it 2 assignment

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MEGHANA BHAT09BBM20104

6TH SEM D SEC

1.List out all the admissible and inadmissible expenses and income under Incomefrom Business.

Answer:

Admissible Expenses:

1) Expenses incurred in the purchase, manufacture and sale of goods.

2) General expenses incurred in the day to day running to the business.

3) Expenses incurred in defending a case for damages for breach of contract.

4) Amount of sales-tax paid and expenses incurred in connection with sales-tax proceedings

including appeals.

5) Compensation paid to an undesirable employee for the retrenchment of his services or to a

director to get rid of his services.

6) Contribution made to provident fund maintained for the benefit of employees under an Act

and with the previous approval of a state Government may not be allowable u/s 36(1)(iv) but

allowable u/s 37(1).

7) Commission, etc. paid for securing orders for the business.

Compensation paid to employees in connection with injury sustained by them or accident met

by them while on duty.

9) Royalties paid in connection with mines.

10) Insurance premium paid under a policy insuring its employees against injury or against

liability for compensation in respect of accident to its workmen.

11) Reasonable expenses incurred on the occasion of Dussehra, Diwali, commencement of

the business, etc.

12) Compulsory subscription or a subscription given to an association in the interest of the

business.

13) Legal expenses incurred in connection with the business or profession.

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14) Legal expenses incurred by a director of a company in defending a suit brought against

him to challenge the validity of his election as a director; as it is incurred to save his income

from the source.

15) Interest on unpaid purchase price of any business assets purchased by an assessee and put

to use will be allowed.

16) Expenditure incurred to oppose nationalization or to prevent extinction of business.

17) Under executive instructions, cost of installing new telephone.

18) Normal advertisment expenditure incurred to maintain the sales.

19) Penalty paid by the assessee for saving from confiscation the good which he purchased

from a third party without knowing that they had been illegally imported.

20) Amount paid by a director of a company in liquidation for compounding misfeasanceproceeding started against him by the liquidator.

21) Welfare expenditure incurred by the assessee.

22) Payment of excise duty.

23) Guarantee fee paid to he Government for loan obtained for purchase of machinery.

24) Expenditure incurred in connection with alterations made in the Memorandum or Articles

of Association of a company if therse alterations are warranted by the changes made inCompanies Act.

25) If an asseessee stand ss surety for the debt of another and it is usual in this trade to

guarantee debts, any payment made as a result of such guarantee may be allowed as a

business losss.

26) Professional tax levied by local authorities the payment of which is a necessary condition

for the carrying on the business within the area of a local authority.

27) Rebate granted by co-operative stores to their members on the value of the purchases

made by them.

28) The interest payable on arrear of cess is in the nature of compensation paid to the

Government of delay in the payment of cess and not as penalty, hence it is deductible.

Similarly, interest paid for delay in payment of municipal taxes is also allowable as

deduction.

29) Amount spent by an assessee in purchasing loom hours is deductible as revenue

expenditure.

30) Amount paid as damages to the Government Department for delay in the execution of

contracts was held to be allowable deduction, if the delay was inherent in the nature ofbusiness carried on by the assessee.

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31) Annual listing fee paid to Stock Exchange by public limited company is allowable.

32) Interest levied for failure to pay installment of the assets purchased on hire-purchase basis

is allowable.

33) Expenditure incurred on inauguration ceremony is allowable.

34) Expenditure incurred on foreign tour of director for purposes of expansion of business of

the managed company is allowable.

35) Wife of chairman-cum-managing director accompanying him for fulfilling social aspects.

Expenses incurred on foreign tour of wife are deductible.

36) Liability to pay debenture premium is to be spread over the years between date of issue

and date of redemption.

37) Payment towards Flat Day Fund is deductible.

38) Cash shortage found in business at the end of the day.

39) Deposit made under own your telephone scheme.

40) Expenses in connection with income tax, sales tax proceedings

Inadmissible Expenses:

2. Bring out various provisions and rates with respect to Depreciation.

Answer:

Depreciation

Depreciation means a diminution in the value of assets due to wear and tear, obsolescence

etc. caused by their use over a period of time. Its cost is spread over its life by charging

depreciation every year against the profits of business.

Assets eligible for depreciation:

A. Tangible assets: (i) Building, (ii) Machinery or Plant, and (iii) Furniture.

B. Intangible assets: (i) Patents, (iii) Copyrights, (iv) Trademarks,

(v) Licenses, (vi) Franchises, (vii) any other business or commercial rights of similar nature.

Other assets such as investments, goodwill, etc., do not qualify for depreciation allowance

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Building means only the superstructure and does not include the land on which it is

constructed, as the land does not depreciate by use. Building includes roads, bridges, culverts,

wells and tube wells. The term plant includes ships, vehicles, books scientific apparatus etc.

Conditions for allowance of depreciation:

(i) Asset should be owned, wholly or partly by the assessee

(ii) It should be used for the purpose of the assessees business or profession.

(iii) Depreciation is allowed on the block of assets:

=>Block of Assets

The term Block of Assets means a group of assets falling within a class of assets

comprising:

-tangible assets, being building, machinery, plant or furniture,

-intangible assets, being know-how, patents, copyrights, trademarks, licenses,

Franchises or any other business or commercial rights of similar nature, acquired on or after

1.4.1998, in respect of which the same percentage of depreciation is prescribed.

=> Methods of Depreciation:

(i) In the case of assets of an undertaking engaged in generation or generation anddistribution of power, depreciation may be claimed at the prescribed rates on the actual cost

thereof, i.e., on the basis of Straight Line Method.

