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    4.PGBP - Ay 2023-24

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    , Income under the Head Profits and Gains of Business or Profession" CO UAV Mn as |G [Sections 28 to 44D] SECTIONWISE STUDY. Sections Particulars [Discussed under lPara [Page L 2 A 28 Profits and Gains of Business or Profession Chargeability/Scope of income under this [6.2 190 29 Income from Profits and Gains of Business or Profession, how computed? 16.9 194 30 Reat, Rates, Taxes, Repairs and Insurance for buildings [6.14 198 Br [Repairs and Insurance of Machinery, Plant and Furniture 6.15 19 32, [Depreciation 16.16 199 32(2) Treatment of unabsorbed depreciation io.18 219 33AB Tea Development Account Coffee Development Account and Rubber Development |6.19 za ‘Account 33ABA. |Site Restoration Fund [6.20 223 35. [Expenditure on Scientific Research lo21 225 3SABA. | Amortisation of spectrum fee for purchase of spectrum 16.22 228 3SABB Expenditure for obtaining licence to operate’ ‘telecommunication services (6.22, 228 35AD_ ‘Deduction in respect of expenditure on specified business [623 232 35CCA Expenditure by way of payment to association and institutions for rural development |6.24 24 programmes GECGC | Weighted deduction of 150% for expenditure incured on agricultural extension 625 24 project sccD | Weighted deduction of 150% for expenditure incurred by @ company on skill|6.26 234 [development project 35D “Amortisation of certain preliminary expenses 6.27 235 Rule 6AB |3SDD "Amortisation in case of amalgamation or demerger 16.28 236 3SDDA_ Amortisation of expenditure income under voluntary retirement ‘scheme 16.29 237 emule ‘Deduction for expenditure on prospecting etc., for certain ‘minerals. {6.30 237 36 |Other deductions [6.31 238, 36(1 i) Insurance premium of stocks 6.31a 238 '36(1)ia) | Insurance premium of cattle [6316 238 Scanned with CamScanner 188, ‘Systematic Approach to Income Tax ‘Chap. 6 Sections [Particutars [Discussed under [Para [Page 1 > 36(1)(16) [Insurance on health of employees [631¢ 238 onus or commission to employees [63ia 238 Interest on borrowed capital [este 238 36(IYiia) [Discount on issue of zero coupon bonds to be allowed as deduction on pro rata basis_|631f 238 36(I i») Erployers contribution oa reognised Provident Fund or Approved Superannuation [631g 29 36(1){iva)__| Employers’ contribution towards a pension scheme [6.31h 239) 361%) [Employers contribution to an approved gratuity fund [6304 239 36(1)(va)__| Sums received from employees towards certain welfare schemes if credited to their [6.31j 239 accounts before the due date 36(1)(vi)__| Allowance in respect of dead or permanenily useless animals lo3ik 239 36(1)(vii) | Bad debts lo3i4 239 36(1}(viia) | Provisions for bad and doubiful debis in respect of rural branches of scheduled banks [631m 240 Jor non-scheduled banks 36(I)(vit) |Special reserve credited and maintained by special entity [6310 240 36(1)(é) | Expenditure on promoting family planning amongst the employees 631-0 241 36(1)(a~) | Securities Transaction Tax paid to be allowed as deduction l631p zal 36(1)avi) [Commodities transaction tax to be allowed as a deduction [631q 241 37a) [General deductions [o32. 2a2 37(2B) __| Advertisement to political parties [633 248 38 Building, etc, partly used for business, etc, or not exclusively so used [o34 244 40 [Amounts not deductible 635 244 40(a) In case of all assessees leasay [244 4006) Disallowable in case of partnership firm leas) [246 40(62) Disallowable in case of AOP/BOL l63s) | 247 [40a Expenses or payments not deductible in certain circumstances (636 247 4042) Payments to relatives [636a 247 '40A(3) Disallowance of 100% of expenditure if payment is made by any mode other than [6.360 247 account payee cheque or draft 40A(7) __| Disallowance in respect of provision for gratuity [6366 250 40A(9) Disallowance in respect of contribution to Non-statutory Funds i637 250 TAQA(13) | Marked to market loss or other expected loss not 10 be allowed except provided in|6.38 250 section 36(1 xviii) a0) Deemed profits chargeable to tax loa 255 42 Special provisions for deduetions in the case of business for prospecting, etc, for|(not relevant — for mineral oil syllabus) 3B (Certain deductions to be only on actual payment [639 250 3A Special provision for il value of consideration for wansfr of ass olher than capital asset rain [6,40 232 cB Compuinon of acme frm constuction and sevice conc leat rr 8D ‘Special provisions in case of income of public financial institutions ete. (not relevant for syllabus) | Scanned with CamScanner ‘Income under the Head “Profits and Gains of Business or Profession” ud [Sect Particulars [Discussed under [Page 5 Z Pa a - soe ‘oot relevant for = 7 syllabus) 'pecial provision for deduction in the case of trade, professional or similar association | (not i for sya 44nd [Mai . Rule 6F intenance of accounts by certain persons carrying on business or profession leas 257 44AB and — | Compulsory audit of account anes ry audit of accounts [o46 259 [agAD ‘Special provisions for coi 261 aes once ee amrtng ros and ein of any buns (excluding the [6.47 44ADA_ |Special provision for computing profits and gains of profession on presumptive besis_|6.48 262 HAE [Special provisions f in ing, bil 264 sing esea f" empuing pois and esne of basins of pling hiring or [6.49 ‘Special provisions for computi fits and gai ions [6.50 iz Seeaet smputing profits and gains [Sections 44B, 44BB, 44BBA and | 4B Special provisions for computing profits and gains of shipping business in the case of 6.50 266 non-residents 4B [Special provisions for computing profits and gains in connection with the business of 6.50 266 exploration, etc, of mineral oils [BBA |Special provision for compuing profs and gan f bse of operation of aircraft |6.50 266 in the case of non-residents “4BBB | Special provisions for computing profits and gains of foreign companies engaged in|6.50 266 the business of civil construction, et. in certain tumkey power projects 7 aC Deduction