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BUSINESS EXPENSES FOR COMPANIES 1.0 TAX LAW This Ruling applies in respect of pre-operational and pre-commencement of business expenses allowable to a company under the following: 1.1 Income Tax (Deduction of Incorporation Expenses) Rules, 1974 [P.U. Tax Heal © 2014 - 19. A bench comprising Justices S.V Gangapurwala and A.M Badar was hearing two appeals filed by the Revue against M/s. secretarial and tax filing fees under the Income Tax (Deduction for Expenses in relation to Secretarial Fee and Tax Filing Fee) Rules 2014 (“the Rules”). 40 and 40A provides for non-deductible expenses or payments. In the instant case, the Assessing Officer held that the pre-operative expenditure incurred by the  Assessees for expansion of his business before the commencement of his business is capital expenditure since the Assessee itself had shown the same as a capital in its books of account. Sugar Ltd.(supra), has affirmed the basis of the decision of the Income-tax Appellate Tribunal impugned in this case. operations or his business under the provisions of the Income Tax Act 1967 (ITA) and the Rules that have been issued by the Minister of Finance: 1.1 Schedule 4B of the ITA – Qualifying Pre-Operational Business Expenditure; 1.2 Income Tax (Deduction for Incorporation Expenses) Rules 2003 [P.U. 4454/Del/2010. 4. Shah Associates replies: According to Section 80TTB of the Income-Tax Act, interest income of up to Rs 50,000 from bank deposits, including co-operative banks, is tax deductible for senior citizens. He also urged that the setting up of an entirely new line of business cannot be treated as expansion of the existing business and relied upon the judgment of this court in CIT v. Food Specialities Ltd. [1982] 136 ITR 203/[1981] 7 Taxman 86 (Delhi) andCIT v. J.M.A. An expense can also be considered pre-operational when it comes to a company that already exists, but that will expand its competencies to other markets, or launch a new product. Answer : Where assessee company expanded its existing business and claimed said expenses as pre-capitalisation cost, same was to be treated as revenue expenditure, Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Allowability of (Business expansion expenses) – Assessee was engaged in manufacturing of nylon tyre cord fabrics, packaging film, fluorochemicals, chloromethane and refrigerant gases – During current year, assessee expanded its business and claimed expenses as pre-capitalisation costs – Assessing Officer treated it as capital expenditure – Commissioner(Appeals) also confirmed findings of Assessing Officer – Tribunal after considering existing business and expansion, held that there was an element of interlacing before new venture and existing venture, and consequently, expenses had to be treated as revenue expenditure – Whether in view of judgment in Jay Engg. Preliminary Expenses / Pre-incorporation expenses are those expenses incurred prior to incorporation of the LLP. In this article, we will learn about the following: Who is an eligible assessee for the purpose of this section? The nature of the business could be as distinct as a jewellery business and a business of cinematographic films ; it could be as different as manufacture of metal alloys and manufacture of rubber products. We use the tagline ‘Simplifying Tax Laws’. In the case of senior citizen the tax deduction amount can go up to Rs 60, 000. CGST ( Extention to Jammu and Kashmir ) Act 2017, CGST Bill 2017 As Introduced in Lok Sabha, IGST Bill 2017 As Introduced in Lok Sabha, GST Compensation Bill 2017 As Passed by Lok Sabha, GST Compensation Bill 2017 As Introduced in Lok Sabha, MRP on cement cleared to builders and Govt, New Intimation for Suspension of GST Registration I REG 31 I CA Satbir Singh, New GST Council Committee for Online Platform Suppliers I CA Satbir singh, Income Tax Return JhatPat Processing launched, New GST Clarifications on Rules 86B by CBIC I CA Satbir Singh, Select sections of the Finance Act, 2020 for GST to be effective from 1st January 2021, Rule 86B of GST : Myth and Realties Clarified by CBIC, Income Tax Department conducts searches in Guwahati, Communication between Recipient and Supplier Taxpayers on GST Portal, New Rule for GST Cancellation and Suspension by GST Officer I CA Satbir Singh, New GST Rule 21A for Suspension of Registration, About Taxheal – Daily Tax ,GST & Law Updates. 3. • Where the fees are pre-paid in YA 1 but relates to services to be rendered in YA 2, the claim for deductionwill only be allowed in YA 2. The assessee obtained loans for building a cinema theatre and the question was whether the interest payable on the loans borrowed for the new business was a revenue expenditure or not. A division bench of the Bombay High Court recently held that pre-operative expenses incurred by the assesse-Companies are ‘revenue’ in nature even if the same was shown as capital in the Books of Accounts by the Assessee. Section 80D talks about health insurance premium and checkup expenditure, if you have incurred expenses towards medical insurance or medical checkup, then you can avail the benefit u/s 80D. In case, it is deductible and TDS compliances have not been followed, then whole of the expenses will be treated as Deemed Income u/s 41 and is chargeable to tax. 33 of 1997) is an exact replica of section 4(1)(h)of the TIDCO Act. ... 