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Expenses Expressly Allowed as Deductions from Gross Income from Business or Profession [Section-30-37]

Deduction in respect of the following has been expressly allowed against profits and gains of Business or Profession:

1. Rent, Rates, Taxes, Repairs And Insurance For Building [Section 30]

In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, profession, the following deductions shall be allowed:

  1. where the premises are occupied by the assessee:

    1. as a tenant — the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs;

    2. otherwise than as a tenant — the amount paid by him on account of current repairs to the premises;

  2. any sum paid (whether as owner or tenant) on account of land revenue, local rates or municipal taxes;

  3. any insurance premium paid (whether as owner or tenant) in respect of insurance against risk of damage or destruction of the premises.

2. Repairs and insurance of machinery, plant and furniture [Section 31]

In respect of machinery, plant or furniture used for the purpose of business, the following deductions are allowable:

  1. amount paid on account of current repairs,

  2. any insurance premium paid in respect of insurance against risk of damage or destruction of the plant and machinery or furniture.

3. Depreciation [Section 32] :

  • In order to claim depreciation, an assessee has to fulfil the following conditions:

  • The asset should be owned by the assessee. Where, however, an assessee carries on business or profession in a building not owned by him but taken on lease, he is entitled to depreciation in respect of the capital expenditure incurred by him after March 31, 1970 on the construction of any structure or any work in relation to the building by way of improvement, renovation or extension.  

  • The asset, in respect of which depreciation is claimed, must have been used for the purpose of business. Where, however, the asset is partly used for business or profession and partly used for private and personal purposes, a reasonable proportion of the depreciation attributable to the business user of the asset is allowed [Section 38].

  • Under the Income-tax Act, one can claim depreciation in respect of the following assets—

      • Tangible Assets – Building, Machinery, Plant and Furniture

      • Intangible Assets acquired after Markch 31, 1998. -  Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

4. Investment allowance in notified backward area in Andhra Pradesh, Bihar, Telangana or West Bengal [Section 32AD]

Manufacturing unit eligible for deduction @ 15% of actual cost of new asset being eligible plant and machinery [Section 32AD(1)]

The deduction will be available for the assessment year relevant to the previous year in which the new asset is installed. But in order to avail benefit under section 32AD, the new asset must both be acquired and installed on or after 1.4.2015 but on or before 31.3.2020.

5. Tea/Coffee/Rubber Development Account [Section 33AB] –

Deduction under section 33AB is available to an assessee who satisfies the following conditions:
Essential Conditions :

  1. the assessee is engaged in the business of growing and manufacturing tea or coffee or rubber in India;

  2. the assessee has, within six months from the end of the previous year or before the due date of furnishing return of income whichever is earlier;

  3. the assessee must get its accounts audited by a Chartered Accountant and furnish the report of such audit in Form No. 3AC, along with the return of income.
  4. Quantum of deduction:
    Quantum of deduction shall be:

    1. the amount(s) deposited in the schemes referred to above; or

    2. 40% of the profits of such business computed under the head profits and gains of business or profession,
      whichever is less.

6. Site Restoration Fund [Section 33ABA]

Deduction under section 33ABA is allowed to an assessee who satisfies the following conditions:

Essential conditions:

  1. The assessee is carrying on business consisting of prospecting for or extraction or production of petroleum or natural gas or both in India and in relation to which the Central Government has entered into an agreement with such assessee for such business.

  2. The assessee has before the end of the previous year—

    1. deposited with the State Bank of India any amount(s) in a special account maintained by the assessee with that bank, in accordance with and for the purposes specified in, a scheme approved in this behalf by the Ministry of Petroleum and Natural Gas of the Government of India; or

    2. deposited any amount in the Site Restoration Account opened by the assessee in accordance with, and for the purpose specified in a scheme framed by the aforesaid Ministry. This scheme is known as Deposit Scheme.

  3. The assessee must get its accounts audited by an Accountant as defined in the Explanation below section 288(2) and furnish the report of such audit in the Form No. 3AD alongwith the return of income. In a case where the assessee is required by or any other law to get its accounts audited, it shall be sufficient compliance if such assessee gets the accounts of such business audited under such law and furnishes the report of the audit as required under such other law and a further report in the form prescribed. Quantum of deduction:

  4. Quantum of deduction shall be:—

    1. the amount deposited in the scheme referred to above; or

    2. 20% of the profit of such business computed under the head profits and gains of business or profession,

    Whichever is Less.

7. Expenditure on Scientific Research [Section 35] –

Scientific research may be carried on:

  1. by the assessee, relating to his business; or

  2. by making payment to outside agencies engaged in scientific research work.

1. In-house Scientific Research:

The expenses incurred on in-house research i.e. research carried out by the assessee are allowed as a deduction, only where the research work relates to the business of the assessee.

