TAXATION- Concept Book

Standard Rent Rs.2,16,000 Expected Rent Rs.2,16,000 Less: Loss due to vacancy Rs.20,000 Reasonable Rent Rs.1,76,000 Actual Rent Rs.2,00,000 Gross Annual Value Rs.2,00,000 Less: Municipal Taxes paid Net Annual Value 5,000 Rs.1,95,000 Q71. Calculation of Net Annual Value Rs.1,80,000 Municipal Value Rs.2,52,000 Fair Rent Rs.2,16,000 Standard Rent Rs.2,16,000 Expected Rent Less: Loss due to vacancy NIL Reasonable Rent Rs.2,16,000 Actual Rent Gross Annual Value NIL Less: Municipal Taxes paid NIL Net Annual Value NIL NIL Q72. Calculation of Net Annual Value Rs.2,16,000 Expected Rent NIL Less: Loss due to vacancy Reasonable Rent Rs.2,16,000 Actual Rent NIL Gross Annual Value NIL Less: Municipal Taxes paid 5,000 Net Annual Value (5,000) Q73. Calculation of Net Annual Value Let out Self Nature occupied 4,80,000 Actual Rent 4,80,000 NIL Gross Annual Value 40,000 NIL Less: Municipal Taxes paid 4,40,000 NIL Net Annual Value NIL CFP Level 2 - Module 2 – Taxation - India Page 245

Section 24(a) 1,32,000 NIL Section 24(b) 22,500 22,500 Income 2,85,500 (22,500) Net income from house property 2,63,000 Q74. Calculation of income from House Property Rs.3,00,000 Gross Annual Value Rs.25,000 x 12 Rs.10,000 Less: Municipal Taxes paid Rs.2,90,000 Net Annual Value Rs.87,000 Less: Deduction u/s 24(a) @ 30% of NAV Less: Deduction u/s 24(b) Interest on borrowed capital NIL Add: Recovery of arrear of Rent Rs.5,000 x 3 Rs.15,000 Less: Deduction of 30% Rs.4,500 Rs.10,500 Taxable House Property Income Rs.2,13,500 Q75 and Q76. Calculation of income from House Property 2 Floors SO 2 Floors LO GAV NIL Less: Municipal Taxes paid NIL NAV NIL Less: Deduction u/s 24(a) 30% of NAV NIL Rs.75,000 Less: Deduction u/s 24(b) interest on borrowed capital House Property income ( Rs.75,000) Calculation of Total income Q83 Q84 Mr. J Mr. D Income from Salary Rs.4,00,000 Rs.4,00,000 Income from House Property ( Rs.2,26,000 – Rs.75,500 Rs.75,500 Rs.75,000 = Rs.1,51,000/2 ) Gross Total Income Rs.4,75,500 Rs.4,75,500 CFP Level 2 - Module 2 – Taxation - India Page 246

Less: Deduction under Section 80C Rs.70,000 Rs.70,000 Total Income Rs.4,05,500 Rs.4,05,500 Q77. Calculation of income from House Property Rs.2,40,000 Rs.10,000 GAV Rs.2,30,000 Less: Municipal l Taxes paid Rs.69,000 NAV Less: Deduction u/s 24(a) 30% of NAV NIL Less: Deduction u/s 24(b) interest on borrowed capital Rs.1,61,000 House Property Income Q78. Calculation of Total Income Rs.5,32,800 Income from salary Rs.1,61,000 Income from House Property Rs.6,93,800 Gross Total income Rs.50,000 Less: Deductions under Section 80C under Section 80G Rs.25,000 Rs.6,18,800 Total Income Rs.2,80,000 Q79. Computation of House Property income. Rs.2,80,000 Municipal Valuation ( Rs.40,000 X 7) Expected Rent Rs.50,000 Less: loss of Rent due to vacancy Rs.2,30,000 Reasonable Rent Rs.3,00,000 Actual Rent ( Rs.50,000 x 6) Rs.2,50,000 Less: unrealised Rent of 1 month Rs.50,000 Rs.2,50,000 Gross Annual Value Less: Municipal Taxes paid Rs.20,000 Net Annual Value Rs.2,30,000 Less: Standard Deduction (30% of Rs.2,30,000) ( Rs.69,000) Less: Interest on borrowed capital ( Rs.1,96,400) Income from House Property ( Rs.35,400) CFP Level 2 - Module 2 – Taxation - India Page 247

Calculation of Interest on borrowed capital Step 1: Pre-construction period: 1/9/2012 to 31/3/2017 = 55 months Step 2: Pre-construction interest: Rs.10,00,000 X 12% X 31/12 Rs.3,10,000 Rs.8,00,000 X 12% X 24/12 Rs.1,92,000 Total Rs.5,02,000 Amortization Rs.5,02,000 / 5 Rs.1,00,400 Step 3: Current period interest: Rs.8,00,000 X 12% Rs.96,000 Step 4: total interest: Rs.1,00,400 + Rs.96,000 Rs.1,96,400 Q80. Computation of Income from House Property. Rs.2,50,000 Municipal Value Rs.2,80,000 Fair Rent Rs.2,60,000 Standard Rent Rs.2,60,000 Expected Rent Rs.25,000 Less: Loss on account of vacancy Rs.2,35,000 Reasonable Rent Rs.2,50,000 Actual Rent less unrealised Rent Rs.2,50,000 Gross Annual Value Rs.12,500 Less: Municipal Tax paid by land lord (Rs.25,000/2) Rs.2,37,500 Net Annual Value (NAV) Rs.71,250 Less: Deduction u/s 24(a) Standard deduction @ 30% of NAV Rs.3,06,667 Less: Deduction u/s 24(b) Interest on loan for construction (Rs.1,40,417) Income from House Property Working Notes for interest calculation 1) Pre construction period: 1/8/2015 to 31/3/2018 32 months Rs.5,33,333 2) Pre construction interest: Rs.20,00,000 X 10% X 32/12 Rs.1,33,333 Rs.2,00,000 3) Amortization Rs.5,33,333 / 5: Rs.2,00,000 Rs.1,06,667 4) Interest for the current FY Rs.20,00,000 X 10% Rs.3,06,667 5) Total interest: Post period interest Pre period interest Total interest CFP Level 2 - Module 2 – Taxation - India Page 248

Sub-Section–2.3: Profits & Gains of Business or Profession Section 28 to 44DB Learning Objectives After studying this unit, you would be able to understand -  the meaning of “business” and “profession”  when income is chargeable under this head  what are the admissible deductions while computing income under this head  what are the inadmissible deductions while computing income under this head  when certain receipts are deemed to be income chargeable to tax under this head  which are the deductions allowable only on actual payment  who are the assessees required to compulsorily maintain books of account  when audit of accounts is compulsory  who are the assessees to whom presumptive tax provisions apply  how income is computed on presumptive basis in case of such assessees 2.3.0. General Business [Section 2(13)] - \"business\" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Business connotes some activity, which is carried on by devoting time, attention, and labour of person with the motive to make profits. Even an isolated transaction may be considered as business under certain circumstances. Profession [Section 2(36)] - \"profession\" includes vocation. Profession is when person acquires knowledge, skill, on qualifying some degree/diploma course. Vocation is the activity, which is not done on the basis of knowledge acquired but on account of inborn talent, skill and attributes. CFP Level 2 - Module 2 – Taxation - India Page 249

2.3.1. Scope of Income & Its Computation Profits and Gains of Business or Profession – Section 28 (Basis of Charge) The following incomes shall be chargeable to income-tax under the head “Profits and gains of business or profession”, - (i) the profits and gains of any business or profession which was carried on by the assessee during the previous year. (ii) Export incentives (a) profits on sale of an import license (b) cash assistance against exports (c) Custom duty or excise duty drawback (iii) the value of any benefit or perquisite arising from business or profession. (iv) Compensation received: (a) For termination/modification of agreement for managing a company. (b) For termination/modification of terms of agency. (c) For vesting of management of any property or business in government under any law. (v) Income from specific services performed for its members by a trade, professional or similar association. (vi) Value of any benefit or perquisite arising during the course of carrying on of any business or profession. (vii) Interest, salary, bonus, commission or remuneration due or received by a partner of a firm in which he is a partner. (viii) Any sum received under Key man Insurance Policy including bonus on such policy. (viii) Income from speculation business. (ix) Any sum received in cash or in kind under an agreement of not carrying out any activity in relation to any business. Amendment Made under Section 28 [W.e.f. A.y. 2019-20] Clause (via) inserted under Section 28 It says that any inventory or stock trade converted into capital asset determined in the prescribed manner then the fair market value of inventory as on the date of conversion shall be chargeable to tax as business income. Determination of FMV for inventory under Rule 11UAB (i) being an immovable property, being land or building or both, shall be the value adopted or assessed or assessable by any authority of the Central Government or a State CFP Level 2 - Module 2 – Taxation - India Page 250