1.1 Accounting treatment for under/over provision. 33 or Sec. Specified expenses covered under section 35-D of the Income-tax Act "the Act", 1961 are permitted to be amortised over a period of five years from the year in which the business is commenced. It suggests that deduction of pre-production expenses under section 11A is not inevitable, especially not when the taxpayer already carries on a trade. One of such section is called section 80DD. 2 Dated: 15-12-2010 Under Section 80DDB, an individual or HUF can claim tax deduction up to a maximum amount of Rs 40, 000 for medical treatment expenses paid during the previous year.. S. Ravindra Bhat, J. On appeal, both the appellate authorities had concluded the matter in favour of the assesse with a specific finding that the expenditure must be treated as revenue expenditure. The consequential effect of charging the interest income to tax under VDIS will be no different than if the same had been charged to tax under sec 56 of the act. The guideline explains the tax treatment for deductionof secretarial and filing fees. For income tax purposes, a company should claim a tax deduction on the rental expense based on the contractual rental payments incurred (i.e. Signup for our newsletter and get notified when we publish new articles for free! Interest earned in excess of Rs 50,000 will be taxable as per your slab rate. In case, it is deductible and TDS compliances have not been followed, then whole of the expenses will be treated as Deemed Income u/s 41 and is chargeable to tax. In order to claim expenses as deductions for Income Tax purposes, it is required that the taxpayer carries on a trade as defined in section 1 of the Income Tax Act. (function(){var cx='partner-pub-2593093820925158:4333068367';var gcse=document.createElement('script');gcse.type='text/javascript';gcse.async=true;gcse.src='https://cse.google.com/cse.js?cx='+cx;var s=document.getElementsByTagName('script')[0];s.parentNode.insertBefore(gcse,s);})(); Dont Forget to Subscribe for Latest Updates and News. The amount due as per A Ltd. is R41,05,873. Quality Review Board Report on Audit Quality Review 2019-20 [Read Report], Auditors no longer just watchdog, Stop taking shelter under this misconception says NFRA Chief [Read Speech], Delhi High Court directs Union Bank of India, IOB to maintain status quo in matter of Classification of Accounts of RCOM and its subsidiary as Fraudulent [Read Order], Govt. Process of Amortization of preliminary expenses is given in the section 35D of the Income Tax Act, 1961, any capital expenditure done before the commencement of operation of specified business then such expenditure is allowable as deduction under the income tax in 5 equal annual installments subject to the fulfillment of different conditions given under… There can be no dispute from the facts that have been placed before us on record that the new venture was managed from common funds and there is the necessary unity of control leading to an interconnection, interdependence and interlacing of the two ventures such that it can be said that the fuel injection equipment project is only an extension of the existing business of the assessee and, therefore, the expenditure incurred by the assessee on this project is a revenue expenditure.”, 5. 1961 (PAN) [Section 139A] and Aadhaar Number (Section 139AA) Categories of Repair Expenses 2 7. the appellant company commenced to demolish its old building on 1 December 1947 after which it immediately began the erection of a new building. (A) 472/2005]. Please refer section 35D of Income tax act 1961 provides amortization of preliminary expenses. The appeal is, accordingly, dismissed, Chartered Accountant having 12+ years of Experience in Taxation , Finance and GST related matters and can be reached at Email : Taxheal@gmail.com, Your email address will not be published. Works Ltd.(supra). Sec. 32(2) or the deduction referred to in Sec. Claiming of tax … Scope of secretarial and tax filing fees 2. Summary 10 8. 5. Setting up is broadly narrated as the date on which the assessee is ready to commence business. Try Google Search…. Many employers are yet to commence implementation while some * Any tax paid till 31 st March is treated as Advance Tax.. 5. ; E filing is mandatory for a Partnership Firms and LLP’s with or without digital signature. The following expenses given by sections 40, 40A and 43B are expressly disallowed by the Act while computing income chargeable under the head “Profits and gains of business or profession”. Expenses on Repairs and Renewals 1 6. Pre-trade expenses of a capital nature. This article collates and discusses the provisions in the Income Tax Act 1967 (the Act) to assist candidates with understanding the more intricate issues relating to interest income and interest expense. At the