Business Income and Business Income Taxation
Macro-Economic Context & Fiscal Consolidation
The last full budget of the government prior to the parliamentary elections is fuelled with proposals towards populism, as the experience goes. However, it is because the PM and FM appreciate that good economics is also good politics, it has eschewed this and instead, focuses on giving the long-term interest of citizens primacy. Sustained improvement in people’s fortunes rather than small giveaways aimed at each identifiable group that wins votes is good economics.
The Union Budget pursues a disciplined course on fiscal consolidation. While the fiscal deficit in 2022-23 is estimated to have come down to 6.4% of GDP from 6.7% the earlier year, this budget proposes to bring it further down to 5.9%. Moreover, the FM has announced the Government’s intention to bring the deficit down to 4.5% by 2025-26. The budget has committed to raising capital expenditure (capex) to 3.3% of GDP from its estimated level of 2.9% during the previous year. These are good news for trade, commerce and industry, with contained inflation, value of money will not erode, and capex brings more demand.
Statutory Timeline & Applicability Framework
No retrospective amendments that are taxing, provides comfort to taxpayers. Important proposals for income from business or profession are discussed in this article. All the proposals from the Finance Bill, 2023, unless expressly stated otherwise, when enacted, are proposed to take effect from 1st April, 2024 and will, accordingly, apply in relation to the assessment year 2024-2025 and subsequent assessment years.
1. Benefit or Perquisite in Business or Profession (Sections 28(iv) & 194R)
Statutory Background & Circular 20D of 1964
Section 28 provides a list of items of income that are expressly chargeable to income-tax under the head “Profits and gains of business or profession.” Clause (iv) of section 28 provides that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession is chargeable under this head.
Circular no. 20D dated 7th July 1964 was issued to explain the provisions of the Act, stating clearly that the benefit could be in cash or in kind. Therefore, the intention of the legislature while introducing this provision was to include benefit or perquisite whether in cash or in kind. However, Courts have interpreted that if the benefit or perquisite is in cash, it is not covered within the scope of clause (iv) of section 28 of the Act.
To align the provision with legislative intent, clause (iv) of section 28 has been proposed to be amended as follows:
“(iv) the value of any benefit or perquisite arising from business or the exercise of a profession, whether––
(a) convertible into money or not; or
(b) in cash or in kind or partly in cash and partly in kind;”.
Consequential TDS Clarification under Section 194R: Deduction of tax on benefit or perquisite in respect of business or profession was introduced by insertion of section 194R by the Finance Act 2022. In section 194R, Explanation 2 has been inserted to clarify that the benefit or perquisite shall also apply whether in cash or in kind or partly in cash and partly in kind. This amendment takes effect from 1st April, 2023.
Judicial Precedents & Overriding Effect
Interpreting the meaning of ‘perquisite’, the Supreme Court in the case of Commissioner vs. Mahindra and Mahindra Ltd. (93 taxmann.com 32 (SC)) held that perquisite received in the form of waiver of loan cannot be taxed under Section 28(iv) of the Income Tax Act, 1961, if the receipts are in cash or money. Because, for invoking Section 28(iv), the benefit received had to be in some other form rather than in the shape of money.
It is believed that this statutory amendment shall override the aforesaid judgment. However, one further test remains: whether a loan waiver qualifies as “any benefit or perquisite arising from business or the exercise of a profession”.
Black’s Law Dictionary Definition & Supreme Court Authority:
Perquisites: Emoluments, privileges, fringe benefits, or other incidental profits or benefits attaching to an office or employment position in addition to regular salary or wages. Shortened term — Perks is used with reference to such extraordinary benefits afforded to business executives (e.g. free cars, club memberships, insurance, etc.).
In Commissioner of Income Tax, Bombay v. M/s. Mafatlal Gansabhai & Co. (P) Ltd. (1996 SCC (7) 569), the Supreme Court held that cash payments do not fall within the ambit of Section 40(a)(v) or 40-A(5)(a)(ii), agreeing with consistent rulings from Karnataka, Delhi, Calcutta, Bombay, Andhra Pradesh, Madras, and Gujarat High Courts.
Trade & Cash Discounts: Of course, trade or cash discount is not a perquisite, as it represents remission for not enjoying credit period or abatement of sales price, respectively.
2. MSME Purchases & Section 43B(h) Payment Disallowance
Core Mechanism of Section 43B(h) & Exception to the Proviso
Section 43B mandates that deductions for specified expenses (taxes, statutory funds, bank/NBFC loan interest, leave encashment, etc.) are allowed only upon actual payment, irrespective of the method of accounting regularly employed.