(ii) in any other case on any block of assets at the prescribed rates on the written-down value

of such block of assets.

Assets acquired and put to use during the previous year:

In the case of an asset acquired and put to use in the business during the previous year, only

50% of the normal depreciation will be allowed if it is used in the business for less than 180

days during the previous year.

Tax Planning: As for as possible, the assessee should purchase and put to use the net asset

on which depreciation is allowed upto 2nd October in the previous year. This will entitle to

him full depreciation for the relevant previous year.

Meaning of Written down Value of an asset

Written-down value means:

(a) in the case of asset acquired in the previous year the actual cost to the assessee; and

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(b) In the case of assets acquired before the previous year, the actual cost to the assessee less

depreciation actually allowed to him.

The amount of unabsorbed depreciation carried forward is treated as depreciation actually

allowed.

(c) Depreciation is calculated on the block of asset instead of individual assets. In the case of

any block of assets, the written-down value shall be computed as under:

(i) The aggregate of the W.D.V. of all the assets falling within a block which were acquired

during the previous year.

(ii) Add to it the actual cost of any asset falling in that block which was acquired during the

previous year.

(iii) The sum arrived at in (ii) shall be reduced by the moneys receivable together with scrap

value in regard to any asset falling within that block which is sold, discarded, demolished ordestroyed during the previous year. The amount of such reduction cannot exceed the amount

arrived at as per (ii) above. If it exceeds the written-down value will be taken as nil.

(iv) The balance under (iii) shall be the W.D.V. for computation of depreciation for that

previous year.

If the full block of the assets is transferred and the monies payable is less than the W.D.V.

under (iii), the loss shall be treated as short term capital loss. When the money payable in

respect of a full block of assets or its part is more than written down value under (iii), the

excess shall be treated as short term capital gains.

=>Additional depreciation on plant or machinery (I.e. 2006-07)

On new plant or machinery (other than ships and aircraft), which has been acquired and

installed after 31.3.2005, by an assessee engaged in business of manufacture or production of

any article or thing, additional depreciation shall be allowed @ 20% @ 10% if the asset is put

to use for less than 180 days in the year in which it is acquired) of the actual cost of it:

However, the deduction shall not be allowed in respect of:

(a) any machinery or plant which, before its installation by the assesse, was used either withinor outside India by any other person; or

(b) any machinery or plant installed in any office premises or any residential accommodation,

including accommodation in the nature of a guest house; or

(c) any office appliances or road transport vehicles or

(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction

(whether by way of depreciation of otherwise) in computing the income chargeable under the

head Profit and gains of business or profession of any one previous year.

=>Rates of Depreciation

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Rates of Depreciation on Written-down Value Method

I. Building Rates % of

W.D.V.

A. Buildings which are used mainly for residential purposes

except hotels and boarding houses

5

B. Building other than those used mainly for residential purposes 10

C. Building acquired after 31.8.2002 for installing machinery and

plant forming part of water supply project or water treatment

system and which is put to use for the purposes of business of

providing infrastructure facilities

100

D. Purely temporary erections such as wooden structure 100

II. Furniture and Fittings:

Furniture and fittings including electrical fittings 10

Electric-fittings include electrical wiring, switches, sockets,

other fittings and fans etc.

III. Machinery and Plant:

A General Rate applicable to all machinery or plant

Other than certain specified machines and plants

15

B. Special Rate:

1. Motor Buses, motor lorries and motor taxies used in a business

of running them on hire

30

2. Motor-cars (other than those used in a business of running

them on hire) acquire or put to use on or after Ist April, 1990

15

(3) Energy Saving Devices 80

(4) Machinery relating to environment protection and pollution

control

100

(5) Books for professional purposes: 100

(i) Books being annual publications 100

(ii) Other books 60

6. Books owned by assesse carrying on business in running

lending libraries

100

7. Containers made of glass or plastic used in refills 50

8. Computers including computer software 60

9. Plant and machinery acquired and installed after 31.8.2002 in

a water supply project or a water treatment system and which is

put to use for the purpose of business of providing infrastructure

facility

100

IV. Ships:

1. Ocean-going ships 20

2. Vessels ordinarily operating on inland water not being speed 20

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boats

3. Vessels ordinarily operating on inland waters being speed

boats

20

Intangible Assets

Know-how, patents, copyrights, trademarks, licenses, franchises

or any other business or commercial rights of similar nature

w.e.f. A.Y. 1999-2000).

25

=>Unabsorbed Depreciation

Depreciation allowance for a particular previous year is first deductible from the profits and

gains of the business or profession. If the profits and gains of the same business or profession

are insufficient for this purpose, the balance of the amount of current depreciation allowance

is deductible from the profits of any other business or profession of the assessee. If the profitsof any other business or profession are also unable to absorb the whole amount of

depreciation allowance, the balance of such allowance which remains unabsorbed can be set-

off against any other taxable income of the same year. If still, the whole amount of current

depreciation allowance is not deductible on account of the insufficiency of the other taxable

income, the remaining unabsorbed amount is called Unabsorbed Depreciation.

If unabsorbed depreciation cannot be wholly set-off, the amount of depreciation not set-off

shall be carried forward to the following assessment year.

The unabsorbed depreciation shall be added to the depreciation allowance for the following

previous year or for the succeeding previous years till such time it is fully deducted. In other

words the unabsorbed depreciation shall be treated as part of the current years depreciation.