Profits and Gains - Income Tax Notes Part - 04
INCOME TAX NOTES PART - 04 PROFITS AND GAINS OF BUSINESS OR PROFESSION - I
Depreciation allowance [Sec. 32]
Following conditions should be satisfied by the assessee to avail depreciation:
1. Asset must be owned by the assessee.
2. Asset must be used for the purpose of business or profession.
3. Asset should be used during the relevant previous year:
Normal depreciation (i.e., full year’s depreciation) is available if an asset is put to use at least for sometime during the previous year. However, where an asset is acquired during the previous year but put to use for the purpose of business or profession for less than 180 days during that year, in such a case, half of the normal depreciation is allowed.
4. Depreciation is available on tangible assets (Building, machinery, plant or furniture) as well as intangible assets (know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature). However, it must be noted that the intangible assets must be acquired after March 31, 1998.
If all the above conditions are satisfied, depreciation is available (it is a must, it is not at the option of the assessee to claim or not to claim, depreciation in such cases).
Basis concepts for computation of depreciation allowance: 1. Block of assets:
The term “block of assets” means a group of assets falling within a class of assets in respect of which the same percentage of depreciation is prescribed. A taxpayer may have 9 different blocks of assets (out of which 8 blocks are for tangible assets and 1 block is for intangible asset). These blocks are given below:
| Type of Asset | Blocks | Nature of Asset | Rate of Depreciation |
| Buildings | 1 | Residential buildings | 5% |
| 2 | Office, factory, godowns | 10% | |
| 3 | Purely temporary erections such as wooden structures | 40% | |
| Furniture | 4 | Any furniture/fittings including electrical fittings | 10% |
| Plant and machinery | 5 | Any plant and machinery (not covered by block 6, 7 and 8) | 15% |
| 6 | Ocean-going ships | 20% | |
| 7 | Buses, lorries and taxis used in the business of running them on hire | 30% | |
| 8 | Aeroplanes, Containers made of glass or plastic used as re-fills, Computers, Energy saving devices, Air pollution control equipments, water pollution control equipments, | 40% | |
| 9 | Motor buses, motor lorries and motor taxis (used in a business of running them on hire) acquired on or after 23.08.2019 but before 01.04.2020 and is put to use before 1.4.2020. | 45% | |
| Intangible assets (acquired after March 31, 1998) | 10 | Know-how, patents, copyrights, trademarks, licenses, franchises and any other business or commercial rights of similar nature | 25% |
| WDV at the year end | |
| = | WDV of the block on the 1st day of the previous year |
| Add: | Actual cost of the asset (falling in the same block) acquired during the previous year |
| Less: | Money received/ receivable* (together with scrap value) in respect of that asset (falling within the block of assets) which is sold, discarded, demolished or destroyed during the previous year (* It does not mean gross consideration. It is net consideration after excluding expenditure incidental to sale. Further, here actual money received or receivable in cash or by cheque or draft is deductible. In other words, any other things or benefit which can be converted in terms of money cannot be deducted.) |
3. No depreciation will be charged in the following cases:
a. If written down value of the block of asset is reduced to zero, though the block of assets does not cease to exist on the last day of the previous year; or
b. If block of asset is empty or ceases to exist on the last day of the previous year, though the written down value is not zero (*In such cases, written down value of the block on the first day of the next previous year will be taken as Nil); or
c. If any imported car is used for the purpose of business or profession in India which is acquired during March 1, 1975 and March 31, 2001. If, however, such imported car is used in the business of running it on hire for tourist or for the purpose of business or profession outside India, then depreciation is admissible at the usual rate.
d. Whenever depreciable asset is acquired otherwise than by an account payee cheque/ draft or use of electronic clearing system through a bank account (and the payment exceeds Rs. 10,000), such payment shall not be eligible for normal/ additional depreciation.
4. Meaning of “Actual Cost”:
It means the actual cost to the assessee as reduced by the proportion of the cost thereof, if any, as has been met, directly or indirectly, by any other person or authority. Actual cost for any asset includes all expenses directly relatable to acquisition of the asset.