of head office expenditure in the case of non-residents, (not relevant for syllabus) 44D Special provisions for computing income by way of royalties, eic, in the case of| (not relevant for foreign companies syllabus) [Other Sections discussed under this Chapter 2013) Definition of Business et 190 145 Method of accounting [6.12 195 145A) ‘Method of accounting in certain cases joi2cay_[_ 197 271A ‘Consequences of failure to keep accounts, ete [o45a 259 Undisclosed income/investments taxed as deemed income 1 68 (Cash credits [6.43 254 G ‘Unexplained investments [saab 254 6a, ‘Unexplained money, ete. l643e 254 6B Tnvestments not fully disclosed lea3a 254 69 [Unexplained expenditure, etc. [s.a3e 254 69D ‘Amount borrowed or repaid on hundi [6.43f 254 HOW TO COMPUTE "PROFITS AND GAINS OF BUSINESS AND PROFESSION" Tncome from sources other than speculation business 1. Net profivioss as per Profit and Loss Account Ri Scanned with CamScanner 190 Chap. 6 ‘Systematic Approach to Income Tax f 2. Aukitions and deduction of nous which have na boca ajdt Profit and Loss Account in accondance with sections 28 6 44C Total adjustments 3. Balance after adjustments (1 +2) ‘ 4. Interest and remuneration from the firm. S ‘5. Chargeable income from business/profession (other than speculation business (3 + 4) R |B. Speculation business 6. Net ProfiVioss fom speculation business (after adjustments in accordance with sections 28 to| 44C, ifnecessary), 7 Brought forward speculation los adjusted with income atm 6 e 8. Balance speculation profit (6-1) : 9. Total of amount at items 5 and 8 a 10. Other brought forward loss fom businespofeion fan, set of with he icome aitem 9. |. 11. Balance income (8-9) * ‘SYSTEMATIC STUDY 6.1 Business or Profession The word ‘Business’ is defined in section 2(13) to include any trade, commerce or manufacture or any adventure or ‘concern in the nature of trade, commerce or manufacture. ‘The word business has a wider content than the word trade, commerce or manufacture. The activities which constitute carrying on of business need not necessarily consist of activites by way or trade, commerce or manufacture or activities in the exercise of a profession or vocation. They may even consist of rendering services to others. The definition of business being an inclusive definition and not being exhaustive, is indicative of extension and expansion and not restriction. “Adventure in the nature of trade: Section 2(13) defines business to include "any adventure or concern in the nature of trade, commerce or manufacture." The word ‘business is generally understood as systematic and organised course of activity cor conduct with a set purpose. But an isolated transaction can also be considered as business. The requirement is that it must have an element of trade. Profession involves the idea of an occupation requiring purely intellectual skill or manual skill on the basis of some special leaming. There should be some special qualification of a person apart from skill and ability, which is required in carrying on any activity which could be considered as a profession. This could be having education in a particular system either in a college, university or institute or it may be even by experience. Vocation refers to any activity on which a person spends a major part of hs time in order to earn his livelihood, ‘The distinction between business, profession or vocation is however not material because the income from all these activities is taxable under the same head ie. ‘Profits and gains of business or profession’. 6.2 Chargeability/scope of income under the head ‘Profits and gains of business or profession’ [Section 28] ‘The following incomes shall be chargeable 1 income-tax under the head “Profits and gains of business or profession" (Othe profits and gains of any business which was carried on by the assessee at any time during the previous year; (i) any compensation or other payment due to or received by, — (@) any person in connection with termination/modification of his agreement for managis Substantial the whole ofthe afr fen Indian company or ay olhereorpeny, eee Scanned with CamScanner hap. 6 Ie . Chap. Income under the Head "Profits and Gains of Business or Profession (i) Ww) () ow (wit) (ti) (®) « 191 (8) any person holdi of any other person 214 Femon toding an agency in nda for any part of the ativiies relating to the business of 2 distributor of ator in connection with the termination or modification ofthe tems ofthe 9BTEEY Fo, ty and it faammany for entire Northem India. During 2022-23, the company bas re oaified the contract of @BCRCY wil N bs 25,00,000. Such te catia only for Delhi. In lieu of such modification, the cOmPIOY Tbe as business ‘chee unt of &5,00,000 received by B, although capital receipt buts (©) any person for or in connectos ion owned by OF with the vesting in the Government, or in any Corpor rol or = bby the Government, under any law forthe time being imposed, of the management of any Property (@)_any compensation received or receivable by any person, by whatever name called, at oF — the termination or : the modification of the terms and conditions ony contrac elatng this bsnest hal be table a business income. coment words, compensation received or receivable by any person, whether rey ; ion with the above, shall be taxable as business income. ipeome =e a ae professional or similar association from specific services PoP OME is jon to the general princi ising t0 mutual association cann\ Til ae exeepton to the gant prince tats surplus arising t0 mt ‘export incentives which include: ()_ profits on sales of import licences granted under Imports (Control) Order on account of exPors (8) cashassistance, by whatever name called, received or receivable against export, (6). duty drawbacks of Customs and Central Excise duties, (@ any profit on the transfer of the Duty Entitlement Pass Book Scheme, (©). any profit on the transfer of the Duty Free Replenishment Certificate; ‘he valve of any benefit o pergusite, whether converble into money of