Profits and Gains from Business or Profession - 2 | Commerce & Accountancy Optional Notes for UPSC PDF Download

Introduction

In the preceding unit, we delved into the concepts of business or profession, the fundamental principles behind levying income tax on such income, general guidelines for computing business income or professional income, and special deductions permitted under Sections 30 to 32 AD. This unit will explore various deductions under Sections 33AB to 37.

Specific Deductions-ii

Tea Development Account, Coffee Development Account, and Rubber Development Account [Section 33 AB]

Required Conditions

• Engaged in the business of cultivating and manufacturing tea, coffee, or rubber in India.
• Deposit made with NABARD in a specialized account or deposit under a scheme sanctioned by the Tea, Coffee, or Rubber Board.
• Deposit to be made within 6 months from the conclusion of the previous year or before the due date of filing the income tax return, whichever is earlier.
• Accounts to be audited by a Chartered Accountant.

Deduction

• The amount deposited in the above-mentioned scheme or 40% of the profits of the said business (calculated under the 'Profits and gains of business or profession' head), whichever is lesser.
• Profits to be calculated before any deduction under Section 33AB and adjustment of brought forward loss under Section 72 but after deducting depreciation of the current year.

Site Restoration Fund [Section 33 ABA]

Required Conditions

• Engaged in the business of exploring for, or extraction or production of, petroleum or natural gas or both in India.
• The Central Government has executed an agreement with such a taxpayer.
• Deposit made with SBI in a specialized account in a scheme approved by the Ministry of Petroleum and Natural Gas or deposit in the Site Restoration Account under a scheme sanctioned by the Ministry of Petroleum and Natural Gas. The deposit should be made before the conclusion of the previous year.
• Accounts to be audited by a Chartered Accountant.

Deduction

• The amount deposited in the above-mentioned scheme or 20% of the profits of the said business (calculated under the 'Profits and gains of business or profession' head), whichever is lesser.
• Profits to be calculated before any deduction under Section 33ABA and adjustment of brought forward loss under Section 72.

Expenditure on Scientific Research [Section 35]

Scientific research is defined as any activity aimed at expanding knowledge in the natural sciences, including agriculture, animal husbandry, or fisheries [Section 43 (4)]. Such research can be conducted in two ways:

By the Assessee Himself

• Revenue Expenditure [Section 35 (1) (i)] - An assessee engaged in scientific research during the previous year can claim revenue expenses related to the research as a deduction, provided the research is related to the business.
• Capital Expenditure [Section 35 (1) (iv)] - An assessee engaged in scientific research during the previous year can claim capital expenses (excluding expenditure on land) related to the research as a deduction, provided the research is related to the business.

By Contribution to Outsiders

An assessee may not necessarily conduct research themselves but contribute payment to outside agencies for research. The contributions fall under different sections:

• Payment made to certain associations/institutions for scientific research - Specified by the Central Government [Section 35 (1) (ii) & (iia)].
• Payment made to certain institutions for research in social sciences or statistical sciences - Approved university, college, or other institution [Section 35 (1) (iii)].
• Payment made to a company for scientific research - To be used for scientific research [Section 35 (1) (iia)].
• Payment made to a National Laboratory, University, Indian Institute of Technology, or specified person - Specified that the sum shall be used for scientific research under an approved program [Section 35 (2AA)].

Weighted Deduction on In-House Research and Development to a Company Assessee in Certain Cases [Section 35(2AB)]

A weighted deduction of 100% will be allowed to a company:

• Engaged in any business of manufacturing or production of any article except those specified in the list of the 11th Schedule of the Income Tax Act.
• Which has incurred revenue and capital expenditure (excluding land and building) on an in-house scientific research and development facility approved by the prescribed authority.
• Expenditure on scientific research done after 31.03.2020 shall not be eligible for weighted deduction under this Section.
• The expenditure incurred on the acquisition of a building (excluding the cost of land) shall be available under Section 35 (1) (iv) @ 100% of the expenditure incurred.

Amortization of Spectrum Fee for the Purchase of Spectrum [Section 35ABA]

• Capital expenditure incurred by the assessee for obtaining any right to use spectrum for telecommunication services, either during any previous year or before the commencement of the business, shall be allowed for each of the relevant previous years as a deduction equal to the appropriate fraction of the amount of each expenditure.

The provisions contained in sub-sections (2) to (8) of Section 35ABB shall apply as if the word 'License' was substituted with the word 'Spectrum'. If any deduction has been claimed and granted to the assessee under Section 35ABA and subsequently, there is a failure to comply with any of the provisions of this section, then:

• The deduction shall be treated as having been allowed by mistake.
• The assessing officer may again compute the total income of the assessee for the relevant previous year and may take necessary corrections.

For the above purpose, the relevant previous year means:

• Where the spectrum fee is actually paid before starting the business, the previous year beginning with the previous year in which such business started.
• In any other case, the previous year beginning with the previous year in which the spectrum fee is actually paid.