Interest pertaining to the period till the asset is put to use should be added to the “actual cost” of the asset.
Expenditure on travelling incurred for acquiring depreciable assets is part of “actual cost”.
5. Method of depreciation:
Method of computation of depreciation is written down value method. However, depreciation is available in the case of tangible assets according to “straight-line” method in the case of an undertaking engaged in generation or generation and distribution of power in some cases.
6. The following points should be noted in this regard:
a. The concept of half the rate of normal depreciation is applicable only in the year in which an asset is acquired and not in subsequent years.
b. If an asset is not used at all, no depreciation in respect of that asset is available. This rule is applicable in the first year in which the asset is acquired as well as in the subsequent years.
c. If an asset is acquired during any previous year but not put to use during that previous year; the actual cost of such asset will become part of the block of assets on day 1 of the next year. For example, if any asset is purchased during the previous year 2016-17 but put to use in the previous year 2017-18; this asset is a part of the block on April 1, 2017. This rule is applicable even if the asset is not put to use in the previous year 2016-17. Here, depreciation is available for the first time in the previous year 2017-18.
d. If nothing is mentioned about the date of use of an asset, then assume that the asset is put to use on the same day the asset is acquired.
Tea / Coffee/ Rubber development account [Sec. 33AB]
An assessee can claim deduction under this section if the following conditions are satisfied:
1. The assessee must be engaged in the business of growing and manufacturing tea or coffee or rubber in India.
2. The assessee must make a deposit in a “special account” [i.e., deposit with National Bank for Agriculture and Rural Development (NABARD)] or deposit under a scheme approved by the Tea Board or Coffee Board or Rubber Board.
3. The aforesaid amount shall be deposited within 6 months from the end of the previous year or before the due date of furnishing return of income, whichever is earlier.
Amount of deduction:
The amount of deduction is lower of the following:
a. a sum equal to amounts “deposited in special account” as mentioned above; or
b. 40 per cent of the profit of such business computed under the head “Profits and gains of business or profession” before making any deduction under section 33AB and before adjusting brought forward business loss under section 72.
Expenditure on scientific research [Sec. 35]
The term “scientific research” means “any activity for the extension of knowledge in the fields of natural or applied sciences including agriculture, animal husbandry or fisheries”. To promote scientific research, section 35 provide tax incentives.
Following is the classification of such expenditures which are deductible under section 35:
1. Revenue expenditure incurred by the assessee himself [Sec. 35(1)(i)]
100 per cent deduction is allowed for such expenditure, if such research relates to the business.
Pre-commencement period expenses:
Revenue expenses (other than expenditure on providing perquisites to employees) incurred before the commencement of business (but within 3 years immediately before commencement of business) on scientific research related to the business are deductible in the previous year in which the business in commenced. However, the deduction is limited to the extent it is certified by the prescribed authority.
Such expenses may be the expenditure on purchasing materials used in scientific research, salary paid to employees (not being a perquisite).
2. Contribution made to outsiders [Sec. 35 (ii)/ (iii)]:
Where the assessee does not himself carry on research but makes contributions to other institutions for this purpose, a weighted deduction is allowed, as follows-
a. Deduction allowed is 150 per cent of any sum paid to an approved research association which has, as its object, undertaking of scientific research related or unrelated to the business of assesse [Sec. 35(1)(ii)].
b. Deduction allowed is 150 per cent of any sum paid to an approved university, college or other institution for the use of scientific research related or unrelated to the business of assesse [Sec. 35(1)(ii)].
c. Deduction allowed is 100 per cent of any sum paid to an approved association which has as its object the undertaking of research in social science or statistical science or an approved university, college or other institution for the use of research in social sciences or statistical research related or unrelated to the business of the assessee [Sec. 35(1)(iii)].
It is to be noted that approval under section 35(1)(ii)/(iii) is given by the Central Government.
3. Capital expenditure incurred by an assessee himself [Sec. 35(2)]:
100 per cent deduction is allowed for such expenditure, if such research relates to the business.
