Rise of American Accounts. "Hollywood ".
COMPUTATION OF INCOME UNDER THE HEAD PROFITS AND GAINS
Under this head income from any business or profession carried on by assesse is included. The business or profession must be carried on during the relevant previous year.
.Business
The term business means an economic activity carried on for earning profit. Section 2(3) has defined business as any trade, commerce, manufacture or any adventure in the nature of trade, commerce or manufacture.
.Adventure in the Nature of Trade, Commerce or Manufacture
Profits earned from an isolated transaction are taxable as business profits if it is treated as an adventure in the nature of trade, commerce or manufacture. The transaction must have been made with a view to earn profits. The intention of the person making such transaction must be to earn profits.
.Profession
A profession is an occupation of requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator e. g., lawyer, accountant, engineer, surgeon, author etc. Profession includes vocation also.
.Charging Provisions
U/S 28 following incomes are included under this head :
1. Income from business or profession. The profits and gains of any business or profession carried on by the assessee during the previous year are assessable under this head. Business may be carried on inside or outside India.
2. Compensations
(a) any compensation received on termination of a managing agency of an Indian company
(b) any compensation received on termination of managing agency of a foreign company
(c) any compensation received on termination of any agency or on modification of terms of agency
(d) any compensation received from government or a corporation on taking over of management of property or business.
3. Income of a trade association. A trade association is a non-profit voluntary Organisation of business competitors operating in same line of business. The object of such organisation is to protect the interest of its members. Income derived by a trade Organisation from specific services performed for its members only is to be considered as business income.
4. Profits on sale of license. In case any license granted under Imports ( Control ) Order, 1955 or under Export ( Control ) Act 1947 is sold, the income from such sale is taxable under this head.
5. Cash Assistance. In case subsidy is received by any person against exports under any scheme of Government of India is taxable under this head.
6. Any drawback of duty of customs or excise. In case any amount is repaid or is repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules 1971 is treated as business income.
7. Value of any benefit or perquisite. In case any benefit or amenity is received by a person who is carrying on any business or profession, the value of such benefit or amenity is taxable under this head.
8. Salary, bonus, interest, commission or remuneration received by a partner and allowed as deduction u/s 40(b) is also taxable under this head.
9. Speculation business. Speculation means trading on difference in prices only without any physical delivery. Speculation gain / loss is covered under this head but treated separately as speculation loss can be adjusted only from speculation gain.
Trading in Derivatives not to be Speculative Transactions [ Section 43(5) Provision ]
An eligible transaction in respect of trading in derivatives referred to in section 2(aa) of the Securities Contracts ( Regulation) Act, 1956 carried out in a recognised stock exchange shall not be called as speculative transaction.
The expressions :
(1) eligible transaction means any transaction :
(a) carried out electronically on screen - based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 in accordance with the provisions of the Securities Contracts ( Regulation) Act, 1956 or the Securities and Exchange Board of India Act, 1992 or the Depositors Act, 1996 and the rules, regulations or bye-lawyers made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange : and
(b) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act.
2. recognised stock exchange means a recognised stock exchange referred to in clause (t) of section 2 of the Securities Contracts (Regulation) Act, 1956 and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose.
10. Profit from illegal business. Income may be earned from legal or illegal business. In case a person is carrying on smuggling business income of such business shall be taxable under this head, Any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by any law, shall not be allowed to be debited as business expenditure out of any income. This amendment has been made by the Finance Act (2) 1998 with retrospective effect from 1-4-1962.
Expenses incurred to earn illegal income [ Explanation u/s 37(1) ]
" For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose, which is an offence, or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure "
It means that any expenditure incurred to earn an income from a source which is an offence or is prohibited by law shall not be allowed to be deducted from any income.
Computation of Business Profits or Professional Gain.
While computing business profit or professional gain following points must be kept under consideration :
1. Business carried on by the assessee. The business must be carried on by the assessee at any time during the previous year.
2. Tax is levied on aggregate income. Income from all businesses carried on by the assessee is aggregated and taxable under this head as part of total income.
