For Business

Depreciation – depreciation is the big tool for the businessman to save taxes. But depreciation should be planned advisedly to make it effectively. The following points should be noted in this regard.

• Counter the short term capital gain – if any assets are sold and short term capital gain arises, the assessee is advised to counter it by purchasing any other assets of the amount of short term capital gain. This will save the tax of the increment of sale of assets. However, if any old short term capital loss in the account, this will also counter the gain.
• Time to purchase assets – while purchasing any new assets, this thing should be kept in mind that the assessee would use these assets at least 180 days in a financial year. Less than 180 days in a year, the rate of depreciation will be 50% of what it would be after 180 days in a financial year.
• Additional depreciation – from the financial year 2007-08, additional depreciation @ 20% is allowed to any extension of plant and machinery by an undertaking. This additional depreciation is for promoting new plants and machinery.

Expenditure on Scientific Research – any expenditure on scientific research should be planned accordingly like:

• Inhouse research expenditure is deducted if the expenditure is related to business. If research is not business related, the assessee is advised to apply to an approved research association to take up such research, which will be fully deductible.
• If land is on lease, the lease rent is deductible as a scientific research or revenue expenditure under section 35.
• If assets are only used for scientific research and sold, implication of deemed business profits under section 41(3) should be analysed to reduce the incidence of tax.
• Amalgamation should be with the Indian company so that the profits and gains can be calculated in the Indian manner and no double tax provisions will take in effect.

Treatment of preliminary expenses – any legal as well as engineering expenses are allowed to be deducted in profits and loss under the section 35D of income tax. If the ceiling limit u/s 35D has been exhausted it is better to capitalise them and claim the depreciation.

Bad Debts – Bad debts are the expenses where the debtor fails to pay the credit to an assessee. Bad debts are allowed to be deducted in the profits, if the assessee can prove that this income also computed while making profits and loss of the company. So an assessee needs to make all the records for claiming the deduction.
Employer contributions to provident fund and other statutory liabilities – any contribution to employer fund and other statutory liabilities should be paid on or before the due date to claim the deduction and avoid its disallowance.

Advertisement – advertisement is an expense which is deductible from profits. An assessee should not insert any advertisement in the souvenir published by a political party to avoid the forfeiture of deduction.

Capital Gains – when depreciation is not allowed to some assets, it is better not to purchase it. Instead an assessee can acquire a right to use assets. The expenses to use such assets are deductible.

Compensation for breach of agreement for purchasing of an asset – any payment for compensation for breach of an agreement with the seller is not allowed to be deducted in the profits as it is capital expenditure. So the assessee first purchases assets and thereafter only sells it. Any loss regarding purchase and selling will be short term capital loss and can be counter with short term capital profits of the year or 8 years onwards from the loss is occurred.

Borrowing for business – any borrowing for the business should be after setting up the business. Like if a businessman likes to issue debentures, all the expenses like stamp duty, legal expenses and other expenses will be allowed to deductible under section 37(1) if the business is already set up. However, if the borrowing is made to purchase an assets which is depreciable. Then it can be purchased before setting up the business and the depreciation will be allowed to deduct from the profits.

Tax Audit – under the provision section 44AB of the Income Tax Act, a business should get their books audited if the gross turnover / sales exceed 1 crore Rupees in the previous year; whereas in the case of profession the limit is 25 Lakhs Rupees in the previous year. The plenty is 1.5 lakh rupees if the business or profession do not audited their books in time of the previous year. So it’s advisable to audit your books in time.

Maintenance of books – under section 44AA of income tax, a professional need to prepare the books of his profession if the total receipts are more than 150,000 Rupees in a financial year. Where in the case of business the limit is 10 lakh. If the business or profession does not come in this limit, they need not to maintain the records of the books and their income will be calculated in presumed manner.

TDS from certain payments – Tax deducted at source (TDS) is deducted from certain payments like interest, royalty, fees for technical services etc. in India or payment outside India. So TDS should be deducted according to the rule and deposited in the income tax account timely to avoid any problem as well as disallowance as expenditure.

Payment more than Rs 20,000 should not be cash – according to the section 40A (3) of Income Tax, an assessee can pay less than 20,000 Rupees to any creditor or any bill in a single day. Any payment more than 20,000 Rupees should be made either by account payee cheque, demand draft, RTGS, or any other mode of banks. If payment is made more than 20,000 Rupees in a single day to a party in cash, the amount is disallowed and will be treated as income of the firm.