Insertion of Clause (h): Clause 13 of the Finance Bill 2023 inserts clause (h) into Section 43B to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) shall be allowed as a deduction only on actual payment.
Under the general proviso to Section 43B, deductions are allowable if paid on or before the due date for filing return of income u/s 139(1). This proviso has been expressly amended so that it DOES NOT apply to clause (h). Hence, year-end outstanding dues to micro/small enterprises paid after the close of the financial year (even if paid before return filing due date) will be disallowed in that year if paid beyond the MSMED Act credit period!
MSMED Act Thresholds & Statutory Payment Timeline (Section 15)
| Enterprise Category | Manufacturing (Plant & Machinery) | Services (Equipment) | Section 43B(h) Covered? |
|---|---|---|---|
| Micro Enterprise | Investment does not exceed Rs. 25 Lakhs | Investment does not exceed Rs. 10 Lakhs | YES |
| Small Enterprise | Investment > Rs. 25 Lakhs up to Rs. 5 Crores | Investment > Rs. 10 Lakhs up to Rs. 2 Crores | YES |
| Medium Enterprise | Investment > Rs. 5 Crores up to Rs. 10 Crores | Investment > Rs. 2 Crores up to Rs. 5 Crores | NO (Excluded) |
• With Written Agreement: Payment must be made on or before the agreed date, but in no case can the credit period exceed 45 days from the day of acceptance or deemed acceptance.
• Without Written Agreement: Payment must be made before the Appointed Day, which is the day immediately following the expiry of 15 days from the day of acceptance or deemed acceptance.
Comprehensive Practical Illustrations on Section 43B(h)
Illustration 1: Purchase on 1st July 2023 with 45 Days Credit (Due Date of Return: 30th Sept 2024)
| Case | Payment Date | AY for Deduction | Statutory Rationale & Treatment |
|---|---|---|---|
| (i) | 31 July, 2023 | AY 2024-25 | Paid within MSMED Act agreed time (within 45 days). Sec. 43B inapplicable. |
| (ii) | 31 August, 2023 | AY 2024-25 | Paid beyond MSMED due date, Sec. 43B applicable; but paid before close of PY. Deduction available. |
| (iii) | 31 March, 2024 | AY 2024-25 | Paid before end of previous year. Deduction allowed in AY 2024-25. |
| (iv) | 30 April, 2024 | AY 2025-26 | Paid beyond MSMED date & after close of PY. Disallowed in AY 2024-25, deductible in AY 2025-26. |
| (v) | 30 Sept, 2024 | AY 2025-26 | Paid before return due date but after close of PY. Disallowed in AY 2024-25, deductible in AY 2025-26. |
| (vi) | 50% on 31 Mar 2024 50% on 31 May 2024 |
50% in AY 2024-25 50% in AY 2025-26 |
Paid before end of PY allowed in AY 2024-25; amount paid after close of PY disallowed and shifted to AY 2025-26. |
- Illustration 2 – Treatment of GST: On purchases of Rs. 20 Lakhs + GST Rs. 3.60 Lakhs (Total dues Rs. 23.60 Lakhs) paid on 30.04.2024: Disallowance is strictly restricted to Rs. 20 Lakhs. Since input tax credit is availed on GST, it does not form part of ‘a deduction otherwise allowable under this Act’.
- Illustration 3 – March Purchases: Purchases of Rs. 20 Lakhs made on 21st March with 40 days credit, paid on 10th April. Since payment is made within the agreed MSMED timeline (before 30th April), Section 43B is inapplicable and deduction is allowed in AY 2024-25.
- Illustration 4 – Conversion of Dues into Loan / Debentures: Dues of Rs. 50 Lakhs converted into an interest-bearing loan on 01.01.2024. As held by the Supreme Court in M.M. Aqua Technologies Pvt Ltd. v. CIT (Civil Appeal Nos. 4742-4743 of 2021), discharging liability through debentures/loan novation extinguishes the trade liability and amounts to actual discharge, qualifying for deduction in AY 2024-25.
- Audit Fee Provisions: For audit fee provision as at 31st March, liability arises upon completion and issuance of bill. Under Section 2(b) of MSMED Act, time begins from acceptance/deemed acceptance of services, hence year-end provisions cannot be treated as overdue.
3. Alignment of NBFC Classification (Sections 43B & 43D)
Sections 43B and 43D currently refer to two erstwhile categories of NBFCs: “Deposit taking Non-Banking Financial Company” and “Systemically Important Non-Deposit taking Non-Banking Financial Company”. This terminology is no longer followed by the Reserve Bank of India for asset classification following the adoption of Scale-Based Regulation.
To align with regulatory frameworks, Section 43B clause (da) and Section 43D are amended to substitute those categories with: “such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf”.
