Scheme of deductions and allowances Arrangement of Income Tax Act 1961.

Section 28 defines various kinds of incomeSection 29 permits deductions and allowances laid down by section 30 to 44 while computing profit and gains of a business or profession. **

Basic principles governing admissibility of deductionsOnus to prove admissibility of an expenditure.Allowance are cumulative means can not be denied unless expressly prohibits by any other section.Allowable expenditure relates to the previous year only. 4.Business should be carried on during the previous year. 5. Expenditure should have been incurred with assesses own business.**

Basic principles governing admissibility of deductions6. No allowance in respect of non- assessable business.7.Expenditure tainted with illegality.8. No allowance for contingent liability.9. No allowance for anticipated losses.10. Relevance of distinction between capital and revenue expenditure**

Deduction expressly allowedRent/ rates/taxes/repairs/ insurance u/s 30Depreciation u/s 32 Expenditure on scientific research u/s 35 Interest on borrowed capital u/s 36(1)(iii)Bad debt {36(1)(iv)} General deduction u/s 37(1)

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DEPRICIATION [Sec. 32]Meaning of depreciation Depreciation allowance [Sec. 32] - Depreciation shall be determined according to the provisions of section 32.Conditions for claiming Depreciation - In order to avail depreciation, one should satisfy the following conditions:1 Asset must be owned by the assessee.2 It must be used for the purpose of business or profession.3 It should be used during the relevant previous year.4 Depreciation is available on tangible as well as intangible assets.

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Assets qualify for depreciation Block of Assets [Sec. 2(11)] - The term block of assets means a group of assets falling within a class of assets comprising tangible assets, being buildings, machinery, plant or furniture;intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature.In respect of which the same percentage of depreciation is prescribed.

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ContdWritten Down Value [Sec. 43(6)] - Written down value for the assessment year 2009-10 will be determined as under:

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Step 1Find out the depreciated value of the block on the April 1, 2008.Step 2To this value, add actual cost of the asset (falling in the lock) acquired during the previous year 2008-09.Step 3From the resultant figure, deduct money received/receivable (together with scrap value) in respect of that asset (falling within the block of assets) which is sold, discarded demolished or destroyed during the previous year 2008-09.

ContdMeaning of Actual Cost [Sec. 43(1)] - It means the actual cost to the assessee as reduced by the proportion of the cost thereof, if any, as has been met, directly or indirectly, by any other person or authority.If written down value of the block of asset is reduced to zero, though the block is not empty - No depreciation is admissible.If the block of assets is empty or ceases to exist on the last day of the previous year though the written down value is not zero - No depreciation is admissible.**

Rules of Depreciation & rates. Actual Cost includes all expenses directly related to acquisition of asset. Such as cost price of asset, interest on capital for asset, bank charges, installation charges, other incidental charges .Any subsidy or relief granted will be reduce to arrive actual cost. **

Rule of Depreciation & rates. 50% rate of depreciation if asset used less than 180 days in first previous year.If an asset is not used at all, no depreciation in respect of that asset. When a depreciable asset (on which depreciation is claimed on straight line basis) of a power generating unit is disposed in a previous year, then terminal depreciation (loss) is deductible or balancing charge (gain) is taxable

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Additional depreciationCondition for claiming additional depreciationThe assessee must be engaged in manufacturing or production of any article or thingNew plant and machinery should be acquired and installed after 31.03.205It should be eligible plant and machineryAdditional depreciation, in addition to normal depreciation, @ 20% is available.

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If asset is used for less than 180 days during the previous year, in which its purchased, then additional depreciation is restricted to 10% of actual cost. When a depreciable asset(on which depreciation is claimed on straight line basis) of a power generating unit is disposed in a previous year, then terminal depreciation (loss) is deductible or balancing charge (gain) is taxable**

Unabsorbed depreciation Depreciation allowance is first deductible from the profit and gain of B/PIf depreciation allowance is not fully deductible under the head profit and gain of B/P than it is deductible from income chargeable under other heads excluding head salaries If depreciation allowance is still unabsorbed , it can be carried forward to the subsequent years by the same assessee.