not, arising during the course of the crying on of any business profesion, e, the value of rent fee residential accommodation secured By an athe ffom a company in consideration ofthe professional services a a lawyer rendered by Ni that company, will be sear ble te handy of the assessce as hs income unde the head "Profits and Gains of Business or Profession’ Frunter, the assesoee may receive a car air conditioner, motorcycle or anyother article on achieving a sales WB, Further nr ale constitutes perquisite taxable a5 profits or gain from business or profession. Similarly Free air tckets received by the assessee for achieving a target shal be perquisites; any interest, salary, bonus, commision or remuneration duc to or recived by partner of rm fo the firm in aa rine i's parmer, However, where any interest, salary, bonus, commission or remuneration by whatever Take cry r any part thereof has not been allowed to be deducted under seotion 4046), in the eOmputation of the called. or dhe fem, the income tobe taxed shall be adjusted tothe extent of the amount disallowed. saeathce words, suppose a frm pays intrest to a partner at 18% simple intrest p.a. amount 10 £2,7OS00, The aon eta nteeat i 12% pa. Hence the excess 6% pid will be disallowed inthe hands ofthe Fm. Since, the a est as been taxed inthe hands of the firm, the same will not be taxed in the hands oF the pare ‘The exes i fcost taxable in the hands ofthe pater shall be &1,80,000 (Calculated @ 12% pa) instead of 22,70,000; any sum whether received or receivable in cash orn kind under an agreement for:— (not earying out activity in relation to any business or profession: or (rey string any know-how, patent copyright tmdemark, Teenee, franchise or any, other business or ot shang of similar nature or information or technique likely to asist inthe manufacture or processing ‘of goods or provision for services reer the above clause (a) sall not apply where any sum, whether received or reeivabl, in eash or kind, However tiranser ofthe right (0 manufacture, produce or process any article or thing or right 10 cary on on, bsiness or profession, which s chargeable under the head “Capital guns”; any su recived under aKeyman Insurance Policy including the sim allosted by way of bonus on such policy: aera market value of inventory as on the date on which it i converted ino, or treated as, a capital asset the fa athe prescribed manner [Claus via) inserted wee. A.Y. 2019-20]. For details see para 63 below. say sum, wheter received r receivable, in cash or kind, on account of any capital aset other than land or good aaa instument) being demolished, destroyed, discarded or transfered, ifthe whole of the ‘apendure on octal aset has been allowed asa deduction under section 3SAD. [Section 2)] in connection with— enue or capital, in sformed for its members. ot be regarded as Scanned with CamScanner 192 6 ‘Systematic Approach to Income Tax a meanehe Geapepsd rf fitute a business then such ‘alate busines hl bs deme be dsc nde eyes bac Howes, ai erate [iri out in a recognised stock exchange shall not be regarded asa speculative transaction. a ee of provision relating to conversion of inventory into Capital Asset [Section It provides that the fair mark itis € into, or treated as, a capital va tenn reat nna case iustration 6.1 (lustration tobe read after studying Chapter on Capital Gain) R Ltd. who is carrying on the business of trading in shares submits the following information: {Qpening inventory of shares which includes shares of Reliance Industries amounting to €25,00,0000 3,00,00, [Purchases of shares of various companies during the year inclusive of STT paid 140,004 [Sale of shares during the year whose cost was €80,00,000 1.20.00, [ST paid onthe sale of such shares 2 [Reliance Industries shares costing 20,00,000 were converted into capital asset on 5.5.2022 when the fair market alue of such shares was rupees 45.00, [Reliance Industries shares which were converted ino capital asset were sold on 8.112022. 5400, ITT pid nth slo shares Ec ‘Compute the income under the head "business and profession” and capital gain of R Lid. for the previous year 2022-23. Solution Computation of business income of R Ltd. for the assessment year 2023-24 q q El [Shares sold during the year 1,20,00,000) [Zess: Cost of shares sold : [Opening inventory 3,00,00,000] [Adal Shares purchased during the year 1,40,00,000] 4,40,00,000] |Zess: Cost of shares converted into capital asset 20,00,000 [Zess: Closing inventory 3.40,00,000 3,60,00,000] 80,00,000 [Gross profit 40,00,000] \cess: STT paid 12,000) [Net profit 39,88,000 [Ada Fair market value of Reliance Industries shares converted into capital asset 45,00,000+ [Business income 84,88,000 ‘Computation of closing inventory q q [Opening inventory of shares 300,00, (dd: Cost of shares purchased during the year 1,40,00,000] [Total 4.40, [Zess: Cost ofthe shares converted into capital asset 20,00,0004 of shares sold 80,005 1,00,00, [Value of closing inventory 3,40,00,00q ‘Computation of income under the head “capital gain” [Consideration price 4,00,000 [dess: Cost of acquisition (as per section 49(9)) 45,00,000] Scanned with CamScanner 193 chap. 6 Income under the Head "Profits and Gains of Business or Profession” oy tia 5400 Not allowed a5] deduction] 45,00,000 [short-term capital gain 000 [period of holding (5.5.2022 to 8.11.2022) thus short-term capital asset = cm part of inventory and the profit of the year o ‘2(va), the fair market The cost of inventory which has been converted into e €20,00,000) will no longer fo tenes i hs been rduced om the valu of losing i ane be et of reducing | sion value of inv Serle sas ca Gere ne 6.4 Profits and gains of business deali Profits and gains of business or profession: ents: of section 28 is the main clause dealin wit the charge of profits and gains ofa amine ieee ire eines (9 five ingredients are found to emerge: (@) there should be a business or profession; (8) the business or profession should be carried on by the assessee; (0)_ the business or profession should be carried on for some time during the previous year: (d)_the charge isin respect of the profits and gains ofthe previous year of the business or professions and (e) the charge extends to any business or profession carried on. 6.5 Business must be carried on during the previous year Under section 28, the income is chargeable as profit ofthe business, ony ifthe business is carried on by the assessee ar any time during the previous year. tis, however, not necessary that the business is carried out throughout the previous year aie end ofthe previous year Hence the yest n which the business income is assessable is relevant. Also relevant isthe Ghestion, whether the Business is setup or commenced inthe yer of account. When the assessee does not cary on Business fall, section 28 cannot be applied and the amount that he reeives eannot bear the character of profits of a business. 