PGBP

PROFITS AND GAINS OF BUSINESS OR PROFESSION 4.
169
UNIT – 3 : PROFITS AND GAINS OF BUSINESS OR

PROFESSION
LEARNING OUTCOMES
After studying this chapter, you would be able to-
 comprehend the meaning of “business” and “profession” and the
scope of income chargeable to tax under this head;
 comprehend the meaning of speculative transaction and the tax
treatment of loss incurred in speculative business;
 identify the expenditures/ payments which are admissible as
deduction, know the conditions to be satisfied to avail such
deductions, the limits, if any, specified in respect thereof;
 compute the deductions available while computing business income
applying the relevant provisions;
 identify the expenditures/ payments which are not admissible as
deduction;
 identify the deductions allowable only on actual payment;
 examine when certain receipts are deemed to be income chargeable
to tax under this head;
 identify the assessees, who are required to compulsorily maintain
books of account and get them audited;
 apply the presumptive tax provisions under the Act to compute
income from eligible business or profession;
 compute the business income by applying the charging and deeming
provisions and allowing permissible deductions;
 compute the business income in cases where income is partly
agricultural and partly business in nature.
© The Institute of Chartered Accountants of India

4.170 INCOME TAX LAW
Proforma for computation of income under the head “Profits and gains of
business or profession"
Particulars Amount Amount

(`) (`)
Net profit as per statement of profit and loss A
Add: Expenses debited to statement of profit and loss but
not allowable
• Depreciation as per books of accounts xxx
• Income-tax [disallowed u/s 40(a)(ii)] xxx
• 30% of sum payable to residents on which tax is not xxx
deducted at source or has not been remitted on or
before the due date u/s 139(1), after deduction,
disallowed under section 40(a)(ia) [The same is
allowable in the year in which the tax is deducted
and remitted]
• Any expenditure incurred, in respect of which xxx
payment is made for goods, services or facilities to a
related person, to the extent the same is excessive or
unreasonable, in the opinion of the A.O, having
regard to its FMV [disallowed u/s 40A(2)]
• Any payment to partner (in case of firm only) by way xxx
of salary, interest, bonus, commission or
remuneration in excess of prescribed limits u/s 40(b)
• Any expenditure incurred in respect of which xxx
payment or aggregate of payments to a person
exceeding ` 10,000 in a single day is made otherwise
than by way of A/c payee cheque/bank draft/ use of
ECS through bank A/c or through such other
prescribed electronic mode [disallowed u/s 40A(3)]
• Certain sums payable by the assessee which have xxx
not been paid during the relevant P.Y. in which the
liability was incurred on or before the due date for
filing return u/s 139(1) in respect of that P.Y.
[disallowed u/s 43B]
• Personal expenses [not allowable as per section 37] xxx
• Capital expenditure [not allowable as per section 37] xxx
• Repairs of Capital nature [not allowable as per xxx
Sections 30 & 31]

PROFITS AND GAINS OF BUSINESS OR PROFESSION 4.171
• Amortization of preliminary expenditure u/s 35D/ xxx

expenditure incurred under voluntary retirement
scheme u/s 35DDA [4/5th of such expenditure to be
added back]
• Fine or penalty paid for infringement or breach of xxx
law [However, penalty in the nature of damages for
delay in completion of a contract, being
compensatory in nature, is allowable]
• All expenses related to income which is not taxable xxx
under this head e.g. municipal taxes in respect of
house property
• Any sum paid by the assessee as an employer by
way of contribution to pension scheme u/s 80CCD
exceeding 10% of the salary of the employee xxx B
(A + B) C
Less: Expenditure allowable as deduction but not debited
to statement of profit and loss
• Depreciation computed as per Rule 5 of Income-tax xxx
Rules, 1962
• Additional depreciation@20% of actual cost of new P & xxx
M acquired by an assessee engaged in the business of
manufacture or production of any article or thing or
generation, transmission or distribution of power (10% of
actual cost, if put to use for less than 180 days in the year
of acquisition)/ 35% of actual cost (17.5% if put to use for
less than 180 days in the year of acquisition), if the
manufacturing undertaking is set up in a notified
backward area in the State of A.P./Bihar/Telangana/West
Bengal on or after 1.4.2015 [Balance additional
depreciation can be claimed in the next year]
• Deduction@15% of actual cost of new P&M u/s xxx
32AD in case of a manufacturing undertaking/
enterprise set up in a notified backward area in the
State of A.P./Bihar/Telangana/West Bengal on or
after 1.4.2015
• Weighted deduction for expenditure on/contribution xxx
for research u/s 35(1)(ii), 35(2AA), 35(2AB) in excess
of the amount already debited to statement of profit
& loss

• Investment-linked deduction in respect of specified

businesses u/s 35AD xxx D
(C - D) E
Less: Income credited in statement of profit and loss but
not taxable/ taxable under any other head
• Dividend income exempt under section 10(34)/ xxx
taxable under section 115BBDA
• Agricultural income exempt under section 10(1) xxx
• Interest on securities/savings bank account/FD xxx
taxable under the head “Income from other sources”
• Profit on sale of capital asset taxable under the head xxx
“Capital Gains”
• Rent from house property taxable under the head xxx
“Income from house property”
• Winnings from lotteries, horse races, games etc. xxx
taxable under the head “Income from other sources”
• Gifts exempt or taxable under the head “Income xxx
from other sources”
• Income-tax refund not taxable xxx
• Interest on income-tax refund taxable under the
head “Income from other sources” xxx F
(E - F) G
Add: Deemed Income
• Bad debt allowed as deduction u/s 36(1)(vii) in an xxx
earlier PY, now recovered [deemed as income u/s
41(4)]
• Remission or cessation of a trading liability [deemed
as income u/s 41(1)] xxx H
Profits and gains from business or profession (G + H) I
3.1 MEANING OF ‘BUSINESS’ AND ‘PROFESSION’

The tax payable by an assessee on his income under this head is in respect of the
profits and gains of any business or profession, carried on by him or on his behalf
during the previous year.

Business Profession
The term “business” has been The term “profession” has not been
defined in section 2(13) to defined in the Act. It means an
“include any trade, commerce or occupation requiring some degree of
manufacture or any adventure or learning. The term ‘profession’ includes
concern in the nature of trade, vocation as well [Section 2(36)]
commerce or manufacture”.
• Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an

architect and even an astrologer are persons who can be said to be carrying
on a profession but not business.
• However, it is not material whether a person is carrying on a ‘business’ or
‘profession’ or ‘vocation’ since for purposes of assessment, profits from all
these sources are treated and taxed alike.
• Business necessarily means a continuous exercise of an activity; nevertheless,
profit from a single venture in the nature of trade may also be treated as
business.
Meaning of ‘Profits’
(i) Profits in cash or in kind: Profits may be realised in money or in money’s
worth, i.e., in cash or in kind. Where profit is realised in any form other than
cash, the cash equivalent of the receipt on the date of receipt must be taken
as the value of the income received in kind.
(ii) Capital receipts: Capital receipts are not generally to be taken into account
while computing profits under this head.
(iii) Voluntary Receipts: Payment voluntarily made by persons who were under
no obligation to pay anything at all would be income in the hands of the
recipient, if they were received in the course of a business or by the exercise
of a profession or vocation. Thus, any amount paid to a lawyer by a person
who was not a client, but who has been benefited by the lawyer’s
professional service to another would be assessable as the lawyer’s income.
(iv) Application of the gains of trade is immaterial: Gains made even for the
benefit of the community by a public body would be liable to tax. To attract
the provisions of section 28, it is necessary that the business, profession or
vocation should be carried on at least for some time during the accounting

year but not necessarily throughout that year and not necessarily by the
assessee-owner personally, but it should be under his direction and control.
(v) Legality of income: The illegality of a business, profession or vocation does
not exempt its profits from tax. The revenue is not concerned with the taint
of illegality in the income or its source.
(vi) Income from distinct businesses: The profits of each distinct business
must be computed separately but the tax chargeable under this section is
not on the separate income of every distinct business but on the aggregate
profits of all the business carried on by the assessee.
(vii) Computation of profits: Profits should be computed after deducting the
losses and expenses incurred for earning the income in the regular course
of the business, profession, or vocation unless the loss or expenses is
expressly or by necessary implication, disallowed by the Act. The charge is
not on the gross receipts but on the profits and gains.
3.2 METHOD OF ACCOUNTING

Under section 145(1), income chargeable under the heads “Profits and gains of
business or profession” or “Income from other sources” shall be computed in
accordance with either the cash or mercantile system of accounting regularly
employed by the assessee.
However, as per section 145B, certain income would be taxable in the following
manner:
(i) interest received by an assessee on compensation or on enhanced
compensation, shall be deemed to be the income of the year in which it is
received. [Such income is taxable under the head “Income from other
sources”
(ii) income referred to in section 2(24)(xviii) i.e., assistance in the form of a
subsidy or grant or cash incentive or duty drawback or waiver or concession
or reimbursement, by whatever name called, by the Central Government or
a State Government or any authority or body or agency in cash or kind to
the assessee shall be deemed to be the income of the previous year in
which it is received, if not charged to income tax for any earlier previous
year.

Under section 145(2), the Central Government is empowered to notify in the Official
Gazette from time to time, income computation and disclosure standards (ICDSs) to
be followed by any class of assessees or in respect of any class of income.
Accordingly, the Central Government has, vide Notification No. S.O.3079(E) dated
29.9.2016, notified ten ICDSs to be applicable from A.Y.2017-18.
The notified ICDSs have to be followed by all assessees (other than an individual or a
Hindu undivided family who is not required to get his accounts of the previous year
audited in accordance with the provisions of section 44AB) following the mercantile
system of accounting, for the purposes of computation of income chargeable to
income-tax under the head “Profits and gains of business or profession” or “Income
from other sources”, from A.Y.2017-18.
The ten notified ICDSs are:
ICDS I : Accounting Policies

ICDS II : Valuation of Inventories
ICDS III : Construction Contracts
ICDS IV : Revenue Recognition
ICDS V : Tangible Fixed Assets
ICDS VI : The Effects of Changes in Foreign Exchange Rates
ICDS VII : Government Grants
ICDS VIII : Securities
ICDS IX : Borrowing Costs
ICDS X : Provisions, Contingent Liabilities and Contingent Assets
Note: ICDS would be dealt with in detail at Final Level.
3.3 INCOME CHARGEABLE UNDER THIS HEAD

[SECTION 28]
The various items of income chargeable to tax as income under the head ‘profits and
gains of business or profession’ are as under:
(i) Income from business or profession: Income arising to any person by way
of profits and gains from the business or profession carried on by him at
any time during the previous year.

(ii) Any compensation or other payment due to or received by:

(a) Any person, by whatever name called, managing the whole or
substantially the whole of -
(i) the affairs of an Indian company or
(ii) the affairs in India of any other company
at or in connection with the termination of his management or office
or the modification of any of the terms and conditions relating
thereto;
(b) any person, by whatever name called, holding an agency in India for
any part of the activities relating to the business of any other person,
at or in connection with the termination of the agency or the
modification of any of the terms and conditions relating thereto;
(c) any person, for or in connection with the vesting in the Government or
in any corporation owned or controlled by the Government under any
law for the time being in force, of the management of any property or
business;
(d) any person, by whatever name called, at or in connection with the
termination or modification of the terms and conditions, of any
contract relating to his business.
(iii) Income from specific services performed for its members by a trade,
professional or business: Income derived by any trade, professional or
similar associations from specific services rendered by them to their
members. It may be noted that this forms an exception to the general
principle governing the assessment of income of mutual associations such
as chambers of commerce, stock brokers’ associations etc.
As a result a trade, professional or similar association performing specific
services for its members is to be deemed as carrying on business in respect
of these services and on that assumption the income arising therefrom is to
be subjected to tax. For this purpose, it is not necessary that the income
received by the association should definitely or directly be related to these
services.
(iv) Incentives received or receivable by assessee carrying on export
business:
(a) Profit on sale of import entitlements: Profits on sale of a licence

granted under the Imports (Control) Order, 1955 1 made under the
Imports and Exports (Control) Act, 1947 2.
(b) Cash assistance against exports under any scheme of GoI: Cash
assistance (by whatever name called) received or receivable by any
person against exports under any scheme of the Government of India.
(c) Customs duty or excise re-paid or repayable as drawback: Any
Customs duty or Excise duty drawback repaid or repayable to any
person against export under the Customs and Central Excise Duties
Drawback Rules, 1971 3.
(d) Profit on transfer of Duty Entitlement Pass Book Scheme or Duty
Free Replenishment Certificate: Any profit on the transfer of the
Duty Entitlement Pass Book Scheme 4 or Duty Free Replenishment
Certificate, being Duty Remission Scheme, under the export and
import policy formulated and announced under section 5 of the
Foreign Trade (Development and Regulation) Act, 1992.
(v) Value of any benefit or perquisite: The value of any benefit or perquisite
whether convertible into money or not, arising from business or the exercise
of any profession.
(vi) Sum due to, or received by, a partner of a firm: Any interest, salary,
bonus, commission or remuneration, by whatever name called, due to or
received by a partner of a firm from such firm will be deemed to be income
from business. However, where any interest, salary, bonus, commission or
remuneration by whatever name called, or any part thereof has not been
allowed to be deducted under section 40(b), in the computation of the
income of the firm the income to be taxed shall be adjusted to the extent of
the amount disallowed.
1 Now Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993
2 Now Foreign Trade (Development and Regulation) Act, 1992
3 Now Customs and Central Excise Duties Drawback Rules, 1995
4 The pre‐export DEPB scheme was abolished with effect from 1 April 2000. After several
extensions through the years, the post‐export scheme was phased out on 30 September 2011 and
thereafter DEPB items were incorporated into the Duty Drawback Schedule with effect from 1
October 2011

Example:
Suppose a firm pays interest to a partner at 20% simple interest p.a. The
allowable rate of interest is 12% p.a. Hence the excess 8% paid will be
disallowed in the hands of the firm. Since the excess interest has suffered
tax in the hands of the firm, the same will not be taxed in the hands of the
partner.
(vii) Any sum whether received or receivable, in cash or kind, under an
agreement:
(a) for not carrying out any activity in relation to any business or
profession; or
However, the following sums received or receivable would not be

chargeable to tax under the head “profits and gains from business
or profession”:
(i) any sum, whether received or receivable, in cash or kind, on
account of transfer of the right to manufacture, produce or
process any article or thing or right to carry on any business or
profession, which is chargeable under the head “Capital gains”.
(ii) any sum received as compensation, from the multilateral fund of
the Montreal Protocol on Substances that Deplete the Ozone
layer under the United Nations Environment Programme, in
accordance with the terms of agreement entered into with the
Government of India.
(b) for not sharing any know-how, patent, copyright, trade mark, licence,
franchise or any other business or commercial right of similar nature
or information or technique likely to assist in the manufacture or
processing of goods or provision for services.
Meaning of certain terms
Term Meaning
Agreement Includes any arrangement or understanding or action in
concert, -
(A) whether or not such arrangement, understanding or
action is formal or in writing; or

(B) whether or not such arrangement, understanding or

action is intended to be enforceable by legal
proceedings;
Service Service of any description which is made available to
potential users and includes the provision of services in
connection with business of any industrial or commercial
nature such as accounting, banking, communication,
conveying of news or information, advertising,
entertainment, amusement, education, financing, insurance,
chit funds, real estate, construction, transport, storage,
processing, supply of electrical or other energy, boarding
and lodging.
(viii) Any sum received under a Keyman insurance policy: Any sum received
under a Keyman insurance policy including the sum allocated by way of
bonus on such policy will be taxable as income from business.
(ix) Fair market value of inventory on its conversion as capital asset: Fair
market value of inventory on the date of its conversion or treatment as
capital asset, determined in the prescribed manner, would be chargeable to
tax as business income.
(x) Sum received on account of capital asset referred under section 35AD:
Any sum received or receivable, in cash or kind, on account of any capital
asset (in respect of which whole of the expenditure on such capital asset has
been allowed as a deduction under section 35AD) being demolished,
destroyed, discarded or transferred.
3.4 SPECULATION BUSINESS

Explanation 2 to section 28 specifically provides that where an assessee carries on
speculative business, that business of the assessee must be deemed as distinct and
separate from any other business. This becomes necessary because section 73
provides that losses in speculation business unlike other business cannot be set-off
against the profits of any business other than a speculation business.
Likewise, a loss in speculation business carried forward to a subsequent year can be
set-off only against the profit and gains of any speculative business in the
subsequent year. Profits and losses resulting from speculative transaction must,

therefore, be treated as separate and distinct from profits and gains of business and
profession from any other business.
Meaning of Speculative Transaction
“Speculative transaction” means a transaction in which a contract for the
purchase or sales of any commodity including stocks and shares is periodically or
ultimately settled otherwise than by the actual delivery or transfer of the
commodity or scrips [section 43(5)].
Where any part of the business of a company consists in the purchase and sale of
the shares of other companies, such a company shall be deemed to be carrying
on speculation business to the extent to which the business consists of the
purchase and sale of such shares.
However, this deeming provision does not apply to the following companies –
(1) A company whose gross total income consists of mainly income chargeable
under the heads “Interest on securities”, “Income from house property”,
“Capital gains” and “Income from other sources”;
(2) A company, the principal business of which is –
(i) the business of trading in shares; or
(ii) the business of banking; or
(iii) the granting of loans and advances.
Accordingly, if these companies carry on the business of purchase and sale of
shares of other companies, they would not be deemed to be carrying on
speculation business. [Explanation to section 73]
Transactions not deemed to be speculative transactions
The following forms of transactions shall not be deemed to be speculative
transaction:
(i) Hedging contract in respect of raw materials or merchandise: A contract
in respect of raw materials or merchandise entered into by a person in the
course of his manufacturing or merchandising business to guard against
loss through future price fluctuations in respect of his contracts for the
actual delivery of goods manufactured by him or merchandise sold by him;
or

(ii) Hedging contract in respect of stocks and shares: A contract in respect of

stocks and shares entered into by a dealer or investor therein to guard
against loss in his holdings of stocks and shares through price fluctuation;
or
(iii) Forward contract: A contract entered into by a member of a forward
market or stock exchange in the course of any transaction in the nature of
jobbing or arbitrage to guard against any loss which may arise in the
ordinary course of his business as a member; or
(iv) Trading in derivatives: An eligible transaction carried out in respect of
trading in derivatives in a recognized stock exchange.
Term Meaning
Eligible Any transaction,–
transaction (A) carried out electronically on screen-based systems
through a stock broker or sub-broker or such other
intermediary registered under section 12 of the
Securities and Exchange Board of India Act, 1992 in
accordance with the provisions of the Securities
Contracts (Regulation) Act, 1956 or the Securities and
Exchange Board of India Act, 1992 or the Depositories
Act, 1996 and the rules, regulations or bye-laws made
or directions issued under those Acts or by banks or
mutual funds on a recognised stock exchange; and
(B) which is supported by a time stamped contract note
issued by such stock broker or sub-broker or such
other intermediary to every client indicating in the
contract note, the unique client identity number
allotted under any Act referred to in sub-clause (A)
and permanent account number.
(v) Trading in commodity derivatives: An eligible transaction in respect of

trading in commodity derivatives carried out in a recognized association,
which is chargeable to commodities transaction tax under Chapter VII of the
Finance Act, 2013.

However, the requirement of chargeability of commodities transaction tax is

not applicable in respect of trading in agricultural commodity derivatives
from A.Y. 2019-20.
Term Meaning
Eligible Any transaction,–
transaction (A) carried out electronically on screen-based systems
through a member or an intermediary registered
under the bye-laws, rules and regulations of the
recognized association for trading in commodity
derivative in accordance with the provisions of the
Forward Contracts (Regulation) Act, 1952 and the
rules, regulations or bye-laws made or directions
issued under that Act on a recognized association; and
(B) which is supported by a time stamped contract note
issued by such member or an intermediary to every
client indicating in the contract note, the unique client
identity number allotted under the Act, rules,
regulations or bye-laws referred to in sub-clause (A),
unique trade number and permanent account number.
3.5 COMPUTATION OF PROFITS AND GAINS

FROM BUSINESS OR PROFESSION
[SECTION 29]
According to section 29, the profits and gains of any business or profession are to be
computed in accordance with the provisions contained in sections 30 to 43D. It must,
however, be remembered that in addition to the specific allowances and deductions
stated in sections 30 to 36, the Act further permits allowance of items of expenses
under the residuary section 37(1), which extends the allowance to items of business
expenditure not covered by sections 30 to 36, where these are allowable according
to accepted commercial practices.

Computation of profits and

gains from business or
profession (section 29)
Expenses or
Admissible payments not Profits
Inadmissible
deductions deductible in chargeable to Other
deductios
(sections 30 to certain tax (section provisions
(section 40)
37) circumstances 41)
(section 40A)
3.6 ADMISSIBLE DEDUCTIONS [SECTION 30 TO 37]

(i) Rent, rates, taxes, repairs and insurance for buildings [Section 30]
Section 30 allows deduction in respect of the rent, rates, taxes, repairs and insurance
of buildings used by the assessee for the purposes of his business or profession.
• Premises used partly for business and partly for other purposes: Where
the premises are used partly for business and partly for other purposes, only
a proportionate part of the expenses attributable to that part of the
premises used for purposes of business will be allowed as a deduction.
• Premises sub-let: Where the assessee has sublet a part of the premises, the
allowance under the section would be confined to the difference between
the rent paid by the assessee and the rent recovered from the sub-tenant.
• Occupation of premises by the assessee being the owner: Where the
assessee himself is owner of the premises and occupies them for his
business purposes, no notional rent would be allowed under this section.
However, where a firm runs its business in the premises owned by one of its
partners, the rent payable to the partner will be an allowable deduction to
the extent it is reasonable and is not excessive.
• Repairs of the premises: Apart from rent, this section allows deductions in
respect of expenses incurred on account of repairs to building in case where
♦ the assessee is the owner of the building or
♦ the assessee is a tenant who has undertaken to bear the cost of
repairs to the premises.

♦ Even if the assessee occupies the premises otherwise than as a tenant or

owner, i.e., as a lessee, licensee or mortgagee with possession, he is
entitled to a deduction under the section in respect of current repairs to
the premises.
• Cost of repairs and current repairs of capital nature not to be allowed
as deduction [Explanation to section 30]: Amount paid on account of the
cost of repairs to the premises occupied by the assessee as a tenant and the
amount paid on account of current repairs to the premises occupied by the
assessee, otherwise than as a tenant, shall not include any capital nature
expenditure. In other words, cost of repairs and current repairs other than of
capital nature is allowed as deduction while computing business income.
• Other expenses: In addition, deductions are allowed in respect of expenses
by way of land revenue, local rates, municipal taxes and insurance in respect
of the premises used for the purposes of the business or profession. Cesses,
rates and taxes levied by a foreign Government are also allowed.
(ii) Repairs and insurance of machinery, plant and furniture [Section 31]
Section 31 allows deduction in respect of the expenses on current repairs and
insurance of machinery, plant and furniture in computing the income from business
or profession.
• Usage of the asset: In order to claim this deduction the assets must have
been used for purposes of the assessee’s own business the profits of which
are being taxed.
The word ‘used’ has to be read in a wide sense so as to include a passive as

well as an active user. Thus, insurance and repair charges of assets which
have been discarded (though owned by the assessee) or have not been
used for the business during the previous year would not be allowed as a
deduction.
Even if an asset is used for a part of the previous year, the assessee is
entitled to the deduction of the full amount of expenses on repair and
insurance charges and not merely an amount proportionate to the period of
use.
• Repairs exclude replacement or reconstruction: The term ‘repairs’ will
include renewal or renovation of an asset but not its replacement or
reconstruction.

Also, the deduction allowable under this section is only of current repairs but
not arrears of repairs for earlier years even though they may still rank for a
deduction under section 37(1).
• Insurance premium: The deduction allowable in respect of premia paid for

insuring the machinery, plant or furniture is subject to the following
conditions:
 The insurance must be against the risk of damage or destruction of
the machinery, plant or furniture.
 The assets must be used by the assessee for the purposes of his
business or profession during the accounting year.
 The premium should have been actually paid (or payable under the
mercantile system of accounting).
The premium may even take the form of contribution to a trade association
which undertakes to indemnify and insure its members against loss; such
premium or contribution would be deductible as an allowance under this
section even if a part of it is returnable to the insured in certain
circumstances.
It does not matter if the payment of the claim will enure to the benefit of
someone other than the owner.
• Current repairs of capital nature not to be allowed [Explanation to
section 31]: Amount paid on account of current repairs of machinery, plant
or furniture shall not include any capital nature expenditure. In other words,
current repairs other than of capital nature expenditure is allowed as
deduction in the computation of income under the head “profits and gains
of business or profession”
(iii) Depreciation [Section 32]
(1) Charge of depreciation mandatory: Section 32 allows a deduction in
respect of depreciation resulting from the diminution or exhaustion in the
value of certain capital assets.
The Explanation 5 to this section provides that deduction on account of
depreciation shall be made compulsorily, whether or not the assessee has
claimed the deduction in computing his total income.

(2) Conditions to be satisfied for allowance of depreciation: The allowance

of depreciation which is regulated by Rule 5 of the Income-tax Rules, 1962,
is subject to the following conditions which are cumulative in their
application.
(a) The assets in respect of which depreciation is claimed must
belong to either of the following categories, namely -
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trademarks, licences, franchises
or any other business or commercial rights of similar nature,
being intangible assets acquired on or after 1st April, 1998.
 The depreciation in the value of any other capital assets
cannot be claimed as a deduction from the business income.
 No depreciation is allowable on the cost of the land on which
the building is erected because the term ‘building’ refers only
to superstructure but not the land on which it has been
erected.
 The term ‘plant’ as defined in section 43(3) includes ships,
books, vehicles, scientific apparatus and surgical equipments
used for the purposes of the business or profession but does
not include tea bushes or livestock or buildings or furniture
and fittings.
 The word ‘plant’ does not include an animal, human body or
stock-in-trade. Thus, plant includes all goods and chattels,
fixed or movable, which a businessman keeps for employment
in his business with some degree of durability.
 The expression ‘plant’ includes part of a plant (e.g., the engine
of a vehicle); machinery includes part of machinery and
building includes a part of the building.
 Similarly, the term ‘buildings’ includes within its scope roads,
bridges, culverts, wells and tubewells.
(b) The assets should be actually used by the assessee for purposes of
his business during the previous year - The asset must be put to use
at any time during the previous year. The amount of depreciation

allowance is not proportionate to the period of use during the

previous year.
Asset used for less than 180 days - However, it has been provided
that where any asset is acquired by the assessee during the previous
year and is put to use for the purposes of business or profession for a
period of less than 180 days, depreciation shall be allowed at 50 per
cent of the allowable depreciation according to the percentage
prescribed in respect of the block of assets comprising such asset. It is
significant to note that this restriction applies only to the year of
acquisition and not for subsequent years.
If the assets are not used exclusively for the business or profession of
the assessee but for other purposes as well, the depreciation allowable
would be a proportionate part of the depreciation allowance to which
the assessee would be otherwise entitled. This is provided in section
38.
Depreciation would be allowable to the owner even in respect of

assets which are actually worked or utilized by another person e.g., a
lessee or licensee. The deduction on account of depreciation would be
allowed under this section to the owner who has let on hire his
building, machinery, plant or furniture provided that letting out of
such assets is the business of the assessee. In other cases where the
letting out of such assets does not constitute the business of the
assessee, the deduction on account of depreciation would still be
allowable under section 57(ii).
Use includes passive use in certain circumstances: One of the
conditions for claim of depreciation is that the asset must be “used for
the purpose of business or profession”. Courts have held that, in
certain circumstances, an asset can be said to be in use even when it is
“kept ready for use”.
For example, stand by equipment and fire extinguishers can be
capitalized if they are ‘ready for use’’.
Likewise, machinery spares which can be used only in connection with
an item of tangible fixed asset and their use is expected to be
irregular, has to be capitalised. Hence, in such cases, the term “use”
embraces both active use and passive use. However, such passive use
should also be for business purposes.

(c) The assessee must own the assets, wholly or partly - In the case of
buildings, the assessee must own the superstructure and not
necessarily the land on which the building is constructed. In such
cases, the assessee should be a lessee of the land on which the
building stands and the lease deed must provide that the building will
belong to the lessor of the land upon the expiry of the period of lease.
Thus, no depreciation will be allowed to an assessee in respect of an
asset which he does not own but only uses or hires for purposes of his
business.
However, in this connection, students may note that the Explanation 1

to section 32 provides that where the business or profession of the
assessee is carried on in a building not owned by him but in respect of
which the assessee holds a lease or other right of occupancy, and any
capital expenditure is incurred by the assessee for the purposes of the
business or profession or the construction of any structure or doing of
any work by way of renovation, extension or improvement to the
building, then depreciation will be allowed as if the said structure or
work is a building owned by the assessee.
Depreciation is allowable not only in respect of assets “wholly” owned

by the assessee but also in respect of assets “partly” owned by him
and used for the purposes of his business or profession.
(3) Computation of Depreciation Allowance - Depreciation allowance will be
calculated on the following basis:
(i) Power generation undertakings: In the case of assets of an
undertaking engaged in generation or generation and distribution of
power, such percentage on the actual cost to the assessee as
prescribed by Rule 5(1A).
Rule 5(1A) - As per this rule, the depreciation on the abovementioned
assets shall be calculated at the percentage of the actual cost at rates
specified in Appendix IA of these rules. However, the aggregate
depreciation allowed in respect of any asset for different assessment
years shall not exceed the actual cost of the asset. It is further
provided that such an undertaking as mentioned above has the option
of being allowed depreciation on the written down value of such block
of assets as are used for its business at rates specified in Appendix I to
these rules.

However, such option must be exercised before the due date for
furnishing return under section 139(1) for the assessment year
relevant to the previous year in which it begins to generate power. It is
further provided that any such option once exercised shall be final and
shall apply to all subsequent assessment years.
(ii) Block of assets: In the case of any block of assets, at such percentage
of the written down value of the block, as may be prescribed by Rule
5(1).
Block of Assets: A “block of assets” is defined in section 2(11), as a

group of assets falling within a class of assets comprising—
(a) tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights,
trademarks, licenses, franchises or any other business or
commercial rights of similar nature,
in respect of which the same percentage of depreciation is prescribed.
Know-how - In this context, ‘know-how’ means any industrial

information or technique likely to assist in the manufacture or
processing of goods or in the working of a mine, oil-well or other
sources of mineral deposits (including searching for discovery or
testing of deposits for the winning of access thereto).
(iii) Additional depreciation on Plant or Machinery acquired by an
Industrial Undertaking: Additional depreciation is allowed on any
new machinery or plant (other than ships and aircraft) acquired and
installed after 31.3.2005 by an assessee engaged in the business of
manufacture or production of any article or thing or in the business of
generation, transmission or distribution of power at the rate of 20% of
the actual cost of such machinery or plant.
Such additional depreciation will not be available in respect of:
(i) any machinery or plant which, before its installation by the
assessee, was used within or outside India by any other person; or
(ii) any machinery or plant installed in office premises, residential
accommodation, or in any guest house; or
(iii) office appliances or road transport vehicles; or

(iv) any machinery or plant, the whole or part of the actual cost of
which is allowed as a deduction (whether by way of depreciation
or otherwise) in computing the income chargeable under the
head “Profits and Gains of Business or Profession” of any one
previous year.
Asset put to use for less than 180 days: As per second proviso to
section 32(1)(ii), 50% of additional depreciation to be allowed, where
the plant or machinery is put to use for less than 180 days during the
previous year in which such asset is acquired.
Further, third proviso to section 32(1)(ii) also provides that the balance
50% of the additional depreciation on new plant or machinery
acquired and used for less than 180 days which has not been allowed
in the year of acquisition and installation of such plant or machinery,
shall be allowed in the immediately succeeding previous year.
Eligibility for grant of additional depreciation under section

32(1)(iia) in the case of an assessee engaged in printing or
printing and publishing [Circular No. 15/2016, dated 19-5-2016]
An assessee, engaged in the business of manufacture or production of an
article or thing, is eligible to claim additional depreciation under section
32(1)(iia) in addition to the normal depreciation under section 32(1).
The CBDT has, vide this Circular, clarified that the business of printing
or printing and publishing amounts to manufacture or production of
an article or thing and is, therefore, eligible for additional depreciation
under section 32(1)(iia).
(iv) Terminal depreciation: In case of a power concern as covered under

clause (i) above, if any asset is sold, discarded, demolished or
otherwise destroyed in the previous year (other than the previous year
in which it is first brought into use) the depreciation amount will be
the amount by which the moneys payable in respect of such building,
machinery, plant or furniture, together with the amount of scrap value,
if any, falls short of the written down value thereof. The depreciation
will be available only if the deficiency is actually written off in the
books of the assessee.

