Income under the head “Profits and gains of business or profession” CHAPTER and its computation mm WHAT IS THE BASIS OF CHARGE [SEC. 28] 77. Under section 28, the following income is chargeable to tax under the head “Profits and gains of business or profession” 4. profits and gains of any business or profession ; . any compensation of other payments due to or received by any person specified in section 28(ii) ; trade, professional or similar association from specific services performed for its income derived by members ; 4d. the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ; .. any profit on transfer of the Duty Entitlement Pass Book Scheme; any profit on the transfer of the duty free replenishment certificate; 'g- export incentive available to exporters ; hi. any interest, salary, bonus, commission or remuneration received by a partner from firm; any sum received for not carrying out any activity in relation to any business or profession or not to share any know-how, patent, copyright, trademark, etc.; fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner; k. any sum received under a Keyman insurance policy including bonus ; 1. any sum received (or receivable) in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expendi- ture on such capital asset has been allowed as a deduction under section 35AD ; and ‘m. income from } tive transaction. Income from the aforesaid activities is computed in accordance with the provisions laid down in sections 29 to 44DB. TIA Meaning of business - In view of section 2(13), business includes any (a) trade, (b) commerce, (c) manufacture, or (d) any adventure or concern in the nature of trade, commerce or manufacture. 16371.2 @ INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 164 © Significance of profit motive - The word “business” is one of large and indefinite import and connotes something which occupies attention and labour of a person for the purpose of profit. ‘© Business cannot be carried on with oneself Business arises out of commercial transactions between two or more persons. One cannot enter into a business transaction with oneself. 77.2 Business income not taxable under the head “Profits and gains of business or profession”- In the following cases, income from trading or business is not taxable under section 28, under the head “Profits and gains of business or profession” : Nature ofincome | Head under which tis chargenble to fax ] Rental income in | Rent of house property is taxable under the head "Income from house property”, even if | the case of dealer | property constitutes stockin-trade of recipient of rent or the recipient of rents engaged in | | in property the business of letting properties on rent - Dividend on shares | Dividends on shares are taxable under section 56(2)(0), under the head “Income from other | inthecase ofa | sources", even if they are derived from shares held as stock-in-trade or the recipient of | ealer-inshares _ | dividends is a dealerin-shares. _ - | Winnings from | Winnings from lotteries, races, etc, are taxable under the head “Income from other | lotteries, ete sources” (even if derived as a regular business activity). Interest received on | Such interest is always taxable under the head “Income from other sources” (even if compensation or | pertains to a regular business activity). A deduction of 50 per cent is allowed and enhanced compen- | effectively only 50 per cent of such interest is taxable under the head “Income from other | sation sources”, Profits derived from the aforesaid business activities are not taxable, under the head “Profits and gains of business or profession”. Profits and gains of any other business are taxable under “Profits and gains of business or profession”, unless such profits are exempt under sections 10 to 13A. 77.3 Taxation on certain incomes [Sec. 145B] - Section 145B provides mode of taxation of the following incomes - 1 Interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which itis received (however, itis taxable under section 56 under the head “Income from other sources”). 2. The claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved, 3. Assistance in the form of subsidy (or grant or cash incentive or duty drawback or waiver or concession or reimbursement) as referred to in section 2(24)(xvii) shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year. = @ WHAT ARE THE BASIC PRINCIPLES FOR ARRIVING AT BUSINESS INCOME 78. One has to keep in mind the following general principles while computing income taxable under the head “Profits and gains of business or profession” : 78.1 Business or profession carried on by the assessee - Business or profession should be carried on by the assessee. Its the person carrying on a business or profession who is chargeable to tax 78.2 Business or profession should be carried on during the previous year - Income from business of profession is chargeable to tax under this head only ifthe business or profession is carried on by the assessee at any time during the previous year (not necessarily throughout the previous year). There are a few exceptions. 78.3 Income of previous year is taxable during the following assessment year - Income of business of profession carried on by the assessee during the previous year is chargeable to tax in the next following assessment year. There are, however, certain exceptions to this rule, 78.4 Tax incidence arises in respect of all businesses or professions - Profits and gains of different businesses or professions carried on by the assessee are not separately chargeable to tax. Tax incidence arises on aggregate income from all businesses or professions carried on by the assessee. If, therefore, an assessee ‘earns profit in one business and sustains loss in another business, income chargeable to tax is the net balance after setting off loss against income, However, profits and losses of a speculative business are kept separately. 78.5 Legal ownership vs. Beneficial ownership - Under section 28, it is not only the legal ownership but also the beneficial ownership that has to be considered. The courts can go into the question of beneficial ownership165 © LOSSES INCIDENTAL TO TRADE = Para 78.11 and decide who should be held liable for the tax after taking into account the question as to who is, in fact, in receipt of the income which is going to be taxed. 78.6 Real profit vs. Anticipated profit- Anticipated or potential profits or losses, which may occur in future, are not considered for arriving at taxable income of a previous year. This rule is, however, subject to one exception : stock-in-trade may be valued on the basis of cost or market value, whichever is lower. 78.7 Real profit vs. Notional profit- The profits which are taxed under section 28 are the real profits and not notional profits. For instance, no person can make profit by trading with himself in another capacity. 78.8 Recovery of sum already allowed as deduction - Any sum recovered by the assessee during the previous year in respect of an amount or expenditure which was earlier allowed as deduction, is taxable as business income of the year in which it is recovered, 78.9 Mode of book entries not relevant - The mode or system of book-keeping cannot override the substantial character of a transaction. 78.10 Mlegal business - The income-tax law is not concerned with the legality or illegality of a business or profession. It can, therefore, be said that income of illegal business or profession is not exempt from tax. 78.11 Losses incidental to trade - Commercial principles for computing business income - Trading losses of revenue nature incurred in carrying out the business are deductible, if they are incidental to the operation of business. This rule is applicable even if it is not specially coded anywhere under the Act. + Instances of losses deductible from business income 1. Loss of stock-in-trade as a result of enemy action, or arising under similar circumstances. 2, Loss of stock-in-trade due to destruction by an act of God. 3. Loss arising on account of failure on the part of the assessee to accept delivery of goods. 4, Depreciation in funds kept in foreign country for purchase of stock-in-trade. 5. Loss due to exchange rate fluctuations of foreign currency held on revenue account. 6. Loss arising from sale of securities held in the regular course of business. 7. Loss of cash and securities in a banking company on account of dacoity (maybe after banking hours.) 8. Loss incurred on realisation of amount advanced in connection with business. 9. Loss of security deposited for the purposes of acquisition of stock-in-trade. 10. Loss due to forfeiture of a deposit made by the assessee for properly carrying out of contract for supply of commodities. 11. Loss on account of embezzlement by an employee. 12. Loss incurred due to theft or burglary in factory premises during or after working hours. 13, Loss of precious stones or watches of a dealer while bringing them from business premises to his house. 14, Loss arising from negligence or dishonesty of employees. 45, Loss incurred on account of insolvency of banker with which current account is maintained by the assessee. 16, Loss incurred due to freezing of the stock-in-trade by enemy action, 17, Loss incurred by a sugar manufacturing company by foregoing advance made to sugarcane growers who Used to sell sugarcane crop exclusively to the company. 18. Loss on account of non-recovery of advances given by the assessee-company (engaged in the business of financing its subsidiaries) to its 100 per cent subsidiary company. 19. Loss incurred by a holding company which has guaranteed a loan taken by its subsidiary company. 20, Loss arising as a result of seizure and confiscation of illegal stock-in-trade is allowable as a business loss against income from illegal business. 21. Loss arising as a result of rejection of goods by the importer (as goods are unfit for human consumption). ¢ Instances of losses not deductible from business income 1. Loss which is not incidental to trade or profession, carried on by the assessee, 2. Loss incurred due to damage, destruction, etc,, of capital assets. 43. Loss incurred due to sale of shares held as investment. “4. Loss of advances made for setting up of a new business which ultimately could not be started. 5. Depreciation of funds kept in foreign currency for capital purposes, 6. Loss arising from non-recovery of tax paid by an agent on behalf of the non-resident.Para 79 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 166 7. Anticipated future losses. 8. Provision made by assessee in respect of non-performing assets. 9. Loss relating to any business or profession discontinued before the commencement of previous year. =| METHOD OF ACCOUNTING - HOW FAR RELEVANT FOR COMPUTING BUSINESS INCOME 79. Income under the heads “Profits and gains of business or profession” and “Income from other sources” shall be computed in accordance with method of accounting regularly employed by the assesseet, 79.1 Tax accounting standards [Sec. 145] - The Central Board of Direct Taxes has notified the Income Disclosure and Tax Accounting Standards (ICDS) vide Notification No. 87/2016, dated September 29, 2016. These standards are applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of account. These standards are applicable from the assessment year 2017-18. 