An assessee can claim the following expenditure as a deduction:

  1. revenue expenses

  2. capital expenses

2. Sale of an Asset used for Scientific Research

3. Unabsorbed capital expenditure on scientific research:

For claiming deduction on account of capital expenditure on scientific research, it may be noted that like depreciation, the deduction of such capital expenditure shall be allowed to the extent of the profit from that business. There cannot be business loss due to such deduction.

4. Payment to Outside Agencies :

  1. Payment made to certain association/ institutions for scientific research [Section 35(1)(ii) & (iia)]

  2. Payment mode to certain institutions for research in social sciences or statistical research [S. 35(1)(iii)]

  3. Payment made to a company to be used for scientific research [Section 35(1)(iia)]

  4. Payment made to a National Laboratory or a University or an Indian Institute of Technology [Section 35(2AA)]

8. Expenditure for obtaining right to use Spectrum for Telecommunication Services [Section 35ABA]

Where any capital expenditure is incurred by the assessee for acquiring any right to use spectrum for telecommunication services either before the commencement of the business or thereafter at any time during any previous year and for which payment has actually been made to obtain a right to use spectrum, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.

9. Expenditure for obtaining licence to operate Telecommunication Services [Section 35ABB]

Where any capital expenditure is incurred by the assessee for acquiring any right to operate telecommunication services either before the commencement of the business to operate telecommunication service or thereafter any time during any previous year and for which payment has actually been made to obtain a license, a deduction will be allowed in equal instalments over the period for which the license remains in force, subject to the following:

  1. If the fee is paid for acquiring any right to operate telecommunication services before the commencement of such business, the deduction shall be allowed for the previous years beginning with the previous year in which such business commenced.

  2. If the fee is paid for acquiring such rights after the commencement of such business the deduction shall be allowed for the previous years beginning with the previous year in which the license fee is actually paid.

10. Deduction in respect Of Expenditure On Specified Business [Section 35AD]

Deduction under section 35AD shall be allowed to the assessee who is carrying on any of the following specified business:

  1. setting up and operating a cold chain facility;

  2. setting up and operating a warehousing facility for storage of agricultural produce;

  3. laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution,

  4. the business of building and operating anywhere in India, a hotel of two-star or above category, as classified by the Central Government;

  5. building and operating, anywhere in India, a hospital with at least 100 beds for patients;

  6. developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government.

  7. developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government.

  8. production of fertiliser in India;

  9. Setting up and operating an Inland Container Depot or Container Freight Station notified and approved under the Customs Act, 1962;

  10. bee-keeping and production of honey and beeswax; and

  11. setting up and operating a warehousing facility for storage of sugar.

  12. laying and operating a slurry pipeline for the transportation of iron ore;

  13. setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines;

  14. developing or maintaining and operating or developing maintaining and operating a new infrastructure facility

Nature and Amount of Deduction:

100% deduction shall be allowed an account of any expenditure of capital nature incurred wholly and exclusively for the purpose of the above specified business carried on by such assessee during the previous year in which such expenditure in incurred by him.

11. Payment to Associations and Institutions for carrying out Rural Development Programmes [Section 35CCA]

Under section 35CCA, any assessee who is carrying on a business/profession shall be allowed a deduction of the amount of the expenditure incurred by way of payment of any sum:

  1. to National Fund for Rural Development set up by the Central Government;

  2. to the National Urban Poverty Eradication Fund set up and notified by the Central Government.

12. Expenditure on Agricultural Extension Project [Section 35CCC]

Deduction shall be allowed on account of any expenditure incurred by the assessee on agricultural extension project notified by the Board in this behalf in accordance with the guidelines as may be prescribed

Quantum of Deduction :      150% of such expenditure incurred during the previous year

13. Expenditure on Skill Development Project [Section 35CCD]

Deduction shall be allowed on account of any expenditure (not being expenditure in the nature of cost of any land or building) incurred by the company on skill development project notified by the Board in this behalf in accordance with the guidelines as may be prescribed

Quantum of deduction: 150% of such expenditure incurred during the previous year

14. Amortisation of preliminary expenses [Section 35D]

Assessees who can claim deduction under this section are:

  1. Indian Company, or

  2. a person other than a company who is resident in India.

