New industrial enterprises, including small businesses, are excluded from paying income tax on their profits under section 80J of the Income Tax Act of 1961, up to a maximum of 6 percent annually of their capital employed. This tax break is available for five years from the start of production.

A small business must meet the following two requirements must be met by a small business to qualify for this tax exemption.

1. An existing unit should not have been split or rebuilt to create the unit.

2. In a production process using the power of at least 10 employees, the unit of 20 or more workers are without power.

Depreciation: A small-scale industry is eligible for a deduction on a block of assets’ depreciation account at the specified rate under Section 32 of the Income Tax Act of 1961. Small businesses are permitted to deduct up to Rs. 20 lakh for plant and machinery depreciation using the declining balance technique.

Depreciation is determined by taking into account an asset’s written-down value when it was bought prior to the accounting period. An additional payment is known as “Extra Shift Allowance” is also offered for equipment utilized in manufacturing during double or triple shifts.

Before a small business is qualified for a depreciation deduction, it must meet the following requirements:

1. The assessee must be the legal owner of the assets.

2. The assets need to be really put to use in the assess’s company or line of work.

3. Only permanent assets, such as furniture, building machinery, and other plant and equipment, are eligible for a depreciation allowance or deduction.

In the case of a firm, depreciation will be capped to Rs. 7,590/- of the amount calculated at the appropriate percentage on the written-down value block of assets as of the assessment year 1991-92.

Rehabilitation Allowance:

Small-scale businesses that cease operations for the following reasons may be eligible for a rehabilitation allowance under Section 33-B of the Income Tax Act of 1961:

1. A flood, typhoon, hurricane, cyclone, earthquake, or any natural disaster;

2. A riot or other civil unrest;

 3. An accident involving fire or explosion; and 4. Enemy action or an enemy-related activity.

Within three years following the unit’s re-establishment, reconstruction, or revival, the rehabilitation grant must be put to use for commercial endeavors.

The rehabilitation allowance is granted to the unit in an amount equal to 60% of the deduction that is granted to the unit.

Investment Allowance:

The Initial Depreciation Allowance was replaced by the Investment Allowance in 1976. According to Section 31 A of the Income Tax Act of 1961, investments are eligible for tax breaks at a rate of 25% of the installed cost of new machinery or plant.

A particular dispensation has been allowed for the equipment and machinery installed in small-scale companies under the Eleventh Schedule to the Income Tax Act of 1961, even though the investment allowance has been made accessible for all commodities or things except for some items of low priority. Small-scale businesses have an advantage when claiming an investment allowance deduction compared to other industries. A small business may be eligible for an investment allowance if it uses the equipment either in the year of installation or the year immediately after, or else the advantage will be lost.

Scientific research on Spending

 The following deductions are permitted for spending on scientific research under Section 35 of the Income Tax Act of 1961:

1. Any money spent on scientific research connected to the assessee’s business in the preceding year.

2. Any amount paid to an organization dedicated to scientific research, a university, college, or other institution, or to a publicly traded firm whose goal is to do scientific research

3. Any capital expenses made for scientific research pertaining to the assessee’s business that is covered by Section 35(2) of the Income Tax Act of 1961.

The provisions of the Income Tax Act let to carry forward any unabsorbed capital expenditures made for scientific research for adjustment against the profits made by the business in the following years for an endless amount of time.

Amortization of Certain Preliminary Expenses:

Under Section 35D of the Income Tax Act of 1961, Indian companies and residents are permitted to deduct the preliminary and developmental costs they incurred in connection with the establishment of a new industrial unit or the expansion of an existing industrial unit.

Examples of preliminary costs include

a. Costs associated with creating a feasibility study that is required for their firm; b. Business-related engineering costs; and c. Legal fees, if applicable, for drafting agreements.

The writing off of the upfront costs is permitted up to a maximum of ten annual installments, starting with the year the new unit starts producing or the expansion of an existing unit is finished. The total amount of expenses that can be written off is capped at 2.5% of the project’s overall cost.

The following requirements must be met in order for a small-scale unit operating in a backward area to qualify for a 20% deduction from profits and gains under Section 80-HH:

A. The unit started producing after December 31, 1970, in any backward area of the nation.

B. It is a newly established unit in a backward area. It has not been created by the transfer of equipment or plant that was previously used for any purpose in any backward area to a new business

C. It does not split or reconstitute from an existing business in any backward area.

D. It does not employ 10 or more workers in a manufacturing process with power or 20 or more workers without power.

Tax Break for Small-Scale Businesses in Rural Areas: A new Section 80-HHA was added to the Income Tax Act of 1961 by the Finance (No. 2) Act of 1977.

According to Section 80-HHA, taxpayers are eligible for a deduction of 20% of the profits and gains generated by small-scale businesses operating in rural areas.

The deduction is available for ten years starting in the year when manufacturing activity resumes after September 30, 1977. Any area covered by the Explanation to Section 35 CC (I) of the Income Tax Act of 1961 is considered a rural area for the purposes of this definition. The small-scale mining units are not, however, eligible for this tax reduction benefit.

Tax Break for Small-Scale Businesses in Rural Areas:

A new Section 80-HHA was added to the Income Tax Act of 1961 by the Finance (No. 2) Act of 1977.

According to Section 80-HHA, taxpayers are eligible for a deduction of 20% of the profits and gains generated by small-scale businesses operating in rural areas.

The deduction is available for ten years starting in the year when manufacturing activity resumes after September 30, 1977. Any area covered by the Explanation to Section 35 CC (I) of the Income Tax Act of 1961 is considered a rural area for the purposes of this definition. The small-scale mining units are not, however, eligible for this tax reduction benefit.

For a period of ten years commencing with the year that manufacturing or production began, this deduction is permitted. The unit will be permitted this deduction on the earnings made from the enterprise after moving to the backward area for a period of 10 years, though, if a small-scale industry has previously been formed in a non-backward area and afterward transferred to a backward area. Small-scale businesses located in underdeveloped areas yet engaged in mining activities are not eligible for this type of deduction benefit.

To qualify for this tax credit, the unit must meet the requirements listed below:

1. It was founded on or after December 31, 1970.

2. It either employs at least 10 workers in a manufacturing process that uses power or at least 20 workers in a manufacturing process that does not.

Expenditure on Acquiring Patents and Copyrights:

Under Section 35-A of the Income Tax Act of 1961, a small-scale industry may deduct from its income any capital expenditures made in order to acquire a patent or copyright. However, the expense must be incurred after February 28, 1966. The cost of securing patents and copyrights for the unit may be written off over the course of 14 equal payments starting with the prior year.

Tax Deductions are also available for the following:

1. Royalties from any Indian corporation are also eligible for deductions (Under Section 80 M)

2. Royalties from specific international businesses (Under Section 800)

3. Dividends between corporations (Under Section 80 M)

4. Cooperative Society Income (Under Section SOP)

5. Forward business losses and offset them (Under Section 72)

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