prefits and gains-7

8/14/2019 Prefits and Gains-7

http://slidepdf.com/reader/full/prefits-and-gains-7 1/52

57Applied Direct Taxation

STUDY NOTE - 7

PROFITS AND GAINS OF BUSINESS OR PROFESSION

This Study Note includes

• Definition of Business and Profession

• Chargeability of Income From Profits and Gains of Business or Profession

• Various Provisions of the Income Tax Act for computation of income under thehead “Profits and Gains of Business or Profession”

INTRODUCTION

Income from Business and from Profession constitutes maximum chunk of taxable income.this is an important head of income. Elaborate provisions are made to govern computationmechanism. The sections under this Chapter have been categorised as under:-

Section

Terms Defined 2

Chargeability 28

Computation 29

Admissible Expenses 30 to 37

Inadmissible Expenses 40, 40A

Deduction on Actual Payment Basis 43B

Deemed Profit 41

Accounts & Audit Provision 44AA, 44AB

Special Provisions 44 to 44D

Other Provisions 42,43A, 43C & 43D

Definition 2(11), 2(13), 2(36), 43

Method of Accounting 145, 145A

7.1 DEFINITION OF BUSINESS AND PROFESSION

BUISNESS [Sec. 2(13)]

Definition of “Business” includes any trade, commerce or manufacture or any adventure orconcern in the nature of trade, commerce or manufacture.

Certain terms used in the definition can be understood as follows:




(iv) Profits on sale of REP licence / Exim scrip, Cash Assistance received or receivable againstexports, and Duty drawback of customs or excise, received or receivable against exports.[Secs. 28(iiia), (iiib) and (iiic)]

(v) The value of any benefit or perquisite, whether convertible into money or not, arisingfrom business or in exercise of a profession. [Sec. 28(iv)]

(vi) Any interest, salary, bonus, commission or remuneration due to or received by a partnerof a firm from the firm to the extent it is allowed to be deducted from the firm’s income.[Sec. 28(v)]

Any interest, salary, etc. which is not allowed to be deducted u/s. 40(b), the income of thepartners shall be adjusted to the extent of the amount so disallowed. [Sec. 28(v) Proviso]

(vii) Any sum received or receivable in cash or in kind under an agreement for not carrying outactivity in relation to any business, or not to share any know-how, patent, copyright,trademark, licence, franchise or any other business of commercial right of, similar nature

or information or technique likely to assist in the manufacture or processing of goods orprovision for services except when such sum is taxable under the head ‘capital gains’ or isreceived as compensation from the multilateral fund of the Montreal Protocol on Substancesthat Deplete the Ozone Layer[ Sec. 28(va)]

(viii) Any sum (including bonus) received under a Key man Insurance Policy referred to insection. 10(10D). [Sec. 28(vi);]

In the context of computation of income under the head profits and gains of Business orProfession, the following points may be noted :

(a) Profits chargeable to tax are computed on the basis of commercial principles includinggenerally accepted accounting principles and practices.

(b) Only profits or gains are liable to income-tax and not mere gross receipts. Capital receiptsand Capital expenditures are not generally to be taken into account while computing profitsunder this section unless it expressly provides in the provisions of the Income Tax Act.

(c) Taxable profits or gains should be real and not notional. Anticipated losses are not providedfor and unrealized gains are not considered except in case of stock valuation which isvalued at lower of cost or market price.

(d) Profits and gains arises to Business or Profession carried on by the assessee are computedin relation to a time period which is covered by a previous year.

It is not necessary that Business or Profession should be carried on throughout the PreviousYear. However, as an exception, the following incomes are taxable by virtue of express provisions

under the Act even if no business was carried on during the Previous Year.(i) Recovery against any loss, expenditure or trading liability earlier allowed as deduction.

[sec. 41(1)]

(ii) Balancing charge i.e. profits or gains from sale of a building, machinery, plant orfurniture owned by a power undertaking. [Sec. 41(2)]

(iii) Profits and gains from sale of capital asset used for scientific research. [Sec. 41(3)]



Applied Direct Taxation60

Profits and Gains of Business or Profession

(iv) Recovery against bad debt. [Sec. 41(4)]

(v) Amount withdrawn from special reserve. [Sec. 41(4A)]

(vi) Profits and gains from transfer of the Business or interest in the petroleum and naturalgas business. [Sec. 42(2)]

(vii) Any sum received after the discontinuance of a business. [Sec. 176(3A), Sec. 176(4)]

e) Profits and gains can not arise by trading with oneself.

f) Taxability of an income depends on its source. Thus, profits and gains that arise to anassessee during the Previous Year may not be taxed under the head Business orProfession, its taxability depends on source.For example :

(i) Profits from activity of purchasing and selling real estate properties is taxable underthe head “Profits and gains of Business or Profession”. However, rental income fromany of such properties is taxable under the head “Income from House Property”.

(ii) Interest on securities held as investment is charged to tax under the head “Incomefrom Other Sources”. However, interest on securities held as stock-in-trade is chargedunder the head “Profits and gains of Business or Profession”.

(g) Profits and gains from illegal business are also chargeable to Income-tax under this head.

(h) Income from letting or exploiting of commercial assets is charged under the head Businessor Profession but the intention of the assessee should be to treat the asset as commercialasset.

For example, if the asset is purchased with the intention of letting it out without using it in business, income there from is chargeable under the head “Other Sources”.

Case Law :

(i) ‘Business’ must be construed in broad sense - The word ‘business’ is one of wide importand in fiscal statutes, it must be construed in a broad rather than a restricted sense - MazagaonDock Ltd. v. CIT 34 ITR 368 (SC).

7.3 MODE OF COMPUTATION OF INCOME FROM BUSINESS ORPROFESSION

[Sec.29]

Section 29 states that income referred to in section 28 shall be computed in accordance with theprovisions contained in sections 30 to 43D and in accordance with the method of accountingregularly employed by the assessee under section 145 of the Income-tax Act. w.e.f. AssessmentYear 1997-98 income from Business or Profession shall be computed in accordance with themethod of accounting regularly employed by the assessee either by mercantile system or cashsystem. Further Profits and Gains of Business or Profession are required to be computed inaccordance with accounting standards which the Central Government may notify from time to




time. By notification number 9949 dated 25.1.96 the Central Government has since notifiedAccounting Standard-1 relating to disclosure of accounting policies and Accounting Standard-2 to relating to disclosure of prior period and extraordinary items and changes in accounting

policies.Once a method of accounting is followed by the assessee in computing income from Businessor Profession, it cannot be changed unless the change is for bonafide reasons and not a casualdeparture from the regular method.

In computing income under the head “Profits and Gains of Business or Profession” apart fromcomplying with the provisions of section 145, an assessee needs to comply with the provisionsof section 145A w.e.f. assessment year 1999-2000 in respect of valuation of purchase and sale of goods and inventory.

In computing income from Business or Profession, revenue expenses paid or incurred for thepurpose of business are allowed as per provisions of the Income Tax Act unless there is anyspecific provision to allow capital expenditure.

“Paid” means actually paid or incurred according to the method of accounting upon the basisof which the profits or gains are computed under the head “Profits and Gains of Business orProfession”

Case Laws:

(i) Profits are ascertainable even before venture is completed - It is not a correct propositionto say that the profits of the assessee can be ascertained only on the completion of theadventure. Profits can be computed even if a particular trade adventure is not completed- P.M. Mohammed Meerakhan v. CIT 73 ITR 735.

(ii) Rebate allowed must be excluded - The real profit of a businessman under section 10(1) of the 1922 Act cannot obviously include the amounts returned by him by way of rebate tothe consumers under statutory compulsion - Poona Electric Supply Co. Ltd. v. CIT 57 ITR521.

(iii) Mere fact that income is partially exempt is not relevant for allowing expenditure - If theexpenditure was laid out or expended for the purpose of the business carried on by theassessee, the fact that the income arising from a part of that business is not eligible to taxunder the Act is not a relevant circumstance - CIT v. Maharashtra Sugar Mills Ltd. 82 ITR452 /Punjab State Co-operative Supply & Marketing Federation Ltd. v. CIT 128 ITR 189/CIT v. C. Parakh & Co. (India) Ltd. 29 ITR 661 /CIT v. Indian Bank Ltd. 56 ITR 77 .

(iv) The assessee Company in the case had claimed the said expenditure as a capital expenditureand only for the computation purpose it considered as revenue expenses. The Supreme

case held that the Mill is a plant under section 31(1) and expenditure on replacement of machines per se may not be allowed as a deduction u\s 31(1), the said expenditure is thusallowed as deduction under section 37(1). CIT vs Saravana Spinning Mills Ltd 293ITR 201(SC).





Expenses which are allowed as deduction [Sections 30 to 37]

RENT, RATES, TAXES, REPAIRS AND INSURANCE FOR BUILDINGS [Sec. 30]

In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed—

(a) where the premises are occupied by the assessee—

(i) as a tenant, the rent paid for such premises ; and further if he has undertaken to bearthe cost of repairs to the premises, the amount paid on account of such repairs ;

(ii) otherwise than as a tenant, the amount paid by him on account of current repairs tothe premises ;

(b) any sums paid on account of land revenue, local rates or municipal taxes ;

(c) the amount of any premium paid in respect of insurance against risk of damage ordestruction of the premises.

REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE [Sec. 31]

In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed—

(i) the amount paid on account of current repairs thereto ;

(ii) the amount of any premium paid in respect of insurance against risk of damage ordestruction thereof

Case Law :

(i) Repairs which are not current repairs can be considered under section 37(1) - Repairswhich are not ‘current repairs’ should be considered for deduction on general principles

or under section 37(1) - CIT v. Kalyanji Mavji & Co. 122 ITR 49 /CIT v. I.C.I. (India) (P.)Ltd. 139 ITR 105.

DEPRECIATION [Sec. 32]

Depreciation is the diminution in the value of an asset due to normal wear and tear or due toobsolescence. In order to allow depreciation as notional expenses in computing profits andgains of Business or Profession , the following conditions are to be fulfilled;

(i) There must be assets : It may be classified into two types.

(a) Tangible assets :- Buildings, machinery plant or furniture.

(b) Intangible assets:- Know-how, patents, copy rights, trademarks, licences, franchise

or any other business or commercial right of similar nature acquired on or after 1stApril, 1998.

(ii) Such asset should be owned, wholly or partly, by the assessee : Ownership does notnecessarily mean legal ownership. Assessee will be treated as owner if he is capable of enjoying the right of the owner in respect of asset in his own right and not on behalf of theowner in whom title vests even though a formal deed of title has not been executed and




registered (Mysore minerals, Ltd. vs. CIT[(1999) 239 ITR 775(SC)]. In case of a building inwhich Business or Profession is carried on is not owned by the assessee but he holds alease or other right of occupancy though he is not entitled to depreciation on the building,

depreciation is allowed on the capital expenditure incurred for the purposes of Businessor Profession on construction of any structure or renovation etc.

(iii) Such asset should be used for purposes of Business or Profession.

Case Laws:

(i) Deduction is allowable even according to accounting principles - Depreciation is allowableas a deduction both according to accountancy principles and according to the IndianIncome-tax Act, because otherwise, one would not have a true picture of the real incomeof the business - CIT v. Alps Theatre 65 ITR 377 .

(ii) Calculation must be in Indian currency - A company may keep its accounts in foreigncurrency but depreciation will have to be calculated in Indian currency at the point of timeof acquisition of the asset - CESC Ltd. v. CIT 233 ITR 50.

(iii) Roads inside factory are ‘buildings’ - The roads laid within the factory premises as links orwhich provide approach to the buildings are necessary adjuncts to the factory buildings tocarry on the business activities of the assessee and would be ‘building’ within the meaningof section 32 - CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. 62 Taxman 471/196 ITR 149 .

Depreciation allowance is calculated on the following method :-

(i) Straight line method : In the case of assets of an undertaking engaged in generation orgeneration and distribution of power, such percentage on the actual cost thereof to theassessee as prescribed by rule 5(1A) and appendix 1A to the Income Tax Rules, 1962 w.e.f.1.4.1998.

However, the aggregate depreciation allowed in respect of any asset for different assessment

years shall not exceed the actual cost of the asset. Further, such an undertaking may opt fordepreciation on the written down value method at rates prescribed in appendix 1 of the I.T.Rules. The option shall be exercised before the due date for furnishing the return. Once suchoption is exercised, it shall be final and shall apply to all the subsequent AY. [Sec. 32(1)(i)]

(ii) Written down value method : Under this method depreciation is calculated on the writtendown value of a block of assets at the prescribed rates appearing in appendix 1 of the I.T.Rules. [Sec. 32(1)(ii)]

BLOCK OF ASSETS [Sec. 2(11) AND EXPLANATION 3 TO SECTION 32] :

It means a group of assets falling within a class of assets comprising,

(i) Tangible assets :- Buildings, machinery, plant or furniture;(ii) Intangible assets:- Know-how, patents, copyright, trademarks, licences, franchises or any

other business or commercial rights of similar nature in respect of which same percentageof depreciation has been prescribed.





WRITTEN DOWN VALUE [Sec. 43(6)]

(i) In case of assets acquired in the Previous Year, written down value is the actual cost to the

assessee.(ii) In case of assets acquired before the Previous Year :- Written down value is the actual cost

of the asset to the assessee as reduced by depreciation actually allowed to him in respect of such asset under this Act.

