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Expenditure on eligible projects or schemes [Section 35AC]

• Where an assessee incurs any expenditure by way of payment of any sum to (i) a public sector
company or (ii) a local authority or (iii) to an association or institution approved by the National
Committee for carrying out any eligible project or scheme for promoting the social and economic
welfare of or the uplift of the public as the Central Government may specify, the amount so paid,
shall be allowed as deduction provided a certificate in Form No. 58A is obtained from the said
institution and furnished along with the return of income.

Expenditure by way of payments to associations and institutions for carrying out Rural Development
Programmes [Section 35CCA]
• Under section 35CCA, any assessee who is carrying on a business/profession shall be allowed a
deduction of the amount of the expenditure incurred by way of payment of any sum:
• (a) to an association or institution, which has as its object the undertaking of any rural
development programme approved by the prescribed authority;
• (b) to an association or institution engaged in training of persons for implementing rural
development programmes;
• (c) to National Fund for Rural Development set up by the Central Government;
• (d) to the National Urban Poverty Eradication Fund set up and notified by the Central
Government.

Amortisation of certain preliminary expenses [Section 35D]


• Assessees who can claim deduction under this section are:
• (i) Indian Company, or
• (ii) a person other than a company who is resident in India.
• [Foreign company excluded]
Expenditure in respect of which deduction is available
• (a) Expenditure incurred before the commencement of business; or
• (b) expenditure incurred after the commencement of business in connection with the extension
of existing undertaking or in connection with setting up a new Unit.

Corporate assessee Non-Corporate assessee

5% of cost of project or 5% of the cost of the project


5% of capital employed
Whichever is More

• Quantum of deduction: The amount qualifying, as per the limits specified above, shall be allowed as
a deduction in 5 equal annual installments

Amortisation of expenses incurred for amalgamation (35DD)
 Indian company
 Deductions in five successive installments

Amortisation of expenses under voluntary retirement scheme


• Any assessee
• Deduction 1/5 every year for 5 years

Other deductions (section 36)


• 1. Insurance premium of stocks
• 2. Insurance premium of cattles (milk cooperative society)
• 3. Insurance on health of employees
• 4. Bonus or commission to employees
• 5. Interest on borrowed capital
• 6. Discount on issue of zero coupon bonds on pro rata basis to period of life with rounding
off the time
• 7. Employer/s contribution towards recognised provident fund and approved gratuity fund
• 8. Bad debts (no provision is eligible for deduction)
• 9. Allowance in respect of animal
• If died /useless
• Used as capital asset
• Allowed loss in that year = Original cost- sale of animals)
• No depreciation is allowed any time on animals
• 10. Expenditure on family planning amongst the employees
• For Company assessee
• Revenue expenditure- Fully allowed
• Capital Expenditure - 1/5th every year
• Note- where profits of the business are not sufficient to absorb any rev or cap exp on family planning,
the balance shall be treated as unabsorbed expenditure
• 11. Banking cash transaction tax paid
• 12. Securities transaction tax paid
• 13. Commodity transaction tax paid

General deductions- conditions


• The expenditure should not be of the nature described under sections 30 to 36.
• It should not be in the nature of capital expenditure.
• It should not be personal expenditure of the assessee.
• It should have been incurred in the previous year.
• It should be in respect of business carried on by the assessee.
• It should not have been incurred for any purpose, which is an offence or is prohibited by any law.
Example
• Remuneration to employees
• Payment of compensatory damages
• Legal expenses
• Expenditure on raising loans, advertisement
• Diwali and mahurat expenses
• Payment for telephone etc