79.2 Method ofaccounting in certain cases [Sec. 145A]-For the purpose of determi under the head “Profits and gains of business or profession”, the following valual 1. The valuation of inventory shall be made at lower of actual cost ornet realizable value computed inthe manner provided in ICDS. 2. The valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation. 3. Inventory (being securities not listed, or listed but not quoted, ona recognised stock exchange) shall be valued at actual cost initially recognised in the manner provided in ICDS, 4. Inventory (being securities held by a scheduled bank or financial institution) shall be valued in accordance with ICDS after taking into account extant guidelines issued by the RBI ingtheincomechargeable mn rules are applicable— 5. Inventory (being listed securities) shall be valued at lower of actual cost or net realisable value in the manner provided in ICDS and for this purpose the comparison of actual cost and net realisable value shall be done category-wise. 6. Any tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence of such payment for the purposes of the said section. ® WHAT IS THE SCHEME OF BUSINESS DEDUCTIONS/ ALLOWANCES 80. Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business or profession”. Section 29 permits deductions and allowances laid down by sections 30 to 43D while ‘computing profits or gains of a business or profession. Loss of revenue nature, which is incidental to business, isallowable as deductions while computing taxable business income, even though itis not codified specifically under any of these sections, Sections 40, 40A and 43B give a list of expenses which are not deductible. Before studying the nature and amount of permissible and non-permissible deductions under sections 30 to 43D, it will be useful if one keeps in view the following principles governing admissibility of these deductions ‘© Onus of proof Itis the responsibility of the assessee to prove that a particular deduction is admissible in his. case. Allowances are cumulative - The allowances laid down under sections 30 to 37 are cumulative and not alternative. ‘© Expenditure should relate to the previous year - It is necessary to claim deduction that the expenditure should relate to the previous year. In order to ascertain whether the expenditure relates to the relevant previous year or not, one has to examine method of accounting generally adopted by the assessee. If the assessee keeps his books of account on the basis of mercantile system, expenses of the previous year would be deductible irrespective of the fact whether they are actually paid during the previous year or not. If the assessee, on the other hand, keeps his books of account on the basis of cash system, expenses actually paid during the previous year are deductible, whether or not they are in respect of previous year. {However, interest received by an assessee on compensation (or on enhanced compensation), shall be deemed to be the income of the year in which itis received and itis chargeable to tax under the head “Income from other sources” (50 per cent of such interest js deductible and effectively 50 per cent is chargeable to ta),167 RENT, RATES, TAXES, REPAIRS AND INSURANCE FOR BUILDING = Para 81.1 4 Business should be enrried on during the previous year - In order to avail deduction of expenditure, itis necessary that he busines in respect of which expenses are incurred, should be carried on by the assessee during the previous yes ¢ Expenditure should have been incurred in connection with assessee’s business - An expenditure is allowable as deduction in computation of taxable income only if itis incurred for the purpose of assessee’s own business For instance, parent company cannot be allowed a deduction in respect of an expenditure incurred for the benefit ofits subsidiary company (even if it is a wholly-owned subsidiary company) ¢ Benefit ofexpenditure may extend to somebody els - I the expenditure is incurred primarily in connection with assessee’s own business, it would still be allowed as deduction even if it enures to the benefit of someone else, # Benefit of expenditure may extend beyond the relevant previous year - It is not necessary that benefit of the expenditure should be limited to the previous year in which the expenditure is incurred. A revenue expendi- ture incused during the previous year is deductible even if benefit of expenditure is extended beyond the year of expenditure. ‘@ Noallowance in respect of exhaustion of wasting assels - No deduction is admissible in respect of diminution or exhaustion of the capital asset from which income is derived. Wasting assets such as mines and quarries, timber-bearing land, leasehold interest are capital assets and their diminution or exhaustion in value repre- sents capital loss which is not allowable as deduction, as the Act permits deduction of revenue loss. ‘¢ Noallowance in respect of expenditure incurred before the setting up ofa business -In the case of a new business the first previous year commences on the date when the business or profession is set-up. Expenditure incurred prior to setting up of a business falls outside the previous year. Section 28 applies only in respect of business carried on during the previous year. As a consequence, expenditure incurred before setting up of a business would not be deductible, while computing income of the previous year. However, there is sometimes a time- lag between setting up a business and its actual commencement. Expenditure incurred after setting up of a business may be allowed as deduction under sections 30 to 37, even if it is incurred before the actual commencement of business. To the aforesaid general rule that expenditure incurred before setting up of a business is not permissible as deduction, some exceptions are provided. + No allowance in respect of non-assessable business - If an assessee carries on a non-taxable business (such as agricultural income in India), no deduction on account of expenditure relating to such non-taxable business can be claimed. ‘© Expenditure relating to illegal business - Profits of even illegal business is chargeable to tax. In arriving at chargeable profits, ordinary business expenditure incurred in carrying on an illegal business is allowable as deduction. However, infringements of law including breaches of obligations are not ordinary incidence of business and penalty or damages paid in connection with such infringement do not constitute expenditure and not deductible. + No allowance in respect of anticipated losses - Anticipated loss cannot be deducted, though the loss is certain. The only exception to this rule is that stock-in-trade may be valued at cost or market value, whichever is lower. No deduction in respect of depreciation of investment - A deduction in respect of depreciation of investment in shares and securities is not allowable. + Relevance of distinction between capital and revenue expenditure - The question whether the expenditure is capital expenditure or revenue expenditure is relevant only in the case of expenditure falling under sections 30,31 and 37(1) which expressly exclude the items of the nature of “capital expenditure” from being allowed as. permissible deductions. However, expenditure falling under other sections may fall either under the category of capital expenditure or revenue expenditure. WHAT ARE SPECIFIC DEDUCTIONS UNDER THE ACT 81. Sections 30 to 37 cover expenses which are expressly allowed as deduction while computing business income. Sections 40, 40A and 43B cover expenses which are not deductible. The following expenses are expressly allowed as deductions against profits and gains of business or profession 81.1 Rent, rates, taxes, repairs and insurance for building [Sec. 30] - Under section 30, the following are deductible - + Rent and repairs - Rent and repair expenditure of premises, used for the purpose of carrying on business or profession, are deductible. However, this deduction is available only ifthe assessee has occupied the property {asa tenant and the expenditure on account of rent and repair is not capital in nature. ‘¢ Municipal taxes - Municipal taxes (land revenue or any other local taxes) of premises used for the purpose of carrying on business or profession, are deductible. However, one has to satisfy the requirement of section 43BPara 61.2 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 16s (ie,, payment should be actually made during the previous year or till the due date of submission of return of income). ; # Insurance - Any premium in respect of insurance against risk of damage or destruction of the aforesaid premises, is deductible. repairs and i ir it - The expenditure incurred 81.2 Repairs and insurance of machinery, plant and furniture [Sec. 31] - The expe: curred on current repairs (not being capital expenditure) and insurance in respect of plant, machinery and furniture used for business purposes is allowable as deduction under section 31 81.3 Depreciation allowance [Sec. 32] - Depreciation shall be determined according to the provisions of section 32. 81.3-1 CONDITIONS FOR CLAIMING DEPRECIATION - In order to avail depreciation, one should satisfy the following conditions: 1. Asset must be owned by the assessee. 2. It must be used for the purpose of business or profession. 43. It should be used during the relevant previous year. 4, Depreciation is available on tangible as well as intangible assets. 1 Asset should be owned by the assessee - The asset should be owned by the assessee or the assessee should be the co-owner of the asset. The following points should be noted ~ 1. It is not necessary that the assessee should be the registered owner of the asset. If a person acquires a building by satisfying conditions of section 534 of the Transfer of Property Act [i under a Power of Attorney Transaction], depreciation is available even if he is not the registered owner of the building, 2. Where an assessee carries on a business or professian in a building not owned by him but in respect of which hhe holds a lease or right of occupancy, he is entitled todepreciation*, in respect of capital expenditure incurred by him on construction of any structure or any work in relation to the building by way of improvement, renovation or extension. 