Durgesh singh charts.pdf

(1)

Profits

Profits &

& Gains

Gains

of

any

Business

Business or

or Profession

Profession

which

was

carried

carried on

on by

by the

the assessee

assessee

at

at any

any time

time

during

the

the previous

previous year

year

Badridas Daga (SC)

Loss of stock by Fire Loss of stock by Fire Loss of embezzlement of Loss of embezzlement of money by employee money by employee

AO :

No express DedNo express Dednn_u/s_u/s 30-36 &

30-36 & Sec. 37(i) : Sec. 37(i) : Loss ≠Loss ≠ Expenditure Expenditure

SC :

28(i) : Real Profits28(i) : Real Profits

••

Real Income Theory (V)Real Income Theory (V)

••

Profits & gain arrived asProfits & gain arrived as

per Comm A/c ing per Comm A/c ing Principle(C/A/P) Principle(C/A/P) .’. Trading loss .’. Trading loss Revenue field Revenue field (V) (V)

Applying ratio of above SC Applying ratio of above SC verdicts

verdicts

Closing stock as per AS - 2 Closing stock as per AS - 2

Sec 2(13) : Business includes : Sec 2(13) : Business includes :



TradeTrade



CommerceCommerce



MfgMfg



Systematic & organisedSystematic & organised set of activity with a set set of activity with a set PURPOSE

PURPOSE (+) Servicing Activities (+) Servicing Activities .’. Any random trxn = Buz., if .’. Any random trxn = Buz., if PROFIT Motive (V) PROFIT Motive (V)



Assessee to carry on B & PAssessee to carry on B & P during the P.Y. during the P.Y.



Assessee himself NOTAssessee himself NOT carrying on still assessee be carrying on still assessee be Charged. Charged. Not Necessary Not Necessary .’. Business .’. Business 

Carried on for someCarried on for some point of time during point of time during the PY the PY Exception Exception Sum Recd on Sum Recd on Closure of Buz. Closure of Buz. Which is now no Which is now no longer in existence longer in existence Capital Receipt Capital Receipt In

In Buz. Buz. In In ProfessionProfession

Taxable (Where, Cash Taxable (Where, Cash system of Accounting system of Accounting

is followed is followed

Income/exp of one yr not to be taken/ allowed Income/exp of one yr not to be taken/ allowed in later yr

in later yr

.’. PPI specifically shown in Audit Report .’. PPI specifically shown in Audit Report

Dr. T A Qureshi (SC)

Loss of stock allowed on Loss of stock allowed on account of confiscation by account of confiscation by Narcotics dept Narcotics dept

Loss of Plant & Mach. Due to Loss of Plant & Mach. Due to fire (X) (Capital Field Loss) fire (X) (Capital Field Loss) ITO vs K P Varghese (SC) ITO vs K P Varghese (SC) FVC = Actual Selling Price FVC = Actual Selling Price

SUBSIDY SUBSIDY With respect to With respect to acquisition of acquisition of capital asset capital asset – – Reduce from cost Reduce from cost of acquisition of acquisition (exp (expnn_{10 to sec-}_{10 to}

sec-43(1)) 43(1)) others others OBJECT: OBJECT: To enable the assessee To enable the assessee to carry the trade or to carry the trade or business more profitably business more profitably

– – Revenue receipt taxable Revenue receipt taxable u/s 28(i) (Sahney steel u/s 28(i) (Sahney steel and press works Ltd) and press works Ltd) – –

Eg. Power subsidy, Eg. Power subsidy, refund of taxes etc. refund of taxes etc.

OBJECT : OBJECT : Industrial promotions Industrial promotions E.g. E.g. OR OR Shifting the Shifting the Industry in Industry in other locations other locations Expansion of Expansion of its capacities its capacities

Profits and Gains from Business or Profession

Any adventure Any adventure in nature of in nature of T C T C MM Sec 2(36) : Profession Sec 2(36) : Profession Occupation + Intellectual Skills/ Occupation + Intellectual Skills/ Some degree of learning + Some degree of learning + Vocation

Vocation (V) (V)

Sec 2(29BA) : Sec 2(29BA) : ManufactureManufacture Change

ChangeTransformation ofTransformation of object

objectNew & distinct objectNew & distinct object



 Different Name, Character & Different Name, Character & Use

UseDiff. Chemical CompDiff. Chemical Compnn

N.A. to living physical object N.A. to living physical object

Eg : NRI

Eg : NRIthrough agentthrough agent



.’. business connection in.’. business connection in India

India.’. NRI = assessee.’. NRI = assessee Eg : Foreign Co. Eg : Foreign Co. F Co’s Control F Co’s Control (v) (v).’. F Co (V).’. F Co (V) Independently Independently Working Working.’. S Co.’. S Co  Domestic CoDomestic Co Branch

Branch (P.E.) (P.E.) Subs Subs CoCo of F Co of F Co Sham Sham Entity Entity F Co’s Control (V) F Co’s Control (V).’. F Co(V).’. F Co(V)

To Carry To Carry B & P B & P through through out the out the PY PY Buz Buz carried carried out in PY out in PY remain in remain in existence existence in AY in AY 1 1 22

Sec 41 : Receipt for which Sec 41 : Receipt for which



 Ded Dednn_{Claimed & Allowed}_{Claimed & Allowed}

Earlier

Earlier Taxable in the yr Taxable in the yr of receipt (even buz not in of receipt (even buz not in existence)

existence)

1.

