Taxation Nandish Patel

8/2/2019 Taxation Nandish Patel

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Presented by: -

AnuragKhandelwal Himanshu

Shekhaliya Rikita Agrawal Harsh R Patel

Nimesh

Tulsiyani Arnish Patel Kusum Lata Parth Patel Umang Panchal Chetan Borad

Hitesh Madhani

Harsh N Patel Nandish Patel Tapan Shah Hardik Patel

INCOME UNDER THE HEAD PROFITS & GAIN

OF BUSINESS OR PROFESSION


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Income under head Profit & gain of

business & Profession Covers provisions Computation of taxable income

Sect. 28 Defines Scope of Income

Sect. 29-44 D Method of Computation of Income

Sect. 29-37 Lists Expenses/ Allowances by the Act

Sect. 40, 40A,43B Disallowed Expenses


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Basis of charge

Profits & gains from business or profession

Any compulsion or other payments due to received by any personspecified in section 28(ii)

Income derived by trade; profession or similar association fromspecific service performed for its members.

The value of any benefit/perquisite, whether convertible intomoney or not, arising from business or profession.

Any profit on the transfer of duty entitlement pass book scheme.

Any profit on transfer of the duty free replenishment certificate. Export incentive available to exporters.


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Basis of charge cont.

Any interest, salary, bonus, commission or remunerationreceived by the partner from firm.

Any sum received for not carrying out any activity in relation toany business or not to share any know-how, patent, copyrighttrademark, etc.

Any sum received under a keyman insurance policy includingbonus.

Any sum received in cash on account of any capital asset beingdemolished, destroyed, discarded or transferred if the whole ofthe such expenditure on such capital has been allowed as adeduction under section 35AD.

Profits and gains of managing agency.

Income from speculative transaction.


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Meaning of business

Though the definition is not exhaustive. It basicallycovers all the following activities :

Business includes trade Business includes commerce

Business includes manufacturing

Business includes any adventure in the nature of trade,commerce or manufacture.


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Rent received from Agricultural Land.

Income from agricultural operation. Income from farm house.

Income from nursery operation.

AGRICULTURAL INCOME


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There must be Land.

Land should be situated in India.

Land should be used as agricultural purpose.

Land cultivation is necessary.

If the income derived from farm house, the

building of the farm house should be situated onthat land only.

CONDITIONS


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INCOMES HELD TO BE NON AGRICULTURAL

INCOME


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Business income not taxable under the head profits &

gains of business or profession


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LOSSES CAN BE ALLOWED AS DEDUCTION ONLY

IF THE FOLLOWING CONDITION ARE SATISFIED


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SCHEME OF BUSINESS DEDUCTIONSParticulars Examples

Onus of proof Loss of revenue incidental to businessor profession

Allowances are cumulative Rent, repair, Insurance for business Not capital nature, personal exp. of

assessee

Expenditure should relate to theprevious year

Mercantile account method Cash account method

Business should carried on previousyear

If business close/discontinue beforecommencement of PY

Expenditure should have been

incurred in connection with assessesbusiness

Parent company sub company

Benefit of expenditure may extend tosomebody else

Lessor lessee

Benefit of the expenditure may extendbeyond the relevant previous year

Revenue exp. incurred during PY isdeductible if benefit of extend beyond

year of exp.


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Particulars Examples

No allowance in respect of exhaustion ofwasting assets

Wasting asset

no allowance in respect of expenditureincurred before the setting up of a business

Exception incorporation

New business

if business is commenced bypromoters of a company beforeits incorporation tax incidence

on profit

No allowance in respect of non assessablebusiness

Agriculture income

Expenditure relating to illegal business Ordinary business exp. In caringillegal business, notinfringement

No allowance in respect of anticipated losses Exception stock-in trade

No deduction in respect of depreciation ofinvestment

Share and security not allowed

Relevance of distinction between capital orrevenue expenditure

Exp. fall under certain sectionsexclude capital exp. are allowed


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Conditions for Claiming Depreciation

1. Asset must be owned by the Assesse

2. Used for the purpose of business or profession

3. Should be used during the relevant P.Y.

4. Depreciation is available on tangible orintangible assets

Depreciation Allowance


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Basic Concepts for computation of depreciation

allowance

1. Block of Assets(Total 13 Blocks)

Tangible assets(12 blocks) Plant & machinery(8 blocks) ,

building(3 blocks), furniture(1 block)

Intangible assets(1 block) patents, copyrights, trade marks,

etc.

