Direct Taxation - Profits and Gains of Business or Profession

 

DIRECT TAXATION

PROFITS AND GAINS OF

BUSINESS OR PROFESSION

 

COMPUTATION OF INCOME

CHARGEABLE UNDER THE HEAD

“PROFITS AND GAINS OF BUSINESS OR PROFESSION”

	Net Profit as per Profit and Loss A/c
	ADD: Inadmissible Expenses debited to Profit and Loss A/c:
1	(1) Any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable,— (a)         outside India; or (b)         in India: (A)         to a non-resident, not being a company; or (B)           to a foreign company, in respect of which TDS default has been committed u/s 40(a)(i); (2)30% of any sum payable to a resident in respect of which TDS default has been committed u/s 40(a) (i a).
2	(a) Income tax paid u/s 40(a)(ii) (b) Wealth tax paid u/s 40(a)(iia) (c) Tax on perquisite paid by the employer u/s 40(a)(v)
3	Penal Tax, Penal Interest, Fines, etc. payable to Government
4	Charity and Donation (deductible separately u/s 80G)
5	Gifts and Presents to others including proprietor’s relatives
6	(a)         Interest on money borrowed to pay income-tax (b)         Interest for late payment/non-payment of advance tax (c)         Interest for late filing of return (d)         Provision for Bad Debt [excl. prov. for b/d/d u/s 36(1)(viia)] (e)         Amount transferred to special reserve (not allowed to an individual or a non-finance company)
7	Expenses not deductible u/s 40
8	Expenses not deductible u/s 40A
9	Depreciation (taken separately) [See note: 1 below]
10	Expenses to the extent not admissible u/s 30 to 40A
11	Proprietor’s household expenses
12	Salary to proprietor
13	Contribution to Unrecognized Provident Fund
14	Interest on Capital contributed by proprietor
15	Proprietor’s personal expenses
16	Unreasonable salary and any unreasonable payment to proprietor’s relatives [Sec 40A(2)]
17	Interest on loan given by the proprietor
18	Advance Tax paid u/s 40(a)(ii)
19	Provision for Income Tax
20	(i)        Contribution / Donation to a political party (deduction u/s 80GGB is available to an Indian company and u/s 80GGC to a person other than an Indian company)   [Sec 37(2B)] (ii)      Advertisement in any souvenir, brochure, pamphlet, magazine etc. published by a political party (deduction u/s 80GGB is available to an Indian company)   [Sec 37(2B)]
21	Family planning expenditure [Sec. 36(1)(ix)] – (a)         no deduction for non-corporate assessees under this section [non-corporate assessees can claim deduction u/s 32 and 37(1)] (b)         revenue expenditure by corporate assessees for promoting family planning among their employees – fully allowed (c)         capital expenditure by corporate assessees for promoting family planning among their employees – allowed in 5 equal annual instalments in 5 previous years starting from prev. year in which the expenditure incurred
22	Salary paid outside India on which tax has not been deducted at source [Sec 40(a)(iii)]
23	Reserve for losses
24	Any expenses in the nature of Capital Expenditure and Capital Losses
25	Inadmissible bonus, interest, commission, etc. u/s 43B [See note: 2 below]
26	Reserve for payment of fines and penalties
27	Reserve for Bad and Doubtful Debts
28	Preliminary expenses (taken separately) [Sec 35D]
29	Expenses on issue of shares (taken separately) [Sec 35D]
30	Expenses on issue of debentures and raising loan incurred by a new concern before commencement of business (taken separately) [Sec 35D]
31	Contribution to approved research association (for undertaking scientific research), approved university, college or other institution (for using scientific research), approved association (for undertaking research in social or statistical science), approved university, college or other institution (for using research in social or statistical science) (taken separately) [Sec 35(1)]
32	Contribution to National Laboratory including Universities and IITs (taken separately) [Sec 35(2AA)]
33	Expenditure on approved in-house R&D facility by a company incurred up to 31st March, 2012 (not being expenditure in the nature of cost of any land and building) (taken separately) [Sec 35(2AB)]
34	Contribution to a registered company approved by the prescribed authority as having the scientific R&D as its main object, to be used by such company for scientific research (taken separately) [Sec 35(1)]
35	Unreasonable payment of an expense to a person having substantial interest in the company
36	Expenditure on acquisition of patent rights and copyrights (taken separately) [Sec 35A]
37	Expenditure on know-how (taken separately) [Sec 35AB]
38	Any payment or aggregate of payments in respect of any expenditure made to a person in a day, otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft or by use of an electronic clearing system through a bank account, exceeding           Rs 10,000 [Sec 40A(3)]. Provided that, in the case of payment made for plying, hiring or leasing goods carriages (i.e. for road transport), any payment exceeding Rs 35,000.
