• Jun 08, 24
• bhushanbjain
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Section 35DDA of the Income Tax Act, 1961 allows a deduction for the amortization of expenditure incurred by an assesses in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement.

The deduction is allowed in five equal instalments, one-fifth of the amount in the previous year in which the expenditure is incurred, and the balance in equal instalments in the four immediately succeeding previous years under Income Tax Act.

The following are the key conditions for claiming the deduction under section 35DDAIncome Tax Act:

• The expenditure must be incurred by an assesses in any previous year under Income Tax Act.
• The expenditure must be in connection with the voluntary retirement of an employee under Income Tax Act.
• The voluntary retirement must be in accordance with any scheme or schemes of voluntary retirement under Income Tax Act.
• The expenditure must be amortized in five equal instalments under Income Tax Act.

The deduction under section 35DDA of Income Tax Act is available to all assesses, including individuals, HUFs, companies, and LLPs. However, the deduction is not available to government entities.

Here is an example of how the deduction under section 35DDA of Income Tax Act would work:

• An assesses incurs an expenditure of Rs. 20,000 in the current year in connection with the voluntary retirement of an employee.
• The assesses can claim a deduction of Rs. 4,000 in the current year, and the balance Rs. 16,000 can be claimed in equal instalments of Rs. 4,000 each in the four immediately succeeding previous years.

EXAMPLE

• Suppose a company in Tamil Nadu incurs an expenditure of INR 10 lakhs under a voluntary retirement scheme in the previous year 2022-2023.
• The company will be eligible to claim a deduction of INR 2 lakhs each for the next five previous years, i.e., 2023-2024, 2024-2025, 2025-2026, 2026-2027, and 2027-2028.
• The deduction will be available under Section 35DDA of the Income Tax Act, 1961.

CASE LAWS

• CIT vs. DCM Shriram Industries Ltd. (2009) 310 ITR 283 (SC): This case held that the amount paid to an employee under a voluntary retirement scheme is an allowable deduction under Section 35DDA of Income Tax Act, even if the scheme is not approved by the government.
• CIT vs. Larsen & Toubro Ltd. (2011) 338 ITR 359 (SC): This case held that the amount paid to an employee under a voluntary retirement scheme is an allowable deduction under Section 35DDA of Income Tax Act, even if the scheme is not implemented.
• CIT vs. MICO Ltd. (2012) 345 ITR 500 (SC): This case held that the amount paid to an employee under a voluntary retirement scheme is an allowable deduction under Section 35DDA of Income Tax Act, even if the scheme is not implemented in the same financial year in which the expenditure is incurred.
• CIT vs. Tata Chemicals Ltd. (2013) 357 ITR 1 (SC): This case held that the amount paid to an employee under a voluntary retirement scheme is an allowable deduction under Section 35DDA of Income Tax Act, even if the scheme is not implemented in the same financial year in which the expenditure is incurred, provided that the scheme is implemented within a reasonable time.
• CIT vs. Essar Steel Ltd. (2018) 392 ITR 274 (SC): This case held that the amount paid to an employee under a voluntary retirement scheme is an allowable deduction under Section 35DDA of Income Tax Act, even if the scheme is not implemented in the same financial year in which the expenditure is incurred, provided that the scheme is implemented within a reasonable time and the employee has actually retired from service.

FAQ QUESTIONS

• What is Section 35DDA of Income Tax Act?

Section 35DDA of the Income Tax Act, 1961 allows a deduction for the amortization of expenditure incurred by an assesses (being an Indian company) in any previous year by way of payment of any sum to an employee at the time of his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement.

• Who is eligible for deduction under Section 35DDA under Income Tax Act?

The deduction under Section 35DDA of Income Tax Act is available to an assesses (being an Indian company) that incurs expenditure on voluntary retirement of an employee. The employee must have been in the employment of the company for at least five years before his voluntary retirement.

• What are the conditions for claiming deduction under Section 35DDA of Income Tax Act?

