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:
- where the premises are occupied by the assessee:
- 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;
- otherwise than as a tenant — the amount paid by him on account of current repairs to the premises;
- any sum paid (whether as owner or tenant) on account of land revenue, local rates or municipal taxes;
- 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:
- amount paid on account of current repairs,
- 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]
Additional investment allowance is available from the assessment year 2016-17 under section 32AD. Accordingly, if an undertaking is set up in the notified backward areas in Andhra Pradesh, Bihar, Telangana and West Bengal by a company, it shall be eligible to claim deduction under section 32AD if it fulfils the conditions specified under section 32AD.
Conditions for Claiming Deduction Under Section 32AD –
The following conditions should be satisfied in order to avail tax incentive of additional investment allowance under section 32AD –
- The assessee may be a company or any other person.
- He/it sets up an undertaking/enterprise for manufacture or production of any article or thing on or after April 1, 2015.
- Such undertaking must be set up in any backward area (notified by the Central Government) in Andhra Pradesh, Bihar, Telangana and West Bengal.
- He/it acquires and installs (for the purposes said undertaking) a “new asset”. “New asset” for this purpose is a new plant or machinery. But it does not include second hand machinery, machinery installed in office/ residential accommodation/guest house, vehicle, ship or aircraft or any plant and machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing business income of any previous year.
- The new asset should be acquired and installed after March 31, 2015 but before April 1, 2020. Both ‘acquisition’ and ‘installation’ of the new asset (i.e., new plant and machinery) are required to be made after March 31, 2015 but before April 1, 2020.
Quantum of Investment Allowance Under Section 32AD : –
If the above conditions are satisfied, investment allowance under section 32AD is 15 % of actual cost of “new asset”. It is available in the year in which the new asset is installed.
5. Tea/Coffee/Rubber Development Account [Section 33AB] –
Deduction under section 33AB is available to an assessee who satisfies the following conditions:
Essential Conditions :
- the assessee is engaged in the business of growing and manufacturing tea or coffee or rubber in India;
- 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;
- 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.
Quantum of Deduction:
Quantum of deduction shall be:
- the amount(s) deposited in the schemes referred to above; or
- 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 :
- 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.
- The assessee has before the end of the previous year—
- 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
- 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.
- 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:
Quantum of Deduction shall be:—
- the amount deposited in the scheme referred to above; or
- 20% of the Profit of such Business computed under the head profits and gains of business or profession,
Whichever is Less.
The profits are to be computed before making any deduction under this section i.e. section 33ABA and before making adjustment for brought forward losses u/s 72.
7. Expenditure on Scientific Research [Section 35] –
The term “scientific research” means “any activity for the extension of knowledge in the fields of natural or applied sciences including agriculture, animal husbandry or fisheries”. The term ‘scientific research’ has a wide scope. It does not necessarily mean only invention or successful scientific research. With a view to accelerating scientific research, section 35 provides tax incentives.
Under this section amount deductible in respect of scientific research may be classified as under:
|Expenditure on Research carried on by the Assessee||Contribution to Outsiders|
|1. Revenue Expenditure under Section 35(1))(i)||1. Contributionto an Approved Research Association under Section 35(1)(ii)/(iii)|
|2. Capital Expenditure under Section 35(2)||2. Payment to National Laboratory under Section 35(2AA)|
|3. Expenditure on an Approved in-House Research under Section 35(2AB)||3. Contribution to an Indian Scientific Research Company.|
1. Revenue Expenditure Incurred by an Assessee who Himself Carries On Scientific Research [Section 35(1)(i)]
Where the assessee himself carries on scientific research and incurs revenue expenditure, deduction is allowed for such expenditure only if such research relates to his business.
Pre-commencement Period Expenses –
Revenue expenses incurred before the commencement of business (but within three years immediately before commencement of business) on scientific research related to the business are deductible in the previous year in which the business is commenced.
However, the deduction is limited to the extent it is certified by the prescribed authority prescribed for this purpose under rule 6 [prescribed authority is Director-General (Income-tax Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research, Government of India].