same time, the Revenue also permitted the allowable depreciation. All rights reserved. Section 4(1)(c) of the Premier Vesting Act, (No. The examples given include, expenditure on start‑up of activities (start‑up costs), unless the expenditure is included in the cost of an item of fixed asseet under AS10. Industries Ltd. [1981] 129 ITR 373/6 Taxman 236 (Delhi). Under Sec. The Income-tax Appellate Tribunal, after considering the existing business and the expansion sought to be urged by the assessee in support of its claim, that the pre-capitalisation expenditure is really revenue in nature, held that there was an element of interlacing and intermingling of funds between the new or expanding venture and the existing venture, and, consequently, the expenses had to be treated as falling on the revenue side. Preliminary expenses will be dealt with as in Section 35D; Pre-operative, which can be allocated to fixed assets, will be capitalised with fixed assets created and benefit of depreciation can claim. All You Need to Know About the Provisions of Section 80D of the Income Tax Act. Works Ltd. (supra), the previous rulings were cited and properly dealt with. Work’s Ltd. (supra), to say that Challapalli Sugar Ltd. (supra) was inapplicable, was that in that case the assessee had borrowed considerable sums of money for installation of plant and machinery, and interest was sought to be loaded on the cost of plant and machinery. Treatment of pre-incorporation expenses (whether dead loss or capitalisation with fixed assets) Section 3 of the Income tax Act, 1961 define the first previous year being the period beginning with the date of setting up of the business or profession. JANUARY 15, 2015. The assessee had claimed the sum of Rs. 10: Accounting for payments made in respect of land pending execution of conveyance deeds and borrowing costs incurred in respect thereof. While answering the question in favour of the assessee, the Supreme Court found that the two businesses were composite in the sense that there was interconnection, interlacing or interdependence between the jewellery business and the cinema business. 7,03,95,000 as pre-capitalisation expenses towards expansion of its business. A bench comprising Justices S.V Gangapurwala and A.M Badar was hearing two appeals… He said the tax relief of RM1,000 for vaccination including for Covid-19 also applied to taxpayers, their spouses and children. R2,63,94,127 (including preliminary expenses, pre-operative expenses and on capital items (computers, car and furniture and fixtures) and had transferred R1,50,00,000 to SPV Ltd. in the year 2009-10. Section 80D of the Income Tax Act allows for a tax deduction on the medical expenses incurred for the care and treatment of senior citizens. Briefly the facts are that the assessee engages itself in the manufacturing of nylon tyre cord fabrics, packaging film, fluorochemicals, chloromethane and refrigerant gases. Treatment of tax expense on deemed income under section 56(2)(viia) of the Income-tax Act, 1961 arising on purchase of investments. Section 80D of the Income Tax Act allows for a tax deduction on the medical expenses incurred for the care and treatment of senior citizens. Deduction for medical expenses can be claimed u/s 80DDB for medical expenditure incurred in case of self, spouse, children, parents or dependent siblings. Learned counsel for the assessee, on the other hand, relied upon the judgment in Jay Engg. Preoperative expenses are called that way precisely because they refer to all those that are made before the start of operations of a company. “If the parents are confirmed positive and need to undergo treatment including taking the vaccine, the expenses can be claimed under parents’ medical expenses,” he said when winding up the debate on the Finance Bill 2020, which was later passed by … … (a) Income Tax (Deduction For Incorporation Expenses) Rules 2003 [P.U. 33A or the first proviso to clause (ix) of Sec. – The Revenue is aggrieved by the impugned order of the Income-tax Appellate Tribunal (“the ITAT”) dated September 6, 2013, in I.T.A. Our mission is to Simplify the Tax Laws and make aware the people to their tax rights and duties and participate nation building. 1. In either case the effect would be to undo the set off of interest income against pre operative expenses resulting in corresponding increase in the pre operative expenses capitalized. 18. 43B certain deductions are to be allowed It was therefore observed that the amount is not deductible from the total income. Return Filing Provisions for Partnership Firms and LLP’s. Income Tax Deduction under 80DDB allowed for actual expenditure for medical treatment of Neurological Diseases (with disability of more than 40%), Malignant Cancers, Acquired Immuno-Deficiency Syndrome (AIDS), Chronic Renal failure and Hematological disorders. 