Term Meaning
Moneys In respect of any building, machinery, plant or furniture
payable includes —
(a) any insurance, salvage or compensation moneys
payable in respect thereof;
(b) where the building, machinery, plant or furniture is
sold, the price for which it is sold.
Sold Includes a transfer by way of exchange or a compulsory
acquisition under any law for the time being in force.
However, it does not include a transfer, in a scheme of
amalgamation, of any asset by the amalgamating
company to the amalgamated company where the
amalgamated company is an Indian company or a
transfer of any asset by a banking company to a banking
institution in a scheme of amalgamation of such banking
company with the banking institution, sanctioned and
brought into force by the Central Government.
(4) Rates of depreciation - All assets have been divided into four main
categories and rates of depreciation as prescribed by Rule 5(1) are given
below:
PART A TANGIBLE ASSETS

I Buildings
Block 1. Buildings which are used mainly for residential purposes 5%
except hotels and boarding houses
Block 2. Buildings which are not used mainly for residential purposes 10%
and not covered by Block (1) above and (3) below
Block 3. Buildings acquired on or after 1st September, 2002 for 40%
installing machinery and plant forming part of water
supply project or water treatment system and which is
put to use for the purpose of business of providing
infrastructure facilities
Block 4. Purely temporary erections such as wooden structures 40%

II Furniture and Fittings

Block 1. Furniture and fittings including electrical fittings 10%
["Electrical fittings" include electrical wiring, switches,
sockets, other fittings and fans, etc.]
III Plant & Machinery
Block 1. Motor cars other than those used in a business of running 15%
them on hire, acquired or put to use on or after 1-4-1990
Block 2. Motors buses, motor lorries, motor taxis used in the 30%
business of running them on hire
Block 3. Moulds used in rubber and plastic goods factories 30%
Block 4. Aeroplanes, Aeroengines 40%
Block 5. Specified air pollution control equipments, water 40%
pollution control equipments, solid waste control
equipment and solidwaste recycling and resource
recovery systems
Block 6. Plant & Machinery used in semi-conductor industry 30%
covering all Integrated Circuits (ICs)
Block 7. Life saving medical equipment 40%
Block 8. Machinery and plant, acquired and installed on or after 40%
the 1st day of September, 2002 in a water supply project
or a water treatment system and which is put to use for
the purpose of business of providing infrastructure
facility
Block 9. Oil wells 15%
Block 10. Renewable Energy Saving Devices (as specified) 40%
(i) Windmills and any specially designed devices which 40%
run on windmills installed on or after 1.4.2014
(ii) Any special devices including electric generators and 40%
pumps running on wind energy installed on or after
1.4.2014 would be eligible for depreciation
(iii) Windmills and any specially designed devices 15%

running on windmills installed on or before 31.3.2014

and any special devices including electric generators and
pumps running on wind energy installed on or before
31.3.2014
Block 11. Computers including computer software 40%
Block 12. Books (annual publications or other than annual 40%
publications) owned by assessees carrying on a
profession
Block 13. Books owned by assessees carrying on business in 40%
running lending libraries
Block 14. Plant & machinery (General rate) 15%
IV Ships
Block 1. Ocean-going ships 20%
Block 2. Vessels ordinarily operating on inland waters not covered 20%
by Block (3) below
Block 3. Speed boats operating on inland water 20%
PART B INTANGIBLE ASSETS
Know-how, patents, copyrights, trademarks, licences, franchises or 25%
any other business or commercial rights of similar nature
Note: Students should refer to Income-tax Rules, 1962 for the detailed
classification of assets under Rule 5(1) and the rates applicable thereto.
(5) Increased rate of depreciation for certain assets [Rule 5(2)]

Any new machinery or plant installed to manufacture or produce any article
or thing by using any technology or other know-how developed in or is an
article or thing invented in a laboratory owned or financed by the
Government or a laboratory owned by a public sector company or a
University or an institution recognized by the Secretary, Department of
Scientific and Industrial Research, Government of India shall be treated as a
part of the block of assets qualifying for depreciation @40% of written
down value.

Conditions to be fulfilled:
1. The right to use such technology or other know-how or to
manufacture or produce such article or thing has been acquired from
the owner of such laboratory or any person deriving title from such
owner.
2. The return filed by the assessee for any previous year in which the said
machinery is acquired, should be accompanied by a certificate from the
Secretary, Department of Scientific and Industrial Research, Government
of India to the effect that such article or thing is manufactured or
produced by using such technology or other know-how developed in
such laboratory or such article or thing has been invented in that
laboratory.
3. The machinery or plant is not used for the purpose of business of
manufacture or production of any article or thing specified in the
Eleventh schedule.
The depreciation ordinarily allowable to an assessee in respect of any block
of assets shall be calculated at the above specified rates on the WDV of
such block of assets as are used for the purposes of the business or
profession of the assessee at any time during the previous year.
(6) Depreciation in case of succession of firm/ sole proprietary concern by a
company or business reorganization or amalgamation or demerger of
companies
As per the sixth proviso to section 32(1)(ii), depreciation allowable in the hands of
- predecessor and the successor in case of succession of firm/ sole
proprietary concern by a company fulfilling the conditions mentioned in
section 47(xiii)/ (xiv) 5or
- predecessor company and successor LLP in case of conversion of a private
company or an unlisted public company into an LLP fulfilling the
conditions mentioned in section 47(xiiib)5 or
5
It may be noted that the conditions specified in clauses (xiii)/ (xiiib)/(xiv) of section 47
will be discussed at Final Level. The questions based on the sixth proviso to section
32(1)(ii) has to be solved assuming that the conditions specified in such clauses to section
47 are satisfied.

- amalgamating/ amalgamated company or demerged or resulting

company in case of amalgamation or demerger of companies
shall not exceed the amount of depreciation calculated at the prescribed
rates as if the succession, business reorganization, amalgamation or
demerger had not taken place.
It is also provided that such amount of depreciation shall be apportioned

between the two entities in the ratio of the number of days for which the
assets were used by them.
ILLUSTRATION 1
Mr. X, a proprietor engaged in manufacturing business, furnishes the following particulars:
Particulars `
(1) Opening WDV of plant and machinery as on 1.4.2019 30,00,000
(2) New plant and machinery purchased and put to use on 08.06.2019 20,00,000
(3) New plant and machinery acquired and put to use on 15.12.2019 8,00,000
(4) Computer acquired and installed in the office premises on 2.1.2020 3,00,000
Compute the amount of depreciation and additional depreciation as per the

Income-tax Act, 1961 for the A.Y. 2020-21. Assume that all the assets were
purchased by way of account payee cheque.
SOLUTION
Computation of depreciation and additional depreciation for A.Y. 2020-21
Plant & Computer

Particulars Machinery (40%)
(15%)
Normal depreciation
@15% on ` 50,00,000 [See Working Notes 1& 2] 7,50,000 -
@7.5% (50% of 15%, since put to use for less than 60,000 -
180 days) on ` 8,00,000
@20% (50% of 40%, since put to use for less than - 60,000
180 days) on ` 3,00,000
Additional Depreciation
@20% on ` 20,00,000 (new plant and machinery 4,00,000 -

put to use for more than 180 days)

@10% (50% of 20%, since put to use for less than
180 days) on ` 8,00,000 80,000 -
Total depreciation 12,90,000 60,000
Working Notes:
(1) Computation of written down value of Plant & Machinery as on
31.03.2020
Particulars Plant & Computer

Machinery (`)
(`)
Written down value as on 1.4.2019 30,00,000 -
Add: Plant & Machinery purchased on 08.6.2019 20,00,000 -
Add: Plant & Machinery acquired on 15.12.2019 8,00,000 -
Computer acquired and installed in the office premises - 3,00,000
Written down value as on 31.03.2020 58,00,000 3,00,000
(2) Composition of plant and machinery included in the WDV as on

31.3.2020
Plant & Computer

Particulars Machinery (`)
(` )
Plant and machinery put to use for 180 days or more 50,00,000
[` 30,00,000 (Opening WDV) + ` 20,00,000 (purchased
on 8.6.2019)]
Plant and machinery put to use for less than 180 days 8,00,000 -
Computers put to use for less than 180 days - 3,00,000
58,00,000 3,00,000
Notes:
(1) As per the second proviso to section 32(1)(ii), where an asset acquired
during the previous year is put to use for less than 180 days in that previous
year, the amount of deduction allowable as normal depreciation and

additional depreciation would be restricted to 50% of amount computed in

accordance with the prescribed percentage.
Therefore, normal depreciation on plant and machinery acquired and put to
use on 15.12.2019 and computer acquired and installed on 02.01.2020, is
restricted to 50% of 15% and 40%, respectively. The additional depreciation
on the said plant and machinery is restricted to ` 80,000, being 10% (i.e.,
50% of 20%) of ` 8 lakh
(2) As per third proviso to section 32(1)(ii), the balance additional depreciation
of ` 80,000 being 50% of ` 1,60,000 (20% of ` 8,00,000) would be allowed as
deduction in the A.Y.2021-22.
(3) As per section 32(1)(iia), additional depreciation is allowable in the case of
any new machinery or plant acquired and installed after 31.3.2005 by an
assessee engaged, inter alia, in the business of manufacture or production
of any article or thing, @20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter
alia, any machinery or plant installed in office premises, residential
accommodation or in any guest house.
Accordingly, additional depreciation is not allowable on computer installed
in the office premises.
ILLUSTRATION 2
Mr. Gopi carrying on business as proprietor converted the same into a limited
company by name Gopi Pipes (P) Ltd. from 01-07-2019. The details of the assets
are given below:
`
Block - I WDV of plant & machinery (rate of depreciation @ 15%) on 12,00,000
01.04.2019
Block - II WDV of building (rate of depreciation @ 10%) on 25,00,000
01.04.2019
The company Gopi Pipes (P) Ltd. acquired plant and machinery in December 2019
for ` 10,00,000. It has been doing the business from 01-07-2019.
Compute the quantum of depreciation to be claimed by Mr. Gopi and successor
Gopi Pipes (P) Ltd. for the assessment year 2020-21. Assume that plant and
machinery were purchased by way of account payee cheque.
Note: Ignore additional depreciation.

SOLUTION
Computation of depreciation allowable to Mr. Gopi for A.Y. 2020-21
Particulars ` `
Block 1 Plant and Machinery (15% rate)
WDV as on 1.4.2019 12,00,000
Depreciation@15% 1,80,000
Block 2 Building (10% rate)
WDV as on 1.4.2019 25,00,000
Depreciation@10% 2,50,000
Total depreciation for the year 4,30,000
Proportionate depreciation allowable to Mr. Gopi for
91 days (i.e., from 1.4.2019 to 30.6.2019) [i.e., 91/366 x 1,06,913
` 4,30,000)
Computation of depreciation allowable to Gopi Pipes (P) Ltd. for

A.Y.2020-21
Particulars `
(i) Depreciation on building and plant and machinery 3,23,087
Proportionately for 275 days (i.e. from 1.7.2019 to 31.3.2020)
(275/366 x ` 4,30,000)
(ii) Depreciation@ 50% of 15% on ` 10 lakh, being the value of
plant and machinery purchased after conversion, which was put
to use for less than 180 days during the P.Y. 2019-20 75,000
Depreciation allowable to Gopi Pipes (P) Ltd. 3,98,087
Note: In the case of conversion of sole proprietary concern into a company, the
depreciation should be first calculated for the whole year as if no succession had
taken place. Thereafter, the depreciation should be apportioned between the sole
proprietary concern and the company in the ratio of the number of days for which
the assets were used by them. It is assumed that in this case, the conditions
specified in section 47(xiv) are satisfied.

ILLUSTRATION 3
Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down
value on 01.04.2019 was ` 40 lacs. It purchased another asset (second-hand plant
and machinery) of the same block on 01.11.2019 for ` 14.40 lacs and put to use on
the same day. Sai Ltd. was amalgamated with Shirdi Ltd. with effect from
01.01.2020.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for
the previous year ended on 31.03.2020 assuming that the assets were transferred to
Shirdi Ltd. at ` 60 lacs. Also assume that the plant and machinery were purchased
by way of account payee cheque.
SOLUTION
Statement showing computation of depreciation allowable
to Sai Ltd. & Shirdi Ltd. for A.Y. 2020-21
Particulars `
Written down value (WDV) as on 1.4.2019 40,00,000
Addition during the year (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on ` 40,00,000 @ 15% 6,00,000
Depreciation on ` 14,40,000 @ 7.5% 1,08,000
Total depreciation for the year 7,08,000
Apportionment between two companies:
(a) Amalgamating company, Sai Ltd.
` 6,00,000 × 275/366 4,50,820
` 1,08,000 × 61/152 43,342
4,94,162
(b) Amalgamated company, Shirdi Ltd.
` 6,00,000 × 91/366 1,49,180
` 1,08,000 × 91/152 64,658
2,13,838
Notes:
(i) The aggregate deduction, in respect of depreciation allowable to the

amalgamating company and amalgamated company in the case of

amalgamation shall not exceed in any case, the deduction calculated at the
prescribed rates as if the amalgamation had not taken place. Such
deduction shall be apportioned between the amalgamating company and
the amalgamated company in the ratio of the number of days for which the
assets were used by them.
(ii) The price at which the assets were transferred, i.e., ` 60 lacs, has no
implication in computing eligible depreciation.
(7) Hire purchase - In the case of assets under the hire purchase system the
allowance for depreciation would under Circular No. 9 of 1943 R. Dis. No.
27(4) I.T. 43 dated 23-3-1943, be granted as follows:
• In every case of payment purporting to be for hire purchase,
production of the agreement under which the payment is made would
be insisted upon by the department.
• Where the effect of an agreement is that the ownership of the asset is
at once transferred on the lessee the transaction should be regarded
as one of purchase by instalments and consequently no deduction in
respect of the hire amount should be made. This principle will be
applicable in a case where the lessor obtains a right to sue for arrears
of installments but has no right to recover the asset back from the
lessee. Depreciation in such cases should be allowed to the lessee on
the hire purchase price determined in accordance with the terms of
hire purchase agreement.
• Where the terms of an agreement provide that the asset shall
eventually become the property of the hirer or confer on the hirer an
option to purchase an asset, the transaction should be regarded as
one of hire purchase. In such case, periodical payments made by the
hirer should for all tax purposes be regarded as made up of
(i) the consideration for hirer which will be allowed as a deduction
in assessment, and
(ii) payment on account of the purchase price, to be treated as
capital outlay and depreciation being allowed to the lessee on
the initial value namely, the amount for which the hired assets
would have been sold for cash at the date of the agreement.

The allowance to be made in respect of the hire should be the amount

of the difference between the aggregate amount of the periodical
payments under the agreement and the initial value as stated above.
The amount of this allowance should be spread over the duration of
the agreement evenly. If, however, agreement is terminated either by
outright purchase of the asset or by its return to the seller, the
deduction should cease as from the date of termination of agreement.
(8) Actual Cost [Section 43(1)]
The expression “actual cost” means the actual cost of the asset to the
assessee as reduced by that portion of the cost thereof, if any, as has been
met directly or indirectly by any other person or authority.
However, where an assessee incurs any expenditure for acquisition of any
asset or part thereof in respect of which a payment or aggregate of
payments made to a person in a day, otherwise than by an account payee
cheque drawn on a bank or account payee bank draft or use of electronic
clearing system through a bank account or through such other prescribed
electronic mode, exceeds ` 10,000, such expenditure shall not form part of
actual cost of such asset [Proviso to section 43(1)]
Actual cost in certain special situations [Explanations to section 43(1)]
(i) Asset used for business after it ceases to be used for scientific
research: Where an asset is used for the purposes of business after it
ceases to be used for scientific research related to that business, the
actual cost to the assessee for depreciation purposes shall be the
actual cost to the assessee as reduced by any deduction allowed
under section 35(1)(iv) [Explanation 1].
(ii) Inventory converted into capital asset and used for business or
profession: Where inventory is converted or treated as a capital asset
and is used for the purpose of business or profession, the fair market
value of such inventory as on the date of its conversion into capital
asset determined in the prescribed manner, shall be the actual cost of
such capital asset to the assessee [Explanation 1A].
(iii) Asset is acquired by way of gift or inheritance: Where an asset is
acquired by way of gift or inheritance, its actual cost shall be the
actual cost to the previous owner minus depreciation allowable to the

assessee as if asset was the only asset in the relevant block of assets
[Explanation 2].
Further, any expenditure incurred by the assessee such as expenditure
on freight, installation etc. of such asset would also be includible in
the actual cost.
(iv) Second hand asset: Where, before the date of its acquisition by the
assessee, the asset was at any time used by any other person for the
purposes of his business or profession, and the Assessing Officer is
satisfied that the main purpose of the transfer of the asset directly or
indirectly to the assessee was the reduction of liability of income-tax
directly or indirectly to the assessee (by claiming depreciation with
reference to an enhanced cost) the actual cost to the assessee shall be
taken to be such an amount which the Assessing Officer may, with the
previous approval of the Joint Commissioner, determine, having
regard to all the circumstances of the case [Explanation 3].
(v) Re-acquisition of asset: Where any asset which had once belonged
to the assessee and had been used by him for the purposes of his
business or profession and thereafter ceased to be his property by
reason of transfer or otherwise, is re-acquired by him, the actual cost
to the assessee shall be —
(a) the actual cost when he first acquired the asset minus
depreciation allowable to the assessee as if asset was the only
asset in the relevant block of assets; or
(b) the actual price for which the asset is re-acquired by him
whichever is less [Explanation 4].
(vi) Acquisition of asset previously owned by any person to whom
such asset is given on lease, hire or otherwise: Where before the
date of acquisition by the assessee say, Mr. A, the assets were at any
time used by any other person, say Mr. B, for the purposes of his
business or profession and depreciation allowance has been claimed
in respect of such assets in the case of Mr. B and such person acquires
on lease, hire or otherwise, assets from Mr. A, then, the actual cost of
the transferred assets, in the case of Mr. A, shall be the same as the
written down value of the said assets at the time of transfer thereof by
Mr. B [Explanation 4A].

Example: We can explain the above as follows—

A person (say “A”) owns an asset and uses it for the purposes of his
business or profession. A has claimed depreciation in respect of such asset.
The said asset is transferred by A to another person (say “B”). A then
acquires the same asset back from B on lease, hire or otherwise. B being
the new owner will be entitled to depreciation. In the above situation, the
cost of acquisition of the transferred assets in the hands of B shall be the
same as the written down value of the said assets at the time of transfer.
Explanation 4A overrides Explanation 3
Explanation 3 to section 43(1) deals with a situation where a transfer
of any asset is made with the main purpose of reduction of tax liability
(by claiming depreciation on enhanced cost), and the Assessing
Officer, having satisfied himself about such purpose of transfer with
the prior approval of the joint commissioner, may determine the
actual cost having regard to all the circumstances of the case.
In the Explanation 4A, a non-obstante clause has been included to the
effect that Explanation 4A will have an overriding effect over
Explanation 3. The result of this is that there is no necessity of finding
out whether the main purpose of the transaction is reduction of tax
liability. Explanation 4A is activated in every situation described above
without inquiring about the main purpose.
(vii) Building previously the property of the assessee: Where a building
which was previously the property of the assessee is brought into use
for the purposes of the business or profession, its actual cost to the
assessee shall be the actual cost of the building to the assessee, as
reduced by an amount equal to the depreciation calculated at the
rates in force on that date that would have been allowable had the
building been used for the purposes of the business or profession
since the date of its acquisition by the assessee [Explanation 5].
ILLUSTRATION 4
A car purchased by Dr. Soman on 10.08.2016 for ` 5,25,000 for personal
use is brought into professional use on 1.07.2019 by him, when its
market value was ` 2,50,000.
Compute the actual cost of the car and the amount of depreciation for the
assessment year 2020-21 assuming the rate of depreciation to be 15%.

SOLUTION
As per section 43(1), the expression “actual cost” would mean the
actual cost of asset to the assessee.
The purchase price of ` 5,25,000 is, therefore, the actual cost of the
car to Dr. Soman. Market value (i.e. ` 2,50,000) on the date when the
asset is brought into professional use is not relevant.
Therefore, amount of depreciation on car as per section 32 for the
A.Y.2020-21 would be ` 78,750, being ` 5,25,000 x 15%.
Note: Explanation 5 to section 43(1) providing for reduction of notional
depreciation from the date of acquisition of asset for personal use to
determine actual cost of the asset is applicable only in case of building
which is initially acquired for personal use and later brought into
professional use. It is not applicable in respect of other assets.
(viii) Transfer of capital asset by a holding company to subsidiary
company or vice-versa: When any capital asset is transferred by a
holding company to its wholly owned Indian subsidiary company or by
a subsidiary company to its 100% holding company, being transferee
an Indian company then, the transaction not being regarded as a
transfer of a capital asset, the actual cost of the transferred capital
asset to the transferee company shall be taken to be the same as it
would have been if the transferor company had continued to hold the
capital asset for the purposes of its own business [Explanation 6].
(ix) Capital asset is transferred by the amalgamating company to the
amalgamated company: In a scheme of amalgamation, if any capital
asset is transferred by the amalgamating company to the
amalgamated Indian company, the actual cost of the transferred
capital assets to the amalgamated company will be taken at the same
amount as it would have been taken in the case of the amalgamating
company had it continued to hold it for the purposes of its own
business [Explanation 7].
(x) Capital asset is transferred by the demerged company to the
resulting company: In the case of a demerger, where any capital
asset is transferred by the demerged company to the resulting Indian
company, the actual cost of the transferred asset to the resulting
company shall be taken to be the same as it would have been if the

demerged company had continued to hold the asset. However, the

actual cost shall not exceed the WDV of the asset in the hands of the
demerged company [Explanation 7A].
(xi) Capitalization of interest paid or payable in connection with
acquisition of an asset: Certain taxpayers have, with a view to obtain
more tax benefits and reduce the tax outflow, resorted to the method
of capitalising interest paid or payable in connection with acquisition
of an asset relatable to the period after such asset is first put to use.
This capitalisation implies inclusion of such interest in the ‘Actual Cost’
of the asset for the purposes of claiming depreciation, investment
allowance etc. under the Income-tax Act, 1961. This was never the
legislative intent nor was it in accordance with recognised accounting
practices. Therefore, with a view to counter-acting tax avoidance
through this method and placing the matter beyond doubt,
Explanation 8 to section 43(1) provides that any amount paid or
payable as interest in connection with the acquisition of an asset and
relatable to period after asset is first put to use shall not be included
and shall be deemed to have never been included in the actual cost of
the asset [Explanation 8].
(xii) Amount of duty of excise or additional duty leviable shall be
reduced if credit is claimed: Where an asset is or has been acquired
by an assessee, the actual cost of asset shall be reduced by the
amount of duty of excise or the additional duty leviable under section
3 of the Customs Tariff Act, 1975 in respect of which a claim of credit
has been made and allowed under the Central Excise Rules, 1944 6
[Explanation 9].
(xiii) Subsidy or grant or reimbursement: Where a portion of the cost of
an asset acquired by the assessee has been met directly or indirectly
by the Central Government or a State Government or any authority
established under any law or by any other person, in the form of a
subsidy or grant or reimbursement (by whatever name called), then, so
much of the cost as is relatable to such subsidy or grant or
reimbursement shall not be included in the actual cost of the asset to
the assessee.
6
Now Central Excise Rules, 2002

However, where such subsidy or grant or reimbursement is of such

nature that it cannot be directly relatable to the asset acquired, so
much of the amount which bears to the total subsidy or
reimbursement or grant the same proportion as such asset bears to all
the assets in respect of or with reference to which the subsidy or grant
or reimbursement is so received, shall not be included in the actual
cost of the asset to the assesse [Explanation 10].
(xiv) Asset is acquired outside India by an assessee, being a non-
resident and such asset is brought by him to India: Where an asset
is acquired outside India by an assessee, being a non-resident and
such asset is brought by him to India and used for the purposes of his
business or profession, the actual cost of asset to the assessee shall be
the actual cost the asset to the assessee, as reduced by an amount
equal to the amount of depreciation calculated at the rate in force
that would have been allowable had the asset been used in India for
the said purposes since the date of its acquisition by the assesse
[Explanation 11].
(xv) Capital asset is acquired under a scheme for corporatization:
Where any capital asset is acquired under a scheme for
corporatisation of a recognised stock exchange in India approved by
the SEBI, the actual cost shall be deemed to be the amount which
would have been regarded as actual cost had there been no such
corporatization [Explanation 12].
(xvi) Capital asset on which deduction is allowable under section 35AD:
Explanation 13 to section 43(1) provides that the actual cost of any
capital asset, on which deduction has been allowed or is allowable to
the assessee under section 35AD, shall be nil.
This would be applicable in the case of transfer of asset by the
assessee where -
(1) the assessee himself has claimed deduction under section 35AD;
or
(2) the previous owner has claimed deduction under section 35AD.
This would be applicable where the capital asset is acquired by
the assessee by way of -
(a) gift, will or an irrevocable trust;

(b) any distribution on liquidation of the company;

(c) any distribution of capital assets on total or partial partition of
a HUF;
(d) any transfer of a capital asset by a holding company to its
100% subsidiary company, being an Indian company;
(e) any transfer of a capital asset by a subsidiary company to its
100% holding company, being an Indian company;
(f) any transfer of a capital asset by the amalgamating company
to an amalgamated company in a scheme of amalgamation, if
the amalgamated company is an Indian company;
(g) any transfer of a capital asset by the demerged company to
the resulting company in a scheme of demerger, if the
resulting company is an Indian company;
(h) any transfer of a capital asset or intangible asset by a firm to a
company as a result of succession of the firm by a company in
the business carried on by the firm, or any transfer of a capital
asset to a company in the course of demutualization or
corporatisation of a recognized stock exchange in India as a
result of which an association of persons or body of individuals
is succeeded by such company (fulfilling the conditions
specified);
(i) any transfer of a capital asset or intangible asset by a sole
proprietary concern to a company, where the sole
proprietary concern is succeeded by a company (fulfilling
the conditions specified).
(j) any transfer of a capital asset or intangible asset by a
private company or unlisted public company to an LLP as a
result of conversion of the such company into LLP
(fulfilling the conditions prescribed).
However, where an asset, in respect of which deduction is
claimed and allowed under section 35AD is deemed to be the
income of the assessee in accordance with the provisions of
section 35AD(7B) (on account of asset, being used for a purpose
other than specified business under section 35AD), the actual
cost of the asset to the assessee shall be actual cost to assessee

as reduced by the amount of depreciation allowable had the

asset been used for the purpose of business, calculated at the
rate in force, since the date of its acquisition [Proviso to
Explanation 13 to section 43(1)].
(9) Written down value [Section 43(6)]
(i) Assets acquired by the assessee during the previous year: In the
case of assets acquired by the assessee during the previous year, the
written down value means the actual cost to the assessee.
(ii) Assets acquired before the previous year: In the case of assets
acquired before the previous year, the written down value would be
the actual cost to the assessee less the aggregate of all deductions
actually allowed in respect of depreciation. For this purpose, any
depreciation carried forward is deemed to be depreciation actually
allowed [Section 43(6)(c)(i) read with Explanation 3].
The written down value of any block of assets shall be worked out as
under in accordance with section 43(6)(c):
(1) W.D.V. of the block of assets on 1st April of the xxx

previous year
(2) Add: Actual cost of assets acquired during the xxx
previous year
(3) Total (1) + (2) xxx
(4) Less: Money receivable in respect of any asset falling
within the block which is sold, discarded, demolished
or destroyed during that previous year together with
scrap value. However, such amount cannot exceed xxx
the amount in (3).
(5) W.D.V at the end of the year (on which depreciation xxx
is allowable) [(3) – (4)]
(6) Depreciation at the prescribed rate
(Rate of Depreciation × WDV arrived at in (5) above) xxx
(7) WDV of the block of assets as on 1st April of the next xxx
year [(5) – (6)]
(iii) Succession to business or profession: When in the case of a
succession to business or profession, an assessment is made on the

successor 7, the written down value of an asset or block of assets shall

be the amount which would have been taken as the written down
value if the assessment had been made directly on the person
succeeded to [Explanation 1 to section 43(6)].
(iv) Transfer of block of assets by a holding company to a subsidiary
company or vice versa: Where in any previous year any block of
assets is transferred by a holding company to its wholly owned Indian
subsidiary company or by a subsidiary company to its 100% holding
company, being an Indian company or by an amalgamating company
to an amalgamated company, the latter being an Indian company,
then the actual cost of the block of assets in the case of transferee-
company or amalgamated company, as the case may be, shall be the
written down value of the block of assets as in the case of the
transferor company or amalgamating company, as the case may be,
for the immediately preceding year as reduced by depreciation
actually allowed in relation to the said previous year [Explanation 2 to
section 43(6)].
(v) Block of assets is transferred by demerged company to the
resulting company: Where in any previous year any asset forming
part of a block of assets is transferred by demerged company to the
resulting company, the written down value of the block of assets of
the demerged company for the immediately preceding year shall be
reduced by the written down value of the assets transferred to the
resulting company [Explanation 2A to section 43(6)].
(vi) Block of assets is transferred by a demerged company to the
resulting company: Where any asset forming part of a block of assets
is transferred by a demerged company to the resulting company, the
written down value of the block of assets in the case of resulting
company shall be the written down value of the transferred assets of
the demerged company immediately before the demerger
[Explanation 2B to section 43(6)].
(vii) Block of assets in the case of the successor LLP: The actual cost of
the block of assets in the case of the successor LLP, fulfilling the
specified conditions, shall be the written down value of the block of
7
under section 170(2)

assets as in the case of the predecessor company on the date of

conversion [Explanation 2C to section 43(6)].
(viii) Block of assets transferred by a recognised stock exchange in
India to a company under a scheme for corporatization: Where any
asset forming part of a block of assets is transferred in any previous
year by a recognised stock exchange in India to a company under a
scheme for corporatisation approved by SEBI, the written down value
of the block shall be the written down value of the transferred assets
immediately before the transfer [Explanation 5 to section 43(6)].
(ix) Depreciation provided in the books of account deemed to be
depreciation actually allowed: Section 32(1)(ii) provides that
depreciation shall be allowed at the prescribed percentage on the
written down value (WDV) of any block of assets. Section 43(6)(b)
provides that written down value in the case of assets acquired before
the previous year means the actual cost to the assessee less all
depreciation actually allowed to him under the Income-tax Act, 1961.
Persons who were exempt from tax were not required to compute
their income under the head “Profits and gains of business or
profession”. However, when the exemption is withdrawn subsequently,
such persons became liable to income-tax and hence, were required
to compute their income for income-tax purposes. In this regard, a
question arises as to the basis on which depreciation is to be allowed
under the Income-tax Act, 1961 in respect of assets acquired during
the years when the person was exempt from tax.
Explanation 6 to section 43(6) provides that,-
(a) the actual cost of an asset has to be adjusted by the amount
attributable to the revaluation of such asset, if any, in the books
of account;
(b) the total amount of depreciation on such asset provided in the
books of account of the assessee in respect of such previous year
or years preceding the previous year relevant to the assessment
year under consideration shall be deemed to be the depreciation
actually allowed under the Income-tax Act, 1961 for the purposes
of section 43(6);

(c) the depreciation actually allowed as above has to be adjusted by

the amount of depreciation attributable to such revaluation.
(x) Composite Income: Explanation 7 provides that in cases of
‘composite income’, for the purpose of computing written down value
of assets acquired before the previous year, the total amount of
depreciation shall be computed as if the entire composite income of
the assessee is chargeable under the head “Profits and Gains of
business or profession”. The depreciation so computed shall be
deemed to have been “actually allowed” to the assessee.
For instance, Rule 8 prescribes the taxability of income from the

manufacture of tea. Under the said rule, income derived from the sale
of tea grown and manufactured by seller shall be computed as if it
were income derived from business and 40% of such income shall be
deemed to be income liable to tax. If the turnover is, say, ` 20 lakh,
the depreciation ` 1 lakh and other expenses ` 4 lakh, then the
income would be ` 15 lakh. Business income would be ` 6 lakh (being
40% of ` 15 lakh). In this case, ` 1 lakh, being the amount of
depreciation would be deemed to have been actually allowed.
Accordingly, the WDV is required to be computed by deducting the
full depreciation attributable to composite income i.e. ` 1 lakh.
(xi) Cases where the Written Down Value reduced to nil: The written
down value of any block of assets, may be reduced to nil for any of
the following reasons:
(a) The moneys receivable by the assessee in regard to the assets
sold or otherwise transferred during the previous year together
with the amount of scrap value may exceed the written down
value at the beginning of the year as increased by the actual
cost of any new asset acquired, or
(b) All the assets in the relevant block may be transferred during the
year.
(10) Carry forward and set off of depreciation [Section 32(2)]
Section 32(2) provides for carry forward of unabsorbed depreciation. Where,
in any previous year the profits or gains chargeable are not sufficient to give
full effect to the depreciation allowance, the unabsorbed depreciation shall
be added to the depreciation allowance for the following previous year and

shall be deemed to be part of that allowance. If no depreciation allowance is

available for that previous year, the unabsorbed depreciation of the earlier
previous year shall become the depreciation allowance of that year. The
effect of this provision is that the unabsorbed depreciation shall be carried
forward indefinitely till it is fully set off.
Order of set-off
However, in the order of set-off of losses under different heads of income,
effect shall first be given to business losses and then to unabsorbed
depreciation.
The provisions in effect are as follows:
• Since the unabsorbed depreciation forms part of the current year’s
depreciation, it can be set off against any other head of income except
“Salaries”.
• The unabsorbed depreciation can be carried forward for indefinite
number of previous years.
• Set off will be allowed even if the same business to which it relates is
no longer in existence in the year in which the set off takes place.
Current depreciation to be deducted first - The Supreme Court, in CIT v.
Mother India Refrigeration (P.) Ltd. [1985] 23 Taxman 8, has categorically
held that current depreciation must be deducted first before deducting the
unabsorbed carried forward business losses of the earlier years in giving set
off while computing the total income of any particular year.
ORDER OF SET-OFF
Brought
Current Year Unabsorbed
forward
Depreciation depreciation
Business Loss
ILLUSTRATION 5
A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has
acquired the following assets in his office during F.Y. 2019-20 at the cost shown

against each item. Calculate the amount of depreciation that can be claimed from
his professional income for A.Y.2020-21. Assume that all the assets were purchased
by way of account payee cheque.
Sl. Description Date of Date when Amount

No. acquisition put to use `
1. Computer including computer 27 Sept., 19 1 Oct., 19 35,000
software
2. Computer UPS 2 Oct., 19 8 Oct., 19 8,500
3. Computer printer 1 Oct., 19 1 Oct., 19 12,500
4. Books (other than annual 1 Apr., 19 1 Apr., 19 13,000
publications are of ` 12,000)
5. Office furniture 1 Apr., 19 1 Apr., 19 3,00,000
(Acquired from a practicing C.A.)
6. Laptop 26 Sep., 19 8 Oct., 19 43,000
SOLUTION
Computation of depreciation allowable for A.Y.2020-21
Asset Rate Depreciation

(`)
Block 1 Furniture [See working note below] 10% 30,000
Block 2 Plant (Computer including computer software,
Computer UPS, Laptop, Printers and Books)
[See working note below] 40% 34,500
Total depreciation allowable 64,500
Working Note:
Computation of depreciation
Block of Assets `
Block 1: Furniture – [Rate of depreciation - 10%]

Put to use for more than 180 days [` 3,00,000@10%] 30,000

Block 2: Plant [Rate of depreciation- 40%]

(a) Computer including computer software (put to use for more than 14,000
180 days) [` 35,000 @ 40%]
(b) Computer UPS (put to use for less than 180 days) [` 8,500@ 20%] 1,700
[See note below]
(c) Computer Printer (put to use for more than 180 days) [` 12,500 @ 40%] 5,000
(d) Laptop (put to use for less than 180 days) [` 43,000 @ 20%] [See 8,600
note below]
(e) Books (being annual publications or other than annual publications)
(Put to use for more than 180 days) [` 13,000 @ 40%] 5,200
34,500
Note - Where an asset is acquired by the assessee during the previous year and is
put to use for the purposes of business or profession for a period of less than 180
days, the deduction on account of depreciation would be restricted to 50% of the
prescribed rate. In this case, since Mr. Dhaval commenced his practice in the P.Y.
2019-20 and acquired the assets during the same year, the restriction of
depreciation to 50% of the prescribed rate would apply to those assets which
have been put to use for less than 180 days in that year, namely, laptop and
computer UPS.
ILLUSTRATION 6
Mr. Gamma, a proprietor started a business of manufacture of tyres and tubes for
motor vehicles on 1.1.2019. The manufacturing unit was set up on 1.5.2019. He
commenced his manufacturing operations on 1.6.2019. The total cost of the plant
and machinery installed in the unit is ` 120 crore. The said plant and machinery
included second hand plant and machinery bought for ` 20 crore and new plant
and machinery for scientific research relating to the business of the assessee
acquired at a cost of ` 15 crore.
Compute the amount of depreciation allowable under section 32 of the Income-tax
Act, 1961 in respect of the assessment year 2020-21. Assume that all the assets
were purchased by way of account payee cheque.