3. Tax on real owner. Some times business is carried on by a person on the name of some other person.
The real owner is that person who invests and bears the risk. The Assessing Officer must make an effort to find out the real owner and tax should be levied on real owner and not on beneficial owner.
EXPENSES WHICH CAN BE DEBITED U/S 30 TO 36 .
A. Rent of business premises
In case business is carried on in hired premises, full rent is allowed to be debited. In case of own premises rent cannot be debited. In case premises are partly used for business and partly for residential purposes, only that part of rent can be debited which relates to business portion.
B. Expenses on business premises
Any expenditure on current repairs, fire insurance premium, land revenue, ground rent, etc. relating to premises used for business and owned by assessee are fully allowed to be debited. In case premises are used partly for business, only proportionate expenses will be allowed. In case of hired building these expenses can be debited only if agreement expressly so provides.
C. Expenditure of other business assets
Expenses on current repairs, fire insurance premium of all other business assets are fully allowed. Expenses on registration, road tax, insurance etc. of vehicles are also allowed.
D. Expenditure on Scientific Research :
Expenditure on scientific research are revenue expenditure, capital expenditure, expenditure on in-house research and development, contribution to an approved research association, university, college or other institutions, contribution to National Laboratory, contribution to an Indian Company whose main objective is scientific research and development.
(A) Expenses on research activities carried on by the assessee himself.
When the assessee carries on research in his own premises, he has to incur various types of expenses. Such expenses can further be divided into 2 parts.
(A-1) Revenue expenditure incurred by assessee himself [ Sec. 35(1)(1) ]
When an assessee sets up a research laboratory of his own to carry on research which may be helpful in his business, he has to incur various types of revenue expenses and all such expenses incurred by the assessee are allowed as a deduction. Such expenses are usually on the purchase of raw materials required for research, salary etc. given to workers engaged in research and such other expenses which are incidental to research activities related to assessee's business. In case assessee is engaged in a business of textiles, so research expenses relating to textile business only are allowed.
In case assessee has incurred such type of expenses within three years immediately preceding the commencement of his business, all such expenses shall be deemed to be have been incurred in the previous year in which the business commences and allowed to be debited to the profit and loss account of that year and all such expenses must be certified by the prescribed authority.
(A-2) Capital expenditure incurred by the assessee himself to set up research project [ Sec. 35(2) ]
Any expenditure of capital nature on scientific research carried on by the assessee himself and related with assessee's business or profession, shall be allowed as deduction in full. Capital expenditure means expenses incurred to construct a building to set up research laboratory, purchase of pant and machinery, computer etc. but the cost of land shall be excluded.
Any capital expenditure incurred within three years immediately proceeding the commencement of business shall be deemed to have been incurred in the previous year in which business is commenced.
Regarding capital expenditure on research, following points are to be kept in mind
(a) Capital expenditure on research should be related to assessee's business.
(b) Capital expenditure so incurred shall be allowed as deduction even if the asset so constructed or acquired has not been put to use in assessee's business in that previous year.
(c) No depreciation shall be allowed as whole cost of the asset so purchase or constructed shall be allowed to be debited to Profit and Loss account.
(d) In case the above mentioned asset is sold, transferred etc. without having been used for any other purpose, any surplus realized over the cost shall be taxable as capital gain u/s 45 but amount realized upto deduction already allowed u/s 35 shall be taxable under the head business.
(B) Research carried on by any other agency, body, university, college etc. and financed by assessee.
Where the assessee is not performing research activities himself but gives money to other institutions to carry on research, a weighted deduction is allowed as under.
1. If amount is given to an approved research association, research may be related or unrelated to assessee's business, a weighted deduction @175% of actual expenditure shall be allowed.
2. If amount is given for research to an approved university, college or other institution and research may or may not be related to assessee's business, a weighted deduction @175% of actual expenditure shall be allowed.
