In our series of Articles on Tax Treatment of Income from Different Sources we earlier explained Provisions of Income From Salary and Income from House Property, which can be accessed at the following links :-
Tax Treatment of Income from Salary in Brief
All about Income from House Properties
In this Article we have discussed briefly Different Provisions Applicable to Income from Business and Profession at one place. In coming articles we will also discuss Income Tax provisions related to Capital Gain & Income from Other Sources.
Profits and Gains from Business and Profession
1 Chargeability:
The following incomes are chargeable to tax under the head Profit and Gains from Business or Profession:
S. No.
Section
Particulars
1.
28(i)
Profit and gains from any business or profession carried on by the assessee at any time during the previous year
2.
28(ii)
Any compensation or other payment due to or received by any specified person
3.
28(iii)
Income derived by a trade, professional or similar association from specific services performed for its members
4.
28(iiia)
Profit on sale of a license granted under the Imports (Control) Order 1955, made under the Import Export Control Act, 1947
5.
28(iiib)
Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of Government of India
6.
28(iiic)
Any duty of Customs or Excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971.
7.
28(iiid)
Profit on transfer of Duty Entitlement Pass Book Scheme, under Section 5 of Foreign Trade (Development and Regulation) Act, 1992
8.
28(iiie)
Profit on transfer of Duty Free Replenishment Certificate, under Section 5 of Foreign Trade (Development and Regulation) Act 1992
9.
28(iv)
Value of any benefits or perquisites arising from a business or the exercise of a profession.
10.
28(v)
Interest, salary, bonus, commission or remuneration due to or received by a partner from partnership firm
11.
28(va)
Any sum received for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, trademark, etc.
12.
28(vi)
Any sum received under a Key man Insurance policy including the sum of bonus on such policy
13.
28(vii)
Any sum received ( or receivable) in cash or in kind, on account of any capital assets (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital assets has been allowed as a deduction under section 35AD
14.
Explanation to section 28
Income from speculative transactions. However, it shall be deemed to be distinct and separate from any other business.
15.
41(1)
• Remission or cessation of liability in respect of any loss, expenditure or trading liability incurred by the taxpayers
• Recovery of trading liability by successor which was allowed to the predecessor shall be chargeable to tax in the hands of successor. Succession could be due to amalgamation or demerger or succession of a firm succeeded by another firm or company, etc.
• Any liability which is unilaterally written off by the taxpayer from the books of accounts shall be deemed as remission or cessation of such liability and shall be chargeable to tax.
16.
41(2)
Depreciable asset in case of power generating units, is sold, discarded, demolished or destroyed, the amount by which sale consideration and/ or insurance compensation together with scrap value exceeds its WDV shall be chargeable to tax.
17.
41(3)
Where any capital asset used in scientific research is sold without having been used for other purposes and the sale proceeds together with the amount of deduction allowed under section 35 exceed the amount of the capital expenditure, such surplus or the amount of deduction allowed, whichever is less, is chargeable to tax as business income in the year in which the sale took place.
18.
41(4)
Where bad debts have been allowed as deduction under Section 36(1)(vii) in earlier years, any recovery of same shall be chargeable to tax.
19.
41(4A)
Amount withdrawn from special reserves created and maintained underSection 36(1)(viii) shall be chargeable as income in the previous year in which the amount is withdrawn.
20.
41(5)
Loss of a discontinued business or profession could be adjusted from the deemed business income as referred to in section 41(1), 41(3), (4) or (4A) without any time limit.
21.
43CA
Where consideration for transfer of land or building or both as stock-in-trade is less than the stamp duty value, the value so adopted shall be deemed to be the full value of consideration for the purpose of computing income under this head.
22.
43D
As per RBI Guidelines, Interest on bad and doubtful debts of Public Financial Institution or Scheduled Bank or State Financial Corporation or State Industrial Investment Corporation, shall be chargeable to tax in the year in which it is credited to Profit and Loss A/c or year in which it is actually received, whichever happens earlier.
23.
43D
Similarly as per NHB Guidelines, Interest on bad and doubtful debts of housing finance company, shall be chargeable to tax, in the year it is credited to P & L A/c or year in which it is actually received by them, whichever is earlier.
