Amortisation of expenditure for telecommunications services, amalgamation, demerger, scheme of voluntary retirement, etc.
52(1)
Where an expenditure of the nature specified in column B of the Table given below is incurred during the tax year, a deduction or part thereof shall be allowed in equal instalments in each of the tax years as mentioned in column D of the said Table, beginning from the initial tax year specified in column C thereof.
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52(2)
Where the rights referred to in sub-section (1) (Table: Sl. No. 3 or 4) are transferred and—
- (a) where the proceeds of the transfer (so far as they consist of capital sums) are less than the expenditure though incurred, but remaining unallowed, a deduction equal to such expenditure remaining unallowed, as reduced by the proceeds of the transfer, shall be allowed in respect of the tax year in which the licence is transferred;
- (b) where the whole or part of the right is transferred, the proceeds of the transfer (so far as they consist of capital sums) exceed the amount of the expenditure though incurred, but remaining unallowed, so much of the excess as does not exceed the difference between the expenditure incurred to obtain the licence and the amount of such expenditure remaining unallowed, shall be chargeable to income-tax as profits and gains of the business in the tax year in which the licence has been transferred;
- (c) where the rights under clause (b) is transferred in a tax year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that tax year;
- (d) where the whole or part of the right is transferred, the proceeds of the transfer (so far as they consist of capital sums) are equal or greater than the amount of expenditure incurred remaining unallowed, no deduction for such expenditure shall be allowed under sub-section (1) in respect of the tax year in which the licence is transferred or in respect of any subsequent tax year or years;
- (e) such transfer is in a scheme of amalgamation or demerger to the amalgamated company or resulting company, being an Indian company,— (i) the provisions of clauses (a), (b), (c) and (d) shall not apply to the amalgamating or demerged company; and (ii) all the provisions of this section shall continue to apply to the amalgamated or resulting company as it would have applied to the amalgamating or demerged company, as if the transfer has not taken place.
52(3)
Where a part of the rights is transferred in a tax year and sub-section (2)(b) and (c) does not apply, the deduction to be allowed under sub-section (1) for the expenditure incurred remaining unallowed shall be arrived at by—
- (a) subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure remaining unallowed; and
- (b) dividing the remainder by the number of relevant tax years which have not expired at the beginning of the tax year during which the licence is transferred.
52(4)
No deduction shall be allowed––
- (a) for depreciation under section 33(1) to (10) in respect of expenditure mentioned in sub-section (1) (Table: Sl. No. 3 or 4), where deduction under this section is claimed and allowed for any tax year;
- (b) under any other provision of this Act in respect of the expenditure mentioned in sub-section (1) (Table: Sl. No. 1 or 2).
52(5)
In case any deduction has been claimed and granted in respect of an expenditure referred in sub-section (1) (Table: Sl. No. 3) and there is subsequent failure on part of the assessee to comply with any of the provisions of this section, then,—
- (a) the deduction shall be deemed to have been wrongly allowed;
- (b) the Assessing Officer may, irrespective of any other provisions of this Act, recompute the total income of the assessee for the said tax year by making necessary rectification;
- (c) the provisions of section 287 shall, so far as may be, apply; and
- (d) the period of four years specified in section 287(8) shall be counted from the end of the tax year in which such failure takes place.
52(6)
Where a specified business reorganisation takes place before the expiry of the period specified in sub-section (1) (Table: Sl. No. 2.D), in case of an expenditure referred against serial number 2 thereof, then,—
- (a) the provisions of this section shall continue to apply to the successor entity for the tax year in which the business reorganisation took place and subsequent tax years; and
- (b) no deduction shall be allowed to the predecessor entity under this section for the tax year in which such reorganisation takes place.