39	The amount of any premium paid by cash by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme framed in this behalf by— (A) the GICI and approved by the Central Government; or (B) any other insurer and approved by the IRDA       [Sec 36(1)(ib)]
	ADD: Incomes not credited to Profit and Loss A/c but          chargeable to Income Tax:
1	Deemed Incomes chargeable u/s 41, for example (a)      Recovery of Bad Debt [Bad Debt Recovered – (Bad Debt Claimed in an earlier year – Bad Debt Allowed in that year)]          (b)      Sale of assets used for scientific research [See note: 3 below]          (c)      Recovery against any deduction allowed in any of the earlier years          (d)      Recovery after discontinuance of business or profession
2	Any other chargeable income/profit which have not been credited to P/L A/c
	LESS: Incomes credited to Profit and Loss A/c but not chargeable to income tax under the head “Income from business or profession”:
1	Interest on Investment
2	Interest on Securities
3	Short term Capital Gains
4	Gift received from any friend (this is chargeable to tax as “Income from other sources” if the aggregate of such gift exceeds Rs 50,000 during a financial year)
5	Loan taken from Public Provident Fund
6	Rent received from house property
7	Refund from supplier including interest on that
8	Salary income
9	Dividend income
10	Refund of Income Tax, Wealth Tax, Gift Tax, etc.
11	Recovery of Excise Duty and Customs Duty from the Government, if it was not allowed as deduction earlier when paid [Sec 41(1)]
12	Recovery of bad debt if it was not allowed as deduction earlier
	LESS: Admissible expenses not debited to Profit and Loss A/c:
1	Depreciation u/s 32 of the Income Tax Act [See note: 1 below]
2	Outstanding sales tax u/s 43B of the Income Tax Act [See note: 2 below]
3	Embezzlement of cash by employee (in the year in which it is known to assessee)
4	i.    Revenue expenditure incurred after commencement of the business by the assessee on scientific research carried on by the assessee himself in relation to his own business are deductible in the previous year in which such expenditure are incurred. [Sec 35(1)(i)] ii.  Revenue expenditure (on payment of any salary, other than expenditure on providing perquisites, to employees engaged in scientific research or on the purchase of materials used in such scientific research) incurred before commencement of the business (but within three years immediately before commencement of the business) on scientific research carried on by the assessee himself in relation to his own business are deductible in the previous year in which the business is commenced to the extent it is certified by the prescribed authority [Sec 35(1)(i)]
5	Contribution to approved research association (for undertaking scientific research) (actual expenditure) [Sec 35(1)(ii)]
6	Contribution to approved university, college or other institution (for the use of scientific research) (actual expenditure) [Sec 35(1)(ii)]
7	Contribution to approved association (for undertaking ‘research in social or statistical science’) (actual expenditure) [Sec 35(1)(iii)]
8	Contribution to approved university, college or other institution (for ‘research in social or statistical science’) (actual expenditure) [Sec 35(1)(iii)]
9	Contribution to a registered Indian company approved by the prescribed authority as having scientific research as its main object, to be used by such company for scientific research (actual expenditure) [Sec 35(1)(iia)]
10	Capital expenditure (excluding cost of land) incurred by the assessee on scientific research related to his business (actual expenditure) [Sec 35(2)] IMPORTANT NOTE: Capital expenditure on scientific research by the assessee related to his business, incurred within three years immediately preceding the commencement of the business, is deductible in the previous year in which the business is commenced (actual expenditure) [Sec 35(2)]. Moreover, no deduction by way of depreciation u/s 32 is admissible in respect of an asset used in scientific research.
11	Contribution to National Laboratory including Universities and IITs (actual expenditure) [Sec 35(2AA)]
12	Expenditure (both revenue and capital) on approved in-house R&D facility by a company (excluding cost of any land and building) (actual expenditure) [Sec 35(2AB)] IMPORTANT NOTE: Capital expenditure on cost of building, in any case, is fully deductible u/s 35(2).
13	Expenditure on acquisition of patent rights and copyrights (depreciation is allowed u/s 32) [Sec 35A]
14	Expenditure on know-how (depreciation is allowed u/s 32) [Sec 35AB]
15	Amortisation of preliminary expenses (qualifying expenditure ÷ 5) [Sec 35D] [See note: 4 below]
16	Amortisation of expenses on issue of shares (actual expense ÷ 5) [Sec 35D]
17	Amortisation of expenses on issue of debentures and raising long-term or short-term loan incurred by a new concern before commencement of business (actual expense ÷ 5) [Sec 35D]
	TAXABLE INCOME FROM BUSINESS

