CHAPTER 14 PGBP. Rent, rates, taxes, repairs and insurance for buildings. Repairs and insurance of P&M and Furniture & Fixtures

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1 CHAPTER 14 PGBP Section Section 28 Section 30 Section 31 Section 32 Section 32(2) Subject Matter Charging section for PGBP income Rent, rates, taxes, repairs and insurance for buildings Repairs and insurance of P&M and Furniture & Fixtures Depreciation, depreciation in case of power generating units, depreciation in case of succession of business Treatment of unabsorbed depreciation Section 32(1)(iia) Additional depreciation Section 32AD Section 35 Section 35AD Section 35CCA Section 35CCC Section 35CCD Section 35D Section 35DDA Section 36(1)(i) Section 36(1)(ib) Section 36(1)(iii) Section 36(1)(iv), (iva) & (v) Section 36(1)(va) Section 36(1)(vii) Investment allowance for notified backward areas Expenditure on scientific research Deduction for investment linked tax incentive for specified business Expenditure by way of payment to associations for rural development programmes Expenditure on agricultural extension project Weighted Deduction for expenditure on skill development Amortization of certain preliminary expenses Amortization of expenditure incurred under VRS Deduction for premium paid for insurance of stock-in-trade Deduction for health insurance premium paid for employees Interest on borrowed capital Employer s contribution to recognised provident fund, pension scheme, approved gratuity fund/ superannuation fund Employee s contribution to RPF, superannuation fund etc. Bad debts

2 Section Section 36(1)(ix) Section 36(1)(xv) Section 36(1)(xvi) Section 37(1) Section 37(2B) Section 38 Section 40(a)(i) Section 40(a)(ia) Section 40(a)(iii) Section 40A(2) Section 40A(3); Rule 6DD Section 40A(7) Section 40A(9) Section 40(b) Section 41 Section 43(1) Section 43B Section 43CA Section 44AA, Rule 6F Section 44AB, Rule 6G Section 44AD Section 44ADA Section 44AE Section 145 Subject Matter Expenditure on promoting family planning amongst employees Securities transaction tax Commodities transaction tax General deductions Advertisement in newspapers of political parties, etc Assets partly used for business purposes & partly for personal purposes Interest, royalty, FTS etc payable outside India/ payable to non-resident Deduction of TDS in case of payments made to resident Deduction of TDS in case of salary payable outside India/ payable to non-resident Payment to relatives/related persons Payments exceeding Rs 10,000 to be made by account payee cheque/account payee draft Employer s contribution to gratuity fund Employer s contribution to various other funds Remuneration to partners Deemed profits chargeable to tax Actual cost Certain expenses allowed on actual payment basis Special provision for property dealers Compulsory maintenance of books of accounts Compulsory audit of accounts Presumptive Taxation (General Provisions) Presumptive Taxation (Specified Profession) Presumptive Taxation (Plying/Hiring/Leasing Goods Carriages) Method of Accounting

3 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal 14.1 CHAPTER 14 PROFITS & GAINS OF BUSINESS/PROFESSION Section 28 CHARGING SECTION - INCOMES TAXABLE U/H BUSINESS/PROFESSION As per Section 28, following incomes shall be chargeable u/h PGBP (the list is not exhaustive): Profits and gains of any business/profession Value of any benefit or perquisite arising from any business/profession: If a person carrying any business/profession receives any gift/perquisite from his clients, the value of such gift/perquisite shall be considered to be the income of the person u/h profits and gains of business/profession whether such gift/perquisite is convertible into money or not. Example: A client is extremely happy with the work of his CA and apart from the agreed upon fees, the client gives a wrist watch worth Rs 50,000 to the CA. The value of such watch shall be included in the income of the CA u/h income from business/profession. Any interest, salary, bonus, commission or remuneration, by whatever name called, received by a partner of a firm from such firm to the extent allowed u/s 40(b). Non-compete fee received/receivable for not carrying on a business/profession: Any payment received by a person for not carrying out any particular business/profession for a particular period or at a particular place is termed as non-compete fee and taxable as PGBP income. Similarly, any sum received for not sharing any know-how, patent, copyright, trademark, license, etc is also taxable as business income. Conversion of inventory into capital asset and used for business/profession: Where inventory is converted or treated as a capital asset and is used for the purpose of business/ profession, the fair market value of such inventory as on the date of its conversion into capital asset would be chargeable to tax as business income. Further, such fair market value shall be the actual cost of such capital asset to the assessee. Termination/modification of terms and conditions of any business contract: Any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to business shall be taxable as business income. Sum received under Keyman Insurance Policy: A person may take a life insurance policy for any of its employees or any other person who are extremely crucial for his business. Such insurance policy is known as Keyman Insurance Policy. The premium paid by the person is allowed to be debited to P&L A/c. If any sum is received under such a policy by the assessee himself (ie the employer), such income is taxable in his hands u/h PGBP. If such sum is received by the employee, such sum is taxable in the hands of the employee u/h salary. If such sum is received by any other person, such sum is taxable in the hands of the other person u/h other sources. For Classes & Information: Visit & download IGP Mobile App

