Business or Profession

Computation of Income from Business or Profession

Introduction
Income from business or profession is computed under Section 29 of the Income-tax Act, 1961, following provisions in Sections 30 to 43D. These provisions determine allowable and disallowable expenses for calculating taxable income.

General Principles

• Sections 30 to 43D are not exhaustive. Expenditures or losses incidental to business or profession may be deductible based on ordinary commercial principles, even if not explicitly covered.
• Expenditures expressly prohibited under these sections are not deductible.

Business Losses
Business losses may be allowed if they meet the following conditions:

• Losses are revenue in nature, not capital.
• Incurred during the relevant previous year.
• Incidental to the business or profession.
• Real losses, not fictional or expected.
• Not restricted by any provision of the Act.

Computation of Income
Income is computed either under normal provisions or under the presumptive taxation scheme. Under normal provisions, taxable income from business or profession is calculated as follows:

1. Add: Revenue receipts and specified capital receipts.
2. Deduct:

• Revenue expenditures.
• Allowed capital expenditures.
•  
• Payments and expenditures subject to conditions.

3. Add:

• Non-deductible capital expenditures.
• Disallowed expenditures due to non-fulfillment of conditions.

 

Treatment of Foreign Exchange Fluctuations

 

Introduction
Foreign exchange fluctuations arising from changes in foreign exchange rates can be classified as either capital account fluctuations or revenue account fluctuations. The tax treatment varies based on this classification, governed by Section 43A, Section 43AA, and the provisions of ICDS-VI (The Effects of Changes in Foreign Exchange Rates).

Types of Foreign Exchange Fluctuations

• Capital Account Fluctuations

• Applicable when fluctuations relate to assets purchased for business or profession.
• Adjusted to the actual cost or written-down value (WDV) of the asset in the year of payment.
• Examples:
  • Depreciable assets
  • Capital expenditure on scientific research or patents
  • Cost of acquisition for computing capital gains
• Revenue Account Fluctuations

• Gains are taxable under Section 28; losses are deductible under Section 37(1).
• Governed by ICDS-VI, covering:
  • Monetary and non-monetary items
  • Financial statements of foreign operations
  • Forward contracts
  • Foreign currency translation reserves.

Key Provisions for Capital Account Fluctuations (Section 43A)

• Eligibility: Arises when an asset is acquired from outside India for business or profession, and a liability exists for its payment.
• Adjustment:

• Added to or reduced from the cost, WDV, or acquisition cost of the asset.
• Applies even if the asset is transferred but the block of assets exists at the time of payment.
• Does not apply where liability for acquiring the asset is met, directly or indirectly, by someone other than the assessee.
  • Forward Contracts: If a forward contract exists, adjustments are based on the settlement price.
  • Block Ceases to Exist: Gains or losses are deemed capital receipts or expenditures with no tax impact.

Key Provisions for Revenue Account Fluctuations (Section 43AA)

• Gains and losses not linked to capital transactions are treated as revenue fluctuations.
• Taxable or deductible in the year they arise as per ICDS-VI.

 

Deductions Allowed on Payment Basis

 

Introduction
Certain expenditures are deductible only on actual payment, regardless of the assessee's accounting method. These deductions are governed by Section 43B of the Income-tax Act.

• For most payments, deductions are allowed in the year of accrual if paid by the due date for filing the income tax return.
• Overdue payments to micro or small enterprises (MSEs) are disallowed on an accrual basis, even if paid by the return filing due date, and are only allowed in the year of actual payment.

Expenses Deductible on Payment Basis

• Taxes and Duties
  • Includes sums payable as tax, duty, cess, or fee under any law.
  • Deductions are allowed on actual payment, including advanced deposits, but exclude amounts secured via bank guarantees.
• Contributions to Employee Welfare Funds
  • Employer contributions to provident funds, gratuity funds, etc., are deductible if deposited by the return filing due date.
  • Employee contributions are allowed only if deposited by the due date under the relevant fund's rules.
• Bonus or Commission to Employees
  • Deductible when paid, even if accrued earlier.
• Interest on Loans and Advances
  • Interest payable to banks, financial institutions, or specified non-banking financial companies (NBFCs) is deductible only upon actual payment.
  • Conversion of interest into loans, debentures, or similar instruments does not qualify as payment.
• Leave Encashment
  • Payments for leave encashment are deductible only when paid.
• Payments to Indian Railways
  • Sums payable for the use of railway assets are allowed as deductions upon actual payment.
• Payments to Micro or Small Enterprises (MSEs)
  • Payment to MSME is allowed only in the year of actual payment if paid beyond the Section 15 time limit.
  • Time limits under Section 15 of the MSMED Act, 2006:
    • Payment within the agreed terms (not exceeding 45 days).
    • Payment within 15 days if no terms are agreed upon.

 

Full Value of Consideration for Transfer of Immovable Property (Other than a Capital Asset)

 

When land or building (not a capital asset) is transferred for consideration less than its stamp duty value, the stamp duty value is deemed to be the full value of consideration for computing profits and gains, except when within specified safe-harbor limits.

Key Provisions

• Rule:
  • If the consideration received for transferring immovable property is less than the stamp duty value, the latter is deemed as the full value of consideration.
• When Sale Agreement Precedes Registration:
  • The stamp duty value on the agreement date may be used if consideration is paid (wholly or partly) via account payee cheque, draft, ECS, or prescribed electronic modes before the agreement date.

Exceptions

• Safe-harbour Rule

o Stamp duty value not exceeding 110% of actual consideration is treated as the full value of consideration.

• Reference to Valuation Officer

o If the stamp duty value exceeds the fair market value, and the assessee has not disputed this value in any appeal or litigation, the Assessing Officer may refer the matter to a Valuation Officer.

o The deemed full value of consideration will be the lower of:

• Valuation Officer's assessed value, or
• Stamp duty value.

 

Computation of Income from Construction and Service Contracts

 

Income from construction and service contracts is computed based on the Percentage of Completion Method as specified under the Income-tax Act and applicable Income Computation and Disclosure Standards (ICDS).

Method of Computation

The provisions apply to:

• Construction Contracts
• Service Contracts

Income from Construction Contracts

• A construction contractrefers to a specifically negotiated agreement for constructing assets that are interrelated in terms of design, technology, function, or ultimate use. This includes contracts for services directly linked to construction (e.g., project managers, architects) and contracts involving destruction/restoration of assets or the environment.
• Income is determined using Percentage of Completion Method, aligning contract revenue with incurred costs at each stage of completion per ICDS-III.
• Revenue considerations:

• Retention money is included.
• Incidental income (interest, dividend, or capital gains) is not deducted from contract costs.

Income from Service Contracts

• Percentage of Completion Method:Revenue and associated expenses are recognized similarly to construction contracts, following ICDS-IV.
• Project Completion Method:Revenue is recognized upon completion/substantial completion of the contract. This method applies only to service contracts with a duration not exceeding 90 days and is optional for the assessee.
• Straight Line Method:Revenue is recognized evenly over a specified period for services rendered through multiple acts. This method is also optional and applies when services are performed over a specific timeframe.

Maintenance of Accounts

Taxpayers are required to maintain books of accounts if their income, turnover, or receipts exceed prescribed thresholds. Books must be maintained at the place of business or profession for six years from the end of the relevant assessment year.

Who Must Maintain Books of Accounts?

• Specified Professions:Legal, medical, engineering, architecture, technical consultancy, interior decoration, film artists, accountancy, information technology, etc.

• Mandatory, unless opting for presumptive taxation under Section 44ADA.
  • Non-specified Professions and Businesses:Thresholds apply:
• Individual/HUF: Income exceeding ₹2,50,000 or turnover exceeding ₹25 lakhs in any of the last three years.
• Others: Income exceeding ₹1,20,000 or turnover exceeding ₹10 lakhs in any of the last three years.

Presumptive Taxation Cases:

• Books are required if profits are declared below the presumptive rates under Sections 44AD, 44AE , 44BB , or 44BBB .

Books to Be Maintained

• Specified Professions (other than company secretary and IT):

• Cash book, journal, ledger, carbon copies of bills above ₹25, original bills, and signed vouchers for expenditures.
  • Medical Profession:
• Additional requirements include Form 3C for daily cases and inventory of drugs and consumables.
  • Non-Specified Professions and Businesses:
• Books necessary for computing taxable income if thresholds are exceeded.

Where and How Long to Maintain Books

• Location:At the place of business or profession; for multiple locations, at the principal or respective locations.
• Duration:Six years from the end of the relevant assessment year. If the assessment is reopened under Section 147, books must be retained until the reassessment is completed.

 

Method of Accounting under Sections 145 and 145A of the Income-tax Act

 

Introduction
Sections 145 and 145A govern the method of accounting for computing income under the heads Profits and gains of business or profession and Income from other sources. Assessees may follow either the cash system or the mercantile system of accounting, subject to regularity and compliance with notified Income Computation and Disclosure Standards (ICDS).

When Method of Accounting Shall Be Used

Income under the above heads shall be computed in accordance with the method of accounting regularly employed by the assessee. These provisions do not apply to income taxable under Salaries, House Property and Capital Gains.

Certain incomes are deemed taxable in the year of receipt or as specifically prescribed, irrespective of the accounting method. These include:

• Dividend income (including deemed dividend), with interim dividend taxable on payment;
• Interest on securities where no regular method is followed, taxable on becoming due;
• Interest on income-tax refund as per ICDS-IV, taxable on receipt;
• Interest on compensation or enhanced compensation, taxable on receipt;
• Claims for escalation of price or export incentives, taxable when reasonable certainty of realisation arises;
• Government grants or subsidies covered under Section 2(24)(xviii), taxable on receipt if not earlier charged to tax.

Types of Method of Accounting

Mercantile system records income and expenditure on an accrual basis.
Cash system records income and expenditure only on actual receipts or payments.

Different methods may be used for different sources, if regularly and consistently followed and capable of yielding true profits.

Income Computation and Disclosure Standards

The Central Government has notified 10 ICDS applicable from 01-04-2016 for computation of income under the relevant heads. These relate to Accounting Policies, Inventories, Construction Contracts, Revenue Recognition, Tangible Fixed Assets, Foreign Exchange Effects, Government Grants, Securities, Borrowing Costs, and Provisions/Contingent Liabilities.

Rejection of Books of Account

The Assessing Officer may reject books and make a best-judgment assessment where:

• Accounts are incorrect or incomplete;
• Method of accounting is not regularly followed;
• Income is not computed in accordance with ICDS.

A definite finding must be recorded before rejection.

Valuation of Stock

Valuation of stock-in-trade is essential for determining profits.

• Inventory is to be valued at the lower of actual cost or net realisable value in accordance with ICDS-II.
• Section 145A requires inclusion of taxes, duties, cess or fees actually paid or incurred for bringing goods or services to their present location and condition.
• Under the inclusive method, no further adjustments are required. Under the exclusive method, profit or loss must be adjusted for taxes such as GST.
• Unlisted or unquoted securities are valued at actual cost; listed and quoted securities are valued at cost or net realisable value, whichever is lower, category-wise, as per ICDS-VIII.
• For banks, valuation follows RBI guidelines.

Specific situations:

• On conversion of a capital asset into stock-in-trade, fair market value on the date of conversion is deemed sale consideration and becomes the cost of such stock.
• On capital contribution by a partner or member, the amount recorded in the firm’s or entity’s books becomes the value of stock if treated as stock-in-trade.
• On partition of an HUF, the cost to the transferor member is deemed the cost of acquisition, increased by cost of improvement and transfer expenses.
• On inheritance or gift of a non-depreciable asset treated as stock-in-trade, the cost is determined as per the Act based on prior ownership.

 

Treatment of Tax Paid on Goods: Inclusive vs. Exclusive Approach under Section 145A

 

The Income-tax Act recognizes two methods for recording transactions related to sales, purchases, and inventories:

• Exclusive Method:Excludes duties or taxes.
• Inclusive Method:Includes duties or taxes.
  Section 145A mandates adjustments for taxes, duties, cess, or fees while computing taxable income under "Profits and Gains of Business or Profession."

Key Provisions

• Mandatory Adjustments:

• Taxes or duties on purchases, sales, and inventories must be included in income computation, even if excluded from books maintained using the exclusive method.
• Inclusive adjustments ensure accurate disclosure in the Income-tax Return (ITR).
  • Treatment in Books of Account:
• Assessees following the exclusive approach in their books need not alter their accounting system.
• Adjustments can be made solely for income computation and ITR preparation.
  • Specific Scenarios:
• Capital Goods:
  • If GST is included in the cost of assets, depreciation is claimed on the gross amount.
  • If Input Tax Credit (ITC) is availed, unutilized ITC is disclosed in "Other Current Assets" in the ITR.
• Inventory and Sales:
  • GST components for purchases and sales must be disclosed separately in relevant ITR sections.
• Composite Dealers:
  • Dealers ineligible for ITC must account for GST paid as part of purchase cost.
• Disclosure Requirements in ITR:

• GST on purchases and sales must be distinctly reported in the trading account or profit and loss section.
• Unutilized ITC is recorded under "Balance with Revenue Authorities."
  • Compliance Guidance:
• Adjustments ensure adherence to Section 145A without necessitating changes to accounting practices.

 

Sales Turnover and Gross Receipts under the Income-tax Act

 

Introduction

• Sales Turnover:Aggregate amount of sales made by an enterprise, considering gross or net turnover (before/after discounts and returns).
• Gross Receipts:All receipts from a profession or business, used for determining tax audit applicability, presumptive taxation, and maintenance of accounts.

Key Considerations

• Inclusions and Exclusions:

• Discounts:
  • Upfront and trade discounts linked to sales are excluded.
  • Cash discounts unrelated to turnover are included.
• Sales Returns:Deducted from turnover, even if from prior years.
• Fixed Assets and Investments:Proceeds from sales are excluded unless held as stock-in-trade.
• Taxes:GST and similar taxes are generally excluded unless specified under Section 145A for income computation.
  • Special Cases:
• Commission Agents:Turnover is limited to the commission unless the agent assumes ownership risks, in which case the full sale price is included.
• Speculative Transactions:Aggregate of favorable and unfavorable differences from contract settlements is considered turnover.
• Derivative Transactions:Turnover includes differences from squared-off trades, premiums on options, and reverse trade differences. Open positions are accounted for when settled.
• Delivery-Based Transactions:Full sale value is included as turnover.
• Investments:Transactions in securities held as investments are excluded unless they are part of business activities.
  • GST Treatment:
• For businesses under GST, taxes charged to customers are excluded from turnover unless integrated under Section 145A for profit computation.
  • Multiple Businesses:
• Aggregate turnover from all businesses is considered unless excluded under specific schemes like presumptive taxation.
  • Professional Receipts:
• Gross receipts include all amounts arising from the profession, such as fees, reimbursements, and incidental charges, but exclude rental income, dividends, and agricultural income.

 

Specified Modes of Payment

 

Rule 6ABBA prescribes electronic modes for acceptable receipt and payment of amounts under the Income-tax Act. These modes include credit cards, debit cards, net banking, BHIM, UPI, NEFT, and others.

Relevant Provisions

The following sections mandate payments or receipts through prescribed electronic modes:

• Section 13A: Donations exceeding 2,000.
• Section 35AD: Capital expenditure exceeding 10,000.
• Section 40A: Payments exceeding 10,000 (Rs. 35,000 in specific cases).
• Section 43: Payments exceeding 10,000 for acquiring capital assets.
• Section 43CA, 50C, and 56: Consideration of agreement dates for computing the full value of consideration.
• Section 44AD: Modes for receiving payments to declare presumptive income at 6%.
• Section 80JJAA: Payment of employee emoluments.
• Section 269SS: Loans, deposits, or specified sums of 20,000 or more.
• Section 269ST: Receipts exceeding 2 lakh.
• Section 269T: Repayment of loans or deposits of 20,000 or more.

Prescribed Electronic Modes

The Central Board of Direct Taxes (CBDT) has approved the following modes:

• Credit Cards
• Debit Cards
• Net Banking
• Immediate Payment Service (IMPS)
• Unified Payment Interface (UPI)
• Real Time Gross Settlement (RTGS)
• National Electronic Funds Transfer (NEFT)
• BHIM Aadhaar Pay

 

Recognition of Stock Exchange for Derivative Transactions

 

Derivative transactions in shares and commodities are not considered speculative if carried out on a recognized stock exchange. Recognition is granted upon fulfilling specified conditions under Rules 6DDA , 6DDB , 6DDC , and 6DDD .

Key Conditions for Recognition

Share Derivatives ( Rule 6DDA )

A stock exchange must:

• Have SEBI approval and comply with its guidelines.
• Maintain client data, including PAN and unique client identity numbers.
• Retain a 7-year audit trail for cash and derivative market transactions.
• The stock exchange shall ensure that once a transaction in respect of cash and derivative market is registered in the system, it shall not be erased.
• Prevent erasure of registered transactions. Modifications must be limited to genuine errors and reported monthly via Form 3BB.

Commodity Derivatives ( Rule 6DDC )

An association must:

• Have Forward Markets Commission approval and adhere to its guidelines.
• Store client data, including PAN and unique client identity numbers.
• Retain a 7-year audit trail for derivative transactions.
• Prevent erasure of registered transactions. Modifications must be limited to genuine errors and reported monthly via Form 3BC .

Application for Recognition

Submission Process ( Rules 6DDB and 6DDD )

• Applications must be addressed to the Member (Income Tax), CBDT, New Delhi.
• Documents required:

• SEBI/Forward Markets Commission approval.
• Up-to-date rules, bye-laws, and trading regulations.
• Confirmation of compliance with conditions.
• Any additional relevant information.

