Issues in Deduction of Business Expenses under IT - PowerPoint Presentation

1. Issues in Deduction of Business Expenses under ITByCMA S. VENKANNA

2. Section 30 to 37 of IT Act 1961Sec.30 – Expenses on Business PremisesSec.31 - Expenses on Plant and MachinerySec.32 - DepreciationSec.32AD – Investment AllowanceSec.33AB – Tea / Coffee / Rubber Development AccountSec.33ABA – Site Restoration FundSec.35 – Expenditure on Scientific ResearchSec.35AD – Specified BusinessSec.35D – Amortization of Preliminary ExpensesSec.35DD – Expenditure on Amalgamation/DemergerSec.36 - Certain Statutory PaymentsSec.37 – General Deductions

3. Sec.30 –Expenses on Business PremisesRent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, deductions shall be allowed:1. where the premises are occupied by the assessee:as a tenant — the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs;otherwise than as a tenant — the expenditure on current repairs to the premises;2. Sum paid (whether as owner or tenant) on account of land revenue, local rates or municipal taxes;3. insurance premium paid (whether as owner or tenant) in respect of insurance against risk of damage or destruction of the premises.

4. Sec.31 – Expenses on Plant and MachineryIn respect of machinery, plant or furniture used for the purpose of business, the following deductions are allowable:amount paid on account of current repairs, (not being capital expenditure)any insurance premium paid in respect of insurance against risk of damage or destruction of the plant and machinery or furniture.Definition of P&M: Used for businessExample: Machinery in manufacturing company Computers in IT Industry Furniture in hiring business Vehicles in Transport Business Conveyor Systems in Mining Industry.

5. Sec.32 - DepreciationNormal Depreciation Block 1 to 10 Tangible Assets – Appendix 1Intangible Assets – Appendix 2Additional Depreciation Sec.32(1)(iia) - 20% Additional Depreciation in States of AP Telengana, WB and Bihar = 35%

6. Sec.32AD – Investment AllowanceAllowed upto 31st March 2020Rate 15% Investment in AP, Telengana, WB and BiharNew Machinery installedAcquired between 1.4.2015 to 31.3.2020

7. Sec.33ABA – Site Restoration FundEssential Conditions :The assessee is carrying on business consisting of prospecting for or extraction or production of petroleum or natural gas or both in India and in relation to which the Central Government has entered into an agreement with such assessee for such business.The assessee has before the end of the previous year—deposited with the State Bank of India any amount(s) in a special account maintained by the assessee with that bank, in accordance with and for the purposes specified in, a scheme approved in this behalf by the Ministry of Petroleum and Natural Gas of the Government of India; ordeposited any amount in the Site Restoration Account opened by the assessee in accordance with, and for the purpose specified in a scheme framed by the aforesaid Ministry. This scheme is known as Deposit Scheme.The assessee must get its accounts audited by an Accountant as defined in the Explanation below section 288(2) and furnish the report of such audit in the Form No. 3AD alongwith the return of income. In a case where the assessee is required by or any other law to get its accounts audited, it shall be sufficient compliance if such assessee gets the accounts of such business audited under such law and furnishes the report of the audit as required under such other law and a further report in the form prescribed. Quantum of Deduction shall be:—the amount deposited in the scheme referred to above; or20% of the Profit of such Business computed under the head profits and gains of business or profession,

8. Sec.33AB – Coffee/Tea/RubberDeduction under section 33AB is available to an assessee who satisfies the following conditions:Essential Conditions :the assessee is engaged in the business of growing and manufacturing tea or coffee or rubber in India;the assessee has, within six months from the end of the previous year or before the due date of furnishing return of income whichever is earlier;the assessee must get its accounts audited by a Chartered Accountant and furnish the report of such audit in Form No. 3AC, along with the return of income.Quantum of Deduction:Quantum of deduction shall be:the amount(s) deposited in the schemes referred to above; or40% of the Profits of such Business computed under the head profits and gains of business or profession,whichever is less.