43. Ifan assessee acquires an asset under financial lease, he can claim depreciation, 4, Generally, in the case of a hire purchase agreement. the hirer has an uninterrupted right over the asset fo all practical purposes, ifhe discharges his obligation (ie., payment of al instalments). In such a case, the hirer (and not seller) can claim depreciation from the year in which the asset is taken on hire. + Asset must be used for the purpose of business or profession - The asset, in respect of which depreciation is claimed, must have been used for the purpose of business or profession. Even if an asset is put to use for trial production, depreciation can be claimed. The user of the asset should be understood in a wide sense so as to embrace passive as well as active user. Ifa machine iskept ready for use at any moment in a particular factory, the machinery can be said to be “used” for the purpose of the business and depreciation is available. Any forced idleness of the machinery cannot disentitle the assessee from getting the benefit of depreciation allowance. If an asset is used partly for business purposes and partly for other purposes, proportionate depreciation is available. + User ofthe asst in the previous year - The asset, in respect of which depreciation is claimed, must have been used for the purpose of business during the relevant previous year. Even if an asset is used for a few days (or even for a few hours) during the previous year, depreciation for the entire year is available. However, in the first year, in which an asset is acquired, the asset should be used at least for 180 days to claim fully year’s depreciation (if it is used for less than 180 days, half year’s depreciation is available in the first year in which the asset is acquired) Depreciation is available on tangible as well as intangible assets - Under the Income-tax Act, one can claim depreciation in respect of the following assets — Tangible assets Building, machinery, plant or furniture Intangible assets acquired | Know-how, patents, copyrights, trade marks, licences, franchises or any other after March 31, 1998 business or commercial rights of similar nature (not being goodwill of a business or profession} “Building” means the superstructure only and does not include site. “Plant” includes ships, vehicle, books (including technical know-how report) scientific apparatus and surgical equipments used for the purpose of business or profession. It does not include tea bushes or livestock or buildings or furniture and fittings. “Baemur on construction of road/brdge by an assesce on leased land provided by a State Government is quali!169 DEPRECIATION ALLOWANCE = Para 81.3 # Consequences when above conditions are satisfied - If the above conditions are satisfied, depreciation is available {itis a must, it is not at the option of the assessee to claim, or not to claim, depreciation in such cases). In other words, depreciation is available whether (or not) the assessee has claimed the deduction for depreciation in computing his total income. 81.3-2 BASIC CONCEPTS FOR COMPUTATION OF DEPRECIATION ALLOWANCE IN RESPECT OF UNITS OTHER THAN POWER UNITS - Depreciation is admissible for block of assets. Method of computation of depreciation is written down value method. To understand method of computation of depreciation, one must know the meaning of the following terms : 1. Block of assets. 2. Written down value, 3. Actual cost. + Depreciation is available (at the option of the assessee) in the case of tangible assets according to “straight- line” method in the case of an undertaking engaged in generation or generation and distribution of power in some cases’. 81,3-3 BLOCK OF ASSETS [SEC, 201) - The term “block of assets” means a group of assets falling within a class of assets comprising — 4a, tangible assets, being buildings, machinery, plant or furniture ; b. intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature (and from the assessment year 2021-22) not being goodwill of a business or profession, in respect of which the same percentage of depreciation is prescribed. There are 10 different blocks* of assets as given below - Number ‘Nature of asset ‘Rate of depreciation Block 1 | Buildings Residential buildings other than hotels and boarding houses | 5% Block 2 | Buildings - Office, factory, godowns or buildings which are not mainly 10% used for residential purpose [it covers hotels and boarding houses but does not cover those which are covered under Blocks 1 and 3] Block 3 | Buildings - The following buildings 0% 1. buildings acquired on or after September 1, 2002 for installing machinery and plant forming part of water supply project or water treatment system, land whichis put to use for the purpose of business of providing infrastruc- ture facilities under section 80-1A(4)(); b, temporary erections such as wooden structures Block ¢ | Furniture - Any furniture/fittings including electrical fitings 70% Block | Plant and machinery - Any plant or machinery [not covered by Block 6, 7, 8 15% ‘or 9], motor cars (other than those used in a business of running them on hire) ‘acquired or put to use on or after April 1, 1990, oil well (not covered under any other block) - Block 6] Plant and machinery - Ocear-going ships, vessels ordinarily operating on 20% inland waters including speed boats Block 7 | ~Plant and machinery - Block includes the following — oan ‘@ Buses, lorries and taxies used in the business of running them on hire* '@ Motor cars (other than those used in a business of running them on hire) acquired on orafter August 23,2019 but before the April 1, 2020and is puttouse before April 1, 2020 ‘ Moulds used in rubber and plastic goods factories ¢ Machinery and plant, used in semi-conductor industry {For computation of depreciation in the case of power units, see para 81.3.9, ‘t¢may be noted that “block of assets” means asets of all units ofthe assessee having the same rate of deprecation and not assets cof only one unit “This block is applicable only when the assessce isin the busines of hiring outits/his buses, lorries or taxes If lorries ae used by a timber merchant for delivery of goods to his customers, this block isnot applicable even if transportation income is included in business income.Para 81.3 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 70 Number Nature of asset Rate of depreciation Block 8 lant and machinery - Block includes the following ~ 4 Acroplanes.Italso includes commercial vehicle acquired after September 30, 1998 but before April 1, 1999 and put to use before April 1, 1999 and life saving medical equipment and plant and machinery which satisfy conditions of rul 5). ‘@ Containers made of glass or plastic used as refills and the following— a. new commercial vehicle acquired during 2001-02 and put to use before March 31, 2002 for the purpose of business or profession; ; . machinery/plant used in weaving, processing and garment sector o! toatl industy which s purchased under Technology Upgradation Fund ‘Scheme during April 1, 2001 and March31, 2004 and putto use up toMarch 31, 2004; and new commercial vehicle which is acquired during January 1, 2009 and ‘September30, 2009 and is put to use before October 1, 2009 for the purposes of business or profession. ‘© Computers™ including computer software and new commercial vehicle acquired in replacement of condemned vehicle of 15 years of age which is put to use before April 1, 1999 (if acquired during October 1, 1998 and March 31, 1999) or before April 1, 2000 (if acquired during 1999-2000). It also includes books (other than annual publications) owned by a professional. Italso includes gas cylinders; plant used in field operations by mineral oil concerns; direct fire glass melting furnaces. ¢ Energy saving devices; renewal energy devices; rollers in flour mills, sugar works and steel industry (however, it doesnot include windmills or any special device, which run on windmills installed after March 31, 2012 but before April 12014), ¢ Air pollution control equipments; water pollution control equipments; solid ‘waste control equipments, recycling and resource recovery systems; machinery acquired and installed on or after September 1, 2002 in a water supply project, or water treatment system or forthe purpose of providing infrastructure facility; wooden parts used in artificial silk manufacturing machinery; cinematograph {ilms, bulbs of studio lights; wooden match frames; some plants used in mines, quarries and salt works; and books (being annual publications) owned by assessees carrying on a profession or books (may or may not be annual publications) owned by a person carrying on business in running lending libraries. 40% | Block 9 Plant and mackinery Motor buses, motor lorries and motor taxis (used in a business of running them on hire) acquired on or after August 23, 2019 but before the April 1, 2020 and is put to use before April 1, 2020 45x° Block 10 Intangible assets (acquired after March 31, 1998) - Know-how, patents, copy- rights, trademarks, licences, franchises and any other business or commercial rights of similar nature but not being goodwill of a business or professiont 25% ‘Note: In section 217), its not necessary that the asset should be used for purpose of business during the year undet consideration. The user of the asset is important for the purpose of actual allowability of depreciation, but not for determining whether the asset falls within the block of assets or not 81.3-4 WRITTEN DOWN VALUE SEC. 43(6)] - Written down value for the assessment year 2022-23 will be determined as under : ‘Printers, scanners, NT server, UPS, router, are part of computer and eligible for depreciation at the rate of cent. However EPABX and mobile phones arc not computers ie or deprecation at heat of 4 percent. How {Stock exchange membership card, goodwill, licence granted by a Government to collect tol, website, non-compete rights acquired by payment non-compete cences/approval/registraton acquired or operating hotels ear qualified for depres" ® Depreciation rate cannot be more than 40 per cent, in the case of an assessee who has opted for the alternative tax regime.im DEPRECIATION ALLOWANCE = Para 81.3 Step1_| Find out the “depreciated” value of the block on April 1, 2021. Step 2 Toth value, add “actual cost” of the asset (falling in the block) acquired during the previous year Ste 3_| From the resultant figure, deduct money received/ receivable (together with scrap value) in respect of that asset (falling within the block of assets) which is sold, discarded, demolished or destroyed during the previous year 2021-22. ‘ Other points - The following points should be noted — 1. The resulting amount is the written down value of the block of assets on March 31, 2022 relevant for the assessment year 2022-23, 2, The amount of reduction under Step 3 cannot exceed the value of assets computed under Step 1 and Step 2. 3. One may determine written down value for any other assessment years on similar basis. 