Explanations to S.43(6) Expln. 1- When assessment is made on
the successor u/s. 170(2), the W.D.V. of any asset or any block of assets shall be the amount which would have been taken as W.D.V. in the hands of the prdecessor. Expln. 2- Where any block of assets is transferred in any P.Y. by-
(a) a holding company to its subsidiary or vice
versa and the conditions of S.47(iv) or 47(v) are satisfied, or (b) the amalgamating company to amalgamated company which is an Indian company, then notwithstanding anything contained in S.43(1), the actual cost of the block of assets in the case of transferee co. or the amalgamated co. shall be the W.D.V. in the case of transferor co. or amalgamating co., at the beginning of the P.Y..
Expln. 2A- In case of transfer of any
asset forming part of a block of assets by demerged co. to the resulting co., W.D.V. of the block of assets of demerged co. for the immediately preceeding P.Y. shall be reduced by the W.D.V. of the assets transferred to the resulting co. pursuant to demerger.
Expln. 2B- In case of transfer of any
asset forming part of a block of assets by a demerged co. to resulting co., the W.D.V. of the block of assets in case of resulting co. shall be the W.D.V. of the transferred assets in case of demerged co. immediately before demerger. Expln. 3- Any depreciation carried forward u/s. 32(2) shall be deemed to be ‘actually allowed’.
Expln. 4- ‘Moneys Payable’ and ‘sold’ shall have the
same meanings as in the Expln. To S.41(4). Expln. 5- In case of transfer of any asset forming part of a block of assets of a recognised stock exchange in India to a co. under a scheme of corporatisation approved by the SEBI, the W.D.V. in case of such co. shall be the W.D.V. of the transferred assets immediately before such transfer. Money payable means actual money payable in cash or by cheque/draft and not any other thing or benefit which can be converted inyo money. CIT v. Kasturi & Sons Ltd. 103 Taxman 342 (S.C.)
Actual Cost S. 43(1) Actual Cost means the actual cost of the
assets to the ‘A’, reduced by that portion of the cost, thereof, if any, as has been met directly or indirectly by any other person or authority. The following expenses shall be included in the actual cost of the asset-
Expenses directly relatable to acquisition of the asset,
expenses necessary to bring the asset to site, install it and make it fit for use as carriage inwards, installation charges, etc., expenses incurred to facilitate the use of the asset such as cost of repairs and modification prior to use of the asset to make it workable, training expenses of the staff before the use of the asset.
If interest is payable on capital borrowed by a concern
which has already commenced business, it has to be capitalised, if borrowed capital is used to acquire assets in order to expand business.
Some Decisions (1) Interest incurred before
commencement of commercial production shall be capitalised. It cannot be claimed as deduction u/s. 36(1)(iii). Challapalli Sugars Ltd. v. CIT 98 ITR 167(SC)
(2) Where the ‘A’ has paid interest on borrowed
capital and has received interest on surplus funds invested during construction period, interest received is taxable under the head Income from Other Sources and interest paid should be capitalised. Tutikorin Alkali Chemicals & Fertilisers Ltd. v. CIT 227 ITR 172 (SC).
As per ICAI Guidance Note, interest paid less
interest received shall be capitalised. S.C. decision is in contradiction to ICAI Guidance Note.
(4) If the ‘A’ receives any amounts which are inextricably
linked with the process of setting up its plant & machinery, such receipts will go to reduce the cost of the assets. Charges received from contractors for quarters given for their workers during construction period, interest charged on advances to contractors during construction period , hire charges received for letting plant & machineryto contractor for construction work, royalty received for escavation and use of stone lying in the compound of the ‘A’ shall be reduced from the cost of the assets and not to be treated as income of the ‘A’. CIT v. Bokaro Steel Ltd. 236 ITR 315 (SC). Similar decisionsCIT v. Karnal Coop. Sugar Mill Ltd. 118 Taxman 489 Bangaigaon Refinery & Petro. Ltd. V. CIT 251 ITR(SC)
(5) Where liability in respect of an asset
increases on account of exchange rate fluctuation, cost of the asset shall be increased by such amount. CIT v. Tata Hydro Electric Power Supply Co. Ltd. 159 ITR 29 (Bom), Pudumjee Pulp & Paper Mills Ltd. v. CIT 210 ITR 97 (Bom) (6) Expenses on trial run of machinery less sale proceeds of trial run products shall form part of actual cost of machine. Where such sale proceeds are more than trial run expenses, difference to be reduced from actual cost. CIT v. Food Specialities Ltd. 136 ITR 203(Del)
(7) Compensation for delayed delivery of
machinery cannot be reduced from the cost of the asset as it has nothing to do with the cost. Shree Digvijay Cement Co. Ltd. v. CIT 138 ITR 45 (Guj) (8) Rebate allowed to the ‘A’ as the machine supplied was defective cannot be reduced from the cost of the asset. Rebate was held as taxable in the hands of the ‘A’. CIT v. Rohtas Industries Ltd. 130 ITR 292(Cal).