3. In case amount is given for research to an approved association the objective of which is to undertake research in the field of social sciences or statistical research or amount is given to an approved university, college or other institution for research in social sciences or statistical research, a weighted deduction @125% of actual expenditure shall be allowed. Such research may or may not be related with assessee's business.
(B-1) Contribution to National Laboratory [ Sec. 35 (2AA) ]
A higher weighted deduction @200% of actual amount given shall be allowed if amount is given to following institutions under a specific direction that the amount so received is to be used for undertaking scientific research programme approved by the prescribed authority. Weighted deduction is allowed if the following institutions are approved at the time of making the payment.
These institutions are National Laboratory, A University, Indian Institute of Technology, A specified person as approved by the prescribed authority.
(B-2) Weighted Deduction for a sum of money given to a company for Scientific Research.
In case any assessee provides money to an Indian company engaged in the scientific research and approved for this purpose, a weighted deduction @125% of the amount paid shall be allowed. Research carried on by the company may or may not be related to donor assessee's business.
Conditions :
1. The company is registered in India.
2. The main object of the company is scientific research and development.
3. The company is an approved scientific research company by the prescribed authority.
(B-3) Expenditure on in-house research to company engaged in manufacturing except those mentioned in 11th Scheduled [ Section 35(2AB) ]
Under section 35(2AB) ,a weighted deduction @200% of the expenditure incurred on in-house research and development shall be allowed as under.
1. This deduction shall be allowed only to a company assessee.
2. This deduction shall be allowed to a company engaged in the business of bio - technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule of the Income Tax Act [ w. e. f. 1-4-2010 ]
3. This deduction shall be allowed in respect of any expenditure on in-house research and development facility approved by the prescribed authority.
4. This deduction shall not be allowed in case of any expenditure in the nature of cost of any land or building. However, deduction regarding capital expenditure on building ( excluding cost of land) shall be allowed u/s 35(1) .
5. This deduction shall be allowed in respect of this type of expenditure incurred upto 31st March, 2012 ( Extended upto 31-3-2017 ).
6. In case any deduction is allowed under this section, no deduction under any other section can be claimed for such expenditure.
With effect from assessment year 2010-11 with a view to promote research and development in all sectors of the economy the benefit of weighted deduction has been extended to companies engaged in the business of manufacture or production of an article or thing except those specified in the list of the Eleventh Schedule of the Income Tax Act.
Any expenditure incurred on scientific research for the above purpose shall include expenditure incurred on clinical drug trail, obtaining approved from any regulatory authority under the central, state or Provincial Act and filing of application for patent.
Carry forward and set-off of capital expenditure on scientific research.
Capital expenditure on research is allowed to be debited to the Profit and Loss Account in full but in case profit is insufficient to absorb full amount of capital expenditure then the same shall be allowed to be set-off out of income of any other head except salary income and if any part of capital expenditure still remains unadjusted the same shall be allowed to be carried forward and set-off in future years as if it is an unabsorbed depreciation.
E. Expenditure on Patent Right / Copy Right etc.
(1) Expenditure incurred before 1-4-1998 will be spread over the number of years for which such a right has been acquired but on expenditure incurred after 1-4-1998 depreciation @ 25% is allowed.
(2) In case patent right is acquired and used but price is paid in some later years, it will be written off in remaining numbers of years ( i.e., 14 years less number of years which have already passed).
(3) In case patent right is sold and money realised is less than its WDV, the difference can be written off in the same year. In case money realised is more than WDV the excess amount realised is deemed as business profit up to the amount already debited and excess if any, is capital gain.
(4) In case part of the patent right is sold and money realised is less than WDV, the balance is written off in remaining number of years. If money realised is more, it is to be treated in the same manner as per point (d) (above)
F. Cost of Technical know-how
(1) It is capital expenditure hence fully disallowed.
(2) If technical know-how developed in India by a Govt. or Govt. financed institution, and was acquired before 1-4-98 it was to be spread over a period of 3 years i.e.,1/3 rd every year.
(3) In all other cases 1/6th every year.
(4) With effect from 1-4-98, expenditure on technical know-how shall qualify for depreciation @25%.