Expenditure in respect of which deduction is available

  1. expenditure incurred before the commencement of business; or

  2. expenditure incurred after the commencement of business in connection with the extension of existing undertaking or in connection with setting up a new unit.
    Expenses qualifying for deduction:

The following expenses qualify for deduction:

  1. Expenditure incurred in connection with:
    1. preparation of a feasibility report;
    2. preparation of a project report;
    3. conducting market survey or any other survey necessary for the business of the assessee;
    4. engineering services relating to the business of the assessee;
  2. legal charges for drafting any agreement between the assessee and any other person relating to the setting up or conduct of the business of the assessee;
  3. where the assessee is company, also, expenditure—
    1. by way of legal charges for drafting the Memorandum and Articles of Association of the company;
    2. on printing of the Memorandum and Articles of Association;
      1. by way of fees for registering the company under the provisions of the Companies Act, 1956;
      2. in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus;
  4. such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provisions of this Act) as may be prescribed.

Amount qualifying for deduction:

The aggregate of the expenditure referred to in clauses (a) to (d) above shall not exceed 5% of the cost of the project in case of all assessees other than companies.

In the case of a company, it cannot exceed 5% of—

  1. the cost of the project, or

  2. the capital employed in the business of the company,

    whichever is beneficial to the company.

Quantum of deduction:

The amount qualifying, as per the limits specified above, shall be allowed as a deduction in 5 equal annual instalments beginning with the previous year of commencement of business or the previous year in which the extension of undertaking is completed or the new unit commences production or operation.

Amortisation of expenditure in case of Amalgamation / Demerger [Section 35DD]

Where an assessee, being an Indian company, incurs any expenditure, wholly and exclusively for the purpose of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to 1/5th of such expenditure for each of five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. No deduction shall be allowed in respect of the expenditure mentioned above under any other provision of the Act.

Amortisation of Expenditure under Voluntary Retirement Scheme [Section 35DDA]

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.

Insurance Premium [Section 36(1)(i)]

The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession is allowed as deduction.

Insurance Premium paid by a Federal Milk Co-Operative Society [Section 36(1)(ia)]

The amount of any premium paid by a federal milk cooperative society towards an insurance on the life of the cattle owned by a member of the primary milk co-operative society is allowed as deduction provided such primary society is engaged in supplying milk raised by its members to such federal milk co-operative society.

Insurance Premium on Health of Employees [Section 36(1)(ib)]

The amount of any premium paid by any mode of payment other than cash by the assessee as an employer to effect or keep in force an insurance on the health of his employees under the scheme framed by (i) the General Insurance Corporation of India, or (ii) any other insurer approved by IRDA, and approved by the Government of India is allowed as deduction. There is no monetary ceiling for this deduction.

Bonus or Commission to Employees [Section 36(1)(ii)]

Any sum paid to an employee as bonus or commission for services rendered, is allowed as deduction, provided such sum would not have been payable to him as profits or dividends if it has not been paid as bonus or commission. It may be noted that this deduction is allowable only on payment basis. However, it can be claimed on accrual basis also subject to provisions of section 43B

Interest on Borrowed Capital [Section 36(1)(iii)]

The amount of interest paid in respect of capital borrowed for the purposes of business or profession is allowed as deduction.

Discount on issue of Zero Coupon Bonds [Section 36(1)(iiia)]

Any discount on issue of zero coupon shall be allowed on a pro rata basis having regard to the period of life of such bond calculated in a manner as may be prescribed.

  1. Meaning of discount: Discount means the difference between the amount received or receivable at the time of issuing the bond and the amount payable by on maturity or redemption of such bond;
  2. Meaning of period of life of the bond: Period of life of the bond means the period commencing from the date of issue of the bond and ending on the date of the maturity or redemption of such bond.

Employer’s Contribution to Recognised Provident Fund and Approved Superannuation Fund [Section 36(1)(iv)]

Any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or approved superannuation fund or any other approved welfare scheme of employee is allowed as a deduction subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, etc. as the case may be.

Employer’s Contribution to National Pension Scheme (NPS) [Section 36(1)(iva)]

Any sum paid by the assessee as an employer by way of contribution towards a pension scheme, as referred to in section 80CCD on account of an employee to the extent it does not exceed 10% of the salary of the employee in the previous year shall be allowed as deduction.

Contribution towards Approved Gratuity Fund [Section 36(1)(v)]

Any sum paid by the assessee as an employer by way of contribution towards approved gratuity fund, created by him for the exclusive benefit of his employees under an irrevocable trust, shall be allowed as a deduction subject to the provisions of section 43B.

Employees’ Contribution to Staff Welfare Schemes [Section 36(1)(va)]

Certain employers were deducting amounts from the salaries of the employees towards certain welfare schemes like PF, ESI, etc. but were not crediting it to the employees' accounts even after long periods. This Section was introduced to check such malpractices. Sum deducted from the salary of the employee as his contribution to any provident fund or superannuation fund or ESI or any other fund for the welfare of such employee is now treated as an income of the employer as per section 2(24)(x). However, if such contribution is actually paid on or before the due date mentioned below the deduction will be allowed for the same under this clause.

