Profits and Gains of Business and Profession

Session 5A

Charging Section

• As per section 28, income from any Business / Profession shall be taxable under the head Business / Profession.

Business – Section 2(13)

• “Business” includes any Trade, Commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture

Profession – Section 2(36)

• “Profession” includes Vocation

• Income from speculation business [Section 43(5)] shall be taxable under head Business / Profession.

Meaning of Speculative Business

• A Speculative transaction is defined under Section 43(5) to mean a transaction in which a contract for purchase or sale of a commodity including stocks or shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrip.

• The Income referred to in Section 28 is computed in accordance with the provisions contained in Sections 30 to 43D of the Income Tax Act.

• For understanding the deductions under this head, it would be useful to categorize the sections into seven broad categories:

The first category is Deductible Expenses - Sections 30 to 38 [except 37(2)].

• Sections 30 and 31 deal with revenue expenses related to Buildings, Plant and Machinery.

• Section 32 deals with Depreciation. • Section 32A is a special case of capital expenditure allowance

for the first year called investment allowance. • Section 35 relates to expenditure on scientific research and • section 35ABB relates to expenditure for obtaining license to

operate telecommunication services.

The second category is Inadmissible Expenses - Sections 37(2), 40, 40A, 43B & 44-C.

• Not all expenses incurred by the Business are allowable as deductions for tax purposes.

• The sections in this category spell out • the kinds of expenditures that are not allowed

as deduction for tax purposes • and the conditions under which they are not

allowed.

• The third category is where certain amounts have been deposited by specified Businesses in a specified account like a tea Development account or Site restoration fund - Sections 33AB, 33ABA.

• The fourth category related to expenditure on certain eligible projects or schemes – 35AC,

The fifth category relates to accounting issues – Section 35D, 35DD, 35DDA, 41, 43A.

• Section 35D relates to Amortization of Preliminary expenses, • 35DD to amortization of expenditure relating to

amalgamation or demerger and • 35 DDA to amortization of expenditure incurred under

voluntary retirement scheme.• Section 41 deals with the treatment of expenses or losses

which are subsequently recovered while • section 43A deals changes in rates of exchange of currency.

• The sixth category are Special Provisions relating to Oil prospecting, extraction or production and special provision with regard to Public Financial Institutions and Public Companies - Sections 42 & 43D

The Seventh category consists of special computing provisions for specified categories - Sections 44, 44A, 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB,

44-D & 44-DA.

• These are special provisions for computing income or allowing deduction for specific categories.

• Section 44 deals with Insurance Business, • Section 44A with deduction in case of trade, professional or similar

association, • section 44AD with Civil construction, • Section 44AE with the business of leasing and hiring goods carriages, • section 44AF with retail trade, • section 44B with shipping Business of non residents, • section 44BB with exploration of mineral oil,

• section 44BBA with operation of aircrafts in case of non residents,

• section 44BBB with foreign companies engaged in civil construction, erection , testing or commissioning of plant and machinery in certain turnkey power projects,

• section 44D with royalties or fees for technical services in case of foreign companies,

• section 44DA with royalties or fees for technical services in case of individuals.

DEPRECIATION (SECTION 32)

• Block of Asset• Depreciation under Income Tax Act is not

allowed on the basis of individual asset. Depreciation is allowed on the basis of block of assets which means a group of similar type of assets having same rate of depreciation.

Depreciation on the basis of block of assets shall be computed in the manner given below:

• Take opening W.D.V. of the block.• Add purchases during the same year of that particular block.• Deduct Sale price / Insurance Claim / Scrap Value of all the assets sold during the

year relating to the same block.• Depreciation shall be charged on the balance at the end of the year. • If any asset was purchased during the year and was put to use for less than 180

days, in that case depreciation shall be allowed at half the normal rate for that particular asset.

• If any asset was put to use for less than 180 days & the balance left at the end of the year is less than the value of such asset, in that case, depreciation shall be charged at half the normal rate on such balance.

• If all the assets have been sold but still there is some balance it will be called Short Term Loss under Section 50 and no depreciation is allowed.

• If there is Negative Balance, it will be Short Term Gain under Section 50 and no depreciation is allowed.

Depreciation in case of Power generating or generating and distributing of units Section 32(1)(i)

• Power generating units shall have the option to claim depreciation either on the basis of W.D.V. or on the basis of S.L.M.(Straight Line Method) and the option once exercised has to be followed consistently

• if the assessee has opted for depreciation on the basis of W.D.V., depreciation shall be allowed on the basis of block of assets.

• If the assessee has opted SLM, depreciation shall be allowed on the basis of individual asset and further at the prescribed rate.

• However concept of 180 days shall be applicable.