However, the following points must be noted in this regard:
a. Such expense may be on plant or equipment for research or constructing building (excluding cost of land) for research or expenses of capital nature connected with research like expenses on purchase of buses to transport research personnel.
b. Where any capital expenditure has been incurred on scientific research related to business before the commencement of business, the amount of such expenditure incurred within 3 years immediately preceding the commencement of the business, is deductible in the previous year in which the business is commenced.
c. Deduction is available even if the relevant asset is not put to use for research and development purposes during the previous year in which the expenditure is incurred.
d. No deduction by way of depreciation is admissible in respect of an asset used in scientific research.
e. If an asset is sold without having been used for other purposes, then surplus (i.e., sale price) or deduction already allowed under section 35, whichever is less, is chargeable to tax as business income of the previous year in which the sale took place [Sec. 41(3)]. The excess of sale price over cost of acquisition (or indexed cost of acquisition) is chargeable to tax under section 45 under the head “Capital Gains”.
4. Contribution to national laboratory [Sec. 35 (2AA)]:
Deduction allowed is 150 per cent of actual payment made to “National Laboratory” or University or Indian Institute of Technology (IIT) or specified person as approved by the prescribed authority. However, the above payment is made under a specific direction that it should be used by the aforesaid person for undertaking scientific research programme approved by the prescribed authority.
5. Expenditure on in-house research and development expenses [Sec. 35(2AB)]: Deduction allowed is 150 per cent of the expenditure incurred if all the given below conditions are satisfied:
a. The taxpayer is a company.
b. The company should be engaged in the business of manufacture or production of any article or thing except those specified in the Eleventh Schedule.
c. It incurs any expenditure on scientific research and such expenditure is of capital nature or revenue nature (not being expenditure in the nature of cost of any land or building)*.
d. The research and development facility is approved by the prescribed authority.
However, if the aforesaid conditions are not satisfied, then deduction may be claimed as per the rules mentioned in point (1) and point (3) above relating to revenue expenses and capital expenses respectively.
In respect of the aforesaid expenditure, no deduction shall be allowed under any other provisions of the Act.
* Cost of building (excluding cost of land) is eligible for 100 per cent deduction under section 35(2).
6. Contribution to a company to be used by such company for scientific research [Sec. 35(1)(iia)]:
The taxpayer can claim a deduction of 100 per cent of the amount paid to the payeecompany if all the given below conditions are satisfied:
a. The taxpayer is any person (may be an individual, HUF, firm, company or any other person).
b. The taxpayer has paid any sum to a company (hereinafter referred to as “payeecompany”) to be used by the payee for scientific research.
c. The scientific research may or may not be related to the business of the tax payer.
d. The payee-company is registered in India which has, as its main object, scientific research and development.
e. The payee-company is for the time being approved by the prescribed authority.
f. The payee-company fulfils such other conditions as may be prescribed.
With a view to avoid multiple claims for deduction, it has been provided that the payee-company will not be entitled to claim weighted deduction of 150 per cent under section 35(2AB). However, deduction to the extent of 100 per cent of the sum spent as revenue expenditure or capital expenditure on scientific research, which is available under section 35(1), will continue to be allowed.
7. Carry forward and set-off of deficiency in subsequent years:
If on account of inadequacy or absence of profits of the business, deduction on account of capital expenditure on scientific research cannot be allowed, fully or partly, the deficiency so arising is to be carried forward as if it is an unabsorbed depreciation.
General Deductions [Section 37]
Section 37(1) is a residuary section. In order to claim deduction under this section, the following conditions should be satisfied:
1. The expenditure should not be of the nature described under sections 30 to 36.
2. It should not be in the nature of capital expenditure.
3. It should not be assessee’s personal expenditure.
4. It should have been incurred in the previous year.
5. It should be in respect of business carried on by the assessee.
6. It should have been expended wholly and exclusively for the purpose of such business.
7. It should not have been incurred for any purpose which is an offence or prohibited by any law.
Advertisement expenses [Section 37(2B)]
Deduction is not available in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.
Contribution to a political party is deductible under section 80GGB (if contribution is made by an Indian company) or under section 80GGC (if contribution is made by a person other than an Indian company).