Government for the purpose of payment of stamp duty in respect of such immovable property on the date on which the inventory is converted into, or treated, as a capital asset; (ii) being jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, shares or securities referred to in rule 1 lUA, shall be the value determined in the manner provided in sub-rule (1) of rule 11UA and for this purpose the reference to the valuation date in the rule 11U and rule 1 lUA shall be the date on which the inventory is converted into, or treated, as a capital asset; (iii) being the property, other than those specified in clause (i) and clause (ii), the price that such property would ordinarily fetch on sale in the open market on the date on which the inventory is converted into, or treated, as a capital asset.”. Method of Computation – Section 29 Read with Section 145 The income under head PGBP shall be computed in accordance with the Sections 30 to 43D. Method of computing profit under the head PGBP Profit as per Profit & Loss Account Step 1: Add: Incomes of business not recorded in Profit & Loss Account. Step 2: Less: Income credited to Profit & Loss Account but which are not business incomes. Step 3: Add: Expenditure debited to Profit & Loss Account, which are not allowed to be debited. Step 4: Less: Expenditure relating to business but not debited to Profit & Loss Account= Balance amount is the income under head PGBP Assessee may follow either mercantile system of accounting or may follow cash basis of accounting. Further, assessee must follow Income Computation & Disclosure Standards while computing income u/h PGBP. Till date, 10 ICDS have been notified which needs to be followed w.e.f. FY 2017-18. 2.3.2. Deductible & Inadmissible Expenses Depreciation – Section 32(1)(ii) Conditions Required to be Fulfilled before Claiming Depreciation: 1. The asset should be actually used by the assessee. Use includes passive use also (e.g. fire extinguisher installed in business premises). 2. The asset should be used by the assessee for the purposes of his business or profession. 3. The assessee must be the owner of the asset. CFP Level 2 - Module 2 – Taxation - India Page 251

Rates of Depreciation Nature of asset Rate Building 1 Residential buildings (e.g. let out to employees) 5% 2 Other buildings 10% Furniture and fittings including electrical fittings 10% Plant & Machinery 15% 1 P&M other than those covered below 30% 2 Motor cars, buses – running them on hire (e.g. taxi) 15% 3 Other motor cars 40% 4 Computers including computer software 5 Books owned by assessees carrying on a profession - 40% (a) Books, being annual publications 40% (b) Books, other than those covered by entry (a) above 25% Intangible Assets - patents, copyrights, trademarks, licences, franchises, etc. Points to be considered: 1. Depreciation rates are fixed by Income-tax Act, 1961 read with Income-tax Rules, 1962. These are mandatory in nature and are not minimum or maximum rates of depreciation. 2. In Income-tax Act, instead of calculating depreciation on each & every asset separately, concept of block of asset is being applied. 3. In block of assets concept, block is created for assets for which depreciation rate is prescribed separately. E.g. in case of building, there will be 2 blocks, for furniture & fittings – single block, P&M – 6 blocks, intangible assets – single block. 4. Depreciation rate prescribed above is applied to Written Down Value (WDV) of the concerned block existing on the last day of the relevant previous year (i.e. 31/03/2018). 5. Computation of WDV of the block as on 31/03/2020 WDV of the block as on 01/04/2019 (i.e. opening WDV) Add: Actual cost of assets acquired & put to use during the previous year belonging to this block Less: Sale price of assets sold during the year, insurance claim, scrap value, etc. (on accrual basis) = WDV of the block as on 31/03/2020 CFP Level 2 - Module 2 – Taxation - India Page 252

Note: It may be noted that first of all whole year purchases need to be added, and then whole year sales need to be subtracted. It may be further noted that actual sale price has to be subtracted irrespective of its actual cost, book value, WDV, etc. 6. Computation of WDV of the block as on 01/04/2019 (i.e. opening WDV) WDV of the block as on 31/03/2019 Less: Depreciation actually allowed in PY 2018-19 (i.e. in preceding year) 7. Same exercise needs to be done for each & every block separately 8. Depreciation rates prescribed above are not rates per annum but absolute rates. There shall be no calculation of depreciation day to day basis. Depreciation rate shall be applied on WDV as on 31/03/2020 (i.e. last day of the previous year) irrespective of the date of acquisition or date of put to use of the asset, except in following situation: If asset is acquired & put to use in the same PY and is put to use for less than 180 days during that PY, then depreciation rate on that particular asset shall be half of the normal rate of depreciation. Illustration-1 Particulars P&M – 15% Building – 10% WDV as on Mach. A-D = Bldg. A-E = Rs.7,40,000 01/04/2019 Rs.4,00,000 Purchases Mach. E – Rs.2,00,000, Bldg. F – Rs.2,20,000, pur. – 11/06/2019, put made during the year pur. – 08/05/2019, to use – 20/06/2019 put to use – Bldg. G – Rs.1,60,000, pur. – 15/07/2019, put 08/05/2019 to use – 15/11/2019 Sales made Mach. C – Rs.60,000 Bldg. D – Rs.90,000 during the year CFP Level 2 - Module 2 – Taxation - India Page 253

Solution: Calculation of Depreciation u/s 32 Particulars Plant & Machinery Building WDV as on 01/04/2019 4,00,000 7,40,000 Add:- Addition the year During 2,00,000 3,80,000 Less:- Sale During the year 60,000 90,000 Value as on31/03/2020 5,40,000 10,30000 Depreciation 5,40,000*15% =81,000 1,60,000*10%*6/12 +(8,70,000*10%) =95,000 Capital Gains on sale of depreciable assets – Section 50 Situation Part of the block is transferred Full block is transferred Sale price > opening WDV WDV = Nil, Depreciation = WDV = NA, Depreciation + purchases made during Nil, excess shall be STCG = NA, excess shall be STCG the year u/h Capital Gains u/h Capital Gains Sale price < opening WDV WDV = positive, WDV = NA, Depreciation + purchases made during depreciation = positive, no = NA, deficiency shall be the year impact u/h Capital Gains STCL u/h Capital Gains Illustration-2 Compute depreciation u/s 32 and/or capital gains in the following situations: Case 1: Opening WDV Rs.2,00,000 consisting of Building A, B & C. Rate of depreciation 10%. Building D purchased on 10.10.2019 for Rs.50,000. Building B sold for Rs.1,00,000 on 04.04.2019. What will be your answer if building B sold for Rs.4,50,000. Case 2: Opening WDV Rs.2,00,000 consisting of Building A, B & C. Rate of depreciation 10%. Building D purchased on 10.10.2019 for Rs.50,000. All buildings sold for Rs.1,00,000 on 04.02.2020. What will be your answer if buildings sold for Rs.4,50,000. Solution: 2,00,000 Case 1 WDV as on 01/04/2019 CFP Level 2 - Module 2 – Taxation - India Page 254

