Deductions which are specified Under Section 36 include the followings…
1. Insurance Premium [Section 36(1)(i)]
Insurance premium is deductible in the following cases –
- Any premium paid in respect of insurance against risk of damage or destruction of stocks or stores, used for the purposes of business or profession.
- Insurance premium paid by a federal milk co-operative society on the lives of cattle, owned by the members of a primary milk co-operative society affiliated to it.
- Health insurance premium of employees paid by employer by any mode other than cash.
2. Bonus or Commission to Employees [Section 36(1)(ii)]
Bonus or commission paid to an employee is allowable as deduction subject to certain conditions:
- Admissible only if not payable as profit or dividend –
One of the conditions is that the amount payable to employees as bonus or commission should not otherwise have been payable to them as profit or dividend. This is provided to check an employer from avoiding tax by distributing his/its profits by way of bonus among the memberemployees of his/its concern, instead of distributing the sum as dividend or profits.
- Deductible on payment basis –
Bonus or commission is allowed as deduction only where payment is made during the previous year or on or before the due date of furnishing return of income under section 139
3. Interest on Borrowed Capital [Section 36(1)(iii)]
Interest on capital borrowed is allowed as deduction if the following conditions are satisfied —
- The assessee must have borrowed money.
- The money so borrowed must have been used for the purpose of business.
- Interest is paid or payable on such borrowing.
- Assessee must have Borrowed Capital –
Interest in respect of capital borrowed for the purpose of business/ profession is a permissible deduction. Interest on own capital is not deductible. In other words, interest shall be paid to another person. Interest paid by one unit of the assessee to another unit is not deductible.
- The following Propositions should also be kept in view –
- Deduction of interest on borrowed capital cannot be denied only because the borrowed capital produces nontaxable income.
- Guaranteed interest paid to shareholder on paid-up capital is not deductible.
- Interest paid to wife and daughters on money allotted to them on partition, is deductible.
- Interest paid by a firm to partners is deductible according to the provisions of section 40(b) [i.e., @ 12 per cent per annum simple interest]. However, interest paid by an association of persons to its members is not deductible.
- Capital must be used for the Purpose of Business –
Capital should have been borrowed for the purpose of business or profession.
- Interest on capital borrowed for acquiring a capital asset –
Interest liability pertaining to the period beginning from the date on which capital is borrowed by an existing concern for the acquisition of an asset till the date, when such asset is first put to use, should be capitalised and it cannot be claimed as deduction under section 36. Only interest on capital borrowed to purchase a capital asset for business purposes pertaining to the period after the asset is put to use, is deductible on year to year basis under section 36.
- Other Points –
The following proposition taken from different judicial pronouncements should also be kept in view:
- If borrowed money is utilised in earning non-assessable income, no deduction is allowed for interest paid on such borrowing.
- It is not for the income-tax department to examine whether there was no need to borrow money because the assessee had ample fund of his own.
- A taxpayer who is engaged in the business of trading in paper can claim deduction in respect of interest on capital borrowed for the setting of a garment business (even if the new business generates negative income).
- It is not open to the Assessing Officer to reject the claim of the assessee in respect of the interest paid on that capital merely because the use of the capital is unremunerative.
- Interest on money originally borrowed for business purposes would be disallowable in a subsequent year in which the money is used for non-business purposes.
- Interest paid by the assessee on money borrowed for payment of dividends is an allowable deduction.
- Where the assessee-partner borrows money for investing as capital in partnership, interest paid by the assessee on borrowed money is allowable as deduction.
- Interest on money borrowed to pay income-tax is not allowable as deduction. Interest for late payment/nonpayment of income-tax/advance tax/tax deducted or collected at source or for late filing of return, is not allowable as deduction. Similarly, where interest is paid for meeting tax liability of partners, such interest is not deductible.
4. 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.
- What are Zero Coupon Bonds -According to section 2(48), zero coupon bond is a notified bond issued by any infrastructure capital company (or infrastructure capital fund or public sector company or scheduled bank) on or after June 1, 2005. In respect of such bond, no payment/benefit is received (or receivable) by a bondholder before maturity/redemption.