1. Glass Miniature BGlass Miniature Bulb Ind Ltd (SC) :ulb Ind Ltd (SC) : Assessee following mercantile system of a/c ing Assessee following mercantile system of a/c ing toto ensure claiming dedn of exp in

ensure claiming dedn of exp in correct PY, i.e. PYcorrect PY, i.e. PY where there is loss to the

where there is loss to the buz. & NOT postpone tobuz. & NOT postpone to the point of time when chances of recovery the point of time when chances of recovery becomes negligible, i.e., where there is loss to the becomes negligible, i.e., where there is loss to the assessee. .’. Avoid belated claim of ded assessee. .’. Avoid belated claim of dednn_(PPI)_(PPI)



Not Allowed u/s 28(i)Not Allowed u/s 28(i)

6. Sec 43D : Pub Fin 6. Sec 43D : Pub Fin Inst/Inst/ Fin Corp/ Banks/ Public Co Fin Corp/ Banks/ Public Co in financing : Interest recd in financing : Interest recd on bad & doubtful debt : on bad & doubtful debt : Taxable in : EARLIER of Taxable in : EARLIER of a. Yr credited to P & L a. Yr credited to P & L OR OR b. Yr of receipt b. Yr of receipt 7. Embezzlement of money: 7. Embezzlement of money: PY in which fraud is PY in which fraud is discovered discovered 8. Provisions : 8. Provisions : 9. Advt Exp 9. Advt Exp 2. Revision of salary 2. Revision of salary with retrospective with retrospective effect on higher side. effect on higher side. .’. Incremental salary .’. Incremental salary for earlier period for earlier period accrued in C.Y. (V). accrued in C.Y. (V). Not Prior Period Exp. Not Prior Period Exp. 3. Sec 43B : Ded 3. Sec 43B : Dednn_in_in

PY of actual pymt, PY of actual pymt, irrespective of PY to irrespective of PY to which exp relates. which exp relates. 4. Sec 36(1)(iii) : Bad 4. Sec 36(1)(iii) : Bad debts allowed in PY debts allowed in PY in which Debtor in which Debtor w/off. w/off. 5. Sec 35D : Ded 5. Sec 35D : Dednn_of_of

preliminary exp preliminary exp Sec 35 : Scientific Sec 35 : Scientific research exp research exp – – both both incurred, when incurred, when business is not in business is not in existence existence Liability in Liability in PRAESENTI PRAESENTI (V) (V) Liability in Liability in FUTURO FUTURO (V) (V)

Section 28

Section 28 Section 28(i) :

Section 28(i) :

Section 41

Recovery of Loss or Expenditure already allowed or remission of Liability [Sec.41(1)] :

Recovery of Loss or Expenditure already allowed or remission of Liability [Sec.41(1)] : Recovered amount shall Recovered amount shall be deemed to be PGBP for

be deemed to be PGBP for him or successor of Business & chargeable to tax in the PY him or successor of Business & chargeable to tax in the PY of receipt.of receipt. Profit on Sale of assets of Power Sector Unit which has claimed Depreciation under SLM [Sec. 41(2)] : Profit on Sale of assets of Power Sector Unit which has claimed Depreciation under SLM [Sec. 41(2)] : If If Moneys payable is greater than WDV, then the difference between Actual Cost & WDV shall be Moneys payable is greater than WDV, then the difference between Actual Cost & WDV shall be chargeable tochargeable to tax as Business Income in the PY in which the amount is

tax as Business Income in the PY in which the amount is due.due.

Amount realised on sale of capital asset used for scientific research [Sec.41(3)] :

Amount realised on sale of capital asset used for scientific research [Sec.41(3)] : Lower of Lower of – – (i) Amount of (i) Amount of Deduction, or (ii) Sale Proceeds, is chargeable to tax as PGBP

Deduction, or (ii) Sale Proceeds, is chargeable to tax as PGBP in the PY of transfer.in the PY of transfer. Recovery of Bad debts allowed u/s 36(1)(vii) [Sec. 41(4)] :

Recovery of Bad debts allowed u/s 36(1)(vii) [Sec. 41(4)] : 1.

1. If recovered amount is greater than the UnallowIf recovered amount is greater than the Unallowed amount, then such excess is treated as incomed amount, then such excess is treated as income u/s 41(4).e u/s 41(4). 2.

2. If recovered amount is lesser than the Unallowed amIf recovered amount is lesser than the Unallowed amount, then such deficiency is allowed as deducount, then such deficiency is allowed as deduction u/stion u/s 36(2)(ii).

36(2)(ii).

Note : Recovery by Successor of business is not taxable. Note : Recovery by Successor of business is not taxable.

Set off of Losses incurred in the year of discontinuance of business [Sec. 41(5)] :

Set off of Losses incurred in the year of discontinuance of business [Sec. 41(5)] : First set off against Income First set off against Income u/s 41(1), 41(3), 41(4), 41(4A).

u/s 41(1), 41(3), 41(4), 41(4A).

Section 28(ii) :

any compensation or other payments received on :

(a) Termination of management or modification in

terms of management of any Indian company.

(b) of any other business

(c)

(c) Compensation r

Compensation r eceived on

eceived on termination o

termination o ff

managing agency.

(d)

(d) nationalizati

nationalizati on of any company or

on of any company or business

business

being taken over by the Government.

Section 28(iii) :

Income derived by trade, professional or similar

association from specified services rendered for its

members.

Section 28(iiia)

Section 28(iiia) –

–

(iiie)

(iiie) ::

Profits on sale of Import entitlement licence, cash

assistance (cash compensatory support), Duty

drawback.

Section 28(iv)

Section 28(iv) ::

the value of any benefit or perquisite, whether convertible into money

or not, arising from business or the exercise of profession.

TheThe conditions necessary for invoking sec. 28(iv) are

conditions necessary for invoking sec. 28(iv) are

(a) the benefit/perquisite must arise from the business of an assessee (a) the benefit/perquisite must arise from the business of an assessee

and

(b) There must be nexus or connection between the business of an (b) There must be nexus or connection between the business of an

assessee and the benefit/perquisite sought to be taxed. assessee and the benefit/perquisite sought to be taxed.

Capital receipt

Taxable

as the scope of as the scope of “income” has been

“income” has been enlarged .enlarged . NOTE: FA 2015

NOTE: FA 2015: A new clause (xviii) has been introduced to section 2(24) as: A new clause (xviii) has been introduced to section 2(24) as per which

per which

•• Subsidy or grant or cash incentive or duty drawback or waiver orSubsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement

concession or reimbursement

•• “other than the subsidy or grant or reimbursement which is taken into“other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to Section 43(1)”

with the provisions of Explanation 10 to Section 43(1)” •• In cash or in kindIn cash or in kind

•• to the assesseto the assesse

•• given by the CG or SG or any authority or body or agencygiven by the CG or SG or any authority or body or agency •• shall be treated as income.shall be treated as income.

