Disallowance of Expenditure related to Exempted Income under section 14A of Income Tax CIRCULAR NO. 5/2014

Allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial-year or not. No deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

CIRCULAR NO. 5/2014 [F.No. 225/182/2013-ITA.II] Dated: February 11, 2014

Clarification circular regarding applicability of section 14A for disallowance of expenditure even where taxpayer in a particular year has not earned any exempt income

Subject: – Clarification regarding disallowance of expenses under section 14A of the Income-tax Act in cases where corresponding exempt income has not been earned during the FY -regarding.

Section 14A of the Income-tax Act, 1961 (‘Act’) provides for disallowance of expenditure in relation to income not “includible” in total income.

2. A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial-year.

3. The matter has been examined in the Board. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vide circular No. 14 of 2001 as under:

“Certain incomes are not includible while computing the total income, as these are exempt under various provisions; of the Act There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debating the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income”.

Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial-year or not.

4. The above position is further clarified by the usage of term ‘includible’ in the heading to section 14A of the Act and also the Heading to Rule 8D of I.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year’s income, for disallowance to be triggered. Also, section 14A of the Act does not use the world “income of the year” but “income under the Act”. This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration.

5. The above position is further substantiated by the language used in Rule 8D(2(ii) & 8D(2)(iii) of I.T. Rules Which are extracted below:

“(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely:-

AB/C

Where…

B= the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year.”

…………..

(iii) an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year.”

(Emphasis added)

6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income.

7. This may be brought to the notice of all concerned

Expenditure incurred in relation to income not includible in total income

14A. (1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.

Depreciation on Goodwill and Goodwill is treated as asset under section 32 of the Income Tax Act, 1961

Can assessee claim the depreciation on Goodwill or Can Goodwill is treated as asset under section 32 of the Income Tax Act, 1961.Supreme court in case of Commissioner of Income Tax, Kolkata Vs. Smifs Securities Ltd. has decided that goodwill arising post the amalgamation of two companies will be treated as Intangible asset under section 32 of Income Tax Act, 196. since one of the basic condition for finding the value of asset is “What’s the consideration paid for that asset”, So in given case assessee has taken assets & liability of other entity and issued the shares and in this whole process goodwill has arisen in the books of the company. Further explained by assessee that excess consideration paid by the assessee over the value of net assets acquired should be considered as goodwill arising on amalgamation. The assessee Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee Company stood increased. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele

  As per Explanation 3 to Section 32(1) of the Act:

  • “Explanation 3.– For the purposes of this sub-section, the expressions `assets’ and `block of assets’ shall mean– [a] tangible assets, being buildings, machinery, plant or furniture;
  • [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.”

Explanation 3 states that the expression `asset’ shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words ‘any other business or commercial rights of similar nature‘ in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature’. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).

In the circumstances, we are of the view that `Goodwill’ is an asset under Explanation 3(b) to Section 32(1) of the Act.

 