9. Sec.35(1) – Contribution to Scientific ResearchApproved Scientific AssociationApproved University, College or InstitutionApproved university, college or institution Research in Social sciences or statistical researchDeduction = 100%

10. Sec.35 – Expenditure on Scientific ResearchIn house ResearchRevenue ExpenditureCapital ExpenditureDeduction 100%Expenditure on Research carried on by the AssesseeContribution to Outsiders1. Revenue Expenditure under Section 35(1))(i)1. Contribution to an Approved Research Association under Section 35(1)(ii)/(iii)2. Capital Expenditure under Section 35(2)2. Payment to National Laboratory under Section 35(2AA)3. Expenditure on an Approved in-House Research under Section 35(2AB)3. Contribution to an Indian Scientific Research Company.

11. Expenses on In-House Research and Development Expenses [Section 35(2AB)]Conditions - One has to satisfy the following conditions—The taxpayer is a company.The company should be in the business of bio-technology or in the business of manufacture or production of any article or thing except those specified in the Eleventh Schedule.It incurs 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.The research and development facility is approved by the prescribed authority.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 regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed.

12.  If all the above conditions are satisfied, the quantum of deduction is as follows—company approved under the provisions of section 35(1)(iia) is not eligible to claim weighted deduction under section 35(2AB). However, deduction under section 35(1)(i)/(2) can be claimed to the extent of 100% of the sum spent as revenue expenditure or capital expenditure on scientific research.For the assessment years 2018-19 to 2020-21150% of actual paymentFrom the assessment year 2021-22 onwards100% of actual payment

13. Capital Expenditure Incurred by an Assesses who himself Carries On Scientific Research [Section 35(2)]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.The following points should also be kept in view:The assessee should incur expenditure of a capital nature on scientific research and there is no requirement that such an expenditure should be capitalized in its books of account .Where any capital expenditure has been incurred before the commencement of the business, the aggregate of such expenditure, incurred within three years immediately preceding the commencement of the business, is deemed to have been incurred in the previous year in which the business is commenced [Explanation to section 35(2)(ia)].The aforesaid deduction is not available in respect of capital expenditure incurred on the acquisition of any land after February 29, 1984.If the asset is sold without having been used for other purposes, surplus or deduction allowed, whichever is less, is chargeable to tax as business income of the previous year in which the sale took place [sec. 41(3)]. The excess of surplus over deduction allowed is, however, chargeable to tax as capital gains.Deduction by way of depreciation is not admissible in respect of an asset used in scientific research, either in the year in which the capital expenditure is incurred or in a subsequent year.

14. Amortisation of Telecom license feeDeduction for the licence period

15. Sec.35AD = Specified BusinessOperating Cold Chain facilityOperating warehouse for storage of agricultural produceCross country pipe line for natural gas or crudeOperating 2 star hotel Operating hospital with minimum 100 bedsHousing Projects – slum re-developmentAffordable Housing Projects approved by SG or CGProduction of FertilizerSetting up of ICDs

16. Sec.35AD Bee-Keeping and production of honeySetting up of warehousing facility for storage of sugarLaying of slurry pipeline for transportation of iron oreSetting up of semi conductor water fabrication manufacturing unitDeveloping new infrastructure facility – with agreement with govt.

17. Deduction under Sec.35AD100% of expenditure incurred and in some case 150%Capital Expenditure = 100%Assessee claiming deduction = other deductions not allowed

18. Sec.35D – Preliminary ExpensesAmortisation 1/5th of the qualifying amountAmount Qualifying for Deduction:The aggregate of the expenditure referred to in clauses (1) to (4) above shall not exceed 5% of the cost of the project in case of all assessees other than companies.In the case of a company, it cannot exceed 5% of—the Cost Of the Project, orthe Capital Employed in the Business of the Company, whichever is beneficial to the company.

19. Sec.35DD – Amalgamation/DemergerDeduction allowed in the hands of amalgamating company or resulting company in case of demergerAmortisation for 5 years

20. Expenditure on Skill Development Project [Section 35CCD]Deduction shall be allowed on account of any expenditure (not being expenditure in the nature of cost of any land or building) incurred by the company on skill development project notified by the Board in this behalf in accordance with the guidelines as may be prescribedQuantum of Deduction:150% of such expenditure incurred during the previous year for the assessment years 2013-14 to 2020-21[from the assessment year 2021-22, an assessee can claim 100 % of expenditure as deduction (but not weighted deduction)].