Decision Timeline

The Central Government must issue a notification for recognition or rejection within four months from the application month’s end.

Validity of Recognition

Recognition remains valid until:

• SEBI or Forward Markets Commission approval is withdrawn or expires.
• The Central Government rescinds the notification.

Rent, Repairs, Insurance, etc., of Building

Introduction
This provision allows deductions for revenue expenses incurred on premises used for business or profession, including rent, repairs, municipal taxes, and insurance. Only current repairs qualify for deduction.

Deductible Expenditures

• Rented Premises

• Rent for premises used as offices, warehouses, or residential quarters.
• Current repairs by the tenant under tenancy terms.
• Land revenue, local rates, or municipal taxes (deductible on a paid basis under Section 43B.)
• Insurance premiums for business premises.
  • Owned Premises
• Current Repairs: Necessary maintenance repairs, excluding capital improvements or extensions.
• Payment of land revenue, municipal taxes, or local rates (deductible on a paid basis under Section 43B.)
• Insurance premiums for the premises.
  • Shared Use of Premises
• Rented Premises (Partial Residential Use): Proportional deductions for rent, repairs, and taxes under Section 38.
• Owned Premises (Partial Business Use): Proportional deductions for repair expenses and insurance premiums under Section 38.

 

Repairs and Insurance of Plant and Furniture

 

Introduction
Provision of Section 31, allows deductions for repair and insurance expenses related to machinery, plant, or furniture used for business or profession purposes. Only current repair expenses qualify for deduction.

Key Points on Deduction

• Eligibility

• The deduction is available only to the owner of the asset if it is used for business or professional purposes.
• It applies only to expenses on current repairs; capital expenditures are not deductible.
• Premiums paid for insuring the asset are also eligible for deduction.
  • Quantum of Deduction Allowability Conditions:
• Assets must be used for business, even if only part of the year.
• Assets kept ready for use are considered "used" for business, making the related expenses deductible.
• If the asset is partly used for non-business purposes, deductions are allowed proportionately under Section 38.

Deduction Timing

• Under the mercantile system, expenses are deductible in the year incurred.
• Under the cash system, expenses are deductible on a payment basis, including advance payments.

 

Assets Used Partly or Not Exclusively for Business or Profession

 

Introduction

When an asset is used partly for personal purposes and partly for business or profession, or not exclusively for business, deductions for expenses and depreciation are limited to a proportionate amount as determined by the Assessing Officer.

Key Provisions

Proportionate Deductions

• Deductions are granted based on the extent of business or professional use of the asset.
• The proportion is determined by the Assessing Officer.

Specific Scenarios

• Dwelling Houses: If part of the premises is used as a residence, deductions for rent, repairs, and related expenses are proportionate to the business use.
• Land Revenue and Taxes: Land revenue, local rates, or municipal taxes are deductible based on the proportionate use of the business.
• Building, Machinery, Plant, and Furniture: Current repairs, insurance premiums, and depreciation are allowable only for the business-use portion of the asset.

Depreciation as per Income-tax Act

Introduction
The term 'depreciation' means decrease or reduction in the value of an asset over a period of time due to wear and tear or obsolescence. Depreciation allows a business entity to allocate the cost of tangible and intangible assets (except goodwill) over their useful life. It is calculated using the written-down value (WDV) method, except for power generation entities, which may use the straight-line method (SLM). The prescribed depreciation rates are specified in Appendix I and Appendix IA of the Income-tax Rules.

Key Aspects

• Types of Depreciation

• Normal Depreciation: Applicable to assets used for business or profession, calculated using WDV or SLM depending on business type.
• Additional Depreciation: Available at 20% for manufacturing businesses under specific conditions.
  • Rate of Depreciation:

Depreciation is allowed at the rates specified in the New Appendix I on the written-down value of block of assets which are used for the purposes of business or profession of the assessee at any time during the previous year. The rates of depreciation under straight line method are prescribed under Appendix IA.

• Eligibility

• Assets must be owned, used for business/profession, and put to use during the relevant year.
• Partially used assets: Deduction is proportional to business use under Section 38.
  • Special Provisions
• Assets used less than 180 days in a year: Depreciation limited to 50% of the annual rate.
• In business reorganisations (e.g., mergers), depreciation is apportioned between entities based on the number of days for which the asset was used by them.
  • Exclusions
• Payments exceeding 10,000 in cash for asset acquisition disqualify for depreciation claims.
• Land or goodwill.
• Build-Operate-Transfer (BOT) arrangements allow cost amortization but not depreciation.[Circular No. 9/2014, dated April 23, 2014]
  • Block of Assets Concept
• Once included in a block of assets, depreciation applies even if specific assets within the block are not used during the year.
• If a block’s written-down value (WDV) becomes zero or ceases to exist, depreciation cannot be claimed.

 

Rate of Depreciation

 

Introduction
Depreciation is calculated at specified rates using the written-down value (WDV) or straight-line method (SLM), depending on the type of business. Entities engaged in power generation or distribution may opt for either method, while others must use the WDV method. Assets are grouped into blocks for depreciation purposes, classified into tangible and intangible categories.

Depreciation Rates

• WDV Method: Rates range from 5% to 40% for various asset classes (e.g., buildings, machinery, furniture). [see New Appendix I of Income-tax Rules]
• SLM Method: Applicable to power entities, with rates varying based on asset type (e.g., hydroelectric plants: 3.4%; transformers: 7.81%; temporary wooden structures: 33.4%). [see Appendix IA of Income-tax Rules]

Key Rules for Claiming Depreciation

• Part-Year Usage: Assets used for less than 180 days in a year qualify for 50% of the standard depreciation rate.

Exclusions

• Depreciation is disallowed for cash payments exceeding 10,000 per day for asset acquisition.
• Assets acquired but not used during the year are ineligible for depreciation.

 

Methods of Depreciation

 

Introduction
The Income-tax Act, 1961 provides two methods for claiming depreciation:

1. Written Down Value (WDV) Method: Mandatory for all taxpayers except those engaged in generation or generation and distribution of power.
2. Straight Line Method (SLM): Available exclusively for undertakings engaged in generation or generation and distribution of power.

Calculation of Depreciation under the WDV Method
Depreciation under the WDV method is computed in the following steps:

• Step 1: Classification of Assets
  Assets are grouped into relevant "blocks of assets" based on their class (e.g., building, furniture, plant) and depreciation rates as prescribed. Each block includes assets with the same depreciation rate.
• Step 2: Determination of Closing WDV
  Closing WDV is computed as:

• Opening WDV at the beginning of year
• Add: Actual cost of assets acquired during the year
• Less: Sale proceeds of disposed assets
• Less: WDV of the assets, transferred under 'slump sale' falling under that block
  • Step 3: Application of Depreciation Rate
    Depreciation is calculated by multiplying the prescribed rate with the closing WDV. For assets used for less than 180 days, only 50% of the applicable rate is allowed.

Calculation of Depreciation under the SLM Method
Applicable only to power generation or distribution undertakings, the SLM method calculates depreciation as follows:

• Option to Adopt SLM
  This option must be exercised before filing the income tax return for the first year of power generation. The option exercised in the first assessment year will be applicable in subsequent years as well.
• Depreciation Calculation

• Total depreciation over the asset’s working life cannot exceed its acquisition cost.
• Depreciation rates are applied to tangible assets; intangible assets are depreciated using the WDV method.
  • Terminal Depreciation and Balancing Charge
    If an asset is sold during its working life, unclaimed cost may be allowed as terminal depreciation, or surplus may be taxed as a balancing charge.

 

Actual Cost of Assets Used for Business or Profession

 

Introduction
The term "actual cost" refers to the cost incurred by an assessee to bring an asset to its current location and condition, reduced by any portion of the cost borne directly or indirectly by another party. In certain cases, "notional cost" is used instead of actual cost.

Inclusions in Actual Cost
The actual cost of a fixed asset under the Income-tax Act includes:

• Attributable incidental expenses (Acquisition and Installation Costs)

• Purchase price, freight, import duties, and installation expenses.
• As per ICDS-V (Tangible Fixed Assets) any sale proceeds realised from sale of experimental products shall be reduced from cost of acquisition of a fixed asset.
  • Borrowing Costs
• Interest on borrowings for acquiring the asset until it is put to use (capitalized as per ICDS-IX).
  • Technical Fees and Commissions
• Payments for technical know-how, erection, or commissioning of machinery.

Exclusions from Actual Cost

• Payments in Cash Exceeding 10,000
  Expenditure paid in non-permissible modes exceeding Rsa. 10,000 in a day is excluded.
• Post-Use Interest
  Interest after the asset is put to use is claimed as a revenue expense under Section 36(1)(iii).
• Subsidy, Grant, or Reimbursement
  Government-provided subsidies that directly or indirectly reduce the cost of the asset are excluded.
• Input Tax Credit
  Taxes eligible for GST or customs credit are not included.
• Incidental Income
  Income related to asset acquisition (e.g., interest on funds temporarily parked) is deducted.

Notional Cost of Fixed Assets
Notional cost is used to determine the actual cost in special situations:

1. Assets Previously Used for Scientific Research
   Cost is reduced by the deduction allowed under Section 35 for scientific research.
2. Assets Acquired by Gift or Inheritance
   Cost equals the previous owner’s cost, adjusted for depreciation.
3. Re-acquired Asset

If an asset once owned and used for business/profession is re-acquired after transfer, its actual cost shall be the lower of:

• Re-acquisition price, or
• Original cost - depreciation actually allowed
  4. Sale and Leaseback Transactions
     Transferee’s actual cost is deemed the transferor’s written-down value.
  5. Transfer within Related Companies
• Transfers between holding and subsidiary companies or under amalgamations or demergers are carried over at the transferor’s written-down value.
  6. Building Brought from Personal Use
     Depreciation since acquisition is deducted to compute actual cost.
  7. Second-Hand Assets
     If acquired to claim excess depreciation, the Assessing Officer may revalue the cost after approval of JCIT.
  8. Asset acquired by a non-resident outside India

Actual cost shall be the acquisition price reduced by notional depreciation computed at prescribed rates as if the asset had been used in India from the date of acquisition.

9. Assets under Corporatization Scheme

If an assessee acquires assets through SEBI-approved corporatization of a recognized stock exchange, the actual cost is deemed to be the same as it would have been without such corporatization.

Special Cases

• Trial-Run Income
  Proceeds from experimental sales reduce the asset’s cost as per ICDS-V.
• Assets Acquired Under Specific Modes
  Assets acquired by gift, inheritance, amalgamation, or corporatization are valued per specified provisions, ensuring no double deduction or inflated depreciation claims.

 

Computation of Written Down Value (WDV)

 

Introduction
The Written Down Value (WDV) represents the depreciated value of an asset or a block of assets, adjusted for acquisitions and disposals during a financial year. This value is crucial for calculating depreciation under the Income-tax Act, 1961.

General Calculation of WDV
The WDV of a block of assets is computed as follows:

Particulars

• Opening WDVat the beginning of the year
• Add: Actual cost of new assets acquired (excluding goodwill for businesses or professions)
• Less: Money payable for assets sold, discarded, or destroyed, along with scrap value
• Less: WDV of assets transferred in slump sales

Closing WDV
The remaining value represents the closing WDV before applying depreciation.

Special Cases for WDV Calculation

1. Slump Sale

• Net worth, computed as the difference between total assets and liabilities, determines WDV for depreciation.
• Depreciable assets are valued at their individual WDV, as if each was the sole asset in its block.
  2. Demerger
• For the demerged company: WDV of transferred assets is deducted from the block's WDV.
• For the resulting company: WDV of transferred assets in the books of the demerged company is adopted.
  3. Business Succession
• WDV is calculated as if the ownership change did not occur, ensuring continuity in depreciation claims.
  4. Corporate Restructuring
• In corporatization schemes (e.g., stock exchanges), WDV of transferred assets is carried forward to the successor entity.
  5. Exempt Income Period
• If profits were exempt earlier, WDV is adjusted based on notional depreciation for the exemption period.
  6. Goodwill Adjustment
• From A.Y. 2021-22, depreciation on purchased goodwill is disallowed. WDV is adjusted to exclude goodwill after deducting depreciation claimed in earlier years.

Key Considerations

• Depreciation Ceases: If WDV becomes nil or the block ceases to exist, depreciation ends, and Section 50 capital gain provisions apply.
• Exempt Income: For entities earning agricultural or other exempt incomes with normal business income, depreciation is computed as if all income were taxable under "Profits and Gains of Business or Profession."

 

Depreciation in Case of Sale of Fixed Assets (Income-tax)

 

Introduction
The treatment of depreciation on the sale of fixed assets depends on the method of depreciation adopted by the assessee:

1. Written Down Value (WDV) Method
2. Straight Line Method (SLM)

Treatment Under the WDV Method
For entities not engaged in the generation or generation and distribution of power, depreciation is computed on a block of assets basis under the WDV method.

• Sale of Fixed Assets within a Block
  The sale proceeds are reduced from the block's WDV, and depreciation is calculated on the remaining value.
• Block Ceases to Exist
  If entire block of assets has been transferred or it ceases to exist, the scheme of depreciation comes to an end. The difference between the sale consideration and the WDV is treated as short-term capital gain or lossunder Section 50.
• Partial Sale with WDV Nil
  If the sale consideration exceeds the WDV of the block, the surplus is treated as a capital gain under Section 50. No depreciation is allowed on the block for that year or subsequent years.

Treatment Under the SLM Method
Entities engaged in the generation or generation and distribution of power compute depreciation on individual assets under the SLM method.

• Terminal Depreciation
  If the money payable (plus scrap value) is less than the asset's WDV, the deficiency is deductible as terminal depreciation. This does not apply to intangible assets, which are treated as capital loss under Section 50A.

Particulars	Taxability
Sale price > Actual cost	Sale price – Actual cost = Capital Gains
	Actual Cost – WDV = Profit under the head PGBP
Sale price is upto Actual cost	Actual Cost – WDV =Profit under the head PGBP

• Balancing Charge
  If the money payable (plus scrap value) exceeds the WDV, the surplus is taxable as a balancing charge under Section 41(2) to the extent of previously allowed depreciation. Excess beyond depreciation is treated as a short-term capital gain.

 

Additional Depreciation

 

Introduction
Assessees engaged in manufacturing, production, or power generation, transmission, or distribution can claim additional depreciation. This benefit is not available to those in trading, investment businesses, or professional services.

Eligibility

• Who Can Claim: Assessees involved in manufacturing, production, or power sector activities. Power units using the straight-line method for depreciation cannot claim additional depreciation.
• Who Cannot Claim:

• Assessees opting for concessional tax regimes under Sections 115BA, Sections 115BAA, Sections 115BAB, Sections 115BAC, Sections 115BAD, or Sections 115BAE.
• Unabsorbed depreciation related to additional depreciation cannot be carried forward in such cases.

Eligible Assets
Additional depreciation is allowed for new machinery or plant acquired and used during the same financial year, except for:

• Ships, aircraft, buildings, furniture.
• Second-hand machinery.
• Machinery used in offices or residential accommodations.
• Road transport vehicles.
• Fully depreciated machinery.

Rates

• 20%: If used for less than 180 days, only 10% is allowed in the first year, with the balance in the next year.

 

Computation of Depreciation in Case of Succession

 

Introduction
In cases of succession, amalgamation, or demerger, depreciation is computed as if the succession, amalgamation, or demerger had not occurred. The computed depreciation is then allocated between the predecessor and successor entities proportionately.

Applicability
Proportionate depreciation applies in the following cases:

• A firm or sole proprietorship succeeded by a company.
• An AOP/BOI succeeded by a company during demutualization or corporatization of a recognized stock exchange in India.
• A private company or unlisted public company succeeded by an LLP.
• Business or profession succession under Section 170.
• Amalgamation of companies or transfer of undertakings in a scheme of demerger.

Computation Methodology

1. Depreciation Calculation: Compute depreciation for tangible and intangible assets as if no succession or restructuring had occurred.
2. Apportionment: Allocate depreciation between the predecessor and successor based on the number of days the assets were utilized by each.

 

Unabsorbed Depreciation

 

Introduction
Unabsorbed depreciation arises when the depreciation allowance exceeds the business profits in a given year. Such unclaimed depreciation can be set off against any other income (excluding salary) and carried forward indefinitely for adjustment in subsequent years.

Treatment of Unabsorbed Depreciation

1. First Preference: Set-off Against Business Profits

• Unabsorbed depreciation can first be adjusted against profits from any other business or profession carried on by the assessee in the same year.
  2. Second Preference: Set-off Against Other Income
• If business profits are insufficient, the unabsorbed depreciation can be set off against income under other heads such as house property, capital gains, or income from other sources. However, it cannot be adjusted against:
  • Income under the head "Salaries."
  • Lottery or similar income taxed under Sections 115BB and 115BBJ.

3. Third Preference: Carry Forward

• If any depreciation remains unabsorbed, it can be carried forward indefinitely. It will be deemed as the current year's depreciation in subsequent years and adjusted in the same order of preference.

Order of Set-off

1. Adjust current year's depreciation against business profits.
2. Offset unabsorbed business losses (subject to Section 70, Section 71, and Section 73A).
3. Set off unabsorbed depreciation against the remaining taxable income.

Conditions for Carry Forward

• The entity claiming the set-off must be the same as the one in which the depreciation originated, except in cases like:

• Amalgamation or demerger under Section 72A and 72AA.
• Conversion of a firm or proprietorship into a company as per Section 47(xiii) and 47(xiv).

Deduction for Expenditure on Scientific Research

Introduction Section 35 provides deductions for expenses on scientific research, either conducted in-house or outsourced. It encompasses revenue and capital expenditures related to business, as well as contributions to approved external entities.

