Income from business

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Income from business

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Income from business

  1. 1. Income from business/Profession By Prof. Augustin Amaladas M.Com., AICWA.,PGDFM., B.Ed.
  2. 2. Charging Section[Sec.28] <ul><li>Profits and gains of any profession/profession </li></ul><ul><li>Any compensation received related business </li></ul><ul><li>Income received from members of similar profession </li></ul><ul><li>Any benefit or perquisites from business /profession </li></ul><ul><li>Export incentives from government </li></ul>
  3. 3. Charging -Continue <ul><li>Any interest, salary, bonus, commission or remuneration received by a partner from firm. </li></ul><ul><li>Sum received(compensation) from other company not to carry on any business for know how, patent, copy right, trademark. </li></ul><ul><li>Profits and gains of managing agency </li></ul>
  4. 4. Meaning of business <ul><li>Profit motive </li></ul><ul><li>Business and rendering services to others </li></ul><ul><li>Business cannot be carried on with oneself </li></ul>
  5. 5. Export incentives <ul><li>Duty drawback import entitilement licences </li></ul><ul><li>Are taxable u/s 28-Business/profession </li></ul>
  6. 6. Business income not taxable u/s 28 <ul><li>1. Rental income in case of dealer in property taxable under the head income from house property[u/s22]. </li></ul><ul><li>2. Dividend on shares in case of a dealer in shares- taxed under income from other sources [u/s 56]. </li></ul><ul><li>3. winning from lotteries (lottery business) taxed u/s 56-income from other sources. </li></ul>
  7. 7. Losses deductible from business income <ul><li>Loss due to natural calamity </li></ul><ul><li>Loss due to non acceptance of goods </li></ul><ul><li>Reduction in value of foreign currency which is meant for purchase of stock. </li></ul><ul><li>Loss of cash/goods due to embezzelment, burglary, forfeiture of deposits. </li></ul><ul><li>Loss of forgoing advance given by sugar industries to formers due to monsoon failure </li></ul>
  8. 8. Loss not deductible from business <ul><li>Loss due to destruction of Capital asset. </li></ul><ul><li>Loss on sale of investments held as investment. </li></ul><ul><li>Loss of advance to set up a business but business could not be started. </li></ul><ul><li>Depreciation in value of foreign currency for capital purpose </li></ul><ul><li>Anticipated future losses. </li></ul><ul><li>Loss of discontinued business </li></ul><ul><li>Loss from illegal business[T.A.Qureshiv.CIT(2006)SC] </li></ul>
  9. 9. Computation of assessable profits/loss for tax <ul><li>Net profit as per P/L Account </li></ul><ul><li>Add : Amount debited to P/L A/c in respect of the following </li></ul><ul><li>Loss of earlier years </li></ul><ul><li>Capital losses </li></ul><ul><li>Personal expenses (such as drawings) </li></ul><ul><li>Income tax, surtax, wealth tax, gift tax, estate duty[Direct taxes], tax penalty, penal interest, fine. </li></ul>
  10. 10. Continues <ul><li>Add: Charity and donation </li></ul><ul><li>Gifts and presents to others </li></ul><ul><li>All reserves/provisions such as tax provision, Reserve for dividend, provision for bad debts except provision for depreciation </li></ul><ul><li>All expenses related to other heads of income </li></ul>
  11. 11. Continues <ul><li>Add : Expenses not deductible u/s 40 and 40A </li></ul><ul><li>Expenses debited to P/L A/C not admissible u/s 30 to 40A </li></ul><ul><li>Add : Amount not credited to P/L A/c </li></ul><ul><li>Deemed income </li></ul><ul><li>Deduct :Income credited to P/L A/c but not chargeable under other heads </li></ul>
  12. 12. Continues <ul><li>Less : </li></ul><ul><li>Salary income( income from salary(u/s 15) </li></ul><ul><li>Rental incomeIncome from House property(u/s22) </li></ul><ul><li>Capital gain(u/s 45) </li></ul><ul><li>Dividend[ Income from other sources(56)] </li></ul><ul><li>Direct taxes refund such as Income tax, Wealth tax, estate duty, surtax refunds </li></ul><ul><li>Bad debts, excise duty recovered not allowed as expenditure preceding previous years </li></ul><ul><li>Deduct: </li></ul><ul><li>Expenses not debited to P/L A/c but allowed u/s 30 to 40A </li></ul><ul><li>Depreciation u/s 32 </li></ul><ul><li>Income chargeable under income from business/profession. </li></ul>
  13. 13. Specific deductions expressly allowed u/s 30 to 37 <ul><li>1.Rent (Sec.30) </li></ul><ul><li>Repairs(including painting of a house ) </li></ul><ul><li>Land revenue, local taxes and municipal taxes </li></ul><ul><li>Insurance against risk of damage or destruction </li></ul><ul><li>Not allowed: a) arrears of rent b) share of profit instead of rent c. </li></ul>
