Business Taxation

Session 8
Depreciation
• Accounting Depreciation
• Tax Depreciatioin
• Accounting depreciation (also known as a book depreciation) is the
cost of a tangible asset allocated by a company over the useful life of
the asset.
• Despite its non-cash nature, depreciation expense still appears on
the company’s financial statements. A company records its
depreciation expenses on the income statement. Thus, this non-cash
item ultimately reduces the net income reported by a company.
• In addition, most accounting standards require companies to disclose
their accumulated depreciation on the balance sheet. The
accumulated depreciation reveals the impact of the depreciation on
the value of the company’s fixed assets recorded on the balance
sheet.
• Accounting depreciation can be calculated in numerous ways. The two
most common ways to determine the depreciation are straight-line and
accelerated methods.
• The straight-line depreciation is the easiest and most frequently used
depreciation method. It distributes depreciation expenses equally over all
periods of the asset’s useful life.
• Conversely, accelerated depreciation methods allow deducting greater
depreciation expenses in the earlier periods of the asset’s useful life and
smaller depreciation expenses in the subsequent periods.
• Tax depreciation is the depreciation expense listed by a taxpayer on a tax
return for a tax period. Tax depreciation is a type of tax deduction that
tax rules in a given jurisdiction allow a business or an individual to claim
for the loss in the value of tangible assets. By deducting depreciation,
tax authorities allow individuals and businesses to reduce the taxable
income.
• A taxpayer cannot claim depreciation for all assets. Only some assets
that meet the specific requirements in the given tax jurisdiction may be
eligible for the depreciation claim.
• The asset is the property owned by a taxpayer.
• A taxpayer uses the asset in the income-generating
activities.
• The asset possesses a determinable useful life.
• The asset’s useful life is more than one year.
Income from other sources
• The following incomes are chargeable to tax:-
• 1. Dividend received from any entity other than domestic company. This is because
dividend received from a domestic company has been made exempt in the hands
of the receiver. Accordingly dividend received from a cooperative bank or dividend
received from a foreign company will be taxable as income from other sources.
• 2. Any pension received by the legal heirs of an employee.
• 3. Any winnings from lotteries, crosswords, puzzles, races including horse races,
card games or other games of any sort or gambling or betting of any form or
nature.
• 4. Income from any plant, machinery or furniture let out on hire where it is not the
business of the assessee to do so.
• 5. Income from securities by way of interest.
6. Any sum received by the assessee from his employees as
contribution to any staff welfare scheme. However when the assessee
makes the payment of such contribution within the time limit under the
scheme of welfare, then the payment will be allowed as a deduction
and only the balance amount will be taxable.
7. Interest on bank deposits
• 1. Gift Of Cash / Cheque / Draft: If, through one or more transactions, gift
received is up to Rs 50,000 per financial year, then nothing is taxable. If gift is
Rs 50,001 or above, then it is fully taxable. For example, if gift of Rs. 70,000/-
is received in cash, then taxable amount is Rs.70,000/- and not Rs.20,000/-.
• 2. Gift of immovable property : In this case, if Stamp duty value is up to Rs
50,000 then nothing is taxable. If it is above Rs 50,000, then fully taxable. It
is applicable for each individual transaction.
• Unlike above, if more than one transaction of Gift, below Rs 50,000, than
they shall not be aggregated. Similarly, if there is consideration, may be less
or say if difference between the actual selling price and Stamp duty value is
more than 50,000, then the above law is not applicable. It is applicable only
in case of gift i.e. when property is transferred without consideration.
• 3. Gift of movable property (one or more transactions): If fair market value
of all movable properties gifted in one financial year is up to Rs 50,000, then
nothing is taxable. But if it is more than Rs 50,000, then it is fully taxable.
Pension
• Family pension means a regular monthly amount payable by the
employer to a person belonging to the family of a deceased employee
(e.g. widow or legal heirs of a deceased employee)
• Minimum of: 1/3rd of such pension; or ` 15,000
• Whichever is less is tax deductable
Example
• Sunder died on 31st July 2020 while being in Central Government
service. In terms of rules governing his service, his widow Mrs. Sunder
is paid a family pension of ` 10,000 p.m. and dearness allowance of
40% thereof. State whether the amount of family pension is
assessable in her hands, and if so, under what head of income.
• Can she claim any relief/deduction on such receipt? Compute taxable
income for the assessment year 2021-22 and tax thereon.
Solution
 Kind of securities
• There are four types of securities.
• Tax free government securities: The interest on these securities is fully exempt from tax. The interest
on such securities is neither included in total income nor taxed.
• Less tax government securities: These securities are issued by central govt or state government.
These securities are taxable securities. But no tax is deducted at source on such securities. Therefore
the interest on such securities will not be grossed up.
• Tax free commercial securities: These securities are issued by local authority or Statuary Corporation
or a company in the form of debentures or bonds. Actually the interest is not tax free. Income tax
due on this interest is payable by the company or authority or Statuary Corporation.These are called
tax free because the assessee is not required to pay tax on it. The interest due to an assessee is
grossed up and this grossed up amount is included in the total income.
• Less tax commercial securities: These are taxable securities. In this case income tax is deducted at
source on the amount of interest calculated at the percentage stated on the securities. In this type of
securities, if the net amount of interest is given, it has got to be grossed up. If the rate of percentage
of interest is given it is not grossed up.
Grossing up Concept
• Interest income received = Interest income earned – Tax deducted at
source on such income
Example 2
Solution