Key Provisions

• Scientific Research Definition: Activities advancing knowledge in natural/applied sciences, agriculture, or medicine. Research must relate to business for deductions.
• In-House Research:

• Revenue Expenditure [Section 35(1)(i)]: Deductible if incurred during business operations or within three years prior to commencement.
• Capital Expenditure [Section 35(1)(iv) and Section 35(2)]: 100% deductible except for land acquisition. Deduction is also allowed for capital expenditure incurred within 3 years prior to commencement of business.
• Expenditure on Approved Research [Section 35(2AB)]: Deductible for companies in biotechnology or manufacturing (excluding Eleventh Schedule items), subject to prescribed approvals.
  • Payments to External Entities:
• Approved Scientific Research Associations [Section 35(1)(ii)]: Deduction allowed for scientific research donations.
• Universities and Colleges [Section 35(1)(iii)]: Applicable to contributions for scientific, social science or statistical research.
• National Laboratories/IITs [Section 35(2AA)]: Deduction is available to any assessee making payments to a National Laboratory, University, IIT, or other approved institution/person.
• Indian Companies [Section 35(1)(iia)]: Deductible for donations to companies engaged in scientific research.

Deduction Rates:

• In-House Research: 100% of actual expenditure from AY 2021-22.
• Payments to External Entities:

• Scientific Research: 100% deduction from AY 2021-22.
• Social/Statistical Research: 100% deduction from AY 2021-22.

Conditions for Deductions:

• Contributions must be made to approved entities.
• Applications for approvals are submitted via prescribed forms and reviewed by authorities.
• Recipients must issue certificates (Form 10BE) and file donation statements (Form 10BD) as per procedure laid down under Rule 18AB.

Consequence of Default:

If such research association, university, college, other institution or company fails to furnish such statement or certificate, it shall be liable for payment of fee under Section 234G. Further, penalty under Section 271K shall also be levied.

Special Provisions:

• Unabsorbed Capital Expenditure: Can be carried forward like depreciation.
• Asset Transfers: Gains from unutilized research assets are taxed under "Business Income" or "Capital Gains."

 

Approval of Research Association or College or University under Section 35

 

Introduction
Section 35 of the Income-tax Act allows deductions for contributions to research associations, universities, colleges, or other institutions for scientific research, social science or statistical research. The deduction applies only if the recipient entity is approved under the Income-tax Act.

Key Provisions and Application Process

Application for Approval ( Rule 5C )

• Institutions or universities must apply in Form 3CF to the Commissioner/Director of Income-tax during the financial year preceding the assessment year for approval.If such association claims exemption under Section 10(21), annexure to the application shall also be filled.
• Applications must be filed electronically, verified with a digital signature or electronic verification code.

Rectification of Application

• Deficiency notices are issued within 1 month of receipt.
• Applicant must rectify deficiencies within 15 days of notice, extendable on request, but not beyond 30 days in total. If unresolved, the application may be deemed invalid after approval from the Central Government.

Grant of Approval

• Applications are reviewed for genuineness, and recommendations are sent to the Member (IT), CBDT within 3 months of receipt.
• The Central Government may request additional information and publish approved institutions in the Official Gazette.

Withdrawal of Approval

• Approval can be withdrawn if activities cease, are found non-genuine, or violate conditions under Rules 5D or 5E .
• A reasonable opportunity to respond must be provided before withdrawal.

Conditions for Approval

For Research Associations ( Rule 5D )

• Sole objective must be scientific, social science, or statistical research.
• Maintain audited books of accounts and file an audit report with the Commissioner/Director of Income-tax by the due date under Section 139(1).
• Submit annual research activity reports, including research notes, published articles, and patents applied for. And submit such statement to the Commissioner/Director of Income-tax by the due date under Section 139(1).
• The Commissioner/Director of Income Tax may, after enquiry, report to the Central Government within six months of filing the return under Section 139(1), if a research association fails to maintain books, furnish audit reports or statements, ceases genuine research activities, or violates approval conditions.

For Universities, Colleges, or Other Institutions ( Rule 5E )

• Funds must be utilized for research purposes, conducted by faculty or enrolled students.
• Maintain audited, separate accounts for research funds and provide an audit report by the due date under Section 139(1).
• The applicant must submit to the Commissioner/Director of Income Tax, by the due date under Section 139(1), a statement detailing research work done, published articles, patents/rights applied or registered, and proposed research projects with financial allocations.
• The Commissioner/Director of Income Tax may, after enquiry, report to the Central Government within six months of the return filing under Section 139(1), if a university, college, or institution fails to maintain books, furnish audit reports or statements, ceases genuine research, or violates approval conditions.

 

Filing of Intimation by Research Association under Section 35

 

Introduction
Notifications issued under Section 35(1)(ii)/(iia)/(iii) for research associations, universities, colleges, institutions, or companies before April 1, 2021, remain valid only if these entities file an intimation in Form 10A. The latest due date for filing this intimation is June 30, 2024 [Circular No 7/2024, Dated 25-04-2024]. Valid notifications remain effective for five consecutive assessment years starting from April 1, 2022.

Key Provisions and Filing Process

Filing Intimation

• Form:Intimation is filed in Form 10A with the Principal Commissioner or Commissioner authorised by CBDT.
• Documents Required:

• Self-certified copy of the instrument or evidence of establishment.
• Self-certified registration documents (e.g., Registrar of Companies or Public Trusts).
• Registration under the Foreign Contribution (Regulation) Act, if applicable.
• Copy of the existing notification granting approval under Section 35.

Mode of Submission

• Digital Signature or E-Verification Code:Intimation must be filed electronically and verified by the authorised signatory.

Unique Registration Number (URN)

• A 16-digit alphanumeric URNis issued by the Principal Commissioner or Commissioner upon receipt of a valid intimation.

Cancellation of URN
The URN may be cancelled if:

1. The intimation lacks required information or documents.
2. Incorrect or false information or documents are submitted.
3. Submission requirements (manner or verification) are not followed.

Procedure for Cancellation:

• The applicant will be given a reasonable opportunity to present their case before cancellation.
• Upon cancellation, the URN is deemed to have never been issued.

 

Filing of Statement and Issue of Certificate for Donations Made to Research Institutions

 

Introduction:
Deduction under Section 35(1)(ii)/(iia)/(iii) is allowed for donations to approved research institutions only if the donee files a statement of donation in Form 10BD and issues a certificate in Form 10BE to the donor.

Eligible Institutions:
The deduction applies to contributions made to:

• Approved research associations (Section 35(1)(ii)/(iii)).
• Approved universities, colleges, or other institutions (Section 35(1)(ii)/(iii)).
• Indian scientific research companies (Section 35(1)(iia)).

Statement of Donation ( Form 10BD ):

• Filing Requirement: Donees must file Form 10BD electronically using a digital signature or Electronic Verification Code (EVC).
• Due Date: Form 10BD must be filed by May 31 of the financial year immediately following the year in which the donation was received.
• Verification: The statement must be verified by an authorized person.

Certificate of Donation ( Form 10BE ):

• Filing Requirement: Donees must issue Form 10BE to donors, specifying the amount donated during the financial year.
• Due Date: The certificate must be issued by May 31 of the financial year immediately following the year in which the donation was received.
• Purpose: This certificate serves as evidence for the donor to claim the deduction.

Determination of Amount Received from Donors:

• All donations of the same nature from a donor in a financial year must be considered.
• If a donation is made jointly, the amount is attributed proportionally among donors unless otherwise specified.

 

Procedure to Obtain Approval Under Section 35(2AA) and 35(2AB)

 

Introduction:
Section 35(2AA) allows a deduction for payments made to National Laboratories, Universities, IITs, or specified persons for scientific research upon filing Form 3CG .
Section 35(2AB) provides a deduction for in-house R&D expenditure incurred by companies engaged in biotechnology or manufacturing upon filing Form 3CK

Approval Under Section 35(2AA)

• Eligible Entities: National Laboratories, Universities, IITs, or specified persons.
• Application Process:

• File Form 3CG .
• The head of the National Laboratory or the University or the Indian Institute of Technology or Principal Scientific Adviser if he is satisfied that it is feasible to carry out the scientific research programme, pass an order in Form 3CH within two months of receiving the application. However, an order rejecting application shall only be passed after providing a reasonable opportunity of being heard.
• The National Laboratory, University, Indian Institute of Technology or specified person (herein after referred as applicant) shall issue a receipt of payment for carrying out an approved programme of scientific research in Form 3CI .
  • Approval Conditions:
• Programme must not relate to market research, sales promotion, quality control, testing, commercial production, style changes, or similar routine activities.
• Prescribed authority to submit Form 3CJ to specified authority within 3 months of granting approval.
• Applicant to submit annual progress and expenditure statement to specified authority.
• Prescribed authority cannot extend programme duration or approve cost escalation.
• Applicant to maintain separate audited accounts for each programme and furnish them by 31st October each succeeding year.
• Assets acquired for the programme cannot be disposed of without specified authority’s approval.
• On completion, applicant to jointly submit:
  • A completion certificate along with a copy of the report on the research activities carried out;
  • Salient features of the result obtained; and
  • Its further application for commercial exploitation;
• Prescribed authority to furnish audited statement of accounts to specified authority within 6 months of completion.

Approval Under Section 35(2AB)

• Eligible Applicants:
  Companies engaged in biotechnology or manufacturing (excluding items in the Eleventh Schedule).
• Application Process:

• File Form 3CK .
• The Secretary of the Department of Scientific and Industrial Research (DSIR) issues an order in Form 3CM , if he is satisfied the prescribed conditions are fulfilled. However, an order rejecting application shall only be passed after providing a reasonable opportunity of being heard.
  • Approval Conditions:
• The R&D facility should not include market research, quality control, testing, or similar activities.
• DSIR submits electronic reports:
  • Part A of Form 3CL for facility approval.
  • Part B of Form 3CL for expenditure eligibility.
• Form 3CL to be submitted electronically to the jurisdictional Principal CCIT/CCIT/PDGIT/DGIT:
  • Within 120 days of approval (Part A).
  • Within 120 days of audit report (Part B).
• Company to keep separate audited accounts for each facility and submit Form 3CLA by due date under Sec. 139(1).
• Disposal of assets requires prior approval from the prescribed authority.

 

Deduction for Expenditure on Skill Development Project

 

Introduction

Companies incurring expenditure on notified skill development projects are eligible for deductions under Section 35CCD.

• Assessment Years 2013-14 to 2020-21: Weighted deduction of 150% of actual expenditure.
• From Assessment Year 2021-22 onwards: Deduction is 100% of actual expenditure.

Eligibility

• Companies engaged in manufacturing or production of any article or thing (not being alcoholic spirits and tobacco products) or providing specified services can claim the deduction.
• Deductible expenditure excludes costs for land or buildings and applies only to notified skill development projects.

Skill Development Project Requirements

• Training facilities (set up by the Central Government, State Government or Local Authority) must be affiliated to or approved/empanelled by:

• National or State Councils for Vocational Training.
• National Skill Development Agency.
• Relevant Central or State Government authorities.
  • Projects must provide training to potential or newly recruited employees. Training for employees after six months of recruitment is ineligible. [Press Release, Dated 18-7-2013]
  • Companies must maintain separate books of account for the project and get them audited.

Application Process

• Eligible companies must apply to the National Skill Development Agency in Form 3CQ , adhering to guidelines under Rule 6AAF .
• Deduction is not available under other provisions of the Act for the same expenditure in any year.

 

Guidelines for Approval of Skill Development Project

 

Introduction
For claiming deduction under Section 35CCD, an eligible company must obtain notification for a skill development project. The company is required to apply to the National Skill Development Agency (NSDA) in Form 3CQ and comply with prescribed conditions, including maintenance and audit of separate books of account.

Eligibility and Conditions

A company engaged in manufacture or production of any article or thing other than alcoholic spirits or tobacco products, or a company providing specified services, may claim deduction under Section 35CCD for expenditure (excluding land or building cost) incurred on a notified skill development project.

To obtain notification, the company shall:

• Apply to the NSDA as per Rule 6AAF ; and
• Fulfil the conditions laid down in Rule 6AAG .

A project may be notified only if undertaken by an eligible company in separate facilities of a training institute.

Meaning of Eligible Company

An eligible company includes companies engaged in manufacture or production of articles or things not listed at serial numbers 1 and 2 of the Eleventh Schedule, or companies providing specified services such as accounting, architecture, automobile repair, banking and insurance services, beauty and cosmetology, cable or DTH services, cargo handling, construction, courier services, design, event management, facilities management, fire and safety services, food processing, health and wellness, home décor, healthcare, hospitality, logistics, market research, media, mining, packaging and warehousing, port and maritime services, power sector services, private security, refrigeration and air-conditioning, repair and maintenance, retail marketing, telecom, and travel and tourism.

Meaning of Training Institute

A training institute must be one of the following:

• Set up by the Central Government, State Government or Local Authority;
• Affiliated to National Council for Vocational Training or State Council for Vocational Training;
• Affiliated, approved or empanelled by the NSDA;
• Affiliated or approved by the Central Government and certified by the National Council for Vocational Training as following equivalent standards;
• Affiliated or approved by the State Government and certified by the National Council for Vocational Training or State Council for Vocational Training as following equivalent standards.

Application Process

Before undertaking a project, the eligible company shall submit Form 3CQ in duplicate to the NSDA and send a copy to the jurisdictional Commissioner or Director of Income-tax. An acknowledgement from NSDA must accompany the application.

The application must include:

• Detailed note on the project;
• Estimated expenditure and expected date of completion;
• Letter of concurrence from the training institute.

Defects in Application

If defects are found, NSDA shall intimate the applicant within one month from the date of receipt. The applicant must rectify the defect within 15 days or within an extended period not exceeding 30 days in total. If defects are not rectified, NSDA shall recommend treating the application as invalid, and CBDT may pass an order accordingly.

Recommendations for Approval or Rejection

When the application is complete, NSDA may conduct necessary inquiry and seek documents to verify the genuineness of activities. NSDA shall send its recommendation to CBDT within two months from the end of the month in which a complete application was received.

The jurisdictional CIT or DIT shall separately send recommendations to NSDA within one month of receiving the application copy, after examining compliance with the Income-tax Act.

Issue of Notification

CBDT shall issue notification in Form 3CR within 15 days from the end of the month of receiving NSDA’s report. The notification remains effective for a prescribed period, not exceeding three assessment years. If activities are satisfactory, CBDT may extend the notification in consultation with NSDA.

If NSDA recommends rejection, CBDT shall pass an order rejecting the application.

Withdrawal of Notification

CBDT may rescind the notification at any time if it is satisfied that:

• The company or training institute has ceased activities;
• The activities are not genuine; or
• Activities are not carried out as per provisions or conditions of notification.

An opportunity of being heard shall be provided before withdrawal. Copies of orders shall be sent to the applicant, training institute, NSDA and jurisdictional authorities.

Conditions for Notification

The company must maintain separate books of account for the notified project and have them audited by a Chartered Accountant. The audit report shall comment on:

• True and fair view of accounts;
• Genuineness of activities;
• Fulfilment of relevant conditions.

A project is not eligible where training is provided to existing employees whose training commences after six months of their recruitment.

Expenses Eligible for Deduction

All expenditure incurred wholly and exclusively for a notified project, except land or building cost, is eligible. Any expenditure reimbursed or reimbursable to the company is not eligible.

Furnishing of Audited Statement

On or before the due date under Section 139(1), the company shall furnish to the CIT or DIT the audited statement of accounts, audit report and amount of deduction claimed.

Report for Rescinding Notification

The CIT or DIT may report to CBDT for rescinding the notification if the company has not maintained required books, has not furnished documents, has ceased activities, or its activities are not genuine or not in accordance with provisions or conditions. NSDA may also recommend withdrawal if activities are not genuine.

Deduction for Telecom License Fees

Introduction
Assessees incurring capital expenditure for acquiring a license or spectrum for telecommunication services can claim deductions in equal installments over the license or spectrum term.

Deduction for Spectrum Fees [Section 35ABA]

• Eligibility: Assessees who incur capital expenditure to acquire spectrum rights by paying spectrum fee will be allowed deduction for the same.
• Deduction Amount:

• For upfront payment: Allowed in equal installments from the year of payment (or commencement of business, whichever is later) until the spectrum term ends.
• For deferred payment: Allowed based on the upfront payment equivalent, spread over the spectrum term.
  • Conditions: If a deduction is claimed under this provision, no depreciation under Section 32 is allowed for the same expenditure.

Withdrawal of Deduction
If an assessee opts for deferred spectrum fee payment but fails to meet DoT (Department of Telecommunications, Government of India) conditions leading to termination of spectrum, the deduction earlier allowed shall be deemed wrongly allowed. The Assessing Officer will re-compute income of the years in which deduction was claimed and rectify within 4 years from the end of the year of failure. Spectrum fees paid up to termination are treated as “actually paid,” and no reversal is made for such amount. The year of termination is deemed the year of spectrum transfer.

Deduction for Telecommunication License Fees [Section 35ABB]

• Eligibility: Assessees incurring capital expenditure for acquiring telecom licenses.
• Deduction Amount: Allowed in equal installments from the year of payment (or commencement of business, whichever is later) until the license term ends.
• Conditions: Depreciation under Section 32 is not allowed for the same expenditure if claimed under this provision.

Transfer of License or Spectrum

• Entire Transfer:

• If proceeds are less than unamortized expenditure: The difference is deductible in the year of transfer.
• If proceeds exceed unamortized expenditure: The excess is taxable as business income (up to the prior deduction claimed).
  • Partial Transfer:
• If proceeds are less than unamortized expenditure: The remaining unamortized amount is deductible in equal installments over the unexpired term.
• If proceeds exceed unamortized expenditure: The excess is taxable as business income (up to the prior deduction claimed).

