance of books of accounts by Professionals:Section 44AA of Income Tax Act and rule 6F of Income Tax rules deal with the provisions regarding maintenance of books of accounts under Income tax Act. As per section 44AA(1) read with rule 6F the persons carrying on any of the profession as mentioned below are required to maintain books of accounts and other documents as may enable the assessing officer to compute his total income, if yearly gross receipts of the profession exceeded Rs 1,20,000.1) Legal2)Medical3)architectural4)engineering5)accountancy6)technical consultancy7)interior decoration8)authorized representative9)film artist10)any other profession as is notified by the boardWhen no books of accounts are required to be maintained by professionals covered u/s 44AA (1): Proviso to Rule 6F (1) provides that if the gross receipts of a profession do not exceed Rs 120000 in any one of the three years immediately preceding the previous year or where the profession has been newly setup in the previous year, his total gross receipts in the profession for that year are not likely to exceed the said amount, then such professional need not to maintain any books of accounts as mentioned in sub rule 2 of rule 6F.It means that if the gross receipts of a profession exceed Rs 120000 in all the three years preceding the previous year only then the books of accounts will be required to be maintained, if the gross receipt exceed the prescribed limit in the two preceding years but not in the third preceding year then there will be no need to maintain books of accounts as contemplated in sub rule 2 of rule 6F.Maintenance of Books of accounts by other Persons covered u/s 44AA (2):In relation to any other persons engaged in any other profession or carrying on any business other than section 44AA (1), the requirement of compulsory maintenance of books of accounts applies if- either the income from business or profession exceeds Rs 120000 or the turnover or gross receipts exceed Rs 10 Lakhs in any one of the three years immediately preceding the previous year.When no books of accounts are required to maintained by other persons covered u/s 44AA (2):If the Income or the gross receipts or gross turnover of a person carrying on business or profession other than profession as mentioned u/s 44AA (1) do not exceed in any one of the three years preceding the previous year then no books of accounts will be required to be maintained u/s 44AA (2).Presumptive Income scheme:The persons who are filling their return of income under the presumptive income scheme like under section 44AD or 44ADA or 44AE or 44AF etc are not require to compulsorily maintain books of account u/s 44AA. However where the profits and gains from the business are deemed to be profits and gains u/s 44AD or 44ADA or 44AE or 44AF or 44BB or 44BBB as the case may be, and the assessee has claimed his income to be lower than the profits or gains so deemed, then the books of accounts will be required to be maintained u/s 44AA.Maintenance of books of accounts in case of 44AD section: Sub section 2 of section 44AA provides that where the profits and gains from a business are deemed to be profits and gains of the assessee under section 44AD and the assessee has claimed such income to be lower than the profits and gains so deemed i.e. below 8%/6% and the income of the assessee exceeds the maximum amount which is not chargeable to income tax during previous year then in such case such person shall keep and maintain such books of accounts and other documents as may enable the assessing officer to compute his total income.Thus it means that if a person declares his income below the 8%/6% of his total turnover or gross receipts as required u/s 44AD and his income is above the exempted limit then he will have to compulsorily maintain his books of accounts. But if his total income is below the exempted limit and profits are also declared below 8%/6% of gross turnover or gross receipts then he will need not to maintain compulsory books of accounts.What books of accounts are required to be maintained by persons covered u/s 44AA(1):As per Rule 6F(2) the following books of accounts and documents are required to be maintained:1) cash book,2) Journal, if the accounts are maintained as per mercantile system of accounting,3) ledger4) carbon copies of bills, serially numbered and carbon copies or counterfoils of receipts issued in respect of sums exceeding Rs 25,5) original bills for expenses exceeding Rs. 50 and payment vouchers for petty expenses. However in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred, then vouchers are not necessary in respect of expenses upto Rs 50.Persons engaged in medical profession are, in addition, required to maintain daily case register in the prescribed Performa (Form No. 3C) and inventory, as at the beginning and end of the year, of stock of drugs, medicines and other consumables accessories used for the purpose of the profession.Books or books of accounts have also been defined u/s 2(12A) as including ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device.Document has been u/s 2(22AA) as including an electronic record as defined in clause (t) of sub section (1) of section 2 of the Information Technology Act, 2000.For how many years books of accounts are required to be preserved:Every year the record of books of accounts grows up and the cupboards filled up more and more. Every assessee wants to know for how many years he should keep the records of his books of accounts.Rule 6F (5) provides that the books of accounts and other documents are to be kept for at least 6 years from the end of relevant assessment year. That means from the assessment year 2020-21 one should keep books of accounts upto the assessment year 2014-15 i.e. books of accounts of financial year 2013-14.The time limit for issuing notices for assessment or reassessments have been prescribed u/s 149, after the end of such prescribed time no notice can be issued and no assessment can be framed, therefore the assessee will not need books of accounts of the concerned year. Keeping in mind the time limit as provided u/s 149 for issuing notice the following suggestions are made regarding preservation of books of accounts:1) If the assessee has made an appeal against any assessment order of any year then the books of accounts of such year should be preserved until the final decision of such appeal.2) Where the assessment in relation to any Year has been reopened u/s 147 within time u/s 149, in such case all the books of account and documents shall continue to be kept till the assessment so reopened has been completed.3) Books of accounts for only 7 financial years should be preserved. Therefore, the taxpayers should keep books of accounts of only financial year 2013-14 and onwards.Where the books of accounts should be kept:The current year’s books of accounts should be maintained and kept at the principal place of business or profession as per Rule 6F(3). There is no specific rule as to where the books of accounts of earlier years should be kept.Consequences for failure to maintain books of accounts: Failure to maintain books of accounts and other documents or to retain them as required u/s 44AA attracts penalty of Rs. 25000 u/s 271A. The penalty can be imposed by the assessing officer or CIT (Appeal).When Audit of Accounts by Certain Persons is Compulsory [Sec. 44AB]?-> As per section 44AB, following persons are compulsorily required to get their accounts audited : A person carrying on business, if his total sales, turnover or gross receipts (as the case may be) in business for the year exceed or exceeds Rs. 1 crore. This provision is not applicable to the person, who opts for presumptive taxation scheme under section 44AD and his total sales or turnover does not exceeds Rs. 2 crores. A person carrying on profession, if his gross receipts in profession for the year exceed Rs. 50 lakhs. A person who is eligible to opt for the presumptive taxation scheme of section 44AD but claims the profits or gains for such business to be lower than the profits and gains computed as per the presumptive taxation scheme of section 44AD and his income exceeds the amount which is not chargeable to tax. If an eligible assessee opts out of the presumptive taxation scheme, after specified period, he cannot choose to revert back to the presumptive taxation scheme for a period of five assessment years thereafter. For provisions of section 44AD refer tutorial on “Tax on presumptive basis in case of certain eligible business”. A person who is eligible to opt for the presumptive taxation scheme of section 44ADA (*) but he claims the profits or gains for such profession to be lower than the profit and gains computed as per the presumptive taxation scheme and his income exceeds the amount which is not chargeable to tax.A This provision is not applicable to the person, who opts for presumptive taxation scheme under section 44AD and his total sales or turnover does not exceeds Rs. 2 crores. For provision of section 44ADA, refer tutorial on “Tax on presumptive basis in case of certain eligible business” A person who is eligible to opt for the presumptive taxation scheme of sections 44AE but he claims the profits or gains for such business to be lower than the profits and gains computed as per the presumptive taxation scheme of sections 44AE. For provisions of sections 44AE refer tutorial on “Tax on presumptive basis in case of certain eligible business”. A person who is eligible to opt for the taxation scheme prescribed under section 44BB or section 44BBB but he claims the profits or gains for such business to be lower than the profits and gains computed as per the taxation scheme of these sections. Section 44BB is applicable to non-resident taxpayers engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire basis to be used in exploration of mineral oils. Section 44BBB is applicable to foreign companies engaged in the business of civil construction or erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project. What are Special Provisions for Computation of Business Income?