52(7)
In this section,––
- (a) “actually paid” means the actual payment of expenditure irrespective of the tax year in which the liability for the expenditure was incurred according to the method of accounting regularly employed by the assessee or payable in such manner, as prescribed;
- (b) “equal installments” shall be calculated by taking numerator as 1 and denominator as the tax years mentioned in column D of the Table in sub-section (1);
- (c) “specified business reorgnisation” means–– (i) amalgamation of an Indian company and its undertaking with another Indian company; or (ii) demerger of an undertaking of an Indian company to another company; or (iii) succession of a firm or proprietorship concern to a company fulfilling conditions as laid down in section 70(1)(zd); or (iv) conversion of a private company or unlisted public company to a limited liability partnership fulfilling conditions laid down in section 70(1)(ze)
Explanation
Section Summary:
Section 52 of the new income tax law governs the amortization (spreading out) of certain types of expenditures over a specified period. These expenditures include costs related to telecommunications services, amalgamation, demerger, voluntary retirement schemes, and similar business activities. The section allows taxpayers to claim deductions for these expenditures in equal installments over a defined number of years, as specified in a table provided in the law. It also outlines rules for scenarios where the rights associated with these expenditures are transferred, and how deductions should be adjusted in such cases.
Key Changes:
- Amortization of Expenditures: The section introduces a structured approach to amortizing specific expenditures, replacing or supplementing earlier rules under the Income Tax Act.
- Transfer of Rights: Detailed provisions are added for scenarios where rights related to these expenditures are transferred, including adjustments to deductions and tax implications.
- Business Reorganizations: Specific rules are introduced for business reorganizations (e.g., amalgamation, demerger), ensuring continuity of deductions for successor entities.
- Interaction with Depreciation: The section clarifies that no depreciation can be claimed under Section 33(1) to (10) for expenditures covered under this section if amortization deductions are claimed.
Practical Implications:
- Taxpayers and Businesses: Taxpayers incurring expenditures on telecommunications services, amalgamation, demerger, or voluntary retirement schemes can now claim deductions over a specified period, improving cash flow management.
- Transfer of Rights: If rights related to these expenditures are transferred, taxpayers must adjust their deductions or report gains/losses based on the transfer proceeds.
- Business Reorganizations: In cases of amalgamation or demerger, the successor entity can continue claiming deductions, while the predecessor entity loses this benefit.
- Compliance: Taxpayers must ensure accurate documentation and reporting of expenditures, transfers, and reorganizations to avoid penalties or re-computation of income.
Critical Concepts:
- Amortization: The process of spreading out the cost of an expenditure over several years, rather than deducting it all at once.
- Equal Installments: Deductions are calculated by dividing the total expenditure by the number of years specified in the table (e.g., if the expenditure is ₹100 and the period is 5 years, the annual deduction is ₹20).
- Specified Business Reorganization: Includes amalgamation, demerger, succession of a firm to a company, or conversion of a company to an LLP, provided certain conditions are met.
- Interaction with Depreciation: If a taxpayer claims amortization under this section, they cannot claim depreciation under Section 33 for the same expenditure.
Compliance Steps:
- Identify Eligible Expenditures: Determine if the expenditure falls under the categories listed in the table provided in Section 52(1).
- Calculate Amortization: Divide the total expenditure by the number of years specified in the table to determine the annual deduction.
- Document Transfers: If rights related to the expenditure are transferred, calculate the adjustment to deductions or report gains/losses as per Section 52(2).
- Handle Reorganizations: In case of amalgamation or demerger, ensure that the successor entity continues to claim deductions, and the predecessor entity stops claiming them.
- Avoid Double Deductions: Ensure that no depreciation is claimed under Section 33 for expenditures amortized under this section.
Examples:
- Amortization Example: A telecom company incurs ₹10 crore in expenditure for acquiring a license. The table specifies a 10-year amortization period. The company can claim ₹1 crore as a deduction each year for 10 years.
- Transfer of Rights Example: If the company transfers the license after 5 years for ₹6 crore, and the unamortized expenditure is ₹5 crore, the company can claim a deduction of ₹1 crore (₹5 crore - ₹6 crore) in the year of transfer. If the transfer proceeds exceed the unamortized expenditure, the excess is taxable as business income.
- Business Reorganization Example: In a demerger, if the telecom business is transferred to a new company, the new company can continue claiming the remaining amortization deductions, while the original company cannot claim any further deductions.
This section provides a clear framework for handling specific expenditures and ensures consistency in tax treatment across various business scenarios.