Bailabel Type : non-bailable

Description

Section 36 of the Income Tax Act, 1961, deals with the deductions that can be claimed by taxpayers engaged in business or profession, which are not specifically covered under other sections of the Act. This section provides a wide range of allowable deductions for various business-related expenses that can help reduce taxable income, thus lowering the tax liability.

Purpose of Section 36:

• To allow businesses and professionals to deduct certain expenses incurred in the process of earning income.
• To recognize genuine business expenses and operating costs that are necessary for conducting business or profession.
• It ensures that businesses are not taxed on amounts that they have spent on genuine expenses to earn their income.

Key Provisions of Section 36:

1. List of Expenses Eligible for Deduction under Section 36:

The section specifically enumerates the types of expenses that are eligible for deductions. Below are the main categories of expenses that are deductible under Section 36:

• Section 36(1)(i): Business Bad Debts:

  • Bad debts that have been written off by the taxpayer as irrecoverable are eligible for deduction.
  • The debts must be related to the business or profession, and the taxpayer must have attempted recovery before writing them off.
  • These deductions are also available for provision for bad debts if the taxpayer is a bank or a financial institution.

• Section 36(1)(ii): Provision for Bonus or Commission:

  • Any provision for bonuses or commission made by the taxpayer for the employees of the business can be deducted, provided the provision is:
    • Made in the accounting year.
    • Based on a legal obligation.
    • Based on actual work or performance.

• Section 36(1)(iii): Interest on Borrowed Capital:

  • Interest paid on capital borrowed for business purposes is eligible for deduction.
  • The interest must be paid or payable during the accounting year and must be related to the business or profession.

• Section 36(1)(iv): Contributions to Provident Fund:

  • Employer contributions to employees' provident fund or any other employee welfare fund that is approved by the government are eligible for deduction.
  • The contributions must be made before the due date of filing the tax return.

• Section 36(1)(v): Contribution to Gratuity Fund:

  • Contributions made by the employer to a gratuity fund are eligible for deduction.
  • The fund must be approved by the government under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.

• Section 36(1)(vi): Depreciation on Assets:

  • While Section 32 deals with depreciation on tangible assets, Section 36(1)(vi) allows deductions for depreciation on intangible assets like patents, copyrights, trademarks, and trade secrets.
  • The deduction is given based on the amortization of the value of these intangible assets over their useful life.

• Section 36(1)(vii): Bad Debt Written Off:

  • In addition to the deduction under Section 36(1)(i) for bad debts, Section 36(1)(vii) allows for the deduction of bad debts that have been written off during the financial year.
  • The business must have made reasonable efforts to recover the debts before writing them off as irrecoverable.

• Section 36(1)(viii): Provision for Expenses Related to Research and Development (R&D):

  • Expenditure on scientific research and technological development that is directly related to the business can be deducted under this section.
  • The taxpayer must meet the specific criteria for R&D under the Act to claim this deduction.

• Section 36(1)(ix): Expenditure on Transfer of Technology:

  • Expenditure incurred on the transfer of technology or intellectual property that is related to the business is eligible for deduction.

• Section 36(1)(x): Expenditure Incurred on Professional Tax:

  • The professional tax paid by the taxpayer for their business or profession is eligible for deduction.

• Section 36(1)(xi): Other Deductions:

  • Any other expenses that are incurred by a business or profession in the course of operations and are not specifically covered elsewhere in the Act can be allowed as a deduction under Section 36.

2. Timing of Deductions:

• For certain expenses, the deduction is allowed only in the year in which the expense is actually paid or incurred.
• For example, deductions for bad debts can only be claimed in the year when the debt is written off.
• Similarly, interest on loans can only be deducted in the year the interest is paid or accrued.

3. Restrictions:

• The section specifies that if any deduction under Section 36 is claimed in excess of the amount actually incurred by the taxpayer, the taxpayer may be subject to penalties or reassessment of tax.

4. Documentation and Compliance:

• Proper documentation and proof of expenses incurred must be maintained by the taxpayer to claim deductions under Section 36.
• Businesses must have proper books of accounts and records to substantiate their claims for deductions related to bad debts, interest, contributions to funds, etc.

5. Carry Forward of Losses:

• Losses arising from the deductions under Section 36 can be carried forward and set off against future profits, provided the relevant conditions are met.
• For instance, if a business claims a deduction for bad debts but still faces losses, it can carry forward the loss and set it off against future business income.

Punishment

If a taxpayer fraudulently claims deductions under Section 36 or misrepresents expenses, it can result in:

• Penalty under Section 270A for misreporting of income.
• Interest under Sections 234A, 234B, and 234C for delayed tax payments.
• Prosecution under Section 276C for willfully evading tax.