Less Sale During the Year 1,00,000 Add Purchase During the year 50,000 Value as on 31/03/2020 1,50,000 Depreciation (50000*10% *6/12)+(1,00,000*10%) =12,500 If Building B sold for Rs.4,50,000 Then 2,00,000 WDV as on 01/04/2019 4,50,000 Less Sale During the Year 50,000 Add Purchase During the year (2,00,000) Value as on 31/03/2020 No Depreciation is charged Depreciation Short Term Capital Gain is Rs.2,00,000. Case 2 2,00,000 WDV as on 01/04/2019 1,00,000 Less Sale During the Year (all units) 50,000 Add Purchase During the year 1,50,000 Value as on 31/03/2020 No Depreciation is charged. Depreciation Short Term Capital Loss Rs.1,50,000. If Building Sold For Rs.4,50,000 Then 2,00,000 WDV as on 01/04/2019 4,50,000 Less Sale During the Year 50,000 Add Purchase During the year 2,00,000 Value as on 31/03/2018 No Depreciation is charged. Depreciation Short Term Capital Gain Rs.2,00.000. Additional Depreciation – Section 32(1)(iia) In case following conditions are fulfilled, then additional depreciation @ 20% of actual cost is allowed in the first year of use of asset in addition to depreciation calculated above: 1. Assessee’s business must be of manufacturing/production of articles/things, or business of generation or generation & distribution of power. 2. Assessee may be any assessee. 3. Additional depreciation is allowed only on plant & machinery, except: CFP Level 2 - Module 2 – Taxation - India Page 255

a) Second hand P&M b) Installed in office premises, residential accommodation, or guest house (i.e. additional depreciation is allowed only if P&M is installed in factory premises) c) Office appliances, road transport vehicles, ships, aircraft 4. Additional depreciation is allowable only in the first year of installation of asset. In other words, additional depreciation can be claimed for every year in respect of an assessee but in respect of an asset, only in first year of installation. 5. If less than 180 days condition is being fulfilled (as stated above), the additional depreciation shall be 10% only. Balance 10% is not allowable in next year. 6. Additional depreciation shall also be subtracted from WDV of the block at the end of the PY to compute next year’s opening WDV. 7. Add amount of depreciation provided i.e. 50% that will be provided ………… Illustration-3 Compute depreciation allowable u/s 32 for AY 2020-21 from the following information assuming assessee is engaged in the business of manufacturing of goods: Opening WDV of P&M as on 01/04/2019 = Rs.20,00,000 Purchases made during the year: Name of Date of Date of put Amount New/Second Installed at asset Hand acquisition to use A 04/04/2019 11/05/2019 1,00,000 New Factory B 11/05/2019 26/07/2019 2,00,000 Second hand Factory C 17/06/2019 16/08/2019 3,00,000 New Office D 18/08/2019 20/10/2019 4,00,000 New Factory E 19/09/2019 26/11/2019 5,00,000 Second hand Factory F 25/10/2019 24/02/2020 6,00,000 New Office Sales made during the year from old assets: Rs.4,00,000 Solution: Calculation of Depreciation WDV as on 01/04/2019 20,00,000 CFP Level 2 - Module 2 – Taxation - India Page 256

Less:- Sale During the Year 4,00,000 Add:-Purchase During the Year 21,00,000 Value as on 31/03/2020 37,00,000 Normal Depreciation (15,00,000*15%*6/12) + (22,00,000*15%) Additional Depreciation =4,42,500 (1,00,000*20%)+(4,00,000*20%*6/12) =60,000 Total Depreciation 5,02,500 Unabsorbed Depreciation – Section 32(2) 1. Depreciation calculated as above (i.e. normal depreciation + additional depreciation, if any) can’t exceed Income u/h PGBP before depreciation. If it exceeds the Income u/h PGBP before depreciation, then excess shall be called unabsorbed depreciation. 2. If there is already loss (i.e. Income u/h PGBP before depreciation is already negative), then whole of the depreciation shall be called unabsorbed depreciation. In that case there shall be two things viz., unabsorbed depreciation (governed by section 32(2)) & unabsorbed business losses (governed by section 72). 3. Unabsorbed depreciation, calculated as above shall be set off with other incomes of the assessee under any of the heads, and balance if any, shall be carried forward to next year. 4. In next year it shall be merged with next year’s depreciation, and can be set off with any income of the assessee in next year. 5. In this manner it can be carried forward indefinitely. 6. Even if business, to which unabsorbed depreciation pertains, is discontinued, still assessee can carry forward & set off such unabsorbed depreciation from other incomes of the assessee. Proportionate Depreciation In case of (i) succession u/s 47(xiii) – succession of partnership firm by a company, or (ii) succession u/s 47(xiv) – succession of proprietary concern by a company, or (iii) succession u/s 47(xiiib) – succession of company by a LLP, or (iv) succession as referred u/s 170 e.g. transfer by HUF to a member, or (v) amalgamation, or demerger CFP Level 2 - Module 2 – Taxation - India Page 257

Section 32 states that first of all depreciation shall be calculated on assets transferred assuming that there was no such transaction. After that such depreciation shall be apportioned between predecessor & successor in the ratio of number of days for which the assets were used by them. It may be noted that depreciation on assets purchased by successor before or after such transaction shall be allowed to successor only. Illustration-4 M/s Sidhant & Co., a sole proprietary concern is converted into a company, Sidhant Co. Ltd. with effect from November 29, 2019. The written down value of assets as on April 1, 2019 is as follows: Items Rate of Depreciation WDV as on 1st April, 18 Rs.3,50,000 Building 10% Rs.50,000 Rs.2,00,000 Furniture 10% Plant and Machinery 15% Further, on October 15, 2019, M/s Sidhant & Co. purchased a plant for Rs.1,00,000 (rate of depreciation 15%). After conversion, the company added another plant worth Rs.50,000 (rate of depreciation 15%). Compute the depreciation available to (i) M/s Sidhant & Co. and (ii) Sidhant Co. Ltd. for AY 2020-21. Solution: Calculation of Depreciation Total Depreciation (For all assets held or purchase by M/s Sidhant & co) Items Depreciation Building 3,50,000*10% = 35,000 Furniture 50,000 *10% =5000 P & M (2,00,000+1,00,000) (2,00,000*15%) +(1,00,000*15%*6/12) =37500 Total 77500 CFP Level 2 - Module 2 – Taxation - India Page 258

Depreciation for Sidhant & co 77500*242/366 =51,243 Depreciation for Sidhant co Ltd 77500*124/366 =26,257 Depreciation on Plant purchased by company =50,000*15*6/12 =3750 Total Depreciation for Sidhant co Ltd 3750+26257 =30007 Actual Cost – Section 43(1) 1. In case building is being used by assessee for any other purpose, and then introduced in his business/profession, actual cost for depreciation purposes shall be actual cost of building less notional depreciation till date. It may be noted that this provision is not applicable for other assets. 2. In case asset cost includes Excise Duty and/or VAT, and of such Excise Duty and/or VAT, input tax credit (also called CENVAT Credit) is taken, then amount of such input tax credit shall be reduced from total cost of such asset, and on balance amount depreciation shall be allowed. Illustration-4 A car purchased by S on 10.8.2015 for Rs.3,25,000 for personal use is brought into the business of the assessee on 01.12.2019, when its market value is Rs.1,50,000. Compute the actual cost of the car and the amount of depreciation for the Assessment year 2020-21 assuming the rate of depreciation to be 15%. Solution: Actual cost of car is taken Rs.3,25,000 i.e Purchase cost of car on that day Depreciation on car for AY 2020-21 is 32500*15% =48,750 Asset used partly for business purposes and partly for other purposes – Section 38 1. In case asset is being used for business purposes (say 60%) as well as for other purposes (i.e. 40%), then depreciation calculated above shall be treated as business expense to the extent the asset was used for business purposes. It may be noted that actual cost of the asset shall not be apportioned in this case while adding the same to the block of assets. CFP Level 2 - Module 2 – Taxation - India Page 259