(iii) In case of any block of assets :- Written down value of the block of asset is computed as perthe following mechanism.

Rs.Written down value of the block of assets at the beginning of the current Previous Year. ***

Add: Actual cost of assets falling within that block, acquiredduring the Previous Year. ***

Less: Moneys payable and scrap value if any, in respect of asset sold/discarded/demolished destroyed during thePrevious Year ***

Written down value ***

(iv) In case of block of assets when there is a slump sale:– In accordance with section 2(42C),“slump sale” means the transfer of one or more undertakings as a result of the sale forlump sum consideration without values being assigned to the individual assets andliabilities in such sales.

Written down value in case of slump sale is computed as per the following mechanism.

Rs.Written down value of the entire block at the beginning of the relevant Previous Year. ***

Add: Actual cost of assets falling within that block, acquiredduring the Previous Year. ***

***Less: Moneys payable and scrap value if any, in respectof asset sold/discarded/demolished/destroyed duringthe Previous Year ***

***Less: Actual cost of the asset falling within that block asreduced by amount of depreciation actually allowed to suchasset, but it should not exceed the written down value of the block as at the end of the Previous Year in itcannot be negative. ***

Written down value in case of slump sale. ***




(v) Written down value in case of demerged company [Explanation 2A of Sec. 43(6)]:

Written down value of resulting company= Written down value of assets prior to demerger

shall be reduced by the written down value of assets transferred pursuant to demerger.

(vi) Written down value in case of resulting company [Explanation 2B to Sec. 43(6)]

Written down value of resulting company = Written down value of assets as appearing in

the books of the demerged company before the

demerger.

(vii) Written down value in case of corporatisation [Explanation Sec. 5 to Sec. 43(6)]

Written down value of a company undera scheme of corporatisation approved by SEBI = Written down value of the transferred

asset by a recognised stock exchange inIndia immediately before such transfer.

Note: Written down value cannot be negative i.e. it shall be reduced to ‘nil’ in the followingsituations :

(a) Where the block of assets ceases to exist i.e., all the assets of the block are transferred.(b) Where a part of the block is sold and the sale consideration of the assets sold exceeds the

value of the block.

Case Laws:

(i) Meaning of ‘actually allowed’ - The expression ‘actually allowed’ is unambiguous and

connotes the idea that the allowance was actually given effect to - CIT v. Straw ProductsLtd. 60 ITR 156 /CIT v. Dharampur Leather Co. Ltd. 60 ITR 165 .

(ii) Year in which asset is acquired is not relevant - There is no merit in the contention thatsection 43A(1) will come into operation only in respect of a year subsequent to the year inwhich the asset is acquired. - CIT v. Arvind Mills Ltd. 193 ITR 255.

MONEYS PAYABLE [EXPLANATION TO SEC. 41]

Moneys payable in respect of any building, machinery, plant and furniture includes

(a) any insurance, salvage or compensation moneys payable in respect thereof;

(b) where the building, machinery plant or furniture is sold, the price for which it is sold.

DEPRECIATION MANDATORYExplanation 5 to Sec. 32 inserted by the Finance Act, 2001 w.e.f. 1.4.2002, it is clarified that thedepreciation provisions shall apply, whether or not the assessee has claimed the deduction inrespect of depreciation in computing his total income.

ADDITIONAL DEPRECIATION :

Sec. 32(1)(iia) has been inserted by the Finance Act, 2002 w.e.f. from Assessment Year 2003-04





to provide additional depreciation @20% of the actual cost of new machinery and plant (otherthan ships and air craft) which has been acquired and installed after the 31.3.2002 by an assesseeengaged in the business of manufacture or production of any article or thing provided that

such further deduction of 20% shall be allowed to :(i) a new industrial undertaking during any Previous Year in which such undertaking begins

to manufacture or produce any article or thing on or after 1.4.2002. or

(ii) any industrial undertaking existing before the 1.4.2002, during any Previous Year in whichit achieves the substantial expansion by way of increase in installed capacity by not lessthan 25% provided further that no deduction shall be allowed in respect of:-

(a) any machinery or plant which, before its installation by the assessee was used eitherwithin or outside India by any other person; or

(b) any machinery or plant installed in office premises for any residential accommodationincluding accommodation in the nature of a guest house; or

(c) any office appliances or road transport vehicles; or

(d) any machinery or plant, the whole of the actual cost which is allowed as deduction(whether by way of depreciation or otherwise) in computing the income chargeableunder the head “Profits and gains of Business or Profession” of any one PreviousYear .

Additional depreciation as per section 32(1)(iia) is available on furnishing the details of machinery or plant and increase in the installed capacity of production in the prescribed formalong with the returned income and the report of an accountant as defined in the explanation below subsection (2) of section 288 certify that the deduction has been correctly cleaned inaccordance with the provisions of this clause.

DEPRECIATION AT REDUCED RATE

Where an asset referred in clause (i) or clause (iii) as the case may be, is acquired by the assesseeduring the Previous Year and is put to use for the purposes of Business or Profession for lessthan 180 days in that Previous Year, the depreciation allowable in respect of such asset shall berestricted to 50% of the normal rate.

TERMINAL DEPRECIATION [Sec. 32(1)(III)]

When an asset being building, machinery, plant or furniture used by an undertaking engagedin generation or generation and distribution of power in respect of which depreciation is claimedand allowed under clause (i) of section 32 and which is sold, discarded, demolished or destroyedin 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 scrapvalue, if any, fall short of written down value thereof, shall be written off as depreciation in theyear in which such asset is sold, discarded etc. provided that such deficiency is actually writtenoff in the books of the assessee.




BALANCING CHARGE U/S. 41(2)

On the other hand, if money payable in respect of such asset which is sold/discarded, etc.together with the amount of scrap value, if any exceeds written down value, then the excess to

the extent of difference between the actual cost and written value (i.e. depreciation allowed)shall be chargeable to income-tax as income of the business of the Previous Year as balancingcharge .

Case Law:

(i) Moneys’ will denote only cash, and not ‘money’s worth’ - It is obvious that the Legislaturehas deliberately used the word ‘moneys’. Wherever the Legislature intended to refer topayment in kind other than cash or money, it has taken care to provide specifically therefor.There are several sections in the Act which refer to benefits other than cash though thevalue thereof can be ascertained in terms of cash or benefits which are convertible in cash.When the Legislature has instead of using any word such as ‘benefit’ used only the term‘money’, it can refer only to money as understood in the ordinary common parlance. Hence,the word ‘money’ used in section 41(2) has to be interpreted only as actual money or cash,and not as any other thing or benefit which could be evaluated in terms of money - CIT v.Kasturi & Sons Ltd. 103 Taxman 342/237 ITR 24 .

PROPORTIONATE DEPRECIATION

In the following cases, depreciation is allowed on proportionate basis where in any PreviousYear, there is :-

(a) Succession of a partnership firm by a company [u/s. 47(xiii)] or

(b) Succession of a proprietary concern by a company [u/s. 47(xiv)]

(c) Succession of any business other than on death [u/s. 170] or

(d) Amalgamation of company [u/s. 2(1B)] or

(e) Demerger of any company [u/s. 2(19AA)]

ASSET IS PARTLY USED FOR BUSINESS, PARTLY FOR PERSONAL PURPOSES[Sec. 38(2)]

If any asset is partly used for business and partly for personal purposes, depreciation u/s.32(1)(ii) shall be restricted to a fair proportionate part thereof which the Assessing Officer maydetermine having regard to the user of such assets (building, machinery, plant or furniture) forthe purposed of business or profession.

UNABSORBED DEPRECIATION [Sec. 32(2)]

Unabsorbed depreciation shall be treated as part of the current year depreciation suchunabsorbed depreciation can be set off not only against income under “Profits and gains of Business or Profession” but also against income under any other head. Unabsorbed depreciationcan be carried forward indefinitely and the business need not be continued in order to get the benefit of carry forward of unabsorbed depreciation.It is also presumed that unabsorbed depreciation brought forward from assessment year 2001-02 (including those relating to earlier assessment years) would be eligible for set off against





business income subject to the time limit of eight (8) assessment years as was provided inerstwhile sub section 2 of section 32 prior to substitution of new section 32(2) in the FinanceAct, 2001.

SECTION 43(1) — ACTUAL COST

Rs.Total cost price of the asset ***Less: Amount met by any authority or other person by way of subsidy or grant either directly or indirectly. Even if the subsidyor grant or reimbursement is of such nature that it cannot bedirectly relate to the asset acquired, so much of the amountwhich bears to the total amount so met the same proportion assuch asset bears to all the assets in respect of which or withreference to which the amount is so received shall beexcluded – Sec. 43(1) and Explanation 10 thereunder ***

Add:1. Interest on loan borrowed for acquiring the asset, payableupto the date of commencement of production (as per thedecision of Supreme Court in Ms. Challappali Sugars Ltd.vs. CIT, 98 ITR 167) ***2. Expenses incurred for acquiring the assete.g. freight, insurance, loading, unloading etc. ***3. Expenses incurred in connection with the installationof the asset eg. technician fees for erection,platform erection cost, etc., ***

Actual Cost ***

DETERMINATION OF “ACTUAL COST” IN CERTAIN SPECIFIC CIRCUMSTANCES

Expl. to Mode of acquisition Actual costS.43(1)

1. Asset acquired for scientific research subsequently Actual cost less deduction availed brought into business use. 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 Actual cost to bedetermined by thefor his Business or Profession with a view to claim Assessing Officer with the prior

depreciation on enhanced cost and reduce tax liability. approval of JointCommissioner.

4 Asset transferred by the assessee and reacquired The WDV at the time of original by him. transfer or the price paid for

re-acquiring the asset whichever isless.




4A Asset acquired by an assessee from another person The written down value of thegiven on lease to the same person who had earlier asset to the transferor at theclaimed depreciation on such asset. time of transfer to the

assessee.5 Building used for private purpose subsequently The cost of purchase or

brought into business use. construction of the building asreduced by the notionaldepreciation calculated upto theyear of bringing the asset to business use at therate applicable to that year.

6 Asset transferred by a holding Co. to its subsidiary Co. WDV to the transferoror by a Subsidiary Co. to holding co. if the following company willtwo conditions are satisfied:- be adopted as the actual cost to

the transferee company.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.

7 Transfer of asset in a scheme of amalgamation by WDV to the amalgamatingamalgamating company to amalgamated Indian company will be adopted as thecompany. actual cost to the amalgamated .

company.

7A Asset transferred by a demerged company to the Actual cost shall be the writtenresulting Indian company. down value in the hands of the

demerged company.

8 Asset acquired out of borrowed funds. Interest on loan borrowedrelating to the period after theasset is first put to use shallnever form part of actual cost.

9 Asset acquired subject to levy of excise duty or So much of the duty in respectcustoms duty. of which a claim of credit has

been made and allowed underthe Central Excise Rules, 1944shall not form part of the actualcost.

10 A portion of the cost of an asset acquired is met So much of the cost as isindirectly by Government or any statutory authority relatable toor any other person in the form of a subsidy or grant such subsidy or grant oror reimbursement. reimbursement shall not form

part of the actual cost. If it is notdirectly relatable to the assetacquired,





11 Asset brought into India by a Non-resident Actual cost as reduced by theassessee for use in his Business or Profession. amount of depreciation

notionally calculated at the rate

in force as if the asset wasused in India since the date of acquisition.

12 Any capital asset acquired under a scheme for The amount which would havecorporatisation of a recognised stock exchange in been regarded as actual costIndia, approved by SEBI. had there been no such

corporatisation shall bedeemed to be the actual cost.

Case Laws :

(i) Cost must be to the owner and not to the seller - The cost to be calculated for the purposeof depreciation allowance is the cost to the assessee and not the person who makes the sale- Jogta Coal Co. Ltd. v. CIT 36 ITR 521 .

(ii) Interest for pre-production period - Interest paid before the commencement of productionon amount borrowed by the assessee for the acquisition and installation of plant andmachinery forms part of the ‘actual cost’ - Challapalli Sugars Ltd. v. CIT 98 ITR 167.

DEPRECIATION CHART [APPENDIX-I TO THE INCOME TAX RULES, 1962]

A. TANGIBLE ASSETS

I. Building Rate of Deprn.

(%)

1 Building other than those covered by sub-item (3) below which

are used mainly for residential purposes. 5

2 Building which are not used mainly for residential purposes and

which are not covered by sub-item (3) below 10

3. Purely temporary erections such as wooden structures 100

II. Furniture and fittings

5. Furniture and fittings used in hotels, restaurants and boarding houses;

schools, colleges and other educational institutions; libraries, welfarecentres; meeting halls; cinema houses; theatres and circuses; and

furniture and fittings let out on hire for use on the occasion of

marriages and similar functions 10

6. Other furniture and fittings 10




III. Machinery and Plant

7. Motor cars, other than those used in a business of running them on hire,

acquired or put to use on or after the 1.4.1990. 15

8. Motor buses, Motor lorries and Motor taxis used in a business of

running them on hire 30

9. New commercial vehicle acquired on or after 1.4.2001, and is put to use

before the 1.4.2002 for the purposes of business or profession. 50

10. Aeroplane- Aeroengines; Motor buses, motor lorries and motor taxis

used in a business of running them on hire; Moulds used in rubber and

plastic goods factories; Machinery and plant, used in semi-conductor

industry covering all integrated circuits. 40

11. Containers made of glass or plastic used as re-fills 50

12. Computers 6014. Air pollution control equipments; Water Pollution Control

Equipments; Wooden parts used in artificial silk manufacturing

machinery; Cinematograph films, bulbs of studio lights; Energy

saving devices; Flour mills- Rollers; Gas Cylinders including valve

and regulators; Glass manufacturing concerns- Direct fire glass

melting furnaces; Iron and steel industry- Wooden match frames;

Mineral oil concern; Salt works- Salt pans, reservoirs and

condensers, etc., made of earthy, sandy or clayey material or any

other similar material; Sugar works- Rollers; Renewal energy devices,

Books owned by assessees carrying on a profession, Books owned

by assessees carrying on business in running lending libraries. 100

IV. Ships

1. Ocean-going ships including dredgers, tugs, barges, survey

launches and other similar ships used mainly for dredging purposes

and fishing vessels with wooden hull 20

2. Vessels ordinarily operating on inland waters, not covered by sub-item

(3) below 20

3. Vessels ordinarily operating on inland waters being speed boats 20

B. INTANGIBLE ASSETS

Know-how, patents, copyrights, trademarks, licenses, franchisesor any other business or commercial rights of similar nature. 25





Notes:

1. “Building” includes roads, bridges, culverts, wells and tube wells.