4, Under Step 3, only actual money (received or receivable in cash or by cheque or draft) is deductible. In other words, any other things or benefit (which can be converted in terms of money) cannot be deducted under Step 3. Problem = 7 . = 81.3-4P Compute the written down value from the following information forthe assessment year 2022-23 —~ Blocks of asset Rate of ‘Depreciated value depreciation | on April 1, 2021 lis (percent) Rs. 1. Plant A, Band C w 110,40,000 2 Plant Dand E 40 2,60,000 3. Plant F 30 70,000 4. Building A, B, Cand D 10 10,90,600 5. Building E, F and G 5 7,10,200 6. Building H, 1, Jand K 40 16,90,000 ‘Afler April 1, 2021, the company purchases the following assets — ‘Assets ‘Date of purchase Rate of depreciation ‘Actual cost (per cent) Rs. Plant ‘April 6, 2021 30 6,000 Plant H ‘May 11, 2021 15 18,000 Furniture June 6, 2021 10 56,000 Gar July 7, 2021 15 2,56,000 Building L September 26, 2021 5 7,28,700 ‘Computer September 27, 2021 “0 90,000 Copyright September 30, 2021 25 17,50,000 The following assets are transferred — he Bee Sale consideration Rs, Pua ‘December 20, 2021 25,10,900 Plant D amuary 31, 2022 2,000 Building L ‘March 6, 2022 600,000 Solution : Block 1 - Plant and mackinery (rate of depreciation 15%) Rs. Depreciated value of the block consisting of Plants A, B and C 10,40,000 ‘Add : Actual cost of Plant H and car ()2.74,000 Total Less Sale proceeds of Plant B [although sale proceeds of Plant B is more than Rs. 13,14,000, amount to be deducted is restricted to Rs. 13,14,000] (134,000 Written down value of the block consisting of Plants A, C and H on March 31, 2022 NiPara 81.3 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION im Rs, Block 2 Plant and machinery (rate of depreciation : 40%) Depredated valucof the Bock eecne of Plants D and Eon April 1, 2021 2,60,000, Add : Cost of computer purchased during 2021-22 Less : Sale proceeds of Plant D sold during 2021-22 Written down value of the block consisting Plant E on March 31, 2022 Block 3 - Plant and machinery (ate of depreciation : 30%) Depreciated value of the block consisting of Plant F on April 1, 2021 ‘Add : Cost of Plant G purchased during 2021-22 Written down value of the block consisting of Plants F and G on March 31, 2022 Block 4 - Building (rate of deprecation : 10%) Depreciated value of the block on April 1, 2021 consisting of Buildings A, B, Cand D ‘Written down value on March 31, 2022 Block 5 - Buildings (rae of depreciation :5%) Depreciated value of the block consisting of Buildings E, F and G ‘Addi: Cost of Building L. purchased during 2021-22 Less : Sale proceeds of Building L sold during 2021-22 Written down value of the block consisting of Buildings E, F and G on March 31, 2022 Block 6 - Building (rate of depreciation : 40%) Depreciated value of the block consisting of Buildings H, I, Jand K on April 1, 2021 Written down value Block 7 - Furniture (rate of deprecation : 10%) Depreciated value on April 1, 2021 Nil Add : Cost of furniture purchased during 2021-22 36,000 36,000 Written down value on March 31, 2022 Block 9 - Copyright (ate of deprecation : 25%) Depreciated value on April 1, 2021 ‘Add : Cost of copyright purchased during 2021-22 Written down value on March 31, 2022 B1.3-5 COMPUTATION OF NORMAL DEPRECIATION ALLOWANCE - Depreciation allowance is of two types— normal and additional. The rule for normal depreciation is given in this para, Additional depreciation is covered in para 81.36, Normal depreciation is calculated as follows - [ Written ‘down value of the block of asset on the last day of the previous year * Rate of depreciation ‘© Where anassessee incurs any expenditure for acquisition ofa depreciable asset in respect of which a payment (or aggregate of payments made toa person ina day), otherwise than by an account payee cheque/ draft or use of electronic clearing system through a bank account (or through prescribed electronic modet), exceeds Rs. 10,000, such payment shall not be eligible for depreciation. ¢ The aforesaid rule is applicable to all cases, except a few which are given below - 1. If written down value of the block of asset is reduced to zero, though the block is not empty. 2. Ifthe block of assets is empty or ceases to exist on the last day of the previous year (though the written down value is not zero). 43. In the case of imported cars. 4.1In the case of succession or amalgamation or business re-organisation or demerger. 5. If in the first year in which an asset is acquired, itis put to use for less than 180 days. ¢ When the written down value of a block of asst is reduced to zero - No depreciation is admissible where written down value has ben recced to zero on the lst day of the previous year, though the black of assets doesnot cease {{As per rule GABBA, prescribed modes of electronic payment are; 2)creitcard, (t) debitcard, (cnet banking, (d) IMPS Immediate Payment Service), (e) UPI (Unified Payment Interface, () RTGS (Real Time Gross Settlement) lational Electronic Funds Tranter) and) BHIM (Bharat Interac for Money) Andhaae fap ee173 Provisions illustrated —— On April 1, 2021, depreciated value of a block of assets (rate of depreciation : 15 per cent) is Rs. 80,000. It consists of Plants A and B. The assessee purchases Plant C (rate of depreciation: 15 per cent) during the previous year 2021-22 for Rs. 30,000 and sells Plant A on May 3, 2021 for Rs. 1,80,000. In this case on March 31, 2022, the assessee has Plant Band Plant C in the block of the assets, though the written down value of the block is zero. No depreciation will be admissible for the previous year 2021-22 (ic. the assessment year 2022-23) as is evident from the computations given below Rs. Depreciated value of the block consisting of Plants A and B a ‘Add : Actual cost of Plant C 30,000 Ae 710,000 Less : Sale consideration of Plant A [though the plant is sold for Rs 180,000, the amount of reduction cannot exceed Rs. 1,10,000; the difference of Rs. 7,000 is short-term capital gain under section 50(1)} 110,000 ‘Written down value of the block consisting of Plants B and C a Less: Depreciation forthe previous year 2021-22 Bal Depreciated value of the block consisting of Plants B and C on April 1, 2022 mm + If block of assets ceases to exist - If a block of assets ceases to exist or if all assets of the block have been transferred and the block of assets is empty on the last day of the previous year, no depreciation is admissible in such case. Provisions illustrated X-Ltd. owns two plants—Plant A and Plant B—on April 1, 2021 (rate of depreciation : 15 per cent, depreciated value ‘on April 1, 2021 : Rs. 2,37,000). The company purchases Plant C on May 31, 2021 for Rs. 20,000 and sells Plant A (on April 10, 2021), Plant B (on December 12, 2021) and Plant C (on March 1, 2022) for Rs. 10,000, Rs. 15,000 and Rs, 24,000, respectively. Written down value of the block of assets will be determined as under Depreciated value of the block consisting of Plants A and B ‘Add : Cost of Plant C Total Less : Sale proceeds of Plants A, B and C Written down value of the block (which is empty) In the aforesaid case, no depreciation is admissible, as the block of assets ceases to exist on the last day of the previous year. Rs. ,08,000 will be treated as short-term capital loss on sale of Plants A, B and C under section 50(2}t. Depreciated value of the block on the first day of the next previous year (ie, on April 1, 2022) will be taken as nil (ie, written down value on March 31, 2022 : Rs. 2,08,000 minus short-term capital loss: Rs. ,08,000). In the case study given above if Plants A, B and C are transferred for a consideration which is higher than Rs. 257,000 (say, Rs. 3,57,000), then no depreciation will be available and Rs. 1,00,000 shall be taken as short-term gain on sale of Plants A, B and C. ‘ Imported cars Ifan imported car was acquired during March 1, 1975 and March31, 2001, depreciation is not admissible unless it is used in the business of running it on hire for tourist or for the purpose of business or profession outside India). ‘© Depreciation in case of succession, amalgamation, business re-organisation or demerger [Fifth proviso to sec. 32(1) and sec. 4DB] - These provisions are applicable while determining depreciation if there is a change of ownership of assets because of the following — a. conversion of firm or sole proprietary concer into company; ». succession to business other than on death — business of HUF taken over by amember, business of a firm taken over by a partner, conversion of HUF concern into company; ©. amalgamation of a company; 4. demerger of a company; ‘For section 50, one may refer to para 101.3.Para 81.3 @ INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION 4 nd €. conversion of private company /unlisted public company into limited liability partnership; J. amalgamation or demerger of co-operative banks. - In the year in which change of ownership takes place because of the aforesaid reasons, depreciation shall be calculated as under — 1. Find out the amount of depreciation of the previous year in which ownership of assets changes (because of the aforesaid reasons) on the assumption that the succession, amalgamation or demerger, etc., has not taken place, 2. The amount of depreciation so determined shall be apportioned between the predecessor and successor, in the ratio of number of days for which the assets are used by them during the previous year in which ownership changes. Provisions illustrated — ee A firm owns Plants A and B on April 1, 2021 (rate of depreciation : 15 per cent ; depreciated value : Rs. 30,000). It purchases Plant C on April 1, 2021 for Rs. 20,000 (jt is not qualified for additional depreciation). The firm is converted into a company with effect from June 26, 2021 {conditions of section 47(xii) are satisfied]. The amount of depreciation available to the firm and company will be determined as under — Depreciated value of April 1, 2021 ‘Add : Cost of Plant C purchased by the firm during 2021-22 Written down value on March 31, 2022 Depreciation @ 15% Depreciation available to the firm (i.e, 86/365 of Rs. 7,500) Depreciation available to the company (ie, 279/365 of Rs. 7,500) ‘¢ When an asset is put to use for less than 180 days in the year of acquisition - If any asset falling within a block of assets is acquired by the assessee during the previous year and it is put to use* for the purposes of business or profession for a period of less than 180 days in that previous year, the deduction in respect of such asset shall be restricted to 50 per cent of the amount calculated at the percentage prescribed in the case of block of asset comprising such asset. The following table highlights these provisions — Wether the asset is put | For how many days the asset | Depreciation (ofthe first year in | Depreciation (of any tose during the year is put touse hich the asset is “acquired”) | __ subsequent year) No = No depreciation ‘No depreciation Yes Less than 180 days Half of usual depreciation | Usual depreciation Yes 180 days or more Usual depreciation Usual depreciation Provisions illustrated ‘The above provisions are explained in the following examples — 1. X Ltd, purchases an old plant (rate of depreciation : 15 per cent) on May 10, 2021. Itis put to use on January 10, 2022. In this case, the plant is acquired during 2021-22 and in 2021-22 it is put to use for less than 180 days. Its, therefore, qualified for half of the usual depreciation (ie., 75 per cent). 