Basic Conditions for claiming Depreciation

• The assessee must be the owner of the asset. The ownership may be whole or fractional.

• The asset must be used for the purpose of carrying on the Business / Profession of the assessee.

• In the year of acquisition, if the asset is put to use for less than 180 days, then it is eligible for only 50% of the normal depreciation.

• The asset in respect of which depreciation is claimed should fall within the eligible classification of assets.

Is it Mandatory to claim depreciation?

• As per explanation 5 to section 32(1), it is mandatory for every assessee to claim depreciation.

• Explanation 5- For the removal of doubts, it is hereby declared that the provisions of this sub section apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income.

Depreciation in case of assets not owned by the assessee.

• If the business of the assessee is carried on in a building not owned by him

• but in respect of which the assessee holds a lease right of occupancy

• and any capital expenditure is incurred by the assessee on the construction, renovation, extension, improvement etc. to the building,

• the assessee shall be eligible for depreciation in the normal manner

• and it does not matter that the assessee is not the owner.

TEA/COFFEE/RUBBER DEVELOPMENT ACCOUNTSECTION 33AB

• Deduction is allowed to all the assesses who are engaged in growing & manufacturing of Tea, Coffee or Rubber and the Deduction allowed is equal to the amount deposited in an account opened with NABARD.

• However the maximum deduction allowed shall be 40% of profits before debiting any amount under Section 33AB.

• Amount has to be deposited within 6 months from the end of the previous year or before the due date of furnishing of return of income whichever is earlier.

• The deduction is allowed subject to the condition that the accounts of the assessee have been audited by a Chartered Accountant.

• The amount so deposited should be utilized subsequently as per the scheme of Tea Board/Coffee Board/Rubber Board of India.

SITE RESTORATION FUND - SECTION 33ABA

• Deduction is allowed to all the assessees engaged in prospecting income, extraction or production of mineral oils.

• The deduction is allowed to the extent amount has been deposited with State Bank.

• However, the maximum deduction allowable shall be 20% of the profits before debiting any amount under Section 33ABA.

• The amount so deposited should be utilized for restoration of the site which is being abandoned.

EXPENDITURE IN CONNECTION WITH SCIENTIFIC RESEARCHSECTION 35

• If an assessee has incurred expenditure in connection with scientific research,

• such expenditure is allowed to be debited to the P&L A/c

• provided the research is related to the Business / Profession of the assessee.

• Capital expenditure also can be debited to P&L Account but expenditure on land is not allowed.

• If any assessee has given any donation or contribution to any approved scientific research, university, college, Indian Company etc,

• deduction is allowed equal to 1.25 times of the donation or contribution.

• There is no condition that the research should be related to the Business / Profession of the assessee.

• Capital expenditure in connection with scientific research is allow to be debited

• only to the extent income is available under the head Business / Profession and the unadjusted expenditure

• is eligible for set off and carry forward under the act, like unabsorbed depreciation.

• If any assessee has incurred any expenditure before commencement of business in connection with scientific research, but within 3 years before the commencement,

• such expenditure shall be allowed in the year in which the business has commenced.

• However, revenue expenditure shall be allowed only to the extent it has been permitted by the prescribed authority.

• If the company is engaged in Bio Technology, Manufacturing of drugs, Pharmaceuticals, Chemicals, Computers, Electronic equipment, Telecommunication equipment or any other product notified by the prescribed authority,

• the deduction is admissible up to 1.5 times the expenditure incurred.

• The Scope of provisions relating to weighted deduction of 150% on expenditure incurred on in-house R&D to the businesses mentioned above, is being extended (as per Budget July, 2009) except for a small negative list.

• The proposed amendment will take effect from 1st April, 2010.

Section 41(3)

• Where an assessee has incurred capital expenditure in connection with scientific research and subsequently the asset was sold by the assessee,

• the amount recovered shall be considered to be the income under the head Business / Profession as per Section 41(3)

• but only to the extent the amount has been debited to the P&L Account.

• Any excess over it shall be taxable under the head Capital Gains.

• Where an assessee has incurred capital expenditure in connection with scientific research

• & the amount was debited to the P&L Account • but subsequently the amount was transferred to the normal

business, • in this case it will be entered in the respective block of assets • and its WDV shall be taken to be NIL • and if such asset has been sold subsequently, • in that case sale price shall be deducted from the WDV of the

block.

LICENSE FOR TELECOMMUNICATIONSECTION 35ABB

• If an assessee has incurred expenditure for the purchase of license for telecommunication,

• such expenditure shall be allowed in installments starting with the year in which the payment has been made,

• and ending with the year in which the license has expired.

• If an assessee has made the payment before commencement of business, such installments shall be allowed from the year in which the business has commenced.