Petition(s) for Special Leave to Appeal (Civil) No(s).35600/2009
(From the judgement and order dated 19/02/2008 in ITA No.642/2007
of The HIGH COURT OF CALCUTTA)
C.I.T., KOLKATA                                   Petitioner(s)
                 VERSUS
SMIFS SECURITIES LTD.                             Respondent(s)
(With prayer for interim relief and office report)
[For Final Disposal]
Date: 22/08/2012  This Petition was called on for hearing today.
CORAM :
        HON'BLE THE CHIEF JUSTICE
        HON'BLE MR. JUSTICE MADAN B. LOKUR
For Petitioner(s) Mr. A.S. Chandhiok,ASG.
                          Mr. R.P. Bhatt,Sr.Adv.
                          Mr. Gurpreet S. Parwanda,Adv.
                          Mr. Rahul Kaushik,Adv.
                          Ms. Sonia Mathur,Adv.
                          Ms. Anil Katiyar,Adv.
                          for Mr. B.V. Balaram Das,Adv.
For Respondent(s) Mr. Partha Sil,Adv. (N/P)
           UPON hearing counsel the Court made the following
                               O R D E R
                  None appears for the respondent, though served.
                  Heard learned counsel for the Department.
                  Leave granted.
                  The civil appeal filed by the Department stands dismissed
        with no order as to costs.
             [ T.I. Rajput ]                    [ Indu Satija ]
             A.R.-cum-P.S.                      Court Master
                  [Signed order is placed on the file]
                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION
                        CIVIL APPEAL NO.5961 OF 2012
                (Arising out of S.L.P. (C) No.35600 of 2009)
   Commissioner of Income Tax, Kolkata      ...Appellant(s)
                                   Versus
   Smifs Securities Ltd.          ...Respondent(s)
                                O  R  D  E  R
 None appears for the respondent, though served.
 Heard learned counsel for the Department.
Leave granted.
This civil appeal concerns the Assessment Year  2003-2004.
Three questions arise for determination by this Court.  They are as follows:
   Question No.[a]:
     "Whether Stock Exchange Membership Cards are assets eligible for depreciation under Section 32 of the Income Tax Act,1961? Whether, on the  facts and in  the  circumstances  of  the  case, deletion of Rs.53,84,766/- has been made correctly?"
   Answer:
         Learned Additional Solicitor General fairly concedes that the said question is covered by the decision of this Court in the case of  Techno shares and Stocks Limited vs. Commissioner of Income  Tax,reported in [2010] 327 I.T.R. 323, in favour of the assessee.
   Question No.[b]:
         "Whether goodwill is an asset within the meaning of Section 32  of the Income Tax Act, 1961, and whether depreciation  on  `goodwill'is allowable under the said Section?"
   Answer:
         In the  present  case,  the  assessee  had  claimed  deduction of Rs.54,85,430/- as depreciation on goodwill.  In the course  of hearing,the explanation regarding origin of such goodwill was given as under:
  "In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly  sanctioned  by Hon'ble High Courts of Bombay  and  Calcutta)  with  retrospective efect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest  in  the  company.
         In the process goodwill has arisen in the books of the company."
         It was further explained that  excess  consideration  paid  by  the assessee over the value  of  net  assets  acquired  of  YSN  Shares  and Securities Private Limited [Amalgamating Company] should  be  considered as goodwill arising on amalgamation.  It  was  claimed  that  the  extra consideration was paid towards the  reputation  which  the  Amalgamating Company was enjoying in order to retain its existing clientele.
         The Assessing Officer held that goodwill was not an asset  falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 [`Act',for short].
         We quote hereinbelow Explanation 3 to Section 32(1) of the Act: "Explanation 3.--  For  the  purposes  of  this  sub-section,  the expressions `assets' and `block of assets' shall mean--
[a]  tangible  assets,  being  buildings,  machinery,   plant   or furniture;
         [b]  intangible  assets,  being  know-how,  patents,   copyrights, trademarks,  licences,  franchises  or  any  other   business   or commercial rights of similar nature."
Explanation 3 states that the expression  `asset'  shall  mean  an
intangible asset, being  know-how,  patents,  copyrights,  trademarks, licences, franchises or any  other  business  or  commercialrights of similar nature.  A reading the words `any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates  that goodwill  would  fall  under  the  expression  `any  other  business  or commercial right of a similar nature'.The principle of ejusdem generis would strictly apply while interpreting the said expression which  finds place in Explanation 3(b).
In the circumstances, we are of the  view that `Goodwill'  is  an asset under Explanation 3(b) to Section 32(1) of the Act.
One more aspect needs to be highlighted. In the present case,  the Assessing Officer, as a matter of fact, came to the conclusion  that  no amount was actually paid on account of  goodwill.   This  is  a  factual finding.  The Commissioner of Income Tax (Appeals) [`CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High  Court  ordering  amalgamation  of  the above two Companies; that the assets and liabilities of M/s. YSN  Shares and Securities Private Limited were transferred to the  assessee  for  a consideration; that the difference between the cost of an asset and  the amount paid constituted goodwill and that the  assessee-Company  in  the process of amalgamation had acquired a capital  right  in  the  form  of goodwill  because of  which the  market  worth of the
   assessee-Company stood increased.  This finding has also been upheld  by Income Tax Appellate Tribunal [`ITAT', for short]. We see no  reason  to interfere with the factual finding.
One more aspect which needs to be mentioned is  that,  against  the decision of ITAT, the Revenue had preferred an appeal to the High  Courtin which it had raised only the question as to whether  goodwill  is  an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not  file  an  appealon  the  finding  of  fact referred to hereinabove.
For the afore-stated reasons, we answer Question  No.[b]  also  infavour of the assessee.
   Question No.[c]:
         The  last  question  raised  in  this  civil  appeal  is  regarding cancellation of disallowance of an amount of  Rs.83,02,976/-  as  a  bad debt.
   Answer:
         It has been stated on behalf of the Revenue that,  since  the  Tax Audit Report indicated the amount  to  have  been  incurred  on  capital account, the assessee was not entitled to deduction on  account  of  bad debt  Both the CIT(A) as well as the ITAT concluded  that  the  assessee has satisfied the provisions of Section 36(1)(vii)  of  the  Act. They have held that bad debt claimed by the  assessee  was  incurred  in  the normal course of business and, therefore, the assessee was  entitled  to deduction under Section 36(1)(vii) of the Act.  It is  well-settled  now by a catena of decisions that the manner in which the assessee maintains its accounts is not conclusive for deciding the nature of expenditure. In the present case, the concurrent finding of  facts  recorde by the  authorities below indicate that the assessee was entitled to claim deduction in the course of business under  Section 36(1)(vii) of the Act.
For the afore-stated reasons, we answer all the three questions infavour of the assessee and against the Revenue.The civil appeal filed by the Department stands dismissed with  no order as to costs
                                               .........................CJI.
                                       [S.H. KAPADIA]
                                               ...........................J.
                                       [MADAN B. LOKUR]
   New Delhi,
   August 22, 2012.
   -tir-