• Business restructuring of Companies

If an amalgamating company (or a demerged company) transfers the telecom license or spectrum in a scheme of amalgamation (or demerger) to Indian amalgamated company (or Indian resulting company), the provisions of amortization of deficiency or deemed profit or capital gains, as the case may be, apply to Indian amalgamated company (or Indian resulting company) in the same manner as they would have applied to the amalgamating company (or demerged company).

 

Investment Linked Incentives to Specified Business

 

Introduction
Assessees engaged in specified businesses can claim 100% deduction of capital expenditure incurred for such businesses. Losses from specified businesses can only be set off against profits from similar businesses.

Eligibility

• Businesses eligible include cold chain facilities, warehousing for agricultural produce, distribution pipelines, hotels (two-star and above), hospitals (100 beds or more), slum redevelopment, affordable housing, fertilizer production, and more.
• Certain businesses, like pipeline networks and infrastructure development, are restricted to Indian companies or specified authorities.

Conditions

• Business and plant/machinery must be new (used machinery allowed if its value doesn’t exceed 20% of total plant/machinery value).
• Imported machinery not previously used in India may qualify if no prior depreciation was claimed.
• Assessee is required to maintain books of account and get them audited.
• If an assessee has two units and only one qualifies for deduction, inter-unit transfers of goods or services shall be valued at market valuefor deduction purposes. Further, if transactions with others yield more than ordinary profits, the AO may reasonably re-compute such profits.

Quantum of Deduction

• 100% of capital expenditure, incurred wholly and exclusively for specified business purposes, is deductible in the year of expenditure or business commencement if capitalized.
• No other deductions (e.g., depreciation) are allowed for the same expenditure.
• Losses can be carried forward indefinitely for set-off against profits from the same business.

Exceptions

1. No deduction for cash payments exceeding 10,000 to a single person in a day.
2. Expenditure on land, goodwill, or financial instruments is not deductible.

Withdrawal of Deduction

• Transfer or destruction of assets: Proceeds are taxable as business income.
• Non-specified use: Assets must be used for the specified business for 8 years; otherwise, deductions claimed (adjusted for depreciation) are added back as business income.

Exception: Where an assessee has built a hotel of 2 star or above category, even though he continues to own it, transfers its operations to another person, transferor shall still be deemed to be carrying on the specified business.

 

Payment for Rural Development Programme

 

Introduction

Assessees can claim deductions under Section 35CCA for payments made to approved institutions or funds for carrying out rural development programmes. If claimed under this provision, no deduction is allowed under Section 80G for the same payment.

Eligibility

Deductions are available for payments made to:

• Associations or institutions approved before March 1, 1983, for rural development programmes.
• Associations or institutions approved before March 1, 1983, for training individuals in implementing rural development programmes.
• Rural Development Fund notified by the Central Government.
• Notified National Urban Poverty Eradication Fund.

Key Points

• The deduction will not be withdrawn if the approval of the programme or institution is later revoked.
• No double deduction is permitted under this or any other section for the same payment.

 

Expenditure on Agricultural Extension Project

 

Introduction

Assessees incurring expenditure on notified agricultural extension projects are eligible for deductions under Section 35CCC.

• Assessment Years 2013-14 to 2020-21: Weighted deduction of 150% of the actual expenditure.
• From Assessment Year 2021-22 onwards: Deduction reduced to 100% of the actual expenditure.

Eligibility

Assessees undertaking projects for the training, education, and guidance of farmers can claim the deduction for projects approved and notified by the Ministry of Agriculture.

Conditions

• Applications must be filed electronically in Form 3C-O with the Member (IT), CBDT, as per Rule 6AAD guidelines.
• Maintenance of books of accounts and audit compliance is mandatory.
• No other deduction under this or any other provision is allowed for the same expenditure in any year.

 

Deduction of Expenditure on Feature Films

 

Rules 9A and 9B prescribe the method for computing deductions for costs incurred by film producers and distributors. The deduction is based on the certification and release of the film during the year.

Production of Feature Films ( Rule 9A )

• Cost of Production: Includes all production expenses. Subsidies not included in income are deducted.
• Deduction Allowance: Allowed in the year the film is certified for release. If unreleased, the cost is carried forward.

Other Expenditures:

• Advertisement and print costs incurred after certification are excluded from production costs.
• Abandoned Films: Treated as revenue expenditure under Section 37, not Rule 9A .

Manner of Deduction:

1. Full Rights Sold: Entire production cost is deductible in the year of sale.
2. Exhibition or Partial Sale:

• Full deduction allowed if the film is released commercially 90 days before year-end.
• If released later, deduction is limited to realized revenue. Remaining cost is carried forward.
  3. No Rights Sold or Exhibited: Deduction deferred to the next year.

Distribution of Feature Films ( Rule 9B )

• Cost of Acquisition: Includes amounts paid to producers or other distributors. Advertisement and print costs are excluded.

Manner of Deduction:

1. Full Rights Sold: Entire acquisition cost is deductible in the year of sale.
2. Exhibition or Partial Sale:

• Full deduction allowed if released commercially 90 days before year-end.
• Otherwise, limited to realized revenue, with the balance carried forward.
  3. No Rights Sold or Exhibited: Deduction deferred to the next year.

Conditions for Deduction

• Minimum Guarantee Basis: Deduction allowed only when guaranteed amounts and excess receipts are credited in the year of deduction.
• Mandatory Record Maintenance: Books of accounts must reflect receipts to claim deductions.

	Person		Situation		Quantum of deduction
					Films released on or before 31st December*		Films released after 31st December*
	Film producer		He sells all rights of exhibition of the film in the previous year		Entire cost of production		Entire cost of production
			He exhibits the film in all or some of the areas		Entire cost of production		Cost of production, or amount realised, whichever is less**
			He sells the rights of exhibition of the film in respect of some of the areas		Entire cost of production		Cost of production, or amount realised, whichever is less**
			He exhibits the film in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas		Entire cost of production		Cost of production, or amount realised, whichever is less**
			He does not exhibit the film, nor sell the rights of exhibition		Nil***		Nil***
	Distributor		He sells all rights of exhibition of the film in the same previous year in which it is acquired by him		Entire cost of acquisition		Entire cost of acquisition
			He exhibits the film on a commercial basis in all or some of the areas, or sells the rights of exhibition in respect of some of the areas, or himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in all or some of the remaining areas		Entire cost of acquisition		Cost of acquisition of the film, limited to (i) the amount realised by the film distributor by releasing the film on a commercial basis, or (ii) the amount for which the rights of exhibition has been sold or, as the case may be, (iii) the aggregate of the amounts realised by the film distributor by exhibiting the film and by the sale of the rights of exhibition**
			He does not exhibit the film nor sells the rights of exhibition during the previous year		Nil***		Nil***
	* The date will be 1st January in a leap year. ** Balance, if any, is deductible in the immediately succeeding year. *** Enter cost is deductible in the immediately succeeding year.
Person		Situation		Quantum of deduction
				Films released on or before 31st December*		Films released after 31st December*
Film producer		He sells all rights of exhibition of the film in the previous year		Entire cost of production		Entire cost of production
		He exhibits the film in all or some of the areas		Entire cost of production		Cost of production, or amount realised, whichever is less**
		He sells the rights of exhibition of the film in respect of some of the areas		Entire cost of production		Cost of production, or amount realised, whichever is less**
		He exhibits the film in certain areas and sells the rights of exhibition of the film in respect of all or some of the remaining areas		Entire cost of production		Cost of production, or amount realised, whichever is less**
		He does not exhibit the film, nor sell the rights of exhibition		Nil***		Nil***
Distributor		He sells all rights of exhibition of the film in the same previous year in which it is acquired by him		Entire cost of acquisition		Entire cost of acquisition
		He exhibits the film on a commercial basis in all or some of the areas, or sells the rights of exhibition in respect of some of the areas, or himself exhibits the film on a commercial basis in certain areas and sells the rights of exhibition of the film in all or some of the remaining areas		Entire cost of acquisition		Cost of acquisition of the film, limited to (i) the amount realised by the film distributor by releasing the film on a commercial basis, or (ii) the amount for which the rights of exhibition has been sold or, as the case may be, (iii) the aggregate of the amounts realised by the film distributor by exhibiting the film and by the sale of the rights of exhibition**
		He does not exhibit the film nor sells the rights of exhibition during the previous year		Nil***		Nil***
* The date will be 1st January in a leap year. ** Balance, if any, is deductible in the immediately succeeding year. *** Enter cost is deductible in the immediately succeeding year.

Other Provisions

• Section 285B Compliance: Producers must submit a statement under Section 285B for payments exceeding 50,000 to individuals involved in production.
• Assessing Officer’s Discretion: The officer may adjust the deduction method in exceptional cases.

Tea, Coffee, or Rubber Development Account

Introduction
The deduction under Section 33AB is available to assessee engaged in the business of growing and manufacturing tea, coffee, or rubber in India are eligible for deductions if they deposit funds in specific accounts for development purposes. These funds must be used as per the prescribed conditions, and misuse results in withdrawal of the deduction.

Eligibility

• Who Can Claim:

• Assessees engaged in growing and manufacturing tea, coffee, or rubber in India.
• The deduction is unavailable if only growing or only manufacturing operations are conducted.
  • When Deduction is Allowed:
• Deposits must be made in:
  • A special account with NABARD under schemes approved by the Tea, Coffee, or Rubber Board.
  • A deposit account under schemes framed by the Tea, Coffee, or Rubber Board and approved by the Central Government.
• Deposits should be made within six months from the end of the previous year or before the due date for filing the return, whichever is earlier.

Quantum of Deduction

• Lower of:

• The amount deposited in the specified accounts.
• 40% of profits from the business of tea, coffee, or rubber before claiming this deduction.

Such deduction is allowed before making any deduction of carried forward business losses under Section 72.

Claim of Deduction

To claim this deduction, the assessee is required to get his accounts audited by a Chartered Accountant and furnish the report of such audit electronically in Form 3AC before one month prior to due date of furnishing return of income under section 139(1).The audit shall not be mandatory if accounts are required to be audited under any other law and the audit report as per that law is obtained along with a report in Form 3AC for the purposes of this provision.

Withdrawal of Funds
Funds can be withdrawn for specified purposes or under circumstances like business closure, death, or liquidation. Misuse or non-utilization of funds results in the withdrawal of deductions.

1. Closure of Business:

• On business closure or firm’s dissolution, withdrawn deposit is taxable as business income. But no tax arises if withdrawn due to death of assessee, HUF partition, or company liquidation.
  2. Non-Permitted Use:
• If funds are used for ineligible assets (e.g., office equipment, fully depreciated assets), the amount utilized is added to business income.
  3. Non-Utilization:
• Unutilized withdrawn funds are deemed business income.
  4. Asset Sale Within 8 Years:
• If assets acquired under the scheme are sold within eight years, proportionate deductions are withdrawn. The deduction to be withdrawn shall be calculated as under:

Total Amount of deduction allowed	x	Deposit utilized to purchase asset which is sold within 8 years
		Total amount of deposit utilized

• Exceptions apply for transfers to government entities or succession under specific conditions.

Taxability on withdrawal of deduction:

As income from tea plantation (or coffee or rubber plantation) is treated as income partly from agriculture operations and partly from business activities, the amount to be taxed, out of the deduction withdrawn under this provision, shall be computed in accordance with Rule 7A, Rule 7B or Rule 8.

Double Deduction

Where amount deposited has been allowed as deduction in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

No Deduction to Partner or Member

In case of a Firm, AOP or BOI, No deduction shall be allowed for the amount deposited while computing the income of any partner or member, as the case may be.

 

Site Restoration Fund

 

Introduction
The deduction under Section 33ABA is available to assessees engaged in prospecting, extracting, or producing petroleum or natural gas or both in India under an agreement with the Central Government. The deduction is for deposits made into a special or site restoration account.

Eligibility and Conditions

• Who Can Claim: Businesses involved inprospecting for or extracting or production of petroleum/natural gas or both in India under an agreement with the Central Government agreement.
• Deposit Accounts:

The deduction is available when assessee deposits amount in the following accounts:

• Special account with SBI under a scheme approved by Ministry of Petroleum and Natural Gas.
• Site restoration account under a scheme by the Ministry of Petroleum and Natural Gas.

Interest credited to these accounts is also treated as a deposit for the purposes of deduction under this provision.

• Timeframe: Deposits must be made before the end of the previous year.
• Amount of Deduction: Lower of:

• Amount deposited (including interest).
• 20% of business profits before any deductions under this section.

Such deduction is allowed before making any deduction of carried forward business losses under Section 72.

Procedure to Claim Deduction

• Accounts must be audited by a Chartered Accountant.
• Submit the audit report electronically in Form 3AD one month before the due date for filing the return of income under Section 139(1).

Utilization and Withdrawal

• Permissible Uses: Funds can only be withdrawn for:

• Equipment and installation removal under an abandonment plan.
• Site restoration as per petroleum industry standards.
• Expenses to prevent hazards post-agreement expiry or termination.
  • Non-permitted Uses: Utilization for specified assets (e.g., office appliances) or any purpose beyond the scheme renders the amount as taxable business income.
  • Unutilized Amount: Funds not used as per the scheme are treated as taxable business income.
  • Asset Sale Within 8 Years:
• If assets acquired under the scheme are sold within eight years, proportionate deductions are withdrawn. The deduction to be withdrawn shall be calculated as under:

Total Amount of deduction allowed	x	Deposit utilized to purchase asset which is sold within 8 years
		Total amount of deposit utilized

• Exceptions apply for transfers to government entities or succession under specific conditions.
  • Double Deduction

o Where amount deposited has been allowed as deduction in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

• No Deduction to Partner or Member

• In case of a Firm, AOP or BOI, No deduction shall be allowed for the amount deposited while computing the income of any partner or member, as the case may be.

 

Amortisation of Certain Preliminary Expenses

 

Introduction

Indian companies or resident non-corporate assessees can claim deductions under Section 35D for preliminary expenses in 5 equal instalments starting from the year of business commencement, new unit operation, or undertaking extension.

Eligible Expenses

• For all assessee: the following expenses shall be treated as preliminary expenses.

• Preparation of feasibility and project reports.
• Conducting market or business surveys.
• Engineering services for business
• Legal charges for drafting business agreements.
• The assessee shall be required to furnish a statement in Form No. 3AF for each previous year containing the particulars of expenditure as specified above (other than legal charges) to the prescribed income tax authority. This statement shall be furnished 1 month before the due date for furnishing the return of income under Section 139(1). The statement in Form No. 3AF shall be furnished electronically under digital signature where a person is required to furnish return of income electronically under digital signature. In any other case, the statement shall be furnished electronically through Electronic Verification Code (EVC).
• Prescribe income tax authority means PDGIT/DGIT (Systems), or any authorised person.
  • For companies(Additional): a company assessee may also claim a deduction for the following expenditure:
• Legal charges for drafting and printing of the Memorandum and Articles of Association.
• Registration fees under the Companies Act, 2013.
• Expenses for issue of shares for public or debentures, including underwriting commission, brokerage, drafting charges, typing, printing, and advertisement of the prospectus.

Quantum of Deduction

1. Calculate Qualifying Amount:

• Lower of actual expenses or 5% of the project cost (or capital employed, at the option of the Indian companies).
  2. Allowable Deduction:
• 1/5th of the qualifying amount each year for 5 years.

Business Restructuring

• In amalgamation or demerger, deductions transfer to the successor Indian company for the unexpired period.

Other Conditions

• The assessee, other than a company or a co-operative society, must have its books of account audited and submit Form 3AE one month before the return filing deadline under Section 139(1) for the first year in which the deduction is claimed.

 

Amortisation of Expenditure of Amalgamation or Demerger

 

Introduction

Indian companies can claim deductions under Section 35DD for expenses incurred on amalgamation or demerger over five equal instalments in successive years.

Eligibility

• Only Indian companies incurring expenses related to amalgamation or demerger are eligible for this deduction.

Quantum of Deduction

• The entire expenditure is allowed as a deduction in five equal instalments.
• The first instalment is deductible in the year of amalgamation or demerger.

Restriction

• Deductions claimed under this provision cannot be claimed under any other provision of the Income-tax Act.

 

Expenditure Incurred on Voluntary Retirement Scheme

 

Introduction

Employers can claim deductions under Section 35DDA for payments made under a Voluntary Retirement Scheme (VRS) in five equal instalments over five successive years.

Eligibility

• The deduction applies to compensation paid to employees as part of a VRS.
• The first instalment is deductible in the year the amount is paid to the employees.

Quantum of Deduction

• The entire compensation is deductible in 5 equal instalments starting from the year of payment.
• No other deduction under any provision is allowed for the same expenditure.

Business Reorganization

• If the business undergoes reorganisation (e.g., amalgamation, demerger, or conversion), the successor entity is entitled to claim the remaining deductions for the unexpired period.

 

Expenditure on Prospecting of Minerals

 

Introduction

This provision allows Indian companies and resident assessees engaged in prospecting, extraction, or production of minerals to claim deductions under Section 35E for specified expenditures over 10 equal instalments.

Eligibility

An Indian Company and every resident assessee who is engaged in any operations relating to prospecting for, or extraction or production of, any mineral specified in Part A or Part B of the Seventh Schedule can claim a deduction under this provision.