21. Important Points : The following points should be noted -A company engaged in manufacture/ production of any article/thing (not being alcoholic spirits and tobacco products) or a company engaged in providing specified services (31 services have been notified for this purpose) can claim the benefit of weighted deduction under section 35CCD.Expenditure should be incurred on notified skill development project.The project should be undertaken in separate facilities in a training institute set up by Government, local authority or in an institute affiliated to National Council for Vocational Training or State Council for Vocational Training.For the purpose of claiming weighted deduction, an application should be submitted in Form No. 3CQ to National Skill Development Agency (NSDA).A copy of Form No. 3CQ should be sent to the Commissioner of Income-tax.Form No. 3CQ to be accompanied by detailed note on skill development project, expected expenditure and expected completion date, letter of concurrence from the training institute.

22. Sec.36 – Statutory paymentsInsurance for business risksInsurance on health of employeesBonus or commission to employeesInterest on borrowed capitalDiscount on Zero Coupon BondsEmployers Contribution to Recognised PFContribution to National Pension Scheme (NPS)Bad Debts

23. Sec.36 continuedBad DebtsThe amount of any bad debt or part thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be allowed as a deduction subject to the provisions of section 36(2) which are as under:—Such debt or part thereof must have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year, orIt represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.

24. Sec.361. There must be a Debt -Before claiming an amount as a debt, it must be shown that it is a proper debt. In other words, a bad debt presupposes the existence of a debt and relationship of a debtor and creditor. Unless, therefore, there is an admitted debt it cannot be allowed as bad debt when it becomes irrecoverable.2. Debt must be Incidental to the Business or Profession of the Assesee -The debt which is claimed as bad debt under section 36(1)(vii) must be incidental to the business or profession carried on by the assessee. In other words, debts not connected with business or profession carried on by the assessee or not arising out of the operation of business or profession carried on by the assessee, are not admissible as bad debts even if other conditions are satisfied.3. Debt must have been taken into Account in computing Assessable Income -No deduction on account of bad debt is admissible unless the amount of debt is taken into account in computing the total income of the assessee of that previous year or of an earlier year. This condition is however, not relevant, if bad debt represents money lent in the ordinary course of money-lending or banking business.

25. Sec.36. Debt must have been Written Off in the Books of Account of the Assessee -No deduction in respect of bad debt is allowable under section 36(1)(vii) unless it is written off as irrecoverable in the books of the assessee in the previous year in which claim for deduction is made††. It is not necessary to establish that debt has become bad during the relevant previous year. For this purpose, transfer to “provision for bad and doubtful debts account” shall not be taken as bad debts written off.5. Deduction in the case of an Assessee who is also eligible for Deduction under Section 36(1)(viia) -Deduction relating to a bad debt (or part thereof) in the case of an assessee to which section 36(1)(viia) applies is limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts account made under that section.6. Adjustment at the time of Recovery -A deduction on account of bad debt is based upon a mere estimate and it is allowed as deduction on the basis of amount written off in the books of account of the taxpayer. Therefore, in a case where debt ultimately recovered is less (or more) than the amount of debt left after writing off bad debt, some adjustment is required.

26. Sec.367. Debts of a Discontinued Business Not Deductible -No allowance can be claimed in respect of bad debts of a business which has been discontinued before the commencement of the previous year. Such bad debt cannot be deducted even from profits of a separate existing business.8. Allowable in the hands of Successor -In some cases (e.g., one of the partners taking over business of the firm with all assets and liabilities or conversion of firm into company by taking over all assets and liabilities), the successor can claim the benefit of deduction of bad debt if the successor carries on the business of the predecessor and bad debt is written off in the books of account of the successor.

27. Expenditure on Family PlanningThis deduction is allowed only to company assessees. Any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees is allowable as deduction in the year in which it is incurred. Where such expenditure or part thereof is of a capital nature, 1/5th of such expenditure shall be deducted for the previous year, in which it was incurred and the balance shall be deducted in four equal instalments during the subsequent four years.The following points should be considered —No deduction is available under section 36(1)(ix) in the case of a non-corporate assessee. A non-corporate assessee may claim deduction under sections 32 and 37(1) if the relevant conditions are satisfied.Any family planning expenditure which is not allowed as deduction due to inadequacy of profit, shall be set off and carried forward as if it is unabsorbed depreciation.

