INCOME FROM BUSINESS OR PROFESSION – RECENT AMENDMENTS

The Finance Act, 2023, has made amendments in some of the provisions relating to Income from Business or Profession.  These provisions will impact the computation of income from Business or Profession for the A.Y. 2024-25 (F.Y. 2023-24) and onwards. In this Article, the amendments made in the various provisions of the Income tax Act (Act) are discussed.

1. INCOME BY WAY OF BENEFITS OR PERQUISITES SECTION 28 (iv)

Section 28 of the Act gives a list of items chargeable to Income-tax under the head “Profits and Gains of Business or Profession”.  Section 28(iv) provides that the value of any benefit or perquisite, whether convertible into money or not arising from business or exercise of a profession shall be chargeable to income tax.  The Supreme Court, in the case of Mahindra & Mahindra Ltd V/s CIT (404 ITR-1) held that section 28(iv) does not cover benefit received in cash.

Section 28(iv) is now amended from A.Y. 2024 – 25 (F.Y. 2023-24) and it is now provided that the value of any benefit or perquisite receivable in Cash or in Kind or partly in Cash and partly in Kind from business or the  exercise of the profession shall be chargeable to tax  as Income from Business or Profession.  Consequential amendment is made in Section 194 R which provides for deduction of tax  at source (TDS) from such benefits or perquisite amount.

What is “Benefit” or “Perquisite” is not defined in the Act.  However, the CBDT has issued a Circular No.12 of 2022 dated 16.06.2022 explaining the provisions of Section 194 R dealing with the provisions for TDS from such benefits or perquisites covered under Section 28(iv).  This Circular Clarifies that (i) Free samples given to customer; (ii) Incentive given in the form of cash or in kind such as Car, TV., Computer, Gold Coin, Mobile Phone etc.; (iii) Free Trip to customers or agents etc., upon achieving certain  targets given to the concerned person or his  relatives; (iv) Free ticket given for an events; (v) Medicine Samples given free to a  medical practitioner, whether he is employee of a Hospital or Practicing as a Consultant; (vi) Any benefit or perquisite in form of  use of assets of the entity for personal use of owner, director, employees or their relatives will be considered as benefit or perquisite to the  recipient under Section 28(iv) as well as under section 194R. It is also clarified that the above list is only an illustrative list of Benefits or Perquisites.  In view of the above amendment every person engaged in business or profession will have to be careful while entering into any transaction with third party and will have to first ascertain whether the same amounts to benefit or perquisite.  If the same is covered under section 28(iv) he will have to declare the same as his income. It may be noted that Section 28(iv) applies to a person during the course of carrying on a business or profession. Hence, if any benefit is received by a person  while purchasing goods or availing services as an ordinary customer no tax will be payable by him.

2. AMORTISATION OF CERTAIN PRELIMINARY EXPENSES – SECTION 35D:

Section 35D of the Act provides that preliminary expenses incurred in connection with various activities like preparation of feasibility report, preparation of project report, conducting market survey or any other survey or engineering services relating to the business is allowed to be amortized only if the work in connection with such activities is carried out by the assesse himself or by an approved person.

This section is now amended from A.Y. 2024-25 (F.Y. 2023-24) to provide that the assessee shall provide information about such expenditure to be amortized in a Statement as prescribed by  Rules within the prescribed time limit, containing the particulars of expenditure. The condition that such activities should have been carried out by the assessee or an approved person has been deleted.

3. DEDUCTION OF AMOUNT ONLY ON ACTUAL PAYMENT – SECTION 43B:

Section 43B provides that certain payments for expenses etc.will be allowed as deduction in computation of income only on payment before the specified date, i.e. the date by which I.T. Return under section 139 (1) is to be filed. Section 43B (da) deals with payment of interest on any loan or borrowing from specified Non-Banking Finance Companies (NBFC).  This section is amended, effective from A.Y. 2024 – 25 (F.Y 2023-24), to make it applicable to interest payment to notified class of NBFCS i.e. a deposit taking NBFC or a systematically important non-deposit taking NBFC.

Further, section 43B is amended, effective from A.Y. 2024-25 (F.Y. 2023 – 24), to enlarge its scope to payments to Micro and Small Enterprises.  It is now provided that any payment for supply of goods or services to a Micro or Small Enterprise to which Micro, Small and Medium Enterprises Development Act, 2006, (MSME Act) applies, shall be allowed as a deduction in the F.Y. in which actual payment is made. Section 15 of the MSME Act provides that payment for supply of goods or services by a Micro or Small Enterprise should be made within 15 days of such supply.  This period can be extended upto 45 days by an Agreement between the parties.  If there is delay in payment beyond the stipulated period interest is payable as provided in that Act.