2. Contribution to Outside Institutions for Scientific Research [Section 35(1)(ii)/(iii)]
Where the assessee does not himself carry on research but makes contributions to the following institutions for this purpose, a deduction is allowed as follows—
|To whom Contribution can be given||Deduction( as a percentage of Actual Expenditure)|
|For AY 2018-19 to 2020-21||For AY 2021-22 onwards|
|An approved’ scientific association which has, as its object, undertaking of scientific research related or unrelated to the business of assessee [sec. 35(1)(ii)]||150%||100%|
|An approved’ university, college or other institution for the use of scientific research related or unrelated to the business of assessee [sec. 35(1)(ii)]||150%||100%|
|An approved’ university, college or other institution for the use of research in social sciences or statistical research related or unrelated to the business of the assessee [sec. 35(1)(iii)]||100%||100%|
3. Amount Paid to an Approved Scientific Research Company [Section 35(1)(iia)]
Section 35(1)(iia) is applicable if the following conditions are satisfied—
- The taxpayer is any person (maybe an individual, HUF, firm, company or any other person).
- The taxpayer has paid any sum to an Indian company (hereinafter referred as “payee-company”) to be used by the payee for scientific research.
- The scientific research may or may not be related to the business of the taxpayer.
- The payee-company has as its main object the scientific research and development.
- The payee-company is for the time being approved by the prescribed authority (i.e., the Chief Commissioner of Income-tax having jurisdiction over the applicant). An application shall be submitted online for this purpose in Form No. 3CF-III.
- The payee-company fulfils such other conditions as may be prescribed. These conditions are given in rule 5F.
Amount of Deduction –
If the above conditions are satisfied, the taxpayer can claim a deduction under
section 35(1)(iia). The amount of deduction is –
– for the assessment years 2009-10 to 2017-18 : 125% of the amount paid;
– from the assessment year 2018-19 onwards : 100% of the amount paid.
Payee-company cannot claim Deduction under Section 35(2AB) –
With a view to avoid multiple claims for deduction, it has been provided that the payee-company approved under the provisions of section 35(2)(iia) is not entitled to claim deduction under section 35(2AB). However, deduction to the extent of 100% of the sum spent as revenue expenditure or capital expenditure on scientific research which is available under section 35(1) will continue to be allowed.
4. Capital Expenditure Incurred by an Assesses who himself Carries On Scientific Research [Section 35(2)]
Where the assessee incurs any expenditure of a capital nature on scientific research related to his business, the whole of such expenditure incurred in any previous year is allowable as deduction for that previous year.
The following points should also be kept in view:
- The assessee should incur expenditure of a capital nature on scientific research and there is no requirement that such an expenditure should be capitalized in its books of account .
- Where any capital expenditure has been incurred before the commencement of the business, the aggregate of such expenditure, incurred within three years immediately preceding the commencement of the business, is deemed to have been incurred in the previous year in which the business is commenced [Explanation to section 35(2)(ia)].
- The aforesaid deduction is not available in respect of capital expenditure incurred on the acquisition of any land after February 29, 1984.
- If the asset is sold without having been used for other purposes, surplus or deduction allowed, whichever is less, is chargeable to tax as business income of the previous year in which the sale took place [sec. 41(3)]. The excess of surplus over deduction allowed is, however, chargeable to tax as capital gains.
- Deduction by way of depreciation is not admissible in respect of an asset used in scientific research, either in the year in which the capital expenditure is incurred or in a subsequent year.
5. Contribution to National Laboratory for Scientific Research[Section 35(2AA)]
The provisions of section 35(2AA) are given below—
CONDITIONS – The following conditions should be satisfied—
- The payment is made to—
- National Laboratory; or
- University; or
- Indian Institute of Technology; or
- Specified person as approved by the prescribed authority.
- The above payment is made under a specific direction that it should be used by the aforesaid person for undertaking scientific research programme approved by the prescribed authority.
AMOUNT OF DEDUCTION –
If the aforesaid conditions are satisfied, the taxpayer is eligible for deduction as follows—
- For the assessment years 2018-19 to 2020-21 : 150% of actual payment
- From the assessment year 2021-22 onwards : 100% of actual payment
Such contribution which is eligible for deduction under the aforesaid provisions is not eligible for any other deduction under the Act.