2. Examples of other purposes may be personal use of motor car, agricultural use of vehicle, etc. 3. In case other purpose is personal use, then for the purpose of computing next year’s opening WDV (e.g. 01/04/2020), depreciation actually allowed (i.e. 60%) is to be subtracted from WDV of the block as on the last day of the previous year (i.e. 31/03/2019). 4. In case other purpose is agricultural use, then for the purpose of computing next year’s opening WDV (e.g. 01/04/2020), whole of the depreciation (i.e. business use + agricultural use = 100%) shall be subtracted from WDV of the block as on the last day of the previous year (i.e. 31/03/2020). Illustration-5 Mr. Tenzingh is engaged in business which is taxable u/h PGBP. Relevant information pertaining to the year ended 31.3.2020 are given below: Rs. WDV of Car as on 1.4.2017 3,00,000 WDV of Machinery as on 31.3.2019 (15% rate) 15,00,000 Besides being used for business purposes, the car is also used for personal use; disallowance for personal use may be taken at 20%. The machines were used in business operations. Compute the depreciation allowable u/s 32 for the assessment year 2020-21. Show the WDV of the assets as on 31.03.2020 and 01.04.2020. What shall be your answer in case car is being used for agricultural purposes instead of personal use? Solution: Calculation of Depreciation -if car used for personal use Items Depreciation Car (3,00,000*15%*60%) =27000 Plant & Machinery (15,00,000*15%) =2,25,000 Total Depreciation 2,52,000 -if used for agriculture CFP Level 2 - Module 2 – Taxation - India Page 260

Items Depreciation Car (3,00,000*15%*100%) =45,000 Plant & Machinery (15,00,000*15%) =2,25,000 Total Depreciation 2,70,000 Expenditure on scientific research – Section 35 Research by assessee himself: Nature of expense Percentage of expense allowed Other assessee Company engaged in business of bio- technology Or manufacturing/ production Revenue nature expenses (any 100% in the year of 150% in the year of type) incurred while business is incurrence only incurrence only going on Revenue nature expenses incurred in prior 3 years prior to the date of commencement of business Salary to research employees and 100% in the year of commencement of purchase of materials used in business research Other revenue expenses (e.g. Not allowed (dead loss) electricity, travelling, etc.) Capital nature expenses incurred while business is going on Land Not allowed (part of capital gains) Building 100% in the year of incurrence only Other (e.g. furniture, P&M, etc.) 100% in the 150% in the year of CFP Level 2 - Module 2 – Taxation - India Page 261

year of incurrence only incurrence only Capital nature expenses incurred in prior 3 years prior to the date of commencement of business Land Not allowed (part of capital gains) Building 100% in the year of commencement of business Other e.g. furniture, P&M, etc.) 100% in the year of commencement of business Points to be noted: 1. No depreciation shall be allowed on capital nature expenses referred above. 2. If an asset, on which section 35 deduction has been allowed, is sold, then sale proceeds upto cost of such asset shall be taxable u/h PGBP and balance, if any, shall be taxable u/h Capital Gains – Section 41(3). 3. If such asset is used for the purposes of business, then same shall be added to relevant block of asset, but its actual cost shall be NIL. If later on, same is being sold, then sale proceeds shall be subtracted from block of assets (in terms of section 32 read with section 50). Illustration-6 Vivitha Bio-medicals Ltd. is engaged in the business of manufacture of bio-medical items. The following expenses were incurred in respect of activities connected with scientific research: Year ended Item Amount ( Rs.) 31.03.2015 Land 10,00,000 (Incurred after 1.10.2016) Building 25,00,000 31.03.2018 Plant and machinery 5,00,000 31.03.2019 Raw materials 2,20,000 31.03.2020 Raw materials and salaries 1,80,000 CFP Level 2 - Module 2 – Taxation - India Page 262

The business was commenced on 01-10-2019. In view of availability of better model of plant and machinery, the existing plant and machinery were sold for Rs.8,00,000 on 1.03.2020. Discuss the implications of the above for the assessment year 2020-21 along with brief computation of deduction permissible u/s 35 assuming that necessary conditions have been fulfilled. You are informed that the assessee’s line of business is eligible for claiming deduction u/s 35 at 200% on eligible items. Solution: Year ended Item Amount (Rs) Amount ( Rs.) 31.03.2015 Land 10,00,000 NIL (Incurred after 1.10.2014) Building 25,00,000 25,00,000 31.03.2018 Plant and machinery 5,00,000 NIL 31.03.2019 2,20,000 Raw materials 2,20,000 31.03.2020 Raw materials and 1,80,000 Total 3,60,000 salaries 30,80,000 Calculation of deduction under u/s 35 Purpose of Donee Expense u/h donation National Laboratory, University, IIT, specified PGBP Scientific 150% of the Research person for approved scientific research programme donations made Scientific Research association having object of scientific 150% of the Research research, university, college, other approved donations made institution Scientific 100% of the Research Company having main object of scientific donations made Research in research 100% of the Research association having object of such CFP Level 2 - Module 2 – Taxation - India Page 263

social research, university, college, other approved donations made science or institution statistical research If donation is being made for research other than above, or donation is being made to donee other than specified above, then nothing shall be allowed as a business expenses (i.e. shall be a dead loss) Other Donations: Purpose of donation Donee Expense u/h PGBP For carrying out any eligible project Public sector company 100% of the or scheme - Eligible project or Local authority donations scheme should be for promoting Association or institution the social & economic welfare of or approved by National the upliftment of the public – Committee Section 35AC For Rural development Association/institution having object 100% of the programmes – Section 35CCA of undertaking of rural development donations made programme. Association/ institution any engaged in training of persons for implementing rural Development programmes. Rural Development Fund set up by the CG. National Urban Poverty Eradication Fund set up and notified by the CG. (3) Amortisation of Certain Preliminary Expenses – Section 35D CFP Level 2 - Module 2 – Taxation - India Page 264

Nature of expenditure (i) Feasibility report, project report, market survey, engineering services (ii) Legal charges for drafting of agreements (iii) In case of company, following expenses shall also qualify for deduction a) Drafting & printing of MoA, AoA b) Registration fees c) Underwriting commission, brokerage d) Drafting, typing, printing and advertisement of prospectus It may be noted that under Income-tax Act, 1961, preliminary expenses are allowed to every assessee including company assessee. Quantum of Expenditure For Company assessee Assessee other than Company 5% of cost of 5% of cost of project project Whichever is 5% of capital Whichever lower employed is higher Actual expenditure Whichever is lower Actual expenditure Quantum of Deduction in a year Quantum of expenditure calculated above shall be allowed in 5 equal instalments starting from the year of commencement of business. Illustration-7 Jardine Ltd. is a newly incorporated Indian Company. It incurs the following expenditure in connection with the incorporation: CFP Level 2 - Module 2 – Taxation - India Page 265

Preparation of project report Rs. Market survey 4,00,000 Legal and other charges for issue of additional capital required for the 5,00,000 new unit 2,00,000 Total The following further data is given: 11,00,000 Cost of project Capital employed 30,00,000 40,00,000 What is the deduction admissible to the company u/s 35D for AY 2020-2021? Solution: Calculation of deduction u/s 35D Higher of 5% Cost of project = 30,00,000*5% =1,50,000 = 2,00,000 5% Capital Employed = 40,00,000*5% Lower of 2,00,000 of actual expense (4) Other Expenses Allowed Nature of expense Conditions/remarks Employees's health insurance If paid in cash, then shall not be allowed as premium business expense (i.e. dead loss) Interest on money borrowed If money is borrowed for the purposes of acquisition of CFP Level 2 - Module 2 – Taxation - India Page 266

Interest on expansion of existing be added to the actual cost of the asset and units till the additional assets are then depreciation shall be allowed on such interest put to use will be added to actual cost and will not be allowed as amount expense from PGBP. Livestock There shall be no depreciation on livestock. Bad debts Purchase cost shall be allowed as an expense in the year of death of the animal or in the year in which it becomes useless. Sale proceeds realised from carcasses/useless animal shall be subtracted from purchase cost, and balance shall be treated as expense. Provision for bad & doubtful debts shall not be allowed as an expense. Bad debts shall be allowed as an expense only if following two conditions are being fulfilled: It was treated as income of the assessee of any PY It was written as irrecoverable in the books of the accounts of the assessee. Bad debts recovery shall be treated as business income of the assessee - Section 41(4). If sales made by predecessor, and bad debts are also claimed by the predecessor, then any bad debts recovered by successor shall not be taxable in the hands of successor. If sales made by predecessor, and then bad debts are CFP Level 2 - Module 2 – Taxation - India Page 267

claimed by the successor, then such bad debts shall be allowed to successor as business expense and any bad debts recovery shall be taxable in the hands of successor. In short, assessee claiming bad debts and assessee recovering the bad debts shall be the same for taxability of such bad debts recovery. Expenditure on promotion of Allowed to company assessee only. (i.e. for other family planning amongst assessees, same shall be dead loss & have no employees tax treatment) Revenue expenses are allowed in the year itself. Capital nature expenses are allowed in 5 equal instalments. No depreciation on such assets. Securities Transaction Tax Allowed as business expense subject to section 43B /Commodities Transaction Tax Allowed if revenue in nature and are not Other expenses (e.g. salary, personal. Further, incurred for the purposes of commission, advertisement, carriage inward, rent, repairs, business or profession only. P&M insurance) Expenditure agricultural Deduction @ 150% of the expenses (whether extension on project – Section capital or revenue in nature) incurred shall be 35CCC allowed as business Expense Expenditure on skill development Deduction @ 150% of the expenses incurred project Section 35CCD (except on land & building) shall be allowed as business expense only to company assessee. CFP Level 2 - Module 2 – Taxation - India Page 268

