'Profits and Gains of business or...

CHAPTER – 5 BUSINESS INCOME"PROFITS AND GAINS OF BUSINESS OR PROFESSION"

Q1. Which incomes are chargeable under the head "Profits and gains of business or profession"

Ans. Following incomes are chargeable to tax under the head "Profits and gains of business or profession.

a) Profits and gains of business or profession.Compensation received or receivable by a person managing the whole or substantially the whole of the affairs of an Indian company, in connection with termination of Management or office or modification of the terms and conditions relating to the management.

b) Any Compensation or other payment due to or received by any person managing the whole

or substantially the whole of the affairs in India of any other company (i.e. other than Indian company) in connection with termination of his Management or office or modification of terms and conditions relating the management.

c) Any compensation or other payment due to or received by any person, in connection with termination or modification of terms of the agency held for any part of the activities relating to business of any other person.

d) Income derived by any trade, professional or similar association from specific services performed for its members

e) The value of any benefit or perquisite whether convertible in to money or not, arising from business or exercise of a Profession

f) Export incentives available to exporters.

g) Profits on sale of licences granted under Import (control) order, 1955)

h) Cash assistance or excise repaid or repayable as draw back to any person against exports under the customs and Central Excise duties drawback rules 1971.

i) Duty draw back repayable to any person against export under Custom and Central excise Duties Drawback rules 1971. Any Interest, Salary, bonus, commission or remuneration received by a partner from firm. However, where any interest, commission, bonus or remuneration, by what ever name called has been disallowed to the firm under Clause (b) of section 40, the amount disallowed will not be taxed in the hand s of the partners

j) Any sum received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business or profession for not sharing any know how patent copy right, trade mark, licence, franchise or any other business or commercial right of similar nature. Excluding sum received in cash or kind on account of transfer of right to produce or manufacture or right to carry on any business which is chargeable under the head “Capital gain”

k) Aany sum received under a Key man insurance policy including bonusl) Profits and gains of Managing agency

Income from speculative transactionsWhere any business is carried by an assesee which is of a speculative nature such business shall be deemed to be a separate from other business(es). (Explanation 2 to section 28).

"Business includes any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture. "Profession is defined to include vocations. It covers cases of doctor, lawyers, chartered Accountants, Musicians etc.

Q2. Enumerate the basic principles which should be kept in Mind while computing, Income under the Head "Profits and gains of business or profession."

a) Business should be carried on during the previous year Income from business or profession is chargeable to tax under this head of income only if

business or profession is carried on by the assessee at any time during the previous year. It is not necessary that the business should be carried on throughout the previous year. However there are some exceptions specified in section 41 where some receipts are taxable even if the business to which such receipts relates is not carried on during the previous year

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Prof. Bhambwani’sRELIABLE/ C.A.INTERMEDIATE /TAX/BUSINESS INCOME

Illegal business: The income-tax law is not concerned with the legality or illegality of a business or profession. It can therefore be said that income of illegal business or profession is chargeable to tax. Expenditure relating to illegal business is allowed as deduction.

b) Income from all Businesses or professions: Profits and gains from different businesses or professions are not separately charged to tax under this head of income. Tax incidence arises on aggregate income from all businesses carried on by the assessee. Hence if there is a loss in one business and profit from other business then only net amount is chargeable to tax. However profits and losses of a speculative business are kept separately.

Section 29 states that incomes specified under section 28 shall be computed in accordance with the Provisions of section 30 to 43-D.

Section 30 to 37 shows deduction which are expressly allowed to calculate Income under this heading.

A) DEDUCTION WHICH ARE EXPRESSLY ALLOWED:

1. Rent, Rates Taxes, Repairs & Insurance of Building (Sec. 30) a) Where the assessee has occupied the premises as tenant, Following expenses are allowed

as deductioni) the rent at the premises, ii) the cost of repairs, if the assessee has under taken to bear the cost of repairs b) Where the assessee has occupied the premises otherwise as an tenant then the assessee is

allowed deduction in respect of current repairs to the premises.c) Any sum paid by the assessee on account of land revenue, local rates and municipal taxes.d) Any sum paid as premium in respect of insurance against risk of damage or destruction of

premises.Land revenue, local rates, or municipal taxes are deductible subject to conditions specified by section 43B.In short under section 30 any expenses relating to rent, Repairs & Municipal taxes or insurance of premises is allowed as deduction. The deduction is available only if the Property is used for business

IMPORTANT POINTS IN CONNECTION WITH THESE DEDUCTIONS.a) Explanation to section 30 clearly states the term “repairs and Current repairs” does not

include repairs of capital nature.

b) If the assessee takes premises on lease and agrees to pay arrears of rent of previous tenant, such expenditure is not deductible

2. Repairs and Insurance of Machinery Plant & Furniture (Sec 31): Under section 31 any expenses relating to current repairs or insurance of machinery plant & furniture is allowed as deduction.Explanation to section 31 clearly states the term “Current repairs” does not include repairs of capital nature.In other words no deduction under this section will be allowed if the repairs expenditure incurred is of capital nature.

3. Depreciation (Section 32 & section 34):Depreciation means loss or fall in the value of an asset. Following points are important in connection with Depreciation.

a) Depreciation will be allowed only in respect of following assets:i) Building, Plant Machinery & Furniture. Being tangible assetsii) Knowhow, patents, copyrights, trademarks licences, franchises or any other business or

commercial rights of similar nature which are acquired on or after 1st April 1998 being intangible assets.

Ships, Vehicles (including Cars) books scientific apparatus, surgical equipment used for the purpose of business or profession. but does not include tea bushes or live stock or building or furniture and fittings.

The above definition of plant is given by section 43(3) However the definition given above is an inclusive definition. Therefore the term plant covers any other asset also.

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The term Building does not include Land.Work in relation to partition or false ceiling in the building comes under the expression furniture and fittings and not under building for the purpose of depreciation.

b) Depreciation is allowed as deduction only, if the following conditions are satisfied.

1) The assessee must be the owner of the asset:The assessee should be the own the asset wholly or partly.Where an assessee carries on business or profession in a building not owned by him but occupied by him as under a lease or as a tenant, the assess is entitled to depreciation in respect of capital expenditure incurred by him on construction of any structure or any work in relation to the building by way of improvement renovation of expenditure.

a) Assets acquired under hire-purchase are eligible for depreciation, subject to certain conditions . Under hire purchase agreement, depreciation is allowable to the user – CIT v. Nagpur Golden Transport Co. [1998] 233 ITR 389 (Delhi)

b) Depreciation is allowable even if the asset is a partly owned by the Assessee.

2) The asset must be used for the purpose of business or profession. If the asset is partly used for business or profession and partly for private purposes then a reasonable proportion of normal depreciation will be allowed as deduction.

(a) Depreciation is admissible on assets under repairs CIT v. G.N. Agarawal.

(b) Depreciation is not admissible for the period during which factory was under lockout CIT v. Oriental Coal Company.

3) The assets must be used in the relevant previous year.When a asset is acquired in the business during the previous year, is used for less than 180 day during that previous year the depreciation allowance shall be limited to 50% of normal depreciation. However if the assessee uses the assets for less than 180 days in the subsequent previous year ( After the previous year of acquisition ) in such a case normal depreciation will be allowed.The word "use" includes "ready to use". Even if the assets is not actually used but if it is kept ready for use then the days for which assets is kept ready for use shall be taken in to account for the purpose of calculating the days for which asset is used.If Asset is not used during the previous year of acquisition or in subsequent previous years then no depreciation will be allowed in respect of such assets in that previous year(s).

Table showing extent of depreciation allowableAsset not used Used for less than 180

daysUsed for 180 days or more

Year of purchase No Depreciation 50% of Normal depreciation

Normal depreciation

Subsequent years

No depreciation Normal depreciation Normal depreciation

No Depreciation is allowable in respect of a motor car which is manufactured outside India and which is purchased on or after 1st March, 1975. But before 1st April, 2001 however, if the assessee is carrying on business of running cars on the hire for tourist then depreciation for a foreign car is allowed as deduction. Depreciation of foreign car will be allowed if it is used outside India for the purpose of business or profession. Foreign car purchase on or after 1st April, 2001 will be eligible for depreciation.

4. No depreciation will be allowed on any Machinery or plant if the actual cost of such machine or plant is allowed as deduction in one or more years under an Agreement entered in to by the Central Government.

5. The rate at which Depreciation is to calculate is prescribed under the Income Tax Act. For different types of assets such as Building, Machinery Plant & Furniture different rates have been prescribed.

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The Supreme court in CIT V/s Mahendra Mills has held the allowing depreciation is for the benefit of the assessee. If an assesee does not claim depreciation, the assessing officer cannot force an assesee to claim depreciation. However, the finance act 2001 has inserted explanation 5 to section 32(1) stating their depreciation shall be allowed whether or not the assesse has claimed the deduction in respect of depreciation in computing his total income. Before explaining the method of calculating depreciation for Income Tax purpose, the following terms should be understood.

1. BLOCK OF ASSETS:Block of Assets means a group of assets relating to a particular class of assets such as Building plant or Furniture, for which same percentage of depreciation has been prescribed. In other words block of assets means assets which are of the same class and for which same rate of depreciation has been prescribed.

For example a person holds following assets : Assets Rate of Depreciation.

Building A 5% Building X 5% Building B 10% Building C 10% Building D 20% Plant A 33.1\3 % Plant B 33.1\3% Plant C 50% Furniture & Fittings 10%

The following will be the Block of Assets :- BUILDING

1st Block - Rate of Depreciation 5% on Building . Building' A Rs. & Building 'X'.2nd Block- Rate of Depreciation 10% on building. Building 'B Rs. & Building 'C Rs.3rd Block- Rate of Depreciation 20% on Building 'D'.

PLANT4th Block - Rate of Depreciation 33.1\3% on plant. Plant 'A'& Plant 'B'.5TH BLOCK PLANT C 50 % DEPRECIATION6th Block- Rate of Depreciation 10% on Furniture & Fitting.

FURNITURE AND FITTING 10 %

2. WRITTEN DOWN VALUE OF BLOCK OF ASSET:-W.D.V. for each Block of Assets is calculated as under:-

a) Total opening written down value of all assets falling within A block of Asset (i.e.) the W.D.V. of that block at the beginning of the year is to be found first from the books of accounts.

b) Add :- Actual cost of any asset, falling within that block, which is purchased or destroyed during the year.

c) Less Money payable / paid to the assessee in resp1ect of asset falling with that block which is sold, discarded, demolished or destroyed during the previous year. Money payable or paid to the Assessee includes.

Any insurance, salvage or compensation moneys payable in respect thereof. If the Asset is sold the price at which the asset is sold.

It should be noted that only money receivable or received in cash or by cheque or draft is to be only deducted. If any other benefit is derived from the sale of asset the value of such benefit should not be deducted to arrive at the written down value of the asset. Note:

a) Depreciation allowable under the income Tax is to be calculated as per the Written down value method.

b) Depreciation is allowed only for Building, Furniture Plant & Machinery and intangible assets such as knowhow, patents, copyrights, trademarks licences franchises or any other business or commercial rights of similar nature Depreciation on intangible asset is allowed only in case of intangible assets acquired on 1-4-1998.

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c) Depreciation is allowed for the whole year even though the asset may be used only for part of year. However if the asset is used for less than 180 days in the year in which asset is acquired then depreciation allowed in respect of such asset will be 50% of the normal depreciation in the year of acquisition only.

3. If the sale proceeds of an asset sold during the year exceeds the written down value of the asset plus the cost of asset purchased during the year. (i.e. a + b-c is negative ) then the amount so arrived i.e. negative written down value will be considered as short term capital gain and no depreciation will be allowed during that year

4. If a + b -d –c is positive, but all the assets within that block are sold then no depreciation will be allowed in that previous year. However the amount arrived at i.e. a + b - c will treated as short term capital loss/ gain.

From (3) and (4) above we conclude that depreciation will be allowed inrespect of a block of an asset only if there is Written down value of the block in the asset and there is atleast one asset in the block.

In short depreciation is allowed only if there exists assets in the block at the end of the year and there is Written down value of the block at the end of the year. The rates of depreciation are given in Income tax rules some of the rates are specified below.

Rates of Depreciation.Buildings used for residential purpose 5%Building used as office etc for non residential purpose 10%Plant and machinery general rate 15%Computers including software 40%Intangile assets 25%Motor cars 15%Furniture 10%Books owned by assessee carrying on profession being annual publications Or business of running lending libraries 40% Books other than given below 40%

Apportionment of Depreciation in case of Succession of Business or reorganization company

Section Predcessor SuccessorConversion of Partnership in to firm

47(xiii) Firm Company

Sole proprietor 47(xiv) Sole proprietor CompanyAmalgamation of companies 170 Amalgamating

compAmalgamated company

Demerger Demerged co Resulting companyConversion of private company or unlisted public company into limited liability partnership

47(xiiib) Privated company or unlisted public company

Limited liability partnership.

In the above cases of reorganization, compute total depreciation as if reorganization has not taken place.The total depreciation so arrived at is apportioned between the predecessor and successor in the ratio of number of days the asset was used by them.

Special provisions for depreciation in case of assets of an undertaking engaged in generation or generation and distribution of power. Sec. 32(2) (i)However with effect from Assessment year 1998-99 in respect of an undertaking which is engaged in generation or generation and distribution of power depreciation will be allowed at the rates specified in appendix IA of the income tax rules on the original cost of the asset.However, straight line method can be claimed only in respect of assets acquired after March 31 1997.

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It should be noted that it is not compulsory for an undertaking engaged in the generation or generation or distribution of power to follow original cost method. Such undertakings can even claim depreciation by written down value method.

Such option, once exercised shall be final and shall apply to all the subsequent assessment year. If the option is not exercised, the depreciation shall be allowed only on the basis of straight line method on the actual cost of each asset.The option to claim depreciation in accordance with either of the two methods is available only in respect of assets acquired on or after 1-4-1997. For assets which were acquired before 1-4-1997, the assessee will be entitled to claim depreciation only on written down value of assets.In the case of straight line method of depreciation also if the asset is acquired during the previous year and put to use for the purpose of business for a period less than 180 days in the previous year, the depreciation in respect of such asset shall be restricted to 50% of the normal rate.

ADDITIONAL DEPRECIATION (section 32(iia):

1. Additional depreciation is allowed to a) an assessee engaged in the business of manufacture or production of any article or thing.

And also tob) An assesee engaged in the business of generation or generation and distribution of power.2. Additional depreciation is allowed inrespect of new machinery or plant (other than ships and

aircrafts) which has been acquired and installed after 31st march 2005.)3. Additional depreciation is allowed at the rate of 20% of the cost of the asset.4. Additional depreciation at enhanced rate of 35% ( Inserted by Finance Act 2015)(from

assessment year 2016-17) (provisio to section 32(iia)An assessee is entitled to claim additional depreciation at the rate of 35% if the following conditions are satisfied.

a) The assesee sets up an undertaking or enterprises for the manufactur or production of any article or thing.

b) Such an undertaking or enterprise is set up on or after 1st April 2015 in any backward area notified by the central Government in the state of Andhra Pradesh or in the state of Bihar or in the state of Telengana or in the st ate of west Bengal.

c) The assessee acquires and installs any new machinery or plant( other than ship and aircraft) for the purpose of the said undertaking or enterprise during the period beginning from 1st

day of april 2015 and ending before 1st april 2020 in the said backward area.5. No additional depreciation will be allowed in respect of the following assets:a) Any machinery or plant which before installation by the assessee, was used by any other

person.b) Any machinery or plant installed in any office premises or any residential accommodation,

including accommodation in the nature of guest house.c) Any office appliances or road transport vehicle.d) Ships and Aircrafts.e) Any machinery or plant, the whole of the actual cost of which is allowed as deduction in

computing the income chargeable under the head:” profits and gains of business of profession” of any one previous year.

6. Additional depreciation would be deducted from written down value of block of assets for computing written down value for subsequent years.

7. If the assets is put to use for less than 180 days in the year of acquisition, additional depreciation will be allowed will he 50% of the total amount of depreciation calculated @ 20% or 35% will be allowed in that previous year and balance 50% will be allowed in the immediately succeeding year ( (amended by finance Act 2015)Consequences if Depreciable assets are sold: If the assessee follows, written down value method and charges the depreciation on block assets, the sale price/money payable shall, be deducted from total value of the block of assets.On the other hand, if the assessee opts for depreciation on straight line method and any building, machinery, plant or furniture is sold discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use) the amount by which the money payable in respect of such asset together with the amount of scrap value, if any, fail short of the written down value thereof, shall be written off as depreciation (terminal depreciation) in the year such asset is sold, discarded, etc. provided that such deficiency is actually written off in the books of the assessee. However, terminal depreciation will be allowed only when the asset is used for the purpose of the business of the assessee at least for some time during the previous year in which the sale took place. (Section 32(iii))

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On the other hand, if the money payable in respect of such asset which is sold/discarded, etc., together with the scrap value, if any, exceeds the written down value then the treatment shall be as under

(f) Balancing charge: The excess of the sale price, etc., including scrap value, if any, over the written down value to the extent of difference between the actual cost and written down value shall be chargeable to income-tax as income of the business of the previous year as balancing charge u/s 41(2). Such balancing charge shall be taxable in the previous year in which the money payable for such asset becomes due. If in that previous year, the business was no longer in existence, the above provisions will apply as if the business is in existence in that previous year.

(g) Capital gain: Where the money payable, including scrap value, if any, of the asset sold, discarded, etc., exceeds the cost of acquisition of such asset, such excess shall be treated as capita gain. The capital gain may be long term or short term depending up n the period of holding of the asset.The cost of acquisition of the asset shall, as per section50A, be taken as written down value of the asset as defined in section 43(6) as adjusted. The words as adjusted have not been defined. However, it can be understood as written down value of the asset as increased by balancing charge under section 41(2).

DEDUCTION ON ACCOUNT OF INVESTMENT ALLOWANCESSECTION 32AC(1A)Deduction is available if the following conditions are satisfied

1. Assessee is a company2. The company is engaged in the business or manufacture or production of any article

or thing.3. The company acquires new asset during the previous year..

If the new asset is installed in a year other than the year of acquisition, the deduction under this sub section shall be allowed in the year in which new asset is installed

4. The aggregate of cost of new assets acquired in the above period exceeds 25 crores.Amount of deduction is 15% of the actual cost of new asset acquired and installed during the previous year.Deduction under this section is available only up to assessment 2017-18No deduction under section 32AC(IA) shall be allowed for any assessment year commencing on or after 1st April 2018. Definition of new Asset.New asset means any plant and machineryBut does not include the followingi) Ship or aircraftii) Any plant or machinery which was used within India or outside India by any other

person before its installation by the assessee.iii) Any plant and machinery installted in any office premisesiv) Any plant and machinery installted in any residential accommodation including

accommodation in the nature of guest housev) Any office appliances including computers or computer softwarevi) Any vehiclesvii) Any plant or machinery , the whole of the actual cost of which is allowed as

deduction (By way of depreciation or any other deduction) in computing the income chargeable under the head “ Profits and gains of business or profession” of any previous year.

Consequences when the new asset referred above is sold.

If any such new asset is sold or otherwise transferred within a period of five years from the date of installation.

If any such new asset is sold or otherwise transferred after a period of 5 years from the date of installation.

If such sale or transfer is not in connection with amalgamation or demerger.

If such sale or transfer is inconnection with the amalgamation or demerger

Nothing is chargable to tax on account of deduction claimed.

Amount of deduction allowed Provisions of section 32AC will

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under apply to the amalgamated company or resulting company as the case may be as they would have applied to the amalgamating company or the demerged company.

Section 32AC(1) or 32C(1A) will be deemed to be income of the assesee chargeableUnder the head “profits and gains of business or profession” The income will be chargeable in the year in such new asset is sold or otherwise transferred. This income will be in addition to gain arising on account of transfer of such new asset.

