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Deduction for exp on prospecting of

certain minerals S.35E


(1) An Indian co or a res. ‘A’ engaged in
prospecting for or extraction or production of any
minerals who incurs exp specified in sub sec. (2)
after 31-3-1970, shall be entitled to deduction of
1/10th of such exp in the relevant P.Y.s.
(2) Exp is incurred during the year of comml.
prod. or one or more of the 4 years preceding
that year on prospecting of minerals specified in
Part A or Part Bof the Seventh Schedule.
Exp met by any person or authority and sale,
salvage, compensation or insurance money
realised from any property shall be excluded.
(3) Exp on acquisition of site or on acquisition of
deposits of minerals or on any building, mach,
plant or furniture on which depreciation is
admissible u/s. 32 shall not be regarded as
eligible exp.u/sub sec.(2).
(4) Deduction of 1/10th of the exp specified in sub
sec. (2) or amount sufficient to reduce the
income from comml. prod. To NIL shall be
allowed for 10 years. Amount remaining
unallowed shall be allowed in subsequent year(s)
up to the 10th year. It shall not be c/f. beyond the
10th year.
(5) ‘Operation relating to prospecting’,’year of commercial
production’ and ‘relevant previous year’ defined.
(6) ‘A’ other than a co. or co op. soc. required to get the
A/cs audited and submit audit report along with the return
of the first year in which deduction under this section is
claimed.
(7)&(7A) In case of amalgamation or demerger of an
Indian co eligible for deduction under this section before
expiry of 10 years, amalgamated co or demerged co shall
be entitled to deduction for the balance no of years from
the year of amalgamation or demerger.
(8) No deduction under any other provision of the Act shall
be allowed in respect of exp aloowed as deduction under
this section.
Deductions u/s. 36(1) -
(i) any insurance premium against risk of
damage or destruction of stocks or stores
used for business or profession.
(ia) any premium paid by a Federal Milk Co-
op. Society for insurance on the life of cattle
owned by a member of a primary society.
(ib) any premium paid by any mode of
payment other than cash by an employer for
insurance on health of his employees under
a scheme framed by G.I.C. or by I.R.D.A.
(ii) any bonus or commission for services
rendered, where such sum would not have
been payable to him as profits or dividends.
(iii) interest paid on capital borrowed for the
purposes of business or profession.
However, interest paid on capital
borrowed for acquisition of an asset for
extension of existing business or profession
from the date on which capital was borrowed
till the date on which the asset was first put to
use shall not be allowed as deduction.
Some decisions –
Interest paid is not subject to the test of
reasonableness (unless covered by S. 40A(2)) or
necessity.
Ram Kishan Oil Mills v. CIT 56 ITR 186 (MP)
CIT v. Sundaram Fastners Ltd. 149 ITR 773
(Mad.)
If more than one activities are carried on as the
same business and the activity for which capital
was borrowed is closed down, interest on such
loan for the period after the activity is closed
down is allowable.
Veecumseen v. CIT 86 Taxman 243 (S.C.)
Where borrowed money is invested in tax free
securities, interest on such part of borrowed
money is allowable.
CIT v. Indian Bank Ltd. 59 ITR 77 (S.C.)
(Decision will not apply after the introduction of
S. 14A).
Capital means money only.
Bombay Steam Navigation Co. 56 ITR 52 (S.C.)
Borrowals diverted to meet personal/business
obligation is not allowable.
Madhav Prasad Jatia v. CIT 118 ITR 200 (S.C.)
Where money borrowed by a co. was
advanced to its directors free of interest as
a matter of business expediency, it was held
as allowable.
CIT v. Coimbatore Salem Transport Pvt. Ltd.
61 ITR 480 (Mad.)
Interest on money borrowed for payment of
Income-tax not allowable.
