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1 Click icon to add picture Specific deductions under Income Tax Act, For discussion purposes only April Deloitte Haskins & Sells LLP 1

2 Introduction Setting the context 2017 Deloitte Haskins & Sells LLP 2

3 Specific deductions in Profits and gains from business & profession Deduction in relation to revenue expenses incurred on fixed assets (Section 30 & 31) Depreciation/ allowance for use of plant & machinery (Section 32) Specific & general deduction of revenue expenses (Section 36 & 37) Deduction on expenditure incurred for scientific research (Section 35) Profit linked deductions (Section 10AA) 2017 Deloitte Haskins & Sells LLP 3

4 BASIC PROVISIONS GOVERNING DEDUCTION U/S. 3O TO 37 No allowance of expenditure incurred before Onus to prove the expenditure lies setting on the up assesse of business 2 Expenditure should have been himself incurred and in he the shall previous prove the correctness 1 year in which the business was carried on. Expenditure should have been incurred connection with the assessee s own income and with a valid proof for the same Deloitte Haskins & Sells LLP 4

5 Setting up of business Mere purchase of any raw material is sufficient to satisfy set-up condition Setting up of infrastructure and/or employment of personnel Installation of machinery & trial run constitutes set-up Where licenses is required for business date of signing licensing agreement Sale not necessary Canvassing for sale will constitute set up Where any activity directed towards the main objective of business is initiated, business is said to be set up Display/ issue of samples will also constitute set up of business What constitutes setting up of business is to be decided on case to case basis 2017 Deloitte Haskins & Sells LLP 5

6 Deduction in relation to revenue expenses incurred on fixed assets 2017 Deloitte Haskins & Sells LLP 6

7 Rent, rates, taxes, repairs and insurance for buildings Premises occupied as a tenant Deduction for: - Rent - Cost of repairs Premises occupied otherwise than as tenant Deduction for: - Land revenue, local taxes, municipal taxes - Premium paid in respect of insurance - Amount of current repairs Cost of repairs not to include expenditure in capital nature Specific issues Notional rent paid by proprietor? Not allowable as deduction - Rent paid by partnership firm to partner is deductible Applicability of provisions of Section 43B Land revenue, local taxes etc. are deductible subject to the provisions of section 43B Allowance of capital expenditure undertaken to make rented premises suitable for use Is it deductible u/s 30, deductible u/s 37 or to be capitalised? 2017 Deloitte Haskins & Sells LLP 7

8 Repairs & Insurance of plant, machinery & furniture Deduction allowable for (i) Current repairs; (ii) Premium paid in respect of insurance Current repairs Predominant test whether expense for repairs is done to preserve and maintain an already existing asset or is it to bring a new/ substantially new asset to existence or to obtain fresh advantage Expense Allowed? Replacements Reconstruction/ remodelling Accumulated repairs Renewal of worn out doors/ ceiling r a r a Even where deduction is not available under section 31, the revenue expenditure may be deductible u/s Deloitte Haskins & Sells LLP 8

9 Depreciation/ Allowance for use of plant & machinery 2017 Deloitte Haskins & Sells LLP 9

10 Depreciation 2017 Deloitte Haskins & Sells LLP 10

11 Investment related allowance Eligibility Applicable from AY to to taxpayers engaged in business of manufacture of any article or thing Investment allowance of 15% of cost of new assets acquired and installed if investment in new assets exceeds Rs. 25 cr. If the assets are installed in a year, other than the year in which it was purchased than the deduction this under section would be allowed in the year of installation. Key conditions New assets means any new plant or machinery other than: - Assets used by any other person prior to installation, in India or outside India - Ship or aircraft, assets installed in office premises or residential accommodation - Office appliances including computer and computer software, vehicles. - Any asset on which whole cost is allowed as deduction in any previous year If asset is sold within 5 years from date of its installation, deduction allowed under section 32(AC) will be deemed to be income of the AY in which the asset is sold. Exception in the case of amalgamation and demerger, where lock-in period will apply to the amalgamated/ resulting company Deloitte Haskins & Sells LLP 11

