Professional Documents
Culture Documents
Section 41
Recovery of Loss or Expenditure already allowed or remission of Liability [Sec.41(1)] : Recovered amount shall
be deemed to be PGBP for him or successor of Business & chargeable to tax in the PY of receipt.
Profit on Sale of assets of Power Sector Unit which has claimed Depreciation under SLM [Sec. 41(2)] : If
Moneys payable is greater than WDV, then the difference between Actual Cost & WDV shall be chargeable to
tax as Business Income in the PY in which the amount is due.
Amount realised on sale of capital asset used for scientific research [Sec.41(3)] : Lower of – (i) Amount of
Deduction, or (ii) Sale Proceeds, is chargeable to tax as PGBP in the PY of transfer.
Recovery of Bad debts allowed u/s 36(1)(vii) [Sec. 41(4)] :
1. If recovered amount is greater than the Unallowed amount, then such excess is treated as income u/s 41(4).
2. If recovered amount is lesser than the Unallowed amount, then such deficiency is allowed as deduction u/s
36(2)(ii).
Section 28 Note : Recovery by Successor of business is not taxable.
Set off of Losses incurred in the year of discontinuance of business [Sec. 41(5)] : First set off against Income
u/s 41(1), 41(3), 41(4), 41(4A).
Section 28(i) : Section 28(v) :
Profits & Gains of Business or Profession which carried on by the assessee at any time during the previous year any interest, salary bonus, commission or remuneration, by whatever
any was
Assessee to carry on B & P
name called, due to, or received by, a partner of a firm from such firm:
Trade
Badridas Daga (SC) Sec 2(13) : Business includes : Not Necessary Income/exp of one yr not to be taken/ allowed Provided that where any interest, salary, bonus, commission or
Investment Allowance :
depreciation actually allowed in respect of that block. As per explanation 3
to sec. 43(6), any allowance in respect of any depreciation carried forward
Miscellaneous
u/s 32(2) shall be deemed to be depre iatio a tuall allo ed .
In case of succession
computer & computer software Vehicle Ship or aircraft or any other
capital gain taxed u/s 45 r.w.s. 50. amalgamation/
RATE OF DEPRECIATION IN CASE OF BLOCK OF ASSETS :
Plant & machinery for which whole cost is allowed as deduction Amalgamation/ Demerger/ Business re organisation is exempt. demerger taken place
TANGIBLE ASSETS Rate
(I) Building C/f & set off of depreciation :
(1) Residential Building except hotel and boarding houses. 5 ISSUE: - Unabsorbed depreciation c/f to next yr as
(2) Non-Residential Buildings [office, factory, godown, hotels, boarding, houses 10 Conditions for availing depreciation.
but other than (1) above and (3) below]
X Ltd. sets- up an undertaking in a notified backward area in
depreciation : - ROI not reqd to file.
(3) (i) Buildings for installing Plant and Machinery forming part of water supply or 100 Andhra Pradesh. For this purpose, it purpose, it purchases
- B/f losses to be set off first.
water treatment system for infrastructure business U/S 80 IA (4)(i) new plant and machinery(rate of normal depreciation 15%)
(ii) Purely temporary erections such as wooden structures. In respect of depreciation of - Chronology of deduction :
eligible assets
as follows-
(II) FURNITURE AND FITTINGS (a) Current year Depreciation
(4) Fu itu e a d Fitti gs i ludi g ele t i al fitti gs Ele t i al fitti gs i lude 10 – (owned) wholly or partly, Plant Actual Date of Date of Date when (b) Set off of B/f Buz loss
by the assessee
electrical wiring, switches, sockets, other fittings and fans, etc.) Cost purchase installation put to use (c) Unabsorbed Depreciation
= Qualified
Specific expenditure (5) Compare
inheritance depreciation actually to him. 5% of cost of Project
OR Qualified
3 Asset acquired at higher price from any Actual cost to be determined by the
5% of cost of project Amount
OR amount
Higher Lower
other person using the asset for his Assessing Officer with prior approval of 1/5th
business or profession with a view to Joint Commissioner. 5% of Capital OR
Qualified Amount 1/5th
claim depreciation on enhanced cost and Specified
reduce tax liability Expenditure
4 Asset once belonged to the assessee The WDV at the time of original transfer 1. The deduction u/s 35D depends upon the scalability of the project or the quantum of the capital employment in the business higher
Section 35D provides for the events or activities in respect of which expenditure incurred shall qualify for deduction u/s 35D any
which was used by him for business & is or the price paid for reacquiring the asset, the project cost or capital employed shall result into a higher claim of deduction u/s 35D
transferred and reacquired by him whichever is less. 2.
expenditure incurred as a result of or in connection with such event or activity will qualify as an eligible expenditure u/s 35D.
4A Asset acquired by an assessee from The written down value of the asset to
Accordingly advertisement expenditure incurred as a result of the market survey report shall also qualify as deduction u/s 35D.
another person who had claimed the transferor at the time of transfer to 3. In respect of a Co. the event of issue of shares for public subscription is an eligible activity in relation to which any expenditure incurred
depreciation on such asset and the asset the assessee. shall quality for deduction u/s 35D. for e.g.:- fee paid to the banker to the issue / Merchant Bankers / Share registry transfer agents /
is leased back to such other person underwriting agents towards public subscription process of the shares of the co. shall be eligible for deduction u/s 35D.
