Company Taxation

Calculating Trading Profits

Trading profits represent profits as per the Profit and Loss Account which are drawn as per the provisions of the Indian Companies Act, which is further adjusted considering the admissible/ inadmissible expenses as per the provisions of the ITA (see Profits subject to tax).

According to the ITA, for the purpose of calculating profits, all incomes accrued/earned during the fiscal year should be considered. Capital receipts are not considered while calculating trading profits. However, what constitutes a capital receipt is a matter of considerable litigation.

As explained earlier, capital expenses are not deductible. However, the ITA has prescribed certain capital expenses that can be allowed as deductions, but over a period of time. For example:

  • Preliminary expenses incurred prior to the set up of, or in connection with the extension of the business, are allowed over a period of five years subject to certain conditions
  • Expenditure incurred on amalgamation is allowed over a period of five years
  • Expenditure on the prospecting of certain minerals is allowed over a period of 10 years
  • Expenditure on obtaining a telecommunication license over the license period.

Furthermore, according to the ITA, certain capital expenditures are allowed in the year that they are incurred. For example:

  • Capital expenditure (except on land) on scientific research related to the business carried on by the company
  • The entire capital expenditure (except on land, goodwill, and financial instruments) in case of specified businesses that have commenced operations in the specified time period
  • Weighted deduction of 150% in the case of expenditure on an in-house scientific research and development facility as approved by the prescribed authority, which inter alia includes capital expenditure, except that on land and building. This deduction has been reduced to 100% from 1 April 2020 onwards.

Similarly, a company is eligible to claim depreciation on fixed assets according to the rate prescribed in the Income Tax Rules. A company is also eligible to claim bad debts, provided the sales in respect thereof have been offered to tax either in the current financial year or in the previous financial year. Besides allowing the claim for expenditure, the ITA also allows claims for business losses provided they are in the revenue field and discovered in the year under consideration. Examples of business losses are a loss on account of obsolete stock, loss on account of fire/ theft/burglary/fraud, etc.

The ITA also restricts the allowance of certain revenue expenses if certain requirements are not met:

  • If tax is not withheld and deposited in the government treasury within the prescribed time, 30% of the expense claimed by the company shall be disallowed
  • Certain statutory expenses like tax, duty, cess or fees are not allowed as deduction unless they are actually paid either during the year or up to the time allowed to file tax returns.

Certain expenses are expressly not allowed while computing taxable income. For example:

  • Tax on profits, tax on capital
  • Tax paid by an employer on behalf of an employee on non-monetary perquisites
  • Expenditure incurred with respect to exempt income – a controversial provision.
Particulars Amount (INR) Amount (INR)
A. Net Profit as per Profit and Loss Account XXX
B. Inadmissible expenses debited to Profit and Loss Account
• Disallowable expenses/claims XXX
• Depreciation as per the Companies Act XXX
• Deemed income not credited to Profit and Loss Account XXX XXX
C. Total = (A + B) XXX
D. Admissible deduction allowable claims/deductions XXX
• Depreciation as per the Income Tax Act XXX
• Incomes chargeable under other heads credited to Profit and Loss Account/Exempt Income XXX XXX
E. Profits and Gains of Business or Profession (C – D) XXX
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Maulik Doshi
Senior Executive Director
Transfer Pricing and Transaction Advisory Services

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