Bharat Commerce & Inds. Ltd. v. CIT 230
ITR 733 (S.C.)
East India Pharmaceutical Works Ltd. v. CIT
224 ITR 627 (S.C.)
Where advance tax is paid out of overdraft
account in which profits are pumped in and
they are sufficient to pay advance tax, it
cannot be said that advance tax is paid out
of the overdraft.
Woolcombers of India Ltd. v. CIT 134 ITR
219 (Cal.)
(iiia) the pro-rata amount of discount on zero
coupon bond having regard to the period of
life of such bond calculated in the manner as
prescribed.
(iv) employer’s contribution to a
recognised provident fund or an
approved superannuation fund
subject to the prescribed limit.
(subject to S. 43B)
(v) employer’s contribution to an
approved gratuity fund created for
exclusive benefit of employees under
an irrevocable trust.
(va) any sum received from employees
towards their contribution to provident
fund, if it is credited to his account in the
relevant fund or funds on or before the
due date under the relevant Act, rule,
order, award or contract of service or
otherwise.
(vi) Difference between the cost of animals
to the ‘A’ and the amount realised in
respect of the carcasses of the animals.
(vii) Bad debt or part thereof written off as
irrecoverable in the accounts of the ‘A’ for
the P. Y.
For the ‘A’ to which clause (viia) applies, the
deduction shall be restricted to such debt
and the credit balance in Provision for Bad
and Doubtful Debts.
Explanation – Bad debt shall not include
any provision for bad and doubtful debts.
Bad debts w/o. should have been
recorded as the income of the ‘A’ earlier or
should be the loans / advances made by the
‘A’ engaged in the business of money
lending.
It is not for the ‘A’ to establish that the
debt had become bad in the P.Y., it will
suffice if the debt is w/o. in the P. Y.
Newdeal Finance & Investment Ltd. v.
DCIT 74 ITD 469 (Chen.)
(viia) Any provision for bad debt made by -
(a) a scheduled or non scheduled bank
other than a foreign bank or a co op. bank
other than a primary agricultural credit
society or a primary co op agricultural &
rural development bank – upto 7 ½% of
total income before this deduction and
deductions u/ch. VIA and amount not
exceeding 10% of aggregate average
advances made by the rural branches.
(b) a foreign bank, a Public Financial Instn.,
a State Financial Corpn. or a State Industrial
Investment Corpn. – upto 5% of the total
income before this deduction and deductions
u/ch. VIA.
(viii) Any special reserve created, not
exceeding 20% of profit from the
business of providing long term
finance by a financial corporation, fin.
Corpn. Which is a public sector co., a
banking co., a co op bank, a housing
fin. Co. and any other fin. Corpn.
engaged in providing long-term
finance for industrial, agricultural or
infrastructure development in India or
constn. Or purchase of houses in India
for res. Purposes.
No allowance under this clause, if the
aggregate reserves exceed twice the
amount of paid up share capital and
general reserves of the corporation or
the co.
(ix) Any expenditure by a co. for
promoting family planning amongst its
employees.
If the expenditure is of capital nature,
1/5th of such expenditure shall be
deducted in the P. Y. in which incurred
and the balance in 4 equal annual
installments, in 4 subsequent P.Y.s.
Ss. 32(2) and 72(2) shall apply to
deduction under this clause as they
apply to depreciation.
Ss. 35(2), 35(5), 41(3) and Expln. 1
to S. 43(1) shall apply to cap. exp. on
family planning.
(xi) Not relevant – Y2K exp. Between
1.4.1999 and 31.3.2000.
(xii) Expenditure other than cap. exp. incurred
by a corporation or body corporate, if it is
constituted or established by a Central,
State or Provincial Act, is notified by the
Central Govt. in Official Gazette for the
purposes of this clause and exp. Is incurred
for the purposes authorised by the Act under
which it was established.