2. A building shall to be a deemed building used mainly for residential purposes, if the built-up floor area thereof used for residential purposes is not less than sixty-six and two-thirdper-cent of its built-up floor area and shall include any such building in the factory premises.

3. In respect of any structure or work by way of renovation or improvement in or in relationto a building referred to in Explanation 1 of clause (ii) of sub-section (1) of section 32. thepercentage to be applied will be the percentage specified against sub-item (1) or (2) of item1 as may be appropriate to the class of building in or in relation to which the renovation orimprovement is effected. Where the structure is constructed or work is done by way of extension of any such building, the percentage to be applied would be such percentage aswould be appropriate, as if the structure or work constitute a separate building.

4. Water treatment system includes system for destination, demineralization and purification

of water.5. “Electrical fittings” include electrical wiring, switches, sockets, other fittings and fans, etc.

6. “Commercial vehicle” means “heavy goods vehicle”, “heavy passenger motor vehicle”,“light motor vehicle”, medium goods vehicle”, and medium passenger motor vehicle” but does not include “maxi-cab”, “motor-cab”, “tractor” and “road –roller”. The expressions“heavy goods vehicle”, “heavy passenger motor vehicle”, “light motor vehicle”, mediumgoods vehicle”, “medium passenger motor vehicle”, “maxi-cab”, “motor-cab”, “tractor”and “road –roller” shall have the meanings respectively as assigned to them in section 2 of the Motor vehicles Act, 1988 (59 of 1988).

7. ”Computer software” means any computer programme recorded on any disc, tape,

perforated media or other information storage device.8. “TUFS” means Technology Up gradation Fund Scheme announced by the Government of

India in the Form of a Resolution of the Ministry of the Textiles vide No. 26 1/99-CTI of 31.31.1999.

9. Machinery and Plants includes pipes needed for delivery from the source of supply of rawwater to the plant and from the plant to the storage facility.

“Speed boat” means a motor boat driven by a high speed internal combustion engine capableof propelling the boat at a speed exceeding 24 kilometer per hour in still water and so designedthat when running at a speed, it will plain, i.e. its bow will rise from the water.

Additional depreciation:Additional depreciation is applicable on all assessee engaged in the business of manufacture orproduction of any article or thing, subject to the following conditions:

Assessee must be an industrial undertaking, which manufactures or produces any article orthing.

Assessee acquired and installed after 31st March 2005, a new plant or machinery.




Assessee furnishes –

(i) the details of plant and machinery and increased in installed capacity of production inForm 3AA along

(ii) with the return income; and the report of a chartered accountant certifying that thededuction has been correctly claimed in accordance with the provisions of this clause.

20% is the rate of additional depreciation, however, if the asset is acquired & put to use for lessthan 180 days then rate of depreciation will be considered as 10% of actual cost.

Case Laws:

(i) Deduction is allowable even according to accounting principles - Depreciation is allowable as adeduction both according to accountancy principles and according to the Indian Income-tax Act, because otherwise, one would not have a true picture of the real income of the business - CIT v. Alps Theatre 65 ITR 377 .

(ii) Roads inside factory are ‘buildings’ - The roads laid within the factory premises as links orwhich provide approach to the buildings are necessary adjuncts to the factory buildings tocarry on the business activities of the assessee and would be ‘building’ within the meaningof section 32 - CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. 62 Taxman 471/196 ITR 149.

INVESTMENT ALLOWANCE [Sec.32A]

In respect of a ship or an aircraft or machinery or plant specified in sub-section (2), which isowned by the assessee and is wholly used for the purposes of the business carried on by him,there shall, in accordance with and subject to the provisions of this section, be allowed adeduction, in respect of the previous year in which the ship or aircraft was acquired or themachinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in

the immediately succeeding previous year, then, in respect of that previous year, of a sum byway of investment allowance equal to twenty-five per cent of the actual cost of the ship, aircraft,machinery or plant to the assessee

INVESTMENT DEPOSIT ACCOUNT [Sec.32AB]

Subject to the other provisions of this section, where an assessee, whose total income includesincome chargeable to tax under the head “Profits and gains of business or profession”, has, outof such income,—

(a) deposited any amount in an account (hereafter in this section referred to as deposit account)maintained by him with the Development Bank before the expiry of six months from theend of the previous year or before furnishing the return of his income, which-ever isearlier; or

(b) utilised any amount during the previous year for the purchase of any new ship, new aircraft,new machinery or plant, without depositing any amount in the deposit account underclause (a),

in accordance with, and for the purposes specified in, a scheme (hereafter in this section referredto as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Tea





Board, the assessee shall be allowed a deduction [(such deduction being allowed before theloss, if any, brought forward from earlier years is set off under section 72)]of—

(i) a sum equal to the amount, or the aggregate of the amounts, so deposited and any amount

so utilised; or

(ii) a sum equal to twenty per cent of the profits of business or profession as computed in theaccounts of the assessee audited in accordance with sub-section (5), whichever is less :

DEVELOPMENT REBATE [Sec.33]

(1)(a) In respect of a new ship or new machinery or plant (other than office appliances or roadtransport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of thissection and of section 34, be allowed a deduction, in respect of the previous year in which theship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is

first put to use in the immediately succeeding previous year, then, in respect of that previousyear, a sum by way of development rebate as specified in clause (b).

(b) The sum referred to in clause (a) shall be—

(A) in the case of a ship, forty per cent of the actual cost thereof to the assessee;

(B) in the case of machinery or plant,—

(i) where the machinery or plant is installed for the purposes of business of construction,manufacture or production of any one or more of the articles or things specified in thelist in the Fifth Schedule,—

(a) thirty-five per cent of the actual cost of the machinery or plant to the assessee,where it is installed before the 1st day of April, 1970, and

(b) twenty-five per cent of such cost, where it is installed after the 31st day of March,1970;

(ii) where the machinery or plant is installed after the 31st day of March, 1967, by anassessee being an Indian company in premises used by it as a hotel and such hotel isfor the time being approved in this behalf by the Central Government,—



(iii) where the machinery or plant is installed after the 31st day of March, 1967, being anasset representing expenditure of a capital nature on scientific research related to the business carried on by the assessee,—






(iv) in any other case,—(a) twenty per cent of the actual cost of the machinery or plant to the assessee, where

it is installed before the 1st day of April, 1970, and

(b) fifteen per cent of such cost, where it is installed after the 31st day of March,1970.](1A)(a) An assessee who, after the 31st day of March, 1964, acquires any ship which before thedate of acquisition by him was used by any other person shall, subject to the provisions of section 34, also be allowed as a deduction a sum by way of development rebate at such rate orrates as may be prescribed, provided that the following conditions are fulfilled, namely :—

(i) such ship was not previous to the date of such acquisition owned at any time by anyperson resident in India;

(ii) such ship is wholly used for the purposes of the business carried on by the assessee;and

(iii) such other conditions as may be prescribed.

(b) An assessee who installs any machinery or plant (other than office appliances or roadtransport vehicles) which before such installation by the assessee was used outside India by any other person shall, subject to the provisions of section 34, also be allowed as adeduction a sum by way of development rebate at such rate or rates as may be prescribed,provided that the following conditions are fulfilled, namely :—

(i) such machinery or plant was not used in India at any time previous to the date of such installation by the assessee;

(ii) it is imported in India by the assessee from any country outside India;

(iii) no deduction on account of depreciation or development rebate in respect of such

machinery or plant has been allowed or is allowable under the provisions of the IndianIncome-tax Act, 1922 (11 of 1922), or this Act in computing the total income of anyperson for any period prior to the date of the installation of the machinery or plant bythe assessee;

(iv) such machinery or plant is wholly used for the purposes of the business carried on bythe assessee; and

(v) such other conditions as may be prescribed.

(c) The development rebate under this sub-section shall be allowed as a deduction in respectof the previous year in which the ship was acquired or the machinery or plant was installedor, if the ship, machinery or plant is first put to use in the immediately succeeding previousyear, then, in respect of that previous year.]

(2) In the case of a ship acquired or machinery or plant installed after the 31st day of December,1957, where the total income of the assessee assessable for the assessment year relevant tothe previous year in which the ship was acquired or the machinery or plant installed orthe immediately succeeding previous year, as the case may be (the total income for thispurpose being computed without making any allowance under sub-section (1) [or sub-section (1A)] [of this section or sub-section (1) of section 33A] [or any deduction under





Chapter VI-A is nil or is less than the full amount of the development rebate calculated atthe rate applicable thereto under [sub-section (1) or sub-section (1A), as the case may be],—

(i) the sum to be allowed by way of development rebate for that assessment year under

sub-section (1) [or sub-section (1A)] shall be only such amount as is sufficient to reducethe said total income to nil; and

(ii) the amount of the development rebate, to the extent to which it has not been allowedas aforesaid, shall be carried forward to the following assessment year, and thedevelopment rebate to be allowed for the following assessment year shall be suchamount as is sufficient to reduce the total income of the assessee assessable for thatassessment year, computed in the manner aforesaid, to nil, and the balance of thedevelopment rebate, if any, still outstanding shall be carried forward to the followingassessment year and so on, so however, that no portion of the development rebateshall be carried forward for more than eight assessment years immediately succeedingthe assessment year relevant to the previous year in which the ship was acquired or

the machinery or plant installed or the immediately succeeding previous year, as thecase may be.

Explanation.—Where for any assessment year development rebate is to be allowed in accordancewith the provisions of sub-section (2) in respect of ships acquired or machinery or plant installedin more than one previous year, and the total income of the assessee assessable for thatassessment year (the total income for this purpose being computed without making anyallowance under sub-section (1) [or sub-section (1A)] [of this section or sub-section (1) of section33A] [or any deduction under Chapter VI-A ) is less than the aggregate of the amounts due to be allowed in respect of the assets aforesaid for that assessment year, the following procedureshall be followed, namely :—

(i) the allowance under clause (ii) of sub-section (2) shall be made before any allowanceunder clause (i) of that sub-section is made; and

(ii) where an allowance has to be made under clause (ii) of sub-section (2) in respect of amounts carried forward from more than one assessment year, the amount carriedforward from an earlier assessment year shall be allowed before any amount carriedforward from a later assessment year.

(3) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfersto the amalgamated company any ship, machinery or plant in respect of which developmentrebate has been allowed to the amalgamating company under sub-section (1) or sub-section(1A),—

(a) the amalgamated company shall continue to fulfil the conditions mentioned in sub-section (3) of section 34 in respect of the reserve created by the amalgamating companyand in respect of the period within which such ship, machinery or plant shall not besold or otherwise transferred and in default of any of these conditions, the provisionsof sub-section (5) of section 155 shall apply to the amalgamated company as theywould have applied to the amalgamating company had it committed the default; and




(b) the balance of development rebate, if any, still outstanding to the amalgamatingcompany in respect of such ship, machinery or plant shall be allowed to theamalgamated company in accordance with the provisions of sub-section (2), so,

however, that the total period for which the balance of development rebate shall becarried forward in the assessments of the amalgamating company and theamalgamated company shall not exceed the period of eight years specified in sub-section (2) and the amalgamated company shall be treated as the assessee in respectof such ship, machinery or plant for the purposes of this section and section 34.

(4) Where a firm is succeeded to by a company in the business carried on by it as a result of which the firm sells or otherwise transfers to the company any ship, machinery or plant,the provisions of clauses (a) and (b) of sub-section (3) shall, so far as may be, apply to thefirm and the company.

(5) The Central Government, if it considers it necessary or expedient so to do, may, by

notification in the Official Gazette, direct that the deduction allowable under this sectionshall not be allowed in respect of a ship acquired or machinery or plant installed after suchdate, not being earlier than three years from the date of such notification, as may be specifiedtherein.

(6) Notwithstanding anything contained in the foregoing provisions of this section, nodeduction by way of development rebate shall be allowed in respect of any machinery orplant installed after the 31st day of March, 1965, in any office premises or any residentialaccommodation, including any accommodation in the nature of a guest-house.