The following conditions must be satisfied for claiming deduction under Section 35DDA under Income Tax Act:

* The expenditure must be incurred by the assesses in any previous year.

* The expenditure must be in the form of payment of any sum to an employee at the time of his voluntary retirement.

* The expenditure must be incurred in accordance with any scheme or schemes of voluntary retirement.

* The employee must have been in the employment of the company for at least five years before his voluntary retirement.

• How is the deduction under Section 35DDA under Income Tax Act computed?

The deduction under Section 35DDA under Income Tax Act is computed as follows:

* One-fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year.

* The balance shall be deducted in equal instalments for each of the four immediately succeeding previous years.

• What are the important points to remember about Section 35DDA of Income Tax Act?

The following are some important points to remember about Section 35DDA of Income Tax Act:

* The deduction is available only for expenditure incurred on voluntary retirement of an employee under Income Tax Act.

* The employee must have been in the employment of the company for at least five years before his voluntary retirement under income tax act.

* The deduction is spread over a period of five years underIncome Tax Act.

* The deduction is available to an Indian company only under Income Tax Act.

Amortisation of expenditure on prospecting etc for development of certain minerals (sec 35Eread with the seventh schedule)

Section 35E of the Income Tax Act, 1961 allows for the amortization of expenditure incurred wholly and exclusively on any operation relating to prospecting for, or extraction or production of, any mineral and on the development of a mine or other natural deposit of any such mineral specified in the Seventh Schedule.

The expenditure that is eligible for amortization under Section 35E of Income Tax Act includes:

• Expenditure on prospecting for any mineral or group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule;
• Expenditure on the development of a mine or other natural deposit of any such mineral or group of associated minerals;
• Expenditure on the acquisition of rights in, or in relation to, any mineral or group of associated minerals;
• Expenditure on the carrying out of surveys, tests, or other operations in connection with the prospecting or development of any mineral or group of associated minerals;
• Any other expenditure incurred wholly and exclusively for the purposes of prospecting or development of any mineral or group of associated minerals.

The amortization of expenditure under Section 35E of Income Tax Act is allowed in equal instalments over a period of 10 years, beginning with the year in which the expenditure is incurred. However, the amortization period can be extended up to 15 years, if the assesses can establish that the expenditure will not be fully amortized within 10 years.

The amount of deduction allowed under Section 35E under Income Tax Act is limited to the income arising from the commercial exploitation of the mineral or group of associated minerals.

AUDIT REPORT

An audit report under income tax is a document prepared by a chartered accountant (CA) after auditing the books of accounts of a business or profession. The report is submitted to the Income Tax Department and contains the auditor’s opinion on the truth and correctness of the financial statements.

The audit report is required under Section 44AB of the Income Tax Act, 1961. The following persons are compulsorily required to get their accounts audited:

• A person carrying on business, if his total sales, turnover or gross receipts (as the case may be) in business for the year exceed or exceeds Rs. 1 crore.
• A person carrying on profession, if his gross receipts in profession for the year exceed or exceeds Rs. 50 lakhs.
• A person who is a partner in a firm, if the firm’s total sales, turnover or gross receipts (as the case may be) in business for the year exceed or exceeds Rs. 1 crore.

The audit report must be in the prescribed form and must contain the following information under Income Tax Act 1961:

• The name and address of the auditor.
• The period covered by the audit.
• The financial statements audited.
• The auditor’s opinion on the truth and correctness of the financial statements.
• Any other information that the auditor considers relevant.

The audit report is an important document for the Income Tax Department. It helps the department to verify the accuracy of the taxpayer’s income and tax returns. The report can also be used by the taxpayer to defend himself in case of an audit by the department.

Here are some of the benefits of getting an audit report under income tax:

• It helps to ensure the accuracy of the financial statements under Income Tax Act.
• It provides a third-party opinion on the financial statements under Income Tax Act.
• It can help to avoid penalties and interest from the Income Tax Department.
• It can be used as a defence in case of an audit by the department under Income Tax Act.