12 Investment related allowance Deduction u/s 32AD - Deduction with respect to Investment in new plant and machinery in notified areas Additional investment allowance of an amount equal to 15% of the cost of new asset acquired and installed by an assesse is allowed, if - He sets up an undertaking or enterprise for manufacture or production of any article or thing on or after 1st April, 2015 in any notified backward areas in the State of Andhra Pradesh, Bihar, West Bengal, Telangana and other places notified in this regard by the Central Government. - The new assets are acquired and installed for the purposes of the said undertaking or enterprise during the period beginning from the 1st April, 2015 to 31st March, This deduction shall be available over and above the existing deduction available under section 32AC of the Act. Accordingly, if an undertaking is set up in the notified backward areas in the States of Andhra Pradesh or Telangana by a company, it shall be eligible to claim deduction under the existing provisions of section 32AC of the Act as well as under the section 32AD if it fulfills the conditions (such as investment above a specified threshold) specified in the said section 32AC and conditions specified under this section. Key conditions of section 32AC shall hold good in this case Deloitte Haskins & Sells LLP 12

13 Issues around investment allowance claim Whether put to use is necessary for claiming investment allowance? Literally interpreting the law, it can be said that the intent of the legislature is to promote acquisition and installation of new Plant or Machinery. It appears that the claim of deduction has not been linked to putting the asset to use. Can allowance be claimed on plant & machinery leased to third party? The Supreme Court in the case of CIT v. Shaan Finance (P.) Ltd., made an interesting interpretation which discussed the provisions of a similarly worded section 32A of the Act. The Apex court held that in case an asset, which is owned by an assessee, is let out to another taxpayer which is using the same for the purposes of manufacturing activity, even then the assessee would be eligible for investment allowance Whether computers and computer software installed in the Plant or Machinery used in factory would be eligible for deduction under section 32AC? Computers & computer softwares installed in the office premises are not eligible for deduction. However, in case the computers or computer softwares form an integral part of the machinery without which such plant or machinery would not work, such computers or softwares may be taken to be a part of the 'Machinery' eligible for deduction under section 32AC 2017 Deloitte Haskins & Sells LLP 13

14 Deduction of expenditure on Scientific research 2017 Deloitte Haskins & Sells LLP 14

15 DEDUCTION UNDER SECTION 35 Expenditure on scientific research B. Contribution for the purpose of Research & development A. Research & development:.. Deduction of revenue & capital expenditure incurred on R&D Weighted deduction for expenses incurred on in-house R&D 1. Contribution to approved research association/an Indian company for R&D 125% (100% from 1 April 2018) 2. Contribution to approved national laboratory etc - 200% (150% from 1 April 2018 and 100% from 1 April 2020) 2017 Deloitte Haskins & Sells LLP 15

16 R&D in India Overview of tax incentives Company engaged into business of biotechnology or manufacture/ production of article or thing (not being any article mentioned in Eleventh Schedule) were initially notified Weighted deduction of R&D expenses Manufacture and production of computer software got notified to be article or thing by Notification 452 dt. 8/2/2000 Expenditure should be incurred in the in-house research and development facility as approved by DSIR to qualify for weighted deduction Revenue expenses and capital expenses (other than those incurred on land & building) shall be eligible for a weighted deduction * The Finance Act 2016 has specified that deduction under this section shall 150% from 1 April 2017 to 31March 2020; 100% from 1 April 2020 and onwards 2017 Deloitte Haskins & Sells LLP 16

17 Deduction of expenditure on Scientific research Approval by DSIR R&D Centre to have valid recognition by DSIR Proper documentation to be maintained for the R&D programmes taken up R&D centre is exclusively engaged in R&D for production of any article or thing Well defined R&D programs R&D unit to be located in a separate earmarked area and have exclusive R&D manpower 2017 Deloitte Haskins & Sells LLP 17