DEDUCTION ON ACCOUNT OF ADDITIONAL INVESTMENT ALLOWANCE (SECTION 32AD) (INSERTED BY FINANCE ACT 2015)

An additional deduction on account of investment in plant and machinery is allowed if the following conditions are satisfied.

a) An assesee sets up an undertaking or enterprise for manufacture or production of any article or thing on or after 1 st day of april 2015.

b) Such an undertaking or enterprises for manufacture or production is set up in any backward area notified by the central Government in this behalf in the state of Telengana or in the state of Andhra Pradesh or in the state of Bihar or in the state of Telengana. Or in the state of West Bengal.

c) The assesee acquires and installs any new asset for the purpose of the said undertaking or enterprises during the period beginning from 1 st April 2015 to 31 st march 2020 in the said backward areases.

d) New asset means

i) Any plant or machinery which was used within India or outside India by any other person before its installation by the assessee.ii) Any plant and machinery installted in any office premises

iii) Any plant and machinery installted in any residential accommodation including accommodation in the nature of guest houseiv) Any office appliances including computers or computer softwarev) Any vehiclesvi) Any plant or machinery , the whole of the actual cost of which is allowed as deduction

( By way of depreciation or any other deduction) in computing the income chargetable under the head “ Profits and gains of business or profession” of any previous year.

e) Deduction is allowed @ 15% of Actual cost of such new assets for assessment year relevant to the previous year in which such new asset is installed.

Consequences if the Asset is sold.

If any such new asset is sold or otherwise transferred within a period of five years from the date of installation.

If any such new asset is sold or otherwise transferred after a period of 5 years from the date of installation.

If such sale or transfer is not in connection with amalgamation or demerger.

If such sale or transfer is inconnection with the amalgamation or demerger or reorganistion of business referred in section 47(xiii),(xiiib) or

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(xiv) within a period fo 5 yers from the date of if its installation

Amount of deduction allowed under Section 32AD will be deemed to be income of the assesee chargeableUnder the head “profits and gains of business or profession” The income will be chargeable in the year in such such new asset is sold or otherwise transferred. This income will be in addition to gain arising on account of transfer of such new asset.

Nothing is chargable to tax on account of deduction claimed.Provisions of section

32AD will apply to the amalgamated company or resulting company as the case may be as they would have applied to the amalgamating company or the demerged company.or successor referred in section 47(xiii),(xiiib) or (xiv)

WHAT DO YOU MEAN BY ACTUAL COST OF THE ASSET: 1. The term cost includes purchase price of the asset plus expenses necessary to bring the

asset to site, install the asset and make the asset fit for use. However if a part of the cost is met directly or indirectly by any other person or authority then the actual cost to the assessee shall be reduced by that amount. For example if X purchases a Machine for Rs 70,000 and obtains a subsidy of Rs 10,000 from the Government of India than the cost of Asset to Mr X will be considered as Rs 60,000 only for the purpose of calculating depreciation.

Provisio Inserted by Finance Act 2017 states thatWhere the assessee incurs any expenditure for acquisition of any asset or part thereof in respect of which a payment or agreement of payments made to a person in a day, exceeds Rs 10,000 and such payments are made otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account such expenditure will be ignored for the purpose of determining actual cost of Asset.

2. INTEREST ON MONEY BORROWED FOR CONSTRUCTING AN ASSET.(a) if interest is paid by a newly started concern which is in the process of constructing and

erecting its plant, then interest paid in respect of the period before commencement of production will be capitalised and added to the cost of asset.(Challapalli Sugars Ltd v C.I.T ) with effect from assessment year (2004-5) Section 36 provides that interest paid on capital borrowed for acquisition of asset for extension of existing business or profession will not be allowed as deduction for any period from the date on which capital was borrowed till the date on which such asset was first put to use. However interest related to the period after the asset has been put in to use cannot be capitalized and such interest can be claimed only under section 36(1)(iii).

IMPORTANT COST IN RELATION TO COST OF ACQUISITION.Expl. To

Sec. 43(1)

Mode of acquisition Actual cost

1 Asset acquired for scientific research subsequently brought into business use

Actual cost less deduction availed u/s.35

2 Asset acquired by way of gift or inheritance

WDV to the previous owner.

3 Asset acquired from any other person using the asset for his business or profession with a view to claim depreciation on enhanced cost and reduce tax liability

Actual cost to be determined by the Assessing Officer with the prior approval of Joint Commissioner

4 Asset transferred by the assessee and reacquired by him

The WDV at the time of original transfer or the price paid for reacquiring the asset whichever is less.

4A Asset acquired by an assessee from The written down value of the asset to the

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another person given on lease to the same person who had earlier claimed depreciation on such asset

transferor at the time of transfer to the assessee.

5 Building used for private purpose subsequently brought into business use.

The cost of purchase or construction of the building as reduced by the notional depreciation calculate up to the year of bringing the asset to business use at the depreciation rate applicable to that year.

6 Asset transferred by a holding Co. to its subsidiary co. or by a Subsidiary Co., to holding co. if the following two conditions are satisfied-i) Shares of the subsidiary co. should be wholly owned by the holding co. or its nominees. ii) The transferee co. should be an Indian company.

WDV to the transferee company will be adopted as the actual cost to the transferor company.

7 Transfer of asset in a scheme of amalgamation by amalgamating company to amalgamated Indian company.

WDV to the amalgamating company will be adopted as the actual cost to the amalgamated company.

7A Asset transferred by a demerged company to the resulting Indian company.

Actual cost shall be the written down value in the hands of the demerged company.

8 Asset acquired out of borrowed funds

Interest on loan borrowed relating to the period after the asset is first put to use shall never form part of actual cost.

9 Asset acquired subject to levy of excise duty or customs duty

So much of the duty in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944 shall not form part of the actual cost.

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

So much of the cost as is relatable to such subsidy or grant or reimbursement shall not form part of the actual cost. If it is not directly relatable to the asset acquired, proportionate amount calculated by considering all assets shall be excluded.

11 Asset brought into India by a Non-resident assessee for use in his business or profession.

Actual cost as reduced by the amount of depreciation notionally calculated at the rate in force as if the asset was used in India since the date of acquisition.

12 Any capital asset acquired by a company under a scheme for corporations of a recognized stock exchanged in India, approved by SEBI. Rs.

The amount which would have been regarded as actual cost had there been no such corporatisation shall be deemed to be the actual cost.

13 Where 100% of capital expenditure incurred by an assessee has been allowed as deduction under section 35AD

Cost of such asset will be taken as nil

UNABSORBED DEPRECIATION:The Finance Act has revised section 32(2). With effect from Assessment year 2002-2003 the provisions relating to deduction account of depreciation are summarized below.

a) Depreciation relating to previous year 2001-2002 and subsequent years will be deducted from Income chargeable under the head “profits and gains of business or profession.” If the Income under this head is insufficient the balance of depreciation which could not be given effect shall be set off against or income under any other head, if still any balance remains the balance is carried forward to the next assessment year and will be added to the depreciation allowance of subsequent year and so on. The is no limit on the number of years for which deprecation can be carried forward.

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Q1. X submits the following particularPrevious years

2016-17Rs.

2017-18Rs.

Income from Salary 1,00,000 2,00,000Business profits (before depreciation) 16,000 18,000Current depreciation 1,34,000 1,32,000Income from other sources 10,000 80,000

Determine the taxable income of X for the assessment years 2017-18 and 2018-19.

EXPENDITURE ON SCIENTIFIC RESEARCH. (SECTION 35)

Following expenses relating to scientific Research are allowed as deduction.

REVENUE EXPENDITURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS1. Any expenditure of revenue nature incurred during previous year on scientific research

related to the business of the Assessee is allowed as deduction. If the assessee has incurred any Revenue expenditure on Scientific research on payment of salary to an employee engaged in scientific research or on purchase of material used in scientific research, during the period of 3 years immediately preceding, the commencement of business, the aggregate of such expenditure is allowed as deduction in the year in which the assessee commences the business. (Section 35(1) (i))In short following expenditure incurred is allowed as deduction

a) Revenue expenditure incurred during the previous year on scientific research related to the business of the assessee.

b) Revenue expenditure incurred on scientific research during a period of 3 years immediately preceding the commencement of business is allowed as deduction in the previous year in which the business commences if such expenditure is incurred on payment of salary or material used in scientific research.However Scientific research should be related to the business of the assessee.If expenditure incurred during a period of three years immediately preceding the date of commencement of business is claimed as deduction, in such a case the deduction is limited to an amount certified by the prescribed authority i.e. Director General (Income tax exemptions) in currency with the secretary, Department of Scientific and Industrial Research, Government of India.

2. Capital Expenditure on Scientific research related to business of Assessee Any Capital Expenditure (other than purchase of Land) incurred by the assessee during the previous year on scientific research related to his business is allowed as deduction. (Section 35(1)(iv) read with section 35(2)(ia).

However, such capital expenditure should not be on purchase of Land. However, once such on capital expenditure is allowed as deduction; No depreciation is in respect of the same asset will be allowed a deduction in the same year or subsequent year.

Expenditure incurred during three years preceding the commencement of the business .Where capital expenditure has been incurred on scientific research related to the business of the assessee, during a period of three years before the commencement of the business, the aggregate of such capital expenditure shall be allowed as deduction in the previous year in which business commences. It should be noted that

a) Scientific research should be related to the business

b) Capital expenditure should not be on purchase of land (including any interest in Land)Where capital expenditure on scientific research has been allowed as deduction, no depreciation shall be allowed on such assets

If the asset in respect of which deduction is allowed is sold without being used for any other purpose, the sale price of asset or deduction allowed which ever is less is chargeable to tax.For example is an Assets costing Rs 35,000 is used for scientific purpose and full amount is allowed as deduction. If the assets is sold after two years at Rs 32,000. In such a case Rs 32,000 is taxed as business income. If the asset is sold for Rs 40,000, then deduction allowed Rs 35,000 will be chargeable to tax as business income and the difference between

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Sale price and indexed cost or cost shall be chargeable under the head "Capital Gain " Where an asset purchased for scientific research is used in the business after it ceases to be sued for scientific research, the actual cost of such asset will be taken as nil for the purpose of inclusion in the block of asset.

3. Any amount paid for scientific research, to a approved Scientific research association or a university, or college or association or other institution, which is approved by the Central Government is allowed as deduction. The scientific research may be related or unrelated to the business of the assessee. ( section 35(1)(ii) Deduction available is equal to 1.75 times of the amount paid . The deduction will be 150% for assessment years 18-19 to Assessment year 2020-2021.And with effect from assessment year 21-22 the deduction for the above mentioned payment will be 100% i.e amount actually paid.

4. Any amount paid to a approved University College or other institution for carrying on Research in Social Science or statistical research in which is related or unrelated to the business of the assessee is allowed as deduction. (Section 35(1)(iii)However such University, College or Institution should be approved by the Central Government.Deduction available is equal to 1.25 times of the amount paid Deduction will be actual amount paid from assessment year 2018-19 onwards

5. CONTRIBUTION TO NATIONAL LABORATORY :(Section 35 (2AA). Any sum paid by the assessee to a National laboratory or a University or

i) an Indian Institute of Technology orii) a specified person.

With a specific direction that the sum shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority is eligible for weighted deduction. The deduction is allowed at 2 times of the amount paid to the National Laboratory. Deduction is available only if the programme of scientific research is approved by the prescribed authority. Specified person mean such person as is approved by the prescribed authority.

The deduction will be 150% for assessment years 18-19 to Assessment year 20-21.And with effect from assessment year 21-22 the deduction for the above mentioned payment will be 100% i.e amount actually paid.

6. EXPENDITURE ON IN HOUSE RESEARCH AND DEVELOPMENT: (Section 35(2AB)With effect from assessment year 1998-99, a new subsection 35(2AB) has been inserted. It provides for a weighted deduction for expenditure incurred on in House research and development expenses if the following conditions are satisfied

a) The taxpayer is a companyb) The assessee i.e. the company is engaged in the business of manufacture or production of

any article or thin g, not being an article or thing specified in the list of the Eleventh schedule.c) It incurs any expenditure on scientific research whether being of revenue or capital nature

but not being expenditure in the nature of cost of any land and building.d) The above expenditure is incurred on in-house research and development facilitye) The research and development facility is approved by the prescribed authority.f) The tax payer has entered into an agreement with the prescribed authority for co-operation

in such research and development facility g) The tax payers fulfils such conditions with regard to maintenances of accounts and

audit thereof and furnishing of reports in such manner as may be prescribed.

If the above conditions are not satisfied, an assesee can claim deduction Equal to a sum which is 2 times of the expenditure incurred. For the purpose of this clause “Expenditure on scientific research in relation to drugs and pharmaceuticals shall include

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a) Expenditure incurred on clinical drug trial, b) Obtaining approval from any regulatory authorityc) Filing an application fro a patent.

Expenditure for deduction has been claimed under section 35(2AB) shall not qualify for deduction under any other provision of the Act. The deduction will be 150% for assessment years 18-19 to Assessment year 20-21.And with effect from assessment year 2021-2022 the deduction for the above mentioned payment will be 100% i.e amount actually paid.

CARRYFORWARD AND SETOFF OF EXPENDITURE ON SCIENTIFIC RESEARCH.(Section 35 (4) )if deduction on account of capital expenditure of scientific research referred in section 35(1)(iv) cannot be claimed due to absence of profits or inadequacy of profits then the deficiency can be carried forward and set off as if it is unabsorbed depreciation. This is the provisions of section 32( 2) shall apply to such capital expenditure.

Deduction in case of Amalgamation. (Section 35(5).If an asset representing capital expenditure on scientific research is transferred in an scheme of amalgamation by the amalgamating company to the amalgamated company, in such a case the provisions of section 35 would apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamating company had not transferred the assets.

Q1. R purchased an asset for scientific research for Rs. 15,00,000 in the previous year 2010-11. During the previous year 2017-18, the said asset ceased to be used for scientific research.The following information is also submitted to you: Rs.Profit from business before depreciation 5,00,000Written down value of block of assets 15% as on 1-4-2017 10,00,000The scientific research asset if used for business shall be eligible for depreciation @15%. Compute the total income if the scientific research asset is sold for Rs. 25,00,000 assuming-

(a) it is sold without using for business;(b) it is sold after using for business.

Section 35ADDeduction @ 100% of capital expenditure incurred by an assesee engaged in specified business( Section 35AD).

Deduction under this section shall be allowed to the assesee who is carrying on any of the following specified business.1) Setting up and operating a cold chain facility ((from 1-4-2009)2) Setting up and operating a warehousing facility for storage of agricultural produce.

(from 1-4-2009)3) Laying and operating a cross country natural gas or cred or petroleum oil pipeline

network for distribution, including storage facilities being an integral part of such network. (from 1-4-2007)

4) Business in the nature of building and operating, any where in India, a hotel of two star or above category as classified by Central Government (from 1-4-2010)

5) Business in the nature of building and operating a hospital ,any where in india, with atleast one hundred beds for patients (from 1-4-2010)

6) Business In the nature of developing and building a housing project under a scheme of slum redevelopment or rehabilitation framed by the Central Government or state Government. And notified by the board in this behalf in accordance with the guidelines as may be prescribed. (from 1-4-2010)

7) Developing and building a housing project under a scheme for affordable housing framed by the Central Government or a state Government , as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed. (from 1-4-2011)

8) Production of fertilizers in India. (from 1-4-2011)9) Setting up and operating an inland container depot or a container freight station

notified or approced under the Custom Act, 1962(from 1-4-2012)10) bee –keeping and production of honey and beeswax(from 1-4-2012)11) setting up and operating a warehousing facility for storage of sugar. (from 1-4-2012)

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12) Laying and operating a slurry pipeline for the transportation of iron ore(From (1-4-2014)

13) Setting up and operating a semi-conductor wafer fabrication manufacturing unit notified by the Board in accordance with such guideline as may be prescribed.(from 1-4-2014).

14) Developing or maintaining and operating or developing , maintaining and operating a new infrastructure facility.(from 1.4.2017)Infrastrucutre facility means i) A road including toll road , a bridge or rail systemii) A highway project including housing or other activities being an integral

part of highway project.iii) A water supply project, water treatment system, irrigation

project,sanitation and sewerage system or solid waster management systems.

iv) A port, airport, inland waterways, inland port or navigational channel in the sea.

In case of business referred in 14 above, such businessA) should be owned by a company registered in India or by a consortium of such

company or by an authority or a board or corporation or any other body established or constituted under any central or state Act

B) entity referred in sub clause (A) has entered in to an agreement with the Central Government or a state Government or a local authority or any other statutory body for developing or operating and maintaining or developing, operating and maintaining , a new infrastructure facility

Where the assessee builds a hotel of two-star or above category as classified by the Central Government and subsequently, while continuing to own the hotel, transfers the operation thereof to another person, the assess shall be deemed to be carrying on the specified business of hotels.

QUANTUM AND NATURE OF DEDUCTION.

Deduction will be allowed on account of any expenditure of capital nature incurred during the previous year by the assesee wholly and exclusively for the purpose of the above specified business carried on during the previous year.However deduction will also be available if such expenditure has been incurred prior to the commencement of its operation. However where the expenditure has been Incurred prior to the commencement of its operation deduction will be available in the previous year in which the assessee commences operation of specified business and the amount of expenditure incurred is capitalized in the books of account of the assesee on the date of commencement of its operation.In order to claim deduction under this section, the assesee should fulfill the following conditions.

a) The business should not be set up by splitting up, or reconstruction of a business already in existence.

b) The specified business should not be set up by the transfer to the specified business of machinery or plant previous used for any purpose

c) 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

i) The business is owned by a company formed and registered in India under the companies Act 1956,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.

ii) The business has been approved by the Petroleum and Natural Gas Regulatory Boardiii) At least one thirds of its total pipeline capacity is available for use on common carrier basis

by any person other than the assessee or an associated personiv) The business should fulfill such other conditions as may be prescribed

If the above conditions are satisfied deduction is equal to 150% of capital expenditure incurred in the following businesses .Deduction of 150% in the following 5 businesses will be available assessment 2017-18. With effect from assessment year 18-19 deduction will be 100% of capital expenduiture for all eleigible business.

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1) Setting up and operating a cold chain facility ((from 1-4-2009)2) Setting up and operating a warehousing facility for storage of agricultural produce.

(from 1-4-2009)3) Business in the nature of building and operating a hospital ,any where in India, with atleast

one hundred beds for patients (from 1-4-2010)4) Developing and building a housing project under a scheme for affordable housing framed by

the Central Government or a state Government , as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed. (from 1-4-2011)

5) Production of fertilizers in India. (from 1-4-2011)In case of other specified business deduction will be equal to 100% of Capital expenditure incurred.

Capital expenditure will not include i) any expenditure incurred on the acquisition of any land or goodwill or financial

instrument.ii) Any expenditure in respect of which the payment or aggregate of payments exceeding

ten thousand has been made made to person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system thorough a bank account.It means payments in excess of Rs 10,000 in a day to a person will qualify for deduction is only payments are made throught account payee cheqe or bank draft or banking system.

Where the assessee claims deduction under this section, then No future deduction will be available under chapter VIA under the heading C “Deduction in respect of certain Incomes” I.e. No deduction will be available under section 80IA and 80IB. Where an expenditure has been allowed as deduction under this section, no deduction for such expenditure will be allowed in the any previous year under any other section and no deduction will be allowed under any other previous year under this section.Where deduction @ 100% has been allowed on capital expenditure under the abovementioned situation, If any sum is received or receivable in cash or kind by reason of destruction, demolition discarding or transfer of such capital asset (except land, goodwill or financial instrument) the sum so received will be taxed as Income under the head “profits and gains of business or profession”(Section28(vii))

ASSET NOT TO BE USED FOR ANY OTHER BUSINESS (Section 35AD(7A)(7B)(7C)Any asset inrespect of which deduction is claimed and allowed under section35AD should 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.

Where any asset in respect of which deduction has been claimed and allowed under section 35AD is used for a purpose other than the specified business during the period of eight years specified above the following amount computed shall be deemed to be the income of the assessee chargeable under the head “Profits and gains of business or profession“

Amount taxable as income = Deduction claimed under section 35AD(in respect of such asset) – amount of Depreciation allowable in accordance with the provisions of section 32 in respect of such asset (as if no deduction under section 35AD was allowed) The provisions of section 35(7A) (7B) SHALL NOT APPLY TO A COMPANY WHICH HAS BECOME A SICK INDUSTRIAL COMPANY UNDER SECTION 17(1) OF The Sick industrial companies (special provisions) Act of 1986.