SOLUTION
Computation of depreciation allowable for the A.Y. 2020-21 in the hands of
Mr. Gamma
Particulars ` in crore
Total cost of plant and machinery 120.00
Less: Used for Scientific Research (Note 1) 15.00
105.00
Normal Depreciation at 15% on ` 105 crore 15.75
Additional Depreciation:
Cost of plant and machinery 120.00
Less: Second hand plant and machinery (Note 2) 20.00
Plant and machinery used for scientific
research, the whole of the actual cost of
which is allowable as deduction under section 15.00 35.00
35(1)(iv) read with section 35(2)(ia) (Note 2)
85.00
Additional Depreciation at 20% 17.00
Depreciation allowable for A.Y.2020-21 32.75
Notes:
1. As per section 35(2)(iv), no depreciation shall be allowed in respect of plant
and machinery purchased for scientific research relating to assessee’s
business, since deduction is allowable under section 35 in respect of such
capital expenditure.
2. As per section 32(1)(iia), additional depreciation is allowable in the case of
assessee engaged in, inter alia, the business of manufacture or production
of any article or thing, at the rate of 20% of the actual cost of such
machinery or plant.
alia, –
(i) any machinery or plant which, before its installation by the assessee,
was used either within or outside India by any other person;

(ii) any machinery or plant, the whole of the actual cost of which is
allowed as a deduction (whether by way of depreciation or otherwise)
in computing the income chargeable under the head “Profit and gains
of business or profession” of any one previous year.
In view of the above provisions, additional depreciation cannot be claimed
in respect of -
(i) Second hand plant and machinery;
(ii) New plant and machinery purchased for scientific research relating to
assessee’s business in respect of which the whole of the capital
expenditure can be claimed as deduction under section 35(1)(iv) read
with section 35(2)(ia) & (iv).
(11) Building, machinery, plant and furniture not exclusively used for
business purpose [Section 38(2)]
Where any building, plant and machinery, furniture is not exclusively used
for the purposes of business or profession, the deduction on account of
expenses on account of current repairs to the premises, insurance premium
of the premises, current repairs and insurance premium of machinery, plant
and furniture and depreciation in respect of these assets shall be restricted
to a fair proportionate part thereof, which the Assessing Officer may
determine having regard to the user of such asset for the purposes of the
business or profession.
(12) Balancing Charge
Section 41(2) provides for the manner of calculation of the amount which
shall be chargeable to income-tax as income of the business of the previous
year in which the monies payable for the building, machinery, plant or
furniture on which depreciation has been claimed under section 32(1)(i), i.e.
in the case of power undertakings, is sold, discarded, demolished or
destroyed. The balancing charge will be the amount by which the moneys
payable in respect of such building, machinery, plant or furniture, together
with the amount of scrap value, if any, exceeds the written down value.
However, the amount of balancing charge should not exceed the difference
between the actual cost and the WDV. The tax shall be levied in the year in
which the moneys payable become due.
The Explanation below section 41(2) makes it clear that where the moneys
payable in respect of the building, machinery, plant or furniture referred to
in section 41(2) become due in a previous year in which the business, for the

purpose of which the building, machinery, plant or furniture was being used,
is no longer in existence, these provisions will apply as if the business is in
existence in that previous year.
(iv) Manufacturing industries set up in the notified backward areas of
specified States to be eligible for a deduction @15% of the actual cost
of new plant & machinery acquired and installed during the previous
year [Section 32AD]
(1) In order to encourage the setting up of industrial undertakings in the
backward areas of the States of Andhra Pradesh, Bihar, Telangana and West
Bengal, section 32AD has been inserted to provide for a deduction of an
amount equal to 15% of the actual cost of new plant and machinery
acquired and installed in the assessment year relevant to the previous year
in which such plant and machinery is installed, if the following conditions
are satisfied by the assessee-
(a) The assessee sets up an undertaking or enterprise for manufacture or
production of any article or thing on or after 1st April, 2015 in any
backward area notified by the Central Government in the State of
Andhra Pradesh or Bihar or Telangana or West Bengal; and
(b) the assessee acquires and installs new plant and machinery for the
purposes of the said undertaking or enterprise during the period
between 1st April, 2015 and 31st March, 2020 in the said backward areas.
(2) For the purposes of this section, “New plant and machinery” does not
include—
(a) any ship or aircraft;
(b) any plant or machinery, which before its installation by the assessee,
was used either within or outside India by any other person;
(c) any plant or machinery installed in any office premises or any
residential accommodation, including accommodation in the nature of
a guest house;
(d) any office appliances including computers or computer software;
(e) any vehicle;
(f) any plant or machinery, the whole of the actual cost of which is
allowed as deduction (whether by way of depreciation or otherwise) in
computing the income chargeable under the head “Profits and gains
of business or profession” of any previous year.

Any
Assessee
1.West Bengal
Acquired and Set up
Conditions Manufactu 2.Andhra Pradesh
Installed
for ring Unit in
Between
deduction notified 3. Bihar
01.04.2015 to
u/s 32AD backward
31.03.2020
areas 4. Telangana
Set up unit
on or after
01.04.2015 Deduction @15% of
actual cost
(3) In order to ensure that the manufacturing units which are set up by availing
this incentive actually contribute to economic growth of these backward
areas by carrying out the activity of manufacturing for a substantial period
of time, a suitable safeguard restricting the transfer of new plant and
machinery for a period of 5 years has been provided.
Accordingly, section 32AD(2) provides that if any new plant and machinery
acquired and installed by the assessee is sold or otherwise transferred
except in connection with the amalgamation or demerger or re-organisation
of business, within a period of 5 years from the date of its installation,
the amount allowed as deduction in respect of such new plant and
machinery shall be deemed to be the income chargeable under the head
“Profits and gains from business or profession” of the previous year in which
such new plant and machinery is sold or transferred, in addition to taxability
of gains, arising on account of transfer of such new plant and machinery.
(4) However, this restriction shall not apply to the amalgamating or demerged
company or the predecessor in a case of amalgamation or demerger or
business reorganization, within a period of five years from the date of its
installation, but shall continue to apply to the amalgamated company or
resulting company or successor, as the case may be.
Additional depreciation @35% to be allowed to assessees setting up
manufacturing units in notified backward areas of specified States and
acquiring and installing of new plant & machinery [Proviso to section 32(1)(iia)]
(1) Under section 32(1)(iia), to encourage investment in new plant or
machinery, additional depreciation of 20% of the actual cost of plant or

machinery acquired and installed is allowed. Such additional depreciation

under section 32(1)(iia) is allowed over and above the normal depreciation
under section 32(1)(ii).
(2) In order to encourage acquisition and installation of plant and machinery
for setting up of manufacturing units in the notified backward areas of the
States of Andhra Pradesh, Bihar, Telangana and West Bengal, a proviso has
been inserted to section 32(1)(iia) to allow higher additional depreciation at
the rate of 35% (instead of 20%) in respect of the actual cost of new
machinery or plant (other than a ship and aircraft) acquired and installed
during the period between 1st April, 2015 and 31st March, 2020 by a
manufacturing undertaking or enterprise which is set up in the notified
backward areas of these specified States on or after 1st April, 2015.
(3) Such additional depreciation shall be restricted to 17.5% (i.e., 50% of 35%),
if the new plant and machinery acquired is put to use for the purpose of
business for less than 180 days in the year of acquisition and installation.
(4) The balance 50% of additional depreciation (i.e., 50% of 35%) would,
however, be allowed in the immediately succeeding financial year.
Notified Backward areas:
State Notified Backward Areas
(1) Telengana Adilabad, Nizamabad, Karimnagar, Warangal, Medak,
Mahbubnagar, Rangareddy, Nalgoda, Khammam
(2) West Bengal South 24 Parganas, Bankura, Birbhum, Dakshin Dinajpur,
Uttar Dinajpur, Jalpaiguri, Malda, East Medinipur, West
Medinipur, Murshidabad, Purulia
(3) Bihar Patna, Nalanda, Bhojpur, Rohtas, Kaimur, Gaya, Jehanabad,
Aurangabad, Nawada, Vaishali, Samastipur, Darbhanga,
Madhubani, Purnea, Katihar, Araria, Jamui, Lakhisarai,
Supaul, Muzaffarpur, Sheohar Arwal, Banka, Begusarai,
Bhagalpur, Buxar, Gopalganj, Khagaria, Kishanganj,
Madhepura, Munger, West Champaran, East Champaran,
Saharsa, Saran, Sheikhpura, Sitamarhi, Siwan
(4) Andhra Pradesh Anantapur, Chittoor, Cuddapah, Kurnool, Srikakulam,
Vishakhapatnam, Vizianagaram

ILLUSTRATION 7
Mr. X, set up a manufacturing unit in Warangal in the state of Telangana on
01.06.2019. It invested ` 30 crore in new plant and machinery on 1.6.2019. Further,
he invested ` 25 crore in the plant and machinery on 01.11.2019, out of which ` 5
crore was second hand plant and machinery. Compute the depreciation allowable
under section 32. Is Mr. X entitled for any other benefit in respect of such
investment? If so, what is the benefit available?
SOLUTION
Computation of depreciation under section 32 for Mr. X for A.Y. 2020-21
Particulars ` (in crores)

Plant and machinery acquired on 01.06.2019 30.000
Plant and machinery acquired on 01.11.2019 25.000
WDV as on 31.03.2020 55.000
Less: Depreciation @ 15% on ` 30 crore 4.500
Depreciation @ 7.5% (50% of 15%) on ` 25 crore 1.875
Additional Depreciation@35% on ` 30 crore 10.500
Additional Depreciation@17.5% (50% of 35%) on
` 20 crore 3.500 20.375
WDV as on 01.04.2020 34.625
Computation of deduction under section 32AD for Mr. X for A.Y. 2020-21
Particulars ` (in crores)

Deduction under section 32AD @ 15% on ` 50 crore 7.50
Total benefit 7.50
Notes:
(1) As per the second proviso to section 32(1)(ii), where an asset acquired
during the previous year is put to use for less than 180 days in that previous
year, the amount deduction allowable as normal depreciation and additional
depreciation would be restricted to 50% of amount computed in accordance
with the prescribed percentage.
Therefore, normal depreciation on plant and machinery acquired and put to
use on 1.11.2019 is restricted to 7.5% (being 50% of 15%) and additional
depreciation is restricted to 17.5% (being 50% of 35%).

(2) The balance additional depreciation of ` 3.5 crore, being 50% of ` 7 crore
(35% of ` 20 crore) would be allowed as deduction in the A.Y.2021-22.
of any article or thing. In this case, since new plant and machinery acquired
was installed by a manufacturing unit set up in a notified backward area in
the State of Telangana, the rate of additional depreciation is 35% of actual
cost of new plant and machinery. Since plant and machinery of ` 20 crore
was put to use for less than 180 days, additional depreciation@17.5% (50%
of 35%) is allowable as deduction. However, additional depreciation shall
not be allowed in respect of second hand plant and machinery of ` 5 crore.
Likewise, the benefit available under sections 32AD would not be allowed in
respect of second hand plant and machinery.
Accordingly, additional depreciation and investment allowance under section
32AD have not been provided on ` 5 crore, being the actual cost of second
hand plant and machinery acquired and installed in the previous year.
(v) Expenditure on Scientific Research [Section 35]
(1) This section allows a deduction in respect of any expenditure on scientific
research related to the business of assessee.
Meaning of certain terms:
Term Meaning
Scientific Activities for the extension of knowledge in the fields of
research natural or applied science including agriculture, animal
husbandry or fisheries [section 43(4)(i)].
Scientific Expenditure incurred on scientific research would include all
research expenditure incurred for the prosecution or the provision of
expenditure facilities for the prosecution of scientific research but does
not include any expenditure incurred in the acquisition of
rights in or arising out of scientific research.
Scientific Scientific research related to a business or a class of
research business would include
related to a (i) any scientific research which may lead to or facilitate
business or an extension of that business or all the business of
a class of that class, as the case may be;

business (ii) any scientific research of a medical nature which has a

special relation to the welfare of the workers
employed in that business or all the business of that
class, as the case may be.
The deduction allowable under this section consists of –
by a company engaged in
business of Bio-technology
or in any business of
manufature or production of 150% of expenditure
any article, not being article incurred (other than
or thing specified in the list expenditure on land
of the Eleventh Schedule on & building)
an approved in-house
research and development
facility
Expenditure on Scientific research
100% of the
Revenue Expenditure expenditure
incurred
(other than
Capital Expenditure
Incurred by assessee expenditure
on scientific research on land)
related to business Approved Indian
company for scientific
research
100%
Notified approved
of sum
University/ college/
Research association/ paid
other institution for
social science or
statistical research
Paid to Notified approved
University/ college/
Research association/ other
institution for scientific
research 150%
of sum
Approved National
Laboratory/university/IIT/ paid
specified person for scientific
research undertaken under
an approved programme

(I) Incurred by assessee:

(i) Revenue Expenditure: Any revenue expenditure incurred by the
assessee on scientific research related to his business would be
allowed as deduction in the year in which it was incurred. Expenditure
incurred within 3 years immediately preceding the commencement of the
business on payment of salary to research personnel engaged in
scientific research related to his business carried on by the taxpayer or on
purchase of material inputs for such scientific research will be allowed as
deduction in the year in which the business is commenced. The
deduction will be limited to the amount certified by the prescribed
authority [Section 35(1)(i)].
(ii) Capital Expenditure: Any expenditure of a capital nature on scientific
research related to the business carried on by the assessee would be
deductible in full in the previous year in which it is incurred [Section
35(1)(iv)].
(a) Capital expenditure prior to commencement of business
The Explanation 1 to section 35(2)(ia) specifically provides that
where any capital expenditure has been incurred prior to the
commencement of the business, the aggregate of the
expenditure so incurred within the three years immediately
preceding the commencement of the business shall be deemed
to have been incurred in the previous year in which the business
is commenced and will rank for deduction as expenditure for
scientific research incurred during the previous year.
Expenditure on land disallowed
No deduction will be allowed in respect of capital expenditure
incurred on the acquisition of any land whether the land is
acquired as such or as part of any property.
(b) Carry forward of deficiency
Capital expenditure incurred on scientific research which cannot
be absorbed by the business profits of the relevant previous year
can be carried forward to the immediately succeeding previous
year and shall be treated as the allowance for that year. In effect,
this means that there is no time bar on the period of carry
forward. It shall be accordingly allowable for that previous year.

(c) No depreciation
Section 35(2)(iv) clarifies that no depreciation will be admissible
on any capital asset represented by expenditure which has been
allowed as a deduction under section 35 whether in the year in
which deduction under section 35 was allowed or in any other
previous year.
(d) Sale of asset representing expenditure of capital nature on
scientific research
Section 41, inter alia, seeks to tax the profits arising on the sale
of an asset representing expenditure of a capital nature on
scientific research.
Such an asset might be sold, discarded, demolished or
destroyed, either after having been used for the purposes of
business on the cessation of its use for the purpose of scientific
research related to the business or without having been used for
other purposes. In either case, tax liability could arise.
Where the asset is sold, etc., after having been used for the
purposes of the business - It may be noted that in such cases,
the actual cost of the concerned asset under section 43(1) read
with explanation would be nil and no depreciation would be
allowed by virtue of section 35(2)(iv). On sale of such asset, the
moneys payable in respect of such asset together with the
amount of scrap value, if any, could be brought to charge under
section 41(1), the provisions of which are wide enough to cover
such situations and to bring to tax that amount of deductions
allowed in earlier years.
Where the asset representing expenditure of a capital nature
on Scientific Research is sold without having been used for
other purposes - This case would come under section 41(3) and
if the proceeds of sale together with the total amount of the
deductions made under section 35 exceed the amount of capital
expenditure, the excess or the amount of deduction so made,
whichever is less, will be charged to tax as income of the
business of the previous year in which the sale took place.
In simple words, if (sale proceeds + deduction under section 35)

> amount of capital expenditure, then sale proceeds +

deduction under section 35 – amount of capital expenditure OR
deduction under section 35, whichever is less, will be the
charged to tax as income of the business.
(II) Amount contributed or paid to:
(i) Notified approved research association, university, college or
other institution: An amount equal to 1½ times (i.e., 150%) of any
sum paid to –
- a research association which has as its object, the undertaking of
scientific research or
- to a university, college or other institution to be used for
scientific research
provided that such university, college, institution or association is
approved for this purpose and notified by the Central Government.
[Section 35(1)(ii)]
The payments so made to such institutions would be allowable
irrespective of whether:
(a) the field of scientific research is related to the assessee’s
business or not, and
(b) the payment is of a revenue nature or of a capital nature.
Note - Weighted deduction to be restricted to –
Rate Period
100% from P.Y.2020-21 onwards (i.e., from A.Y.2021-22 onwards)
(ii) Approved Indian company for scientific research: A sum equal to

any amount paid to a company to be used by it for scientific research
[Section 35(1)(iia)]
However, such deduction would be available only if;
- the company is registered in India and
- has as its main object the scientific research and development.
Further, it should be approved by the prescribed authority and should
fulfill the other prescribed conditions.

A company approved under section 35(1)(iia) will not be entitled

to claim weighted deduction of 150% under section 35(2AB). However,
it can continue to claim deduction under section 35(1)(i) in respect of
the revenue expenditure incurred on scientific research.
(iii) Approved notified research association, university, college or

other institution: A sum equal to any amount paid to
- a research association which has as its object the undertaking of
research in social science or statistical research or
- to a university, college or other institution to be used for
research in a social science or statistical research
provided that they are approved for this purpose and notified by the
Central Government. [Section 35(1)(iii)].
Further, it has been clarified that the deduction to which an assessee
(i.e. donor) is entitled on account of payment of any sum to a research
association or university or college or other institution for scientific
research or research in a social science or statistical research, shall not
be denied merely on the ground that subsequent to payment of such
sum by the assessee, the approval granted to any of the aforesaid
entities is withdrawn.
(iv) Sum paid to National Laboratory, etc. [Section 35(2AA)]: Section
35(2AA) provides that any sum paid by an assessee to a National
Laboratory or University or Indian Institute of Technology or a
specified person for carrying out approved programmes of scientific
research approved by the prescribed authority will be eligible for
weighted deduction of 1½ times (i.e., 150%) of the amount so paid.
No other deduction under the Act: No contribution which qualifies
for weighted deduction under this clause will be entitled to deduction
under any other provision of the Act.
It has been clarified that the deduction to which an assessee is entitled
on account of payment of any sum by him to an approved National
Laboratory, University, Indian Institute of Technology or a specified
person for the approved programme shall not be denied to the
donor-assessee merely on the ground that after payment of such sum
by him, the approval granted to any of the aforesaid donee-entities or
the programme has been withdrawn.

Term Meaning
Specified person A person who is approved by the prescribed
authority
Rate Period
100% from P.Y.2020-21 onwards(i.e., from A.Y.2021-22 onwards)
(III) Company engaged in Business of Bio-technology or manufacturing of

article or thing etc. [Section 35(2AB)]
Where a company engaged in the business of bio-technology or in any
business of manufacture or production of any article or thing, not being an
article or thing specified in the list of the Eleventh Schedule incurs any
expenditure on scientific research on in-house research and development
facility as approved by the prescribed authority, a deduction of a sum equal
to 1½ times (i.e., 150%) of the expenditure will be allowed. Such
expenditure should not be in the nature of cost of any land or building.
“Expenditure on scientific research” in relation to drugs and

pharmaceuticals shall include expenditure incurred on clinical drug trial,
obtaining approval from any state regulatory authority, and filing an
application for a patent under the Patents Act, 1970.
No deduction will be allowed in respect of the above expenditure under any

other provision of the Income-tax Act, 1961.
No company will be entitled to this deduction unless it enters into an
agreement with the prescribed authority for co-operation in such research
and development facility and fulfills the prescribed conditions with regard
to maintenance and audit of accounts and also furnishes prescribed reports
in the prescribed manner.
Rate Period
100% from P.Y. 2020-21 onwards(i.e., from A.Y. 2021-22 onwards)
(2) Weighted Deduction under section 35: A summary

The following table gives a summary of weighted deduction available under
section 35 for A.Y. 2020-21 in respect of contributions made by any

assessee to certain specified/ approved institutions or expenditure incurred

by assessee:
Deduction (as a
Section Expenditure incurred/ Contribution % of contribution
made to made)
35(1)(i) Revenue expenditure incurred on 100%

scientific research related to the
assessee’s business
35(1)(ii) Notified approved research association/ 150%

university/ college/ other institutions for
scientific research
35(1)(iia) An approved Indian company for 100%

scientific research
35(1)(iii) Notified approved research association/ 100%

university/ college/ other institutions for
research in social science or statistical
research
35(1)(iv) Capital expenditure (other than 100%

expenditure on land) incurred on
scientific research related to the
assessee’s business
35(2AA) An approved National Laboratory/ 150%

University/ IIT/ specified person for
scientific research undertaken under an
approved programme
35(2AB) Expenditure incurred by a company 150%

engaged in the business of Bio-
technology or any business of production
or manufacture of article or thing, not
being listed in Eleventh Schedule (other
than cost of Land & Building) on
approved in-house research and
development facility

ILLUSTRATION 8
Mr. A, furnishes the following particulars for the P.Y.2019-20. Compute the
deduction allowable under section 35 for A.Y.2020-21, while computing his income
under the head “Profits and gains of business or profession”.
Particulars `
1. Amount paid to notified approved Indian Institute of Science, 1,00,000
Bangalore, for scientific research
2. Amount paid to IIT, Delhi for an approved scientific research 2,50,000
programme
3. Amount paid to X Ltd., a company registered in India which has 4,00,000
as its main object scientific research and development, as is
approved by the prescribed authority
4. Expenditure incurred on in-house research and development
facility as approved by the prescribed authority
(a) Revenue expenditure on scientific research 3,00,000
(b) Capital expenditure (including cost of acquisition of land 7,50,000
` 5,00,000) on scientific research
SOLUTION
Computation of deduction under section 35 for the A.Y.2020-21
Particulars ` Section % of Amount of

weighted deduction
deduction (`)
Payment for scientific
research
Indian Institute of Science 1,00,000 35(1)(ii) 150% 1,50,000
IIT, Delhi 2,50,000 35(2AA) 150% 3,75,000
X Ltd. 4,00,000 35(1)(iia) 100% 4,00,000
Expenditure incurred on in-
house research and
development facility
Revenue expenditure 3,00,000 35(1)(i) 100% 3,00,000
Capital expenditure (excluding 2,50,000 35(1)(iv) 100%

cost of acquisition of land read

` 5,00,000) with 2,50,000
35(2)(ia)
Deduction allowable under section 35 14,75,000
Note: Only company assessees are entitled to weighted deduction @150% under
section 35(2AB) in respect of in-house research and development expenditure
incurred. However, in this case, the assessee is an individual. Therefore, he would
be entitled to deduction@100% of the revenue expenditure incurred under
section 35(1)(i) and 100% of the capital expenditure incurred under section
35(1)(iv) read with section 35(2), assuming that such expenditure is laid out or
expended on scientific research related to his business.
(vi) “Investment-linked tax incentives” for specified businesses [Section 35AD]
(1) List of specified businesses: Although there are a plethora of tax incentives
available under the Income-tax Act, 1961 they do not fulfill the intended
purpose of creating infrastructure since these incentives are linked to profits
and consequently have the effect of diverting profits from the taxable sector
to the tax-free sector.
With the specific objective of creating rural infrastructure and environment
friendly alternate means for transportation of bulk goods, investment-linked
tax incentives have been introduced for specified businesses, namely –
• setting-up and operating ‘cold chain’ facilities for specified products;
• setting-up and operating warehousing facilities for storing agricultural
produce;
• laying and operating a cross-country natural gas or crude or
petroleum oil pipeline network for distribution, including storage
facilities being an integral part of such network;
• building and operating a hotel of two-star or above category,
anywhere in India;
• building and operating a hospital, anywhere in India, with at least 100
beds for patients;
• developing and building a housing project under a notified scheme
for slum redevelopment or rehabilitation framed by the Central
Government or a State Government.

• developing and building a housing project under a notified scheme

for affordable housing framed by the Central Government or State
Government;
• production of fertilizer in India;
• setting up and operating an inland container depot or a container
freight station notified or approved under the Customs Act, 1962;
• bee-keeping and production of honey and beeswax;
• setting up and operating a warehousing facility for storage of sugar;
• laying and operating a slurry pipeline for the transportation of iron
ore;
• setting up and operating a semiconductor wafer fabrication
manufacturing unit, if such unit is notified by the Board in accordance
with the prescribed guidelines;
• developing or maintaining and operating or developing, maintaining
and operating a new infrastructure facility.
(2) Deduction for Capital Expenditure: 100% of the capital expenditure
incurred during the previous year, wholly and exclusively for the above
businesses would be allowed as deduction from the business income.
However, expenditure incurred on acquisition of any land, goodwill or

financial instrument would not be eligible for deduction.
Further, any expenditure in respect of which payment or aggregate of

payment made to a person of an amount exceeding ` 10,000 in a day
otherwise than by an account payee cheque drawn on a bank or an account
payee bank draft or use of electronic clearing system through a bank
account or through such other prescribed electronic mode would not be
eligible for deduction.
(3) Expenditure prior to commencement of operation: Further, the

expenditure incurred, wholly and exclusively, for the purpose of specified
business prior to commencement of operation would be allowed as
deduction during the previous year in which the assessee commences
operation of his specified business.

The amount incurred prior to commencement should be capitalized in the

books of account of the assessee on the date of commencement of its
operations.
(4) Conditions to be fulfilled: For claiming deduction under section 35AD, the
specified business should fulfill the following conditions –
General Conditions:
To be fulfilled by every specified business
(i) it should not be set up by splitting up, or the reconstruction, of a
business already in existence;
(ii) it should not be set up by the transfer to the specified business of
machinery or plant previously used for any purpose;
In order to satisfy this condition, the total value of the plant or
machinery so transferred should not exceed 20% of the value of the
total plant or machinery used in such specified business.
For the purpose of this condition, machinery or plant would not be
regarded as previously used if it had been used outside India by any
person other than the assessee provided the following conditions are
satisfied:
(a) such plant or machinery was not, at any time prior to the date
of its installation by the assessee, used in India;
(b) the plant or machinery was imported into India from a foreign
Country; and
(c) no deduction on account of depreciation in respect of such
plant or machinery has been allowed to any person at any time
prior to the date of installation by the assessee.
Conditions required to be fulfilled by certain specified businesses:
I. Business of laying and operating a cross-country natural gas or
crude or petroleum oil pipeline network for distribution, including
storage facilities being an integral part of such network
(i) Such business should be owned by a company formed and registered
in India under the Companies Act, 1956 8 or by a consortium of such
companies or by an authority or a board or a corporation established
or constituted under any Central or State Act;
8
Now Companies Act, 2013

(ii) It should have been approved by the Petroleum and Natural Gas
Regulatory Board and notified by the Central Government in the
Official Gazette
(iii) It should have made not less than such proportion of its total
pipeline capacity as specified by regulations made by the Petroleum
and Natural Gas Regulatory Board, available for use on common
carrier basis by any person other than the assessee or an associated
person.
(iv) It should fulfill any other prescribed condition.
II. Business of developing or operating and maintaining or
developing, operating and maintaining a new infrastructure facility
(i) The business should be owned by a company registered in India or
by a consortium of such companies or by an authority or a board
or corporation or any other body established or constituted under
any Central or State Act.
(ii) The entity should have entered into an agreement with the Central
Government or a State Government or a local authority or any other
statutory body for developing or operating and maintaining or
developing, operating and maintaining, a new infrastructure facility.
(5) No deduction under section 10AA or Chapter VI-A under the heading
“C - Deductions in respect of certain incomes”: Where a deduction under
this section is claimed and allowed in respect of the specified business for
any assessment year, no deduction under the provisions of Chapter VI-A
under the heading “C - Deductions in respect of certain incomes” or section
10AA is permissible in relation to such specified business for the same or
any other assessment year.
Correspondingly, section 80A has been amended to provide that where a
deduction under any provision of this Chapter under the heading “C –
Deductions in respect of certain incomes” is claimed and allowed in respect
of the profits of such specified business for any assessment year, no
deduction under section 35AD is permissible in relation to such specified
business for the same or any other assessment year.

In short, once the assessee has claimed the benefit of deduction

under section 35AD for a particular year in respect of a specified business,
he cannot claim benefit under Chapter VI-A under the heading “C -
Deductions in respect of certain incomes” or section 10AA for the same or
any other year and vice versa.
(6) No deduction allowable under the Act in respect of expenditure for

which deduction allowed under this section: The assessee cannot claim
deduction in respect of such expenditure incurred for specified business
under any other provision of the Income-tax Act, 1961 in the current year or
under this section for any other year.
(7) Date of Commencement of specified businesses:
S. Specified business Date of

No. commencement of
operations
1. Laying and operating a cross country natural on or after 1st April,
gas pipeline network for distribution, including 2007
storage facilities being an integral part of such
network;
2. (a) building and operating anywhere in on or after 1st April,
India, a hotel of two-star or above 2010
category as specified by the Central
Government
(b) building and operating a hospital with
at least 100 beds for patients
(c) notified scheme for slum
redevelopment or rehabilitation
housing projects
3. (a) notified scheme for affordable housing on or after 1st April,
projects and 2011
(b) production of fertilizer in a new plant
or in a newly installed capacity in an
existing plant
4. (a) setting up and operating an inland on or after 1st April,
container depot or a container freight 2012

station notified or approved under the

Customs Act, 1962,
(b) bee-keeping and production of honey
and beeswax
(c) setting up and operating a warehousing
facility for storage of sugar
5. (a) laying and operating a slurry pipeline on or after 1st April,
for the transportation of iron ore or 2014
(b) setting up and operating a notified semi
conductor wafer fabrication manufacturing
unit
6. developing or operating and maintaining or on or after 1st April,
developing, operating and maintaining, any 2017
infrastructure facility
7. In any other case, namely, setting and on or after 1st April,
operating- 2009
(a) “cold-chain” facilities for specified
products or
(b) warehousing facilities for storing
agricultural produce
(8) Meaning of certain terms

Term Meaning
Cold chain facility A chain of facilities for storage or transportation

of agricultural and forest produce, meat and meat
products, poultry, marine and dairy products,
products of horticulture, floriculture and
apiculture and processed food items under
scientifically controlled conditions including
refrigeration and other facilities necessary for the
preservation of such produce.
Associated person In relation to the assessee means a person—
(i) who participates directly or indirectly or
through one or more intermediaries in the
management or control or capital of the

assessee;
(ii) who holds, directly or indirectly, shares
carrying not less than 26% of the voting
power in the capital of the assessee;
(iii) who appoints more than half of the Board of
directors or members of the governing board,
or one or more executive directors or
executive members of the governing board of
the assessee; or
(iv) who guarantees not less than 10% of the total
borrowings of the assessee.
Infrastructure (i) A road including toll road, a bridge or a rail
facility system.
(ii) A highway project including housing or other
activities being an integral part of the
highway project.
(iii) A water supply project, water treatment
system, irrigation project, sanitation and
sewerage system or solid waste management
system.
(iv) A port, airport, inland waterway, inland port
or navigational channel in the sea.
(9) Set-off or carry forward and set-off of loss from specified business:
The loss of an assessee claiming deduction under section 35AD in respect of
a specified business can be set-off against the profit of another specified
business under section 73A, irrespective of whether the latter is eligible for
deduction under section 35AD.
Example: A assessee can therefore, set-off the losses of a hospital or hotel

which begins to operate after 1st April, 2010 and which is eligible for
deduction section 35AD, against the profits of the existing business of
operating a hospital (with atleast 100 beds for patients) or a hotel (of two-
star or above category), even if the latter is not eligible for deduction under
section 35AD.