List of Income Taxable as Profits and Gains of Business or Profession

As per section 28 of the Income Tax Act, 1961 following income will be chargeable as profits and gains of business or profession.

The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”,—

(i)  the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year ;

(ii)  any compensation or other payment due to or received by,—

  1. any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
  2. any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto ;
  3. any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto ;
  4. any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business ;

(iii)  income derived by a trade, professional or similar association from specific services performed for its members ;

(iiia)  profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947) ;

(iiib)  cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India ;

(iiic)  any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 ;]

(iiid)  any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992);

(iiie)  any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992) ;

(iv)  the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;

(v)  any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm :

Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted ;

(va) any sum, whether received or receivable, in cash or kind, under an agreement for—

  1. not carrying out any activity in relation to any business; or
  2.  not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services:

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

  1. any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head “Capital gains”;
  2. any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India.

                Explanation.—For the purposes of this clause,—

(i) “agreement” includes any arrangement or understanding or action in concert,—

(A) whether or not such arrangement, understanding or action is formal or in writing; or

(B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;

(ii) “service” means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging;

(vi)  any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.  Explanation.—For the purposes of this clause, the expression “Keyman insurance policy” shall have the meaning assigned to it in clause (10D) of section 10;

(vii)  any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD.

Explanation 1.—[Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.

Explanation 2.—Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as “speculation business”) shall be deemed to be distinct and separate from any other business.

Format of Certificate to be obtained by Auditor, under clause 17(h) of Form CD of the Tax Audit Report

To

 

PQR & Associates/Co.
Chartered Accountants
XYZ City

 

CERTIFICATE

 

UNDER CLAUSE 17(h) A OF FORM 3CD

(Read With Section 40a (3) Read With Rule 6dd Of The Income Tax Act, 1961)

 

1. Name of the Assessee                       :_______________________________________
2. Address                                               :_______________________________________
3. Permanent Account Number          :__________________
4. Status :__________________
5. Previous year ended                         :__________________
6. Assessment year                                :__________________

 

I/We (the above named assessee/ partner or director of the above named assessee) do hereby certify, for and on behalf of the assessee, that the following expenditure  is incurred by the assessee during the previous year ended as stated above, in excess of Rs. 20,000/- otherwise than by account payee cheque drawn on a bank or by account payee bank draft, and is therefore not allowable under the provisions of Section 40A(3) read with Rule 6DD of the Income Tax Act, 1961 read with Rule 6DD and accordingly 100% of the following expenditure is added back as income while computing the total income of the assessee for the above said assessment year Viz.:

 

DateParticularsAmountAllowanceDisallowance
Total          Rs.