The scope of section 2(24)(viii) is very vast to cover even LPG subsidy. There The scope of section 2(24)(viii) is very vast to cover even LPG subsidy. There is nothing in the language of the provision to limit the sc

is nothing in the language of the provision to limit the sc ope of “subsidy orope of “subsidy or grant or cash incentive or duty drawback or waiver or concession grant or cash incentive or duty drawback or waiver or concession oror reimbursement” to those received by

reimbursement” to those received by any person carrying on business orany person carrying on business or profession.

profession. The above amendment is in line with the notified ICDS.The above amendment is in line with the notified ICDS.

Section 28(v)

Section 28(v) ::

any interest, salary bonus, commission or remuneration, by whatever

name called, due to, or received by, a partner of a

name called, due to, or received by, a partner of a firm from such firm:

firm from such firm:

Provided that where any interest, salary, bonus, commission or

remuneration, has not been allowed to be deducted u/s 40(b), the

income under this clause shall be adjusted to the extent of the amount

not so allowed to be deducted.

Section 28(va)

Section 28(va) ::

any sum, whether received or receivable, in cash or kind, under an

agreement for

– –

(a) not carr

(a) not carr ying out any activity in relation to any business; or

ying out any activity in relation to any business; or

(b) not sharing any know-how, patent, copyright, trademark, licence,

franchise

franchise or

or any

any other

other business

business or

or commercia

commercial

l right

right of

of similar

similar

nature or information or technique likely to

nature or information or technique likely to assist

assist

in the manufacture or processing of goods

provision fo

provision for services

r services

Provided that sub-clause (a) shall not apply to

– –

Any sum received,

Any sum received, in cash or kind,

in cash or kind, on accou

on account of transfer of (i) th

nt of transfer of (i) the right

e right

to manufacture, produce or process any article, or (ii) right to carry on

a

ny business, which is chargeable under the head “Capital gains”.ny business, which is chargeable under the head “Capital gains”.

Section 28(vi)

Section 28(vi) ::

any sum received under a keyman insurance policy u/s. 10(10D)

including the sum allocated by way of bonus on such policy.

Section 28(vii)

Section 28(vii) ::

any sum, whether received or receivable, in cash or kind, on account of

any capital asset being demolished, destroyed, discarded or

transferred, if the whole of the expenditure on such capital asset has

been allowed as a deduction u/s 35AD.

Charging Section (Except

Presumptive Taxation)

Deduction (Except

Sectoral Analysis)

1

(2)

(3)

 Basis of Depreciation

Sec. 32(1)(i)

Sec. 32(1)(ii)

C/f & set off of depreciation :

- Unabsorbed depreciation c/f to next yr as depreciation.

- ROI not reqd to file. - B/f losses to be set off first. - Chronology of deduction :

(a) Current year Depreciation (b) Set off of B/f Buz loss (c) Unabsorbed Depreciation ( 1)

Explanation 3 to section 32(1)

:-For the purpose of this sub-section, the expressions “assets” shall mean – (a) tangible assets, being buildings, machinery, plant or furniture.

(b) intangible assets, being know-how, patents, Copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature. (2)

Sec 43(3) :-

“plant” includes ships, vehicles, books scientific apparatus and surgical eauipment used for the purposes of business or profession but does not include t ea bushes, or livestock or buildings, or furniture and fittings.

Rates of depreciation of Block of assets.

RATE OF DEPRECIATION IN CASE OF BLOCK OF ASSETS :

TANGIBLE ASSETS Rate

(I) Building

(1) Residential Building except hotel and boarding houses. 5 (2) Non-Residential Buildings [office, factory, godown, hotels, boarding, houses

but other than (1) above and (3) below]

10

(3) (i) Buildings for installing Plant and Machinery forming part of water supply or water treatment system for infrastructure business U/S 80 IA ( 4)(i) (ii) Purely temporary erections such as wooden structures.

100

(II) FURNITURE AND FITTINGS

(4) Furniture and Fittings including electrical fittings (“Electrical fittings” include electrical wiring, switches, sockets, other fittings and fans, etc.)

10

(III) PLANT AND MACHINERY

(5) Motor Cars not used in business of running them on hire; and

Plant and Machinery other than those covered in other Blocks (GENERAL RATE).

15

(6) Ships and Vessels 20

(7) Motor buses, lorries and taxis used in business of running on hire; Moulds used in rubber & plastic goods factories; plant & Machinery used in Semiconductor industry including circuits; (HIGHER/ACCELERATED RATE)

30

(8) Aero plane – Aero engines; Life- Saving Medical Equipments (….do…) 40

(9) Glass and plastic containers used as refills: 50

(10) (i) Computer including computer software. 60

(ii) Books other than those covered in (12)(i) below. (iii) Gas Cylinders including values and regulators

(iv) Glass Manufacturer – Melting Furnaces; Mineral Oil Concerns; (11) Flour Mills – Rollers; Rolling Mill rolls in Iron and Steel Industry; Energy

renewal and energy saving devices; Rollers in Sugar works.

80

(12) (i) (a) Books (annual publications) owned by assesse carrying on profession and

100

(b) Books owned by assesse carrying on business in running lending libraries. (ii) Plant and machinery in water supply and treatment system for infrastructure U/S 80 IA(4)(i); Wooden part in artificial silk manufacturing Plant and Machinery; Cinematograph Films – Bulbs of studio lights; Wooden Match frames in Match factories; Mines and Quarries – tubs, ropes, lamps, pipes; Salt Works-clay and salt pans etc.; Air –pollution, Water – Pollution, Solid waste control equipment’s and Solid waste recycling system.