65a Exceptions There are, however, six exceptions tothe above rule. In these cases, certain rec even though no business is being carried on by the assessee in the year of receipt. (Recovery against any los, expenditure or trading liability earlier allowed as a deduction [Section 41(1)} (i) Balancing charge in case of electricity companies (Section 41(2)] (iii). Sale of capital asset used for scientific research (Section 41(3)} (iv). Recovery against bad debis [Section 41(4)} (v) Amount withdrawn from Special Reserve [Section 41(4A)]- (vi) Receipt of discontinued business under cash system of accounting [Section 176(3A). (4). The above six clauses have been discussed in para 6.44. 6.6 Business loss It is obvious that business profit cannot deductible in computing the profit eamed by thereof. Such trading losses can be claimed as a (a) It should be a real loss and not notional or fictitious. (8) Itshould be a loss on revenue account and not on capital account. (6) Temust have actually arisen and been incurred not merely anticipated as certain to oceur in future. (G) It should be one that is incidental to the carying on of the business and must arise or spring directly from or be incidental to the carrying out of an operation of the business. (©. There should be no prohibition in the Act, express or implied, against the deductibility thereof, it has been held that the loss is incidental to business and is deductible in computing the income cipts are taxable as ‘Income from business’ 1 be computed without allowing a business loss. A trading loss of business is the business even though there is no specific provision in the Act for allowance deduction provided the following conditions are satisfied: In the following cases chargeable under this head: {loss on account of embezzlement by an employee is allowed as deduction in the previous year in which such embezzlement is discovered. (ii). toss of stock-in-trade by fire and other natural calamities or due to negligence of the employees. ii) toss on account of robbery or theft provided itis in the course of business and incidental tothe trade whichever trade itis. (i) oss caused on account of fluctuations in exchange rate at the it ba ge rate at the time of remitting the money for purchase of raw Scanned with CamScanner Chap. 6 a Systematic Approach to Income Tax ef © {os caused by non-recovery of advances made in course of business, provided itis a trading loss. eg. advance ‘money paid toa supplier for supply of raw material who does not supply the goods. (i) loss caused due o breach of contract for delivery of goods by either party. (vil) loss of raw material, finished goods in transit (id Toss caused by forfeiture of security deposits given at the time of submission of tenders for supply of goods. (G2) loss by the failure of bank in which money is deposited. (2) loss of stock in trade due to enemy action, (ri) Any loss incurred due to non-recovery of advance given to salvage the capital, if itis in the revenue field, is an admissible deduction, 6.64 Losses which are not deductible from business income (Lass sustained before the business is commenced e.g. the pre-incorporation losses of the business taken over by & company cannot be claimed by the company. Losses incurred in the closing down ofthe busines. (i) Loss incured due to damage, destruction, et. of eapital asses. (i») Loss which isnot incidental tothe carrying on ofthe business ofthe assssee. (©) Loss due to sale of securities held as investments as it willbe a capital loss and not the business loss (7) Loss caused by forfeiture of advance given for purchase of capital assets : (it) Violation of law isnot a normal incident of trade and an expense incurred by way of penalty for infraction of laws isnot deductible as business los. (vil) Trading loss du to loss of goods in transit in normal course of busines. 6.7 Legal business v illegal business For purposes of taxation, there should not be, and indeed ther is no distinction made between legal and illegal business. Profits from an illegal business are subject to tax just as from a legal business. 6.8 Cases where income from certain business is not taxable under the head ‘Profits and gains of business’ (1) Rent from House Property: Where an assessee is carrying on a business of owning and letting out of residential hhouses, the income derived by him, from such letting, shall be taxable under the head “Income from house property’ and not as business income. However, if residential houses/flats arc let out to the employees for efficient conduct of assessee's own business and letting of house properties is not the main business of the assessee but is subservient and incidental to the main business, income from such leting shall be taxable as business income. (2) Dividend Income: An assessce who is carrying on a business of dealing in shares and securities and earns income by way of dividend on such business assets shall be taxable, in respect of the dividends, under the head "Income from other sources’ and not under this head. (@)_ Winning from Lotteries, Races, ete.: Any winning from Lotteries, Races, etc. ae taxable under the head ‘Income from Other Sources’ even if its derived as a regular business activity As specified heads of income have been specified for income from these three activities, therefore, they have to be taxed under those heads only. 6.9 Income from business or profession — how to be computed Section 29 states that profits and gun of business or profession, chargeable to income tax w/s 28, shall be computed in accordance with the provisions contained in sections 30 to 43D. It may be added here that the provisions of sections 44 to 44D have also to be taken into account inthis context as they make certain special provisions regarding the computation of profits and deduction of expenditure in certain cases. 