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General Deduction - Taxation

General Deduction

Expenditure is not covered under section 30 to 36.
Expenditure is incurred wholly and exclusively for the purpose of the business.

Note: The word ‘wholly’ refers to the quantum of expenditure and the word ‘exclusively’ refers to the motive, object or purpose of the expenditure.
Any expenses which
(a) increases the reputation of the company
(b) is incurred on employee
(c) incurred on maintenance of assets and liabilities
(d) incurred on customers or clients is held as incurred exclusively for the purpose of the business.

Such expenditure is not in the nature of personal expenditure.
E.g. Due to exercise of a profession, an assessee may fall ill and unless he gets well, he cannot carry on his business or profession. Assessee cannot claim deduction on account of medical expenses.
Such expenditure is not of capital in nature i.e. expenses should be of revenue in nature.
Such expenditure should be incurred during the previous year.

Note 1: Any expenditure incurred which is an (i) offence or (ii) which is prohibited by law shall not be allowed as deduction. Law is passed by parliament. (It means penalty paid for breach of law is not allowed as deduction. However damages paid for breach of contract is allowed as deduction).
Note 2: As per section 37(2B) expenditure on advertising in any souvenirs, brochure etc. of a political party shall not be allowed as deduction.
Note 3: Any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession

Explain tax treatment of the following expenditures.

1.Donations. Donation made to

National Laboratory: 2 times of the donation made is allowed as deduction u/s 35.
Political party: not a business expenditure therefore not allowed as deduction. However deduction u/s 80GGB/80GGC available. 100% deduction is available.
Govt. NGO’s: not a business expenditure therefore not allowed as deduction. However deduction u/s 80G available.
Personal donations not allowed as deduction.

Trade association: Business expenditure therefore allowed as deduction u/s 37.

2. Interest on payment of dividend. Interest on loan taken for payment of dividend allowed as deduction held to be incurred wholly and exclusively for the purpose of the business. However interest on personal loan is not allowed as deduction. E.g. Income tax, Wealth Tax, Household expenses.

3. Expenditure incurred on raising capital / loan

Balance

Sheet

Public issue expenses like Advertisement, Prospectus, Underwriting commission, brokerage, merchant bankersfees

ROC Expenses like Stamp duty, Form fees

annual Listing fees

ESC/PSC/

RS/BS

CE except BS. As per Supreme Court judgement expenditure incurred on issue of bonus shares is allowed as deduction held as revenue expenditure.

CE not allowed as deduction

RE allowed as deduction

Bonds/

Debentures

Revenue expenditure allowed as deduction

RE allowed as deduction

4. Payment of direct tax. - Payment of direct tax i.e income tax and wealth tax not allowed as deduction as per section 40(a). - Corporate dividend tax not allowed as deduction.

- As per section 36(1) payment of Securities Transaction Tax is allowed as deduction.

5. Payment of Indirect tax. Payment of Indirect tax like excise duty, custom duty, octroi, sales tax, shall be allowed as deduction u/s 37. Municipal tax and land revenue in respect of premises is allowed as deduction u/s 30. This deduction is subject to section 43B.

6. Penalty : It is paid for either infringement of law or breach of contract.

• Penalty paid for non payment of sale tax, excise, custom etc. not allowed as deduction since infringement of law.

• Damage or penalty paid for not complying with terms and conditions of contract is allowed as deduction since breach of contract.

		Legal expenses	Illegal expenses	Legal loss	Illegal Loss
Legal income	Taxable	Allowed	Not allowed	Allowed	Allowed
Illegal income	Taxable	Allowed	Not Allowed	Allowed	Allowed

7. Other expenses allowed as deduction u/s 37.

a. Official or Administrative expenses.

b. Audit or legal fees.

c. Advertising expenses, travelling or conveyance expenses.

d. Entertainment expenses.

e. Interest paid for overdraft facility.

f. Remuneration payable to employees or other expenses incurred for the benefit of employees.

g. Diwali expenses.

h. Expenditure incurred on development of website. (Treated as revenue expenditure)

i. Expenditure incurred on upgradation of computer. (Treated as revenue expenditure)

8. Following expenses not allowed as deduction

a. Drawings by the owner for personal use.

b. Interest on own capital in case of proprietorship concern.

c. Remuneration paid to owner of the business in case of proprietorship concern.

d. Purchase of capital assets used for the purpose of business.

e. Any provision or reserve made for contingencies, anticipated loss, dividend, sales tax, custom duty, excise, gratuity, bonus etc.

f. Notional expenses i.e. rent paid for own building etc.