-> A few special provisions for computation of business income are given below-1. Computation of cost of acquisition in certain cases under section 43C-Where an asset [not an asset referred to in section 45(2)], which has become the property of an amalgamated company under a scheme of amalgamation, is sold as stock-in-trade, then, in computing the profits and gains from the sale of such asset, the cost of acquisition of the asset to the amalgamated company shall be the cost of acquisition of the asset to the amalgamating company, as increased by the cost, if any, of any improvement made thereto and the expenditure incurred wholly and exclusively in connection with such transfer. Similar rules are applicable when an asset (acquired by an assessee by way of total or partial partition of his Hindu undivided family or under a gift or will or an irrevocable trust) is sold as stock-in-trade. In such a case, the cost of acquisition shall be the cost of acquisition in the hands of the transferor or the donor, as increased by the cost of any improvement made and the expenditure incurred wholly and exclusively in connection with such transfer including the payment of gilt tax, by the transferor or the donor, as the case may be.2. Special provisions for determining sale consideration in the case of transfer of immovable property (Sec. 43CAJ- Section 43CA is applicable if an asset (other than capital asset), being land or building or both transferred. If, however, the asset which is transferred is a capital asset, section 50C (not section 43CA) is applicable.When section 43CA is applicable-Section 43CA is applicable if stamp duty value (of land/building) is more than sale consideration. The provisions applicable for different years are given below-For the assessment years 2014-15 to 2018-19From the assessment year 2019-20Where the consideration for the transfer of land (or building or both) is less than the stamp duty value, the value so adopted (or assessed or assessable) shall be deemed to be the full value of the consideration for the purposes of computing business income.Where stamp duty is more than 105 per cent of actual consideration, stamp duty value shall be deemed to be full value of consideration for the purpose of computing business income.When date of agreement and date of registration are not same- Where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer. However, this exception shall apply only in those cases where amount of consideration (or a part thereof) for the transfer has been received -by any mode (other than cash) on or before the date of the agreement (applicable for the assessment years 2014-15 to 2018-19), or by way of an account-payee cheque/draft or by use of electronic clearing system through a bank account, on or before the date of agreement for transfer of the asset (applicable from the assessment year 2019-20). 3. Computation of income from construction and service contracts [Sec. 43CB] – Section 43CB has been inserted by the Finance Act, 2018, with effect from the assessment year 2017-18. It provides as follows-▸ Percentage of completion method – Profits and gains arising from construction contracts/service contracts shall be determined on the basis of percentage of completion method. Computation will be done on the basis of notified Income Computation and Disclosure Standards (ICDS).Service contracts – Income from service contracts with duration of not more than 90 days, shall be determined on the basis of project completion method. Moreover, service contracts involving indeterminate number of acts over a specific period of time, shall be determined on the basis of straight line method.Retention money – For making above computations, contract revenue shall include retention money.Cost-Contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains.What are the Special Provisions for Computing Income on Estimated Basis Under Sections 44AD, 44ADA and 44AE?-> Section 44ADIt is designed to give relief to small taxpayers being resident individual, resident HUF and resident partnership firm (not LLP) engaged in any business who have not claimed deductions u/s 10A/10AA/10B/10BA or 80HH to 80RRB for the relevant year, but does not include the following businesses:Business of plying, hiring or leasing of goods carriages referred to in section 44AE;A person who is carrying on any agency business;A person who is earning income in the nature of commission or brokerage;A person who is engaged in any profession as prescribed u/s 44AA (1).The presumptive taxation scheme of section 44AD can be exercised only if your total turnover or gross receipts from the business do not exceed Rs. 2 crores [Earlier, the same was Rs. 1 crore].In case, you are adopting the provisions of section 44AD, your income will not be computed in the normal manner but will be computed @ 8% of the turnover or gross receipts of the eligible business for the year. The income computed under this scheme will be the final