INTANGIBLE ASSETS

(13) Know-how, patents, copyrights, trademarks, licenses, franchise or any other

business or commercial rights of similar nature. ₂₅

The concept of WDV :- Sec 43(6)

“WDV” means – (a) (b) (c) in the case of assets acquired in the

P.Y.:-in the case of assets acquired before the previous year:-in the case of any block of assets    The ACTUAL COST

The Actual cost to the assessee (-) all depreciation actually allowed to him

Please refer the format below sec. 32 (1)(ii)

 

Note 5 to 12 Note 1 to 4

ISSUE:

X Ltd. sets- up an undertaking in a notified backward area in

Andhra Pradesh. For this purpose, it purpose, it purchases

new plant and machinery(rate of normal depreciation 15%)

as

follows-Plant

Actual

Cost

(Rs.

in

crore)

Date

of

purchase

Date

of

installation

Date when

put to use

A 18 25/6/2015 1/9/2015 2/11/2015 B 8 27/6/2015 1/12/2015 3/12/2015 C 20 29/6/2015 20/3/2016 1/6/2016 D 7 30/6/2015 1/12/2016 6/12/2016 E 35 10/9/2015 21/9/2015 28/9/2015 TOTAL 88

Calculate Normal depreciation, additional depreciation and investment allowance .

(2) Actual Cost u/s 43(1):

Actual cost to the Assessee (-) Portion of cost met directly or indirectly by other party = Actual Cost

Expl 10 to S 43(1) : Subsidy, Grant or reimbursement by CG/ SG relatable to the asset acquired to be reduce from the cost.

However, above expl does not cover Waiver of Loan then, also it can squarely fall into the trap of above defn. of “Actual Cost” sec. 43(1) i.e. part of cost met by the other person. Because, in books of accounts treatment would be Cost / WDV Less Loan Waived. Notes : ( 1) I n T ea co depre. at prescribed rate deemed to be wholly allowed under the Act. (3) Forex rate fluctuation on acquisition of asset :

a. Forex loan specifically to purchase an asset

b. Asset is acquired on credit from vendor in foreign country Forex rate fluctuation capitalise to cost of asset in PY in which loan or vendor has been paid

(4) Actual Cost of asset as per S. 43(1) = Purchase Price (+) Cost “inextricably linked with” bringing an asset put to use ( Cost directly attributable to bring asset in working condition like, freight, loading unloading etc. & interest cost on borrowal of capital for acquiring the asset where, interest for the period upto asset first put to use) (-) Rent for housing of worker of contractor, interest on advance to contractor etc. (-) Excise or Custom duty Cenvattable (- ) “Subsidy” as per note 2

     

    ℎ,  = 

Deduction (Except Sectoral Analysis) :

In the case of assets of an

undertaking Engaged in

generation or generation

and distribution of power,

Such percentage on the

actual cost thereof to the

assessee

as

may

be

prescribed

In case of any block of asset, such percentage on the WDV thereof as may

be prescribed.

WDV of BLOCK sec. 43(6)(c). r.w. Rule 5

Date

Particulars

No. of

unit

Amount

1.4.py. OP WDV* (say) 2 xx

(+) during p.y. Actual cost (Additions) (say) 1 xx ( –) During p.y. Money payable (say) (1) (xx)

(in respect of asset sold, discarded, demolished or destroyed during the p.y)

WDV

2 XX

* WDV of the block in immediately preceding p.y. as reduced by the

depreciation actually allowed in respect of that block. As per explanation 3

to sec. 43(6), any allowance in respect of any depreciation carried forward

u/s 32(2) shall be deemed to be

depreciation “actually allowed”.

A. Depreciation :

Eligible assets & Rate of depreciation :



Additional Depreciation :

PROVISIONS IN RESPECT OF ADDITIONAL DEPRECIATION (SECTION 32(1)(iia)]:

(1) Applicability : Additional depreciation is available on new machinery or plant (other than ships and aircraft), which has been acquired and installed.

(a) This provision is applicable only in case of an assessee engaged in the business of manufacture or production of any article or thing. (b) Assessee engaged in the business of generation or generation and distribution of power.

(2) Deduction: A further deduction of 20% of actual cost of such plant and machinery is allowed. ❖ However, in case the asset acquired -put to use for a period of < 180 days then addl. Depre. on such asset will be @ 10% of actual cost.

As inserted by Finance Act, 2015 w.e.f. 1-4-2016:

 Additional Depreciation @ 35% instead of 20% shall be allowed,❖ On any new machinery or plant acquired and installed (other than ships and aircraft), Where any undertaking is set up for manufacturing and production on or after 1-4-2015 and before 1-4-2020, In areas notified by Central Govt. (Andhra Pradesh, Bihar, West Bengal or Telangana)

(3) 2nd_{Proviso to Sec. 32(1)(iia) No Deduction: Additional depreciation is not allowed in respect of the}

following:- Plant and machinery which, was used whether in India or outside India by any other person;❖ Any office appliance or road transport vehicles;Plant or machinery installed in the office premises or the residential accommodation (including the guest houses); plant and machinery whose whole of the actual cost is deductible (by way of depreciation or otherwise) in any one previous year.

Computers used for date processing in industrial premises are eligible for additional depreciation



Investment Allowance :

Sec. 32AC (1A) :

Company engaged in manufacture or production o f any article or thing acquire & install New assets, Actual cost whereof during any PY > ` 25 Crores.

Deduction : 15 % of Actual Cost

Except, If deduction allowable u/s 32AC(1), i.e. for investment upto 31.03.2015, then no deduction is allowed u/s 32AC(1A), for AY2015-16.

Deduction is available only upto AY 2017-18.

“New asset” for this purpose is a new plant or machinery. But it does not include the following –

 Used by other person whether in or outside India ❖ Installed at office or residential premises including guest house Office appliance including computer & computer software Vehicle  Ship or aircraft or  any other Plant & machinery for which whole cost is allowed as deduction

Sec. 32AD :

Company engaged in manufacture or production o f any article or thing set up an undertaking or enterprise on or after 1.4.2015 In

notified backward Area (AP, Telangana, Bihar or West Bengal)

Deduction : 15 % of Actual Cost of new asset for that AY Deduction is available only upto AY 2020-21. “New Asset” as defined u/s 32AC(1A).

New asset should not be sold or transferred within 5 yrs from the date of installation. If sold or transferred :

Amount of investment allowance will be deemed to be income under the head “ PGBP” in the year of transfer in addition to capital gain taxed u/s 45 r.w.s. 50.

Amalgamation/ Demerger/ Business re organisation is exempt.