 

IMPORTANT NOTES

Note: 1 – Depreciation Allowance [Section 32]

(a) For availing deduction in respect of depreciation the following conditions should be satisfied:

      i.    The asset must be owned by the assessee.

      ii.    It must be used for the purpose of the business or profession.

      iii.   It should be used during the relevant previous year.

      iv.   It may be both tangible as well as intangible asset, but if it is                      intangible asset it should be acquired after 31 – 3 – 1998.

 

(b) Depreciation is admissible for block of assets. Method of computation of depreciation is Written-Down Value method (i.e. WDV method). However, in the case of tangible assets of an undertaking engaged in generation or generation and distribution of power, depreciation is computed under Straight Line Method.

 

(c) U/s 2(11) BLOCK OF ASSETS means a group of assets falling within a class of assets in respect of which the same rate of depreciation is prescribed. [For different blocks of assets with different rates of depreciation please see Page: 161 of CMA Study Materials]

 

(d) U/s 43(6) WRITTEN DOWN VALUE at the end of the previous year will be calculated as follows:

Particulars	Rs
Depreciated value of the block of assets at the beginning of the previous year	×××
ADD: Actual cost of the assets falling in the block acquired during the previous year	×××
	×××
LESS: Money received or receivable (together with scrap value) in respect of the assets falling in the block sold, discarded, demolished or destroyed during the previous year	×××
WDV of the block of assets at the end of the previous year	×××

 

(e) There are two types of depreciation allowance:

      (i)   Normal depreciation allowance, and

      (ii)  Additional depreciation allowance.

 

(f)  RULE FOR COMPUTATION OF NORMAL DEPRECIATION ALLOWANCE

Normal depreciation =

(WDV of the block of assets at the end of the previous year) × (Rate of depreciation prescribed for the block of assets)

     

      EXCEPTIONS TO THE ABOVE RULE

      i.    No depreciation is admissible where WDV has become zero although the block of assets at the end of the previous year is not empty. [In this case, {Sale consideration from sale of previous year − (WDV at the beginning of the previous year + Cost of acquisition for purchase of previous year)} = Short term capital gain]

 

      ii.   No depreciation is admissible where the block of assets at the end of the previous year is empty but the WDV of the same at the end of the previous year is not zero. [In this case, {(WDV at the beginning of the previous year + Cost of acquisition for purchase of previous year) − Sale consideration from sale of previous year} = Capital loss]

 

      iii.   If an imported car was acquired after 28 – 2 – 1975 but before 1 – 4 – 2001 for the purpose of business or profession in India, no depreciation allowance is admissible.

 

      iv.  No depreciation is admissible as per the above rule if there is a change of ownership of assets because of the following:

(a) Conversion of firm or sole proprietorship business into a        company.

(b) Business of HUF taken over by a member of the family.

(c) Business of a firm taken over by a partner.

(d) Conversion of HUF into company.

(e) Amalgamation of a company with another company.

(f) Demerger of a company.

(g) Amalgamation of a co-operative bank with another co-           operative bank.

(h) Demerger of a co-operative bank.

In all the above cases the amount of depreciation will be calculated as usual for the previous year in which ownership of assets changes. But after that the amount of depreciation will be apportioned between the previous owner and the subsequent owner in the ratio of the number of days for which the assets were used by the respective owners during the previous year.

 

      v.   When an asset acquired during the previous year is put to use for less than 180 days in the previous year, the depreciation allowance in respect of such asset shall be restricted to 50% of the amount of depreciation calculated at the prescribed rate in the prescribed manner.

 

            The above restriction is applicable only in the year in which the asset was acquired and not applicable in the subsequent years. The above provision, however, is not applicable in case of partition of HUF, dissolution of firm or conversion of firm into a company because in such cases the asset is not acquired by the successor.

 

            If an asset is kept ready for use for more than 180 days during the previous year, whereas it was actually used for less than 180 days, the above restriction will not apply.