G. Any expenditure incurred to acquire telecommunication license.
It can be written off by companies only in number of years for which lease is taken. It can be written off in the previous years commencing with the year in which payment is made and ending with the year in which the license expires.
H. Expenditure on Eligible Projects [ Section 35AC ]
(1) Corporations, companies or authority can take up such projects and spend money on it. The amount so spent is fully allowed to be debited.
(2) An individual, HUF, firm can give an amount to an institution, authority, corporation which is engaged in execution of such projects, amount so given is fully allow.
I. Deduction in respect of expenditure incurred on setting up of a specified business. [ Sec. 35AD ]
With effect from assessment year 2010-11, a new deduction u/s 35AD was introduced to provide incentive to those assessees who sets up new business units in certain specified areas / field. This deduction shall be available if following conditions are satisfied :
(1) A unit is set up in specified businesses.
(2) Unit of the specified business should be a new one.
(3) Books of the assessee are audited.
This new section shall apply in case of following businesses :
(1) Setting up and operating a cold chain facilities for specified products.
(2) Setting up and operating a warehousing facilities for storage of agricultural product.
(4) Building and operating a hotel of two star or above category anywhere in India.
(5) Building and operating a hospital with atleast 100 beds for patients anywhere in India.
(6) Developing a building a housing project for slum redevelopment or rehabilitation scheme framed by Central or a State Government and notified by Board as per guidance as may be prescribed.
(7) Developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government and notified by the Board in this behalf as per prescribed guidelines [w. e. f, Assessment year 2012-2013] .
(8) Production of fertilizer in India [ w. e. f. Assessment year 2012-2013].
Inclusion of 3 new business [ w. e. f. 1-4-2013]
(9) Setting up and operating an inland Container depot or a container freight station notified or approved under the Customs Act. 1962 on or after 1-4-2012.
(10) Bee-keeping and production of honey and bees wax on or after 1-4-2012.
(11) Setting up and operating a warehousing facility for storage of sugar on or after 1-4-2012.
Finance Act (2) 2014 has enlarged the scope of section 35AD and has added two new businesses in the category of Specified Businesses.
(12) Laying and Operating a slurry pipeline for the transportation of iron ore, and
(13) Setting up and operating and semi conductor wafer fabrication manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines.
The date of commencement of operations in these two businesses shall be on or after 1-4-2014 otherwise investment linked deduction will not be allowed.
Rate of Deduction.
In case an assessee sets up a new business unit in the given list of the specified businesses, a deduction @100% of capital expenditure incurred shall be allowed. This deduction shall be allowed in the year in which this expenditure is incurred.
Increased deduction @150% for following specified businesses commencing operations on or after 1-4-2012 [ w. e. f. 1-4-2013 ]
(1) Setting up and operating a cold chain facility. [ Section 35AD(8)(C) (1) ].
(2) Setting up and operating a warehousing facility for storage of agriculture produce. [ Sec. 35AD(8)(C) (2) ].
(3) Building and operating, anywhere in India a hospital with atleast 100 beds for patients [ Sec. 35AD(8)(C) (5) ].
(4) Developing and building a housing project. [ Sec. 35AD(8)(C) (7) ]
(5) Production of fertilizers in India [ Sec. 35AD(8)(C)(8) ]
Following points to be noted in this connection :
(1) This deduction will not be available in case of an expenditure incurred on the purchase of land, goodwill or financial instruments.
(2) Any capital expenditure incurred by the assessee prior to the commencement of operations of the new unit shall also be allowed as deduction in the previous year in which assessee commences the operations of his new specified business. Assessee must capitalise the amount of expenditure in his books of accounts on the date of commencement of operation of the specified business.
(3) In case assessee has enjoyed the benefit of deduction u/s 35AD, he cannot claim any deduction for the same expenditure u/s 80 or any other provisions of Income-Tax Act.
(4) In case those assets regarding which assessee had claimed deduction u/s 35AD are destroyed, demolished, discarded or transferred and any money received in this connection by the assessee will have to be credited to Profit and Loss Account of the assessee.