I/We (the above named assessee/ partner or director of the above named assessee) do hereby further certify, for and on behalf of the assessee, that all other expenditure  incurred by the assessee during the previous year ended as stated above, in excess of Rs. 20,000/- is incurred by account payee cheque drawn on a bank or by account payee bank draft only and not otherwise, except in such cases and in such circumstances (having regard to the nature and extent of banking facilities available. considerations of business expediency and other relevant factors) as prescribed under Rule 6DD of the Income Tax Act, 1961.

 

Place:_____________

                     ________________

                                                   Proprietor / Partner / Director

Date:______________

                             

Deemed Income for Good Carriages Owner under Section 44AE of the Income Tax

As per section 44AE of the Income Tax Act, 1961 assessee who owns less than 10 goods carriages during the year and engaged in the business of plying, hiring or leasing such goods carriages then the income such business will be deemed to be considered as Rs 5,000/- for heavy vehicle and Rs.4,500/-other than heavy vehicle per month. In the given provision ownership is considered as point of taxation, so whether assessee run the vehicle or not he has to pay the tax on deemed income.

Eligible assessee

Assessee who owns not more than 10 goods carriages at any time during the previous year

Minimum deemed profit / gain:

For having vehicle (more than 12 ton capacity):-

Rs. 5000/- per month or part of a month which the heavy vehicle is owned by the assessee in the previous year.

For goods carriage other than heavy goods vehicle (upto 12 ton capacity):-

Rs. 4500/- per month or part of a month during which the goods carriage is owned by the assessee in the previous year.

Special provision for computing profits and gains of business of plying, hiring or leasing goods carriages.

Reference section 44AE of the Income Tax Act 1961:

(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee, who owns not more than ten goods carriages at any time during the previous year and who is engaged in the business of plying, hiring or leasing such goods carriages, the income of such business chargeable to tax under the head “Profits and gains of business or profession” shall be deemed to be the aggregate of the profits and gains, from all the goods carriages owned by him in the previous year, computed in accordance with the provisions of sub-section (2).

(2) For the purposes of sub-section (1), the profits and gains from each goods carriage,—

 (i)  being a heavy goods vehicle, shall be an amount equal to five thousand rupees for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher;

(ii)  other than a heavy goods vehicle, shall be an amount equal to four thousand five hundred rupees for every month or part of a month during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher.

(3) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed:

Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.

(4) The written down value of any asset used for the purpose of the business referred to in sub-section (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.

(5) The provisions of sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in sub-section (1) and in computing the monetary limits under those sections, the gross receipts or, as the case may be, the income from the said business shall be excluded.

(6) Nothing contained in the foregoing provisions of this section shall apply, where the assessee claims and produces evidence to prove that the profits and gains from the aforesaid business during the previous year relevant to the assessment year commencing on the 1st day of April, 1997 or any earlier assessment year, are lower than the profits and gains specified in sub-sections (1) and (2), and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the assessee on the basis of assessment made under sub-section (3) of section 143.

(7) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in sub-sections (1) and (2), if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.

Explanation.—For the purposes of this section,—

 (a) the expressions “goods carriage” and “heavy goods vehicle” shall have the meanings respectively assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988);

 (b) an assessee, who is in possession of a goods carriage, whether taken on hire purchase or on instalments and for which the whole or part of the amount payable is still due, shall be deemed to be the owner of such goods carriage.

Rate of Depreciation under Income Tax Act

One of the basic difference in income tax depreciation calculation and companies act depreciation other than rates of depreciation is method of calculation. Under income tax only written down value method is allowed means each year value of asset is reduced by depreciation amount and next year depreciation is calculated on that reduced value of asset. Whereas under companies act depreciation can be calculated on Straight line method or Written down value method (SLM Method or WDV Method).

Income tax Act depreciation rate: Also Read List of Income Taxable as Profits and Gains of Business or Profession

  1. An asset acquired during previous year and is put to use for less than 180 days during the year – Half of usual depreciation
  2. Additional depreciation at the rate of 20% over and above of normal rate shall be allowed to and industrial undertaking for any new plant & machinery acquired and installed after31.03.2005 u/s 32(iia)Read Depreciation on Goodwill and Goodwill is treated as asset under section 32 of the Income Tax Act, 1961

Company’s Act depreciation rate:

  1. Pro rata basis from the date of additional or upto the date of sale / discarded.
  2. Assets whose actual cost does not exceed Rs. 5000/- shall be provided depreciation at the rate of 100%
Particulars

Income Tax

Company’s Act

% WDV

% WDV

% SLM

A.Y.

