Deductions In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed:
(a) where the premises are occupied by the assessee:
(i) 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;
(ii) otherwise than as a tenant — the amount paid by him on account of current repairs to the premises;
(b) 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 i.e. if these expenses are claimed on due basis, the payment of the same must be made on or before the due date of furnishing the return of income under section 139(1)
(c) 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)(i) above and the amount paid on account of current repairs referred to in clause (a)(ii) above shall not include any expenditure in the nature of capital expenditure.
In respect of machinery, plant or furniture used for the purpose of business, the following deductions are allowable:
(a) amount paid on account of current repairs,
(b) any insurance premium paid in respect of insurance against risk of damage or destruction of the plant and machinery or furniture.
The amount paid on account of current repairs shall not include any expenditure in the nature of capital expenditure.
Depreciation is the diminution in the value of an asset due to normal wear and tear and due to obsolescence. There are different methods for calculation of depreciation under financial accounting. The methods commonly used are:
(a) straight line method;
(b) written down value method;
The system of claiming depreciation under the Income-tax Act is quite different from financial accounting.
The following are the three kinds of depreciation allowance which are allowed under the Income-tax Act:
(i) Normal depreciation for block of assets [Section 32(1)(ii)].
(ii) Additional depreciation in case of any eligible new machinery or plant (other than ship and aircraft) which has been acquired and installed—
(a) by an assessee engaged in the business of manufacture or production of any article or things or in the business of generation, transmission or generation and distribution of power [Section 32(1)(iia)].
(b) before 1-4-2020 by an assessee engaged in the business of manufacture or production of any article or things which is set up in a notified backward area in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal
(iii) Normal asset-wise depreciation for an undertaking engaged in generation or generation and distribution of power [Section 32(1)(i)].
(i) Find the opening written down value of each block at the beginning of the year.
(ii) Add cost of acquisition of assets acquired during the year in the respective blocks to which the new assets belong.
(iii) Deduct the money received/receivable along with scrap value, if any, in respect of the assets of the same block, which are sold, discarded or destroyed during the year.
(iv) (i) + (ii) – (iii) is the written down value of each block as on the last day of the previous year.
(v) On the closing written down value, compute the depreciation at the rates prescribed for each block.
Manufacturing unit eligible for deduction @ 15% of actual cost of new asset being eligible plant and machinery [Section 32AD(1)]
A new section 32AD has been inserted in the Act to provide for an additional Investment Allowance of an amount equal to 15% of the cost of new asset acquired and installed by an assessee (whether company or non-company), if—
(a) he sets up an undertaking or enterprise for manufacture or production of any article or thing on or after 1.4.2015 in any backward area notified by the Central Government in this behalf in the State of Andhra Pradesh, or in the State of Bihar, or in the State of Telangana or in the State of West Bengal; and
(b) the new assets are acquired and installed for the purposes of the said undertaking or enterprise during the period beginning from 1.4.2015 & ending before 1.4.2020.
The deduction will be available for the assessment year relevant to the previous year in which the new asset is installed. But in order to avail benefit under section 32AD, the new asset must both be acquired and installed on or after 1.4.2015 but on or before 31.3.2020.
1. Unlike section 32AC, where to claim deduction under that section, the investment in the new eligible plant and machinery should exceed ₹25 crore in any previous year, there is no restriction of the amount to be invested during the previous year in the new eligible assets.
2. Amendment made by the Finance Act, 2020.
If an individual or HUF opts to be taxed as per the new alternative regime under section 115BAC, he/it will not be entitled to claim deduction on account of investment in new plant and machinery in notified backward areas in certain States as discussed above.
Deduction under section 33AB is available to an assessee who satisfies the following conditions:
(i) the assessee is engaged in the business of growing and manufacturing tea or coffee or rubber in India;
(ii) the assessee has, within six months from the end of the previous year or before the due date of furnishing return of income whichever is earlier;
(a) deposited with National Bank for Agriculture and Rural Development (NABARD) any amount(s) in a special account maintained by the assessee with that bank in accordance with and for the purpose specified in a scheme approved in this behalf by the Tea Board or the Coffee Board or the Rubber Board; or
(b) deposited any amount in the Deposit Account opened by the assessee in accordance with and for the purpose specified in a scheme framed by the Tea Board or the Coffee Board or the Rubber Board with the previous approval of the Central Government;
(iii) the assessee must get its accounts audited by a Chartered Accountant and furnish the report of such audit in Form No. 3AC, along with the return of income.