In respect of depreciation of eligible assets

– (owned) wholly or partly, by the assessee

AND – (used) for the purpose of

the business or profession the following deductions shall be allowed –

(i) SLM (ii) WDV

(iia) Additional depreciation (iii) Terminal depreciation

 Conditions for availing depreciation :

In case of succession of proprietary, firm /LLP by a Co. or conversion from Co. to LLP or Amalgamation or demerger : “Depreciation” will be available to predecessor & successor in the ratio of no. of days assets were used by them. “Depreciation” : Calculate depreciation on total assets as if no amalgamation/ demerger taken place

2

(4)

(5)

Cases where Actual cost are not so actual

:-Sec 35D [Quantum of Deduction of Preliminary Expns_] OR

Non-corporate assessee Corporate Assessee

 [Not being a foreign Co.]

Specific expenditure (5) Compare

OR = Qualified

5% of cost of project Amount 

 Higher Lower

1/5th  

Qualified Amount 1/5th

1. The deduction u/s 35D depends upon the scalability of the project or the quantum of the capital employment in the business higher the project cost or capital employed shall result into a higher claim of deduction u/s 35D

2. Section 35D provides for the events or activities in respect of which expenditure incurred shall qualify for deduction u/s 35D any expenditure incurred as a result of or in connection with such event or activity will qualify as an eligible expenditure u/s 35D. Accordingly advertisement expenditure incurred as a result of the market survey report shall also qualify as deduction u/s 35D. 3. In respect of a Co. the event of issue of shares for public subscription is an eligible activity in relation to which any expenditure incurred

shall quality for deduction u/s 35D. for e.g.:- fee paid to the banker to the issue / Merchant Bankers / Share registry transfer agents / underwriting agents towards public subscription process of the shares of the co. shall be eligible for deduction u/s 35D.

The above list is only illustrative & not exhaustive.

Scope of Section 35D

Phase I AND Phase II

 

Newly setup business / profession Expansion of business / Profession OR

Same line New line

 

e.g.: PA hired agents to know the no. of students pursuing CA in Chennai The report said 50 students  PA did not open a branch in Chennai but still had to pay mkt survey expenditure. Such expenditure shall be eligible for deduction.

 Yes u/s 37(1)

e.g.: Assessee is currently in the business of steel now proposing to set up a new business of cement. For starting the business it incurred Rs.25lakhs towards feasibility of new project but did not get license to operate at the end.



Whether Rs. 25L can be claimed by steel?  If license not recd  Sunk cost  No cement division will claim u/s 35D if license recd

Section 35D also applies to expansion of business or profession.

The expansion can be either in the same line or a separate line of business. It is an imp. principle of computation that each business shall be computed separately to arrive at the income even though such sources of income falls under the same head.

 The computation under the head B&P shall be undertaken for each business separately.

 Where the specified expenditure is incurred to the new line of business then its deduction shall be available only on the commencement of such new business. Conversely put, if the new business has to be aborted & it was never commenced then the specified expenditure cannot be allowed as deduction from the income of the existing business  they are distinct to each other. However, if the expansion is sought to be in the same line of business then the treatment of such specified expenditure shall be as

under:

The deduction in section 35D or sec 37(1) as the case may be shall still be made available even though the expansion in the existing business could not be commenced. Further it is pertinent to note that the provision of sec 35D is enabling provision & not a disabling one.  Where a full deduction is otherwise allowed under any other provision of this head then it shall be allowed as deduction in that section. This situation is possible only when the expansion is in the existing business which does not involve an

increase in the capital field. Specified expenditure.

New setup of business Expansion of business



Expenses in connection with issue of:

Existing line New line

 

Shares Debentures Expenses in issue of Expenses in issue of

 

Sec 35D Sec 35D Shares Debentures Shares Debentures

   

Sec 35D Sec 37(1) Sec 35D Sec 35D

 It can be observed that where there is an increase in the capital field of the business then expenditure incurred is a capital expenditure &  an expansion of business or a new setup of business shall be governed by the provision of section 35D towards the eligible expenditure. Money borrowed through issue of debentures to expand the business does not increase the capital field & hence expenditure on its issue shall be allowed as deduction u/s 37(1) if it is in relation to an expansion in the existing line of

business.

 Although the expenditure on issue of debentures is not capital in nature it cannot be covered u/s 37(1) if it is incurred before the commencement of the new business & hence outside the scope of chargeability u/s 28(i). Its deduction is allowed & regulated

by express provision of sec 35D which enables the deduction that was otherwise not allowed.

Expl. To

Sec. 43(1)

Mode of Acquisition

Actual Cost

1 Asset acquired for scientific research subsequently brought into business use

Actual cost less deduction availed u/s. 35

2 Asset acquired by way of gift or inheritance

Actual Cost to the previous owner minus depreciation actually to him. 3 Asset acquired at higher price from any

other person using the asset for his business or profession with a view to claim depreciation on enhanced cost and reduce tax liability

Actual cost to be determined by the Assessing Officer with prior approval of Joint Commissioner.

4 Asset once belonged to the assessee which was used by him for business & is transferred and reacquired by him

The WDV at the time of original transfer or the price paid for reacquiring the asset, whichever is less.

4A Asset acquired by an assessee from another person who had claimed depreciation on such asset and the asset is leased back to such other person

The written down value of the asset to the transferor at the time of transfer to the assessee.

5 Building used for private purpose subsequently brought into business use.

The cost of purchase or construction of the building as reduced by the notional depreciation calculated up to the year of bringing the asset to business use at the depreciation rate applicable to that year. 6 & Exp. 2

to section 43(6)

Asset transferred by a holding Co. to its subsidiary Co. or by a Subsidiary Co, to holding Co. if the following two conditions are

satisfied:-(i) Shares of the subsidiary Co. should be wholly owned by the holding co. or its nominees.

(ii) The transferee co. should be an Indian company.

Note: If transferor company was not claiming depreciation since it was not used for its business, then the actual cost to the transferee company shall be the actual cost to the transferor Company.

WDV to the transferor company will be adopted as the actual cost to the transferee company.