Note: If any expense (other than bad debts) is allowed in any year, and subsequently any benefit is being received by the assessee (e.g. recovery of amount, cessation of liability), then such benefit shall be taxable in the hands of assessee and taxable even in the hands of successor if benefit received by the successor of business – section 41(1). (5) Expenses not Allowed/Expenses Disallowed Nature of expense Conditions/remarks 1. Any payment to (a) If TDS is not deducted during the PY, or resident (b) If TDS is deducted during the PY (on or before (including salary) 31/03/2018) but is not deposited with CG on or before on which TDS is the due date of return of income u/s 139(1) – 30% of the expense shall be disallowed. deductible Same shall be allowed in the year in which TDS is section deposited with the CG. 40(a)(ia) This provision shall be applicable whether such expense is outstanding on the last day of the PY or has been actually paid during the PY. 2. Any payment to (a) If TDS is not deducted during the PY, or non-resident (b) If TDS is deducted during the PY but is not deposited (excep salary) with CG on or before due date of return of income u/s t which is taxable 139(1) in the hands of 100% of the expense shall be disallowed. non-resident – Same shall be allowed in the year in which TDS is CFP Level 2 - Module 2 – Taxation - India Page 269

section 40(a)(i) deposited with the CG 3. Salary to non- Shall not be allowed if TDS not deducted or not deposited resident with the CG. (permanent disallowance – will not be allowed in future) 4. Advertisement Advertisement in any souvenir, brochure, pamphlet, etc. published by a political party (because it’s way to give 5. Expenses donations to political party). Donations to political party payment made to are not allowed as business expense. relatives – section But donations to political party or electoral trust are 40A(2) allowed as deduction u/s 80GGB or 80GGC from GTI. ¤ If payment made to relatives for expenses is more than reasonable, then excess shall not be allowed as business expense. But full payment shall be treated as business revenue for such relative. 6. Payment made in In respect of an expense, if payment is made exceeding cash – section Rs.10,000 in a single day, then whole of the expense shall be 40A(3) disallowed. If expense is incurred in a particular previous year, & payment is being made in any subsequent year exceeding Rs.10,000 in a single day, then such expense shall be allowed in year of incurrence, but shall be treated as income of that CFP Level 2 - Module 2 – Taxation - India Page 270

subsequent year. Expense shall be allowed in following cases although made in excess of Rs.10,000: i) Payment mad made by account payee cheque or account payee bank draft (ii) Payment made to any bank, LIC, Govt. (iii) Payment made by electronic clearing, credit card, debit card (iv) Payment made to cultivator, etc. for purchases ofagricultural produce, animal husbandry, poultry farming, fish products v) Payment made in a town or village not served by a bank vi) Payment on which date bank is closed Note: In case of payment to transporter, limit of payment shall be Rs.35,000. w.e.f. AY 18-19 Depreciation under Section 32 shall be disallowed if payment exceeding Rs.10,000 has been made in respected any depreciable asset. Also deduction U/s 35AD shall be disallowed. 7. Employer’s contribution to unapproved funds for welfare of employees (e.g. unapproved gratuity fund, unapproved provident fund) 8. Employee’s Such contribution is deducted by employer from employee’s salary and thereafter employer deposits the same in relevant fund. Contribution to If such contribution is not deposited by employer in relevant provident fund, fund on or before due date of deposit in relevant fund (i.e. 20th of next month), same shall be treated as income of the employer. Superannuation If later on same is being deposited by employer in the relevant fund, still same shall not be allowed to employer as an expense in any year (i.e. permanent difference). Fund, etc. CFP Level 2 - Module 2 – Taxation - India Page 271

(a) tax, duty, cess or fee under any law (b) employer’s contribution to approved provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees 9. Certain deductions to (c) bonus or commission to employees be only on actual payment – section 43B (d) interest on any loan from scheduled bank/public financial institution/State financial corporation/State industrial investment corporation (e) leave salary (f) any amount payable to Indian Railways. These expenses are allowed in the year in which they are incurred only if actual payment is being made on or before due date of return of income u/s 139(1). Otherwise these 10. CSR Expenditure Expenditure incurred on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2016 shall not be allowed u/s 37. But if such expenditures get covered by other sections viz., sections. 11. Payment to Allowed as expense over the five years starting from the year in employees on VRS - which it is actually paid. Section 35DDA 12. Any expenditure incurred for any purpose which is an offence or which is a Pharmaceutical company distributing freebies to Doctors, etc. shall not be allowed as an expense as the same is prohibited by Medical Council Act, 1956. 13. Any sum paid under Tax itself, interest on tax, penalty, CDT/DDT (refer chart below) Income-tax Act, 1961, or Wealth-tax Act, 1957 CFP Level 2 - Module 2 – Taxation - India Page 272

Nature of expense Act to which expense pertains to Tax itself Income-tax, Wealth-tax Service Tax, Excise Duty, etc. Provision for tax X ✓ Interest X ✓ (Subject to Sec. 43B) Penalty Fees to professional for X✓ advise, etc. XX ✓✓ Illustration-9 Assessee incurred following expenses during the PY 2017-18, but he made some violations in deduction of TDS for these payments made to residents. You are required to inform the assessee that in which PY following expenses shall be allowed assuming the due date of filing of return of income for him is 31/07 for every year: Nature of TDS TDS deducted TDS deposited Year of expense deductible on on on allowance Rent 08/07/2017 08/07/2017 11/11/2018 06/06/2017 28/02/2018 Interest 06/06/2017 05/10/2017 05/06/2018 Professional 05/10/2017 04/07/2017 20/11/2019 22/12/2017 28/07/2019 Fees 12/12/2017 11/11/2018 Salary 04/07/2017 15/01/2018 28/02/2018 05/04/2018 05/06/2018 Commission 22/12/2017 04/02/2018 20/11/2019 To sales agent 25/03/2018 28/07/2019 Rent 08/07/2017 Interest 06/06/2017 Professional 05/10/2017 Fees Salary 04/07/2017 Commission 22/12/2017 CFP Level 2 - Module 2 – Taxation - India Page 273

To sales agent Solution: of TDS TDS TDS Year of allowance Nature deductible on deducted to deposited to 70% in 2017-18 expense 30% in 2019-20 08-07-17 08-07-17 11-11-18 100% in 2018-19 Rent 100% in 2018-19 Interest 06-06-17 06-06-17 28-02-18 70% in 2018-19 Professional 05-10-17 05-10-17 05-06-18 30% in 2019-20 Fees 70% in 2018-19 Salary 04-07-17 04-07-17 20-11-19 30% in 2019-20 70% in 2018-19 Commission 22-12-17 22-12-17 28-07-19 30% in 2019-20 To sales agent 08-07-17 12-12-17 11-11-18 100% in 2018-19 Rent 70% in 2018-19 30% in 2019-20 Interest 06-06-17 15-01-18 28-02-18 70% in 2018-19 Professional 05-10-17 05-04-18 05-06-18 30% in 2019-20 Fees 70% in 2018-19 Salary 04-07-17 04-02-18 20-11-19 30% in 2019-20 Commission 22-12-17 25-03-18 28-07-19 To sales agent Illustration-10 Following expenses were found debited in P&L A/c for the PY 2019-20. Expense nature Amount Payment Year of deduction date Sales tax 10,000 20.3.20 Sales tax 25,000 20.4.20 Bonus 5,000 5.10.20 Interest to scheduled bank 11,000 30.9.19 Leave salary 50,000 10.4.20 Employer’s contribution to 16,000 30.9.20 provident fund Assume due date of return to be 30.09.2018 for PY 2017-18. In which previous year deduction can be claimed? CFP Level 2 - Module 2 – Taxation - India Page 274