Quantum of deduction shall be:
(a) the amount(s) deposited in the schemes referred to above; or
(b) 40% of the profits of such business computed under the head profits and gains of business or profession,
whichever is less.
The profits are to be computed before making any deduction under this i.e. section 33AB and before making adjustment for brought forward losses u/s 72 but after making deduction of current year depreciation.
If separate accounts are maintained in respect of business of growing and manufacturing tea or coffee or rubber in India, it shall be profits from such business before claiming deduction under this section. In case separate accounts are not maintained it will be calculated as under:
1. If a deduction has been allowed u/s 33AB, no deduction shall be allowed in respect of such amount in any other previous year.
2. Amendment made by the Finance Act, 2020.
If an individual or HUF opts to be taxed as per the new alternative regime under section 115BAC, he/it will not be entitled to claim deduction on account of Tea Development Account, Coffee Development Account and Rubber Development Account as discussed above.
Deduction under section 33ABA is allowed to an assessee who satisfies the following conditions:
1. The assessee is carrying on business consisting of prospecting for or extraction or production of petroleum or natural gas or both in India and in relation to which the Central Government has entered into an agreement with such assessee for such business.
2. The assessee has before the end of the previous year—
(a) deposited with the State Bank of India any amount(s) in a special account maintained by the assessee with that bank, in accordance with and for the purposes specified in, a scheme approved in this behalf by the Ministry of Petroleum and Natural Gas of the Government of India; or
(b) deposited any amount in the Site Restoration Account opened by the assessee in accordance with, and for the purpose specified in a scheme framed by the aforesaid Ministry. This scheme is known as Deposit Scheme.
3. The assessee must get its accounts audited by an Accountant and furnish the report of such audit in the Form No. 3AD along with the return of income.
Quantum of deduction shall be:—
(a) the amount deposited in the scheme referred to above; or
(b) 20% of the profit of such business computed under the head profits and gains of business or profession,
whichever is less.
The profits are to be computed before making any deduction under this section i.e. section 33ABA and before making adjustment for brought forward losses u/s 72.
1. Profits from business in this case also is to be calculated in the same manner as is mentioned in section 33AB.
2. If a deduction has been allowed under section 33ABA, no deduction shall be allowed in respect of such amount in any other previous year.
3. Any amount credited in the special account or Site Restoration Account by way of interest shall be deemed to be a deposit.
4. Amendment made by the Finance Act, 2020.
If an individual or HUF opts to be taxed as per the new alternative regime under section 115BAC, he/it will not be entitled to claim deduction on account of Site Restoration Fund as discussed above.
Scientific research may be carried on:
(a) by the assessee, relating to his business; or
(b) by making payment to outside agencies engaged in scientific research work.
The expenses incurred on in-house research i.e. research carried out by the assessee are allowed as a deduction, only where the research work relates to the business of the assessee.
An assessee can claim the following expenditure as a deduction:
(i) Revenue Expenses on Scientific Research
(ii) Capital Expenses on Scientific Research
All revenue expenses laid out or expended on scientific research during the previous year are fully allowed as a deduction.
It has further been provided that following revenue expenses, expended or laid out during three years immediately preceding the commencement of the business, shall be deemed to be the expenditure of the previous year in which the business commences and therefore, shall be allowable in that year to the extent these are certified by the prescribed authority:
(a) payment of salary to employees engaged in scientific research;
(b) purchase of material used in scientific research.
For example, if the assessee commences its business on 15.12.2019 then all revenue expenses on scientific research related to the business incurred, on or after 15.12.2019, will be allowed as a deduction.
Further, expenses incurred during the period 15.12.2016 to 14.12.2019 and which are certified by the prescribed authority will be deemed to be expenses of the previous year 2019-20 and will be allowable in that year.
All capital expenses (excepting expenditure on acquisition of land) incurred on scientific research related to the business of the assessee shall be allowed as a deduction in the year in which they are incurred.
Further, capital expenditure incurred during three years immediately preceding the commencement of the business shall be deemed to be expenses of the previous year of commencement of business and allowed in that year. Capital expenses may be incurred on acquisition of plant and machinery, construction of building, acquisition of vehicles, etc. for the purpose of scientific research.
1. No deduction shall be admissible under this clause in respect of any expenditure incurred on the acquisition of land, whether the land is acquired as such or as part of any property.