DEVELOPMENT ALLOWANCE [Sec.33A]

In respect of planting of tea bushes on any land in India owned by an assessee who carries on

business of growing and manufacturing tea in India, a sum by way of development allowanceequivalent to—

(i) where tea bushes have been planted on any land not planted at any time with tea bushesor on any land which had been previously abandoned, [fifty] per cent of the actual cost of planting; and

(ii) where tea bushes are planted in replacement of tea bushes that have died or have becomepermanently useless on any land already planted, [thirty] per cent of the actual cost of planting,

shall, subject to the provisions of this section, be allowed as a deduction [in the manner specifiedhereunder, namely :—

(a) the amount of the development allowance shall, in the first instance, be computed withreference to that portion of the actual cost of planting which is incurred during the previousyear in which the land is prepared for planting or replanting, as the case may be, and inthe previous year next following, and the amount so computed shall be allowed as adeduction in respect of such previous year next following; and





(b) thereafter, the development allowance shall again be computed with reference to the actualcost of planting, and if the sum so computed exceeds the amount allowed as a deductionunder clause (a), the amount of the excess shall be allowed as a deduction in respect of the

third succeeding previous year next following the previous year in which the land has been prepared for planting or replanting, as the case may be.

TEA DEVELOPMENT ACCOUNT [Sec. 33AB]

Deduction u/s. 33AB is available to any assessee who is carrying on business of growing andmanufacturing tea in India. Deduction shall be allowed to the extent of amount deposited withthe national bank for agriculture and rural development or in a tea deposit account opened bythe assessee in accordance with the scheme framed by the Tea Board within six months fromthe end of the Previous Year or before filing the return of income, whichever is earlier or 40% of the profits of such business computed under the head Profits and gains of Business or Profession,whichever is less. The accounts are required to be audited by Chartered accountant and thereport should be furnished to get the benefit under this section.

Case Law:

(i) Allowance must be in relation to income of business of growing and manufacturing tea -Tea development allowance must be in relation to the income of business of growing andmanufacturing tea, rather than in relation to taxable portion of such income and in thiscontext rule 8 has no application - CIT v. Mahavir Plantations Ltd. 269 ITR 552/ 142 Taxman538

SITE RESTORATION FUND [Sec. 33ABA]

The amount deposited in site restoration fund including interest thereon or 20% of profits,whichever is less, in case of an assessee carrying on business of prospecting for, or extraction orproduction of, petroleum or prospecting for, or extraction or production of, petroleum or natural

gas or both in India. The accounts are required to be audited and furnish of such report in form3AD is necessary to avail the deduction.

DEDUCTION FOR SHIPPING COMPANIES [Sec. 33AC]

A Government company or a public company registered in India with the main object of carryingon the business of operation of ships can claim deduction in respect of amount transferred to aspecial reserve account. The amount of deduction is to the extent of amount transferred to thespecial reserve account or 100% of the profit (for Assessment Years 2001-02 to 2005-06) derivedfrom the business of operation of ships only whichever is less. If the aggregate amount transferredto the reserve account from time to time exceeds twice the paid of capital, then deduction willnot be allowed in respect of the excess amount excluding the amount capitalised from reservesas issue of bonus shares.The reserve must be utilised for acquiring new ships within a period of 8 years from the end of the Previous Year in which it is created. The ship so acquired should not be transferred for aperiod of eight years from the end of the Previous Year in which it is acquired.




Tax implications in case of violation of conditions stated supra :-

(i) The reserve is used for any purpose other The amount so utilised is chargeable

than the specified purpose within eight years. to tax in the year of such utilisation.(ii) The reserve is not used for acquiring The amount will be taxed in the yearships within 8 years. immediately following the period of 8 yrs.

(iii) The new ship acquired is transferred within The amt. utilised for acquiring charged toa period ship will be of 8 yrs. other than in tax in the yr. in which the ship is trfd.any scheme of demerger.

Tax incidence restricted to amount utilized out of Reserve account for acquisition of ship[ Section 33AC]

(1) Under section 33AC, a shipping company is allowed a specified deduction in respect of amounts credited to a reserve account to be utilised for acquiring a new ship. The acquisition

of a new ship is generally financed by debt as well as internal accruals. These internalaccruals could be from general reserves or special reserves created for this purpose .

(2) Sub-section (4) provides that if a company sells or transfers the ships after the three yearslock in period and the sale proceeds are not utilised for the purpose of acquiring a newship within a period of one year from the end of the previous year in which such sale ortransfer took place, the sale proceeds are deemed to be the profits of the assessment yearimmediately following the previous year in which the ship was sold or transferred.

(3) As per the existing provisions, where a new ship is acquired by a shipping company byutilising both reserves and borrowed capital and the ship is sold or transferred, the wholeof the sale proceeds would be subject to tax. This implies that both borrowed capital andamount withdrawn from reserves would bear the burden of tax. However, the real intentis to restrict the incidence of the tax on the amount utilised from the reserve account foracquiring the ship.

(4) Sub-section (4) of section 33 AC has been amended to clarify this position whereby only somuch of the sale proceeds which represent the amount credited to the reserve account andutilised (Effective retrospectively from A.Y. 2004-05).

Rehabilitation allowance[Sec . 33B]

Where the business of any industrial undertaking carried on in India is discontinued in anyprevious year by reason of extensive damage to, or destruction of, any building, machinery,plant or furniture owned by the assessee and used for the purposes of such business as a directresult of—

(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature ; or

(ii) riot or civil disturbance ; or

(iii) accidental fire or explosion ; or

(iv) action by an enemy or action taken in combating an enemy (whether with or without adeclaration of war),





and, thereafter, at any time before the expiry of three years from the end of such previous year,the business is re-established, reconstructed or revived by the assessee, he shall, in respect of the previous year in which the business is so re-established, reconstructed or revived, be allowed

a deduction of a sum by way of rehabilitation allowance equivalent to sixty per cent of theamount of the deduction allowable to him under clause (iii) of sub-section (1) of section 32 inrespect of the building, machinery, plant or furniture so damaged or destroyed

EXPENDITURE ON SCIENTIFIC RESEARCH [Sec. 35]

“Scientific Research” means any activities for the extension of knowledge in the filed of naturalor applied sciences including agriculture, animal husbandry and fisheries. [Sec. 43(4)]

Expenditure incurred by the assessee

(i) Both revenue and capital expenditure incurred will be allowed as deduction provided theresearch is related to the assessee’s business or profession.

(ii) If expenditure (capital and revenue) is incurred during 3 years immediately preceding the

year of commencement of business, the entire expenses so incurred can be claimed asdeduction in the year in which the business commences. For revenue expenditure if it iscertified by the prescribed authority to the extent of payment of salary to employees engagedin scientific research and purchase of raw material used in scientific research can be claimedas deduction. Prescribed authority for this purpose is Director General (Income-taxexemptions) in concurrence with the Secretary, Department of Scientific and IndustrialResearch Government of India. [Rule 6(1)]

(iii) In the case of a company engaged in the business of biotechnology or manufacture orproduction of any drugs. Pharmaceutical, electronic equipment, computers,telecommunication equipment, chemicals or any other article or thing notified by the Board,deduction equal to 1½ times of the expenditure incurred on scientific research shall be

allowed. This deduction shall not be allowed in respect of expenditure incurred after31.3.2012. The expenditure on in house research and development for which deductionavailable does not include the cost of any land or building. In respect of capital expenditureallowed this section, no depreciation can be claimed u/s. 32 [Sec. 35(2AB)].

Contribution to others :-

Contribution for the purpose of research in social science or statistical research or any otherresearch will qualify for deduction even if the research is not related to the assessee’s business.Contribution to laboratory owned or financed by the Government, approved university, collegeor institution, national laboratory or a university or to Indian Institute of Technology will alsoqualify for deduction.

Deduction in respect of above contributions is sum equal to one and one fourth times of theamount so contributed. Any amount which qualifies for deduction under this section, will notqualify for deduction under any other provisions of the Income Tax Act [Sec. 35(i)(ii),(iii),35(2AA)].




Case Law:

(i) Retrospective amendment to section 35(2)(iv) by the Finance (No. 2) Act, 1980, providingthat where deduction is allowed for any previous year under section 35, no depreciation

shall be allowed under section 32 in respect of same asset for any previous year, is valid -CIT v. Hico Products (P.) Ltd. 116 Taxman 373/247 ITR 797 .

EXPENDITURE ON ACQUISITION OF PATENT RIGHT OR COPYRIGHT [Sec. 35A]

Any capital expenditure incurred on the acquisition of patent rights or copyrights before31.3.1998 used for the purpose of the business shall be allowed in equal instalments spreadover a period of 14 years beginning with the previous year in which such expenditure is incurred.Where such expenditure is incurred before the commencement of the business, the period of the years would reckon from the previous year in which the business commenced. W.e.f. 1.4.1998,assessees are required to constitute as a separate block of assets being intangible assets andclaim depreciation at the rate of 25% on written down value method.

EXPENDITURE ON KNOW-HOW [Sec. 35AB]Any lump sum consideration paid by the assessee for acquiring any know-how before 31.3.98to use for purpose of his business will be allowed as deduction by spreading it equally over 6years, namely, the year in which the lump sum consideration is paid and the 5 immediatelysucceeding years. Where the know-how is developed in a laboratory, university or institutionreferred in Sec. 32A(2B), the consideration is spread equally over 3 years. For the purpose of this section know-how means any industrial information or technique likely to assist in themanufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits including the searching for, discovery or testing of deposits or the winning of access thereto. W.e.f. 1.4.1998, assessees are required to constitute as a separate block of assets being intangible assets and claim depreciation at the rate of 25% on written down value method.

Case Law:

(i) Absolute ownership is not necessary - In order to attract the rigour of section 35AB, it maynot be necessary for the assessee to actually become absolute owner of the know-how.Even if actual title has not passed in favour of the assessee and yet he is able to run effectivelyhis business with the aid of know-how obtained by him pursuant to an agreement onpayment of consideration, then it is sufficient to attract the provisions of section 35AB -CIT v. Bright Automotives & Plastics Ltd. 141 Taxman 582.

AMORTISATION OF TELECOM LICENCE FEES [Sec. 35ABB]

Section 35ABB has been inserted w.e.f. the Assessment Year 1996-97. It provides that any capitalexpenditure incurred and actually paid by an assessee on the acquisition of any right to operate

telecommunication services by obtaining licence will be allowed as a deduction in equalinstalments over the period starting from the year in which such payment has been made andending in the year in which the licence comes to an end. Where the licence is transferred andthe proceeds of the transfer are less than the expenditure incurred remaining unallowed adeduction equal to the expenditure remaining unallowed as reduced by the proceeds of transfer,shall be allowed in respect of the previous year, in which the licence has been transferred.Further, where the licence is transferred and proceeds of the transfer exceed the amount of





expenditure incurred remaining unallowed, so much of the excess as does not exceed thededuction allowed under this section in the earlier years shall be chargeable to tax as profitsand gains of business in the previous year in which the licence has been transferred (where the

business is in existence in that year or not). No deduction shall be allowed in the Previous Yearin which the licence is transferred. It also provides for the manner of deduction of the expenditurewhere the licence is partly transferred. In a scheme of amalgamation or demerger if the licenceis transferred then the amalgamated company/resulting company would be entitled to get thededuction as that could have been availed by amalgamating company/ demerged companyhad it continued to exist.

EXPENDITURE ON ELIGIBLE PROJECTS/SCHEMES [Sec. 35AC]

Where an assessee incurs any expenditure by way of payment of any sum to a public sectorcompany or a local authority or to an association or institution approved by the nationalcommittee for carrying out any eligible project or scheme it will be allowed as deduction. Inorder to avail the deduction under this section the assessee should furnish with return of income

a certificate from the chartered accountant to that extent.

National committee can withdraw the approval granted by it to an association or institution onthe ground that the project or scheme is not being carried out in accordance with all or any of the conditions subject to which approval was granted or the notification through which a projector scheme was notified after giving reasonable opportunity. The contribution or donationreceived by the company or authority or association or institution, as the case may be, or thededuction claimed by company in respect of any expenditure incurred directly on the eligibleproject or scheme, the approval for which is withdrawn by the national committee shall bedeemed to be the income of the company or authority or association or institution as the casemay be, of the year in which such approval or notification is withdrawn w.e.f. AY 2003-04 andshall be taxed at the maximum marginal rate of tax in force for that year.

EXPENDITURE BY WAY OF PAYMENT TO ASSOCIATION AND INSTITUTION FORCARRYING OUT RURAL DEVELOPMENT PROGRAMME [Sec. 35CCA]

Where an assessee incurs any expenditure by way of payment of any sum- a) to an associationor institution engaged in any programme of rural development, or b) to an association orinstitution which undertakes training of persons for implementing any programme of ruraldevelopment or c) to National fund set up for rural development notified in this behalf by theCentral Government or to the National urban poverty Eradication fund set up and notified bythe Central Government he will be allowed a deduction of the amount of such expenditureincurred during the Previous Year.

EXPENDITURE BY WAY OF PAYMENT TO ASSOCIATIONS AND INSTITUTIONS FOR

CARRYING OUT PROGRAMMES OF CONSERVATION OF NATURAL RESOURCES[Sec. 35CCB]

Expenditure incurred on or before 31.3.2002 by way of payment to associations and institutionsfor carrying out programme of conservation of natural resources or afforestation or to anapproved fund for afforestation.