Allowance in respect of Dead or Permanently useless Animals [Section 36(1)(vi)]

Expenditure incurred on the purchase of animals otherwise than as stock in trade which are used for the purpose of business or profession is a capital expenditure. However, no depreciation is allowed on such capital expenditure. Such capital expenditure will be written off as a loss in the year in which the animal dies or becomes permanently useless for such business or profession. If any amount is realised on sale of the carcasses or the animals, such amount recovered shall be deducted from the capital expenditure which was incurred for the purchase of the animal and the balance amount shall be allowed as a deduction under this section.

Bad debts [Section 36(1)(vii)]

The amount of any bad debt or part thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be allowed as a deduction subject to the provisions of section 36(2) which are as under:—

  1. Such debt or part thereof must have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year, or
  2. It represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.

Provision for Bad and Doubtful Debts relating to Rural Branches of Commercial Banks [Section 36(1)(viia)]

In respect of any provision for bad and doubtful debts made by,—

  1. a scheduled bank (not being a foreign bank) or a co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank) or a non-scheduled bank,
    a deduction shall be allowed

    1. of an amount not exceeding 8.5% of the total income (computed before making any deduction under this clause and Chapter VIA i.e. deductions u/s 80C to 80U) and

    2. of an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.

  2. a bank incorporated by or under any foreign laws or a public financial institution or a State Financial Corporation or a State Industrial Investment Corporation, a deduction shall be allowed of an amount not exceeding 5% of the total income (computed before making any deduction under this clause and Chapter VIA).

  3. a non-banking financial company, a deduction shall be allowed of an amount not exceeding 5% of total income (computed before making any deduction under this clause Chapter VIA).

Transfer to Special Reserve [Section 36(1)(viii)]

Deduction under this section is allowed to a specified entity of an amount not exceeding 20% of the profits derived from eligible business computed under the head profits and gains of business or profession (before making any deduction under this clause) carried to special reserve account created and maintained by such specified entity. However where the aggregate of the amount carried to such reserve account from time to time exceeds 200% of the amount of the paid up capital and of general reserves of the specified entity, the excess amount is not deductible.

Family Planning Expenditure [Section 36(1)(ix)]

This deduction is allowed only to company assessees. Any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees is allowable as deduction in the year in which it is incurred. Where such expenditure or part thereof is of a capital nature, 1/5th of such expenditure shall be deducted for the previous year, in which it was incurred and the balance shall be deducted in four equal instalments during the subsequent four years.

Securities Transaction Tax [Section 36(1)(xv)]

An amount equal to the securities transaction tax paid by the assessee in respect of the taxable securities transactions entered into in the course of his business during the previous year, if the income arising from such taxable securities transactions is included in the income computed under the head "Profits and Gains of Business or Profession".

Commodities Transaction Tax [Section 36(1)(xvi)]

An amount equal to the commodities transaction tax paid by the assessee in respect of the taxable commodities transactions entered into in the course of his business during the previous year shall be allowable as deduction, if the income arising from such taxable commodities transactions is included in the income computed under the head "Profits and gains of business or profession".

Expenditure by Co-Operative Society for purchase of Sugarcane [Section 36(1)(xvii),

The amount of expenditure incurred by a cooperative society engaged in the business of manufacture of sugar for purchase of sugarcane at a price which is equal to or less than the price fixed or approved by the Government shall be allowed as a deduction.

General Deductions [Section 37]

Any expenditure (not being expenditure of the nature described in Sections 30 to 36) and not being in the nature of capital expenditure or personal expenditure of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed as deduction in computing the income chargeable under the Head "Profits and Gains of Business or Profession".

The twin requirements, therefore, are that the expenditure should be—

  1. Wholly and exclusively.
  2. For the purpose of business.

Examples of Expenditure Allowable as a Deduction u/s 37(1)

Remuneration to Employees:

Salary and perquisites paid to the employees of the assessee are allowable as a deduction. Salary paid by a firm to its partners is allowed as deduction subject to certain limits and conditions.

Payment of Penalty / Damages:

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.

Legal Expenses:

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.

Expenditure on Raising Loans:

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.

Interest:

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:

  1. interest on deferred payment for purchase of assets;
  2. interest on delayed payment of electricity charges;
  3. interest on purchase price of raw material;
  4. any amount paid 'in lieu of interest' in compromising a dispute with a trade creditor.

Expenditure on Advertisement:

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.

Expenses Allowable under Specific Instructions of CBDT:

  1. Diwali and Mahurat expenses.
  2. Payment for telephone/telex connection.
  3. 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.
  4. Annual listing fee: Annual listing fee paid to a stock exchange is allowable.
  5. Professional tax by the business assessee.
 
 

 
 
 
 
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