2. Written Down Value3. Actual Cost
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Normal depreciation & Additional

Depreciation

Normal Depreciationa) WDV 250000

b) Rate of Depreciation as per the blocks of 10%

assets

The multiplication of both will give us normal depreciation 25000

Additional Depreciation

20% if asset is used for 180 days or more

10% if asset is used for less than 180 days

Conditions:

a) Assesse must be engaged in manufacture/production of any article or

thing

b) New plant & machinery should be acquired & installed after 31/3/2005

c) It should be an eligible plant & machinery

Example


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Unabsorbed Depreciation

Depreciation allowance of the P.Y. is first deductible from theincome chargeable under the head PGBP.

If it is not fully deductible under the head PGBP because ofabsence or inadequacy of profits, it is deductible from income

chargeable under other heads of income (except under the head of

salaries) for the same A.Y.

If still it is unabsorbed, it can be carried forward to thesubsequent A.Y.(s) by the same assesse for indefinite years

Continuity of business is not relevant for the purpose of above setoff & carry forward

Depreciation can be carried forward by the same assesse


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Other specific deduction under the act

Rent, rates, taxes, repairs and insurance for building

[sec 30]

The rent of premises and the amount of repair

the amount of current repair

Sum on account of land revenue, local rates or municipal taxes[ sec 43B]

Any premium of insurance against damage

Judicial rulings

Assesses take premises on lease for business or profession and agree to payrent of previous tenant, such rent not deducted.

Fluctuating item like a share in profit cant be treated as rent.

Painting outside of a house is repair.


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Repairs and insurance of machinery,plant and furniture [sec31]

Investment Allowance[ sec.32A]

Investment deposit account scheme[ sec 32AB]


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Tea/coffee/rubber development

account[sec 32AB]

Conditions1. Engaged in tea/rubber/coffee plantation

2. Deposit

3. Audit

Amount of deduction1. a sum equal to amt deposited in the special account

2. 40% of profit

Whichever is less


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Other points No Deduction shall be allowed in any other

previous year

Amt. released from the special account in a yearnot utilized in the same previous year will betreated as taxable profit.

Amt. withdrawn when closure or dissolution of

business, amt. will be treated as taxable profit. In other death of tax payer, partition of HUF and

liquidation of company, the amt. withdrawn willnot include as taxable income.


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Site restoration fund [Sec. 33ABA] An assessee can claim deduction under section 33ABA as follows:

The assessee must satisfy the following conditions-1. Production of petroleum/ natural gas2. Agreement3. Deposit

4. AuditAmount of deduction is-a. A sum equal to amounts deposited as given belowb. 20% of the profit of such business,

Whichever is less

Reserves for shipping business [Sec 33AC] -

No deduction under section 33AC is available from A.Y

2005-06


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Expenditure on scientific research Any activity for the extension of knowledge in the fields of natural

or applied sciences including agriculture, animal husbandry orfisheries.

1. Revenue expenditure incurred by the assessee himself [Sec 35(1)(i)] Pre-commencement Period expenses

2. Contribution made to outsiders [sec 35(1)(ii)/(iii)]

To whom contribution is made Weighted deduction

An approved research association whichundertakes scientific research [sec 35(1)(ii)]

175% of actual expenditure

An approved university, college or other

institution for the use of scientific research[sec.35(1)(ii)]


An approved association which undertakesresearch in social science or statistical or anapproved university, college or other institutionfor the use of research in social science or

statistical research[sec.35 (1)(iii)]



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3. Capital expenditure incuured by an asseessee himself [Sec 35(2)]

4. Contribution to national laboratory [Sec. 35 (2AA)]

Amt of deduction: Weighted deduction of 200%, if the aforesaidconditions are satisfied

5. Expenditure on in-house Research and development expenses[Sec. 35(2AB)]

Amt of deduction: If all the conditions are satisfied, then a sum equalto 200% of the expenditure so incurred shall be allowed as deduction

6. Contribution to a company to be used by such company forscientific research [Sec.35(1)(iia)]

If all the conditions are satisfied, a weighted deduction of 125% ofthe amount paid by taxpayer to the payee-company


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Production: Dec 1, 2011

Expenditure upto year ending on March 31, 2012Sr. No Particulars Amt in Rs.

