DT: Amendment in scientific research

Click on the following links to read the amendments provided in the previous posts

1. Amendments in Charitable Purpose and Income definition

2. Amendments in Period of Holding and Residential Status

3. Amendment in Additional Depreciation

4. Know everything about section 32AD 
5. Amendment in section 36 of P/G/B/P 

Today, we are posting the amendment related to scientific research. 

 

Section 35(2AB)

According to section 35(2AB), weighted deduction of 200 per cent is allowed to a company engaged in the business of bio-technology or manufacture of goods (except items specified in Schedule XI). This weighted deduction is available in respect of in-house scientific research expenditure (not being expenditure in the nature of cost of any land or building) incurred on approved in-house research and development facility. For availing this weighted deduction, the company is required to enter into an agreement with the Secretary, Department of Scientific and Industrial Research (DSIR) and is also required to obtain his approval. The Secretary, DSIR is required to send the required to obtain his approval. The Secretary, DSIR is required to send the report regarding approval to DGIT (Exemption) in Form No. 3CL who generally does not have jurisdiction over the assessee-company. Further, the company is required to maintain separate books of account for approved R&D facility and is also required to get the accounts audited. However, the copy of audit report is required to get the accounts audited. However, the copy of audit report is required to be submitted to the DSIR only.

The Comptroller and Auditor General of India in its report on performance audit of pharmaceuticals sector recommended rationalization of the provision relating to monitoring of this weighted deduction. In order to have a better and meaningful monitoring mechanism for weighted deduction allowed under section 35(2AB) the following amendments have been made with effect from the assessment year 2016-17-

1.       1. Deduction under section 35(2AB) shall be allowed only if the company enters into an agreement with the prescribed authority for co-operation in such research and development facility and fulfils prescribed conditions with regard to maintenance and audit of accounts and also furnishes prescribed reports.

2.      2.  Reference of the Principal Chief Commissioner or Chief Commissioner has been inserted in section 35(2AA) and section 35(2AB) so that the report referred to therein may be sent to the Principal Chief Commissioner or Chief Commissioner having jurisdiction over the company claiming the weighted deduction under the said section.

DT: Amendment in section 36 of P/G/B/P

Click on the following links to read the amendments provided in the previous posts

1. Amendments in Charitable Purpose and Income definition

2. Amendments in Period of Holding and Residential Status

3. Amendment in Additional Depreciation

4. Know everything about section 32AD

Today, we are providing the amendments in section 36 of P/G/B/P.

 

Section 36(1)(iii)

Proviso to section 36(1)(iii) is applicable if the following conditions are satisfied-

a.       a. Capital is borrowed for acquiring an asset and interest is paid or payable in respect of the borrowed capital;

b.     b.  The capital is borrowed for acquisition of the asset for the purpose of extension of an existing business or profession; and

c.       c. The interest liability may or may not be capitalized in the books of account.

If the above conditions are satisfied then interest on borrowed capital till the date asset is first put to use, shall not be allowed as deduction under section 36(1)(iii). However, the same may be capitalized to claim the benefit of depreciation and investment allowance.

Amendment

Proviso to section 36(1)(iii) is applicable only in the case of an existing business. It is not applicable in the case of a new business or in the case of an existing business when there is no extension. Interest on capital borrowed to finance asset acquisition in such cases is allowable as deduction, even if the interest liability related to the period before the asset is first put to use. To avoid the current mischief, the words “for extension of existing business or profession” have been deleted in the said proviso. After this recent amendment, the said proviso will now be applicable even in the case of a new business or in the case of an existing business when there is no extension.

Section 36(1)(vii)

Bad debts are allowed as deduction in the year in which such debts are written off in the books of account of the assessee and such debt has been taken into account in computing the income of the assessee of the current year or earlier year. If such debt becomes irrecoverable on the basis of Income Computation and Disclosure Standards without recording the same in the accounts, no deduction is allowed under the existing provisions of section 36.

Amendment

Newly inserted second proviso to section 36(1)(vii) provides that if a debt becomes irrecoverable on the basis of Income Computation and Disclosure Standards (ICDS) without recording the same in books of account, it shall be allowed as deduction in the previous year in which such debt becomes irrecoverable and it shall be deemed that such debt has been written off as irrecoverable in the accounts for the purpose of section 36(1)(vii).

Section 36(1)(xvii)

As per the newly inserted clause (xvii) to section 36(1), deduction will be allowed in respect of expenditure incurred by a co-operative society, engaged in the business of manufacture of sugar, for purchase of sugarcane at a price which is equal to or less than the price fixed or approved by the government.

DT: Know everything about newly inserted section 32AD

Click on the following links to read the amendments provided in the previous posts

1. Amendments in Charitable Purpose and Income definition

2. Amendments in Period of Holding and Residential Status

3. Amendment in Additional Depreciation

Today, we are posting the newly inserted section 32AD which is quite similar to section 32AC.

Section 32AD: Additional investment allowance

Additional investment allowance will be available under section 32AD. This deduction will be in addition to the existing deduction available under section 32AC. Accordingly, if an undertaking is set-up in the notified backward areas in Andhra Pradesh, Bihar, Telangana or West Bengal by a company, it shall be eligible to claim deduction under the existing provisions of section 32AC as well as under section 32AD if it fulfils the conditions specified in the said section 32AC and conditions specified under section 32AD.

Conditions for claiming deduction under section 32AD

1.       The assessee may be a company or any other person.

2.       He/it sets-up an undertaking/enterprise for manufacture or production of any article or thing on or after April 1, 2015.

