Chap 6 - Profits and Gains of Business or Profession

Question 1

What are the provisions relation to sum due to or received by a partner of a firm as per Income chargeability under section 28 and deduction under section 40(b)?

Answer 1

Suppose a firm pays interest at 20% p.a. simple interest to a partner The allowable rate of interest is 12% p.a. Hence the excess 8% paid will be disallowed in the hands of the firm. Since the excess interest has suffered tax in the hands of the firm due to disallowance, the same will not be taxed in the hands of the partner. However the interest allowed to the extent of 12% p.a. in the hands of firm will be taxed in the hands of partner.

Question 2

What is the nature of plant and machinery eligible for additional depreciation as per section 32(iia) and the rate of additional depreciation and until what date the same is available as per the aforesaid provision?

Answer 2

allowed on any new machinery or plant (other than ships and aircraft) acquired and installed after 31.3.2005 by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or transmission or distribution of power at the rate of 20% of the actual cost of such machinery or plant.

Question 3

Additional depreciation as per section 32(iia) shall not be available in respect of what types of plant and machinery?

Answer 3

(i) any machinery or plant which, before its installation by the assessee, was used within or outside India by any other person (second hand machinery); or
(ii) any machinery or plant installed in office premises, residential accommodation, or in any guest house; or
(iii) office appliances or road transport vehicles; or
(iv) any machinery or plant, the whole or part of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and Gains of Business or Profession” of any one previous year.

Question 4

How additional depreciation under section 32(iia) will be allowed when the same is put to use for less than 180 days during the previous year?

Answer 4

As per second proviso to section 32(1)(ii), 50% of additional depreciation to be allowed, and balance of 50% will be allowed in the immediately succeeding previous year.

Question 5

What are the special provisions of section 32(iia) regarding allowability of additional depreciation for assessee setting up manufacturing units in notified backward areas of specified states? what is the special rate applicable and until what date the same may be applicable to the assessee?

Answer 5

Higher additional depreciation @35% (instead of 20%) in respect of the actual cost of new machinery or plant (other than a ship and aircraft) acquired and installed during the period between 1st April, 2015 and 31st March, 2020 by a manufacturing undertaking or enterprise which is set up in the notified backward areas of these specified States, namely, Andhra Pradesh, Telengana, West Bengal and Bihar on or after 1st April, 2015.

If put to use for less than 180 days, the 50% of 35% is 17.5% will be allowed in the the immediately succeeding previous year.

Question 6

What happens if when, the plant and machinery is installed in the notified backward area on or after 01.04.2020? how will it affect the applicability of enhanced additional depreciation applicable to them?

Answer 6

installed in such notified backward areas on or after 1.4.2020, additional depreciation is not allowable at the enhanced rate of 35%. Additional depreciation will be allowable@20% (if put to use for more than 180 days in that P.Y.) and @10% (if put to use for less than 180 days in that P.Y.).

Question 7

What are the rates of depreciation as per the provisions of rule 5(1), based on the provisions of section 32 of the act?

Answer 7

Question 8

What are the important provisions as per second proviso to section 32(1)(ii), regarding putting the asset to use for less than 180 days?

Answer 8

As per second proviso to section 32(1)(ii), 50% of additional depreciation to be allowed, where the plant and machinery is put to use for less than 180 days during the previous year in which such asset is acquired.

Further, third proviso to section 32(1)(ii) also provides that the balance 50% of the additional depreciation on new plant or machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant or machinery, shall be allowed in the immediately succeeding previous year.

The above provision applies equally for both normal and additional depreciation..

Question 9

What is the significance of put to use vs. Available for use vis a vis allowance of depreciation as per the provisions of section 32 of the act?

Answer 9

The asset must be put to use at any time during the previous year. The amount of depreciation allowance is not proportionate to the period of use during the previous year. If the asset is acquired during the previous year and is not put to use in the same year, then the depreciation shall not be allowed for such asset but the cost of such asset would be added to the block of asset - Actually used and used for the purposes of business or profession during the previous year.

Use includes passive use in certain circumstances: One of the conditions for claim of depreciation is that the asset must be “used for the purpose of business or profession”. Depreciation is allowed when asset is actually put to use and not ready to use. However, in certain circumstances, Courts have held that, an asset can be said to be in use even when it is “kept ready for use”

Question 10

What are the provisions regarding Depreciation in case of succession of firm/sole proprietary concern by a company or business reorganization, amalgamation or demerger of companies or succession of business otherwise than on death?