1. 80000*1.75 [ Sec 35(1)(ii)] 1,40,000

2. 70000*1.25 [Sec 35 (1)(iii)] 87,500

3. 40250*2 80500

4. Cost of construction only 4,70,000

5. Revenue Expenditure

Perquisite(Not Deductible) Nil

Salary to research personnel 32,000

Perquisite(Not Deductible) Nil

Purchasing Research material 44,800 Cost of Land (Not deductible) Nil

Cost of equipment 1,40,000

Cost of Growing herbals 44,600

Amount deductable under section 35 for theassessment year 2012-13

10,39,400


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Expenditure on acquisition of patent rights and copyrights :- Expenditure on know-how Amortisation of telecom licence fees

ConditionsIf all conditions are satisfied, then one can claimdeduction under section 35ABB.


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Assessee To whom the payment should bemade

Direct expenditure on eligible

projectA company Deduction is available if the taxpayer incurs

any expenditure by way of payment of any

sum to a public sector company or a local

authority or to an association or institution

approved by the National Committee for

carrying out any eligible project or scheme.

A certificate in Form No. 58A should beobtained from the done organizatin

A company can also directly incur

expenditure in respect of eligible

project and claim the same as

deduction provided it is certified

by a chartered accountant in Form

No. 58B

A person other than a

companySame as above Direct expenditure is not

permitted.

Expenditure on eligible projects or scheme[sec.35AC]

Withdrawal of approval-

Consequences in the hands of payer

Consequences in the hands of recipient


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CONDITION 1 sec [35AD]Specified business Who should

own thebusiness

Approval

(if any)

Date of

commencement ofbusiness

Setting up and operating a cold chain Any person Notrequired

On or afterApril 1,2009

Setting up and operating a warehousingfacility for storage of agriculturalproduce

Any person Notrequired


Building and operating, anywhere inIndia, any hospital with atleast 100 bedsfor the patients (applicable from theassessment year 2011-2012)

Any person No approvalrequired


Production of the fertilizer in India(applicable from the assessment 2012-

2013)

Any person Notrequired

On or afterApril 1 2011


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Condition 2- specified business should

be new business

specified business should be new business oldplant and machinery should not be transferred to set

up a new business 20 percent old machinery is permitted- value of the

transferred assets should not exceed 20 percent ofthe total value of the machinery or plant used inbusiness.

Second-hand imported machinery is treated as new-plant and machinery which was used outside Indiaby any person (other than assessee) shall not betreated as previously used for any purpose.


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Amount of deduction-

Expenditure incurred on acquistion of any landor goodwill or financial instrument is eligible for

any deduction. Expenditure incurred prior to the

commencement of operation, shall be allowed as

deduction during the previous year in which hestarted any specified business.


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Consequences of claiming deductionunder sec [35AD] IF DEDUCTION IS CLAIMED AND ALLOWED,

THE ASSESSEE shall not be allowed any

deduction in respect of the specified business. No deduction in respect of the expenditure.

If the assesse owns two units one of them

qualifies for the deductions and the other one isnot eligible for the same and the inter unittransfer of goods and services between the twounits, transactions are made at the market value.


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Payments to associations and institutions forcarrying out rural development programmes[sec. 35CCA]

Amortisation of preliminary expenses [sec.35D]

Double deductions not permissible.

Amortisation of expenditure in the case ofamalgamation/demerger


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Amortisation of expenditure on prospecting

etc, for development of certain minerals.

Section:35E

Who can claim deductionsQualifying personQualifying expenditureAmount and period of deduction


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Insurance premium

Insurance premium paid by a federal milk co-operatives society.

Premium for insurance on health of employees.

Bonus or commission to employeesAdmissible only if not payable as profit or dividend

Deductible on payment basis

Section:36(1)


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DEDUCTIBLE EXPENSES

EMPLOYERS CONTRIBUTION TO RECOGNIZED PROVIDENT

FUND/ APPROVED SUPERANNUATION FUND [SEC. 36 (1)(IV)]

EMPLOYERS CONTRIBUTION TOWARDS AN APPROVEDGRATUITY FUND [SEC. 36 (1)(V)]

EMPLOYEES CONTRIBUTION TOWARDS STAFF WELFARESCHEMES [SEC. 36 (1)(VA)]

Any sum received from the employees as contribution (providentfund, gratuity fund etc.) shall be allowable as deduction only if such sumis credited by employer to the employees account on or before due date.


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WRITE OFF ALLOWANCE FOR ANIMALS [SEC. 36(1)(VI)]

BAD DEBTS INCURRED [SEC. 36 (1)(VII)]

Conditions:

The Debt has been considered while computing the Income of the assesseof that previous year/ an earlier previous year.