(5) In case of a loss in specified business, the same shall be set-off against the profit of another specified business only. In case it is not possible in that year, then unabsorbed part of the loss shall be carried forward to be set-off against the profit of the specified business in future years. Carry forward is allowed over indefinite number of years.
(6) Any Capital Assets on which investment linked deduction u/s (35AD) has been claimed must be used for the specified business for a period of atleast 8 years before it is sold or transfered to any other business [ Section 35AD (7A) [ w. e. f. A. Y. 2015-16 ]
(7) Any capital asset on which deduction u/s 35AD has been claimed if used for any other purpose other than the specified business before the expiry of 8 years, the total amount of deduction claimed and allowed u/s 35AD shall be deemed to be income chargeable under the business head in the year in which the asset is so used for any other purpose. In this type of situation, the provisions of depreciation u/s32 shall apply as if no deduction u/s 35AD had been allowed and depreciation so calculated will be deducted out of deemed to be income chargeable under business head. [ Section 35AD(7B) ] [ w. e. f. A. Y. 2015-16 ]
J. Any amount given to an institution or association [ Section 35CC, 35CCA and 35CCB ]
Any amount given an institution or association.
(1) Any amount given an institution or association whose object is the undertaking of any programme of rural development.
(2) Any amount given an institution or association whose object is training of persons for rural development.
(3) Any Rural Development Fund set up and notified by the Central Govt.
(4) The National Poverty Eradication Fund set up and notified by the Central Govt.
Expenditure on Notified Agriculture Extension Project [ Section 35CCC ] [ w. e. f. A. Y. 2013-14 ]
(1) Eligible Assessee. Any [ i.e., individual, HUF, Firm, Company etc. ]
(2) Nature of Expenditure. The expenditure must have been incurred in agricultural extension project notified by the Board in this behalf in accordance with the prescribed guidelines.
(3) Amount of Deduction. 150% of such expenditure.
(4) No Deduction Under any Other Section. Where such expenditure is claimed and allowed under this section for any assessment year, no deduction shall be allowed in respect of such expenditure under any other provision of the Income Tax Act for the same or any assessment year.
Expenditure on Notified Skill Development Project [ Section 35CCD ] [ w. e. f. A. Y. 2013-14 ]
(1) Eligible assessee. Company.
(2) Nature of expenditure. The expenditure must have been incurred in any skill development project notified by the Board in this behalf in accordance with the prescribed guidelines.
Note: The expenditure must not have been incurred on acquisition of land or building.
(3) Amount of deduction. 150% of such expenditure.
(4) No deduction under any other section. Where such expenditure is claimed and allowed under this section for any assessment year, no deduction shall be allowed in respect of such expenditure under any other provisions of the Income tax Act for the same or any assessment year.
K. Preliminary Expenses [ Section 35D ]
Any expenditure incurred on feasibility report, project report, technical survey, plans and blue prints, financial consultancy incorporation expenditure and expenditure on raising capital are aggregated and converted into fictitious assets, the cost of such assets cannot exceed 5% of cost of project or capital employed. This asset is written off 1/5th every year. The preliminary expenses incurred before 1-4+1998 the limit was 2.5% of capital employed or cost of project and it could be written off 1/10th every year.
L. Expenditure incurred on amalgamation or demerger [ Section 35DD ]
In case a company incurs any expenditure exclusively for the purpose of amalgamation or demerger, such expenditure can be written off in five equal installments i.e., 1/5th every year.
M. Amount given to employees under VRS [ Section 35DDA ]
Any amount given by employer to employee on voluntary retirement such expenditure can be written off in five equal installments i.e., 1/5th every year.
N. Expenses on Prospecting Minerals [ Section 35E ]
All revenue expenditure incurred during 4 years, prior to commercial production are aggregated and 1/10th is debited every year. If one installment remains unadjusted it is added to next year installment and can be carried forward but not beyond 10th year.