Explanations to S. 43(1) Expln. 1- Where an asset is used in business
after it ceases to be used for scientific research, its actual cost shall be the actual cost to the ‘A’ as reduced by deduction allowed to the ‘A’ u/s. 35(1)(iv).
Expln. 2- Where an asset is acquired by the ‘A’
by way of gift or inheritance, actual cost to the ‘A’ shall be the cost to the previous owner, reduced by depreciation that wuold have been allowable to the ‘A’ as if it was the only asset in the relevant block.
Expln. 3- Where before acquisition by
the ‘A’, the assets were used by any other person for his business or profession and A.O. is satisfied that the main purpose of transfer directly or indirectly to ‘A’ is reduction of tax by claiming depreciation on enhanced cost, actual cost shall be the sum determined by A.O. with previous approval of the JT.C.I.T.
Expln. 4- Any asset which once belonged to ‘A’
and used for his business or prof. which ceased to be his property is reacquired by him, its actual cost shall be (i) actual cost to him when first acquired less depreciation that would have been allowable as if it were the only asset in the relevant block till the year when it was sold, or (ii) actual price at which it is reacquired Whichever is less.
Expln. 4A- In case of sale and lease back of
any asset, actual cost in the hands of the lessor shall be the W.D.V. of the asset at the time of transfer by the lessee. Some Important Points (1) CBDT Cir. No. 762 dt Feb,18,1998- If asset forms part of a block, its W.D.V. to be computed as if it is the only asset in the block and in case of more than one intermediate sale, in cases of reacquisition, W.D.V. at the time of first sale shall be the actual cost.
(2) In case of sale and lease back, Expln. 4A
has overriding effect over Expln. 3. (3) Expln. 4A not applicable, if seller had not claimed depreciation or asset was not qualified for depr.. In such a case, Expln. 3 will apply. (4) Expln. 4A and Expln. 3 both not applicable where the seller did not use the asset for his business or prof.. (5) While applying Expln. 3 A.O. required to record a finding that the main purpose of transfer was to claim higher depr.. No such finding required to be recorded while applying Expln. 4A.
Expln. 5- Where a building previously property
of the ‘A’ is brought to business use, actual cost shall be the actual cost less depr. That would have been allowable had the asset been used for business from the date of acquisition.
Expln. 6- Where a cap. asset is transferred by
holding co. to subsidiary co. or vice versa and S. 47(iv) or 47(v) is satisfied, actual cost to transferee co. shall be the same as it would have been if trnsferor co. had continued to hold the asset.
Expln. 7- In case of transfer of asset by
amalgamating co. to amalgamated co. which is an Indian co. in a scheme of amalgamation, actual cost to amalgamated co. shall be the same as it would have been if the amalgamated co. had continued to hold the asset.
Expln. 8- Interest payable in connection with
acquisition of an asset for the period after the asset is put to use shall not be included in the actual cost of the asset.
Expln. 9- Actual cost of an asset shall be
reduced by excise duty or additional duty leviable on the asset which has been allowed by way of credit to the ‘A’. Expln. 10- Where cost of an asset is met directly or indirectly by the Central or State Govt. as subsidy or grant or reimbursement, such amount shall not be included in actual cost. Where subsidy cannot be related to any asset, proportionate amount of subsidy shall be excluded from actual cost of all assets for which subsidy is granted.