AMORTISATION OF CERTAIN PRELIMINARY EXPENSES [Sec. 35D]

The deduction is allowed under this section only in case of an Indian company or a person(other than company) resident in India. The deduction is in respect of the expenditure incurred

after 31.3.1970 and expenditure may be of the type which was incurred —

(i) before the commencement of the business, or

(ii) after the commencement of his business, in connection with the extension of existingindustrial unit.

The following expenses shall be eligible for deduction u/s. 35D(2):

(a) expenditure in connection with-

(i) preparation of feasibility report;

(ii) preparation of project report;

(iii) conducting market survey or any other survey necessary for the business of the

assessee;

(iv) engineering services relating to the business of the assessee.

(b) Legal charges for drafting any agreement between the assessee and any other person forany purpose relating to the setting up or conduct of the business of the assessee.

(c) The following expenses in case of company assessees :

(i) legal charges for drafting the Memorandum and Articles of Association of thecompany;

(ii) on printing of the Memorandum and Articles of association;

(iii) by way of fees for registering the company under the provision of the Companies

Act, 1956;(iv) in connection with the issue, for public subscription, of shares in or debentures of the

company being underwriting commission, brokerage and charges for drafting, typing,printing and advertisement of the prospectus.

(d) Such other item of expenditure (not being expenditure eligible for any allowance ordeduction under any other provision of this Act) as may be prescribed.

Mode of Deduction: Deduction of qualified amount is allowed in 5 equal instalements beginningwith the Previous Year in which the business is commenced .

Amount of expenditure qualifying for deduction :-

The aggregate amount of expenditure referred to clause (a) to (d) above shall not exceed 5%cost of project if such expenditure incurred after 1.4.1998. But in case of an Indian company, 5%of the cost of the project or 5% of the capital employed at the option of the company.

“Capital employed” means the aggregate of issued capital debentures and long term borrowings(repayable during a period of not less that 7 years) as on the last day of relevant Previous Year.The qualifying amount of preliminary expenditure is allowed as deduction over a period of 5years in equal installments.





In case of an Indian company under amalgamation/demerger, no deduction shall be allowedto amalgamating/demerged company for the Previous Year in which amalgamation/demergertakes place. Deduction is allowed to the amalgamated company/ resulting company in the

same manner as allowable to amalgamating/demerged company. Audit of accounts is necessaryfor claiming deduction where accounts are not audited under any other law.

Case Law:

(i) Share premium, whether ‘Capital employed’ - Premium collected by assessee-company onits subscribed share capital is not ‘capital employed in business of company’ within meaningof section 35D - Berger Paints India Ltd. v. CIT 154 Taxman 293.

AMORTISATION OF EXPENDITURE IN CASE OF AMALGAMATION OR DEMERGER[Sec. 35DD]

Where an Indian company incurs any expenditure on or after 1.4.1999, wholly and exclusivelyfor the purposes of amalgamation or demerger of an undertaking, the assessee company is

allowed deduction in respect of such expenditure over a period of five years equally beginningwith the Previous Year in which amalgamation or demerger takes place.

AMORTISATION OF EXPENDITURE INCURRED UNDER VOLUNTARY RETIREMENTSCHEME [Sec. 35DDA]

Where any expenditure is incurred by way of compensation to an employee under VRS inaccordance with any scheme is allowed deduction over a period of 5 years equally from theyear in which compensation is paid. W.e.f. Assessment Year 2001-02 inserted by the FinanceAct, 2002 to provide that where an undertaking of an Indian company, entitled to deductionfor amortisation of voluntary retirement expenses, is transferred before the expiry of the periodspecified to another Indian company in a scheme of amalgamation or demerger, the deductionshall continue to be available to the amalgamated company or the resulting company as if the

amalgamation or demerger had not taken place.

In case of reorganisation of certain form of business where by a firm for a proprietary concernis succeeded by a company, the deduction shall continue to be available to the successorcompany. Deduction is not available to amalgamating company or demerged company or tothe firm or proprietary concern, as the case may be, in the year of transfer.

DEDUCTION FOR EXPENDITURE ON PROSPECTING Etc. FOR CERTAIN MINERALS[Sec. 35E]

Where an assessee being a Indian company or a person other than a company who is residentin India, is engaged in any operation relating to prospecting for, extraction or production of any mineral and incurs after 31.3.1970 any expenditure during the period of 5 years ending

with the year of commencement of commercial production is allowed as deduction over aperiod of 10 years in equal installments.

Auditing of Accounts : The accounts of the assessee have got to be audited by a qualifiedchartered accountant and a copy of the audited report is to be sent as an accompaniment to thereturn of income. Companies and cooperative societies getting their accounts audited ordinarilyneed not get them audited specifically for this purpose.




Expenses amortised not deductible : Expenses which are included for amortisation will not bededucted while computing business profit or loss under any other section of this Act.

OTHER DEDUCTIONS [Sec. 36]

The deduction provided for in the following clauses shall be allowed in respect of the mattersdealt with therein, in computing the income referred to in Sec. 28.

INSURANCE PREMIUM FOR STOCK AND STORES [Sec. 36(1)(I)]

The amount of any insurance premium paid in respect of insurance against risk of damage ordestruction of stocks or stores used for the purpose of the Business or Profession.

PREMIUM PAID BY FEDERAL MILK COOPERATIVE SOCIETY [Sec. 36(1)(IA)]

A federal milk cooperative will be allowed deduction in respect of any premium paid by ittowards an insurance policy in the life of cattle owned by a member of a primary cooperativesociety, which is engaged in supply of milk (raised by its members) to the federal milk

cooperative society.PREMIUM FOR EMPLOYEES’ HEALTH INSURANCE [Sec. 36(1)(IB)]

The amount of any premium paid by any mode of payment other than cash by the assessee asan employer to effect or to keep in force an insurance on the health of his employees under ascheme in this behalf by the General Insurance Corporation of India and approved by theCentral Government.

BONUS OR COMMISSION TO EMPLOYEES [Sec. 36(1)(II)]

Any sum paid to an employee as bonus or commission for services rendered is deductibleprovided it would not otherwise be payable to him as profits or dividend, before due datesubject to section 43B.

Case Law:

(i) Progressive and liberalistic approach is necessary - It is high time that the administrationof our tax law recognised it and encouraged sharing of profits by employers with employees by adopting a progressive and liberal approach in the applicability of section 36, sub-section (1) clause (ii) - Shahzada Nand & Sons v. CIT 108 ITR 358.

INTEREST ON BORROWED CAPITAL [Sec. 36(1)(III)]

The amount of the interest paid in respect of capital borrowed for the purposes of the businessor profession subject to section 43B.

Case Laws:

(i) Diversion of borrowals to sister concerns - Borrowed fund advanced to a third party should be for commercial expediency, if it is sought to be allowed under section 36(1)(iii).

The assessee borrowed fund from bank and advanced part of it to its sister concern (a subsidiary)as interest-free loan. The Assessing Officer disallowed interest under section 36(1)(iii) on borrowings to extent those were advanced to subsidiary. The Tribunal as well as High Courtupheld order of Assessing Officer. The Apex Court held that since neither High Court nor





Tribunal and other authorities had examined whether amount advanced to sister concern was by way of commercial expediency, matter was to be remanded to Tribunal for a fresh decisionin accordance with law

The Apex Court held that the High Court and other authorities should have examined thepurpose for which the assessee advanced the money to its sister concern, and what the sisterconcern did with the money, in order to decide whether it was for commercial expediency, butthat had not been done.

The court further held that it is not in every case that interest on borrowed loan has to beallowed if the assessee advances it to a sister concern. It all depends on the facts andcircumstances of the respective case. For instance, if the directors of the sister concern utilizethe amount advanced to it by the assessee for their personal benefit, obviously it cannot be saidthat such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many othercircumstances. Where holding company has a deep interest in its subsidiary, and the holding

company advances borrowed money to a subsidiary and the same is used by the subsidiary forsome business purposes, the holding company would ordinarily be entitled to deduction of interest on its borrowed loans - S.A. Builders Ltd. v. CIT 288 ITR 1.

CONTRIBUTION TOWARDS RECOGNISED PROVIDENT FUND OR AN APPROVEDSUPERANNUATION FUND [Sec. 36(1)(IV)]

Any sum paid by the assessee as an employer by way of contribution to a recognized providentfund or an approved superannuation fund subject to limits prescribed in this regard in S. 43B.

CONTRIBUTION TOWARDS AN APPROVED GRATUITY FUND [Sec. 36(1)(V)]

Any sum actually paid by an employer by way of contribution towards an approved gratuityfund created by him for the exclusive benefit of his employees under an irrecoverable trust

subject to Sec. 43B.

CONTRIBUTIONS RECEIVED FROM EMPLOYEES TO A WELFARE OF THE EMPLOYEES[Sec. 36(1)(VA)]

Deductions in respect of any sum received by the assessee a contribution from his employeestowards provident fund or any other welfare fund of such employees is allowed only if suchsum is credited by [the tax payer] to the employees accounts in the relevant funds on or beforedue date. If payment is not made within the due date such contribution should be treated asincome of the assessee.

However, deduction will be allowed in respect of any such sum received as stated above onlyif such sum is credited by the assessee to the employee’s account in relevant fund on or before

the due date, i.e. the date by which the assessee is required as an employer to credit suchcontribution to the employee’s account under the provisions of any law or term of contract of service or otherwise.




DEDUCTION IN RESPECT OF ANIMALS USED FOR BUSINESS WHICH HAVE DIEDOR BECOME PERMANENTLY USELESS [Sec. 36(1)(VI)]

In respect of animals used for the purpose of Business or Profession (but not stock in trade)

who have died or become permanently useless, the difference between the actual cost to theassessee of the animals and the amount, if any, realised in respect of carcasses or animals, will be allowed as a deduction.

BAD DEBTS [Sec. 36(1)(VII)]

Any bad debt or part thereof which is written off as irrecoverable in the accounts of the assesseefor the Previous Year will be allowed as deduction if—

(i) the debt is incidental to business,

(ii) it should have been taken into account in computing income of the assessee, or it shouldrepresent money lent in the ordinary course of banking or money lending business,

(iii) it should be written off in the books of account

(iv) the business in respect of which the debt is incurred should be continued during, thePrevious Year.

The successor of a business is entitled to claim deduction in respect of debt created by thepredecessor CIT Vs. T. Veerabhadra Rao, K. Koteswara Rao & Co. 155 ITR 152.

Case Law:

(i) ‘Debt’ is something more than an advance, which is related to and results from assessee’s business - Before a debt can become bad or doubtful it must first be a debt. A debt is anoutstanding which if recovered would have swelled the profits. It is not money handedover to someone for purchasing a thing which that person has failed to return even thoughno purchase was made. In this section a debt means something more than a mere advance.It means something which is related to business or results from it - A.V. Thomas & Co.Ltd. v. CIT 48 ITR 67.

PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY [Sec. 36(1)(VIIA)] :-

(i) Schedule bank (not incorporated outside India) or non-schedule bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agriculturaland rural development bank, upto 7.5% of its total income and an addition at 10% averageadvances made by the rural branches of such bank. Option has also been given to bank toclaim deduction in respect of any provision for doubtful or loss of assets as per RBIguidelines, upto a maximum of 5% of such assets at the end of the relevant Previous Yearfor the AY 2000-01 to 2002-03 and upto 10% of such assets for AY 2003-04 and 2004-05.

(ii) A bank incorporated outside India upto 5% of its total income.

(iii) A Public Financial Institution on a State Financial Corporation or a state industrialinvestment corporation, upto 5% of its total income. Option is also given to FinancialInstitution/Corporation to claim deduction in respect of any provision for doubtful orloss assets as per RBI guidelines, upto a maximum of 10% of such assets at the end of thePrevious Year relevant to Assessment Year 2003-04 or 2004-05.





Total income for this purpose means income computed before making any deduction underchapter VIA.

SPECIAL RESERVE CREATED AND MAINTAINED BY A FINANCIAL CORPORATION

[Sec.36(1)(VIII)

Deduction under this section is allowed in respect of any special reserve created and maintained by :

(a) to a financial corporation which is engaged in providing long time finance for industrialor agricultural or development in India or for development for infrastructure facility inIndia; or

(b) by a public company formed and registered in India with the main objective of carryingon the business of providing long time finance for construction of purchase of houses inIndia for residential purposes.

The deduction under this section shall be an amount transferred to reserve account or an amountnot exceeding 20 % of the profits derived from such business which ever is less. If the amountof reserve is more than twice the paid up share capital and general reserve, the excess amountis not deducted.

Case Law:

(i) Computation of allowance - Deduction under section 36 (1)(viii) should be calculated ontotal income before deduction of amount allowable under that section - CIT v. Kerala StateIndustrial Development Corpn. 96 Taxman 641.

EXPENDITURE INCURRED BY COMPANY FOR PROMOTING FAMILY PLANNINGAMONGST ITS EMPLOYEES [Sec. 36(1)(IX)]

The company assessee is entitled to claim deduction in respect of bonafide revenue expenditureincurred by it in a Previous Year for the purposes of promoting family planning amongst itsemployees. In case of expenditure of a capital nature, the deduction is allowed in 5 equal yearlyinstallments commencing from the previous year in which such expenditure is incurred.

The capital expenditure under this section is governed by the same conditions as are applicableto capital expenditure for scientific research. The unabsorbed expenditure under this sectioncan be carried forward and set off in the following years like unabsorbed depreciation allowance.