6.10 General principles for allowability of deductions (0 Expenditure should have been incurred during the previous year. (Gi) Expenditure should be incurred for the purpose of the business, (iii) No deduction is allowable in respect ofa discontinued business. (iv) Expenses incurred before the seting up ofa business are not allowed, 6.10a Reservesiprovisions for contingencies or anticipated losses cannot be claimed as a deduction In cases where the assesee provides for any contingent lability like bad debi, sales tax, et. which have not arisen daring the previous year but are only anticipated to arise inthe future, no deduction is allowable. Deduction vaste eee only when the expenditure or the loss has been actually incurred during the previous year Scanned with CamScanner Chap. 6 Income un . ‘ome under the Head "Profits and Gains of Business or Profession” 198 6.11 Losses and expenditure The terms "Loss" and "Expenditure" Dictionary: Renita! a epost ee Gsadvanags, ‘tc. caused by losing something. *E Mure — an expending/a spending or usin, ; : 1g of money. Business losses are different from expenditure and shall be allowed as deduction by computing the profits or gains under ofits and gains of business or i the ° " profession’ w/s 28. Th ¢ of allowit Jiness expenses while computing pris or gis under the head Profs an gaits ofbuines cr potest eas anise (a) expenses which are expressly allowed (Sect lo ions 30 0 37); (6) expenses which are specifically disallowed (Section. ae (©)_ expenses or payments not deductible in certain cases (Section 40A). 6.12 Method of Accounting [Section 145] @ a eed ‘either on the basis of cash or mercantile system of accounting [Section 145(1)] 7 Se ne head "Profits and gains of business or profession” or "Income from other sources . ions of section 145(2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessec. 2) Central Government empowered to notify income computation and disclosure standards [Section 145(2)] ee neat may notify, in the Official Gazette from time to time, income computation and disclosure to be followed by any class of assesses or in respect of any class of income. The Central Government vide Notification No. 87/2016, dated 29.9.2016 has notified certain Income Computation and Disclosure Standards to be followed by all assessees. (Sec para 6.12a below). (3) Assessing Officer empowered to mi wi 7 =r ‘make assessment in the manner provided under section 144 in certain cases (® Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or (ii) Where the method of accounting provided in section 145(1) has not been regularly followed by the assessce, or (iii) Where income has not been computed in accordance with the standards notified under section 145(2), the Assessing Officer may make an assessment in the manner provided in section 144 6.12a Income Computation and Disclosure Standards (1) The Central Government vide Notification No. 87/2016, dated 29.9.2016 has notified the following Income ‘Computation and Disclosure Standards to be followed by all assesses (other than an individual or a Hindu undivided family who is not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB), following mercantile system of accounting for the purposes of computation of income chargeable to tax under the head “profit and gains of business or profession” or “income from other sources”: A. Income ‘Computation and Disclosure Standard I relating to accounting, policies B. Income Computation and Disclosure Standard Il relating to valuation of inventories Income Computation and Disclosure Standard III relating to construction contracts have distinct meanings and are defined as follows inthe Webster New Word c. D. Income Computation and Disclosure Standard IV relating to revenue recognition E. Income Computation and Disclosure Standard V relating to tangible fixed assets F. Income Computation and Disclosure Standard VI relating to the effects of changes in foreign exchange rates G. Income Computation and Disclosure Standard VII relating to government grants H. Income Computation and Disclosure Standard VIII relating to securities 1. Income Computation and Disclosure Standard IX relating to borrowing costs J. Income Computation and Disclosure Standard X relating to provisions, contingent liabilities and contingent assets ‘The above notification shall apply to the assessment year 2017-18 and subsequent assessment years. 2) Certain clarifications issued by CBDT vide Circular No. 10/2017, dated 233.2017. 