2. According to section 43(4), Scientific Research means any activity for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. Besides Scientific Research, donation for research in social sciences like human behaviour and marketing research work are also covered under this section. This is an expenditure where the Government intends to provide encouragement and therefore, specific provisions have been enacted for the treatment of this expenditure.
Where any capital expenditure is incurred by the assessee for acquiring any right to use spectrum for telecommunication services either before the commencement of the business or thereafter at any time during any previous year and for which payment has actually been made to obtain a right to use spectrum, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure.
Where any capital expenditure is incurred by the assessee for acquiring any right to operate telecommunication services either before the commencement of the business to operate telecommunication service or thereafter any time during any previous year and for which payment has actually been made to obtain a license, a deduction will be allowed in equal instalments over the period for which the license remains in force, subject to the following:
(a) If the fee is paid for acquiring any right to operate telecommunication services before the commencement of such business, the deduction shall be allowed for the previous years beginning with the previous year in which such business commenced.
(b) If the fee is paid for acquiring such rights after the commencement of such business the deduction shall be allowed for the previous years beginning with the previous year in which the license fee is actually paid.
1. Where a deduction for any previous year has been claimed and allowed under this section, no depreciation shall be allowed under section 32(1) for the same or any subsequent year. [Section 35ABB(8)]
Deduction under section 35AD shall be allowed to the assessee who is carrying on any of the following specified business :
(i) setting up and operating a cold chain facility;
(ii) setting up and operating a warehousing facility for storage of agricultural produce;
(iii) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network;
(iv) the business of building and operating anywhere in India, a hotel of two-star or above category, as classified by the Central Government;
(v) building and operating, anywhere in India, a hospital with at least 100 beds for patients;
(vi) developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed;
(vii) developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed;
(viii) production of fertiliser in India;
(ix) setting up and operating an Inland Container Depot or Container Freight Station notified and approved under the Customs Act, 1962;
(x) bee-keeping and production of honey and beeswax; and
(xi) setting up and operating a warehousing facility for storage of sugar.
(xii) laying and operating a slurry pipeline for the transportation of iron ore;
(xiii) setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines;
(xiv) developing or maintaining and operating or developing maintaining and operating a new infrastructure facility
Business mentioned in clause (xii) or (xiii) above should commence its operation on or after 1-4-2014.
100% deduction shall be allowed an account of any expenditure of capital nature incurred wholly and exclusively for the purpose of the above specified business carried on by such assessee during the previous year in which such expenditure in incurred by him.
1. In case of specified business of production of fertilizer in India, the deduction for capital expenditure shall be allowed not only for production in a new plant but it shall also be allowed for a newly installed capacity in an existing plant for production of fertilizer.
2. Where the assessee builds a hotel of two star or above category and subsequently, while continuing to own the hotel, transfers the operation thereof to another person, the assessee shall continue to be allowed the deduction although operations are carried on by other person.
Under section 35CCA, any assessee who is carrying on a business/profession shall be allowed a deduction of the amount of the expenditure incurred by way of payment of any sum:
(a) to National Fund for Rural Development set up by the Central Government;
(b) to the National Urban Poverty Eradication Fund set up and notified by the Central Government.
If deduction is claimed u/s 35CCA, it shall not be allowed under any other provision of the Act.
1. To whom deduction shall be allowed u/s 35CCC:
2. Purpose for which deduction shall be allowed:
Deduction shall be allowed on account of any expenditure incurred by the assessee on agricultural extension project notified by the Board in this behalf in accordance with the guidelines as may be prescribed
3. Quantum of deduction:
150% of such expenditure incurred during the previous year
4. Deduction not to be allowed under any other section if claimed under this section:
Where a deduction under section 35CCC is claimed and allowed for any assessment year in respect of such expenditure, deduction shall not be allowed in respect of such expenditure under any other provisions of this Act for the same or any other assessment year.
Amendment made by the Finance Act, 2020
If an individual or HUF opts to be taxed as per the new alternative regime under section 115BAC, he/it will not be entitled to claim deduction under section 35CCC, as discussed above.
1. To whom deduction shall be allowed u/s 35CCC:
A company assessee only
2. Purpose for which deduction shall be allowed:
Deduction shall be allowed on account of any expenditure (not being expenditure in the nature of cost of any land or building) incurred by the company on skill development project notified by the Board in this behalf in accordance with the guidelines as may be prescribed
3. Quantum of deduction:
150% of such expenditure incurred during the previous year
4. Deduction not to be allowed under any other section if claimed under this section:
Where a deduction under section 35CCD is claimed and allowed for any assessment year in respect of such expenditure, deduction shall not be allowed in respect of such expenditure under any other provisions of this Act for the same or any other assessment year.