5 Building used for private purpose The cost of purchase or construction of The above list is only illustrative & not exhaustive.
subsequently brought into business use. the building as reduced by the notional
depreciation calculated up to the year of Scope of Section 35D
bringing the asset to business use at the
depreciation rate applicable to that year. Phase I AND Phase II
6 & Exp. 2 Asset transferred by a holding Co. to its WDV to the transferor company will be Newly setup business / profession Expansion of business / Profession
to section subsidiary Co. or by a Subsidiary Co, to adopted as the actual cost to the OR
43(6) holding Co. if the following two transferee company.
Same line New line
conditions are satisfied:-
e.g.: PA hired agents to know e.g.: Assessee is currently in the business
(i) Shares of the subsidiary Co. should
the no. of students pursuing of steel now proposing to set up a new
be wholly owned by the holding co.
The report said 50 students
CA in Chennai business of cement. For starting the
or its nominees. business it incurred Rs.25lakhs towards
(ii) The transferee co. should be an PA did not open a branch in feasibility of new project but did not get
Chennai but still had to pay license to operate at the end.
Indian company. mkt survey expenditure. Such
Note: If transferor company was not expenditure shall be eligible Whether Rs. 25L can be claimed by
claiming depreciation since it was for deduction. steel?
Expl. 2C to Block of assets transferred by a private WDV of the block of assets in the hands Section 35D also applies to expansion of business or profession.
S. 43(6) Company to LLP of unlisted Company. The expansion can be either in the same line or a separate line of business. It is an imp. principle of computation that each
The computation under the head B&P shall be undertaken for each business separately.
7 & Expl. Transfer of asset in a scheme of WDV to the amalgamating company will business shall be computed separately to arrive at the income even though such sources of income falls under the same head.
Where the specified expenditure is incurred to the new line of business then its deduction shall be available only on the
2 to Sec amalgamation by amalgamating company be adopted as the actual cost to the
43(6) to amalgamated Indian Company. amalgamated company.
Note: If amalgamating Company was not commencement of such new business. Conversely put, if the new business has to be aborted & it was never commenced then the
claiming depreciation since it was not specified expenditure cannot be allowed as deduction from the income of the existing business they are distinct to each other.
used for its business, then actual cost to
However, if the expansion is sought to be in the same line of business then the treatment of such specified expenditure shall be as
the amalgamated company shall be the
under:
actual cost to the amalgamating
company. Specified expenditure (5+3)
7A Asset transferred by a demerged Actual cost shall be the written down
company to the resulting Indian value in the hands of the demerged
Company. company. Whether the Capital expenditure
Allowed u/s 35D 1/5
8 Asset acquired out of borrowed funds Interest on loan borrowed relating to the expansion is in Yes
period after the asset is first put to use the capital field?
It can be observed that where there is an increase in the capital field of the business then expenditure incurred is a capital
to be the actual cost. Sec 35D Sec 37(1) Sec 35D Sec 35D
expenditure & an expansion of business or a new setup of business shall be governed by the provision of section 35D towards
13 Actual cost of capital asset has been The actual cost of such asset to the
allowed as deduction under section 35AD transferee shall be NIL.
and capital asset is transferred by way of the eligible expenditure. Money borrowed through issue of debentures to expand the business does not increase the capital field
transactions referred to in section 47. & hence expenditure on its issue shall be allowed as deduction u/s 37(1) if it is in relation to an expansion in the existing line of
Although the expenditure on issue of debentures is not capital in nature it cannot be covered u/s 37(1) if it is incurred before
business.
ISSUE :
the commencement of the new business & hence outside the scope of chargeability u/s 28(i). Its deduction is allowed & regulated
Posco Ltd. set up a manufacturing unit in Hyderabad of Telangana on 1st April, 2015. The company invested `
by express provision of sec 35D which enables the deduction that was otherwise not allowed.
20 crore in acquisition of new plant & machinery on 3rd March, 2015 & another ` 20 crore in acquisition of
plant & machinery on 21st December, 2015, out of which ` 10 crore was second hand plant & machinery. The
new plant & machinery were installed & put to use on the date of acquisition. You are required to calculate
the depreciation allowable u/s 32.
Discuss whether Posco Ltd. would be eligible for any other benefit in respect of such investment in plant &
machinery.
What would be the position if such manufacturing unit is set up by Posco & Co., a firm, instead of Posco Ltd ? CA Durgesh Singh ©
(iii) In the case of conversion of a firm/proprietorship into a company, for the remaining period.
4 C. Capital Expenditure (iv)
(v)
In case of conversion of company into LLP, for the remaining period.
No deduction shall be allowed under any other provisions of this Act.
Sec 37(1) Sec. 30, Sec.31
(2) Section 36:- Other deduction
➢ Health Insurance premium paid by any mode of payment other ➢ Such Scheme must be –(a) framed by GIC and approved by central
GENERAL DEDUCTION RENT, RATES, TAXES, INSURACE, (ib)
– Any expenditure REPAIRS OF BUILDING than cash by an employer on health of his employees under a Government, or (b) framed by any other insurer and approved by
Sec.30:- Premises should be occupied scheme. IRDA
➢ Bonus or commission paid to an employee for services rendered ➢ Voluntary payments are deductible if it is for services rendered.