1. Interplay between ICDSI and Maintenance of Books of Account Question: Preamble of ICDS-I states that this ICDS is applicable for computation of income chargeable under the head "Profits and gains of business or profession” or "Income from other sources" and not for the purposes of maintenance of books of accounts. However, Para 1 of ICDS I states that it deals with significant Sccounting policies. Accounting policies are applied for maintenance of books of accounts and prepari financial statements. What isthe interplay between ICDS-I and maintenance of books of accounts? Scanned with CamScanner 196 ‘Systematic Approach to Income Tax (Chap. 6 As stated in the Preamble, ICDS is not meant for maintenance of books of accounts or preparing financial statements. Persons are required to maintain books of accounts and prepare financial statements as per accounting policies applicable to them. For example, companies are required to maintain books of account and prepare financial statements as per requirements of Companies Act 2013. The accounting polices mentioned in ICDS-1 being fundamental in nature shall be applicable for computing income under the heads "Profits and gains of business or profession" or "Income from other sources" 2. Applicability of ICDS in case of assesses covered under presumptive scheme of taxation Answer: Question: Does ICDS apply t0 non-corporate taxpayers who are not required to maintain books of account and/or those who are covered by presumptive scheme of taxation like sections 44AD, 44AE, 44ADA, 44B, 44BB, AABBA, etc. of the Act? Answer: ICDS is applicable to specified persons having income chargeable under the heed ‘Profits and gains of business or profession’ of Income from other sources’. Therefore, the relevant provisions of ICDS shall also apply to the persons computing income under the relevant presumptive taxation scheme. For example, for ‘computing presumptive income of a partnership firm under section 44AD of the Act, the provisions of ICDS on Construction Contract or Revenue recognition shall apply for determining the receipts or tumover, asthe case may be. ‘3. Conflict between the provisions of ICDS and Income Tax Rules, 1962 Question: —_If there is conflict between ICDS and other specific provisions of the Income-tax Rules, 1962 (the Rules?) ‘governing taxation of income like rules 9A, 9B etc. ofthe Rules, which provisions shall prevail? Answer: ICDS provides general principles for computation of income. In case of conflict, if any, between the provisions of Rules and ICDS, the provisions of Rules, which deal with specific circumstances, shall prevail 4. Applicability of ICDS to companies which adopted Ind-AS Question; ICDS is framed on the basis of accounting standards notified by Ministry of Corporate Affairs (MCA) vide Notification No. GSR 739(E) dated 7 December 2006 under section 21 1(3C) of erstwhile Companies Act 1956, However, MCA has notified in February 2015 a new set of standards celled ‘Indian Accounting, ‘Standards’ (Ind-AS). How will ICDS apply to companies which adopted Ind-AS? Answer: ICDS shall apply for computation of taxable income under the head "Profit and gains of business or profession” or "Income from other sources" under the Income Tax Act. This is imespective of the accounting standards adopted by companies ie. either Accounting Standards or Ind~AS. TCDS are applicable for computation of income chargeable under the head “profits and gains of business or profession” and “income from other sources” and not for maintaining books of accounts. ICDS applies to all taxpayers except individual and HUF who are not covered under the tax audit provisions. In case of confit between the provisions of the Act and ICDS, the provisions of the Act shall prevail to that extent. ICDS applies only to taxpayers following mercantile system of accounting ‘As per section 145(3), where income has not been computed in accordance with the standards notified under section 145(2) the Assessing Officer may make an assessment in the manner provided in section 144. ‘Note.—In the case of Chamber of Tax Consultants v UOI (2017) 87 taxmann.com 92 (Del): It was held that ‘income computation and Diselosure Standards' (ICDS) notified by Central Government in exercise of power under section 145(2) cannot override binding judicial precedents or provisions of Act or Rules framed thereunder. ‘Amendments made by the Finance Act, 2018 6.12 Amendments in relation to notified Income Computation and Disclosure Standards [W.r.e. A.Y. 2017-18} Reasons for making amendments Recent judicial pronouncements have raised doubts on the legitimacy ofthe notified ICDS. However, a large number of taxpayers have already complied with the provisions of ICDS for computing income for assessment year 2017-18. In order to regularise the compliance with the notified ICDS by a large number taxpayers so as to prevent any further inconvenience to them, the Act has brought amendments by inserting the following sections retrospectively with effect from Ist April, 2017 ice. the date on which the ICDS was made effective and will, accordingly, apply in relation to assessment year 2017-18 and subsequent assessment years: ‘Amendments made [W.r.e.f. A.Y. 2017-18] ‘The following amendments have been made in view of the incorporation of ICDS in the Income Tax Act: (). Marked to market loss or other expected loss to be allowed [Clause (xvii) inserted in section 36(1)] Clause (xviii) to section 36(1) provides that marked to market loss or other expected loss as computed in the manner provided in income computation and disclosure standards notified under section 145(2), shall be allowed deduction. (Also reproduced at proper place). Scanned with CamScanner (i) Marked to market loss or o Income under the Head "Profits and Gains of Business or Profession” 7 40A(13) inserted} ther expected loss not to be allowed except provided in section 36(1)(xvil) [Section Section 40, i other oe that no deduction or allowance shall be allowed in respect of any marked to market oss oF except as allowable under section 36(1)(xvii). (Also reproduced at proper place) (iii) Taxation of foreign exchange fluctuation [Section 43AA inserted] in foreign exchange (1) Subj (1) Subject to the provisions of section 43A, any gain or loss arising on account of any change i tng ted in Tats shal be teed as income rls, asthe case may be, and sch si oF 1s shall De com @) For the ‘income computation and disclosure standards notified under section 145(2). Ent Puoses of section 43AA(I), gun o las arising on acount of the effects of change in frcign in respect ofall foreign currency transactions, including those relating o— (@ money tems and wor onetny ten (ii) translation of financial statements of foreign operations; (ii) forward exchange contracts; Gv) foreign currency translation reserves, (Also reproduced at proper place) (iv) Computation of income from construction