It has been written off as irrecoverable in the accounts of the assesse forthat particular previous year.

There must be a debt.

Debt must be incidental to the business/ profession of the assesse.

If any subsequent recovery is made against a bad debt already claimed asdeduction in any earlier previous year is chargeable to tax as BusinessIncome in the year of recovery under provisions of Section 41(4) of theIncome Tax Act.


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Debts of a discontinued business are not deductible ifsuch business has been discontinued before thecommencement of the assessable previous year.

Debts must have been written off in the books ofaccounts.

Limitation: Limited to the amount by which suchdebts exceeds the credit balance in the provision for

bad debts.


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TRANSFER TO SPECIAL RESERVE U/S 36(1)

A financial corp., banking company, co-op. bank and a housingfinance company can claim deduction, if following conditions aresatisfied.

The amount transferred during the previous year to the specialreserve account created for the purpose of section 36(1) OR

20% of the profits derived from the business of providing long-term finance before claiming deduction under the same sectionOR

200% of paid-up share capital as on last day of previous yearminus the balance of the special reserve account on the first day

of the previous year. Whichever is lower.


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EX. X Ltd. Financial Corp. for purpose of deduction U/S 36(1)

for income of the taxpayer for the previous year 2011-12.

Given data,

Providing long term finance for Ind. Development 560 lakh

Paid-up capital and general reserve on March 31,2012 610 lakh

Balance of special reserve account on April 01,2011 1150 lakh

Amt. transfer to Special reserve acc. during year 2011-12 220 lakh

Sol.

a) Rs.220 lakh (amt. transferred to special reserve account during year2011-12) OR

b) Rs.110 lakh (being 20% of Rs.560 lakh) ORc) Rs.70 lakh (being 200% of Rs.610 lakh minus Rs.1150 lakh)

So, the least amount of deduction U/S 36(1) will be 70 lakh.


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Other deductions

Family Planning expenditure

Revenue expenditure incurred by entities established

under any Central, State or Provincial Act. Banking cash transaction tax and securities transaction

tax


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Other deductions (continued)

Contribution to credit guarantee trust fund

Advertisement expenses

Expenses deductible from commission earned by lifeinsurance agents, UTI agents, post office / Govtsecurities agent and agents of notified mutual funds


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Disallowances

INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES PAYABLE TO A

NON-RESIDENT

Disallowance attracted if the following conditions are satisfied.

Condition one The amount paid is interest , royalty, fees for technical services .

Condition two The aforesaid amount is chargeable to tax under the Act in the hands of the

recipient.

Condition three The aforesaid amount is paid/payable as followsSituation Place of payment To whom it ispaid/payableSituation 1 =Outside India = o a resident or nonresidentSituation 2 = In India = To a non-resident or foreign company

Condition four In respect of the aforesaid, tax is deductible but tax has not been deductedOrtax has been deducted but after deduction it has not been paid to theGovernment in the previous year.


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SECURITIES TRANSACTION TAX - Securities transaction taxis not deductible while calculating business income.

FRINGE BENEFIT TAX - Fringe benefit tax is not deductible

while calculating business income from the assessment year 2006-07.

INCOME-TAX

WEALTH-TAX

SALARY PAYABLE OUTSIDE INDIA WITHOUT TAX DEDUCTION


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- is applicable if the following conditions are satisfied

Condition one The payment is chargeable under the head Salaries in the handsof the

recipient.

Condition two It is payablea. outside India (to any person resident or non-resident); orCondition twob. in India to a non-resident.

Condition three Tax has not been paid to the Government nor deducted at source under theIncome-tax Act.


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PROVIDENT FUND PAYMENT WITHOUT TAX

DEDUCTION

Amount not deductible in case of a partnership firm

AMOUNT NOT DEDUCTIBLE IN RESPECT OFPAYMENT TO RELATIVES

Relative ?Substantial interest ?(1) Payment to relatives , directors , partners(2) payment to a person who has substantial interest in the

business and to the relative of such person.(3) payment to a person in whose business the assessee has a

substantial interest


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AMOUNT NOT DEDUCTIBLE IN RESPECT OFEXPENDITURE EXCEEDING RS. 20,000

Condition one The assesse incurs any expenditure, which is otherwisedeductible under the other provisions of the Act for computingbusiness/profession income (e.g., expenditure for purchase ofraw material, trading goods, expenditure on salary, etc.). Theamount of expenditure exceeds Rs. 20,000.