Not being capital in Nature
(ii)
➢ Any bonus exceeding the statutory amount is allowed if such
shall be allowed as by the assessee either as tenant or as
(not otherwise have been payable to him as profit or dividend).
➢ Deduction is subject to the provisions of sec. 43B and Sec. 40A
deductions provided it is owner (except in case of Rent). Current excess payment has been made on account of commercial
incurred wholly and repair (not being in the nature of (2). expediency.
exclusively for the purpose capital (expenditure), local taxes, (iv) ➢ Contribution made by employer to recognized provident fund/ ➢ Deduction is subject to the provisions of Section 43B.
of business & profession approved superannuation fund.
➢ Sum paid by employer towards an approved gratuity fund set up ➢ Deduction is subject to the previous of Section 43B.
municipal taxes, and insurance
(v)
premium of building are allowed. for benefit of his employees.
(va) ➢ Sum received by assessee from his employees as contributions to ➢ “u h su should e edited the assessee to the e plo ee s
Provident Fund or Employee State Insurance Fund or account in the relevant fund(s) on or before the due date.
Repairs and Insurance of Plant, Superannuation fund of any other employee-welfare fund. ➢ Due Date means date by which the assessee is required as an
➢ Such sum received by the assessee is first treated as income e plo e to edit a e plo ee s o t i utio to his a ou t i
machinery and furniture
under Section 2(24)(x) and thereafter, deduction is allowed in the relevant fund(s) under any law, standing order, award, contract
respect of such sum if the relevant conditions are satisfied. of service or otherwise.
(ix) ➢ Expenditure incurred bona fide by company for promoting family ➢ Any unabsorbed family planning expenditure is carried forward and
Sec.31:- The asset should be used for
purpose of business and profession planning amongst its employees. set off in the same manner as unabsorbed depreciation.
current repairs (not being in the nature ➢ Extent of deduction and period: ➢ No depreciation allowable under section 32 if deduction has been
(a) Where expenditure is of revenue nature: 100% in the previous claimed here.
➢ Tax treatment is case of sale of such asset:
of capital expenditure) is allowed
year in which it is uncured.
(b) Where expenditure is capital in nature: 1/5th of such Same as in Section 35.
expenditure deductible in 5 consecutive previous years
The de ided ases ha e, f o ti e to ti e, e ol ed a ious tests fo disti guishi g et ee apital a d e e ue e pe ditu e beginning with the previous year in which the expenditure is
incurred.
(iva) ➢ Contribution made by employer to employees pension scheme ➢ MAXIMUM amount allowed 10% of salary. Salary shall include DA
but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no
touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole referred to in S.80CCD shall qualify for deduction w.e.f. AY 2012- (in terms of employment), but will exclude all other allowances and
operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as 013 perquisites.
they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by
ISSUE:
Lord Cave, in Atheerton v. British Insulated and Helsby Cables Ltd. [1925] to TC 155, 192 (HL) where the learned Law Lord The assessee a listed company wanted some credit facilities from the bank for its business purpose. The banker insisted on personal guarantee of the
stated: directors as a pre-condition for providing financial assistance to the company. The directors were employees (as well as shareholders) of the
company . A resolution was passed for paying commission to the directors and a sum of Rs. 24.37 lakhs each was paid as commission calculated at
…… Whe a e pe diture is ade, ot o l o e a d for all, ut ith a ie to ri gi g i to e iste e a asset or a
the rate of 1.5 % of the principal sum, in respect of which personal guarantee was furnished by the directors to the bank. The AO applied Sec. 36(1)(ii)
advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to and held that if the amount was not paid to them as commission, the same would have been payable as profits or dividend.
an opposite con lusio ) for treati g su h a e pe diture as properl attri uta le ot to re e ue ut to apital. Decision:
The Delhi HC in Control & Switchgear Contractors Ltd. (2014) observed that the act of providing personal guarantee was clearly beyond the scope of
Is expenditure incurred for Not a Capital Following the principle of law laid down by the SC in Empire Jute Addln. CIT v. the services of the Directors as the employees of the company. The assessee company ,in its commercial wisdom, had agreed to pay commission for
construction of expenditure Mills case, the Allahabad High Court , in held that the expenditure Dhampur such guarantees by passing the resolution to that effect.
transmission lines by the which was incurred by the assessee in the laying of transmission Sugar Mills (P.) In such case the AO only has to determine whether the transactions are real and genuine.
assessee for supply of lines was clearly on the revenue account. The transmission lines, Ltd (2015)
power to UPPCL by the upon erection, VESTED ABSOLUTELY IN UPPCL. The expenditure (All.) As regards Sec. 36(1)(ii), the recipient directors were not entitled to receive the amount as commission in lieu of bonus or dividend. The dividend is
assessee deductible as incurred which was incurred by the assessee was for AIDING paid to all the shareholders and the recipient directors were not the only shareholders of the company.
The payment of commission , hence , cannot be taken as payment of dividend.
revenue expenditure? EFFICIENT CONDUCT OF ITS BUSINESS since the assessee had to
supply electricity to its sole consumer UPPCL. THIS WAS NOT AN
ADVANTAGE OF A CAPITAL IN NATURE. Hence it was allowed as (3) 40A(7):- No deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to his employees on their
deduction. retirement or on termination for any reason.