Expln. 11- Where an asset acquired outside
India is brought to India and used by the ‘A’ for his business or prof., its actual cost shall be reduced by depreciation that would have been allowable, if it was used in India from the date of its acquisition. Expln. 12- Where a cap. Asset is acquired under a scheme of corporatisation approved by SEBI, actual cost shall be the actual cost had there been no corporatisation.
Unabsorbed Depreciation S.32(2) Depreciation of the P.Y. deductible from Income
from Business or Profession. Depreciation that could not be fully deducted under the head Business or Profession because of absence or inadequecy of profit is deductible from income under other heads of income. Depreciation still unabsorbed shall be carried forward and shall form part of depreciation for the succeeding year and can be carried forward indefinitely.
Tea, Coffee, Rubber Development Account S.33AB ‘A’ carrying on business of growing and
manufacturing tea or coffee or rubber in India shall be allowed a deduction before loss, if any, b/f. from earlier years is set off u/s. 72 of (a) amount deposited with National Bank or according to a scheme framed by the Tea, Coffee or Rubber Board or (b) 40% of such profit of such business before deduction under this section Whichever is less.
Conditions to be satisfied 1. ‘A’ to deposit any amount with
National Bank according to a scheme approved by the respective Board or any account opened according to scheme framed by the respective Board as approved by the Central Government within 6 months from the end of the P.Y. or before due date of furnishing the Return of Income.
(2) Where deduction allowed to a firm or AOP,
deduction shall not be allowed to partner or member. (3) Once deduction in respect of a deposit allowed under this section, no deduction shall be allowed under any other section. (4) Accounts of the ‘A’ required to be audited and report in F. No. 3AC to be furnished with the Return of Income. If ‘A’ required to get A/Cs audited under any other law, report in F.No. 3AC to be furnished.
(5) Amount in deposit can be withdrawn only for
purposes specified in the scheme, except on (a) closure of business (b) death of ‘A’ (c ) partition of H.U.F. (d) dissolution of firm (e) liquidation of a co. In case of (a) & (d), amount withdrawn taxable under this head.
(6) If deposit is withdrawn and used for
purchase of (a) mach. or plant installed in office or residence or guest house or (b) its cost is fully allowed as deduction, (c ) any office appliance other than computer, (d) mach. or plant used to manufacture articles specified in Eleventh Schedule, Such amount shall be chargeable under this head in that P.Y..
(7) Amount withdrawn & not utilised for
specified purpose taxable in the P.Y. of withdrawal. (8) If asset acquired out of amount withdrawn from deposit is sold (other than sale to Govt. or Statutory Corpn.or succession of a firm by a co.) within 8 years from the end of P.Y. in which acquired, cost of such asset shall be taxable in P.Y. in which asset is sold.
Transfer by firm to co. on its conversion
not to result in withdrawal of deduction, only if, (a) all properties and liabilities of business of firm transferred to co. (b) all shareholders of co. were partners of firm before transfer. The Central Govt. may notify sunset date for the deduction.
Site Restoration Fund S.33ABA Deduction allowable subject to following
conditions (a) ‘A’ carrying on business of prospecting for or extracting or production of petroleum or natural gas has entered into agreement with Cent. Govt. ofr such business. (b) deposited with SBI any amount according to scheme approved by Govt. or any amount in ‘Site Restoration A/c’ according to scheme framed by the Ministry of Petroleum & Natural Gas.
Deduction Amount of deposit or 20% of profit of such
business before allowing such deduction whichever is less. Deduction allowed before setting off losses. If deduction allowed to firm, AOP or BOI, deduction not to be allowed to partners or members. Interest credited to Deposit A/c to be treated as amount deposited.
Further Conditions Accounts to be audited & audit report to be
submitted with return. Amount withdrawn from deposit a/c to be used for the purpose specified in the scheme except for installing mach. or plant in office, residence or guest house or buying office appliances, or buying mach. or plant cost of which is fully deductible or mach. or plant for manufacturing art. Or thing mentioned in Eleventh Schedule.