 

      vi.  If an asset falling in a particular block was

a) acquired during the previous year, and

b) put to use during the previous year for less than 180 days,

The depreciation allowance for the block u/s 32, with respect to the relevant assessment year, will be calculated as follows:

 

(a)          If WDV of the block as at the end of the previous year is greater than the actual cost of the asset acquired during the previous year and put to use for less than 180 days:

 

When WDV at the end of PY > COA during PY

Particulars	Rs
Actual cost of the asset acquired during the previous year and put to use for less than 180 days x ROD x ½	×××
ADD: (WDV of the block as at the end of the previous year – Actual cost of the asset acquired during the previous year and put to use for less than 180 days) x ROD	×××
NORMAL DEPRECIATION OF THE BLOCK	×××

 

(b)          If WDV of the block as at the end of the previous year is less than the actual cost of the asset acquired during the previous year and put to use for less than 180 days:

When WDV at the end of PY < COA during PY

NORMAL DEPRECIATION OF THE BLOCK

WDV at end of PY × ROD × ½

 

(g)  RULE FOR COMPUTATION OF ADDITIONAL DEPRECIATION ALLOWANCE

      Rate of additional depreciation is 20% of the actual cost of the asset. If, however, the asset is put to use for less than 180 days in the year of its acquisition, the rate of additional depreciation will be 10%.

 

      CONDITIONS FOR AVAILING ADDITIONAL DEPRECIATION

1.         Assessee must be engaged in manufacture or production of any article or thing.

2.         Assets must be new plant and machinery acquired and installed after 31 – 03 – 2005.

3.         Following assets are not regarded as plant and machinery for additional depreciation:

(a)          Ships and aircrafts.

(b)          Any plant and machinery which before its installation by the assessee was used by some other person.

(c)          Any plant and machinery installed in any office premises or residential accommodation or in any guest-house.

(d)          Any office appliances and road transport vehicles.

(e)          Any plant and machinery which was allowed for 100% depreciation in any of the P.Y.

 

(h) MEANING OF ACTUAL COST [Section: 43(1)]

      (i)   It is the cost to the assessee as reduced by any proportion thereof, if any, as has been met directly or indirectly by any other person or authority.

      (ii)  It includes all expenses directly related to the acquisition of the asset. For example, interest on money borrowed for the purchase of the asset, bank charges, expenses necessary to bring the asset to the site and to install the same, expenses incurred to facilitate the use of the asset, training expenses of the operator of the machine, etc. It also includes expenditure on travelling incurred for acquisition of the depreciable asset.

 

(i)   UNABSORBED DEPRECIATION [Section: 32(2)]

1.   Depreciation allowance of the previous year is first deducted from the business income.

 

2.   If the depreciation allowance cannot be fully deducted from the business income, it can be deducted from incomes chargeable under other heads of income (except income from salaries) for the same assessment year.

 

3    If depreciation allowance is still unabsorbed, it can be carried forward to the subsequent assessment year.

 

4.         No time limit is fixed for the purpose of carry forward of unabsorbed depreciation. It can be carried forward for indefinite period, if necessary.

 

5.         In the subsequent years the unabsorbed depreciation can again be set off against any income including business income but excluding income from salaries.

 

6.   In the matter of set off in the subsequent years, the order of priority will be as follows:

(a)   Current depreciation.

(b)   Brought forward business loss.

(c)   Unabsorbed depreciation.

 

      7.   If in the subsequent year(s), there is no brought forward business loss, unabsorbed depreciation can be added to current depreciation for the purpose of claiming deduction.

 

      8.   Continuity of business is not relevant for the above carry forward and set off of unabsorbed depreciation and brought forward business loss.

 

(j)   TERMINAL DEPRECIATION

      In case of power generation and distribution units, if the sale consideration of any asset is less than the written-down-value as on the first day of the previous year, the difference is allowable as terminal depreciation. Terminal Depreciation (TD) on an asset = WDV of the asset as on the first day of the PY – Sale consideration of the asset.

 

      If the asset is sold or discarded in the previous year in which it was first put to use, the loss arising therefrom is not allowed as terminal depreciation but, is treated as capital loss. Terminal depreciation allowance cannot be claimed, if the asset is not used at least for sometime during the previous year.

 

(k) BALANCING CHARGE [Section: 41(2)]

      In case of power generation and distribution units, if the sale consideration of any asset is more than the written-down-value as on the first day of the previous year, the difference is treated as surplus. Surplus = Sale consideration of the asset − WDV of the asset as on the first day of the PY.

