income from business and profession - expenses expressly allowed

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Page 1: Income From Business and Profession - Expenses Expressly Allowed

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Welcome Welcome

Page 2: Income From Business and Profession - Expenses Expressly Allowed

Income From Business and Profession - An overview

Prof. V.RAMACHANDRAN.

Times Business School, Vashi,

Navi Mumbai

September.2010September.2010

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Page 3: Income From Business and Profession - Expenses Expressly Allowed

Meaning of “Business” -Section 2 (13):

Business includes any (a) Trade, (b) Commerce, (c) Manufacture, or (d) any adventure or concern in the nature of trade, commerce or manufacture.

The definition of the term is not exhaustive. It covers every facet of an occupation carried on by a person with a view to earn profits.

Two crucial tests are Control and Profit Motive.

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Page 4: Income From Business and Profession - Expenses Expressly Allowed

Meaning of “Profession & Vocation” –

Section 2 (36): Profession includes vocation. The word

implies professional attainments in special knowledge, which is acquired after patient study and application, e.g.: Tax Experts, Financial and Cost Accountants, Lawyers, Engineers, Doctors, etc.

In Income tax no distinction is made between Business, Profession and Vocation.

The income under these is chargeable to tax under one head i.e. Profits & Gains of Business or Profession.

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Page 5: Income From Business and Profession - Expenses Expressly Allowed

Meaning of “Profession & Vocation” – Section 2 (36):

Following types of income are chargeable under this head:

Profits & Gains of any business or profession Any compensation or other payments due or received by any

person. Income of trade professional or similar association from specific

services performed for its members. Profit on sale of import entitlement licenses, incentives, cash

compensatory support and duty drawback. The value of any benefit or perquisite in cash or kind arising from

business or profession. Any interest, salary, bonus, commission or remuneration

received by partner from such firm. Any sum received or receivable for not carrying out any activity

in relation to business, know-how, patent, copy right, etc. Any sum received under key-man insurance policy (including

bonus). Income from speculative business.

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Page 6: Income From Business and Profession - Expenses Expressly Allowed

General Principles governing Assessment of Business Income:

Business or profession should be carried on by the assessee. The emphasis is not on ownership but on the fact of carrying on of business by the assessee. The assessee should have a right to carry on the business and the business may be carried on by the assessee himself or his agent/servant.

The business or profession should be carried on during the previous year. It is not essential that the business should be carried out throughout the year. It could be during any part of the year. Exception to the above principle are:

Recovery/Excess Recovery against deduction already availed.

Sale of Asset used for scientific research. Recovery/excess recovery against bad debts already

availed. Withdrawal from special reserve Sums received after discontinuance of business or

profession.6

Page 7: Income From Business and Profession - Expenses Expressly Allowed

General Principles governing Assessment of Business Income: Incidence of tax arises in respect of all business and

profession carried on by the assessee, which is aggregated and taxed as one item. However, profit and loss of speculative business is kept separately. The loss of a speculative nature can be set off against income from speculative business only

Anticipated and potential profits or losses are not considered for arriving taxable income. This is subject to the exception of valuation of inventory, which is done on the basis of cost or market price, whichever is lower.

Legality or illegality of business is not recognized by Income Tax. All income whether legal or illegal will be subject to tax.

Trading/Revenue Loss only is allowed

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Page 8: Income From Business and Profession - Expenses Expressly Allowed

Basic Principles for Admissibility of Deductions u/s 30 to 44D: Onus to prove is of the assessee. Allowances are cumulative and not alternative Expenditure should relate to previous year. Business should have been carried on during

previous year. Expenditure to be incurred in connection with

assessee’s own business. No allowance is allowed on wasting assets.

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Page 9: Income From Business and Profession - Expenses Expressly Allowed

Basic Principles for Admissibility of Deductions u/s 30 to 44D: No allowance is allowed in respect of non-

assessable business. No allowance is allowed in respect of

expenditure tainted with illegality (penalty, fines).

No allowance is admissible in respect of contingent or non-existent liability.

No allowance in respect of expenditure on items of capital nature is allowed.

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Page 10: Income From Business and Profession - Expenses Expressly Allowed

Deductions Expressly allowed in respect of Expenses/Allowance–u/s 30 to37:

Rent, rates, taxes, repairs and insurance of building (Section 30). In respect of premises taken on rent, actual rent

paid by assessee and cost of repairs not being of capital nature, if undertaken and borne by him.

In respect of premises owned by the assessee no deduction on account of rent is allowable.

Amount spent on current repairs not being of capital nature is allowed.

Amount paid for land revenue, local taxes, insurance for risk of damage or destruction is allowed.