Single Shift

Single Shift

Computers

60%

40%

16.21%

Plant and machinery

15%

13.91%

4.75%

Furniture and fixture

10%

18.10%

6.33%

Cars and vehicles

15%

25.89%

9.50%

Cars vehicles used on hire

30%

40%

16.21%

Building – Non residential

10%

10%

3.34%

Building – Residential

5%

5%

1.63%

Books owned by Professionals
i)Books being annual publications

100%

ii)Books other than i) above

60%

Books owned by assessee carrying on business in running lending library

100%

Know how, patent, copy right, trademarks

25%

 Read Amortize Preliminary Expenses under section 35D

Compulsory Audit of Business and Profession under Section 44AB of the Income Tax

As per section 44AB of the Income Tax Act, 1961 every business and profession has to undertake compulsory tax audit in case turnover from such business exceeds Rs 1 crs for business and in case of profession gross receipt exceeds Rs 25 lakhs from such profession. In case if turnover/receipt is less than given limit assessee can opt for deemed income provision and profit and gain from such business and profession has to be minimum of 8% of such Turnover/Gross Receipt.Calculating Business Gain on Presumptive Basis under Section 44AD of the Income Tax Act: Deemed Income

Compulsory Tax Audit Limit

For Business Turnover/Sales to Exceed

Assessment Year

Prior to Year 1.4.2011

1.4.2011 to 31.3.2013

For Year 2013-14

Amount Exceeding (In Rs.)

40 Lakhs

60 Lakhs

100 Lakhs

For profession – Taxation of Business Income: Calculating Income Tax on Profit from Business and Profession

Assessment Year

Prior to Year 1.4.2011

1.4.2011 to 31.3.2013

For Year 2013-14

Amount Exceeding (In Rs.)

10 Lakhs

15 Lakhs

25 Lakhs

Reference: Section 44AB of the Income Tax Act, 1961 (Also Read How to Claim Deduction for Payment made to relatives as Business Expenditure under section 40A (2) of Income Tax Act)

Audit of accounts of certain persons carrying on business or profession Read Compulsory Maintenance of Books of Accounts under Section 44AA of Income Tax Act

Every person,—

  • carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds sixty lakh rupees in any previous year or
  • carrying on profession shall, if his gross receipts in profession exceed fifteen lakh rupees in any previous year; or
  • carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AE or section 44BB or section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year; or
  • carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his business and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year,
  • get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed :

Provided that this section shall not apply to the person, who derives income of the nature referred to in section 44B or section 44BBA, on and from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later: Also Read Disallowance of Certain Expenses if TDS has not been Deducted or if Deducted then not Deposited to Government within time

Provided further that in a case where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnishes by that date the report of the audit as required under such other law and a further report by an accountant in the form prescribed under this section. Also Read Deduction for Expenses only on Actual Payment under Income Tax Section 43B

Explanation.—For the purposes of this section,—

  • “accountant” shall have the same meaning as in the Explanation below sub-section (2) of section 288;
  • “specified date”, in relation to the accounts of the assessee of the previous year relevant to an assessment year, means the due date for furnishing the return of income under sub-section (1) of section 139


Calculating Business Gain on Presumptive Basis under Section 44AD of the Income Tax Act: Deemed Income

As per section 44AD of the Income Tax Act, 1961 every eligible assessee undertaking eligible business can declare minimum 8% of total turnover or gross receipts as profit from such business and this deemed income provision is only applicable to business whose turnover is less than Rs. 60 Lakhs and profit and gain from such business has to be minimum of 8% of such Turnover/Gross Receipt which means assessee can declare higher income. In case assessee wants to declare lower amount than he is has to undergo tax audit.