2 Deductions under Sections 30 to 37
Amount deductible, while computing, Profits and Gains of Business or Profession are:-
Section
Nature of expenditure
Quantum of deduction
Assessee
30
Rent, rates, taxes, repairs (excluding capital expenditure) and insurance for premises
Actual expenditure incurred excluding capital expenditure
All assessee
31
Repairs (excluding capital expenditure) and insurance of machinery, plant and furniture
Actual expenditure incurred excluding capital expenditure
All assessee
32
Depreciation on buildings, machinery, plant or furniture, know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature, being intangible assets (Subject to certain conditions)
Allowed at prescribed percentage on WDV method for each block of assets
All assessee
32AC
Deduction under section 32AC is available if actual cost of new plant and machinery acquired and installed by a manufacturing company during the previous year exceeds Rs. 25/100 Crores, as the case may be.(Subject to certain conditions)
15% of actual cost of new asset acquired and installed (if it exceeds Rs. 25 Crores/100 Crores, as the case may be)
Company engaged in business or manufacturing or production of any article or thing
33AB
Amount deposited in Tea/Coffee/Rubber Development Account by assessee engaged in business of growing and manufacturing tea/Coffee/Rubber in India
Deduction shall be lower of following:
a) Amount deposited in account with National Bank for Agricultural and Rural Development (NABARD) or in Deposit Account of Tea Board, Coffee Board or Rubber Board in accordance with approved scheme; or
b) 40% of profits from such business before making any deduction under section 33ABand before adjusting any brought forward loss.
(Subject to certain conditions)
All assessee engaged in business of growing and manufacturing tea/Coffee/Rubber
33ABA
Amount deposited in Special Account with SBI/Site Restoration Account by assessee carrying on business of prospecting for, or extraction or production of, petroleum or natural gas or both in India
Deduction shall be lower of following:
a) Amount deposited in Special Account with SBI/Site Restoration Account; or
b) 20% of profits from such business before making any deduction under section 33ABAand before adjusting any brought forward loss.
(Subject to certain conditions)
All assessee engaged in business of prospecting for, or extraction or production of, petroleum or natural gas or both in India
35(1)(i)
Revenue expenditure on scientific research pertaining to business of assessee is allowed as deduction (Subject to certain conditions).
Entire amount incurred on scientific research is allowed as deduction.
Expenditure on scientific research within 3 years before commencement of business (in the nature of purchase of materials and salary of employees other than perquisite) is allowed as deduction in the year of commencement of business to the extent certified by prescribed authority.
All assessee
35(1)(ii)
Contribution to approved research association, university, college or other institution to be used for scientific research shall be allowed as deduction (Subject to certain conditions)
175% of sum paid to such association, university, college, or other institution is allowed as deduction.
All assessee
35(1)(iia)
Contribution to an approved company registered in India to be used for the purpose of scientific research is allowed as deduction (Subject to certain conditions)
125% of sum paid to the company is allowed as deduction
All assessee
35(1)(iii)
Contribution to approved research association, university, college or other institution with objects of undertaking statistical research or research in social sciences shall be allowed as deduction (Subject to certain conditions)
125% of sum paid to such association, university, college, or other institution is allowed as deduction
All assessee
35(1)(iv)read with35(2)
Capital expenditure incurred during the year on scientific research relating to the business carried on by the assessee is allowed as deduction (Subject to certain conditions)
Entire capital expenditure incurred on scientific research is allowed as deduction.
Capital expenditure incurred within 3 years before commencement of business is allowed as deduction in the year of commencement of business.
Note:
i. Capital expenditure excludes land and any interest in land;
ii. No depreciation shall be allowed on such assets.
All assessee
35(2AA)
Payment to a National Laboratory or University or an Indian Institute of Technology or a specified person is allowed as deduction.
The payment should be made with the specified direction that the sum shall be used in a scientific research undertaken under an approved programme.
200% of payment is allowed as deduction (Subject to certain conditions).
All assessee
35(2AB)
Any expenditure incurred by a company on scientific research (including capital expenditure other than on land and building) on in-house scientific research and development facilities as approved by the prescribed authorities shall be allowed as deduction (Subject to certain conditions).
Expenditure on scientific research in relation to Drug and Pharmaceuticals shall include expenses incurred on clinical trials, obtaining approvals from authorities and for filing an application for patent.
200% of expenditure so incurred shall be as deduction.
Note:
i. Company should enter into an agreement with the prescribed authority for co-operation in such research and development and audit of accounts maintained for such facilities;
ii. Deduction under this provision would be allowed only up to 31-3-2017.
Company engaged in business of bio-technology or in any business of manufacturing or production of eligible articles or things
35ABB
Capital expenditure incurred for acquiring any license or right to operate telecommunication services shall be allowed as deduction over the term of the license.