(xiii) anyinancia banking cash transaction tax


paid by the ‘A’ during the P.Y.
(xiv) Any sum paid by a public financial
institution by way of contribution to such
credit guarantee fund trust for small
industries as the central government may,by
notification in the official gazette,specify in
this behalf.
Business Expenditure S. 37(1) –
Any expenditure not being expenditure
described in Ss. 30 to 36 and not being
in the nature of cap. exp. or personal
exps. of the ‘A’, laid out or expended
wholly and exclusively for the purposes
of the business or profession shall be
allowed in computing Income from
Business or Profession.
Explanation – Any exp. incurred by an
‘A’ for any purpose which is an offence or
which is prohibited by law shall not be
deemed to have been incurred for the
purpose of business or profession and no
deduction shall be made of such exp.
Some decisions –
(8)Provision to be construed liberally.
CIT v. Kalyanji Mavji & Co. 122 ITR
49 (S.C.)
(2) The burden of proof that the exp.
falls u/s. 37(1) is on the ‘A’.
CIT v. Calcutta Agency Ltd. 19 ITR
191 (S.C.)
(3) It is not open to the Department to
go into the necessity (propriety) of the
exp.
CIT v. Dhanrajgiri Raja Narasingirji 91
ITR 544 (S.C.)
Sasson J. Davis & Co. Pvt. Ltd. v. CIT
188 ITR 261 (S.C.)
(4) Contingent Liabilities do not constitute
exp. allowable under this section.
Shree Sajjan Mills Ltd. v. CIT 156 ITR
585 (S.C.)
(5) Where an ‘A’ carries on several
independent businesses and one of such
businesses is closed before the P.Y., he
cannot claim deduction u/s. 37(1) in
respect of exp. attributable to the closed
bus. against income of other bus.
L.M. Chhabda & Sons v. CIT 65 ITR 638
(S.C.)
Deferred Revenue Exp. –
(6) Discount on issue of debentures –
allowed over the life of debentures.
Madras Ind. Corpn. v. CIT 225 ITR 802
(S.C.)
(7) Cost of constn. of a buil. on
leasehold prem. allowed in the year of
completion of constn.
CIT v. Madras Auto Services Pvt. Ltd.
233 ITR 468 (S.C.)
Share Issue Exps. –
(8) R.O.C. fees to increase authorised
share capital is cap. exp. and is not
allowable as deduction.
Punjab State Ind. Corpn. Ltd. v. CIT
225 ITR 792 (S.C.)
(9) Share issue expenses even for
raising working capital is cap. exp.
Brook Bond India Ltd. v. CIT 225 ITR
798 (S.C.)
(10) Exps. for issue of shares for effecting
renewal of technical collaboration
agreement is allowable as revenue
expenditure.
CIT v. Glaxo Laboratories (I) Ltd. 218
ITR 59 (Bom.)
(11) Exps. on issue of convertible
debentures held as allowable
proportionately as a part of the exp. is
for augmentation of equity base of the
co.
Banco Products (I) Ltd. v. CIT 63 ITD
370 (Ahd.)
(12) However, Mumbai ITAT held that
the entire exp. on issue of convertible
deb. is allowable as deduction as at the
time of issue, the debentures
constitute debt.
Voltas Ltd. v. Dy. CIT 61 TTJ 543
(Mum.)
Software Expenditure –
(13) Software was held as technical
know how and., hence, cap. Exp.
IAC v. Commission & General Agency
17 ITD 6 (Bang.)
(14) Where software was provided
alongwith electronic typewriter which
would not work without the software,
cost of software shall form part of cost
of typewriter/computer. (See AS-10)
Indian Communication Network Ltd. v.
IAC 50 ITD 411 (Del.)
(15) Cost of applications software which
is not required for ‘any’ use of
computer does not give rise to a
capital asset and is in the revenue field
although it gives enduring benefit.
Therefore, it is possible to contend that
it is allowable u/s. 37(1) as held by the
S.C. in Empire Jute Co. Ltd. 124 ITR 1.
Even if, software exp. is regarded as
cap. Exp., the ‘A’ would be entitled to
depreciation on the software under the
Block ‘Intangible Assets’ as software is
a licence.
Warranty Provisions –
(16) So long as provision for warranty is
made on scientific basis, it is allowable
as deduction u/s. 37(1).
Voltas Ltd. v. Dy. CIT 61 TTJ 546
(Mum.)
Commr. of Inland Rev. v. Mitsubishi
Motors Newzealand Ltd. 222 ITR 697
(Priv. Council).
Amounts not deductible
S. 40(a) –
(iii)Interest, royalty, fees for technical
services payable outside India –
Conditions –
(a) The aforesaid amount is taxable in
the hands of the recipient
(b) Amount is paid / payable –
Outside India to a resident or non-
res. or in India to a non-res. or
foreign co.
(c) On the aforesaid amount tax is
deductible but has not been
deducted or tax has been
deducted but has not paid to the
Govt. in the same P.Y. or by the
due date u/s.200(1) after the end
of the P.Y.
However, if the aforesaid amount is
paid after the end of the P.Y. in which
it was incurred and after the due date
u/s. 200(1), deduction shall be allowed
in the P.Y. in which it is paid.
(ia) Interest, commission or brokerage,
fees for technical services and
professional services, payment to
contractors/sub-contractors, rent or
royalty paid/payable to a resident,
if tax is not deducted at source or after
having deducted, is not paid during the
P.Y. or after the end of the P.Y., by the
due date u/s. 200(1).
Such amount shall be allowed in the
P.Y. in which it is paid, if it is paid after
the end of the P.Y. and after the due
date u/s. 200(1)
Provisions of S. 40(a)(i) and 40(a)(ia)
summarised –
(1) Sum on which tax Allowable in the same
deducted at source P.Y. in which
and paid during the incurred.
P.Y. by due date u/s.
200(1)
(2) Sum on which tax Allowable in the same
deducted at source P.Y. in which
and paid during the incurred.
P.Y. after due date
u/s.200(1)
(3) Sum on which tax Allowable in the
deducted at source and same P.Y. in which
paid after the end of the incurred.
P.Y. within due date u/s.
200(1).