Expl. 2C to S. 43(6)

Block of assets transferred by a private Company to LLP

WDV of the block of assets in the hands of unlisted Company.

7 & Expl. 2 to Sec

43(6)

Transfer of asset in a scheme of amalgamation by amalgamating company to amalgamated Indian Company. Note: If amalgamating Company was not claiming depreciation since it was not used for its business, then actual cost to the amalgamated company shall be the actual cost to the amalgamating company.

WDV to the amalgamating company will be adopted as the actual cost to the amalgamated company.

7A Asset transferred by a demerged company to the resulting Indian Company.

Actual cost shall be the written down value in the hands of the demerged company.

8 Asset acquired out of borrowed funds Interest on loan borrowed relating to the period after the asset is first put to use shall never form part of actual cost. 9 Asset acquired subject to levy of excise

duty or customs duty in respect of which CENVAT credit is availed.

So much of the duty in respect in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944 shall not form part of the actual cost.

10 A portion of the cost of an asset acquired is met directly or indirectly by Government or any statutory authority or any other person in the form of a subsidy or grant or reimbursement.

So much of the cost as is relatable to such subsidy or grant or reimbursement shall not form part of the actual cost. If subsidy is not directly relatable to the asset acquired, but subsidy is with reference to the assets then the subsidy shall be proportionately reduced from the actual cost of the assets with reference to which subsidy has been granted.

11 Asset brought into India by a Non-resident assessee or a foreign company for use in his business or profession.

Actual cost as reduced by the amount of depreciation calculated at the rate in force as if the asset was used in India since the date of acquisition. 12 Any capital asset acquired under scheme

of corporatization of a recognized stock exchange in India, approved by SEBI.

The amount, which would have been regarded as actual cost, had there been no such corporatization shall be deemed to be the actual cost.

13 Actual cost of capital asset has been allowed as deduction under section 35AD and capital asset is transferred by way of transactions referred to in section 47.

The actual cost of such asset to the transferee shall be NIL.

B. Sec 35 D : Preliminary Expenditure

5% of cost of Project OR Qualified amount OR Specified Expenditure Specified expenditure (5+3) Whether the expansion is in the capital field?

Yes _{Allowed u/s 35D  1/5}Capital expenditure

No Not capital in nature Expenditure u/s 37(1)

ISSUE :

Posco Ltd. set up a manufacturing unit in Hyderabad of Telangana on 1st_{April, 2015. The company invested `} 20 crore in acquisition of new plant & machinery on 3rd_{March, 2015 & another ` 20 crore in acquisition of} plant & machinery on 21st_{December, 2015, out of which ` 10 crore was second hand plant & machinery. The} new plant & machinery were installed & put to use on the date of acquisition. You are required to calculate the depreciation allowable u/s 32.

Discuss whether Posco Ltd. would be eligible for any other benefit in respect of such investment in plant & machinery.

What would be the position if such manufacturing unit is set up by Posco & Co., a firm, instead of Posco Ltd ?

(6)

“The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave, in Atheerton v. British Insulated and Helsby Cables Ltd. [1925] to TC 155, 192 (HL) where the learned Law Lord stated:

“…… When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an

advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to

an opposite con

clusion) for treating such an expenditure as properly attributable not to revenue but to capital.”

Is expenditure incurred for

construction of

transmission lines by the assessee for supply of power to UPPCL by the assessee deductible as revenue expenditure?

Not a Capital expenditure

Following the principle of law laid down by the SC in Empire Jute Mills case, the Allahabad High Court , in held that the expenditure which was incurred by the assessee in the laying of transmission lines was clearly on the revenue account. The transmission lines, upon erection, VESTED ABSOLUTELY IN UPPCL. The expenditure incurred which was incurred by the assessee was for AIDING EFFICIENT CONDUCT OF ITS BUSINESS since the assessee had to supply electricity to its sole consumer UPPCL. THIS WAS NOT AN ADVANTAGE OF A CAPITAL IN NATURE. Hence it was allowed as deduction.

Addln. CIT v.

Dhampur

Sugar Mills (P.)

Ltd

(2015)

(All.)

Where the assessee company came into existence on bifurcation of a joint venture company , can the amount paid by it to the JVC for use of costumer database and transfer of trained personnel be claimed as revenue expenditure?

Not a Capital expenditure

The Karnataka HC observed that expenditure incurred for use of customer database DID NOT RESULT IN ACQUISITION OF ANY CAPITAL ASSET. The assessee got the right to use the database AND THE COMPANY WHICH PROVIDED THE DATABASE WAS NOT PRECLUDED FROM USING SUCH DATABASE. Hence the expenditure incurred is a revenue expenditure.

As regards payment for obtaining trained and skilled employees, it was held that the joint venture company spent lot of money to give training to employees who were transferred to the assessee company. They were trained in the field of software. They have opted for employment with the assessee company, and for their past services with the joint venture company, expenditure has been incurred. In effect, the payment made by the assessee-company was towards expenditure incurred for their training and recruitment. Therefore the expenditure cannot be termed as capital expenditure though the benefit may be of enduring in nature.

IBM

GLOBAL

SERVICES

P. LTD

(2014)

(Kar.)

Provisions for employees under B & P. (1) Sec. 35DDA: Amortization of expenditure incurred under voluntary Retirement. (2) 36 (1)(ib): Premium on Health insurance of employees paid by the employer. (3) 36(1)(ii):- Bonus or commission paid to employee.

(4) 36(1)(iv)/(iva)/(v): Employers contribution to recognized PF or approved superannuation or gratuity fund.

(5) 36(1)(va):- Employee contribution to PF/SA/ESIC deposited before due-date. (6) Sec. 43B:- Deduction allowed on payment basis.

(7) 36(1)(ix):-Deduction on family planning expenditure. (8) Rule 6DD:- Exception to sec. 40A(3).

(9) 40A(7):- Provision for gratuity disallowed. (10) 40A(9):- Contribution to unrecognized funds disallowed. (11) Sec. 37(1):- General Deductions.

(1) 35DDA:

Amortization of expenditure incurred under voluntarily retirement

scheme:-(i) Where an assessee incurs any expenditure in any previous years by way of payment (whole or in installment) of any sum to an employee at the time of his voluntary retirement in accordance with any scheme of voluntary retirement.