Expenditure by way of advertisement in a magazine owned by a political party is treated as “contribution” to a political party for the purpose of section 80GGB, but not for the purpose of section 80GGC. In other words, advertisement expenditure (in a magazine owned by a political party) is deductible under section 80GGB (if the taxpayer is an Indian company) but the same is not deductible under section 80GGC (if the taxpayer is a person other than an Indian company).
Amount not deductible under section 40(a)
In the case of any assessee, the following expenses are expressly disallowed under section 40 (a):
Interest, royalty, fees for technical services or any other sum (except salary) payable outside India or payable to a non-resident in India [Sec. 40(a)(i)]
If the following three conditions are satisfied, the assessee (i.e., the payer) is supposed to deduct tax at source (TDS) and deposit the same with the Government:
Condition 1: The amount paid is interest, royalty, fees for technical services or any other sum (not being salary).
Condition 2: The aforesaid amount is chargeable to tax under the Act in the hands of the recipient.
Condition 3: The aforesaid amount is paid/ payable (a) outside India to any person; or (b) in India to a non-resident.
If the assessee fails to deduct tax at source, 100% of such expenditure is disallowed.
Disallowance of expenditure under section 40(a)(i):
| TDS default | Is such expenditure deductible in the current previous year | Is such expenditure deductible in any subsequent previous year |
| Case 1: Tax is deductible during the current financial/ previous year but not deducted during the current financial/ previous year | 100% of such expenditure is disallowed in the current year | If tax is deducted in any subsequent year, the expenditure (which is disallowed in the current year) will be deducted in the year in which TDS will be deposited by the assessee with the Government |
| Case 2: Tax is deductible (and is so deducted) during the current financial year but it is not deposited on or before the due date of submission of return of income under section 139(1) | 100% of such expenditure is disallowed in the current year | If tax is deposited with the Government after the due date of submission of return of income, the expenditure (which is disallowed in the current year) will be deducted in that year in which tax will be deposited |
Any sum payable (including salary) to a resident (in India or outside India) [Sec. 40(a)(ia)]
Disallowance of expenditure under section 40(a)(ia):
| TDS default | Is such expenditure deductible in the current previous year | Is such expenditure deductible in any subsequent previous year |
| Case 1: Tax is deductible during the current financial/ previous year but not deducted during the current financial/ previous year | 30% of such expenditure is disallowed in the current year | If tax is deducted in any subsequent year, the expenditure (which is disallowed in the current year) will be deducted in the year in which TDS will be deposited by the assessee with the Government |
| Case 2: Tax is deductible (and is so deducted) during the current financial year but it is not deposited on or before the due date of submission of return of income under section 139(1) | 30% of such expenditure is disallowed in the current year | If tax is deposited with the Government after the due date of submission of return of income, the expenditure (which is disallowed in the current year) will be deducted in that year in which tax will be deposited |
Relief applicable in Sec. 40(a)(ia) when recipient has paid tax:
In case of disallowances of section 40(a)(ia), relief is applicable in case 1 default if recipient has paid the tax. In such a case, it shall be deemed that the payer has deducted and paid the tax on such amount and the date of payment shall be assumed as the date when return of income is furnished by the resident recipient.
Amount paid to a non-resident for a service where equalization levy is payable [Sec. 40(a)(ib)]
Where equalization levy (applicable for a specified service) is deductible but not deducted (or deducted but not deposited till due date of filing return of income), any amount paid to a nonresident will be disallowed. However, it will be allowed in the year in which such levy is deposited.
Salary payable outside India (or in India to a non-resident) without tax deduction [Sec. 40(a)(iii)]
This section is applicable if salary is paid paid/ payable outside India to any person or in India to a non-resident and tax has not been paid to the Government nor deducted at source under the Income-tax Act. In such a case, salary payment is not allowed as deduction.
Fringe benefit tax (FBT), income-tax, dividend tax, wealth-tax (including penalty, fine and interest)
These taxes are not deductible while computing income from business or profession.