18 Deduction of expenditure on Scientific research - On in-house research & development Revenue expenditure If any revenue expenditure laid out or expended on scientific research related to the business is deductible. If such expenditure is incurred before the commencement of business, regarding salary paid or purchase of materials, aggregate expenditure within 3 years immediately preceding the commencement of the business shall, be allowed in the previous year in which the business is commenced, provided it is certified by a prescribed authority. Capital expenditure Capital expenditure (excluding Land) incurred on scientific research related to business, shall be considered for weighted deduction. If any capital expenditure has been incurred before the commencement of the business, the aggregate of the expenditure so incurred within 3 years immediately preceding the commencement of the business shall be allowed in the previous year in which the business is commenced (excluding Land). Deduction of expenditure on buildings shall be restricted to 100% 2017 Deloitte Haskins & Sells LLP 18

19 Deduction of expenditure on Scientific research - On contributions made Section Nature of expenditure Deduction available for Quantum of deduction * 35(1)(ii) Scientific Research Expenditure Sum paid to a research association or to a university, college, or other institution to be used for scientific research 150% of the sum paid 35(1)(iia) Scientific Research Expenditure Sum paid to a scientific R&D company to be used by it for scientific research 100% of the sum paid 35(1)(iii) Scientific Research Expenditure Sum paid to research association, university college or other institution to be used in social science or statistical research 100% of the sum paid 35(2AA) Scientific Research Expenditure Any sum paid to National Laboratory or a University or IIT or a specified person with a direction that such sum is to be used for scientific research 150% of the sum paid * Deductions restricted to 100% from 1st April Deloitte Haskins & Sells LLP 19

20 Tax Incentives for Specified Business 2017 Deloitte Haskins & Sells LLP 20

21 Deduction of expenditure on Specified Business 100% deduction of capital expenditure for a new business unit set up for specified businesses (listed below) i. Operating a cold chain facility ii. iii. iv. Operating a warehousing facility for agricultural produce Operating a cross-country natural gas or crude or petroleum oil pipeline network Operating a hotel of two-star or above category v. Operating a hospital with at least one hundred beds for patients vi. vii. Developing & building a housing project under a scheme for slum redevelopment or rehabilitation Developing & building a housing project viii. Production of fertilizer in India; ix. Setting up and operating an inland container depot or a container freight station x. Bee-keeping and production of honey and beeswax xi. xii. Setting up and operating a warehousing facility for storage of sugar Laying and operating a slurry pipeline for the transportation of iron ore xiii. Setting up and operating a semi-conductor wafer fabrication manufacturing unit; xiv. Developing or maintaining and operating or developing, maintaining and operating a new infrastructure facility 2017 Deloitte Haskins & Sells LLP 21

22 Deduction of expenditure on Specified Business Expenditure before commencement Expenditure wholly and exclusively for the specified business. The amount is capitalized in the books on the date of commencement. No deduction with respect to such expenditure shall be available in any other section. Expenditure after commencement Available only for the capital expenditure incurred during the previous year by the assesse. Expenditure wholly and exclusively for the specified business. Shall not be incurred my mode of cash exceeding Rs.10,000/-. Key Conditions : Business is not formed by splitting up or reconstruction of business It is not setup by transfer to any other specified business, the plant and machinery used for any other purpose. No deduction shall be claimed under section 10AA or chapter VI-A What if there is loss in specified business? It shall be adjusted with profits of another specified business only. The unabsorbed portion shall be carried forward for further set off. Carry forward is over INDEFINITE number of years Deloitte Haskins & Sells LLP 22

23 Deduction for specific expenditures 2017 Deloitte Haskins & Sells LLP 23

24 Deduction of preliminary expenditure * Preliminary expenses Expenditure in connection with - preparation of feasibility report - preparation of 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 in case of registration of a company Restriction Total deduction to be restricted to 5% of - Cost of project; or - Capital employed by the company 2017 Deloitte Haskins & Sells LLP 24

25 Deduction of expenses incurred on amalgamation/ demerger & on a VRS scheme Deduction of expenditure incurred on amalgamation/ demerger Deduction of expenditure for VRS Deduction applicable only for expenditure incurred by Indian company Expenditure to be incurred wholly or exclusively for the purpose of amalgamation/ demerger Deduction of one-fifth of such expenditure provided for five successive previous years beginning from the year in which the amalgamation/ demerger took place Payments made to an employee in connection with his voluntary retirement, deduction can be claimed for one-fifth of such expense for five successive previous years beginning from the previous year in which such payment was made Treatment of claim of provision for VRS scheme debited to P&L account? Whether expenditure incurred by amalgamated/ demerged company can be allowed as a deduction? 2017 Deloitte Haskins & Sells LLP 25