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Page 11: Income From Business and Profession - Expenses Expressly Allowed

Repairs & Insurance of machinery, plant and furniture (Section 31):

Deduction of expenditure incurred towards current repairs(not being of capital nature ) and insurance premium paid against risk of damage and destruction of machinery, plant and furniture is allowed only if the asset is used for the purposes of assessee’s own business or profession during the previous year, the profits of which are subject to tax.

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Page 12: Income From Business and Profession - Expenses Expressly Allowed

Depreciation: Sec.32

Depreciation means

loss or decline in value of useful life of physical asset due to wear and tear, etc.

which cannot be restored by current repairs and maintenance.

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Page 13: Income From Business and Profession - Expenses Expressly Allowed

Assets, which qualify for Depreciation:

Tangible Asset: Building, Machinery, Plant or Furniture

Intangible Asset Know-how, Patents, acquired after 31-3-1998: copyrights, and

trademarks Licences, etc.

Building does not include land. It represents super structure only and includes roads, bridges, culverts, wells and tube wells.

The plant is defined to include ships, vehicles, books, scientific apparatus and surgical equipment but does not include tea bushes, livestock or building, furniture and fittings.

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Page 14: Income From Business and Profession - Expenses Expressly Allowed

Conditions for claiming Depreciation Allowance: Asset must be owned by the assessee. Asset must be used for the purposes of business or profession

and It should be used during the relevant previous year. From the assessment year 2002-03, depreciation is allowable

whether the assessee has claimed it in his return or not

The concept of ownership would mean power of enjoyment and disposal as he likes and right to exclude others, power to alienate, power to make will, etc.

In the case of property taken on lease normally lessor is entitled to depreciation. However, in the case of building with effect from 1st April 1970 the lessee who holds right of occupancy of a building is entitled for depreciation in respect of capital expenditure incurred by him for improvement, renovation or extension 14

Page 15: Income From Business and Profession - Expenses Expressly Allowed

Conditions for claiming Depreciation Allowance: In respect of contract of hire purchase, the

economic ownership rests with the purchaser. Accordingly, he will be entitled to depreciation notwithstanding the fact that under civil law the ownership passes only after the last installment of hire purchase is paid.

The term “use” will embrace passive as well as active use. The machine kept ready for use would be deemed as used although in fact the machine may not have worked at all during the year, e.g. standby engines, etc.

For assets partly used for business or profession, the deduction shall be restricted to a fair proportionate part only

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Page 16: Income From Business and Profession - Expenses Expressly Allowed

Depreciation on Additions during the year:

From the assessment year 1992-93, when the asset is acquired and put to use for less than 180 days during the previous year in which it is acquired, the depreciation thereon shall be allowed at 50% of the rate prescribed in respect of block of assets.

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Page 17: Income From Business and Profession - Expenses Expressly Allowed

Block Asset – Section 2 (11):

The term “block asset” means group of assets falling within a class comprising of - Tangible assets – Building, Machinery, Plant or

Furniture; Intangible assets – Know-how, patents, copyrights,

trademarks, licence, etc. Depreciation is allowed on written down value

method under Income tax for all business and professions except in the case of generation and distribution of power.

For generation and distribution of power, depreciation is allowed on straight-line method.

The term “actual cost” is defined u/s 43(1) & WDV u/s 43 (6).

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Page 18: Income From Business and Profession - Expenses Expressly Allowed

Rate of Depreciation

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Page 19: Income From Business and Profession - Expenses Expressly Allowed

Rate of Depreciation

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Page 20: Income From Business and Profession - Expenses Expressly Allowed

Illustrattion

When Written Down Value of the block assets is reduced to zero, no depreciation is admissible. For instance: -

On 1st April 2005 depreciated value of block of assets (rate of depreciation 15%) is Rs.80,000/-. It consists of Plant-A and B. The Assessee purchases Plant-C (rate of depreciation 15%) during the previous year, 2005-06 for Rs.30,000/- and sells Plant-A on 3rd May 2005 for Rs.1,80,000/-.

In this case, on 31st March 2006, the Assessee has Plant-B and C in the block of assets though the WDV of the block is zero. No depreciation is admissible for the previous year 2005-06(A.Y 2006-07) as will be from the following computation:

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Page 21: Income From Business and Profession - Expenses Expressly Allowed

Solution

RupeesWritten Down Value of the Block consisting of Plant-A & B as on 1st April 2005 80,000Add: Cost of Plant-C purchased

30,000

1,10,000Less: Sale consideration for Plant-A(Though plant is sold for Rs.180000, the amount ofdeduction cannot exceed Rs.110000/-. The difference ofRs.70, 000/- of sale consideration is short-term capitalGain)

110,000Written Down Value of Plant-B & C on 31.3.2006 NilLess: Depreciation for P.Y. 2005-06 NilWDV of the block consisting of Plant-B & C as on 1st April 2006