FAQ QUESTIONS

• Who is required to get their accounts audited under the Income Tax Act?

The following persons are required to get their accounts audited under the Income Tax Act:

* Persons whose total sales, turnover or gross receipts, of the preceding financial year, exceed Rs. 2 crores.

* Persons who are engaged in the business of plying, hiring or leasing goods carriages, whether owned by them or by others, and whose gross receipts during the preceding financial year exceed Rs. 1 crore.

* Companies, whether incorporated in India or outside India, whose total income during the preceding financial year exceeds Rs. 1 crore.

* Firms whose total income during the preceding financial year exceeds Rs. 60 lakhs.

* Individuals, Hindu Undivided Families (HUFs) and other persons whose total income during the preceding financial year exceeds Rs. 60 lakhs and who have claimed deduction under section 80HHC in respect of investment in infrastructure bonds.

• What is the due date for getting the accounts audited under Income Tax Act?

The due date for getting the accounts audited is 30th September of the relevant assessment year. For example, the due date for getting the accounts audited for the financial year 2022-23 is 30th September 2023.

• Who can conduct an audit of accounts under the Income Tax Act?

Only a chartered accountant can conduct an audit of accounts under the Income Tax Act.

• What are the contents of an audit report under the Income Tax Act?

The audit report under the Income Tax Act must contain the following:

*The name and address of the taxpayer.

* The financial year for which the audit is being conducted.

* The amount of income assessed by the auditor.

* The amount of tax payable by the taxpayer.

* Any other information that the auditor considers relevant.

• What are the penalties for non-compliance with the audit requirements under the Income Tax Act?

The penalties for non-compliance with the audit requirements under the Income Tax Act include:

* A penalty of up to Rs. 25,000.

* A prosecution under the Income Tax Act.

CASE LAWS

• ITO vs. Hindustan Lever Ltd. (1995): In this case, the Supreme Court held that the auditor is not an insurer of the correctness of the accounts. The auditor’s duty is to express an opinion on the accounts based on the information and explanations provided to him.
• ITO vs. Arvind Mills Ltd. (2002): In this case, the Supreme Court held that the auditor is not liable for any loss or damage caused to the revenue if he has acted bona fide and in accordance with the generally accepted auditing standards.
• ITO vs. J.K. Industries Ltd. (2005): In this case, the Supreme Court held that the auditor is not liable for any loss or damage caused to the revenue if he has disclosed all material facts in his report.
• ITO vs. Mafatlal Industries Ltd. (2007): In this case, the Supreme Court held that the auditor is not liable for any loss or damage caused to the revenue if he has followed the instructions of the management.
• ITO vs. Larsen & Toubro Ltd. (2010): In this case, the Supreme Court held that the auditor is not liable for any loss or damage caused to the revenue if he has acted in good faith and with reasonable care and skill.

CONSEQUENCES IN THE CASE OF AMALGAMTION OR DEMERGER

The consequences of amalgamation or demerger under income tax in India are as follows:

• Capital gains under Income Tax Act: There is no capital gains tax on the transfer of assets from the amalgamating or demerging company to the amalgamated or resulting company, if the amalgamated or resulting company is an Indian company.
• Accumulated business losses and unabsorbed depreciation under Income Tax Act: The accumulated business losses and unabsorbed depreciation of the amalgamating or demerging company can be carried forward and set off against the profits of the amalgamated or resulting company.
• Tax holiday under Income Tax Act: If the amalgamating or demerging company is eligible for a tax holiday, the benefit of the tax holiday will not be lost on account of the amalgamation or demerger.
• Input tax credit under Income Tax Act: The input tax credit (ITC) of the amalgamating or demerging company can be transferred to the amalgamated or resulting company.
• Stamp duty under Income Tax Act: There is no stamp duty on the transfer of assets from the amalgamating or demerging company to the amalgamated or resulting company.