AMORTISATION OF PRELIMINARY EXPENSES : (Section 35 D)Deduction is available:

i) Indian Companyii) A non company assessee who is resident in India.

Deduction to a foreign company is not available even if such foreign company is a resident.Preliminary Expenses for the purpose of this section meansA Where expenses are incurred before the commencement of the business, preliminary expenses means expenses for setting up any undertaking or setting of business

Where expenses are incurred after commencement of the business, Preliminary expenses means expenses in connection with the setting up of a new industrial unit.

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Preliminary expenses the following:i) Preparation of feasibility report and Project report and conducting market survey or

engineering services provided the work is done by the assessee himself or an concern approved by the Board

ii) Engineering services relating to the business of the Assessee provided the work is done by the assessee himself or an concern approved by the board.

iii) Legal charges for drafting any agreement between assessee and any other person relating to setting up of the business of the assessee,

iv) Legal charges for drafting the memorandum of association and articles of association, v) Charges for drafting, typing printing and advertisement of the prospectus. vi) Registration fees of the company, vii) Brokerage or underwriting commission in connection with public issue of shares or

debentures of the company viii) Such other items of expenditure as may be prescribed.

The maximum qualifying amount is restricted as under

A. Table showing maximum Qualifying amount inrespect of preliminary expenses.Particulars Expenditure incurred

On or after 1st April 1998In case of Indian company 5% of Cost of Project OR

5% of Capital employed.In case of any other assesee 5 % of cost of projectCapital of Project means:Where expenses are incurred before the commencement of the Business for setting up any undertaking or setting of business cost of project means Actual cost of fixed assets namely Building, Land, leasehold, Plant, Machinery, furniture, expenditure on development of land and Building, and railway sidings as shown by the books of the assessee as on the last day of the previous year in which the business of the assessee commences.In case expenses are incurred after the commencement of the business in connection with extension or setting up of industrial undertaking it means additional cost incurred on these assets

CAPITAL EMPLOYED MEANS:

A) Where the expenses are incurred before the commencement of the business capital employed means

Share capital issued + Debentures + Long term borrowings as shown on the last day of the previous year in which the business is commenced.

B) Where expenses are incurred after the commencement of the business, capital employed means Share capital issued + Debentures + Long term borrowings as on the last day of the previous year in which extension is complete or in which industrial unit commences production so far as such capital, debentures and long term borrowings have been issued or obtained for the extension or setting up of a new industrial unit.Long term borrowing means:Money borrowed by a company froma) Governmentb) Industrial finance corporationc) Industrial credit and investment corporation of India d) Any other financial institution eligible under section 36(1)e) Any banking institutionf) Any borrowing or debt incurred in foreign courtly for purpose of capital plant and

machinery outside India where payment is to be made during a period of not less than seven years

AMOUNT OF DEDUCTION : Where the Expenditure has been incurred on or after 1st April 1998The deduction allowed is one fifth of the qualifying expenditure in each of the five successive previous years, beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the new industrial unit commences production or operation. If deduction is claimed by an assessee who is neither a company nor a co-operative society the deduction will be admissible only only if the accounts of the previous year in which such expenditure is incurred are audited by a Chartered Accountant.

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Where an undertaking of an Indian company which is entitled to deduction under this section is transferred before the expiry of the period specified in this section under an scheme of demerger in such a case no deduction will be available to the demerged company in the previous year in which the demerger takes place and the provisions of this section shall apply to the demerged company as would have applied to the demerged company had the demerger not taken place.Where an undertaking of an Indian company which is entitled to deduction under this section is transferred before the expiry of the period specified in this section under an scheme of amalgamation in such a case no deduction will be available to the amalgamating company in the previous year in which the demerger takes place and the provisions of this section shall apply to the demerged company as would have applied to the amalgamating company had the amalgamation not taken place.

Amortisation of Expenses in case of amalgamation or demerger.(35 DD) if the following conditions are satisfied:

Deduction is available under if the following conditions are satisfied.1. The assesse is an Indian company2. Expenditure is incurred after on or after 1-4-1999.3. Expenditure is incurred wholly and exclusively for the purpose of amalgamation or demerger

of an undertaking.

Amount of Deduction.One fifth of the amount is allowed as deduction for five previous year beginning with the previous year in which such amalgamation or demerger takes place.

Amortisation of expenditure in the case of amalgamation/demerger Sec, 35DD]-Section 35DD provides that where an assessee, being an Indian company, incurs expenditure (on or after April 1, 1999), wholly and exclusively for the purpose of amalgamation or demerger, the assessee shall be allowed a deduction equal to one fifth of such expenditure for five successive previous years beginning with the previous year in which amalgamation or demerger takes place.No deduction shall be allowed in respect of the above expenditure under any other provisions of the Act.

Amortisation of expenses relating to voluntary retirement scheme. (Section 35DDA).Where and assessee incurs any expenditure in any previous year by way of payment to an employee at the time of his retirement in accordance with an scheme or schemes of voluntary retirement, one fifth amount paid shall be deducted in computing profits and gains of business for the previous year in which expenditure is incurred and the balance shall be allowed in equal installments for each of the four immediately succeeding previous year. Thus the deduction would start in the year in which the expenditure is incurred and not in the year in which the payment is actually made. The scheme of voluntarily retirement need not be in accordance with the guidelines prescribed under section 10(10C).

The amount will qualify for deduction only if payment has been made

Deduction will be allowed with reference to each payment.Deduction with reference to each payment will be allowed as underOne fifth in the year of payment Balance In 4 equal installments in subsequent previous years.

AMORTISATION OF LICENCE FEES (35 ABB).Deduction under this section is available if the following conditions are satisfied

a) The expenditure is capital in nature.b) The expenditure is incurred for acquiring any right to operate telecommunication servicesc) The payment has been actually made to obtain the license

The payment made will be allowed as deduction in equal installments over the period starting from the year in which such payment is made and ending in the year in which the license comes to an end.If the above mentioned conditions are not satisfied then deduction is not available under this section but it is available under section 37(1) The deduction is allowed only in respect of amount actually paid irrespective of the method of accounting followed by the assessee.

If the licence fees is paid before the commencement of the business the deduction will be allowed in equal installments beginning with the previous year in which the business commences and ending the with previous year in which the licence comes to an end, if the company had not sold the asset.

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Deduction per year Amount paid -----------------number of years

Number of years = year beginning with the year of payment and ending with the year in which licence comes to an end.

Full licence is soldSale price is less than Amount yet to be allowed

The difference betweenAmount yet to be allowed and sale price, is allowed as deduction.

Sale price is more thanAmount yet to be allowedBut less than total amount paid

The excess of sale priceOver amount yet to be allowed is treated as business income

No deduction in the year of sale

Sale price is more than cost of licence( amount paid)

The difference betweenCost and deduction yet to be allowed is treated as business income and the excess of sale price over cost is treated as capital gain


AMORTISATION OFAMOUNT PAID FOR ACQUISITON OF SPECTRUM(35 ABA).Deduction under this section is available in respect of any capital expenditure incurred for acquiring any right to use spectrum for telecommunications services .Deduction under this section is available if the following conditions are satisfied

a) The expenditure is capital in nature.b) The expenditure is incurred for acquiring any right to use spectrum for telecommunication

servicesc) The payment has been actually made to obtain the right to use specturum for

telecommunication servicesThe payment made will be allowed as deduction in equal installments over the period starting from the year in which such payment is made and ending in the year in which the license comes to an end.If the above mentioned conditions are not satisfied then deduction is not available under this section but it is available under section 37(1) The deduction is allowed only in respect of amount actually paid irrespective of the method of accounting followed by the assessee.

If the amount is paid before the commencement of the business the deduction will be allowed in equal installments beginning with the previous year in which the business commences and ending the with previous year in which such right to use spectrum comes to an end, if the company had not sold the asset.

Deduction per year Amount paid ----------------- number of years

Number of years = year beginning with the year of payment and ending with the year in which licence comes to an end.

Full right is soldSale price is less than Amount yet to be allowed

The difference betweenAmount yet to be allowed and sale price, is allowed as deduction.

Sale price is more thanAmount yet to be allowedBut less than total amount paid

The excess of sale priceOver amount yet to be allowed is treated as business income


Sale price is more than cost of licence( amount paid)

The difference betweenCost and deduction yet to be allowed is treated as business income and the excess of sale price over cost is treated as capital gain


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DEDUCTIONS UNDER SETION 36 GENERAL DEDUCTIONS

INSURANCE PREMIUM (SECTION 36 (1) (i-a) & 36 (1) (ib) a) The amount of any premium paid in respect of insurance against risk of damage or destruction stocks or stores, used for the purpose of business or profession, is allowed as deduction. (36(1)(i).

b) Insurance premium paid by a Federal milk co-operative society for insuring the life of the cattle owned by a member of a primary co-operative society. Provided such primary milk society is engaged in supplying milk to the federal co-operative society and such milk being raised by its members. (Section 36(1) (ia).

c) Insurance premium paid on the health of employees: Sec 36(1)(ib) Premium paid for the insurance on the health of the employees in accordance with the scheme framed by the General Insurance corporation and approved by the Central government is allowed as deduction. The premium should be paid by Cheque. Or any other mode except by cash.

BONUS OR COMMISSION TO EMPLOYEES (SECTION 36 (1) (ii) :Bonus or commission paid to employees is allowed as deduction. However, such bonus or commission should not have been paid instead of dividend. e.g. A Ltd. has 10 shareholders and all the 10 shareholders are its employees, so the company may pay bonus to all such employees which in fact may be dividend which all the 10 members would have otherwise received had the bonus not been paid.36(1)(ii)Bonus of commission is allowed as deduction only where payment is made during the previous year or on or before the due date of furnishing the return.

INTEREST ON BORROWED CAPITAL (SECTION 36 (1) (iii) :-Interest paid or payable on capital borrowed for the purpose of business or profession is allowable as deduction.. The deduction is available only if the following conditions are satisfied

a) The assessee must have borrowed moneyb) The money so borrowed must have been used for the purpose of businessc) Interest is paid or payable on such borrowings.

Following points are important in connection with the deduction relating to interest.i) Interest on own capital is not deductible. However interest paid by a firm to its partners is

deductible from the business income of a firm within the specified limits.ii) Interest on money borrowed to pay income-tax is not allowable as deduction. Also interest

for late filing of return, or interest on advance tax is not allowable as deduction as the amount is not utilised for the purpose of business.

iii) Interest paid to Government on loan taken for payment of purchase tax is deductible.iv) If money is borrowed and utilised for earning non assessable income, no deduction on

account of interest on such borrowings is allowed v) Interest paid for money borrowed and invested in partnership firm is allowable as deduction

to the partner.

NOTE: Section 40(a)(i) provides that Interest paid outside India is not allowable as deduction unless tax has been paid or the tax has been deducted at source

vi) If there is no obligation to return capital, interest on such capital is not deductible under section 36(1)(iii).

2. INTEREST ON MONEY BORROWED FOR CONSTRUCTING AN ASSET.A) if interest is paid by a newly started concern which is in the process of constructing and

erecting its plant, then interest paid in respect of the period before commencement of production will be capitalised and added to the cost of asset. (Challapalli Sugars Ltd v C.I.T )provision to section 36)(1)(iii)(with effect from assessment year (2004-05) has been inserted which provides that interest paid on capital borrowed for acquisition of any asset whether capitalized in the books or not will not be allowed as deduction for any period from the date on which capital was borrowed till the date on which such asset was first put to use. In other words Interest on capital borrowed for acquiring the asset will not be allowed for a period till the asset is put to use. Such Interest has to be capitalized and added to the cost of Asset.However interest related to the period after the asset has been put in to use cannot be capitalised and such interest can be claimed only under section 36(1)(iii)

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Interest on zero Discount coupon:Zero discount coupons a bond issued by a the infrastructure capital company or infrastructure capital fund or a public sector company or a scheduled bank. The company or fund or bank issuing such bond issues the bond at a certain price and promises to pay higher amount on redemption. The difference between issue price and redemption is discount. The issuing authority does not pay any interest on such bonds. However the discount on such bonds is in the nature of interest. Section 36(1)(iiia) provides that discount on zero coupon will be allowed on pro rata basis during the period of life of such bonds.The difference between issue price and maturity value is the discount allowed The period of bonds will be converted in to month. Beginning with the month of issue and ending with the month of redemption. A period of 15 days or more in the month of issue/ redemption will be taken as one month. A period of less than 15 days in the month of issue/redemption will not be counted.Discount per month Total discount/No of months

CONTRIBUTION TO RECOGNISED PROVIDENT FUND AND APPROVED SUPERANNUATION FUND. (Section 36 (1) (iv):Contribution made by the employer towards a Recognized Provident Fund is allowed as a deduction, subject to limits prescribed for the purpose of recognizing the provident fund or approving super annuation fund.

The deduction will be restricted to such limits as may be prescribed for the purpose of recognizing the provident fund or approving the superannuation fund.. If such contributions are not in the nature of annual contribution or are not fixed on some basis such as total salary or Number of employees in such a case the deduction will be limited to such an amount as the board may think fit.

CONTRIBUTION TO PENSION SCHEME OF SECTION 80CCD. (Section 36 (1) (iva): Contribution towards a pension scheme made as an employer on account of an employee to the extent it does not exceed 10% of salary of the employee shall be allowed as deduction. However deduction under clause (iv) and (ivb) is subject to provisions of section 43B.

Employers contribution to provident fund should be paid during the previous year or before the due date of furnishing the return. If it is paid within the time limits specified above, deduction will be allowed in the previous year. In case if it is paid or deposited after the said time limit, deduction will be allowed in the year of payment.

For example employers contribution to provident fund for the year 2007-08 should be paid during the previous year 2007-8 or 31st July/Oct2008 which is the due date of furnishing the return. If it is paid after 31st July/Oct 2008 it will be allowed as deduction in the previous year in which it is paid.

CONTRIBUTION TO GRATUITY FUND (Section 36 (1) (v):The Gratuity Fund must be approved and should be created for the benefit of the employees under an irrevocable trust by the assessee (employer). Any contribution to such fund is allowed as deduction. The deduction is subject to provisions of section 43B discussed above.

EMPLOYEES CONTRIBUTION TO STAFF WELFARE SCHEMES- (Ssection 36(1) (v)a) Any sum received by the employer from his employees as contribution to any fund for the

welfare of employees is treated as income of the employer under section 2(24)(x). Such sum is then allowed as deduction from the income of the employer if such sum is credited by the taxpayer to the employee’s Account in the relevant fund on or before the due date of making such payment If the payment is made after the due date of the payment, then no deduction will be allowed in respect of such payment.

Write off of allowances for animals 36 (I) (vi)Animals which are not stock in trade but used for the purpose of business or profession.It should be noted that no depreciation is allowed on animals. Where an animal which is not stock in trade is used for the purpose of business or profession, has died or has become permanently useless, the difference between cost price and amount realised will be allowed as deduction.

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BAD DEBTS (Section 36 (1) (vii):- Any debt or a part of it which has become irrecoverable during the previous year is allowable as deduction if the following conditions are satisfied

a) Debt must be incidental to the business of profession of the assessee.Debt not connection with the business or profession of the assessee is not deductible.

b) The debt should be taken in to account while computing the total income of the assessee during the previous year or any earlier previous year or the debt should represent money lent in the ordinary course of money lending or banking business.

In other words the assessee maintains accounts of cash basis deduction on account of amount becoming irrecoverable will not be allowed as the debt has not been taken in to account while computing the income from the business for the previous year or any earlier previous year.

However debt representing money lent in the ordinarily course of money lending business or banking business and becoming irrecoverable is allowable as deduction though such debt has not been taken in to account for computing the income of the assessee. If the business is not of money lending or banking then bad debts on account of loans advanced are not allowable as such debts are considered as capital losses.

c) Debt must be written off in the books of Account of the assessee. If debt is not written off in the books of accounts of the Assessee, then deduction will not be available under this section. If such debt has been written off in the earlier previous year but deduction was not allowed in the previous year in which it was written off in such a case deduction may be allowed in the subsequent years. In other words such a debt may be written off during the previous year in which it was allowed or in any earlier previous years.

Where such a debt or part thereof has ben taken in to account in computing the income of the assesee for any previous year on basis of Income computation and disclosure standards notified under section 145(2) but the debt has not been recorded in the books of account though taken In to account for computing the income as per standards , it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purpose of this clause. (inserted by finance Act 2015)

Any debt or part thereof, which has become irrecoverable and which is written off as irrecoverable in the accounts of the assessee is allowed as deduction. If a bad debt allowed as deduction is subsequently recovered by the assessee such a recovery will be included in the income of the assessee in the previous year in which such a bad debt is recovered. IF a bad debt is not allowed as deduction in that cases recovery in respect of such a bad debt will not be included as the income of the assessee.

Q1. X, a trader, sells goods on credit. Out of the credit sales made in the current year (or in the earlier years), Rs.50,000 is written off as bad debt. As sales turnover is considered in calculating income, bad debts so written off is allowable as deduction.

Q2. Y owns an industrial undertaking. One of the plants in the factory is replaced by him. The old plant is sold for Rs.60,000 on credit to A.A, however, becomes insolvent before making payment of sale consideration. This is capital loss and it cannot be debited to profit and loss account. It is, therefore, not deductible. In other words, “debt” should be revenue in nature.

Q3. Z, a money lender, gives a loan to A. Before repaying loan along with interest, A becomes insolvent. In this case if interest is included in income on “accrual” basis, it can be written off as bad debt and the same is allowable as deduction. Loss on account of non-recovery of loan is also deductible if it is written off in the books of account (the condition that the debt is deductible only if it was taken into account in computing the total income of the taxpayer, is not applicable in the case of non-recovery of loan where it represents money lent in the ordinary course of money-lending business).

EXPENDITURE ON PROMOTING FAMILY PLANNING: 36(1) (ix)Expenditure Incurred by a company for promoting family planningAny expenditure made by a company to promote family planning among its employees is allowed as deduction.

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If the expenditure is of revenue nature, full amount is allowed as deduction If such expenditure is of a Capital nature, 20 % of such expenditure is allowed as deduction in the year in which such expenditure is incurred and the balance is allowed as deduction in four equal installment.

Deduction under this section is not available to a non company assessee.A non company assessee can claim deduction under section 37(1)

When an Asset used for Family Planning is sold.Where the asset is sold without using it for any other purpose, in such a case if the Sale price of the asset is less than Cost less Deduction allowed then the deficiency will be allowed as deduction in the year in which the asset is sold.

Selling price < Cost of the Asset - Deduction allowed.In other words if selling price + Deduction allowed < Cost of the asset then the deficiency will be allowed as deduction.On the other hand, if the selling price is more than the cost of the asset less deduction allowed then the Excess is taxable as business income. However the amount to be taxed in such case cannot exceed the deduction allowed. The excess of sales price over cost of the asset is subject to provisions of capital gains.If the Asset ceases to be used for the purpose of family planning and is thereafter used for some other business purpose then the cost of the asset for claiming depreciation under section 32(1) shall be the cost price less deduction claimed.If the actual sale price is less than the market value at the time of cessation the deficiency will be allowed in the previous year of sale.

Deduction for Banking transaction tax.Banking transaction tax. Section 36(xiii). Amount paid as banking cash transaction tax is allowed as deduction.

Deduction for security transaction tax.Security transaction tax. Amount paid as security transaction tax is allowed as deduction to an asseseee if income arising from sale of taxable security transaction is chargeable as “profit and gains of business or profession. (Section 36(1)(xv)

Deduction for Commodity transaction tax. 36(1) (xvi)Any amount equal to commodities transaction tax paid by the assesee in respect of taxable commodity transaction is allowed as deduction Conditions to be fulfilled for deductiona) Income arising from such taxable commodities transaction is included in the income

computed under the head “profits and gains of business or profession “.

Expenditure incurred by a co-operative society on purchase of sugarcane,. (36(1)(xvii)In case of a cooperative society engaged in the manufacture of sugar, amount of expenditure incurred for purchase of sugarcane at a price equal to or below the price fixed or approved by the Government, shall be allowed as deduction.