Nil21

Page 22: Income From Business and Profession - Expenses Expressly Allowed

Illustration

If the block of assets ceases to exist – If all the assets of the block are transferred and the block of assets is empty on the last day of the previous year, no depreciation is admissible in such a case, e.g.:

X Ltd. owns two Plants i.e. Plant A & Plant B on 1st April 2005 (rate of depreciation 15%, WDV Rs.2,37,000/-). The company purchases Plant C on 31st May 2005 for Rs.20,000/- and sells Plant A on 10th April 2005 and Plant B on 12th December 2005 and Plant C on 1st March 2006 for Rs.10,000/-, Rs.15,000/- and 24,000/- respectively.

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Page 23: Income From Business and Profession - Expenses Expressly Allowed

Solution

The WDV of the block of assets will be determined as under:

RupeesWDV of Plant A & B as on 1.4.2005

2,37,000Add: cost of Plant C

20,000

2,57,000Less: Sale proceeds of Plant A, B & C

49,000Written down Value of the Block (which is empty) asOn 31st March 2006

2,08,000 In the aforesaid case, no depreciation is admissible as the block ceases

to exist on the last day of the previous year. Rs.2,08,000/- will be treated as the short-term capital loss on sale of Plant A, B & C. Depreciated value of the block on the 1st day of the next previous year, i.e. 1st April 2006 will be taken as “Nil”.

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Page 24: Income From Business and Profession - Expenses Expressly Allowed

Illustration

When the asset is put to use for less than 180 days in the year of acquisition – If any asset falling within a block is acquired by the assessee during the previous year and is put to use for a period less than 180 days in that previous year, the deduction in respect of such asset shall be restricted to 50% of the amount calculated at percentage prescribed for such block of assets. For instance:-

X Ltd. owns two buildings A & B on 1st April 2005 (rate of depreciation 10%, WDV Rs.14, 15,700/-). He purchases on 1st December 2005 Building C for Rs. 3,10,000/- (Rate of depreciation 10%) and sells building A during the previous year 2005-06 (say January 10,2006) for Rs.8,70,000/-. The depreciation claim for the previous year 2005-06 shall be computed as under:

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Page 25: Income From Business and Profession - Expenses Expressly Allowed

Solution

RupeesWDV of the block (A and B) on 1st April 2005 14,15,700Add: cost of Building C purchased in December 2005 3,10,000

17,25,700Less: Sale proceeds of Building A 8,70,000WDV of the block as at the end of the year 8,55,700Depreciation:Building C Rs.3,10,000 @ 5% 15,500Building B Rs.5,45,700 @ 10% 54,570 70,070Depreciated value as on 1st April 2006 7,85,630

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Page 26: Income From Business and Profession - Expenses Expressly Allowed

Solution (Contd…)

If the building A has been sold for Rs.15,87,000/-, depreciation will be determined as under:

RupeesWDV of the block on 1st April 2005 14,15,700Add: cost of Building C purchased in December 2005 3,10,000

17,25,700Less: Sale proceeds of Building A 15,87,000WDV of the block as at the end of the year 1,38,700

Depreciation:As the WDV is lower than the cost of building that is put toUse for less than 180 days, depreciation shall be 50% of10% of Rs.1,38,700/-

6,935Depreciated value as on 1st April 2006

1,31,765

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Page 27: Income From Business and Profession - Expenses Expressly Allowed

Additional Depreciation: To claim additional depreciation following conditions should be satisfied:

Manufacture/ Production of any article. New plant and machinery acquired and installed after 31st March, 2005. No additional depreciation is available in respect of building, furniture. or old plant and machinery.

Eligibility – An assessee engaged in business of manufacture / production of any article or thing.

Qualifying Assets – Any Plant & Machinery acquired or installed after 31st March 2005 but does not include: Ships and aircrafts. Power Generating Units Plant & Machinery already used either in India or outside India by any other

person. Plant & Machinery installed in office, residential accommodation including

guesthouse. Buildings, Furniture, Office appliances and road transport vehicles. Any Plant & Machinery where whole of the actual cost is allowed as

deduction under income tax act. 27

Page 28: Income From Business and Profession - Expenses Expressly Allowed

Additional Depreciation:

Rate - @ 20% of the actual cost of the new machinery acquired and installed after 31st March, 2005. However, if the asset is put to use less than 180 days then 10%. Additional depreciation is available only in the year in which the asset is first put to use.

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Page 29: Income From Business and Profession - Expenses Expressly Allowed

Illustration

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Page 30: Income From Business and Profession - Expenses Expressly Allowed

Solution

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Computation of additional depreciation.