 

      1.   If Surplus > Accumulated Depreciation

(a)  Balancing charge = Accumulated depreciation

(b)  Surplus – Accumulated depreciation = Capital gain

 

      2.   If Surplus ≤ Accumulated Depreciation

(a)  Balancing charge = Surplus

(b)  No capital gain

 

Note: 2 – Amount not deductible in respect of certain unpaid liabilities [Section 43B]

Following expenses (which are deductible under the Income Tax Act, 1961) are deductible on “payment” basis (i.e. deductible in the year in which the payment is actually made):

1.   Any sum payable by way of taxes, duties, cess or fees;

2.   Any sum payable by an employer by way of contribution to provident fund or superannuation fund or any other fund for the welfare of employees;

3.   Any sum payable as bonus or commission to employees for services rendered;

4.   Any sum payable as interest on any loan or borrowing from a public financial institution (i.e. ICICI, IFCI, IDBI, LIC and UTI) or a state financial corporation or a state industrial investment corporation;

5.   Any sum payable as interest on any loan or advance taken from a scheduled bank including a co-operative bank; and

6.   Any sum payable by an employer in lieu of leave at the credit of his employee.

 

EXCEPTIONS TO THE ABOVE RULE UNDER SECTION: 43B

If the assessee maintains his books of account on mercantile basis, then the above expenses are deductible on “accrual” basis. Provided –

(a) Payment in respect of the above expenses is actually made on or before the due date of submission of return of income; and

(b) The evidence of such payment is submitted along with the return of income.

 

DUE DATE OF SUBMISSION OF RETURN OF INCOME

[Section: 139(1)]

 

Type of assessee	Different situations	Due date
Company	Company is required to furnish a report in Form No. 3CEB u/s 92E pertaining to international transaction(s)	30th November
	Any other company	31st October
Other than a company	Accounts of the assessee are required to be audited under any law	31st October
	Assessee is a “working partner” in a firm whose accounts are required to be audited under any law	31st October
	Any other cases (including individual whose accounts are not required to be audited or who is not a “working partner” in a firm whose accounts are required to be audited)	31st July

 

 

Note: 3 – Sale of assets used for scientific research [Section 41(3)]

Where any capital asset used in scientific research [vide Sec 35(2)] is sold without having been used for other purposes and the sale proceeds, together with the amount of deduction allowed u/s 35(2), exceed the amount of the capital expenditure incurred on purchase of such asset, such surplus or the amount of deduction allowed u/s 35(2), whichever is less, is chargeable to tax as business income in the year in which the sale took place.

 

Let,

a =	Sale proceeds of a capital asset used in scientific research (When sold without having been used for other purposes)
b =	Amount of deduction allowed on the asset u/s 35(2)]
c =	Amount of capital expenditure incurred on purchase of the asset

 

If (a + b) > c

1.         (a + b) – c = d = Surplus, and

2.       U/s 41(3), d or b whichever is less, is chargeable to tax as business         income in the year in which the sale took place.

3.     If a > c

        Short-term capital gain = a − c

 

Note: 4 – Amortisation of preliminary expenses [Section 35D]

An Indian company or a resident non-corporate assessee can claim deduction u/s 35D in respect of preliminary expenses. Such expenses may be incurred −

(i)   Before commencement of the business, or

(ii)  After commencement of the business in connection with extension of an undertaking or in connection with setting up a new unit.

 

QUALIFYING EXPENDITURE

The qualifying expenditures are:

(a)    Expenditure in connection with—

i.       Preparation of feasibility report;

ii.     Preparation of 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 :

Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board;

(b)    Legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee;

(c)    Where the assessee is a 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 provision of this Act) as may be prescribed.

 

MAXIMUM CEILING

A.  In the case of a corporate assessee

      a)  5% of the cost of project, or

      b)  5% of the capital employed, whichever is more.

 

B.   In the case of a non-corporate assessee

      5% of the cost of project

 

AMOUNT OF DEDUCTION/AMORTISATION

1/5^th of

i.       The aggregate qualifying expenditure, or

ii.     Maximum ceiling, whichever is lower.

 

The above amount of deduction is allowable in each of the five successive years beginning with the ‘previous year’ in which the business commences, or as the case may be, the extension of the undertaking is completed or the new unit commences production or operation.