Qualifying Expenditure

The deduction can be claimed for the qualifying expenditure incurred in the year of commercial production or in any 4 years immediately preceding the year of commercial production, which

Includes:

• Expenses incurred on any operation relating to prospecting of any mineralspecified in the Seventh Schedule.
• Expenditure on the development of a mine or other natural deposit of any such mineral.
• Sale, salvage, compensation, or insurance moneys realised in respect of any property or rights shall be reduced from such expenditure.

Excludes:

• Costs for acquiring sites or mineral deposits (or any right therein).
• Depreciable asset costs (buildings, machinery, etc.).

Quantum of Deduction

• Allowed in 10 equal instalments over 10 years, beginning with the year of commercial production.
• Deduction limited to profits from the commercial exploitation of the mineral.
• Unused deductions can be carried forward within the 10-year period but lapse thereafter.
• Once deduction is allowed for qualifying expenditure, no deduction for the same expenditure is permitted under any other provision for that or any other year.

Business Restructuring

For amalgamations or demergers, deductions transfer to the successor company for the unexpired period.

Other Conditions

The assessee, other than a company or a co-operative society, must have its books of accounts audited and submit Form 3AE one month before the return filing deadline under Section 139(1) for the first year in which the deduction under Section 35E is claimed.

 

Deductions in case of the business of prospecting, etc., of mineral oil

 

Introduction

The Income-tax Act allows specific deductions for expenses incurred in the business of prospecting, extracting, or producing mineral oils, petroleum, or natural gas, provided these expenses are covered under an agreement with the Central Government.

Eligibility Criteria

• Applicable to both resident and non-resident assessees engaged in the business of prospecting, extracting or producing mineral oils, petroleum or natural gas.
• The Central Government must have entered into an agreement directly or through an authorised entity for participation or association with the assessee.
• Deductions may be allowed in lieu of or in addition to other permissible deductions.

Eligible Expenses

• Expenditure on infructuous or abortive exploration in any area surrendered before starting commercial production.
• Any expenditure, whether incurred before or after commercial production, on drilling, exploration activities, services, or related physical assets shall be allowed as a deduction only after commercial production begins.
• Depletion of mineral oil in the mining area from the year in which commercial production begins and for the subsequent years as specified in the agreement.

Provisions for Business Transfer

If the business is transferred wholly or partially, or if any interest in the business is transferred:

• Deduction of Deficiency: If unclaimed expenses exceed transfer proceeds, the difference is deductible in the year of transfer.
• Taxability of Excess Amount: If transfer proceeds exceed unclaimed expenses, the excess, to the extent already claimed as a deduction, is taxable as business income.
• This provision does not apply to transfers under schemes of amalgamation or demerger where the resulting or amalgamated company is an Indian company.
• The successor company continues to claim deductions as if no restructuring occurred.

Deduction for Interest on Borrowed Capital

Introduction
Interest on capital borrowed for business or profession is allowable as deduction. However, interest relating to the period before a capital asset is put to use must be capitalised and added to the actual cost of the asset.

Conditions to Claim Deduction

Where money is borrowed to acquire an asset, interest up to the date the asset is first put to use is added to its actual cost in accordance with Section 43(1). After the asset is put to use, interest on such borrowings is deductible. Interest on borrowings for operational purposes is also deductible.

ICDS IX requires capitalisation of borrowing costs relating to qualifying capital assets; other borrowing costs are deductible in the year incurred. Borrowing includes periodical recurring subscriptions paid by members of Mutual Benefit societies that meet prescribed conditions.

Capital Must Be Borrowed

Interest must be paid on capital borrowed for business or profession. Borrowed “capital” refers to money, not assets. Purchase of an asset on deferred credit, even if interest is payable, is not treated as borrowing; interest on such credit purchases is not deductible under this section but may be allowable under Section 37(1).

Borrowings Used for Business

Interest is deductible only if the borrowed funds are used for business or professional purposes.

Interest Paid or Payable

Under the cash system, interest is deductible on payment; under the mercantile system, it is deductible on accrual.

However, interest payable to the following institutions is deductible only on actual payment in accordance with Section 43B:

• Public Financial Institutions
• State Financial Corporations
• State Industrial Investment Corporations
• Scheduled Banks
• Co-operative banks other than primary agricultural credit societies or primary co-operative agricultural and rural development banks

If paid on or before the due date for filing the return, deduction is allowed in the year of accrual; otherwise, it is allowed in the year of payment.

Interest Expense to Be Disallowed

Interest paid outside India without deduction of tax is disallowed under Section 40(a)(i).
Interest paid to a resident without deduction of tax results in 30% disallowance under Section 40(a)(ia).

Excessive interest (thin capitalisation rule):

If an Indian company or PE of a foreign company pays interest exceeding Rs. 1 crore to a non-resident associated enterprise, interest exceeding 30% of EBITDA is disallowed. Disallowed interest may be carried forward for up to 8 assessment years.

Interest for earning exempt income:

If borrowed funds are used to earn exempt income, interest and related expenditure are disallowed under Section 14A.

Interest paid to partners:

Interest paid by a firm to its partners is deductible only up to 12% per annum and only if authorised by the partnership deed.

Interest paid by AOP/BOI to members:

No deduction is allowed for any such interest.

Interest on own capital:

Interest on notional capital introduced by the assessee is not deductible.

Interest on money borrowed to pay tax:

Interest on borrowings used for payment of income-tax is not deductible.

 

Deduction for Interest Paid to Associated Enterprise

 

Introduction
Interest paid by an entity to its associated enterprise is deductible only to the extent of 30% of its earnings before interest, taxes, depreciation and amortisation (EBITDA) or the interest paid or payable to the associated enterprise, whichever is lower. Any excess interest disallowed may be carried forward for eight assessment years.

Purpose of the Provision

This provision restricts excessive interest deductions arising from high levels of debt, particularly in multinational group structures where interest can be used to shift profits outside India. It aims to counter cross-border profit shifting through inflated interest payments and protect the tax base.

When This Provision Applies

It applies where:

• The assessee is an Indian company or a permanent establishment of a foreign company in India;
• Interest expenditure exceeds Rs. 1 crore in respect of any debt issued by a non-resident; and
• The lender is an associated enterprise, or the associated enterprise has provided implicit or explicit guarantee to the lender, or deposited matching funds with the lender.

When This Provision Does Not Apply

This restriction does not apply if the entity:

• Is engaged in the business of banking or insurance;
• Is a notified class of non-banking financial company;
• Is a finance company located in an International Financial Services Centre carrying out specified lending, factoring, treasury or similar financial activities, provided the interest is payable in foreign currency.

Amount of Interest Deductible

Deduction is restricted to the lower of:

• Interest paid or payable to the associated enterprise; or
• 30% of EBITDA.

Negative EBITDA results in complete disallowance of interest. Disallowance applies even if the borrowing is for business purposes and the interest rate is at arm’s length under transfer pricing rules.

Carry Forward and Set Off of Excess Interest

Excess interest disallowed may be carried forward for up to eight assessment years. It may be claimed as deduction in a subsequent year to the extent of the maximum allowable limit (i.e., 30% of EBITDA after allowing current-year interest).

Computation of Excess Interest

The following steps are applied:

1. Compute interest paid or payable to the associated enterprise.
2. Compute EBITDA.
3. Compute 30% of EBITDA.
4. Determine deductible interest as the lower of steps 1 and 3.
5. Excess interest = interest paid or payable minus deductible interest.

Profits and gains of business are then recomputed by adding excess interest disallowed and reducing any eligible set-off of carried-forward interest.

Meaning of Certain Terms

Associated Enterprise

Has the meaning assigned under Section 92A(1)/(2). It may include non-business entities if they meet the control or participation criteria.

Debt
Means any loan, financial instrument, finance lease, financial derivative or similar arrangement giving rise to interest, discounts or finance charges deductible in computing business income. Debt must be issued by a non-resident.

Permanent Establishment

A fixed place of business through which the enterprise wholly or partly carries on its business.

Interest
Includes interest payable in any manner on money borrowed or debt incurred, and fees or charges in respect of unused credit facilities.

Non-banking Financial Company

Includes financial institutions or companies engaged in accepting deposits or lending, and such notified non-banking institutions.

 

Meaning of Zero Coupon Bond under Income-tax

 

Introduction
Zero Coupon Bonds are bonds issued by specified entities and notified by the Central Government, where no payment or benefit is received or receivable by the investor before maturity. Only bonds notified by the Government qualify as Zero Coupon Bonds.

What is a Zero Coupon Bond

A Zero Coupon Bond is a bond issued on or after 1 June 2005 by:

• Infrastructure Capital Company
• Infrastructure Capital Fund
• Infrastructure Debt Fund
• Public Sector Company
• Scheduled Bank

No interim payment or benefit should be receivable before maturity. Such bonds must be notified by the Central Government in the Official Gazette.

How Zero Coupon Bonds Are Notified

As per Rule 8B, an application must be submitted in Form 5B at least three months before the proposed issue.

The application cannot relate to bonds to be issued beyond two financial years following the year of application.

Applications must be furnished electronically and are to be disposed of within six months of receipt.

Documents Required

Each application must include a copy of the incorporation certificate, registered trust deed or the relevant Act under which the applicant is constituted.

Conditions to Be Satisfied for Notification

The following conditions must be fulfilled:

• The life of the bond must be at least 10 years and not more than 20 years.
• The applicant must hold an investment-grade rating from at least two credit rating agencies.
• Arrangements must be made for listing the bonds on a recognised stock exchange in India.

Specific investment or utilisation conditions apply based on the category of issuer:

Infrastructure Capital Company/Fund or Infrastructure Debt Fund:

• At least 25% of the funds must be invested by the end of the next financial year after the year of issue.
• The balance must be invested within four financial years following the year of issue.

Public Sector Company:

• At least 15% must be invested or utilised by the end of the next financial year after the year of issue.
• The balance must be invested or utilised within six financial years following the year of issue.

Infrastructure Debt Fund:

• A sinking fund must be maintained to accumulate interest accruing on all Zero Coupon Bonds, and such interest must be invested in Government securities as defined under the Government Securities Act, 2006.

The Central Government, after ensuring compliance with all conditions, will notify the bond specifying the name, life of the bond, issue schedule, maturity amount, discount and number of bonds.

If conditions are not fulfilled, the application may be rejected after providing an opportunity of being heard.

Post-notification non-compliance may lead to withdrawal of notification.

Post-Notification Compliance

The issuer must submit a certificate in Form 5BA from a Chartered Accountant within two months from the end of each financial year in which investment or utilisation was required. The certificate must be e-filed.

Failure to comply may result in withdrawal of the notification by the Central Government.

 

Deduction for Employer’s Contribution to PF and Superannuation Fund

 

Introduction
Employer’s contribution to a recognised provident fund or approved superannuation fund is deductible on actual payment. The total deductible contribution to provident fund and superannuation fund together shall not exceed 27% of the employee’s salary as specified under Rule 87.

Deduction for Contribution to Provident Fund

Employer and employee contribute monthly to the provident fund account. Deduction for employer’s contribution is allowed in the year of actual payment, regardless of the method of accounting. If the contribution is paid on or before the due date of filing the return for the year in which liability accrues, the deduction is allowed in that year.

The employer must make effective arrangements to ensure deduction of tax at source under Section 192A on payments made from the fund that are taxable under the head Salaries.

Conditions to Claim Deduction (PF)

• Contribution must be actually paid.
• Payment made up to the due date of filing the return for the year of accrual is treated as paid during that year.
• Effective arrangements must exist to ensure TDS deduction on taxable payments from the fund.

Deduction for Contribution to Superannuation Fund

Superannuation is a retirement benefit funded by employer contributions. Employers may contribute up to 27% of an employee’s basic salary (including the PF contribution), and any excess is taxable in the employee’s hands.

How Much Deduction Is Allowed (Superannuation Fund)

Deduction for employer’s contribution is computed as follows:

Step 1: Employer’s annual contribution for an employee cannot exceed 27% of salary, reduced by the PF contribution (recognised or unrecognised) made for that employee.
Step 2: 80% of the amount actually paid constitutes the deductible allowance.
Step 3: One-fifth of the deductible allowance is allowed in the assessment year relevant to the year of payment, and the balance is allowed in equal instalments over the next four assessment years.

These additional conditions for percentage limitation and spreading over five years arise from CBDT instructions, not the Act.

 

Conditions to Claim Deduction (Superannuation Fund)

• Contribution must be actually paid.
• Payment made up to the due date of return filing for the relevant previous year is deductible in that year.
• Employer must ensure effective arrangements for TDS deduction on taxable payments from the superannuation fund.

 

Deduction for Employees’ Contribution to Welfare Fund

 

Introduction
Any sum received by an employer from employees as their contribution to a welfare fund such as provident fund or ESI is allowable as deduction only if it is deposited by the employer into the employee’s account in the relevant fund on or before the due date prescribed under the applicable Act.

Employees’ Contribution Treated as Employer’s Income

Under Section 2(24)(x), any amount received by an employer from employees towards their contribution to recognised provident fund, approved superannuation fund, approved gratuity fund or any other welfare fund is deemed to be business income of the employer and must be credited to the profit and loss account.

When Deduction Is Allowed

Deduction is allowed only if the employer deposits the employees’ contribution into the relevant fund on or before the statutory due date specified under the respective labour law or service contract.

The Explanation to Section 36(1)(va) clarifies that:

• “Due date” means the date by which the employer is required to credit the contribution under the relevant Act or contract.
• Section 43B does not apply for employees’ contribution and is deemed never to have applied for this purpose.
• Deduction is not allowedif the contribution is deposited after the statutory due date, even if paid before the due date for filing the income-tax return under Section 139(1).

 

Deduction for Bad Debts

 

Introduction
A deduction for bad debts is allowable in the year in which the debt is actually written off in the books of account. The debt must have been considered in computing taxable income or must represent money lent in the ordinary course of banking or money-lending business. Any subsequent recovery is taxable as business income in the year of recovery.

Conditions to Claim Deduction

Existence of Debt

There must be an admitted debt creating a debtor–creditor relationship. A debt not recorded in the books cannot be claimed as bad debt unless it was recognised for income computation under ICDS; in such cases it is deemed to be written off when it becomes irrecoverable.

Debt Must Be Written Off

The debt must be written off as irrecoverable in the accounts of the assessee during the year. A mere provision for bad and doubtful debts is not allowable, except for specified entities eligible under Section 36(1)(viia).

Debt Considered for Computation of Income

A bad debt is allowable only if the amount was previously taken into account in computing income or represents lending in the ordinary course of banking or money-lending. Bad debts cannot arise where accounts are maintained on cash basis. If a debt accounted for under ICDS becomes irrecoverable without being recorded in the books, the deduction is allowed on a deemed write-off basis.

Debt Must Be Incidental to Business

The debt must arise from business or professional activities. Debts unrelated to business or profession are not allowable as bad debts.

Continuity of Business

Deduction is allowed only for debts of a business carried on during the relevant previous year. A bad debt relating to a discontinued business is not deductible, unless the business continues through succession. The right to claim bad debts attaches to the business, not to the assessee.

Recovery of Bad Debts

If recovery is less than the outstanding amount, the deficiency is allowed as deduction in the year of final recovery.

If recovery exceeds the amount written off and allowed, the excess is taxable as business income in the year of recovery, irrespective of whether the business is in existence.

In cases of succession (including amalgamation, demerger, inheritance or partnership reconstitution), recovery is taxable in the hands of the successor if the deduction was earlier allowed to the predecessor.

Business losses from the year of discontinuance may be set off, even after expiry of the eight-year limit, against income deemed as business profits under this provision.

 

Deduction for Provision for Bad and Doubtful Debts

 

Introduction
The deduction for provision for bad and doubtful debts is available only to specified entities such as banks, financial institutions and NBFCs. The deduction allowed is the lower of the amount of provision created or the amount computed as a prescribed percentage of total income or rural advances, as applicable.

Eligible Assessees

The deduction is available to:

• Scheduled banks
• Non-scheduled banks
• Co-operative banks (other than primary agricultural credit societies or primary co-operative agricultural and rural development banks)
• Foreign banks
• Public financial institutions, State financial corporations and State industrial investment corporations
• NBFCs

Other assessees are not eligible for deduction of provision; they may claim only actual bad debts under Section 36(1)(vii).

Amount of Deduction

The deduction allowable is the lower of the actual provision created or the amount computed based on prescribed percentages of total income and, where relevant, aggregate average rural advances.

Prescribed percentages depend on the category of institution.

Additional Deduction

Scheduled banks (other than foreign banks) and non-scheduled banks may claim an additional deduction equal to income derived from redemption of securities under a notified scheme, provided such income is disclosed under the head Profits and gains of business or profession.

Meaning of Key Terms

• Total income is computed before deduction under this provision and before Chapter VI-A deductions.
• Rural branch means a branch located in an area with population not exceeding 10,000 based on the latest published census.
• Aggregate average advances of rural branches are computed by taking the monthly outstanding advances of each rural branch, averaging them over the year, and aggregating such averages for all rural branches.

Claiming Deduction for Actual Bad Debts

For eligible entities, deduction for actual bad debts under Section 36(1)(vii) is allowed only to the extent the amount written off exceeds the credit balance in the provision for bad and doubtful debts account.

No deduction is allowed unless the bad debt is debited to this provision account.

Taxability of Recovered Debts

Any recovery of debts for which deduction has been allowed under this provision is taxable under Section 41(1) in the year of recovery.

Treatment of Urban and Rural Advance Provisions

Provisions for bad and doubtful debts relating to urban and rural advances are to be treated as a single consolidated account for all purposes.

 

Deduction for Sum Transferred in Special Reserve

 

Introduction
Banks, housing finance companies and financial institutions may claim deduction for amounts transferred to a special reserve account. Deduction is restricted to 20% of profits from eligible business. When the total balance in the special reserve exceeds 200% of the paid-up share capital and general reserves, no further deduction is permitted.