Assessees who can claim deduction under this section are:
(i) Indian Company, or
(ii) a person other than a company who is resident in India.
Expenditure in respect of which deduction is available
(a) expenditure incurred before the commencement of business; or
(b) expenditure incurred after the commencement of business in connection with the extension of existing undertaking or in connection with setting up a new unit.
Expenses qualifying for deduction:
The following expenses qualify for deduction:
(a) Expenditure incurred in connection with:
(i) preparation of a feasibility report;
(ii) preparation of a project report;
(iii) conducting market survey or any other survey necessary for the business of the assessee;
(iv) engineering services relating to the business of the assessee;
(b) legal charges for drafting any agreement between the assessee and any other person relating to the setting up or conduct of the business of the assessee;
(c) where the assessee is company, also, expenditure—
(i) by way of legal charges for drafting the Memorandum and Articles of Association of the company;
(ii) on printing of the Memorandum and Articles of Association;
(iii) by way of fees for registering the company under the provisions of the Companies Act, 1956;
(iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus;
(d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provisions of this Act) as may be prescribed.
Amount qualifying for deduction:
The aggregate of the expenditure referred to in clauses (a) to (d) above shall not exceed 5% of the cost of the project in case of all assessees other than companies.
In the case of a company, it cannot exceed 5% of—
(i) the cost of the project, or
(ii) the capital employed in the business of the company,
whichever is beneficial to the company.
Quantum of deduction:
The amount qualifying, as per the limits specified above, shall be allowed as a deduction in 5 equal annual instalments beginning with the previous year of commencement of business or the previous year in which the extension of undertaking is completed or the new unit commences production or operation.
Compulsory audit of accounts:
No deduction shall be admissible under this section in case of assessees other than a company or cooperative society unless the accounts of the assessee for the year or years for which the expenditure specified above is incurred have been audited by a chartered accountant and the assessee furnishes alongwith his return of income for the first year in which the deduction under this section is claimed, the report of such audit in the prescribed form i.e. Form 3AE duly signed by such Chartered Accountant.
Where an assessee, being an Indian company, incurs any expenditure, wholly and exclusively for the purpose of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to 1/5th of such expenditure for each of five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. No deduction shall be allowed in respect of the expenditure mentioned above under any other provision of the Act.
Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years. No deduction shall be allowed in respect of such expenditure under any other provision of the Income-tax Act.
It may be noted that if such expenditure is incurred by way of payment in more than one year, the deduction shall be allowed in five equal instalments for payment made in each previous year.
Where an assessee, being an Indian company or a person (other than a company) who is a resident of India, is engaged in any operations relating to prospecting for, or extraction or production of specified minerals (mentioned in Seventh Schedule) and incurs, after the 31st day of March, 1970, any specified expenditure, the assessee shall be allowed to amortise such expenditure.
Quantum of deduction:
The deduction to be allowed for any relevant previous year shall be:
(a) an amount equal to 1/10th of the expenditure (hereinafter referred to as the instalment); or
(b) such amount as is sufficient to reduce to nil, the income (as computed before making the deduction under this section) of that previous year arising from the commercial exploitation of this mine or any other mine, or other natural deposit of mineral in respect of which the expenditure was incurred,
whichever amount is less.
Compulsory Audit of Accounts [Section 35E(6)]
Where the assessee is a person other than a company or a co-operative society, no deduction shall be admissible under section 35E(1) unless the accounts of the assessee for the year or years in which the expenditure specified in section 35E(2) is incurred have been audited by an accountant and the assessee furnishes, along with his return of income for the first year in which the deduction under this section is claimed, the report of such audit in the Form 3AE duly signed and verified by such accountant and setting forth such particulars as may be prescribed.