Adjustment of valuation of stock

Stock is valued at cost or market price whichever is lower.

Following business losses are deductible u/s 28 and not in section 37 since not treated as an expenditure.

a. Loss on account of robbery, theft, embezzlement.

b. Loss on account of valuation of Stock-in-Trade.

c. Loss on account of fluctuation in currency rates.

P1: How will you deal with the following in computing the business income ?

1. Profit on transfer of Duty Entitlement Pass Book Scheme.

2. Profit on sale of securities

3. The Manager admitted that during the year purchases to the extent of Rs 10 lakhs were not recorded in the books and also sales to the extent of Rs 15 lakhs were kept out.

4. Gift from Father in law

5. Dividend on Shares of Indian company.

6. Profit from Business of dealing in equity shares.

7. Amount of sales includes a sum of Rs 6,000 representing the value of goods withdrawn by Mr. X for his personal use. These goods were purchased at a cost of Rs 4,000.

8. Loss by theft occurred as embezzlement by the employees.

9. Paid interest of Rs 30,000 for shortfall in advance tax paid.

10. The amount of interest on loan includes an amount of Rs 1,300 being interest on loan taken from wife of X. She gave this loan from her stridhan. The amount of loan taken from wife was utilised for the payment of arrears of income tax.

11. Anticipated loss on forward contract for purchase of raw material as a result of fall in market price.

12. Provision of sales tax.

Ans: (1) BI (2) Capital gain if securities are held as investment. If securities are held as stock in trade then charged under the head PGBP (3) Rs 10 Lakhs allowed as deduction and Rs 15 Lakhs shall be credited to P & L A/c. (4) not taxable (5) OS. However exempt u/s 10(34). (6) BI (7) Rs 2,000 not an income. (8) allowed as deduction. (9) not allowed (10) not allowed (11) not allowed (12) not allowed.

P2: How will you deal with the following in computing the total income of the company ?

1. Depreciation on motor car.

2. Surgical Equipment used by doctor.

3. Medical Books used by doctor

4. A new machinery worth Rs 3,50,000 has been purchased. The expenditure has been debited under the head “Manufacturing expenses”. The machinery was purchased and installed in December.

Ans: (1) Dep allowed @ 15% (2) Dep allowed @ 15% (3) Dep allowed @ 60% (4) Rs 3,50,000 shall be added back however Dep u/s 32 can be claimed @ 15%. (Half rate)

P3: How will you deal with the following in computing the total income of the company ?

Donations

1. Donation in Temple.

2. Donation of Rs 25,000 to a political party.

3. The donation includes Rs 1 lakh to an approved Scientific Research Association.

4. Administrative charges include expenses in respect of donation of Rs 1,000 to the trade association for the purpose of an advertisement in the souvenir publised by it.

Stock valuation

5. Opening stock overvalued by Rs 2,00,000.

6. Closing stock undervalued by Rs 50,000.

7. It was found, some stocks were omitted to be included in both the opening and closing stock, the values of which were—opening stock : Rs 9,000; closing stock : Rs 18,000.

Penalty

8. Penalty levied by excise department under the Excise Act 1944.

9. Miscellaneous Expenses include Rs 30,000 paid towards penalty for non-fulfillment of delivery conditions of a contract of sale for reasons beyond control.

10. Purchases also include Rs 10,000 paid by way of compensation to a supplier as the assessee was unable to take the delivery of goods due to lack of storage space and finances.

11. Rent, rates and taxes also include a penalty of Rs 10,000 levied for non-payment of sales tax. 12. Penalty levied for non-fulfillment of listing laws.

Ans: (1) not allowed (2) not allowed as business expenditure however deduction can be claimed u/s 80GGB/C (3) Rs 2,00,000 can be claimed as deduction u/s 35. (4) allowed (5) Rs 2,00,000 shall be treated as income (6) Rs 50,000 shall be added to net profit (7) Rs 9,000 shall be allowed as deduction and Rs 18,000 shall be treated as income (8) not allowed (9) allowed as deduction (10) allowed as deduction (11) not allowed as deduction (12) allowed as deduction.

P4: How will you deal with the following in computing the total income of the company ?