Where the assessee Not a Capital The Karnataka HC observed that expenditure incurred for use of IBM GLOBAL However, the following shall be allowed as deduction:
company came into expenditure customer database DID NOT RESULT IN ACQUISITION OF ANY SERVICES P. A p o isio ade the assessee fo the pu pose of pa e t of a su a of a o t i utio to a ds a app o ed g atuit fu d .
existence on bifurcation of CAPITAL ASSET. The assessee got the right to use the database LTD (2014) (This is however subject to Sec. 43B).
a joint venture company , AND THE COMPANY WHICH PROVIDED THE DATABASE WAS NOT (Kar.)
(4) Disallowance in respect of contributions to non-statutory funds Sec. 40A(9):
can the amount paid by it PRECLUDED FROM USING SUCH DATABASE. Hence the
Any sum (including contribution) paid to Non-statutory / unrecognized welfare funds is not deductible except where such sum is paid as per
to the JVC for use of expenditure incurred is a revenue expenditure.
provisions u/s 36(1)(iv)/(v) or under any other law for the time being in force.
costumer database and As regards payment for obtaining trained and skilled employees,
ISSUE:
transfer of trained it was held that the joint venture company spent lot of money to Can employees contribution to Provident Fund and ESI be allowed as deduction where the assessee-employer had not remitted the same on or
personnel be claimed as give training to employees who were transferred to the assessee efo e the due date u de the ele a t A t ut e itted the sa e o o efo e the due date fo fili g of ‘OI u/s. ?
revenue expenditure? company. They were trained in the field of software. They have Decision :
opted for employment with the assessee company, and for their The Gujarat HC in Gujarat State Road Transport Corpn (2014) has held that “e tio B pe tai i g to e plo e s o t i utio a ot e
past services with the joint venture company, expenditure has applied with respect to employees contribution which is governed by Section 36(1)(va) .
been incurred. In effect, the payment made by the assessee- Note: Contrary decision is provided by other HC.
company was towards expenditure incurred for their training and
recruitment. Therefore the expenditure cannot be termed as
capital expenditure though the benefit may be of enduring in
nature.
(A) Remote areas:-
where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage
Interest paid on partners capital is allowed as deduction in the hands of the firm u/s 37(1) r.w. & 40(b).
industry, to the producer of such product. Interest on unpaid arrears of salary is allowable u/s 37(1).
where the payment is made in a village or town, which on the date of such payment is not served by any bank
Interest payable under tax law
(B) Bank / Govt.:
where the payment is made to RBI, any banking company, State Bank of India or its subsidiary banks, any co-operative bank or land
mortgage bank, any primary agricultural credit society or any primary credit society or the Life Insurance Corporation of India;
where the payment made to the Government is required to be made in cash; towards late payment of
where the payment is made through any bank, including foreign bank, by any of these modes (i) any letter of credit arrangements; TAXES
(ii) a mail or telegraphic transfer; (iii) a book adjustment between banks; (iv) a bill of exchange made payable only to a bank; (v)
Electronic clearing system; (vi) a credit card; (vii) a debit card;
where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; or
where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travellers cheques Indirect taxes Direct taxes
in the normal course of his business.
(6) 37(1): Expenditure not covered u/s 30 to sec. 36 shall be allowed as deduction if, interalia, it is incurred for the purpose of business &
Allowed u/s 37(1) Not allowed, since it
profession
Since it is cannot be said for the
Note:
compensating in purpose of business
(1) If an expenditure is specifically covered u/s 30 to 36 and the conditions therein are not satisfied then such expenditure cannot be
qualified for the purpose of deductions u/s 37(1). For e.g.: nature and profession (*)
(2) The deduction u/s 37(1) is in respect of an expenditure which is holl a d e lusi el for the purpose of Business and profession.
The AO disallowed an ex-gratia payment to the employee on the ground that there was no contractual obligation, therefore such
expenditure cannot be considered exclusively for the purpose of business & profession. The Apex court in a landmark decision in
Sassoon J. David has held that AO should not sit in the chair of assessee & to determine whether particular expenditure is for the
(*) However Interest on Direct tax refund is chargeable under the head IFOS.
purpose of business or not.
(3) Staff welfare Expenses
Note 3 :-
Donation of bus Club facility Recreation Travelling exps. Higher exps. Amount borrowed (1) working capital = for the purpose of B & P
to a school where facility Of Spouse borne by Co. on
children of the Sp. employee Subsequently used for – (1) acquiring capital asset = For the purpose of B &
e plo ees a e
P, subject to the proviso.
enrolled
X X
X (3) Investment in subsidiary :
Provided to all the No When the When it is in
Few Necessary
employees/Substa necessity domain of different domain
specified for purpose To gain effective control For Carrying on
ntial pool of education is altogether, not
employees of B&P in the existing business Independent business
employees in line with related to
the business business
of the Co. for the purpose of B & No deduction
P, hence deduction
for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such
asset was first put to use, (6) towards payment of statutory dues
➢ Insurance premium paid by Federal paid ➢ Such primary society should be engaged in supplying milk raised
decided by the authority or the court empowered to do so under the respective law and not by the income-tax
(ia)
authorities.
by Federal Milk Co-Operative Society on by its members to such federal milk co-operative society.