Note –
Any sum paid on account of income tax (or interest on money borrowed to pay income-tax) is not deductible. Similarly, any interest/ penalty/ fine for non-payment or late payment of income-tax is not deductible. This rule is applicable whether income-tax is payable in India or outside India.
Amount not deductible under section 40A
In the case of any assessee, the following expenses are expressly disallowed under section 40A:
Amount not deductible in respect of payment to relatives [Sec. 40A(2)]
Any expenditure incurred by an assessee in respect of which payment has been made to the relatives is liable to be disallowed in computing business profits to the extent such expenditure is considered to be excessive or unreasonable, having regard to the fair market value* of goods or services or facilities, etc.
Relative [Sec. 2(41)]:
Relative means the husband, wife, brother or sister or any linear ascendant or descendant of that individual.
Substantial Interest:
A person is deemed to have substantial interest in the business or profession if such person is the beneficial owner of at least 20% of equity capital (in case of a company) or if such person is entitled to 20% profits of a concern (in any other case) at any time during the previous year.
* The aforesaid disallowance shall not be made if such transaction is at arm’s length price as defined in section 92F(ii).
Amount not deductible in respect of expenditure exceeding Rs. 10,000 (*Rs. 35,000 in case of payment made for plying, hiring or leasing goods carriages) [Sec. 40A(3)] No deduction is allowed if the following conditions are satisfied:
a. The assessee incurs any expenditure which is otherwise deductible under other provisions of the Act for computing business/ profession income (i.e., expenditure for purchase of raw material, trading goods, expenditure on salary, etc.) and the amount of expenditure exceeds Rs. 10,000*.
b. A payment (or aggregate of payments made to a person in a day) in respect of the above expenditure exceeds Rs. 10,000*.
c. The above payment is made otherwise than by an account payee cheque/ account payee draft or use of electronic clearing system through a bank account (i.e., it is made in cash or by a bearer cheque or by a crossed cheque or by a crossed demand draft).
Notes –
a. If aggregate payment in a day (otherwise than by an account payee cheque/ draft) to the same person in respect of an expenditure exceeds Rs. 10,000*, it will be disallowed under section 40A(3), even if none of each payment in a day exceeds Rs. 10,000*.
b. If an assessee makes payment of two different bills (none of them exceeds Rs. 10,000*) at the same time in cash (or by bearer cheque or by crossed cheque or by crossed demand draft), section 40A(3) is not applicable even if the aggregate payment is more than Rs. 10,000*. To attract the disallowance under section 40A(3), both the amount of the bill and the amount of payment should exceed Rs. 10,000*.
c. Where the assessee makes payment over Rs. 10,000* at a time, partly by an account payee cheque and partly in cash (or bearer cheque or crossed cheque or by crossed demand draft) to some parties and this payment in cash (or by bearer cheque or crossed cheque or crossed demand draft) alone at one time does not exceed Rs. 10,000*, section 40A(3) is not attracted.
d. Provision of section 40A(3) does not apply in respect of an expenditure which is not to be claimed as deduction under sections 30 to 37.
Some cases where no disallowance will be made even if the expenditure (exceeding Rs. 10,000*) is made in cash:
- Payment to Indian railways;
- Payment of taxes to the government;
- Payment made on a day on which the banks were closed either on account of holiday or strike, etc.
Amount not deductible in respect of provision for unapproved gratuity fund [Sec. 40A(7)]
Provision for gratuity fund (for meeting future liability) is deductible only if such gratuity fund is an approved gratuity fund. In other words, we can say that any provision for unapproved gratuity fund (for meeting future liability) is not deductible.
Notes –
a. An employee retires during the current year. Gratuity is paid to him during the current year. It is deductible during the current year if no deduction was claimed earlier.
b. An employee retires during the current year. Gratuity is payable to him. A part of the amount is paid during the current year and the balance will be paid in the next year. A provision is made towards gratuity in the books of account of the current year for making payment in the next year. The entire amount is deductible during the current year if no deduction was claimed earlier.