6. Expenses on In-House Research and Development Expenses [Section 35(2AB)]
From the assessment year 1998-99, sub-section (2AB) has been inserted in section 35. It provides for a deduction in respect of expenditure on in-house research and development expenses subject to the following—
Conditions – One has to satisfy the following conditions—
- The taxpayer is a company.
- The company should be in the business of bio-technology or in the business of manufacture or production of any article or thing except those specified in the Eleventh Schedule.
- It incurs any expenditure on scientific research and such expenditure is of capital nature or revenue nature (not being expenditure in the nature of cost of any land and building). The expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial, regulatory approval and filing an application for a patent.
- The research and development facility is approved by the prescribed authority.
- The taxpayer has entered into an agreement with the prescribed authority for co-operation in such research and development facility and for audit of the accounts maintained for that facility or fulfils such conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed.
Amount of Deduction –
If all the above conditions are satisfied, the quantum of deduction is as follows—
|For the assessment years 2018-19 to 2020-21||150% of actual payment|
|From the assessment year 2021-22 onwards||100% of actual payment|
A company approved under the provisions of section 35(1)(iia) is not eligible to claim weighted deduction under section 35(2AB). However, deduction under section 35(1)(i)/(2) can be claimed to the extent of 100% of the sum spent as revenue expenditure or capital expenditure on scientific research.
8. Expenditure for Obtaining Right to use Spectrum for Telecommunication Services [Section 35ABA]
Section 35ABA provides tax treatment of spectrum fees on the following lines —
- Any capital expenditure incurred and “actually paid” by an assessee on the acquisition of any right to use spectrum for telecommunication services by paying spectrum fee will be allowed as a deduction in equal instalments over the period for which the right to use spectrum remains in force. Deduction will be available starting from the year in which actual payment is made (or the year of commencement of business, whichever is later) and ending with the year when spectrum comes to an end, irrespective of the previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee or payable in such manner as may be prescribed.
- Where the spectrum is transferred and proceeds of the transfer are less than the expenditure remaining unallowed, a deduction equal to the expenditure remaining unallowed as reduced by the proceeds of transfer, shall be allowed in the previous year in which the spectrum has been transferred.
- If the spectrum is transferred and proceeds of the transfer exceed the amount of expenditure remaining unallowed, the excess amount shall be chargeable to tax as profits and gains of business in the previous year in which the spectrum has been transferred.
- Unallowed expenses in a case where a part of the spectrum is transferred would be amortised.
9. Expenditure for obtaining Licence to operate Telecommunication Services [Section 35ABB]
The provisions of section 35ABB are given below—
Conditions – Deduction under Section 35ABB is available if the following conditions are satisfied —
Condition-1 : The expenditure is capital in nature.
Condition-2 : It is incurred for acquiring any right to operate telecommunication services.
Condition-3 : The expenditure is incurred either before the commencement of business or thereafter at any time during any previous year.
Condition-4 : The payment for the above has been actually made to obtain licence.
If all the above conditions are satisfied, then one can claim deduction under section 35ABB. If, however, these conditions are not satisfied, then deduction under section 35ABB is not available [one may claim deduction under section 37(1)].
Amount of Deduction –
The payment will be allowed as deduction in equal instalments over the period starting from the year in which such payment has been made and ending in the year in which the licence comes to an end.
It may be noted that the deduction starts from the year in which actual payment of expenditure is made irrespective of the previous year in which the liability for the expenditure is incurred according to the method of accounting regularly employed by the assessee.
Where deduction is claimed and allowed under section 35ABB, no deduction will be available in respect of the same expenditure under section 32.
Profit or Loss on Sale of Telecom Licence –
Any profit or loss on sale of telecom licence is taken into consideration while computing business income. The relevant rules are discussed with the help of Problem 81.10-P2.
Consequences in case of Amalgamation or Demerger –
Where under a scheme of amalgamation/demerger, a telecom licence is transferred to an Indian company, then the provisions of section 35ABB shall continue to apply to the transferee-company.
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 specified business:
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.
However, this is subject to the following 3 Propositions—
- Expenditure incurred on the acquisition of any land or goodwill or financial instrument is not eligible for any deduction under section 35AD.