Eligible Assessees

The following entities may claim the deduction:

• Banking companies, co-operative banks and public financial institutions engaged in providing long-term finance for industrial or agricultural development, infrastructure facilities, or housing in India;
• Housing finance companies providing long-term finance for construction or purchase of residential houses;
• Other financial corporations providing long-term finance for development of infrastructure facilities in India.

Amount of Deduction

The deduction allowable is the lower of:

• Amount transferred to the special reserve during the previous year;
• 20% of profits derived from the eligible business;
• 200% of paid-up share capital and general reserves as on the last day of the previous year, reduced by the opening balance of the special reserve.

No deduction is permitted once the special reserve exceeds 200% of paid-up share capital and general reserves.

Consequences of Withdrawal

Any withdrawal from the special reserve is taxable in the year of withdrawal to the extent deduction was previously allowed. Taxability applies irrespective of whether the business is in existence during that year.

Business losses of the year in which business was discontinued may be set off, even after expiry of eight years, against income deemed as business income under this provision.

Meaning of Key Terms

Long-term finance

Loans or advances repayable, along with interest, over a period of at least five years.

Infrastructure facility

Includes roads, bridges, rail systems, highways and related activities, water supply and treatment systems, irrigation systems, sanitation and sewerage systems, solid waste management, ports, airports, inland waterways and similar public facilities as may be prescribed.

Conditions for Notification as Infrastructure Facility

A public facility must satisfy the following:

• It is owned by an Indian company, a consortium of such companies, or a statutory body;
• It is covered by an agreement with the Central or State Government or a local/statutory authority for developing, operating or maintaining a new infrastructure facility;
• It begins operations on or after 1 April 1995.

 

Deduction for Deficiency in Case of Trade, Professional, or Similar Associations

 

Trade, professional, or similar associations may claim a deduction for deficiencies incurred. This deduction is limited to 50% of the total income computed before allowing such deduction. No carry forward of unutilized deficiencies is permitted.

Doctrine of Mutuality

The doctrine of mutuality holds that no person can profit from transactions with themselves. Income derived by associations from general services to members is exempt if there is complete identity between contributors and beneficiaries of the surplus. However, exceptions to this rule include:

• Income from specific services performed for members (taxed as business income).
• Profits from insurance businesses computed per Section 44.

Applicability of Deduction

Eligible Entities:

• Trade, professional, or similar associations receiving amounts from members by subscription or otherwise (excluding remuneration for specific services).
• Associations that do not distribute income to members, except as grants to affiliated associations.

Ineligible Entities:

• Associations under Section 10(23A), such as those controlling or encouraging specific professions like law, medicine, accounting, material management, town planning, etc.

Conditions for Relief:

• The deficiency must result from excess expenditure for protecting or advancing members’ common interests.

Quantum of Deduction

• Calculation:

• Income from members (excluding remuneration for specific services).
• Less: Expenditure for common interests (excluding capital expenditure and deductions under other sections).
• The deficiency is deductible from income under "Profits and Gains of Business or Profession (PGBP)" first and then against income under other heads.
  • Limit:
• Deduction is capped at 50% of the total incomebefore this deduction.

Other Deductions

Introduction

Section 36 allows deductions for various revenue expenses incurred during business or professional operations, provided specific conditions are met.

List of Key Deductions

1. Insurance Premium [Section 36(1)(i)/(ia)/(ib)]: For damage or destruction of stock or stores, on the life of cattle (paid by the federal milk co-operative society), or employees' health (paid by other than cash).
2. Bonus or Commission [Section 36(1)(ii)]: Paid to employees if it would not otherwise have been payable to them as profit or dividend.
3. Interest on Borrowed Capital [Section 36(1)(iii)]: Interest on borrowings taken for operational activities or to acquire an asset, pertaining to the period after such asset is put to use, shall be allowed.
4. Discount on Zero-Coupon Bonds [Section 36(1)(iiia)]: Deductible on a pro-rata basis (refer to Rule 8C) over the bond’s life. Discount on zero-coupon bonds = Amount payable on maturity/redemption – Money realised on issue.
5. Employer Contributions [Section 36(1)(iv)/(iva)/(v)]:

• Employer’s contribution to PF or superannuation fund is deductible, but limited to 27% of the employee’s salary.
• Employer’s NPS contribution is deductible, restricted to the lower of actual contribution or 14% of employee’s salary.
• Employer’s contribution to an approved gratuity fund (irrevocable trust) is deductible, subject to:
• Annual contribution ≤ 8.33% of each employee’s salary, and
• Initial contribution for past service is ≤ 8.33% of salary per year of past service.
  6. Employees’ Contributions [Section 36(1)(va)]: Employee contributions (PF/ESI) received by the employer are treated as the employer’s income, but a deduction is allowed only if deposited in the respective fund by the statutory due date of the relevant fund.
  7. Loss of Animals [Section 36(1)(vi)]: For animals (other than as stock-in-trade) used in business, deductible upon death or permanent disability. Deductible amount = Actual cost of animals – Amount realised from carcasses or sale.
  8. Bad Debts [Section 36(1)(vii)]: Deductible in the year in which written off as irrecoverable in the accounts.
• For the assessee to which Section 36(1)(viia) applies, deduction for bad debts is allowed only to the extent it exceeds the credit balance in the provision for bad and doubtful debts account made.
• If a debt, not recorded in the accounts due to any ICDS, becomes irrecoverable, it will be allowed as a deduction in that year, and it shall be deemed that such debt has been written off as irrecoverable in the accounts.
• The debt must have been included in the total income of the assessee or represent money lent in the ordinary course of banking or money-lending.
• In case of partial recovery, deficiency is deductible in the year of final settlement.
  9. Provision for Bad Debts [Section 36(1)(viia)]: Allowed for banks, financial institutions and NBFCs. Deductible amount = Lower of provision made by assessee or % of total income/% of average rural advances (for banks).
  10. Transfer to Special Reserve [Section 36(1)(viii)]: Allowed for banks, housing finance companies and financial institutions up to 20% of eligible business profits. No further deduction is allowed if the amount of such reserve exceeds 200% of the paid-up share capital and general reserves.
  11. Family Planning Expenses [Section 36(1)(ix)]:
• Revenue expenditure: incurred by a company on promoting family planning among employees is deductible in the year of incurrence.
• Capital expenditure: Deductible in five equal instalments commencing from the year in which such expenditure is incurred. 1/5th of capital expenditure is deductible to the extent of business profits; the unabsorbed amount is carried forward like depreciation.
• If a family planning asset is sold without use for any other purposes, taxable business income = lower of (a) sale proceeds, or (b) deduction already claimed.
• If a family planning asset is later used for other business purposes, its depreciation cost = actual cost – deduction already claimed under this provision.
  12. Revenue Expenditure by Statutory Corporations [Section 36(1)(xii)]: Revenue expenditure incurred by a notified statutory entity for purposes authorised by its Act is fully deductible.
  13. Banking Cash Transaction Tax [Section 36(1)(xiii)]: Any Banking Cash Transaction Tax paid by the assessee on taxable banking transactions is allowable as a deduction.
  14. Credit Guarantee Trust Fund Contributions [Section 36(1)(xiv)]: A public financial institution can claim a deduction for contributions made to a notified Credit Guarantee Fund Trust for Small Industries.
  15. Securities/Commodities Transaction Tax [Section 36(1)(xv)/(xvi)]: STT/CTT paid on taxable securities/commodities transactions is deductible if such income is included under “Profits and gains of business or profession”.
  16. Purchase of Sugarcane [Section 36(1)(xvii)]: A sugar manufacturing co-operative society can claim a deduction for sugarcane purchase, limited to the lower of the actual purchase price or the Government-fixed/approved price.
  17. Marked-to-Market Loss [Section 36(1)(xviii)]: As per ICDS-VIII, listed securities held as stock-in-trade are valued at the lower of cost or NRV; any resulting loss is deductible.

 

General Deductions for Business Expenditures

 

Introduction

Section 37 provides a residual deduction for revenue expenditures incurred wholly and exclusively for business or profession, not covered under Sections 30 to 36, and not prohibited by law.

Conditions for Allowability

• Not Covered by Sections 30 to 36.
• Not a Capital or Personal Expenditure:
  • Capital expenditures are non-deductible unless specified otherwise.
  • Personal expenses are excluded.
• Wholly and Exclusively for Business:
  • Expenditure must serve a commercial purpose, determined from a business perspective.

Specifically Disallowed Expenditures

• Expenditure for any offence or activity prohibited by law, which includes expenditures:
• For any purpose that is an offence or prohibited by law, in India or outside India.
• On providing any benefit/perquisite that violates any law, rules, regulations or guidelines governing the recipient.
• To compound an offence under any law, in India or outside India.
• To settle proceedings for contravention of any law notified by the Central Government. The following laws are notified: [Notification No. 38/2025, dated 23-04-2025]
• Securities and Exchange Board of India Act, 1992;
• Securities Contracts (Regulation) Act, 1956;
• Depositories Act, 1996;
• Competition Act, 2002.
• Expenditure incurred on advertisement in any souvenir, brochure, tract, pamphlet or similar material published by a political party.

 

Disallowance of Expenses

 

Introduction

Certain expenses are disallowed, wholly or partly, while computing taxable income if specific conditions are not met.

Disallowance Categories

Default in payment of TDS [Section 40(a)(i)/(ia)/(iii)]

• Payment outside India or in India to non-residents, for expenses like interest, royalty, FTS, etc., for which TDS was not deducted or deducted but not deposited by the due date of return filing. 100% of the expenditure is disallowed. Such expenditure is deductible in the year in which tax is deducted and deposited or deposited with the Central Government.
• Payment to residents for which TDS was not deducted or deducted but not deposited by the due date of return filing. 30% of the expenditure is disallowed. Such expenditure is deductible in the year in which tax is deducted and deposited or deposited with the Central Government.
• Salary paid outside India or in India to a non-resident for which TDS was not deducted or deducted but not deposited. 100% of the expenditure is disallowed.
• If the payer has not deducted TDS fully or partly, but is not treated as assessee-in-defaultbecause:
  • The payee has included the above income in his return of income.
  • He has paid the tax due on the income declared in such return of income, and
  • The payer obtains a certificate to this effect from a Chartered Accountant in Form No. 26A and submits it electronically,

then it will be assumed that the payer has deducted and paid the TDS on the date when the payee filed their return of income.

Default in payment of equalisation levy [Section 40(a)(ib)]

• Expenses for which the levy was not deducted or deducted but not deposited with the Government by the due date of return filing.
• Such expenditure is deductible in the year in which the levy is deducted and deposited.
• However, the equalisation levy shall not be charged on payments made on or after 01-04-2025.

Tax payment [Section 40(a)(ii)]

• Payment of income tax, surcharge, and education cess,
• Taxes paid outside India, which are eligible for relief under Sections 90, 90A or 91.

Royalty or license fee levied on the State Govt. undertaking [Section 40(a)(iib)]

• Any payment by way of royalty, licence fee, service fee, privilege fee, service charges, or any other fee/charges levied exclusively on or any amount appropriated from a State Govt. undertaking by the State Govt.

Employer’s contribution to PF [Section 40(a)(iv)]

• Employer’s contribution to PF or other employee funds if no proper TDS arrangement is made under Section 192A (or other relevant section) on taxable payments made from the fund, which are taxable as salary.

Tax paid on non-monetary perquisites [Section 40(a)(v)]

• Taxes paid by the employer on non-monetary perquisites provided to its employees.

Payment made to the partners [Sections 40(b)]

• Remuneration payment (such as salary, bonus, commission, or remuneration) made to partners by a partnership firm is deductible only if authorised by the partnership deed and paid to the working partner, subject to the following:
  • Interest on capital is deductible only up to 12% per annum. Interest payment in excess of 12% per annum shall be disallowed.
  • If a partner represents someone else, interest paid to him in his personal capacityis not hit by the 12% cap. Similarly, if he is a partner in his individual capacity, interest received on behalf of another person is outside Section 40(b). However, if the amount is excessive, it may still be disallowed under Section 40A(2).
  • Deduction for partner’s remuneration shall be limited to the following:
• In case of negative book profit (loss) – Rs. 3,00,000
• On the first Rs. 6,00,000 of book profit – Higher of Rs. 3,00,000 or 90% of book profit
• On balance of book profit – 60% of book profit
• Book Profit = Net Profit (including adjustments) + Remuneration already debited
• Interest paid in excess of 12% shall be added back while computing the book profit.

Payment made to the members of AOP/BOI [Sections 40(ba)]

• Payments by an AOP/BOI to its members as salary, bonus, commission, remuneration, or interest. For interest, only the net amount paid (after adjusting interest recovered) is disallowed.
• If a person is a member of an AOP/BOI as a representative of someone else, interest paid to him in his personal capacity won’t be disallowed. Likewise, if a person is a member in his personal capacity, interest paid to him on behalf of another person won’t be disallowed.

Payment made to related parties [Section 40A(2)]

• Expenditure paid to specified persons is disallowed to the extent it is excessive or unreasonable compared to the fair market value of goods/services/facilities, legitimate business needs, or benefit derived.
• Specified person means where the assessee is:
  • an individual
•  
• Persons in whose business the individual or his relative has a substantial interest.
  • a HUF
• Family members, their relatives.
• Persons in whose business the HUF, its members, or their relatives have a substantial interest.
  • a Company
• Directors, relatives of directors.
• Persons in whose business the company, its directors, or their relatives have a substantial interest
  • a partnership firm
• Partners, relatives of partners.
• Persons in whose business the firm, its partners, or their relatives have a substantial interest.
  • an AOP/BOI
• Members, their relatives.
• Persons in whose business the AOP/BOI, its members, or their relatives have a substantial interest.
  • It also includes:
• an individual who has a substantial interest in the business of the assessee and a relative of such individual.
• a company which has a substantial interest in the business of the assessee, any director of such company, any relative of such director, and any other company in which such company has a substantial interest.
• a Firm, AOP, or HUF that has a substantial interest in the business of the assessee, partner or member of such person and any relative of such partner or member.
• a company, one of whose directors has a substantial interest in the business of the assessee, any director of such company and any relative of such director.
• a Firm or AOP or HUF, one of whose partners/members has a substantial interest in the business of the assessee, any partner or member of such person, and any relative of such partner or member.

• A person is deemed to have a substantial interest in the business or profession if such person is the beneficial owner of at least:
  • 20% shares (not being shares entitled to a fixed rate of dividend, whether with or without a right to participate in profits) at any time during the relevant previous year, if a business or profession is carried on by a company; and
  • 20% of profits at any time during the previous year, if the business or profession is carried on by any other person.

Payment made in cash [Section 40A(3)/(3A)]

• If payment or aggregate of payment to a person in a day exceeds 10,000 (Rs. 35,000 for goods carriages) and it is made other than by account payee cheque, bank draft, electronic clearing system, or prescribed electronic modes.
• If expenditure was claimed earlier and repaid in non-specified modes exceeding 10,000, it is treated as business income in the year of repayment.
• Disallowance is not made for the following payments: [ Rule 6DD ]
  • Payment to specified institutions like RBI, banks, LIC, co-operative banks, etc.
  • Payment for an expenditure which is required to be made to the Government in legal tender.
  • Payment by specified modes like letter of credit arrangement via bank, mail/telegraphic transfer via bank, book adjustment of bank accounts, bill of exchange payable to bank.
  • Payment is adjusted against the payee’s liability for goods or services provided by the assessee.
  • Payment made to cultivator, grower, or producer for purchase of agriculture or forest produce, produce of animal husbandry or dairy or poultry farming, fish or fish products, or products of horticulture or apiculture.
  • Payment made to a producer for the purchase of a product manufactured/processed without the aid of power in a cottage industry.
  • Payment made in a village/town without a banking facility, to a resident of such village/town or a person carrying on business/profession there.
  • Payment made to employees or their heirs by way of gratuity, retrenchment compensation, or similar terminal benefit if the aggregate of such sum does not exceed 50,000.
  • Salary paid (after TDS under Section 192) to an employee who is temporarily posted for ≥ 15 days at a place/ship other than normal duty and has no bank account at that place/ship.
  • Payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.
  • Payment made by an authorised dealer or a money changer for the purchase of foreign currency or a traveller's cheque in the normal course of his business.

Provision for gratuity [Section 40A(7)]

• Any provision made for gratuity payment to employees on their retirement or termination, except: provision made for payment of gratuity by way of contribution to an approved gratuity fund, or provision for payment of gratuity that has become payable during the previous year.
• If the provision of gratuity payment was already allowed earlier, no deduction will be allowed again on the actual payment out of such provision.

Contributions to non-statutory funds [Section 40A(9)]

• Any sum paid by an employer to create or contribution to any fund, trust, company, AOP, BOI, registered society, or other institution for any purpose, except where such sum is paid to a recognised PF, approved superannuation/pension scheme, or approved gratuity fund up to limits permitted under income-tax law or it is compulsory under any other law.

Marked-to-market loss [Section 40A(13)]

• Any marked-to-market loss or other expected loss except as allowed under Section 36(1)(xviii).

 

Disallowance for TDS Default

 

Introduction
Expenditure is disallowed if tax is not deducted or, after deduction, not deposited with the Central Government in accordance with Chapter XVII-B. Such expenditure is allowable in the year in which the tax is duly deducted and deposited.

Disallowance from Payment Made to Non-Resident [Section 40(a)(i)]

Disallowance applies where tax is not deducted or not deposited by the due date for filing the return in respect of payments, including interest, royalty, technical fees or any other sum (other than salary), payable outside India or in India to a non-resident or foreign company, where such sum is chargeable to tax in India.