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Unabsorbed depreciation 5. No time limit is fixed for the purpose of C/f of unabsorbed depreciation6. In the subsequent year rule 2 will follows.6. Order of priority for setting off in subsequent years (i) current depreciation (ii) B/F business loss(iii) unabsorbed depreciation.

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General deduction u/s 37(1)Conditions :-Expenditure should not be in the nature described u/s 30-36 not be Capital in naturenot be Personal expenditurehave incurred in the previous yearbe in respect of business carried on by the assessee.have been expended wholly and exclusively for such business. 7. not have been incurred for any purpose which is an offence or prohibited by law

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Basis of ChargeCapital Gains tax liability arises only when the following conditions are satisfied:There should be a capital asset.The capital asset is transferred by the assesseeSuch transfer takes place during the previous year.Any profit or gains arises as a result of transfer.Such profit or gains is not claimed exempt from tax under section 54, 54B, 54D, 54EC, 54F, 54G, and 54GA

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Capital AssetsCapital asset is defined to include property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. However, following are excluded from the definition of capital assets:Any stock-in-trade, consumable stores or raw material held for the purposes of business or profession.Personal effects of the assessee, that is to say, movable property including wearing apparel and furniture held for his personal use or for the use of any member of his family dependent upon him. However, Jewellery, Archaeological Collections, Drawings, Paintings, Sculptures, or Art Work will not be considered as personal effects.

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ContdAgricultural land in India provided it is not situated in any area within the territorial jurisdiction of a municipality or cantonment board, having a population of 10,000 or more; orin any notified area.6 percent Gold Bonds, 1977 or 7 percent Gold Bonds, 1980 or National Defense Gold Bonds, 1980 issued by the Central Government.Special Bearer Bonds, 1991.Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.

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Short-term / Long-term Capital AssetsShort term capital asset means a capital asset held by an assessee for not more than 36 months, immediately prior to its date of transfer. In other words, if a capital asset is held by an assessee for more than 36 months, then it is known as long term capital asset.However in following cases 36 months will be replaced by 12 months :- Equity or preference shares in a companyListed SecuritiesUnits of UTIUnits of a mutual fund specified under section 10(23D)Zero coupon bonds

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Important TermsTransfer of Capital Asset :- Transfer, in relation to capital asset, includes sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law [sec. 2(47)].Full Value of Consideration :- The expression full value means the whole price without any deduction whatsoever.Expenditure on Transfer :- The expression expenditure on transfer means expenditure incurred which is necessary to effect the transfer.

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ContdCost of Acquisition :- Cost of acquisition of an asset is the value for which it was acquired by the assessee. In case of Depreciable Asset COA is the WDV of asset in the beginning of the year. In case of Slump Sale COA is the Net Worth of the undertaking.Cost of improvement :- Cost of improvement is capital expenditure incurred by an assessee in making any additions/ improvement to the capital asset.

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ContdIndexed Cost of Acquisition :- the amount which bears to the COA, the same proportion as CII for the year in which the asset is transferred bears to the CII for the first year in which the asset was held by the assessee or on 01.04.1981, whichever is later.Indexed Cost of Improvement :- an amount which bears to the COI, the same proportion as CII for the year in which the asset is transferred bears to the CII for the year of improvement.

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Capital Gain ExemptionProfit on sale of property used for residence [S. 54]:- Available to Individual & HUF on transfer of Long-term Residential Property and new residential House property is purchased or constructed.Capital gains on transfer of agricultural land [S.54B]:- Available to Individual on transfer of Agricultural land used by individual or his parent for agricultural purposes during 2 year preceding date of transfer and Agricultural land (urban or rural) is purchased.**

ContdInvestment in certain bonds [S.54EC] :- Available to all assesses on transfer of any long-term capital asset for purchase of Bonds, redeemable after 3 years issued by (a) National Highway authority of India; or(b) Rural Electrification Corporation, **

ContdCapital gain on transfer of certain capital assets not to be charged in case of investment in residential house [S. 54F]:- Available to Individual & HUF on transfer of Long-term Asset other than Residential house Property and residential House property is purchased or constructed.