Answer 10

As per the sixth proviso to section 32(1)(ii), depreciation allowable in the hands of
- predecessor and the successor in case of succession of firm/ sole proprietary concern by a company fulfilling the conditions mentioned in section 47(xiii)/(xiv) or

predecessor company and successor LLP in case of conversion of a private company or an unlisted public company into an LLP fulfilling the conditions mentioned in section 47(xiiib) or

predecessor and the successor in case of succession of business otherwise than on death.

amalgamating/ amalgamated company or demerged or resulting company in case of amalgamation or demerger of companies.

shall not exceed the amount of depreciation calculated at the prescribed rates as if the succession, business reorganization, amalgamation or demerger had not taken place

It is also provided that such amount of depreciation shall be apportioned between the two entities in the ratio of the number of days for which the assets were used by them.

Question 11

What is the actual cost under section 43(1) under the below mentioned scenario?

Acquisition of asset previously owned by any person to whom such asset is given on lease, hire or otherwise

Answer 11

Where before the date of acquisition by the assessee, say, Mr. A, the assets were at any time used by any other person, say Mr. B, for the purposes of his business or profession and depreciation allowance has been claimed in respect of such assets in the case of Mr. B and such person acquires on lease, hire or otherwise, assets from Mr. A, then, the actual cost of the transferred assets, in the case of Mr. A, shall be the same as the written down value of the said assets at the time of transfer thereof by Mr. B [Explanation 4A].

Question 12

What is the written down value as per the provisions of section 43(6) of the act under the below mentioned scenario?

Succession to business or profession otherwise than on death:

Answer 12

When in the case of a succession to business or profession otherwise than on death, an assessment is made on the successor under section 170(2),

the written down value of an asset or block of assets shall be the amount which would have been taken as the written down value if the assessment had been made directly on the person succeeded to [Explanation 1 to section 43(6)].

Question 13

What is the written down value as per the provisions of section 43(6) of the act under the below mentioned scenario?

Depreciation provided in the books of account deemed to be depreciation actually allowed:

Answer 13

Question 14

While computing the WDV as per section 43(6) for composite Income as per the provisions of Explanation 7, what is the depreciation that has to be allowed on the portion of the composite Income treated as business Income?

Answer 14

Question 15

What are the provisions of carry forward and set off of depreciation as per the provisions of section 32(2) of the act?

Answer 15

Section 32(2) provides for carry forward of unabsorbed depreciation. Where, in any previous year the profits or gains chargeable are not sufficient to give full effect to the depreciation allowance, the unabsorbed depreciation shall be added to the depreciation allowance for the following previous year and shall be deemed to be part of that allowance. If no depreciation allowance is available for that previous year, the unabsorbed depreciation of the earlier previous year shall become the depreciation allowance of that year. The effect of this provision.

Question 16

What is the order of set off of depreciation as per the provisions of section 32(2)?

Answer 16

Question 17

What are the provisions regarding depreciation allowance for power generation undertakings as per Rule 5(1A)?

Answer 17

In the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost to the assessee as prescribed by Rule 5(1A).

As per rule 5(1A) - the depreciation on the abovementioned assets shall be calculated at the percentage of the actual cost at rates specified in Appendix IA of these rules.

the aggregate depreciation allowed in respect of any asset for different assessment years shall not exceed the actual cost of the asset.

is further provided that such an undertaking as mentioned above has the option of being allowed depreciation on the written down value of such block of assets as are used for its business at rates specified in Appendix I to these rules

However, such option must be exercised before the due date for furnishing return under section 139(1) for the assessment year relevant to the previous year in which it begins to generate power.

Question 18

In which scenario in relation to allowance of additional depreciation in relation to power generation undertaking, will not be allowed as per the provisions of section 32(iia)?

Answer 18

Additional depreciation is not allowed to power generation undertakings opting Appendix 1A of Rule 5 i.e., depreciation calculated as a percentage on the actual cost to the assessee.

Where It is not mentioned as to the nature of the treatment as above, we have to assume and provide for additional depreciation to the power generation undertakings as necessary.

Question 19

What are the important provisions of balancing charge as per the provisions of section 41(2) of the act?

Answer 19

Question 20

What are the provisions of section 35(1)(ii), Amount contributed or paid to Notified approved research association, university, college or other institution: An amount equal to any sum?

Answer 20

Question 21

What are the provisions of section Sum paid to National Laboratory, etc. [Section 35(2AA)]? and what is the proportion of deduction that is available to the company?

Answer 21

Question 22

What are the provisions of the section Section 35(1)(iia)? Approved Indian company for scientific research?