In this case, deduction is available during the current year even if provision is made for gratuity fund, which is unapproved (because, here, the provision is made for already due liability and not for the future liability).
c. A company has 50 employees. To meet future liability to pay them gratuity at the time of retirement, a gratuity fund is created and the employer makes contribution every year. Employers’ contribution to this fund is deductible only if the gratuity fund is an approved gratuity fund.
Amount not deductible in respect of contributions to non-statutory funds [Sec. 40A(9)] Any sum paid by the assessee as an employer by way of contribution towards recognized provident fund, or approved superannuation fund or an approved gratuity fund or NPS is deductible to the extent it is required by any law.
In simple words, if the following conditions are satisfied, then contribution or payment is not deductible by section 40A(9):
a. The contribution/ payment is made by an assessee as an employer.
b. It is paid towards setting up (or formation of) any trust, company, association of persons, body of individuals, society or it is paid by way of contributions to any fund.
c. The contribution or payment is not required by any law.
Notes –
a. Contribution by an assessee (not being in the capacity of an “employer”) cannot be disallowed under section 40A(9).
b. All expenses incurred for the benefit of employees by an employer cannot be treated as contribution by the employer towards the various funds enumerated in section 40A(9). What is disallowed under section 40A(9) is employer’s contribution/ payment towards a fund (for the benefit of employees) which is otherwise not required by any law (which is paid or contributed by an employer under contractual obligation or otherwise but not under a legal requirement).
Examples –
a. N Ltd. incurs an expenditure of Rs. 50,000 for maintenance of street lights in worker’s colony. The expenditure is incurred without any legal or contractual requirement.
In this case, nothing will be disallowed under section 40A(9), as it is not towards setting up or formation of, or as contribution to, any fund, society, etc.
b. A Ltd. has a tea club in its office. Tea club provides tea, coffee, snacks, softdrinks to the employees during tea breaks. The club has been set up by employees (and/ or by A Ltd.) for the benefit of employees without any legal requirement. A Ltd. contributes Rs. 50,000 annually towards tea club.
It will be disallowed under section 40A(9) in the hands of A Ltd. The position will remain the same even if tea club was set up by the employer under the terms of employment but without any legal obligation.
c. Employer’s contribution towards unrecognized provident fund or any other staff welfare fund (without any statutory requirement) will be disallowed under section 40A(9).
Amount not deductible in respect of unpaid liability [Sec. 43B]
Section 43B is applicable only if the taxpayer maintains books of account on the basis of merchantile system of accounting. The following expenses (which are otherwise deductible under the other provisions of the Income-tax Act) are deductible on payment basis:
1. Any sum payable by way of tax, duty, cess or fee (by whatever name called under any law for the time being in force);
2. Any sum payable by an employer by way of contribution to provident fund or superannuation fund or any other fund for the welfare of employees;
3. Any sum payable as bonus or commission to employees for service rendered;
4. Any sum payable as interest on any loan or borrowing from a public financial institution (i.e., ICICI, IFCI, IDBI, LIC and UTI) or a state financial corporation or a state industrial investment corporation;
5. Interest on any loan or advance taken from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;
6. Any sum payable by an employer in lieu of leave at the credit of his employee; and
7. Any sum payable on account of use of railway assets.
The above expenses are deductible in the year in which payment is actually made.
Exception:
However, if the assessee maintains books of account on merchantile basis and the given below two conditions are satisfied, then the expenditure is deductible on “accrual” basis in the year in which the liability is incurred. The conditions are:
1. Payment in respect of the aforesaid expenses is actually made on or before the due date of submission of return of income; and
2. The evidence of such payment is submitted along with the return of income. But no annexure is possible with the new Income-tax return forms; so such evidence should be kept by the taxpayer himself and it can be produced before the Assessing Officer whenever he is required to produce it.
Sale consideration in case of Transfer of Immovable Property [Sec. 43CA]
Where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted (or assessed or assessable) shall be deemed to be the full value of the consideration for the purposes of computing income under the head “Profits and gains of business or profession”.