Deduction would be allowed in equal installments starting from the year in which such payment has been made and ending in the year in which license comes to an end.
All Assessee engaged in telecommunication services
35AC
Expenditure by way of payment of any sum to a public sector company/local authority/approved association or institution for carrying out any eligible scheme or project (Subject to certain conditions).
Actual payment made to prescribed entities. However, a company can also claim deduction for expenditure incurred by it directly on eligible projects.
All assessee. However, deduction for direct expenditure is allowed only to a company
35AD
Deduction in respect of expenditure on specified businesses, as under:
a) Setting up and operating a cold chain facility
b) Setting up and operating a warehousing facility for storage of agricultural produce
c) Building and operating, anywhere in India, a hospital with at least 100 beds for patients
d) Developing and building a housing project under a notified scheme for affordable housing
e) Production of fertilizer in India
(Subject to certain conditions)
150% of capital expenditure incurred for the purpose of business is allowed as deduction provided the specified business has commenced its operation on or after 01-04-2012.
Note: If such specified businesses commence operations on or before 31-03-2012 but after prescribed dates, deduction shall be limited to 100% of capital expenditure.
All assessee
35AD
Deduction in respect of expenditure on specified businesses, as under:
a) Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network;
b) Building and operating, anywhere in India, a hotel of two-star or above category;
c) Developing and building a housing project under a scheme for slum redevelopment or rehabilitation
d) Setting up and operating an inland container depot or a container freight station
e) Bee-keeping and production of honey and beeswax
f) Setting up and operating a warehousing facility for storage of sugar
g) Laying and operating a slurry pipeline for the transportation of iron ore
h) Setting up and operating a semi-conductor wafer fabrication manufacturing unit
(Subject to certain conditions)
100% of capital expenditure incurred for the purpose of business is allowed as deduction provided specified businesses commence operations on or after the prescribed dates.
All assessee (Indian company in case of specified business of laying and operating a cross-country natural gas or crude or petroleum oil pipeline network)
35CCA
Payment to following Funds are allowed as deduction:
a) National Fund for Rural Development; and
b) Notified National Urban Poverty Eradication Fund
Actual payment to specified funds
All assessee
35CCC
Expenditure (not being cost of land/building) incurred on notified agricultural extension project for the purpose of training, educating and guiding the farmers shall be allowed as deduction, provided the expenditure to be incurred is expected to be more than Rs. 25 lakhs (Subject to certain conditions).
150% of the expenditure (Subject to certain conditions)
All assessee
35CCD
Expenditure incurred by a company (not being expenditure in the nature of cost of any land or building) on any notified skill development project is allowed as deduction (Subject to certain conditions).
150% of the expenditure (Subject to certain conditions)
Note: No deduction shall be allowed to a company engaged in manufacturing alcoholic spirits or tobacco products.
Company engaged in manufacturing of any article or providing specified services
35D
An Indian company can amortize certain preliminary expenses (up to maximum of 5% of cost of the project or capital employed, whichever is more) (Subject to certain conditions and nature of expenditures)
Qualifying preliminary expenditure is allowable in each of 5 successive years beginning with the previous year in which the extension of undertaking is completed or the new unit commences production or operation.
Indian Company
35D
Non-corporate taxpayers can amortize certain preliminary expenses (up to maximum of 5% of cost of the project) (Subject to certain conditions and nature of expenditures)
Qualifying preliminary expenditure is allowable in each of 5 successive years beginning with the previous year in which the extension of undertaking is completed or the new unit commences production or operation.
Resident Non-corporate assessees
35DD
Expenditure incurred after 31-3-1999 in respect of amalgamation or demerger can be amortized by an Indian Company
Expenditure is allowed as deduction in five equal installments in 5 previous years starting with the year in which amalgamation or demerger took place.
Indian Company
35DDA
Expenditure incurred under Voluntary Retirement Scheme is allowed as deduction.
Each payment under VRS is allowed as deduction in five equal installments in 5 previous years.
All Assessee
35E
Qualifying expenditure incurred by resident persons on prospecting for the minerals or on the development of mine or other natural deposit of such minerals shall be allowed as deduction (Subject to certain conditions).
Eligible expenditure is allowed as deduction in ten equal installments in 10 previous years.