ADVERTISEMENT EXPENDITUREUnder section 37(2B) any expenditure incurred by an assessee on the advertisement in any souvenir, brouchere, pamphlet, etc published by a political party will not be allowable as deduction.Any other Advertisement expenditure is deductible under Section 37(1)

OTHER EXPENSES (Section 37(1))Any other expenditure incurred by the assessee is allowed as deduction if following conditions are satisfied.

i) Expenditure should not be of the nature described under section 30 to 36.ii) The expenditure should not be a capital expenditure.iii) It should be incurred in the previous year.iv) It should not be a personal expenditure.v) It should be for the business carried on by the assessee and it should be incurred wholly and

exclusively for the purpose of business or profession.vi) However if any expenditure has been incurred by an assessee for any purpose which is an

offence or which is prohibited by law shall not be allowed as deduction as such expenditure will not be considered to have been incurred for the purpose of business or profession.

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Therefore fines and penalties paid for breach of law will not be allowed as deductions. Bribes to Government staff will also not be allowed as deduction.

Expalnation 2 to section 37(1) states that, any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred under section 135 of the companies Act 2013 shall not be deemed to be an expenditure incurred by the assesee for the purpose of the business or profession.

Instances of expenses which are allowable:

Part I1. Litigation expenses in protecting the trade or business.2. Expenditure incurred for the preservation or protection of the asset or for saving such asset

from destruction, dissipation or wastage in the interest of and the benefit of assessee's business.

3. Litigation expenses for the purposes of protecting capital assets of a business.4. Legal charges for obtaining a loan from a financial institution.5. Damages for breach of contract for export of goods before declaration of export policy of the

Government.6. Damages for failure to fulfill a contract in time.7. Brokerage paid for raising a loan to finance business.8. Contribution to a trade syndicate with a view to preventing uneconomic competition.10. Expenses incurred on the occasion of Diwali and Mahurat subject to the Income tax Officer

being satisfied that the expenses are admissible as a deduction under the law and are not expenses of a personal, social or religious nature.

11. Deposit made under "own your telephone" scheme (is allowable as deduction in the year of payment and in case the telephone is not installed and money is returned, it is chargeable to tax under section 41(1)

11. Cash shortage found in business at the end of day.12. Periodical payment for the use of goodwill.13. Share of profit given by debtor to creditor besides interest.14. Expenditure on management of temple in factory premises for recreation of employees.15. Diwali and Mahurat expenses: Expenses incurred on occasion of Diwali and Mahurat are in

nature of business expenditure. If the assessing officer is satisfied, that such expenses are not of a personal, sociall or religious nature, these can be allowed as a deduction.Deposit under Tatkal Telephone Deposit Scheme: The CBDT is of the view that since the amount deposited under the Tatkal Telephone Deposit Scheme does not earn interest, the entire amount may be treated as a revenue expenditure and allowed as a deduction in the year of payment. However, as and when any part of the amount is refunded it shall be treated as an income u/s 41(1) of the Act.Also amount paid for acquiring a telephone OYT scheme and security deposit for a telex connection are treated as business expenditure and are allowed as deduction. Where the amount is refunded to the assessee, it shall be treated as income under section 41(1).

16. Expenditure on fluorescent tubes: The initial expenditure on the first installation of the fluorescent lights, including the expenditure on wiring and fittings, should be treated as capital expenditure as it creates an asset but all subsequent expenditure for replacement of tubes should be treated as of a revenue nature and allowed in to

17. Laga contribution: There is a practice in certain regions for the trade associations to collect from their members a small amount of customary fee, called Laga, on their business transactions to be utilised for charitable purposes. If such contribution are made at the customary rate prevalent in the market, such contributions shall be allowable to the member contributors.

18. Commitment charges: Commitment charges are paid by a borrower with regard to the amount of loan not drawn by him but kept in readiness by the lender for disbursement. Such expenses are wholly and exclusively for the purpose of business and are therefore, permissible.

19. Feature film production: The cost of production of a feature film shall be reduced by the subsidy received by the film producer under any scheme framed by Government where such amount of subsidy has not been included in computing the total income of the assessee for any assessment year. Conversely, the amount received by producers of regional feature films which has not been charged to tax, shall be reduced from the cost or production of the film for the purposes of rule 9A. [Circular No. 541, dated 25th July, 1989].

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20. Professional tax: Professional tax paid by a person carrying on a business or trade can be allowed as deduction under Section 37(1). [Circular Nos. 16 and 18, dated 18 th September, 1969].

21. Advertisement expenses: A businessman can advertise in more than one newspapers or magazines and also in more than one issue of the same newspaper or magazines. Expenditure on such advertisements will qualify for deduction. [Circular No. 203, dated 16-7-1976].

INSTANCES OF EXPENSES WHICH ARE NOT ALLOWABLE.1. Penalty and damages paid in connection with infringement of law.2. Fees paid for increase of authorised capital.4. Fines paid for breach of the Factories Act.5. Payments made for acquisition of goodwill.6. Penalty paid for illegal import of goods.7. Tax paid by assessee ( who is defaulter by not deducting tax at source under section 195 )

on behalf of non resident.8. Expenditure on shifting of registered office.9. Insurance premier paid by a firm on life insurance policies of its partner.10. Penalty payable for non payment of the sales tax within prescribed time.11. Interest paid under section 220(2) for late payment of income tax.12. Expenses tainted with illegality like penalty levied for evading provisions of FERA (payment

tainted with illegality cannot be claimed as deduction under the Income tax Act. Moreover if an assesee is penalised under one Act, he cannot claim that amount to be set off against his income under another Act, because that will be frustrating the entire object of imposition of penalty.

13. Expenditure incurred by way of stamp paper, underwriting commission, registration fees, lawyer’s fees, etc., in connection with the issue of debentures is of capital nature and, cannot in law be allowed as deduction.

14. Fees paid to the Registrar of Companies for bringing about change in the Memorandum and Article is a capital expenditure.

15. Penalty paid for violation or infringement of any law is not allowable.16. Expenditure incurred by a company in connection with shifting of his registered office is not

allowable.17. Expenditure incurred in dismantling of building in order to construct hotel is not allowed as

these are capital in nature.18. Sales tax is a tax on the sale or purchase of goods and not on profits, hence deductible

expense. But taxes such as Income-tax, surcharge, etc. are not expenditure laid for the purposes by are paid after the profits are earned, hence not deductible expenses.Commission payable to banks for furnishing guarantees regarding deferred payments for import of plant and machinery is in the nature of capital expenditure and cannot be allowed as deduction In computing the total Income under the Income tax Act. The Board has however clarified such a commission payable to banks can be added to the cost of plant and machinery and deprecation can be claimed on such enhanced cost.Interest on delayed payment to small scale and Ancillary Industrial undertakings. Act, 1993.

A special Act called as “ The Interest on Delayed Payment to small Scale and Ancillary Industrial Undertakings Act, 1993” has been enacted to protect the interest of small scale undertakings. The above Act provides that,Where a small scale industrial undertaking and ancillary industrial undertaking supplies goods or renders any services to any buyer the buyer shall makes payment for such goods or services on or before the agreed date and where no such date has been fixed then payment should be made within 30 days of the supply of goods or rendering of service. If the buyer makes a delay in paying the amount, he will be liable to pay interest to the seller at a rate which is 5% higher than the minimum lending rate charged by scheduled bank.Such interest paid shall not be allowed as deduction to the seller.

EXPENSES WHICH ARE EXPRESSLY DISALLOWED:

a) Amounts not deductible under section 40(a) (i) Failure to deduct tax at source or failure to pay tax deducted.

where any interest royalty ,fees for technical services or any other sum chargeable under the act is payable outside India to any person or in India to a non resident (other than a company) or to a foreign company and tax has non been deducted at

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source or has been deducted at source but has non been paid within the time limits prescribed under section 200(1) in such a case the interest , royalty fees etc will not be allowed as deduction.In other words if interest royalty etc is paid outside India or in India to a non resident, deduction for such an expenses will be allowed only if tax has been deducted and paid within the time limits prescribed.

Default ConsequencesTax is deductible but has not been deducted by the assessee

No deduction will be allowed . Deduction will not be allowed even if the assesee pays tax from his own pocket.

Tax has been deducted at source has been paid during the previous year but after the due date specified under section 200(1)

Deduction will be allowed during the previous year

Tax has been deducted at source and has been paid after the end of the financial year but before due date specified under section 200(1)

Deduction will be allowed during the previous year

Tax has been deducted at source and has been paid after the end of the financial year and after the due date specified under section 2000(1)

No deduction will be allowed in the previous year to which the expenses pertains. Deduction will be allowed in the previous year in which tax has been deposited by the payer

Tax has been deducted but not paid No deduction will be allowed.

However deduction will be allowed in the previous year in which such tax has been paid. IF tax is deducted and not paid within the time limit prescribed under section 200 but tax has been paid on or before the end of previous year, in such a case deduction will be allowed in the same previous year.Judicial rulings. If royalty is paid to a non resident , tax is deductible but not deductible at source, it is not allowed as deduction. Like wise if technical know how is purchased from a non resident, and tax is deductible but not deductible at source, in such a case depreciation on such technical know how will not be deductible.Conversely incase of legal fees paid to solicitors in U.K which is not chargeable to tax in India , and tax is not deducted as source, no disallowance can be made for non deduction of tax at source. Tax is to be deducted where above sums are chargeable to tax in India.

b) Clause i (a) of section 40(a) provides that: 40(a) (ia).The above section provides that 30% of any sum on which tax is deductible at source under section 192 to 194LA shall not be allowed as deduction in the previous year in which the expenses is incurred while computing the income chargeable under the head “ Profits and gains of business or profession” if in respect of such sum

a) Tax has not been deducted during the previous yearb) After deduction has not been paid on or before the due date mentioned under section

139(1)However in respect of any such sumTax has been deducted in any subsequent year

OR Tax has been deducted during the previous year but paid after the due date specified under section 139(1) in such a case 30% of the sum shall be allowed as deduction in computing the income of the previous year in which such tax has been paid.

For example tax deductible on above payments in the month of march 15 or Feb 15 should be paid on or before 30th Sept 2015. If tax deducted is paid after the above due date then such expenses will be allowed as deduction in the previous year in which tax has been so deducted and paid. In the above example if tax is paid on or before 30 th Sept 15, deduction will be allowed in the previous year 14-15. If tax has been deducted after 30th Sept 15 say 5th

October 2014 then deduction will be allowed in the previous year 2015-16.If tax is not deducted on the above payments, in such a case expenditure will be allowed in

the previous year in which such tax is deposited by the assessee with the previous year.

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Payment Paid Tax deducted

Tax deposited

Royalty In 2014-15 No Before 30th sept 2015Rent In 2014-15 Yes Before 30th September 2015Technical services

In 2014-15 No After 30th september 2015 in previous year 2015-16

Technical services

2014-15 Yes After 30th September 2015

In the above case deduction will be allowed as underRoyalty Previous year 2015-16Rent Previous year 2014-15Technical services previous year 2015-16Technical services previous year 2015-16

It should be noted that tax is to be deducted at source when the above payments are payable or paid by the assesee. The language of section 40(a) (ia) covers defaults only in respect of tax not deducted or tax not paid, when such amounts are payable. As such if the above amounts have been paid and tax has not been deducted disallowance under this section is not attracted. However Amendment by the finance Act 2012 provides that where the assesee fails to deduct whole or part of the tax in accordance with the provision of Chapter XVIIB on any such payment or amount credited but such assesee is not deemed to be an assesee in default under first proviso to section 201(1) then for the purpose of this section the assessee shall be deemed that the assess has deducted and paid tax on such sum on the date of furnishing of return of income by the resident payee referred in the said first proviso to section 201(1).An assesee pays a sum referred above say commission to a resident payee. However the assesee fails to deduct tax at source. Consequently the assesse will not be allowed such sum paid as an expenditure. If the payee has furnished the return of income and such sum received by the payee has been taken in to account for the purpose of computing the income of the payee in such a case the assessee who had failed to deduct tax at source will not be considered as an assesee in default and consequently such expenditure will be allowed as deduction to the assesse. The assesss shall be deemed to have deducted and paid tax on such sum on the date on which the resident payee has furnished the return of income.

Default ConsequencesTax has not been deducted No deduction will be allowed (Except in

situation mentioned below where recipient has paid tax.) if tax is deducted in subsequent year , deduction will be allowed in the year in which tax so deducted is paid .

Tax has been deducted but has not been paid

No deduction will be allowed

Tax has been deducted during the previous year but has been paid after the due date of furnishing return of Income under section 139(1)

Deduction will be allowed in the year in which payment has been made

Tax has been deducted but has been deposited with the time limit prescribed under section 139(1)

Deduction will be allowed in the previous year to which payment/expenses pertains.

The payer will allowed deduction for expenses even where the payer has not deducted tax at sources. However to avail this benefit the following conditions should be satisfied.

1. Tax is deductible on the aforesaid payment but it is not deducted2. The recipient is a resident and has furnished his return of income under section 1393. The resident recipient has taken in to account the above income in such return of income4. The resident recipient has paid the tax due on the income declared in such return of

income

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5. The payer furnishes a certificate to this effect from a chartered accountant in form no 26A.If the above conditions are satisfied, it shall be deemed that thepayer has deducted and paid the tax on such amount on the date of furnishing of return of income by the resident recipient.

c) Non deduction of equlisation levy (section 40(a) (ib)Any consideration paid or payable to a non –resident for a specified service on which equlisation levy is deductible under the provision of chapter VIII of the finance Act 2016 and such levy has not been deducted or after deduction has not been paid on or before the due date specified under section 139(1)Provided that where in respect of any such consideration, the equlisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after due date specified under section 139(1) such sum shall be allowed as dedudction in computing the income of the previous year in which such levy has been paid.

d) Any sum paid on account of fringe benefit tax under chapter XIIH (section 40 (a) (ic)

e) Any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or asseseed as a proportion of or other on the basis of any such profits or gains (section 40 (a) (ii)

f) Any sum paid on account of wealth tax under the wealth tax act 1957 or any tax of similar character chargeable under any law in force in any country outside India . (section 40 (a) (iia).

g) Amount levied on state Government undertaking by the state Government.The following amount will not be allowed as deduction.a) Any amount paid by way of royalty, licence fee , service fee privilege fee, service charge

or any other fee or charge which is levied exclusively on a state Government undertaking by the state Government undertaking.

b) Any amount which is appropriated (directly or indirectly) from a state government undertaking by the state Government..

h) Any salary payable out of India or paid to a non resident will not be allowed as deduction if tax has not been deducted from such salary or tax deducted at source has not been paid. (section 40 (a) (iii)

i) Any payment to Provident fund or other fund established for the benefit of employees of the

assessee in respect of whom the assessee has not made effective arrangements to secure that tax will be deducted at source from any payment made from the fund which are taxable(section 40 (a) (iv)

j) Where an employee provides perquisites to employee and paid tax on such perquisites on behalf of an employee, such tax paid by employer will not be allowed as deduction to employer. (section 40 (a) (v)

DISALLOWANCES IN CASE OF PARTNERSHIP FIRMS:INTEREST OR REMUNERATION TO PARTNERS. Section 40(b)

INTEREST ON PARTNERS CAPITAL:Interest paid by a Firm to its Partners for capital contributed by them is allowed as deduction if the following conditions are fulfilled.

1) Payment of Interest should be authorised by the partnership deed

Interest Payable to partners should be computed on product basis on the aggregate of the fixed capital, current account and loan account of the partners.

Rate of Interest should not exceed 12%p.a. Payment of Interest should pertain to a period after the partnership deed.

If the rate of interest exceeds 12% per annum the excess amount will not be deductible

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REMUNERATION PAID TO A PARTNER 40(b):Remuneration paid by firm to a partner by way of salary, bonus or commission or remuneration by whatever name called is allowed as deduction in computing the taxable income of the firm if the following conditions are satisfied.

a) Remuneration should be paid only to a working partner.b) Remuneration must be authorised by the partnership deedc) Remuneration should not pertain to a period prior to partnership deedd) Remuneration should not exceed the permissible limits.

Working partner means an individual which is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner

If the above conditions are satisfied then remuneration paid to partner by way of Salary, bonus, commission or any other remuneration is allowable as deduction within the permissible limits which are specified below.The Limit is applicable to total remuneration allowed during the previous year to all partners and not for each individual partnerThe limits for allowing remuneration to partners is based on book profits.

The limits are enumerated belowRemuneration to partners which is allowableIf book profits are negative Rs 1,50,000 On the first Rs 3,00,000 90%of book profits or Rs 1,50,000Of book profits which ever is highOn balance book profits 60% of book profits

What does book Profits mean.Book Profit are calculated as under

Step one: Find out net profit as per profit and loss account as per Profit and loss account

Step two: Add / less amounts as Provided by section 28 to 44DStep three: Add remuneration to partners which is debited to Profit and Loss account.

In other words Book Profits means:Profit chargeable to tax under the head Profits and gains of business or profession after deducting Interest on Partners capital which is allowable but before deducting any remuneration to partner. An Individual is a partner in a firm on behalf of or for the benefit of any other person such Individual is referred as partner in a representative capacity.Where an Individual is a partner in a representative capacity, Interest, Salary, Bonus, commission or remuneration paid by the firm to its partner in representative capacity or to the person represented by the partner will be taken will be covered by the above section.However such payments paid to the partner in representative capacity, will not be hit by this section if interest is paid to such a partner in any other capacity other than as a representative of other person.

Example: Suppose R is a partner in a firm on behalf of his HUF and the HUF has contributed Rs.1,00,000 as its capital contribution. Besides, R has also given a loan if Rs.50,000 to the firm in his individual capacity. The firm pays interest @ 24% p.a. on capital as well as on the loan.

Interest amounting to Rs.12,000 paid to R on loan of Rs.50,000 will not be covered u/s 40(b) and would be allowed as deduction in full to the firm;Out of the interest on capital amounting to Rs.24,000 paid to the partner R who represents the HUF, only Rs.12,000 will be allowed as a deduction, because it is hit by the provisions of section 40(b).Similarly, if the interest is received by an individual who is a partner in a firm on behalf and for the benefit of any other person, restriction imposed by section 40(b) will not operate.Where a person is a partner not in a representative capacity, in such a case payments made to such partner as a representative of other person will not be hit by this section.

Example: R is a partner in a firm. He is also karta of HUF who has given loan to the firm. The firm pays Rs.20,000 as interest on capital and loan given by R. The firm also pays Rs.30,000 to R on the loan given by HUF to firm. In this case section 40(b) will be applicable on interest of Rs.20,000 but it will not be applicable on interest of Rs.30,000. However such interest can attract the provisions of section 40A(2)

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Any Interest, Salary, Bonus, commission, or remuneration paid by an A.O.P or B.O I to its members is not allowable as deduction.(Section 40(ba)A) Where an A.O.P\ B.O.I pays interest to a member and also receives interest from its

members then only the net amount of interest paid by an A.O.P\B.O I will not be allowed as deduction.

B) Interest paid to or received by a member of an A.O.P\B.O.I in their individual capacities or representative capacities.Interest paid to or received from a Member of an A.O.P\B.O.I where such member is representing some person shall be regarded as interest paid to or received from the person so represented.

TAXABLE INCOME OF PARTNERS:Where a Partners receives Interest or any remuneration by way of salary, bonus, commission or remuneration by any other name from the firm the same will taxed in the Hands of Partners under the head Profits and gains of business or Profession.Where a Partner receives any share in the profits of the firm such share of Profit in the firm received by the Partner is exempted from tax

PAYMENTS TO RELATIVES AND RELATED CONCERNS. 40A(2) Where a assesses incurs any expenditure in respect of which amount is paid or is payable to persons specified under section 40A(2)(b)(Related persons) and in the opinion of the Assessing officer such expenditure is unreasonable or excessive having regard to market value of goods and services for which payment is made then so much of the expenditure which is considered excessive and unreasonable shall not be allowed as deduction.