If salary is paid outside India or to a non-resident and tax is not paid or deducted, disallowance is made under Section 40(a)(iii).

The provision applies where tax is not deducted under Sections 194B, 194BA, 194BB, 194E, 194G, 194LB, 194LBA, 194LBB, 194LBC, 194LC, 194LD, 194T, 195, 196A , 196B , 196C or 196D .

Amount disallowed: 100% of the expenditure.

Expenditure allowed subsequently:

• If disallowed for non-deduction, it is allowed in the year in which tax is deducted and deposited.
• If disallowed for late deposit, it is allowed in the year in which tax is deposited.

No disallowance is made where the deductee has filed return of income, included the amount in income, paid due tax, and the payer furnishes Form No. 26A electronically.

Disallowance from Payment Made to Resident [Section 40(a)(ia)]

Disallowance applies where tax is not deducted or not deposited from sums payable to a resident and where such expenditure is claimed under the head Profits and gains of business or profession or Income from other sources.

The provision applies where tax is not deducted under Sections 192, 193 , 194A , 194B , 194BA , 194BB , 194C , 194D , 194DA , 194EE , 194F , 194G , 194H , 194-I , 194-IA , 194-IB , 194-IC , 194J , 194K , 194LA , 194LBA , 194LBB , 194LBC , 194M , 194-O , 194P , 194Q , 194R , 194S or 194T .

Amount disallowed: 30% of the expenditure.

Exception: No disallowance if the deductee has filed return, included the income, paid tax, and the payer furnishes Form No. 26A electronically.

Expenditure allowed subsequently:

• If disallowed for non-deduction, it is allowed in the year in which tax is deducted and deposited.
• If disallowed for late deposit, it is allowed in the year in which tax is deposited.

Disallowance from Payment of Salary to Non-Resident [Section 40(a)(iii)]

Salary payable outside India to any person or salary payable in India to a non-resident is not allowable as deduction if tax has not been paid or deducted. If the assessee deposits the tax on such salary, no disallowance arises under this section, though tax paid by the assessee is disallowed under Section 40(a)(ii).

If tax is not deducted from salary paid in India to a resident, disallowance is governed by Section 40(a)(ia).

 

Disallowance of payment made to related persons

 

Introduction

Excessive payment made or is to be made to the related parties in respect of an expenditure shall be disallowed to the extent such expenditure is considered excessive or unreasonable. The object of this provision is to check evasion of tax through excessive or unreasonable payments to relatives and other specified persons.

When disallowance is made?

Where assessee incurs any expenditure, in respect of which payment has been or is to be made to the specified persons, it shall be disallowed to the extent it is considered excessive or unreasonable having regard to the following:

• Fair market value of goods, or services or facilities
• Legitimate needs of the business of the assessee
• Benefit derived by or accruing to assessee as a result of the expenditure.

The onus is on the Assessing Officer to bring the material on record to prove that the payment made by the assessee is excessive or unreasonable having regard to the criterion referred to above.

Exception

No expenditure in a transaction, being a specified domestic transaction incurred for an assessment year commencing on or before April 01, 2016, shall be disallowed by treating it as excessive or unreasonable having regard to its fair market value, if it is at its arm length price as defined under section 92F (ii).

However, expenditure shall be disallowed for any transaction made on or after the assessment year 2017-18, if it is deemed as excessive or unreasonable having regard to its fair market value, even if it is at its arm's length price as defined under section 92F (ii).

Specified Persons

The specified persons for various types of assessee are discussed as below:

Who has incurred the expenditure?	Specified persons to whom payment has been made
1. An Individual	a) Any relative of such individual b) To a person in whose business the individual or any of his relative has a substantial interest
2. A Company	a) Director of the Company b) Any relative of the director c) To a person in whose business the company or any of its directors or relative of such directors has a substantial interest.
3. A Firm	a) Partner of the firm b) Any relative of the partner c) To a person in whose business the firm or any of its partners or relative of such partners has a substantial interest.
4. AOP/BOI	a) Members of the AOP/BOI b) Any relative of the members c) To a person in whose business the AOP/BOI or any of its members or relative of such members has a substantial interest.
5. A HUF	a) To a member of the family b) Any relative of the members c) To a person in whose business the HUF or any of its members or relative of such members has a substantial interest.
6. Any other taxpayer	a) To an individual who has a substantial interest in business of taxpayer b) Any relative of such individual
7. Any other taxpayer	a) To a company which has a substantial interest in the business of the taxpayer b) Any director of such company c) Any relative of such director d) Any other company carrying on business or profession in which above mentioned company has a substantial interest
8. Any other taxpayer	a) To a Firm or AOP or HUF who has substantial interest in the business of the taxpayer b) Partner or member of such person c) Any relative of such partner or member
9. Any other taxpayer	a) To a company, one of whose directors has a substantial interest in the business of the taxpayer b) Any director of such company c) Any relative of such director
10. Any other taxpayer	a) To a Firm or AOP or HUF, one of whose partners/members has a substantial interest in the business of the taxpayer b) Any partner or member of such person c) Any relative of such partner or member

Meaning of ‘Relative’

The term ‘relative’ in relation to an individual shall include husband, wife, brother or sister or any lineal ascendant or descendant of that individual.

Meaning of ‘Substantial Interest’

A person is deemed to have substantial interest in the business or profession if such person is the beneficial owner of at least:

• 20% share (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) at any time during the relevant previous year, if business or profession is carried on by a company
• 20% of profits at any time during the previous year, if business or profession is carried on by any other concern.

 

Disallowance of Cash Payments

 

Introduction
No deduction is allowed for any expenditure if payment exceeding Rs. 10,000 per day is made otherwise than by account payee cheque, account payee bank draft, electronic clearing system through a bank account, or prescribed electronic modes. For payments relating to plying, hiring or leasing goods carriages, the limit is Rs. 35,000. Certain exceptions are provided under Rule 6DD.

When Disallowance Is Made

Disallowance applies where:

• Payment or aggregate payments to a person in a day exceed Rs. 10,000 (or Rs. 35,000 for specified transport-related payments), and
• Payment is not made through permissible banking modes or prescribed electronic modes.

The disallowance operates only when both the expenditure and the payment exceed Rs. 10,000 in a day. Payments made through prescribed electronic modes are acceptable.

Loan repayments are not considered expenditure and are therefore not subject to disallowance, though repayment is subject to Section 269ST. Interest payments are covered by this disallowance provision.

Payments made by commission agents for goods sold on commission are not covered, but purchases on the agent’s own account are subject to these rules.

If an expenditure was allowed in an earlier year but later paid in cash exceeding the limit, the amount so paid is deemed business income in the year of payment. For transport-related businesses, the Rs. 35,000 limit applies.

Exceptions under Rule 6DD

Disallowance does not apply in the following cases:

Payment to specified institutions:

Payments to RBI, banking companies, SBI and subsidiaries, co-operative banks, land mortgage banks, Primary Agricultural Credit or Credit Societies, and LIC.

Payment to Government in legal tender:

Where payment must be made in legal tender.

Payments through specified modes:

Letter of credit, mail or telegraphic transfer, book adjustments between bank accounts, bill of exchange payable only to a bank, electronic clearing systems, and prescribed electronic modes. Bank includes foreign banks.

Payment by book adjustment:

Adjustment against liability for goods or services supplied by the assessee.

Payments for agricultural or animal produce:

Payments to cultivators, growers, or producers of agricultural produce, forest produce, produce of animal husbandry, dairy, poultry, fish or fish products, or products of horticulture or apiculture.
This applies only if payment is made to the actual producer and not to intermediaries.

Purchase of animals:

Payments to producers of livestock and meat are exempt subject to conditions including producer declarations and certification by a veterinary doctor.

Cottage industry products:

Payments to producers manufacturing or processing products without power in a cottage industry.

Terminal benefits to low-paid employees:

Payments of gratuity, retrenchment compensation or similar terminal benefits up to Rs. 50,000.

Salary at remote places:

Where salary is paid after TDS to an employee temporarily posted for at least 15 days at a place or ship where no bank account is maintained.

Authorized dealers and money changers:

Cash payments for purchase of foreign currency or traveller’s cheques in the ordinary course of business.

No dispute permitted:

Where payment is made through prescribed modes to avoid disallowance, no person may claim in any proceeding that payment was not made in cash or otherwise.

 

Deduction for Partner’s Remuneration

 

Introduction
A firm may claim deduction for remuneration or interest paid to its partners if such payments are authorised by the partnership deed, made only to working partners in case of remuneration, and within the statutory limits prescribed under Section 40(b).

When Deduction Is Allowed

Remuneration paid to working partners in the form of salary, bonus, commission or any other form is allowable as deduction only when:

• The partnership deed authorises such payment;
• The partner is a working partner, meaning an individual actively engaged in the conduct of business; and
• The amount does not exceed the limits prescribed under Section 40(b).

Remuneration to non-working partners is not allowable. The firm must demonstrate that the partner qualifies as a working partner.

Interest paid to partners is deductible only if authorised by the partnership deed and not exceeding 12% per annum. Any amendment to the deed has only prospective effect.

The partnership deed must specify the amount of remuneration or the method of quantifying it. If neither the amount nor the quantification mechanism is specified, remuneration cannot be allowed as deduction.

How Much Deduction Is Allowed

In case of remuneration

Deduction is restricted to the amount authorised in the partnership deed or the limits of Section 40(b), whichever is lower.

For assessment years up to 2024–25:

• Negative book profit: Rs. 1,50,000
• First Rs. 3,00,000 of book profit: Higher of Rs. 1,50,000 or 90% of book profit
• Balance book profit: 60% of such balance

From assessment year 2025–26:

• Negative book profit: Rs. 3,00,000
• First Rs. 6,00,000 of book profit: Higher of Rs. 3,00,000 or 90% of book profit
• Balance book profit: 60% of such balance

Book profit is computed by adjusting net profit for provisions under Sections 28 to 44DB and adding back partners’ remuneration debited to the profit and loss account. Unabsorbed depreciation is adjusted but brought-forward losses are not. Income chargeable under other heads is excluded. Interest exceeding 12% is added back. Deductions under Chapter VI-A are ignored.

In case of interest

Interest paid on partners’ capital is deductible only if authorised by the partnership deed and not exceeding 12% per annum. Interest in excess of this limit is disallowed. Interest paid to a partner in a representative capacity is treated based on whether it is received personally or on behalf of another person. Excessive interest may still be disallowed under Section 40A(2).

When Deduction Is Not Allowed

Deduction for remuneration or interest is not allowed if:

• The partnership deed does not specify the profit-sharing ratio;
• The firm fails to file the return, comply with notices under Sections 142(1) or 143(2), or comply with directions issued under Section 142(2A);
• Circumstances under Section 144 apply.
  Disallowance arises only in situations governed by Section 144.

Excessive Remuneration

If remuneration paid to partners is excessive or unreasonable having regard to fair market value, legitimate business needs or benefit derived, such amount may be disallowed under Section 40A(2).

 

Disallowance of Sum Paid to Members of AOP or BOI

 

Introduction
An Association of Persons (AOP) or Body of Individuals (BOI) is not allowed deduction for any salary, bonus, commission, remuneration or interest paid to its members. Other payments made to members, such as rent or consultancy fees, are allowable.

Disallowance for Remuneration and Interest

Any amount paid by an AOP or BOI to its members in the form of salary, bonus, commission, remuneration or interest is not allowable as deduction.

Exception: Member in Representative Capacity

If an individual is a member in an AOP or BOI on behalf of another person, interest paid to such member otherwise than in a representative capacity shall not be disallowed under this provision.
Similarly, where an individual is a member in a personal capacity, interest received on behalf of another person is not considered for disallowance.

Deduction Allowed for Other Payments

Payments made to members that are not in the nature of salary, bonus, commission, remuneration or interest are allowable as deduction.

Presumptive Taxation Schemes

Under presumptive taxation schemes, taxpayers can compute their taxable income as a percentage of turnover, gross receipts, or specified amounts without maintaining detailed books of accounts. The schemes are available for both resident and non-resident assessees, covering specific businesses and professions.

Presumptive Schemes for Residents

• Section 44AD: Businesses

• Eligible Assessee:Resident individuals, HUFs, and partnership firms (excluding LLPs).
• Eligible Business:All except agency or commission businesses.
• Income Presumption:
  • 8% of turnover (6% if received through banking channels).
• Opting Out:
  • Mandatory maintenance of books of accounts and audit.
  • Cannot re-opt for 5 years.
• Section 44ADA: Professions

• Eligible Assessee:Resident individuals and partnership firms (excluding LLPs).
• Eligible Professions:Specified professions like legal, medical, engineering, etc.
• Income Presumption:50% of gross receipts.
• Opting Out:
  • Mandatory maintenance of books of accounts and audit.
• Section 44AE: Goods Transport

• Eligible Assessee:Any resident or non-resident.
• Eligible Business:Plying, hiring, or leasing goods carriages.
• Income Presumption:
  • Heavy vehicle: ₹1,000 per ton of gross vehicle weight.
  • Other vehicles: ₹7,500 per month or part thereof.

Presumptive Schemes for Non-Residents

• Section 44AE:Same provisions as for residents (goods transport).
• Section 44B: Shipping Business

• Income Presumption:5% of gross receipts.
  • Section 44BB: Mineral Oil Exploration
• Income Presumption:10% of gross receipts.
• Audit:Books must be maintained if opted out.
  • Section 44BBA: Airlines
• Income Presumption:5% of gross receipts.
  • Section 44BBB: Turnkey Power Projects
• Eligible Assessee:Foreign companies engaged in civil construction for power projects.
• Income Presumption:10% of gross receipts.
• Audit:Books must be maintained if opted out.
  • Section 44BBC: Cruise Shipping
• Income Presumption:20% of gross receipts.
  • Section 44BBD: Electronics manufacturing support in India
• Income Presumption:25% of gross receipts.

 

Presumptive Taxation Scheme for Businesses Under Section 44AD

 

Section 44AD of the Income-tax Act, 1961, provides a simplified presumptive taxation scheme for eligible businesses. Under this scheme, the taxable income is calculated on a presumptive basis at prescribed rates, eliminating the need for maintaining detailed books of accounts. It applies to eligible resident individuals, HUFs, and partnership firms (excluding LLPs) whose gross receipts or turnover does not exceed specified thresholds.

Key Provisions

• Eligibility:

• Applicable to resident individuals, HUFs, and partnership firms (excluding LLPs).
• Businesses with turnover up to 2 crores, extendable to Rs. 3 crores if cash receipts are ≤5% of total turnover or gross receipts.
  • Exclusions:
• Non-residents, LLPs, companies, and specified entities like trusts and cooperative societies.
• Income from agency businesses, commission/brokerage, or professions specified under Section 44AA.
• Speculative businesses are also excluded as per return filing instructions.
  • Presumptive Income Rates:
• 8%of turnover for cash receipts.
• 6%for receipts through digital modes, account payee cheques, or bank drafts.
  • Restriction on Lower Income Declaration:
• If income is declared lower than the presumptive rate in any of the next 5 years, the taxpayer becomes ineligible for the scheme for the subsequent five years and must maintain books of accounts as per Section 44AA.

Benefits and Limitations

• Exemption from Maintenance of Books and Audit:

• Taxpayers under this scheme are exempted from maintaining books of accounts and audit requirements under Sections 44AA and 44AB.
  • No Deduction for Business Expenses:
• All eligible expenses under Sections 30 to 38 are deemed to have been allowed.
• No separate deduction for partner remuneration or interest under Section 40(b).
  • Advance Tax Payment:
• Advance tax is payable in a single installment by March 15, unlike quarterly installments for other taxpayers.

Special Provisions

• Threshold of Turnover for Cash and Non-Cash Receipts:

• Turnover limit increases from 2 crores to Rs. 3 crores if cash transactions remain ≤5% of total turnover.
  • Depreciation:
• Depreciation is deemed to have been allowed, and the written-down value (WDV) of assets is adjusted accordingly.
  • Restrictions on Chapter VI-A Deductions:
• Deductions under Sections 30 to 38 are allowed, but deductions under Part-C of Chapter VI-A are not applicable.

 

Presumptive Taxation Scheme for Professionals under Section 44ADA

 

Section 44ADA of the Income-tax Act, 1961, provides a simplified presumptive taxation scheme for specified professionals. It allows eligible taxpayers to calculate taxable income on a presumptive basis, reducing compliance requirements. This scheme is applicable if gross receipts from the profession do not exceed Rs. 50 lakhs or Rs. 75 lakhs under specified conditions.

Key Provisions

• Eligibility:

• Applicable to resident individuals and partnership firms (excluding LLPs).
• Gross receipts should not exceed 50 lakhs, extendable to Rs. 75 lakhs if cash receipts are ≤5% of total receipts.
• Cash receipts include payments through non-account payee cheques or drafts.
  • Eligible Professions:
• Legal, medical, engineering, architectural, and accountancy.
• Technical consultancy, interior decoration, information technology, company secretary, authorized representatives, and film artists.
• Other professions are excluded.
  • Presumptive Income Rate:
• Presumed income is 50%of gross receipts.

Lower Income Declaration

• Taxpayers can declare income lower than 50% of gross receipts.
• However, if total income exceeds the basic exemption limit, they must maintain books of accounts as per Section 44AA and have them audited under Section 44AB.

Benefits and Limitations

• Simplified Compliance:

• No requirement to maintain books of accounts or undergo audits if income is calculated on a presumptive basis.
  • No Deduction for Expenses:
• All allowable expenses under Sections 30 to 38 are deemed allowed.
• No additional deduction for partner remuneration or interest as per Section 40(b).
• Depreciation is deemed to have been allowed, and WDV of assets is adjusted accordingly.
  • Advance Tax:
• Entire advance tax is payable by March 15 of the financial year.