GENERAL DEDUCTIONS [Sec. 37]

Any expenditure (not being expenditure of the nature described in sec. 30 to 36), and not beingin the nature of capital expenditure or personal expenses of the assessee paid out or expended

wholly and exclusively for the purposes of the business profession shall be allowed in computingthe income chargeable under the head “Profits and gains of Business or Profession”- Sec. 37(1).The conditions to be fulfilled for general deductions u/s. 37 are as follows—

(i) It should be in respect of a business carried on by an assessee;

(ii) It should have been paid out or expended wholly and exclusively for the purpose of the business;




(iii) It must have been incurred during the Previous Year; and

(iv) It should not be in the nature of capital expenditure or personal expenses of the assessee.

Thus expenses incurred on the occasion of Dewali or Mahurat subject to being satisfied that theexpenses are not expenses of a personal, social or religious nature- allowed deduction u/s.37.

Loss through embezzlement by an employee or recurring expenses incurred on imparting basictraining to apprentices under the Apprentices Act, 1961 are general deductions u/s. 37.

Any expenditure incurred by an assessee for any purpose which is an offence or which isprohibited by law shall not be deemed to have been incurred for the purpose of business orprofession and no deduction or allowance shall be made in respect of such expenditure[Explanation to Sec. 37(1)].

Case Law:

(i) Expenditure on money circulation scheme - Expenditure incurred by assessee on deposit-

linked incentive scheme which scheme had all basic ingredients of money circulationscheme, which is banned under section 3 of Prize Chits and Money Circulation Schemes(Banning) Act, 1978, could not be allowed as deduction in view of Explanation to section37(1) - CIT v. Smt. Amarjeet Kaur 283 ITR 71/ 159 Taxman 178

(ii) Expenditure on issue of bonus shares is revenue expenditure - Issuance of bonus shares does notresult in any inflow of fresh funds or increase in the capital employed; the capital employedremains the same. Issuance of bonus shares by capitalization of reserves is merely areallocation of company’s fund. If that be so then it cannot be held that the company hasacquired a benefit or advantage of enduring nature. The total funds available with thecompany will remain the same and the issue of bonus shares will not result in any changein the capital structure of the company. Issue of bonus shares does not result in the expansion

of capital base of the company. Thus, the expenditure incurred in connection with issuanceof bonus shares is a revenue expenditure - CIT v. General Insurance Corpn.286 ITR 232(SC).

(iii) Business Loss or Expenditure: It was held that loss consequent to seizure of contrabandgoods constituting stock-in-trade of an assessee would not come within the wordexpenditure as used in the explanation to section 37(1) & hence even though the loss isconsequent to seizure of illegal stock-in-trade it would be addmissible as deduction incomputing taxable income of the assessee. Dr. T. A. Quereshi v CIT 287 ITR 547

ADVERTISEMENT EXPENDITURE [Sec. 37(2B)]

No allowance shall be made in respect of expenditure incurred by an assessee on advertisementin any Souvenir, Brochure, Pamphlet or the like published by a political party.

INADMISSIBLE EXPENDITURE [Sec. 40, 40A, 43B]

SECTION 40(a)

Interest, salary, royalty, fees for beneficial services or any other sum payable outside Indiais not deductible unless tax is deducted at source or tax is paid.

Income Tax and Wealth Tax are not deductible.





Any tax paid by the employer on the perquisites not provided by way of monetary paymentis not deductible in computing business income of the employer w.e.f. Assessment Year2003-04.

Fringe Benefit Tax [ Sec.40 (a) (ic)]: Any sum paid on fringe benefit tax.

Disallowance of Fringe Benefit Tax paid [Section. 40 (a) (ic)] :

(a) A new chapter XII-H has been inserted in the Income-tax Act containing sections 115W to115WL, which provides for the levy of additional income-tax on fringe benefits. The fringe benefit tax is payable by an employer who is either a company, firm , an association of persons or a body of individuals , whether incorporated or not (but excluding any fund ortrust or institution eligible for exemption under sec 10(23c) or registered under sec 12AA),a local authority and every juridical person .

(b) Section 115Wa provides that tax is payable in respect of the value of fringe benefits providedor deemed to have been provided by an employer to his employees during the previous

year. Fringe Benefit tax is chargeable at the rate of 30%on the value of fringe benefit socalculated .

(c) However, the employer will not get deduction of the fringe benefit tax paid by him . Clause(ic) has been inserted in sec 40(a) to provide that any sum paid on account of fringe benefittax under chapter XII-H can not be deducted in computing the income chargeable underthe head “Profits and gains of business or professions”.

Case Law:

(i) Unpaid purchase price - Section 40(a)(i) is not attracted where interest is to be paid onaccount of unpaid instalment of purchase price and not on loan - CIT v. India Pistons Ltd.

DISALLOWANCE IN THE CASE OF PARTNERSHIP FIRMS [ Sec. 40(b) ]

(i) Interest to a partner by a firm is not deductible unless the following conditions are fulfilled:

1. It should be authorised by the partnership deed.

2. It should relate to a period falling after the date of the Partnership deed.

3. It should not exceed 18% p.a. (12% p.a. w.e.f. 1.6.2002) simple rate of interest.

Explanation 1:If a person is a partner in his representative capacity in the firm and if he receivesinterest in his individual capacity from the firm such interest should not be disallowed.

Explanation 2:If a person who is a partner in his individual capacity receives interest for andon behalf of some one else from the firm in which he is a partner such interest should not be

disallowed.(ii) Any amount paid by way of salary, bonus, commission or remuneration by a firm to a

partner is not deductible in the computation of income of the firm unless the followingconditions are fulfilled :

1. It should be authorised by partnership deed.

2. It should relate to a period falling after the date of the partnership deed.




3. It should be within the prescribed limits as follows :–

Book Profits

Professional Firms Other Firms Remuneration as a %

of book profits

On the first Rs. 1 lakh or in On the first Rs. 75,000. Rs. 50,000 or 90%case of a loss or in case of a loss Whichever is higher

On the next Rs. 1 lakh On the next Rs. 75,000 60%

On the balance On the balance 40%

4. It should be paid to a working partner.

Explanation 3 : “Book profit” means the net profit, as shown in the profit and loss account forthe relevant Previous Year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been debited while computing the net profit.

Explanation 4 : “Working partner” means an individual who is actively engaged in conductingthe affairs of the Business or Profession of the firm of which he is a partner.

CBDT issued circular no. 739 dt. 25.3.96 stating that disallowance of salary to partners shall bemade in the case of a firm if the partnership deed does not specify the amount of remunerationpayable to each individual working partner or it does not lay down the manner of quantifyingsuch remuneration.

Case Law:

(i) Commission to partner - Since HUF in law cannot be a partner, if karta or any other partner joins a partnership he can do so only as an individual and as such commission paid byfirm to a partner representing his HUF would have to be disallowed under section 40(b) -Rashik Lal & Co. v. CIT 96 Taxman 16.

DISALLOWANCE IN THE CASE OF ASSOCIATION OF PERSONS AND BODY OFINDIVIDUALS [Sec. 40(ba)]

Any payment by way of interest, salary, bonus, commission or remuneration paid by anassociation of persons or body of individuals to any of its members shall be disallowed.

Explanation 1 : If the member who received interest from the AOP or BOI also pays interest tothe AOP or BOI during the same Previous Year only the net excess interest paid by the AOP tosuch member should be disallowed.

Explanation 2 : If a person is a member in his representative capacity in the AOP or BOI and if he received interest in his individual capacity from the AOP or BOI such interest should not bedisallowed.

Explanation 3 : If a person who is a member in his individual capacity received interest for andon behalf of some one else from the AOP or BOI in which he is a member such interest shouldnot be disallowed.





SECTION 40A(1)

Expenses or payment as provided in subsection (2), (3), (7) and (9) of Section 40A are notdeductible.

SECTION 40A(2)

Where an assessee incurs any expenditure, in respect of which payment has been made or is to be made to certain specified persons and in the opinion of Assessing Officer such expenditureis excessive or unreasonable having regard to the fair market value of the goods, services orfacilities for which the payment is made, then so much of expenditure which is considered bythe Assessing Officer to be excessive or unreasonable, shall not be allowed as deduction.

Assessee Specified persons

(i) Individual a) any relative (i.e., spouse, any brother, sister, lineal ascendantdescendant)of such individual ;

b) any person in whose business or profession the assessee(i.e. individual) himself or his relative has substantial interest.

(ii) Company, firm, a) any director of the company, partner of the firm, or member of theAOP or HUF association, or family, or any relative of such director, partner or

member;

b) any person in whose Business or Profession the assessee ordirector, partner or member of the assessee or any relative of suchperson has a substantial interest.

(iii) All assessees a) any individual who has substantial interest in the Business orProfession of the assessee ;

b) a company, firm, AOP or HUF having a substantial interest inBusiness or Profession of the assessee or any director,partner or member of any such person or any relative of any;

DISALLOWANCE OF CASH EXPENDITURE EXCEEDING RS. 20,000 [Sec. 40A(3), RULE6DD]

Where the assessee incurs any expenditure incurred over Rs. 20,000 otherwise than by accountpayee cheque drawn on a bank or account payee bank draft, 20% deduction will be disallowedin respect of such expenditure.

Exceptions under rule 6DD

(a) Payments made to banks, including cooperative bank or land mortgage bank, Life InsuranceCorporation and financial institution like IDBI, UTI, Industrial Development Corporationsand State Financial Corporations, primary agricultural credit society.

(b) Payments made to Government, where such payment is required to be made in legal tendere.g. payment of sales-tax, customs duty, excise duty, etc.

(c) Payments under contracts entered into before 1.4.1969.




(d) Payments made by way of any Letter of Credit, telegraphic transfer, transfer from one bank account to another, or through Bill of Exchange payable to a bank.

(e) Where the payment is made by way of adjustment against the amount of any liability

incurred by the payee for any goods supplied or services rendered by the assessee to suchpayee.

(f) Payment for purchase of

(i) agricultural or forest produce,

(ii) the produce of animal husbandry (including hides and skins), dairy or poultry farming,

(iii) fish or fish-products, or

(iv) products of horticulture, or apiculture if the payment is made to the cultivator, groweror producer of such articles, produce or products.

(g) Payment made for purchase of products manufactured or processed without the aid of

power in a cottage industry, if the payment is made to the producer of such products.

(h) Where the payment is made in a village or town, which is not served by any bank, to anyperson who ordinarily resides or is carrying on any business, profession or vocation inany village or town.

(i) Payment by way of gratuity, retrenchment compensation or similar terminal benefits madeto an employee or his legal heirs, if the income under the head salary of the employee doesnot exceed Rs. 7500 for the current year as well as for the immediately preceding PreviousYear.

(j) Payment made by way of salary to its employees after deducting the income-tax from thesalary, when such an employee 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 the employeedoes not maintain any account in any bank at such place.

(k) Where the payment is required to be made on a day on which the banks were closed,either on account of holiday or strike.

(l) Payments made by any person to his agent who is required to make payments in cash forgoods or services on behalf of such person.

(m) Where the payment is made by an authorised dealer or a money changer against purchaseof foreign currency or travellers cheques in the normal course of his business. [NotificationNo. 11476, dated 6.9.2000 applicable retrospectively from 25.7.1995]

Case Law:

(i) Limit applies to each transaction - The words used are ‘in a sum’, i.e., single sum. Therefore,irrespective of any number of transactions, where the amount does not exceed the aboveamount in each transaction, the rigours of section 40A(3) will not apply - CIT v.Triveniprasad Pannalal 94 Taxman 381 ./CIT v. Kothari Sanitation & Tiles





PROVISION FOR GRATUITY [Sec. 40A(7)]

No deduction shall be allowed in respect of any provision made by the assessee for the paymentof gratuity to his employees on their retirement or on termination of their employment for any

reason. However, any provision made by the assessee for the purpose of payment of anycontribution towards an approved gratuity fund or for the purpose of payment of any gratuitywhich has become payable during the Previous Year shall be allowed as deduction.

Case Law:

(i) Prescribed conditions must be satisfied - For gratuity to be deductible, it must fulfil theconditions laid down in section 40A(7), and the deduction could not be allowed on generalprinciples under any other section of the Act, in view of the overriding effect given to thatprovision. The submission that if no provision was made by the assessee for gratuity stillthe same will be deductible and section 40A(7) will have no application would defeat thevery purpose and object of that provision - Shree Sajjan Mills Ltd. v. CIT 156 ITR 585 .

NON STATUTORY/UNRECOGNISED WELFARE FUND CONTRIBUTIONS [Sec. 40A(9)]Any contribution made by the assessee to unrecognised or non-statutory welfare fund accountsis not deductible.

Special provision for computing deductions in the case of business reorganization of co-operative banks [Sec. 44DB]

After section 44DA of the Income-tax Act, the following sections shall be inserted with effectfrom the 1st day of April, 2008, namely :—

‘44DB. Special provision for computing deductions in the case of business reorganization of co-operativebanks.— (1) The deduction under section 32, section 35D, section 35DD or section 35DDA shall,in a case where business reorganization of a co-operative bank has taken place during the

financial year, be allowed in accordance with the provisions of this section.

(2) The amount of deduction allowable to the predecessor co-operative bank under section 32,section 35D, section 35DD or section 35DDA shall be determined in accordance with theformula—

B

A × C

where A = the amount of deduction allowable to the predecessor co-operative bank if the

business reorganisation had not taken place;

B = the number of days comprised in the period beginning with the 1st day of thefinancial year and ending on the day immediately preceding the date of businessreorganisation; and

C = the total number of days in the financial year in which the business reorganisationhas taken place.