Eligible assessee

Individual / Firm with resident status only (Not applicable for LLP’s)

Business

Any business (excluding the business of transport) having maximum gross turnover / gross receipt Rs. 100 Lakhs

Minimum deemed profit / gain:

Minimum 8% of such gross turnover or gross receipts (Profit lower than 8% can be claimed, but in that case Audit u/s 44 AB is compulsory)

Tax Audit Limits

For Business Turnover/Sales to Exceed

Assessment Year

Prior to Year 1.4.2011

1.4.2011 to 31.3.2013

For Year 2013-14

Amount Exceeding (In Rs.)

40 Lakhs

60 Lakhs

100 Lakhs

Compulsory Maintenance of Books of Accounts under Section 44AA of Income Tax Act

Reference: Section 44AD of the Income Tax Act, 1961

Special provision for computing profits and gains of business on presumptive basis

  1. Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.
  2. Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed :

    Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.

  3. The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
  4. The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business.
  5. Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.
  6. The provisions of this section, notwithstanding anything contained in the foregoing provisions, shall not apply to—
    1. a person carrying on profession as referred to in sub-section (1)
      of section 44AA;
    2. a person earning income in the nature of commission or brokerage; or
    3. a person carrying on any agency business.

Explanation.—For the purposes of this section,—

  1. “eligible assessee” means,—
  • an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009); and
  • who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading “C. – Deductions in respect of certain incomes” in the relevant assessment year;
  1. “eligible business” means,—
  • any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
  • whose total turnover or gross receipts in the previous year does not exceed an amount of sixty lakh rupees for AY 2012-13 and Rs 100 Lakhs for AY 2013-14 and onwards

Payment in excess of Rs. 20000/35000 in cash / cross cheque is disallowed under Section 40A (3) of Income Tax Act (11.8)

Taxation of Business Income: Calculating Income Tax on Profit from Business and Profession

As per section 41 of the Income Tax Act,1961 referred above if any expense was allowed as deduction in any earlier year under Business and Profession head” and now any benefit is received from such amount then such benefit amount is taxable under “Business and Profession head” in the previous year of receipt.

Treatment in case of Asset on which depreciation is claimed

As per section referred above if any asset which is depreciable on a straight line method is sold and a balancing charge arises from such a disposal then such benefit amount is taxable under “Business and Profession head” will be lower of below two options:

Balancing charge=

  • Selling price- opening WDV
  • Accumulated depreciation

Treatment in case of Asset on purchased for scientific use

If a scientific capital asset is sold directly without using it in business then the income which is taxable under Business and Profession head” will be lower of below two options

  • Sale price of the asset
  • Earlier deduction taken under section 35(which may be 100%/200% )

Treatment of Bad debt recovered related to previous year

If any amount of bad debt is recovered in any previous year then such recovered amount is taxable in the previous year of recovery

Taxable amount

  • Actual amount recovered
  • Less: earlier disallowed amount of bad debt (because already taxed , so now exempt)

Treatment of amount withdrawn from special reserve

If amount withdrawn from special reserve account which is transferred to special reserve account under section 36 (1) (viii), then it is a taxable income under Business and Profession head” in the previous year of withdrawn

Taxable amount

  • Actual withdrawn amount
  • Less: earlier disallowed amount

Reference: Section 41 of the Income Tax Act, 1961: Other Information

Profits chargeable to tax

(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,—

 (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

 (b) the successor in business has obtained whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.

[Explanation 1.—For the purposes of this sub-section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.]

[Explanation 2].—For the purposes of this sub-section, “successor in business” means,—

  (i)  Where there has been an amalgamation of a company with another company, the amalgamated company;

 (ii)  Where the first-mentioned person is succeeded by any other person in that business or profession, the other person;

(iii) Where a firm carrying on a business or profession is succeeded by another firm, the other firm;]

[(iv) Where there has been a demerger, the resulting company.]

(2) Where any building, machinery, plant or furniture,—

 (a) which is owned by the assessee;

 (b) in respect of which depreciation is claimed under clause (i) of sub-section (1) of section
32
; and

 (c) which was or has been used for the purposes of business,

is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.

Explanation.—Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provision of this sub-section shall apply as if the business is in existence in that previous year.]