- Meaning of Discount:
- Meaning of Period of Life of the Bond:
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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:—
- 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
- It represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.
In order to claim deduction under section 36(1)(vii), one must keep in view the following points:
1. There must be a Debt –
Before claiming an amount as a debt, it must be shown that it is a proper debt. In other words, a bad debt presupposes the existence of a debt and relationship of a debtor and creditor. Unless, therefore, there is an admitted debt it cannot be allowed as bad debt when it becomes irrecoverable.
2. Debt must be Incidental to the Business or Profession of the Assesee –
The debt which is claimed as bad debt under section 36(1)(vii) must be incidental to the business or profession carried on by the assessee. In other words, debts not connected with business or profession carried on by the assessee or not arising out of the operation of business or profession carried on by the assessee, are not admissible as bad debts even if other conditions are satisfied.
3. Debt must have been taken into Account in computing Assessable Income –
No deduction on account of bad debt is admissible unless the amount of debt is taken into account in computing the total income of the assessee of that previous year or of an earlier year. This condition is however, not relevant, if bad debt represents money lent in the ordinary course of money-lending or banking business.
4. Debt must have been Written Off in the Books of Account of the Assessee –
No deduction in respect of bad debt is allowable under section 36(1)(vii) unless it is written off as irrecoverable in the books of the assessee in the previous year in which claim for deduction is made††. It is not necessary to establish that debt has become bad during the relevant previous year. For this purpose, transfer to “provision for bad and doubtful debts account” shall not be taken as bad debts written off.
5. Deduction in the case of an Assessee who is also eligible for Deduction under Section 36(1)(viia) –
Deduction relating to a bad debt (or part thereof) in the case of an assessee to which section 36(1)(viia) applies is limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts account made under that section.
6. Adjustment at the time of Recovery –
A deduction on account of bad debt is based upon a mere estimate and it is allowed as deduction on the basis of amount written off in the books of account of the taxpayer. Therefore, in a case where debt ultimately recovered is less (or more) than the amount of debt left after writing off bad debt, some adjustment is required.
7. Debts of a Discontinued Business Not Deductible –
No allowance can be claimed in respect of bad debts of a business which has been discontinued before the commencement of the previous year. Such bad debt cannot be deducted even from profits of a separate existing business.
8. Allowable in the hands of Successor –
In some cases (e.g., one of the partners taking over business of the firm with all assets and liabilities or conversion of firm into company by taking over all assets and liabilities), the successor can claim the benefit of deduction of bad debt if the successor carries on the business of the predecessor and bad debt is written off in the books of account of the successor.
11. 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,—
- 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
- 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
- of an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.
- 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).
- 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).
12. Transfer to Special Reserve [Section 36(1)(viii)]
A financial corporation, banking company, co-operative bank and a housing finance company can claim deduction under section 36(1)(viii) as follows, if a few conditions are satisfied —
- the amount transferred during the previous year to the special reserve account created for the purpose of section 36(1)(viii); or
- 20 % of the profits derived from the business of providing long-term finance before claiming deduction under section 36(1)(viii); or
- 200 % of (paid-up share capital and general reserve as on the last day of the previous year) minus the balance of the special reserve account on the first day of the previous year, whichever is lower.
- Amount withdrawn from Reserve Account –
If any amount is withdrawn from the aforesaid reserve account [in respect of which deduction was allowed under section 36(1)(viii)], it will be chargeable to tax in the year in which the amount is withdrawn, under section 41(4A), regardless of the fact whether the business is in existence in that year or not.
13. 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.
The following points should be considered —
- No deduction is available under section 36(1)(ix) in the case of a non-corporate assessee. A non-corporate assessee may claim deduction under sections 32 and 37(1) if the relevant conditions are satisfied.
- Any family planning expenditure which is not allowed as deduction due to inadequacy of profit, shall be set off and carried forward as if it is unabsorbed depreciation.
14. 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”.
15. 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”.
16. 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.