ILLUSTRATION 9
Mr. A commenced operations of the businesses of setting up a warehousing facility
for storage of food grains, sugar and edible oil on 1.4.2019. He incurred capital
expenditure of ` 80 lakh, ` 60 lakh and ` 50 lakh, respectively, on purchase of land
and building during the period January, 2019 to March, 2019 exclusively for the
above businesses, and capitalized the same in its books of account as on 1 st April,
2019. The cost of land included in the above figures is ` 50 lakh, ` 40 lakh and ` 30
lakh, respectively. During the P.Y. 2019-20, he incurred capital expenditure of ` 20
lakh, ` 15 lakh & ` 10 lakh, respectively, for extension/ reconstruction of the
building purchased and used exclusively for the above businesses.
Compute the income under the head “Profits and gains of business or profession”
for the A.Y.2020-21 and the loss to be carried forward, assuming that Mr. A has
fulfilled all the conditions specified for claim of deduction under section 35AD and
has not claimed any deduction under Chapter VI-A under the heading “C –
Deductions in respect of certain incomes”.
The profits from the business of setting up a warehousing facility for storage of food
grains, sugar and edible oil (before claiming deduction under section 35AD and
section 32) for the A.Y. 2020-21 is ` 16 lakhs, ` 14 lakhs and ` 31 lakhs,
respectively. Also, assume in respect of expenditure incurred, the payments are
made by account payee cheque or use of ECS through bank account.
SOLUTION
Computation of profits and gains of business or profession for A.Y.2020-21
Particulars ` (in lakhs)
Profit from business of setting up of warehouse for storage of 31

edible oil (before providing for depreciation under section 32)
Less: Depreciation under section 32
10% of ` 30 lakh, being (` 50 lakh – ` 30 lakh + ` 10 lakh) 3
Income chargeable under “Profits and gains from business or 28

profession”

Computation of income/loss from specified business under section 35AD
Food Sugar Total

Particulars Grains
` (in lakhs)
(A) Profits from the specified business of setting
up a warehousing facility (before providing
deduction under section 35AD) 16 14 30
Less: Deduction under section 35AD
(B) Capital expenditure incurred prior to
1.4.2019 (i.e., prior to commencement of
business) and capitalized in the books of
account as on 1.4.2019 (excluding the
expenditure incurred on acquisition of land)
= ` 30 lakh (` 80 lakh – ` 50 lakh) and ` 20
lakh (` 60 lakh – ` 40 lakh) 30 20 50
(C) Capital expenditure incurred during the P.Y. 20 15 35
2019-20
(D) Total capital expenditure (B + C) 50 35 85
(E) Deduction under section 35AD
100% of capital expenditure (food 50 35 85
grains/sugar)
Total deduction u/s 35AD for A.Y.2020-21 50 35 85
(F) Loss from the specified business of setting
up and operating a warehousing facility
(after providing for deduction under (34) (21) (55)
section 35AD) to be carried forward as per
section 73A (A-E)
Notes:
(i) Deduction of 100% of the capital expenditure is available under section
35AD for A.Y.2020-21 in respect of specified business of setting up and
operating a warehousing facility for storage of sugar and setting up and
operating a warehousing facility for storage of agricultural produce where
operations are commenced on or after 01.04.2012 or on or after 01.04.2009,
respectively.

(iii) However, since setting up and operating a warehousing facility for storage
of edible oils is not a specified business, Mr. A is not eligible for deduction
under section 35AD in respect of capital expenditure incurred in respect of
such business.
(iv) Mr. A can, however, claim depreciation@10% under section 32 in respect of
the capital expenditure incurred on buildings. It is presumed that the
buildings were put to use for more than 180 days during the P.Y.2019-20.
(v) Loss from a specified business can be set-off only against profits from
another specified business. Therefore, the loss of ` 55 lakh from the
specified businesses of setting up and operating a warehousing facility for
storage of food grains and sugar cannot be set-off against the profits of
` 28 lakh from the business of setting and operating a warehousing facility
for storage of edible oils, since the same is not a specified business. Such
loss can, however, be carried forward indefinitely for set-off against profits
of the same or any other specified business.
ILLUSTRATION 10
Mr. Suraj, a proprietor, commenced operations of the business of a new three-star
hotel in Madurai, Tamil Nadu on 1.4.2019. He incurred capital expenditure of ` 50
lakh during the period January, 2019 to March, 2019 exclusively for the above
business, and capitalized the same in his books of account as on 1st April, 2019.
Further, during the P.Y. 2019-20, he incurred capital expenditure of ` 2 crore (out of
which ` 1.50 crore was for acquisition of land) exclusively for the above business.
Compute the income under the head “Profits and gains of business or profession”
for the A.Y.2020-21, assuming that he have fulfilled all the conditions specified for
claim of deduction under section 35AD and has not claimed any deduction under
Chapter VI-A under the heading “C – Deductions in respect of certain incomes”.
The profits from the business of running this hotel (before claiming deduction under
section 35AD) for the A.Y.2020-21 is ` 25 lakhs. Assume that he also have another
existing business of running a four-star hotel in Coimbatore, which commenced
operations twelve years back, the profits from which are ` 120 lakhs for the
A.Y.2020-21. Also, assume that expenditures incurred were paid by account payee
cheque or use of ECS through bank account.

SOLUTION
Computation of profits and gains of business or profession for A.Y. 2020-21
Particulars `
Profits from the specified business of new hotel in Madurai 25 lakh
(before providing deduction under section 35AD)
Less: Deduction under section 35AD
Capital expenditure incurred during the P.Y.2019-20
(excluding the expenditure incurred on acquisition of
land) = ` 200 lakh – ` 150 lakh 50 lakh
Capital expenditure incurred prior to 1.4.2019 (i.e.,
prior to commencement of business) and capitalized
in the books of account as on 1.4.2019 50 lakh
Total deduction under section 35AD for A.Y.2020-21 100 lakh
Loss from the specified business of new hotel in Madurai (75 lakh)
Profit from the existing business of running a hotel in 120 lakh
Coimbatore
Net profit from business after set-off of loss of specified business 45 lakh
against profits of another specified business under section 73A
(10) Transfer of hotel built by the assessee: Where the assessee builds a hotel
of two-star or above category as classified by the Central Government and
subsequently, while continuing to own the hotel, transfers the operation of
the said hotel to another person, the assessee shall be deemed to be
carrying on the specified business of building and operating a hotel.
Therefore, he would be eligible to claim investment-linked tax deduction
under section 35AD.
Therefore, in effect, the assessee shall be deemed to be carrying on

the specified business of building and operating hotel if –
(i) The assessee builds a hotel of two-star or above category;
(ii) Thereafter, he transfers the operation of the hotel to another person;
(iii) He, however, should continue to own the hotel.

(11) Other conditions contained under section 35AD
S. Particulars Condition
No.
1. Transfer of Where any goods or services held for the purposes of
goods and the specified business are transferred to any other
services business carried on by the assessee, or vice versa, and if
the consideration for such transfer does not correspond
with the market value of the goods or services, then the
profits and gains of the specified business shall be
computed as if the transfer was made at market value.
Market value means the price such goods or services
would ordinarily fetch in the open market, subject to
statutory or regulatory restrictions, if any.
Where due to the close connection between the
assessee and the other person or for any other reason,
it appears to the Assessing Officer that the profits of
specified business is increased to more than the
ordinary profits, the Assessing Officer shall compute the
amount of profits of such specified business on a
reasonable basis for allowing the deduction.
2. Audit of The deduction shall be allowed to the assessee only if
accounts the accounts of the assessee for the relevant previous
year have been audited by a chartered accountant and
the assessee furnishes the audit report in the prescribed
form, duly signed and verified by such accountant
along with his return of income.
3. Asset to be Section 35AD(7A) provides that any asset in respect
used for of which a deduction is claimed and allowed under
specified section 35AD shall be used only for the specified
business for business for a period of eight years beginning with
eight years the previous year in which such asset is acquired or
constructed.
4. (i) Asset If any asset on which a deduction under section 35AD
demolished, has been claimed and allowed, is demolished,
destroyed, destroyed, discarded or transferred, the sum received
discarded or or receivable for the same is chargeable to tax under

transferred clause (vii) of section 28.

for which a This does not take into account a case where asset on
deduction which deduction under section 35AD has been
has been claimed is used for any purpose other than the
allowed specified business by way of a mode other than that
specified above.
(ii) Asset If asset is used for any purpose other than the
used for any specified business during 8 years beginning with the
other previous year in which such asset is acquired, the
business total amount of deduction so claimed and allowed in
other than any previous year(s) in respect of such asset, as
specified reduced by the amount of depreciation allowable in
business accordance with the provisions of section 32 as if no
during 8 deduction had been allowed under section 35AD, shall
years be deemed to be income of the assessee chargeable
under the head “Profits and gains of business or
profession” of the previous year in which the asset is
so used.
In such a case, as per the proviso to Explanation 13 to
Section 43(1), the actual cost of such asset for the
assesse shall be the actual cost as reduced by amount
of depreciation would have been allowable had the
asset been used for the purpose of business since the
date of its acquisition.
However, the deeming provision under sub-section (7B) shall not be
applicable to a company which has become a sick industrial company
under section 17(1) of the Sick Industrial Companies (Special
Provisions) Act, 1985, during the intervening period of eight years
specified in sub-section (7A).
ILLUSTRATION 11
Mr. Arnav is a proprietor having two units – Unit A carries on specified business of
setting up and operating a warehousing facility for storage of sugar; Unit B carries on
non-specified business of operating a warehousing facility for storage of edible oil.
Unit A commenced operations on 1.4.2018 and it claimed deduction of ` 100 lacs
incurred on purchase of two buildings for ` 50 lacs each (for operating a warehousing

facility for storage of sugar) under section 35AD for A.Y.2019-20. However, in February,
2020, Unit A transferred one of its buildings to Unit B.
Examine the tax implications of such transfer in the hands of Mr. Arnav.
SOLUTION
Since the capital asset, in respect of which deduction of ` 50 lacs was claimed
under section 35AD, has been transferred by Unit A carrying on specified business
to Unit B carrying on non-specified business in the P.Y.2019-20, the deeming
provision under section 35AD(7B) is attracted during the A.Y.2020-21.
Particulars `
Deduction allowed under section 35AD for A.Y.2019-20 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2019-20 [10% of ` 50 lacs] 5,00,000
Deemed income under section 35AD(7B) 45,00,000
Mr. Arnav, however, by virtue of proviso to Explanation 13 to section 43(1), can

claim depreciation under section 32 on the building in Unit B for A.Y.2020-21. For
the purpose of claiming depreciation on building in Unit B, the actual cost of the
building would be:
Particulars `
Actual cost to the assessee 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2019-20 [10% of ` 50 lacs] 5,00,000
Actual cost in the hands of Mr. Arnav in respect of building in its 45,00,000
Unit B
(vii) Contributions for Rural Development and Urban Poverty Eradication

[Section 35CCA]
This section allows a deduction of the following payment or contribution made by
the assessee during the previous year to:
(1) Notified rural development fund - Payment to a rural development fund
set up and notified by the Central Government. National Fund for Rural
Development has been notified for this purpose.
(2) Notified National Urban Poverty Eradication Fund - Payments made to
“National Urban Poverty Eradication Fund” (NUPEF) set up and notified by
the Central Government.

No other deduction - It has been specifically provided that in every case where any
deduction under this section is claimed by the assessee and allowed to him for any
assessment year in respect of any expenditure incurred by way of payment of
contribution to such notified fund, no deduction in respect of the same expenditure
can again be claimed by the assessee under any other relevant provision for the
same or any other assessment year.
(viii) Weighted deduction in respect of expenditure incurred on notified
agricultural extension project [Section 35CCC]
(1) Eligible project and quantum of deduction: In order to incentivize the
business entities to provide better and effective agriculture extensive
services, section 35CCC provides a weighted deduction of a sum equal to
150% of expenditure incurred by an assessee on notified agricultural
extension project in accordance with the prescribed guidelines.
(2) No other deduction: In case deduction in respect of such expenditure is
allowed under this section then, no deduction in respect of such
expenditure shall be allowed under any other provisions of the Act in the
(3) Project must be notified: The agricultural extension project eligible for this
weighted deduction shall be notified by the CBDT.
The agricultural extension project shall be considered for notification if it
fulfils all of the following conditions, namely:—
(i) the project shall be undertaken by an assessee for training, education
and guidance of farmers;
(ii) the project shall have prior approval of the Ministry of Agriculture,
Government of India; and
(iii) an expenditure (not being expenditure in the nature of cost of any
land or building) exceeding the amount of ` 25 lakhs is expected to be
incurred for the project.
Components of expenditure: All expenses (not being expenditure in

the nature of cost of any land or building), as reduced by the amount
received from beneficiary, if any, incurred wholly and exclusively for
undertaking an eligible agricultural extension project shall be eligible
for deduction under section 35CCC.

However, expenditure incurred on the agricultural extension project

which is reimbursed or reimbursable to the assessee by any person,
whether directly or indirectly, shall not be eligible for deduction under
section 35CCC.
(4) Conditions for claiming weighted deduction: Weighted deduction in

respect of expenditure incurred for notified agricultural extension project
would be available, if
- assessee maintain separate books of account of such notified
agricultural extension project and get such books of account audited
by an Accountant and
- furnish the following on or before the due date of furnishing the
return of income to the Commissioner of Income-tax or Director of
Income-tax, as the case may be :-
• the audited statement of accounts of the agricultural extension
project along with the audited report and amount of deduction
claimed under this section,
• a note on agricultural project undertaken and programme of
agricultural extension project to be undertaken during the
current year and financial allocation for such programme and
• a certificate from Ministry of Agriculture, Government of India,
regarding the genuineness of such project.
Note - Deduction under this section to be restricted to 100% from P.Y.2020-21
onwards (i.e., from A.Y.2021-22 onwards).
(ix) Weighted deduction in respect of expenditure incurred by companies
on notified skill development project [Section 35CCD]
(1) The National Manufacturing Policy (NMP) has been notified by the
Department of Industrial Policy & Promotion (DIPP) vide Press Note dated
4th November, 2011. As per the notified NMP, the government will provide
weighted standard deduction of 150% of the expenditure (other than land
or building) incurred on Public Private Partnership (PPP) project for skill
development in the ITIs in manufacturing sector. This is to encourage
private sector to set up their own institution in coordination with National
Skill Development Corporation.

(2) Quantum of Deduction: In order to encourage companies to invest on

skill development projects in the manufacturing sector, section 35CCD
provides for a weighted deduction of a sum equal to 150% of the
expenditure (not being expenditure in the nature of cost of any land or
building) on notified skill development project incurred by the company in
accordance with the prescribed guidelines. However, expenditure incurred
on the notified skill development project which is reimbursed or
reimbursable to the company by any person, whether directly or indirectly,
shall not be eligible for deduction under section 35CCD.
(3) No other deduction allowed: In case deduction in respect of such
expenditure is allowed under this section then, no deduction of such
expenditure shall be allowed under any other provisions of the Act in the
(4) Only notified projects are eligible: The skill development project eligible
for this weighted deduction shall be notified by the CBDT.
A skill development project would be considered for notification if is
undertaken by an eligible company (a company engaged in the business of
manufacture or production of any article or thing, not being beer, wine and
other alcoholic spirits and tobacco and tobacco preparations or engaged in
providing specified services) and the project is undertaken in separate
facilities in a training institute.
Skill development project in respect of existing employees of the company,
however, would not be eligible for notification, where the training of such
employees commences after six months of their recruitment.
Further, the weighted deduction would be available, if the company
undertaking such project
- maintain separate books of account of the skill development project
and get such books of account audited by an accountant.
- furnish the audited statement of accounts of the skill development
project along with the audited report and amount of deduction
claimed under this section on or before the due date of furnishing the
return of income, to the Commissioner of Income-tax or Director of
Income-tax, as the case may be.
Note - Deduction under this section shall be restricted to 100% from
P.Y.2020-21 onwards (i.e., from A.Y.2021-22 onwards).

(x) Amortisation of Preliminary Expenses [Section 35D]

(1) Nature of expenditure: Section 35D provides for the amortisation of
preliminary expenses incurred by Indian companies and other resident non-
corporate taxpayers for the establishment of business concerns or the
expansion of the business of existing concerns.
(2) Applicable: This section applies
(a) only to Indian companies and resident non-corporate assessees;
(b) in the case of new companies to expenses incurred before the
commencement of the business;
(c) in the case of extension of an existing undertaking to expenses incurred till
the extension is completed, i.e., in the case of the setting up of a new unit -
expenses incurred till the new unit commences production or operation.
(3) Amount eligible for deduction: Such preliminary expenditure incurred
shall be amortised over a period of 5 years. In other words, 1/5th of such
expenditure is allowable as a deduction for each of the five successive
previous years beginning with the previous year in which the business
commences or, the previous year in which the extension of the undertaking
is completed or the new unit commences production or operation, as the
case may be.
(4) Eligible expenses - The following expenditure are eligible for amortisation:
(i) Expenditure in connection with–
(a) the preparation of feasibility report
(b) the preparation of project report;
(c) conducting market survey or any other survey necessary for the
business of the assessee;
(d) engineering services relating to the assessee’s business;
(e) legal charges for drafting any agreement between the assessee
and any other person for any purpose relating to the setting up
to conduct the business of assessee.
(ii) Where the assessee is a company, in addition to the above,
expenditure incurred –
(f) by way of legal charges for drafting the Memorandum and

Articles of Association of the company;

(g) on printing the Memorandum and Articles of Association;
(h) by way of fees for registering the company under the Companies Act;
19569,
(i) in connection with the issue, for public subscription, of the
shares in or debentures of the company, being underwriting
commission, brokerage and charges for drafting, printing and
advertisement of the prospectus; and
(iii) Such other items of expenditure (not being expenditure qualifying for
any allowance or deduction under any other provision of the Act) as
may be prescribed by the Board for the purpose of amortisation.
However, the Board, so far, has not prescribed any specific item of
expense as qualifying for amortisation under this clause.
In the case of expenditure specified in items (a) to (d) above, the work
in connection with the preparation of the feasibility report or the
project report or the conducting of market survey or any other survey
or the engineering services referred to must be carried out by the
assessee himself or by a concern which is for the time being approved
in this behalf by the Board.
(5) Overall Limits - The maximum aggregate amount of the qualifying
expenses that can be amortised has been fixed at 5% of the cost of the
project or in the case of an Indian company, or, at the option of the
company, 5% of the capital employed in the business of the company,
whichever is higher. The excess, if any, of the qualifying expenses shall be
ignored.
9
Now Companies Act, 2013

Amount of
• 5% of cost of
• 5% of the cost of deduction
project
Whichever is
the project •1/5th of OR
qualifying
higher
• 5% of capital
limit for each employed
In case of resident
non-corporate of the five
assessees successive
In case of Indian
years companies
(6) Meaning of certain terms:
Terms Meaning
Cost of (i) Expenses incurred before the commencement of
the business: the actual cost of the fixed assets, being land,
project buildings, leaseholds, plant, machinery, furniture, fittings,
railway sidings (including expenditure on the
development of land, buildings) which are shown in the
books of the assessee as on the last day of the previous
year in which the business of the assessee commences;
(ii) Expenses incurred for extension of the business or
setting up of a new unit: the cost of the fixed assets
being land, buildings, leaseholds, plant, machinery,
furniture, fittings, and railway sidings (including
expenditure on the development of land and buildings)
which are shown in the books of the assessee as on the
last day of the previous year in which the extension of
the undertaking is completed or, as the case may be, the
new unit commences production or operation, in so far
as such assets have been acquired or developed in
connection with the extension of the undertaking or the
setting up of the new unit.
Capital (i) In the case of new company: the aggregate of the
employed issued share capital, debentures and long-term
in the borrowings as on the last day of the previous year in
business which the business of the company commences;

of the (ii) in the case of extension of the business or the setting

company up of a new unit: the aggregate of the issued share
capital, debentures, and long-term borrowings as on the
last day of the previous year in which the extension of
the undertaking is completed or, as the case may be, the
unit commences production or operation in so far as
such capital, debentures and long-term borrowings have
been issued or obtained in connection with the
extension of the undertaking or the setting up of the
new undertaking or the setting up of the new unit of the
company.
Long- Any moneys borrowed in India by the company from the
term Government or the Industrial Finance Corporation of India or
borrowing the Industrial Credit and Investment Corporation of India or
any other financial institution eligible for deduction under
section 36(1)(iii) or any banking institution, or any moneys
borrowed or debt incurred by it in a foreign country in
respect of the purchase outside India of plant and machinery
where the terms under which such moneys are borrowed or
the debt is incurred provide for the repayment thereof during
a period of not less than seven years.
(7) Audit of accounts: In cases where the assessee is a person other than a
company or a co-operative society, the deduction would be allowable only
if the accounts of the assessee for the year or years in which the
expenditure is incurred have been audited by a Chartered Accountant and
the assessee furnishes, along with his return of income for the first year in
respect of which the deduction is claimed, the report of such audit in the
prescribed form duly signed and verified by the auditor and setting forth
such other particulars as may be prescribed.
(8) Special provisions for amalgamation and demerger- Where the
undertaking of an Indian company is transferred, before the expiry of the
period of five years, to another Indian company under a scheme of
amalgamation, the aforesaid provisions will apply to the amalgamated
company as if the amalgamation had not taken place. But no deduction will
be admissible in the case of the amalgamating company for the previous
year in which the amalgamation takes place.

Likewise, in the scheme of demerger where the resulting company will be

able to claim amortisation of preliminary expenses as if demerger had not
taken place, and no deduction shall be allowed to the demerged company in
the year of demerger.
(9) No other deduction under any provision of the Act: It has been clarified
that in case where a deduction under this section is claimed and allowed for
any assessment year in respect of any item of expenditure, the expenditure
in respect of which deduction is so allowed shall not qualify for deduction
under any other provision of the Act for the same or any other assessment
year.
(xi) Amortisation of expenditure incurred under voluntary retirement
scheme [Section 35DDA]:
(1) Nature of expenditure: This section applies to an assessee who has
incurred expenditure in any previous year in the form of payment to any
employee in connection with his voluntary retirement, in accordance with
any scheme or schemes of voluntary retirement.
(2) Amount of deduction: The amount of deduction allowable is one-fifth of
the amount paid for that previous year, and the balance in four equal
installments in the four immediately succeeding previous years.
(3) Transfer of business: In case of amalgamation, demerger, reorganisation or
succession of business during the intervening period of the said 5 years, the
benefit of deduction will be available to the “new company” for the balance
period including the year in which such amalgamation/demerger/
reorganisation or succession takes place.
Condition to be satisfied: This will be applicable in the following
situations:
(i) where an Indian company or the undertaking of an Indian company is
transferred to another Indian company in a scheme of amalgamation;
(ii) where the undertaking of an Indian company is transferred to another
company in a scheme of demerger;
(iii) where due to a re-organisation of business, a firm is succeeded by a
company fulfilling the conditions in section 47(xiii) 10 or a proprietary
10
Conditions specified in clauses (xiii), (xiiib) or (xiv) of section 47 would be discussed at
Final level.

concern is succeeded by a company fulfilling the conditions in section

47(xiv)9;
(iv) where a private company or a unlisted public company has converted
into a LLP fulfilling the conditions laid down in section 47(xiiib)9.
In the above cases, the deduction shall be available to the successor
company as such deduction would have applied to the original entity
if such transfer had not taken place at all.
It is further provided that no deduction shall be available to the
original entity being the amalgamating company, or the demerged
company or the firm or proprietary concern or the company (as the
case may be) for the previous year in which the amalgamation,
demerger or succession takes place.
(4) No deduction under any provisions of the Act: No deduction shall be
allowed in respect of the above expenditure under any other provision of
the Act.
(xii) Other Deductions [Section 36]
This section authorises deduction of certain specific expenses. The items of
expenditure and the conditions under which such expenditures are deductible are:
(1) Insurance premia paid [Section 36(1)(i)] - If insurance policy has been
taken out against risk, damage or destruction of the stock or stores of the
business or profession, the premia paid is deductible. But the premium in
respect of any insurance undertaken for any other purpose is not allowable
under the clause.
(2) Insurance premia paid by a Federal Milk Co-operative Society [Section
36(1)(ia)] - Deduction is allowed in respect of the amount of premium paid
by a Federal Milk Co-operative Society to effect or to keep in force an
insurance on the life of the cattle owned by a member of a co-operative
society, being a primary society engaged in supply of milk raised by its
members to such Federal Milk Co-operative Society. The deduction is
admissible without any monetary or other limits.
(3) Premia paid by employer for health insurance of employees [Section
36(1)(ib)] - This clause seeks to allow a deduction to an employer in
respect of premia paid by him by any mode of payment other than cash to
effect or to keep in force an insurance on the health of his employees in
accordance with a scheme framed by

(i) the General Insurance Corporation of India and approved by the

Central Government; or
(ii) any other insurer and approved by the IRDA.
(4) Bonus and Commission [Section 36(1)(ii)] - These are deductible in full
provided the sum paid to the employees as bonus or commission shall not
be payable to them as profits or dividends if it had not been paid as bonus
or commission.
It is a provision intended to safeguard against a private company or an
association escaping tax by distributing a part of its profits by way of bonus
amongst the members, or employees of their own concern instead of
distributing the money as dividends or profits.
(5) Interest on borrowed capital [Section 36(1)(iii)] - Deduction of interest is
allowed in respect of capital borrowed for the purposes of business or
profession in the computation of income under the head "Profits and gains
of business or profession".
Capital may be borrowed for several purposes like for acquiring a capital
asset, or to pay off a trading debt or loss etc. The scope of the expression
‘for the purposes of business’ is very wide. Capital may be borrowed in the
course of the existing business as well as for acquiring assets for extension
of existing business.
As per proviso to section 36(1)(iii), deduction in respect of any amount of
interest paid, in respect of capital borrowed for acquisition of new asset
(whether capitalised in the books of account or not) for any period
beginning from the date on which the capital was borrowed for acquisition
of the asset till the date on which such asset was first put to use shall not be
allowed.
Explanation 8 to section 43(1) clarifies that interest relatable to a period
after the asset is first put to use cannot be capitalised. Interest in respect of
capital borrowed for any period from the date of borrowing to the date on
which the asset was first put to use should, therefore, be capitalised.
Note: In the case of genuine business borrowings, the department cannot

disallow any part of the interest on the ground that the rate of interest is
unreasonably high except in cases falling under section 40A.

(6) Discount on Zero Coupon Bonds (ZCBs) [Section 36(1)(iiia)] - Section

36(1)(iiia) provides deduction for the discount on ZCB on pro rata basis
having regard to the period of life of the bond to be calculated in the
manner prescribed.
Term Meaning
Discount Difference of the amount received or receivable by an
infrastructure capital company/ infrastructure capital
fund/ public sector company/ scheduled bank on issue of
the bond and the amount payable by such company or
fund or bank on maturity or redemption of the bond.
Period of life The period commencing from the date of issue of the
of the bond bond and ending on the date of the maturity or
redemption.
(7) Contributions to provident and other funds [Section 36(1)(iv) and (v)] -
Contribution to the employees’ recognised provident fund/ approved
superannuation fund/ approved gratuity fund are allowable subject to the
following conditions:
(a) The gratuity fund should be settled upon a trust.
(b) The amount contributed should be periodic payment and not an
adhoc payment to start the fund.
(c) The gratuity fund should be for exclusive benefit of the employees.
(8) Employer’s contribution to the account of the employee under a
Pension Scheme referred to in section 80CCD [Section 36(1)(iva)]
(i) Section 36(1)(iva) to provide that the employer’s contribution to the
account of an employee under a Pension Scheme as referred to in
section 80CCD would be allowed as deduction while computing
business income.
(ii) However, deduction would be restricted to 10% of salary of the
employee in the previous year.
(iii) Salary, for this purpose, includes dearness allowance, if the terms of
employment so provide, but excludes all other allowances and
perquisites.

ILLUSTRATION 12
X Ltd. contributes 20% of basic salary to the account of each employee under
a pension scheme referred to in section 80CCD. Dearness Allowance is 40% of
basic salary and it forms part of pay of the employees.
Compute the amount of deduction allowable under section 36(1)(iva), if the
basic salary of the employees aggregate to ` 10 lakh. Would disallowance
under section 40A(9) be attracted, and if so, to what extent?
SOLUTION
Computation of deduction u/s 36(1)(iva) and disallowance u/s 40A(9)
Particulars `
Basic Salary 10,00,000
Dearness Allowance@40% of basic salary [DA forms part of pay] 4,00,000
Salary for the purpose of section 36(1)(iva) (Basic Salary + 14,00,000
DA)
Actual contribution (20% of basic salary i.e., 20% of ` 10 lakh) 2,00,000
Less: Permissible deduction under section 36(1)(iva) (10%
of basic salary plus dearness pay = 10% of ` 14,00,000 = 1,40,000
` 1,40,000)
Excess contribution disallowed under section 40A(9) 60,000
(9) Amount received by assessee as contribution from his employees

towards their welfare fund to be allowed only if such amount is
credited on or before due date – Section 36(1)(va) and section 57(ia)
provide that deduction in respect of any sum received by the taxpayer as
contribution from his employees towards any welfare fund of such
employees will be allowed only if such sum is credited by the taxpayer to
the employee’s account in the relevant fund on or before the due date.
Due date The date by which the assessee is required as an employer to
credit such contribution to the employee’s account in the
relevant fund under the provisions of any law on term of
contract of service or otherwise.

As per the Employees Provident Funds Scheme, 1952, the amounts under
consideration in respect of wages of the employees for any particular month
shall be paid within 15 days of the close of every month.
(10) Allowance for animals [Section 36(1)(vi)] – This clause grants an
allowance in respect of animals which have died or become permanently
useless.
The amount of the allowance is the difference between the actual cost of
the animals and the price realized on the sale of the animals themselves or
their carcasses.
The allowance under the clause would thus recoup to the assessee the
entire capital expenditure in respect of animal.
(11) Bad debts [Section 36(1)(vii) and section 36(2)] – These can be deducted
subject to the following conditions:
(a) The debts or loans should be in respect of a business which was
carried on by the assessee during the relevant previous year.
(b) The debt should have been taken into account in computing the income of
the assessee of the previous year in which such debt is written off or of an
earlier previous year or should represent money lent by the assessee in the
ordinary course of his business of banking or money lending.
I. Amount of debt taken into account in computing the income of
the assessee on the basis of notified ICDSs 11 to be allowed as
deduction in the previous year in which such debt or part thereof
becomes irrecoverable [Section 36(1)(vii)]
(i) Under section 36(1)(vii), deduction is allowed in respect of the
amount of any bad debt or part thereof which is written off as
irrecoverable in the accounts of the assessee for the previous year.
(ii) Therefore, write off in the books of account is an essential
condition for claim of bad debts under section 36(1)(vii).
(iii) Amount of debt taken into account in computing the income of the
assessee on the basis of notified ICDSs to be allowed as deduction
in the previous year in which such debt or part thereof becomes
irrecoverable.
11
Income Computation Disclosure Standards (ICDSs) will be discussed at Final level.

If a debt, which has not been recognized in the books of account as

per the requirement of the accounting standards but has been taken
into account in the computation of income as per the notified ICDSs,
has become irrecoverable, it can still be claimed as bad debts under
section 36(1)(vii) since it shall be deemed that the debt has been
written off as irrecoverable in the books of account by virtue of
the second proviso to section 36(1)(vii). This is because some ICDSs
require recognition of income at an earlier point of time (prior to the
point of time such income is recognised in the books of account).
Consequently, if the whole or part of such income recognised at an
earlier point of time for tax purposes becomes irrecoverable, it can be
claimed as bad debts on account of the second proviso to section
36(1)(vii).
Where the amount of such debt or part thereof has been taken into account in
computing the income of the assessee (on the basis of ICDSs without
recording the same in the accounts)
of the previous year in which such or of an earlier previous year
debt has become irrecoverable
Such debt or part thereof shall be allowed in the previous year in which such
debt or part thereof becomes irrecoverable
and
It shall be deemed that such debt or part thereof has been written off as
irrecoverable in the accounts
II. Deduction of differential amount of debts due as bad debts in the

year of recovery, to the extent of deficiency in recovery
If on the final settlement the amount recovered in respect of any debt,
where deduction had already been allowed, falls short of the
difference between the debt due and the amount of debt allowed, the
deficiency can be claimed as a deduction from the income of the
previous year in which the ultimate recovery out of the debt is made.