Expenses not deductible


Sections 40, 40A and 43B are in the nature of overriding provisions which provide that even if an
expenditure or allowance comes within the purview of any of the sections 30 to 38 as well as sections 40, 40A
or43B, sections 40, 40A and 43B shall prevail and those of relative sections 30 to 38 shall have no application.
Amounts not deductible [Section 40]
(1) in the case of any assessee [Section 40(a)]
(a) Any interest, royalty, fees for technical services, or other sum chargeable under Income-tax Act which
is payable
(a) outside India; or
(b) in India to a non-resident, not being a company or to a foreign company on which tax has not
been deducted or, after deduction, has not been paid during the previous year, or in the subsequent
year before the expiry of the time prescribed under section 200(1) (i.e. before 7th April or 31st May,
as the case may be).
However, where in respect of any such sum, tax has been deducted in any subsequent year or, has
been deducted in the previous year but paid in any subsequent year after the expiry of the time
prescribed under section 200(1), such sum shall be allowed as a deduction in computing the income
of the previous year in which such tax has been paid.
(b) Any interest, commission or brokerage, rent, royalty, fees for professional services, fees for technical
services, any amount payable to a resident contractor or sub-contractor shall not be allowed as a deduction in
the previous year in which the expenses are incurred while computing the income chargeable under the head
‘Profits and gains of business or profession’, if in respect of such expenses tax is deductible at source and such
tax has not been deducted or after deduction has not been paid:
(c) any sum paid on account of fringe benefit tax
(d) any sum paid on account of any rate or ‘tax’ levied on the profits or gains of any business or
profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. In
other words, any income tax levied and paid in India. Further, any sum paid outside India which is
eligible for relief under section 90 (double taxation relief) or deduction under section 91 (unilateral
relict), is not allowable as a deduction;
(e) any sum paid on account of wealth tax under the Wealth Tax Act and any tax of a similar character
chargeable under any law in force in any country outside India;
(f) any payment which is chargeable under the head “Salaries “, if it is payable:
(a) outside India, or (b) to a non-resident and if the tax has not been paid thereon nor deducted
(g) any payment to provident fund or other fund established for the benefit of employees of the assessee,
unless the assessee has made effective arrangements to secure that tax shall be deducted at source
from any payments made from the funds which are chargeable to tax under the head Salaries;
(h) any tax actually paid by any employer on the perquisites not provided by way of monetary payment
shall not be eligible for deduction while computing tl~e business income of the employer.
(2) Disallowances in case of a partnership firm [Section 40(b)]: These are discussed in detail in the
chapter on Assessment of Partnership Firms. Interest on capital! loans of the partners is allowed upto 12%
p.a. and salary commission, etc. to a working partner is allowed upto certain limits and as per terms of the
partnership deed.
(3) Disallowance in case of AOP/BOI [Section 40(ba)J: Any payment of interest, salary, bonus or
commission or remuneration, by whatever name called, made by an AOP or BOl to its member shall not be
allowed as deduction.

Expenses or payments not deductible in certain circumstances: [Section 40A1

Expenses or payments not deductible where such payments are made to relatives [Section 40A(2)]: Where the
assessee incurs any expenditure, in respect of which payment has been made or is to be made to certain
specified persons (i.e. relatives or close associates of the assessee), and the Assessing Officer is of the opinion
that such expenditure is excessive or unreasonable having regard to the fair market value of the goods,
services or facilities for which the payment is made
Examples
(i) X Co. Ltd., dealing in furniture, buys 100 tables at the rate of Rs. 2,500 per table from R, a director of the
company. The market rate of each table is Rs. 2,000. Tn this case, the payment has been made to a specified
person and is excessive. The assessing officer will disallow an amount of Rs. 50,000 (Rs. 500 x 100) in
computing the business income of the assessee.
(ii) X, an individual carrying on business, has employed his son as the General Manager of the concern and
pays him a salary of Rs. 10,000 per month. Having regard to the qualifications and experience of the son, the
assessing officer feels that the appropriate salary of the son should not be more than Rs. 4,000 per month. The
assessing officer can disallow Rs. 6,000 per month under provisions of this section.

Disallowance of 100% of expenditure if payment is made by any mode other than account payee cheque or
draft [Section 40A(3)(a)]: Where the assessee incurs any expenditure in respect of which a payment or
aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank
or account payee bank draft, exceeds Rs. 20,000, no deduction shall be allowed in respect of such expenditure.

Disallowance in respect of provision for gratuity [Section 40A(7]: Gratuity is a liability which normally arises
according to the length of the service of the employees’ of the assessee. The liability would generally accrue
year after year. No deduction shall be allowed in respect of any provision made for the payment of gratuity to
the employees, even though the assessee may be following the mercantile system of accounting, unless it is a
provision for the purpose of payment of a sum by way of any contribution towards an approved gratuity
fund.
Disallowance in respect of contributions to non-statutory funds [Section 40A(9) As per provisions of various
sections, only the sum contributed by the assessee as an employer towards an approved gratuity fund,
recognised provident fund or an approved superannuation fund (for the purposes and to the extent required
by law), shall be allowed as a deduction. No deduction shall be allowed in respect of any sum paid towards
setting up or formation of any other fund, trust, society, etc. for any other purpose.

Other disallowed expenses


1. Personal expenses or drawings
2. Transfer to reserves
3. Amounts paid as charity
4. Past losses charged to P&L A/c
5. Expenses not for business
6. Penalty paid for infringement for law
7. Insurance premium paid by a firm on life policies of partners
8. gifts given on marriage to relatives

Certain deductions to be allowed only on actual payment [Section 43B}