(3) Where an asset representing expenditure of a capital nature on scientific research within the meaning of clause (iv) of sub-section (1), or clause (c) of sub-section (2B), of section 35, read with clause (4) of section 43, is sold, without having been used for other purposes, and the proceeds of the sale together with the total amount of the deductions made under clause (i) [or, as the case may be, the amount of the deduction under clause (ia)] of sub-section (2), or clause (c) of sub-section (2B), of section 35 exceed the amount of the capital expenditure, the excess or the amount of the deductions so made, whichever is the less, shall be chargeable to income-tax as income of the business or profession of the previous year in which the sale took place.

Explanation.—Where the moneys payable in respect of any asset referred to in this sub-section become due in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.

(4) Where a deduction has been allowed in respect of a bad debt or part of debt under the provisions of clause (vii) of sub-section (1) of section 36, then, if the amount subsequently recovered on any such debt or part is greater than the difference between the debt or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income-tax as the income of the previous year in which it is recovered, whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not.

[Explanation.—For the purposes of sub-section (3),—

 (1) “moneys payable” in respect of any building, machinery, plant or furniture includes—

 (a) any insurance, salvage or compensation moneys payable in respect thereof;

 (b) where the building, machinery, plant or furniture is sold, the price for which it is sold,

so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso;

(2) “sold” includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company.

[(4A) Where a deduction has been allowed in respect of any special reserve created and maintained under clause (viii) of sub-section (1) of section 36, any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn.

Explanation.—where any amount is withdrawn from the special reserve in a previous year in which the business is no longer in existence; the provisions of this sub-section shall apply as if the business is in existence in that previous year.]

(5) Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under sub-section (1), sub-section (3) [, sub-section (4) or sub-section (4A)] in respect of that business or profession, any loss, not being a loss sustained in speculation business, which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year shall, so far as may be, be set off against the income chargeable to tax under the sub-sections aforesaid.

[(6) References in sub-section (3) to any other provision of this Act which has been amended or omitted by the Direct Tax Laws (Amendment) Act, 1987 shall, notwithstanding such amendment or omission, be construed, for the purposes of that sub-section, as if such amendment or omission had not been made.

 

Deduction in respect of amount deposited in Site Restoration Account (SRA) Section 33ABA

Who is eligible to claim deduction for SRA?

Eligible assessee: assessee engaged in production/ extraction of petroleum/natural gas/both in India

 

What are conditions for Claiming Deduction?

Requirement: amount deposited with SBI or MPNG (ministry of petroleum or natural gas) in SRA a/c.

Time limit: amount should be deposited till the end of relevant previous year. Deduction amount: lower of following

  1. Actual deposit in SRA within time
  2. 20% of profit (profit before this section & set off losses)

    Where it can be utilized?

  3. Amount withdrawn from SRA a/c
  4. Withdrawn amount is utilized for ‘specified purpose’ i.e. as per scheme framed then amount is exempt
  5. Withdrawn amount is utilized for ‘ non specified purpose’ then fully taxable under B & P head in the previous year of withdrawn
  6. Withdrawn amount is not utilized till the end of previous year in which amount is withdrawn then fully taxable under B & P head in the previous year of withdrawn
  7. If Amount is withdrawn in following cases then amount is exempt
  8. On partition of HUF
  9. On death of assessee
  10. Liquidation of company
  11. If any asset is purchased from withdrawn amount as per specified scheme and such asset is sold before 8 years from the end of previous year in which asset was purchased then actual cost of asset is taxable B & P income in the previous year of sale
  12. Exception- if asset is sold before 8 years in following cases then nothing is taxable
  13. Sold to govt.
  14. Sold to govt. company
  15. Sold to local authority
  16. Transfer due to conversion of firm into company or V/V.

      

    Reference: Section 33ABA of the Income Tax Act 1961 Site Restoration Fund


    (1) Where an assessee is carrying on business consisting of the 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, has before the end of the previous year—

    (a)  deposited with the State Bank of India any amount or amounts in an account (hereafter in this section referred to as the special account) maintained by the assessee with that Bank in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) approved in this behalf by the Government of India in the Ministry of Petroleum and Natural Gas; or

    (b)  deposited any amount in an account (hereafter in this section referred to as the Site Restoration Account) opened by the assessee in accordance with, and for the purposes specified in, a scheme framed by the Ministry referred to in clause (a) (hereafter in this section referred to as the deposit scheme),

    the assessee shall, subject to the provisions of this section, be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72) of—