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5 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal 14.2 Section 145 METHOD OF ACCOUNTING Income u/h PGBP and income u/h other sources is computed by deducting the eligible expenses from the gross revenue earned to arrive at the net income. Revenue and expenses can be recognized in the books of accounts on either accrual basis or cash basis. Section 145 of the Income Tax Act, 1961 allows an assessee to adopt either of these two methods on a consistent basis. Cash System of Accounting Accrual System of Accounting (Mercantile System) Receipts and payments are recorded in the year in which the amounts are received/paid irrespective of the year to which such payments/receipts relate. Under cash system of accounting, valuation of opening stock and closing stock carries no relevance. Depreciation is allowed as an expense under cash system of accounting in the manner and to the extent prescribed u/s 32 of the Income Tax Act, Under accrual system of accounting, receipts and payments are recorded in the year in which they accrue irrespective of the fact when the same are received/paid. Valuation of opening stock and closing stock is an integral part of accounting under mercantile system of book-keeping. The treatment of undervaluation/overvaluation of opening stock and closing stock has been provided in the table given below: Particulars Opening Stock Closing Stock Treatment in case of undervaluation The undervalued amount is to be deducted from the current year s profits The undervalued amount is to be added to the current year s profits Treatment in case of overvaluation The overvalued amount is to be added to the current year s profits The overvalued amount is to be deducted from the current year s profits Certain expenses listed u/s 43B are allowed to be deducted only on actual payment basis. Such expenses are not allowed to be debited on accrual basis. Change in Method Different Methods for Different Business A method once adopted by the assessee should be applied by him consistently. However, in certain situations, the assessee can change the method of accounting if the change has been approved by the Assessing Officer. If an assessee is carrying on more than one business, he can follow cash system of accounting for one business and mercantile system of accounting for another business. If an assessee has more than one source of income u/h income from other sources, he can follow cash system of accounting for one source and mercantile system of accounting for other sources. Section 38 ASSETS PARTLY USED FOR BUSINESS AND PARTLY USED FOR PERSONAL PURPOSES Where any asset has been used by the assessee partly for business purposes and partly for personal purposes, expenditure is allowed only to the extent the asset has been used for business purposes. Example: A motor car is used by Mr A for business purposes to the extent of 60% and balance 40% for personal purposes. In this case, expenditure shall be allowed to be debited only to the extent of 60%. For Classes & Information: Visit & download IGP Mobile App

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7 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal 14.3 Section 30 RENT, RATES, TAXES, REPAIR & INSURANCE OF BUILDINGS The following expenses in respect of premises are allowed as deduction u/s 30. Such expenses are allowed even if the assessee is not the owner of the premises provided such premises are used for the purposes of business/profession: Rent charges paid by the tenant (where the building is owned by the assessee, notional rent in respect of such building is not allowed to be deducted) Revenue expenses on repairs Insurance premium relating to the premises Municipal taxes, land revenues, local rate, etc (subject to provisions of Section 43B) Note: Capital expenditure on repairs incurred by the owner shall be added to the cost of building. Note: Capital expenditure on repairs incurred by the tenant is deemed as building in the hands of the tenant on which depreciation is allowed to the tenant. Section 31 REPAIRS AND INSURANCE OF PLANT & MACHINERY AND FURNTIURE & FIXTURES The following expenses in respect of plant & machinery and furniture & fixtures are allowed as deduction u/s 31 provided these assets are used for the purposes of business/profession. The assessee need not be the owner of the assets: Revenue expenses on repairs Insurance premium relating to the asset. Note: Capital expenditure on repairs incurred by the owner shall be added to the cost of the asset. Section 32 DEPRECIATION Conditions to be Fulfilled for Claiming Depreciation (Cumulative Conditions) Assets on Which Depreciation is Admissible Generally, the asset on which depreciation is to be claimed must be owned by the assessee either individually or jointly with any other person (in case of joint ownership, each co-owner will get depreciation on his share of the asset); The asset should be used for the purposes of business/profession; and A rate of depreciation must be prescribed under the Income Tax Act in respect of such asset (no deprecation can be claimed in respect of land owned by an assessee and used for his business/profession as no rate of depreciation has been prescribed for land under the Income Tax Act). Tangible Assets: Buildings (the amount of buildings should not include the cost of land) Furniture and fittings Plant & Machinery As per Section 43(3), plant & machinery includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of the business or profession but does not include tea bushes, livestock, buildings or furniture and fittings. Intangible Assets: Intangible assets would include goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other commercial rights of similar nature. For Classes & Information: Visit & download IGP Mobile App