Solution: Expense nature Amount Payment Year of date deduction Sales tax 10,000 2019-20 Sales tax 25,000 20.3.20 2019-20 5,000 20.4.20 2019-20 Bonus 11,000 5.10.19 Interest to scheduled bank 50,000 2019-20 16,000 30.9.19 Leave salary 2019-20 Employer’s contribution to 10.4.19 2020-21 30.9.20 provident fund Illustration-11 Mrs. Arora carries on a textile manufacturing business. Her Profit and Loss Account for the year ending 31st March, 2020 is as follows: Particulars Rs. Particulars Rs. To Office Expenses 8,500 By Gross Profit 2,06,000 To Sundry Expenses 7,500 By Misc. Receipts By Bad debts 6,000 To Staff Welfare Expenses 750 4,500 To Legal Expenses 5,000 recovered To Salaries 17,000 2,16,500 To O/s liability for Excise 7,500 Total duty To Bonus to staff 6,000 To Depreciation 4,000 To Contribution to Approved 7,000 provident fund To Audit fees 32,500 To Net profit 1,20,750 Total 2,16,500 Notes: (i) Depreciation as per Income-tax Act comes to Rs.2,700. (ii) Bonus payable under the Payment of Bonus Act, 1965 amounts to Rs.2,500. CFP Level 2 - Module 2 – Taxation - India Page 275

(iii) Sundry expenses include Rs.1,500 paid as donation to her son’s school for their annual function. (iv) Office expenses include a capital expenditure of Rs.5,000 on additional furniture purchased on 1.12.2019. No depreciation has been provided for in the books. (v) Liability for excise duty was paid as follows: On 13.4.2018 Rs.3,500 On 2.5.2018 Rs.1,000 On 30.7.2018 Rs.1,800 (vi) The return was filed on 31.7.2020 (last date for filing). (vii) No tax has been deducted at source on the audit fees of Rs.32,500. (viii) Bad debts recovered were allowed as deduction in an earlier assessment. You are required to compute Mrs. Arora’s business income. Solution: Calculation of income under head PGBP for PY 2019-20 Net Profit as per Profit & Loss a/c 1500 (Rs) Add:- 5000 1,20,750 Depreciation as per books Excise duty disallowed 2700 4000 Audit Fees Disallowed 250 1200 Sundry exp 9750 Office Exp (Furniture) 21,450 Less Depreciation as per IT 2950 Depreciation on Furniture (5000*10%*6/12) 1,39,250 Income as per Income tax Act Illustration-12 Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2020 Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2020 CFP Level 2 - Module 2 – Taxation - India Page 276

Particulars Rs. Particulars Rs. To Opening Stock 71,000 By Sales 32,00,000 To purchase of Raw 16,99,000 By Closing stock 2,00,000 materials To Manufacturing Wages & 5,70,000 By Gross Profit 34,00,000 Expenses 10,60,000 To Gross Profit 10,60,000 34,00,000 To Administrative charges 3,26,000 To State VAT penalty paid To State VAT paid 5,000 To General Expenses 1,10,000 To Interest to Bank 54,000 (On machinery Term loan) 60,000 To Depreciation To Net Profit 2,00,000 3,05,000 12,55,000 10,60,000 Following are the further information relating to the financial year 2019-20: (i) Administrative charges include Rs.46,000 paid as commission to brother of the assessee. The commission amount at the market rate is Rs.36, 000. (ii) The assessee paid Rs.33,000 in cash to a transport carrier on 29.12.2019. This amount is included in manufacturing expenses. (Assume that the provisions relating to TDS are not applicable to this payment.) (iii) Bank term loan interest actually paid upto 31.03.2020 was Rs.20,000 and the balance was paid in October 2020. CFP Level 2 - Module 2 – Taxation - India Page 277

(iv) Depreciation allowable under the Act is to be computed on the basis of following information. Plant & Machinery (Depreciation rate @ 15%) Rs. Opening WDV (as on 01.04.2017) 12,00,000 Additions during the year (used for more than 180 days) 2,00,000 Total additions during the year 4,00,000 Note: Ignore additional depreciation u/s 32(1)(iia). Compute the total income of Mr. Raju for the assessment year 2020-21. Solution: 2,00,000 3,05,000 Calculation of income from PGBP 10,000 2,55,000 Profit As Per Books 40,000 Add 5000 Depreciation as per books Administration charges Bank Interest disallowed Penalty on VAT Less 2,25,000 2,25,000 Depreciation as per income tax 3,35,000 Income From PGBP 2.3.3. Deemed Income & Special Provisions (1) Special provision for computing profits and gains of business on presumptive basis - Section 44AD & Section 44AE Section 44AD Section 44AE 44ADA CFP Level 2 - Module 2 – Taxation - India Page 278

Eligible Any business other than Business of transportation of Profession Business business referred in goods s section 44AE mentioned u/s44AA(i) Specified profession u/s 44AA Income of commission/brokerage Agency business Eligible Resident - Individual, HUF, Any assessee Resident Assessee Firm (except LLP) Assessee For every goods vehicles 50% of Income u/h 8% of total turnover of the (whether gross receipt Business. 6% PGBP equals in case heavy, medium or light) – payment is Rs.7,500pm or received in cheque , DD or electronic mode[W.e.f. A.y 2020-21 part of a month during which to vehicle is owned by the assessee Assessee owns more Gross Not Turnover exceeds than 10 receipts Rs. Page 279 CFP Level 2 - Module 2 – Taxation - India

applicable in crore OR 2 exceed 50 case lakh goods carriages at any time Assessee claims income during the year OR Assessee claims income from said business to be from said Lower than 8%/ 6% business to be lower than computed as above computed as above Deduction or disallowance All deduction or disallowance u/s 30-38 shall be deemed to be u/s 30-38 allowed. i.e. no separate deduction or allowance shall be allowed for any expense incurred for earning such income Depreciation Depreciation shall be deemed to have been allowed & accordingly WDV of next year shall be calculated Applicability Sections 44AA (maintenance of books of accounts) & Section 44AB of sections (tax audit) shall not be applicable on such business (i.e. business for 44AA & 44AB which assessee opted for taxation on estimation basis). Special provision for computing profits and gains of profession on presumptive basis (Section 44ADA] [W.e.f. A.Y. 2017-18] (1) Resident assesse engaged in the profession referred to in section 44AA(1) on opt for presumptive income in certain cases [Section 44ADA(1)]: Non withstanding anything contained in sections 28 to 43C, in the case of assesse, being a resident in India, who is engaged in a profession referred to in section 44AA(1) and whose total gross receipts do not exceed Rs.50,00,000 in the previous year, a sum equal of 50% of the total gross CFP Level 2 - Module 2 – Taxation - India Page 280

receipts of the assesse in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assesse, shall be deemed to be the profits and gains of such profession chargeable to tax under the head “Profits and gains of business or profession”. Profession referred to in section 44AA(1): Legal, medical, engineering orarchitectural profession, or profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette. Authorised representatives, film artists, company secretaries and profession of information technology have been notified for this purpose. (2) Consequences if the assesse opts for presumptive income scheme: (a) Deduction under sections 30 to 38 shall be deemed to have been allowed [Section 44ADA(2)]: Any deduction allowable under the provisions to have been 30 to 38 shall, for the purposes of section 44ADA(1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed. (b) Written down value of any asset for the succeeding year shall be computed as if the assesse has claimed deduction [Section 44ADA(3)]: The written down value of anyasset used for the purposes of profession shall be deemed to have…… Illustration-13 Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account for the year ended 31st March, 2020: Trading and Profit and Loss Account for the year ended 31.03.2020 To Opening stock Rs. By Sales Rs. 90,000 12,11,500 To Purchases By Other business To Gross Profit 10,04,000 receipts 6,100 3,03,600 1,80,000 By Closing stock 13,97,600 13,97,600 CFP Level 2 - Module 2 – Taxation - India Page 281