ISSUE 1
life of cattle owned by a member of a
Primary co-operative society. Deduction of secret commission / bribe?
(iiia) ➢ Discount on zero coupon bond calculated ➢ Life of bond = Period starting from the date of issue of the bond Not allowed as being prohibited by law
in prorata manner over the life of such and ending on the date of maturity or redemption of such
bond. bond. ISSUE 2
➢ Discount = Amount payable by issuer on For computing life of the bond, if the month in which bond is issued Deduction of fine, penalties etc ?
maturity / redemption of such bond less or is redeemed / matured is a part of the month, then such month Penalty paid by the assessee in exercise of the option given to such assessee by the law or the statutory scheme is
Amount received or receivable on issue of shall be rounded off to the nearest one i.e. if such part is 15 days or deductible because the law or the statutory scheme enables incurring of such expenditure in the course of the
the bond.
➢ Zero coupon bond means a notified bond
more, it will be taken as one month, otherwise it will be ignored. assessee s usi ess “C . Fo e a ple ede ptio fi e paid to lea the goods f o the usto s po t.
issued by any infrastructure capital Penalty arising out of contractual liability is again allowed as deduction as being incurred during the course of business
company/ bank or public sector company, & profession.
in respect of which no payment and
benefit is received or receivable before However penalty imposed for an activity which is considered as an offence shall be disallowed since it shall fall within
maturity or redemption. the scope of the explanation.
(vi) ➢ Loss in respect of animals, used for ➢ Deduction allowed = [Actual cost of the animal – Sale proceeds
However interest on arrears or outstanding balance of sales tax is not penal but compensatory in nature and is
business or profession (otherwise than as of carcasses of animals]
therefore an allowable deduction (SC).
stock-in trade), which have died or
become permanently useless. ISSUE 3
(xii) ➢ Revenue expenditure incurred by a ➢ Such expenditure should be incurred for objects and purpose
notified corporation or a body corporate authorized by the Act under which it was constituted / Loss of stock-in-trade in an illegal business?
constituted or established under any Act. established. Where heroin was seized from a doctor who clandestinely manufactured it, the explanation would not apply, since
(xiii) ➢ Any amount of banking cash transaction tax paid by assessee during the previous year on the taxable banking hat the do to as lai i g as ot e pe ditu e ut a usi ess loss a d he oi fo ed a pa t of sto k-in-trade of
transactions entered into by him. the doctor. The SC held in Dr. TA Quereshi that morality and law were different and that the case had to be decided on
(xiv) ➢ Any sum paid by Public Financial Institutions by way of contributions to notified Credit Guarantee fund for small legal p i iples a d ot o e s o al ie s. The st a ge i o of this de ision is that expenditure incurred to
industries. manufacture heroin will be disallowed under the Explanation to S.37 but if manufactured heroin is seized, it will be
➢ Public financial institution has the same meaning as U/S 4A of Companies Act, 1956. allowable as a business loss.
H. BAD DEBTS
7
Treatment of Bad debts and its recovery.
Section 36(1)(vii) :- Subject to the provision of section 36(2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year shall be allowed as deduction in that previous year.
Explanation:- For the purpose of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.
2nd Proviso to Sec. 36(1)(vii) Amendment FA 2015: The second proviso has been inserted in section 36(1)(vii) .It provides that if a debt becomes irrecoverable on the basis of ICDS without recording the same in the accounts, it shall be allowed as deduction in the
previous year in which such debt becomes irrecoverable and it shall be deemed that such debt has been written off as irrecoverable in the accounts for the purpose of section 36(1)(iii).
Section 36 (2):- Condition for deduction u/s 36(1)(vii):- No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part
thereof is written off or of an earlier previous year or represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee.
ISSUE 1:-
The assessee has paid advances to the raw material supplier, which was forfeited on cancellation of the contract. Whether the assessee would be entitled for deduction of such loss u/s 36(1)(vii)? Will your answer be different if the advances were towards supply
of plant & machinery?
ISSUE 2:-
The Interest on bad and doubtful debt was recognized as income in the books of scheduled bank. Subsequently the Interest amount is waived off by the bank. What is the tax Implication?
Interest
Bank (Lender) Borrower
Case laws
(1) PK Kaimal (SC)
An assessee, who claims bad debts and who recovers, must be same for application of section 41(4).
(2) T veerabhadra Rao K Koteshwara Rao (SC)
The deduction of bad debts is a deduction to the business and hence Bad debts of the predecessor in business can be written off and claimed by the successor as bad debts if it becomes irrecoverable after the successor has taken over.
Appendix
Section 41(5)
Set off of loss against incomes u/s.41[Section 41(5)]: If the business no longer exists and there are deemed profits as referred to under Section 41(1) or 41(3) or 41(4) or 41 (4A) in respect of that business, any loss (not being speculation loss) which arose in that
business and profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year shall be set off against such deemed profits to the extent of such profits.
ISSUE:-
Set off of losses against deemed income: M . X ho s all t adi g a d spe ulatio usi esses e e dis o ti ued i p e ious ea -07 submits the following details for AY – 2009-10
(a) Bad debts recovered Rs. 45,000 (out of which Rs. 20,000 relates to speculation business);
(b) Mr. S, from whom he had obtained unsecured loan of Rs. 10,000 has remitted the same.