- Deduction under section 35AD is not available (with effect from the assessment year 2018-19) pertaining to any expenditure in respect of which payment (or aggregate of payments) made to a person in a day (otherwise than by an account payee cheque/draft/use of electronic clearing system through a bank account) exceeds Rs. 10,000.
- Expenditure incurred prior to the commencement of operation, wholly and exclusively, for the purpose of any specified business, shall be allowed as deduction during the previous year in which the assessee commences the operation of his specified business, if the amount is capitalized in the books of account of the assessee on the date of commencement of operation.
Conditions to be satisfied by the Specified Business to apply Deduction under Section-35AD:
This section applies to the specified business which fulfils all the following conditions:
- it is not set up by splitting up, or the reconstruction, of a business already in existence;
- it is not set up by the transfer to the specified business of machinery or plant previously used for any purpose;
- where the business is of laying and operating a cross country natural gas or crude or petroleum oil pipelines network it should satisfy the following conditions also:
- it is owned by a Indian or by a consortium of such companies or by an authority or a board or a corporation established or constituted under any Central or State Act;
- it has been approved by the Notified Petroleum and Natural Gas Regulatory Board;
- it has made such proportion of its total pipeline capacity available for use on common carrier basis by any person other than the assessee or an associated person as prescribed by the Petroleum and Natural Gas Regulatory Board; and
- any other condition as may be prescribed.
- any asset in respect of which a deduction is claimed and allowed under section 35AD, shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed.
Further, if such asset is used for any purpose other than the specified business during the period of 8 years specified in section 35AD(7A), otherwise then by way of a mode referred to in section 28(vii), the total amount of deduction so claimed and allowed in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.
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 to the following :
- any association or institution to be used for carrying out any programme of rural development approved before March 1, 1983;
- an association or institution which has its object the training of persons for implementation of a rural development programme approved before March 1, 1983;
- the National Fund for Rural Development; and
- notified National Urban Poverty Eradication Fund.
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 for the assessment years 2013-14 to 2020-21
[from the assessment year 2021-22, an assessee can claim 100 % of expenditure as deduction (but not weighted deduction)].
Important Points : The following points should be noted –
- Project shall be undertaken by an assessee for training, education and guidance of farmers.
- Project shall have prior approval of the Ministry of Agriculture.
- Expenditure (not being cost of land/building) exceeding Rs. 25 lakh is expected to be incurred for the project.
- For getting approval for the purpose of claiming weighted deduction under section 35CCC, an application in Form No. 3C-O should be submitted to the Member (IT), CBDT.
- Application shall be accompanied by –
- a detailed note on the agricultural extension project;
- details of the expenditure expected to be incurred and expected date of completion; and
- approving letter of Ministry of Agriculture.
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 for the assessment years 2013-14 to 2020-21
[from the assessment year 2021-22, an assessee can claim 100 % of expenditure as deduction (but not weighted deduction)].
Important Points : The following points should be noted –
- A company engaged in manufacture/ production of any article/thing (not being alcoholic spirits and tobacco products) or a company engaged in providing specified services (31 services have been notified for this purpose) can claim the benefit of weighted deduction under section 35CCD.
- Expenditure should be incurred on notified skill development project.
- The project should be undertaken in separate facilities in a training institute set up by Government, local authority or in an institute affiliated to National Council for Vocational Training or State Council for Vocational Training.
- For the purpose of claiming weighted deduction, an application should be submitted in Form No. 3CQ to National Skill Development Agency (NSDA).
- A copy of Form No. 3CQ should be sent to the Commissioner of Income-tax.
- Form No. 3CQ to be accompanied by detailed note on skill development project, expected expenditure and expected completion date, letter of concurrence from the training institute.
14. Amortisation of Preliminary Expenses [Section 35D]
An Indian company or a resident non-corporate assessee can claim deduction under section 35D in respect of preliminary expenses. Such expenditure may be incurred before commencement of the business or after commencement of the business in connection with extension of an undertaking or in connection with setting up a new unit.
Assessees who can claim deduction under this section are:
- Indian Company, or
- a person other than a company who is resident in India.