Rs. Rs. To Salary 60,000 By Gross profit b/d 3,03,600 To Rent and rates 36,000 3,03,600 To Interest on loan 15,000 To Depreciation 1,05,000 To Printing & stationery 23,200 To Postage & telegram 1,640 To Other general expenses 7,060 To Net Profit 55,700 3,03,600 Additional Information: (i) It was found that 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 (ii) Salary includes Rs.10,000 paid to his brother, which is unreasonable to the extent of Rs.2,000. (iii) The whole amount of printing and stationery was paid in cash. (iv) The depreciation provided in the Profit and Loss Account Rs.1,05,000 was based on the following information: The written down value of plant and machinery is Rs.4,20,000.A new plant falling under the same Block of depreciation of 15% was bought on 1.7.2017 for Rs.70,000. Two old plants were sold on 1.10.2017 for Rs.50,000. (v) Rent and rates includes sales tax liability of Rs.3,400 paid on 7.4.2017. (vi) Other business receipts include Rs.2,200 received as refund of sales tax relating to 2016-17. (vii) Other general expenses include Rs.2,000 paid as donation to a Public Charitable Trust. CFP Level 2 - Module 2 – Taxation - India Page 282

You are required to advise Mr. Sivam whether he can offer his business income u/s 44AD i.e. presumptive taxation. Solution: Net Profit 55,700 - Op Stock (9000) + closing stock 18000 + salary to brother 2000 + printing & stationery 23200 + donations 2000 + depreciation books 1,05,000 - depreciation income tax Income u/h PGBP (66,000) Income u/s 44AD (8% of 12,11,500) 130900 96,920 Illustration-14 Mr. X commenced the business of operating goods vehicles on 1.4.2019. He purchased the following vehicles during the P.Y.2019-20. Compute his income under section 44AE for A.Y.2020-21. Type of Vehicle Number Date of Purchase Light Goods Vehicle 2 10.4.2019 Medium Goods Vehicle 1 15.3.2020 3 16.7.2019 Heavy Goods Vehicle 1 2.1.2020 2 29.8.2019 1 23.2.2020 Would your answer change if the two light goods vehicles purchased in April, 2019 were put to use only in July, 2019? Solution: Number of vehicle months 2 x 12 1x1 CFP Level 2 - Module 2 – Taxation - India Page 283

3x9 1x3 2x8 1x2 = 73 x 7500 = 5,47,500 Answer will be same (2) Maintenance of accounts by certain persons carrying on profession or business – Section 44AA Nature of business or Conditions Satisfaction Books of accounts profession Gross receipts > Satisfied prescribed books of Rs.1.5lacs in all the 3 yrs. preceding accounts the RPY Specified OR profession If profession newly setup Not satisfied such books of accounts and other documents as in RPY, then gross may enable the AO to receipts compute his total likely to exceed income Rs.1.5lacs for the RPY Satisfied such books of accounts and other documents as Income >2.5 lacs or may enable the AO to turnover/ gross receipts > Any 25 lacs in any of the 3 yrs. compute his total income CFP Level 2 - Module 2 – Taxation - India Page 284

business or preceding the RPY profession OR other than If busi./prof. newly setup no books of accounts are specified in RPY, then income/ Not satisfied required to be maintained profession turnover/ gross receipts likely to exceed above limits for the RPY Business Section 44AE followed no books of accounts are required to be maintained such books of accounts and other documents as may enable the AO to compute his total income no books of accounts are required to be maintained covered u/s 44AE Section 44AE not no books of accounts are followed required to be maintained Section 44AD/44ADA followed Business Total income ≤ covered u/s Section maximum no books of accounts are 44AD 44AD/44ADA not amount required to be maintained which is not followed chargeable to tax CFP Level 2 - Module 2 – Taxation - India Page 285

Total income > such books of accounts maximum and other documents as amount may enable the AO to which is not compute his total income chargeable to tax Specified Profession: Legal, medical, engineering, architectural profession, the profession of accountancy, technical consultancy, interior decoration, film artist, profession of Company Secretary, profession of Information Technology. Prescribed Books of Accounts: Cash Book, Journal in case of accrual method of accounting, Ledger, Carbon copies/counterfoil of bills (serially numbered) of amount exceeding Rs.25, original bills/receipts for expenditure incurred. In case of medical profession, additionally: daily case register, inventory register. Note: Books of accounts referred above are required to be maintained at principal place of business and for 6 years from the end of the relevant assessment year. (3) Audit of accounts of certain persons carrying on business or profession–Section 44AB Nature of Conditions under which audit is required business or profession Turnover/gross receipts > Rs.2 crore Business Gross receipts > Rs.50 lacs Profession Section 44AD followed no audit required Total income ≤ maximum CFP Level 2 - Module 2 – Taxation - India Page 286

Business amount which is not no audit required covered Section chargeable to u/s 44AD 44AD tax Business not Total income > maximum covered followed u/s 44AE amount which is not Audit required chargeable to no audit required tax Section 44AE followed Section 44AE not followed Audit required Notes: 1. Accounts are required to be audited by a CA in practice. 2. Audit report shall be in specified form (Form 3CA/3CB and 3CD). 3. If accounts are required to be audited under any other law, then no separate audit necessary. In that case, person shall submit such audit report and a further report under this section. 4. Such audit report shall be submitted with AO on or before due date of filing of return of income. (4) Non-resident shipping business or aircraft business – Section 44B & 44BBA Section 44B 44BBA Non-resident carrying on Non-resident carrying on Applicable to shipping business business of operation of aircraft Income u/h PGBP 7.5% 5%  Above said percentage (7.5% or 5%) shall be applicable to following amounts  Amount receivable by the assessee on account of carriage of passengers, livestock, mail or goods from any place in India. CFP Level 2 - Module 2 – Taxation - India Page 287

 Amount received in India on account of carriage of passengers, livestock, mail or goods from any place outside India.  No expenditure shall be allowed or disallowed from income computed above. Illustration-15 Mr. B. A. Patel, a non-resident, operates an aircraft between London to Ahmadabad. For the Financial year ended on 31st March, 2020, he received the amounts as under: (i) For carrying passengers from Ahmadabad Rs.50 lacs. (ii) For carrying passengers from London Rs.75 lacs received in India. (iii) For carrying of goods from Ahmadabad Rs.25 lacs. The total expenditure incurred by Mr. B. A. Patel for the purposes of the business for the financial year 2019-20 was Rs.1.4 crores. Compute the income of Mr. B. A. Patel under the head “Profits and Gains from business or profession” for the financial year ended on 31st March 20120relevant to assessment year 2020- 21. Solution: 5% of (50lacs + 75 lacs + 25 lacs) = 7.5 lacs (5) Deemed Profits The provisions of section 41 are deeming because even though following are not incomes but still they are deemed to be incomes. Even in the case of discontinuation these provisions will apply. In other words the receipts in the following sections are taxable as business receipts even though no business is carried on by the assessee in the year of receipt.  Section 41(1) – done as part of topic 3.2.4  Section 41(3) – done as part of topic 3.2.2  Section 41(4) – done as part of topic 3.2.4 CFP Level 2 - Module 2 – Taxation - India Page 288

(6) Expenditure for obtaining licence to operate telecommunication services – Section 35ABB o Capital expenditure o incurred to obtain licence to operate telecommunication services o shall be allowed as an expense o in equal instalments o starting from the year of actual payment or commencement of business, whichever is later o and ending with the year in which licence expires. Note: No depreciation shall be allowable on such expense u/s 32. Illustration-15 Swadeshi Ltd., which follows mercantile system of accounting, obtained licence on 1.4.2018 from the Department of telecommunication for a period of 10 years. The total licence fee payable is Rs.18,00,000. The relevant details are: Year ended Licence fee Payments made Amount March 31st payable for the Rs. Date 2019 year 3,70,000 2020 30.03.19 6,30,000 Rs. 15.05.19 5,40,000 10,00,000 28.02.20 8,00,000 Balance of Rs.2,60,000 is pending as on 31.3.2020. Compute the amount of deduction available to the assessee u/s 35ABB for the AY 2019-20 and AY 2020-21. Solution: AY 2019-20 = 3,70,000 / 10 = 37,000 AY 2020-21 = 37,000 + 11,70,000/9 = 1,67,000 (7) Deduction for Partnership Firms – Section 40(b) CFP Level 2 - Module 2 – Taxation - India Page 289