Persons specified under section 40A(2)(b)1. Where the assessee is an Individual any relative of the assessee

2. Where the assesse is a company, firm, association of person or a Hindu undivided family, any director of the company, Partner of the firm or member of the association or family or any relative of such director, partner or member.

3. A Individual, company, firm, association of person, or Hindu undivided family having a substantial interest in the business or Profession of the assessee. Any, relative of such individual, director of such company, partner of such firm or member of such association or family or any relative of such director, partner, or member.

4. A company, firm, association of persons or Hindu Undivided family whose director, partner or member has substantial interest in the business or profession of the assessee Or any director, partner, or member of such company, firm or association. Any relative of such director, partner or member.

Any person in whose business, the assessee or his relative or director, partner, member of the assesee, or any relative of the director, partner or member of the relative has substantial interestMeaning of the term Relatives:Relative in relation to an individual means Husband, wife, Brother, or sister or any lineal ascendant or descendant of that Individual.Substantial Interest:A person is deemed to have substantial interest in the business or profession if such person is beneficial owner of at least 20% of the equity capital of the company, or if such person is entitled to 20% of the profits of a concern at any time during the previous year.Note: The expenditure will be disallowed only when it is unreasonable in the opinion of the Income tax officer.

The following table gives list of person covered by section 40A(2).An individual Where the payment is made to –

(i) any relative (i.e., spouse, any brother, sister, lineal ascendant or descendant) of such individual;

(ii) any person (individual, company, firm, AOP, HUF) having a substantial interest in the business or profession of the individual or any director, partner

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or member of such company firm, association or family;

(iii) any person (company, firm, AOP, HUF) of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the individual or any director or partner or member of such company, firm, AOP, HUF;

-- any relative of any such person given under (ii) or (iii) above(iv) any person who carries on a business or profession

and in his business or profession the assessee (i.e. individual) himself or his relative has substantial interest.

--- company Where the payment is made to ---(i) any director of the company; or his relative;(ii) any person (individual, firm, company, AOP, HUF,

etc.) having a substantial interest in the business or profession of the company or any director, partner, member of such company, firm, association or family;

(iii) any person (company, firm, AOP or HUF) of which a director partner or member, as the case may be, has a substantial interest in the company or any director, partner or member of such company firm, association of family;

-- any relative of person; given as (ii) and (iii) above.(iv) any person who carries on a business or profession and in his business the assessee i.e. the company or director of such company or relative of such directors has substantial interest

-- Firm Where the payment is made to –(i) any partner of the firm or his relative;(ii) any person having a substantial interest in the

business or profession of the firm or any director, partner, member of such company, firm, association or family;

(iii) any person of which a director, partner or member as the case may be, has a substantial interest in the business or profession of the firm or any director, partner, member a such company, firm, association of family;

-- any relative of such person; given in (ii) or (iii) above.(iv) to a person who carries on business or profession

and in his business the assessee (i.e. firm) or its partner or any relative of such partner has substantial interest

-- AOP or HUF Where the payment is made to –(i) any member of the AOP or HUF, as the case may

be; or his relative(ii) any person having a substantial interest in the

business or profession of the AOP or HUF, or any director, partner or member of such company firm, association or family;

(iii) any person of which a director, partner or member has a substantial interest in the business or profession of the AOP or HUF, as the case may be or any director, partner, member of such company firm, association or family;

-- any relative of person; given in (ii) or (iii) above.(iv) to a person who carries on business or profession

and in his business or profession, the assessee (i.e. AOP or HUF) or its member or relative of such member has substantial interest

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PROBLEMS ON PAYMENT FOR RELATIVES

Q1. X Co. Ltd., dealing in furniture, buys 100 tables at the rate of Rs. 2,500 per table from R, a director of the company. The market rate of each table is Rs. 2,000. In this case, the payment has been made to a specified person and is excessive. The assessing officer will disallow an amount of Rs. 50,000 (Rs. 500 X 100) in computing the business income of the assessee.

Q2. X, an individual carrying on business, has employed his son as the General Manager of the concern and pays him a salary of Rs. 10,000 per month. Having regard to the qualifications and experience of the son, the assessing officer feels that the appropriate salary of the son should not be more than Rs. 4,000 per month. The assessing officer can disallow Rs. 6,000 per month under provisions of this section.

Section 40A(3)PAYMENTS EXCEEDING Rs. 10,000 PAID OTHERWISE THAN BY A CROSSED CHEQUE OR CROSSED BANK DRAFTS - (SECTION 40-A(3))

Where an assessee incurs any expenditure in respect of which payment is in excess of Rs. 10,000 or Aggregagate payment in a Day Exceeds Rs 10,000 and payment not made by an Account payee cheque or Account payee bank draft or use of electronic clearing system through a bank account, entire amount such expenditure will not be allowable as deduction. However payment up to Rs 35,000 can be made in a day without attracting disallowance if such payment is made for plying, hiring or leasing goods carriages .

Where deduction has been claimed in an assessment year and payment is made in subsequent year other wise than by an account payee cheque, or account payee bank draft or use of electronic clearing system through a bank account , in such a case the amount so paid will be deemed to be income of the previous year in which such payment is made. No disallowance shall be made if payment is made by an account payee cheque drawn on a bank or an account payee cheque or use of electronic clearing system through a bank account

However Rule 6DD prescribes cases and circumstances under which payment in excess of Rs 10,000 may be made otherwise then by a cross cheque or Bank draft without attracting disallowanceCases prescribed by rule 6DD.

(a) Where the payment is made to --------(i) the Reserve Bank of India or any banking company as defined in clause (c) of

section 5 of the Banking Regulation Act, 1949 (10 of 1949)

(ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);

(iii) any co-operative bank or land mortgage bank;(iv) any primary agricultural credit society or any primary credit society as defined under

section 56 of the Banking Regulation Act, 1949 (10 of 1949)(v) the Life Insurance Corporation of India established under section 3 of the Life

Insurance Corporation Act, 1956 (31 of 1956);

(b) Where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender;

(c) Where the payment is made by:(i) Any letter of credit arrangements through a bank;(ii) A mail or telegraphic transfer through a bank;(iii) A book adjustment from any account in a bank to any other account in that or any

other bank(iv) A bill of exchange made payable only to a bank;(v) The use of electronic clearing system through a bank account;(vi) A credit card;(vii) A debit card.Explanation: For the purposes of this clause and clause (g), the term “bank” means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank [not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), whether incorporated or not, which is established outside India;

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(d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee;

(e) Where the payment is made for he purchase of -(i) Agricultural or forest produce; or(ii) The produce of animal husbandry (including livestock, meat, hides and skins) or dairy

or poultry farming; or(iii) Fish or fish products; or(iv) The products of horticulture or apiculture,

to the cultivator, grower or producer of such articles, produce or products. (f) Where the payment is made for the purchase of the products manufactured or processed

without the aid of power in a cottage industry, to he producer of such products.

(g) Where he payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town.

(h) Where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed fifty thousand rupees.

i) Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee-(i) Is temporarily posted for a continuous period of fifteen days or more in a place other

than his normal place of duty or on a ship; and(ii) Does not maintain any account in any bank at such place or ship;

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

(k) Where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;

(l) Where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travelers cheques in the normal course of his business.

Explanation.- For the purposes of this clause, the expressions “authorized dealer” or “money changer” means a person authorized as an authorized dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force.

Following points are important in connection with the above disallowance a) Provision of section 40A(3) does not apply in respect of

Repayments of loans or payment towards the purchase price of capital asset such as plant and machinery which are not meant for resale (Circular no 34 dated 5-3-1970)

b) The provisions of section 40A(3) are applicable only in computing income under the heads “Profits and gains of business or profession” and “ Income from other sources “.

d) If an assesee makes payment of two different bills (none of them exceeds Rs 10,000) at the same time in cash or by bearer cheque section 40(A)(3) is not applicable.

e) Provision of section 40A(3) are applicable only inrespect of expenditure covered by section 30 to 37.

Q1. Determine the amount of disallowance in the cases given below:-1. Generally X pays salary to his employees by account payee crossed cheques. Salary of

December 2016 is, however, paid to three employees A, B and C in cash (payment being Rs. 3,000, Rs. 10,000 and Rs.10,250, respectively)

2. X Ltd. purchases goods on credit from Y Ltd. on May 6, 2017 for Rs. 86,000 which is paid as follows-

a. Rs. 7,500 in cash on May 11, 2017;b. Rs. 15,000 by a bearer cheque on May 31, 2017;c. Rs. 20,500 by an account payee cheque.

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3. Z Ltd. purchases goods on credit from A Ltd. on May 10, 2017 for Rs. 8,000 and on May 30, 2017 for Rs. 7500. The total payment of Rs.15,500 is made by a bearer cheque on June 1, 2017.

4. A Ltd. purchases goods on credit from a relative of a director on June 20, 2017 for Rs. 25,000 (market value: Rs. 21,000). The amount is paid in cash on June 25, 2017.

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. 18,000, market price being Rs.8500). It is paid in cash on July 26, 2017

. Q2. Compute the amount of disallowance in the cases given below-1. X pays Indian railways a bill of Rs. 15,600 in cash.2. Sales tax is paid to the Government in cash (amount being Rs. 76,592).3. Y, a grain trader, purchases wheat from a cultivator. The payment, being Rs. 1,20,000, is,

however, made in cash. 4. Z pays a bill of Rs. 36,000 in cash on April 7, 2017 when banks are closed on account of a

strike.Provision for Gratuity: Section 40A(7)Employer’s liability to pay gratuity depends upon the length of service of the employee. The liability accrues from year to year however it is difficult to compute the exact amount of liability towards payment of gratuity.To overcome the difficulty in computing the exact amount of liability accrued section 40A(7) provides that Provision made in the books of accounts for payment of gratuity is not allowed as deduction except in the following two cases

a) Where Provision has been made by the assessee for the purpose of contribution towards an approved gratuity fund

b) Where Provision has been made for payment of any gratuity which has become payable during the previous year.

If Provisions made for gratuity is allowed as deduction, then any sum paid on account of such provisions shall not be allowed as deduction in any other previous year.

Although provision for gratuity to the approved fund is allowed as deduction, the deduction is subject to provisions of section 43B.

Payment for formation or setting up of any fund: 40A(9)Any sum paid by the assessee towards the setting up or formation of or as contribution to, any fund, trust, company, or any society for any purpose will not be allowed as deduction except where such as sum is paid to an a recognised provident fund, approved gratuity fund or an approved super annuation fund.

DISALLOWANCE OF UNPAID LIABILITY.43B.Section 43B provides that certain expenses will be allowed as deduction only if payments relating to those expenses are made within the prescribed time limits. Deduction is allowed only if payments are made on or before the relevant date irrespective of method of accounting employed by the assesee.

A) Any sum payable by way of tax or duty, access or fee, by whatever name called, under any law for the time being force:Payment should be made either during the relevant previous year or on before the due date for furnishing return of income under section 139(1)If Payment is not made before the relevant date mentioned above, then no deduction shall be allowed in respect of outstanding liability while determining business income. Deduction can, however be claimed in the yearof payment.

B) Employer’s contribution to staff welfare funds:Any sum payable by an employer by way of contribution to any provident fund or superannuation fund or any other fund for the welfare of employees.The above clause covers employers Contribution to the funds for the welfare of the employees.

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The payment should during the previous year and before due date OF FUNISHING THE RETURN UNDER SECTION 139(1)If Employer’s contribution to staff welfare funds is made during the previous year or before the due date of furnishing the returns, deduction will be allowed for the previous year. If payment is made after the due date of furnishing the return, deduction will allowed in the previous year in which payment is made. Employees Contribution to Provident Fund:The amount of employes contribution received by the employer is treated as income under section 2 (24) (x).

If the sum is paid to the credit of employee’s Account, the same is allowed as deduction under section 36(1)(va).

However deduction will be allowed only if the employees contribution is credited to employee’s Account on or before the due date. If the payment is made during the previous year, but after the due date then such payment of employees contribution will be not be allowed as deduction. If the amount is paid before the due date but not paid during the previous year in such a case the deduction will be allowed in the previous year to which the amount relates.

Section 43B is not applicable to payment for employees contribution and as such employees contribution shall be allowed as in the previous year on due basis provided the payment is made before due date.

C) Any sum payable as bonus or commission to employees for service rendered.Payment should be made be either during the relevant previous year or on before the due date for furnishing return of income under section 139(1)If Payment is not made before the relevant date mentioned above, then no deduction shall be allowed in respect of outstanding liability while determining business income. Deduction can, however be claimed in the year of payment.

D) Any sum payable as interest on any loan or borrowing from

i) any Public financial institution (i.e. ICIC, IFCI, IDBI, LIC and UTI) ii) a State financial corporation or iii) State Industrial corporation or iv) a scheduled bank orv) a co-operative bank.(excluding primary agricultural credit society or a primary co-operative

agricultural and rural development bank)Payment should be made either during the relevant previous year or on or before the due date for furnishing return of income under section 139(1)If Payment is not made before the relevant date mentioned above, then no deduction shall be allowed in respect of outstanding liability while determining business income. Deduction can, however be claimed in the year of payment.It should be noted that interest on overdraft facility/ cash credit limits paid to banks is not covered by section 43B and as such interest on overdrafts and cash credit is allowed on accrual basis. Only interest on term loans taken from banks is covered by section 43B.

E) Any sum payable by the Assessee as an employer in lieu of any leave at the credit of his employee.Payment should be made be either during the relevant previous year or on before the due date for furnishing return of income under section 139(1).If Payment is not made before the relevant date mentioned above, then no deduction shall be allowed in respect of outstanding liability while determining business income. Deduction can, however be claimed in the year of payment.

Deduction will be available only if payment is made during the previous year or on or before the due date of furnishing the return under section 39(1) and the assessee should furnish evidence of payment along the return of income.It should be noted that where the deduction for amount payable for leave salary has already been claimed by the assessee, in computing the income under section 28 during the previous year in which the liability arises in such a case the assessee shall not be entitled to deduction on payment basis.

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F) Any sum payable by the assesee to the Indian Railways for the use of Railway assets.Payment should be made be either during the relevant previous year or on before the due date for furnishing return of income under section 139(1).If Payment is not made before the relevant date mentioned above, then no deduction shall be allowed in respect of outstanding liability while determining business income. Deduction can, however be claimed in the year of payment.Deduction will be available only if payment is made during the previous year or on or before the due date of furnishing the return under section 39(1) and the assessee should furnish evidence of payment along the return of income.

Section 43CA inserted from assessment year 2014-15.(Application of section 50C for computing business income.)

If capital asset being land or building or both is transferred for a consideration which is lesser than stamp duty value in such a cases the value assessed by the stamp duty authority shall betaken as full value of consideration for the purposes fo computation of capital gain. Provisions of section 50C are not applicable for computing business income. Courts have recently held that section 50Cis not applicable if land or building is transferred as stock in trade. To overcome this difficulty the finance Act 2013 has inserted section 43CA. with effect from assessment year 2014-15.Section 43CA states the following1. Where the consideration received or accruing as a result of the transfer by an assessee

of any land or building or both( but not being a capital asset) is less than the value adopted or assessed or assessable by any authority of the state government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall for be deemed to be the full value of the consideration received or accruing as a result of such transfer.

2. Where the date of agreement fixing the value of consideration for transfer of the above asset and the date of registration of such transfer of asset are not the same, the value assessed by the above mentioned authority on the date of agreement shall be taken in to consideration. However this is subject to the condition that the amount of consideration or a part thereof has been received by any mode other than cash on or before thedate of agreement for transfer of the asset.

Q1. An analysis of the profit and loss account and the balance sheet of X as at 31-3-2018 reveals that the following expenses which were due, were though debited to the profit and loss account but have been paid after 31-3-2018.

(i) Sales-taxRs.

50,000Rs.

20,000 paid on 14-7-201830,000 paid on 1-10-2018

(ii) Excise-duty

(iii) Bonus to staff

1,20,000

60,000

40,000 paid on 14-7-201840,000 paid on 1-10-201840,000 paid on 1-11-201858,000 paid on 10-7-20182,000 paid on 15-12-2018

(iv)Employer’s contribution to provident fund

55,000 Rs. 25,000 paid on 15-7-2018Rs. 10,000 paid on 31-7-2018Rs. 20,000 paid on 15-1-2019

The due date of filing of return is 30-9-2017. In which previous years can the above payments be claimed as a deduction?

Q3. What are deemed profits and how are they charged Tax under section 41 SECTION 41 : DEEMED PROFITSAs a General rule, Income is charged under the head Profits and gains of business or profession if the business is carried on during the previous year.However section 41 specifies certain receipts which are chargeable to tax as business income even though business may not be carried on during the previous year. Such receipts are called as deemed profits which are discussed below.

1. Recovery against deduction. 41(1)Where any allowance or deduction was made in the assessment of income of any year in respect of a) any loss, or

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b) any expenditure or c) any trading liability and subsequently during any previous year any amount is received by the assesee in cash or in kind in respect of such loss or expenditure or some benefit accrues to the assessee by way of remission of trading liability, in such a case the amount or value of benefit so obtained by the assessee is chargeable to tax as business income

Eg: If the assesee pays rent to the land lord and claims as business expenditure, in the subsequent year the rent is decreased retrospectively due to some law or court order and the assesee receives refund of excess rent paid in a case the recovery against the deduction claimed will be taxable under section 41(1) If the assessee is allowed any deduction or allowance in respect of any loss or expenditure or any trading liability, and his business is succeeded either due toa) amalgamation of two companies orb) on account of reconstitution of new firm or c) the business is continued by some other person ord) There is a demerger and the business is carried on by the resulting company, and the

assessee ceases to carry on the business, then if the person succeeding receives any amount in relation to which deduction was allowed then such amount received will be taxable in the hands of successor.

For the purpose of this section successor means:a) The amalgamated company where there has been an amalgamation of a company

with another company.b) Other firm, if the business of a firm is succeeded by another firm.c) Other persons where the business or profession of a person is succeeded by any

other person.d) The resulting company, where there is a demerger (W.E.F from 1-4-2000)

Provisions of this section will apply where the assessee received excise duty refunds in the relevant assessment year which was not claimed as deduction in the profit and loss account. This implies if the assessee maintains a separate account of excise duty collected from customers and paid to the excise authorities, in such a case if any amount received from excise authorities by way of refund such receipt will attract the provisions of section 41(1) and tax will be charged on such receipt.

Q1. Rs. 1,50,000 is paid as sales tax by X during the previous year 2008-09 and the same is allowed as deduction. The taxpayer claims a refund of Rs. 10,000 on June 16,2017 from the sales tax department after getting a favorable verdict from the Delhi High Court Rs. 10,000 is taxable for the previous year 2017-18 even if the business is not in existence during 2017-18

Q2. Suppose in 1 above, before the verdict of the Delhi High Court, X dies and the business is continued by his son Y who gets a refund of Rs. 10,000 from the sales tax department, then Rs. 10,000 is taxable as business income of Y

Q3. X Ltd. purchases goods on credit from different parties and claims deduction on “accrual” basis. Generally, these bills are paid at Bombay office within 6 months of submission of delivery documents signed by the incharge of the Pune depot. As some of these documents are misplaced by A, one of the suppliers, he could not claim payment of a bill of Rs. 20,000 pertaining to 2012-2013, although X Ltd. has claimed deduction during the same year. After the expiry of limitation period of three years, during 2017-18 the company credits the same in its profit and loss account, although A, the supplier, has not discharged the liability of the company. Rs. 20,000, in this case, is chargeable to tax by virtue of section 41(1) as business income of the assessment year 2018-19.

Q4. An assessee is allowed deduction for the assessment year 2013-14 in respect of Rs. 42,000

misappropriated by his cashier, and later on in the previous year relevant for the assessment year 2018-19, Rs. 8,000 (out of the sum so misappropriated) is recovered by the assessee. Rs. 8,000 is chargeable to tax as business profits for the assessment year 2018-19.

Q5. X pays Rs. 80,000 as excise duty and claims the same as deduction in 2013-14. Later on in 2017-18, he gets a refund of Rs. 20,000 from the department by obtaining a favourbale verdict from the Delhi High Court. The department files an appeal in the Supreme Court and the matter is still pending. In this case, Rs. 20,000 is taxable in the previous year 2017-18

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If the Supreme Court decides the appeal against the assessee, the amount, which will be paid back, will be deductible in the year of payment by virtue of section 43B.

