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Section 36 of the Income Tax Act, 1961: Other Deductions While Determining PGBP Income
In India, the taxation arena, the Income Tax Act 1961 Section 36 plays a pivotal role in defining the financial strategy of businesses. This section is interrelated with others in this Act organically and provides detailed directions with regard to the deductions that could be made from the gross total income of an undertaking. Such provisions are essential for every business so that they may know how far can they go to minimize the liability towards taxes under legitimate standards.
Contents :-
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Overview of Section 36
Section 36 of the Income Tax Act is basically there to offer businesses relief in the sense that it enables claim deductions on different expenses that were incurred in any given financial year. The importance of such is put into perspective when looking at how they aid in the diminution of their respective taxable income, hence resulting in a decrease in tax liability. The essence of this section lies in its detailed list of expenditures, which are deemed as permissible deductions.
Types of Deductions Under Section 36
Here is the superannuation benefit structure presented in an easy-to-understand table format:
Section 36(1)(i)
Insurance premiums paid by the assesses on its stock in trade, lives of cattle, and health of employees.
The following are under this section:
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Section 36(1)(i): This includes deductions for the premium paid against the risk of damage to stock in trade.
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Section 36(1)(a): Premium paid by Federal Milk Co-operative Society against the life of cattle held by persons or by members of primary societies and those supplying milk to FMCS. This premium can be shown as expenditures by the businesses and claim necessary deductions.
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Section 36(1)(ib): Premium paid by professionals or businesses for the health insurance of employees working under them in any mode other than cash. The amount is eligible for deduction claims if it is paid in any mode other than cash.
Section 36(1)(ii): Commissions and bonuses paid to employees
This section is about the commissions and bonuses paid by businesses and professionals to their employees for rendering services as deductions. A voluntary and statutory bonus also comes under this section, and these deductions can only be claimed in the year in which payments were made. However, such payments should have two conditions:
1. Bonuses or commissions should follow Section 43B of the Income Tax Act.
2. These payments should be made for rendering services and not in lieu of dividends.
Section 36(1)(iii): Interest paid on loans borrowed for business purposes
Even interest paid on the capital borrowing of the business owners and professionals is eligible as a deduction under this Section. The loans should state these conditions mentioned in Section 43B of the Income Tax Act and the capital must be borrowed from banks, private finance initiatives, and state finance corporations. However, when the loans are taken to purchase any capital asset interest paid on them from the date of purchase till the date on which they are put to use is not considered as a deduction.
Section 36(1)(iiia): Zero coupon bonds
Businesses also qualify for getting discounts under the zero-coupon bonds. However, with respect to zero coupon bonds, the process of amortization shall be conducted by the entities on a pro-rata basis of discount amounts being realized over the life span.
Section 36(1)(iv): Employer’s contribution towards provident fund
Employer contributions to the Employees' Provident Fund (EPF) or superannuation fund shall also be eligible for claiming as deductions under the relevant Section of the Income Tax Act. The entities can claim these contributions in deductions only in the year in which the payments were made.
Section 36(1)(iva):
Employer’s contribution towards the pension fund The contributions made in the pension fund by the employers as stated in Section 80CCD of the Income Tax Act are eligible for deduction. The benefit in this head is up to a limit of 10% of the total salary of the employees. In the salary component, only the DA and no other allowances are included.
Section (36)(v):
Employer’s contribution towards gratuity funds The deduction is available to contributions made by the employers towards a gratuity fund under irrevocable trust, established by them for the welfare of the employees. The gratuity fund has to comply with provisions as referred to in Section 43B of such Income Tax Act.
Section 36(1)(va):
Amount paid by employees towards welfare schemes: Any amount collected from the employers to wards ESI, PF etc is eligible for deductions only if it is received from the employees. The condition is that the said amount so received shall be deposited in the respective welfare account within the due date. The same will be treated like income from business/profession by the Income Tax Department if employers do not deposit the same within the due date.
Section 36(1)(vi):
Allowance in respect of dead/permanently useless animals: Capital expenditures include any expenditure made for purchasing the animal for business reasons. Depreciation of these expenses is not allowed to be claimed by the tax authorities. These animals expensed, respectively, written off their capital expenditures incurred on such animals when they die or are of no use.
Section 36(1)(vii): Bad debt written off
The amount shall be allowed as a deduction only when the amount is connected with running businesses or professions and bad debt should have been considered by the entities while calculating their income. A provision for bad debt can be claimed as a deduction when the entity concerned is in the lending business.