2.Y Ltd. purchases a plant (being an office appliance) (rate of depreciation : 15 per cent) on May 10, 2021. tis put © use on January 10, 2023. In this case, the plant is acquired during 2021-22 and in 2021-22 itis not put to use at all Therefore, for the previous year 2021-22, no depreciation will be available. It is put to use in the previous Yea" 2022-23. For the previous year 2022-23, the usual depreciation will be available (as the asset is not acquired during 2022-23), although itis put to use for less than 180 days. 43. X Ltd. owns two buildings A and B on April 1, 2021 (rate of depreciation : 10 per cent, depreciated value! Rs. 14,15,700). It purchases on December 1, 2021 building C (rate of depreciation : 10 per cent) for Rs. 4,10,000 (out of ‘which Rs. 3,10,000 is paid by an account payee cheque and Rs. 1,00,000 is paid in cash). It sells building A during the previous year 2021-22 (say on January 10, 2022) for Rs. 8,70,000. In this case, depreciation for the previous yea 2021-22 shall be determined as under - “Itincludes active use as well as passive use. It includes an asset which is kept ready for use, evenif itis not actually used due ® any reason.vs 7 oe DEPRECIATION ALLOWANCE = Para 61.3 Depreciated value of the block (ie, buildings A and B) on April 1, 2021 Add : Cost of building C (purchased on December 1, 2021) (amount paid exceeding Rs. 10,000 by bearer cheque or in cash, is not considered) Total Less : Sale proceeds of building A. Written down value of the block Depreciation [as building C is purchased in the year 2021-22 and it is put to use for less than 180 days, depreciation on Rs. 3,10,000 will be 50 per cent of 10 per cent of Rs. 3,10,000 and on the remaining amount depreciation will be 10 per cent of (Rs. 8,55,700 — Rs. 3,10,000)} oo Depreciated value of the block on April 1, 2022 Ee If, in the aforesaid case, building A is sold for Rs. 15,87,000, depreciation will be determined as under Depreciated value on April 1, 2021 1415,700 Add : Cost of building C 3,10,000 Total 17,25,700 Less : Sale proceeds of building A. 1587000 Written down value 1,38,700 Depreciation [as the written down value is lower than cost of building C which is put to use for less than 180 days, depreciation shall be 50 per cent of 10 per cent of Rs. 1,38,700] fs Depreciated value of the block on April 1, 2022 131,765 Problems _ 81,3-5PL X Lid, owns the following assets on April 1, 2021 Assets ‘Actual cost ‘Written down value ‘Rate of depreciation ‘on April 1, 2021 (per cent) Re Re Building A 30,00,000 13,50,000, 10 B 6,00,000 2,25,000 10 c 8,00,000 40,000 5 Plant A 170,000 45,100 15 8 3,10,000 68,000 5 c 30,000 7,000 40 D 50,000 31,000 40 ‘The company acquires the following assets after April 1, 2021 ‘Asset Cost Date of acquisition Date when the asset | Rate of depreciation Re input lou’ (per cent) Building D 6,00,000 ‘May 28, 2021 Tune 1, 2021 70 Building E 4,00,000 June 8, 2021 June 8, 2021 5 Plant E 5,90,000 ‘August 12, 2021 September 1, 2021 6 Plant F 2,10,000 September 18, 2021 September 19, 2021 15 Plant G 150,000 September 19, 2021 October 30, 2021 0 Building F 2,00,000 ‘May 10, 2021 May 10, 2021 10 Plant H 130500 June 5, 2021 July 6, 2021 15 ‘The company sells the following assets after April 1, 2021 ie Date of sale Sale ie May TH, 2021 73,00,000 May 16, 2021 20,000 December 18, 2021 215,000 December 8, 2021 32,000Para 81.3 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION ia Determine the amount of depreciation for the assessment year 2022-23 on the assumption tha additional depreciation is nat ‘amilable. Out of purchase price of Plant E of Rs. §,90,000, Rs. 1,00,000 is paid in ensh. All other transactions are made by ‘account-payce cheques. Solution : The written down value and amount of depreciation for the assessment year 2022-23 will be as follows © First Block: Building (rae of depreciation : 10%) Rs Aggregate amount of written down value of buildings A and Bon April 1, 2021 (ie, Rs. 19,50,000 + Rs. 225,000) 15375000 ‘Add = Cost of Buildings D and F acquired during the previous year 2021-22 800000 Less : Sale consideration of building A sold during the previous year 2021-22 (this amount cannot, however, exceed Rs. 15,75,00 + Rs, 8,00,000) ()13.00,000 Written down value forthe previous year 2021-22 1075000 Depreciation for the previous year 2021-22 (assessment year 2022-23) (ie, 10% of RS, 10,75,000) 107500 ‘© Second Bock : Building (rate of deprecation : 5%) Written down value of Building C 40,000 ‘Add : Cost of building E acquired during the previous year 2021-22 (+) 4.00.00 Written down value for the previous year 2021-22 “440,000 Depreciation for the previous year 2021-22 (assessment year 2022-23) (5% of Rs, 440,000) 22.000 6 Third Block: Plant [rate of deprecation : 15%] Aggregate amount of written down value of Plants A and Bon April 1, 2021 (.¢, Rs. 45,100 + Rs. 68,000) L310 ‘Add : Cost of Plants E, F and H acquired during the previous year 2021-22 (ie, Rs. 490,000 + Rs. 210,000 + Rs 1.30 50, cash payment exceeding Rs. 10000 is not considered) (820500 Less: Sale consideration of Plant B sold during the previous year 2021-22 2000 Written down value forthe previous year 2021-22 92360 Depreciation for the previous year 2021-22 (assessment year 2022-23) (ie, 15% of Rs. 923,600) 13850 © Fourth block : Plant rae of depreciation : 40%] ‘Aggregate amount of written down value of Plants Cand Don April, 2021 (ie, Rs. 7,000 + Rs. 31,000) 2000 ‘Add : Cost of Plant G acquired during the previous year 2021-22 (@) 150000 Less : Sale consideration of Plants C and D sold during the previous year 2021-22 (though the plants are sold for Rs. 247,000 (.e, Rs. 215,000 + Rs. 32,000), the amount of reduction cannot exceed Rs. 38,000 + 150,000) 188.000 Written down value for the previous year 2021-22 ~ fil Depreciation for the previous year 2021-22 (assessment year 2022-28) Ni Depreciation admissible — First block 107300 Second block "0 Third block 1.38540 Fourth block a Total e800 81.3-5P2 X owns the following assets on April 1, 2021 —_ ‘ssela Wate down va on Apel 1-221 [Rat of depreciation (percen) | Fursiture 20,170 an ms @ Plant and machinery 2.10000 % Plant and machinery sa0000 2 Plant and machinery aaa 57 DEPRECIATION ALLOWANCE ® Para 81.3 During the prev mus year 2021-22, the following assets are purchased by X Date of purchase | Date when the Ae Cost] Rate of depreciation asset is put to use ., (per cent) ‘October 1, 2021 | October 9, 2021 Trade mark 15,000 25 June 20, 2021 June 22, 2021 Plant (second-hand) 190,000 40 November 30,2021 | Deceniber 1, 2021 Foreign made car 140,000 15 | December 6, 2021 | December 10, 2021 | Books for profesional use| 2,700 40 Determine the amount of depreciation for the assessment year 2022-23. Solution : Depreciation will be determined as under First] Second] Third] Fourth] Fifth] Sith bock| block} Block | Block} block) block Furniture] Bulding| Plant] Plant} Plant) Trade ma Rate of depreciation ox] 10%, 20% | 15%] 40%] 25% Rs, Rs, Rs. Rs. Rs. Rs. Deprecated value on April 1, 2021 20,170] 9,00,500| 2,10,000| 64,00,000} 2,05,000 - Cost of assets acquired during the previous year = S —__| 1,40,000"| 1,92,700 | 15,000" Written down value 20,170] 9,00,500| 2,10,000| 65,40,000| 3,97,700 | 15,000 Depreciation 2017| 90,050] 42,000] 9,70,500) 1,58,540] 1,875 ‘Admissible depreciation forthe assessment year 2022-23 First block Second block ‘Third block Fourth block Fifth block Sixth block Total 81.3-6 COMPUTATION OF ADDITIONAL DEPRECIATIONS - The provisions of additional depreciation are given below— ‘ Conditions - The following conditions should be satisfied to claim additional depreciation — 1. Manufacture/production of any article - The assessee should be engaged in the manufacture or production of any article or thing or generation, transmission or distribution of power". 2. New plant and machinery installed and acquired after March 31, 2005 - Additional depreciaticn is available only in respect of new plant and machinery acquired and installed after March 31, 2005. However, the following assets are not eligible for additional depreciation — 4. shipsand aircrafts; or b. any machinery ot plant which, before its installation by the assessee, was used either within or outside India by any other person; or ©. any machinery or plant which is installed in any office premises, any residential accommodation, or in a guest house; or 4. any office appliances or road transport vehicles; or ¢. any machinery or plant, which is eligible for 100 per cent deduction in the first year. ‘ Rate ofadditional deprecation - Additional depreciation shall be available atthe rate of 20 per cent of the actual cost of new plant and machinery acquired and installed after March 31, 2005. If, however, the asset is put to use TAs trade mark, car and books are purchased during the previous year 2021-22 and put to use for less than 18) days during the year 2021-22, only 50% of normal depreciation is admissible. “*A power generating unit which claims depreciation on straight-line basis under section 32(1)) cannot claim any additional deprecation in rexpost of anvestment in new plant and machinery. y ® Additional depreciation under section 32()() is not available if the option is exercised for the alternative tax regime [ee para 1943),Para 61.3 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 7 forless than 180 days in the year in which itis acquired, the rate of additional depreciation will be 10 per cent (the remaining 10 per cent shall be allowed as deduction in the next year). Where an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment (or aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft or tise of electronic clearing system through a bank account (or through prescribed electronic modet), exceeds Rs. 10,000, such payment shall not be eligible for additional depreciation Problem ——————--— {81.3-6PL X Lid. isengaged in the business of manufacture of computer hardware in Rajasthan since 1995. During the previous ‘year 2021-22, the following assets are acquired and put to se — (Rs. in thousand) Block1 | Block2 |” Block3_ Rate of depreciation 15% | 30% | 40% [Number of assets in the block u R v Deprecated value ofthe block on April 1, 2021 1800 | 25,00 | 5,00 ‘Additions of plants (new) during te previous year 2021-22 | Plant A 57,50 . = Plant B - Plant C = Sale of old plants (one plant in each block) 8 Plants A, Band Care acquired during May 2021 and put to use during September 2021. However, Plant B is put to ws in the last week of March 2022. Payment is made through NEFT/RTGS. However, in the case of Plant A, Rs. 50,000 is paid in cash Find out the amount of depreciation, additional depreciation and capital gains. Solution : Computation of additional depreciation Plant A | Plint® [Plant | Whether additional depreciation is available Yes Yes Yes Rate of additional depreciation 20% 10%| 0% Rs, Rs, Rs: ‘Actual cost (Plant A : Rs. 57,50,000 - cash payment of Rs. 50,000) 57,00,000| —4,00,000| _17,00,000 ‘Additional depreciation (total Rs. 15,20,000) 140,000) 40,000] _3.40.000 ‘Consputation of normal depreciation ~ — Block 1] Block 2] Bleck Rate of depreciation 15% 30% 40% Rs, Rs. Depreciated value of the block on April 1, 2021 18,00,000 | 25,00,000 ‘Add : Actual cost of Plants A, B and C acquired during the previous year | 57,00,000| _4,00,000 Total (a) 75,00,000 | 29,00,000) Less : Sale proceeds of old plants (8,000 | ()28,70,000 Written down value of the block on March 31, 2022 742,000] 30,000] Less : Normal depreciation 11,233,800 4,500 | Less : Additional depreciation as computed earlier 11,40,000 40,000} _3,40,000 Depreciated value of the block on April 1, 2022 52,28,200 Nill Nil Computation of capital gains Sale proceeds of old plants 8,000| 28,70,000| 42,00,000 {As pernule 6ABBA, prescribed modes of electronic payment are: (2) creditcard (debit card, (net banking, (0) IMPS (medi Payment Service), () UPI (Unified Payment Interface), () RTS (Real Time Gross Settlement) (g) NEFT (National Electronic F ‘Transft) and (i) BHIM (Bharat Interface for Money) Aadhaar Py.179 DEPRECIATION ALLOWANCE ™ Para 81.3 Plant A | PlantB | Plant ‘Whether capital gain is taxable [*the block does not cease to exist, sale proceeds do not exceed the opening balance plus new addition, ie, (2)] No Not Yes Less :Cost of acquisition fi, (a)} -|__ 22,00,000 Short-term capital gain Nil Nil] 20,00,000 Note -X Ltd. can claim normal depreciation of Rs. 11,2830 [ie Rs. 11,28,800 + Rs. 4,500]. Besides, itis also eligible for additional depreciation of Rs, 15,20,000 as computed above. If, however, X Ltd. opts for the alternative tax regime under section 115BAA/115BAB, additional depreciation is not available. 