Income Tax

Deductions and Disallowances under Section 36

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Deductions and Disallowances under Section 36

This section deals with various expenses that are allowed as deduction while computing the income under the heads “Profits or Gains from Business or Profession”

List of Expenses dealt in this section :

  1. Insurance Premium for stocks: The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession;
  2. Insurance premium paid on life of cattles being live stock: The amount of any premium paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk raised by` its members to such federal milk co-operative society;
  3. Insurance premium paid by employer to employee: It is allowed as deduction if premium paid in any mode other than cash
  4. Bonus ,Commission: Any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; It is allowed subject to restrictions of Section 43B .With regard to amount the amount of bonus it may exceed the amount of bonus payable under the Payment of Bonus Act ,1965
  5. Interest on Loan:
  • Loan taken for business or profession purpose from scheduled banks, Public Financial Institution ,State Financial corporation,State Industrial Investment Corporation,NBFC is allowed subject to Section 43B
  • Loan taken for business or profession purpose from others is also allowed
  • Loan taken for Personal purpose is not allowed
  1. Discount on Zero Coupon Bonds: The pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond calculated in the manner as may be prescribed.

Discount means : discount” means the difference between the amount received or receivable by the infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank issuing the bond and the amount payable by such company or fund or public sector company or scheduled bank on maturity or redemption of such bond;

  1. Employer Contribution for the benefit of Employee : Any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or an annual contributions fixed on some definite basis by reference to the taxes on corporate income chargeable under the head “Salaries” or to the contributions or to the number of members of the fund;

Note : Payments made to Unrecognised Provident Fund ,Unapproved Super Annuation fund , Unapproved Gratuity Fund ,or any other fund is not allowed

  1. Employer Contribution towards Pension Scheme : any sum paid by the assessee as an employer by way of contribution towards a pension scheme, as referred to in section 80CCD, on account of an employee to the extent of
  • Actual contribution
  • 10% of salary (Basic +D.A.).

Whichever is lower

  1. Employers Contribution towards Gratuity Fund : any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust;
  2. Employees Contribution towards Welfare Fund: Any sum received by Employer from Employees as contribution to PF,Super annuation fund ,ESI,etc. is deemed to be income is such sum is not deposited in respective fund up to the due date to such fund
  3. Animals used for the purpose of business: in respect of animals which have been used for the purposes of the business or profession otherwise than as stock-in-trade and have died or become permanently useless for such purposes, the difference between the actual cost to the assessee of the animals and the amount, if any, realised in respect of the carcasses or animals;
  4. Bad debts :
  • Actual bad debts relating to sales is allowed
  • Bad debts related to loan is not allowed exception to this is money lending business sectors.
  • Bad debts should be written off in the books of accounts of assessee in the Previous year in which the deduction is claimed
  1. Provision for bad debts:Not allowed except for banks mentioned below

Indian banks = 8.5% of Gross total income (Before this deduction) plus 10% of aggregate average Advance made by rural branches.

For Foreign banks , Public Financial institutions ,state financial corporation,state industrial investment corporation,Non banking financial corporation = 5% of Gross Total Income (before this deduction)

  1. Expenses on Promotion of family planning of employees: Any expenditure bona fideincurred by a company for the purpose of promoting family planning amongst its employees :
  • If incurred as revenue expenditure then 100% deduction is allowed
  • Whereas incurred as capital expenditure then deduction allowed in 5 equal instalments (1/5th in each year -totally 5 years)
  1. Expenses on compliant computer system: Any expenditure incurred by the assessee, on or after the 1st day of April, 1999 but before the 1st day of April, 2000, wholly and exclusively in respect of a non-Y2K compliant computer system, owned by the assessee and used for the purposes of his business or profession, so as to make such computer system Y2K compliant computer system
  1. Expenses authorised by the act: Any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, if,—

It is constituted or established by a Central, State or Provincial Act;

Such corporation or body corporate, having regard to the objects and purposes of the Act referred to in sub-clause (a), is notified by the Central Government in the Official Gazette for the purposes of this clause; and

the expenditure is incurred for the objects and purposes authorised by the Act under which it is constituted or established;

  1. Cash Transaction tax paid : Any amount of banking cash transaction tax paid by the assessee during the previous year on the taxable banking transactions entered into by him.
  1. Contribution by PFI for small industries: Any sum paid by a public financial institution by way of contribution to such credit guarantee fund trust for small industries as the Central Government may, by notification in the Official Gazette, specify in this behalf.
  1. Securities Transaction Tax: An amount equal to the securities transaction tax paid by the assessee in respect of the taxable securities transactions entered into in the course of his business during the previous year, if the income arising from such taxable securities transactions is included in the income computed under the head “Profits and gains of business or profession”.
  1. Commodities Transaction Tax : An amount equal to the commodities transaction tax paid by the assessee in respect of the taxable commodities transactions entered into in the course of his business during the previous year, if the income arising from such taxable commodities transactions is included in the income computed under the head “Profits and gains of business or profession”.
  1. Purchase of Sugarcane: The amount of expenditure incurred by a co-operative society engaged in the business of manufacture of sugar for purchase of sugarcane at a price which is equal to or less than the price fixed or approved by the Government;
  1. Marked to market loss:
  • MTM losses or Expected losses which are computed as Income Computation and Disclosure Standards are allowed.
  • MTM losses or Expected losses which are computed as per other methods are not allowed.

Deductions and Disallowances under Section 43B

This section provides that certain deductions are allowed only on actually paid by the assessee on or before the due date of furnishing the income tax return filing.(irrespective of method of accounting followed by the assessee)

Those list of expenses are

(a)any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force,

(b)  any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees,

(c)  any sum referred to in clause (ii) of sub-section (1)of section 36,(ie.Bonus or Commission to Employees)

(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

[(da) any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or]

(e)  any sum payable by the assessee as interest on any loan or advances 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 in accordance with the terms and conditions of the agreement governing such loan or advances, or

(f)  any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee,(leave encashment) or

(g)  any sum payable by the assessee to the Indian Railways for the use of railway assets,

Note :

  • If payment made after due date of return filing then such expenses shall be allowed in the year of actual payment
  • TDS is not included in section 43B and hence cannot be claimed as an expense
  • Systematically important non deposit taking NBFC = means a NBFC which is not accepting or holding public deposits and having total assets of not less than 500 crore rupees as per the last audited balance sheet and is registered with the Reserve Bank of India
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