3.       Such undertaking must be set-up in any backward area in Andhra Pradesh, Bihar, Telanagana or West Bengal.

4.       He/it acquires and installs a “new asset”. “New asset” for this purpose is a new plant or machinery. However, it does not include the following assets:-

a.       Any plant or machinery which before its installation by the assessee was used either within or outside India by any other person;

b.      Any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;

c.       Any office appliances including computers or computer software;

d.      Any vehicle;

e.      Ship or aircraft;

f.        Any plant or machinery, the whole of the actual cost of which is allowed as deduction in computing the income chargeable under the head “P/G/B/P” of any previous year.

5.       The new asset should be acquired and installed after March 31, 2015 but before April 1, 2020. Both ‘acquisition’ and ‘installation’ of new plant and machinery are required to be made after March 31, 2015 but before April 1, 2020.

Quantum of investment allowance: 15 per cent of actual cost of “new asset”. It will be available in the year in which the new asset is installed if all the above conditions are satisfied.

Lock in Period: 5 years

DT: Amendment in Additional Depriciation

If you have missed out our first series of amendment then you can catch it here. While, amendments related to “period of holding” and “Residential Status” are available here. Today, we are providing the amendment related to additional depreciation.

Section 32(1)

To encourage investment in new plant or machinery by the manufacturing and power sector, additional depreciation of 20 per cent of the cost of new plant and machinery is available in the year in which the asset is put to use. It is allowed over and above normal depreciation allowance. If, however the new plant and machinery is put to use for less than 180 days in the year in which it is acquired, the additional depreciation would be restricted to 10 per cent of cost of new plant and machinery in the year it is acquired. In such a case, law was silent whether the assessee can claim the balance additional depreciation (i.e. 10 per cent cost of new plant and machinery) in the immediately succeeding year.

Amendment in section 32(1)

Finance Act, 2015 has made an amendment to the section 32(1) to provide that if the asset is put to use for less than 180 days in the year of acquisition then additional depreciation would be 10 per cent of the cost of acquisition in the first year and the balance 10 per cent would be available in the immediately succeeding previous year. The amended provisions would be applicable from the assessment year 2016-17.

Analysis

Earlier, assessee was deprived of the benefit of 20% additional depreciation on new plant and machinery if the asset was put to use for less than 180 days during the previous year. However, assessee would now be entitled to claim the full benefit of additional depreciation even if the asset was not put to use for 180 or more than 180 days in the previous year by virtue of the recent amendment.

Example: XYZ Ltd. engaged in manufacturing of articles, purchased the new plant and machinery for 1,00,000 on 14-5-2015 and put it to use on 31-12-2015. Calculate the additional depreciation on the newly purchased asset.

Solution: Since the asset is put to use for less than 180 days during the previous year 2015-16, only 50% of  additional depreciation would be allowable in the assessment year 2016-17 i.e. 1,00,000 x 20% x 50% = 10,000.

In the assessment year 2017-18, XYZ Ltd. would be entitled to claim the remaining additional depreciation i.e. 10,000 (1,00,000 x 20% - 10,000) by virtue of the recent amendment.   

DT: Amendments in "Period of Holding" and "Residential Status"

In the series of Income Tax amendments, Sanjay Jain Classes has provided the amendments to the section 2(15) and 2(24) here. Today, we are posting the amendments related to “Period of Holding” and “Residential Status”.

Amendment in section 2(42A)

Section 2(42A) defines the tern “short-term capital asset”. Explanation 1 to the said clause provides for determining the period for which the capital asset is held by the assessee. Clause (i) to the said Explanation has been amended by the Finance Act, 2015. The amended provision provides that –

a.      in the case of unit or units, which become the property of the assessee in consideration of a transfer referred to in section 47(xviii), there shall be included the period for which the unit or units in the consolidating scheme of the mutual fund were held by the assessee;

b. in the case of shares in a company [acquired by the non-resident assessee on redemption of GDRs referred to in section 115AC(1)(b) held by such assessee], the period shall be reckoned from the date on which a request for such redemption was made.

Analysis

In order to encourage the investment in the above mentioned units and shares, the government has amended the clause (i) to the Explanation 1 of section 2(42A) so that such  units and shares could become long-term capital asset and ultimately the tax liability of the assessee get reduced.

Section 6(3) before the amendment

According to section 6(3), a company is said to be resident in India in any previous year, if-

a.       it is an Indian company; or

b.      during that year, the control and management of its affairs is situated wholly in India.

Amendment in section 6(3)

With effect from the assessment year 2016-17, a company shall be said to be resident in India in any previous year, if-

a.       it is an Indian company; or

b.      its place of effective management, in that year, is in India.

Analysis

Before the amendment, even if the company is not an Indian company, it shall be treated as resident in India in any previous year, if during that year the control and management of its affairs is situated wholly in India.  Even a partial control of the company outside India was sufficient to hold the foreign company as a non-resident. The Apex Court has given guidelines as to how the expression “control and management” would operate in different cases. It has held that “the head and brain of a company is the Board of Directors, and if the Board of Directors exercises complete local control, then the company is also deemed to be resident”. Due to the requirement that whole of control and management should be situated in India and that too for whole of the year, the condition has been rendered to be practically inapplicable. A company can easily avoid becoming a resident by simply holding a board meeting outside India. This facilitates creation of shell companies which are incorporated outside but are controlled from India. After the amendment to the clause (b) of section 6(3), the place of effective management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made.