81.3-7 MEANING OF “ACTUAL COST” (SEC. 43(1)|- “Actual cost” is considered for calculating the written down value of a block of asset to find out normal depreciation. “ Actual cost” of a new plant and machinery is taken into consideration to find out the quantum of additional depreciation. Meaning of the expression “actual cost” as given in section 43(1) and other related issues are summarized below - ‘© The accepted accounting rule for determining cost of the fixed asset is to include all expenses directly relatable to acquisition of the asset (viz., cost price of the asset, interest on money borrowed for purchase of the asset, bank charges), expenses necessary to bring the asset to site, install it and make it fit for use (viz., carriage inwards, loading and unloading charges, installation charges, etc.), and expenses incurred to facilitate the use of the asset (vi2., cost of repairs and modification prior to use of the asset to make it workable, training expenses of the staff before the use of the plant, expenses on essential construction work such as, cold storage rooms, cooling towers, etc.) and expenses on insurance, power and fuel, incurred before commencement of business. Regularization fees paid by an assessee towards violation of certain regulations in construction of a building forms part of “actual cost” of building for claiming depreciation ¢ If an assessee incurs any expenditure for acquisition of any asset in respect of which a payment (or aggregate of payments made to a person in a day), otherwise than by an account payee cheque/ draft or use of electronic clearing system through a bank account (or through prescribed electronic mode), exceeds Rs. 10,000, such payment shall be ignored for the purposes of determination of actual cost of such asset. Consequently, normal depreciation/additional depreciation under section 32 and investment allowance under section 32AD will not be available pertaining to a payment (exceeding Rs. 10,000) which is made otherwise than by an account payee cheque/ draft or use of electronic clearing system through a bank account (or through prescribed electronic mode). ¢ Interest pertaining to the period till the asset is put to use should be added to the “actual cost” of the asset. However, interest relatable to any period after the asset is first put to use cannot be included in actual cost. ‘# Expenditure on travelling incurred for acquiring depreciable assets is part of actual cost. ¢ “Actual cost” of an asset for the purpose of depreciation is zer0 if itis used in business after it ceases to be used for scientific research related to that business. ¢ If inventory is converted into capital asset, “actual cost” of such asset shall be the fair market value of such asset on the date of conversion. ‘@ If an asset is acquired by gift of inheritance, written down value in the hands of previous owner will be considered as cost acquisition. ¢ Ifan asset is acquired from 100 per cent subsidiary company, or from 100 per cent holding company, written down value in the hands of transferor will be considered as cost acquisition. ¢ Ifan asset is acquired in a scheme of amalgamation or demerger by an Indian company, written down value in the hands of transferor will be considered as cost acquisition. ¢ Where any portion of cost is met by Government (or any other person) in the form of subsidy, grant or teimbursemert, the amount met by the Government (or any other person) shall be deducted from the cost. ¢ If deduction is claimed under section 35D, actual cost is zerot. 81.3-8 UNABSORBED DEPRECIATION - While dealing with unabsorbed depreciation, one should keep in mind the following points : GAGS an Cilla caus respect of which deduction allowed under section 35AD is deemed tbe the income ofthe asesseein {Where any capita se ning of sub-section (7B) ofthe said section, the actual cost fo the asesse shal be the actual costo the accordance with the provision equate amount of deprecation calculated a tera inforcethatwouldhavetecn allowable aosesce as reduce by 1 i purpones of business since the date oft cyusion,Para 81.3 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION 180 Siep one | Depreciation allowance of the previous year is first deductible from the income chargeable under the head “Profits and gains of business or profession”. " ‘Step wo | If depreciation allowance is not fully deductible under the head “Profits and gains of business or ee | olecsion” because of absence or inadequacy Of profit itis leduetible from income charges | Unier other heads of income [except income under the head “Salaries” for the same assessment | year. imei _ Siep Uiree | ~f depreciation allowance is still unabsorbed, it can be carried forward to the subsequent assess. iment year(s) by the same assessee [se also the points given below] Notes: 1. No time-limit is fixed for the purpose of carrying forward of unabsorbed depreciation; it can be cartied forward for indefinite period, if necessary. 2. In the subsequent year(s), unabsorbed depreciation can be set off against any income whether chargeable ‘under the head “Profits and gains of business or profession” or under any other head [except income underthe head “Salaries’). In the matter of set off, the following order of priority is followed in the subsequent year(s) a, Current depreciation. b. Brought forward business loss. ¢. Unabsorbed depreciation. It may be said that if in the subsequent year(s), there is no brought forward business loss, unabsorbed depreciation can be added to current depreciation for the purpose of claiming deduction. 3. Continuity of business is not relevant for the purpose of above set off and carry forward. 4, Depreciation can be carry forward by the same assessee. This rule is, however, not applicable in some cases. = Problems — 81.3-8P1 X submits the following particulars 202-0 Rs, Income from salary (after standard deduction) 2,00,000 Business profits (before depreciation) 18,000 Current depreciation Income from other sources Determine the taxable income of X forthe assessment years 2022-23 and 2023-24. Solution : ASSESSMENT YEAR 2022-23 (PREVIOUS YEAR 2021-22) Profits and gains of business or profession Business profits Less: Depreciation Depreciation not deductible against business profits Income from salary Income from other sources Less: Depreciation Net income Note: Unabsorbed depreciation of Rs. 1,08,000 will be carried forward. ASSESSMENT YEAR 2023-24 (PREVIOUS YEAR 2022-28) Profits and gains of business or profession Business income 7,00,000 18,000 Less : Depreciation (ie., current depreciation : Rs. 1,32,000 + unabsorbed depreciation of the previous year 2021-22 : Rs. 1,08,000) 240,000 wil Depreciation not deductible against business income 222,000 Income from salary Income from other sources 80,000 Less : Depreciation 2.22,000 Net income181 INVESTMENT ALLOWANCE IN BACKWARD AREAS = Para 81.5 Note: As per section 71(2A), an assessce shall not be entitled to set-off of any loss under the head "Profits and gains of business or profession” against income under the head “Salaries”. Consequently, unabsorbed depreciation of Rs 80,000 is set off against income from other sources and remaining unabsorbed depreciation of Rs, 1,42,000 will be carried forward. 81.3-8P2 X submits the following particulars years: 22D Rs. Business profits (before depreciation) 45,000 Current deprecation 20,000 Income from other sources 70,000 Determine the net income of X for the assessinent years 2022-23 and 2023.24 Solution : ASSESSMENT YEAR 2022-25 (PREVIOUS YEAR 2021-22) Income from other sources 20,000 Less : Business loss, 20,000 Net income Nil Amount to be carried forward Business loss Rs, 30,000 Unabsorbed depreciation Rs. 18,000 ASSESSMENT YEAR 2023-24 (PREVIOUS YEAR 2022-23) Profits and gains of business or profession Business profits 45,000 Less : Current depreciation 20,000 Profit after depreciation 25,000 Less : Brought forward business loss of the previous year 2021-22 30,000 Nil Business loss of previous year 2021-22 to be carried forward to the next year 5,000" Income from other sources Income 70,000 Less : Unabsorbed depreciation of the previous year 2021-22 18,000 52,000 Net income 52,000 *Brought forward business loss can be set off only against business profits and not against any other income. {81.3-9 DEPRECIATION ON STRAIGHT-LINE BASIS IN THE CASE OF POWER UNITS - An undertaking engaged in {generation or generation and distribution of power can claim depreciation (in respect of assets acquired after March 31, 1997) according to any one of the following methods — Straight. | Depreciation can be claimed according to straight-line basis in the case of tangible assets at the ine Isis | percentage specified in Appendix A to the Income-tax Rules on the actual cost of individual asset. ‘The aggregate depreciation cannot exceed the “actual cost” Written | Alternately, such undertaking can claim depreciation, at its option, according to written do down alue method like any other assessee. The option for this purpose shall be exercised before the due same basis | ate of furnishing retum of income. Once the option is exercised, it shal be final and shall apply to all the subsequent years. 814 Investment allowance for acquisition and installation of new plant and machinery [Sec. 32AC] - Section 32AC provides investment allowance in order to encourage substantial investment in new plant and sere en, Inbestment allowance is in addition to depreciation. However, deduction under section 32AC is available only for assessment years 2014-15 to 2017-18. 815 Investment allowance in notified backward areas in Andhra Pradesh, Bihar, Telangana and West Bengal [Sec. 32D] - Deduction under section S2AD is not available nowadays,Para 81.6 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION ez 81.6 Tea/coffee/rubber development account [Sec. 33ABP - An assessee can claim deduction under section 33ABas follows — ‘# Conditions - The assessee must satisfy the following conditions - 1, Engaged in tea/coffe/rubber plantation - It must be engaged in the business of growing and manufacturing tea or coffee or rubber in India. 2. Deposit - The assessee must make a deposit in a “special account” (ie. deposit with NABARD) or deposit ‘under a scheme approved by the Tea Board or Coffee Board or Rubber Board. Deposit should be made within ‘6months from the end of the previous year or before the due date of furnishing return of income, whichever is earlier. 