 1/5th_{of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance}

shall be deducted in equal installments for each of the 4 immediately succeeding previous years.

(ii) In the case of amalgamation or merger of an Indian company, deduction will be available in hands of Transferee Company, for the remaining period.

(iii) In the case of conversion of a firm/proprietorship into a company, for the remaining period. (iv) In case of conversion of company into LLP, for the remaining period.

(v) No deduction shall be allowed under any other provisions of this Act. (2) Section 36:- Other deduction

(ib) ➢ Health Insurance premium paid by any mode of payment other than cash by an employer on health of his employees under a scheme.

➢ Such Scheme must be –(a) framed by GIC and approved by central Government, or (b) framed by any other insurer and approved by IRDA

(ii) ➢Bonus or commission paid to an employee for services rendered (not otherwise have been payable to him as profit or dividend).

➢ Deduction is subject to the provisions of sec. 43B and Sec. 40A (2).

➢Voluntary payments are deductible if it is for services rendered.

➢ Any bonus exceeding the statutory amount is allowed if such excess payment has been made on account of commercial expediency.

(iv) ➢ Contribution made by employer to recognized provident fund/ approved superannuation fund.

➢Deduction is subject to the provisions of Section 43B. (v) ➢Sum paid by employer towards an approved gratuity fund set up

for benefit of his employees.

➢Deduction is subject to the previous of Section 43B. (va) ➢Sum received by assessee from his employees as contributions to

Provident Fund or Employee State Insurance Fund or Superannuation fund of any other employee-welfare fund.

➢ Such sum received by the assessee is first treated as income under Section 2(24)(x) and thereafter, deduction is allowed in respect of such sum if the relevant conditions are satisfied.

➢Such sum should be credited by the assessee to the employee’s account in the relevant fund(s) on or before the due date.

➢ Due Date means date by which the assessee is required as an employer to credit an employee’s contribution to his account in the relevant fund(s) under any law, standing order, award, contract of service or otherwise.

(ix) ➢Expenditure incurred bona fide by company for promoting family planning amongst its employees.

➢Extent of deduction and period:

(a) Where expenditure is of revenue nature: 100% in the previous year in which it is uncured.

(b) Where expenditure is capital in nature: 1/5th_{of such}

expenditure deductible in 5 consecutive previous years beginning with the previous year in which the expenditure is incurred.

➢Any unabsorbed family planning expenditure is carried forward and set off in the same manner as unabsorbed depreciation.

➢ No depreciation allowable under section 32 if deduction has been claimed here.

➢Tax treatment is case of sale of such asset: Same as in Section 35.

(iva) ➢ Contribution made by employer to employees pension scheme referred to in S.80CCD shall qualify for deduction w.e.f. AY 2012-013

➢ MAXIMUM amount allowed 10% of salary. Salary shall include DA (in terms of employment), but will exclude all other allowances and perquisites.

ISSUE:

The assessee a listed company wanted some credit facilities from the bank for its business purpose. The banker insisted on personal guarantee of the directors as a pre-condition for providing financial assistance to the company. The directors were employees (as well as shareholders) of the company . A resolution was passed for paying commission to the directors and a sum of Rs. 24.37 lakhs each was paid as commission calculated at the rate of 1.5 % of the principal sum, in respect of which personal guarantee was furnished by the directors to the bank. The AO applied Sec. 36(1)(ii) and held that if the amount was not paid to them as commission, the same would have been payable as profits or dividend.

Decision:

The Delhi HC in Control & Switchgear Contractors Ltd. (2014) observed that the act of providing personal guarantee was clearly beyond the scope of the services of the Directors as the employees of the company. The assessee company ,in its commercial wisdom, had agreed to pay commission for such guarantees by passing the resolution to that effect.

In such case the AO only has to determine whether the transactions are real and genuine.

As regards Sec. 36(1)(ii), the recipient directors were not entitled to receive the amount as commission in lieu of bonus or dividend . The dividend is paid to all the shareholders and the recipient directors were not the only shareholders of the company.

The payment of commission , hence , cannot be taken as payment of dividend.

(3) 40A(7):- No deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination for any reason.

However, the following shall be allowed as deduction:

“Any provision made by the assessee for the purpose o f payment of a sum by way of any contribution towards an approved gratuity fund”. (This is however subject to Sec. 43B).

(4) Disallowance in respect of contributions to non-statutory funds Sec. 40A(9):

Any sum (including contribution) paid to Non-statutory / unrecognized welfare funds is not deductible except where such sum is paid as per provisions u/s 36(1)(iv)/(v) or under any other law for the time being in force.

ISSUE:

Can employees contribution to Provident Fund and ESI be allowed as deduction where the assessee-employer had not remitted the same on or before the “due date” under the relevant Act but remitted the same on or before the due date for filing of ROI u/s. 139(1)?

Decision :

The Gujarat HC in Gujarat State Road Transport Corpn (2014) h as held that Section 43B(b) pertaining to employer’s contribution cannot be applied with respect to employees contribution which is governed by Section 36(1)(va) .

Note: Contrary decision is provided by other HC.

Sec 37(1)

Sec. 30, Sec.31

GENERAL DEDUCTION

– Any expenditure

Not being capital

in Nature shall be allowed as deductions provided it is incurred wholly and exclusively for the purpose of business & profession

RENT, RATES, TAXES, INSURACE,

REPAIRS OF BUILDING

Sec.30:

- Premises should be occupied by the assessee either as tenant or as owner (except in case of Rent).

Current

repair

(not being in the nature of capital (expenditure), local taxes, municipal taxes, and insurance premium of building are allowed.

Repairs and Insurance of Plant,

machinery and furniture

Sec.31:

- The asset should be used for purpose of business and profession

current repairs

(not being in the nature of capital expenditure) is allowed

C. Capital Expenditure

D. Expenditure Relating to Employee

(7)

(8)

(5) Rule 6DD:- Exception to section

40A(3):- where any payment is made to an employee of assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of g ratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sum payable to employee or his heir does not exceed Rs.50,000.

 Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax at source, when such employee is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship, and does not maintain any account in any bank at such place or ship.

Other situations of Rule 6DD (A) Remote

areas:- where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such product.

 where the payment is made in a village or town, which on the date of such payment is not served by any bank (B) Bank / Govt.:

 where the payment is made to RBI, any banking company, State Bank of India or its subsidiary banks, any co-operative bank or land mortgage bank, any primary agricultural credit society or any primary credit society or the Life Insurance Corporation of India;  where the payment made to the Government is required to be made in cash;

 where the payment is made through any bank, including foreign bank, by any of these modes (i) any letter of credit arrangements; (ii) a mail or telegraphic transfer; (iii) a book adjustment between banks; (iv) a bill of exchange made payable only to a bank; (v) Electronic clearing system; (vi) a credit card; (vii) a debit card;

 where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;  where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travellers cheques

in the normal course of his business.

(6) 37(1): Expenditure not covered u/s 30 to sec. 36 shall be allowed as deduction if, interalia, it is incurred for the purpose of business & profession

Note:

(1) If an expenditure is specifically covered u/s 30 to 36 and the conditions therein are not satisfied then such expenditure cannot be qualified for the purpose of deductions u/s 37(1). For e.g.:

(2) The deduction u/s 37(1) is in respect of an expenditure which is “wholly and exclusively” for the purpose of Business and profession. The AO disallowed an ex-gratia payment to the employee on the ground that there was no contractual obligation, therefore such expenditure cannot be considered exclusively for the purpose of business & profession. The Apex court in a landmark decision in Sassoon J. David has held that AO should not sit in the chair of assessee & to determine whether particular expenditure is for the purpose of business or not.

(3) Staff welfare Expenses

Specific deduction u/s 36(1)(iii)

1. the amount of the Interest paid in respect of capital borrowed 2. for the purposes of the business or profession

3. provided that (Amended FA 2015) any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension or otherwise

of existing o r New business or profession (whether capitalized in the books of account or not);

for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use,

shall not be allowed as deduction .

Note 1 Amt borrowed for acquiring asset (Amendment FA 2015 )

Existing business New business .

for expansion otherwise

Proviso.to section 36(1)(iii)

Up till the asset is put to use the Int. exps. shall be not be allowed as deduction. It may be capitalized as per CSM case or as per Explanation to Sec.43(1).

Thereafter it shall be allowed as deduction, since the apex court in India cements Ltd. case has held that the loan obtained has been used for the purpose of business and profession.

Note 2 : Section 36(1)(iii) provides for deduction of Interest in respect of capital borrowed. However Interest exps. incurred otherwise than by way of borrowings shall be governed by the provision of sec. 37(1), which allows deduction of any expenditure not being capital in nature; not being personal in nature; and incurred wholly & exclusively for the purpose of

business and profession. The following cases are covered u/s 37(1).

 The assessee issued long term debentures to mutual funds and financial Institutions, with a difference between issue price and amount payable on maturity. Such difference could not be strictly described as interest on borrowing in view of the fact that debentures are freely transferable and there is no lender – borrower relationship between the issuing institution and the holder of debenture bonds. The amount is also payable only on maturity and not on year to year basis, though accounting requirement would require provision to be made on proportionate basis. If it were treated as interest, such amount would require tax deduction at source and also to be covered u/s 43B, so as to be deductible only in the year of payment. The CBDT has classified that no tax need be deducted in such cases.

 Interest paid on partners capital is allowed as deduction in the hands of the firm u/s 37(1) r.w. & 40(b).  Interest on unpaid arrears of salary is allowable u/s 37(1).

 Interest payable under tax law 

towards late payment of TAXES

(*) However Interest on Direct tax refund is chargeable under the head IFOS.

Note 3 :-Amount borrowed

Subsequently used for –

(4) diverted to Sisters concern 

Whether commercial expediency could be established by assessee?

(6) towards payment of statutory dues

DT IDT

(x) (v)

ISSUE

The assessee is a public limited company engaged in the manufacture and sale of synthetic yarn and cement It stood as guarantor to the loans taken by its subsidiary company. The subsidiary company incurred heavy losses and as a result became a defaulter in paying its debts. The assessee was a guarantor to the loans taken by the subsidiary company for the purpose of protecting its own business interest. Since the subsidiary company could not adhere to the repayment of its liabilities, the assessee-holding company started repayment of loan installment on behalf of subsidiary company and claimed Rs. 8 lakhs, being interest paid, as deduction u/s. 36(1)(iii). The claim of the assessee was rejected in assessment.

Decision: JK Synthetics Ltd. (2014)(All.)

The HC made a reference of the Apex court ruling in Madhav Prasad Jatia where the expression “for the purpose of business” occurring in section 36(1)(iii) was held as wider in scope than the expression “ for the purpose of earning of proifts “ . The Apex cou rt observed that where a holding company has a deep interest in its subsidiary and the same is used by the subsidiary for its business purposes, the lending-holding company would be entitled to deduction of interest on its borrowed loans. It was thus held by the HC that the claim for deduction is allowable. Donation of bus to a school where children of employees’ are enrolled

Club facility Recreation facility Travelling exps. Of Spouse Higher exps. borne by Co. on the Sp. employee  X  X  X

Provided to all the employees/Substa ntial pool of employees Few specified employees Necessary for purpose of B&P No necessity When the domain of education is in line with the business of the Co. When it is in different domain altogether, not related to business

E. Deduction of Interest Expenditure

or

Indirect taxes Direct taxes

Allowed u/s 37(1) Since it is compensating in

nature

Not allowed, since it cannot be said for the purpose of business

and profession (*)

(1) working capital = for the purpose of B & P (1) acquiring capital asset = For the purpose of B &

P, subject to the proviso. (3) Investment in subsidiary : To gain effective control in the existing business

 for the purpose of B &

P, hence deduction For Carrying on Independent business  No deduction Yes  Int. on borrowed money shall be allowed as deduction even if the money has been advanced to Sister concern at a concessional rate of Interest

r

No  Int. shall be disallowed.

(5) diverted to director / partners  for purpose of B & P

(7) towards payment of Dividend = for the purpose of business and profession

OR