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CEC - GBT trainings Income computation – profits and gains from business or profession (PGBP).

Familiarise with the broad framework and key concepts forming part of the PGBP provisions of the ITA, as are applicable to corporate taxpayers Understand the manner of computing income under the head profits and gains from business or profession.

Introduction Computation mechanism Tax regimes and rates Chargeability and key principles Allowances Admissible expenses Depreciation allowance Disallowances ICDS Accounts, audit & presumptive tax provisions Minimum Alternate Tax Case Study.

Introduction.

Charging Section S. 28 – PGBP Deductions S. 41 - Profits chargeable to tax S. 30 to 36 - Deductions including depreciation Specified disallowance S. 40 - Amounts not deductible S. 40A - Expenses or payments not deductible in certain circumstances Non-resident/ foreign companies (44B to 44DA) Aircrafts Civil construction, etc. in certain turnkey projects Deduction of head-office expenses Royalties Accounts and Audits Accounts by specified business or professions (44AA) Audit of accounts (44AB) Income of specific business Insurance business (44) Presumptive basis taxation (44AD to 44AF) Section 44DB – Business reorganization of co-operative banks S. 29 – Computation of income from PGBP Other provisions Definitions (43) Changes in exchange rates (43A and 43AA) Computation of CoA of certain assets and FV of consideration for transfer of assets other than capital assets (43C and 43CA) Income Computation and Disclosure Standards (ICDS) ICDS I to ICDS X Minimum Alternate Tax (MAT)/ Alternate Minimum Tax (AMT) applicable to certain taxpayers Applicable from AY 2017-18 S. 37- General deduction S. 43B - Expenses deductible on payment basis Public financial institution, public companies, etc. (43D) Shipping business Exploration, etc. of mineral oils MAT (115JB) applicable to companies on book profits AMT (115JC) applicable to non-corporate taxpayers on adjusted total income Construction/ service contracts (43CB).

Computation mechanism. Particulars Amount (INR) Amount (INR) Net profit before tax as per the audited Profit & Loss account xxxx Add: Expenses debited to P&L and not allowable as per ITA provisions (including ICDS) inadmissible expenses _____ _____ xxx xxxx Xxx Add: Income not credited to P&L but taxable as per ITA provisions (including ICDS) _____ _____ xxxx xxxx Xxx Less: Expenses not debited to P&L and allowable as per ITA provisions (including ICDS) admissible expenses _____ _____ xxxx xxxx (xxx) Less: Income credited to P&L but not taxable as per ITA provisions (including ICDS) _____ _____ xxxx xxxx (xxxx) Profits or gains from business or profession xxxx.

Tax regimes. NEW SCHEMES – OPTION OF LOWER RATES W/O INCENTIVES.

Corporate tax rates. Types of companies Income up to INR 10 million Above INR 10 million up to INR 100 million Above INR 100 million Effective tax rate (Normal) Effective tax rate (MAT) Effective tax rate (Normal) Effective tax rate (MAT) Effective tax rate (Normal) Effective tax rate (MAT) Domestic Company with turnover up to INR 400 crore in FY 2019-20 & avails any tax incentives or exemptions or tax holiday 26%** 15.60%** 27.82%** 16.69%** 29.12%** 17.47%** 115BAA- Domestic Company without tax incentives or exemptions or tax holiday 25.17%*** NIL 25.17%*** NIL 25.17%*** NIL Other domestic company 31.20%** 15.60%** 33.38%** 16.69%** 34.94%** 17.47%** 115BAB - New domestic manufacturing companies (set up & registered on or after 1 Oct 2019 & does not avail of any tax incentives or exemptions & commences production on or before 31 Mar 24)# 17.16%*** NIL 17.16%*** NIL 17.16%*** NIL Foreign companies 41.60%^ 15.6%^ 42.43%^ 15.912%^ 43.68%^ 16.38%^.

Chargeability.

Income chargeable under section 28. Benefits arising from business Any benefit or perquisite whether convertible into money or not, arising from business or profession Income from partnership Interest, salary, commission, received by partner from the firm (excluding any part which was not allowed as a deduction to the firm) Others Export incentives and sale proceeds of various import entitlements are taxable as business profits Keyman insurance policy proceeds received by the employer Income of a trade, professional or similar association from services performed for its members Profits Profits earned from business or profession carried on during the previous year is taxable under s. 28 Compensations Compensation or similar payments received for managing affairs of an entity, or for termination/ modification of terms of any contract Non-compete fees and fees for exclusivity rights Benefits or perquisites Value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.

Key principles. Business includes any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture.

Income not taxable as PGBP. Business income should be distinguished from income from employment.

Allowances/Deductions.

Admissible expenses.

Sections 30 and 31. Expenses pertaining to capital assets.