3. Audit - The accounts of the taxpayer should be audited by a chartered accountant and audit report should be submitted one month prior to the due date of submission of return of income. ‘# Amount of deduction - Amount of deduction is - 4, asum equal to amount deposited in the “special account”; or b. 40 per cent of the profit of such business computed under the head “Profits and gains of business or profession” before making any deduction under section 33AB and before adjusting brought forward ‘business loss under section 72, whichever is less. ‘# Other points - The following points should be noted ~ 1. Where any deduction is claimed under this section, no deduction shall be allowed in respect of such amount in any other previous year. 2. The amount standing to the credit of the special account may be withdrawn only for the purpose specified in the approved scheme. If the amount released from the “special account” in a year is not utilized in the same previous year for the purpose for which it is released, the amount not so utilized will be treated as taxable Profits of that year and taxed accordingly. 3. Where an amount is withdrawn because of closure of business or because of dissolution of firm, the amount withdrawn will be treated as taxable profit and taxed accordingly on the basis as if the business was continuing or the firm had not been dissolved. In all other cases, viz., death of the taxpayer, partition of the Hindu undivided family and liquidation of the company, the amount withdrawn on closure of account because ofthe occurrence of any of these events will not be included in the taxable income even though the amount has not, been utilized for any of the purposes specified in the scheme. 4. The amount withdrawn from the “special account” cannot be utilised for acquiring plant and machinery which is to be installed in any office premises or residential accommodation or guest houses. Barring computers, office appliances cannot be purchased. Even any machinery which is to be installed in an undertaking producing low priority items (specified in the Eleventh Schedule) or is an item of plant ot machinery entitled to 100 per cent deduction in any one year, cannot be acquired. Machinery so acquired should not be transferred within 8 years from the end of the year in which it is acquired (this rule of 8 year is not applicable in the case of transfer to the Central Government, State Government, statutory corporation, Government company or transfer in a scheme of conversion of firm into company.) Problem 81.6-6P1 Find out the tax consequences in the following cnses — 1. Business profit of X Ltd, a tea growing and manufacturing company, is Rs 70 lakh Aipots R25 lt in he “pei acu” for clang dedecton ak forward business loss of Rs. 12,00,000, 2. By withdrawing Rs, 20 lake on January 20, 2022 from the “special account”, X Ltd purchases a non-depreciale asset ot Rs Tel acordng tthe chee framed by the Te Board The remaining amount of Rs 2 aks not tise up to March 3. The asset which is purchased for Rs. 18 lakh is sold to Y for Rs. 31 lakh on December 3, 2024 Solution : 1, Amount deductible for the assessment year 2021-22 is — for the assessment year 2021-22. It Jor claiming deduction under section 33AB. It wants to claim set-off of brought © Deduction under section 33AB is not available, ifthe option is exercised for the alternative tax regime [se para 194.3]183 EXPENDITURE ON SCIENTIFIC RESEARCH ™ Para 81.9 a, Rs. 2Blakh (ie, 40% of Rs. 70 lakh) ; or b. Rs. 25 lakh (being the deposit with the “special account”), whichever is lower. Rs, 25 lakh is, therefore, deductible under section 3B. Taxable income of X Ltd. shall be determined as under — Rs. in lakh Business income 70 Less : Deduction under section 33AB ss Net income, 45 As per rule 8, 40% of Rs. 45 lakh is taken as non-agricultural income which is chargeable to tax and the balance 60% is treated as agricultural income which is not taxable Non-agricultural income {ie, 40% of Rs, 45 lakh) pe Less : Brought forward loss 2 6 Net income 2. Rs. 2lakh, being the amount not utilised up to March 31, 2022, will be business income (40% of which will be taxable as non-agricultural income) for the assessment year 2022-23, 3, The new asset is transferred within eight years from March 31, 2022. Consequently, the taxable income for the assessment year 2025-26 (i.e, previous year 2024-25 in which the asset is transferred) will be determined as follows — Rs. Business income [40% of which is taxable as non-agricultural income] 18,00,000 Short-term capital gain (ie., Rs. 31 lakh - Rs. 18 lakh) 13,00,000 81,7 Site restoration fund [Sec. 33ABAP - An assessee can claim deduction under section 33ABA as follows— ‘ Conditions - The assessee must satisfy the following condi 1. Production of petroleum/natural gas ~ The taxpayer is engaged in the business of the prospecting for, or extraction or production of, petroleum or natural gas or both in India 2, Agreement - The Central Government has entered into an agreement with the taxpayer for such business. 3, Deposit - It must make a deposit with SBI in a “special account” in accordance with a scheme approved by the Ministry of Petroleum and Natural Gas or deposit any amount in a “site restoration account” under a scheme framed by the Ministry of Petroleum and Natural Gas. The deposit should be made before the end of the previous year. 4, Audit - Books of account of the taxpayer should be audited and audit report should be submitted one month prior to the due date of submission of return of income. @ Amount of deduction - Amount of deduction is ~ 2. a sum equal to amounts deposited as given above; or b. 20 per cent of the profit of such business computed under the head “Profits and gains of business or profession” before making any deduction under section 33ABA and before adjusting brought forward business loss under section 72, whichever is less. 81.8 Reserves for shipping business [Sec. 33AC]- No deduction under section 33AC is available from the assessment year 2005-06. 81.9 Expenditure on scientific research [Sec. 35]- The term“ extension of knowledge in the fields of natural or applied sciences including agriculture, animal husbandry or fisheries”. The term ‘scientific research’ has a wide scope. It does not necessarily mean only invention or ‘successful scientific research. With a view to accelerating scientific research, section 35 provides tax incentives. Under this section amount deductible in respect of scientific research may be classified as under : ‘or Rule 8, see para 187. @ Deduction under section 38ABA is not available, if the option i exercised forthe alternative tax sgime [se para 194.3]Para 81.9 @ INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION ly Eipenditure on romeorch curried on Contribution to outsiders by the assessee : a . 7. Revenue expenditure under section 5(I)() |e Contribution to an approved research association {see para 81 oy ' under section 35(1)(ii)/ (ii) [see para 81.9-2] 2. Capital expenditure under section 35(2) 2, Payment to National Laboratory under section 35(2A.A) {see para 819.3} {see para 81.9-4] 3. Expenditure on an approved in-house research | 3. Contribution to an Indian scientific research company under section 35(2AB) [see para 81.9-5] [see para 81.946] = 81.9-1 REVENUE EXPENDITURE INCURRED BY THE ASSESSEE HIMSELF (SEC. 35(1)@)] - Where the assessee himself carries on scientific research and incurs revenue expenditure, deduction is allowed for such expenditure only such research relates to the business. Provisions illustrated Suppose X Ltd. is engaged in the business of manufacture of paper and it incurs revenue expenses for conducting scientific research for improving the quality of steel, such expenditure is not deductible, as it is not related to the usiness of the taxpayer. Pre-commencement period expenses - Revenue expenses (other than expenditure on providing perquisites to employees) incurred before the commencement of business (but within three years immediately before commencement of business) on scientific research related to the business are deductible in the previous yearin which the business is commenced. However, the deduction is limited to the extent it is certified by the prescribed authority. Provisions illustrated. X Ltd. starts a business on May 21, 2021. Revenue expenditure (for conducting scientific research related to the business) incurred by it from May 21, 2021 to March 31, 2022 is allowed as deduction for the assessment year 2022-23. Besides, the following expenses on scientific research related to the business incurred by X Ltd. during May 21, 2018 and May 20, 2021 (and approved by the prescribed authority) will be allowed as deduction for the assessment year 2022-23 — 4 expenses on purchase of material used in scientific research ; and », salary paid to employees (not expenses on perquisites). 81.9-2 CONTRIBUTION MADE TO OUTSIDERS ISEC. 351) (i)/i))* - Where the assessee does not himself carry on research but makes contributions to other institutions for this purpose, a deduction is allowed, as follows— To whom contribution can be given Quantum of deduction An approved research association which has, as its object, undertaking of | 100% of actual expenditure? scientific research related or unrelated to the business of assessee [sec.35(1)(i)] ‘An approved university, college or other institution for the use of scientific | 100% of actual expenditure? research related or unrelated to the business of assessee [sec. 5(1)i)] ‘An approved association which has as its object the undertaking of research | 100% of actual expenditure in social science oF statistical science or an approved university, college or ‘other institution for the use of research in social sciences or statistical research | related or unrelated to the business of the assessee (sec. 35(1)i)} Approval is given by the Central Government. Contribution to these institutions are qualified for deduction ‘even if after the date of making contribution, the approval granted to these institutions have been withdraw? 100% of actual 2021-22 onwards). -penditure (for the assessment years 2018-19 0 2020-21) and 100% of actual expenditure (from the assessment y°" ® Deduction under section 351}, (is not available, i the option is exercised forthe alternative tax regime [er para 194.185 819 EXPENDITURE ON SCIENTIFIC RESEARCH & Ps 81.9-3 CAPITAL EXPENDITURE INCURRED BY AN ASSESSEE HIMSELF [SEC, 352)] - Where the assessee incurs any expenditure of a capital nature on scientific research related to his business, the whole of such expenditure incurred in any previous year is allowable as deduction for that previous year. One should note the following points — $, Capital expenditure on conducting scientific research (relating to the business of assessee) is deductible at cae oper cent in the year in which expenditure isincurred Deduction i available even if the relevant rut to use for researc! fevelopment purposes during the previous year in whic! Seehdicare Bin onuse FOF Tesearch and development purposes during the previous year in # The above expenses may be on plant or equipment for research or constructing building (excluding cost of land) for research or expenses of capital nature connected with research like expenses on purchase of buses to transport research personnel. ‘# Where any capital expenditure has been incurred on scientific research related to business before the commence- ment of business, the amount of such expenditure, incurred within three years immediately preceding the com- mencement of the business, is deductible in the previous year in which the business is co The aforesaid deduction is not available in respect of capital expenditure incurred on the acquisition of any lan + No deduction by way of depreciation is admissible in respect of an asset used in scientific research 4 If the asset is sold without having been used for other purposes, the following amount shall be chargeable to tax under section 41(3)— a, surplus (ie, sale price); or b, deduction already allowed under section 35, whichever is less. It is chargeable to tax as business income of the previous year in which the sale took place. The excess of sale rice over cost of acquisition (or indexed cost of acquisition) is chargeable to tax under section 49 under the ead “Capital gains”. 