Interest

1. Interest on loan to pay dividend.

2. Interest on loan to pay advance tax.

Taxes

3. Advance payment of income-tax.

4. Wealth Tax.

5. Interest on late payment of income tax.

6. Dividend distribution tax.

7. Indirect tax.

8. Securities transaction tax.

Personal expenses

9. New year expenses of his family.

10. Salary paid by him includes Rs 24,000 paid to a boy who helps him in the clinic and also at home. (Assessing officer disallowed 1/3rd of expenses incurred).

11. X had gone on a foreign tour in connection with the business. The journey was for 10 days in which he spent 2 days on visiting tourist spots. Total expenses incurred, which were within RBI norms also, in respect of this foreign tour were Rs 20,000.

Ans: (1) allowed (2) not allowed (3) not allowed (4) not allowed (5) not allowed (6) not allowed (7) allowed (8) allowed (9) not allowed (10) Rs 8,000 shall be added back to net profit (11) Rs 4,000 shall be added back to net profit

P5: How will you deal with the following in computing the total income of the company ?

1. Fees paid to an architect for valuation of the office building and factory building for contesting excessive municipal tax levied : Rs 12,500.

2. Compensation paid to a director on termination of service : Rs 1,30,000.

3. The company paid Rs 2,04,000 to its three whole time Directors as remuneration.

4. Expenses paid to management consultant for preparation of budgeting formats : Rs 34,000.

5. Cost of lunch given at a 5-Star hotel where four representatives of suppliers were treated to lunch along with the purchase manager and secretary of the Company : Rs 3,800.

6. Supplied spare parts to customers (free of charge) under a warranty clause (cost is Rs 1,20,000, normal selling price Rs 1,80,000).

7. Spent Rs 1,70,000 towards training an employee in Germany (air fare Rs 1,00,000 and daily allowance at Rs 2,000 per day for 35 days).

8. A sum of Rs 1,500 paid on the accident of an employee is included in the factory expenses.

9. Travelling expenses.

10. Stationery

11. Conveyance

12. Telephone expenses

13. Tea & snacks in office

14. Audit fees

15. Legal expenses incurred in sales tax proceedings

16. Expenses on income-tax proceedings.

17.Rs 500 legal expenses relate to sales tax appeal and the rest to a suit filed for recovering an outstanding sum from a debtor.

18. Advertisement expenses included cost of 20 gift packets of Rs 1,100 each presented to customers on occasion of Diwali.

19. Advertisements expenditure debited to P & L A/c include the following Rs 10,000 being capital expenditure on advertisement. [Neon lights]

20. Advertisement expenses include Rs 3,000 for advertisement in the souvenir published by a political party.

21. Rs 80,000 to his son school for his admission.

22. The company floated new shares this year. Out of the application money received by it, the company forfeited Rs 15,00,000 because some of the applicants did not subscribe to the share capital after allotment of shares to them.

Ans: (1) to (18) allowed. (19) to (21) not allowed; (22) Forfeited amount is not an income.

P6: Mr. Prem Sagar, CEO, furnishes P & L A/c of Travelling and Adventure Equipment Ltd. You are required to compute its total income.

Dr. Particulars		Amount	Particulars	Amount Cr.
Opening stock		2,70,000	Sales	52,00,000
Purchases		42,80,000	Closing stock	54,000
Purchase of audio visual equipment		20,000	Other receipts	3,00,000
Advertising of a product in a brochure of soya citizens political party.		1,100	LTCG on sale of Trade Mark	2,29,125
Expenses incurred in respect of premises taken on rent			Recovery of bad debt (earlier out of Rs 30,000, Rs 6,000 was allowed as deduction)	25,000
- Current repairs	2,000
- Capital repairs	12,000
- Insurance of premises	3,000
- Municipal tax	5.000	22,000
Interest A/c
- Interest on overdraft	3,000
- Interest on loan to pay dividend	6,000
- Interest on loan to pay advance tax	15,000
- Interest on debentures	8,000
- Interest on company deposits	1,000	33,000
Contribution towards RPF		13,000
Contribution towards unapproved gratuity fund		6,500
Provision for doubtful debts		8,000
Health insurance premium		10,000
Expenses to raise debentures		11,200
Transfer to Debenture Redemption Reserve A/c		45,000
Income tax		620
Net profit		10,87,705

Additional informations:

1. Municipal tax which falls due on previous year but paid on 1-4-2017.

2. Health insurance premium taken on health of employees. Out of Rs 10,000, Rs 7,000 is paid in cash.

3. Audio visual equipment is used for promotion of family planning amongst employees. Expenses incurred for promoting family planning is Rs 3,500 p.a. not debited to P & L A/c.