  14. 14. Repairs and insurance of machinery, plant and furniture(sec.31) <ul><li>Revenue repair-allowed </li></ul><ul><li>Capital expenditure – not allowed </li></ul><ul><li>Quantum of expenditure is not important </li></ul>
  15. 15. Depreciation Allowances(sec.32) <ul><li>Conditions: </li></ul><ul><li>Asset must be owned by the assessee(Registration is not important),full control over asset,right to retain the possession and defend are characteristics of ownership. </li></ul><ul><li>Used or ready to use for business purpose </li></ul><ul><li>Used in the previous year </li></ul><ul><li>Both tangible and intangible assets </li></ul><ul><li>Right on occupancy on Lease property is entitled for depreciation </li></ul><ul><li>If hirer purchaser has right over asset and hire seller will loose all rights- Depreciation is allowed. </li></ul>
  16. 16. Depreciation-Continues <ul><li>Insurance premium, repairs and other expenditure incurred on leased business asset are deductible in the hands of lessor. </li></ul><ul><li>If any asset is fully controlled such as lease the capital expenditure incurred by lessee can provide depreciation[32(1)(ii). </li></ul>
  17. 17. Lease property <ul><li>Registered ownership is not necessary Sec. 53A of the transfer of property Act. </li></ul><ul><li>If the assessee can be the co-owner to claim depreciation </li></ul><ul><li>Any capital expenditure incurred by the person who takes building can provide depreciation on capital expenditure. </li></ul><ul><li>Rules of Accounting Standard (AS19) not applicable for depreciation as per IT Act. </li></ul>
  18. 18. Hire purchase <ul><li>Conditions: </li></ul><ul><li>Hire purchaser can provide depreciation if hire purchaser has uninterrupted right over the asset. </li></ul><ul><li>The seller looses his right </li></ul><ul><li>Who can provide depreciation? </li></ul><ul><li>Hire purchaser. </li></ul>
  19. 19. Residential quarters If used by the assessee’s employees –depreciation is allowed.
  20. 20. 50% of rate of depreciation <ul><li>If an asset acquired during the previous year. </li></ul><ul><li>Put into use or ready to use for less than 180 days. </li></ul><ul><li>Exceptions:1. Put into use for less than 180 days but ready to use for more than 180 days –full rate of depreciation </li></ul><ul><li>If asset purchased in the preceding year to current previous year but put into use for less than 180 days during the current previous year what is the rate of depreciation rate? </li></ul><ul><li>If an asset is not used at all-No depreciation not only for first year but also for subsequent period </li></ul>
  21. 21. <ul><li>Full rate of depreciation. </li></ul><ul><li>Can depreciation be provided on intangible assets such as know- how, patent rights, copy right, trade mark, licences, franchises etc. depreciation? </li></ul>
  22. 22. Meaning of Building and Plant <ul><li>Building means: Super structure only. It does not include site. </li></ul><ul><li>Plant : Includes ships, vehicle, books, technical know-how report, scientific apparatus and surgical equipment. </li></ul><ul><li>It does not include tea bushes or livestock or building or furniture and fittings. </li></ul><ul><li>If assessee does not claim depreciation whether is depreciation available? </li></ul>
  23. 23. Method of depreciation <ul><li>Yes. </li></ul><ul><li>Block asset method. </li></ul><ul><li>What is block asset method? </li></ul><ul><li>Similar nature of asset having the same rate of depreciation are clubbed together. </li></ul>
  24. 24. 100% depreciation? <ul><li>1. Building acquired on or after September 1, 2002 forming part of water supply project </li></ul><ul><li>2. Pollution control equipments </li></ul><ul><li>3. waste control equipment </li></ul><ul><li>4.wooden parts used in artificial silk manufacturing machine </li></ul><ul><li>5.cinimatograph films </li></ul><ul><li>6. Books </li></ul>
  25. 25. Commercial vehicle <ul><li>If acquired and used before 31,March 2002. -Rate of depreciation is 50% . </li></ul>
  26. 26. calculation of depreciation <ul><li>Block value in the beginning </li></ul><ul><li>Add:- Purchase of asset of the same block </li></ul><ul><li>Less:- Net sale value of the consideration received/receivable in cash /cheque/draft if any of the block of assets sold during the year </li></ul>
  27. 27. Continuation <ul><li>Calculate depreciation of the balance amount. </li></ul><ul><li>If it reaches to Zero value no more depreciation is allowed. </li></ul><ul><li>If net sale consideration exceeds the block it amounts to short term capital gain. </li></ul>