• If the payment has been made in installments deduction shall be allowed from the year in which the installment has been paid.

• If the assessee sells the license • subsequently, any loss shall be debited to the P&L

Account • and if there is any income, it will be taxable under

the head Business / Profession • but only to the extent the amount was debited to

the P&L Account. • Any excess over it shall be taxable under the head

Capital Gains.

DONATION / CONTRIBUTION FOR ELIGIBLE PROJECTSECTION 35AC

• This Deduction is allowed to all assessee in the case of donation or contribution to notified institutions which are carrying on eligible projects.

• “Eligible Project” shall include the projects of social or economic importance, for example Drinking Water Project, Contribution of Houses for the Poor Persons etc.

• A company has the option to incur the expenditure directly also.

NEW SECTION 35AD PROPOSED AS PER FINANCE MINISTER’S BUDGET SPEECH ON 6TH JULY, 2009

• By inserting new section 35AD • businesses are to be given an incentive by providing investment linked tax

exemptions rather than profit linked exemptions. • Investment linked tax incentives are to be provided to begin with, • to the businesses of setting up and operating ‘cold chain’, warehousing

facilities for storing agricultural produce and the business of laying and operating cross country natural gas or crude or petroleum oil pipeline network for distribution on common carrier principle.

• Under this method, all capital expenditure, other than expenditure on land, goodwill and financial instruments are to be fully allowable as deduction.

DONATION / CONTRIBUTION FOR RURAL DEVELOPMENTSECTION 35CCA

• This Deduction is allowable to all categories of assessees, in cases of donation or contribution to the notified institutions for the purpose of Rural Development.

• If there is a contribution to a national fund for rural development, such contribution is also allowed.

• Similarly, contribution to the national urban poverty eradication fund shall be allowed.

AMORTIZATION OF CERTAIN PRELIMINARY EXPENSESSECTION 35D

• The expenses incurred before the commencement of business shall be allowed to be debited

• in five annual equal installments starting with the year in which the business commenced.

• The expenditure is allowed only to the resident assessees and to Indian Companies.

The expenses which are allowed under Section 35D are as given below:

• Expenditure in connection with project report, feasibility report, engineering services, conducting market survey provided the work has been taken up by the assessee himself or by any organization approved by the board.

• Expenses incurred in connection with legal agreements relating to the business or profession.

• Expenses being incorporation fee of the company.• Expenses on drafting and printing of memorandum and articles of

association.• Expenses on issue of share capital and debentures including expenses on

drafting and printing of prospectus and also expenses being commission paid to the underwriters.

• Any other expense prescribed for this purpose.

• The expenses incurred before commencement of business is allowed, to the extent of 5% of the project cost. However, an Indian Company has the option to take 5% of capital employed.

• “PROJECT COST” = Total of actual cost of all the fixed assets as on the last day of the year in which the business was commenced.

• “CAPITAL EMPLOYED” = Total of issued share capital, debentures and long term borrowings as on the last day of the year in which the business was commenced.

• If there is expansion or extension of an existing business, in that case also expenditure shall be allowed in the similar manner.

• If there is amalgamation or De merger, the remaining installments shall be allowed to the amalgamated company or the resulting company.

EXPENDITURE IN CONNECTION WITH AMALGAMATION / DE MERGER - SECTION 35DD

• This expenditure is allowed only to an Indian Company and is allowed for the expenditure incurred in connection with amalgamation / de merger.

• The expenditure is allowed in five annual equal installments.

EXPENDITURE IN CONNECTION WITH VOLUNTARY RETIREMENTSECTION 35DDA

• This Deduction shall be allowed to all categories of assessees and is with regard to the expenditure incurred in connection with Voluntary Retirement.

• The expenditure shall be allowed in five annual equal installments.

PREMIUM FOR INSURANCE OF STOCKSSECTION 36(1)(i)

• Where an assessee has paid premium for the insurance of Raw Material, Finished Goods etc, the premium paid is allowed as a deduction under this head.

PREMIUM FOR INSURANCE OF CATTLESECTION 36(1)(ia)

• Where a Cooperative Society has paid premium for insurance of cattle owned by the members of society, such premium shall be allowed to be debited under this head.

PREMIUM FOR MEDICLAIM POLICYSECTION 36(1)(ib)

• Where an assessee has paid premium in connection with a Mediclaim Policy taken in the name of employees, the premium shall be allowed to be debited.

PAYMENT OF BONUS / COMMISSION TO EMPLOYEESSECTION 36(1)(ii)

• Bonus / Commission paid to the employees is allowed but subject to the provision of Section 43B. Such Bonus / Commission should have been payable to the employees out of profits.