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9 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal 14.4 Rates of Depreciation Tangible Assets: Buildings: Residential building 5% Commercial building including roads/bridges, etc 10% Purely temporary erections such as wooden structures 40% Furniture and Fittings: Furniture and fixtures are always 10% Plant & Machinery: Plant & machinery other than those which are mentioned below (like machines, air-conditioner, generator) 15% Motor cars 15% Motor buses, motor lorries and motor taxis used in a business of running them on hire 30% Computers including computer software 40% Books (annual publications as well as other than annual publications) 40% Pollution control equipment 40% Intangible Assets: The rate of depreciation for all intangible assets is 25%. Manner of Calculating Depreciation under Income Tax Act Depreciation would be allowable to the owner even in respect of assets which are actually worked or utilized by another person (such as lessee or licensee). Under the Income Tax Act, depreciation is allowed only on WDV basis. Straight line method of depreciation is not allowed except in case of power generating companies. Depreciation is not calculated on the basis of value of individual assets; rather it is allowed on the basis of block of assets concept. Block of assets refers to a group of assets which belong to the similar class of assets and carry the same rate of depreciation. Depreciation at full rate in some cases and at half rate in other cases: Case I: If the asset has been put to use during the year of acquisition (a) (b) The asset has been put to use for 180 days or more during the relevant previous year The asset has been put to use for less than 180 days during the relevant previous year Depreciation shall be calculated at full rate Depreciation shall be calculated at half rate Example: ABC Ltd has purchased one P&M for Rs 10,00,000 on but it was put to use on In this case, depreciation for PY shall be computed at the full rate of 15% and the depreciation amount would be Rs 1,50,000. Example: If in the above example the asset was put to use on , depreciation for PY shall be computed at 7.5% since the asset has been put to use for less than 180 days and therefore the depreciation amount would come out to Rs 75,000. Case II: If the asset has been acquired during one previous year and has been subsequently put to use during a different year Depreciation shall be calculated at the full rate in the year in which the asset has been put to use. The number of days for which the asset has been put to use during such year is irrelevant. Example: ABC Ltd has purchased one P&M for Rs 10,00,000 on but it was put to use on In this case, no depreciation shall be allowed during PY However, depreciation for PY shall be computed at the full rate of 15% even though the asset has been used for less than 180 days and the depreciation amount for PY would come out to Rs 1,50,000. For Classes & Information: Visit & download IGP Mobile App

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11 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal 14.5 Meaning of PUT TO USE : Put to use means making an asset ready for use (ie installing an asset so that it is ready to be used). Actual use of the asset is not necessary. Amount on which depreciation is to be calculated {Section 43(6)}: Opening WDV as on 1 st April of the relevant PY Add: Actual cost of assets purchased during the year {Meaning of actual cost is given u/s 43(1)} Less: Sale value of assets sold/ Insurance claim in case of assets destroyed/ Scrap value in case of assets discarded Value of block of assets for the purpose of charging depreciation Less: Depreciation for the relevant PY Opening WDV as on 1 st April of the next PY XXXX XXXX (XXXX) XXXX (XXXX) XXXX Special point in respect of asset used for less than 180 days: If any asset in the block has been put to use for less than 180 days during the relevant PY, the actual cost of such asset shall be separated from the value of block of assets for the purpose of charging depreciation. Depreciation on the actual cost so separated shall be charged at half rate. On the balance amount, depreciation shall be charged at the full rate. (Refer Illustration 2 below) If the value of block of assets for the purpose of charging depreciation is less than the actual cost of the asset used for less than 180 days, depreciation shall be charged at half rate on the entire value of block of assets for the purpose of depreciation. (Refer Illustration 3 below) Special Cases: If all assets in the block have been sold/destroyed/discarded and there still remains some balance in the block, such balance would be treated as short term capital loss as per Section 50 and no depreciation shall be allowed on such balance. Further, such block would cease to exist with effect from next previous year. (Refer Illustration 4 below) If there is negative balance in the block, such negative balance would be treated as short term capital gains as per Section 50. The opening WDV of block of assets for the next previous year shall be taken to be NIL. (Refer Illustration 5 below) Illustration 1: Particulars Amount (Rs) Written down value of Plants A, B, C as on ,00,000 Add: Plant D purchased and put to use on ,00,000 Less: Sale value of Plant A (10,00,000) Value of block of assets for the purpose of charging depreciation 60,00,000 Less: Depreciation for PY (15% of Rs 60L) (9,00,000) Closing WDV of Plants B, C, D as on ,00,000 Illustration 2: Particulars Amount (Rs) Written down value of Plants A, B, C as on ,00,000 Add: Plant D purchased on & put to use on ,00,000 Less: Sale value of Plant A (10,00,000) Value of block of assets for the purpose of charging depreciation 60,00,000 Less: Depreciation for PY (7.5% of Rs 20L and 15% of Rs 40L) (7,50,000) Closing WDV of Plants B, C, D as on ,50,000 For Classes & Information: Visit & download IGP Mobile App