81.9-4 CONTRIBLITION TO NATIONAL LABORATORY [SEC 35(24A)- The provisions of section 35(2AA) are given low— ¢ Conditions - The following conditions should be satisfied — 1. The payment is made to National Laboratory, university, IT, ora specified person as approved by the prescribed authority 2, The above payment is made under a specific direction that it should be used by the aforesaid person for undertaking scientific research programe approved by the prescribed authority. ‘@ Amount of deduction - If the aforesaid conditions are satisfied, 100 per centt of contribution is deductible. Such contribution which is eligible for deduction is not eligible for any other deduction under the Act. 81.9-5 EXPENDITURE ON IN-HOUSE RESEARCH AND DEVELOPMENT EXPENSES [SEC, 3528) - Section 35(2AB) provides for a deduction in respect of expenditure on in-house research and development expenses subject to the following — Conditions - One has to satisfy the following conditions — 1. The taxpayer is a company. 2. The company should be engaged in the business of bio-technology or in any business of manufacture or production of any article or thing except those specified in the Eleventh Schedule. 3. Itincurs any expenditure on scientific research and such expenditure is of capital nature or revenue nature* {not being expenditure in the nature of cost of any land and building)*. The expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial, regulatory approval and filing an application for a patent. 4. The research and development facility is approved by the prescribed authority. 5. The taxpayer has entered into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of the accounts maintained for that facility or fulfils such conditions with res ‘to maintenance of accounts and audit thereof and furnishing of reports in such manner as ‘may be. prescribed. + Amount of deduction ~If all the above conditions are satisfied, then a sum equal to 100} per cent of the ccpondita Sc ‘incurred shall be allowed as deduction. If the aforesaid conditions are not catishied, thes deduction may be claimed as per the rules mentioned in paras 81.9-1 and 81.9-3, 81.9-6 CONTRIBUTION TO A COMPANY TO BE USED FOR SCIENTIFIC RESEARCH [SEC. 35(1)(ia)®- Section 35(1)(ia) is applcabie\! the taxpayer has paid any sum to an approved Indian scientific research compart respect of sEENpayanent a deduction of 100 per cent is available. Research may or may not be related to Ve Doetness Of the person making the contribution. “There is no need to find out whether the expenditure i capital expenditure or revenue expenditure because under ths section both revenue and capital expenditure ae allowable as deduction Cont of bling (excluding cost of land) is eligible for 10 percent deduction under section 35(2) [ce para 819-3. +H130% (forthe azesament years 2018-19 to 2020-21) and 100% (from the assessment year 2021-22 onwards) # Deduction under section 35(1\H)/@AA)/2AB) isnot available ifthe option s exercised forthe alternative tax regime para 1943}Para 81.9 = INCOME UNDER PROFITS & GAINS OF BUSINESS OR PROFESSION & ITS COMPUTATION. ey Restriction on payee-company - The payee-company cannot claim deduction of 100 per cent under section 35(2AB), However, the payee-company can claim a deduction tothe extent of 100 percent ofthe sum spent as revenue expenditure or capital expenditure on scientific research, under section 35(1).. 81.9-7 CARRY FORWARD AND SET-OFF OF DEFICIENCY IN SUBSEQUENT YEARS - If on account of inadequacy or absence of profits of the business, deduction on account of capital expenditure on scientific research cannot be allowed, fully or partly, the deficiency so arising is to be carried forward as if it is unabsorbed depreciation, 81.9-8 CONSEQUENCES IN CASE OF AMALGAMATION - In pursuance of an agreement of amalgamation, if the amalgamating company transfers to the amalgamated company, which is an Indian company, any asset representing capital expenditure on scientific research, provisions of section 35 would apply to the amalgam. ated company as they would have applied to the amalgamating company if the latter had not transferred the asset. 81.9-9 PROCEDURE FOR APPROVAL, STATEMENT AND CERTIFICATE - The following amendments have been made with effect from April 1, 2021 - ‘@ Existing research association/company - Anentity which has taken approval for the purpose of section 35(1)(i)/ (iia)/ (i) before April 1, 2021 is required to apply afresh (approval granted up to March 31, 2021 shall be deemed tohave been withdrawn). Such entity will have to make an online intimation in Form No. 10A to the prescribed income-tax authority on or before March 31, 2022. Subject to this intimation, the notification shall be valid for a period of 5 assessment years. © Newentities - Any new notification issued by the Central Government under section 35(1)(i)/(ia)/ (ii) (after March 26, 2020) shall be applicable only for 5 assessment years (or less) ¢ Statement and certificate - The above entities are required to furnish to the prescribed income-tax authority a statement of contributions / donations {in Form No. 10BD] received by them from different persons during the year. Form No. 10BD is required to be uploaded on or before May 31 immediately following the financial year in which such donations/ contributions are received. Moreover, the above entities are required to give a certificate of donation to the donors [i.., the taxpayers who want to claim deduction under section 35(1)(1)/(tia)/(i)] in Form No. 10BE on or before May 31 immediately following the financial year in which such donations/ contributions are received Problems 81.9-P1 X Ltd. commenced production of paper on December 1, 2021. The company has made the following expenditure on scientific research up to the year ending on March 31, 2022 : ae 1. On December 13, 2021, the company pays Rs. 80,000 to the Indian Agricultural Research Institute, New Delhi, being an ‘approved research institution under section 35(1)(i), for the purpose of carrying out scientific research in natural science. 2.On December 21, 2021, the company pays Rs. 70,000 to the Indian Institute of Management, Ahmedabad, being an approved institute under section 35(1) (ti), for the purpose of carrying out researc in social or statistical science. 3.0m fnary 10, 2022, company pays Rs 40.250 ton approved National Laboratory fr crying out programmes of scientific research. 4. On December 23, 2021, the company purchases a plot of land for Rs. 6,00,000. Later ona laboratory building is constructed (cost of construction : Rs. 4,70,000, date of completion of construction : March 1, 2022) to start an in-house research. 5: Before the commencement ofthe production, te company had mate the folowing revenue expedite frit research t- ratory — © Expenditure on salary and perquiste to research personnel and research material during the 12 months ending on November 30, 2018 : Rs. 30,000. © Expenditure on salary of research profesional from December 1,2018 to November 30, 2021 : Rs. 91,000 (out of which amount certified by the prescribed authority is Rs. 32,000). © Expenditure on providing rent free flat and club facility to research personnel from December 1, 2018 to November 30, 2021 : Rs, 18,000. a : - © Expenditure on research material from December 1, 2018 to November 30, 2021 : Rs. 76,800 (out of which amount certified by the prescribed authority is Rs, 44,800). © Capital expenditure om scientific research (not certified by the prescribed authority). Expenditure incurred | Expenditure incurred ‘upto November 30, | between December 1, 2018 2018 and November 30, 2021 Rs. Rs. Purchase of land for growing herbals for research 250,000 60,000 Purchase of equipments for research 30,000 140,000 Cost of cultivation of herbals *92,000 Ano187 EXPENDITURE ON SCIENTIFIC RESEARCH m Para 81.9 Determine the amount of deduction avilable to X Ltd. under section 35(1) for the assessment yenr 2022-23, ifthe scientific research is related to the business of the assssee-company. Solution : ‘The amount of deduction under section 35 for the assessment year 2021-22 will be determined as under ~ Rs 1. Payment of Rs. 80,000 to an approved research institution for carrying on research in natural science deductible under section 35(1)(i) 80,000 2. Payment of Rs.70,000 to an approved institution forcarrying on researchin social science is deductible under section 35(1)(i) 70,000 3. Payment of Rs. 40,250 to an approved National Laboratory 40,250 4. Cost of laboratory building (excluding cost of land) [deductible under section 35(2)] 4,70,000 5. Expenditure on salary (excluding Juisite) to research personnel and expenditure on material for seticnured wt aa some as te ten © Rs. 30,000 being expenditure on salary and perquisites is not deductible as it is not incurzed within 3 years before commencement of business Le ‘© Rs.32,000 being expenditure on salary to research personnel as certified by the prescribed authority within 3 years before commencement of business is deductible 32,000 © Rs. 18,000 being expenditure on providing perquisites to research personnel before commencement of business is not deductible Nil ‘© Rs, 44,800 being expenditure as certified by the prescribed authority on purchasing research material within 3 years before commencement of business is deductible 44,800 ‘© Cost of land purchased for growing herbals (not deductible) i © Rs. 1,40,000 (being the cost of equipment) is deductible 1,40,000 © Rs, 44,600 being cost of growing herbals is deductible 44,600 Amount deductible under section 35 for the assessment year 2022-23 921,650 81.9-P2 XY7 [14.0 paper manufacturing concern, purchases a machine on March I, 2019 for Rs. 610,000 for its laboratory with a view to improving the quality of art paper manufactured by the company, 1. What will be the amount of deduction under section 35 on account of capital expenditure of Rs. 6,10,000 for the assessment year 2019-20 ? 2 Ifthe research activity for which the aforesaid machine i purchased, ceases in 2020

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