Resident persons
36(1)(i)
Insurance premium covering risk of damage or destruction of stocks/stores
Actual expenditure incurred
All Assessee
36(1)(ia)
Insurance premium covering life of cattle owned by a member of co-operative society engaged in supplying milk to federal milk co-operative society
Actual expenditure incurred
All Assessee
36(1)(ib)
Medical insurance premium paid by any mode other than cash, to insure employee’s health under (a) scheme framed by GIC of India and approved by Central Government; or (b) scheme framed by any other insurer and approved by IRDA
Actual expenditure incurred
All Assessee
36(1)(ii)
Bonus or commission paid to employees which would not have been payable as profit or dividend if it had not been paid as bonus or commission
Actual expenditure incurred
All Assessee
36(1)(iii)
Interest on borrowed capital (Subject to certain conditions)
Actual interest incurred, except interest to be capitalized with actual cost of capital asset, shall be allowed as deduction
All Assessee
36(1)(iiia)
Discount on Zero Coupon Bonds (Subject to certain conditions)
Pro-rata amount of discount on zero coupon bonds shall be allowed as deduction over the life of such bond
Specified Assessee
36(1)(iv)
Employer’s contributions to recognized provident fund and approved superannuation fund [subject to certain limits and conditions]
Actual expenditure incurred
All Assessee
36(1)(iva)
Any sum paid by assessee-employer by way of contribution towards a pension scheme, as referred to in section 80CCD, on account of an employee.
Actual expenditure not exceeding 10% of the salary* of the employee
*Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits)+ turnover based commission
All Assessee – Employer
36(1)(v)
Employer’s contribution towards approved gratuity fund created exclusively for the benefit of employees under an irrevocable trust shall be allowed as deduction (Subject to certain conditions).
Actual expenditure not exceeding 8.33% of salary of each employee
All Assessee – Employer
36(1)(va)
Deposit of employee’s contributions in their respective provident fund or superannuation fund or any fund set up under Employees’ State Insurance Act, 1948
Actual amount received if credited to the employee’s account in relevant fund on or before due date specified under relevant Act
All Assessee – Employer
36(1)(vi)
Allowance in respect of animals which have died or become permanently useless (Subject to certain conditions)
Actual cost of acquisition of such animals less realization on sale of carcasses of animals
All Assessee
36(1)(vii)
Bad debts which have been written off as irrecoverable (Subject to certain conditions)
Actual bad debts which have been written off from books of accounts
All Assessee
36(1)(viia)
Deductions for provision for bad and doubtful debts created by certain banks and financial institutions (Subject to certain conditions).
Note
Deduction in respect of bad debts actually written off under section 36(1)(vii) shall be limited to that amount of bad debts which exceed the provision for bad and doubtful debts created undersection 36(1)(viia).
Deductions for provision for bad and doubtful debts shall be limited to following:
a) In case of scheduled and non-scheduled banks: Sum not exceeding aggregate of 7.5% of total income (before any deductions under this provision and Chapter VI-A) and 10% of aggregate average advances made by rural branches of such bank;
b) In case of Financial Institutions: Up to 5% of total income before any deductions under this provisions and Chapter VI-A; and
c) In case of foreign banks: Up to 5% of total income before any deductions under this provisions and Chapter VI-A
Banks, Public Financial Institutions, State Financial Corporation, State Industrial Investment Corporations
36(1)(viii)
Deduction under this provisions is allowed to following entities in respect of amount transferred to special reserve account:
a) Financial Corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India; or
b) Public company registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of residential houses in India.
[Subject to certain conditions]
Deduction shall be allowed to the extent of lower of following:
a) Amounts transferred to special reserve account
b) 20% of profits derived from eligible business
c) 200% of paid-up capital and general reserve (on last day of previous year) minus balance in special reserve account (on first day of previous year)
Specified financial corporations or public company
36(1)(ix)
Expenditure incurred by a company on promotion of family planning amongst employees is allowed as deduction
1) Entire revenue expenditure is allowed as deduction
2) Capital expenditure shall be allowed as deduction in five equal installment in five years
Company
36(1)(xii)
Any expenditure incurred by a notified corporation or body corporate constituted or established by a Central, State or Provincial Act, for the objects and purposes authorized by the respective Act is allowed as deduction
Actual expenditure incurred (not being in the nature of capital expenditure)
Notified corporations
36(1)(xiv)
Contribution to Credit Guarantee Trust Fund for micro and small industries is allowed as deduction
Actual expenditure incurred
Public Financial Institutions
36(1)(xv)
Securities Transaction Tax paid
Actual expenditure incurred if corresponding income is included as income under the head profits an