INTEREST ON LOAN TAKEN FOR BUSINESS / PROFESSIONSECTION 36(1)(iii)

• Where an assessee has taken a loan for the purpose of Business / Profession, the interest is allowed without any restriction.

• If the loan has been taken for the purpose of acquiring a capital asset, the interest up to the date of putting the asset to use shall be capitalized, and depreciation shall be allowed on capitalized amount. The interest for the subsequent period shall be debited to the P&L Account as per Section 43(1).

DISCOUNT ON ZERO COUPON BONDSECTION 36(1)(iiia)

• The Discount on Zero Coupon Bonds shall be allowed on pro-rata basis taking into consideration life of such bond in months.

• “ZERO COUPON BONDS” means such bonds for which no return is allowed till the maturity of such bond.

• “DISCOUNT” means difference between the amount received and the amount paid.

EMPLOYER’S CONTRIBUTION TO PF / GRATUITY FUND ETC.SECTION 36(1)(iv)/(v)

• Employer’s Contribution to Registered PF, approved Gratuity fund or other similar funds is allowed but subject to the provision of Section 43B.

EXPENDITURE ON PURCHASE OF ANIMALSSECTION 36(1)(vi)

• Where an assessee has incurred any expenditure on purchase of animals for the purpose of Business / Profession, the expenditure shall be allowed to be debited at the time of death of animal or when the animal has been discarded.

• If the animals are Stock-in-trade, the amount shall be allowed to be debited.

BAD DEBTS / PROVISION FOR BAD DEBTSSECTION – 36(1)(vii), 36(1)(viia) and 41(4)

• Where an assessee has incurred a bad debt in connection with Business / Profession, such bad debt shall be allowed to be debited. If the bad debts debited by an assessee are recovered subsequently, in any deficiency shall be allowed as bad debt and any excess shall be considered to be Income under the head Business / Profession under Section 41(4). However, if the bad debt were not allowed, in that case recovery shall not be considered to be income under the head Business / Profession.

EXPENDITURE ON PROMOTION OF FAMILY PLANNING NORMS (SECTION 36(1)(ix))

• This Expenditure is allowed only to the company assessee who is promoting family planning among its employees. The revenue expenditure has to be debited in the same year.

• Capital expenditure is allowed in 5 annual installments. The Expenditure is allowed to be debited only to the extent income is available under the Business / Profession. The unadjusted expenditure shall be allowed to be set-off and carried forward just like unabsorbed depreciation.

BANKING CASH TRANSACTION TAX (BCTT) (SECTION 36(1)(xiii))

• Where an assessee has paid BCTT, it will be allowed to be debited to the P&L Account. BCTT is not payable in case of withdrawal from savings bank A/c.

• [BCTT HAS BEEN ABOLISHED W.E.F. A.Y. 2010-11]

COMMODITIES TRANSACTION TAX AND SECURITIES TRANSACTION TAX SECTION 36(1)(xv)

• Where an assessee has paid CTT in connection with Sale/Purchase of various commodities as a part of his business, it will be allow to be debited to the P&L Account.

• Where an assessee has paid securities transaction tax in respect of the taxable securities transactions the STT so paid shall be allowed as a deduction from the P&L Account, provided the income from such taxable securities is included in the income computed under the head ‘Profits and Gains of Business and Profession. This is effective from 1st April, 2009.

GENERAL EXPENDITURESECTION 37(1)

• Any other expenditure that wholly and exclusively incurred in relation to the Business of the assessee and is revenue in nature, is covered under Section 37(1).

The expenses which may be allowed under Section 37(1) are as given below:-

• Expenditure being payment of salary to employees.• Expenditure in connection with advertisement (like diaries, calendars etc.) but if

the assessee has incurred capital expenditure, depreciation shall be allowed• Expenditure incurred in connection with traveling relating to Business / Profession

of the assessee including expenditure incurred on stay in hotels etc.• Expenditure incurred on the occasion of Diwali provided the expense is not

personal nature or religious nature i.e. it should be in the nature of Business / Profession.

• Security Deposit under Own Your Telephone Scheme (OYT) or Tatkal Telephone Scheme or Telex Connection shall be allowed to be debited.

• Expenditure being loss due to embezzlement of funds by the employees.• Expenditure due to theft.• Expenditure in connection with legal proceedings.• Any other expenditure relating to the Business / Profession and is revenue in

nature.

• Expenditure incurred for any purpose which is an offence or which is prohibited by law is not admissible as a deduction.

ASSETS IN MIX USESECTION 38

• Where an assessee has any asset in the use of Business / Profession which is also in personal use, in such cases, expenses shall be allowed only to the extent the asset is in the use of the Business / Profession.