2. Balancing Charge. Section 41(2)This section is applicable to those assessee who claim depreciation as per straight line method under section 32(1) (i). If depreciation is claimed under section 32(1)(i) and the asset on which depreciation is claimed is sold , discarded, demolished or destroyed during the year and the money payable in respect of such asset exceed the written down value of the asset then the excess shall be chargeable to income tax. However the amount chargeable to tax shall not exceed the deduction under section 32(1)(i). If the money due for the above becomes due in the previous year in which business is not in existence in such a case the provisions of this section shall apply as if the business is in existence in the previous year.

3. Sale of Assets used for scientific research: 41(3).

Where a capital asset which was used for scientific research is sold without being used for any other purpose, then surplus is charged to tax as underSurplus is the least of the following.

a) Sale price + Deduction allowed under section 35 - cost of the assetb) Deduction allowed under section 35.

For example if an asset is purchased for scientific research for Rs 80,000and full amount is claimed as deduction in the previous year 1994-95.In the previous year 2005-2006 the asset is sold for Rs.90,000 computation of surplus

a) Sale price +Deduction allowed - cost of the asset = 90,000 + 80,000 - 80,000 = Rs.90,000b) Deduction allowed under section 35 =Rs 80,000

In other words Rs.80,000 will be chargeable to tax.For example if an asset is purchased for scientific research for Rs 80,000 and the asset is used for in house research and development and a deduction of Rs.1,00,000 is claimed in the previous year 1994-95. In the previous year 2014-2015 the asset is sold for Rs 90,000 computation of surplus

a) Sale price +Deduction allowed - cost of the asset = 90,000 + 1,00,000 - 80,000 = Rs 110,000b) Deduction allowed under section 35 =Rs 1,00,000

Rs 1,00,000 is taxable.The above receipt is taxable even if the business is not in existence during the previous year in which such amount becomes due or is received.It should be noted that where the asset is used for the purpose of business or profession after it ceases to be used for scientific research purposes then cost of such asset will part of block of asset and its cost of acquisition to be included in the block of asset will be Cost of asset – deduction allowed. ( Usually Nil since full cost is allowed as deduction)

4. Recovery of Bad debt (Sec 41(4)Where any bad debt has been allowed as deduction under section 36(1) (viii)and the amount is subsequently recovered then the amount calculated as under is chargeable to taxAmount taxable = amount recovered - (Original debt - Deduction allowed in respect of bad debt). In other words amount recovered in respect of bad debts will be chargeable to tax only if the amount recovered exceeds the amount of debt remaining after deduction on account of bad debt. For example if a revenue debt of Rs 40,000 is due from Mr X. Rs 15,000 out of Rs.40,000 is written off and claimed as deduction. In the subsequent previous year Mr. X pays Rs 30,000 in such a case Rs 5,000 will be taxable under this section as business income. However if the amount recovered is 24,000 then the amount chargeable under this section is Nil.The above receipt is taxable even if the business is not in existence in the previous year in which such amount is recovered.

Section 41(4) is not applicable to the successor of the business. If a debt allowed as deduction is subsequently recovered by the successor in such a case the amount cannot be taxed in the hands of the successor of the business.

5. Amount withdrawn from reserve created under section 36(1)(viii) Section 41(4A).Where reserve is created under section 36(1)(viii) and deduction is claimed under any previous year and Subsequently if any amount which was allowed as deduction is withdrawn

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then such amount is taxable in the previous year in which such withdrawal is made. However if the amount withdrawn for reserve is that which was not allowed as deduction then the amount not withdrawn is not taxable.For example the amount standing to the credit of Special reserve created under section 36(1)(viii) is Rs50,000 on 1-4-97 out of which deduction has been claimed in the past previous years to the extent of Rs 38,000. If during the previous year 2004-2005 the assessee withdraws Rs 10,000 from the reserve then nothing will be charged to tax in the previous year 2004-2005.However if the amount withdrawn is Rs 15,000 then Rs 3,000 will be charged to tax during the previous year 2004-2005.Where the withdrawal is made in the previous year in which business is not in existence in such a case the provisions of this section shall apply as if the business was in existence.

6. Recovery after discontinuance of business or profession (Section176(3A)(4)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.

Qn. State the provisions of section 44AA regarding compulsory maintenance of books of accounts.

Provisions relating to maintenance of accounts are tabulated below.Persons carrying on specified professions Persons carrying any business or profession

not being a specified professionWhose gross receipts exceeds Rs 1,50,000 in all the three immediately preceding previous years or where the profession is newly set up in the previous year, his gross receipts in the profession, his receipts are likely to exceed the limits specified above

. Whose gross receipts does not 1,50,000 in any one or more of the three immediately Preceding previous year or where then profession is newly set up in the previous year, his gross receipts are not likely to exceed the limits specified above

Persons is an Individual or Hindu undivided family

Any person other than an Individual or Hindu undivided family.

Such Assesees are required to maintain Books of accounts prescribed under rule 6F(2). The books prescribed are

a) A cash bookb) a journal if accounts are maintained according to mercantile systemc) a ledgerd) Carbon copies of machine numbered or otherwise serially numbered bills exceeding Rs 25.e) original bills and

receipts issued to the assessee in respect of expenditure incurred if the expenditure exceeds Rs 50. a) Payment

vouchers prepared and

Such persons are required to maintain such books of accounts As would enable the assessing officer to compute their taxableincome under the Income tax Act.

A) A Whose income from such Business or profession exceeds Rs 2,50,000 or total sales, Turnover gross receipts Exceeds Rs 25,00,000 in any one of the three immediately preceding previous year

Where the profession or businesshas been newly started in theprevious year then the Income orsales, turnover or gross receipts arelikely to exceed the limits specified above

Such persons are required to maintain such books of

A) A Whose income from such Business or profession exceeds Rs 1,20,000 or total sales, Turnover gross receipts Exceeds Rs 10,00,000 in any one of the three immediately pre ceding previous year


Such persons are required to maintain such books of accounts As would enable the

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signed by persons whre such bills and receipts are not issued and expenditure does not exceed Rs 50.

Vouchers mentioned above need not be prepared if the cash bookContains adequate particulars in respect of expenditure incurred by him.Apart from books specified above a person carrying on medical profession is required to keep the following additional books/documents

i) A daily case register in form No 3C showing date, patient Rs.s Name, Nature of professional service rendered, fees received and date of receipt

An inventory as on the first and last day of the previous year of stock of drugs, medicines and other consumable accesories used for the purpose of his profession.

accounts As would enable the assessing officer to compute their taxable income under the Income tax Act.

B) B Whose income from such business or profession does not exceeds Rs 250,,000 and total sales, Turnover gross receipts does not exceeds Rs 25,00,000 in all of the three immediately preceding previous year Where the profession or business has Been newly started in the previous year then the Income or sales, turnover or gross receipts are not likely to exceed the limits specified

Persons coming in this category are not required to maintain any books of Accounts.

assessing officer to compute their taxable income under the Income tax Act.

B) B Whose income from such business or profession does not exceeds Rs 1,20,000 and total sales, Turnover gross receipts does not exceeds Rs 10,00,000 in all of the three immediately preceding previous year Where the profession or business has Been newly started in the previous year then the Income or sales, turnover or gross receipts are not likely to exceed the limits specified


I Persons carrying on specified Professions

A. Whose gross receipts exceeds Rs. 1,50,000 in any all the three immediately preceding previous years or where then profession is newly set up

Such Assesees are required to maintain Books of accounts prescribed under rule 6F(2). The books prescribed are

a) A cash bookb) a journal if accounts are maintained according to mercantile systemc) a ledgerd) Carbon copies of machine numbered or otherwise serially numbered bills exceeding Rs 25.e) original bills and receipts issued to the

assessee in respect of expenditure incurred if the expenditure exceeds Rs 50. b) Payment vouchers prepared and

signed by persons whre such bills and receipts are not issued and expenditure does not exceed Rs 50.

Vouchers mentioned above need not be

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prepared if the cash bookContains adequate particulars in respect of expenditure incurred by him.Apart from books specified above a person carrying on medical profession is required to keep the following additional books/documents

i) A daily case register in form No 3C showing date, patient Rs.s Name, Nature of professional service rendered, fees received and date of receiptAn inventory as on the first and last day of the previous year of stock of drugs, medicines and other consumable accesories used for the purpose of his profession.

B. Whose gross receipts does not 1,50,000 in any of the threeimmediately Preceding previous year or where then profession is newly set up in the previous year, his gross receipts are not likely to exceed the limits specified above

Such persons are required to maintain such books of accounts As would enable the assessing officer to compute their taxableincome under the Income tax Act.

Persons carrying on non specfied professions or any other business.A Whose income from such Business or profession exceeds Rs 1,20,000 or total sales, Turnover gross receipts Exceeds Rs 10,00,000 in any one of the three immediately pre underceding previous year


B Whose income from such business or profession does not exceeds Rs 1,20,000 and total sales, Turnover gross receipts does not exceeds Rs 10,00,000 in all of the three immediately preceding previous year Where the profession or business has Been newly started in the previous year then the Income or sales, turnover or gross receipts are not likely to exceed the limits specified

Such persons are required to maintain such books of accounts As would enable the assessing officer to compute their taxable income under the Income tax Act.


When the assessee is covered by section 44AD(4) i.e once having opted for presmumptive assessment under section 44AD and thereafter does not compute profits in accordance with provision of section 44AD for any of the five subsequent years then such assesee is required toKeep and maintain such books of accounts and other documents as may enable the assessing officer to compute his total income in accordance with the provisions of this Act.

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Apart from the persons specified above, an Assessee who is covered by section Rs.44AD, or 44AE and claims that his profit and gains from the business or profession is less than profits computed on estimated basis in accordance with section 44AD(1) or 44AE(2) and such an assessee is required to maintain such " Books of accounts and other documents" which will enable the assessing officer to compute their taxable income .

Specified profession for the Purpose of section 44AA means the following professions Medical, engineering, Architectural, technical consultancy, Accountancy, Legal or interior decoration or any other notified profession (Authorised representative, film artist and company secretary and information technology)Film artist means any person engaged in his professional capacity in the production of a cinematography film, whether produced by him or by any other person as an actor, a cameraman, a director, a music director, an art director, a dance director, an editor, a singer, a lyricist, a story writer, a screen play writer, a dialogue writer and a dress designer.

Where should the books of accounts kept.The books of accounts specified under rule 6F(2) and 6F(3) and other documents specified should be kept and maintained at the place where the assessing is carrying on the profession or where such profession is carried on in more than one place the books should be kept and maintained at the principal place of business.

However where the person keeps and maintains separate books of accounts in respect of each place such books of accounts and other documents may be kept and maintained at the respective places at which the profession is carried on

The books specified in rules above should be kept for a period of 6 years from the end of the relevant assessment year. (Notification no 21/2002, dated 4-2-2002)Failure to keep accounts and retain them for the prescribed period will lead to imposition of penalty which is fixed at Rs 25,000.(Section 271A)

Q1. When is income computed on estimated basis under the income tax Act.Under sections 44AD, and 44AE income of certain businesses is computed on estimated basis.The Provisions of these sections are given below.

a) Section 44AD is applicable i) if the assessee is engaged in eligible businessii) The assesee is an eligible assessee

Eligible business means any business except business of plying, hiring or leasing goods carriages referred to in section 44AE. And whose total turnover or gross receipts in the previous year does not exceed Rs 2,00,00,000

Eligible Assessee means an Individual,Hindu undivided familyA partnership firm,(excluding a limited liability partnership)The assessee should be resident during the previous year.

The scheme of presumptive assessment is not applicable to following persons1. Persons carrying on Professions specified under section 44AA

Specified profession for the Purpose of section 44AA means the following professions Medical, engineering, Architectural, technical consultancy, Accountancy, Legal or interior decoration or any other notified profession (Authorised representative, film artist and company secretary and information technology)

2. Person earning income in the nature of commission or brokerage3. Person carrying on any agency business.

The Assessee should not claim deduction under section 10A or 10AA or 10B or 10BA or deduction under any provisions of chapter VIA under the heading “Deduction in respect of certain Incomes”

If the above conditions are satisfied income of such assesee should be deemed to be 8% of total turnover or gross receipts of the assessee in the previous year on account of such business or a sum higher than such sum claimed to have been earned by the eligible assesee

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b) If section 44AD is applicable then income from the above mentioned business will be estimated to be 8% of the Turnover or gross receipts paid or payable to the assessee. However, an assesee may voluntarily declare higher income in his return of income. However the Income will be presumed to be 6% of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the date specified under section 139(1) for filing the return of IncomeIn other words when amount of turnover is received through cheques or banking channels the income will be assessed at 6% of the amount of such turnover.

However if the assessee declares a higher income from the above business in his return of income then tax will be charged on such income declared

c) The rate of 8%(or 6%) is comprehensive. If income is estimated to be 8% (or 6%) of the gross receipts then all deductions under section 30 to 38 including depreciation is deemed to have been allowed under these sections. if the assessee is a firm then deduction on account of Interest to partners and deduction inrespect of salary, bonus, commission etc payable to partners ( to the extent allowable under section 40(b) ) shall be presumed to be have been allowed. No further deduction for such amounts paid to partners shall be allowed.

e) Depreciation in respect of assets used in the above mentioned business whose income is computed on the basis of estimation will deemed to have been allowed and the Written down value of the asset will be reduced accordingly.

f) If the assessee claims that his income from the abovemented business is lower than the income arrived on estimated basis then such an assessee has to maintain books of accounts under section 44AA and get the accounts audited under section 44AB irrespective of the Income or turnover of the assessee.

g) An assessee who is covered by section 44AD will have to adhere to the provisions of section 44AA and 44AB.Such an assessee will have to maintain books of accounts if the sales/income is in excess of limits prescribed under section 44AA.

H) Special provisions for break in this method of computing income.Where an eligible assesee declares his profits in accordance with the provisions of section 44AD for any previous year and there after he declares profits of any of the of five assessment year not in accordance with the provision of section 44AD then he shall not be eligible to claim the benefit of the provisions of this section for five assessment year subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordeance with the provisions of section 44AD(1)

Such an assessee will be required to keep and maintain such books of accounts and other documents as required under section 44AA(2) and will be required to get his Books of accounts Audited and furnish a report of such audits as required under section 44AB.

Discuss special provision of computing income of persons engaged in Profession specified under section 44AA(1).

Ans. Section 44ADA prescribes computing of income by presumptive method.Section 44ADA is applicable to assessee who is

A resident in indiaEngaged in a profession referred section 44AA(1) i.e specified professionsWhose total gross receipts does not exceeds Rs 50,00,000.

Income of such assesee from the said profession shall be deemed to be 50% of the total gross receipts of the assesee in the previous year on account of such profession or income declared from such profession in the returns furnished by the assesee which ever is higher.

c) The rate of 50% is comprehensive. If income is estimated to be 50% of the gross receipts then all deductions under section 30 to 38 including depreciation is deemed to have been allowed under these sections.

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d) Depreciation in respect of assets used in the above mentioned business whose income is computed on the basis of estimation will deemed to have been allowed and the Written down value of the asset will be reduced accordingly.

4. If the assessee claims that his income from the abovemented business is lower than the income arrived on estimated basis then such an assessee has to maintain books of accounts under section 44AA and get the accounts audited under section 44AB irrespective of the Income or turnover of the assessee.

BUSINESS OF PLYING, HIRING OR LEASING GOODS CARRIAGEa) Section 44AE is applicable i) if the assessee is the owner of 10 or less than 10 Goods carriages

ii) The assessee is engaged in the business of of plying, hiring, or leasing such goods carriages. For the purpose of this section a person who is in possession of goods carriage taken on hire purchase or on installments and for which the whole or part of the amount is still payable shall be deemed to be the owner of such goods carriage.

a) If section 44AE is applicable then income from such business is estimated as underb) The income from goods carriage owned by the assessee is estimated at Rs 7,500 per

month or part thereof during which the Goods carriage is owned by the assessee during the previous year.Income is estimated on the basis of period of ownership of the vehicle and it is irrelevant whether or not the business is carried on by the assesee during this period.However if the assessee declares a higher income from the above business in his return of income then tax will be charged on such income declared

c) The rate Rs7500 per month per Goods carriage is comprehensive. If income is estimated on the above basis then all deductions under section 30 to 38 including depreciation is deemed to have been allowed under these sections. However if the assessee is a firm then deduction on account of Interest to partners and deduction in respect of salary, bonus, commission etc payable to partners ( to the extent allowable under section 40(b)) will be deducted from the 8% of the gross receipts as computed above.

d) Depreciation in respect of assets used in the abovementioned business whose income is computed on the basis of estimation will deemed to have been allowed and the Written down value of the asset will be reduced accordingly.

e) Such an assessee is not required to maintain books of accounts as prescribed by section 44AA and is not required to get his accounts audited as required by section 44AB if income is estimated on the above basis.However such an assessee is required to maintain books of accounts and get the accounts audited in respect of other business carried on by him If income or Gross receipts or sales or turnover from other business exceeds the limits specified under section 44AA and 44AB.In other words for the purpose of calculating limits specified under section 44AA for the purpose of maintenance of accounts and 44AB for the purpose of audit of accounts, the turnover from the business of plying, hiring or leasing good carriages shall be excluded. Also the estimated income from such business will be excluded for the purpose of calculating limits specified under section 44AA.

Q2. Discuss the Provisions of section 44B, 44BB, 44BBA, 44BBB in respect of computing profits and gains in connection with business of exploration etc of mineral oils, for non residents assesee.

Type of assessee Section Computation of estimated Incomevi) a non resident

asssessee who is engaged in the business of providing services or facilities in connection with or supplying plant and machinery on hire which is used or to be used in prospecting or extraction or production of mineral oils

44BB 10% of the aggregate of the following amounts. Amount paid or payable to the

assesee or any other person on behalf of the assesee on account of providing any services and facilities or supplying any plant and machinery on hire used or to be used in the prospecting for or extraction or production of mineral oils in India.

Amount received by the assesee In India in connection with the

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abovementioned items for prospecting or extraction or production of minerals outside India.

Section 44B is applicable in case of an assesee i) who is a non residentii) and engaged in the business of operation of ships.

44B 7.5% of the aggregate of the following amount. Amount paid or payable to the

assesee or to any other person on behalf on behalf of the assesee on account of carriage of passengers, live stock, mail or goods shipped at any port in India.

Any amount received or deemed to be received in India by the assesee or his agent on account of the carriage of passengers , live stock mail or goods shipped at any port outside India.

The abovmentioned amounts also include any sum received on account of demurrage charges or handling charges or any other amount of similar nature.

3. Assessee is i) Non resident engaged in the business of operation of Aircraft

44BBA Amount 5% of the following: Amount paid or payable to the

assesee or to any other person on behalf on behalf of the assesee on account of carriage of passengers, live stock, mail or goods from any place in India.

Any amount received or deemed to be received in India by the assesee or his agent on account of the carriage of passengers, live stock mail or goods from any place in India.

Assessee is are foreign company engaged in the business of i) Civil Construction Orii) Erection of plant and machinery Or

vii) Testing or commissioning of machinery or plant

In connection with the turn key power project approved by central government and financed under any international Aid programme

44BBB 10% of amount paid or payable to the such assessee or to any person on his behalf on account of such activities.