and service contracts [Section 43CB inserted] ae Profits and gains arising from a construction contractor a contract for providing services shall be determined on basis of percentage of completion method in accordance with the income computation and disclosure standards notified under section 145(2). However, the profit and gain arising from the following services shall be determined as under: (contract for providing services with duration of not more than 90 days shall be determined on the basis of project completion method; (Gi) contract for providing services involving indeterminate number of acts over a specific period of time shall be determined on the basis of straight line method. Further, for the purposes of percentage of completion method, project completion method or straight line method referred to above— (i) the contract revenue shall include retention money; (ii) the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains. (Also reproduced at proper place) (v) Substitution of new sections 145A and 145B for section 145A. (A) Method of accounting in certain cases [New section 145A] For the purpose of determining the income chargeable under the head “Profits and gains of business or profession", — (j) the valuation of inventory shall be made at lower of actual cost or net realizable value computed in the ‘manner provided in income computation and disclosure standards notified under section 145(2). Gi) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the mount of any tax, duty, cess of fee actully paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on te date of valuation Gi) inventory being securities not listed, or listed but not quoted, on a recognised stock exchange, shall be rived ot actual cost initially recognised in the manner provided in income computation and disclosure standards notified under section 145(2). (iv) inventory being listed securities, shal be valued at lower of actual cost or net ealisable value inthe manner provided in income computation and disclosure standards notified under section 145(2) Provided that the inventory being securities held by a scheduled bank or public financial institution shall be eannad in accordance with the income computation and disclosure standards notified under sub-section (2) of “ottion 145 afer taking info account the extant guidelines issued by the Reserve Bank of Inia inthis regard: Provided further, that the comparison of actual cost and net realisable value of securities shall be done category-wise. “Explanation 1-—Forthe purposes ofthis section, amy tax, duty, cessor fee (by whatever name called) under fan law forthe time being in fore, shall include all such payment notwithstanding any right arising as @ consequence to such payment. Scanned with CamScanner 198 Systematic Approach to Income Tax apis Explanation 2—For the purposes ofthis section — (@) “public financial institution” shall have the meaning assigned to it in section 2(72) of the Companies ‘Act, 2013, (©) "recognised stock exchange® shall have the meaning assigned to it in clause (i) of Explanation J of section 43(5). (©) "scheduled bank” shall have the meaning assigned to it in clause (i) of the Explanation to section 36(1Xviia). (8) Taxability of certain income [Section 145B inserted] (1) Notwithstanding anything to the contrary contained in section 145, interest received by an assessee on Compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received. (2) the claim for escalation of price in a contractor export incentives shall be deemed to be the income of the Previous year in which reasonable certainty of its realisation is achieved. (©) income referred to section 2(24)xvili) (relating to subsidy or grant or cash incentive, ete. from Government) shall be deemed to be the income of the previous year in which iti received, if not charged to income tax for any earlier previous year. 6.13 Expenses which are expressly allowed as a deduction [Sections 30 to 37] caning of the term ‘paid’ Before we discuss the specific expenses, itis necessary to understand the meaning of the serorgaid which wil be used in relation to these expenses. According to section 432) ‘paid! means actually paid or incurred Scrording to the method of accounting upon the basis of which the profits or gains are computed under the bead ‘Profits and ‘gains of business or profession’, Therefore, where during the previous year shall be treated to be ‘paid! assessee follows the cash system then the expenses the previous year. 6.14 Rent, rates, taxes, repairs and insurance for buildings [Section 30] 6.14a Deductions In respect of rent, rates, taxes, repairs and insurance for premises, used forthe purposes ofthe business or profession, the following deductions shall be allowed: (@)_ where the premises are occupied by the assessee: (0 as a tenant — the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs; (@_ otherwise than as a tenant — the amount paid by him on account of current repairs tothe premises; (8) any sum paid (whether as owner or tenant) on account of land revenue, local rates or municipal taxes; However, these are allowable subject to provisions of section 43B ie. if these expenses are claimed on due basi the payment of the same must be made on or before the due date of fumishing the retum of income under seeion 139(1) [Ret Para 6.39]; (© any insurance premium paid (whether as owner or tenant) in respect of insurance against risk of damage or destruction of the premises. The amount paid on account of the cost of repairs referred to clause (a\() above and the amount pald on account oF current repairs referred to in clause (aX!) above shall not include any expenditure inthe nature of capital expenditure [Explanation to section 30] 6.14b Current Repairs ‘The expression “current repairs" means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which i only forthe purpose of preserving or maintaining an already existing asset an Which does not bring a new asset into existence or does not give tothe assessee a new or different advantage. Current