Deductions which are specified u/s 36 include the following:
1. Insurance premium of stocks [Section 36(1)(i)]:
2. Insurance premium of cattle [Section 36(1)(ia)]:
3. Insurance on health of employees [Section 36(1)(ib)]:
4. Bonus or Commission to employees [Section 36(1)(ii)]:
5. Interest on borrowed capital [Section 36(1)(iii)]:
6. Discount on issue of Zero Coupon Bonds to be allowed as Deduction on Pro Rata basis [Section 36(1)(iiia)]
7. Employer's contribution to a Recognised Provident Fund or Approved Superannuation Fund [Section 36(1)(iv)]
8. Employer's contribution towards a Pension Scheme [Section 36(1)(iva)]
9. Employer's contribution to an Approved Gratuity Fund [Section 36(1)(v)]
10. Sums received from employees towards certain welfare schemes if credited to their accounts before the due date [Section 36(1)(va)]
11. Allowance in respect of dead or permanently useless animals [Section 36(1)(vi)]
12. Bad Debts [Section 36(1)(vii)]
13. Provision for Bad and Doubtful Debts of a certain banks and financial institutions [Section 36(1)(via)]
14. Amount credited to Special Reserve credited and maintained by Special Entity. [Section 36(1)(viii)]
15. Expenditure on promoting Family Planning amongst the employees [Section 36(1)(ix)]
16. Securities Transaction Tax paid to be allowed as Deduction [Section 36(1)(xv)]
17. Commodity Transaction Tax to be allowed as a Deduction [Section 36(1)(xvi)]
Any Expenditures subject to the following conditions shall be allowed as Deduction in computing the income chargeable under the head "Profit and Gains of Business or Profession".
(i) Such expenditure should not be covered under the specific sections, i.e. sections 30 to 36.
(ii) Expenditure should not be of capital nature.
(iii) The expenditure should have been incurred during the previous year.
(iv) The expenditure should not be of a personal nature.
(v) The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.
Examples of Expenditures allowable as a Deduction U/s 37(1) – for computing Profit and Gains of Business or Professions.
Salary and perquisites paid to the employees of the assessee are allowable as a deduction.
However, salary paid to the proprietor of the business is an appropriation of profit and shall not be allowed as deduction. Compensation paid to the employees in connection with the termination of employment on ground of commercial expediency is also allowable. Salary paid by a firm to its partners is allowed as deduction subject to certain limits and conditions.
Penalty is normally levied for breach of law and are, therefore, generally not allowable as deduction.
However, at times an amount though termed as penalty, is purely compensatory in nature. For example, damages, penalty or interest paid for delay in completion of a contract, though termed as penalty are really in the nature of a compensatory payment and are therefore, allowable as a deduction.
However, penalties paid to customs authorities, sales-tax authorities, income-tax authorities, etc for infringement of law are not allowed. Levy for failure to pay sales tax within time is partly compensatory and partly penal, compensatory part is allowable and penal part is disallowable.
All legal expenses, incurred in connection with the business or profession of the assessee, are allowable, irrespective of the result of the legal proceedings.
However, legal expenses on criminal prosecution are not deductible, as they are not incidental to the business or profession.
Legal expenses to defend or maintain the title to a capital asset of the assessee's business are allowable, but expenses to acquire a title are not allowable because they are of a capital nature.
- litigation expenses for protecting the trade or business and for protection of assessee's trade mark are allowed.
- Legal and court expenditure spent for preparation and pursuing income-tax appeals are allowable expense.
Expenses of various types incurred in connection with raising of loans, for the purposes of the business, are allowable as a deduction. Therefore, legal charges for obtaining the loans from financial institutions, legal charges for drafting various deeds, brokerage paid for raising loans, stamp and registration charges, shall be allowed as deduction.
While Section 36(1)(iii) makes a specific provision for allowing a deduction in respect of interest on money borrowed for the purpose of business, other kinds of interest payments in respect of interest do not fall under that Section. If these payments have been made wholly and exclusively for the purposes of business, they can be allowed u/s 37(1). Some of these could be:
(i) interest on deferred payment for purchase of assets;
(ii) interest on delayed payment of electricity charges;
(iii) interest on purchase price of raw material;
(iv) any amount paid 'in lieu of interest' in compromising a dispute with a trade creditor.
Any expenditure incurred during the previous year on advertisement for the purpose of business and profession shall be allowed as deduction. Expenditure incurred for sports tournaments organised, which directly result in publicity and advertisement of the assessee and its products, qualify for deduction. Expenditure incurred on putting up stall in exhibition organised in connection with centenary celebrations of Congress Party was held by the Tribunal to be expenditure on advertisement.
(i) Diwali and Mahurat expenses.
(ii) Payment for telephone/telex connection.
(iii) Payment to Registrar of Companies: The fee paid to the Registrar of Companies are in connection with the company's legal obligations to be discharged under the Company law and are an essential part of the company's business activities and are therefore, allowed.
(iv) Annual listing fee: Annual listing fee paid to a stock exchange is allowable.
(v) Professional tax by the business assessee.