O. Following Expenses are Fully Allowed to be Debited u/s 36.
(1) Insurance premium for stock-in-trade and consumable raw material business vehicles and any other business insurance. [ Sec 36(1)(1) ]
(2) Insurance premium on the life of cattle. [ Sec 36(1)(1a) ]
(3) Insurance premium on the health of employees only if paid by cheque. [ Sec 36(1)(1b) ]
(4) Employer's contributation to statutory provident fund recognised provident fund or an approved superannuation fund. [ Sec 36(1)(4) ].
(5) Employer's contribution to gratuity fund. [ Sec 36(1)(5) ]
(6) Bonus or commission paid to employees. [ Sec 36(1)(2) ].
(7) Deduction of discount on zero coupon bond. [ Section 36(3a) ]
The pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond calculated in the manner as may be prescribed shall be allowed to be debited.
(8) Loss on sale or death of animals. [ Sec 36 (1)(6) ]
(9) Interest on loan taken for business purposes from any person except on own funds. The amount of interest on loan taken for acquisition of new asset for extension of existing business or profession from the period between the date of taking loan and the date on which asset is first put into use ( whether capitalized or not) shall not be allowed to be debited. [ Sec 36(1)(3) ]
(10) Actual bad debts of the year. Debt must be incurred in the ordinary course of business. Reserve or provision for bad and doubtful debt will not be allowed. [ Sec 36(1)(7) ]
(11) Expenditure on promotion of family planning are fully allowed only to companies, others cannot debit it. Capital expenditure is allowed for companies only to be written off 1/5th every year.
(12) Any amount paid by employer as premium under Keyman's insurance scheme is fully allowed.
(13) Creation of reserves by banks [ Section 36(7) ]. Banks and other financial institutions are allowed to create a provision for bad and doubtful debts as under :
(a) Scheduled and Non-scheduled banks excluding foreign banks or a co-operative bank ( excluding a primary agricultural credit society or a primary co-operative agricultural and Rural Development Banks) is 7.5% of total income before allowing deductions u/s 80 and 10% of aggregate average advances made by rural branches of these banks.
(b) Foreign Banks is 5% of total income before allowing any deduction u/s 80.
(c).Public Financial Institutions, State Finance Corp. and State Industrial Investment Corp is 5% of total income before allowing deductions u/s 80C to 80U.
(14) Contribution to Exchange Risk Administration Fund [ Section 36(10) ] Amount paid by a public financial institution towards Exchange Risk Administration Fund shall be fully allowed to be debited.
(15) Expenditure by a corporation or body incorporate [ Section 36(12) ] w. e. f. 1-4-2002 any expenditure incurred by a corporation or body incorporate for its objects and purposes authorised by the Act under which it has been set up shall be fully allowed to be debited.
(16) Deduction of banking cash transaction tax [ Section 36(13) ] Any amount of banking cash transaction tax paid by the assessee during the previous year on the taxable banking transactions entered into by him shall be allowed to be debited.
(17) Security Transaction Tax (STT). During the course of its business, any security transaction tax paid by the assessee during the previous year shall be allowed as deduction provided the income arising from such taxable securities transaction is included in the income computed under the head Profits and Gains of Business and Profession.
(18) Deduction of Commodity transaction tax [ Section 36(1)(16) ] [ w. e. f. A. Y. 2014-15 ].
Any commodities transaction tax paid by the assessee shall be allowable as deduction. This deduction shall be allowed if the assessee is a dealer in commodity derivatives and income arising from such commodities transaction is included in the income computed under the head Profits and gains of business or profession.
Expenditure by a sugar mill to purchase sugarcane.
A co-operative society running a sugar mill shall be allowed to debit the purchase price of sugarcane which may be equal or less than the price fixed or approved by the government.
Important Points :
(a) No depreciation u/s 32 shall be allowed on capital expenditure incurred / capital asset acquired to promote family planning among employees.
(b) Expenditure on family planning incurred by a non-corporate assessee ( i.e., individual, HUF, Firm etc.) is not allowed as deduction u/s 36(1)(9) . However, a non-corporate assessee can claim deduction only in respect of revenue expenditure incurred on family planning u/s 37(1). Thus, capital expenditure incurred on family planning incurred by a non-corporate assessee is not allowed as deduction at all.
