Section 36: Other Deductions Allowed Under Business or Profession

Insurance premium:

Section 36(1)(i):

Insurance premium against the risk of damage and destruction of stock in trade, used for the purpose of Business & Profession of the assessee shall be allowed as deduction.

Section 36(1)(ia)

Insurance premium paid by Federal Milk Cooperative Society for the life of cattle owned by the members to primary society supplying milk to it.

Section 36(1)(ib)

Health insurance premium of employees is allowed as deduction if the premium paid in any mode other than cash by the employer.

Section 36(1)(ii) Bonus or commission paid to employees

• Bonus or commission paid to employees whether it is statutory or voluntary bonus is allowed as condition if following conditions are satisfied
• It is allowed as deduction subject to Section 43B. Bonus or commission is allowed as deduction only where payment is made during the previous year or on or before the due date of furnishing return of income under section 139.
• The same should not be paid in lieu of dividends or profits.

Interest on Borrowed Capital [Section 36(1)(iii)]:

• Loan taken for Business/ Profession purpose, then the amount of interest shall be allowed as deduction on basis of actual payment basis as per section 43B.
• Loan taken for acquired of capital asset, then interest amount is added to capital asset up to its put to use and it is not allowed as deduction.
• Interst on loan taken for payment income tax shall be disallowed since income tax is personal liability.

Section 36(1)(iiia) : Discount on a zero-coupon bond:

Pro-rata amount of discount will be amortized over the life (calendar months) of the zero-coupon bonds.

Example:

KRK Ltd issued Rs:1,00,000 ZCB on 06/12/22 Rs:80. Face value of bond is Rs: 2100, ZCB redeemable after 10 months. Compute deduction allowed for P.Y. 2022-23.

Solution:

Total Discount = 1,00,000 x 20 20,00,000
Monthly Discount= 20,00,000/10 months= 2,00,000 Per Month

Discount for Previous Year. 2022-23= 2,00,000 x 4 months = 28,00,000 [December 2022 to March 2023]

Note:

If any calendar month part is 15 days or more, it shall be increased to one calendar month & if such part is less than 15 days it shall be Ignored. Suppose in above example if ZCB issued on 16/12/22 then we will take 11 calendar months because period is 15 days, or more in the month of issue and redemption.

Monthly discount = 20,00,000/ 11 Months= 1,81,818

Deduction for PY 22-23= 1,81,818 x 4 months 7,27,273

Section 36(1)(iv) : Employer’s contribution to recognized provident fund or a superannuation fund:

Note: The above deduction which is allowable only if employer actually paid as per the provision of Section 43B.

Section 36(1)(iva) : Employer’s contribution towards pension fund as referred to section 80CCD:

This section allowed as deduction subject to section 43B.

Deduction allowed to employer as per the following

• Actual contribution
• 10% of Salary

Whichever is lower

Here Salary means Basic and Dearness allowance in terms of employment.

Section 36(1)(va) : Employee’s contribution towards staff welfare schemes:

Deduction for any sum received by the employer from his employees as contribution to PF, superannuation fund, ESI etc, (such contributions is deemed to be profit and gains from business and profession if such sum is not deposited in the respective fund by the due date of such fund) only when such sum is deposited in the respective welfare account on or before the due date of the respective Act.

Notes

• Provident Fund Return cum Challan  due date is 15th of next Month.
• Employee contribution is need to pay within the due date of of respective due of such fund.
• But employer’s contribution is allowed as deduction if the payment made within the due date of return filing as per the section 139(1).
• If any amount deposited after the due date of fund, then it will be treated as Profit or Gain from business or profession of employer and never be allowed to employer.

As clarified by Finance Act 2021, for the purpose of employee contribution the due date means due date of Fund and not a due date of return of income as per section 43B.

Section 36(1)(vi) : Write off Animals used in Business:

When animals which are used for the purpose of business or profession(not as stock-in-trade) have died or became permanently useless, then deduction is allowed in the year in which such animal becomes permanently useless.
Deduction amount = Cost of animal -Scrap Value

Section 36(1)(vii) : Bad Debts Written off:

• Bad debts should be written off in the books of A/c’s of Assessee in the Previous Year in which deduction is claimed.
• The debt should have been taken into account for computing income for Previous Year or earlier Previous Year. No need to prove that the debts have become bad debt.
• Where the amount of such debt has been taken into account in computing the income for Previous Year or earlier PY (on the basis of ICDSS without recording the same in the accounts). Such debt shall be allowed in the previous year in which such debt becomes bad and It shall be deemed that such debt has been written off as irrecoverable in the accounts.

Section 36(1)(viia) :Deduction in case of provision for bad debts in case of banks and certain financial institution:

• No deduction is allowed for actual bad debts u/s 36(1)(vii).
• Actual Bad debts should be debited to Provision. for Bad debts A/c.
• If Provision for bad debts is less than actual bad debts, then remaining bad debts allowed us 36(1)(vii).
• Assessee should maintain only one account in respect of provision for bad and doubtful debts and such account shall relate to all types of advances including advances made by rural and urban branches.

Amount deductible in case of bad and doubtful debts

Section 36(1)(viii) : Transfer to Special Reserve

When any profit from eligible business is transferred to the reserve it can be claimed as a deduction. The amount allowed as a deduction is lower of the following.

– 20% of the profit computed as per section 28 before deduction u/s 36(1)(viii)
– Actual amount transferred to special reserve
– 200% of (Paid-up capital+ General reserve) – Opening balance in special reserve

Eligible business means Financial corporation engaged in providing long term finance (5 years or more) for industrial, agricultural, infrastructure and housing development companies.
Note : Any amount withdrawn from this reserve shall be treated as business income in the year of withdrawal.

Section 36(1)(ix): Expense on promoting family planning of employees:

• This expense is allowed as a deduction to the only company.
• If the family planning expenses is revenue in nature, then it is 100% allowed as deduction.
• If the family planning expenses is capital in nature, then it allowed in 5 equal installment.

Section 36(1)(xv) and (xvi) :

Securities Transaction Tax(STT) / Commodities Transaction Tax(CTT)  is allowed as deduction when shares/units/commodities are held as stock-in trade.

Section 36(1)(xiv ) : Contribution to Credit Guarantee Trust Fund:

A public financial institution can claim deduction for its contribution to notified credit guarantee trust for small industries(i.e. Credit Guarantee Fund Trust for Micro and Small Enterprises). Couldn’t find it online

Section 36(1)(xvii) : Expenditure by Co-operative society for Purchase of Sugarcane:

Expenditure incurred by cooperative society engaged in the business of manufacturing of sugar for purchase of sugarcane at a price which is equal to or less than the price fixed by the government is allowed as deduction.

Section 36(1)(xviii) : Marked to Market Loss:

Marked to market loss or any other expected loss as computed in the manner provided in ICDS(Income Computation & Disclosure Standards) shall be allowed as deduction.