  28. 28. continues <ul><li>Once asset is depreciated the gain on sale of block never be a long term gain </li></ul><ul><li>Index can not be used for the calculation of capital gain. </li></ul><ul><li>If all assets of the assets sold out but block continues it amounts to short term capital loss. </li></ul>
  29. 29. ###Intangible assets <ul><li>Depreciation is allowed at the rate of 25% </li></ul><ul><li>Include: know- how, patent rights, copy rights, trade mark, licenses, franchises etc. </li></ul>
  30. 30. Imported Cars <ul><li>Purchased between March 1, 1975 and March 31, 2001 for hire for tourist- no depreciation is allowed if used in India for business purposes other than for hire for tourist </li></ul><ul><li>Used outside india for business-alowed </li></ul><ul><li>For hire for tourist-allowed </li></ul><ul><li>After 31 st March 2001- all purposes depreciation is allowed </li></ul>
  31. 31. Change in the ownership in any part of the year due to amalgamation , absorption or demerger <ul><li>Calculate depreciation for the previous year as if no amalgamation/re-organization taken place </li></ul><ul><li>Apportion between the companies on time basis. </li></ul>
  32. 32. ###Computation of additional depreciation <ul><li>Manufacture or production of any article </li></ul><ul><li>Purchased entirely new machinery Not used any part of the world </li></ul><ul><li>Acquired and installed after March 31, 2005 </li></ul><ul><li>Rate-20% </li></ul><ul><li>If used less than 180 days-Half of the rate </li></ul><ul><li>Excludes ships and aircrafts, used in the guest house, or office road transport vehicles </li></ul>
  33. 33. Actual Cost <ul><li>Total cost-subsidy </li></ul><ul><li>Includes: interest on money borrowed before the asset is put into use </li></ul><ul><li>Bank charges </li></ul><ul><li>Loading </li></ul><ul><li>Unloading </li></ul>
  34. 34. Actual cost-continues <ul><li>Modification before first put into use </li></ul><ul><li>Training of staff to operate the machine </li></ul><ul><li>Other related expenses required such as cold storage. </li></ul><ul><li>Traveling expenses to acquire the asset </li></ul>
  35. 35. Un-absorbed depreciation <ul><li>Deduct the depreciation of the previous year from income from business or profession </li></ul><ul><li>Deduct it from other heads of income except salary </li></ul><ul><li>If not able to absorb-carry over to subsequent assessment year (s) – No time limit. </li></ul>
  36. 36. Subsequent assessment years <ul><li>Order of priority to set off: </li></ul><ul><li>1. current depreciation </li></ul><ul><li>2.Brought forward business losses </li></ul><ul><li>3. Un-absorbed depreciation </li></ul><ul><li>Note: Continuity of business is not relevant. </li></ul><ul><li>The same assessee only can carry forward </li></ul>
  37. 37. Depreciation on Straight Line basis/WDV <ul><li>Applicable to Power units(generating and distribution of power) </li></ul><ul><li>Assets acquired after 31 st march 1997. </li></ul>
  38. 38. Terminal depreciation <ul><li>If straight line depreciation method followed on power generating units </li></ul><ul><li>sold after the use of such asset more than one previous year </li></ul><ul><li>Terminal depreciation=WDV> Net Sale consideration </li></ul><ul><li>Capital gain=Net sale>WDV </li></ul>
  39. 39. Tea, coffee and rubber development account[Sec.33AB] <ul><li>Deposit with NABARD or Deposit account of tea, coffee or rubber Board </li></ul><ul><li>With in 6 months from the end of the previous year or before the last date of filing of returns whichever earlier </li></ul><ul><li>Exemption: </li></ul><ul><ul><ul><li>Amount deposited or 40% of profit whichever is less </li></ul></ul></ul><ul><ul><ul><li>Can amount be withdrawn? </li></ul></ul></ul>
  40. 40. withdrawal <ul><li>Only for the purpose stated </li></ul><ul><li>If unutilised within the previous year it is treated as income </li></ul><ul><li>If business closed or dissolved-treated as taxable profit </li></ul><ul><li>If death of the taxpayer/partition of HUF/liquidation of company will not be treated as income </li></ul><ul><li>Purpose: installed in plant and machinery in low priority sector or entitled to get 100% depreciation. </li></ul><ul><li>Maximum 8 years </li></ul>
  41. 41. Site restoration fund[sec.33ABA] <ul><li>Production of Petroleum /Natural gas in India </li></ul><ul><li>Deposit with SBI/account opened as per petrolem and Natural Gas Commission In a scheme specified </li></ul><ul><li>Before the end of the previous year </li></ul><ul><li>Amount withdrawn should be used for low priority sector/100% depreciated and utiled within 8 years at the end of previous year. </li></ul>
