Applying these tests, urged learned counsel, the assessee was squarely covered by the ruling in Jay Engg. 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. 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. The deduction under this section is available only for expenditures incurred for medical treatment of specified diseases. 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. 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. Towards these, it claimed the expenses to the tune of Rs. Query No. Under Sec. Deduction for Entertainment Expense An entertainment expense that is wholly and exclusively incurred in the production of gross income under subsection 33(1) of the ITA is allowed a deduction of fifty percent 32A or Sec. 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-operative expenses can be capitalized to the assets to which it relates and depreciation can be claimed. – The Revenue is aggrieved by the impugned order of the Income-tax Appellate Tribunal (“the ITAT”) dated September 6, 2013, in I.T.A. Other than the following expenses are treated as pre-operative expenses. Currently, businesses can choose to fully expense the costs of research and development (R&D); that is, they can deduct the costs of R&D from their taxable income in the year that those costs occur. 10: Accounting for payments made in respect of land pending execution of conveyance deeds and borrowing costs incurred in respect thereof. Jay Engg. Whereas if expenses are not deductible, then it is not chargeable to tax too. Regarding income tax treatment of cooperatives, under section 1382, taxable income is calculated similar to a corporation with the exception that income of the cooperative that is attributable to patron business is excluded or deducted from income when it is allocated to the patrons. 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 Ashok Shah Partner, N.A. The bench noted that it is not relevant as to how the Assessee shows a particular income or expenditure in the books of account. 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. 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. Setting up is broadly narrated as the date on which the assessee is ready to commence business. The Commissioner of Income-tax (Appeals) confirmed the findings of the Assessing Officer. 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. Many employers are yet to commence implementation while some In Jay Engg. 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 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. 72(1) or Sec. Briefly the facts are that the assessee engages itself in the manufacturing of nylon tyre cord fabrics, packaging film, fluorochemicals, chloromethane and refrigerant gases. A bench comprising Justices S.V Gangapurwala and A.M Badar was hearing two appeals… Industries Ltd. [1981] 129 ITR 373/6 Taxman 236 (Delhi). 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. In the case of senior citizen the tax deduction amount can go up to Rs 60, 000. 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. Operating Leases 17. 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. 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. Expensing is the proper tax treatment of investment and other business costs, as it prevents a firm’s profits from being overstated in real terms. 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. It suggests that deduction of pre-production expenses under section 11A is not inevitable, especially not when the taxpayer already carries on a trade. The same may be capitalised once the corporate start commence the production activities. The Revenue treated this as properly falling in the capital side and disallowed the expenditure. 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. 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. He also relied upon the decisions of other High Courts. The important point of distinction noted by the court in Jay Engg. 18. In this article, we will learn about the following: Who is an eligible assessee for the purpose of this section? Interest, Royalty, Fees for Technical Services Payable Outside India or Payable to a … 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 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. Treatment of tax expense on deemed income under section 56(2)(viia) of the Income-tax Act, 1961 arising on purchase of investments. 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. 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. Amortization of preliminary expenses incurred prior to the commencement of business, extending an existing business, setting up a new unit etc. 5. 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. Sec. One of such section is called section 80DD. 1961 (PAN) [Section 139A] and Aadhaar Number (Section 139AA) Pre-trade expenses of a capital nature. These expenses are therefore mostly of a capital nature. “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 … 2. The assessee had claimed the sum of Rs. 37(1). Requiring a firm to amortize business costs o… 33A or the first proviso to clause (ix) of Sec. 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. This lowers the cost of investment. Signup for our newsletter and get notified when we publish new articles for free! S. Ravindra Bhat, J. actual rental expenses incurred) rather than its accounting treatment. At the same time, the Revenue also permitted the allowable depreciation. Works Ltd. (supra), a Division Bench of this court relied upon a large number of previous judgments, including the judgments of this court and held as follows (page 410 of 311 ITR) : “Finally, in Veecumsees v. CIT [1996] 220 ITR 185 (SC), the assessee ran a jewellery business and then commenced business in the exhibition of cinematographic films. 32(2) or the deduction referred to in Sec. 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”. are eligible to be amortized under section 35D of the Income Tax Act, 1961. 344 OF 2014. (adsbygoogle=window.adsbygoogle||[]).push({}); Can not find what you are looking ? We use the tagline ‘Simplifying Tax Laws’. 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”). Income Tax Act mandates the preliminary expenses to be amortized equally over a period of 5 years. 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. No. 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). 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. 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. Learned counsel for the assessee, on the other hand, relied upon the judgment in Jay Engg. 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. 2. 43B certain deductions are to be allowed 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. 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. There is general perception in taxpayers that they can claim only medical –health insurance premium under section 80D of the Income tax act but Finance Minister has tweaked the provisions of the little bit in Finance Act-2018 and now medical expenses paid in other than cash mode for resident senior citizens also eligible for deduction under this section. 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. 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. All specified diseases for which this deduction can be claimed are mentioned in the Rule - 11DD in the Income Tax Rules. ... 1.1 Accounting treatment for under/over provision. Profit before tax is usually a gross profit less operating, financial and other expenses plus other income. TaxScan Media is an online news portal for reporting all news, articles, judgments, Circulars, orders and notifications relating to Taxation Laws in India. '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. The guideline explains the tax treatment for deductionof secretarial and filing fees. 36(l) or any loss carried forward under Sec. Preliminary and Pre-operative expenses are two different words. 1. Preliminary Expenses / Pre-incorporation expenses are those expenses incurred prior to incorporation of the LLP. 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.. For income tax purposes, a company should claim a tax deduction on the rental expense based on the contractual rental payments incurred (i.e. (a) Income Tax (Deduction For Incorporation Expenses) Rules 2003 [P.U. 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. 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. 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. There is general perception in taxpayers that they can claim only medical –health insurance premium under section 80D of the Income tax act but Finance Minister has tweaked the provisions of the little bit in Finance Act-2018 and now medical expenses paid in other than cash mode for resident senior citizens also eligible for deduction under this section. He said the tax relief of RM1,000 for vaccination including for Covid-19 also applied to taxpayers, their spouses and children. If income tax rate is 30% calculate the profit before tax and provision for taxation for this year. Our mission is to Simplify the Tax Laws and make aware the people to their tax rights and duties and participate nation building. This court notices that in Jay Engg. 19. However, the funds utilised for the management of both the concerns must be common as reflected in the balance-sheet of the company. the appellant company commenced to demolish its old building on 1 December 1947 after which it immediately began the erection of a new building. Disclaimer 10 DIRECTOR GENERAL'S PUBLIC RULING Section 138A of the Income Tax Act 1967 (ITA) provides that the Director General is empowered to make a Public Ruling in relation to the application of any provisions of the ITA. The amount due as per A Ltd. is R41,05,873. 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. The following are preliminary expenses. 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. 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. Pre-operative expenses are incurred after incorporation of business but before commencement of business operations. Claiming of tax … The balance R46,06,833 has been shown under claims receivable. 7,03,95,000 as pre-capitalisation costs. Income Tax (Deduction of Pre-Commencement of Business Training Expenses) Rules 1996 ... 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