Amortization of Telecom License Fees [Section 35ABB]

Required Conditions to be Fulfilled to Avail Deduction under Section 35ABB (otherwise, if conditions are non-fulfilled, then deduction can be claimed under Section 37 (1)):

• Expenditure incurred for acquiring any right to operate telecom services, either before the commencement of business or thereafter, during any previous year should be of capital nature.
• Payment has been made to obtain the license.

Deduction: In equal installments over the period for which the right to use the license remains in force and starting from the year in which the payment is made. No deduction shall be allowed under Section 32 (1) of the said expenditure if claimed under Section 35ABB.

Cold Chain Facility: A chain of facilities for storage or transportation of agricultural and forest produce, meat and meat products, poultry, marine and dairy products, products of horticulture, floriculture, and apiculture, and processed food items under scientifically controlled conditions including refrigeration and other facilities necessary for the preservation of such produce.

• In case any capital expenditure in respect of which a payment (or aggregate of payments made to a person in a day), except by an account payee cheque/draft or use of an electronic clearing system through a bank account, exceeds Rs. 10,000, such payment shall not be eligible. Also, expenditure on the acquisition of land or goodwill or financial instruments shall also not be allowed.
• Deduction: 100% of capital expenditure incurred wholly and exclusively for such purposes as per Section 35 AD during the previous year.
• n the year of commencement of business, expenditure incurred prior to the commencement of operation that is capitalized in the books of account of the assessee shall be allowed as a deduction.

Required Conditions:

• Not set up by splitting or reconstruction of existing business.
• Not set up by transferred machinery or plant used previously for any purpose.
• The asset in respect of which deduction is claimed shall be used specifically for the specified business for a period of 8 years beginning from the year of acquisition or construction.

If the asset is used for another purpose, then the deduction under Section 35 AD shall stand withdrawn but after allowing depreciation under Section 32, and the amount so arrived shall be deemed to be the business income of the previous year in which the asset is so used.

Expenditure on Payments to Associations and Institutions for Rural Development [Section 35CCA]

Any amount paid to the National Fund for Rural Development established by the Central Government or to the National Urban Poverty Eradication Fund established and notified by the Central Government shall be allowed as a deduction to the assessee engaged in a business or profession.

Weighted Deduction of 100% for Expenditure on Agricultural Extension Project [Section 35CCC]

• Allowed to: Any Assessee
• Purpose: Any expenditure incurred on an agricultural extension project notified by the Board
• Quantum: 100% of expenditure incurred during the year
• Allowability: If deduction is claimed under Section 35CCC, it is not allowable under any other provision of this Act or any other assessment year

Weighted Deduction of 100% for Expenditure Incurred by a Company on Skill Development Project [Section 35CCD]

• Allowed to: Company assessee only
• Purpose: Any expenditure excluding expenses on the cost of any land/building on a Skill Development Project notified by the board
• Quantum: 100% of expenditure incurred during the year
• Allowability: If deduction is claimed under Section 35CCD, it is not allowable under any other provision of this Act or any other assessment year

Amortization of Certain Preliminary Expenses [Section 35D And Rule 6 AB]

• Allowed to: Indian company or a person other than a company who is a resident in India
• Allowability: Expenditure incurred before the commencement of business or after commencement in connection with the extension of the existing undertaking or in connection with setting up a new unit.

Qualifying Expenditure: The following expenses qualify for deduction:

Expenditure incurred in connection with:

• Preparation of a feasibility report;
• Preparation of a project report;

Conducting market survey or any other survey necessary for the business of the assessee;

• Engineering services relating to the business of the assessee;
• Legal charges for drafting any agreement between the assessee and any other person relating to the setting up conduct of the business of the assessee;
• Where the assessee is a company, also, expenditure:
• By way of legal charges for drafting the Memorandum and Articles of Association of the company;
• On printing of the Memorandum and Articles of Association;
• In connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage, and charges for drafting, typing, printing, and advertisement of the prospectus;

Any other as prescribed.

• Qualifying Amount: Not exceeding 5% of the cost of the project in the case of all except companies. For companies, 5% of the cost of the project or 5% capital employed by the company (whichever is beneficial to the company)
• Quantum of Deduction: 5 equal installments beginning with the previous year of commencement of business or the previous year in which the extension is completed or the new unit commences production/operation.

Amortization of Expenditure in case of Amalgamation or Demerger [Section 35DD]

• Allowed to: Any Indian Company
• Purpose: Any expenditure incurred, wholly or exclusively, for the purpose of the amalgamation or demerger of an undertaking.
• Deduction: 1/5th of such expenditure for each of five successive previous years beginning in the year in which the amalgamation or demerger takes place.
• Allowability: If deduction is claimed under Section 35DD, it is not allowable under any other provision of this Act or any other assessment year.