  42. 42. ###Scientific research[Sec.35] In house research <ul><li>All Revenue expenditure and Capital expenditure related to one’s business during the current previous year or even 3*** preceding previous years allowed [Except Land] </li></ul><ul><li>Even asset is not put into use –it is allowed. </li></ul><ul><li>No depreciation is allowed on such capital asset </li></ul><ul><li>If such asset is sold what could be the consequences? </li></ul>
  43. 43. If scientific asset sold? <ul><li>If not used for any other purpose: </li></ul><ul><li>***Sale or deduction already allowed whichever is less taxed as business profit. </li></ul><ul><li>Capital gain=Sale-Cost (index if required) </li></ul>
  44. 44. Contribution to National laboratory <ul><li>Including University, IIT </li></ul><ul><li>Weighted deduction= 1.25 times of contribution can be treated as Expenditure. </li></ul><ul><li>*** Even approval is withdrawn after the payment to such institution the assesssee who contributed can enjoy the benefit </li></ul>
  45. 45. Expenditure on Patent rights and copy rights[35A] <ul><li>Capital Expenditure incurred before 1 st April 1998 </li></ul><ul><li>14 instalments </li></ul><ul><li>After 1 st April 1998- Depreciation can be claimed-25% </li></ul><ul><li>Revenue expenditure- Fully allowed expenditure in the year such expenditure incurred. </li></ul>
  46. 46. Technical know how <ul><li>Only depreciation </li></ul><ul><li>25% allowed </li></ul>
  47. 47. Amortisation of telecom license fees[35ABB] <ul><ul><ul><li>Conditions </li></ul></ul></ul><ul><li>Capital Expenditure </li></ul><ul><li>Acquiring any right to operate telecommunication services </li></ul><ul><li>Incurred before or after commencement of Business </li></ul><ul><li>Mainly incurred to obtain license. </li></ul><ul><li>If conditions fulfilled claim can be done u/s 35ABB otherwise u/s 37(1) as business expenditure. </li></ul>
  48. 48. Payment to associations and institution for rural development program <ul><li>Institutions approved before 1 st March 1983 </li></ul><ul><li>Deduction up to the amount paid </li></ul>
  49. 49. Amortisation of preliminary expenses <ul><li>Indian Company or resident non corporate assessee </li></ul><ul><li>Foreign company excluded </li></ul><ul><li>Legal charges on MOA, AOA,printing of MOA, AOA,Registration fees,expenses connected to issue of shares or debentures </li></ul><ul><li>Is there any limit? </li></ul>
  50. 50. Limit of preliminary expenses Actual cost= costs incurred initially and additional costs after commencement Of business 5% of the cost of the project 5% of cost of project or 5% of capital employed Whichever is More(dil monge more) Non-Corporate assessee Corporate assessee
  51. 51. Preliminary Exp. Continue <ul><li>The value on the last day of the previous year in which the business of the assessee commences. </li></ul><ul><li>Deduction: 1/5 of the qualifying expenditure </li></ul>
  52. 52. Expenses on issue of shares/Debentures <ul><li>New company even Old industrial company issue shares - u/s 35 D </li></ul><ul><li>Old company-- u/s 37(1) except issue of shares) </li></ul><ul><li>Old industrial company issue shares-35D </li></ul><ul><li>Non industrial company – All expenses related to bonus issue, issue of debentures or raising of long term or short term loans </li></ul><ul><li>Note : old non industrial company- Expenditure related to issue of shares can not be claimed </li></ul>
  53. 53. Amortisation of expenditure incurred for amalgamation[35DD] <ul><li>Indian company </li></ul><ul><li>Deductions in five successive installments </li></ul>
  54. 54. Amortisation of expenditure under voluntary retirement scheme[35DDA] <ul><li>Any assessee </li></ul><ul><li>Deduction 1/5 every year </li></ul><ul><li>Voluntary retirement scheme need not be accordance with guidelines prescribed under section 10(10C) </li></ul>
  55. 55. Amartisation of expenditure on development of certain minerals[35E] <ul><li>Indian companies and Resident assessee </li></ul><ul><li>I/10 every year allowed </li></ul>
  56. 56. Insurance premium to protect the asset or employees[36(1)(i)] <ul><li>Allowed </li></ul><ul><li>Bonus to employees[36(1)(ii)] </li></ul>
  57. 57. Interest on borrowed capital[36 (1)(iii) <ul><li>Interest on own capital is not allowed. </li></ul><ul><li>Interest paid by a firm to partner is deductible- 12% per annum Simple interest </li></ul><ul><li>Interest paid to wife and daughter- allowed </li></ul><ul><li>Interest before the asset is put into use to be capitalised </li></ul>