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13 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal 14.6 Illustration 3: Particulars Amount (Rs) Written down value of Plants A, B, C as on ,00,000 Add: Plant D purchased on & put to use on ,00,000 Less: Sale value of Plant A (58,00,000) Value of block of assets for the purpose of charging depreciation 12,00,000 Less: Depreciation for PY (7.5% of Rs 12L) (90,000) Closing WDV of Plants B, C, D as on ,10,000 Illustration 4: Particulars Amount (Rs) Written down value of Plants A, B, C as on ,00,000 Less: Sale value of Plants A, B, C (42,00,000) Short term capital loss u/s 50 8,00,000 Depreciation for PY (Block would cease to exist wef ) Nil Illustration 5: Particulars Amount (Rs) Written down value of Plants A, B, C as on ,00,000 Less: Sale value of Plant A (55,00,000) Short term capital gain u/s 50 5,00,000 Depreciation for PY Nil Opening WDV of Plants B, C as on Nil Meaning of Unabsorbed Depreciation Treatment of Unabsorbed Depreciation Section 32(2) TREATMENT OF UNABSORBED DEPRECIATION Assessee carrying business/profession are allowed to debit the depreciation expenditure while calculating their income u/h business/profession. However, such expenditure can be debited only to the extent income is available u/h business/profession. The balance amount of depreciation that cannot be debited is referred to as unabsorbed depreciation. Example: PGBP income before debiting current year depreciation is Rs 1,00,000 and current year depreciation expenditure turns out to be Rs 1,60,000. In this case, depreciation to the extent of Rs 1,00,000 would be debited to P&L A/c and balance Rs 60,000 would be referred to as unabsorbed depreciation. Unabsorbed depreciation of a particular year is allowed to be set-off in the same year against income under any other head except salary income and casual income. If unabsorbed depreciation cannot be adjusted in the same year, it is allowed to be c/f for indefinite period of time (ie for an unlimited period) and in the subsequent years, such unabsorbed depreciation shall be allowed to be set-off against any income other than salary income and casual income. If any assessee has b/f business losses as well as b/f unabsorbed depreciation, a rational taxpayer would first adjust business losses and unabsorbed depreciation afterwards. Example: Mr X has business income of Rs 10,00,000 for PY and has b/f business losses of Rs 8,00,000 and b/f unabsorbed depreciation for Rs 5,00,000 pertaining to past periods. In this case, b/f business loss would be adjusted first and unabsorbed depreciation would be adjusted subsequently to the extent of Rs 2,00,000. Unabsorbed depreciation of Rs 3,00,000 would be carried forward to the next AY. For Classes & Information: Visit & download IGP Mobile App

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15 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal 14.7 Section 32(1)(iia) ADDITIONAL DEPRECIATION Conditions to be Fulfilled (Eligible Assessee) Meaning of New Plant & Machinery Amount of Additional Depreciation Deduction is available to all assessees who are engaged in the business of: manufacture or production of any article or thing; or generation, transmission or distribution of electricity. The assessee has purchased and installed new plant & machinery. New plant & machinery does not include: Second hand plant & machinery whether Indian or imported (ie plant & machinery should be brand new) Any plant & machinery installed in any office premises or any residential accommodation like guest houses (ie plant & machinery should be installed at factory) Any office appliances including computers or computer software Any vehicle Ship or aircraft Any plant & machinery, the actual cost of which is allowed to be debited to P&L A/c (ie plant & machinery for which deduction is claimed u/s 35, 35AD, etc) Case I: If new plant & machinery has been put to use during the year of acquisition: (a) Put to use for 180 days or more: One-time additional depreciation is 20% of the actual cost of the plant & machinery. (b) Put to use for less than 180 days: One-time additional depreciation is 10% of the actual cost of the plant & machinery. The balance 10% is allowed in the next year. Case II: If new plant & machinery has been acquired during one previous year and has been subsequently put to use during a different year: In such cases, one-time additional depreciation is 20% of the actual cost of the plant & machinery in the year in which the asset has been put to use. The number of days for which the asset has been put to use during such year is irrelevant. Special Provision for Units Set-up in Certain States This special provision is applicable to all kinds of assessees provided all the conditions listed below are fulfilled: The assessee sets up an undertaking/enterprise for manufacture or production of any article or thing on or after April 1, Such undertaking must be set up in any backward area (notified by the Central Government) in Andhra Pradesh, Bihar, Telengana and West Bengal. The assessee acquires and installs a new plant and machinery for the purposes of such undertaking on or after April 1, 2015 but before April 1, If all the above conditions are fulfilled, the rate of additional depreciation shall be taken to be 35% instead of 20%. Where the new plant & machinery has been put to use for less than 180 days in the year of acquisition, additional 17.5% shall be allowed in the first year and the balance 17.5% shall be allowed in the next year. Points to be Noted The amount of additional depreciation is in addition to the normal depreciation. Further, the amount of additional depreciation is reduced from the actual cost of the plant & machinery to arrive at its WDV value. For Classes & Information: Visit & download IGP Mobile App

