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2. Mr.Suraj, commenced operations of the business of a new three-star hotel in Chennai on
April 1, 2020. He incurred capital expenditure of Rs.50 lakhs during the period January 2020 to March 2020 exclusively for the above business and capitalized the same in his books of account as on 01.04.2020.
Further, during the previous year 2020-21, he incurred a capital expenditure of Rs.2 crore (out of which Rs.1.5 crore was for acquisition of land) exclusively for the above business.
Compute the income under the head “Profits and Gains of business or profession” for the assessment year 2021-22, assuming that he has fulfilled all the conditions specified for claim of deduction under section 35AD and has not claimed any deduction under Chapter VI-A under the head “C.- Deductions in respect of certain incomes”.
The profits from the business of running this hotel (before claiming deduction under section 35AD) for the assessment year 2021-22 is Rs.25 lakhs.
Assume that he also has another existing business of running a four-star hotel in Coimbatore, which commenced operations thirty years back, the profits from which was Rs.120 lakhs for assessment year 2021-22. Also, assume that expenditure incurred were paid by account payee cheque or use of ECS.
Answer:
Computation of profits and gains of business or profession for A.Y.2021-22
A. Profit from the existing business of running a hotel in Coimbatore 120 lakhs
B. New three-star hotel in Chennai:
Profit before claiming deduction u.s.35AD 25 lakhs Less: Deduction u.s.35AD (see note below) 100 lakhs (75 lakhs)
Income from business after set-off of losses of specified business
against profits of another specified business 45 lakhs
Note: Deduction u.s.35AD in respect of the new hotel:
Expenditure incurred prior to commencement of business and capitalized in the books of account 50 lakhs
Capital expenditure incurred during the previous year 20-21
excluding land 50 lakhs
Amount of deduction u.s.35AD for A.Y. 2021-22 100 lakhs
Asset shall be used only for Specified Business:
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Any asset in respect of which a deduction is claimed and allowed shall be used only for the specified business for a period of 8 years beginning with the previous year in which such asset is acquired.
If the above condition is violated:
In case the asset is used for a purpose other than the specified business within the period of 8 years, the total amount of deduction so claimed and allowed as reduced by the amount of depreciation u.s.32 shall be deemed to be the income under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.
3. Mr.Arnav is a proprietor having two units – Unit A carries on specified business of setting up and operating a warehousing facility for storage of sugar; Unit B carries on non- specified business of operating a warehousing facility for storage of edible oil.
Unit A commenced operations on 1.4.2019 and it claimed deduction of Rs.100 lacs incurred on purchase of two buildings for Rs.50 lacs each (for operating a warehousing facility for storage of sugar) under section 35AD for A.Y. 2020-21. However, in February, 2021, Unit A transferred one of its buildings to Unit B. Examine the tax implications of such transfer in the hands of Mr.Arnav and what shall be the cost for the purpose of claiming depreciation for A.Y.21-22.
Answer: Since the capital asset, in respect of which deduction of Rs.50 lacs was claimed u.s.35AD, has been transferred by Unit A carrying on specified business to Unit B carrying on non-specified business in the previous year 20-21, the tax implication is as under:
Deduction allowed u.s.35AD for A.Y.2020-21 50 lakhs
Less: Depreciation allowable u.s.32 for A.Y.2020-21 (50 lacs x 10%) 5 lakhs Balance to be treated as income 45 lakhs
Mr.Arnav can claim depreciation on the building transferred to unit B for A.Y.2021-22. The actual cost of the building would be:
Actual cost to the assessee 50 lakhs
Less: Depreciation allowable u.s.32 for A.Y.20-21 (10% of 50 lacs) 5 lakhs Actual cost of the building for claiming depreciation for A.Y.21-22 45 lakhs
4. DAS Pvt Ltd. fulfilling all the conditions as being specified in section 35AD of the Income Tax Act, 1961 has incurred capital expenditure of Rs.30 lakhs on purchase of land, Rs.80 lakhs (Rs.75 lakhs by cheque and Rs.5 lakhs in cash) on construction of building and Rs.10 lakhs on the plant and machinery during the previous year 2020-21 for setting up and operating a warehouse for the storage of sugar. The warehouse became operational on 01st March, 2021. The amount of deduction which the company can claim for such capital expenditure as per section 35AD in AY. 2021-22 shall be …………………..
SECTION 35: EXPENDITURE ON SCIENTIFIC RESEARCH:
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Scientific research may be carried on:
a. by the assessee himself, relating to his business (in-house research); or b. by making contributions to approved institutions engaged in scientific research
A. Revenue expenditure related to the business of the assessee (in-house research):
For all assessees: 100% of such expenditure shall be allowed as deduction
Revenue expenditure incurred BEFORE COMMENCEMENT OF BUSINESS on:
a. salary to employees excluding perquisites; and b. purchase of raw materials used in scientific research
shall be fully allowed as deduction but not exceeding three years immediately preceding the date of commencement of business. Deduction is allowed to the extent these are approved by the prescribed authority.
B. Capital Expenditure related to the business of the assessee (in-house research):
For all assessees: 100% of such expenditure (excluding land) shall be allowed as deduction
Capital expenditure (excluding land) incurred BEFORE COMMENCEMENT OF BUSINESS
shall be fully allowed as deduction but not exceeding three years immediately preceding the date of commencement of business.
Note: Since entire cost is allowed as deduction, depreciation is not allowed.
C. Contribution to RESEARCH ASSOCIATIONS engaged in research activities:
Any contribution made to a Research Association, National Laboratory, University or IIT; for the purpose of scientific research or research in social science or statistical science:
Deduction shall be 100% of contribution made to these institutions.
Any contribution made to a Company (which is registered in India and having scientific research as its main object): Deduction shall be 100% of contribution made to these institutions.
The Research carried on by the Institution need not be related to the business of the assessee.
Note: A ‘research association’ can be a university or a college or any other institution