(3) The amount of deduction allowable to the successor co-operative bank under section 32,section 35D, section 35DD or section 35DDA shall be determined in accordance with theformula—

B

A × C

where A = the amount of deduction allowable to the predecessor co-operative bank if the business reorganisation had not taken place;

B = the number of days comprised in the period beginning with the date of businessreorganisation and ending on the last day of the financial year; and

C = the total number of days in the financial year in which the business reorganisationhas taken place.

(4) The provisions of section 35D, section 35DD or section 35DDA shall, in a case where anundertaking of the predecessor co-operative bank entitled to the deduction under the saidsection is transferred before the expiry of the period specified therein to a successor co-operative bank on account of business reorganisation, apply to the successor co-operative bank in the financial years subsequent to the year of business reorganisation as they wouldhave applied to the predecessor co-operative bank, as if the business reorganisation hadnot taken place.

DEEMED PROFIT/DEEMED INCOME [Sec 41(1)]

Where deduction has been made in respect of loss, expenditure or trading liability for any yearand subsequently the assessee or successor of the business has obtained any amount in respect

of such loss expenditure or some benefit in respect of such trading liability by way of remissionor cessation thereof, the amount obtained or the value of benefit accrued shall be deemed to beincome.

The provisions are applicable even to the successor who receives the amount/benefit.

The ‘successor in business’, for this purpose, means—

(a) Where there has been an amalgamation of a company with another company, theamalgamated company;

(b) Where any person is succeeded by another person in carrying on the Business orProfession, such other person;

(c) Where a firm carrying on a Business or Profession is succeeded by another firm, suchother firm.

(d) Where there has been a demerger, the resulting company.

If there is a remission or cessation of a trading liability which was earlier allowed as deduction,it is chargeable to tax. Even if the remission or cessation is effected by a unilateral Act of writingoff of such liability by the assessee, the amount so written off is chargeable to tax.





The above mentioned sub-section covers loss, expenditure and trading liability.e.g.

(i) If stock is destroyed by fire and allowed as trading loss but later insurance compensationis received, the same is assessable u/s. 41(1).

(ii) If credit purchase of raw material is made and claimed as deduction but later, a lesseramount is settled to the supplier creditor, the benefit accruing on remission of the tradingliability will be deemed as income u/s. 41(1).

Case Law:

(i) It must be proved that allowance or deduction was given in an earlier year - Unless it isproved that an allowance or deduction has been made in the assessment in any previousyear in respect of loss, expenditure or trading liability, it is not open to the revenue to referto section 41(1) for charging the tax on the receipt by the assessee by refund or otherwiseof such expenditure in a subsequent year - Tirunelveli Motor Bus Service Co. (P.) Ltd. v.CIT 78 ITR 55 .

SECTION 41(2)

In the case of an undertaking engaged in the generation or generation and distribution of power,option is available to claim depreciation on straight line method with reference to each individualasset. If such option is exercised, block of asset concept does not apply. In the case of such anassessee, where any building, machinery, plant or furniture is transferred for a considerationwhich is more than the depreciated value, the surplus to the extent of depreciation alreadyallowed shall be assessed as business income. This is normally described as ‘balancing charge’.

SECTION 41(3)

Any amount realised on transfer of an asset used for scientific research is taxable as businessincome to the extent of deduction allowed u/s. 35 in the year in which the transfer takes place.

SECTION 41(4)

Any amount recovered by the assessee against bad debt earlier allowed as deduction shall betaxed as income in the year in which it is received.

Case Law:

(i) Conditions precedent - Continued existence of the business is not a condition for applyingsection 41(4). The only basis for applying the provision is the identity of the assessee beingthe same - CIT v. P.K. Kaimal 123 ITR 755 .

SECTION 41(4A)

Under sec. 36(1)(viii) any special reserve created and maintained by a financial corporation or

public company specified there under qualifies for deduction subject to the limit prescribed.Sub-section (4A) is introduced in sec. 41 to make it clear that where a deduction has been soallowed, any amount subsequently withdrawn from such special reserve shall be deemed to bethe profits of the year of such withdrawal and shall be charged to tax accordingly. Thechargeability applies even if the business is no longer in existence during the relevant PreviousYear.




SECTION 41(5)

In the case of an assessee who is chargeable to tax in respect of any amount deemed as profit u/s. 41 relating to a discontinued business, any loss incurred in the year in which the business

was discontinued shall be allowed to be set off against such profit and only the balance, if any,shall be taxed.

SECTION 176(3A)

Where any business is discontinued in any year, any sum received after discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried onthe business had such sum been received before such discontinuance.

SECTION 176(4)

Where any profession is discontinued in any year on account of the cessation of the profession

by, or the retirement or death of, the person carrying on the profession, any sum received afterthe discontinuance shall be deemed to be the income of the recipient and charged to taxaccordingly in the year of receipt, if such sum would have been included in the total income of the aforesaid person had in been received before such discontinuance.

CASH CREDITS [Sec. 68]

Where any sum is found credited in the books of an assessee, maintained for any PreviousYear, and the assessee offers no explanation about the nature and source thereof or theexplanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sumso credited may be charged to income-tax as the income of the assessee of that Previous Year.

Case Law:

(i) Amount credited in business books can normally be presumed as business receipt - Whenan amount is credited in business books, it is not an unreasonable inference to draw that itis a receipt from business, if the explanation given by the assessee as to how the amountscame to be received is rejected by all the income-tax authorities as untenable - LakhmichandBaijnath v. CIT 35 ITR 416 .

UNEXPLAINED INVESTMENTS [Sec. 69]

Where in the financial year immediately preceding the Assessment Year, the assessee has madeinvestments which are not recorded in the books of account, if any, maintained by him for anysource of income and the assessee offers no explanation about the nature and source of theinvestments 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.

Case Laws:

(i) Non-maintenance of stock register - Where assessee had not maintained stock register andAssessing Officer, on verification of records of assessee, found certain excess stock of bearings, he was justified in making addition on account of that as unexplained investment,





since it was obligatory for assessee to maintain stock register so that one was able to ascertainactual position of stock lying with the assessee in which he was trading - Sanjay Son of Dwarkadas Jajoo v. CIT 154 Taxman 101 .

(ii) ‘May’ meaning of - Even if assessee’s explanation regarding source of an investment is notfound to be satisfactory, ITO has discretion to treat or not to treat such investment asassessee’s income - CIT v. Smt. P.K. Noorjahan 103 Taxman 382/237 ITR 570 .

UNEXPLAINED MONEY ETC. [Sec. 69A]

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 notrecorded in the accounts, if any maintained by him for any source of income, and the assesseeoffers no explanation about the nature and source of acquisition of the money, bullion, jewelleryor other valuable article, or the explanation offered by him is not, in the opinion of the AssessingOfficer, satisfactory, the money and the value of the bullion, jewellery or other valuable articlesmay be deemed to be the income of the assessee for such Financial Year.

Case Law:

(i) Person can be owner of money even after giving incorrect explanation - A person can still be held to be the owner of a sum of money even though the explanation furnished by himregarding the source of that money is found to be not correct. From the simple fact that theexplanation regarding the source of money furnished by A in whose name the money islying in deposit has been found to be false, it would be a remote and far-fetched conclusionto hold that the money belongs to B - CIT v. Daulat Ram Rawatmull 87 ITR 349 .

INVESTMENTS, ETC. NOT FULLY DISCLOSED IN BONUS OF A/C. [Sec. 69B]

Where in any Financial Year, the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article, and the Assessing Officer finds that the amount

expended on making such investments or in acquiring such bullion, jewellery or other valuablearticle exceeds the amount recorded in his behalf in the books of account maintained by theassessee for any source of income and the assessee offers no explanation about such excessamount or the explanation offered by him is not, in the opinion of the Assessing Officer,satisfactory, the excess amount may be deemed to be the income of the assessee for such FinancialYear.

UNEXPLAINED EXPENDITURE [Sec. 69C]

Where in any Financial Year, an assessee has incurred any expenditure and he offers noexplanation 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, may be deemed to be the income of theassessee for such Financial Year.

Further, notwithstanding anything contained in any other provision of the Income Tax Act,such unexplained expenditure which is deemed to be the income of the assessee, shall not beallowed as a deduction under any head of income.




UNEXPLAINED AMOUNT BORROWED OR REPAID ON HUNDI [Sec. 69D]

Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, anyperson 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 theamount aforesaid for the Previous Year, in which the amount was borrowed or repaid, as thecase may be, provided that, if in any case any amount borrowed on a hundi has been deemedunder the provisions of this Section to be the income of any person, such person shall not beliable to be assessed again in respect of such amount under the provisions of this Section onrepayment of such amount.

Explanation : For the purposes of the Section, the amount repaid shall include the amount of interest paid on the amount borrowed.

EXCHANGE RATE FLUCTUATION [Sec. 43A]

Where an assessee acquires an asset from abroad and in consequence of the variation in exchange

rate, the liability of the assessee in terms of payment towards the acquisition of that assetincreases or decreases, then the actual cost of that asset shall be increased or decreasedaccordingly. The effect of exchange rate fluctuation shall be taken into consideration for thepurpose of deduction u/s. 32, 35, 35A, 36(1)(ix) and for the purpose of computation of capitalgains u/s. 48 or u/s. 50 as the case may be.

The increase or decrease in liability due to exchange rate fluctuation shall be taken into accountat the time of making payment also.

SECTION 43B

Certain expenses are allowed only on payment basis within a stipulated time period irrespectiveof method of accounting and the evidence of such payment is furnished alongwith the return

of income.

Nature of Expense Stipulated time period

1 Any sum payable by way of tax, duty, cess or Due amount should be paid on orfee, by whatever name called, under any law before the due date of furnishing thefor the time being in force. return of income u/s. 139(1) in respect

of the Previous Year.

2. Any sum payable to an employee as bonus or in which the liability to pay such sumcommission for services rendered. was incurred and proof of payment.

should be attached alongwith the

return of income.3. Any sum payable by the assessee as interest However, in cases (1) to (5), if

on any loan or borrowing from any public the payment of outstanding liability isfinancial institution or State Financial made after the due date, deductionCorporation or State Industrial Investment can be claimed in the year of Corporation like IDBI, IFCI, UPSIDC, Delhi payment.Financial Corporation, etc. in accordance





with the terms and conditions of theagreement governing such loan or borrowing.

4. Any sum payable by the assessee as intereston any term loan from a scheduled bank in -do-accordance with the terms and conditions of the agreement governing such loan.

5 Any sum payable by the assessee as an However, if the deduction hasemployer in lieu of any leave at the credit already been allowed on due basisof his employee (inserted w.e.f. AY 2002-03) before this amendment, the same will

not be allowed again when the sum is .actually paid.

6. Any sum payable by the assessee as an Payments should be made in cash or

employer by way of contribution to any by issue of a cheque or draft, or byprovident fund of superannuation fund any other mode on or before the dueor gratuity fund or any other fund for date by which the employer is requiredthe welfare of employees. to credit an employee’s contribution to

the employee’s account in the relevantfund under the respective Act, rule,order or notification. Where thepayment has been made otherwisethan in cash, the sum should berealised within fifteen days from therelevant due date

Case Law:

(i) Where Tribunal, while deciding issue in favour of assessee under section 43B, did notproperly consider whether fee and additional fee payable on import of spirit under rule 6of West Bengal Excise Rules, 1979 were excise duty and High Court confirmed Tribunal’sorder, issue was to be remanded to Tribunal to decide issue - CIT v. Varas International(P.) Ltd. 155 Taxman 202.

2. Section 43B of the Act was not attracted in the case — an excise duty which is in the natureof tax can be imposed only by a statute which answers the description of Article 265 of theConstitution of India — the Tribunal and the High Court have not committed any error in

passing the impugned judgment- CIT v. Distillers Co. Ltd. 290 ITR 419.

Nature of Expense Stipulated time period




COST OF ACQUISITION OF CERTAIN ASSETS [Sec. 43C]

Mode of acquisition Cost of acquisition

1) Amalgamation 1) Cost to the amalgamating company2) Cost of improvement3) Expenses incurred for transfer

2) Gift 1) Cost to the donor,2) Cost of improvement3) Expenses incurred for accepting the gift and the gift

tax paid by the donor

3) Partition of HUF 1) Cost to the HUF2) Cost of improvement3) Expenses incurred for partition.

4) Will 1) Cost to the previous owner2) Cost of improvement3) Expenses incurred for probating the will

5) Irrevocable trust 1) Cost to the previous owner2) Cost of improvement3) Expenses incurred for establishing the trust.

SPECIAL PROVISIONS FOR DEDUCTION IN CASE OF TRADE, PROFESSIONAL ORSIMILAR ASSOCIATION [Sec.44A]

Amount received from members of trade, professional or similar associations by way of

subscription or membership fee falls short of the expenditure incurred, such deficit will beallowed as deduction in computing the income under the head “Profits and gains of Businessor Profession”. If there is no income under that head or if the income under that head isinadequate to absorb the deficit, it can be set off against the income of the association computedunder any other head of income.

In any case any loss or allowance brought forward from earlier assessment year, the deductionpermissible under this provision cannot exceed 50% of the total income for that previous yearcomputed before allowing this deduction.