Unexplained money,bullion, jewellery, investments (Sec 68 to sec 69 D)Section 68: Cash CreditWhere any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.In case the assess is a company Not being a company in which the public are substantially interested and the sum consist of share application money, share capital or share premium or any such amount by what ever name called, the explanation officer by such company may be considered as satisfactory only if

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a) The person , being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about the nature and source of such sum so credited

b) Such explanation is found to be satisfactory in the opinion of the Assessing officer.Provided further that nothing contained above shall apply if the person in whose name the sum referred to therein is recorded is a venture capital fund or a venture capital company as referred to in section 10(23FB)

Cash Credit: Any sum found credited in the books of an assessee maintained for any previous year. Thus any credit entry in the books is cash credit, it may be anything like loan, Gift, Capital receipts etc.The A.O. may treat the cash credit as income of the income of the assessee if the assessee offers no explanation or the explanation offered is not, in the opinion of AO, satisfactory.The explanation should be with regard to nature and source of the cash credit. Thus, if a gift is received the assessee has to show that the receipt is in nature of gift and he must show from whom the gift is received. When an explanation is satisfactory as to the nature & source of cash credit.The satisfactory explanation must show following three elements viz.

a) Genuineness of transaction i.e. the transaction is genuine and not just an accommodation (entry);

b) The sum received has definite source and at the heads of the payer it has been properly explained.

c) The payer has creditworthiness. All the three conditions must be shown to make the explanation satisfactory. If the explanation offered is not satisfactory or if no explanation is offered, the sum (cash credit) may be treated as income of the assessee.The cash credit when so treated as income of the assessee, it is income of the previous year, in books of which it is found to be so credited. E.g. In the books of ‘A’ for Financial year 1998-99 Rs.12,500 is shown as loan received from ‘B’ A is not able to give satisfactory explanation of the credit. The AO may treat Rs.12,500 as income of ‘A’ for previous year 1998-99 and tax is in the A.Y 1999-2000.Sec-69 Unexplained InvestmentWhere in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.If(the condition)

1. Assessee has made investment during the financial year immediately preceding the assessment year’

2. The investment so made are not recorded in the books of accounts, if any, maintained by him for any source of income;

3. The assessee either a) Offers no explanation; orb) The explanation offered by him is not in the opinion of the AO, satisfactory,The explanation should be about the nature and source of the investment. Then- (Effect) The value of the investments may be deemed to be the income of the assessee for such financial year.E.G. ‘A’ has purchased a house in the financial year1999-2000. The purchase is not recorded in the books of ‘A’. He is not able to offer a satisfactory explanation in regarded to the nature and source of investment in house. The value of the house shall be deemed to be income of ‘A’ for previous year 1999-2000 relevant to assessment year 2000-01.

69-A [Unexplained money, etc.]Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.

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69-B. [Amount of investments, etc., not fully disclosed in books of account.]Where in any financial year the assessee has made investments or is and the [Assessing] Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount of the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year.]

69-C. [Unexplained expenditure, etc.]Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be deemed to be the income of the assessee for such financial year:]Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assesssee shall not be allowed as a deduction under any head of income.

69-D. Amount borrowed or repaid on hundi.Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount aforesaid for the previous year in which the amount was borrowed or repaid, as the case may be: Provided that, if in any case any amount borrowed on a hundi has been deemed under the provisions of this section to be the income of any person, such person shall not be liable to be assessed again in respect of such amount under the provisions of this section on repayment of such amount.

Q4. Discuss the provisions of Section 44AB in respect of Audit Under Income Tax Act.Ans. Person who is required to get his Accounts Audited and Furnish and Audit report in the

prescribed form.1. Every person carrying on business if his total sales, turnover or gross receipts as the case

may be in business exceeds Rs 1 crore in any previous year. However the above limit is Rs 2 crores in case the assesee declares profits and gains for the previous year in accordance with the provisions of section 44AD(1)

2. Every person carrying on profession, if his gross receipts in profession for an previous year exceed Rs 50 lacs..

3 A person covered under section 44AD, 44ADA or 44AE and who claims that his income chargeable under the head “ Profits and gains of business or profession” for the business specified in the above sections is less than the profits and gains computed in accordance the above sections.

Date of Getting books Audited.? Due date of furnishing the return specified under section 139(1))Under section 139(1) a persons who is required to get the accounts audited should file the return on or before 30th September of the assessment yearHowever where the assessee is required to submit a report on international transaction or domestic transaction under section 92F of the Act , the due date for furnishing the return of income is 30th November of the relevant assessment year.

Who shall conduct an Audit ? A Chartered Accountant.

If the Accounts of the assessee are audited under any other law in such a case it will suffice if the accounts are audited under such other law before due date and the assessee obtains before the said date a report of the audit as required under such law and also a report of audit from chartered accountant in the prescribed form.

Tax Audit report shall be furnished by the specified date irrespective of the fact whether or not return of income is filed by that date.

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If the return of income is submitted after submission of tax audit report, then following should be submitted along with the return of income.

a) A copy of tax audit report.b) A proof of filing tax audit report before the specified date.

INCOME FROM BUSINESS AND PROFESSIONCLASS WORK PROBLEMS

Q1. Mr. X, a proprietor engaged in manufacturing business, furnishes the following particulars:

Particulars Rs.(1) Opening WDV of plant and machinery as on 1.4.2017 30,00,000(2) New plant and machinery purchased and put to use on

08.06.201720,00,000

(3) New plant and machinery acquired and put to use on 15.12.2017 8,00,000

(4) Computer acquired and installed in the office premises on 2.1.2018 3,00,000

Compute the amount of depreciation and additional depreciation as per the Income-tax Act, 1961 for the A.Y. 2018-19

Q2. Mr. Gopi carrying on business as proprietor converted the same into a limited company by name Gopi Pipes (P) Ltd. from 01-07-2017. The details of the assets are given below:

Rs.Block - I WDV of plant & machinery (rate of depreciation @ 15%) on 01.04.2017

12,00,000

Block - II WDV of building (rate of depreciation @ 10%) on 01.04.2017 25,00,000

The company Gopi Pipes (P) Ltd. acquired plant and machinery in December 2017 for Rs. 10,00,000. It has been doing the business from 01-07-2017.Compute the quantum of depreciation to be claimed by Mr. Gopi and successor Gopi Pipes (P) Ltd. for the assessment year 2018-19.Note: Ignore additional depreciation.

Q3. Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down value on 01.04.2017 was Rs. 40 lacs. It purchased another asset (second-hand plant and machinery) of the same block on 01.11.2017 for Rs. 14.40 lacs and put to use on the same day. Sai Ltd. was amalgamated with Shirdi Ltd. with effect from 01.01.2018.You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the previous year ended on 31.03.2018 assuming that the assets were transferred to Shirdi Ltd. at Rs. 60 lacs.

Q4. A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired the following assets in his office during F.Y. 2017-18 at the cost shown against each item. Calculate the amount of depreciation that can be claimed from his professional income for A.Y. 2018-19:

Sl.No.

Description Date of acquisition

Date when put to use

Amount

1. Computer 27 Sept., 17 1 Oct., 17 35,0002. Computer software 2 Oct., 17 8 Oct., 17 8,5003. Computer printer 1 Oct., 17 1 Oct., 17 12,5004. Books (of which books being annual

publications are of Rs. 12,000)1 Apr., 17 1 Apr., 17 13,000

5. Office furniture 1 Apr., 17 1 Apr., 17 3,00,000

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(Acquired from a practising CA)6. Laptop 26 Sep., 17 8 Oct., 17 43,000

Q5. Mr. Kunal, a proprietor, engaged in the business of generation of power, furnishes the following particulars pertaining to P.Y. 2017-18. Compute the depreciation allowable under section 32 for A.Y. 2018-19, while computing his income under the head “Profits and gains of business or profession”. The proprietor has opted for the depreciation allowance on the basis of written down value.

Particulars Rs.1. Opening Written down value of Plant and Machinery (15% block) as on

01.04.2017 (Purchase value Rs. 8,00,000)5,78,000

2. Purchase of second hand machinery (15% block) on 29.12.2017 for business purpose

2,00,000

3. Machinery Y (15% block) purchased and installed on 12.07.2017 for the purpose of power generation

8,00,000

4. Acquired and installed for use a new air pollution control equipment on 31.7.2017

2,50,000

5. New air conditioner purchased and installed in office premiseson 8.9.2017

3,00,000

6. New machinery Z (15% block) acquired and installed on 23.11.2017 for the purpose of generation of power

3,25,000

7. Sale value of an old machinery X, sold during the year (Purchase value Rs. 4,80,000, WDV as on 01.04.2017 Rs. 3,46,800)

3,10,000

Q6. Mr. X, set up a manufacturing unit in Warangal in the state of Telangana on 01.06.2017. It invested Rs. 30 crore in new plant and machinery on 1.6.2017. Further, it investedRs. 25 crore in the plant and machinery on 01.11.2017, out of which Rs. 5 crore was second hand plant and machinery. Compute the depreciation allowable under section 32. Is Mr. X entitled for any other benefit in respect of such investment? If so, what is the benefit available?

Q7. Mr. A, furnishes the following particulars for the P.Y.2017-18. Compute the deduction allowable under section 35 for A.Y.2018-19, while computing its income under the head “Profits and gains of business or profession”.

Particulars Rs.1. Amount paid to Indian Institute of Science, Bangalore, for

scientific research1,00,000

2. Amount paid to IIT, Delhi for an approved scientific researchProgramme

2,50,000

3. Amount paid to X Ltd., a company registered in India which has as its main object scientific research and development, as is approved by the prescribed authority

4,00,000

4. Expenditure incurred on in-house research and development facility as approved by the prescribed authority

(a) Revenue expenditure on scientific research 3,00,000(b) Capital expenditure (including cost of acquisition of land

Rs. 5,00,000) on scientific research7,50,000

Q8. Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of food grains, sugar and edible oil on 1.4.2017. He incurred capital expenditure of Rs. 80 lakh, Rs. 60 lakh and Rs. 50 lakh, respectively, on purchase of land and building during the period January, 2017 to March, 2017 exclusively for the above businesses, and

capitalized the same in its books of account as on 1st April, 2017. The cost of land

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included in the above figures are Rs. 50 lakh, Rs. 40 lakh and Rs. 30 lakh, respectively. Further, during the P.Y.2017-18, it incurred capital expenditure of Rs. 20 lakh, Rs. 15 lakh & Rs. 10 lakh, respectively, for extension/ reconstruction of the building purchased and used exclusively for the above businesses. Compute the income under the head “Profits and gains of business or profession” for the A.Y.2018-19 and the loss to be carried forward, assuming that Mr. A has fulfilled all the conditions specified for claim of deduction under section 35AD and has not claimed any deduction under Chapter VI-A under the heading “C. – Deductions in respect of certain incomes”. The profits from the business of setting up a warehousing facility for storage of food grains, sugar and edible oil (before claiming deduction under section 35AD and section 32) for the A.Y. 2018-19 is Rs. 16 lakhs, Rs. 14 lakhs and Rs. 31 lakhs, respectively. Also, assume that expenditure incurred during the previous year 2017-18 are by account payee cheque or use of ECS through bank account.

Q9. Mr. Arnav is a proprietor having two units – Unit A carries on specified business of setting up and operating a warehousing facility for storage of sugar; Unit B carries on non- specified business of operating a warehousing facility for storage of edible oil.Unit A commenced operations on 1.4.2016 and it claimed deduction of Rs. 100 lacs incurred on purchase of two buildings for Rs. 50 lacs each (for operating a warehousing facility for storage of sugar) under section 35AD for A.Y.2017-18. However, in February, 2018, Unit A transferred one of its buildings to Unit B.Examine the tax implications of such transfer in the hands of Mr. Arnav.

Q10. X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme referred to in section 80CCD. Dearness Allowance is 40% of basic salary and it forms part of pay of the employees. Compute the amount of deduction allowable under section 36(1)(iva), if the basic salary of the employees aggregate to Rs. 10 lakh. Would disallowance under section 40A(9) be attracted, and if so, to what extent?

Q11. Delta Ltd. credited the following amounts to the account of resident payees in the month of March, 2018 without deduction of tax at source. What would be the consequence of non-deduction of tax at source by Delta Ltd. on these amounts during the financial year 2017-18, assuming that the resident payees in all the cases mentioned below, have not paid the tax, if any, which was required to be deducted by Delta Ltd.?

Particulars Amount in Rs.

(1) Salary to its employees (credited and paid in March, 2018) 12,00,000(2) Directors’ remuneration (credited in March, 2018 and paid in April,

2018)28,000

Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in April, 2018 at the time of payment and remitted the same in July, 2018?

Q12. A firm has paid Rs. 7,50,000 as remuneration to its partners for the P.Y.2017-18, in accordance with its partnership deed, and it has a book profit of Rs. 10 lakh. What is the remuneration allowable as deduction?

Q13. Rao & Jain, a partnership firm consisting of two partners, reports a net profit of Rs. 7,00,000 before deduction of the following items:

(1) Salary of Rs. 20,000 each per month payable to two working partners of the firm (as authorized by the deed of partnership).

(2) Depreciation on plant and machinery under section 32 (computed) Rs. 1,50,000.

(3) Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital eligible for interest Rs. 5,00,000.

Compute:(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.(ii) Allowable working partner salary for the assessment year 2018-19 as per section 40(b).

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Q14. Hari, an individual, carried on the business of purchase and sale of agricultural commodities like paddy, wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation (APSFC) and Indian Bank and has not paid interest as detailed hereunder:

Rs.(i) Andhra Pradesh State Financial Corporation (P.Y. 2016-17 & 2017-18) 15,00,000

(ii) Indian Bank (P.Y. 2017-18) 30,00,00045,00,000

Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2017-18, converted the above interest payable by Hari to them as a loan repayable in 60 equal installments. During the year ended 31.3.2018, Hari paid 5 installments to APSFC and 3 installments to Indian Bank.

Hari claimed the entire interest of Rs. 45,00,000 as an expenditure while computing the income from business of purchase and sale of agricultural commodities. Discuss whether his claim is valid and if not what is the amount of interest, if any, allowable.

Q15. Vinod is a person carrying on profession as film artist. His gross receipts from profession are as under:

Financial year 2014-15 Rs. 1,15,000Financial year 2015-16 Rs. 1,80,000Financial year 2016-17 Rs. 2,10,000What is his obligation regarding maintenance of books of accounts for Assessment Year 2018-19 under section 44AA of Income-tax Act, 1961?

Q16. Mr. Praveen engaged in retail trade, reports a turnover of Rs. 1,98,50,000 for the financial year 2017-18. His income from the said business as per books of account is computed at Rs. 13,20,000. Retail trade is the only source of income for Mr. Praveen.is Mr. Praveen eligible to opt for presumptive determination of his income chargeable to tax for the assessment year 2018-19?

(i) If so, determine his income from retail trade as per the applicable presumptive provision.(ii) In case Mr. Praveen does not opt for presumptive taxation of income from retail trade, what

are his obligations under the Income-tax Act, 1961?

What is the due date for filing his return of income under both the options?

Q17. Mr. X commenced the business of operating goods vehicles on 1.4.2017. He purchased the following vehicles during the P.Y.2017-18. Compute his income under section 44AE for A.Y.2018-19.

Type of Vehicle Number Date of purchase(1) Light Goods Vehicles 2 10.4.2017

1 15.3.2018(2) Medium Goods Vehicles 3 16.7.2017

1 2.1.2018(3) Heavy Goods Vehicles 2 29.8.2017

1 23.2.2018

Would your answer change if the two light goods vehicles purchased in April, 2017 were put to use only in July, 2017?

Q18. Miss Vivitha, a resident and ordinarily resident in India, has derived the following income from various operations (relating to plantations and estates owned by her) during the year ended 31-3-2018:

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S.No.

Particulars Rs.

(i) Income from sale of centrifuged latex processed from rubber plants grown in Darjeeling.

3,00,000

(ii) Income from sale of coffee grown and cured in Yercaud, Tamil Nadu.

1,00,000

(iii) Income from sale of coffee grown, cured, roasted and grounded, in Colombo. Sale consideration was received at Chennai.

2,50,000

(iv) Income from sale of tea grown and manufactured in Shimla. 4,00,000(v) Income from sapling and seedling grown in a nursery at

Cochin. Basic operations were not carried out by her on land.

80,000

You are required to compute the business income and agricultural income of Miss Vivitha for the assessment year 2018-19.

Q19. Mr. Abhimanyu is engaged in the business of generation and distribution of electric power. He always opts to claim depreciation on written down value for income-tax purposes. From the following details, compute the depreciation allowable as per the provisions of the Income-tax Act, 1961 for the assessment year 2018-19:

(Rs. in lacs)(i) Opening WDV of block (15% rate) 42(ii) New machinery purchased on 12-10-2017 10(iii) Machinery imported from Colombo on 12-4-2017. 9

This machine had been used only in Colombo earlier and the assessee is the first user in India.

(iv) New computer installed in generation wing of the unit on 15-7-2017 2

Q20. Examine with reasons, the allowability of the following expenses incurred by Mr. Manav, a wholesale dealer of commodities, under the Income-tax Act, 1961 while computing profit and gains from business or profession for the Assessment Year 2018-19.

(i) Construction of school building in compliance with CSR activities amounting toRs. 5,60,000.

(ii) Purchase of building for setting up a warehousing facility for storage of food grains amounting to Rs. 4,50,000.

(iii) Interest on loan paid to Mr. X (a resident) Rs. 50,000 on which tax has not been deducted. The sales for the previous year 2016-17 was Rs. 202 lakhs.

(iv) Commodities transaction tax paid Rs. 20,000 on sale of bullion.

Q21. Examine with reasons, for the following sub-divisions, whether the following statements are true or false having regard to the provisions of the Income-tax Act, 1961:

(i) For a dealer in shares and securities, securities transaction tax paid in a recognized stock exchange is permissible business expenditure.

(ii) Where a person follows mercantile system of accounting, an expenditure ofRs. 25,000 has been allowed on accrual basis and in a later year, in respect of the said expenditure, assessee makes the payment of Rs. 25,000 through a cheque crossed as “& Co.”, disallowance of Rs. 25,000 under section 40A(3) can be made in the year of payment.

(iii) It is mandatory to provide for depreciation under section 32 of the Income-tax Act, 1961, while computing income under the head “Profits and Gains from Business and Profession”.

(iv) The mediclaim premium paid to GIC by Mr. Lomesh for his employees, by a draft, on 27.12.2017 is a deductible expenditure under section 36.

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(v) Under section 35DDA, amortization of expenditure incurred under eligible Voluntary Retirement Scheme at the time of retirement alone, can be done.

(vi) An existing assessee engaged in trading activities, can claim additional depreciation under section 32(1)(iia) in respect of new plant acquired and installed in the trading concern, where the increase in value of such plant as compared to the approved base year is more than 10%.

Q22. Examine, with reasons, the allowability of the following expenses under the Income-tax Act, 1961 while computing income from business or profession for the Assessment Year 2018-19:

(i) Provision made on the basis of actuarial valuation for payment of gratuity Rs. 5,00,000. However, no payment on account of gratuity was made before due date of filing return.

(ii) Purchase of oil seeds of Rs. 50,000 in cash from a farmer on a banking day.(iii) Tax on non-monetary perquisite provided to an employee Rs. 20,000.(iv) Payment of Rs. 50,000 by using credit card for fire insurance.(v) Salary payment of Rs. 2,00,000 outside India by a company without deduction of tax.(vi) Payment made in cash Rs. 30,000 to a transporter in a day for carriage of goods

Q23. Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account

for the year ended 31st March, 2018:

Trading and Profit and Loss Account for the year ended 31.03.2018Particulars Rs. Particulars Rs.

To Opening stock 90,000 By Sales 1,12,11,500To Purchases 1,10,04,000 By Closing stock 1,86,100To Gross Profit 3,03,600 -

1,13,97,600 1,13,97,600To Salary 60,000 By Gross profit b/d 3,03,600Particulars Rs. Particulars Rs.To Rent and rates 36,000 By Income from UTI 2,400To Interest on loan 15,000To Depreciation 1,05,000To Printing & stationery 23,200To Postage & telegram 1,640To Loss on sale of shares (Short term)

8,100

To Other general expenses 7,060To Net Profit 50,000

3,06,000 3,06,000

Additional Information:(i) It was found that some stocks were omitted to be included in both the Opening and Closing

Stock, the values of which were:

Opening stock Rs. 9,000Closing stock Rs. 18,000(ii) Salary includes Rs. 10,000 paid to his brother, which is unreasonable to the extent of

Rs. 2,000.(iii) The whole amount of printing and stationery was paid in cash by way of one time payment.(iv) The depreciation provided in the Profit and Loss Account Rs. 1,05,000 was based on the

following information:The written down value of plant and machinery is Rs. 4,20,000 as on 01.04.2017. A new plant falling under the same block of depreciation was bought on 1.7.2017 for

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Rs. 70,000. Two old plants were sold on 1.10.2017 for Rs. 50,000.(v) Rent and rates includes sales tax liability of Rs. 3,400 paid on 7.4.2018.(vi) Other general expenses include Rs. 2,000 paid as donation to a Public Charitable Trust.You are required to advise Mr. Sivam whether he can opt for presumptive taxation under section 44AD and if so, whether it would be beneficial for him to declare income as per section 44AD. Assume that he has not opted for presumptive taxation scheme in any earlier previous year. Also, assume that the whole of the amount of turnover received by account payee cheque or use of electronic clearing system through bank account during the previous year.