PAYMENT OF INCOME TAX OR WEALTH TAX ETC,SECTION 40(a)

• Direct taxes like Income tax, Wealth Tax, FBT, Additional Income tax(CDT), are not allowed to be debited to the P&L Account, but if any person has paid Sales Tax, Excise Duty, Custom Duty, Service Tax etc. it will be allowed to be debited to the P&L Account, subject to the provisions of Section 43B

• Where a person has taken a loan for the payment of Income Tax etc, interest on that loan is not an allowable expense but if the loan has been take for the payment of sales tax etc, interest is allowed.

• Where a person has paid interest for late payment of Income Tax etc, that interest is not allowed but if the person has paid interest for late payment of sales tax etc., the interest is allowed.

• Income tax refund or wealth tax refund are not considered as income of the assessee. But sales tax refund will be considered to be income under head Business / Profession.

• Interest on refund of income tax will be considered to be income under the head Income from other sources, but if the interest is on the refund of sales tax etc., it is considered income under the head Business / Profession.

• Where an assessee has incurred expenditure in connection with the filing of the return of income, the expense is allowed. Similarly, if salary has been paid to an employee who is looking after income tax matters, the salary is allowed. Similarly where there is expenditure in connection with audit, the expenditure is allowed.

PAYMENTS OUTSIDE INDIA WITHOUT DEDUCTING TAX AT SOURCESECTION 40(a)(i)

• Where an assessee has made payment of interest, technical fees etc. outside India or to any Non Resident or to any foreign company in India without deducting tax at source, the payment is disallowed as expenditure.

PAYMENTS IN INDIA TO ANY RESIDENT WITHOUT DEDUCTING TAX AT SOURCE

SECTION 40(a)(ia)

• Where an assessee has made payment in India to any resident person and tax is deductible on such payment at source and such tax has not been deducted, the payment is not allowed as expenditure.

PAYMENT OF SALARY OUTSIDE INDIA WITHOUT TDSSECTION 40(a)(iii)

• Where an assessee has paid salary outside India or salary has been paid in India to any Non Resident and the assessee has neither deducted tax at source nor has the tax has been paid to the government, in such case the expenditure is disallowed. But if either the TDS has been deducted or TDS has been paid to the Government, the salary is allowed to be debited.

PAYMENT OF SALARY AND INTEREST TO THE PARTNER.SECTION 40(b)

• Interest is allowed but maximum @ 12% p.a. simple interest.• Salary, Bonus, Commission etc. is allowed, but only to the working partners &

maximum salary allowed shall be as given below:-– If the partnership firm has specified profession under section 44AA, maximum

salary allowed shall be as given below:-• • BOOK PROFITS SALARY ALLOWED AS

PERCENTAGE OF BOOK PROFITS• Up to 1 Lac 90% or Rs. 50000 whichever is higher• Next 1 Lac 60%• Balance amount 40%

• “Book Profits” means profit and gains of the Business / Profession but before debiting any salary to the partners. If the firm is paying salary less than from the salary calculated by above formula, in that case the lesser salary shall be allowed.

– If any partnership firm has business or non-specified profession, in that case maximum salary allowed shall be as given below:-

• • BOOK PROFITS SALARY ALLOWED AS

PERCENTAGE OF BOOK PROFITS• • Up to 75000 90% or Rs. 50000 whichever is higher• Next 75000 60%• Balance amount 40%

• Salary and interest are allowed to be debited to the P&L account, only if it is permitted as per the partnership deed.

PROPOSED CHANGES TO SECTION 40(b) AS PER FINANCE MINISTER’S BUDGET SPEECH ON 6TH JULY, 2009

• It is also proposed to prescribe uniform limits for both professional and non professional firms for simplicity and administrative ease. The revised limits are proposed to be as under:

• (a) On the first Rs. 3,00,000 of the book-profit or in case of a loss Rs. 1,50,000 or at the rate of 90 per cent of the book-profit, whichever is more;

• (b) On the balance of the book-profit at the rate of 60 per cent;

The proposed amendment will take effect from 1st April, 2010.

PAYMENTS TO RELATIVES / RELATED PARTYSECTION 40A(2)

• Where a person has made a payment whether revenue or capital and such payment has been made to any relative / related person and it is unreasonable / excessive, in such cases it is disallowed to the extent the payment is unreasonable / excessive.

PAYMENT IN EXCESS OF RS. 20,000SECTION 40A (3) RULE 6DD

• Where an assessee • has incurred Revenue Expenditure • and the payment with regard to such expenditure

has been made in a sum exceeding Rs. 20,000 • and such payment was made otherwise than through

account payee cheque or account payee bank overdraft,

• No deduction shall be allowed in respect of such expenditure.