It is permissible for the Assessing Officer to allow deduction in respect

of a bad debt or any part thereof in the assessment of a particular
year and subsequently to allow the balance of the amount, if any, in
the year in which the ultimate recovery is made, that is to say, when
the final result of the process of recovery comes to be known.
Recovery of a bad debt subsequently [Section 41(4)] - If a deduc-
tion has been allowed in respect of a bad debt under section 36, and
subsequently the amount recovered in respect of such debt is more
than the amount due after the allowance had been made, the excess
shall be deemed to be the profits and gains of business or profession
and will be chargeable as income of the previous year in which it is
recovered, whether or not the business or profession in respect of
which the deduction has been allowed is in existence at the time.
(12) Expenses on family planning by a company [Section 36(1)(ix)] - Any
expenditure of revenue nature bona fide incurred by a company for the
purpose of promoting family planning amongst its employees will be
allowed as a deduction in computing the company’s business income;
• Where, the expenditure is of a capital nature, one-fifth of such
expenditure will be deducted in the previous year in which it was
incurred and in each of the four immediately succeeding previous
years.
• This deduction is allowable only to companies and not to other
assessees.
• The assessee would be entitled to carry forward and set off the
unabsorbed part of the allowance in the same way as unabsorbed
depreciation.
The capital expenditure on promoting family planning will be treated in the
same way as capital expenditure for scientific research for purposes of
dealing with the profit or loss on the sale or transfer of the asset including a
transfer on amalgamation.
(13) Deduction of securities transaction tax paid [Section 36(1)(xv)] - The
amount of securities transaction tax paid by the assessee during the year in
respect of taxable securities transactions entered into in the course of
business shall be allowed as deduction under section 36 subject to the
condition that such income from taxable securities transactions is included
under the head ‘Profits and gains of business or profession’.

Thus, securities transaction tax paid would be allowed as a deduction like

any other business expenditure.
(14) Deduction for commodities transaction tax paid in respect of taxable
commodities transactions [Section 36(1)(xvi)]
(a) The Finance Act, 2013 has introduced a new tax called Commodities
Transaction Tax (CTT) to be levied on taxable commodities
transactions entered into in a recognised association, vide Chapter VII
of the Finance Act, 2013.
(b) For this purpose, a ‘taxable commodities transaction’ means a
transaction of sale of commodity derivatives in respect of
commodities, other than agricultural commodities, traded in
recognised associations.
(c) CTT is to be levied at 0.01% on sale of commodity derivative. CTT is to
be paid by the seller.
(d) A “commodity derivative” means –
(1) A contract for delivery of goods which is not a ready delivery
contract
(2) A contract for differences which derives its value from prices or
indices of prices -
(i) of such underlying goods; or
(ii) of related services and rights, such as warehousing and freight;
or
(iii) with reference to weather and similar events and activities
having a bearing on the commodity sector.
(e) Consequently, clause (xvi) of section 36(1) provides that an amount
equal to the CTT paid by the assessee in respect of the taxable
commodities transactions entered into in the course of his business
during the previous year shall be allowable as deduction, if the income
arising from such taxable commodities transactions is included in the
income computed under the head “Profits and gains of business or
profession”.

(xiii) Residuary Expenses [Section 37]

(1) Revenue expenditure incurred for purposes of carrying on the business,
profession or vocation - This is a residuary section under which only
business expenditure is allowable but not the business losses, e.g., those
arising out of embezzlement, theft, destruction of assets, misappropriation
by employees etc. The deduction is limited only to the amount actually
expended and does not extend to a reserve created against a contingent
liability.
(2) Conditions for allowance: The following conditions should be fulfilled in
order that a particular item of expenditure may be deductible under this
section:
(a) The expenditure should not be of the nature described in sections 30
to 36.
(b) It should have been incurred by the assessee in the accounting year.
(c) It should be in respect of a business carried on by the assessee the
profits of which are being computed and assessed.
(d) It must have been incurred after the business was set up.
(e) It should not be in the nature of any personal expenses of the
assessee.
(f) It should have been laid out or expended wholly and exclusively for
the purposes of such business.
(g) It should not be in the nature of capital expenditure.
(h) The expenditure should not have been incurred by the assessee for
any purpose which is an offence or is prohibited by law.
This section is thus limited in scope. It does not permit an assessee to make
all deductions which a prudent trader would make in ascertaining his own
profit. It might be observed that the section requires that the expenditure
should be wholly and exclusively laid out for purpose of the business but
not that it should have been necessarily laid out for such purpose.
Therefore, expenses wholly and exclusively laid out for the purpose of trade
are, subject to the fulfilment of other conditions, allowed under this section
even though the outlay is unnecessary.

(3) Expenditure incurred on Keyman insurance policy: CBDT Circular no.

762/1998 dated 18.02.1998 clarifies that the premium paid on the Keyman
Insurance Policy is allowable as business expenditure.
The Punjab and Haryana High Court held that, “the Keyman Insurance Policy
when obtained to secure the life of a partner to safeguard the firm against a
disruption of the business is equally for the benefit of the partnership
business which may be effected as a result of premature death of a partner.
Thus, the premium on the Keyman Insurance Policy of partner of the firm is
wholly and exclusively for the purpose of business and is allowable as
business expenditure”.
The CBDT accepted the view of the High Court, accordingly, vide Circular
no. 38/2016 has clarified that, in case of a firm, premium paid by the firm on
the Keyman Insurance Policy of a partner, to safeguard the firm against a
disruption of the business, is an admissible expenditure under section 37.
(4) Explanation 1 to section 37(1) - This Explanation provides that any
expenditure incurred by the assessee for any purpose which is an offence or
is prohibited by law shall not be allowed as a deduction or allowance.
Inadmissibility of expenses incurred in providing freebees to medical

practitioner by pharmaceutical and allied health sector industry
[Circular No. 5/2012 dated 1-8-2012]
Section 37(1) provides for deduction of any revenue expenditure (other than
those falling under sections 30 to 36) from the business income if such
expense is laid out or expended wholly or exclusively for the purpose of
business or profession. However, the Explanation 1 below section 37(1)
denies claim of any such expenses, if the same has been incurred for a
purpose which is either an offence or prohibited by law.
The CBDT, considering the fact that the claim of any expense incurred in
providing freebees to medical practitioner is in violation of the provisions of
Indian Medical Council (Professional Conduct, Etiquette and Ethics)
Regulations, 2002 has clarified that the expenditure so incurred shall be
inadmissible under section 37(1) of the Income-tax Act, 1961, being an
expense prohibited by the law. The disallowance shall be made in the hands
of such pharmaceutical or allied health sector industry or other assessee
which has provided aforesaid freebees and claimed it as a deductible
expense in its accounts against income.

This circular has also clarified that a sum equivalent to value of freebees
enjoyed by the aforesaid medical practitioner or professional associations is
also taxable as business income or income from other sources, as the case
may be, depending on the facts of each case.
(5) Disallowance of CSR expenditure [Explanation 2 to Section 37(1)]

(i) Section 135 of the Companies Act, 2013 read with Schedule VII
thereto and Companies (Corporate Social Responsibility) Rules, 2014
are the special provisions under the new company law regime
imposing mandatory CSR obligations.
Mandatory CSR obligations under section 135:

 Every company, listed or unlisted, private or public, having a –
- net worth of ` 500 crores or more [Net worth criterion]; or
- turnover of ` 1,000 crores or more [Turnover criterion]; or
- a net profit of ` 5 crores or more [Net Profit criterion]
during any financial year to constitute a CSR Committee of the
Board;
 CSR Committee has to formulate CSR policy and the same has to
be approved by the Board;
 Such company to undertake CSR activities as per the CSR Policy;
 Such company to spend in every financial year, at least 2% of its
average net profits made in the immediately three preceding
financial years, on the CSR activities specified in Schedule VII to
the Companies Act, 2013.
(ii) As per Rule 4 of the Companies (CSR) Rules, 2014, the following
expenditure are not considered as CSR activity for the purpose of
section 135:
 Expenditure on activities undertaken in pursuance of normal
course of business;
 Expenditure on CSR activities undertaken outside India;
 Expenditure which is exclusively for the benefit of the employees
of the company or their families; and

 Contributions to political parties.

(iii) Under section 37(1) of the Income-tax Act, 1961, only expenditure, not
covered under sections 30 to 36, and incurred wholly and exclusively
for the purposes of the business is allowed as a deduction while
computing taxable business income. The issue under consideration is
whether CSR expenditure is allowable as deduction under section 37.
(iv) It has now been clarified that for the purposes of section 37(1), any
expenditure incurred by an assessee on the activities relating to
corporate social responsibility referred to in section 135 of the
Companies Act, 2013 shall not be deemed to have been incurred for
the purpose of business and hence, shall not be allowed as deduction
under section 37.
(v) The rationale behind the disallowance is that CSR expenditure, being
an application of income, is not incurred wholly and exclusively for the
purposes of carrying on business.
(vi) However, the Explanatory Memorandum to the Finance (No.2) Bill,
2014 clarifies that CSR expenditure, which is of the nature described in
sections 30 to 36, shall be allowed as deduction under those sections
subject to fulfillment of conditions, if any, specified therein.
(6) Advertisements in souvenirs of political parties: Section 37(2B) disallows
any deduction on account of advertisement expenses representing
contributions made by any person carrying on business or profession in
computing the profits and gains of the business or profession. It has
specifically been provided that this provision for disallowance would apply
notwithstanding anything to the contrary contained in section 37(1).
In other words, the expenditure representing contribution for political
purposes would become disallowable even in those cases where the
expenditure is otherwise incurred by the assessee in his character as a
trader and the amount is wholly and exclusively incurred for the purpose of
the business.
Accordingly, a taxpayer would not be entitled to any deduction in respect of
expenses incurred by him on advertisement in any souvenir, brochure, tract
or the like published by any political party, whether it is registered with the
Election Commission of India or not.

3.7 INADMISSIBLE DEDUCTIONS [SECTION 40]

By dividing the assessees into distinct groups, this section places absolute restraint
on the deductibility of certain expenses as follows:
In the case of any assessee, the following expenses are not deductible:
(1) Section 40(a)
Any interest, royalty, fees for technical services or other sum chargeable under this
Act, which is payable, -
(a) outside India;
(b) in India to a non-resident non-corporate or to a foreign company,
on which tax is deductible at source under Chapter XVIIB and such tax has not been
deducted or, after deduction, has not been paid on or before the due date of filing of
return specified under section 139(1).
It is also provided that where in respect of any such sum, where tax has been
deducted in any subsequent year, or has been deducted in the previous year but
paid after the due date of filing of return under section 139(1), such sum shall be
allowed as a deduction in computing the income of the previous year in which such
tax has been paid.
In case, assessee fails to deduct the whole or any part of tax on any such sum
but is not deemed as assessee in default under the first proviso to section 201(1)
by reason that such payee –
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return
of income; and
(iii) has paid the tax due on the income declared by him in such return of
income, and the payer furnishes a certificate to this effect from an
accountant in such form as may be prescribed,
it would be deemed that the assessee has deducted and paid the tax on such
sum on the date on which return of income has been furnished by the payee.
Since the date of furnishing the return of income by the payee is taken to be the
date on which the payer has deducted tax at source and paid the same, such
expenditure/payment in respect of which the payer has failed to deduct tax at
source shall be disallowed under section 40(a)(i) in the year in which the said

expenditure is incurred. However, such expenditure will be allowed as deduction

in the subsequent year in which the return of income is furnished by the payee,
since tax is deemed to have been deducted and paid by the payer in that year.
(2) Section 40(a)(ia)
Section 40(a)(ia) provides that 30% of any sum payable to a resident, on which tax is
deductible at source under Chapter XVII-B, shall be disallowed if –
(i) such tax has not been deducted; or
(ii) such tax, after deduction, has not been paid on or before the due date
specified in section 139(1).
If in respect of such sum, tax has been deducted in any subsequent year or has been
deducted during the previous year but paid after the due date specified in section
139(1), 30% of such sum shall be allowed as deduction in computing the income of
the previous year in which such tax has been paid.
For instance, tax on royalty paid to Mr. A, a resident, has been deducted during
the previous year 2019-20, the same has to be paid by 31st July/ 30th September
2020, as the case may be. Otherwise, 30% of royalty paid would be disallowed in
computing the income for A.Y.2020-21. If in respect of such royalty, tax deducted
during the P.Y.2019-20 has been paid after 31st July/ 30th September, 2020, 30%
of such royalty would be allowed as deduction in the year of payment.
Note: Students are advised to read Chapter 9 on “Advance tax, tax deduction
at source and introduction to tax collection at source” before solving this
illustration.
ILLUSTRATION 13
Delta Ltd. credited the following amounts to the account of resident payees in the
month of March, 2020 without deduction of tax at source. What would be the
consequence of non-deduction of tax at source by Delta Ltd. on these amounts
during the financial year 2019-20, assuming that the resident payees in all the
cases mentioned below, have not paid the tax, if any, which was required to be
deducted by Delta Ltd.?
Particulars Amount in `
(1) Salary to its employees (credited and paid in March, 2020) 12,00,000
(2) Directors’ remuneration (credited in March, 2020 and paid in 28,000
April, 2020)

Would your answer change if Delta Ltd. has deducted tax on directors’
remuneration in April, 2020 at the time of payment and remitted the same in July,
2020?
SOLUTION
Non-deduction of tax at source on any sum payable to a resident on which tax is
deductible at source as per the provisions of Chapter XVII-B would attract
disallowance under section 40(a)(ia).
Therefore, non-deduction of tax at source on any sum paid by way of salary on
which tax is deductible under section 192 or any sum credited or paid by way of
directors’ remuneration on which tax is deductible under section 194J, would
attract disallowance@30% under section 40(a)(ia). Whereas in case of salary, tax
has to be deducted under section 192 at the time of payment, in case of directors’
remuneration, tax has to be deducted at the time of credit of such sum to the
account of the payee or at the time of payment, whichever is earlier. Therefore, in
both the cases i.e., salary and directors’ remuneration, tax is deductible in the
P.Y.2019-20, since salary was paid in that year and directors’ remuneration was
credited in that year. Therefore, the amount to be disallowed under section
40(a)(ia) while computing business income for A.Y.2020-21 is as follows –
Particulars Amount Disallowance

paid in ` u/s 40(a)(ia)
@30%
(1) Salary 12,00,000 3,60,000
[tax is deductible under section 192]
(2) Directors’ remuneration 28,000 8,400
[tax is deductible under section 194J
without any threshold limit]
Disallowance under section 40(a)(ia) 3,68,400
If the tax is deducted on directors’ remuneration in the next year i.e., P.Y.2020-
21 at the time of payment and remitted to the Government, the amount of
` 8,400 would be allowed as deduction while computing the business income of
A.Y. 2021-22.
In case, assessee fails to deduct the whole or any part of tax on any such sum but is
not deemed as assessee in default under the first proviso to section 201(1) by reason
that such payee –
(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of
income; and
(iii) has paid the tax due on the income declared by him in such return of income,
and the payer furnishes a certificate to this effect from an accountant in such
form as may be prescribed,
it would be deemed that the assessee has deducted and paid the tax on such sum.
The date of deduction and payment of taxes by the payer shall be deemed to be the
date on which return of income has been furnished by the payee.
Since the date of furnishing the return of income by the payee is taken to be the date
on which the payer has deducted tax at source and paid the same, 30% of such
expenditure/payment in respect of which the payer has failed to deduct tax at source
shall be disallowed under section 40(a)(ia) in the year in which the said expenditure is
incurred. However, 30% of such expenditure will be allowed as deduction in the
subsequent year in which the return of income is furnished by the payee, since tax is
deemed to have been deducted and paid by the payer in that year.
Disallowance of any sum paid to a resident at any time during the previous
year without deduction of tax under section 40(a)(ia) [Circular No.10/2013,
dated 16.12.2013]
There have been conflicting interpretations by judicial authorities regarding the
applicability of provisions of section 40(a)(ia), with regard to the amount not
deductible in computing the income chargeable under the head ‘Profits and gains
of business or profession’. Some court rulings have held that the provisions of
disallowance under section 40(a)(ia) apply only to the amount which remained
payable at the end of the relevant financial year and would not be invoked to
disallow the amount which had actually been paid during the previous year
without deduction of tax at source.
Departmental View: The CBDT’s view is that the provisions of section 40(a)(ia)
would cover not only the amounts which are payable as on 31st March of a
previous year but also amounts which are payable at any time during the year.
The statutory provisions are amply clear and in the context of section 40(a)(ia),
the term "payable" would include "amounts which are paid during the previous
year".
The Circular has further clarified that where any High Court decides an issue
contrary to the above “Departmental View”, the “Departmental View” shall not be
operative in the area falling in the jurisdiction of the relevant High Court.

ILLUSTRATION 14
During the financial year 2019-20, the following payments/expenditure were made/
incurred by Mr. Yuvan Raja, a resident individual (whose turnover during the year
ended 31.3.2019 was ` 99 lacs):
(i) Interest of ` 45,000 was paid to Rehman & Co., a resident partnership firm,
without deduction of tax at source;
(ii) ` 3,00,000 was paid as salary to a resident individual without deduction of tax
at source;
(iii) Commission of ` 16,000 was paid to Mr. Vidyasagar, a resident, on 2.7.2019
without deduction of tax at source.
Briefly discuss whether any disallowance arises under the provisions of section
40(a)(ia) of the Income-tax Act, 1961 assuming that the payees in all the cases
mentioned above, have not paid the tax, if any, which was required to be deducted
by Mr. Raja?
SOLUTION
Disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is attracted
where the assessee fails to deduct tax at source as is required under the Act, or
having deducted tax at source, fails to remit the same to the credit of the Central
Government within the stipulated time limit.
(i) The obligation to deduct tax at source from interest paid to a resident arises
under section 194A in the case of an individual, whose total turnover in the
immediately preceding previous year, i.e., P.Y.2018-19 exceeds ` 100 lakhs.
Thus, in present case, since the turnover of the assessee is less than ` 100
lakhs, he is not liable to deduct tax at source. Hence, disallowance under
section 40(a)(ia) is not attracted in this case.
(ii) The disallowance of 30% of the sums payable under section 40(a)(ia) would
be attracted in respect of all sums on which tax is deductible under Chapter
XVII-B. Section 192, which requires deduction of tax at source from salary
paid, is covered under Chapter XVII-B. The obligation to deduct tax at
source under section 192 arises, in the hands all assessee-employer even if
the turnover amount does not exceed ` 100 lakhs in the immediately
preceding previous year.
Therefore, in the present case, the disallowance under section 40(a)(ia) is
attracted for failure to deduct tax at source under section 192 from salary

payment. However, only 30% of the amount of salary paid without

deduction of tax at source would be disallowed.
(iii) The obligation to deduct tax at source under section 194-H from
commission paid in excess of ` 15,000 to a resident arises in the case of an
individual, whose total turnover in the immediately preceding previous year,
i.e., P.Y.2018-19 exceeds ` 100 lakhs. Thus, in present case, since the
turnover of the assessee is less than ` 100 lakhs, he is not liable to deduct
tax at source u/s 194-H. Mr. Raja is not required to deduct tax at source u/s
194M also since the aggregate of such commission to Mr. Vidyasagar does
not exceed ` 50 lakh during the P.Y. 2019-20. Therefore, disallowance under
section 40(a)(ia) is not attracted in this case.
(3) Section 40(a)(ii)
Any sum paid on account of tax or cess levied on profits on the basis of or in
proportion to the profits and gains of any business or profession.
(4) Section 40(a)(iib)
(i) any amount paid by way of royalty, licence fee, service fee, privilege fee,
service charge, etc., which is levied exclusively on, or
(ii) any amount appropriated, directly or indirectly, from a State Government
undertaking by the State Government (SG)
A State Government undertaking includes –
(a) A corporation established by or under any Act of the State Government;
(b) A company in which more than 50% of the paid up equity share capital is
held by the State Government;
(c) A company in which more than 50% of the paid up equity share capital is
held singly or jointly by (a) or (b);
(d) A company or corporation in which the State Government has the right to
appoint the majority of directors or to control the management or policy
decisions
(e) An authority, a board or an institution or a body established or constituted
by or under any Act of the State Government or owned or controlled by the
State Government.

(5) Section 40(a)(iii)

Any sum which is chargeable under the head ‘Salaries’ if it is payable outside India or
to a non-resident and if the tax has not been paid thereon nor deducted therefrom
under Chapter XVII-B.
(6) Section 40(a)(iv)
Any contribution to a provident fund or the fund established for the benefit of
employees of the assessee, unless the assessee has made effective arrangements to
make sure that tax shall be deducted at source from any payments made from the
fund which are chargeable to tax under the head ‘Salaries’.
(7) Section 40(a)(v)
Tax paid on perquisites on behalf of employees is not deductible - In case of an
employee, deriving income in the nature of perquisites (other than monetary
payments), the amount of tax on such income paid by his employer is exempt from
tax in the hands of that employee.
Correspondingly, such payment is not allowed as deduction from the income of the
employer. Thus, the payment of tax on perquisites by an employer on behalf of
employee will be exempt from tax in the hands of employee but will not be allowable
as deduction in the hands of the employer.
In the case of any firm assessable as such or a limited liability partnership (LLP)
the following amounts shall not be deducted in computing the business income
Section 40(b)
(1) Remuneration to non-working partner - Any salary, bonus, commission,
remuneration by whatever name called, to any partner who is not a working
partner. (In the following discussion, the term ‘remuneration’ is applied to
denote payments in the nature of salary, bonus, commission);
(2) Remuneration to a working partner not authorized by deed - Any
remuneration paid to the working partner or interest to any partner which is
not authorised by or which is inconsistent with the terms of the partnership
deed;
(3) Remuneration or interest to a partner authorized by deed but relates to
an earlier period - It is possible that the current partnership deed may
authorise payments of remuneration to any working partner or interest to
any partner for a period which is prior to the date of the current partnership
deed. The approval by the current partnership deed might have been

necessitated due to the fact that such payment was not authorised by or
was inconsistent with the earlier partnership deed. Such payments of
remuneration or interest will also be disallowed. However, it should be
noted that the current partnership deed cannot authorise any payment
which relates to a period prior to the date of earlier partnership deed.
Next, by virtue of a further restriction contained in section 40(b)(iii), such
remuneration paid to the working partners will be allowed as deduction to
the firm from the date of such partnership deed and not for any period
prior thereto. Consequently, if, for instance, a firm incorporates the clause
relating to payment of remuneration to the working partners, by executing
an appropriate deed, say, on July 1, 2019 but effective from April 1, 2019 the
firm would get deduction for the remuneration paid to its working partners
from July 1, 2019 onwards, but not for the period from April 1 to June 30. In
other words, it will not be possible to give retrospective effect to oral
agreements entered into vis a vis such remuneration prior to putting the
same in a written partnership deed.
(4) Interest to any partner in excess of 12% p.a.- Any interest payment
authorised by the partnership deed falling after the date of such deed to
the extent such interest exceeds 12% simple interest p.a.
(5) Remuneration to a working partner in excess of prescribed limits - Any
remuneration paid to a working partner, authorised by a partnership deed
and falling after the date of the deed in excess of the following limits:
Book Profits Quantum of deduction
On the first ` 3 lakh of book ` 1,50,000 or 90% of book profit,

profit or in case of loss whichever is higher
on the balance of book profit 60% of book profit

(6) Meaning of certain terms:
Term Meaning
Book Profit The net profit as shown in the profit and loss account for the
relevant previous year computed in accordance with the
provisions for computing income from profits and gains
[Explanation 3 to section 40(b)].
The above amount should be increased by the remuneration
paid or payable to all the partners of the firm if the same has

been deducted while computing the net profit.

Working An individual who is actively engaged in conducting the
partner affairs of the business or profession of the firm of which he is
a partner [Explanation 4 to section 40(b)]
ILLUSTRATION 15
A firm has paid ` 7,50,000 as remuneration to its partners for the P.Y.2019-20,
in accordance with its partnership deed, and it has a book profit of ` 10 lakh.
What is the remuneration allowable as deduction?
SOLUTION
The allowable remuneration calculated as per the limits specified in section
40(b)(v) would be –
Particulars `
On first ` 3 lakh of book profit [` 3,00,000 × 90%] 2,70,000
On balance ` 7 lakh of book profit [` 7,00,000 × 60%] 4,20,000
6,90,000
The excess amount of ` 60,000 (i.e., ` 7,50,000 – ` 6,90,000) would be
disallowed as per section 40(b)(v).
(7) Explanations to section 40(b)
(1) Where an individual is a partner in a firm in a representative capacity:
(i) interest paid by the firm to such individual otherwise than as
partner in a representative capacity shall not be taken into
account for the purposes of this clause.
(ii) interest paid by the firm to such individual as partner in a
representative capacity and interest paid by the firm to the
person so represented shall be taken into account for the
purposes of this clause [Explanation 1 to section 40(b)]
(2) Where an individual is a partner in a firm otherwise than in a
representative capacity, interest paid to him by the firm shall not be
taken into account if he receives the same on behalf of or for the
benefit of any other person [Explanation 2 to section 40(b)].

ILLUSTRATION 16
Rao & Jain, a partnership firm consisting of two partners, reports a net profit of
` 7,00,000 before deduction of the following items:
(1) Salary of ` 20,000 each per month payable to two working partners of the
firm (as authorized by the deed of partnership).
(2) Depreciation on plant and machinery under section 32 (computed) ` 1,50,000.
(3) Interest on capital at 15% per annum (as per the deed of partnership). The
amount of capital eligible for interest is ` 5,00,000.
Compute:
(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the assessment year 2020-21 as per
section 40(b).
SOLUTION
(i) As per Explanation 3 to section 40(b), “book profit” shall mean the net profit
as per the profit and loss account for the relevant previous year computed
in the manner laid down in Chapter IV-D as increased by the aggregate
amount of the remuneration paid or payable to the partners of the firm if
the same has been already deducted while computing the net profit.
In the present case, the net profit given is before deduction of depreciation
on plant and machinery, interest on capital of partners and salary to the
working partners. Therefore, the book profit shall be as follows:
Computation of Book Profit of the firm under section 40(b)
Particulars ` `
Net Profit (before deduction of depreciation, salary 7,00,000
and interest)
Less: Depreciation under section 32 1,50,000
Interest @ 12% p.a. [being the maximum
allowable as per section 40(b)] (` 5,00,000 × 60,000 2,10,000
12%)
Book Profit 4,90,000
(ii) Salary actually paid to working partners = ` 20,000 × 2 × 12 = ` 4,80,000.

As per the provisions of section 40(b)(v), the salary paid to the working
partners is allowed subject to the following limits -
On the first ` 3,00,000 of ` 1,50,000 or 90% of book profit, whichever
book profit or in case of loss is more
On the balance of book profit 60% of the balance book profit
Therefore, the maximum allowable working partners’ salary for the A.Y.
2020-21 in this case would be:
Particulars `
On the first ` 3,00,000 of book profit [(` 1,50,000 or 90% of 2,70,000
` 3,00,000) whichever is more]
On the balance of book profit [60% of (` 4,90,000 - ` 3,00,000)] 1,14,000
Maximum allowable partners’ salary 3,84,000
Hence, allowable working partners’ salary for the A.Y.2020-21 as per the
provisions of section 40(b)(v) is ` 3,84,000.
In the case of Association of persons or body of individuals, following amounts
shall not be deducted in computing the business income
Section 40(ba)
Any payment of interest, salary, commission, bonus or remuneration made by an
association of persons or body of individuals to its members will also not be allowed
as a deduction in computing the income of the association or body.
There are three Explanations to section 40(ba):
Explanation 1 - Where interest is paid by an AOP or BOI to a member who has paid
interest to the AOP/BOI, the amount of interest to be disallowed under clause (ba)
shall be limited to the net amount of interest paid by AOP/BOI to the partner.
Explanation 2 - Where an individual is a member in an AOP/BOI in a representative
capacity, interest paid by AOP/BOI to such individual or by such individual to AOP/
BOI otherwise than as member in a representative capacity shall not be taken into
account for the purposes of clause (ba). But, interest paid to or received from each
person in his representative capacity shall be taken into account.
Explanation 3 - Where an individual is a member in his individual capacity, interest
paid to him in his representative capacity shall not be taken into account.

3.8 EXPENSES OR PAYMENT NOT DEDUCTIBLE IN

CERTAIN CIRCUMSTANCES [SECTION 40A]
(i) Payments to relatives and associates
Section 40A(2) provides that where the assessee incurs any expenditure in respect of
which a payment has been or is to be made to a specified person [See column (2) of
Table below) so much of the expenditure as is considered to be excessive or
unreasonable shall be disallowed by the Assessing Officer. While doing so he shall
have due regard to:
(a) the fair market value of the goods, service of facilities for which the
payment is made; or
(b) the legitimate needs of the business or profession carried on by the assessee;
or
(c) the benefit derived by or accruing to the assessee from such a payment.
Assessee Specified Person

(1) (2)
Individual 1. Any relative of the individual assessee
2. Any person who carries on a business or profession, if
• the individual assessee has a substantial interest in the
business of that person or
• any relative of the individual assessee has a substantial
interest in the business of that person
Company, 1. Any director of the company, partner of the firm or member
Firm, HUF of the family or association or any relative of such director,
or AOP partner or member or
2. In case of a company assessee, any individual who has
substantial interest in the business or profession of the
company or any relative of such individual or
3. Any person who carries on a business or profession, in
which the Company/ Firm/ HUF/ AOP or director of the
company, partner of the firm or member of the family or
association or any relative of such director, partner or
member has substantial interest in the business of that
person

All The following are specified persons:

assessees Person who Other related persons of such person, who
has has a substantial interest in the assessee’s
substantial business
interest in
the
assessee’s
business
Company/ • Any director of such company, partner of
AOP/ Firm/ such firm or the member of such family or
HUF association or
• any relative of such director, partner or
member or
• Any other company carrying on business or
profession in which the first mentioned
company has a substantial interest
a director, • Company/ Firm/ AOP/ HUF of which he is a
partner or director, partner or member or
member • Any other director/ partner/ member of the
such Company/Firm/ AOP/ HUF or
• Any relative of such director, partner or
member
Relative in relation to an Individual means the spouse, brother or sister or
any lineal ascendant or descendant of that individual [Section 2(41)].
Substantial interest in a business or profession

A person shall be deemed to have a substantial interest in a business or
profession if -
- in a case where the business or profession is carried on by a company,
such person is, at any time during the previous year, the beneficial owner
of equity shares carrying not less than 20% of the voting power and
- in any other case, such person is, at any time during the previous year,
beneficially entitled to not less than 20% of the profits of such business or
profession.

(ii) Payments in excess of ` 10,000 made otherwise than through

prescribed modes
According to section 40A(3), where the assessee incurs any expenditure, in respect of
which payment or aggregate of payments made to a person in a day otherwise than
by an account payee cheque drawn on a bank or by an account payee bank draft or
use of electronic system through bank account or through such other prescribed
electronic modes exceeds ` 10,000, such expenditure shall not be allowed as a
deduction.
The provision applies to all categories of expenditure involving payments for goods
or services which are deductible in computing the taxable income.
Example:
If, in respect of an expenditure of ` 32,000 incurred by X Ltd., 4 cash payments of
` 8,000 are made on a particular day to one Mr. Y – one in the morning at 10 a.m.,
one at 12 noon, one at 3 p.m. and one at 6 p.m., the entire expenditure of
` 32,000 would be disallowed under section 40A(3), since the aggregate of cash
payments made during a day to Mr. Y exceeds ` 10,000.
Payments in excess of ` 10,000 made otherwise than through prescribed
modes deemed to be the income of the subsequent year, if expenditure has
been allowed as deduction in any previous year on due basis:
In case of an assessee following mercantile system of accounting, if an
expenditure has been allowed as deduction in any previous year on due basis,
and payment has been made in a subsequent year otherwise than by account
payee cheque or account payee bank draft or use of electronic clearing system
through a bank account or through such other prescribed electronic modes,
then the payment so made shall be deemed to be the income of the subsequent
year if such payment or aggregate of payments made to a person in a day
exceeds ` 10,000 [Section 40A(3A)].
Increase in limit of cash payment, where payment made to transport
operator: This limit of ` 10,000 has been raised to ` 35,000 in case of payment
made to transport operators for plying, hiring or leasing goods carriages.
Therefore, payment or aggregate of payments up to ` 35,000 in a day can be
made to a transport operator otherwise than by way of account payee cheque or
account payee bank draft or use of electronic clearing system through a bank
account or through such other prescribed electronic modes. In all other cases,
the limit would continue to be ` 10,000.