Condition two A payment in respect of the above expenditure (or part thereof)exceeds Rs. 20,000.

Condition three The payment mentioned in condition two is made in cash or bybearer cheque (i.e., not by crossed cheque or crossed demanddraft).

Example : x ltd purchasedgoods on creditA) 15,000 in cashB) 30,000 by bearer chequeC) 41,000 by an account payee

cheque

Solution :A) Nothing will disallowed (not exceeding20000 )B) 100 % of 30,000 disallowedC) Nothing will disallowed ( account payeecheque )


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amount not deductible in respect of provision for unapproved gratuityfund

Provision for gratuity fund is deductible only if such gratuity fund is an approvedgratuity fund

amount not deductible in respect of contributions to non-statutory funds .

Condition1) The contribution is made by an assessee as an employer .2) it is paid towards setting up any trust , company , association of persons , body of

individuals , society or it is paid by way of contribution to any fund .

3) the contribution is not required by any law.


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Amount not deductible in respect of unpaid

liabilities

Mercantile system is mustGeneral Rule:certain expenses are on payment basis

Exception:when deductible on accrual basis

Conversion of unpaid taxes into loan by state govt.

Conversion of unpaid interest on loan as fresh loan bybank/financial institution

Condition 1 Payment in respect of aforesaidexpenses is has to be made on or

before due date of submission ofreturn of income

Condition 2 Evidence of such payment issubmitted along with return ofincome


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Deemed profits and how they are charged

Recovery against any deduction Sale of assets used for scientific research Recovery of bad debts Amount withdrawn from reserve created under Sec 36 (1) (viii) Recovery after discontinuance of business or profession

Adjustment of Loss

Condition 1 The business or profession is discontinued

Condition 2 Loss of such business or profession pertaining to theyear in which it is discontinued could not be set offagainst any other income of that year

Condition 3 Such business is not a speculative business

Condition 4 After discontinuation of such business or profession,there is a receipt which is dominated as businessincome under sec 41(1), (3), (4) or (4A).

Condition 1 In any of the earlier years a deduction was allowed tothe tax payer in respect of laws, expenditure (revenueor capital expenditure) or trading liability incurred bythe assessee

Condition 2 During the current previous year, the tax payer A) has obtained a refund of such trading liability (itmay be in cash or any other manner) orB) has obtained such benefit in respect of such tradingliability by way of remission or cessation thereof

(remission or cessation for this purpose includesunilateral act of the assessee by way of writing-off suchliability in this books of accounts)


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Undisclosed income/investments are taxed

Cash Credit

Unexplained investments

Unexplained money, etc.

Amount of investment not fully disclosed in books of accounts

Unexplained expenditure

Amount borrowed or repaid on hundi


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When maintenance of books of accounts becomes compulsory

Persons Carrying on specified professions Persons Carrying on non specified professionals or any business Persons covered by sections 44AD, 44AE, 44BB, 44BBB


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Who has to get his accounts

audited on compulsory Basis

Tax Payers When they cover by Provision of compulsoryaudit.

A person carryingon Business.

If the total sales, turnover for the previous year relevantto the assessment year exceeds or exceeds Rs.60 lakh.

A person carryingon Profession.

If the total gross receipts for the previous year relevant tothe assessment year exceeds Rs.15 lakh.


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Special provision computing income on

estimated basis U/S 44AD

The following Condition must be satisfied:-

1. Eligible assesse2. Has not claimed some deduction

3. Eligible business4. Turnover not exceed 60 lakh.

If a tax payer is engaged in a business.


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Who is covered by Section 44AE

If a Tax-payer is engaged in business of leasing andhiring trucks.

Following Conditions must be satisfied:

Condition 1 The taxpayer may be anindividual , HUF ,firm,

company, co-operativesociety, or any other person.

Condition 2 Tax payer is engaged in thebusiness of plying, hiring orleasing goods carriages.

Condition 3 The taxpayer owns notmore than 10 goodscarriages at any time duringthe previous year.


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An assesse may value its stock either at cost price orat market price, whichever is less.

Once a particular method of valuation is adopted,

the same should be continued in subsequent year. On the basis of lower of cost or market price:

Individual method In this method, one has to take cost or market price,

whichever is less, in respect of each item of stock. Global method In this method, value of stock is taken as the total cost of

all items of stocks or market price of all items of stocks,whichever is less.

VALUATION OF CLOSING STOCK


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Example

Global Method Individual Method


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Taxation Nandish Patel

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