As per Rule 6DD of the Income Tax Rules, a payment in cash or by bearer cheque or by crossed cheque shall be allowed in following cases:

– If the payment is being made to the Government’s financing Institutions (like LIC, UTI etc.) or to Government Banks etc.

– If the payment is being made for purchasing • Agricultural or forest produce.• Products of dairy farming, poultry farming, fisheries etc. and the

payment is made to the producer or cultivator. • Products of cottage industries and the goods have been made

without the aid of power.• Products of Horticulture or Apiculture.

– If the payment is being made in a village / town and there is no bank in that village or town on the date of making the payment and the payment is made to a person who has Business / Profession at that place, or the person ordinarily resides at that place.

– If the payment is being made on a day when the banks are closed due to a strike or otherwise.

– If the payment is being made to the Central / State Government in legal tender.

– Payments of terminal benefits like gratuity, retrenchment compensation etc. to low paid employees (Drawing less than Rs. 7,500 annually) or to their families.

– Where the payment is made by any person to his agent who is required to make payment in cash for goods and services on behalf of such person.

– Where the payment is made by an assessee by way of salary to his employee after deducting the Income-Tax from salary in accordance with the provisions of Section 192 of the Act, and when such employee – • 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• Does not maintain any account in any bank at such place or ship.

SPECIAL PROVISION FOR TRANSPORT OPERATORS ON LONG HAUL JOURNEYS

• As per Finance Minister’s Budget speech on 6th July, 2009, given the special circumstances of transport operators for incurring expenditure on long haul journeys, it is proposed to raise the limit of payment to such transport operators otherwise than by an account payee cheque or account payee bank draft to Rs 35,000/- from the existing limit of Rs 20,000/-. The proposed amendment will apply to transactions effected on or after the 1st October, 2009.

PROVISION FOR GRATUITYSECTION 40A(7)

• In general a provision or a reserve is not an allowable deduction. However, provision for Gratuity is an allowable deduction provided the amount has become due for payment.

CONTRIBUTION TO VARIOUS FUNDSSECTION 40A(9)

• Employer’s Contribution to RPF, SPF, and Approved Superannuation Fund, Approved Gratuity fund or any other fund required under any other Act shall be allowed.

• Employer’s Contribution to URPF, Unapproved Superannuation Fund, Unapproved Gratuity fund etc. shall not be allowed.

• For Example: Employer’s Contribution to Staff welfare Fund or other similar fund is not allowed.

DEEMED INCOME - SECTION 41(1)

• Where an assessee has debited expenditure and subsequently such expenditure is recovered by him, the amount so recovered shall be considered to be his income under the head Business / Profession under Section 41(1)

SALE OF CAPITAL ASSET – SCIENTIFIC RESEARCHSECTION 41(3)

• Where an assessee has incurred capital expenditure in connection with scientific research

• and subsequently the asset is sold by the assessee, • the amount recovered shall be considered to be the income

under the head Business / Profession as per Section 41(3) • but only to the extent the amount has been debited to the

P&L Account. • Any excess over it shall be taxable under the head Capital

Gains.

RECOVERY OF BAD DEBTSSECTION 41(4)

• Where an amount was allowed as bad debt • and subsequently it was recovered, • the amount so recovered shall be considered

to be income under the head Business / Profession

• in the year in which the amount has been recovered.

LOSSES OF DISCONTINUED BUSINESS / PROFESSIONSECTION 41(5)

• Where an assessee has closed down his Business / Profession

• and there are losses relating to such Business / Profession,

• the losses shall be allowed to be carried forward even after expiry of the period of 8 years.

• However such losses can be set off only from income under Section 41(1), 41(3) and 41(4).

• (The above provisions shall not be applicable in case of Speculation Business)

• Section 41(1) relates to some trading benefit in respect of a previously incurred expenditure.

• Section 41(3) relates to • where an asset representing expenditure of a capital nature on scientific

research is sold, • and the proceeds of the sale together with the total amount of the

deductions exceed the amount of the capital expenditure, • the excess or the amount of the deductions so made, whichever is the

less, shall be chargeable to income-tax as income of the business or profession of the previous year in which the sale took place.

Section 41(4)

• Where a deduction has been allowed in respect of a bad debt or part of debt under the provisions of clause (vii) of sub-section (1) of section 36, then, if the amount subsequently recovered on any such debt or part is greater than the difference between the debt or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income-tax as the income of the previous year in which it is recovered, whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not.