(c) Trading business loss for AY 2006-07 and AY 2007-08 were Rs. 50,000 and Rs. 15,000 respectively.
Compute the income of Mr. X for the AY 2009-10.
Solution: Remission of unsecured loans of Rs. 10,000 is not taxable, as unsecured loans were not allowed as deduction in any year. Bad Debts recovered of Rs. 45,000 will be taxable after allowing business losses (other than speculation losses) incurred in the year
of discontinuance of business i.e. assessment year 2007-08 relevant to previous year 2006-07.
Hence, income of Mr. X = 45,000 – 15,000 (being trading losses of assessment year 2007-08) = Rs. 30,000.
CA Durgesh Singh ©
8 Disallowance
General Disallowance Specific Disallowance
Sec. 14A: Expenditure incurred in relation to Income not Includible in total Income:- Sec. 40(a):
(1) For the purpose of computing the total Income under this chapter (Note 1) (1) PROVISIONS APPLICABLE FROM THE ASSESSMENT YEAR 2015-16 – If the following conditions are satisfied, the payer is supposed to deduct
No deduction shall be allowed (Note 2) tax at source –
In respect of expenditure incurred by the assessee (Note 3)
a. the amount payable is interest, royalty, technical fees or any other sum (but not salary);
In relation to (Note 4)
Income which does not form part of total income under this Act. (Note 5)
b. in the hands of the recipient, it is chargeable to tax in India; and
c. the aforesaid sum is payable outside India or to a non-resident/foreign company.
To highlight the a o e p i iple, let s o side the follo i g ase. If these conditions are satisfied, tax is deductible under the Act. If there is a TDS default, disallowance provision would be attracted from the
assessment year 2015-16 as follows-
A Ltd., a I est e t o pa e ei ed di ide d i o e of ‘s. , , o its i est e t i sha es. It I u ed i te est e penditure of Rs.
2,00,000 on the borrowed capital utilized in the Investment in shares: • Case 1 (tax not deducted) – If tax is deductible but not deducted in the current year, the entire expenditure will be disallowed under section
In the above case the dividend received of Rs. 1,00,000 from Investment in shares is exempt u/s 10(34). Section 10(34) provides that dividend 40(a)(i). If tax is deducted in a subsequent year, the expenditure would be allowed as deduction in the year in which TDS is deposited.
• Case 2 (tax deducted but not deposited) – If tax is deductible (and if is so deducted) during the current year but TDS is not deposited till the
referred to in section 115-O i.e. on which corporate Dividend Tax has been paid by the Domestic company is exempt in the hands of the
shareholders.
due date of submission of return of income under section 139(1), the entire expenditure will be disallowed for the current previous year. If
Further u/s 14A(1), the interest expenditure of Rs.2,00,000 is not deductible in computation of total Income since such expenditure is incurred i.r.t. tax is deposited in a subsequent year, expenditure will be deductible in the year in which TDS is deposited.
Income which does not form part of total Income.
ISSUE:
Note 1 Sec.14A is applicable to all heads of income. Whethe othe su ha gea le efe s to the hole su ei g e itted o o l the po tio ep ese ti g the su ha gea le to income-tax
under relevant provisions of the Act?
Note 2 The special bench of the Tribunal in cheminvest Ltd. V. ITO (Del.) has held that where the dividend is exempted u/s 10(34) of the Act and
Answer: CBDT Circular No. 3/2015:
the interest is paid on borrowed capital utilized for purchase of shares, deduction is hit by section 14A of the Act, irrespective of the fact,
As per Circular dated 2/2014, the board has clarified that in cases where tax is not deducted at source u/s. 195 of the Act, the AO shall
Whether the shares were held as investment or stock-in-trade determine the appropriate portion of the sum chargeable to tax, as mentioned in section 195(1), to ascertain the tax liability on which the
Whether the dividend income has actually been received or not during the relevant previous year. deductor shall be deemed to be an assessee in default u/s 201 of the Act.
Note 3:- As disallowance of amount u/s. 40(a)(i) of the Act in case of a deductor is interlinked with the sum chargeable under the Act as mentioned in
3 mth 3 mth section 195 of the Act for the purposes of TDS, the CBDT, in exercise of powers conferred u/s. 119 of the Act, hereby clarifies that for the
pu poses of aki g disallo a e of othe su ha gea le u/s. a i of the A t, the appropriate portion of the sum which is chargeable to
Divid. tax under the Act shall form the of such disallowance and shall be determined by the AO .
Investment Rs.10 Thus whole sum remitted cannot be disallowed if only portion of the such sum is chargeable under this Act.
Record
in shares @ Date Transfer of
Rs.115 shares at COMPLIANCE OF TDS PROVISIONS IN CASE OF A RESIDENT [SEC. 40(a)(ia)] – With a view to augment compliance of TDS provisions, clause (ia)
Rs.100 has been inserted in section 40(a).Any sum payable to a residentdisallowed30 % of Expscase 1 & case 2of sec 40(a)(i) shall apply.