4. The company enters into a contract with Mr. Bellow for supply of travel equipment. However due to strike of workers, the company was unable to supply and has to pay damages of Rs 50,000. This amount is not debited to P/L A/c.

5. The company imported goods worth Rs 50,000 from China. The company paid custom duty of Rs 15,000 and Rs 2,000 as penalty for not complying the provisions of Customs Act. The total amount i.e. Rs 67,000 is not debited to P/L A/c.

6. The company’s stocks has been valued at 10% below the cost price.

7. As per lease agreement of premises 70% of capital repairs shall be borne by the owner and remaining 30% by the tenant.

Ans: Net profit 10,87,705; 10,32,065. [BI=Net profit 10,87,705+closing stock 6,000+Family planning capital expenditure 16,000+ advt in political party 1,100+ capital repairs 12,000+ interest on advance tax 15,000+ unapproved gratuity fund 6,500+ doubtful debts 8,000+ health insurance premium in cash 7,000+ reserve 45,000+ income tax 620– Opening stock 30,000–Dep on capital repairs 360–Family planning revenue expenditure 3,500– Damage 50,000– Import of goods 65,000–LTCG 2,29,125– Recovery of bad debts 24,000= 8,02,940] [TI= BI 8,02,940+ LTCG 2,29,125=10,32,065] [Hint 1: Purchase of audio visual equipment is capital expenditure incurred by company for promotion of family planning amongst employees. 1/5th is allowed as deduction. Rs 20,000 is debited therefore add Rs 16,000] [Hint 2: Capital repair on building is is not allowed as deduction however depreciation is available. Rs 12,000 is debited add Rs 12,000. Depreciation is available on expenditure incurred by assessee. Assessee has incurred only 30%. Therefore 10% of 30% of 12,000=360 is allowed as deduction.

Hint (not full answer)

		(+)	(-)
Net Profit		10,87,705
(-)	Undervaluation of opening stock		(30,000)
(+)	Undervaluation of closing stock	6,000
(+)	Purchase of audio visual equipment	16,000
(-)	Revenue expenditure (Family Planning)		(3,500)
(+)	Advertisement in political party brochure	1,100
(+)	Capital repairs	12,000
(-)	30% of 12,000 = 3,600 treated as deemed building for which depreciation @ 10% of 3,600		(360)

Promotion of family planning amongst employees incurred by company

a. Expenditure is incurred by the company.

b. Company incurs capital expenditure for promoting family planning amongst its employees.

c. In case of capital expenditure 1/5th of expenditure incurred is allowed as deduction in 5 equal installments. (20% SLM)

Note 1 : In case of assessee (other than company) deduction on account of family planning revenue expenditure can be claimed under section 37 and capital expenditure is disallowed as deduction though the assessee can claim depreciation u/s 32(1).

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FAQs on General Deduction - Taxation - Income Tax for assessment (Inter Level)

1. What is general deduction in taxation?

Ans. General deduction in taxation refers to the allowable reduction in taxable income by taxpayers for certain expenses or losses incurred during the tax year. It helps in reducing the overall tax liability of individuals or businesses.

2. What are some examples of deductions that can be claimed in taxation?

Ans. Some examples of deductions that can be claimed in taxation include expenses for medical and dental care, mortgage interest, charitable contributions, state and local taxes paid, and certain business expenses. These deductions vary based on the tax laws of a specific country.

3. How does general deduction affect the tax liability of individuals?

Ans. General deduction reduces the taxable income of individuals, which in turn lowers their overall tax liability. By claiming eligible deductions, individuals can potentially pay less in taxes and keep more of their income.

4. Are there any limitations or restrictions on general deductions in taxation?

Ans. Yes, there are limitations and restrictions on general deductions in taxation. These can include income thresholds, specific requirements for each deduction, and certain deductions being subject to phase-outs or caps based on the taxpayer's income level.

5. Can general deductions be claimed by businesses as well?

Ans. Yes, businesses can also claim general deductions for eligible expenses incurred during the tax year. These deductions help businesses reduce their taxable income and lower their overall tax liability. However, there may be specific rules and regulations governing business deductions that differ from those applicable to individuals.

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