4. Presumptive Taxation Schemes (Sections 44AD, 44ADA, 44AB, 44BB, 44BBB)
Threshold Enhancement for Small Businesses & Professionals
| Section & Eligible Assessee | Existing Limit | Enhanced Limit | Mandatory Condition |
|---|---|---|---|
|
Section 44AD Resident Individual, HUF, Partnership (excl. LLP) |
Rs. 2 Crores | Rs. 3 Crores | Aggregate cash receipts during previous year do not exceed 5% of total turnover/gross receipts. |
|
Section 44ADA Specified Professionals u/s 44AA(1) |
Rs. 50 Lakhs | Rs. 75 Lakhs | Aggregate cash receipts during previous year do not exceed 5% of total gross receipts. |
- Deemed Cash Receipts: Non-account payee cheques or drafts are deemed to be receipts in cash. The percentage is calculated solely on turnover/receipts and does not apply to capital receipts or non-business income.
- Section 44AB Tax Audit Exemption: To grant relief, tax audit under Section 44AB shall not apply to an assessee declaring profits under Section 44AD or 44ADA within the enhanced thresholds.
Curbs on Selective Opt-In / Opt-Out under Sections 44BB & 44BBB
Sections 44BB (mineral oil extraction services) and 44BBB (turnkey power projects civil construction) offer a 10% presumptive profit rate. Taxpayers selectively claimed actual losses with audit in loss years, carried them forward, and switched back to the 10% presumptive rate in profit years to set off past losses.
Anti-Abuse Amendment: Unabsorbed depreciation u/s 32 and business losses u/s 72 cannot be set off against presumptive income declared under Section 44BB or 44BBB.
5. Amortisation of Preliminary Expenses (Section 35D)
Section 35D allows deduction of 1/5th of eligible preliminary expenses over five successive years for Indian companies and resident non-corporates (for feasibility reports, project reports, market surveys, or engineering services).
Removal of Restrictive Proviso: The proviso requiring that such services must be carried out by the assessee or by a concern approved by the Board is omitted. Instead, the assessee is required to furnish a statement containing particulars of the expenditure in the prescribed form and manner to the income-tax authority within the prescribed period.
6. Incentives for Start-ups & Angel Tax Expansion (Sections 80-IAC, 79, 56(2)(viib))
Extension of Tax Holiday & Loss Carry Forward Relief
India is the 3rd largest startup ecosystem in the world with over 75,000 startups (49% in tier-2/3 cities) and 105 unicorns.
- Section 80-IAC Incorporation Window: Period of incorporation for eligible start-ups entitled to a 3-year 100% tax holiday out of 10 years is extended by one year to 1st April, 2024.
- Section 79 Loss Carry Forward: The relaxation allowing carry forward of losses despite changes in shareholding (provided 100% original shareholders continue) is extended from 7 years to 10 years from incorporation, aligning with Section 80-IAC. Both concessions apply from AY 2023-24 onwards.
Angel Tax Extended to Non-Resident Investors (Section 56(2)(viib))
Section 56(2)(viib) taxes share premium received by closely held companies in excess of Fair Market Value (FMV) as income from other sources. While eligible DPIIT-notified start-ups remain exempt, the Finance Bill 2023 omits the words “being a resident”, bringing investments from non-resident investors under the Angel Tax ambit.
7. Inventory Valuation Audit (142(2A)) & Business Reorganisation (170A)
Section 142(2A) – Inventory Valuation by Cost Accountant
AO empowered to direct inventory valuation by a nominated Cost Accountant (Cost and Works Accountants Act, 1959). Expenses determined by Commissioner and paid by Central Government. Section 153 limitation period excludes inventory valuation time. Effective from 01.04.2023.
Section 170A – Successor Modified Return Assessment
Following court/tribunal orders, successor entity files modified return within 6 months. AO must pass an order modifying total income if assessment is complete, or complete assessment/reassessment taking into account the modified return if pending.
8. Sugar Co-operatives Relief & Concessional Manufacturing Tax
Sugarcane Purchase Price Disallowance Resolved (Section 155(19))
Payment of Final Cane Price (FCP) over Statutory Minimum Price (SMP) was previously disallowed as profit appropriation, locking thousands of crores in litigation. Finance Bill 2023 allows deduction up to Government-approved prices for previous years on or before 01.04.2014, with Section 154 rectification available for 4 years from 31.03.2023 (ending 31.03.2027).
Additionally, new manufacturing co-operative societies are granted an optional concessional tax rate of 15% under Section 115BAE for AY 2024-25 onwards, creating fiscal parity with new manufacturing domestic companies.