Section 36(1)(viii)
Any transfer made to a special reserve Any transfer of any profit by businesses referred to in section (vii a) into their reserves will be allowed a deduction. The amount is taken as the lower of the following:
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Amount transferred to the special reserve.
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20% of computed profit as per Section 28 before deductions under Section 36(1)(viii) of the IT Act.
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200% of (General reserve + paid-up capital) – The opening balance of the particular reserve account.
Section 36(1)(ix): Expenses incurred on promotional activities.
The deduction is also eligible for expenditure on promoting family planning amongst the employees. Deductions have to be claimed in five equal instalments, and the tax authorities consider the first instalment in the year in which such expense took place.
Section 36(1)(xv) and 36(1)(xvi):
Expenses on STT/CTT Deductions can be claimed for whichever shares/commodities/units an entity has held as their stock-in-trade on the STT and CTT.
Section 36(1)(xiv): Amount paid towards credit guarantee trust fund
Deductions will be allowed on whatever amounts are paid by the public financial institutions towards credit guarantee funds for small and micro enterprises.
Section 36(1)(xvii): Expenditure on the purchase of sugarcanes
Even expenditures incurred on the cost of purchasing sugarcanes for the manufacture of sugar at a price either equal to or less than, the government fixed price are also admissible as deductions for any cooperative society.
Section 36(1)(xviii): Losses on Marked to Market
Marked-to-market losses or any presumptive loss covered under the ICDS form is available as a deduction for business owners and professionals.
Implications and Considerations
Compliance with Conditions:
For every category of deduction, there are conditions laid that must be fulfilled. For example, when and only borrowed capital is utilised for business then the interest payable on it is allowable as a deduction. Compliance with these conditions is required to avail concessions.
Compliance with Conditions:
For every category of deduction, there are conditions laid that must be fulfilled. For example, when and only borrowed capital is utilised for business then the interest payable on it is allowable as a deduction. Compliance with these conditions is required to avail concessions.
Documentation and Proof:
The expenses are required to be prudently proved and documented. These would include invoices, bank statements, and relevant contracts. In case some supportive documents do not exist in order to evidence the costs borne in terms of deductions, the same will not be allowed.
Strategic Tax Planning:
A business will plan for its expenditure strategically, keeping the tax range advantages. For example, planning to keep the time of capital expenditures could be significant in planning.
Implications on Cash Flow:
Although they help in reducing taxable income, deductions also mean that the costs have already been incurred. Businesses should make sure that they do not maximize their taxes at the expense of cash flow management.
Legal Interpretations and Amendments:
The interpretations towards the legal aspects of Section 36 might differ and the amendments periodically need to be taken care of from the government side as they can affect this section’s applicability. The recent laws surrounding tax need to be updated.
Challenges and criticisms
Section 36, despite its advantages, faces criticisms that include it being a complicated provision or sometimes being ambiguous, leading to a dispute in courts of law. The other criticism is that businesses need help comprehending and abiding by the minutiae of every requirement of deduction.
Conclusion
More importantly, the provisions made under Section 36 of the Income Tax Act are highly prospective instruments for businesses in India that offer several tax deductions on legal business expenses. While it gives huge benefits in terms of tax planning and thereby reducing liabilities, it needs to be intended with due care within the norms of legal tolerance and strategic plans of financial management. Hence, the business needs to comprehend Section 36 in and out to derive optimum results from Section 36.
Frequently Asked Questions
Q
What is the purpose of Section 36 in the Income Tax Act?
A
Section 36 aims to provide tax relief to businesses by allowing deductions on various expenses incurred in a financial year.
Q
Can insurance premiums paid on stock in trade be claimed as a deduction under Section 36?
A
Yes, premiums paid on stock in trade are deductible under Section 36(1)(i).
Q
Is the premium paid by Federal Milk Co-operative Society for cattle insurable under Section 36?
A
Yes, such premiums are covered under Section 36(1)(a).
Q
Are health insurance premiums for employees deductible under Section 36?
A
Yes, premiums for employee health insurance are deductible under Section 36(1)(ib), provided they are not paid in cash.
Q
Can bonuses and commissions to employees be deducted under Section 36?
A
Yes, bonuses and commissions are deductible under Section 36(1)(ii) subject to certain conditions.
Prachi Jain
Chartered Accountant
Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.
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