Where amount withdrawn from deposit a/c on
its closure, amount withdrawn less payable to Govt. as its share in profits shall be chargeable as business income. Amount withdrawn and not used as per scheme taxable as business income of the P.Y. of withdrawal. Asset acquired out of deposit not to be transferred for 8 years. Provision similar to that u/s. 33AB.
Expenditure on Scientific Research S.35 Following deductions allowed (i) Revenue expenditure before
commencement of business on salary or purchase of material certified by prescribed authority for scientific research related to ‘A’s business, (ii) One & one fourth times of amount paid to scientific research association, University or college for scientific res.,
One & one fourth times of any sum paid to
university, college or other institution for research in social science or statistical research, Cap. Exp. Related to A’s business other exp. on land after 29-2-84. Cap. Exp. Incurred within 3 years before commencement of business shall be deemed to be incurred in the P.Y. of commencement of business. S. R. Asso., university, college should be approved by the Cent. Govt.. Where deduction allowed under this section on cap. Exp., no depreciation to be allowed.
Amount paid to National Lab., university or I.I.T. under
direction to use for approved programme, deduction of 1 ¼ times allowable. No deduction under any other section to be allowed.
S. 35(2AA) Deduction not to be denied, if subsequently,
approval to National Lab., etc. is withdrawn.
S. 35(2AB) Exp. on inhouse research by a co. engaged
in bio technology, manufacture of pharma., drugs, electronic equip.,computers, telecom. Equip, chem, or articles or things notified by the Board allowed deduction of 1 ½ times the exp.. No other deduction on such exp..
S. 32(2) shall apply for carry forward of exp.
u/s. 35(1)(iv). Where cap. Asset transferred by amalgamating co. to amalgamated co., deduction to be allowed to amalgamated co., not to amalgamating co.. Some DecisionsAny sum paid to foreign co. which carried out research on behalf of ‘A’, related to business carried on by ‘A’, allowable. CIT v National Rayon Corpn. Ltd. 140 ITR 1434(Bom)
Payment to reimburse other person for
exp. Incurred by that other person not allowable. CIT v Ciba of India Ltd. 69 ITR 692(SC). Exp. on approach road to laboratory building regarded as exp. Related to A’s business. CIT v Sandoz (I) Ltd. 74 Taxman 225(Bom).
Expenditure on Licence to operate Telecom. Services S.35ABB Cap. Exp. actually paid to acquire right to
operate telecom. services during any P.Y., deduction of appropriate fraction of exp. for each P.Y. during relevant P.Y.s. If licence is transferred, exp. remaining unallowed less proceeds of transfer shall be allowed in the P.Y. of transfer. If whole or any part of the licence is transferred and proceeds of transfer exceed exp. remaining unallowed, the excess to the extent of difference between exp incuurred and exp remaining unallowed shall be taxable under this head.
If licence is transferred after closer of business,
bus. shall be deemed to be in existence. Where whole or a part of licence is transferred for price not below amount remaining unallowed, no deduction under this section shall be allowed in P.Y. of transfer or any subsequent P.Y.. In case of transfer of part of the licence for sum less than exp remaining unallowed, balance remaining unallowed less proceeds realised, to be aloowed over remaining no of years.
Where amalgamating co transfers the
licence to amalgamated co, the latter shall be entitled to deduction for the balance period of the licence. Similarly, in case of demerger, resulting co shall be allowed deduction for the balance period. Where deduction is allowed under this section, no depreciation shall be allowed u/s. 32 on the same exp.
Expenditure on Eligible Project or Scheme S. 35AC Payment of any sum to a public sector co., local
auth., asso., or instn. Approved by National Comm. For an eligible project or scheme-100% deduction allowed. A co. may pay any sum as above or incure exp. Directly on eligible project or scheme. A certificate from the donee for payment of any sum or in case of a co. which incurred exp. Directly from an accountant required to be attached with return of income.
Where deduction allowed under this
section, no deduction to be allowed under any other provision of the Act. National Com. may withdraw approval, if it is satisfied that project is not being carried on according to conditions of approval or report required to be submitted to National Com has not been submitted.
The P.Y. in which approval of the
National Com. is withdrawn,amount received by pub. Sector co., local auth., asso. or instn. Shall be treated as its income. Guidelines for recommending projects.