Below are the deductions outlined under Section 36:

• Insurance Premium for Stocks: The amount paid for insurance against the risk of damage or destruction of stocks or stores is deductible if it's used for business purposes. The payment must be made or incurred according to the chosen accounting method.
• Insurance Premium for Cattle: A federal milk cooperative society's payment towards insuring the life of cattle owned by a primary milk cooperative society member is deductible.
• Insurance for Employees' Health: The premium paid for insuring the health of employees is deductible if paid by non-cash methods and under an approved scheme by the General Insurance Corporation of India or another IRDA-approved insurer.
• Bonus or Commission to Employees: Payments made as bonuses or commissions to employees, not as part of profit or dividends, are deductible. Payments must be made and not just accrued, unless governed by Section 43B.
• Interest on Borrowed Capital: Interest paid or payable on borrowed capital for business, profession, or vocation is deductible. This excludes interest on own capital and interest on borrowing for asset acquisition.
• Discount on Zero Coupon Bonds: Discounts on zero coupon bonds issued by specific entities are deductible on a pro-rata basis over the bond's life.
• Employer's Contributions to Provident Fund, etc.: Contributions to recognized provident funds or approved superannuation funds are deductible, subject to prescribed limits.
• Employer's Contributions to Pension Schemes: Contributions to the National Pension System (NPS) are deductible up to 10% of an employee's salary, including Dearness Allowance.
• Employer's Contributions to Gratuity Funds: Employer payments towards approved gratuity funds are subject to Section 43B provisions.
• Sums Received for Employee Welfare: Sums deducted from employee salaries for provident funds, superannuation funds, or similar welfare funds must be deposited into the relevant fund by the due date, or they will be treated as the employer's income.
• Allowance for Dead or Permanently Useless Animals: Expenses on animals purchased for non-trading purposes, minus any realized amounts from carcasses or sales, are deductible.
• Bad Debts: Irrecoverable debts considered in previous year incomes or written off in the accounts can be deducted. These debts must relate to the business or profession and be of revenue nature.
• Promoting Family Planning: Companies can deduct expenses incurred for promoting family planning among employees, with 1/5th of capital expenditure deductible in the year incurred and the rest spread over subsequent years.
• Securities Transaction Tax (STT): The STT paid by the assessee is deductible if income from taxable securities transactions is included in the income.
• Commodities Transaction Tax (CTT): The CTT paid by the assessee is deductible if income from taxable commodities transactions is included in the income.

General Deductions 

Deductions under Section 37 are subject to certain conditions:

• The expense should not fall under Sections 30 to 36.
• It should not be capital or personal expenditure of the assessee.
• It must have been incurred in the previous year for the business.
• It should have been spent wholly and exclusively for the business.
• It should not be for any unlawful purpose.

Some approved general deductions under Section 37(1) are:

• Overdraft facility expenses.
• Periodical payments for goodwill use.
• Cash deficiencies at the end of a day.
• Trademark registration expenses.
• Tea garden maintenance costs.
• Goods purchase, sale, or production expenses.
• General advertising expenses.
• Daily business expenses.
• Labor welfare expenses.
• Sales tax payments and appeal expenses.
• Trade union contributions against uneconomical competition.
• Contributions against business nationalization.
• Employee salaries and perquisites.
• General manager commissions.
• Sales representative commissions.
• Compensation for undesirable employees or directors.
• Employee pension and gratuity.
• Reasonable festival expenditures.
• Business-interest contributions.
• Order-obtaining commission.
• Contract non-fulfillment damages.
• Software maintenance consultation fees.
• AS-7 loss provisions.
• Royalty for logo usage.
• Legal expenses for financial institution loans.
• Employee accident compensation.
• Business-related legal expenses.
• New telephone/telex connection expenses.
• Trade nationalization opposition expenses.
• Business asset capital interest.
• Capital asset protection legal expenses.
• Business protection legal expenses.
• Excise duty provisions.
• Non-company family planning expenses.
• Trademark registration and maintenance.
• Debenture issue and loan expenses.
• Customs evasion fine payments.
• Professional tax for business operation.
• House purchase loan interest.
• Government compensation for contract delays.
• Chamber of Commerce contributions.
• Royalty amount.
• Professional tax payments.
• Trade-related income tax expenses.
• Company Act-related Memorandum and Articles of Association revision expenses.
• Hire Purchase late installment interest.
• Government cess delay interest.
• Company trade development foreign tour expenses.
• Employee festival prizes.
• Stock exchange listing fees.

Examples of non-deductible expenses under Section 37(1) include:

• State agreement breach damages and penalties.
• Law infringement penalties and damages.
• Asset title litigation expenses.
• Share registration litigation expenses.
• Authorized capital increase fees.
• Equity and preference share capital raising expenses.
• Technical know-how acquisition expenses.
• Permanent right or asset acquisition expenses.
• Goodwill acquisition payments.
• Mineral land rights acquisition expenses.
• Mineral license fees.
• Monopoly product manufacturing right acquisition payments.
• Non-resident tax deduction default fines.
• Capital asset investment avoidance compensation.
• Registered office shifting expenses.
• Partner life insurance premium.
• Liquor trade unauthorized transaction payments.
• Company capital base enhancement filing fees.
• Partner 15-year business restraint compensation.