16. Amortisation of expenditure incurred under Voluntary Retirement Scheme [Section 35DDA] - for computing Profit & Gains of Business or Profession
Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years. No deduction shall be allowed in respect of such expenditure under any other provision of the Income-tax Act.
It may be noted that if such expenditure is incurred by way of payment in more than one year, the deduction shall be allowed in five equal instalments for payment made in each previous year.
17. Deduction for expenditure on Prospecting, etc., for Certain Minerals [Section 35E and Rule 6AB] - for computing Profit & Gains of Business or Profession
Where an assessee, being an Indian company or a person (other than a company) who is a resident of India, is engaged in any operations relating to prospecting for, or extraction or production of specified minerals (mentioned in Seventh Schedule) and incurs, after the 31st day of March, 1970, any specified expenditure, the assessee shall be allowed to amortise such expenditure.
Quantum of deduction:
The deduction to be allowed for any relevant previous year shall be:
(a) an amount equal to 1/10th of the expenditure (hereinafter referred to as the instalment); or
(b) such amount as is sufficient to reduce to nil, the income (as computed before making the deduction under this section) of that previous year arising from the commercial exploitation of this mine or any other mine, or other natural deposit of mineral in respect of which the expenditure was incurred,
whichever amount is less.
Compulsory Audit of Accounts [Section 35E(6)]
Where the assessee is a person other than a company or a co-operative society, no deduction shall be admissible under section 35E(1) unless the accounts of the assessee for the year or years in which the expenditure specified in section 35E(2) is incurred have been audited by an accountant and the assessee furnishes, along with his return of income for the first year in which the deduction under this section is claimed, the report of such audit in the Form 3AE duly signed and verified by such accountant and setting forth such particulars as may be prescribed.
18. Other Allowable Deductions [Section 36] - for computing Profit & Gains of Business or Profession
Deductions which are specified u/s 36 include the following:
1. Insurance premium of stocks [Section 36(1)(i)]:
2. Insurance premium of cattle [Section 36(1)(ia)]:
3. Insurance on health of employees [Section 36(1)(ib)]:
4. Bonus or Commission to employees [Section 36(1)(ii)]:
5. Interest on borrowed capital [Section 36(1)(iii)]:
6. Discount on issue of Zero Coupon Bonds to be allowed as Deduction on Pro Rata basis [Section 36(1)(iiia)]
7. Employer's contribution to a Recognised Provident Fund or Approved Superannuation Fund [Section 36(1)(iv)]
8. Employer's contribution towards a Pension Scheme [Section 36(1)(iva)]
9. Employer's contribution to an Approved Gratuity Fund [Section 36(1)(v)]
10. Sums received from employees towards certain welfare schemes if credited to their accounts before the due date [Section 36(1)(va)]
11. Allowance in respect of dead or permanently useless animals [Section 36(1)(vi)]
12. Bad Debts [Section 36(1)(vii)]
13. Provision for Bad and Doubtful Debts of a certain banks and financial institutions [Section 36(1)(via)]
14. Amount credited to Special Reserve credited and maintained by Special Entity. [Section 36(1)(viii)]
15. Expenditure on promoting Family Planning amongst the employees [Section 36(1)(ix)]
16. Securities Transaction Tax paid to be allowed as Deduction [Section 36(1)(xv)]
17. Commodity Transaction Tax to be allowed as a Deduction [Section 36(1)(xvi)]
19. General Deductions [Section 37(1)] – Allowed for computing Profit & Gains of Business or Profession
Any Expenditures subject to the following conditions shall be allowed as Deduction in computing the income chargeable under the head "Profit and Gains of Business or Profession".
(i) Such expenditure should not be covered under the specific sections, i.e. sections 30 to 36.
(ii) Expenditure should not be of capital nature.
(iii) The expenditure should have been incurred during the previous year.
(iv) The expenditure should not be of a personal nature.
(v) The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.
Examples of Expenditures allowable as a Deduction U/s 37(1) – for computing Profit and Gains of Business or Professions.
1. Remuneration to Employees U/s 37(1):
Salary and perquisites paid to the employees of the assessee are allowable as a deduction.
However, salary paid to the proprietor of the business is an appropriation of profit and shall not be allowed as deduction. Compensation paid to the employees in connection with the termination of employment on ground of commercial expediency is also allowable. Salary paid by a firm to its partners is allowed as deduction subject to certain limits and conditions.
2. Payment of Penalty / Damages U/s 37(1):
Penalty is normally levied for breach of law and are, therefore, generally not allowable as deduction.
However, at times an amount though termed as penalty, is purely compensatory in nature. For example, damages, penalty or interest paid for delay in completion of a contract, though termed as penalty are really in the nature of a compensatory payment and are therefore, allowable as a deduction.
However, penalties paid to customs authorities, sales-tax authorities, income-tax authorities, etc for infringement of law are not allowed. Levy for failure to pay sales tax within time is partly compensatory and partly penal, compensatory part is allowable and penal part is disallowable.
3. Legal Expenses U/s 37(1):
All legal expenses, incurred in connection with the business or profession of the assessee, are allowable, irrespective of the result of the legal proceedings.
However, legal expenses on criminal prosecution are not deductible, as they are not incidental to the business or profession.
Legal expenses to defend or maintain the title to a capital asset of the assessee's business are allowable, but expenses to acquire a title are not allowable because they are of a capital nature.
- litigation expenses for protecting the trade or business and for protection of assessee's trade mark are allowed.
- Legal and court expenditure spent for preparation and pursuing income-tax appeals are allowable expense.
4. Expenditure on Raising Loans U/s 37(1):
Expenses of various types incurred in connection with raising of loans, for the purposes of the business, are allowable as a deduction. Therefore, legal charges for obtaining the loans from financial institutions, legal charges for drafting various deeds, brokerage paid for raising loans, stamp and registration charges, shall be allowed as deduction.
5. Interest U/s 37(1) :
While Section 36(1)(iii) makes a specific provision for allowing a deduction in respect of interest on money borrowed for the purpose of business, other kinds of interest payments in respect of interest do not fall under that Section. If these payments have been made wholly and exclusively for the purposes of business, they can be allowed u/s 37(1). Some of these could be:
(i) interest on deferred payment for purchase of assets;
(ii) interest on delayed payment of electricity charges;
(iii) interest on purchase price of raw material;
(iv) any amount paid 'in lieu of interest' in compromising a dispute with a trade creditor.
6. Expenditure on Advertisement U/s 37(1) :
Any expenditure incurred during the previous year on advertisement for the purpose of business and profession shall be allowed as deduction. Expenditure incurred for sports tournaments organised, which directly result in publicity and advertisement of the assessee and its products, qualify for deduction. Expenditure incurred on putting up stall in exhibition organised in connection with centenary celebrations of Congress Party was held by the Tribunal to be expenditure on advertisement.
7. Expenses allowable under specific instructions of CBDT U/s 37(1)
(i) Diwali and Mahurat expenses.
(ii) Payment for telephone/telex connection.
(iii) Payment to Registrar of Companies: The fee paid to the Registrar of Companies are in connection with the company's legal obligations to be discharged under the Company law and are an essential part of the company's business activities and are therefore, allowed.
(iv) Annual listing fee: Annual listing fee paid to a stock exchange is allowable.
(v) Professional tax by the business assessee.