Cases where disallowances would not be attracted:

(i) Loan transactions: It does not apply to loan transactions because
advancing of loans or repayments of the principal amount of loan does not
constitute an expenditure deductible in computing the taxable income.
However, interest payments of amounts exceeding ` 10,000 at a time are
required to be made by account payee cheques or drafts or electronic
clearing system or through such other prescribed electronic modes as
interest is a deductible expenditure.
(ii) Payment made by commission agents: This requirement does not apply to
payment made by commission agents for goods received by them for sale on
commission or consignment basis because such a payment is not an expenditure
deductible in computing the taxable income of the commission agent.
For the same reason, this requirement does not apply to advance payment
made by the commission agent to the party concerned against supply of
goods.
However, where commission agent purchases goods on his own account but
not on commission basis, the requirement will apply. The provisions
regarding payments by account payee cheque or draft or electronic clearing
system or through such other prescribed electronic modes apply equally
to payments made for goods purchased on credit.
Cases and circumstances in which a payment or aggregate of payments
exceeding ten thousand rupees may be made to a person in a day,
otherwise than by an account payee cheque/ account payee bank draft/
use of ECS through a bank account or through such other prescribed
electronic modes [Rule 6DD]:
As per this rule, no disallowance under section 40A(3) shall be made and no
payment shall be deemed to be the profits and gains of business or
profession under section 40A(3A) where a payment or aggregate of
payments made to a person in a day, otherwise than by an account payee
cheque drawn on a bank or account payee bank draft or use of electronic
electronic modes, exceeds ten thousand rupees in the cases and
circumstances specified hereunder, namely:
(a) where the payment is made to

(i) the Reserve Bank of India or any banking company;

(ii) the State Bank of India or any subsidiary bank;
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit
society;
(v) the Life Insurance Corporation of India;
(b) where the payment is made to the Government and, under the rules
framed by it, such payment is required to be made in legal tender;
(c) where the payment is made by
(i) any letter of credit arrangements through a bank;
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other
account in that or any other bank;
(iv) a bill of exchange made payable only to a bank;
(v) a credit card;
(vi) a debit card.
(d) where the payment is made by way of adjustment against the amount
of any liability incurred by the payee for any goods supplied or
services rendered by the assessee to such payee;
(e) where the payment is made for the purchase of -
(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat,
hides and skins) or dairy or poultry farming; or
(iii) fish or fish products; or
(iv) the products of horticulture or apiculture,
to the cultivator, grower or producer of such articles, produce or
products;
Notes -
(i) The expression ‘fish or fish products’ (iii) above would include
‘other marine products such as shrimp, prawn, cuttlefish, squid,

crab, lobster etc.’.

(ii) The 'producers' of fish or fish products for the purpose of Rule
6DD(e) would include, besides the fishermen, any headman of
fishermen, who sorts the catch of fish brought by fishermen
from the sea, at the sea shore itself and then sells the fish or fish
products to traders, exporters etc.
However, the above exception will not be available on the
payment for the purchase of fish or fish products from a person
who is not proved to be a 'producer' of these goods and is only
a trader, broker or any other middleman, by whatever name
called.
(f) where the payment is made for the purchase of the products
manufactured or processed without the aid of power in a cottage
industry, to the producer of such products;
(g) where the payment is made in a village or town, which on the date of
such payment is not served by any bank, to any person who ordinarily
resides, or is carrying on any business, profession or vocation, in any
such village or town;
(h) where any payment is made to an employee of the assessee or the
heir of any such employee, on or in connection with the retirement,
retrenchment, resignation, discharge or death of such employee, on
account of gratuity, retrenchment compensation or similar terminal
benefit and the aggregate of such sums payable to the employee or
his heir does not exceed fifty thousand rupees;
(i) where the payment is made by an assessee by way of salary to his
employee after deducting the income-tax from salary in accordance with
the provisions of section 192 of the Act, and when such employee -
(i) is temporarily posted for a continuous period of fifteen days or
more in a place other than his normal place of duty or on a ship;
and
(ii) does not maintain any account in any bank at such place or ship;
(j) where the payment was required to be made on a day on which the
banks were closed either on account of holiday or strike;

(k) where the payment is made by any person to his agent who is
required to make payment in cash for goods or services on behalf of
such person;
(l) where the payment is made by an authorised dealer or a money
changer against purchase of foreign currency or travelers cheques in
the normal course of his business.
Note: Where any payment in respect of any expenditure is required to be made
by an account payee cheque/ account payee bank draft or use of electronic
electronic modes in order that such expenditure may not be disallowed as a
deduction under section 40A(3), then the payment may be made by such cheque
or draft or electronic clearing system or through such other prescribed
electronic modes.
No person is allowed to raise, in any suit or other proceeding, a plea based on the
ground that the payment was not made or tendered in cash or in any other manner.
This is notwithstanding anything contained in any other law for the time being in
force or in any contract
(iii) Disallowance of provision for gratuity
Section 40A(7) provides that no deduction would be allowable to any taxpayer
carrying on any business or profession in respect of any provision (whether called as
provision or by any other names) made by him towards the payment of gratuity to
his employers on their retirement or on the termination of their employment for any
reason.
The reason for this disallowance is that, under section 36(1)(v), deduction is allowable
in computing the profits and gains of the business or profession in respect of any
sum paid by a taxpayer in his capacity as an employer in the form of contributions
made by him to an approved gratuity fund created for the exclusive benefit of his
employees under an irrevocable trust. Further, section 37(1) provides that any
expenditure other than the expenditure of the nature described in sections 30 to 36
laid out or expended, wholly and exclusively for the purpose of the business or
profession must be allowed as a deduction in computing the taxable income from
business.
A reading of these two provisions clearly indicates that the intention of the
legislature has always been that the deduction in respect of gratuity be allowable to

the employer either in the year in which the gratuity is actually paid or in the year in
which contributions to an approved gratuity fund are actually made by employer.
This provision, therefore, makes it clear that any amount claimed by the assessee
towards provision for gratuity, by whatever name called would be disallowable in the
assessment of employer even if the assessee follows the mercantile system of
accounting.
However, no disallowance would be made as per section 40A(7) in the case where
any provision is made by the employer for the purpose of payment of sum by way of
contribution to an approved gratuity fund during the previous year or for the
purpose of making payment of any gratuity that has become payable during the
previous year by virtue of the employee’s retirement, death, termination of service
etc.
Further, where any provision for gratuity for any reason has been allowed as a
deduction to the assessee for any assessment year, any sum paid out of such
provision by way of contribution towards an approved gratuity fund or by way to
gratuity to employee shall not be allowed as deduction to the assessee in the year in
which it is paid.
(iv) Contributions by employers to funds, trust etc. [Sections 40A(9))]
This sub-section has been introduced to curb the growing practice amongst
employers to claim deductions from taxable profits of the business of contributions
made apparently to the welfare of employees from which, however, no genuine
benefit flows to the employees.
Accordingly, no deduction will be allowed where the assessee pays in his capacity as
an employer, any sum towards setting up or formation of or as contribution to any
fund, trust, company, association of persons, body of individuals, society registered
under the Societies Registration Act, 1860 or other institution for any purpose.
However, where such sum is paid in respect of funds covered by sections 36(1)(iv),
36(1)(iva) and 36(1)(v) or any other law, then the deduction will not be denied.
3.9 PROFITS CHARGEABLE TO TAX

[SECTION 41]
This section enumerates certain receipts which are deemed to be income under the
head “business or profession.” Such receipts would attract charge even if the

business from which they arise had ceased to exist prior to the year in which the
liability under this section arises. The particulars of such receipts are given below:
(i) Remission or cessation of trading liability [Section 41(1)]
Suppose an allowance or deduction has been made in any assessment year in
respect of loss, expenditure or trading liability incurred by A. Subsequently, if A has
obtained, whether in cash or in any manner whatsoever, any amount in respect of
such loss or expenditure of some benefit in respect of such trading liability by way of
remission or cessation thereof, the amount obtained by A, or the value of benefit
accruing to him shall be taxed as income of that previous year. It does not matter
whether the business or profession in respect of which the allowance or deduction
has been made is in existence in that year or not.
It is possible that after the above allowance in respect of loss, expenditure, or trading
liability has been given to A, he could have been succeeded in his business by
another person. In such a case, the successor will be liable to be taxed in respect of
any such benefit received by him during a subsequent previous year.
Successor in business:
(i) Where there has been an amalgamation of a company with another
company, the successor will be the amalgamated company.
(ii) Where a firm carrying on a business or profession is succeeded by another
firm the successor will be the other firm.
(iii) In any other case, where one person is succeeded by any other person in
that business or profession the other person will be the successor.
(iv) In case of a demerger, the successor will be the resulting company.
Remission or cessation of a trading liability includes remission or cessation of liability
by a unilateral act of the assessee by way of writing off such liability in his accounts.
(ii) Balancing charge, Sale of capital asset used for scientific research,
Recovery of a bad debt subsequently etc.[Section 41(2),(3) & (4)]
The provisions of section 41(2) relating to balancing charge, of section 41(3) relating
to assets acquired for scientific research and of section 41(4) dealing with recovery of
bad debts have been dealt with earlier under the respective items.
(iii) Brought forward losses of defunct business [Section 41(5)]
In cases where a receipt is deemed to be profit of a business under section 41
relating to a business that had ceased to exist and there is an unabsorbed loss, not

being a speculation loss, which arose in that business during the previous year in
which it had ceased to exist, it would be set off against income that is chargeable
under this section even after the expiry of 8 years.
3.10 CHANGES IN THE RATE OF EXCHANGE OF

CURRENCY [SECTION 43A]
(1) The section provides that where an assessee has acquired any asset from a
foreign country for the purpose of his business or profession, and due to a
change thereafter in the exchange rate of the two currencies involved, there
is an increase or decrease in the liability (expressed in Indian rupees) of the
assessee at the time of making the payment, the following values may be
changed accordingly with respect to the increase or decrease in such
liability:
(i) the actual cost of the asset under section 43(1)
(ii) the amount of capital expenditure incurred on scientific research
under section 35(1)(iv)
(iii) the amount of capital expenditure incurred by a company for
promoting family planning amongst its employees under section
36(1)(ix)
(iv) the cost of acquisition of a non-depreciable capital asset falling under
section 48.
The amount arrived at after making the above adjustment shall be taken as
the amount of capital expenditure or the cost of acquisition of the capital
asset, as the case may be.
(2) Where the whole or any part of the liability aforesaid is met, not by the
assessee, but, directly or indirectly, by any other person or authority, the
liability so met shall not be taken into account for the purposes of this
section.
(3) Where the assessee has entered into a contract with authorised dealer as
defined in section 2 of the Foreign Exchange Management Act, 1999 for
providing him with a specified sum in a foreign currency on or after a
stipulated future date at the rate of exchange specified in the contract to
enable him to meet the whole or any part of the liability aforesaid, the

amount, if any, for adjustment under this section shall be computed with
reference to the rate of exchange specified therein.
3.11 CERTAIN DEDUCTIONS TO BE MADE ONLY

ON ACTUAL PAYMENT [SECTION 43B]
The following sums are allowed as deduction only on the basis of actual payment
within the time limits specified in section 43B.
(a) Any sum payable by way of tax, duty, cess or fee, by whatever name called,
under any law for the time being in force.
(b) Any sum payable by the assessee as an employer by way of contribution to
any provident fund or superannuation fund or gratuity fund or any other
fund for the welfare of employees.
(c) Bonus or Commission for services rendered payable to employees.
(d) Any sum payable by the assessee as interest on any loan or borrowing from
any public financial institution or a State Financial Corporation or a State
Industrial Investment Corporation.
(e) Any sum payable by the assessee as interest on any loan or borrowing
from a deposit taking non-banking financial company or systemically
important non-deposit taking non-banking financial company, in
accordance with the terms and conditions of the agreement governing
such loan or borrowing,
(f) Interest on any loan or advance from a scheduled bank or co-operative
bank other than a primary agricultural credit society or a primary co-
operative agricultural and rural development bank on actual payment basis.
(g) Any sum paid by the assessee as an employer in lieu of earned leave of his
employee.
(h) Any sum payable by the assessee to the Indian Railways for use of Railway assets.
The above sums can be paid by the assessee on or before the due date for furnishing
the return of income under section 139(1) in respect of the previous year in which the
liability to pay such sum was incurred and the evidence of such payment is furnished
by the assessee along with such return.

Where in respect of any sum referred in (e) above, deduction is allowed in

computing the income referred to in section 28, on due basis in the previous
year relevant to the assessment year 2019-20 or any earlier assessment year,
the assessee would not be entitled to any deduction under this section in respect
of such sum in computing the income of the previous year in which the sum is
actually paid by him.
Any sum payable means a sum for which the assessee incurred liability in the
previous year even though such sum might not have been payable within that year
under the relevant law.
For example, an assessee may collect GST from customers during the month of
March, 2020. However, in respect of such collections he may have to discharge the
liability only within say 10th April, 2020 under the GST law. The explanation covers
this type of liability also. Consequently, if an assessee following accrual method of
accounting has created a provision in respect of such a liability the same is not
deductible unless remitted within the due date specified in this section.
Conversion of interest into a loan or borrowing or advance or payable in other

manner
Explanation 3C, 3CA & 3D clarifies that if any sum payable by the assessee as interest
on any such loan or borrowing or advance referred to in (d), (e) and (f) above, is
converted into a loan or borrowing or advance, the interest so converted and not
“actually paid” shall not be deemed as actual payment, and hence would not be
allowed as deduction. The clarificatory explanations only reiterate the rationale that
conversion of interest into a loan or borrowing or advance does not amount to actual
payment.
The manner in which the converted interest will be allowed as deduction has been
clarified in Circular No.7/2006 dated 17.7.2006. The unpaid interest, whenever
actually paid to the bank or financial institution, will be in the nature of revenue
expenditure deserving deduction in the computation of income. Therefore,
irrespective of the nomenclature, the deduction will be allowed in the previous year
in which the converted interest is actually paid.
Meaning of certain terms:
Term Meaning
Non-banking (i) a financial institution which is a company;
financial company (ii) a non-banking institution which is a company and

which has as its principal business the receiving of

deposits, under any scheme or arrangement or in any
other manner, or lending in any manner;
(iii) such other non-banking institution or class of such
institutions, as the bank may, specify with the
previous approval of the Central Government and by
notification in the Official Gazette.
Deposit taking a non-banking financial company which is accepting or
non-banking holding public deposits and is registered with the RBI under
financial company the provisions of the Reserve Bank of India Act, 1934.
Systemically a non-banking financial company which is not accepting or
important non- holding public deposits and having total assets of not less
deposit taking than ` 500 crore rupees as per the last audited balance
non-banking sheet and is registered with the RBI under the provisions of
financial the Reserve Bank of India Act, 1934.
company
ILLUSTRATION 17
Hari, an individual, carried on the business of purchase and sale of agricultural
commodities like paddy, wheat, etc. He borrowed loans from Andhra Pradesh State
Financial Corporation (APSFC) and Indian Bank and has not paid interest as
detailed hereunder:
`
(i) Andhra Pradesh State Financial Corporation (P.Y. 2018-19 & 15,00,000
2019-20)
(ii) Indian Bank (P.Y. 2019-20) 30,00,000
45,00,000
Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during
the year 2019-20, converted the above interest payable by Hari to them as a loan
repayable in 60 equal installments. During the year ended 31.3.2020, Hari paid 5
installments to APSFC and 3 installments to Indian Bank.
Hari claimed the entire interest of ` 45,00,000 as an expenditure while computing
the income from business of purchase and sale of agricultural commodities.
Examine whether his claim is valid and if not what is the amount of interest, if any,
allowable.

SOLUTION
According to section 43B, any interest payable on the term loans to specified
financial institutions and any interest payable on any loans and advances to, inter
alia, scheduled banks shall be allowed only in the year of payment of such
interest irrespective of the method of accounting followed by the assessee. Where
there is default in the payment of interest by the assessee, such unpaid interest
may be converted into loan. Such conversion of unpaid interest into loan shall not
be construed as payment of interest for the purpose of section 43B. The amount
of unpaid interest so converted as loan shall be allowed as deduction only in the
year in which the converted loan is actually paid.
In the given case of Hari, the unpaid interest of ` 15,00,000 due to APSFC and of
` 30,00,000 due to Indian Bank was converted into loan. Such conversion would
not amount to payment of interest and would not, therefore, be eligible for
deduction in the year of such conversion. Hence, claim of Hari that the entire
interest of ` 45,00,000 is to be allowed as deduction in the year of conversion is
not tenable. The deduction shall be allowed only to the extent of repayment
made during the financial year. Accordingly, the amount of interest eligible for
deduction for the A.Y.2020-21 shall be calculated as follows:
Interest Number of Amount Instalments Interest

outstanding Instalments per paid allowable
instalment (`)
APSFC 15 lakh 60 25,000 5 1,25,000
Indian Bank 30 lakh 60 50,000 3 1,50,000
Total amount eligible for deduction 2,75,000
Allowability of Employer's Contribution to funds for welfare of employees

paid after the due date under the relevant Act but before the due date of
filing of return of income under section 139(1) [Circular No.22/2015 dated
17-12-2015]
Under section 43B of the Income-tax Act, 1961, certain deductions are admissible
only on payment basis. The CBDT has observed that some field officers disallow
employer's contributions to provident fund or superannuation fund or gratuity fund
or any other fund for the welfare of employees, by invoking the provisions of section
43B, if it has been paid after the 'due dates' as per the relevant Acts.
The CBDT has examined the matter in light of the judicial decisions on this issue. In
the case of Commissioner vs. Alom Extrusions Ltd, [2009] 185 Taxman 416, the

Apex Court held that the deduction is allowable to the employer assessee if he
deposits the contributions to welfare funds on or before the 'due date' of filing of
return of income.
Accordingly, the settled position is that if the assessee deposits any sum payable by
it by way of tax, duty, cess or fee, by whatever name called, under any law for the
time being in force, or any sum payable by the assessee as an employer by way of
contribution to any provident fund or superannuation fund or gratuity fund or any
other fund for the welfare of employees, on or before the 'due date' applicable in his
case for furnishing the return of income under section 139(1), no disallowance can
be made under section 43B.
It is further clarified that this Circular does not apply to claim of deduction relating
to employee's contribution to welfare funds which are governed by section 36(1)(va)
of the Income-tax Act, 1961.
3.12 STAMP DUTY VALUE OF LAND AND

BUILDING TO BE TAKEN AS THE FULL
VALUE OF CONSIDERATION IN RESPECT
OF TRANSFER, EVEN IF THE SAME ARE
HELD BY THE TRANSFEROR AS STOCK-
IN-TRADE [SECTION 43CA]
(i) Section 43CA has been inserted as an anti-avoidance measure to provide
that where the consideration for the transfer of an asset (other than capital
asset), being land or building or both, is less than the stamp duty value, the
value so adopted or assessed or assessable (i.e., the stamp duty value) shall
be deemed to be the full value of the consideration for the purposes of
computing income under the head “Profits and gains of business of
profession”.
However, if the stamp duty value does not exceed 105% of the
consideration received or accruing then, such consideration shall be
deemed to be the full value of consideration for the purpose of computing
profits and gains from transfer of such asset.
(ii) Further, where the date of an agreement fixing the value of consideration
for the transfer of the asset and the date of registration of the transfer of

the asset are not same, the stamp duty value may be taken as on the date of
the agreement for transfer instead of on the date of registration for such
transfer, provided at least a part of the consideration has been received by
way of an account payee cheque/ account payee bank draft or use of ECS
through a bank account or through such other prescribed electronic
modes on or before the date of the agreement.
(iii) The Assessing Officer may refer the valuation of the asset to a valuation
officer as defined in section 2(r) of the Wealth-tax Act, 1957 in the following
cases -
(1) Where the assessee claims before any Assessing Officer that the value
adopted or assessed or assessable by the authority for payment of
stamp duty exceeds the fair market value of the property as on the
date of transfer and
(2) the value so adopted or assessed or assessable by such authority has
not been disputed in any appeal or revision or no reference has been
made before any other authority, court or High Court.
(iv) Where the value ascertained by the Valuation Officer exceeds the value
adopted or assessed or assessable by the Stamp Valuation Authority, the
value adopted or assessed or assessable shall be taken as the full value of
the consideration received or accruing as a result of the transfer.
The term ‘assessable’ has been defined to mean the price which the stamp
valuation authority would have, notwithstanding anything to the contrary
contained in any other law for the time being in force, adopted or assessed,
if it were referred to such authority for the purposes of the payment of
stamp duty.
Example
Case Date of Actual Stamp duty Stamp duty Full value Remark
transfer consider- value on value on the of
of land/ ation the date of date of considera
building agreement registration -tion
held as
stock-
in-trade ` in lakhs
1 1/5/2019 100 120 210 120 Stamp duty

(` 10 lakhs (1/9/2018) (1/5/2019) value on the

received by date of
A/c payee agreement to
cheque on be adopted as
1/9/2018) full value of
consideration
since the stamp
duty value
exceeds 105%
of consideration
i.e., ` 105 lakhs.
2 1/5/2019 100 104 210 210 Stamp duty
(` 10 lakhs (1/9/2018) (1/5/2019) value on the
received by date of
cash on registration to
1/9/2018) be adopted as
full value of
consideration
since part of
consideration is
received by
cash and such
stamp duty
value exceeds
105% of
consideration
i.e., ` 105 lakhs.
3 31/1/2020 100 104 210 100 Actual sales
(` 10 lakhs (1/9/2018) 31/1/2020 consideration
received by would be the
A/c payee full value of
cheque on consideration,
1/9/2018) since stamp
duty value on
the date of
agreement
(which has to
adopted as full
value of
consideration

since part of
consideration is
received by
account payee
cheque) does
not exceed
105% of actual
consideration
4 31/3/2020 100 120 210 210 Stamp duty
(Full (1/5/2019) (31/3/2020) value of the
amount date of
received in registration
cash on the would be the
date of full value of
registration) consideration
since the stamp
duty value
exceeds 105%
of consideration
i.e., ` 105 lakhs.
3.13 COMPULSORY MAINTENANCE OF

ACCOUNTS [SECTION 44AA]
(1) Maintain the books of accounts and other documents by notified
professions [section 44AA(1)]: This section provides that every person
carrying on the legal, medical, engineering or architectural profession or
accountancy or technical consultancy or interior decoration or any other
profession as has been notified by the CBDT in the official gazette must
statutorily maintain such books of accounts and other documents as may
enable the assessing officer to compute his total income in accordance with
the provisions of the income-tax act, 1961.
Notified professions: The professions notified so far are as the profession

of authorised representative; the profession of film artist (actor, camera
man, director, music director, art director, editor, singer, lyricist, story writer,
screen play writer, dialogue writer and dress designer); the profession of
company secretary; and information technology professionals.

(2) Maintain the books of account and other documents if income/

turnover/ sales/ gross receipts exceed the prescribed limits [Section
44AA(2)]:
I. In case of Individual or HUF: An Individual or HUF carrying on any
business or profession (other than the professions specified in (1) above)
must maintain such books of account and other documents as may enable
the Assessing Officer to compute hid total income in accordance the
provisions of the Income-tax Act, 1961 in the following circumstances:
(i) Existing business or profession: In cases where the income
from the existing business or profession exceeds ` 2,50,000 or
the total sales, turnover or gross receipts, as the case may be, in
the business or profession exceed ` 25,00,000 in any one of
three years immediately preceding the accounting year; or
(ii) Newly set up business or profession: In cases where the
business or profession is newly set up in any previous year, if his
income from business or profession is likely to exceed ` 2,50,000
or his total sales, turnover or gross receipts, as the case may be,
in the business or profession are likely to exceed ` 25,00,000
during the previous year.
II. Person (other than individual or HUF): Every person (other than
individual or HUF) carrying on any business or profession (other than
the professions specified in (1) above) must maintain such books of
account and other documents as may enable the Assessing Officer to
compute hid total income in accordance the provisions of the Income-
tax Act, 1961 in the following circumstances:
(i) Existing business or profession: In cases where the income
from the business or profession exceeds ` 1,20,000 or the total
sales, turnover or gross receipts, as the case may be, in the
business or profession exceed ` 10,00,000 in any one of three
years immediately preceding the accounting year; or
(ii) Newly set up business or profession: In cases where the
business or profession is newly set up in any previous year, if his
income from business or profession is likely to exceed ` 1,20,000
or his total sales, turnover or gross receipts, as the case may be,
in the business or profession are likely to exceed ` 10,00,000
during the previous year;

III. Showing lower income as compared to income computed on

presumptive basis under section 44AE (or section 44BB or section
44BBB) 12: Where profits and gains from the business are calculated
on a presumptive basis under section 44AE (or section 44BB or section
44BBB) and the assessee has claimed that his income is lower than the
profits or gains so deemed to be the profits and gains of his business.
IV. Where the provisions of section 44AD(4) are applicable in his case
and his income exceeds the basic exemption limit in any previous
year: In cases, where an assessee not eligible to claim the benefit of
the provisions of section 44AD(1) for five assessment years
subsequent to the assessment year relevant to the previous year in
which the profit has not been declared in accordance with the
provisions of 44AD(1) and his income exceeds the basic exemption
limit during the previous year.
(3) Prescribed books of accounts & other documents: The CBDT has been
authorised, having due regard to the nature of the business or profession
carried on by any class of persons, to prescribe by rules the books of
account and other documents including inventories, wherever necessary,
to be kept and maintained by the taxpayer, the particulars to be contained
therein and the form and manner in which and the place at which they
must be kept and maintained.
Rules pertaining to maintenance of books of accounts & other
documents:
Rule 6F of the Income-tax Rules contains the details relating to the books of
account and other documents to be maintained by certain professionals
under section 44AA(1).
Prescribed class of persons: As per Rule 6F, every person carrying on legal,
medical, engineering, or architectural profession or the profession of ac-
countancy or technical consultancy or interior decoration or authorised
representative or film artist shall keep and maintain the books of account
and other documents specified in rule 6F(2) in the following cases :
– if his gross receipts exceed ` 1,50,000 in all the 3 years immediately
preceding the previous year; or
Section 44BB, 44BBB will be discussed at Final level.

12

– if, where the profession has been newly set up in the previous year, his
gross receipts are likely to exceed ` 1,50,000 in that year.
Note: Students may note that professionals whose gross receipts are less than
the specified limits given above are also required to maintain books of
account but these have not been specified in the Rule.
In other words, they are required to maintain such books of account and other
documents as may enable the Assessing Officer to compute the total income
in accordance with the provisions of this Act.
Prescribed books of accounts and other documents [Sub-rule (2) of

Rule 6F]: The following books of account and other documents are required
to be maintained.
(i) a cash book;
(ii) a journal, if accounts are maintained on mercantile basis ;
(iii) a ledger;
(iv) Carbon copies of bills and receipts issued by the person whether
machine numbered or otherwise serially numbered, in relation to sums
exceeding ` 25;
(v) Original bills and receipts issued to the person in respect of
expenditure incurred by the person, or where such bills and receipts
are not issued, payment vouchers prepared and signed by the person,
provided the amount does not exceed ` 50. Where the cash book
contains adequate particulars, the preparation and signing of payment
vouchers is not required.
In case of a person carrying on medical profession, he will be required to
maintain the following in addition to the list given above:
(i) a daily case register in Form 3C.
(ii) an inventory under broad heads of the stock of drugs, medicines and
other consumable accessories as on the first and last day of the
previous year used for his profession.
Place at which books to be kept and maintained: The books and
documents shall be kept and maintained at the place where the person is
carrying on the profession, or where there is more than one place, at the
principal place of his profession. However, if he maintains separate set of

books for each place of his profession, such books and documents may be
kept and maintained at the respective places.
ILLUSTRATION 18
Vinod is a person carrying on profession as film artist. His gross receipts from
profession are as under:
`
Financial year 2016-17 1,15,000
What is his obligation regarding maintenance of books of accounts for
Assessment Year 2020-21 under section 44AA of Income-tax Act, 1961?
SOLUTION
Section 44AA(1) requires every person carrying on any profession, notified
by the Board in the Official Gazette (in addition to the professions already
specified therein), to maintain such books of account and other documents
as may enable the Assessing Officer to compute his total income in
accordance with the provisions of the Income-tax Act, 1961.
As per Rule 6F, a person carrying on a notified profession shall be required
to maintain specified books of accounts:
(i) if his gross receipts in all the three years immediately preceding the
relevant previous year has exceeded ` 1,50,000; or
(ii) if it is a new profession which is setup in the relevant previous year, it
is likely to exceed ` 1,50,000 in that previous year.
In the present case, Vinod is a person carrying on profession as film artist,
which is a notified profession. Since his gross receipts have not exceeded
` 1,50,000 in financial year 2016-17, the requirement under section 44AA to
compulsorily maintain the prescribed books of account is not applicable to
him.
Mr. Vinod, however, required to maintain such books of accounts as would
enable the Assessing Officer to compute his total income.
(4) Period for which the books of account and other documents are
required to be kept and maintained: The Central Board of Direct Taxes
has also been empowered to prescribe, by rules, the period for which the

books of account and other documents are required to be kept and

maintained by the taxpayer.
Prescribed period: The above books of account and documents shall be
kept and maintained for a minimum of 6 years from the end of the relevant
assessment year.
3.14 AUDIT OF ACCOUNTS OF CERTAIN

PERSONS CARRYING ON BUSINESS OR
PROFESSION [SECTION 44AB]
(i) Who required to get the accounts audited? It is obligatory in the
following cases for a person carrying on business or profession to get his
accounts audited before the “specified date” by a Chartered Accountant:
(1) if the total sales, turnover or gross receipts in business exceed ` 100
lakh in any previous year; or
(2) if the gross receipts in profession exceed ` 50 lakh in any previous
year; or
(3) where the assessee is covered under section 44AE, (44BB or
44BBB) 13and claims that the profits and gains from business are lower
than the profits and gains computed on a presumptive basis. In such
cases, the normal monetary limits for tax audit in respect of business
would not apply.
(4) where the assessee is carrying on a notified profession under section
44AA, and he claims that the profits and gains from such profession are
lower than the profits and gains computed on a presumptive basis under
section 44ADA and his income exceeds the basic exemption limit.
(5) where the assessee is covered under section 44AD(4) and his income
exceeds the basic exemption limit.
(ii) Audit Report: The person mentioned above would have to furnish by the
specified date a report of the audit in the prescribed forms. For this
purpose, the Board has prescribed under Rule 6G, Forms 3CA/ 3CB/ 3CD
containing forms of audit report and particulars to be furnished therewith.
13
Section 44BB, 44BBB containing presumption taxation provision of non-residents/
foreign companies will be discussed at Final level.

(iii) Accounts audited under other statutes are considered: In cases where
the accounts of a person are required to be audited by or under any other
law before the specified date, it will be sufficient if the person gets his
accounts audited under such other law before the specified date and also
furnish by the said date the report of audit in the prescribed form in
addition to the report of audit required under such other law.
Thus, for example, the provision regarding compulsory audit does not imply
a second or separate audit of accounts of companies whose accounts are
already required to be audited under the Companies Act, 2013. The
provision only requires that companies should get their accounts audited
under the Companies Act, 2013 before the specified date and in addition to
the report required to be given by the auditor under the Companies Act,
2013 furnish a report for tax purposes in the form to be prescribed in this
behalf by the CBDT.
(iv) Non-applicability:
(1) The requirement of audit under section 44AB does not apply to a
person who declares profits and gains on a presumptive basis under
section 44AD and his total sales, turnover or gross receipts does not
exceed ` 2 crore.
(2) Further, the requirement of audit under section 44AB does not apply
to a person who derives income of the nature referred to in (sections
44B and 44BBA) 14.
(v) Specified date: The expression “specified date” in relation to the accounts
of the previous year or years relevant to any assessment year means the due
date for furnishing the return of income under section 139(1). For due date
of furnishing return of income, refer section 139(1) in Chapter 10 “Provisions
for filing return of income and self-assessment”.
(vi) Penal provision: It may be noted that under section 271B 15, penal action
can be taken for not getting the accounts audited and for not filing the
audit report by the specified date.
Note - The Institute has brought out a Guidance Note dealing with the various aspects
of tax audit under section 44AB. Students are advised to read the same carefully.
14Section 44B & 44BBA will be discussed at Final level.

15Section 271B will be discussed at Final level.