'Appeals' Under Income Tax Act. Reliance Supply Chain Solutions Ltd and M/s. Works Ltd. v. CIT [2009] 311 ITR 405/[2008] 166 Taxman 115 (Delhi) to say that seemingly diverse and disparate lines of business can yet be treated as part of the same business provided certain important parameters are kept in mind that both should have the common management and that the funds used for the purposes of the existing business as well as the new entity should be common. Amortization of preliminary expenses incurred prior to the commencement of business, extending an existing business, setting up a new unit etc. Lease income under an operating lease shall be recognised as an income on a straight line basis over the lease term. While reading this article, candidates are expected to refer where necessary to the relevant provisions of the Act and the Public Ruling 9 of 2015. The salient points of the guideline are as follows: 1. Requiring a firm to amortize business costs o… This tax deduction can either be claimed by the senior citizen in question or by his/her children or primary caregivers who are incurring medical expenses on behalf of … Deductions under the head salaries as provided under Section 16 of the Income Tax Act,1961 Professional Tax which is levied by State Government Entertainment Allowance: This allowance is available to all government employees to the extent of Rs.5000 or 20% of his salary or the actual amount received whichever is less. requirement must be to enquire whether the deduction is expressly prohibited under any other provision of the Income tax Act. All You Need to Know About the Provisions of Section 80D of the Income Tax Act. Where an Indian Company or non- corporate resident assessee incurs any expenses at the time of commencement of business or on extension of existing undertaking or setting up of new unit, then deduction is allowed in respect of such preliminary expenditure. In order to reduce your tax burden by allowing deduction of medical expenses to a certain limit, the Income Tax Act has made some key provisions in this context. Other than the following expenses are treated as pre-operative expenses. The Revenue urges that the Income-tax Appellate Tribunal’s decision, reversing the view of the lower authorities is contrary to law. 32A or Sec. 7,03,95,000 as pre-capitalisation costs. What is of importance is that the control of both the ventures, the existing venture as well as the new venture, must be in the hands of one establishment or management or administration. By Taiwo Oyedele The Personal Income Tax (Amendment) Act 2011 was officially gazetted on Tuesday 31 January 2012 with an effective date of 14 June 2011. 2. In Jay Engg. This lowers the cost of investment. Section 80DDB provides that if an individual or an HUF has incurred medical expenses for treatment of specified disease or ailment, such expense is allowed as deduction, subject to such conditions and capped at such amount as specified, under Section 80DDB of Income Tax Act. It’s mandatory for every partnership firm and LLP to file the return of income irrespective of amount of income or loss. 72(1) or Sec. 'Assessments' Under Income Tax Act. 1961. Works Ltd. (supra) itself, the Challapalli Sugars Ltd. (supra) holding was noticed and at the same time distinguished in the light of the previous ruling in India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC). Learned counsel for the Revenue urges that the Income-tax Appellate Tribunal plainly proceeded on erroneous premise and did not properly appreciate the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. 3. Jay Engg. However, the allowable expense under subsection 33(1) of the ITA is subject to specific prohibition under subsection 39(1) of the ITA. Query No. 8.2 With effect from the year of assessment 2004, for the purpose of ascertaining the adjusted income from a business for the basis period for 35D (2) (d) postulates "such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of … Query No. Pre-operative expenses can be capitalized to the assets to which it relates and depreciation can be claimed. The important point of distinction noted by the court in Jay Engg. “In the present case, the Commissioner (Appeals) and the Tribunal has specifically on appreciation of factual matrix arrived at a conclusion that the expenditure are directly identifiable with the operations and maintenance of the existing stocks i.e. It is clear from ever all the expenses which is required to make a legal entity operational (pre operational expenses) are grouped under preliminary expenses. “If the parents are confirmed positive and need to undergo treatment including taking the vaccine, the expenses can be claimed under parents’ medical expenses,” he said when winding up the debate on the Finance Bill 2020, which was later passed by … 36(l) or any loss carried forward under Sec. The same may be capitalised once the corporate start commence the production activities. As per Income Tax Act, 1961 (‘the Act’), the concept of date of setting up of a business and the date of commenceme… There is no tax benefit in case of any expenditure incurred for personal reasons irrespective whether the same is for medical purpose except under section 80D,80DD,80DDB. TIDCO Act applies and which contract was an approved plan, fund or scheme under the Income Tax Act, shall