Special provisions consequential to changes in rate of exchange of currency – 43A - Expenditure of a capital nature

• Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment—

• (a) towards the whole or a part of the cost of the asset; or• (b) towards repayment of the whole or a part of the moneys borrowed by

him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any,

• the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from—

• (i) the actual cost of the asset as defined in clause (1) of section 43; or• (ii) the amount of expenditure of a capital nature referred to in clause (iv) of sub-

section (1) of section 35; or• (iii) the amount of expenditure of a capital nature referred to in section 35A; or• (iv) the amount of expenditure of a capital nature referred to in clause (ix) of sub-

section (1) of section 36; or• (v) the cost of acquisition of a capital asset (not being a capital asset referred to in

section 50) for the purposes of section 48, • and the amount arrived at after such addition or deduction shall be taken to be

the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid:

CERTAIN EXPENDITURE ALLOWED ONLY ON ACTUAL PAYMENT BASIS - SECTION 43B

• Where an assessee maintains books of accounts on the basis of mercantile system of accounting, all expenditures are allowed on due basis.

• However the expenses listed below shall be allowed only on actual payment basis: -

• Sales tax, Custom Duty, Excise Duty, Service Tax, Municipal tax or License Fee Etc.• Employer’s Contribution to RPF, approved superannuation fund, statutory

provident fund, approved gratuity fund or any other approved fund for employee’s welfare.

• Bonus or Commission to the employees.• Leave salary to the employees.• Interest on loan taken from Public Financial Institutions, State Financial

Corporations, State Industrial Investment Corporation.• Interest on loan or advance from Banks.

• Expenditure listed under Section 43B is allowed only if the assessee has made the actual payment. The proof of having made the payment should be enclosed.

• The payment can be made till the last date of filing of return of income. Otherwise the expenditure shall be allowed in the year in which the payment is made.

ACTUAL COSTSECTION 43(1)

• In case of depreciable assets, the depreciation is allowed on the actual cost (which means total of expenditure incurred up to the date of putting the asset to use).

• Where the assessee has incurred expenditure in connection with transportation of the capital asset, the expenditure on loading and unloading, transit insurance, payments given top the experts for installation of such asset, interest on loan taken for purchase of such asset (but only for the period between purchase of asset and put to use of such asset) etc., such expenditure shall be capitalized.

• Where the assessee has received subsidy from the Government or similar agency, the amount of subsidy will be deducted from the cost while computing actual cost.

BOOKS OF ACCOUNTSSECTION 44AA RULE 6F

• In case of Specified Profession• A person having specified profession has to maintain

any books of accounts which may help the assessing officer in computing his income. However, where the gross receipt from the profession, has exceeded Rs. 1,50,000 during all the three years immediately preceding the relevant Previous year, in such cases assessee should maintain prescribed books of accounts.

• “Prescribed Books of Accounts” shall include Cash Book, Journal, Ledger, Bills Received, Copies of Bills issued etc.

• Where a person is required to maintain the prescribed books of accounts, such person must retain these books of accounts for a period of at least 6 years from the end of the relevant Assessment Year.

“Specified profession” shall include:

• Medical Profession• Architectural Profession• Legal Profession• Profession of Accountancy• Interior Decoration• Technical Consultancy• Authorized representative• Film artist.

• Where a person has started a specified profession during the year, he must maintain prescribed books of accounts if the gross receipts are likely to exceed Rs. 1,50,000

In case of Business or Non-Specified Profession

• Where an assessee has Business or Non-Specified Profession, in such cases no books of accounts are required.

• However, if the gross receipt exceeds Rs. 10 Lac or the income is exceeds Rs. 1,20,000 in any of the three years immediately preceding the relevant P.Y.,

• in such cases the assessee should maintain any books of accounts which may help the assessing officer in computing his income.

• (Prescribed Books are required only if the Books are required to be Audited)

• Where the Business or the Non-Specified Profession has been setup during the year,

• in that case assessee should maintain any books of accounts if the Gross Receipt is likely to exceed Rs. 10 Lac or the income is likely to exceed Rs. 1,20,000.

• Where the income of a person is to be computed on presumptive basis under Section 44AD, 44AE and 44AF

• and such person has rejected presumptive income, • in such case, the person should maintain any books of

accounts which may help the assessing officer in computing his income.

COMPULSORY AUDIT OR TAX AUDITSECTION 44AB

• Where a person is engaged in a business and his turnover during the year has exceeded Rs. 40 Lac, in such cases the person must get his accounts audited in that particular year.

• Where a person is engaged in a specified or a non-specified profession and his gross receipt during the year has exceeded Rs. 10 Lac, in such cases, such person must get his accounts audited in that particular year.

• Where the income of a person is to be computed on presumptive basis under Section 44AD, 44AE and 44AF and such person has rejected the presumptive income, in such cases such person shall be required to get his

accounts audited.

• Where a person is required to get his accounts audited, such person must submit the audit report on or before the last date of filing of his return of income.