EXPENSES ALLOWED UNDER SECTION 37
Any other expenditure incurred by the assessee is fully allowed to be debited if it fulfils the following conditions :
(a) Expenditure is incurred by the assessee from his own pocket.
(b) It is incurred during the relevant previous year.
(c) It is not of personal nature.
(d) It is not of capital nature. and
(e) It is incidental to carrying on of the business.
As such entertainment expenditure, advertisement expenses, hotel and daily expenditure of employees on tours, legal expenses such as expenditure on breach of contract, a disadvantageous relationship, on a suit relating to the ownership of business assets and on income tax appeal, expenditure on guest house and holiday homes are fully allowed.
Any expenditure incurred on advertisement in souvenir or magazine of a political party is not allowed to be debited. Legal expenditure on criminal case, on acquiring an asset or curing title of asset and a personal case of employee are also not allowed.
Disallowance of Expenditure related to 'Corporate Social Responsibility ' [ Explanation 2 to Section 37(1) w. e. f. A. Y. 2015-16 ] . Any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 115 of the companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of the business or profession u/s 37(1) and hence shall not be allowed as deduction while computing Income under the head Business or Profession. It is so because CSR expenditure has been regarded as were application of income by a company and hence cannot be allowed as deduction for computing the taxable income of the company.
Allowability of CSR expenditure specified in Section 30 to Section 36. It is important to note that the above disallowance of CSR expenditure relates to CSR expenditure allowable u/s 37(1) . However, the CSR expenditure which qualifies for deduction u/s 30 to section 36 shall be allowed as deduction subject to fulfillment of conditions prescribed, if any in respective sections.
Deduction for agents of LIC and Mutual Funds Out of Commission.
(a) If amount of commission exceeds Rs 60,000 No adhoc deduction. The agent must maintain his accounts.
(b) If amount of commission does not exceed Rs 60,000.
(1) For agents of UTI, Post Office & Mutual Funds an adhoc deduction of 50% of such commission is allowed.
(2) For agents if LIC 50% of first year's commission + 15% of renewal commission and if figures regarding commission are not available separately theb1/3rd of such commission or Rs 20,000 whichever is less shall be allowed. No deduction out of bonus commission shall be allowed.
EXPENSES DISALLOWED [ U/S 40A ]
(1) Any interest, commission or brokerage, fees for professional services or fees for technical services payable
(a) outside India.
(b) in India to a non-resident not being a company. or
(c) to a foreign company.
on which tax is deductible at source but has not been deducted or, after deduction, has not been paid to the Government before the expiry of the time prescribed under sub-section (1) if section 200 and in accordance with the other provisions, it shall not be allowed to be debited. Where in respect of any such sum, tax has been deducted and paid in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. [ Section 40(a)(1) ]
(2) Any interest, commission or brokerage, fees for professional services or fee for technical services payable to a resident or amounts payable to a contractor or sub-contractor being resident for carrying out any work ( including supply of labour for carrying out any work) on which tax is deductible at source but has not been deducted or, after deduction, has not been paid to the Government before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with the other provisions, it shall not be allowed to be debited.
Where in respect of any such sum, tax has been deducted and paid in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. [ Section 40(a)(1a) ]
(3) Any amount paid on account of Security Transaction Tax shall not be allowed to be debited. [ Section 40(a)(1b) ]
(4) With effect from A/Y 2006-07 any sum paid on account of fringe benefit tax under section 115WB shall not be allowed to be debited. [ Section 40(a)(c) ]
(5) Any amount of tax on income under the head Profits and Gains of Business or Profession such as income tax is not allowed to be debited. [ Section 10(2) ]
(6) Any amount of wealth tax is not allowed to be debited. [ Section 40(a)(2a) ].
(7) Any amount paid to a person which is chargeable under the head Salaries if it is payable :
(a) Outside India.
