Union Budget – 2021: Few Amendments related to Businesses

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Union Budget – 2021: Few Amendments related to Businesses

No deduction towards employee’s share of PF/ESIC if the same is not deposited within due date under the relevant Act:

There was a long dispute with regard to admissibility of deduction towards belated deposits of employee’s share of PF/ESIC. Under section 2(24)(x), any sum received by employer from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the ESIC Act, 1948  or any other fund for the welfare of such employees is considered as “Income” in the hands of the employer. However, deduction in respect of such amount is admissible u/s 36(1)(va) if it is deposited within due date under the relevant ESIC/PF Act. In short, the amount deducted by employer as employee’s share of PF/ESIC etc is first treated as income in the hands of the employer and then deduction is given to the employer u/s 36(1)(va) if the amount is deposited within the due date prescribed under those Act.    There are various High Courts like Bombay, Rajasthan, P & H, Delhi, Uttarakhand HC which have held that the amount is eligible for deduction if such amount is deposited before the due date of filing income tax returns.

Union Budget-21 has finally proposed to amend the section 36(1)(va) & section 43B so as to provide that the deduction towards employee’s share of PF/ESIC shall be available as deduction only if the same is  if such amount is deposited within due date under the relevant ESIC/PF Act. If the amount is deposited belatedly, even before the due date of filing income tax return, no deduction shall be admissible against such expenses. As a result, on one hand, belated deposit of employee’s share will be subject to the penal consequences under the relevant Act while on the other hand no deduction will be allowed towards such sum even if it is deposited subsequently. (It may be noted that the employer’s share of PF/ESIC will be eligible for deduction u/s 43B even if it is deposited belatedly but before the due date of filing income tax return).

No deduction towards Depreciation on Goodwill:

The Supreme Court in the case of Smiff Securities Ltd (2012) 348 ITR  302 has held that goodwill of a business is an asset and depreciation on it is admissible as deduction. Union Budget – 2021 has reversed the above judgment and has provided that no deduction shall be available towards depreciation on goodwill. Union Budget – 2021 has proposed following:

  1. Goodwill of a business or profession shall not be considered as part of “Intangible Assets” for claiming depreciation u/s 32 of the Income Tax Act-1961.
  2. Even if the goodwill has arisen as a result of purchase, amalgamation or business reorganization, no deduction towards depreciation will be admissible.
  3. A provision is proposed to be added to section 50 so as to provide that if a block of assets includes goodwill of a business as on 01/04/2020 then WDV and STCG will be computed in a prescribed manner. It is likely that the rule will provide the manner to eliminate deprecation on the goodwill of business or profession for AY 2021-22 & onwards.

No Audit (a) if turnover is below Rs. 10 Cr & (b) digital transaction is not less than 95%:

Presently, audit is required U/s 44AB if the turnover is exceeding Rs. 1 Crore. Finance Act-2020 has enhanced the limit to Rs. 5 Cr if the aggregate of all receipts and payments in cash is not exceeding 5% of aggregate receipts & payment respectively. Union Budget -2021 has further proposed to enhance the limit from Rs. 5 Cr to Rs. 10 Cr. As a result, every person carrying on business will not be required to get his books of accounts audited if his total sales, turnover or gross receipts doesn’t exceed Rs. 10 Cr provided the following conditions are satisfied:

  1. a)Aggregate of all amount receipt including amount received for sales, turnover or gross receipts in cash doesn’t exceed 5% of total amount and
  2. b)Aggregate of all payments including amount paid towards expenditure in cash doesn’t exceed 5% of total payment.

Though above amendment is beneficial to the businesses, it may be noted that the Individual, HUF, Firm, AOP having turnover up to Rs. 2 Cr may still be required to get the books of accounts audited pursuant to operation of section 44AD(5) if they don’t offer minimum of 8% or 6% of total sales as profit

Extension the benefit to start up by one more year

  1. Section 80IAC offers 100% deduction towards profit of eligible start up for 3 consecutive years out of a period of 10 years. The time limit for incorporating eligible start up for deduction u/s 80IAC has been extended from 31/03/2021 to 31/03/2022.
  2. Similarly, section 54GB is providing capital gain exemption in respect of LTCG arising from sale of a residential house property if the amount is invested in eligible start up. The period during which the residential property can be transferred in order to become eligible for exemption has been extended from 31/03/2021 to 31/03/2022.

One more year for Affordable Housing Project:

Section 80-IBA offers a 100% deduction towards profit earned from affordable housing projects. For this, an approval from the competent authority was required to be obtained on or before 31/03/2021. One more year of extension is given by Budget – 2021. Now, approval obtained till 31/03/2022 will be eligible for deduction u/s 80IBA. Further, the scope of section 80IBA has been extended even to “Rental Housing Project” also.

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