Under the Income Tax Act, 1961, advertisement expenses are typically allowed as a deduction under Section 37(1) if they are incurred wholly and exclusively for business or profession. However, certain circumstances lead to their disallowance:

1. Advertisement for Political Purposes

Expenses incurred on advertisements directly supporting political parties or political causes are not allowed as deductions. However, contributions to political parties through Electoral Bonds or donations under Section 80GGC may be eligible for tax benefits.

2. Advertisements Resulting in Capital Expenditure

If the advertisement expense creates a long-term brand value, such as launch campaigns, logo redesigns, or promotional hoardings with permanent benefits, it may be classified as a capital expense and not deductible as a business expense. However, depreciation under Section 32 may be available if treated as an intangible asset.

3. Expenses That Are Prohibited by Law

Any expenditure incurred for an illegal purpose, violating regulations, or encouraging unlawful activities is not deductible. This includes advertisements promoting banned products, misleading claims, or violations of ethical advertising standards.

4. Personal Advertisement Expenses

If the expense is related to personal promotion rather than business (e.g., congratulatory advertisements for individuals, non-business sponsorships), it is not deductible. Only business-related advertising expenses qualify.

5. Non-Compliance with TDS Requirements

If an advertisement payment exceeds the prescribed limit and TDS is not deducted as per Section 194C, the expense can be disallowed under Section 40(a)(ia). Ensuring proper TDS compliance is essential to avoid disallowance.

6. Excessive or Unreasonable Advertisement Expenses

If the expense is disproportionate to the business scale or unreasonably high, the Assessing Officer may invoke Section 40A(2) to disallow the excessive portion.

Conclusion
To ensure the deductibility of advertisement expenses, businesses should maintain proper records, ensure compliance with tax laws, and justify the necessity of expenses for business purposes. Keeping track of TDS deductions, ensuring expenses are revenue in nature, and aligning with business requirements can help prevent tax disallowances.

Under the Income Tax Act, 1961, bad debts and provisions for doubtful debts are treated differently for deduction purposes. The law allows actual bad debts as a deduction under certain conditions, while provisions for doubtful debts are generally not deductible.

1. Deduction for Bad Debts [Section 36(1)(vii)]

A bad debt is a debt that has become irrecoverable and is written off from the books of accounts. The following conditions must be satisfied for claiming a deduction:
✅ The debt must have been included as income in earlier years.
✅ The debt must be related to the business or profession carried on by the taxpayer.
✅ The debt should be actually written off in the books of accounts in the year in which the deduction is claimed.

🔹 Important: Writing off the debt in the books of accounts is mandatory—mere provision for bad debts will not be allowed as a deduction.

2. Deduction for Provision for Doubtful Debts [Section 36(1)(viia)]

Normally, a provision for doubtful debts (i.e., expected bad debts that may occur in the future) is not deductible. However, an exception exists for banks, financial institutions, and NBFCs:

• Scheduled Banks & Cooperative Banks: Deduction up to 8.5% of total income (before deductions) and 10% of rural advances.

• NBFCs: Deduction up to 5% of total income on provisions for doubtful debts.

3. When Bad Debt Recovery is Taxable [Section 41(4)]

If a bad debt, which was earlier allowed as a deduction, is subsequently recovered, it must be offered as income in the year of recovery.

4. Key Judicial Decisions & Practical Considerations

• The Supreme Court (T.R.F. Ltd. case) has ruled that if a bad debt is written off in the books, the deduction cannot be denied merely because the assessee failed to prove irrecoverability.

• Businesses should document communication with the debtor (reminders, legal notices) to substantiate the claim in case of scrutiny.

Conclusion

• Bad debts actually written off in the books are allowed as a deduction.

• Provision for doubtful debts is generally not allowed, except for certain financial institutions.

• Recovered bad debts must be offered as income in the year of recovery.

For businesses, maintaining proper records and ensuring compliance with Section 36(1)(vii) & (viia) is crucial for claiming these deductions.

Tax Treatment of Zero Coupon Bonds under the Income Tax Act

1. What are Zero Coupon Bonds?

Zero Coupon Bonds (ZCBs) are debt instruments issued at a discount to their face value but do not pay periodic interest. Instead, the investor earns a return when the bond is redeemed at its maturity value, which is higher than the purchase price.

2. Taxation of Zero Coupon Bonds

✅ For Individual & Non-Business Holders:

• The difference between the redemption value and the purchase price is treated as Capital Gains.