28. Sec.37 – General DeductionsAny expenditure (not being expenditure of the nature described in Sections 30 to 36) and not being in the nature of capital expenditure or personal expenditure of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed as deduction in computing the income chargeable under the Head "Profits and Gains of Business or Profession".The twin requirements, therefore, are that the expenditure should be—Wholly and exclusively.For the purpose of business.

29. Conditions for Sec.37Such expenditure should not be covered under the specific section i.e. sections 30 to 36.Expenditure should not be of capital natureThe expenditure should be incurred during the previous year.The expenditure should not be of personal nature. The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.The business should be commenced.

30. Examplesremuneration to Employees:Salary and perquisites paid to the employees of the assessee are allowable as a deduction. Salary paid by a firm to its partners is allowed as deduction subject to certain limits and conditions.Payment of Penalty / Damages:Penalty is normally levied for breach of law and are, therefore, generally not allowable as deduction. However, at times an amount though termed as penalty, is purely compensatory in nature. For example, damages, penalty or interest paid for delay in completion of a contract, though termed as penalty are really in the nature of a compensatory payment and are therefore, allowable as a deduction. However, penalties paid to customs authorities, sales-tax authorities, income-tax authorities, etc for infringement of law are not allowed. Levy for failure to pay sales tax within time is partly compensatory and partly penal, compensatory part is allowable and penal part is disallowable.

31. Sec.37Legal Expenses:All legal expenses, incurred in connection with the business or profession of the assessee, are allowable, irrespective of the result of the legal proceedings. However, legal expenses on criminal prosecution are not deductible, as they are not incidental to the business or profession.Expenditure on Raising Loans:Expenses of various types incurred in connection with raising of loans, for the purposes of the business, are allowable as a deduction. Therefore, legal charges for obtaining the loans from financial institutions, legal charges for drafting various deeds, brokerage paid for raising loans, stamp and registration charges, shall be allowed as deduction.Interest:While Section 36(1)(iii) makes a specific provision for allowing a deduction in respect of interest on money borrowed for the purpose of business, other kinds of interest payments in respect of interest do not fall under that Section. If these payments have been made wholly and exclusively for the purposes of business, they can be allowed u/s 37(1). Some of these could be:interest on deferred payment for purchase of assets;interest on delayed payment of electricity charges;interest on purchase price of raw material;any amount paid 'in lieu of interest' in compromising a dispute with a trade creditor.

32. Sec.37 – General expensesExpenditure on Advertisement:Any expenditure incurred during the previous year on advertisement for the purpose of business and profession shall be allowed as deduction.Expenditure incurred for sports tournaments organised, which directly result in publicity and advertisement of the assessee and its products, qualify for deduction.Expenses Allowable under Specific Instructions of CBDT:Diwali and Mahurat expenses.Payment for telephone/telex connection.Payment to Registrar of Companies: The fee paid to the Registrar of Companies are in connection with the company's legal obligations to be discharged under the Company law and are an essential part of the company's business activities and are therefore, allowed.Annual listing fee: Annual listing fee paid to a stock exchange is allowable.Professional tax by the business assessee.

33. Expenses that shall be disallowedFees paid to Registrar for Company Incorporation / increase the capitalPenalty paid under any lawExpenditure on dismantling of any assetAny bribe paid

34. Cases where expenses allowedDiwali ExpensesInauguration of business expensesMembership Fees Maintenance of Public ParksMaintenance of Garden inside the factory premisesGoodwill Advertisements released in a souvenir of an organizationSponsorship of event

35. Sec.43B – deductions based on actual payments Unpaid Statutory LiabilitiesAny sum like tax, duty, cess or fee Contribution to PFCommission to employeesInterest on loansLeave Encashment to employeesDeduction subject to payment before the due date for filing ITR under section 139(1)

36. Amounts not deductible Sec.40TDS Default on payments outside IndiaInterestRoyaltyTechnical fees.Disallowance : 100% of such paymentsPayments to ResidentsWithout TDS30% of such amounts disallowed

37. Sec.40A(2) – Payments to RelativesRelativesPerson with Substantial Interest

38. Sec.40A(3) – Cash PaymentsThe Limit = Rs.10,000Conditions: Single Day, Single Bill, Single PartyProvisions = not allowedExceptionsPayment on holidays or bank holidays due to exigenciesCash remittance to the bankCash payment of statutory dues like taxes