Answer 22

A sum equal to any amount paid to a company to be used by it for scientific research [Section 35(1)(iia)]
However, such deduction would be available only if;
- the company is registered in India and
- has as its main object the scientific research and development.

Further, it should be approved by the prescribed authority and should fulfill the other prescribed conditions.

Question 23

what are the provisions of Section 35(2AB) in relation to Company engaged in Business of bio-technology or manufacturing of article or thing etc.?

Answer 23

Also included are the purchase price of any raw material for the purpose of In house research and development.

Question 24

What is the difference in deduction as per section 35ABA and section 35ABB of the Income tax act, 1961?

Answer 24

Expenditure for obtaining right to use spectrum for telecommunication services [Section 35ABA]

Expenditure for obtaining licence to operate telecommunication services [Section 35ABB]

In order to resolve the uncertainty in tax treatment of payments in respect of spectrum i.e., whether spectrum is an intangible asset and the spectrum fees paid is eligible for depreciation under section 32 or whether it is in the nature of a ‘licence to operate telecommunication business’ and eligible for deduction under section 35ABB, section 35ABA provides for tax treatment of spectrum fee.

Question 25

What is the tax treatment for Acquisition of right to operate telecommunication services as per section 35ABB?

Answer 25

Question 26

What are the provisions for transfer of license as per the provisions of section 35ABB of the act? - Very Important

Answer 26

See Illustration 6 for better clarity in this regard.

Question 27

What are the provisions of section 35ABB in relation to transfer of license in a scheme of amalgamation or in a scheme of demerger?

Answer 27

Question 28

What are the provisions of Set-off or carry forward and set-off of loss from specified business under section 35AD of the act?

Answer 28

The loss of an assessee claiming deduction under section 35AD in respect of a specified business can be set-off against the profit of another specified business under section 73A, irrespective of whether the latter is eligible for deduction under section 35AD.

Such loss can, however, be carried forward indefinitely for set-off against profits of the same or any other specified business but the assessee has to file return of income on or before the due date of filling return of income under section 139 for carry forward of losses from specified business.

Question 29

What is the deduction for capital expenditure as per the provisions of section 35AD

Answer 29

Question 30

What is the allowability of expenditure prior to commencement of operation as per section 35AD?

Answer 30

Further, the expenditure incurred, wholly and exclusively, for the purpose of specified business prior to commencement of operation would be allowed as deduction during the previous year in which the assessee commences operation of his specified business.

The amount incurred prior to commencement should be capitalized in the books of account of the assessee on the date of commencement of its operations.

Question 31

What are the specified dates of commencement of various specified businesses as per the provisions of section 35AD?

Answer 31

Question 32

What are the general conditions to be fulfilled by every specified business under section 35AD of the act?

Answer 32

Question 33

What are the provisions of Asset used for any other business other than specified business during 8 years [Section 35AD(7B)]? Also how does it relate to the actual cost provisions as per Explanation 13 to section 43(1) of the act?

Answer 33

However, where an asset, in respect of which deduction is claimed and allowed under section 35AD is deemed to be the income of the assessee in accordance with the provisions of section 35AD(7B) (on account of being used for a purpose other than specified business under section 35AD.

the actual cost of the asset to the assessee shall be actual cost to assessee as reduced by the amount of depreciation allowable had the asset been used for the purpose of business, calculated at the rate in force, since the date of its acquisition [Proviso to Explanation 13 to section 43(1)]

Question 34

What are the provisions of Employer’s contribution to the account of the employee under a Pension Scheme referred to in section 80CCD [Section 36(1)(iva)]?

Answer 34

Also see the provisions of section 40A(9) - which has excluded the above from it’s scope including 36(1)(iv) and 36(1)(v).

Question 35

What are the provisions of Contributions by employers to funds, trust etc. [Sections 40A(9)]?

Section 40A - EXPENSES OR PAYMENTS NOT DEDUCTIBLE IN CERTAIN CIRCUMSTANCES [SECTION 40A]

Answer 35

Question 36

What are the provisions of Contributions to provident and other funds [Section 36(1)(iv) and (v)]? - which is an exception to section 40A(9)

Answer 36

Question 37

What are the provisions of regarding recovery of a bad debt subsequently for which a deduction under section 36(i)(vii) was allowed?

Answer 37

As per section 41(4) a deduction has been allowed in respect of a bad debt under section 36, and subsequently the amount recovered in respect of such debt is more than the amount due after the allowance had been made

the excess shall be deemed to be the profits and gains of business or profession and will be chargeable as income of the previous year in which it is recovered, whether or not the business or profession in respect of which the deduction has been allowed is in existence at the time.