     (i)  A sum equal to the amount or the aggregate of the amounts so deposited; or

    (ii)  A sum equal to twenty per cent of the profits of such business (computed under the head “Profits and gains of business or profession” before making any deduction under this section),

    Whichever is less:

    Provided that where such assessee is a firm, or any association of persons or anybody of individuals, the deduction under this section shall not be allowed in the computation of the income of any partner or, as the case may be, any member of such firm, association of persons or body of individuals :

    Provided further that where any deduction, in respect of any amount deposited in the special account, or in the Site Restoration Account, has been allowed under this sub-section in any previous year, no deduction shall be allowed in respect of such amount in any other previous year :

    Provided also that any amount credited in the special account or the Site Restoration Account by way of interest shall be deemed to be a deposit.

    (2) The deduction under sub-section (1) shall not be admissible unless the accounts of such business of the assessee for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant :

    Provided that in a case where the assessee is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this sub-section 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 under this sub-section.

    (3) Any amount standing to the credit of the assessee in the special account or the Site Restoration Account shall not be allowed to be withdrawn except for the purposes specified in the scheme or, as the case may be, in the deposit scheme.

    (4) Notwithstanding anything contained in sub-section (3), no deduction under sub-section (1) shall be allowed in respect of any amount utilized for the purchase of—

    (a)  Any machinery or plant to be installed in any office premises or residential accommodation, including any accommodation in the nature of a guest-house;

    (b)  Any office appliances (not being computers);

    (c)  Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year;

    (d)  Any new machinery or plant to be installed in an industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.

    (5) Where any amount standing to the credit of the assessee in the special account or in the Site Restoration Account is withdrawn on closure of the account during any previous year by the assessee, the amount so withdrawn from the account, as reduced by the amount, if any, payable to the Central Government by way of profit or production share as provided in the agreement referred to in section 42, shall be deemed to be the profits and gains of business or profession of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year.

    Explanation.—Where any amount is withdrawn on closure of the account in a previous year in which the business carried on by the assessee is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.

    (6) Where any amount standing to the credit of the assessee in the special account or in the Site Restoration Account is utilized by the assessee for the purposes of any expenditure in connection with such business in accordance with the scheme or the deposit scheme, such expenditure shall not be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

    (7) Where any amount, standing to the credit of the assessee in the special account or in the Site Restoration Account, which is released during any previous year by the State Bank of India or which is withdrawn by the assessee from the Site Restoration Account for being utilized by the assessee for the purposes of such business in accordance with the scheme or the deposit scheme is not so utilized, either wholly or in part, within that previous year, the whole of such amount or, as the case may be, part thereof which is not so utilized shall be deemed to be profits and gains of business and accordingly chargeable to income-tax as the income of that previous year.

    8) Where any asset acquired in accordance with the scheme or the deposit scheme is sold or otherwise transferred in any previous year by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired, such part of the cost of such asset as is relatable to the deduction allowed under sub-section (1) shall be deemed to be the profits and gains of business or profession of the previous year in which the asset is sold or otherwise transferred and shall accordingly be chargeable to income-tax as the income of that previous year :

    Provided that nothing in this sub-section shall apply—

     (i)  where the asset is sold or otherwise transferred by the assessee to Government, a local authority, a corporation established by or under a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); or

    (ii)  where the sale or transfer of the asset is made in connection with the succession of a firm by a company in the business or profession carried on by the firm as a result of which the firm sells or otherwise transfers to the company any asset and the scheme or the deposit scheme continues to apply to the company in the manner applicable to the firm.

    Explanation.—the provisions of clause (ii) of the proviso shall apply only where—

     (i)  All the properties of the firm relating to the business or profession immediately before the succession become the properties of the company;

    (ii)  All the liabilities of the firm relating to the business or profession immediately before the succession become the liabilities of the company; and

    (iii)  All the shareholders of the company were partners of the firm immediately before the succession.

    (9) The Central Government may, if it considers necessary or expedient so to do, by notification in the Official Gazette, direct that the deduction allowable under this section shall not be allowed after such date as may be specified therein.

    Explanation.—for the purposes of this section,—

    (a)  “State Bank of India” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955);

    (b)  The expression “amount standing to the credit of the assessee in the special account or the Site Restoration Account” includes interest accrued to such accounts.]