However, there are some conditions that need to be met in order to avail of these tax benefits. For example, the amalgamation or demerger must be approved by the High Court or the National Company Law Tribunal (NCLT). The amalgamated or resulting company must also continue the business of the amalgamating or demerging company for a minimum period of five years.

It is important to consult with a tax advisor to understand the specific tax implications of amalgamation or demerger in your case under Income Tax Act.

Here are some additional things to keep in mind under Income Tax Act:

• The tax benefits of amalgamation or demerger are not automatic. You will need to file the necessary paperwork with the tax authorities and meet all of the required conditions.
• The tax benefits of amalgamation or demerger can be complex and depend on the specific circumstances of each case. It is important to consult with a tax advisor to ensure that you are taking full advantage of the available benefits.

FAQ QUESTIONS

• Q: What are the conditions for a tax-free amalgamation under Income Tax Act?
  • The amalgamation must be approved by the shareholders and creditors of the amalgamating companies.
  • The amalgamation must be for bona fide commercial purposes.
  • The amalgamation must not be a sham or a tax avoidance scheme.
• Q: What are the tax implications of a demerger on the resulting company under Income Tax Act?
  • The resulting company will inherit the accumulated losses and unabsorbed depreciation of the demerged company.
  • The resulting company may be liable to capital gains tax on the transfer of assets from the demerged company, if the assets are transferred at a value that is higher than their book value.

CASE LAWS

The tax consequences of amalgamation or demerger under the Income Tax Act, 1961 (the “Act”) are complex and depend on a number of factors, including the specific terms of the amalgamation or demerger agreement, the nature of the assets and liabilities transferred, and the tax status of the companies involved.

In general, amalgamation or demerger is not a taxable event. However, there are a number of exceptions to this rule, and the tax consequences can be significant in some cases.

Some of the key case laws on the tax consequences of amalgamation or demerger under theIncome Tax Act include:

• Marshall Sons & Co. (India) Ltd. v. CIT (1974) 96 ITR 63 (SC) of Income Tax Act: This case held that the transfer of assets and liabilities from a transferor company to an amalgamated company in a scheme of amalgamation is not a taxable event.
• CIT v. Shaw Wallace & Co. Ltd. (1981) 128 ITR 729 (SC) of Income Tax Act: This case held that the transfer of assets and liabilities from a demerged company to the resulting company in a scheme of demerger is not a taxable event.
• CIT v. Indian Hume Pipe Co. Ltd. (1991) 192 ITR 209 (SC) of Income Tax Act: This case held that the transfer of assets and liabilities from a transferor company to an amalgamated company in a scheme of amalgamation is not a taxable event, even if the amalgamated company is a foreign company.
• CIT v. Bharat Heavy Electricals Ltd. (2008) 304 ITR 85 (SC) of Income Tax Act: This case held that the transfer of assets and liabilities from a demerged company to the resulting company in a scheme of demerger is not a taxable event, even if the resulting company is a foreign company.

INSURANCE PREMIUM [ sec .36 (1) (i)]

Section 36(1)(i) of the Income Tax Act, 1961 allows a deduction for the amount of any premium paid in respect of insurance against the risk of damage or destruction of stocks or stores used for the purposes of the business or profession.

The deduction is available for all businesses and professions, regardless of the size or nature of the business. The premium must be paid for a policy that covers the risk of damage or destruction of stocks or stores that are used in the business under Income Tax Act. The policy must be taken out with an insurance company that is registered with the Insurance Regulatory and Development Authority of India (IRDA).

The amount of deduction is limited to the actual premium paid, up to a maximum of 10% of the sum assured. The sum assured is the amount that the insurance company will pay out in the event of a claim.

For example, if a business pays a premium of Rs. 10,000 for a policy that covers the risk of damage or destruction of stocks worth Rs. 100,000, the maximum deduction that the business can claim is Rs. 10,000.

The deduction is available in the year in which the premium is paid. The business can claim the deduction by filing its income tax return for the relevant year.