• Where an assessee violates the provision of Section 44AB, penalties shall be imposed equal to 0.5% of the turnover but subject to a maximum of Rs. 1 Lac.

PRESUMPTIVE INCOME IN CASE OF PERSONS ENGAGED IN CIVIL CONSTRUCTION

SECTION 44AD

• Where a person is engaged in the business of civil construction or in the business of supply of labor for civil construction and his turnover during the year does not exceed Rs. 40 Lac,

• in that case his income under the head Business / Profession shall be 8% of the Gross Receipt

• and no other expenditure shall be allowed under Section 28-44D

• and such person shall be exempt from maintaining the books of account.

• “Civil Construction” means construction of roads. Dams, bridges, sea port, airport etc.

• While computing Income under the head Business / Profession, no further expenditure shall be allowed under Section 28-44D

• Where the assessee is a partnership firm, in such case salary and interest to the partners is allowed as per Section 40(b).

• The assessee has the option to reject the presumptive income but in that case the assessee has to maintain books of accounts and also he should get the books of accounts audited.

PRESUMPTIVE INCOME IN CASE OF PERSONS ENGAGED IN RETAIL TRADESECTION 44AF

• Where an assessee is in the business of retail trade and the turnover does not exceed Rs. 40 Lac, in such cases income shall be presumed to be 5% of the Gross Receipt.

• While computing Income under the head Business / Profession, no further expenditure shall be allowed under Section 28-44D

• If the assessee is a partnership firm, in that case salary and interest to the partners is allowed as per Section 40(b).

• The assessee has the option to reject the presumptive income but in that case the assessee has to maintain books of accounts and also he should get the books of accounts audited.

PRESUMPTIVE INCOME IN CASE OF NON-RESIDENTS ENGAGED IN SHIPPING BUSINESS SECTION 44B

• Where a Non Resident is engaged in shipping business, the income from shipping business shall be presumed to be 7.5% of the following amounts:-– Amount received in India in connection with

loading of goods etc. outside India.– Income received / receivable in connection with

loading of goods etc. in India.

PRESUMPTIVE INCOME IN CASE OF NON-RESIDENTS ENGAGED IN AIRCRAFT BUSINESS SECTION 44BBA

• Where a Non Resident is engaged in Aircraft business, the income from such Business shall be presumed to be 5% of the following amounts:-

• Amount received in India in connection with loading of goods etc. outside India.• Income received / receivable in connection with

loading of goods etc. in India.

PRESUMPTIVE TAX FROM THE 1ST APRIL 2010, AS PROPOSED IN THE JULY 2009 BUDGET

• The scope of presumptive taxation is proposed to be extended to all small businesses with a turnover up to Rs. 40 lakh as per Budget - July, 2009.

• All such taxpayers are to have the option to declare their income from business at the rate of 8 percent of their turnover and simultaneously enjoy exemption from the compliance burden of maintaining books of accounts.

• As a procedural simplification, they are also to be exempted from advance tax and to be allowed to pay their entire tax liability from business at the time of filing their return.

• This new scheme is to come into effect from the financial year 2010-11.

MINIMUM ALTERNATE TAX

• As per the Finance Minister’s Budget speech on 6th July, 2009, (Section 115 JB)

• Minimum Alternate Tax (MAT) is to be increased to 15 per cent of book profits from 10 per cent.

• These amendments will take effect from 1st April, 2010.

COMMODITIES TRANSACTION TAX

• As per the Finance Minister’s Budget speech on 6th July, 2009, Commodity Transaction Tax (CTT) is to be abolished.

• These amendments will take effect from 1st April, 2009.

Questions for Revision

• What is meant by the term ‘ Block of Assets’ . How is depreciation calculated under the Income Tax Act ?

• What are the basic conditions to claim Depreciation ? Is it mandatory to claim depreciation ?

Questions for Revision

• What are Preliminary expenses ? Discuss the deductibility of Preliminary expenses. Give some examples of such expenses allowable ?

• Are payments in excess of Rs 20,000 in cash deductible under the head ‘ Income from Business and Profession’. What are the exceptions ?

• There are certain expenditures under the head ‘ Income from Business and Profession’ that are deductible only on actual payment basis. Give some examples of such expenditures ?

• What is meant by the term ‘specified profession’. What is meant by ‘ prescribed books of accounts’. Under what conditions does a person engaged in a specified profession have to maintain prescribed books of accounts.

• When is compulsory audit of books of accounts for Income under the head ‘ Income from Business and Profession’ necessary ? When does such report need to be submitted? What are the penalties for non compliance ?

• What is the concept of presumptive income ? Explain the provisions of the Income Tax Act in relation to any one case where presumptive income is permitted?

The End