3.15 SPECIAL PROVISIONS FOR COMPUTING

PROFITS AND GAINS OF BUSINESS ON
PRESUMPTIVE BASIS [SECTION 44AD]
(i) Eligible business: The presumptive taxation scheme under section 44AD
covers all small businesses with total turnover/gross receipts of up to ` 200
lakh (except the business of plying, hiring and leasing goods carriages
covered under section 44AE).
(ii) Eligible assessee: Resident individuals, HUFs and partnership firms (but not
LLPs) and who has not claimed deduction under any of the section 10AA or
deduction under any provisions of Chapter VIA under the heading “C -
Deductions in respect of certain incomes” in the relevant assessment year
would be covered under this scheme.
(iii) Presumptive rate of tax: The presumptive rate of tax would be 8% of total
turnover or gross receipts.
However, the presumptive rate of 6% of total turnover or gross receipts will
be applicable in respect of amount which is received
• by an account payee cheque or
• by an account payee bank draft or
• by use of electronic clearing system
- through a bank account
- or through such other prescribed electronic modes
during the previous year or before the due date of filing of return under
section 139(1) in respect of that previous year.
However, the assessee can declare in his return of income, an amount
higher than the presumptive income so calculated, claimed to have been
actually earned by him.
(iv) No further deduction would be allowed: All deductions allowable under
sections 30 to 38 shall be deemed to have been allowed in full and no
further deduction shall be allowed.
(v) Written down value of the asset: The WDV of any asset of such business
shall be deemed to have been calculated as if the assessee had claimed and

had been actually allowed the deduction in respect of depreciation for each
of the relevant assessment years.
(vi) Relief from maintenance of books of accounts and audit: The intention
of widening the scope of this scheme is to reduce the compliance and
administrative burden on small businessmen and relieve them from the
requirement of maintaining books of account. Such assessees opting for
the presumptive scheme are not required to maintain books of account
under section 44AA or get them audited under section 44AB.
(vii) Higher threshold for non-audit of accounts for assessees opting for
presumptive taxation under section 44AD: Section 44AB makes it
obligatory for every person carrying on business to get his accounts of any
previous year audited if his total sales, turnover or gross receipts exceed ` 1
crore.
However, if an eligible person opts for presumptive taxation scheme as per
section 44AD(1), he shall not be required to get his accounts audited if the
total turnover or gross receipts of the relevant previous year does not
exceed ` 2 crore.
(viii) Advance tax: Further, since the threshold limit of presumptive taxation
scheme has been enhanced to ` 2 crore, the eligible assessee is now
required to pay advance tax by 15th March of the financial year.
(ix) Persons not eligible for presumptive taxation scheme: The following
persons are specifically excluded from the applicability of the presumptive
provisions of section 44AD -
(a) a person carrying on profession as referred to in section 44AA(1) i.e.,
legal, medical, engineering or architectural profession or the
profession of accountancy or technical consultancy or interior
decoration or any other profession as is notified by the Board (namely,
authorized representatives, film artists, company secretaries and
profession of information technology have been notified by the Board
for this purpose);
(b) a person earning income in the nature of commission or brokerage; or
(c) a person carrying on any agency business.
(x) Where an eligible assessee declares profit for any previous year in
accordance with the provisions of this section and he declares profit for any
of the five consecutive assessment years relevant to the previous year

succeeding such previous year not in accordance with the provisions of sub-
section (1), he shall not be eligible to claim the benefit of the provisions of
this section for five assessment years subsequent to the assessment year
relevant to the previous year in which the profit has not been declared in
accordance with the provisions of sub-section (1). This is provided in sub-
section (4).
Example:
Let us consider the following particulars relating to a resident
individual, Mr. A, being an eligible assessee whose gross receipts do not
exceed ` 2 crore in any of the assessment years between A.Y.2020-21 to
A.Y.2022-23 -
Particulars A.Y.2020-21 A.Y.2021-22 A.Y.2022-23
Gross receipts (`) 1,80,00,000 1,90,00,000 2,00,00,000
Income offered for taxation 14,40,000 15,20,000 10,00,000
(`)
% of gross receipts 8% 8% 5%
Offered income as per Yes Yes No
presumptive taxation
scheme u/s 44AD
In the above case, Mr. A, an eligible assessee, opts for presumptive taxation
under section 44AD for A.Y.2020-21 and A.Y.2021-22 and offers income of
` 14.40 lakh and ` 15.20 lakh on gross receipts of ` 1.80 crore and ` 1.90
crore, respectively.
However, for A.Y.2022-23, he offers income of only ` 10 lakh on turnover of
` 2 crore, which amounts to 5% of his gross receipts. He maintains books of
account under section 44AA and gets the same audited under section 44AB.
Since he has not offered income in accordance with the provisions of section
44AD(1) for five consecutive assessment years, after A.Y. 2020-21, he will not
be eligible to claim the benefit of section 44AD for next five assessment years
succeeding A.Y.2022-23 i.e., from A.Y.2023-24 to 2027-28.
(xi) An eligible assessee to whom the provisions of sub-section (4) are
applicable and whose total income exceeds the basic exemption limit has to
maintain books of account under section 44AA and get them audited and

furnish a report of such audit under section 44AB. This is provided in section
44AD(5).
ILLUSTRATION 19
Mr. Praveen engaged in retail trade, reports a turnover of ` 1,98,50,000 for the
financial year 2019-20. His income from the said business as per books of account
is ` 13,20,000 computed as per the provisions of Chapter IV-D “Profits and gains
from business or Profession” of the Income-tax Act, 1961. Retail trade is the only
source of income for Mr. Praveen. A.Y. 2019-20 was the first year for which he
declared his business income in accordance with the provisions of presumptive
taxation under section 44AD.
(i) Is Mr. Praveen also eligible to opt for presumptive determination of his
income chargeable to tax for the assessment year 2020-21?
(ii) If so, determine his income from retail trade as per the applicable
presumptive provision assuming that whole of the turnover represents cash
receipts.
(iii) In case Mr. Praveen does not opt for presumptive taxation of income from
retail trade, what are his obligations under the Income-tax Act, 1961?
(iii) What is the due date for filing his return of income under both the options?
SOLUTION
(i) Yes. Since his total turnover for the F.Y.2019-20 is below ` 200 lakhs, he is
eligible to opt for presumptive taxation scheme under section 44AD in
respect of his retail trade business.
(ii) His income from retail trade, applying the presumptive tax provisions under
section 44AD, would be ` 15,88,000, being 8% of ` 1,98,50,000.
(iii) Mr. Praveen had declared profit for the previous year 2018-19 in accordance
with the presumptive provisions and if he does not opt for presumptive
provisions for any of the five consecutive assessment years i.e., A.Y. 2020-21
to A.Y. 2024-25, he would not be eligible to claim the benefit of
presumptive taxation for five assessment years subsequent to the
assessment year relevant to the previous year in which the profit has not
been declared in accordance the presumptive provisions i.e. if he does not
opt for presumptive taxation in say P.Y. 2019-20, then he would not be
eligible to claim the benefit of presumptive taxation for A.Y. 2021-22 to A.Y.
2025-26.

Consequently, Mr. Praveen is required to maintain the books of accounts

and get them audited under section 44AB, since his income exceeds the
basic exemption limit.
(iv) In case he opts for the presumptive taxation scheme under section 44AD,
the due date would be 31st July, 2020.
In case he does not opt for presumptive taxation scheme, he is required to
get his books of account audited, in which case the due date for filing of
return of income would be 30th September, 2020.
3.16 PRESUMPTIVE TAXATION SCHEME FOR

ASSESSEES ENGAGED IN ELIGIBLE
PROFESSION [SECTION 44ADA]
(i) Eligible Profession: The presumptive taxation scheme under section 44ADA
for estimating the income of an assessee:
• who is engaged in any profession referred to in section 44AA(1) such
as legal, medical, engineering or architectural profession or the
profession of accountancy or technical consultancy or interior
decoration or any other profession as is notified by the Board in the
Official Gazette; and
• whose total gross receipts does not exceed fifty lakh rupees in a
previous year,
(ii) Presumptive rate of tax: Presumptive rate of tax would be a sum equal to
50% of the total gross receipts, or, as the case may be, a sum higher than
the aforesaid sum claimed to have been earned by the assessee.
(iii) Eligible Assessee
Eligible Assessees
engaged in notified
Total gross receipts ≤
Resident assessee profession u/s
` 50 lakhs
44AA(1)

(iv) No further deduction would be allowed: Under the scheme, the assessee
will be deemed to have been allowed the deductions under section 30 to
38. Accordingly, no further deduction under those sections shall be allowed.
(v) Written down value of the asset: The written down value of any asset
used for the purpose of the profession of the assessee will be deemed to
have been calculated as if the assessee had claimed and had actually been
allowed the deduction in respect of depreciation for the relevant
assessment years.
(vi) Relief from maintenance of books of accounts and audit: The eligible
assessee opting for presumptive taxation scheme will not be required to
maintain books of account under section 44AA(1) and get the accounts
audited under section 44AB in respect of such income
(vii) Option to claim lower profits: An assessee mayclaim that his profits and
gains from the aforesaid profession are lower than the profits and gains
deemed to be his income under section 44ADA(1); and if such total income
exceeds the maximum amount which is not chargeable to income-tax, he
has to maintain books of account under section 44AA and get them audited
and furnish a report of such audit under section 44AB.
(viii) Advance Tax: Further, since the presumptive taxation regime has been
extended for professionals also, the eligible assessee is now required to pay
advance tax by 15th March of the financial year.
3.17 SPECIAL PROVISIONS FOR COMPUTING

PROFITS AND GAINS OF BUSINESS OF
PLYING, HIRING OR LEASING GOODS
CARRIAGES [SECTION 44AE]
(i) Eligible business: This section provides for estimating business income of
an owner of goods carriages from the plying, hire or leasing of such goods
carriages;
(ii) Eligible assessee: The scheme applies to persons owning not more than 10
goods vehicles at any time during the previous year;
(iii) Presumptive Income: The estimated income from each goods vehicle,
being a heavy goods vehicle or other than heavy goods vehicle would be

Goods Carriage Presumptive Income

Heavy goods ` 1,000 per ton of gross vehicle
vehicle weight or unladen weight, as the
during which such
case may be, for every month or
vehicle is owned
part of a month
by the assessee for
Other than heavy ` 7,500 for every month or part the previous year.
goods vehicle of a month
The assessee can also declare a higher amount in his return of income. In
such case, the latter will be considered to be his income;
(iv) All other deduction deemed to be allowed: The assessee will be deemed to
have been allowed the deductions under sections 30 to 38. Accordingly, the
written down value of any asset used for the purpose of the business of the
assessee will be deemed to have been calculated as if the assessee had claimed
and had actually been allowed the deduction in respect of depreciation for
each of the relevant assessment years.
(v) Salary and interest to partners is allowed: Where the assesse is a firm, the
salary and interest paid to its partner are allowed to be deducted subject to the
conditions and limit specified under section 40(b).
(vi) Not requirement to maintain books of accounts and get the accounts
audited: The assessee joining the scheme will not be required to maintain
books of account under section 44AA and get the accounts audited under
section 44AB in respect of such income.
(vii) Option to claim lower profits: An assessee may claim lower profits and
gains than the deemed profits and gains specified in sub-section (1) subject
to the condition that the books of account and other documents are kept
and maintained as required under section 44AA(2) and the assessee gets his
accounts audited and furnishes a report of such audit as required under
section 44AB.
(viii) Meaning of certain terms
S.No Term Meaning

(1) Heavy goods any goods carriage, the gross vehicle weight of
vehicle which exceeds 12,000 kilograms.

(2) Gross vehicle total weight of the vehicle and load certified and
weight registered by the registering authority as
permissible for that vehicle.
(3) Unladen the weight of a vehicle or trailer including all
weight equipment ordinarily used with the vehicle or trailer
when working but excluding the weight of driver or
attendant and where alternative parts or bodies are
used the unladen weight of the vehicle means the
weight of the vehicle with the heaviest such
alternative body or part
ILLUSTRATION 20
Mr. X commenced the business of operating goods vehicles on 1.4.2019. He
purchased the following vehicles during the P.Y.2019-20. Compute his income
under section 44AE for A.Y.2020-21.
Gross Vehicle Weight Number Date of purchase

(in kilograms)
(1) 7,000 2 10.04.2019
(2) 6,500 1 15.03.2020
(3) 10,000 3 16.07.2019
(4) 11,000 1 02.01.2020
(5) 15,000 2 29.08.2019
(6) 15,000 1 23.02.2020
Would your answer change if the goods vehicles purchased in April, 2019 were put
to use only in July, 2019?
SOLUTION
Since Mr. X does not own more than 10 vehicles at any time during the previous
year 2019-20, he is eligible to opt for presumptive taxation scheme under section
44AE. ` 1,000 per ton of gross vehicle weight or unladen weight per month or
part of the month for each heavy goods vehicle and ` 7,500 per month or part of
month for each goods carriage other than heavy goods vehicle, owned by him
would be deemed as his profits and gains from such goods carriage.
Heavy goods vehicle means any goods carriage, the gross vehicle weight of which
exceeds 12,000 kg.

(1) (2) (3) (4)

Number Date of No. of months for No. of months × No. of
of purchase which vehicle is vehicles
Vehicles owned [(1) × (3)]
For Heavy goods vehicle
2 29.08.2019 8 16
1 23.02.2020 2 2
18
For goods vehicle other than heavy goods vehicle
2 10.4.2019 12 24
1 15.3.2020 1 1
3 16.7.2019 9 27
1 02.1.2020 3 3
55
The presumptive income of Mr. X under section 44AE for A.Y.2020-21 would be -
` 6,82,500, i.e., 55 × ` 7,500, being for other than heavy goods vehicle + 18 x
` 1,000 x 15 ton being for heavy goods vehicle .
The answer would remain the same even if the two vehicles purchased in April,
2019 were put to use only in July, 2019, since the presumptive income has to be
calculated per month or part of the month for which the vehicle is owned by Mr. X.
Special provisions for computing profits and gains on presumptive basis : A
summary
Particulars Section 44AD Section 44ADA Section 44AE
(1) Eligible Resident individual, Resident An assessee
Assessee HUF or Partnership assessee owning not
firm (but not LLP) engaged in any more than 10
engaged in eligible profession goods
business and who has specified u/s carriages at
not claimed 4AA(1),namely, any time
deduction under legal, medical, during the P.Y..
section 10AA or engineering,
Chapter VIA under “C architectural
– Deductions in profession or
respect of certain profession of

incomes” accountancy or
technical
Non-applicability of
consultancy or
section 44AD in
interior
respect of the
decoration or
following persons:
notified
- A person carrying profession
on profession (authorized
specified u/s representative,
44AA(1); film artist,
- A person earning company
income in the secretary,
nature of profession of
commission or information
brokerage; technology)
- A person carrying
on any agency
business.
(2) Eligible Any business, other Any profession Business of
business/ than business referred specified under plying, hiring
profession to in section 44AE, section or leasing
whose total turnover/ 44AA(1), whose goods
gross receipts in the total gross carriages
P.Y. ≤ ` 200 lakhs receipts ≤ ` 50
lakhs in the
relevant P.Y.
(3) Presumptive 8% of total 50% of total For each heavy
income turnover/sales/gross gross receipts goods vehicle
receipts or a sum of such ` 1,000 per
higher than the profession or a ton of gross
aforesaid sum sum higher vehicle weight
claimed to have been than the or unladen
earned by the aforesaid sum weight, as the
assessee. claimed to have case may be,
been earned by for every
6% of total
the assessee. month or part
turnover/gross
of a month

receipts in respect of and for other

the amount of total than heavy
turnover/sales/gross goods vehicle,
receipts received by ` 7,500 per
A/c payee cheque/ month or part
bank draft/ECS of a month
through a bank during which
account or through such vehicle is
such other owned by the
prescribed electronic assessee or an
modes during the P.Y. amount
or before due date of claimed to
filing of return u/s have been
139(1) in respect of actually
that P.Y. earned from
such vehicle,
whichever is
higher.
(4) Non- Deductions allowable under sections 30 to 38 shall be
allowability deemed to have been given full effect to and no further
of deduction shall be allowed
deductions
Even in case of a firm, Even in case of In case of a
while
salary and interest a firm, salary firm, salary and
computing
paid to partners is not and interest interest paid to
presumptive
deductible. paid to partners partners is
income
is not deductible
deductible. subject to the
conditions and
limits specified
in section 40(b)
(5) Written WDV of any asset of an eligible business/profession shall
down value be deemed to have been calculated as if the eligible
of asset assessee had claimed and had been actually allowed
depreciation for each of the relevant assessment years
(6) Requirement After declaring profits If the assessee If the assessee
of on presumptive basis claims his claims his
maintenance u/s 44AD, say, for profits to be profits to be

of books of A.Y.2020-21, non- lower than the lower than the

account u/s declaration of profits profits profits
44AA and on presumptive basis computed by computed by
audit u/s for any of the 5 applying the applying the
44AB successive A.Y.s presumptive presumptive
thereafter (i.e., from rate, he has to rate, he has to
A.Y.2021-22 to maintain books maintain books
A.Y.2025-26), say, for of account and of account u/s
A.Y. 2022-23, would other 44AA(2) and
disentitle the assessee documents u/s get his
from claiming profits 44AA(1) and accounts
on presumptive basis get his audited u/s
for five successive AYs accounts 44AB.
subsequent to the AY audited u/s
relevant to the PY of 44AB, if his
such non-declaration total income >
(i.e., from A.Y.2023-24 basic
to A.Y.2027-28). In exemption limit
such a case, the for that year.
assessee would have
to maintain books of
account and other
documents u/s
44AA(2) and get his
accounts audited u/s
44AB, if his total
income exceeds the
basic exemption limit
in those years.
Note - If a person is not covered under presumptive tax provisions mentioned
above, audit of books of account u/s 44AB is mandatory, if, in a case where he
carries on business, his total sales, turnover or gross receipts in business > ` 1
crore in that P.Y. and in a case where he carries on profession, his gross
receipts in profession > ` 50 lakh in that P.Y.

3.18 COMPUTATION OF BUSINESS INCOME IN

CASES WHERE INCOME IS PARTLY
AGRICULTURAL AND PARTLY BUSINESS IN
NATURE
(i) Income from the manufacture of rubber [Rule 7A]
(1) Income derived from the sale of centrifuged latex or cenex or latex based
crepes or brown crepes or technically specified block rubbers manufactured
or processed from field latex or coagulum obtained from rubber plants
grown by the seller in India shall be computed as if it were income derived
from business, and 35% of such income shall be deemed to be income liable
to tax.
(2) In computing such income, an allowance shall be made in respect of the
cost of planting rubber plants in replacement of plants that have died or
become permanently useless in an area already planted, if such area has not
previously been abandoned, and for the purpose of determining such cost,
no deduction shall be made in respect of the amount of any subsidy which,
under the provisions of clause (31) of section 10, is not includible in the
total income.
(ii) Income from the manufacture of coffee [Rule 7B]
(1) Income derived from the sale of coffee grown and cured by the seller in
India shall be computed as if it were income derived from business, and
25% of such income shall be deemed to be income liable to tax.
(2) Income derived from the sale of coffee grown cured, roasted and grounded
by the seller in India, with or without mixing of chicory or other flavouring
ingredients, shall be computed as if it were income derived from business,
and 40% of such income shall be deemed to be income liable to tax.
cost of planting coffee plants in such replacement of plants that have died
or become permanently useless in an area already planted, if such area has
not previously been abandoned, and for the purpose of determining such
cost, no deduction shall be made in respect of the amount of any subsidy
which, under the provisions of clause (31) of section 10, is not includible in
the total income.

(iii) Income from the manufacture of tea [Rule 8]

(1) Income derived from the sale of tea grown and manufactured by the seller
in India shall be computed as if it were income derived from business, and
40% of such income shall be deemed to be income liable to tax.
cost of planting bushes in replacement of bushes that have died or become
permanently useless in an area already planted, if such area has not
previously been abandoned, and for the purpose of determining such cost,
no deduction shall be made in respect of the amount of any subsidy which,
under the provision of section 10(30), is not includible in the total income.
Taxability in case of composite income: A Summary
Rule Nature of composite income Business Agricultural

income Income
(Taxable) (Exempt)
7A Income from the manufacture of rubber 35% 65%
7B Income from the manufacture of coffee
- sale of coffee grown and cured 25% 75%
- sale of coffee grown, cured, roasted 40% 60%
and grounded
8 Income from the manufacture of tea 40% 60%
ILLUSTRATION 21
Miss Vivitha, a resident and ordinarily resident in India, has derived the following
income from various operations (relating to plantations and estates owned by her)
during the year ended 31-3-2020:
S. Particulars `
No.
(i) Income from sale of centrifuged latex processed from rubber 3,00,000
plants grown in Darjeeling.
(ii) Income from sale of coffee grown and cured in Yercaud, Tamil 1,00,000
Nadu.
(iii) Income from sale of coffee grown, cured, roasted and 2,50,000
grounded, in Colombo. Sale consideration was received at
Chennai.

(iv) Income from sale of tea grown and manufactured in Shimla. 4,00,000
(v) Income from sapling and seedling grown in a nursery at 80,000
Cochin. Basic operations were not carried out by her on land.
You are required to compute the business income and agricultural income of Miss
Vivitha for the assessment year 2020-21.
SOLUTION
Computation of business income and agricultural income of Ms. Vivitha for
the A.Y.2020-21
Sr. Source of income Gross (`) Business income Agricultur

No. al income
% ` `
(i) Sale of centrifuged latex 3,00,000 35% 1,05,000 1,95,000
from rubber plants
grown in India.
(ii) Sale of coffee grown 1,00,000 25% 25,000 75,000
and cured in India.
(iii) Sale of coffee grown, 2,50,000 100% 2,50,000 -
cured, roasted and
grounded outside India.
(See Note 1 below)
(iv) Sale of tea grown and 4,00,000 40% 1,60,000 2,40,000
manufactured in India
(v) Saplings and seedlings
grown in nursery in 80,000 Nil 80,000
India (See Note 2
below)
Total 5,40,000 5,90,000
Notes:
1. Where income is derived from sale of coffee grown, cured, roasted and
grounded by the seller in India, 40% of such income is taken as business
income and the balance as agricultural income. However, in this question,
these operations are done in Colombo, Sri lanka. Hence, there is no
question of such apportionment and the whole income is taxable as

business income. Receipt of sale proceeds in India does not make this
agricultural income. In the case of an assessee, being a resident and
ordinarily resident, the income arising outside India is also chargeable to
tax.
2. Explanation 3 to section 2(1A) provides that the income derived from
saplings or seedlings grown in a nursery would be deemed to be
agricultural income whether or not the basic operations were carried out on
land.

EXERCISE
Question 1
Mr. Venus., engaged in manufacture of pesticides, furnishes the following
particulars relating to its manufacturing unit at Chennai, for the year ending 31-3-
2020:
(` in lacs)
Opening WDV of Plant and Machinery 20
New machinery purchased on 1-9-2019 10
New machinery purchased on 1-12-2019 8
Computer purchased on 3-1-2020 4
Additional information:
• All assets were purchased by A/c payee cheque.
• All assets were put to use immediately.
• New machinery purchased on 1-12-2019 and computer have been installed
in the office.
• During the year ended 31-3-2019, a new machinery had been purchased on
31-10-2018, for ` 10 lacs. Additional depreciation, besides normal
depreciation, had been claimed thereon.
• Depreciation rate for machinery may be taken as 15%.
Compute the depreciation available to the assessee as per the provisions
of the Income-tax Act, 1961 and the WDV of different blocks of assets as on
31-3-2020.
Answer
Computation of written down value of block of assets of Venus Ltd. as
on 31.3.2020
Particulars Plant & Computer

Machinery (` in lacs)
(` in lacs)
Opening written down value (as on 01.04.2019) 20 Nil
Add: Actual cost of new assets acquired during the
year
New machinery purchased on 1.9.2019 10 -

New machinery purchased on 1.12.2019 8 -

Computer purchased on 3.1.2020 - 4
38 4
Less: Assets sold/discarded/destroyed during the year Nil Nil
Closing Written Down Value (as on 31.03.2020) 38 4
Computation of Depreciation for A.Y. 2020-21
Plant & Computer

Particulars Machinery (` in lacs)
(` in lacs)
I. Assets put to use for more than 180 days,
eligible for 100% depreciation calculated
applying the eligible rate of normal
depreciation and additional depreciation
Normal Depreciation
- Opening WDV of plant and machinery (` 20 3.00 -
lacs x 15%)
- New Machinery purchased on 1.9.2019 (` 10 1.50 -
lacs x 15%)
(A) 4.50 -
Additional Depreciation
New Machinery purchased on 1.9.2019 (` 10 lakhs 2.00 -
x 20%)
Balance additional depreciation in respect of new
machinery purchased on 31.10.2018 and put to
use for less than 180 days in the P.Y. 2018-19 1.00
(` 10 lakhs x 20% x 50%)
(B) 3.00
II. Assets put to use for less than 180 days,
eligible for 50% depreciation calculated
applying the eligible rate of normal
depreciation and additional depreciation, if
any
Normal Depreciation
New machinery purchased on 1.12.2019 [` 8 lacs 0.60 -

x 7.5% (i.e., 50% of 15%)]

Computer purchased on 3.1.2020 [` 4 lacs x 20%
(50% of 40%)] - 0.80
(C) 0.60 0.80
Total Depreciation (A+B+C) 8.10 0.80
Notes:
any new machinery or plant acquired and installed after 31.3.2005, by an
of any article or thing, at the rate of 20% of the actual cost of such
machinery or plant.
alia,–
(i) any office appliances or road transport vehicles;
(ii) any machinery or plant installed in, inter alia, office premises.
In view of the above provisions, additional depreciation cannot be claimed
in respect of -
(i) Machinery purchased on 1.12.2019, installed in office and
(ii) Computer purchased on 3.1.2020, installed in office.
(2) As per third proviso to section 32(1)(ii), balance 50% of additional
depreciation on new plant or machinery acquired and put to use for less
than 180 days in the year of acquisition which has not been allowed in that
year, shall be allowed in the immediately succeeding previous year.
Hence, in this case, the balance 50% additional depreciation (i.e., ` 1 lakhs,
being 10% of ` 10 lakhs) in respect of new machinery which had been
purchased during the previous year 2018-19 and put to use for less than
180 days in that year can be claimed in P.Y. 2019-20 being immediately
succeeding previous year.
Question 2
Mr. Abhimanyu is engaged in the business of generation and distribution of electric
power. He always opts to claim depreciation on written down value for income-tax

purposes. From the following details, compute the depreciation allowable as per the
provisions of the Income-tax Act, 1961 for the assessment year 2020-21:
(` in lacs)
(i) Opening WDV of block (15% rate) 42
(ii) New machinery purchased on 12-10-2019 10
(iii) Machinery imported from Colombo on 12-4-2019. 9
This machine had been used only in Colombo earlier and
the assessee is the first user in India.
(iv) New computer installed in generation wing unit on 15-7-2019 2
All assets were purchased by A/c payee cheque.
Answer
Computation of depreciation under section 32 for A.Y.2020-21
Particulars ` `
Normal Depreciation
Depreciation@15% on ` 51,00,000, being machinery 7,65,000
put to use for more than 180 days [Opening WDV of
` 42,00,000 + Purchase cost of imported machinery of
` 9,00,000]
Depreciation@7.5% on ` 10,00,000, being new
machinery put to use for less than 180 days 75,000
8,40,000
Depreciation@40% on computers purchased ` 2,00,000 80,000 9,20,000
Additional Depreciation (Refer Note below)

Additional Depreciation@10% of ` 10,00,000 [being 1,00,000
actual cost of new machinery purchased on 12-10-
2019]
Additional Depreciation@20% on new computer
installed in generation wing of the unit [20% of 40,000 1,40,000
` 2,00,000]
Depreciation on Plant and Machinery 10,60,000

Note:-
The benefit of additional depreciation is available to new plant and machinery
acquired and installed in power sector undertakings. Accordingly, additional
depreciation is allowable in the case of any new machinery or plant acquired and
installed by an assessee engaged, inter alia, in the business of generation,
transmission or distribution of power, at the rate of 20% of the actual cost of such
machinery or plant.
Therefore, new computer installed in generation wing units eligible for additional
depreciation@20%.
Since the new machinery was purchased only on 12.10.2019, it was put to use for less
than 180 days during the previous year, and hence, only 10% (i.e., 50% of 20%) is
allowable as additional depreciation in the A.Y.2020-21. The balance additional
depreciation would be allowed in the next year.
However, additional depreciation shall not be allowed in respect of, inter alia, any
machinery or plant which, before its installation by the assessee, was used either
within or outside India by any other person. Therefore, additional depreciation is not
allowable in respect of imported machinery, since it was used in Colombo, before its
installation by the assessee.
Question 3
Examine with reasons, the allowability of the following expenses incurred by
Mr. Manav, a wholesale dealer of commodities, under the Income-tax Act, 1961
while computing profit and gains from business or profession for the Assessment
Year 2020-21.
(i) Construction of school building in compliance with CSR activities amounting
to ` 5,60,000.
(ii) Purchase of building for the purpose of specified business of setting up and
operating a warehousing facility for storage of food grains amounting to
` 4,50,000.
(iii) Interest on loan paid to Mr. X (a resident) ` 50,000 on which tax has not been
deducted. The sales for the previous year 2018-19 was ` 202 lakhs. Mr. X has
not paid the tax, if any, on such interest.
(iv) Commodities transaction tax paid ` 20,000 on sale of bullion.

Answer
Allowability of the expenses incurred by Mr. Manav, a wholesale dealer in
commodities, while computing profits and gains from business or profession
(i) Construction of school building in compliance with CSR activities
Under section 37(1), only expenditure not being in the nature of capital
expenditure or personal expense and not covered under sections 30 to 36,
and incurred wholly and exclusively for the purposes of the business is
allowed as a deduction while computing business income.
However, any expenditure incurred by an assessee on the activities relating
to corporate social responsibility referred to in section 135 of the
Companies Act, 2013 shall not be deemed to have been incurred for the
purpose of business and hence, shall not be allowed as deduction under
section 37.
Accordingly, the amount of ` 5,60,000 incurred by Mr. Manav, towards
construction of school building in compliance with CSR activities shall not
be allowed as deduction under section 37.
(ii) Purchase of building for setting up and operating a warehousing
facility for storage of food grains
Mr. Manav, would be eligible for investment-linked tax deduction under
section 35AD @100% in respect of amount of ` 4,50,000 invested in
purchase of building for setting up and operating a warehousing facility for
storage of food grains which commences operation on or after 1st April,
2009 (P.Y.2019-20, in this case).
Therefore, the deduction under section 35AD while computing business
income of such specified business would be ` 4,50,000.
(iii) Interest on loan paid to Mr. X (a resident) ` 50,000 on which tax has
not been deducted
As per section 194A, Mr. Manav, being an individual is required to deduct
tax at source on the amount of interest on loan paid to Mr. X, since his
turnover during the previous year 2018-19 exceeds the monetary limit of
` 100 lacs.
Therefore, ` 15,000, being 30% of ` 50,000, would be disallowed under
section 40(a)(ia) while computing the business income of Mr. Manav for

non-deduction of tax at source under section 194A on interest of ` 50,000

paid by it to Mr. X.
The balance ` 35,000 would be allowed as deduction under section 36(1)(iii),
assuming that the amount was borrowed for the purposes of business.
(iv) Commodities transaction tax of ` 20,000 paid on sale of bullion
Commodities transaction tax paid in respect of taxable commodities
transactions entered into in the course of business during the previous year
is allowable as deduction, provided the income arising from such taxable
commodities transactions is included in the income computed under the
head “Profits and gains of business or profession”.
Taking that income from this commodities transaction is included while
computing the business income of Mr. Manav, the commodity transaction
tax of ` 20,000 paid is allowable as deduction under section 36(1)(xvi).
Question 4
Examine with reasons, for the following sub-divisions, whether the following
statements are true or false having regard to the provisions of the Income-tax Act,
1961:
(i) For a dealer in shares and securities, securities transaction tax paid in a
recognized stock exchange is permissible business expenditure.
(ii) Where a person follows mercantile system of accounting, an expenditure of
` 25,000 has been allowed on accrual basis and in a later year, in respect of
the said expenditure, assessee makes the payment of ` 25,000 through a
cheque crossed as "& Co., ` 25,000 can be the profits and gains of business
under section 40A(3A) in the year of payment.
(iii) It is mandatory to provide for depreciation under section 32 of the Income-tax
Act, 1961, while computing income under the head “Profits and Gains from
Business and Profession”.
(iv) The mediclaim premium paid to GIC by Mr. Lomesh for his employees, by a
draft, on 27.12.2019 is a deductible expenditure under section 36.
(v) Under section 35DDA, amortization of expenditure incurred under eligible
Voluntary Retirement Scheme at the time of retirement alone, can be done.
(vi) An existing assessee engaged in trading activities, can claim additional
depreciation under section 32(1)(iia) in respect of new plant acquired and

installed in the trading concern, where the increase in value of such plant as
compared to the approved base year is more than 10%.
Answer
(i) True: Section 36(1)(xv) allows a deduction of the amount of securities
transaction tax paid by the assessee in respect of taxable securities
transactions entered into in the course of business during the previous year
as deduction from the business income of a dealer in shares and securities.
(ii) True: As per section 40A(3A), in the case of an assessee following mercantile
system of accounting, if an expenditure has been allowed as deduction in any
previous year on due basis, and payment exceeding ` 10,000 has been made
in the subsequent year otherwise than by an account payee cheque or an
account payee bank draft or use of ECS through a bank account or through
such other prescribed electronic modes, then the payment so made shall
be deemed to be the income of the subsequent year in which such payment
has been made.
(iii) True: According to the Explanation 5 to section 32(1), allowance of
depreciation is mandatory. Therefore, depreciation has to be provided
mandatorily while calculating income from business/ profession whether or
not the assessee has claimed the same while computing his total income.
(iv) True: Section 36(1)(ib) provides deduction in respect of premium paid by an
employer to keep in force an insurance on the health of his employees
under a scheme framed in this behalf by GIC or any other insurer. The
medical insurance premium can be paid by any mode other than cash, to be
eligible for deduction under section 36(1)(ib).
(v) False: Expenditure incurred in making payment to the employee in
connection with his voluntary retirement either in the year of retirement or
in any subsequent year, will be entitled to deduction in 5 equal annual
installments beginning from the year in which each payment is made to the
employee.
(vi) False: Additional depreciation can be claimed only in respect of eligible
plant and machinery acquired and installed by an assessee engaged in the
business of manufacture or production of any article or thing or in the
business of generation or transmission or distribution of power.

In this case, the assessee is engaged in trading activities and the new plant
has been acquired and installed in a trading concern. Hence, the assessee
will not be entitled to claim additional depreciation under section 32(1)(iia).
Question 5
Examine, with reasons, the allowability of the following expenses under the Income-
tax Act, 1961 while computing income from business or profession for the
Assessment Year 2020-21:
(i) Provision made on the basis of actuarial valuation for payment of gratuity
` 5,00,000. However, no payment on account of gratuity was made before
due date of filing return.
(ii) Purchase of oil seeds of ` 50,000 in cash from a farmer on a banking day.
(iii) Tax on non-monetary perquisite provided to an employee ` 20,000.
(iv) Payment of ` 50,000 by using credit card for fire insurance.
(v) Salary payment of ` 4,00,000 to Mr. X outside India by a company without
deduction of tax assuming Mr. X has not paid tax on such salary income.
(vi) Payment made in cash ` 30,000 to a transporter in a day for carriage of
goods
Answer
(i) Not allowable as deduction: As per section 40A(7), no deduction is
allowed in computing business income in respect of any provision made by
the assessee in his books of account for the payment of gratuity to his
employees except in the following two cases:
(1) where any provision is made for the purpose of payment of sum by
way of contribution towards an approved gratuity fund or;
(2) where any provision is made for the purpose of making any payment
on account of gratuity that has become payable during the previous
year.
Therefore, in the present case, the provision made on the basis of actuarial
valuation for payment of gratuity has to be disallowed under section 40A(7),
since, no payment has been actually made on account of gratuity.
Note: It is assumed that such provision is not for the purpose of
contribution towards an approved gratuity fund.