Question 38

What is the amount of deduction that is allowable under section 36(1)(vii)? The basic principle?

Answer 38

Under section 36(1)(vii), bad debt actually written off as irrecoverable in the books of account of the assessee is deductible.

However, in the case of entities for which provision for bad and doubtful debts is allowable under section 36(1) (viia), deduction for bad debts written off under said clause (vii) shall be limited to the amount by which the bad debt written off exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia). This is provided in the proviso to section 36(1)(vii).

There is no distinction to be made between rural and urban advances as such.

Question 39

What is the amount deductible in relation to Provision for bad and doubtful debts in cases of specified banks [Section 36(1)(viia)]?

Answer 39

A scheduled bank which is not a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the following deductions will be allowed:

(a) an amount not exceeding 8.5% of the total income (computed before making any deduction under this clause and Chapter VI-A), and
(b) an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the manner prescribed by the CBDT.

Question 40

What are the provisions of section 35(1)(iv) relating to the incurrence of capital expenditure on scientific research purposes? what are all allowed and disallowed?

Answer 40

Any expenditure of a capital nature on scientific research related to the business carried on by the assessee would be deductible in full in the previous year in which it is incurred [Section 35(1)(iv)].

any capital expenditure has been incurred prior to the commencement of the business, the aggregate of the expenditure so incurred within the three years immediately preceding the commencement of the business shall be deemed to have been incurred in the previous year in which the business is commenced and will rank for deduction as expenditure for scientific research incurred during the previous year.

No deduction will be allowed in respect of capital expenditure incurred on the acquisition of any land whether the land is acquired as such or as part of any property.

Question 41

What are the important provisions in relation to deduction under section 35CCC - Deduction in respect of expenditure incurred on notified agricultural extension project?

Answer 41

In order to incentivize the business entities to provide better and effective agriculture extensive services, section 35CCC provides a deduction of a sum equal to expenditure incurred by an assessee on agricultural extension project in accordance with the prescribed guidelines.

All expenses (not being expenditure in the nature of cost of any land or building), as reduced by the amount received from beneficiary, if any, incurred wholly and exclusively for undertaking an eligible agricultural extension project shall be eligible for deduction under section 35CCC.

However, expenditure incurred on the agricultural extension project which is reimbursed or reimbursable to the assessee by any person, whether directly or indirectly, shall not be eligible for deduction under section 35CCC.

Question 42

What are certain other conditions which must be fulfilled for deduction of expenses under notified agricultural extension project under section 35CCC?

Answer 42

Question 43

What are the important provisions in relation Deduction in respect of expenditure incurred by companies on notified skill development project [Section 35CCD]?

Answer 43

In order to encourage companies to invest on skill development projects in the manufacturing sector, section 35CCD provides for a deduction of a sum equal to the expenditure (not being expenditure in the nature of cost of any land or building) on skill development project incurred by the company in accordance with the prescribed guidelines. However, expenditure incurred on the notified skill development project which is reimbursed or reimbursable to the company by any person, whether directly or indirectly, shall not be eligible for deduction under section 35CCD.

Skill development project in respect of existing employees of the company, however, would not be eligible for notification, where the training of such employees commences after six months of their recruitment.

Question 44

What are the provisions in relation to advertisements in souvenirs of political parties as per section 37(2B) of the act?

Answer 44

the expenditure representing contribution for political purposes would become disallowable even in those cases where the expenditure is otherwise incurred by the assessee in his character as a trader and the amount is wholly and exclusively incurred for the purpose of the business.
Accordingly, a taxpayer would not be entitled to any deduction in respect of expenses incurred by him on advertisement in any souvenir, brochure, tract or the like published by any political party, whether it is registered with the Election Commission of India or not.

but the same would be allowed as deduction under section 80GGB from the gross total income of the company.

Question 45

What is the nature of treatment of expenses incurred on issue of right shares?

Answer 45

Expenditure incurred on issue of right shares not allowed as deduction since expenses is of capital nature.

Question 46

What is the nature of treatment of expenses incurred on debentures? - More general but narrowed to section 35D - Amortisation of preliminary expenses?

Answer 46

Expenditure incurred on issue of debentures [allowable]

As per section 35D - Section 35D provides for the amortisation of preliminary expenses incurred by Indian companies and other resident non-corporate taxpayers for the establishment of business concerns or the expansion of the business of existing concerns.

Question 47

What are the general conditions for allowance of deduction under section 37 - Residuary Expenses?

Answer 47