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17 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal 14.8 Choice of WDV/ SLM Section 32 DEPRECIATION IN CASE OF POWER GENERATING UNITS Assessee engaged in the business of generation or generation and distribution of power shall have the option to claim depreciation as per: SLM method on each asset; or WDV method on block of assets Where the assessee has opted for SLM method on each asset, the following points also need to be taken care of: Depreciation shall be calculated at half rate if the asset is put to use for less than 180 days in the year of acquisition. Additional depreciation shall not be available (ie additional depreciation is available only where WDV method on block of assets is followed) Rates of depreciation shall be prescribed separately under the Income Tax Act. Treatment in case of Sale of Asset Where the assessee has opted for SLM method on each asset, tax treatment at the time of sale of asset shall be as follows: If the sale price of the asset is less than its WDV: The difference between the sale price and WDV shall be allowed to be debited to the P&L A/c (such difference is referred to as terminal depreciation ). If the sale price of the asset is more than its WDV but sale price of the asset does not exceed the actual cost of the asset: The difference between the sale price and WDV shall be taxable as income u/h PGBP as per Section 41(2) (such income is referred to as balancing charge ). If the sale price of the asset is more than its WDV and sale price of the asset also exceeds the actual cost of the asset: The difference between the actual cost of the asset and its WDV shall be taxable as income u/h PGBP as per Section 41(2) (such income is called as balancing charge ). The difference between the sale price of the asset and its actual cost shall be taxable as capital gains as per Section 50A. Examples Tata Power Ltd is a power generating unit and the company has purchased one P&M on for Rs 20 lakhs and the same was put to use on The company has opted to follow SLM method and the rate of depreciation prescribed under the Income Tax Act is 8.4%. In this case, the depreciation amount shall be: For PY : 20,00,000 x 8.4% x 50% = Rs 84,000 For PY : 20,00,000 x 8.4% = Rs 1,68,000 For PY : 20,00,000 x 8.4% = Rs 1,68,000 Let s assume that this P&M has been sold on WDV of this P&M as on is Rs 15,80,000. Case 1: The plant has been sold for Rs 9,00,000: The difference of Rs 6,80,000 [Rs 15,80,000 (-) Rs 9,00,000] shall be debited to P& L A/c as terminal depreciation. Case 2: The plant has been sold for Rs 18,00,000: In this case, the difference of Rs 2,20,000 [Rs 18,00,000 (-) Rs 15,80,000] shall be termed as balancing charge and would be deemed to be the PGBP income of the company u/s 41(2). Case 3: The plant has been sold for Rs 23,00,000: In this case, Rs 4,20,000 shall be termed as balancing charge and would be deemed to be the PGBP income of the company u/s 41(2). Rs 3,00,000 [Rs 23L Rs 20L] would be treated as STCG u/s 50A. For Classes & Information: Visit & download IGP Mobile App

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19 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal 14.9 Situations Covered Treatment of Depreciation Section 32 DEPRECIATION IN CASE OF SUCCESSION OF BUSINESS Amalgamation of companies; Demerger of companies; Conversion of proprietary firm into a company (private/public); Conversion of partnership firm into a company (private/public); Conversion of private limited or unlisted public company into a LLP firm. If any of the above mentioned five situations has occurred during the previous year, depreciation shall be computed as if no such succession has taken place and the total amount of depreciation shall be apportioned between the predecessor and the successor in the ratio of the number of days the asset was used by each one of them. Case I: Where the asset existed on the 1 st day of the relevant previous year: The total time period shall commence on 1 st April of the PY & end on 31 st March of PY. Case II: Where the asset was put to use during the relevant previous year: The total time period shall commence on the day when the asset was put to use and end on 31 st March of PY. Conditions to be Fulfilled (Eligible Assessee) Section 32AD INVESTMENT ALLOWANCE FOR NOTIFIED BACKWARD AREAS Benefit u/s 32AD is available to all kinds of assessees (corporate as well as noncorporate assessees). The assessee sets up an undertaking/enterprise for manufacture or production of any article or thing on or after April 1, Such undertaking must be set up in any backward area (notified by the Central Government) in Andhra Pradesh, Bihar, Telengana and West Bengal. The assessee acquires and installs a new plant and machinery for the purposes of such undertaking on or after April 1, 2015 but before April 1, Meaning of New Plant & Machinery Quantum of Deduction New plant & machinery does not include: Second hand plant & machinery whether Indian or imported (ie P&M should be brand new) Any plant & machinery installed in any office premises or any residential accommodation like guest houses (ie plant & machinery should be installed at factory) Any office appliances including computers or computer software Any vehicle, ship or aircraft Any plant & machinery, the actual cost of which is allowed to be debited to P&L A/c (ie plant & machinery for which deduction is claimed u/s 35, 35AD, etc) An investment allowance of 15% of the aggregate investment in new plant & machinery acquired and installed is available in the year in which such new asset is installed. Note: The amount of investment allowance shall not be reduced to arrive at the WDV of the plant & machinery. Lock-in Period of 5 Years New P&M in respect of which investment allowance has been claimed u/s 32AD must not be transferred for a period of 5 years from the date of its installation. If such plant & machinery is sold/transferred within a period of 5 years, deduction allowed earlier shall be deemed as PGBP income of the previous year in which such plant & machinery has been sold/transferred. For Classes & Information: Visit & download IGP Mobile App