Time for filing return of income [Sec. 139(1)]
The due date for filling returns of incomes are given below:
| Different situations | Due date of submission of return |
| Where the assessee is required to furnish a report under section 92E pertaining to international or specified domestic transaction(s) | November 30 of the assessment year |
| Where the assessee is a company [not having international or specified domestic transaction(s)] | September 30 of the assessment year |
| Where the assessee is a person other than a company [i.e., not having international or specified domestic transaction(s)]: - In case where accounts of the assessee are required to be audited under any law - Where the assessee is a “working partner” in a firm whose accounts are required to be audited under any law - In any other case | September 30 of the assessment year September 30 of the assessment year July 31 of the assessment year |
Deemed Profits [Sec. 41]
Recovery against any deduction [Sec. 41(1)]
This section is applicable if the following conditions are satisfied:
a. In any of the earlier, years a deduction was allowed to the taxpayer in respect of loss, expenditure (revenue or capital expenditure) or trading liability incurred by the assessee.
b. During the current previous year, the taxpayer:
i. has obtained a refund of such trading liability (it may be in cash or any other manner); or
ii. has obtained some benefit in respect of such trading liability by way of remission or cessation thereof (“remission or cessation” for this purpose includes unilateral act of the assessee by way of writing-off of such liability in his books of account).
If the above two conditions are satisfied, the amount obtained by such person (or the value of benefit accruing to the taxpayer) shall be deemed to be the profits and gains of business or profession and, accordingly, chargeable to tax as the income of that previous year. This rule is applicable even if the business is not in existence in the year of recovery.
Sale of assets used for scientific research [Sec. 41(3)]
Where any capital asset used in scientific research is sold without having been used for other purposes and the sale proceeds, together with the amount of deduction allowed under section 35, exceed the amount of capital expenditure incurred on purchase of such asset, such surplus (i.e., sale price) or the amount of deduction allowed, whichever is less, is chargeable to tax as business income in the year in which the sale took place even if the business is not in existence.
Recovery of bad debts [Sec. 41(4)]
Where any bad debt has been allowed as deduction and the amount subsequently recovered on such debt is greater than the difference between the debt and the deduction so allowed, the excess realization is chargeable to tax as business income of the year in which the debt is recovered even if the business is not in existence.
Recovery after discontinuance of business or profession
Where any business or profession is discontinued by reason of retirement or death of the person carrying on such business or profession, any sum received after the discontinuance of the business or profession is deemed to be the income of the recipient and charged to tax in the year of receipt.
Adjustment of loss [Sec. 41(5)]
Generally, loss of a business cannot be carried forward after 8 years but there is an exception to this rule.
This exception is applicable if the following conditions are satisfied:
a. The business or profession is discontinued.
b. Loss of such business or profession pertaining to the year in which it is discontinued could not be set-off against any other income of that year.
c. Such business is not a speculative business.
d. After discontinuation of such business or profession, there is a receipt which is deemed as business income.
Special provision for computing profits and gains of profession on presumptive basis [Sec. 44ADA]
This section is applicable if the following conditions are satisfied –
1. The assessee is resident in India.
2. The assessee is engaged in a specified profession referred in section 44AA.
3. The total gross receipts do not exceed Rs. 50 lakh in a previous year.
If all the above conditions are satisfied, a sum equal to 50% of the total gross receipts of the assessee in the previous year on account of such profession 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".
Notes –
1. The assessee can declare the income higher than 50% of the total gross receipts, if he desires.
2. All deductions allowable under sections 30 to 38 shall be deemed to have been already given and no further deduction under those sections shall be allowed while computing such income i.e., 50% of the total gross receipts.
3. The WDV of any asset used for the purposes of profession shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
4. An assessee who claims that his profits and gains from the profession are lower than 50% of the total gross receipts and whose total income exceeds the exemption limit, shall be required to maintain such books of account as may enable the Assessing Officer to compute his taxable income. Also, he should get them audited and furnish a report of such audit as required under section 44AB.
Note: The summary of INCOME TAX NOTES PART - 04 PROFITS AND GAINS OF BUSINESS OR PROFESSION - I Gains summarise from the content of Book of School of Open Learning. © School of Open Learning.