The effect of this amendment will be  that the assessee who has purchased goods or availed of services from a Micro or Small Enterprise will get deduction for cost of goods or expenses for services availed only in the financial year of  actual payment.  Hence, if goods are purchased  in March,2024, but payment for the same is made  after due period of 15 days in April, 2024, deduction for cost of goods will not be allowed in F.Y. 2023 – 24 (A.Y. 2024-25).  The same will be allowed in F.Y. 2024-25 (A.Y. 2025 – 26).  In such a case if the goods purchased in March, 2024, are not consumed or sold before 31.03.2024, they will have to be excluded from the valuation of closing stock as at 31.03. 2024. Such goods will have to be considered for  Income-tax purposes as purchased in F.Y. 2024 – 25 when the actual payment for the same is made.  If part of such goods are consumed or sold before 31.03.2024 there will be mismatch between accounting profit and taxable income.  This new provision will raise some accounting issues.  Therefore, it will be advisable for the asssessee to ensure that payments for all supply of goods and services from Micro and small Enterprises is made before the end of the relevant financial year.

4. PRESUMPTIVE TAXATION SCHEME – SECTION 44AD AND 44ADA:

Sections 44AD and 44ADA provide for presumptive taxation for an eligible business and specified profession.  These sections apply to an Individual, HUF or Firm (other than LLP) having turnover or gross receipts below the specified limits.  Under this scheme the assesse should offer 6% or 8% in the case of eligible business or 50% in the case of a person carrying on profession or any higher rate of profit earned from such business or profession.  Such persons are not required to maintain books under section 44 AA or get the books audited under section 44AB.

Both these sections are amended; effective from A.Y. 2024 – 25 (F.Y.2023-24) and the specified limit has been enhanced as under;

The above enhanced limits shall be applicable only if the amount received by the assessee in cash does not received 5% of the total turnover or gross receipts from the business or profession.  If the cash receipts are more than 5%, the lower specified limit of Rs.2 Cr. (For Business) and Rs.50 Lakhs (For Profession) will apply.

5. PRESUMPTIVE TAXATION SCHEME FOR NON-RESIDENTS – SECTIONS 44BB AND 44BBB:

Sections 44BB and 44BBB provide for presumptive taxation for non-residents engaged in the business in connection with or supplying plant and machinery on hire or to be used in prospecting for or extraction or production of mineral oil and foreign companies engaged in business of civil construction, or erecting plant and machinery or testing or commissioning thereof, in connection of a turnkey power project approved by the Central Government.  Upto now it was possible for such eligible assessees to carry forward the losses in such business and setoff the same and use the presumptive scheme which restrict to profit to 10%.  Both these sections are now amended, effective from A.Y. 2024-25 (F.Y. 2023-24), to provide that unabsorbed depreciation and brought forward losses will not be allowed to be setoff where the assesse has declared the business income in accordance with the presumptive taxation scheme in earlier years but opted out of the scheme and declared income under the normal provisions of the Income tax Act.

6. SET-OFF AND CARRY FORWARD OF LOSSES – SECTION 79:

Section 79 of the Act provides for certain restrictions for set-off and carry forward of losses.  In connection with Start-Up, as referred to in Section 80IAC, it is provided that irrespective of change in shareholding of such Start-Up by more than 49%, it is entitled to carry forward and set-off of loss in the first 7 years of its incorporation.  This is subject to the condition that all the shareholders of such eligible start-Up in the year in which loss was incurred continued to be shareholders in the year in which such loss is to be set-off.  This section is now amended from A.Y. 2023-24 (F.Y. 2022-23) and the above period of 7 years is enhanced to 10 years.

It may be noted that Section 80IAC is also amended and the various benefits to Start-Up which are available to start-Up incorporated on or before 31.03.2023 is now extended to Start-Up incorporated on or before 31-03-2024.

7. SEZ UNITS- SECTION 10AA

Section 10AA provides that eligible SEZ Units can claim deduction of specified percentage of profit while computing its total income. Effective from  A.Y.2024-25 ( F.Y.2023-24), this section is amended. It is now provided that this deduction will be available only if the Return of Income is filed on or before the due date specified in section 139(1). Further,the proceeds from sale of goods or provision of services should be received in, or brought into India, in convertible foreign exchange,  within six months from the end of the relevant financial year. This period can extended by the specified Competent Authority.

The amendment also provides that the above proceeds shall be deemed to have been received in India where the specified export turnover is credited to a separate approved Bank Account maintained for this purpose.

If the deduction under this section is denied by the A.O. on the ground that the above proceeds are not received  within the prescribed time limit, the A.O. is now empowered,  by insertion of section 155(11A), to amend the assessment order within 4 years from the end of the financial year in which the amount of the above proceeds are received in convertible foreign exchange or brought into India.

8. From the above amendments in the Income tax Act it will be noticed that the amendment in Section 28(iv) relating to taxation of benefits or perquisites received in the course of carrying on business or profession will create some practical issues of interpretation about the meaning of the terms “Benefit” or “Perquisite”.  There will be a fresh round of litigation on this issue.  Circular No. 12/2022 of CBDT has enlarged the Scope of these two terms and that has created lot of confusion. Another amendment which will create some practical issues of interpretation relates to amendment in Section 43 B. Persons dealing with Micro and Small Enterprises will have to ensure that payment for supply of goods or services by such enterprises are made before the end of the financial year in which goods or services are supplied.  If this is not done several accounting and tax issues will arise.