Q24. Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1st April, 2017, he owns 10 trucks (out of which 6 are heavy goods vehicles). On 2nd May, 2017, he sold one of the heavy goods vehicles and purchased a light goods vehicle on 6th May, 2017. This new vehicle could however be put to use only on 15th June, 2017.Compute the total income of Mr. Sukhvinder for the assessment year 2018-19, taking note of the following data:

Particulars Rs. Rs.Freight charges collected 12,70,000Less : Operational expenses 6,25,000Depreciation as per section 32 1,85,000Other office expenses 15,000 8,25,000Net Profit 4,45,000Other business and non- business income 70,000

Q25. Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2018:

Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2018Particulars Rs. Particulars Rs.

To Opening Stock 71,000 By Sales 2,32,00,000To Purchase of Raw Materials

2,16,99,000 By Closing stock 2,00,000

To Manufacturing Wages & Expenses

5,70,000

To Gross Profit 10,60,0002,34,00,000 2,34,00,000

To Administrative charges 3,26,000 By Gross Profit 10,60,000To State VAT penalty 5,000 By Dividend from domestic

companies15,000

To State VAT paid 1,10,000 By Income from agriculture (net)

1,80,000

To General Expenses 54,000To Interest to Bank (On machinery term loan)

60,000

To Depreciation 2,00,000To Net Profit 5,00,000

12,55,000 12,55,000Following are the further information relating to the financial year 2017-18:(i) Administrative charges include Rs. 46,000 paid as commission to brother of the assessee.

The commission amount at the market rate is Rs. 36,000.(ii) The assessee paid Rs. 33,000 in cash to a transport carrier on 29.12.2017. This amount is

included in manufacturing expenses. (Assume that the provisions relating to TDS are not

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applicable to this payment)(iii) A sum of Rs. 4,000 per month was paid as salary to a staff throughout the year and this

has not been recorded in the books of account.(iv) Bank term loan interest actually paid upto 31.03.2018 was Rs. 20,000 and the balance was

paid in October 2018.(v) Housing loan principal repaid during the year was Rs. 50,000 and it relates to residential

property occupied by him. Interest on housing loan was Rs. 23,000. Housing loan was taken from Canara Bank. These amounts were not dealt with in the profit and loss account given above.

(v) Depreciation allowable under the Act is to be computed on the basis of following information:

Plant & Machinery (Depreciation rate @ 15%) Rs.Opening WDV (as on 01.04.2017) 12,00,000Additions during the year (used for more than 180 days) 2,00,000Total additions during the year 4,00,000Note: Ignore additional depreciation under section 32(1)(iia)Compute the total income of Mr. Raju for the assessment year 2018-19.

Q26. Shri Hitesh furnishes you the following revenue statement for the year ended 31st March, 2018.

Rs. Rs.To Opening Stock 10,000 By Sales 6,20,000To Purchases 5,30,000 By Closing stock 5,000To Rent 25,000 By Interest on securities 23,000To Office expenses 12,000 By Net loss 8,000 To Interest on borrowing 60,000To Interest on capital 10,000 To Donation 4,000 To Income tax 5,000 _________ Rs.6,56,000 6,56,0001. You are informed that purchases include cost of moped Rs.15,000, cost of computer

Rs.15,000, assets were put into use during the year and were eligible for depreciation at 25%.

2. Office expenses include Rs.1,000 relating to school fees of Hitesh’s son. Rent for office premises is paid to the landlord, Mrs. Hitesh.

3. Interest on borrowing is entirely in respect of money raised to invest in securities.4. His capital account shows a credit of Rs.6,000 being amount recovered from Mahesh who

was a customer whose balance was written off as bad debt in earlier years and in respect off which allowance was availed of in those years. Compute taxable business income.

Q27. Following is the Account of receipts and payments of Dr. Doshi of “MANAS CLINIC” for the year ended 31st March 2018

Receipts & Payments A/c for the year ended 31st March, 2018 Receipts Rs. Payments Rs.

To Balance B/f By Salaries 44,000 Cash-in-hand 1,500 By Bonus to staff 4,400 Cash-with-Bank 3,000 4,500 By Printing & stationery 13,600 To Consulting Fees 1, 85,000 By Rent of Clinic To Visit fees 14,500 (paid to wife) 12,000To Gift from patients 6,000 By Electricity 11,150To Winnings from By Car expenses 30,000 horse races 10,000 By Drawings 48,000To Amount received By Donations 18,000 under Life By Purchase of equipments 12,000 insurance Policy 30,000 By Misc. Expenses 12,000 By Balance c/d

Cash-in-hand 2,600 Cash with Bank 4,850

2,50,000 2,50,000

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1. Rs.6,000 is considered as a reasonable rent of the clinic.2. Misc. expenses are incurred for personal purposes.3. Half of the car expenses are for personal use.4. Depreciation allowable according to Income-tax Act on all assets is Rs.4,000.Compute

income from business or profession of Dr. Doshi .

HOME WORK PROBLEMSQ1. State with reasons, the deductibility or otherwise of the following expenses/payments

under the Income-tax Act, 1961, while computing income under the head “Profits and gains of business or profession” for the Assessment Year 2018-19:

(i) Rs. 120 crore invested in new plant & machinery by ABC Ltd., a manufacturing company, during P.Y. 2017-18.

(ii) Murugan paid Rs. 75,000 as commodity transaction tax in respect of sale of commodity derivatives during the previous year 2017-18.

(iii) Deenu & Co. has set up a warehousing facility for storage of food grains. It commenced operations on 01.04.2017. For this purpose, Deenu & Co. incurred capital expenditure of Rs. 50 lakhs on purchase of building in March 2018.

(iv) Clean (P) Ltd. incurred an amount of Rs. 2,50,000 on a notified project to enhance skill development of its employees.

Q2. M/s. Amla Ltd., a manufacturing concern, furnishes the following particulars for the P.Y. 2017-18:

Rs. (in crore)

(i) Opening written down value of plant and machinery (15% block) 50.00

(ii) Purchase of plant and machinery (put to use on 10.09.2017) 106.00

(iii) Sale proceeds of plant and machinery which became obsolete- the plant and machinery was purchased on 01- 04-2014 for Rs. 0.50 crore.

0.20

Further, out of purchase of plant and machinery:(a) Plant and machinery of Rs. 0.30 crore has been installed in office.

(b) Plant and machinery of Rs. 0.20 crore was used previously for the purpose of business by the seller.

Compute the depreciation, additional depreciation under section 32 and amount of deduction under section 32AC as per Income-tax Act, 1961 for the Assessment Year 2018-19.

Q3. Mr. Jagat engaged in retail trade, reports a turnover of Rs. 82,46,000 for the financial year 2017-18. His income from the said business as per books of account is computed at Rs. 5,85,600. Retail trade is the only source of income for Mr.Jagat.

(i) Is Mr. Jagat eligible to opt for presumptive taxation of his income chargeable to tax for the assessment year 2018-19?

(ii) If so, determine his income from retail trade as per the applicable presumptive provision.

(iii) In case Mr. Jagat does not opt for presumptive taxation of income from retail trade, what are his obligations under the Income-tax Act, 1961?

(iv) What is the due date for filing his return of income under both the options?

Q4. State with reasons, the deductibility or otherwise of the following expenses/payments under the Income-tax Act, 1961, while computing income under the head “Profits and gains of business or profession” for the Assessment Year 2018-19:

(i) Rs. 70 crore and Rs. 30 crore invested in new plant & machinery by ABC Ltd., a manufacturing company, during P.Y. 2016-17 and 2017-18, respectively.

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(ii) MNO Ltd. paid Rs. 2,50,000 as technical fees to a non-resident on which tax is deducted during the previous year 2017-18 but deposited on 31.8.2018.

(iii) Bus & Train Pvt. Ltd. incurred Rs. 1,80,000 towards CSR Expenditure during the previous year 2017-18.

(iv) XYZ Ltd. has not deducted tax at source on the amount of Rs. 7,50,000 paid as annual salary to Mr. Raghav, an employee of the company during the previous year 2017-18. Mr. Raghav has not furnished any declaration to his employer regarding any investment made by him or any other income earned or loss incurred by him for the previous year 2017-18.

(v) Rise & Co. has set up a warehousing facility for storage of sugar. It commenced operations on 01.04.2017. In July 2017, Rise & Co. incurred capital expenditure of Rs. 72 lakhs on purchase of building.

Would your answer be different, if the company has set up a warehousing facility of food grain?

Q5. Mr. Varun is engaged in the business of manufacturing of spare parts. From the following details, compute the depreciation allowable as per the provisions of the Income-tax Act, 1961 for the assessment year 2018-19:

( Rs. in lacs)(i) Opening WDV of block (15% rate) 49(ii) New machinery purchased on 18-11-2017 18(iii) Machinery imported from California on 21-5-2017. 12

This machine had been used only in California earlier and the assessee is the first user in India.

(iv) New computer installed in manufacturing unit on 15-7-2017 6

Q6. Mr. Gamma, a proprietor started a business of manufacture of tyres and tubes for motor vehicles on 1.1.2017. The manufacturing unit was set up on 1.5.2017. He commenced his manufacturing operations on 1.6.2017. The total cost of the plant and machinery installed in the unit is Rs. 120 crore. The said plant and machinery included second hand plant and machinery bought for Rs. 20 crore and new plant and machinery for scientific research relating to the business of the assessee acquired at a cost of Rs. 15 crore.Compute the amount of depreciation allowable under section 32 of the Income-tax Act, 1961 in respect of the assessment year 2018-19.

Q7. A car purchased by Dr. Soman on 10.08.2014 for Rs. 5,25,000 for personal use is brought into professional use on 1.07.2017 by him, when its market value was Rs. 2,50,000.Compute the actual cost of the car and the amount of depreciation for the assessment year 2018-19 assuming the rate of depreciation to be 15%.

Q8. Mr. Praveen Kumar has furnished the following particulars relating to payments made towards scientific research for the year ended 31.3.2018:

Sl. No. Particulars ( Rs. in lacs)

(i) Payments made to K Research Ltd. 20(ii) Payment made to LMN College 15(iii) Payment made to OPQ College 10(iv) Payment made to National Laboratory 8(v) Machinery purchased for in-house scientific research 25(vi) Salaries to research staff engaged in in-house scientific

research12

Note: K Research Ltd. and LMN College are approved research institutions and these payments are to be used for the purposes of scientific research.

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Compute the amount of deduction available under section 35 of the Income-tax Act, 1961 while arriving at the business income of the assessee.

Q9. Mr. Suraj, a proprietor, commenced operations of the business of a new three-star hotel in Madurai, Tamil Nadu on 1.4.2017. He incurred capital expenditure of Rs. 50 lakh during the period January, 2017 to March, 2017 exclusively for the above business, and

capitalized the same in his books of account as on 1st April, 2017. Further, during the P.Y.2017-18, he incurred capital expenditure of Rs. 2 crore (out of which Rs. 1.50 crore was for acquisition of land) exclusively for the above business.Compute the income under the head “Profits and gains of business or profession” for the A.Y.2018-19, assuming that he have fulfilled all the conditions specified for claim of deduction under section 35AD and has not claimed any deduction under Chapter VI-A under the heading “C. – Deductions in respect of certain incomes”. The profits from the business of running this hotel (before claiming deduction under section 35AD) for the A.Y.2018-19 is Rs. 25 lakhs. Assume that he also have another existing business of running a four-star hotel in Coimbatore, which commenced operations ten years back, the profits from which are Rs. 120 lakhs for the A.Y.2018-19. Also, assume that expenditure incurred during the previous year 2017-18 are by account payee cheque or use of ECS through bank account.

Q10. During the financial year 2017-18, the following payments/expenditure were made/ incurred by Mr. Yuvan Raja, a resident individual (whose turnover during the year ended 31.3.2017 was Rs. 99 lacs) :

(i) Interest of Rs. 12,000 was paid to Rehman & Co., a resident partnership firm, without deduction of tax at source;

(ii) Rs. 3,00,000 was paid as salary to a resident individual without deduction of tax at source;

(iii) Commission of Rs. 16,000 was paid to Mr. Vidyasagar on 2.7.2017 without deduction of tax at source.

Briefly discuss whether any disallowance arises under the provisions of section 40(a)(ia) of the Income-tax Act, 1961.

Q11. An assessee owns a light commercial vehicle for 9 months 15 days, a medium goods vehicle for 9 months and a medium goods vehicle for 12 months during the previous year. Compute his income applying the provisions of section 44AE.

Q12. Mr. Venus., engaged in manufacture of pesticides, furnishes the following particulars relating to its manufacturing unit at Chennai, for the year ending 31-3-2018:

( Rs. in lacs)Opening WDV of Plant and Machinery 20New machinery purchased on 1-9-2017 10New car purchased on 1-12-2017 8Computer purchased on 3-1-2018 4

Additional information:• All assets were put to use immediately.• Computer has been installed in the office.• During the year ended 31-3-2017, a new machinery had been purchased on 31-10-2016, for

Rs. 10 lacs. Additional depreciation, besides normal depreciation, had been claimed thereon.

• Depreciation rate for machinery may be taken as 15%.Compute the depreciation available to the assessee as per the provisions of the Income- tax Act, 1961 and the WDV of different blocks of assets as on 31-3-2018.

Q13. Examine with reasons, whether the following statements are true or false, with regard to the provisions of the Income-tax Act, 1961:

(a) Payment made in respect of a business expenditure incurred on 16th February, 2018 for Rs. 25,000 through a cheque duly crossed as “& Co.” is hit by the provisions of section

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40A(3).(b) (i) It is a condition precedent to write off in the books of account, the amount due from

debtor to claim deduction for bad debt.

(ii) Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B, inter alia, from the amounts payable to a resident as rent or royalty, will result in disallowance while computing the business income where the resident payee has not paid the tax due on such income.

Q14. Mr. Tenzingh is engaged in composite business of growing and curing (further processing) coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant information pertaining to the year ended 31.3.2018 are given below:

Particulars Rs.WDV of car as on 1.4.2017 3,00,000WDV of machinery as on 1.4.2017 (15% rate) 15,00,000Expenses incurred for growing coffee 3,10,000Expenditure for curing coffee 3,00,000Sale value of cured coffee 22,00,000Besides being used for agricultural operations, the car is also used for personal use; disallowance for personal use may be taken at 20%. The expenses incurred for car running and maintenance are Rs. 50,000. The machines were used in coffee curing business operations.

Compute the income arising from the above activities for the assessment year 2018-19. Show the WDV of the assets as on 1.4.2018.

Q15. Mr. Abhayhas furnished the following particulars relating to payments made and expenditure incurred towards scientific research for the year ended31.3.2018:

Sl. No.

Particulars

Rs. (in lakhs)

(i) Payments made to an approved Agro Research Association

25

(ii) Payment made to RR University, an approved University

15

(iii) Payment made to XY College 17(iv) Payment made to IIT, Madras (under an

approved programme for scientific research)10

(v) Machinery purchased for in-house scientific research

20

(vi) Salaries to research staff engaged in in-house scientific research

14

Compute the deduction available under section 35 of the Income-tax Act, 1961 for A.Y. 2018-19, while computing his income under the head “Profits and gains of business or profession”.

Q16. State with reasons, whether the following expenses are allowable as deduction while computing income from business or profession for the Assessment Year 2018-19, and if so, the amount allowable as deduction:

(i) Expenditure of Rs. 75,000 incurred by A Ltd. on skill development project in the manufacturing sector.

(ii) Expenditure of Rs. 50,000 incurred by Mr. X on agricultural extension project.

(iii) Rs. 15 lakh and Rs. 5 lakh, respectively, incurred on purchase of land and building by Z Ltd., being expenditure incurred on in-house research and development facility approved by the prescribed authority.

(iv) Rs. 20 lakh incurred by B Ltd. in March, 2018 for purchase of building for setting up and operating a warehousing facility for storage of sugar. B Ltd. commenced operations on 1.04.2013.

(v) Expenditure of Rs. 20 lakh incurred by Y Ltd. during the previous year 2017-18 on payment to its employees in accordance with a scheme of voluntary retirement.

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Q17. X Ltd. is engaged in the business of manufacture of computer hardware since 1995. During the previous year 2017-18 the following assets are acquired and put to use-

(Rs. in thousand)Block 1 Block 2 Block 3

Rate of depreciation 15% 30% 60%Number of assets in the block 11 12 17Depreciated value of the block on April 1, 2017 18,00 25,00 5,00Additions of plants (new) during the Previous year 2017-18Plant A 57,00 -- --Plant B -- 4,00 --Plant C -- -- 17,00Sale of old plants (one plant in each block) 8 28,70 42,00

Plant A, B and C are acquired during May 2017 and put to use during September 2017. However, Plant B is put to use in the last week of March 2018. Find out the amount of depreciation, additional depreciation and capital gains.

Q18 Following is the Profit and Loss Account of Mr. Yogendra for the year ended 31st March 2018. Profit and Loss A/c for the yearn ended 31st March 2018.

Particulars Rs. Particulars Rs.To Office Exp. 36,000 By Gross Profit 1,54,000To Advertisement 10,000 By Winning from Lottery 9,000To Selling Exp 28,000 By Dividend from UTI 3,000To General Exp. 5,000 By Interest on Tax-free RBI Bonds 8,500To Depreciation 18,000 By Income Tax Refund

(Including int. Rs.2,000)4,500

To Sales Tax Penalty 2,000 By Interest on Bank Fixed Deposit 14,000To Donation 10,000To Provision for Gratuity 15,000To Income Tax 15,000To Salary to Yogendra 6,000To Net Profit 48,000

1,93,0000 1,93,000

Additional Information:1. Advertisement Includes Rs.2,000 paid to local political party as advertisement charges in

their annual souvenir.2. Selling Expenses includes a Single Payment of Commission by bearer cheque amounting

to Rs.22,0003. General Expenses pertains to expenditure incurred for tuition fees of Mr. Yogendra’s son,

pusuing MBA at I.I.M., Indore.4. Office salaries includes Rs. 2,000 paid as Diwali Bonus to Employees 5. depreciation as per income tas is Rs. 15,000.

Compute Taxable Business Income of Mr. Yogendra for Assessment Year 2018-19.

Q19. Shri Nayak is a leading Chartered Accountant of Bombay. He banks all his receipts and makes all the payments by cheques. His receipts and payments account for the year ended 31-3-2018 is as under:

RECIEPTS RS. PAYMENTS RS.To Balance b/d 7,500 By Salaries 47,500To Professional fees 2,67,500 By Telephone exp. 5,800To Salary as a part-time By Rent (office) 4,500 lecturer in a college 50,000 By Subscription 5,450To Rent received from By Car expenses 9,000 rented house 22,500 By Office expe. 16,350 To Received from his By Purchase of computer 30,000 father’s HUF being By Advance tax 40,000 his share 15,140 By Donations 10,000

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To Prize received from By Personal drawings 82,500 Lions Club for best By Exp. For rented house: member of the year 5,000 Municipal taxes paid 5,000 Repairs 1,500 Insurance of building 1,600 Rent collection charges 2,200 __________ By Balance c/fd 1,06,240 Rs. 3,67,640 Rs. 3,67,6401. Depreciation on computer is allowed at 25%2. It is considered that 1/3rd of the car expenses are for personal use.3. Shri Nayak stays in his own bungalow. Its gross annual value is Rs.8,000. In respect of his

bungalow, he has paid Rs.2,400 municipal taxes, interest Rs.6,000 on money borrowed for its construction.These expenses are included in his drawings. Determine the Income from profession of Shri Nayak for A.Y. 2018-19.

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