26 Other deductions Insurance premium Deduction of premium payment on insurance of stock & insurance on health of employee. However, loss of stock on fire, embezzlement and other trading loss which cannot be claimed in this section can be claimed as a trading loss in section 28. Bonus & commission Bonus/ commission (otherwise than in the nature of profits/ dividend) paid to employees before due date of filing of return shall be allowed as a deduction Interest on capital (refer slide 24) Interest paid on borrowing before due date of filing of return is allowable as a deduction - Interest paid in respect of borrowing for fixed assets acquisition allowed as deduction only after asset is put to use Contribution to employee welfare funds Employer contribution to recognized provident fund/ approved superannuation fund deducted if paid before 139(1) due date Employer contribution to pension scheme deducted if payment does not exceed 10% of salary Employer contribution to approved gratuity fund deducted if paid before 139(1) due date Employee contribution to superannuation fund, provident fund, any other welfare fund deducted if payment made before due date specified in respective legislations 2017 Deloitte Haskins & Sells LLP 26

27 Other deductions Badebts Bad debts written off as irrecoverable in the books of accounts are to be allowed as deduction. Provision for bad debts cannot be considered as bad debts write off Successor of business entitled to claim deduction for write off of predecessor s debts Reserve FamilyPlaning TransfertoSpecial In respect of any special reserve created and maintained by a specified entity, an amount not exceeding 20% of profits from eligible business (Housing Finance company, Banking company, financial corporation etc) shall be allowed as deduction, provided that if such reserve exceeds twice the paid up capital, then such excess shall not be eligible for deduction. Revenue Expenditure for promoting family planning amongst its employees is allowed as deduction. For Capital expenditure, 1/5 of expenditure incurred is allowed as deduction in 5 equal installment. Bankingcash transactiontax Any amount of Banking Cash Transaction Tax (BCTT) paid by the assesse during the previous year on the taxable banking transactions entered into by him shall be allowed as a deduction Deloitte Haskins & Sells LLP 27

28 Deduction of interest on capital borrowed Interest expense capitalised and added to block Interest expense capitalised and added to block Allowed as a deduction u/s 36(1) (iii) Key principles emerging from judicial precedents Interest on loan from proprietor is not allowed as deduction Interest paid to partners by partnership firm is an allowable deduction Deduction of interest depends on the purpose for which the loan was borrowed. Interest on loan borrowed for business purposes (including for payment of dividend or tax) Interest paid outside India can also be allowed as a deduction under this section provided tax has been deducted as appropriate Income tax department cannot question the need for borrowing and the rate of interest (unless the loan is between associated enterprises 2017 Deloitte Haskins & Sells LLP 28

29 Limit on interest deduction Restriction on Interest deduction in certain cases in line with recommendation of OECD BEPS Action Plan 4 Deduction of interest expense or similar consideration will paid or payable by an entity to its AE is restricted to 30% of its EBITDA Provision applicable to an Indian company, or a PE of a foreign company in India, being the borrower, who pays interest or similar consideration in respect of any debt issued by a non-resident AE Restriction applicable where interest or similar consideration to its AE exceeds INR 10 million Debt shall be deemed to be treated as issued by an AE where it provides an implicit or explicit guarantee to a non-ae lender or deposits a corresponding and matching amount of funds with the non-ae lender Restriction not to apply to Indian company or PE of a foreign company which is engaged in the business of banking or insurance 2017 Deloitte Haskins & Sells LLP 29

30 International Tax Limit on interest deductions (2) Disallowed interest expense shall be carried forward upto 8 assessment years immediately succeeding the assessment year for which the disallowance is first made Deduction in subsequent assessment year will be subject to same restrictions The term debt has been defined to mean any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in the computation of income chargeable under the head Profits and gains of business or profession 2017 Deloitte Haskins & Sells LLP 30