20 Section 43(1) Amendment Introduced Vide The Finance Act, 2017 Under the existing provisions of the Income Tax Act, 1961, revenue expenditure incurred in cash exceeding certain monetary threshold is not allowed to be deducted as per Section 40A(3) except in specified circumstances as referred to in Rule 6DD of the Income Tax Rules, However, there is no corresponding provision elsewhere to disallow the capital expenditure incurred in cash. In order to discourage cash transactions even for capital expenditure, it is proposed to amend the provisions of Section 43 to provide that where an assessee incurs any expenditure for acquisition of any asset in respect which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, such expenditure shall be ignored for the purposes of determination of actual cost of such asset. In other words, if in respect of any capital expenditure, payment or aggregate of payments made to a person in a single day exceeds Rs 10,000, such expenditure shall be treated as a part of actual cost of the asset only if such payment has been made by way of account payee cheque, account payee draft or ECS through a bank account. Example (Covering Latest Amendment): Mr X owns Plant A and Plant B on April 1, 2018 (depreciated value of the block is Rs 60,000; rate of depreciation is 15%). On June 20, 2018, he purchases Plant C for Rs 5,25,000 (Rs 1,95,000 is paid in cash; balance has been paid by way of RTGS transfer). Plant C has been put to use on the same day and it is also to be 15%. Calculate allowable depreciation for PY

21 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal Meaning of Actual Cost Items to be Included in Actual Cost Assets Initially Used For Personal Purposes Subsequently Used in Business/ Profession Section 43(1) ACTUAL COST Actual cost is the cost for which an asset is acquired by the assessee. Note: Any part of the cost paid by any other person or any authority directly or indirectly is not to be included. Example: Mr X has bought a machinery of Rs 10 lakhs. He has received a government grant of Rs 3 lakhs for acquisition of the said asset and the balance Rs 7 lakhs has been paid by him. In this case, actual cost u/s 43(1) shall be Rs 7 lakhs only. Actual cost would include the following: Expenses directly related to the acquisition of the asset; Expenses necessary to bring the asset to site and install it (such as carriage inwards, charges related to loading and unloading of the asset, installation charges, etc); Expenses incurred to put the asset in use (such as cost of making a support structure for the asset); Interest on capital borrowed for the acquisition of asset commencing from the date of borrowing till the date the asset was first put to use. Example: A loan was taken for purchase of machinery on April 1, The asset was purchased on September 1, 2018 and was put to use on November 1, Interest from April 1, 2018 to October 31, 2018 shall be capitalized whereas interest for the period from November 1, 2018 to March 31, 2019 shall be treated as revenue expenditure. Case (a): Buildings previously used for personal purposes subsequently used for the purposes of business/profession. In such cases, actual cost shall be the actual cost of the building to the assessee as reduced by an amount equal to the depreciation that would have been allowable had the building been used for the business/profession since the date of its acquisition. In other words, notional depreciation would be allowed. Example: Mr A bought a residential building for the purposes of his residence on for Rs 20,00,000. The residential building was brought by him for his professional use on , when its market value was Rs 40,00,000. In this case, the actual cost of the asset u/s 43(1) shall be computed as under: Particulars Amount (Rs) Cost of residential building 20,00,000 Less: Notional 2.5% for PY (Less than 180 days) (50,000) WDV as on ,50,000 Less: Notional 5% for PY (97,500) Actual cost of residential building u/s 43(1) = WDV as on ,52,500 Depreciation for PY 5% 92,625 Case (b): Any other asset (such as P&M, furniture, etc) previously used for personal purposes subsequently used for the purposes of business/profession. (Buildings) In such cases, the cost of acquisition of the asset shall be treated as actual cost for the purposes of Section 43(1). In other words, no notional depreciation shall be allowed. Example (May 2012 Exam): A car was purchased by Dr Soman for Rs 5,25,000 on for personal use. It was subsequently brought by him into professional use on , when its market value was Rs 2,50,000. In this case, the actual cost of the car shall be Rs 5,25,000 and depreciation for PY shall come out to Rs 78,750 (ie 15% of Rs 5,25,000). For Classes & Information: Visit & download IGP Mobile App

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23 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal Applicability of Section 43B Types of Expenses to be Allowed on Actual Payment Basis Only Section 43B CERTAIN DEDUCTIONS ALLOWED ON ACUTAL PAYMENT BASIS Section 43B is applicable where the assessee maintains his books of accounts on the basis of mercantile system of accounting (ie accrual basis). Section 43B cannot apply in situations where the assessee follows cash basis of accounting (because under cash accounting system, all expenses are allowed on actual payment basis) Any sum payable by way of tax, duty, cess or fee (by whatever name called under any law for the time being in force); Any sum payable to the Indian Railways for use of the Railway assets; Employer s contribution to provident fund, superannuation fund or any other fund for the welfare of the employees; Bonus, commission or leave salary payable by the employer to his employees; and Interest on loan taken from: a scheduled bank including a co-operative bank; public financial institution (ie, ICICI, IFCI, IDBI, LIC, UTI, etc); state financial corporation; or state industrial investment corporation. Last Date of Payment The above mentioned expenses can be paid till the last date of filing of return of income relating to the previous year in which the expenditure was incurred. If the payment is so made, expenditure is allowed in the previous year itself. If the payment is made after the last date of filing of return of income, expenditure is allowed in the year in which the payment was made. Example: XYZ Ltd has taken a loan from SBI on which interest of Rs 5,000 is payable for PY If this interest was paid to SBI on or before , such interest would be allowed to be deducted in PY itself. However, if this interest was paid on or after , such interest would be allowed to be deducted in the previous year in which such payment was made. Conversion Of Outstanding Interest Into A Fresh Loan/Advance Where an assessee has taken a loan from scheduled banks, public financial institution, state financial corporation or state industrial investment corporation and such assessee is not able to pay any outstanding interest, the lenders may restructure the loan and convert the outstanding interest into a fresh loan/advance. Section 43B clarifies that the interest so converted and not actually paid shall not be deemed as actual payment, and hence would not be allowed as deduction. The unpaid interest, whenever actually paid to the above specified banks/financial institutions, will be in the nature of revenue expenditure deserving deduction in the computation of income. Therefore, irrespective of the nomenclature, the deduction will be allowed in the previous year in which the converted interest is actually paid. In other words, if outstanding interest is converted into a fresh loan/advance, no deduction shall be allowed in the year of conversion. Deduction shall be allowed in the year in which such converted interest has been actually paid. For Classes & Information: Visit & download IGP Mobile App