Interest Interest paid to any partner (whether working or not) shall be allowed as business expense to the partnership firm subject to maximum of 12%pa. Salary  Salary for this purpose shall include salary, fees, bonus, commission, remuneration, by whatever name called.  Salary to non-working partners shall not be allowed as expense to the partnership firm.  Salary to working partners shall be allowed as business expense to the partnership firm subject to maximum of: In case of negative book-profit (i.e. loss): Rs.1,50,000 (cumulative for all working partners) In case of positive book-profit: Higher of (i) 90% of book-profits upto Rs.3,00,000 + 60% of balance book-profits OR (ii) Rs.1,50,000. Book-profit means Income u/h PGBP of the partnership firm before allowing any deduction on account of salaries to partners (whether working or not) but after making all adjustments as required by the provisions of the head PGBP. Profit Share Profit share is not a business expense for firm, but it is appropriation of profits, and hence shall not be allowed as business expense. Taxability in the Hands of Partners:  Interest & salary to the extent allowed to the partnership firm as business expense shall be taxable in the hands of partners under head PGBP – Section 28(v).  Profit share shall be exempt in the hands of partners – Section 10(2A). Partner’s share in profit shall be exempt whether firm is liable to pay any tax or not. Illustration-16 Rao & Jain, a partnership firm consisting of two partners, reports a net profit of Rs.7,00,000 before deduction of the following items: Salary of Rs.20,000 each per month payable to two working partners of the firm (as authorized by the deed of partnership). CFP Level 2 - Module 2 – Taxation - India Page 290

Depreciation on plant and machinery u/s 32 (computed) Rs.1,50,000. Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital eligible for interest Rs.5,00,000. Compute: Book-profit of the firm u/s 40(b) of the Income-tax Act, 1961. Allowable working partner salary for the assessment year as per section 40(b) of the Income-tax Act, 1961. Solution: As per the provisions of Explanation 3 to section 40(b), book profit shall mean the net profit as per the profit and loss account for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to the partners of the firm if the same has been already deducted while computing the net profit. In the present case, the net profit given is before deduction of depreciation on plant and machinery, interest on capital of partners and salary to the working partners. Therefore, the book profits shall be as follows: Computation of Book Profit of the firm u/s 40 (b) of the Income-tax Act, 1961. Particulars Rs. Rs. Net Profit (before deduction of 1,50,000 7,00,000 depreciation, salary and interest) Less: Depreciation u/s 32 Interest @ 12% p.a. [being the 60,000 2,10,000 maximum allowable as per section 4,90,000 40(b)] (5,00,000 × 12%) Book Profit Salary actually paid to working partners = 20,000 × 2 × 12 = Rs.4,80,000. Page 291 CFP Level 2 - Module 2 – Taxation - India

As per the provisions of section 40(b)(v), the salary paid to the working partners is allowed subject to the following limits – On the first Rs.3,00,000 of book Rs.1,50,000 or 90% of book profit, whichever is more profit On the balance of book profit60% of the balance book profit Therefore, the maximum allowable working partners’ salary for the A.Y. In this case would be: Particulars Rs. On the first Rs.3,00,000 of book profit [( Rs.1,50,000 or 90% of Rs.2,70,000 Rs.3,00,000) Rs.1,14,000 whichever is more] Rs.3,84,000 On the balance of book profit [60% of ( Rs.4,90,000 - Rs.3,00,000)] Maximum allowable partners’ salary Hence, allowable working partners’ salary for the A.Y.as per the provisions of section 40(b)(v) is Rs.3,84,000. (8) Deduction in respect of expenditure on specified business – Section 35AD Business Assessee Business commenced Any on & Deduction 1 Cold chain facility Any 01/04/2009 – 100% 2 Warehousing facility for agri. Ind. Com. Produce Ind. Com. 01/04/2009 – 100% 3 Cross-country natural gas pipeline Any 01/04/2007 – 100% Any 4 Cross-country pipeline crude/ 01/04/2009 – 100% petro. Oil 01/04/2010 – 100% 01/04/2010 – 100% 5 Hotel ≥ 2 star 6 Hospital ≥ 100 beds 7 Housing project – redevelopment Any 01/04/2010 – 100% CFP Level 2 - Module 2 – Taxation - India Page 292

8 Housing project – affordable Any 01/04/2011 – 100% housing Any 01/04/2011 – 100% 9 Production of fertilizer Any 01/04/2012 – 100% Any 01/04/2012 – 100% Inland container depot Any 01/04/2012 – 100% Any 01/04/2016 – 100% 11 Bee-keeping, production of honey Any 01/04/2016 – 100% 12 Warehousing facility - sugar 13 Slurry pipeline for the transportation of iron ore 14 Semi-conductor wafer fabrication manufacturing unit Deduction o 100%/150% deduction of capital expenditure incurred during the previous year. o 100%/150% of capital expenditure incurred prior to commencement of business shall be allowed in year of commencement of business only if same has been capitalized on the date of commencement of business. o Capital expenditure shall not include land, goodwill & financial instrument. o Any expenditure exceeding 10000 should be incurred by a/c payee cheque/draft etc. Other Provisions (1) Business should be new business i.e. should not be formed by splitting/reconstruction of old business. (2) Business should not be set up by transfer of old plant & machinery. (3) Actual cost of the asset for which deduction has been allowed u/s 35AD shall be taken as NIL. Further, receipts on account of sale of these assets shall be taxable u/h PGBP only, whatever the amount may be.  If such asset is being used by the assessee for the purposes other than specified business, in that case deduction allowed u/s 35AD in excess of depreciation of the period as per section 32 shall be deemed to be income u/h PGBP of the previous year in which such asset is so used. This provision shall be applicable only if such asset is put to use for other purposes in eight years commencing with the year in which such asset is acquired. CFP Level 2 - Module 2 – Taxation - India Page 293

What shall be the actual cost for other purposes? There is no corresponding amendment in the law. Therefore, actual cost shall be nil for other purposes. Logically it should have been depreciated value considered above. Situation Taxable u/h PGBP Actual cost for Sale subsequent use Sale price Purchase price Use for any Deduction allowed u/s 35AD NIL other (logically it should be depreciated value) purpose less depreciation u/s 32 on deeming basis Illustration-17 Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of food grains, sugar and edible oil on 1.4.2019. He incurred capital expenditure of Rs.80 lakh, Rs.60 lakh and Rs.50 lakh, respectively, on purchase of land and building during the period January, 2019 to March, 2019 exclusively for the above businesses, and capitalized the same in its books of account as on 1st April, 2019. The cost of land included in the above figures are Rs.50 lakh, Rs.40 lakh and Rs.30 lakh, respectively. Further, during the P.Y.2019-20, it incurred capital expenditure of Rs.20 lakh, Rs.15 lakh & Rs.10 lakh, respectively, for extension/ reconstruction of the building purchased and used exclusively for the above businesses. Compute the income under the head “Profits and gains of business or profession” for the A.Y.2020-21 and the loss to be carried forward, assuming that Mr. A has fulfilled all the conditions specified for claim of deduction under section 35AD. The profits from the business of setting up a warehousing facility (before claiming deduction under section 35AD and section 32) for the A.Y.2020-21 is Rs.16 lakhs, Rs.14 lakhs and Rs.31 lakhs, respectively. Solution: Computation of profits and gains of business or profession for A.Y.2020-21 Particulars Rs. (in lakhs) Profit from business of setting up of warehouse for storage of 31 edible oil (before providing for depreciation u/s 32) CFP Level 2 - Module 2 – Taxation - India Page 294