  58. 58. Interest paid outside India without deducting TDS <ul><li>Not allowed </li></ul>
  59. 59. Discount on Zeeero coupon Discount Bonds[36(1)(iiia)] <ul><li>Issued after June 1, 2005 </li></ul><ul><li>Minimum 10 years and Maximum 20 years </li></ul><ul><li>Deduction on pro rata basis. </li></ul>
  60. 60. ***Unpaid liabilities <ul><li>Includes: </li></ul><ul><li>Local taxes, duty cess or fee under any law </li></ul><ul><li>Sum payable to employees such PF, Gratuity, superannuation fund to employees, BONUS, OR COMMISSION </li></ul><ul><li>Interest on loan borrowed from public financial institution such as ICICI,IFCI, IDBI,LIC AND UTI ONLY </li></ul><ul><li>DEDUCTION ALLOWED ON PAYMENT BASIS OR ACCRUAL BASIS? </li></ul>
  61. 61. Payment/ Accrual????? <ul><li>No payment- Not allowed </li></ul><ul><li>If deposited EVEN before the last date of filing of returns with Proof for payment- fully allowed(page 336) </li></ul>
  62. 62. ****Employees ’ contribution towards staff welfare scheme such as PF[36(1)(va)] <ul><li>Amount received by employer- </li></ul><ul><ul><ul><li>Included with the assessee’s Income </li></ul></ul></ul><ul><ul><ul><li>If Paid to the employees’s account??? </li></ul></ul></ul>
  63. 63. If paid !!!!! <ul><li>Due date #### as per the PF rules or Gratuity rules Usually with in a month of deduction from employees. </li></ul><ul><li>*****not as per IT rules </li></ul>
  64. 64. Written off of allowance for animals [36(1)(vi)] <ul><li>If died /useless </li></ul><ul><li>Used as capital asset </li></ul><ul><li>Allowed loss = Original cost- Carcasses or ( sale of animals ) </li></ul><ul><li>No depreciation is allowed any time on animals </li></ul>
  65. 65. Bad debts [36(1)(vii)] !!! <ul><li>If actual- allowed </li></ul><ul><li>Provision –Never allowed </li></ul><ul><li>If recovered[41(4)]-----If earlier allowed it is taxable </li></ul><ul><li>If earlier denied - not taxable </li></ul>
  66. 66. Provision for Bad and doubtful debts to rural branches of scheduled and non scheduled commercial banks[36(1)(vii)] <ul><li>bank and Institution bank </li></ul><ul><li>Non scheduled </li></ul><ul><li>Scheduled Financial Foreign </li></ul><ul><li>7.5% of income 5% 5% </li></ul><ul><li>10% of advances --- --- </li></ul><ul><li>made by rural </li></ul><ul><li>branchs </li></ul>
  67. 67. Transfer to SPECIAL RESERVE [36(1)(viii)] <ul><li>Long term (5 years or more) financial corporation/public company/government company </li></ul><ul><li>Finance for industry/agriculture/infrastructure facilities in India. </li></ul><ul><li>Deduction: Whichever is less </li></ul><ul><li>1. amount transferred to such account or </li></ul><ul><li>2. 40% of profit from business activities before such deductions </li></ul><ul><li>3. 200% of paid up capital and reserve on the last day of PY(- )amount in special reserve account in the beginning of the PY </li></ul>
  68. 68. Family planning expenditure [36(1)(ix)] <ul><li>For Company assessee </li></ul><ul><li>Revenue expenditure- Fully allowed </li></ul><ul><li>Capital Expenditure - 1/5 th every year </li></ul><ul><li>Non-corporate assessee can claim u/s 32(Depreciation on capital expenditure) and 37(1)(Revenue expenditure) </li></ul>
  69. 69. Advertisement Expenditure[37(2B)] <ul><li>Advertisement In publication of political party ------ Not allowed </li></ul><ul><li>All advertisements -- Allowed </li></ul>
  70. 70. Expenses incurred by commission agent from insurance UTI agents etc.If commission less than 60,000 20,000 50% of commission 15% OF THE COMMISSION 33 1/3% No deduction 50% LIC –first year Renewal commission First & renewal Commission Bonus commission UTI/agents of specified securities, mutual funds authorised agent 3 2 1 Max. deduction Adhoc deduction commission
  71. 71. Contribution towards Exchange risk Administration fund [36(1)(x)] <ul><li>By Public financial institution </li></ul><ul><li>Deductible upto the assessment year 2007-08 </li></ul>
  72. 72. Benefits to public financial institutions
  73. 73. General deductions[37(1)] <ul><li>It should not be a capital expenditure or </li></ul><ul><li>Not personal </li></ul><ul><li>Not prohibited by law such as fine, penalty </li></ul><ul><li>Not be an illegal expenditure </li></ul><ul><li>Can we see some of the expenditures allowed as per various case laws? </li></ul>
  74. 74. Expenses allowed <ul><li>*Litigation expenses to protect the trade or business /asset/or to retain title of asset </li></ul><ul><li>*Legal expenses to receive loan </li></ul><ul><li>*Litigation expenses in restoring trade mark </li></ul><ul><li>***Legal expenses to alter the AOA in conformity with the changes brought about </li></ul><ul><li>in the companies ACT </li></ul><ul><li>****Damages paid to workers/fulfil the contract </li></ul><ul><li>***Damages for breach of contract </li></ul>