Exemptions and Special Provisions

• Exemption from disallowance of expenses under Sections 40, 40A , and 43B .
• Deductions under Chapter VI-A are permissible

 

Presumptive Taxation Scheme for Transporters Under Section 44AE

 

Section 44AE of the Income-tax Act, 1961, provides a presumptive taxation scheme for small transporters engaged in the business of plying, hiring, or leasing goods carriages. The scheme simplifies compliance by allowing taxable income to be calculated on a presumptive basis, provided the taxpayer does not own more than 10 goods vehicles during the financial year.

Key Provisions

• Eligibility:

• Applicable to any taxpayer engaged in the goods transportation business.
• Ownership of goods vehicles should not exceed 10 at any time during the year.
• Vehicles on hire-purchase or installment payments are considered owned by the taxpayer.
  • Presumptive Income Rates:
• Heavy Goods Vehicles (gross vehicle weight > 12,000 kg): 1,000 per ton of gross or unladen weight per month or part thereof.
• Other Goods Vehicles (gross vehicle weight ≤ 12,000 kg): 7,500 per vehicle per month or part thereof.
  • Flexibility to Declare Higher Income:
• Taxpayers may voluntarily declare income higher than the presumptive rate.

Lower Income Declaration

• Taxpayers can declare income lower than the presumptive income. However, if total income exceeds the basic exemption limit, they must:

• Maintain books of accounts as per Section 44AA.
• Get the accounts audited under Section 44AB.

Benefits and Limitations

• Exemption from Maintenance of Books and Audit:

• Taxpayers opting for the scheme are exempt from maintaining detailed accounts and audits under Sections 44AA and 44AB.
  • No Deduction for Business Expenses:
• Deductions under Sections 30 to 38 are deemed to have been allowed.
• Depreciation is deemed to have been claimed, and the WDV of assets is adjusted accordingly.
  • Advance Tax Compliance:
• Unlike taxpayers under Sections 44AD or 44ADA, transporters must pay advance tax in four installments.

Additional Requirements

• Expense Disallowance:

• No disallowance is made under Sections 40, 40A , or 43B as all expenses are presumed to be allowed.

 

Presumptive Scheme for Shipping Business under Sections 44B and 172

 

Non-residents operating ships may opt for presumptive taxation under Sections 44B or 172. Taxable income is presumed at 7.5% of specified receipts from the carriage of goods, passengers, livestock, or mail.

Presumptive Scheme under Section 44B

• Applicability: Non-resident individuals or foreign companies engaged in shipping (excluding cruise ships).
• Presumptive Income:

• 5% of the total receipts for:
  • Carriage of passengers, livestock or goods at Indian ports.
  • Amounts received in India for shipping activities at foreign ports.
  • Demurrage, handling, or similar charges.
• Overrides Other Provisions: Income is computed without reference to Sections 28 to 43A, but deductions under Chapter VI-A are available.
• Double Taxation Avoidance Agreements (DTAAs):

• If a DTAA assigns taxation rights exclusively to the resident country, no tax is payable in India. A "No Objection Certificate" must be obtained.

Presumptive Scheme under Section 172

• Applicability: Tax levy and recovery for individual voyages of ships owned or chartered by non-residents, departing from Indian ports.
• Presumptive Income: 7.5% of amounts paid or payable for carriage of passengers, goods, livestock, or mail at Indian ports.
• Return Filing by Shipmaster:

• Must file a return before departure, including all charges received.
• Authorised persons may file if arrangements are made.
  • Assessment by Tax Authority:
• Tax is calculated at foreign company rates.
• Assessment must be completed within nine months of the financial year-end.
  • Port Clearance Certificate:
• Issued only after verifying tax payment or satisfactory arrangements.
  • Option for Regular Assessment:
• Owners or charterers may opt for regular assessment before the assessment year's end.
• Tax paid under Section 172 is treated as advance tax. Refunds or additional payments are adjusted accordingly.
• Interest under Sections 234B and 234C or refunds under Section 244A may apply.

 

Presumptive Scheme for Cruise Shipping Business under Section 44BBC

 

Section 44BBC provides a presumptive taxation scheme for non-resident entities operating cruise ships. Under this scheme, 20% of the total receipts from the carriage of passengers is deemed to be taxable income, effective from Assessment Year 2025-26.

Key Features

• Objective: To promote India as a global cruise tourism hub by offering a predictable tax structure for international operators.
• Eligible Entities: Non-residents and foreign companies operating cruise ships. Entities with Place of Effective Management (POEM) in India are excluded.
• Scope:

• Domestic Traffic: Cruise operations exclusively between Indian ports.
• International Traffic: Operations between Indian and foreign ports or solely foreign ports fall under Section 44B or Section 172.
  • Effective Date: Applies to income earned on or after April 1, 2024.
  • Nature of Scheme:
• 20% of the sum received or receivable by the shipping entity from the carriage of passengers.

Computation of Income

• Taxable Income:

• 220% of the total amount received or receivable by, or paid or payable to, a non-resident cruise ship operator for carriage of passengers is deemed to be the profits and gains from that business.
  • Override Provisions:
• Overrides Sections 28 to 43A. Other provisions, including those for capital gains and loss set-off, remain applicable.

Exemptions and Deductions

• Lease Rentals: Rentals from leasing cruise ships are exempt under Section 10(15B) if both lessor and lessee are subsidiaries of the same holding company.
• Chapter VI-A Deductions: Permitted alongside presumptive taxation.

 

Presumptive Scheme for Exploration Business under Section 44BB

 

Section 44BB provides a presumptive taxation scheme for non-residents engaged in providing services, facilities, or hiring out plant and machinery for activities related to the exploration, extraction, or production of mineral oils. Taxable income is deemed to be 10% of the gross receipts.

Key Features

• Objective: Simplify tax compliance for non-resident entities in the mineral oil exploration sector by offering a presumptive tax mechanism.
• Eligibility:

• Non-residents providing services or facilities related to mineral oil exploration or production.
• Non-residents supplying or hiring out plant and machinery for the same purpose.
  • Definitions:
• Mineral Oil: Includes petroleum and natural gas.
• Plant: Covers ships, aircraft, vehicles, drilling units, scientific apparatus, and equipment used in the specified activities.
  • Exclusions:
• Income covered under Section 42 (special provisions for mineral oil businesses).
• Income classified as royalties or technical fees under Sections 44D, 44DA , or 115A .
• Other specified circumstances under Section 293A.

Computation of Presumptive Income

• Taxable Income: 10% of the total receipts, including:

• Payments for services, facilities, or machinery hire related to mineral oil operations in India or abroad.
• Amounts received directly or through agents, whether in India or overseas.

Provisions and Implications

• Option to Declare Lower Income:

• Permitted, but requires maintaining books of account (Section 44AA) and undergoing a tax audit (Section 44AB).
• Subject to scrutiny under Section 143(3).
  • Non-adjustability of Certain Losses:
• Business losses and unabsorbed depreciation from previous years cannot be set off against presumptive income.
• Losses can be carried forward to future years when the presumptive scheme is not opted for, with the carry-forward period reduced accordingly.
  • Overrides:
• Overrides Sections 28 to 43A for computing business income.
• Provisions for capital gains, set-off or carry forward of losses, etc., remain applicable.
  • Deductions:
• Chapter VI-A deductions are available as the scheme overrides only Sections 28 to 43A.

 

Presumptive Scheme for Airline Companies under Section 44BBA

 

Section 44BBA provides a presumptive taxation scheme for non-residents operating aircraft. Taxable income is deemed to be 5% of specified receipts, simplifying compliance for airline operators.

Key Features

• Objective: To reduce the compliance burden for non-residents engaged in the airline business by allowing taxation on a presumptive basis.
• Eligibility:

• Non-residents engaged in the business of operating aircraft.

Computation of Presumptive Income

• Taxable Income: 5% of the aggregate of:

1. Amounts paid or payable for carriage of passengers, goods, mail, or livestock from any location in India (whether paid in India or abroad, directly or through an agent).
2. Amounts received or deemed to be received in India for carriage from foreign locations.

Provisions and Deductions

• Overrides Sections 28 to 43A:

• Income is computed on a presumptive basis, and no further deductions or additions under Sections 28 to 43A are allowed.
  • Chapter VI-A Deductions:
• Deductions under Chapter VI-A are permissible, as this section overrides only Sections 28 to 43A.

 

Presumptive Scheme for Civil Construction Companies under Section 44BBB

 

Section 44BBB of the Income-tax Act allows foreign companies engaged in civil construction or related activities to compute income on a presumptive basis. This simplifies compliance by requiring tax to be calculated at 10% of amounts received in connection with specified turnkey power projects.

Key Features of the Scheme

• Eligibility:Available to foreign companies undertaking civil construction, erection, testing, or commissioning related to turnkey power projects approved by the Central Government. Approvals are issued by the Department of Power, Ministry of Energy.
• Presumptive Income:Taxable income is deemed to be 10% of the sum received or receivable, regardless of whether payments are made in or outside India.

Option to Declare Lower Income

• Assessees can declare income lower than the presumptive rate, but must maintain books of account under Section 44AA and undergo an audit under Section 44AB. Scrutiny assessment under Section 143(3) is mandatory in such cases.

Treatment of Losses and Depreciation

• No Set-off:Unabsorbed depreciation and brought forward business losses cannot be set off against presumptive income.
• Carry Forward:Business losses from earlier years can be carried forward but are reduced by the number of years the presumptive scheme is opted for.

Override of Other Provisions

• Section 44BBB overrides Sections 28 to 44AA, deeming all additions and deductions under these sections to be allowed.

Deductions under Chapter VI-A

• Deductions under Chapter VI-A can be claimed even if the presumptive scheme is opted for, as Section 44BBB does not override these provisions.

Taxation of Banks or Financial Institutions: Interest on Bad or Doubtful Debts

Interest income on specified categories of bad or doubtful debts for public financial institutions, scheduled banks, and certain other entities is taxable in the year of receipt or credit to the profit and loss account, whichever is earlier.

Entities Covered

This provision applies to:

• Public financial institutions
• Scheduled banks
• Cooperative banks (excluding primary agricultural credit societies and primary cooperative agricultural and rural development banks)
• State financial corporations
• State industrial investment corporations
• Non-banking financial companies (NBFCs) as notified by the Central Government

Bad and Doubtful Debts (Rule 6EA)

Interest income relating to the following categories of bad and doubtful debts qualifies for this provision:

• Non-viable and sticky advances:

• Accounts overdrawn beyond limits for six months or more.
• Overdue instalments, import bills, or deferred payment instalments for defined periods.
• Bills up to 10–15% of the borrower’s outstanding are overdue for under 3 months, with no immediate refund for unpaid bills.
• Accounts showing signs of stagnation, financial distress, or mismanagement.
  • Advances recalled:Where repayment is highly doubtful, and revival is deemed unfeasible.
  • Suit-filed accounts:Advances under legal or recovery proceedings.
  • Decreed debts:Cases where a decree has been obtained but remains unexecuted.
  • Irrecoverable debts:Loans with diminished security value or borrower unwillingness/inability to repay.

Key Provisions

• Section 43D provides for taxation of interest on bad or doubtful debts on receipt or credit basis.
• Provisions under Section 36(1)(via) allow scheduled banks, cooperative banks, and specified institutions to claim a deduction for provisions created for bad debts.
• Actual bad debts can be claimed as a deduction under Section 36(1)(vii) by all assessees.

 

Deduction for Head Office Expenditure in Case of Non-Residents under Section 44C

 

Section 44C of the Income-tax Act limits the deduction for head office expenditure incurred by non-residents while computing income under "Profits and Gains of Business or Profession." Deduction is restricted to the lower of:

• 5% of adjusted total income, or
• Actual head office expenditure attributable to Indian operations.

Key Provisions

• Eligibility for Deduction:

• Non-residents conducting business through branches in India are eligible.
• The section ensures compliance and prevents inflation of head office expense claims.
  • Ceiling on Deduction:
• Deduction is capped at the lesser of 5% of adjusted total income or actual expenditure.
• For losses, 5% of the average adjusted total income for the preceding years is used.
  • Definition of Head Office Expenditure:
• Includes expenses on rent, salaries, travel, and other general administration costs incurred outside India.
• Technical fees unrelated to executive and administrative functions are excluded from the 5% cap.
  • Adjusted Total Income:
• Calculated without considering certain deductions like unabsorbed depreciation, business losses, or Chapter VI-A deductions.
  • Average Adjusted Total Income (in case of losses):
• Based on total income from preceding three years, weighted as follows:
  • Three years: 1/3rd of aggregate adjusted total income.
  • Two years: 50% of aggregate adjusted total income.
  • One year: Total adjusted income for that year.

Administrative Clarifications:

• Technical fees received by the head office are taxed under the DTAA or domestic tax laws.
• Payments for technical services to third parties reimbursed through the head office are deductible without the 5% cap.

 

Computation of Business Income from Royalties or Fees for Technical Services (FTS) under Section 44DA

 

Royalty or Fees for Technical Services (FTS) received by a non-resident or foreign company is taxable under the head "Profits and Gains of Business or Profession" if connected to a Permanent Establishment (PE) or a fixed place of profession in India.

Key Provisions

• Taxability Under Business Income:

• The income qualifies for taxation under "Business or Profession" if:
  • The taxpayer is a non-resident or foreign company.
  • Business is conducted through a PE or a fixed place of profession in India.
  • The income arises from royalty or FTS related to a government or Indian entity per an agreement after April 1, 2003.
  • The rights, property, or contracts generating the income are effectively connected to the PE or fixed place of profession.
• If these conditions are unmet, income is taxed under Section 115A at specified rates, subject to the DTAA under the head income from other sources as permanent establishment does not exist.
  • Restriction on Deductions:
• No deduction for expenses not wholly or exclusively incurred for the Indian business.
• Payments from the PE to the head office or other offices are non-deductible, except for reimbursed expenses.
  • Exclusion from Section 44BB:
• Income covered under Section 44DA is excluded from the applicability of Section 44BB, which pertains to the taxation of income from exploration, production, or extraction activities.

Compliance Requirements:

• Books of Accounts:

• Non-residents and foreign companies must maintain books of accounts.
• Accounts must be audited by a Chartered Accountant with a valid certificate of practice.
  • Audit Report Submission:
• An audit report in Form 3CE must be filed one month before the due date of the income tax return under Section 139(1).

 

Business Reorganisation of Co-operative Banks under Section 44DB

 

Section 44DB provides for the proportional allowance of deductions during the business reorganization of co-operative banks. The deductions cover depreciation, preliminary expenses, amalgamation expenses, and voluntary retirement expenses, shared between the predecessor and successor entities.

Key Provisions

• Scope of Business Reorganization:

• Amalgamation:Merger of one or more co-operative banks into another co-operative bank, with conditions including:
  • Transfer of all assets and liabilities to the amalgamated bank.
  • Retention of at least 75% of voting rights or share value by members or shareholders of the amalgamating bank in the amalgamated bank.
• Demerger:Transfer of one or more undertakings by a co-operative bank to a resulting co-operative bank under specified conditions, including:
  • Transfer of assets and liabilities on a going concern basis at book values.
  • Issuance of proportionate membership in the resulting bank to the members of the demerged bank.
• Conversion:Transition of a primary co-operative bank into a banking company under RBI guidelines.
  • Quantum of Deduction:
• Proportional Allocation:Deductions are split between the predecessor and successor banks or converted entities based on the number of days they operated during the financial year.
  • Predecessor Bank:

Deduction allowable to predecessor bank	=	Total deduction allowable to predecessor bank if such business re-organisation had not taken place	X	No. of days from 1st day of financial year to the day immediately preceding the date of business re-organisation
				Total no. of days in financial year in which business re-organisation has taken place

•  
• Successor Bank:

Deduction allowable to successor bank or converted banking co.	=	Total deduction allowable to predecessor bank if such business re-organisation had not taken place	X	No. of days beginning with date of business re-organisation and ending on last date of the financial year
				Total no. of days in financial year in which business re-organisation has taken place

•  

• Treatment in Subsequent Years:

• For deductions related to preliminary expenses, voluntary retirement expenses, and amalgamation costs, unexpired periods continue to apply to the successor bank as if the reorganization had not occurred.

 

Reporting Obligation under Section 285B of the Income-tax Act, 1961

 

Section 285B mandates specific reporting obligations for persons involved in the production of cinematographic films or other specified activities, requiring them to report payments exceeding Rs. 50,000 in aggregate made or due to individuals engaged in these activities.

Applicability

• Covered Persons:

• Film producers and individuals engaged in event management, documentary production, television or OTT program production, sports event management, performing arts, or other notified activities.
• Includes both residents and non-residents.
  • Non-Covered Persons:
    Non-covered persons are not required to report payments made to covered persons.

Reporting Requirements

• Reportable Payments: Payments exceeding 50,000 in aggregate during a financial year to any person engaged in production or specified activities.
• Exclusions: Payments to individuals not involved in production-related tasks, e.g., accountants or auditors.

Computation of Threshold Limit

• Threshold computed on a gross basis, including GST, reimbursements, and allied charges.
• Payments accrued or due but unpaid, as well as advance payments, are included.

Form and Timeline

• Form No. 52A : To be filed electronically within 60 days from the end of the financial year.
• Submission requires a digital signature or electronic verification code, depending on the person's filing requirements.

Penalties for Non-Compliance

• Penalty under Section 272A: 500 for each day of delay unless reasonable cause is proven.