• Whether section 40(a)(ia) is applicable in respect of expenses actuall paid ithout TD“ – Tax is deductible under sections 193, 194A, 194C,
Note 4:- CIT V/S Kribhco (del.) (2012)
The respondent – assessee is a Co-operative society. It has claimed deduction u/s 80P(2)(d) on dividend received from another Co-operative 194H, 194-I and 194J either at the time of payment or at the time of giving credit to the recipient. However, section 40(a)(ia) is applicable only in
society. The AO did not disturb the said deduction u/s 80P but relying upon sec. 14A held that the aforesaid income were not included in the total respect of TDS defaults if amount is payable. If amount is actually paid and tax is not deducted under the above sections, section 40(a)(ia) is not
I o e of the assessee a d, the efo e, e pe ditu e u de the head I te est a d / of the e plo ee e efits a d e u e ation should be applicable. Section 40(a)(ia) has to be subjected to strict interpretation. Going by the rule of strict interpretation, the default with reference to
disallowed. He observed that the aforesaid expenditure had been incurred for earning of income u/s 80P of the Act and, therefore, has to be a tual pa e t of e pe ditu e ould ot e tail disallo a e. The afo esaid o se atio has o ee upheld diffe e t e ches of
disallowed u/s14A. Tribunal –
• CBDT’s opi io o the aforesaid ruli gs of tri u al – After careful examination of the aforesaid issue, the Board is of the considered view that
The Delhi HC observed that
the provision of section 40(a)(ia) would cover not only the amounts which are payable as on March 31 of a previous year but also amounts
Section 14A States that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure which are payable at any time during the year. CBDT has clarified that in the o te t of se tio a ia the te pa a le ould i lude
incurred in relation to the income which does not form part of the total income under this Act. It does not state that income which is a ou ts hi h a e paid du i g the p e ious ea . Whe e a High Cou t de ides a issue o t a to the Depa t e tal Vie . The
entitled to deduction under chapter VIA has to be excluded for the purpose of the said section. Depa t e tal Vie the eo shall ot e ope ati e i the a ea falling in the jurisdiction of the relevant High Court – Circular No. 10/2013, dated
The o ds do ot fo pa t of the total I o e u de this A t a e sig ifi a t a d i po ta t. Before allowing deduction under chapter VIA December 16, 2013.
we have to compute the Income and Include the same in the total Income. In this manner, the income which qualifies for deductions u/s 80C • Whether disallowance applicable in case of capital expenditure – If loan is taken to finance the purchase of a capital asset, interest liability
to 80U has to be first included in the total Income of the assessee.
(pertaining to the period till the asset is put to use) can be capitalised. If there is a TDS default under section 194A for such interest, depreciation
Se tio B defi es g oss total I o e to ea total Income computed in accordance with the provisions of this Act, before making any o the i te est o po e t hi h is pa t of a tual ost a ot e de ied i oki g the p o isio s of section 40(a)(ia)— Sonic Biochem
deduction under this chapter (VIA). Therefore they form part of the total income but are allowed as deduction and reduced. Extractions (P.) Ltd. v. ITO [2013 59 SOT 4 (Mum.).
• Income Tax & Wealth Tax.
Expenditure in excess of Rs. 20,000 AGGREGATE IN A DAY paid otherwise than by account payee cheque
Issue -1 drawn on a bank or account payee bank draft – Not allowable [Section 40A(3): In case- (a) assessee incurs an
The Net P ofit of “i a Ltd fo the ea e ded . . is a i ed at ‘s. la s afte de it of the follo i g : expenditure over Rs. 20,000, which is allowable & claimed as deduction, and (b) payment of which is made in a day otherwise than by way of
account payee cheque drawn on a bank or account payee bank draft (i.e. by way of cash or bearer cheque / draft or crossed cheque / draft),
1. Amount of Rs.1,50,000 contributed to Employees Welfare Trust. then, whole of such expenditure shall not be allowed as deduction.
2. Amount of Rs.15,00,000 paid for college fee and hostel expense for the MBA course of a close relative of a director. Subsequent Payment: If any expenditure has been claimed as deduction on accrual basis in any previous year and subsequently, in any previous
3. Amount of Rs. 3,00,000 incurred on installation of a traffic signal, so as to facilitate its employees coming to office to overcome traffic jam year, payment thereof is made otherwise than by way of account payee cheque drawn on a bank or account payee bank draft in excess of Rs.
4. Amount of Rs. 5,00,000 on the gift articles distributed to various dealers under sale incentive scheme. 20,000, then the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-
5. Expenses of Rs. 5,00,000 incurred on the travelling of the wife of Managing Director who accompanies him on a tour to U.K. on the invitation tax as income of the year in such payment is made. [Amendment by the Finance Act, 2007 w.e.f. 1-4-2008]
of the Trade and Commerce, London
LATEST AMENDMENT –
6. Amount of Rs. 3,00,000 paid on 11.5.2015 consequent upon change in currency rate due to exchange fluctuation in excess of the amount due
Disallowance u/s 40A (3) for cash payments exceeding Rs.35,000 in case of assessee engaged in the business of plying. Hiring of leasing goods
to the suppliers of machinery.
carriages.
Following further information are also provided by the company.