Expenditure on scientific research Section 35. Section Allowable expenditure Deduction 35(1)(i) to 35(1)(iv) Revenue expenditure as well as capital expenditure (other than on land) incurred on scientific research related to taxpayer’s business 100% 35(1)(ii) to 35(1)(iii) Amount paid to approved university, college, institution, Indian company scientific research association having object of undertaking scientific research to be used for scientific research or for social science or statistical 100% 35(2AA) Amount paid National laboratory, University, Indian Institute of Technology or other specified person with specific direction that amount to be used for approved scientific research programme 100%.

Expenditure before commencement Expenditure wholly and exclusively for the specified business The amount is capitalized in the books on the date of commencement No deduction with respect to such expenditure shall be available in any other section.

Amortisation of preliminary expenses Section 35D.

Amalgamation or demerger expenses incurred by an Indian company Can be amortised over 5 successive years starting from the year of amalgamation or demerger.

Deduction for interest on borrowings - Section 36(1)(iii).

Other deductions Section 36. Bonus or commission payable to a transaction tax n employee for services.

General deductions – S. 37. Not covered under section 30 to 36 Incurred in respect of business carried on by the taxpayer Incurred wholly and exclusively for the purposes of business Not incurred for activities relating to Corporate Social Responsibility Not incurred for advertisement in souvenir, brochure, pamphlet, published by political party Not capital in nature Not incurred for purpose being offence or prohibited under any law* Not incurred for personal purposes Deduction u/s 37 shall be allowed only if it is: Incurred during the year.

S. 37 Illustration for FY 2021-22 (AY 2022-23). No. Particulars Admissible/ Inadmissible Amount of disallowance (in Rs.) 1 Interest paid on late payment of GST– Rs. 5,000 ? ? 2 Expenditure incurred on construction of addition floor on building – Rs. 30,00,000 ? ? 3 Professional fees of Rs. 1,00,000 ? ? 4 Donation given to Siddhivinayak Mandir Trust – Rs. 10,000 ? ? 5 Petrol expenses on Motor car (used by family of Director for half day) – Rs. 20,000 ? ? 6 Fine paid for exceeding pollutants limit – Rs. 2,00,000 ? ? 7 Corporate Social Responsibility expenditure – Rs. 50,000 ? ?.

S. 37 Illustration for FY 2021-22 (AY 2022-23). No. Particulars Admissible/ Inadmissible Amount of disallowance (in Rs.) 1 Interest paid on late payment of GST– Rs. 5,000 Admissible - 2 Expenditure incurred on construction of additional illegal floor on building – Rs. 30,00,000 Inadmissible 30,00,000 (exclude while computing PGBP income if debited to P&L) 3 Professional fees of Rs. 1,00,000 Admissible 1,00,000 4 Donation given to Siddhivinayak Mandir Trust – Rs. 10,000 Inadmissible 10,000 5 Petrol expenses on motor car (used by family of Director for half day) – Rs. 20,000 50% disallowance 10,000 6 Fine paid for exceeding pollution limit – Rs. 2,00,000 Inadmissible 2,00,000 7 Corporate Social Responsibility expenditure – Rs. 50,000 Inadmissible 50,000.

Depreciation allowance.

Depreciation - overview. Section 32. Method Meaning Block of assets Allowance provided for the wear and tear as well as obsolescence of assets used in the course of carrying the business or profession Mandatory allowance Group of assets falling within a class of assets comprising of tangible assets or intangible assets in respect of which the same percentage of depreciation is prescribed Taxpayers can claim depreciation in respect of the block of assets, at the prescribed percentage on the written down value (WDV) thereof WDV means: Where an asset acquired in previous year, its actual cost For other years, actual cost less depreciation actually allowed in previous years.

Depreciation Tangible and intangible assets. Intangible assets eligible for depreciation are know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.

Additional depreciation Section 32(1)(iia). Additional depreciation of 20% on cost of new machinery or plant is allowed to taxpayer engaged in business of manufacture or production of any article or thing or in generation, transmission or distribution of power 50% of additional depreciation allowed in first and second year where the machine or plant is put to use for less than 180 days during the first year Additional depreciation not allowable in the following cases: asset is used before installation by the taxpayer either within or outside India by any other person asset is installed in office premises or residential accommodation office appliances or road transport vehicles whole of actual cost of asset is allowed as deduction in any one previous year.

Depreciation as per section 32. Assets Rate Opening WDV More than 180 days Less than 180 days Total Sale Dep (on opening WDV) Dep >180 days Dep <180 Days Total Dep Closing WDV P&M 15 30,000 3000 0 33,000 0 4,500 450 0 4,950 28,050 Comp 40 20,000 2000 0 22,000 0 8,000 800 0 8,800 13,200 Furniture 10 10,000 1000 0 11,000 0 1,000 100 0 1,100 9,900 60,000 66,000 14,850 51,150.

Depreciation Illustration. Particulars Amount (Rs.) (1) Opening WDV of plant and machinery as on 1.4.2021 30,00,000 (2) New plant and machinery purchased and put to use on 08.06.2021 20,00,000 (3) New plant and machinery acquired and put to use on 15.12.2021 8,00,000 (4) Computer acquired and installed in the office premises on 02.01.2022 3,00,000.