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25 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal Section 35 EXPENDITURE ON SCIENTIFIC RESEARCH PART 1: Scientific Research NOT Carried on by the Assessee Deductibility of Donations - Donation Given to Purpose of Donation Deduction Allowed National laboratory, IIT, university or a specified person approved by the prescribed authority {Section 35(2AA)} Approved research association, approved college, approved university or approved institution Approved research association, approved college, approved university or approved institution An approved company registered in India and having research & development as its main object Carrying out scientific research under an approved research programme Carrying out scientific research Carrying out social science or statistical research Carrying out scientific research 150% of donation given 150% of donation given 100% of donation given 100% of donation given Note 1: The person to whom donation is given can utilize the donation for the prescribed research. There is no condition that such research should be related to the business of the assessee. Note 2: Where the assessee is not carrying any business/profession, such donations are allowed as deduction u/s 80GGA to the extent of 100% of the amount of donation. Provisions Generally Applicable PART 2: Scientific Research Carried on by the Assessee Deductibility of Expenses Where any assessee carries out any research of scientific nature related to the business carried on by him, expenses are deductible in the following manner: Case (a) Expenditure incurred BEFORE the commencement of business: Capital Expenditure: Capital expenditure (other than expenditure on acquisition of land) incurred during three years immediately preceding the date of commencement of business shall be allowed as an expense in the year in which the business commences. Example: If an assessee commences his business on , entire 100% capital expenditure incurred during the period from to shall be allowed as an expense during PY Such capital expenditure can be incurred on acquisition of P&M, construction of building, acquisition of vehicles, etc for the purpose of scientific research. Where any assessee has purchased any land & building, expenditure is allowed only for the building portion and not for the land portion. Revenue Expenditure: Following revenue expenditure incurred during three years immediately preceding the date of commencement of business shall be allowed as an expense in the year in which the business commences: Salary paid to employees engaged in scientific research (excluding perquisites) Purchase of materials used in scientific research Pre-commencement revenue expenditure is allowed only to the extent it has been certified by the prescribed authority. Example: An assessee commences his business on , revenue expenditure incurred during the period from to was Rs 10 lakhs but the prescribed authority certified only Rs 8 lakhs. In this case, Rs 8 lakhs shall be allowed as an expense during PY Any expenditure incurred prior to shall not be allowed as deduction. For Classes & Information: Visit & download IGP Mobile App

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27 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal Case (b) Expenditure incurred AFTER the commencement of business: Capital Expenditure: 100% of the capital expenditure incurred by an assessee on scientific research in relation to his business is allowed as an expense in the year in which the capital expenditure is incurred by the assessee. Capital expenditure incurred on acquisition of land is not allowable as deduction. Where any assessee has purchased any land & building, expenditure is allowed only for the building portion and not for the land portion. Revenue Expenditure: Entire revenue expenditure incurred by an assessee on scientific research in relation to his business is allowed as an expense in the year in which such expenditure is incurred. (Certification from prescribed authority not required) Special Provision for Some Companies [Section 35(2AB)] This special provision applies only to those companies which are engaged in the business of bio-technology or in any business of manufacture or production of any article/thing other than those specified in the Eleventh Schedule. Following conditions are also required to be fulfilled: Research and development facility should be approved by a prescribed authority. The company has entered into an agreement with the prescribed authority for audit of accounts maintained for such facility. Deduction for post-commencement expenditure: Capital Expenditure Revenue Expenditure On land: Nil On building: 100% On other assets: 150% 150% of the expenditure incurred can be claimed as deduction Special Points Depreciation not allowed: No depreciation can be claimed u/s 32 in respect of those assets for which deduction has been claimed u/s 35. Treatment of unabsorbed capital expenditure on scientific research: The rules for set-off & carry-forward of unabsorbed capital expenditure on scientific research are similar to set-off & carry-forward of unabsorbed depreciation. Unabsorbed capital expenditure on scientific research of a particular year is allowed to be set-off in the same year against income under any other head except casual income. If unabsorbed capital expenditure on scientific research cannot be adjusted in the same year, it is allowed to be carried forward for indefinite period of time (ie for an unlimited period) and in the subsequent years, such unabsorbed expenditure shall be allowed to be set off against any income other than casual income. Treatment of scientific research asset no longer used for scientific research: Asset sold without using for the purposes of any other business Section 41(3) shall apply. Least of the following two amounts shall be taxable as PGBP income: Sale price of asset; or Deduction allowed u/s 35 Capital gains shall arise if the sale price exceeds the cost of the asset. Capital gains shall be long term if the asset was sold after a period of 3 years; otherwise capital gains shall be short-term. Asset transferred to any other business The asset shall be added to the existing block of assets of the other business. Actual cost of the asset so transferred shall be taken to be NIL. For Classes & Information: Visit & download IGP Mobile App