• Holding Period Classification:

  • Short-Term Capital Gains (STCG): If held for ≤ 12 months (for listed ZCBs) or ≤ 36 months (for unlisted ZCBs), taxed as per slab rates.

  • Long-Term Capital Gains (LTCG): If held for > 12 months (for listed ZCBs) or > 36 months (for unlisted ZCBs), taxed at 10% without indexation under Section 112.

✅ For Businesses & Traders (Held as Stock-in-Trade):

• Any gain on maturity is treated as business income under Section 28 and taxed at applicable slab rates.

✅ TDS Applicability:

• If the ZCB is issued by a company or institution, TDS (Tax Deducted at Source) may apply at the time of maturity under Section 193, unless exempted.

3. Special Tax Treatment for Government-Notified ZCBs

• As per Section 2(48) of the Income Tax Act, ZCBs notified by the Central Government enjoy special tax benefits.

• The difference between issue and redemption price is not taxed annually but only on maturity as capital gains.

4. Practical Considerations

✔ Keep records of purchase price & redemption value for accurate tax computation.
✔ If investing in listed ZCBs, take advantage of the lower holding period for LTCG.
✔ Ensure TDS compliance if applicable.

As per Section 36(1)(ii), any bonus or commission paid to employees is allowed as a deduction while computing business income, provided it meets certain conditions.

✅ Conditions for Allowing Deduction

🔹 Must be paid to an employee – The payment should be made to an employee and not to proprietors, partners, or directors who are also shareholders.
🔹 Should not be in lieu of dividends – If the commission or bonus is paid instead of distributing profits as dividends, the deduction is not allowed.
🔹 Actual payment is required – As per Section 43B, the deduction is allowed only when the bonus or commission is actually paid before the due date of filing the income tax return.
🔹 Should be reasonable – The payment should be genuine and reasonable as per the business needs; otherwise, tax authorities may disallow it under Section 40A(2) (excessive or unreasonable payments).

⛔ When Deduction is NOT Allowed?

❌ If the bonus/commission is payable instead of a dividend to shareholders.
❌ If the payment is not actually made by the due date of filing the return.
❌ If the amount is considered excessive by tax authorities under Section 40A(2).

💡 Illustration

Example 1: XYZ Pvt Ltd pays ₹2 lakh as a performance-based commission to its employees. Since the payment is made to employees and is not in lieu of dividends, it is allowed as a deduction under Section 36(1)(ii).

Example 2: ABC Ltd pays ₹10 lakh to its shareholder-directors in the form of commission instead of dividends. Since this is effectively a profit distribution, it is not allowed as a deduction.

📌 Conclusion

✅ Bonus/commission paid to genuine employees is deductible under Section 36(1)(ii).
✅ The payment should not be an alternative to dividends.
✅ Deduction is available only on actual payment before the ITR due date.
✅ Ensure payments are reasonable to avoid disallowance under Section 40A(2).

💡 Proper documentation and adherence to these provisions ensure maximum tax benefits! 🚀

When a company incurs expenses exclusively for the purpose of amalgamation or demerger, it can claim a tax deduction for these expenditures under the Income Tax Act.

What You Need to Know

• Relevant Provision:
  The deduction is provided under Section 35DD of the Income Tax Act, 1961.

• Eligibility:

  • Only Indian companies that incur expenditure wholly and exclusively for amalgamation or demerger qualify.

  • The expenses must be directly related to the restructuring process.

• How the Deduction Works:

  • The entire expenditure is not deductible in a single year. Instead, it is spread out over five consecutive financial years.

  • This means you can claim 20% of the total expenditure each year as a deduction.

Step-by-Step Illustration

1. Expenditure Incurred: Suppose your company incurs ₹50 lakhs in amalgamation/demerger expenses during the financial year.

2. Annual Deduction:

   • Claim 20% of ₹50 lakhs = ₹10 lakhs per year.

3. Deduction Period:

   • You will get this deduction each year for five financial years (i.e., ₹10 lakhs per year for 5 years).

Important Considerations

• Documentation:
  It is essential to maintain proper documentation and records that demonstrate the expenses were incurred solely for amalgamation or demerger purposes.

• Exclusivity:
  No other tax deduction is available for these expenses under any other section. This is the only relief provided for amalgamation/demerger costs.

Key Takeaway

By spreading the deduction over five years, Section 35DD helps ease the tax burden on companies undergoing corporate restructuring, making it more manageable to recover the costs associated with amalgamation or demerger.