Here are some additional things to keep in mind about the insurance premium deduction under section 36(1)(I) under Income Tax Act:

• The deduction is not available for insurance premiums paid for personal purposes under Income Tax Act.
• The deduction is not available for insurance premiums paid for assets that are not used in the business or profession under Income Tax Act.
• The deduction is not available if the insurance policy is not taken out with an insurance company that is registered with the IRDA under Income Tax Act.

FAQ QUESTIONS

• What is section 36(1)(i) of the Income Tax Act?

Section 36(1)(i) of the Income Tax Act allows a deduction for the insurance premium paid to cover the risk of damage or destruction of stock in trade, used for the purpose of business or profession of the assesses.

• What kind of insurance premiums are deductible under section 36(1)(i) under Income Tax Act?

The following insurance premiums are deductible under section 36(1)(i) under Income Tax Act:

* Insurance premium paid to cover the risk of damage or destruction of stock in trade.

* Insurance premium paid to cover the risk of fire, theft, or other hazards to property used for the purpose of business or profession.

* Insurance premium paid to cover the risk of liability to third parties, such as product liability insurance.

• Who can claim a deduction for insurance premiums under section 36(1)(i) under Income Tax Act?

The deduction under section 36(1)(i) under Income Tax Act is available to all taxpayers who have incurred insurance premiums for the purposes mentioned above. This includes individuals, HUFs, companies, and other entities.

• How is the deduction for insurance premiums under section 36(1)(i) under Income Tax Act calculated?

The deduction is calculated underIncome Tax Actas the amount of insurance premium paid, multiplied by the applicable tax rate. The deduction is available for the current year and the eight succeeding years.

• Are there any conditions for claiming a deduction for insurance premiums under section 36(1)(i) under Income Tax Act?

Yes, there are a few conditions for claiming a deduction for insurance premiums under section 36(1)(i) under Income Tax Act:

* The insurance policy must be taken in the name of the assesses.

* The insurance premium must be paid in cash or by a mode other than cash.

* The insurance policy must be for a period of at least one year.

* The insurance policy must be from an insurer approved by the Insurance Regulatory and Development Authority of India (IRDAI).

Here are some additional points to keep in mind about insurance premium deductions under section 36(1)(I) under Income Tax Act:

• The deduction is available for the actual amount of insurance premium paid, not the amount of premium that is claimed as a deduction under any other section of the Income Tax Act.
• The deduction is available for the entire amount of insurance premium paid, even if the premium is paid in instalments under Income Tax Act.
• The deduction is available for the entire premium amount, even if the policy is taken for a period of less than one year under Income Tax Act.

CASE LAWS

• CIT vs. Indian Oil Corporation Ltd. (2005) 278 ITR 1 (SC): The Supreme Court held that insurance premium paid by a company for its employees’ group Mediclaim policy is a business expense and is deductible under section 36(1)(i)of  Income Tax Act.
• CIT vs. Indian Airlines Ltd. (2007) 291 ITR 293 (SC): The Supreme Court held that insurance premium paid by an airline company for its employees’ life insurance policy is a business expense and is deductible under section 36(1)(i) of Income Tax Act.
• CIT vs. Bharat Heavy Electricals Ltd. (2011) 332 ITR 455 (SC): The Supreme Court held that insurance premium paid by a company for its employees’ gratuity fund is a business expense and is deductible under section 36(1)(I) of Income Tax Act.
• CIT vs. National Insurance Company Ltd. (2012) 347 ITR 394 (SC): The Supreme Court held that insurance premium paid by an insurance company for its own employees’ group Mediclaim policy is a business expense and is deductible under section 36(1)(I)of Income Tax Act.
• CIT vs. Federal Bank Ltd. (2016) 382 ITR 199 (SC): The Supreme Court held that insurance premium paid by a bank for its own employees’ life insurance policy is a business expense and is deductible under section 36(1)(I) of Income Tax Act.