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29 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal Business Covered Quantum of Benefits u/s 35AD Section 35AD INVESTMENT LINKED TAX INCENTIVE FOR SPECIFIED BUSINESS Section 35AD provides investment linked incentives to the following businesses: Setting-up and operating a cold chain facility Setting-up and operating a warehousing facility for storage of agricultural produce Building and operating a hospital with minimum 100 beds for patients (the hospital can be located anywhere in India) Developing and building a housing project under a scheme for affordable housing Production of fertilizers in India Laying and operating a cross-country natural gas or crude oil or petroleum oil pipeline for distribution, including storage facilities being an integral part of such network. Building and operating, anywhere in India, a hotel of two star or above category (Where an assessee has built a hotel and has subsequently outsourced the hotel operations to any other person, the assessee would still be eligible for deduction u/s 35AD) Developing and building a housing project under a scheme for slum redevelopment or rehabilitation Setting-up and operating an inland container depot or a container freight station Bee-keeping and production of honey/beeswax Setting-up and operating a warehousing facility for storage of sugar Laying and operating a slurry pipeline for transportation of iron ore Setting-up and operating a semi-conductor wafer fabrication manufacturing unit Developing or maintaining and operating or developing, maintaining and operating a new infrastructure facility Case (a) Expenditure incurred AFTER the commencement of business: Capital Expenditure: On land, goodwill or financial instruments: Nil Other capital expenditure: 100% of the capital expenditure shall be allowed as deduction in the year in which such capital expenditure has been incurred. Revenue Expenditure: 100% of the revenue expenditure shall be allowed as deduction in the year in which such revenue expenditure has been incurred. Case (b) Expenditure incurred BEFORE the commencement of business: Expenditure incurred before the commencement of business shall be allowed as deduction in the year in which the business commences to the extent of 100% of such expenditure provided such expenditure has been capitalized in the books of accounts on the date of commencement of business. However, expenditure on acquisition of land, goodwill or financial instruments shall not be allowed. Latest Amendment Introduced Vide The Finance Act, 2017 If payment or aggregate of payments made to a single person in a single day in respect of a particular expenditure exceeds Rs 10,000, deduction shall be allowed for such expenditure only if payment has been made by way of account payee cheque, account payee draft or by use of electronic clearing system through a bank account. If payment has been made by any other mode, deduction shall not be allowed in respect of such expenditure. For Classes & Information: Visit & download IGP Mobile App

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31 PROFITS & GAINS OF BUSINESS/PROFESSION By: CA Vijender Aggarwal Other Points To Be Noted Meaning of Infrastructure Facility : A road including toll road, a bridge or a rail system; A highway project including housing or other activities being an integral part of the highway project; A water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system; and A port, airport, inland waterway, inland port or navigational channel in the sea. No other deduction possible: If deduction has been allowed u/s 35AD, the assessee shall not be allowed any deduction in respect of the specified business u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80QQB and 80RRB. Sale of asset for which deduction has been claimed u/s 35AD to be treated as business income: If any asset, in respect of which deduction has been allowed u/s 35AD, is sold, destroyed, demolished etc, the amount received on its sale, disposal, etc shall be treated as income of the assessee u/h income from business/profession. Assets cannot be used for other purposes for 8 years: The assets, the cost of which has been claimed as deduction u/s 35AD, must be used for the specified business for a period of at least 8 years. If such asset is used for any purpose other than the specified business within the period of 8 years, the following amount shall be deemed to be the income of the assessee u/h income from business/profession for the previous year in which the asset has been so used. Total deduction allowed u/s 35AD Less: Amount of depreciation allowable u/s 32 Amount deemed as income u/h PGBP XXXX (XXXX) XXXX Example: Deduction claimed u/s 35AD on a capital asset is Rs 100 lakhs whereas depreciation eligible on such asset u/s 32 is Rs 15 lakhs. In this case, an amount of Rs 85 lakhs would be deemed as the income of the assessee u/h income from business/profession. Set-off & carry-forward of losses of a specified business covered u/s 35AD (Section 73A): Intra-Head Adjustment: Losses of a business specified u/s 35AD are allowed to be set-off only against the income of another business specified u/s 35AD. Inter-Head Adjustment: Losses of a business specified u/s 35AD cannot be set-off against income under any other head. Carry Forward of Losses: Unadjusted losses of a business specified u/s 35AD are allowed to be carried forward indefinitely for being set-off against the income of a business specified u/s 35AD in future years. For Classes & Information: Visit & download IGP Mobile App