  75. 75. Expenses allowed <ul><li>**Contribution to the union formed to oppose the nationalisation of assessee’s business </li></ul><ul><li>**Expenses incurred during festival </li></ul><ul><li>***Premium paid for loss of profit </li></ul><ul><li>*Professional tax paid </li></ul><ul><li>All maintenance expenditure </li></ul><ul><li>**Expenses incurred to register trade marks </li></ul><ul><li>*****Entertainment expenses </li></ul><ul><li>**Periodical payment for the use of goodwill </li></ul>
  76. 76. Expenses allowed-case laws <ul><li>###Estimated probable liability for free maintenance CIT vs Modi Olovetti ltd.(2004) </li></ul><ul><li>***Expenditure to car even it is huge[CIT vs Mangalchand premchand& co.[2004] </li></ul><ul><li>**Repairs to maintain building taken on lease [Sumitomo Corpn. India (p) ltd. </li></ul><ul><li>Expenditure on civil work on leased asset [Hero Honda motors vs CIT </li></ul><ul><li>***Interest on delayed payment of Provident fund[CIT vs Ishwari Khetan Sugar Mills (P0 ltd.(2004) </li></ul>
  77. 77. Important notes & controversial issues <ul><li>Expenditure to issue of shares fees paid to Registrar to increase the authorised capital disallowed[Brook Bond India ltd Vs CIT(SC) </li></ul><ul><li>Retrenchment compensation payable at the time of partial closure of business Is deductible. But at the time of closure of industry is not deductible[CIT vs MGF India(2004) </li></ul>
  78. 78. Expenses allowed <ul><li>****Expenditure to issue of debentures </li></ul><ul><li>bonus shares allowed </li></ul>
  79. 79. Controversial Continues <ul><li>***Foreign study expenses incurred by the company even though the employee is a director’s son-allowed [J.B Advani& co Vs CIT](2005) </li></ul>
  80. 80. Controversial Continues <ul><li>Medical expenses of wife employee of cine actor-Allowed [Ajay Singh Deol Vs CIT] </li></ul><ul><li>Payment on account of membership fees for health club and also paid membership fees for an another club-Allowed [Sterlite Industries (India) Vs CIT(2006) </li></ul>
  81. 81. Controversial- Continues <ul><li>###Provision made for contribution towards Provident Fund maintained by Government of Tamilnadu sent on deputation to the assessee corporation-allowed[ CIT Vs Kattabomman Transport Corporation Ltd.(2004) </li></ul>
  82. 82. Controversial Continues <ul><li>***Interest on arrears of tax , sales tax compensatory in nature and not penal – allowed(Lachmandas Vs CIT(SC) (2002) </li></ul><ul><li>***Interest paid for late payment of tax is disallowed. Even Income-tax itself disallowed. </li></ul>
  83. 83. Disallowed Expenditure <ul><li>*****Interest paid on borrowed funds to pay Income tax is disallowed </li></ul><ul><li>Interest paid on installment of the price of property </li></ul><ul><li>*****Expenditure to raise capital </li></ul><ul><li>***Expenditure on shifting of registered office </li></ul>
  84. 84. Penalty/fine /interest on penalty <ul><li>*#*#*# Disallowed </li></ul>
  85. 85. Important question to be asked!!! <ul><li>****Protecting Business or protecting the title to capital asset. </li></ul><ul><li>Capital Expenditure or revenue expenditure </li></ul>
  86. 86. Expressly disallowed expenditures <ul><li>Interest, Royalty, fees for technical services payable outside India </li></ul><ul><li>***TAX TO BE DEDUCTED AND PAID WITHIN 7 DAYS FROM THE LAST DAY OF THE MONTH IN WHICH TAX WAS DEDUCTED OR </li></ul>
  87. 87. Expressly disallowed expenditures <ul><li>AMOUNT PAID TO GOVERNMENT IN THE FINANCIAL YEAR IF NOT PAID WITHIN 7 DAYS FROM THE LAST DAY OF THE MONTH. </li></ul><ul><li>Anything paid after the financial year and after the expiry of 7 days FROM THE LAST DAY OF THE MONTH -deductible only in the year of payment. </li></ul>
  88. 88. Fringe benefit tax <ul><li>Fringe benefit tax, Income tax, wealth tax, securities transaction tax- Not Taxable </li></ul>
  89. 89. Salary payable outside India without TDS <ul><li>Outside India both resident and non-resident </li></ul><ul><li>In India to NON-REDIDENT </li></ul><ul><li>NOT ALLOWED </li></ul>
  90. 90. Payment from provident fund <ul><ul><ul><ul><li>If TDS not done- Not allowed </li></ul></ul></ul></ul>
  91. 91. Tax on perquisites paid by the employer <ul><li>Tax paid by employer- Not taxable to employees </li></ul><ul><li>Perquisites paid- Not deductible to employer </li></ul><ul><li>(Non monetary) </li></ul><ul><li>See illustration- para 82.1.8- page 328 </li></ul>