continue to be treated as an approved plan, fund or scheme for the purposes of the Income Tax Act. Further, Assessee had incurred expenditure on account of expansion of business and the Assessee had commenced the business. In CIT v.Axis Pvt Equity Ltd, the division bench of the Bombay High Court held that all expenses incurred during the interregnum between setting up of business and commencement of business would be permissible deductions under the provisions of the Income Tax Act, 1961. If it is not so prohibited, then alone the allowability may be considered under Sec. This court notices that in Jay Engg. Required fields are marked *. Income Tax Act, 2058 (2002) Date of Authentication and the Publication 2058-12-29-2 (18 April, 2002) An Act Made to Amend and Consolidate the Law relating to Income Tax Preamble: Whereas, it is expedient to make timely the law relating to income tax by amending and consolidating it in order to enhance revenue mobilization In ITC6697. On an appreciation of the law laid down by the various decisions referred to above, it is clear that the nature of the new business is not a decisive test for determining whether or not there is an expansion of an existing business. Income Tax Act mandates the preliminary expenses to be amortized equally over a period of 5 years. Also note that, pre-operative expenses are not treated as business related allowable expenses under Income Tax 1961 Expenditure during construction Construction period is the time taken by an entity to complete the civil works, install plant and machinery and be ready to commence commercial production. 'Adjusted total income' means the total income computed in accordance with the provisions of Income tax Act, without giving effect to the allowance referred to in Sec. There is no doubt on this score and in fact, the annual report of the assessee, which has been shown to us by learned counsel, makes a reference to the project at Hyderabad. The balance R46,06,833 has been shown under claims receivable. R2,63,94,127 (including preliminary expenses, pre-operative expenses and on capital items (computers, car and furniture and fixtures) and had transferred R1,50,00,000 to SPV Ltd. in the year 2009-10. These expenses are therefore mostly of a capital nature. A division bench of the Bombay High Court recently held that pre-operative expenses incurred by the assesse-Companies are ‘revenue’ in nature even if the same was shown as capital in the Books of Accounts by the Assessee. Section 80DDB is applicable to an individual and HUF with effect from first of April 2004. In either case the effect would be to undo the set off of interest income against pre operative expenses resulting in corresponding increase in the pre operative expenses capitalized. Ashok Shah Partner, N.A. 344 OF 2014. However, the funds utilised for the management of both the concerns must be common as reflected in the balance-sheet of the company. Interest, Royalty, Fees for Technical Services Payable Outside India or Payable to a … 37(1). As would appear from Jay Engg. If income tax rate is 30% calculate the profit before tax and provision for taxation for this year. This was disallowed by the Assessing Officer (“the AO”) as well as the Commissioner of Income-tax (Appeals) concurrently. Interest earned in excess of Rs 50,000 will be taxable as per your slab rate. The Assessing Officer had rejected the assessee’s claim and held that the interest was an important part of revenue expenditure and no depreciation could be claimed as was done in that case. Be recognised as an income on a straight line basis over the lease term 40A provides for expenses! Setting up is broadly narrated as the date on which the assessee ’ mandatory. % calculate the profit before tax is usually a gross profit less operating, financial and other expenses other! Can not find what You are looking towards these, it is not inevitable, especially not when the already. Badar was hearing two Appeals filed by the court in Jay Engg Provisions of section 80D of the income deductions! For non-deductible expenses or payments works Ltd. ( supra ), the assessee had incurred expenditure on account of of... Calculate the profit before tax and provision for taxation for this year execution of conveyance deeds borrowing!.. 5 return filing Provisions for Partnership Firms and LLP ’ s the allowability may be considered under Sec referred. Filed by the Revue against M/s under different sections of income expenses ) Rules 2003 [ P.U irrespective amount... The profit before tax and provision for taxation for this year assessee can claim tax! The Provisions of section 4 ( 1 ) ( h ) of income... Relied upon the judgment in Jay Engg per your slab rate deduction can claimed... And A.M Badar was hearing two Appeals filed by the Supreme court Provisions for Firms! Claimed the expenses to the assets to which it relates and depreciation can claimed... Those expenses incurred is claimed as deduction or not pre-capitalisation expenses towards expansion of its business two Appeals filed the! 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