Payment to aso. or instn. for carrying out Rural Dev. Programme S.35CCA Payment of any sum by an ‘A’ to (a) an asso or instn for carrying out any rural
dev. prog. Approved by the prescribed authority, or (b) an asso or instn for training of persons for implementing rural dev. prog., or (c ) a rural development fund set up & notified by the Cent. Govt.,or (d) the National Urban Poverty Eradication Fund set up & notified by the Cent. Govt. Shall be allowed as deduction subject to the following conditions.
Conditions (1) ‘A’ shall furnish certificate from the asso or
instn that rural dev. prog. Had been approved before 1-3-1983 and If payment is made after 28-2-1983, work commenced before 1-3-1983. (2) In case of (b) above, ‘A’ shall furnish certificate from asso or instn that it was approved by the prescribed auth. before 1-31983 & training of persons had been started before 1-3-1983.
Asso or Instn issuing certificate
mentioned above shall obtain authorisation from prescribed authority in writing to issue certificate of such nature.
Preliminary Expenses S. 35D (1) An Indian co. or a res. person who incurs
any exp specified in sub s. (2) (a) before commencement of bus., or (b) after commencement of bus, in connection with extension of his undertaking or setting up new industrial unit shall be allowed deduction of 1/5th of such exp. for 5 successive P.Y.s from the P.Y. in which bus commences or extension is comleted or new unit commences prod or operation.
(2) Preliminary exps. (a) Exp for preparation of feasibility report, project report,
conducting market or any other survey or engineering services necessary for bus.. The above work should be carried out by the ‘A’ or a concern approved for the purpose. (b) Legal charges for any agreement for setting up or conduct of the bus.. (c ) In case of a co., exp on legal charges for drafting & printing of M.A. & A.A., fees for regn. of the co., on issue of shares or debentures being underwriting comm., brokerage & exps for drafting, printing & advt of the prospectus & any other exp that may be prescribed.
(3) Total deduction allowable shall be
restricted to 5% of (a) the cost of the project, or (b) in case of a co., at its option of cap employed. Explanation (a) Meaning of Cost of the Project (b) Capital Employed (c ) Long term borrowing.
(4) In the case of an ‘A’ other than a co. or a co op soc.,
no deduction shall be allowed unless the A/cs of the ‘A’ for the year/years in which exp is incurred are audited & audit report is filed with the return of income. (5) In case of amalgamation or demerger of an Indian co. entitled to deduction under this section before expiry of 5 years specified in sub sec (1), amalgamated co or resulting co shall be entitled to deduction for the balance period left out of 5 years. (6) Where deduction in respect of any exp is claimed under this section, no deduction under any other provision shall be allowed for any year on the same exp..
Expenditure on Amalgamation/Demerger S.35DD (1) An Indian co. which incurs exp on
amalgamation/demerger of an undertaking on or after 1-4-1999, shall be allowed a deduction of 1/5th of such exp for 5 successive P.Y.s beginning with the P.Y. in which the amalgamation/demerger takes place. (2) No deduction shall be allowed in respect of such exp under any other provision of this Act.
Exp. under Voluntary Retirement Scheme S. 35DDA Exp incurred by an ‘A’ in connection with
voluntary retirement of an employee under any scheme of voluntary retirement, 1/5th of such sum shall be deducted for that P.Y. and the balance in 4 succeeding P.Y.s equally. (2) In case of amalgamation, amalgamated co. shall be entitled to the deduction for the balance no. of years left in the 5 years. (3) In case of demerger, resulting co. shall be entitled to the deduction for the balance no. of years left in the 5 years.
(4) In case of bus. reorganisation, whereby, a
firm or a proprietory concern is succeeded by a co., fulfilling conditions laid down in S. 47(xiii) or 47(xiv), this section shall apply to the successor co. as it would have applied to the firm or the proprietory concern. (5) No deduction shall be allowed to amalgamating co, demerged co, or firm or proprietory concern in the year of amalgamation, demerger or bus reorganisation. (6) No deduction shall be allowed in respect of the exp under any other provisions of the Act.