Page 31: Income From Business and Profession - Expenses Expressly Allowed

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Page 32: Income From Business and Profession - Expenses Expressly Allowed

Expenditure on Scientific Research (Section-35):

Capital (Other than On Land) and Revenue expenditure incurred by assessee for carrying scientific research is allowed if it relates to his business.

Further, expenditure incurred within 3 years immediately preceding the commencement of the business is also allowed in the previous year when business is commenced, provided the same is certified by the prescribed authority. If the asset is sold without being used for the said

purposes, the surplus or deduction allowed whichever is less is chargeable to tax in the previous year of sale of asset.

Deduction is admissible in respect of asset either in the year when the capital expenditure is incurred or subsequent year.

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Page 33: Income From Business and Profession - Expenses Expressly Allowed

Expenditure on Scientific Research (Section-35):

Contribution to outsiders: Where the Assessee does not himself carry on

scientific research but makes contribution to other institutions for this purpose a weighted deduction is allowed on one and one fourth times of payment if

Payment is made to an approved scientific research association which has object of undertaking scientific research related to or not related to assesses business.

Payment to approved university, college, institution for scientific research.

Payment to an approved university, college, or institution for the use of research in social science or statistical research.

Payment to National Laboratory, University, IIT, or specified person as approved by prescribed authority.

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Page 34: Income From Business and Profession - Expenses Expressly Allowed

Expenditure on Scientific Research (Section-35):

Expenses on In-House R&D. The tax payer is a company. Engaged in business of biotechnology or manufacture

of production of any drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any article or thing notified by board.

Incurs R&D expenditure of capital or revenue nature (other than on any land and building) upto 31st March 2012.

The facility is approved DSIR-Govt. of India. The accounts are maintained and audited by the

prescribed authority. Amount of Deduction :-

A sum equal to one and one half times of the expenditure incurred shall be allowed

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Page 35: Income From Business and Profession - Expenses Expressly Allowed

Expenditure on acquisition of Patent Rights & Copyrights (Sec. 35A):

Capital expenditure incurred before 1.4.1998 and used for Business or Profession is allowable in equal installments for a period of 14 years commencing from the year of acquisition.

The profit or loss on sale of patent rights is adjusted in the year of sale.

In respect of capital expenditure incurred on or after 1st April 1998, depreciation is allowable under section 32.

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Page 36: Income From Business and Profession - Expenses Expressly Allowed

Other Deductions

Amortization of Telecom Licence Fees (Section 35ABB) – The expenditure is of capital nature Incurred for acquiring any right to operate

Telecommunication services Incurred before or after commencement of business Payment has been actually made to obtain a licence

Amount of deduction:-The payment will be allowed in equal installments over the period starting from the year in which payment is made and ending in the year in which licence comes to an end

Profit or loss on sale of licence is taken in to account while computing business in the year of sale

.

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Page 37: Income From Business and Profession - Expenses Expressly Allowed

Other Deductions

Expenditure on Eligible Projects or Schemes (Section 35AC) for promoting social and economic

welfare or uplift of public. Who can claim:

Company or a person other than a company. Expenditure to be incurred by Assessee

or public sector company or local authority or institution approved for carrying out the project

Page 38: Income From Business and Profession - Expenses Expressly Allowed

Other Deductions

Amortization of Preliminary Expenses (Section 35D)

Preliminary expenses incurred after 31st March 1970 by an Indian company or a resident non-corporate before commencement of business or after commencement of business in connection with extension of business or setting of new industrial undertaking etc will qualify for amortization

Amount of Deduction: The aggregate amount cannot exceed 5%on cost of project to all assessees and for Indian companies up to 5% of capital employed

1/5 of qualifying amount allowed as deduction in each 5 consequtive years in which business commences business

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Page 39: Income From Business and Profession - Expenses Expressly Allowed

Other Deductions

Amortization of Expenditure on Voluntary Retirement (Sec. 35DDA)

Any sum incurred by an assessee by way of payment to an employee in connection VRS,1/5 of the amount so paid shall be allowed as deduction in computing the income from business and the balance in four immediately succeeding years

Page 40: Income From Business and Profession - Expenses Expressly Allowed

General Deductions - Section 37(1):

This is a residuary section to enable assessee to claim deduction in respect of expenditure not specifically dealt with. Following conditions should be satisfied for claiming deduction under this section: The expenditure is not covered under section 30 to 36. It is not capital expenditure. It is not personal expenditure of assessee. It is incurred in the previous year. The expenditure is wholly and exclusively and

necessarily incurred for the purposes of business or profession.

It is incurred for purpose, which is not an offence or prohibited in law.

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Page 41: Income From Business and Profession - Expenses Expressly Allowed

Thank You!Thank You!

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