Sec, 44 is applicable only to the trade, professional or similar association the income of whichor any part thereof is not distributed to its members except as grants to any association orinstitution affiliated to it.

Excess over expenditure received by a club from facilities extended to members as part of advantages attached to such membership shall not be chargeable to tax on the principle of mutuality- CIT vs. Bankipur Club Ltd. 226 ITR 97

COMPULSORY MAINTENANCE OF ACCOUNTS [Sec. 44AA, RULE 6F]

Applicability of this section depends on the type of activity carried on by the person. For thispurpose. Persons are classified either carrying on “Notified profession” or “Other than Notifiedprofession”.





The following activities carried on by the assessees fall under “Notified Profession”.

Legal profession

Engineering profession

Accountancy profession

Medical profession

Technical consultancy profession

Interior decoration profession

Architectural profession

Film artist notified [vide 80 17(E) dated 12,1,1977]

Authorised representative notified [vide SO 2675 dated 25.9.1992]

In case of person falls under “Other than Notified profession” (i.e. those who are not notified ascarrying on Notified profession Supra) carrying on Business or Profession are required tomaintain such books of account and documents as may be enable the Assessing Officer tocompute the total income in following circumstances :–

1. Income from such Business or Profession has exceeded Rs. 1,20,000 in any of the threepreceding Previous Years or is likely to exceed Rs. 1,20,000 during the current PreviousYear.

2. Turnover or sales or gross receipts has exceeded Rs. 10,00,000 in any of the three precedingprevious years or is likely to exceed Rs. 10,00,000 during the current Previous Year.

3. Person claims income from business under section 44AD or section 44AE or section 44AFlower than the income prescribed in those provisions during the Previous Year.

In case of person carrying on notified profession are required to maintain books of account anddocument under Rule 6F of the I.T. Rules 1962 if the gross receipts have exceeded Rs. 1,50,000in any of the three immediately preceding previous years or is likely to exceed Rs. 1,50,000during the current Previous Year.

Rule 6F(2) prescribes the books to be maintained are as follows :-

(a) Cash Book

(b) Ledger

(c) Journal (if mercantile system is adopted)

(d) Bills and vouchers in respect of expenses incurred(e) Copies of bills issued for amounts exceeding Rs. 25.

In case of medical practitioner, the following additional books are to be maintained.

(a) Daily case register (Form 3C)

(b) Inventory as on the first and last day of the Previous Year, showing the stock of medicines(where drugs and medicines are dispensed during the course of practice)




Rule 6F(5) provides that the books of account and documents are required to be kept for eightyears from the end of the relevant Assessment Year and for cash book and ledger for a periodof 16 years.

n case of assessment relating to any Assessment Year reopened u/s. 147 of the I.T. Act withinthe period specified in section 149 of the Act, the books and documents relating to that year arerequired to be kept and maintained till the assessment so reopened has been completed.

Case Law:

(i) Assessing Officer cannot direct maintenance of additional books of account - Once theBoard in respect of particular nature of the profession prescribed maintenance of certain books of account, it is not open to the assessing authority to desire some other books of account to be maintained over and above the books of account required by rule 6F - CIT v.Rajni Kant Dave 150 Taxman 387.

AUDIT OF ACCOUNTS [Sec. 44AB]

In case of following person carrying on business or profession are required to get his accountsaudited before the specified date by an accountant and to furnish such report in the prescribedform duly signed and verified by such accountant and setting forth such particulars as may beprescribed before the specified date.

Carrying on business where total sales turnover or gross receipts exceeds Rs.40,00,000;

Carrying on profession where gross receipts exceed Rs. 10,00,000; or

Carrying on business referred to in section 44AD or 44AE or 44AF and claiming his incometo be lower than the income prescribed under the relevant section.

Case Law:

(i) Income-tax practitioners do not have same expertise as Chartered Accountants in mattersof accounts, exclusion of income-tax practitioners from auditing of accounts under section44AB does not violate article 19 of the Constitution - T.D. Venkata Rao v. Union of India103 Taxman 621/237 ITR 315 .

Types of Audit report [Rule 6G]

Form No. 3CA : For the person who carries on Business or Profession and who is required by orunder any other law to get his accounts audited.

Form No. 3CB : For the person carrying on Business or Profession who are not required to gethis account audited under any other law.

Form No. 3CD : The particulars of which are required to be furnished u/s. 44AB.

SPECIFIED DATE [EXPLANATION TO SEC. 44AB]

“Specified date” in relation to the accounts of the assessee of the Previous Year relevant to theAssessment Year, means the 31st October of the Assessment Year.





It may also be noted that the requirement of Audit u/s. 44AB does not apply to person whoderives income referred to in Sec. 44B, 44BB, 44BBA and 44BBB.

In case of an agent who earns only commission income, the audit of accounts is required only

if the commission exceeds Rs. 40 lakhs. [CBDT circular No. 452 dt. 17.3.1986]

INCOME PARTLY AGRICULTURE AND PARTLY BUSINESS

Rule 7A : Income from manufacture of Rubber :-

35% of such income shall be deemed to be business income and liable to tax. 65% of such income shall be deemed to be Agricultural income.

Rule 7B : Income from the manufacture of coffee :-

40% of such income shall be deemed to be business income and liable to tax.

60% of such income shall be deemed to be agricultural income.

Rule 8 : Income from the manufacture of tea :-

40% of such income shall be deemed to be business income and liable to tax.

60% of such income shall be deemed to be agricultural income.




SPECIAL PROVISION FOR COMPUTING PROFITS & GAINS ON ESTIMATED BASIS

Sec. Nature of Business Presumptive Income Common points to

Sec.44AD to 44AF44AD Civil construction business

[“Civil construction” includes-

a) the construction or repair of any building, bridge, dam orother structure or of any canalor road; b) the execution of anyworks contract.]

8% of gross receipts paid orpayable to the assessee orsuch higher income asdeclared by the assessee inthe return of incomeprovided gross receipts fromsuch business is not morethan Rs. 40 lakhs

44AE Business of plying or leasinggoods carriage. According toSec. 2(14) of M.V. Act, 1988“Goods carriage” means

a) any motor vehicleconstructed or adopted for usesolely for the carriage of goods; or

b) any motor vehicle not soconstructed or adopted whenused for the carriage of goodsAccording to Sec. 2(16) of Motor vehicles Act, 1988“Heavy goods vehicle” means

a) any goods carriage thegross vehicle weight of whichor a tractor or a road-roller the

unladen weight of either of which, exceeds 12,000 kgs Anassessee who is in possessionof a goods carriage, whethertaken on carriage, whethertaken on hire purchase or oninstalments and for which thewhole or part of the amountpayable is payable is still due,shall be deemed to the ownerof such goods carriage. [w.e.f.A.Y. 1994-95]

For Heavy vehicle Rs. 3500for every month or part of the month.

For other vehicle Rs. 3150

for every month or part of the month or such higherincome as declared in thereturn by the assesseeprovided no. of carriages forthe business of plying orleasing goods carriage is notmore than ten (10). or 44AFas the case may be, therequirement of sections44AA and 44AB apply evenif the conditions of monetarylimits under those sectionsare not satisfied.[Sec.

44AA(2)(iii) & 44AB(c)] v) Incase of a firm to which theprovisions of sections44AD/AE/AF are applied,the salary and interest paidto its partners shall bededucted while computingincome under sub-section(1) of Sec. 44AD/AE/AF

44AF Retail trade in goods ormerchandise [w.e.f. A.Y. 1998-99]

5% of Gross turnover orsuch higher income as may be declared by the assesseein the return of incomeprovided gross turnover isnot more than Rs. 40 lakhs.

i) Deduction u/s. 30 to 38are deemed to have beenalready allowed.

ii) Written down value of any asset used for such

business is deemed to have been calculated as if depreciation under the Acthas actually been claimed.[w.e.f. A.Y. 1994-95] andallowed for all the relevantassessment yeariii) For calculating themonetary limits in respectof maintenance of accountu/s. 44AA and audit of accounts u/s. 44AB, thegross receipts or incomefrom such business isexcluded. iv) W.e.f. AY1998-99 if income declared islower than the deemedincome ascomputed u/s. 44AD, 44AEsubject to the conditionsand limits specified in clause

(b) of S.40. the condition &limits specified in S.40(b).





Case Law:

(i) Applicability to sub-contracts - The section speaks of any assessee engaged in the business

of civil construction or supply of labour for civil construction and provides for apresumptive profit from such business. On the wording of section 44AD, there is no doubtthat a sub-contractor would also come squarely within the purview of that provision -Manohar Ram Chandra Patil v. Union of India 260 ITR 87.

SPECIAL PROVISIONS FOR COMPUTING PROFITS & GAINS FOR NON-RESIDENTS

Section Nature of Business Profit- % on Turnover

44B Shipping business in case of non-resident. 7-1/2%

44BBB Business of providing services or facilities in connection 10%with orsupplying plant and machinery on hire used in

the prospecting for or extraction or production of mineraloils in case of non-resident.

44BBA Business of operation of aircraft in case of non-resident. 5%

44BBB In case of foreign company engaged in 10% of the grossi) Civil construction amount paid orii) erection of plant or machinery payable in Indiaiii) testing or commissioning thereof in connection with or out of India.turnkey power project approved by the CentralGovernment, income is determined at 10% of the gross amount.

REQUIREMENT AS TO MODE OF ACCEPTANCE, PAYMENT OR REPAYMENT INCERTAIN CASES TO COUNTERACT EVASION OF TAX

Mode of taking or accepting certain loans and deposits [Sec. 269SS]

No person shall, after the 30th day of June, 1984, take or accept from any other person (hereafterin this section referred to as the depositor), any loan or deposit otherwise than by an accountpayee cheque or account payee bank draft if,—

(a) the amount of such loan or deposit or the aggregate amount of such loan and deposit ; or

(b) on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted

earlier by such person from the depositor is remaining unpaid (whether repayment hasfallen due or not), the amount or the aggregate amount remaining unpaid ; or

(c) the amount or the aggregate amount referred to in clause (a) together with the amount orthe aggregate amount referred to in clause (b), is twenty thousand rupees or more :

Provided that the provisions of this section shall not apply to any loan or deposit taken oraccepted from, or any loan or deposit taken or accepted by,—




(a) Government ;

(b) any banking company, post office savings bank or co-operative bank ;

(c) any corporation established by a Central, State or Provincial Act ;(d) any Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956) ;

(e) such other institution, association or body or class of institutions, associations or bodieswhich the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette :

Provided further that the provisions of this section shall not apply to any loan or depositwhere the person from whom the loan or deposit is taken or accepted and the person by whomthe loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act.

Mode of repayment of certain loans or deposits [Sec. 269T]

No branch of a banking company or a co-operative bank and no other company or co-operativesociety and no firm or other person shall repay any loan or deposit made with it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person whohas made the loan or deposit if—

(a) the amount of the loan or deposit together with the interest, if any, payable thereon, or

(b) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with anyother person on the date of such repayment together with the interest, if any, payable on

such loans or deposits, is twenty thousand rupees or more:Provided that where the repayment is by a branch of a banking company or co-operative bank,such repayment may also be made by crediting the amount of such loan or deposit to thesavings bank account or the current account (if any) with such branch of the person to whomsuch loan or deposit has to be repaid :

Provided further that nothing contained in this section shall apply to repayment of any loan ordeposit taken or accepted from—

(i) Government;

(ii) any banking company, post office savings bank or co-operative bank;

(iii) any corporation established by a Central, State or Provincial Act;(iv) any Government company as defined in section 617 of the Companies Act, 1956 (1 of

1956);

(v) such other institution, association or body or class of institutions, associations or bodieswhich the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette.




Mode of repayment of Special Bearer Bonds, 1991 [Sec. 269TT]

Notwithstanding anything contained in any other law for the time being in force, the amountpayable on redemption of Special Bearer Bonds, 1991, shall be paid only by an account payee

cheque or account payee bank draft drawn in the name of the person to whom such payment isto be made.

Income from business or Profession and Tax Planning

Following are certain measures should be kept in mind for tax planning for income from businessor profession.

1. Nature of business: Economic factors such as scope, profitability, feasibility factors, etc.are important for determining the nature of business but the benefits and concessionsavailable to each line of business may also be presumed before expanding an existing lineof business.

2. Location of business: Although certain factors such as nearness to the source of raw materialsor markets or availability of infrastructure may be useful in taking decision on the locationof business, tax consideration is also equally important. If an industry is located in backwardarea, deduction under section 80-IB is available.

3. Sources of funds: There are different sources of funds depending upon the needs,availability, terms, etc. However for availing the tax benefits, there should be proper debt-equity mix in the capital structure and a clear policy on return on capital employed.

4. Travel Expenses: The travel expenses of spouse were held as inadmissible, if such travel isnot for business consideration. She may be made a partner in the firm to claim businessexpenditure on travel and further the share of profit of the spouse cannot be clubbed withthat of the husband as the same is exempt u/s 10(2A).

5. Employee welfare funds: The contribution of the employees’ welfare funds should be paidwithin time limits prescribed under the relevant Acts. It would be better to borrow andpay the tax liability on or before relevant due date. Contribution made to the welfarefunds after the due date does not qualify for deduction even in the year of payment.However interest on money borrowed for meeting such liability qualifies as businessexpenses.

prefits and gains-7

Documents