Expenditure in respect of which deduction is available
- expenditure incurred before the commencement of business; or
- 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:
- Expenditure incurred in connection with:
- preparation of a feasibility report;
- preparation of a project report;
- conducting market survey or any other survey necessary for the business of the assessee;
- engineering services relating to the business of the assessee;
- 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;
- where the assessee is company, also, expenditure—
- by way of legal charges for drafting the Memorandum and Articles of Association of the company;
- on printing of the Memorandum and Articles of Association;
- by way of fees for registering the company under the provisions of the Companies Act, 1956;
- 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;
- 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 (1) to (4) 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—
- the Cost Of the Project, or
- the Capital Employed in the Business of the Company,whichever is beneficial to the company.
- Cost Of Project –
It means the actual cost (or additional cost incurred after commencement of business in connection with extension or setting up an undertaking) of fixed assets, namely, land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences.
- Capital Employed in the Business of a Company –
It is the aggregate of the issued share capital, amount outstanding as share premium† account, debentures and long-term borrowings, as on the last day of the previous year in which the business of the company commences (in the case of an existing company only capital, debentures and long-term borrowing issued or obtained in connection with the extension of the undertaking or the setting up of the new unit of the company, shall be considered).
Amount of Deduction:
1/5 th. of the Qualifying Expenditure is Allowable as Deduction in each of the 5 (five) successive years beginning with the year in which the business commences, or as the case may be, the previous year in which extension of the undertaking is completed or the new unit commences production or operation.
15. 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 5 (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.
16. 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.
The following points should be noted—
- The above rule is applicable even if the scheme of voluntary retirement has not been framed in accordance with guidelines prescribed under section 10(10C).
- Where voluntary retirement payment is made by predecessor and before completion of 5 years it is succeeded in a scheme of business reorganization (like amalgamation/merger of Indian companies or co-operative banks, conversion of firm/proprietary concern/private or unlisted company into company/LLP), the deduction for the remaining years will be available to the successor from the year in which the conversion takes place.
17. Amortisation of Expenditure on Prospecting etc., for Development of Certain Minerals. (Section 35E)
Section 35E provides for the amortisation of expenditure incurred wholly and exclusively on any operation relating to prospecting for the minerals or group of associated minerals or on the development of a mine or other natural deposit of any such minerals or group of associated minerals specified in the Seventh Schedule.
- Who can Claim Deduction –
Deduction under section 35E is allowed only in the case of Indian companies and resident assessees other than companies.
- Qualifying Expenditure – When it should be incurred –
The qualifying expenditure should be incurred during the “year of commercial production” and four years immediately preceding that year.
- Qualifying Expenditure – What does it include –
Expenditure incurred wholly and exclusively on any operations relating to prospecting for any mineral (or group of associated minerals) specified in the Seventh Schedule or on the development of a mine or other natural deposit of any such mineral or group of associated minerals, is “qualifying expenditure”. However, a few expenses (like expenses met by any other person, expenditure on acquisition of site, capital expenses on acquiring building, plant, machinery and furniture) are excluded.
- Amount and Period of Deduction –
The amortisation of qualifying expenditure is allowed in equal instalments over a period of 10 years. The amount deductible for each year is—
- 1/10 th. of “qualifying expenditure”; or
- income (before section 35E deduction) of the previous year arising from commercial exploitation of any mine or deposit of minerals of any other nature,whichever is less.
- Audit Report –
If the assessee is a person, other than a company/co-operative society, then books of account of the relevant year(s) in which the expenditure is incurred should be audited.
- Consequences in the case of Amalgamation or Demerger –
In the case of amalgamation/demerger of Indian companies, the above benefit for the unexpired period will be available to the transferee.
Other Deductions (Section 36)
Deductions which are specified Under Section 36 include the followings…
18. 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.
19. 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
20. 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.
21. 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:
22. 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.
23. 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.
24. 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.
25. 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.
26. 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.
27. 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.
28. 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).
29. 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.
30. 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.
31. 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”.
32. 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”.
33. 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.
34. 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—
- Wholly and exclusively.
- 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.
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.
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:
- interest on deferred payment for purchase of assets;
- interest on delayed payment of electricity charges;
- interest on purchase price of raw material;
- 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:
- Diwali and Mahurat expenses.
- Payment for telephone/telex connection.
- 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.
- Annual listing fee: Annual listing fee paid to a stock exchange is allowable.
- Professional tax by the business assessee.