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Income Tax Laws – I

Notes prescribed in Section 79. This section applies to all losses including losses under the head ‘Capital
Gains’.
Unabsorbed depreciation may be carried-forward for set-off indefinitely. But carry back of
losses or depreciation is not permitted. However, business losses can be carried forward for
eight consecutive financial years and can be set off against the profits of subsequent years.

Step 2: From the gross total income, prescribed ‘deductions’ under Chapter VI A are made to get
the ‘net income’. Generally, all expenses incurred for business purposes are deductible from
taxable income; given that the expenses must be wholly and exclusively incurred for business
purposes and also that the expenses must be incurred or paid during the previous year and
supported by relevant papers and records. But expenses of personal or of capital nature are not
deductible.
Capital expenditure is deductible only through depreciation or as the basis of property in
determining capital gains or losses. Deductions shall also be allowed in respect of depreciation,
as per Section 32 of Income Tax Act, of tangible assets such as machinery, buildings, etc. and
non-tangible assets such as know-how, patents, etc., which are owned by assessee and used for
the purpose of business profession. Depreciation is deducted from the written-down value of
the block of assets mentioned under Section 43 of the Act. However, where an asset is acquired
by assessee during the previous year and is put to use for business or profession purpose for a
period of less than 180 days, the deduction in respect of such assets shall be restricted to 50% of
the normal value prescribed for all block of assets.

But no deduction shall be allowed in respect of any expenditure incurred in relation to income
which does not form part of total income.
Step 3: Tax liability is computed on the ‘net income’ that is chargeable to tax. It is done either on
accrual basis or on receipt basis (whichever is earlier). However if an income is taxed on accrual
basis, it shall not be taxed on receipt basis. From the tax so computed, tax rebates or tax credit are
deducted.

Calculating Companies Taxable Income

The key role played by any tax accountant is to calculate a company’s taxable income. The
taxable income of a company can be calculated using the following formula:

Taxable income = Assessable income – Allowable deductions
This formula applies to all entities, whether they are people known as real entities, or companies,
partnerships and trusts all referred to as artificial entities. We use a company here for simplicity
as companies are by far the most common of the artificial entities for which taxable income
calculations are carried out in practice. We also use the company because they typically have
accounting records from which the operating profit can readily be determined.
The taxable income calculation is quite simple. It is as follows:
Taxable income = Operating profit (+ or –) permanent differences + timing additions – timing
subtractions (+ or –) future timing differences
Where:

Operating profit = revenue – expenses.
Permanent differences = accounting revenue items which are not income for tax law purposes
OR accounting expenses which are not deductions for tax law purposes. Some common
examples include entertainment or non-assessable dividends. Many of these items are
listed in Division 26 of the 1997 Income Tax Act.

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