taxable income of the business covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed even on account of depreciation. However, the written down value of any asset used in such business shall be calculated as if depreciation as per section 32 is claimed and has been actually allowed.Income at the higher rate, i.e., higher than 8% can be declared if the actual income is higher than 8%.You can declare income at a lower rate (i.e., less than 8%), however, if you do so, and your income exceeds the basic exemption limit, then you will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.Further, the whole amount of advance tax is payable on or before 15th March and no separate quarterly dates are specified [Earlier, no advance tax was payable by the taxpayers opting this scheme].A discouraging provision has also been introduced with the Budget 2016 i.e. if you opt for this scheme then you are required to follow the same for the next 5 years and in case, you fail to do so, then presumptive taxation scheme will not be available to you for the next 5 years. In such a case, you will also be required to keep and maintain books of account and get your accounts audited.For example, if you opt for this scheme in FY 2016-17, 2017-18 and 2018-19, but not in 2019-20, then you will not be eligible to claim the benefit of presumptive taxation scheme for the next five years i.e. from FY 2020-21 to 2024-25.Section 44ADAThe presumptive taxation scheme u/s 44ADA is designed to give relief to a person resident in India whose total gross receipts do not exceed Rs. 50 lakh and is engaged in specified profession being the following:LegalMedicalEngineering or architecturalAccountancyTechnical consultancyInterior decorationAny other profession as notified by CBDT.In case, you are adopting the provisions of section 44ADA, your income will be computed @50% of the total gross receipts of the profession for the year and any further claim of deduction(s) is not admissible after declaring profit @ 50% though you can declare profit more than 50% too if you wish.However, if you declare profit less than 50%, and your income exceeds the basic exemption limit, then you will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.The income computed under this scheme will be the final taxable income of the profession covered under the presumptive taxation scheme and no further expenses will be allowed or disallowed even on account of depreciation.The provisions relating to advance tax, maintenance of books of account and audit of accounts are same as discussed above. Further, the provision of opting the scheme for continuous 5 years is not applicable to professionals.Section 44AEThe scheme u/s 44AE is designed to give relief to every person who is engaged in the business of plying, hiring or leasing of goods carriages and who does not own more than 10 goods carriage vehicles at any time during the relevant year.One major difference as compared to Section 44AD is that “person” in this section includes every person i.e. an individual, HUF, firm, company, etc.In case, you are adopting the provisions of section 44AE, your income will be computed @Rs. 7,500 per vehicle per month during which the vehicle is owned by you and where the part of the month would be considered as a full month.And if the actual income is higher than the presumptive rate, i.e., higher than Rs. 7,500, then such higher income can also be declared as per the wish of the taxpayer.Further, you can declare income at a lower rate (i.e., at less than Rs. 7,500 per goods vehicle per month) but if you do so, and your income exceeds the basic exemption limit, then you will be required to maintain the books of accounts u/s 44AA and to get your accounts audited u/s 44AB.The provisions relating to the admissibility of deductions, depreciation, written down value of the asset, advance tax, maintenance of books of account and audit of accounts are same as discussed above. Only a partnership firm can claim the further deduction on account of remuneration and interest paid to partners.What are Permissible Methods of Valuation of Closing Stock?-> The valuation of closing stock or inventory shall be made at lower of actual cost or net realizable value (NRV) [sec. 145A (1)]. Cost/NRV shall be computed in the manner provided in Income Computation and Disclosure Standards (ICDS). The following points should also be noted-1. The method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause. 2. Inventory (being securities not listed, or listed but not quoted, on a recognized stock exchange) shall be valued at actual cost.3. Inventory (being listed securities) shall be valued at lower of actual cost or NRV. For this purpose, the comparison of actual cost and NRV shall be done category-wise (different categories are: shares, debt securities, convertible securities and any other securities).4. Even in the case of dissolution of a partnership firm or AOP or BOI, the inventory on the date of dissolution shall be valued at cost or NRV, whichever is lower.