(4) Sum on which tax Allowable in the


deducted at source and P.Y. in which
paid after the end of the T.D.S. paid to
P.Y. after due date Govt.
u/s.200(1).

(5) Tax deducted at Not allowable.


source remaining unpaid.
(ib) Securities Transaction Tax is not
deductible while calculating business
income.
(ic) Fringe Benefit Tax is not
deductible.
(ii) Any sum paid on account of any rates
or taxes levied on the profits or gains
of any bus. or prof. or assessed at a
proportion of or otherwise on the basis
of any such profits and gains is not
deductible.
Any sum paid outside India and eligible
for relief of tax u/ss. 90/90A/91 is not
allowable. The taxpayer will be eligible
for tax credit in respect of income-tax
paid in a foreign country according to
the provisions of S. 90/90A/91.
(iia) Wealth tax payable under the
Wealth-tax Act, 1957 or any tax of
similar nature chargeable in any
foreign country.
(iii) Salary taxable under the head
salaries in the hands of recipient
payable outside India to a resident or
non-res. or in India to a non-res. on
which no tax has been deducted at
source and not paid to the Govt.
(iv) Any payment to a provident or
other fund established for the benefit
of employees of the ‘A’ is not
deductible, if the ‘A’ has not made
effective arrangements to deduct tax
at source from payments made from
the fund which are taxable under the
head salaries.
(v) Tax on non monetary perquisites to
employees paid by the employer which
is exempt u/s. 10(10CC) in the hands
of employees is not deductible in the
hands of the employer.
Ss. 40(b) and 40(ba) discussed in
Taxation of Firms, A.O.P.s, Private
Trusts’.
Payments to relative – S. 40A(2) –
Any exp. paid to a person who is a
relative of the ‘A’, shall be disallowed
in computing business income to the
extent such exp. is considered
excessive or unreasonable having
regard to the F.M.V. of goods, services
or facilities.
Expenses paid otherwise than by A/c
Payee Cheque/Draft S.40A(3)-
Where payment for exp. exceeding
Rs.20,000incurred by the ‘A’ is made
otherwise than by crossed
cheque/draft(A/c Payee Cheque/draft
w.e.f. 13-7-2006), no deduction Shall be
allowed in respect of such exp..
Where an allowance has been made in the
assessment for any year in respect of any liability
incurred by the assessee for any exp.and
subsequently during any previous year the
assessee makes payment in respect there
of,otherwise than by an account payee cheque
drawn on a bank or account payee bank draft,the
payment so made shall be deemed to be the
profits and gains of bus. Or profession and
accordingly chargeable to income tax as income
of the subsequent year if the amount of payment
exceeds twenty thousand rupees.
No disallowance shall be made and no
payment shall be deemed to be the profits
and gains of bus. or profession under this
sub-section where any payment in a sum
exceeding twenty thousand rupees is
made otherwise than by an account payee
cheque drawn on a bank or account
account payee bank draft, in such cases
and under such circumstances as may be
prescribed, having regard to the nature
and extent of banking facilities
available,consideration of bus. Expediency
and other relevant factor.
Provision for Gratuity S 40A(7)-
Gratuity is deductible only in the following
cases-
(1) Gratuity is paid during the P.Y. or
provision is made for gratuity which has
become payable during the P.Y.
(2) Provision is made for payment to an
approved Gratuity Fund, it is allowable
subject to the provisions of S 36(1)(v).
Contribution to Fund,etc. S 40A(9)-
No deduction is allowable for
payment made for setting up of or as
contribution to any fund, trust, co.,
AOP, BOI, society or instn. for any
purpose except u/s. 36(1)(iv) or (v)
or as required under any law.