repairs indicates repairs which are atended to when the need for them arses from a businessman's point of view ‘and which are not allowed to fall into arrears oF to be accumulated. ‘Where the business or profession ofthe assessee is carried on in a building nor owned by him but i Fespect of Which The assesse holds a lease or other right of occupancy and any capital expendiure is incurred by the assessce forthe purpose ‘of business or profession on the construction of any structure or doing of any work, in or in elation to, and by way of renovation of extension of, or improvement to the building, then the assessee shall be eligible for depreciation fey sect, capital expenditure incurred assuming tht such structure or work isa building owned by the assessee, [Explanation 1 10 section 32] Scanned with CamScanner Chap. 6 Income under the Head "Profits and Gains of Business or Profession” 199 6.15 Repairs a insurance of machinery, plant and furniture [Section 31] . In respect of machinery, plant or furniture used forthe purpose of busines, the following deductions are allowable: (a) amount paid on account of current repairs, (0) any insurance premium pad in respect of nsrance against isk of damage or destcon of the plant {[fhe amount paid on account of current repairs shall not include any expenditure in the nature of capital expenditure. 6.16 Depreciation [Section 32] Depreciation isthe diminution inthe value ofan asst duc to normal wear and ter and de to obsolescence, There 26 | Acquisition oe + the money received receivable along with crap value, ‘ifany, in respect of the assets ofthe ame block, which are sold discarded or destroyed during the year. + The writen down value ofeach block as on, the last day ofthe previous year (On the closing writen down value, compute the depreciation at the rates prescribed for each block. Illustration 6.5: M Lid. owns te following assets on 1.42022: [Assets WY a5 on 142022 @)] Rates of Depresation Gy) Building A 10,20,000 0 Building B '5,40,000] 10 Scanned with CamScanner St tt ln ss ne mm mc mm Chap. 6 Income under the Head "Profits and Gains of Business or Profession” 209 Building C 6,35,000| 10 Building D Saud 7 puns 3.10000 5 [Machinery A a) is [Machinery B cea a ‘Machinery C 765,000 30 Machinery D ion =i Machinery E aie 50 resales 710,00] 0 [Furniture B a a The following assets are acquired by the company during the previous year 2022-23: Asset ‘Actual Cost Rate of Depreciation Date of acquisition si (%) Building F 5,40,000 10 145.2022, Machinery F 1,12,000 15 15.5.2022 [Machinery G 4,000 Is 16.7.2022 Machinery H 62,000 15 21.9.2022, Machinery 1 16,000 30 219.2022 Patents 40,000 25 154.2022 Technical Know-how 60,000 25 17.5.2022 Machinery Y 500,000 30 ‘oquired on 59-2022 and put to use immediately “The following assets are sold by the company during the previous year 2022-23 Asset Sale consideration (%) T Date of Sale Machinery C 110,000, 29.2022 Building D 4,00,000 21.10.2022 |Machinery E 80,000 28.3.2023 j ‘Determine the depreciation forthe assessment year 2023-24. Solution 7 [Particulars WDVason] Additions] Assets sold] WDV ason] —Depreciation| 1.4.2022| during the year| during the year| 31,3,2023) ®) @ @ ® @) [Block 1 Building 10% 21,95,004 5,40,000] —| 27,35,000| 2,73,500| [Block 2 Building 5% 5,710,000] =| 400,000] 1,70,000| 8,500] [Block 3 Machinery 15% 242,000] 1,78,000 = 4,20,000] 63,000) [Block 4 Machinery 30% 2,19,000| 5,16,000| 1,90,000| 5,45,000| 1,63,500} (Block 5 Furniture & Fixtures 1,18,000| = =~ 1,18,000] 11,800} |Block 6 Intangible assets Nill 1,00,000} =| 1,00,000} 25,000] [rot 545,300] 6.16h Depreciation on aset inthe previous year of acquisition if the ase is put o use fr less than 180 days during that previous year Where any asset, falling within @ block of asst, is acquired by the assessee during the previous year and is put to use for the pues of business or profesion fra period of les than 180 days in that previous year, depreciation in respect of such aerate. rexticted 0 30% ofthe amount calculated atthe percentage prescribed for the block of asset toni such asset. Scanned with CamScanner Chap. 6 210 Systematic Approach to Income Tax f ‘Therefore, depreciation will be restricted to 50% of the normal deprecation, if th (a) The asset is aequired during the previous year; and (6) Itis put to use during the previous year; and (6) thas been used fora period of less than 180 days during the previous year Example (i) fa new machinery eligible for 15% depreciation, is purchased on 15.12.202: business on 28.12.2022 depreciation would be allowable on this machinery @ 7-5 15%. ; a ness on 28.12.2022 (G9 Ifa new machinery is purchased on 154.2022 and put to use for the purpose of we BUSTS AZ Ts ee depreciation woud be allowable @ 7.5% Because though th et as Been 2 iz more than 180 days but put to use for Tess than 180 days during the previous iness only on 28.12.2022, (u) ttt new machinery is pachosed on 2.202 and pt se ote pupse ofthe business oly on 2812202, depreciation would be allowable @ 15% and not 7.5% because the aset has not been sequited Huns i Bescon year 2022-23 but acquired in previous year 2021-22 although it s pu 1 use for less ee for les than 180 charging depreciation @ $0% of normal rate of depreciation for asset acquired and put to use Tor “uss Mat tO days, its quite possible that written down value of that block of asset atthe end of the year is less than octufl Cost ofthe asseVassets acquired and put to use for less than 180 days during the previous yea. Iti possible due to sale of any asset of ‘that block during the year. In that case, depreciation @ $0% of normal rate will be charged on the entre writ ‘ofthat block atthe end ofthe year, provided the said asset exists in that block ; The restriction of 50% ofthe nommal depreciation mentioned above applies all Kinds of depreciation i.e () deprecation on tangible assets, (i) depreciation on intangible assets, (i) additonal depreciation discussed under para 6.176, i»)

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