Depreciation Illustration. Particulars Plant & Machinery @ 15% Computers @ 40% Normal depreciation @ 15% on INR 50,00,000 [See Working Note] 7,50,000 @ 7.5% (50% of 15%, since put to use for less than 180 days) on INR 8,00,000 60,000 @ 20% (50% of 40%, since put to use for less than 180 days) on INR 3,00,000 60,000 Additional depreciation @ 20% on INR 20,00,000 (new plant and machinery put to use for more than 180 days) 4,00,000 @10% (50% of 20%, since put to use for less than 180 days) on INR 8,00,000 80,000 Total depreciation 12,90,000 60,000.

Depreciation Illustration. Particulars Plant & Machinery Computers WDV as on 1 April 2021 30,00,000 Add: Plant & Machinery purchased on 08.6.2021 20,00,000 Add: Plant & Machinery acquired on 15.12.2021 8,00,000 Add: Computer acquired and installed in the office premises 3,00,000 Less: Moneys payable in respect of asset of the block which are sold, discarded, demolished or destroyed during previous year Nil Nil WDV for computing depreciation 58,00,000 3,00,000 Less: Depreciation allowable u/s 32 (as computed in earlier slide) (12,90,000) (60,000) Written down value as on 31.03.2022 45,10,000 2,40,000.

Unabsorbed depreciation Section 32(2). Where the depreciation of a year cannot be absorbed by income of the year due to insufficiency of income, the unabsorbed portion of depreciation is treated as depreciation allowance of the succeeding year Unabsorbed depreciation can be carried forward for an infinite period of time and can be adjusted against income under any head of income (other than salaries) It is to be adjusted against current year income after adjusting carried forward business losses Unlike carried forward business losses, unabsorbed depreciation can be adjusted even if no business is being carried on by the taxpayer and even if the taxpayer no longer owns the assets Section 79 which debars carry forward of loss in case of certain changes in shareholding/ voting power is not applicable to unabsorbed deprecation It is not necessary to file return of income to carry forward unabsorbed depreciation..

Unabsorbed depreciation Illustration. Particulars Profit/ (Loss) before depreciation Tax depreciation Current year profit/ loss after depreciation Brought forward losses/ unabsorbed depreciation utilised (BL/ UAD) BL/ UAD to be carried forward to subsequent years for a possible set-off Business Loss Unabsorbed depreciation Year I 80,00,000 10,00,000 70,00,000 - Year II 8,00,000 10,00,000 - - - 2,00,000 Year III 20,00,000 7,00,000 11,00,000 UAD 2,00,000 - - Year IV (30,00,000) 25,00,000 (55,00,000) - 30,00,000 25,00,000 Year V 20,00,000 15,00,000 5,00,000 BL – (5,00,000) 25,00,000 25,00,000 Year VI 10,00,000 4,00,000 6,00,000 BL – (6,00,000) (19,00,000) 25,00,000 Year VII 40,00,000 20,00,000 20,00,000 BL – (19,00,000) UAD – (1,00,000) - 24,00,000.

Disallowances.

Sales 1st Qtr 2nd Qtr 3rd Qtr 0.3 0.3 0.3. Introduced with a view to bring together provisions regarding certain inadmissible sections.

Payments to residents on which TDS is applicable.

Compute the disallowance and subsequent allowance of expenditure in the following cases..

S. 40 disallowance Illustration for FY 2021-22 (AY 2022-23).

Section 40A. Disallowances in certain cases. Types of payments Section reference Payments to relatives, associates and associated enterprises 40A(2) Cash disbursements for items of expenditure > 10,000 to single person in a single day 40A(3), 40A(3A) Provision for gratuity 40A(7) Payments by employer to fund, trust, company, AOP, BOI, registered societies or other institutions 40A(9) Disallowance of marked to market losses 40A(13).

Deductions to be allowed on payment basis. Section 43B.

INCOME COMPUTATION & DISCLOSURE STANDARDS (ICDS).

Notified ICDS – Applicable from AY 2017-18. Background.

Accounts, audit provisions & presumptive taxation.

Accounts, Audit & Presumptive taxation. Books of account shall be compulsorily maintained for business carrying on legal, medical, engineering, architectural, accounting, Technical consultancy, Interior designer services. The following person shall not be required to maintain books of accounts.

Presumptive taxation. Section 44ADA.. Section 44AE..

MAT provisions.

Minimum Alternative Tax (‘MAT’) - Section 115JB. What is MAT ? Why MAT ?.

MAT credit - Section 115JAA. In case the tax is paid in any AY in relation to the deemed income under MAT provisions against tax liability under section 115JB, a tax credit shall be allowed in subsequent fifteenth assessment years Allowable Tax Credit : Tax paid as per MAT calculation – Income-tax payable under normal provisions of the Act.

Case Study.