  92. 92. Payment to relatives[ Sec. 40A(2)] <ul><li>Excess or unreasonable - disallowed </li></ul><ul><li>Relative: husband, wife, brother or sister or lineal ascendant or descendant of that individual. </li></ul><ul><li>Substantial interest:- at least 20% of equity or 20% profits of a concern at any time during the year </li></ul>
  93. 93. Expenditure exceeding Rs. 20,000 <ul><li>Should be paid account payee crossed cheque or account payee demand draft. </li></ul><ul><li>If not - 20% of such payment is disallowed. </li></ul><ul><li>Note: on the same day any number of cheques less than 20,000 each can be given </li></ul><ul><li>Partly cash, partly cheque without account payee crossed cheque without exceeding 20,000 each. </li></ul>
  94. 94. Payment to unapproved gratuity by employer <ul><ul><li>Not deductible expenditure. </li></ul></ul>
  95. 95. Recovery of earlier deductions <ul><li>If recovered in the subsequent assessment years it is taxable even there is no business and taxed in the hands of recepient. </li></ul>
  96. 96. Undisclosed income <ul><li>Cash credit[sec.68] </li></ul><ul><li>Undisclosed investment[sec.69] </li></ul><ul><li>Unexplained money [sec. 69A] </li></ul><ul><li>Amount of investments not fully disclosed [sec.69B] </li></ul><ul><li>Unexplained expenditure [sec.69C] </li></ul><ul><li>Amount borrowed or repaid on hundi[sec.69D] </li></ul><ul><li>They are deemed income of the current previous year. </li></ul>
  97. 97. Maintenance of books compulsory[Sec.44AA] <ul><li>Legal medical, engineering, architectural, accountancy, Film artist technical consultancy, or interior decoration and other notified profession [Specified professional] </li></ul><ul><li>If gross receipts exceed 1,50,000 in any of the three years preceding the previous year. </li></ul><ul><li>Non-specified professional- Income exceed Rs. 1,20,000 and total gross receipts exceed 10,00,000 </li></ul><ul><li>What are those books maintained? </li></ul>
  98. 98. Specified Books to be maintained <ul><li>Cash book </li></ul><ul><li>A Journal on mercantile basis </li></ul><ul><li>Ledger </li></ul><ul><li>Carbon copies of machine numbered bills exceeding Rs. 25 issued by the person </li></ul><ul><li>Original bills if exceed Rs. 50. If bills are not issued payment vouchers signed by the person </li></ul>
  99. 99. Medical practitioner <ul><li>Additional books required: </li></ul><ul><ul><ul><li>Daily cash register showing date, patient’s name, nature of professional services rendered, fees received and date of receipt </li></ul></ul></ul><ul><ul><ul><li>Stock register for medicines and other consumable accessories . </li></ul></ul></ul>
  100. 100. Audit of Accounts[sec.44AB] if crossed limit <ul><li>Business-Gross receipts /sales exceed 40 lakhs </li></ul><ul><li>Profession- gross receipts exceed 10 lakhs </li></ul>
  101. 101. Audit compulsory with out any limit of income/receipt <ul><li>Person engaged in: </li></ul><ul><li>1. civil construction[44AD]- 8% of gross receipts </li></ul><ul><li>2.Business of plying, leasing or hiring trucks[44AE]- Heavy vehicles Rs. 3500 pm (owned months), other vehicles- 3150 pm (not owned more than 10 vehicles any time during the previous year.- No expenditure is deductible . </li></ul><ul><li>Retail traders[44AF]- 5% of turnover is considered as income </li></ul>
  102. 102. Important points to solve problems <ul><li>Bonus-before last date of filing </li></ul><ul><li>Depreciation- permitted as per income tax </li></ul><ul><li>Direct taxes-disallowed </li></ul><ul><li>Indirect taxes-allowed if paid before due date of filing </li></ul><ul><li>Capital expenditure-disallowed </li></ul><ul><li>Bad debts recovered-if allowed earlier taxable </li></ul><ul><li>Income from other heads such as salary, house property etc-if included in the P/L /A/c deduct. </li></ul>
  103. 103. Points to solve problems <ul><li>Outstanding statutory liability-before due date to be paid </li></ul><ul><li>statutory penalty-disallowed </li></ul><ul><li>Contractual penalty-allowed </li></ul><ul><li>Personal expenditure-disallowed </li></ul>
  104. 104. Points to solve problems <ul><li>Entertainment expenditure-fully allowed </li></ul><ul><li>Maintenance of guest house-fully allowed </li></ul><ul><li>Revenue advertisement including gift to customers-fully allowed. </li></ul>
  105. 105. Points to solve problems <ul><li>Capital expenditure on advertisement-depreciation is allowed. </li></ul><ul><li>Amount paid for expenses beyond 20,000 without crossed a/c payee cheque or draft -20% disallowed </li></ul><ul><li>Any expenditure incurred (traveling) out side india –allowed to the extent of RBI’s permission </li></ul>