31 International Tax Limit on interest deductions (3) Illustration Amount in millions Particulars Year 1 Year 2 EBITDA 2,000 3,000 Interest expenditure to AE Maximum interest deduction allowable (30% of EBITDA) Interest allowed in computation of income* ( ) Interest disallowed & carried forward Presuming interest is deductible in computation of income chargeable to tax under the head profits and gains of business and profession 2017 Deloitte Haskins & Sells LLP 31

32 Profit linked deduction 2017 Deloitte Haskins & Sells LLP 32

33 Profit linked deductions Section 10AA Eligibility: Tax holiday for export profits units set up in Special Economic Zone ( SEZ ) Commencement should be after 1st April 2006 Persons covered - manufacturer of article or thing or provider of any services Year Deduction 1-5 years 100% 6-10 years 50% years 50%* Deduction available only for units commencing operations before 31st March 2020 S.10AA Other conditions : A letter of approval by the Development Commissioner to set a unit in a Special Economic Zone Not set up by splitting up, or the reconstruction, of a business already in existence Not set up by the transfer to the specified business of machinery or plant previously used for any purpose (20% of second hand machinery allowed) No deduction under section 35AD should be claimed Maintain separate books of accounts and provides CA certificate * 50% of profits and gains of said business and credited to Special Economic Zone Re-investment Reserve Account created and used for such business Deloitte Haskins & Sells LLP 33

34 Issues under section 10AA Newly formed unit Key characteristics of newly established undertaking - from judicial precedents Split up of existing undertaking CBDT circular dated 8th October 2014 (For IT & ITeS Transfer of technical manpower from existing unit to a new SEZ unit, in the 1st year, shall not be construed as splitting up, provided: - Transferred technical manpower < 50% of total employees 2017 Deloitte Haskins & Sells LLP 34

35 Issues under section 10AA Undertaking Specific vs. Assessee specific Undertaking specific Assessee specific 10AA deduction before set off of losses from other undertakings 10AA deduction after set off of losses/ unabsorbed depreciation from other undertakings/ head of income - CIT vs. Yokogawa India Ltd - Scientific Atlanta vs. ACIT CBDT circular No. 7/2013 dated July 16, 2013 Amendment is been brought in through Finance Act, 2017, where it has been clarified that deduction u/s 10AA of the Act shall be allowed against the total income of the Assessee (after set off of intra head losses) 2017 Deloitte Haskins & Sells LLP 35

36 Deductibility of CSR Expenditure 2017 Deloitte Haskins & Sells LLP 36

37 Deductibility of CSR expenses The Finance (No. 2) Act, 2014 has clarified that CSR expenses shall not be deemed to be an expenditure for purposes of business under s. 37- General deductions. Memorandum to the Finance (No.2) Bill, 2014 provides that CSR expenditure of nature described under section 30 to 36 of Act shall be allowed as deduction, subject to fulfilment of conditions therein. Section Nature of expenditure Deduction available for Quantum of deduction * 35AC Promoting social and economic welfare or uplift of the public Paid to a public sector company or a local authority or to an association or institution approved by the National Committee 100% of the sum paid 35CCA Rural Development Programs Paid to an approved association or institution for undertaking any programme of rural development or training of persons for implementing such programmes; or to a rural development fund or the National Urban Poverty Eradication Fund set up and notified by the Central Government 100% of the sum paid 35CCC 35CCD Expenditure on agricultural extension project Employment enhancing vocation skills Expenditure on training, education and guidance of farmers (agricultural extension project) notified by CBDT Expenditure (not being expenditure in the nature of cost of any land or building) on any skill development project notified by CBDT 150% of sum paid (restricted to 100% from 1st April 2020) 2017 Deloitte Haskins & Sells LLP 37 37

38 Questions? 2017 Deloitte Haskins & Sells LLP 38

39 In this material Deloitte refers to Deloitte Haskins & Sells LLP (DHS) and its affiliate entities in India This material prepared by DHS, is intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s).further, the views and opinions expressed herein are the subjective views and opinions of DHS based on such parameters and analyses which in its opinion are relevant to the subject. Accordingly, the information in this material is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. DHS and its affiliates shall not be responsible for any loss whatsoever sustained by any person who relies on this material 2017 Deloitte Haskins & Sells LLP 39