W.e.f. 1st October 2009, in case of payment made for plying, hiring or leasing goods carriage, disallowance will be made if the payment is made
a. Both the employees and employers contribution towards PF amounting of Rs. 2 lacs each for the month of March, 2016 were deposited on
1.7.2016. in excess of Rs.35,000 otherwise than by way of account payee cheque or account payee bank draft in a day to any person. However the existing
b. Provision for audit fees of Rs. 5 lakhs made in the books for the year ended 31.03.2015 was paid to the auditors in September, 2015 after limit of Rs. 20,000 for all other persons shall continue.
deduction tax u/s 194J and the tax so deducted was remitted by 7.10.2015.
c. A contractor who carried out repairing work in the office was paid In cash on 25.9.2015 by two vouchers No. 175 of Rs. 17,000 and No. 180 of
Rs. 8,000.
d. TDS made out of payment of interest of Rs. 1 lakh in February, 2016 and of Rs. 2 lakhs in March, 2016 was remitted to the Government in July,
2016.
Compute the income chargeable to tax in A.Y. 2016-17 and work out the amount of tax payable on such income.
CA Durgesh Singh ©
9
(1) Withdrawals of amount: Amount can be withdrawn only for the purposes (2) Audit: The A ou ts of assessee’s a e e ui ed to e audited y a Cha te ed
specified in the scheme. The amount utilized out of such deposit account in accordance with Accountant and a report thereof is to be furnished along with the return of income. If
the scheme shall not be allowed as deduction in computing income chargeable under head accounts have already been audited under any other law, then only a further report in
"Profits and gains of business or profession". prescribed form is to be furnished along with such Audit Report.
PART (A)
PHASE I Research Revenue : Salary to scientist TREATMENT SCIENTIFIC RESEARCH ASSET
Particulars Quantum of Deduction
expenses Capital : Equipment
(1) Expenditure 3 years before commencement of business
Ceases to be used for said purpose
Direct Indirect (a) Capital Exp. (excl land) u/s 35(2):100%
Success (b) Salary (excl perquisites) Revenue Option I Option II
transfer such asset without using transfer to business division
(c) Purchase of materials exp. 100% u/s 35(1)(i)
PHASE II Activity if for B & P
(2)(a) Revenue exp. on research 100% u/s 35(1)(i)
Research Division Business Division Surplus to the extent of Surplus over & above the
(After commencement of business)
the deduction allowed u/s 35 cost /deduction allowed
(b) Capital expenditure on research (except cost of land) 100% u/s 35(1)(iv)
Research Revenue Production of medicine & sale
Expenses capital (3) Expenditure (Revenue or capital but not having cost
Deemed Income u/s 41(3) CG u/s 48
Receipts xx of land & Bldg) on specified research of 200% u/s35(2AB)
manufacturing activity approved by prescribed
Assesse based deduction
Direct Indirect (–) Expenses (xx) (B) (C)
(i) Sec. 35 (xx) authority
(ii) Sec 35(Phase 1) (xx)
PGBP Xx
PART B
Donation
• To
college / science or laboratory / Trust
institution for statistical university / Donor
scientific research to IIT charitable 100% Donor Other Assessee
research research trust Indian Co.
association Sec 35 (2AA)
Total Income
Adjusted Total Income = Total Income before deduction (-) Special income chgd u/s 111A/112
10 DEDUCTION IN RESPECT OF SPECIFIED BUSINESS [SEC. 35AD]
No. Specified business Who should the Approval (if any) Date of
business commencement of
business
1. Setting up and operating a Any person Not required On or after April 1,
cold chain facility [see 2009
Note 1]*
2. Setting up and operating a Any person Not required On or after April 1,
warehousing facility for 2009
storage of agricultural
11 Prospecting of mining of coal, limestone, iron, zinc etc. : The excess of expenditure incurred on behalf of members over and above subscriptions from member shall be allowed
as deduction subject to a maximum of 50% of Total Income.
Foreign company doing civil
construction business, etc. - Sec.
Maintenance of books of account by certain persons carrying on profession or business - Sec. 44AA 44BB
Sec. 35E Assessee Criteria Conditions
In the case of a foreign company
Carrying on business or Income Exceeded Rs.1,20,000 in any of the three preceding previous years or likely engaged in the business of civil
profession to exceed Rs. 1,20,000 during the current previous year in case of newly set construction or the business of
up. erection of plant or machinery or
testing or commissioning thereof in
Turnover/ Exceeded Rs. 10,00,000 in any of the three preceding previous years or connection with turnkey power
sales/ likely to exceed Rs. 10,00,000 during the current previous year in case of project approved by the Central
receipts newly set up. Government, income is determined at
10% of the gross amount paid or
Governed by Sec. 44AE, Profits & Profits & Gains claimed is lower than the income prescribed u/s. 44AE, 44BB, payable to the assessee.
44BB,44BBB Gains 44BBB.
Head office expenditure - Sec. 44C
Governed by Sec. 44AD Profits & Profits & Gains claimed is lower than the income prescribed u/s. 44AD and
Gains his income exceeds basis exemption limit In the case of a non-resident,
Notified professions Gross Exceeded Rs. 1,50,000 in all of the three preceding previous year or likely to deduction for the head office
Receipts exceed Rs. 1,50,000 during the cum previous year in case of newly set up. expenditure incurred outside India and
attributable to the business or
The 'Notified Professions" are law, medicine, accountancy, architecture, interior decoration, authorised profession carried on in India cannot
representative, film artist, engineering, technical consultancy, information technology or company secretaryship. exceed the LOWER of the following
limits:
CA Durgesh Singh ©