(b) To a non-resident.
and if tax has not been deducted or has not been paid according to the provisions of TDS, such amount shall not be allowed to be debited. [ Section 40(a)(3) ].
(8) Any contribution by employer to Provident or any other fund established for the benefit of employees shall not be allowed to be debited if employer has not made effective arrangements to deduct tax at source. [ Section 40(a)(4) ]
(9) Any amount paid as tax on perks given to employee as covered u/s 10(10CC) . [ Section 40(a)(5) ]
EXPENSES DISALLOWED IN CERTAIN CASES [ Section 40A ]
(1) Any payment made to a relative for services rendered or goods purchased shall be allowed only up to its fair market value. If assessing officer is satisfied that amount paid is more than its fair market value, and payment has been made to avoid tax he can disallow the expense.
(2) Payment exceeding Rs 20,000 ( Rs 35,000 payment given to a transport operator) must be made by crossed cheque or bank draft. If made in cash or through a bearer cheque, 100% [ 20% upto assessment year 2007-08 ] of such payment will be disallowed. In exceptional circumstances payment exceeding Rs 20,000 ( Rs 35,000 to a transport operator ) can be made in cash.
DEEMED PROFITS U/S 41
(a) Any expenditure or deduction claimed earlier but recovered later is income of the year in which recovered.
(b) Capital expenditure incurred on scientific research earlier but recovered later is income of the year in which recovered.
(c) In case depreciation is claimed on straight line method and it is sold, demolished, destroyed or discarded during the year, gain if any shall be deemed as business profit but it cannot exceed amount of depreciation allowed so far.
(d) Bad debt recovered but allowed earlier is income of the year in which recovered.
(e) Loss of discontinued business cannot be adjusted from any other income but can be set off from deemed profits, if any.
EXPENSES TO BE ALLOWED IF ACTUALLY PAID U/S 43B.
(a) Payment of Excise duty, tax ( sales tax, land revenue, local taxes) bonus to employees, interest on loan taken from financial institutions or banks and any payment payable by the assessee as an employer in lieu of any leave at the credit of employee are allowed to be debited only if these are paid up to 31st March. These payments can still be allowed even if these are paid in next year but before the prescribed date of filing of return.
(b) Employer's contribution to provident fund or Employee's State Insurance Corporation fund [ ESI Fund ] can be debited only if these are paid before due date fixed under respective law.
(c) In case payment is made by cheque the proof of its encashment within 15 days from due date must be furnished.
OTHER PROVISIONS U/S44
Compulsory Audit for Non Company Assessees [ Section 44ab ]
Any person who is a non corporate assessee must get his accounts audited if his gross receipts from business exceed Rs 1 crore or from profession gross receipts exceed Rs 25,00,000 audit report is to be furnished along with return.
Profit from the business of Civil Construction or Supply of Labour [ Section 44AD ]
This section provides for levy of tax on minimum profits of such business. The minimum profit is :
(a) The profit declared in annual return field. or
(b) 8% of the gross receipts paid or payable to the assessee during the previous year on account of such business. whichever is higher.
This section is applicable only if gross receipts of the assessee do not exceed Rs 40,00,000.
In case 8% of gross receipts are taken as profit, it will be presumed that all the expenses allowable u/s 30 to 38 have been claimed.
For calculating the monetary limits under section 44AA and 44AB, the gross receipts of above business shall be excluded. In case of the business covered u/s 44AD, the provisions of section 44AA and 44AB not apply.
Compulsory Audit : An assessee may claim lower profits and gains than the amount specified above if he maintains such books of accounts or other documents as specified u/s 44AA, and gets his accounts audited and a report is furnished u/s 44AB.
With effect from 1-4-2004 an assessee may claim lower income and he shall be required to maintain accounts as per section 44AA and get them audited as per section 44AB.
The provisions of Sec.44AD shall not apply to following persons :
(1) A person carrying on profession as referred to in Section. 44aa(1) .
(2) A person earning income in the nature of commission or brokerage. or
(3) A person carrying on any agency business.
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