Page 207 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes Any other expenditure which is not of capital nature or personal expenses of the assessee
is allowed if it is expended wholly and exclusively for the purposes of business or
profession. However, it should not have been for purpose which is an offence or is
prohibited by any law [section 37 of Income Tax Act]

11.7.3 Expenditure not allowed as Deduction

Following expenditures are not allowed as deduction for purpose of income tax.
Deduction of taxes, interest etc. only on actual payment basis: Tax, duty, cess, fees payable
under any law, Employer’s contribution to provident fund or ESIC, bonus to employees,
commission to employees, interest on any loan or borrowing from financial institutions, banks,
SFC, leave encashment are eligible as deduction only if they are paid on ‘due dates’ on which
these were payable. Even if these are not paid on due dates but are paid before filing of return,
these are allowed as deduction, if proof of payment is filed along with the return. However, in
case of employer’s contribution to provident fund, superannuation fund or gratuity fund, the
same is allowed as deduction only if it was paid before due date of payment [section 43B of
Income Tax Act].

Expenditure in excess of ` 20,000 in cash fully disallowed: If expenditure is incurred in business
or profession by payment of cash over ` 20,000 in a day, entire expenditure is disallowed
[Earlier, 20% of such expenditure was disallowed upto AY 2007-08]. All cash transactions in a day
to a party should not exceed ` 20,000. [Till 31-3-2008, each transaction was considered for the
limit of ` 20,000. Now, total transactions in a day will be considered [section 40A (3) of Income
Tax Act].
Payment over ` 20,000 should be made by cheque or demand draft. This restriction is not
applicable in case of payments to RBI, other banks and financial institutions, LIC Government
payments, payment by book adjustment, railway freight Payment for agricultural produce,
poultry, fish etc. to the cultivator, grower or producer (i.e. payments to middlemen are not
excluded from this provision) [rule 6DD]

Similarly, a person can accept loans or deposits of ` 20,000 or more only by account payee bank
draft or cheque.
Interest on delayed payment to small industries: Interest on delayed payment made to Small
Scale Industries is not allowable as deduction.
Expenditure for any purpose which is an offence in law: Section 37(1) of Income Tax Act states
that any expenditure incurred for any purpose which is an offence or which is prohibited by law
shall not be allowed as deduction.

11.8 Factors Affecting the Tax Planning

The following factors are essential for effective tax planning:
1. Residential status and citizenship of the assessee: We know that a non-resident in India is
not liable to pay income-tax on incomes which accrue or arise and are also received
outside India, whereas a resident in India is liable to pay income-tax on such incomes.
Therefore, every assessee would like to be a non-resident in India, if he has any income
which accrues or arises outside India.
2. Heads of income/assets to be included in computing net wealth: Before the Tax-planner
goes in for his task; he has to have a full picture of the sources of income of the tax payer
and the members of his family. Though total income includes all income from whatever
source derived, the scope of tax planning is not similar in respect of all sources of income.

202 LOVELY PROFESSIONAL UNIVERSITY