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ContdCompulsory acquisition of land & building [S.54D]:- Available to all assesses on Compulsory acquisition of land or building which was used in the business of industrial undertaking during 2 years prior to date of transfer, if New land or building for the industrial undertaking is purchased or constructed.**

ContdShifting of undertaking to rural area [Sec.54G]:- Available to all assesses on Transfer of plant, machinery or land or building for shifting industrial undertaking from under area to rural area, if (a) Purchase/ Construction of plant, machinery, land or building in such rural area or, (b) Shifting original assets to that area or, (c) Incurring notified expenses.**

ContdShifting of undertaking to SEZ [Sec.54GA]:- Available to all assesses on Transfer of plant, machinery or land or building for shifting industrial undertaking from urban area to special Economic Zone, if (a) Purchase/ Construction of plant, machinery, land or building in such SEZ or (b) Shifting the original asset to SEZ or, (c) Incurring notified expenses.**

Computation of Short-term Capital Gains**

ParticularsAmountFull Value of ConsiderationXXXLess: Expenses incurred wholly and exclusively for such transferxxxNet ConsiderationXXXLess: Cost of Acquisition xxxLess: Cost of ImprovementxxxLess: Exemption u/s 54B, 54D, 54G, 54GAxxxTaxable Short -term Capital gainsXXX

Computation of Long-term Capital Gains**

ParticularsAmountFull Value of ConsiderationXXXLess: Expenses incurred wholly and exclusively for such transferxxxNet ConsiderationXXXLess: Indexed Cost of Acquisition xxxLess: Indexed Cost of ImprovementxxxLess: Exemption u/s 54, 54B, 54D, 54EC, 54F, 54G, 54GAxxxTaxable Long- term Capital gainsXXX

Indexed Cost*Indexed Cost of Acquisition / ImprovementCost of acquisition / improvement x Cost inflation Index of the year of transferCost Inflation Index (CII) for the first year in which the asset was held by the assessee or for the year beginning on 1.4.1981, whichever is later / the year of improvementIndex*

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General [Section 56(1)]Income of every kind, which is not to be excluded from the total income and not chargeable to tax under any other head, shall be chargeable under the head Income from Other Sources.

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Specific Income [Section 56(2)]Dividends.Lottery winnings etc.: Winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.Any sum received by an employer-assessee from his employees as contributions to any welfare fund, if the same is not chargeable under the head Profits and Gains of Business or Profession.Income by way of interest on securities if not chargeable as Profits and Gains of Business or Profession

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ContdIncome from letting on hire of Plant, machinery or furniture belonging to the assessee, if not chargeable to under the head Profits and Gains of Business or Profession.Income from letting on hire of machinery, plant or furniture and also buildings, and the letting of buildings is inseparable from letting of such machinery, plant or furniture, if the same is not chargeable to income tax under the head Profits and Gains of Business or Profession.Interest on bank deposits and loans

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ContdAny sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy, if the same is not chargeable to income-tax under the head Profits and Gains of Business or Profession or under the head Salaries.Cash Gifts exceeding Rs. 50,000Interest on foreign government securitiesAgricultural income received from outside IndiaIncome from sub-lettingDirectors feeIncome of race establishment

*Index*

Cash Gifts exceeding Rs. 50,000

1.10.2009 onward- exceeding Rs 50,000 or immovable property being land or building or both; (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art; or (ix) bullion; Exception any sum received from relatives ,on occasion of marriage of individual, by way of will/ inheritance, in contemplation of death of the payee, received from local authority. Charitable institute registered u/s 12AA.

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Meaning of relative U/S 56(2)(V)**

Deduction from head income from other sourcesCommission paid for realizing dividend or interest on securitiesDeduction in respect of employees contribution towards staff welfare schemeRepair , depreciation in case of letting out P&M , furniture, building.Standard deduction @ least of (Rs.15000 or 33.33% of family pension) Any other expense for earning income**