  106. 106. Points to solve problems <ul><li>paid on borrowing-Not allowed Expenditure to audit-allowed </li></ul><ul><li>Expenditure to prepare accounts for IT –allowed </li></ul><ul><li>interest </li></ul>
  107. 107. Points to solve problems <ul><li>Interest on borrowing to pay direct tax such as Income tax-disallowed </li></ul><ul><li>Copy right , technical know how, patent right- amount paid disallowed but depreciation 25% only allowed. </li></ul><ul><li>Employee’s contribution to PF- treated as income </li></ul><ul><li>If such employee’s contribution is paid before due date as per the PF act- allowed. </li></ul>
  108. 108. Points to solve problems <ul><li>Capital expenditure on travelling-disallowed </li></ul><ul><li>Traveling expenditure to buy stock-allowed </li></ul><ul><li>Insurance to asset or employees-fully allowed expenditure </li></ul><ul><li>Profit on sale of capital asset which is included in the P/L /a/c- disallowed </li></ul>
  109. 109. Points to solve problems <ul><li>Rent received from outsider other than employee- credited to P/L A/c-disallowed income-subtract from net profit-Income from House property. </li></ul><ul><li>Any payment to workers/Government-Before the last date of filing returns is allowed </li></ul>
  110. 110. Points to solve problems <ul><li>All reserves/provision except depreciation provision-disallowed </li></ul><ul><li>Interest on own capital-disallowed </li></ul><ul><li>Direct taxes refund like It refund shown in P/L A/C –disallowed income= subtract from profit </li></ul><ul><li>Revenue repair to building , furniture even leasehold –allowed expenditure </li></ul>
  111. 111. Points to solve problems <ul><li>Capital expenditure on family planning- 1/5 is allowed </li></ul><ul><li>Loss of cash, goods-allowed. </li></ul><ul><li>Donation and charity-disallowed </li></ul><ul><li>Fringe benefit tax-disalowed </li></ul><ul><li>Expenditure on issue of shares-disallowed ;where as expenditure on issue of debentures, arrangement of loan (borrowed capital)- allowed </li></ul>
  112. 112. Points to solve problems <ul><li>Income from other heads-inadmissible income </li></ul><ul><li>Advance payment of tax, provision for tax, income tax refund-disalloed </li></ul><ul><li>Life insurance premium of owner paid from business-disallowed </li></ul><ul><li>Scientific Research (in house)-fully allowed including capital expenditure </li></ul><ul><li>Family planning revenue expenditure-allowed </li></ul>
  113. 113. Points to solve problems <ul><li>Unapproved statutory funds-disallowed </li></ul><ul><li>Closing stock and opening stock to be valued in the same manner </li></ul>
  114. 114. Profit and loss account 10,00,000 Gross profit Interest on bonds Dividend received Rent Rent paid in advance Profit on sale of investment discount Salaries Rent and rates Office expenses Stock destroyed Depreciation Discount Advertisement Interest on loan Scientific research expenses Bad debts RBD Insurance on building Insurance stock Income tax Amount Rupees particulars Amount Rupees particulars
  115. 115. <ul><li>Closing stock is 10% less than the actual value </li></ul><ul><li>Opening stock was over valued by 8% </li></ul><ul><li>Advance payment of tax </li></ul><ul><li>provision for tax </li></ul><ul><li>income tax refund </li></ul><ul><li>Loss of cash, goods </li></ul><ul><li>Capital expenditure on family planning </li></ul><ul><li>Loss of cash, goods </li></ul><ul><li>Donation and charity </li></ul><ul><li>Fringe benefit tax </li></ul><ul><li>Expenditure on issue of shares </li></ul><ul><li>expenditure on issue of debentures , </li></ul><ul><li>arrangement of loan on borrowed capital </li></ul><ul><li>Bonus paid on 2 nd september </li></ul><ul><li>Copy right </li></ul><ul><li>technical know how </li></ul><ul><li>patent rights </li></ul><ul><li>Cash Amount paid for expenses 25000 </li></ul>
  116. 116. <ul><li>Bad debts written off recovered (earlier disallowed) </li></ul><ul><li>statutory penalty </li></ul><ul><li>Contractual penalty </li></ul><ul><li>Personal expenditure </li></ul><ul><li>Interest paid on borrowed funds to pay Income tax </li></ul><ul><li>Interest paid on installment of the price of property </li></ul><ul><li>Expenditure to raise capital </li></ul><ul><li>Expenditure on shifting of registered office </li></ul>
  117. 117. <ul><ul><ul><ul><ul><li>THANK YOU </li></ul></ul></ul></ul></ul>ALTERNATIVE WORK IS REST Happiness by giving but not receiving Learn every day No bad day. It depends upon our mind set Two sides in a coin. One is failure(50% ) Other is success(50%) Accepting failure leads to success Enjoy whatever you do Everyone is good

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