 

OTHER IMPORTANT POINTS

1.   Cost of project

It means the actual cost (or additional cost incurred after commencement of the business in connection with extension of the existing undertaking or setting up of a new unit) of fixed assets, namely, land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences (or as the case may be, the previous year in which extension of the undertaking is completed or the new unit commences production or operation).

 

2.   Capital employed

It means the aggregate of the issued share capital, debentures and long –term borrowings, as on the last day of the previous year in which the business of the assessee commences (or as the case may be, the previous year in which extension of the undertaking is completed or the new unit commences production or operation) insofar as such share capital, debentures and long-term borrowing have been issued or obtained in connection with the extension of the undertaking or the setting up of the new unit of the company.

 

3.   Audit report

In the case of a person (other than a company or co-operative society), deduction is available only if a report of audit is obtained from a chartered accountant in Form No. 3AE.

 

4.   Double deduction not permissible

If some expenditure is allowed as deduction u/s 35D, the same expenditure is not allowed as deduction under any other provision of the Act.

 

5.   Consequences in the case of amalgamation or demerger

In a scheme of amalgamation or demerger within the 5-year period of amortisation, the deduction in respect of previous year in which the amalgamation or demerger takes place and the following previous year(s) within the 5-year period, will be allowed to the amalgamated company or resulting company. A similar benefit is available also in the case of amalgamation/demerger of co-operative banks.

 

Section 35ABB: Expenditure for obtaining licence to operate Telecommunication Services

 

(1)     In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services either before the commencement of the business to operate telecommunication services or thereafter at any time during any previous year and for which payment has actually been made to obtain a licence, 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.

      Explanation.—for the purposes of this section,—

      i.  "relevant previous years" means,—

(A) in a case where the licence fee is actually paid before the commencement of the business to operate telecommunication services, the previous years beginning with the previous year in which such business commenced;

(B)  In any other case, the previous years beginning with the previous year in which the licence fee is actually paid,

And the subsequent previous year or years during which the licence, for which the fee is paid, shall be in force;

      ii. "Appropriate fraction" means the fraction the numerator of which is one and the denominator of which is the total number of the relevant previous years;

      iii. "Payment has actually been made" means the actual payment of expenditure irrespective of the previous year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee.

 

(2)     Where the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure remaining unallowed, as reduced by the proceeds of the transfer, shall be allowed in respect of the previous year in which the licence is transferred.

 

Deduction = Expenditure incurred remaining unallowed – Proceeds of the transfer [Allowed in respect of the previous year in which the licence is transferred]

 

(3)     Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are more than the amount of the expenditure incurred remaining unallowed, so much of the excess as does not exceed the difference between the expenditure incurred to obtain the licence and the amount of such expenditure remaining unallowed shall be chargeable to income-tax as profits and gains of the business in the previous year in which the licence has been transferred.

 

Amount chargeable to income-tax as profits and gains of the business

=  (Proceeds of the transfer – Expenditure incurred remaining unallowed),

Subject to maximum of (Expenditure incurred to obtain the licence – Expenditure   incurred remaining unallowed)

[Chargeable to income tax as profits and gains of the business in the previous year in which the licence has been transferred]

 

Explanation.—where the licence is transferred in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.

 

(4)     Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are not less than the amount of expenditure incurred remaining unallowed:

 

No deduction for such expenditure shall be allowed under sub-section (1) in respect of the previous year in which the licence is transferred or in respect of any subsequent previous year or years.

 

(5)     Where a part of the licence is transferred in a previous year and sub-section (3) does not apply [i.e. proceeds of the transfer (so far as they consist of capital sums) are not more than the amount of the expenditure incurred remaining unallowed], the deduction to be allowed under sub-section (1) for expenditure incurred remaining unallowed shall be arrived at by—

(a)   subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure incurred remaining unallowed; and

(b)   Dividing the remainder by the number of relevant previous years which have not expired at the beginning of the previous year during which the licence is transferred.

 

Deduction = (Expenditure incurred remaining unallowed – Proceeds of the transfer) ÷

(Number of unexpired relevant previous years at the beginning of the previous year during which the licence is transferred)

 

(6)     Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the licence to the amalgamated company (being an Indian company),—

i.       the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating company; and

ii.    The provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence.

 

(7)     Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the resulting company (being an Indian company),—

i.       the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the demerged company; and

ii.    The provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company if the latter had not transferred the licence.

 

(8)   Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any expenditure referred to in that sub-section, no deduction shall be allowed under sub section (1) of section 32 for the same previous year or any subsequent previous year.