(ii) Allowable as deduction: As per Rule 6DD, in case the payment is made for
purchase of agricultural produce directly to the cultivator, grower or
producer of such agricultural produce, no disallowance under section 40A(3)
is attracted even though the cash payment for the expense exceeds
` 10,000.
Therefore, in the given case, disallowance under section 40A(3) is not
attracted since, cash payment for purchase of oil seeds is made directly to
the farmer.
(iii) Not allowable as deduction: Income-tax of ` 20,000 paid by the employer
in respect of non-monetary perquisites provided to its employees is exempt
in the hands of the employee under section 10(10CC).
As per section 40(a)(v), such income-tax paid by the employer is not
deductible while computing business income.
(iv) Allowable as deduction: Payment for fire insurance is allowable as
deduction under section 36(1). Since payment by credit card is covered
under Rule 6DD, which contains the exceptions to section 40A(3),
disallowance under section 40A(3) is not attracted in this case.
(v) Not allowable as deduction: Disallowance under section 40(a)(iii) is
attracted in respect of salary payment of ` 2,00,000 outside India by a
company without deduction of tax at source.
(vi) Allowable as deduction: The limit for attracting disallowance under section
40A(3) for payment otherwise than by way of account payee cheque or
account payee bank draft or use of ECS through a bank account or through
such other prescribed electronic mode is ` 35,000 in case of payment made
for plying, hiring or leasing goods carriage. Therefore, in the present case,
disallowance under section 40A(3) is not attracted for payment of ` 30,000
made in cash to a transporter for carriage of goods.
Question 6
Examine with reasons, whether the following statements are true or false, with
regard to the provisions of the Income-tax Act, 1961:
(a) Payment made in respect of a business expenditure incurred on 16th
February, 2020 for ` 25,000 through a cheque duly crossed as "& Co." is hit by
the provisions of section 40A(3).
(b) (i) It is a condition precedent to write off in the books of account, the

amount due from debtor to claim deduction for bad debt.

(ii) Failure to deduct tax at source in accordance with the provisions of
Chapter XVII-B, inter alia, from the amounts payable to a non-resident
as rent or royalty, will result in disallowance while computing the
business income where the non-resident payee has not paid the tax due
on such income.
Answer
(a) True: In order to escape the disallowance specified in section 40A(3),
payment in respect of the business expenditure ought to have been made
through an account payee cheque. Payment through a cheque crossed as
“& Co.” will attract disallowance under section 40A(3).
(b) (i) True: It is mandatory to write off the amount due from a debtor as
not receivable in the books of account, in order to claim the same as
bad debt under section 36(1)(vii). However, where the debt has been
taken into account in computing the income of the assessee on the
basis of ICDSs notified under section 145(2), without recording the
same in the accounts, then, such debt shall be allowed in the previous
year in which such debt becomes irrecoverable and it shall be deemed
that such debt or part thereof has been written off as irrecoverable in
the accounts for the said purpose.
(ii) True: Section 40(a)(i) provides that failure to deduct tax at source
from rent or royalty payable to a non-resident, in accordance with the
provisions of Chapter XVII-B, will result in disallowance of such
expenditure, where the non-resident payee has not paid the tax due
on such income.
Question 7
Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss
Account for the year ended 31st March, 2020:
Trading and Profit and Loss Account for the year ended 31.03.2020
Particulars ` Particulars `
To Opening stock 90,000 By Sales 1,12,11,500
To Purchases 1,10,04,000 By Closing stock 1,86,100
To Gross Profit 3,03,600 -
1,13,97,600 1,13,97,600

To Salary 60,000 By Gross profit b/d 3,03,600

To Rent and rates 36,000 By Income from UTI 2,400
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing & stationery 23,200
To Postage & telegram 1,640
To Loss on sale of shares 8,100
(Short term)
To Other general expenses 7,060
To Net Profit 50,000
3,06,000 3,06,000
Additional Information:
(i) It was found that some stocks were omitted to be included in both the
Opening and Closing Stock, the values of which were:
Opening stock ` 9,000
Closing stock ` 18,000
(ii) Salary includes ` 10,000 paid to his brother, which is unreasonable to the
extent of ` 2,000.
(iii) The whole amount of printing and stationery was paid in cash by way of one
time payment.
(iv) The depreciation provided in the Profit and Loss Account ` 1,05,000 was
based on the following information:
The written down value of plant and machinery is ` 4,20,000 as on
01.04.2019. A new plant falling under the same block of depreciation was
bought on 01.7.2019 for ` 70,000. Two old plants were sold on 1.10.2019 for
` 50,000.
(v) Rent and rates includes GST liability of ` 3,400 paid on 7.4.2020.
(vi) Other general expenses include ` 2,000 paid as donation to a Public
Charitable Trust.
You are required to compute the profits and gains of Mr. Sivam under presumptive
taxation under section 44AD and profits and gains as per normal provisions of the Act.
Assume that the whole of the amount of turnover received by account payee cheque or
use of electronic clearing system through bank account during the previous year.

Answer
Computation of business income of Mr. Sivam for the A.Y. 2020-21
Particulars ` `
Net Profit as per profit and loss account 50,000
Add: Inadmissible expenses/ losses
Under valuation of closing stock 18,000
Salary paid to brother – unreasonable [Section 2,000
40A(2)]
Printing and stationery -whole amount of printing& 23,200
stationary paid in cash would be disallowed, since
such amount exceeds ` 10,000 [Section 40A(3)]
Depreciation (considered separately) 1,05,000
Short term capital loss on shares 8,100
Donation to public charitable trust 2,000 1,58,300
2,08,300
Less: Deductions items:
Under valuation of opening stock 9,000
Income from UTI [Exempt under section 10(35)] 2,400 11,400
Business income before depreciation 1,96,900
Less: Depreciation (See Note 1) 66,000
1,30,900
Computation of business income as per section 44AD -
As per section 44AD, where the amount of turnover is received, inter alia, by way
of account payee cheque or use of electronic clearing system through bank
account or through such other prescribed electronic modes, the presumptive
business income would be 6% of turnover, i.e., ` 1,12,11,500 x 6 /100 = ` 6,72,690
Notes:
1. Calculation of depreciation
Particulars `
WDV of the block of plant & machinery as on 1.4.2019 4,20,000

Add : Cost of new plant & machinery 70,000

4,90,000
Less : Sale proceeds of assets sold 50,000
WDV of the block of plant & machinery as on 31.3.2020 4,40,000
Depreciation @ 15% 66,000
No additional depreciation is allowable as the assessee is not
engaged in manufacture or production of any article.
2. Since GST liability has been paid before the due date of filing return of
income under section 139(1), the same is deductible.
Question 8
Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1 st April,
2019, he owns 10 trucks (out of which 6 are heavy goods vehicles, the gross vehicle
weight of such goods vehicle is 15,000 kg each). On 2nd May, 2019, he sold one of
the heavy goods vehicles and purchased a light goods vehicle on 6 th May, 2019. This
new vehicle could however be put to use only on 15 th June, 2019.
Compute the total income of Mr. Sukhvinder for the assessment year 2020-21,
taking note of the following data:
Particulars ` `
Freight charges collected 12,70,000
Less : Operational expenses 6,25,000
Depreciation as per section 32 1,85,000
Other office expenses 15,000 8,25,000
Net Profit 4,45,000
Other business and non- business income 70,000
Answer
Section 44AE would apply in the case of Mr. Sukhvinder since he is engaged in
the business of plying goods carriages and owns not more than ten goods
carriages at any time during the previous year.

Section 44AE provides for computation of business income of such assessees on a

presumptive basis. The income shall be deemed to be ` 1,000 per ton of gross
vehicle weight or unladen weight, as the case may be, per month or part of the
month for each heavy goods vehicle and ` 7,500 per month or part of month for
each goods carriage other than heavy goods vehicle, owned by the assessee in the
previous year or such higher sum as declared by the assessee in his return of income.
Mr. Sukhvinder’s business income calculated applying the provisions of section
44AE is ` 13,72,500 (See Notes 1 & 2 below) and his total income would be
` 14,42,500.
However, as per section 44AE(7), Mr. Sukhvinder may claim lower profits and
gains if he keeps and maintains proper books of account as per section 44AA and
gets the same audited and furnishes a report of such audit as required under
section 44AB. If he does so, then his income for tax purposes from goods
carriages would be ` 4,45,000 instead of ` 13,72,500 and his total income would
be ` 5,15,000.
Notes:
1. Computation of total income of Mr. Sukhvinder for A.Y. 2020-21
Particulars Presumptive Where books

income are maintained
` `
Income from business of plying goods
carriages 13,72,500 4,45,000
[See Note 2 Below]
Other business and non-business income 70,000 70,000
Total Income 14,42,500 5,15,000
2. Calculation of presumptive income as per section 44AE
Type of carriage No. of Rate per ton Ton Amount

months per month/ `
per month
(1) (2) (3) (4)
Heavy goods vehicle
1 goods carriage upto 1st 2 1,000 15 30,000
May (15,000/

1,000)
5 goods carriage held 12 1,000 15 9,00,000
throughout the year (15,000/
1,000)
Goods vehicle other
than heavy goods
vehicle
1 goods carriage from 11 7,500 - 82,500
6th May
4 goods carriage held 12 7,500 - 3,60,000
throughout the year
Total 13,72,500
Question 9
Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading
and Profit & Loss Account for the year ended 31.03.2020:
Manufacturing, Trading and Profit & Loss Account for the year ended
31.03.2020
Particulars ` Particulars `
To Opening Stock 71,000 By Sales 2,32,00,000
To Purchase of Raw Materials 2,16,99,000 By Closing stock 2,00,000
To Manufacturing Wages & 5,70,000
Expenses
To Gross Profit 10,60,000
2,34,00,000 2,34,00,000
To Administrative charges 3,26,000 By Gross Profit 10,60,000
To SGST penalty 5,000 By Dividend from 15,000
domestic companies
To GST paid 1,10,000 By Income from 1,80,000
agriculture (net)
To General Expenses 54,000
To Interest to Bank (On 60,000
machinery term loan)
To Depreciation 2,00,000

To Net Profit 5,00,000

12,55,000 12,55,000
Following are the further information relating to the financial year 2019-20:
(i) Administrative charges include ` 46,000 paid as commission to brother of the
assessee. The commission amount at the market rate is ` 36,000.
(ii) The assessee paid ` 33,000 in cash to a transport carrier on 29.12.2019. This
amount is included in manufacturing expenses. (Assume that the provisions
relating to TDS are not applicable to this payment)
(iii) A sum of ` 4,000 per month was paid as salary to a staff throughout the year
and this has not been recorded in the books of account.
(iv) Bank term loan interest actually paid upto 31.03.2020 was ` 20,000 and the
balance was paid in October 2020.
(v) Housing loan principal repaid during the year was ` 50,000 and it relates to
residential property acquired by him in P.Y. 2018-19 for self-occupation. Interest
on housing loan was ` 23,000. Housing loan was taken from Canara Bank. These
amounts were not dealt with in the profit and loss account given above.
(vi) Depreciation allowable under the Act is to be computed on the basis of
following information:
Plant & Machinery (Depreciation rate @ 15%) `

Opening WDV (as on 01.04.2019) 12,00,000
Additions during the year (used for more than 180 days) 2,00,000
Total additions during the year 4,00,000
Note: Ignore additional depreciation under section 32(1)(iia)
Compute the total income of Mr. Raju for the assessment year 2020-21.
Note: Ignore application of section 14A for disallowance of expenditures in respect
of any exempt income.
Answer
Computation of total income of Mr. Raju for the A.Y. 2020-21
Particulars ` `
Profits and gains of business or profession
Net profit as per profit and loss account 5,00,000

Add: Excess commission paid to brother disallowed 10,000

under section 40A(2)
Disallowance under section 40A(3) is not Nil
attracted since the limit for one time cash
payment is ` 35,000 in respect of payment to
transport operators. Therefore, amount of
` 33,000 paid in cash to a transport carrier is
allowable as deduction.
Salary paid to staff not recorded in the books 48,000
(Assuming that the expenditure is in the nature
of unexplained expenditure and hence, is
deemed to be income as per section 69C and
would be taxable @ 60% under section 115BBE –
no deduction allowable in respect of such
expenditure) [See Note 1 below]
Bank term loan interest paid after the due date 40,000
of filing of return under section 139(1) –
disallowed as per section 43B
State GST penalty paid disallowed [See Note 2 5,000
below]
Depreciation debited to profit and loss account 2,00,000 3,03,000
8,03,000
Less: Dividend from domestic companies [Exempt 15,000
under section 10(34)]
Income from agriculture [Exempt under section 1,80,000
10(1)]
Depreciation under the Income-tax Act, 1961

(As per working note) 2,25,000 4,20,000
3,83,000
Income from house property
Annual value of self-occupied property Nil
Less: Deduction under section 24(b) – interest on 23,000 (23,000)
housing loan
Gross Total Income 3,60,000

Less: Deduction under section 80C in respect of Principal

repayment of housing loan 50,000
Total Income 3,10,000
Working Note:
Computation of depreciation under the Income-tax Act, 1961
Particulars `
Depreciation@15% on ` 14 lakh (Opening WDV of ` 12 lakh plus
assets purchased during the year and used for more than 180 days 2,10,000
` 2 lakh)
Depreciation @7.5% on ` 2 lakh (Assets used for less than 180 days) 15,000
2,25,000
Notes (Alternate views):
1. It is also possible to take a view that the salary not recorded in the books of
account was an erroneous omission and that the assessee has offered
satisfactory explanation for the same. In such a case, the same should not
be added back as unexplained expenditure, but would be allowable as
deduction while computing profits and gains of business and profession.
2. Where the imposition of penalty is not for delay in payment of sales tax or
VAT or GST but for contravention of provisions of the Sales Tax Act or VAT
Act or GST Law, the levy is not compensatory and therefore, not deductible.
However, if the levy is compensatory in nature, it would be fully allowable.
Where it is a composite levy, the portion which is compensatory is allowable
and that portion which is penal is to be disallowed.
Since the question only mentions “GST penalty paid” and the reason for levy
of penalty is not given, it has been assumed that the levy is not
compensatory and therefore, not deductible. It is, however, possible to
assume that such levy is compensatory in nature and hence, allowable as
deduction. In such a case, the total income would be ` 3,05,000.
Question 10
Mr. Tenzingh is engaged in composite business of growing and curing (further
processing) coffee in Coorg, Karnataka. The whole of coffee grown in his plantation
is cured. Relevant information pertaining to the year ended 31.3.2020 are given
below:

Particulars `
WDV of car as on 1.4.2019 3,00,000
WDV of machinery as on 1.4.2019 (15% rate) 15,00,000
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000
Sale value of cured coffee 22,00,000
Besides being used for agricultural operations, the car is also used for personal use;
disallowance for personal use may be taken at 20%. The expenses incurred for car
running and maintenance are ` 50,000. The machines were used in coffee curing
business operations.
Compute the income arising from the above activities for the assessment year
2020-21. Show the WDV of the assets as on 1.4.2020.
Answer
Where an assessee is engaged in the composite business of growing and curing
of coffee, the income will be segregated between agricultural income and
business income, as per Rule 7B of the Income-tax Rules, 1962.
As per the above Rule, income derived from sale of coffee grown and cured by
the seller in India shall be computed as if it were income derived from business,
and 25% of such income shall be deemed to be income liable to tax. The balance
75% will be treated as agricultural income.
Particulars ` ` `
Sale value of cured coffee 22,00,000
Less: Expenses for growing coffee 3,10,000
Car expenses (80% of ` 50,000) 40,000
Depreciation on car (80% of 15% of
` 3,00,000) [See Computation below] 36,000
Total cost of agricultural operations 3,86,000
Expenditure for coffee curing 3,00,000

operations
Add: Depreciation on machinery 2,25,000

(15% of ` 15,00,000) [See

Computation below]
Total cost of the curing operations 5,25,000
Total cost of composite operations 9,11,000
Total profits from composite activities 12,89,000
Business income (25% of above) 3,22,250

Agricultural income (75% of above) 9,66,750
Computation of value of depreciable assets as on 31.3.2020
Particulars ` ` `
Car
Opening value as on 1.4.2019 3,00,000
Depreciation thereon at 15% 45,000
Less: Disallowance @20% for personal use 9,000
Depreciation actually allowed 36,000
WDV as on 1.4.2020 2,64,000
Machinery
Opening value as on 1.4.2019 15,00,000
Less: Depreciation @ 15% 2,25,000
WDV as on 1.4.2020 12,75,000
Explanation 7 to section 43(6) provides that in cases of ‘composite income’, for
the purpose of computing written down value of assets acquired before the
previous year, the total amount of depreciation shall be computed as if the entire
composite income of the assessee (and not just 25%) is chargeable under the
head “Profits and gains of business or profession”. The depreciation so computed
shall be deemed to have been “actually allowed” to the assessee.
LET US RECAPITULATE
Method of Accounting [Section 145]
Income chargeable under this head shall be computed in accordance with the
method of accounting regularly and consistently employed by the assessee
either cash or mercantile basis.

Income chargeable under this head [Section 28]

(i) The profits and gains of any business or profession carried on by the
assessee at any time during the previous year.
(ii) Any compensation or other payment due to or received by a person, at

or in connection with -
(a) Termination of his management or modification of the terms and
conditions relating thereto, in case the person is managing the
whole or substantially the whole of the affairs of an Indian
company.
(b) Termination of his office or modification of the terms and
conditions relating thereto, in case the person is managing the
whole or substantially the whole of the affairs in India of any other
company.
(c) Termination of agency or modification of the terms and conditions
relating thereto, in case the person is holding an agency in India
for any part of the activities relating to the business of any other
person.
(d) Vesting in the Government or in any corporation owned and
controlled by the Government, under any law for the time being in
force, of the management of any property or business.
(e) Termination or the modification of the terms and conditions, of any
contract relating to his business
(iii) Income derived by a trade, professional or similar association from
specific services performed for its members.
(iv) In the case of an assessee carrying on export business, the following
incentives –
(a) Profit on sale of import entitlements;
(b) Cash assistance against exports under any scheme of GoI;
(c) Customs duty or excise re-paid or repayable as drawback;
(d) Profit on transfer of Duty Free Replenishment Certificate.
(v) Value of any benefit or perquisite, whether convertible into money or
not, arising from business or the exercise of profession.

(vi) Any interest, salary, bonus, commission or remuneration due to, or

received by, a partner of a firm from such firm (to the extent allowed as
deduction in the hands of the firm).
(vii) Any sum, received or receivable, in cash or kind under an agreement for –
(a) not carrying out any activity in relation to any business or
profession; or
(b) not sharing any know-how, patent, copyright, trademark, licence,
franchise or any other business of commercial right of similar
nature or information or technique likely to assist in the
manufacture or processing of goods or provision of services.
(viii) Any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy.
(ix) Fair market value of inventory as on date on which it is converted into or
treated as a capital asset.
(x) Any sum, whether received or receivable, in cash or kind, on account of
any capital asset (other than land or goodwill or financial instrument)
being demolished, destroyed, discarded or transferred, in respect of
which the whole of the expenditure had been allowed as deduction
under section 35AD.
Computation of income under the head “Profits and gains of business or
profession”
The income referred to in section 28 has to be computed in accordance with
the provisions contained in sections 30 to 43D.
Admissible Deductions
Section Deduction
30 Amount paid on account of rent, rates, taxes, repairs (not
including expenditure in the nature of capital expenditure) and
insurance for buildings used for the purpose of business or
profession.
In case the premises are occupied by the assessee as a tenant, the
amount of repairs would be allowed as deduction only if he has
undertaken to bear the cost of repairs to the premises.

31 Amount paid on account for current repairs and insurance of

machinery, plant and furniture used for the purpose of business or
profession.
32 Depreciation
Depreciation is mandatorily allowable as deduction.
Conditions for claiming depreciation
• Asset must be used for the purpose of business or profession
at any time during the previous year.
Note: If the asset is acquired during the previous year and is
put to use for less than 180 days during that previous year
then, only 50% of the depreciation calculated at the rates
prescribed will be allowed.
• The asset should be owned (wholly or partly) by the assessee.
• The depreciation shall be allowed on the written down value
of block of assets at the prescribed rates (except in the case
of assets of power generating units, in respect of which
depreciation has to be calculated as a percentage of actual
cost).
As per section 2(11), block of assets means a group of assets
falling within a class of assets comprising:
(a) buildings, machinery, plant or furniture being tangible
assets,
(b) know-how, patents, copyrights, trademarks, licences,
franchises or any other business or commercial rights of
similar nature being intangible assets;
in respect of which, the same rate of depreciation is
prescribed.
Written Down Value of Assets (W.D.V.) [Section 43(6)]
(1) W.D.V. of the block of assets on 1st April of the xxxx
previous year
(2) Add: Actual cost of assets acquired during the xxxx
previous year
(3) Total (1) + (2) xxxx

(4) Less: Money receivable in respect of any asset

falling within the block which is sold, discarded, xxxx
demolished or destroyed during that previous year
(5) W.D.V at the end of the year (on which xxxx
depreciation is allowable) [(3) – (4)]
(6) Depreciation at the prescribed rate
(Rate of Depreciation × WDV arrived at in (5) xxxx
above)
32(1)(iia) Additional depreciation at the rate of 20% of actual cost of plant

or machinery acquired and installed after 31.03.2005 by an
assessee engaged in the business of manufacture or production of
any article or thing or in the business of generation, transmission
or distribution of power, shall be allowed.
If plant and machinery is acquired and put to use for the purpose
of business or profession for less than 180 days during the
previous year in which it is acquired, additional depreciation will
get restricted to 50% of the depreciation allowable. The balance
50% of additional depreciation will be allowed in the immediately
succeeding previous year.
However, additional depreciation will not be allowed on the
following plant or machinery:
• Ships, aircraft, road transport vehicles, office appliances;
• Machinery previously used by any other person;
• Machinery installed in any office premises, residential
accommodation, or guest house;
• Machinery in respect of which, the whole of the actual cost is
fully allowed as deduction (whether by way of depreciation or
otherwise) of any one previous year.
In order to encourage acquisition and installation of plant and
machinery for setting up of manufacturing units in the notified
backward areas of the States of Andhra Pradesh, Bihar, Telangana
and West Bengal, a proviso has been inserted to section 32(1)(iia)
to allow higher additional depreciation at the rate of 35% (instead
of 20%) in respect of the actual cost of new machinery or plant
(other than a ship and aircraft) acquired and installed during the

period between 1st April, 2015 and 31st March, 2020 by a

manufacturing undertaking or enterprise which is set up in the
notified backward areas of these specified States on or after 1st
April, 2015.
Such additional depreciation shall be restricted to 17.5% (i.e., 50%
of 35%), if the new plant and machinery acquired is put to use for
the purpose of business for less than 180 days in the year of
acquisition and installation.
The balance 50% of additional depreciation (i.e., 50% of 35%)
would, however, be allowed in the immediately succeeding
financial year.
32AD In order to encourage the setting up of industrial undertakings in
the backward areas of the States of Andhra Pradesh, Bihar,
Telangana and West Bengal, section 32AD has been inserted to
provide for a deduction of an amount equal to 15% of the actual
cost of new plant and machinery acquired and installed in the
assessment year relevant to the previous year in which such plant
and machinery is installed, if the following conditions are satisfied
by the assessee -
(a) The assessee sets up an undertaking or enterprise for
manufacture or production of any article or thing on or after
1st April, 2015 in any backward area notified by the Central
Government in the State of Andhra Pradesh or Bihar or
Telangana or West Bengal; and
(b) the assessee acquires and installs new plant and machinery
for the purposes of the said undertaking or enterprise during
the period between 1st April, 2015 and 31st March, 2020 in
the said backward areas.
35 Expenditure on Scientific Research
Expenditure incurred by assessee
• Any revenue and capital expenditure (other than cost of
acquisition of land) on scientific research for in-house
research related to its business is allowable as deduction
[Section 35(1)(i) & Section 35(1)(iv) read with section
35(2)].
• Deduction is also allowed in respect of payment of salary or

purchase of material inputs for such scientific research during

3 years immediately preceding the year of commencement of
business. Such deduction is allowed in the year in which it has
commenced its business [Section 35(1)(i)/Section 35(2)].
• Capital expenditure incurred prior to the commencement of
the business is also allowed in the year in which business is
commenced.
• In case of companies engaged in the business of bio-
technology or manufacture or production of article or thing,
deduction of 150% of expenditure incurred on scientific
research on in-house research and development facility is
allowed (other than expenditure on cost of land or building)
[Section 35(2AB)].
Contributions to Outsiders
Contributions made by any assessee to certain specified/
approved institutions shall be entitled to weighted deduction as
follows:
Deduction (as a % of
Section Contribution made to contribution made)
35(1)(ii) Notified approved research 150%
association/ university/
college/ other institution for
scientific research
35(1)(iia) Approved notified Company 100%
for scientific research
35(1)(iii) Notified approved research 100%
association/university/
college/ other institution for
research in social science or
statistical research
35(2AA) Approved National 150%
Laboratory/ University/ IIT/
specified person to be used
for scientific research
undertaken under an
approved programme

35AD This section provides for investment-linked tax deduction in

respect of the following specified businesses -
• setting-up and operating ‘cold chain’ facilities for specified
products;
• setting-up and operating warehousing facilities for storing
agricultural produce;
• laying and operating a cross-country natural gas or crude or
petroleum oil pipeline network for distribution, including
storage facilities being an integral part of such network;
• building and operating a hotel of two-star or above category,
anywhere in India;
• building and operating a hospital, anywhere in India, with at
least 100 beds for patients;
• developing and building a housing project under a notified
scheme for slum redevelopment or rehabilitation framed by the
Central Government or a State Government;
• developing and building a housing project under a notified
scheme for affordable housing framed by the Central
Government or State Government;
• production of fertilizer in India;
• setting up and operating an inland container depot or a
container freight station notified or approved under the
Customs Act, 1962;
• bee-keeping and production of honey and beeswax;
• setting up and operating a warehousing facility for storage of
sugar;
• laying and operating a slurry pipeline for transportation of iron-
ore; and
• setting up and operating a semiconductor wafer fabrication
manufacturing unit, if such unit is notified by the Board in
accordance with the prescribed guidelines.
• developing or maintaining and operating or developing,
maintaining and operating a new infrastructure facility
100% of the capital expenditure incurred during the previous

year, wholly and exclusively for the above businesses would be

allowed as deduction from the business income.
However, expenditure incurred on acquisition of any land,
goodwill or financial instrument would not be eligible for
deduction.
Further, the expenditure incurred, wholly and exclusively, for the
purpose of specified business prior to commencement of
operation would be allowed as deduction during the previous
year in which the assessee commences operation of his specified
business, provided the amount incurred prior to commencement
has been capitalized in the books of account of the assessee on
the date of commencement of its operations.
Further, any expenditure in respect of which payment or aggregate
of payment made to a person of an amount exceeding ` 10,000 in
a day otherwise than by account payee cheque drawn on a bank or
an account payee bank draft or use of electronic clearing system
through a bank account or through such other prescribed
electronic modes would not be eligible for deduction.
An assessee availing investment-linked tax deduction under
section 35AD in respect of any specified business in any
assessment year, is not eligible for claiming profit-linked
deduction under Chapter VI-A or section 10AA for the same or
any other assessment year in respect of such specified business.
Any asset in respect of which a deduction is claimed and allowed
under section 35AD shall be used only for the specified business,
for a period of eight years beginning with the previous year in
which such asset is acquired or constructed. If such asset is used
for any purpose other than the specified business, the total
amount of deduction so claimed and allowed in any previous year
in respect of such asset, as reduced by the depreciation allowable
under section 32 as if no deduction had been allowed under
section 35AD, shall be deemed to be the business income of the
assessee of the previous year in which the asset is so used.
35CCC 150% of expenditure incurred by an assessee on notified

agricultural extension project in accordance with the prescribed
guidelines.

35CCD 150% of expenditure (other than expenditure in nature of cost of

any land or building) incurred by a company on notified skill
development project.
35D Preliminary expenditure incurred by Indian companies and other

resident non-corporate assessees shall be allowed as deduction
over a period of 5 years beginning with the previous year in which
business commences or in which extension of the undertaking is
completed or the new unit commences operation or productions.
Maximum aggregate amount of the qualifying expenses that can
be amortized is 5% of the cost of project. In case of an Indian
company, 5% of the cost of project or at its option, 5% of the
capital employed by the company, whichever is higher.
35DDA One-fifth of the expenditure incurred by an assessee-employer in

any previous year in the form of payment to any employee in
connection with his voluntary retirement in accordance with a
scheme of voluntary retirement, shall be allowed as deduction in
that previous year and the balance in four equal installments in
the immediately four succeeding previous years.
36(1)(iii) Interest paid in respect of capital borrowed for the purposes of

business or profession.
However, any interest paid for acquisition of an asset (whether
capitalized in the books of account or not) for any period
beginning from the date on which the capital was borrowed for
acquisition of the asset till the date on which such asset was first
put to use, shall not be allowed as deduction.
36(1)(iv) Any sum paid by the assessee as an employer by way of

contribution towards a recognized provident fund or approved
superannuation fund, subject to prescribed limits.
36(1)(iva) Any sum paid by the assessee as an employer by way of

contribution towards a pension scheme referred to in section
80CCD, to the extent of 10% of salary of any employee. Salary
includes dearness allowance, if the terms of employment so
provide. Correspondingly, section 40A(9) disallows the sum paid in
excess of 10% of the salary of any employee.

36(1)(vii) Any bad debts written off as irrecoverable in the accounts of the
assessee for the previous year, provided the debt has been taken
into account in computing the income of the previous year or any
earlier previous year. Amount of debt taken into account in
computing the income of the assessee on the basis of notified
ICDSs to be allowed as deduction in the previous year in which
such debt or part thereof becomes irrecoverable. If a debt, which
has not been recognized in the books of account as per the
requirement of the accounting standards but has been taken into
account in the computation of income as per the notified ICDSs,
has become irrecoverable, it can still be claimed as bad debts
under section 36(1)(vii) since it shall be deemed that the debt has
been written off as irrecoverable in the books of account by virtue
of the second proviso to section 36(1)(vii). This is because some
ICDSs require recognition of income at an earlier point of time
(prior to the point of time such income is recognised in the books
of account). Consequently, if the whole or part of such income
recognised at an earlier point of time for tax purposes becomes
irrecoverable, it can be claimed as bad debts on account of the
second proviso to section 36(1)(vii).
36(1)(ix) Any bona fide expenditure incurred by a company for the

purpose of promoting family planning amongst its employees.
In case the expenditure or part thereof is of capital nature, one-
fifth of such expenditure shall be deducted for the previous year
in which it was incurred; and the balance in four equal
installments in four succeeding previous years.
36(1)(xv) An amount equal to the securities transaction tax (STT) paid by

the assessee in respect of taxable securities transactions entered
into in the course of his business during the previous year, if the
income arising from such taxable securities transactions is
included in the income computed under the head “Profits and
gains of business or profession”.
36(1)(xvi) An amount equal to commodities transaction tax (CTT) paid in

respect of taxable commodities transactions entered into the
course of business during the previous year, if the income arising
from such taxable commodities transactions is included in the

income computed under the head “Profits and gains of business

or profession”.
General
37(1) An expenditure shall be allowed under section 37, provided:

• it is not in the nature of expenditure described under sections 30
to 36;
• it is not in the nature of capital expenditure;
• it is not a personal expenditure of the assessee;
• it is laid out and expended wholly and exclusively for the purpose
of business/ profession;
• it is not incurred for any purpose which is an offence or which is
prohibited by law; and
• it is not an expenditure incurred by the assessee on CSR activities
referred to in section 135 of the Companies Act, 2013.
37(2B) Any expenditure incurred for advertisement in any souvenir,

brochure, tract, pamphlet etc. published by a political party is not
allowable as deduction.
Amounts not deductible
Section Particulars
In the hands of any assessee
40(a)(i) Any interest, royalty, fees for technical services or other sum
chargeable under the Act, which is payable outside India or in India
to a non corporate non-resident or to a foreign company, on
which tax deductible at source has not been deducted or after
deduction has not been paid on or before the due date specified
under section 139(1).
However, if such tax has been deducted in any subsequent year or
has been deducted in the previous year but paid in the subsequent
year after the due date specified under section 139(1), such sum
shall be allowed as deduction in computing the income of the
previous year in which such tax is paid.

40(a)(ia) 30% of any sum payable to a resident on which tax is

deductible at source under Chapter XVII-B and such tax has not
been deducted or, after deduction has not been paid on or
before the due date for filing of return of income under section
139(1).
However, if such tax has been deducted in any subsequent year
or has been deducted in the previous year but paid in the
subsequent year after the due date specified under section
139(1), 30% of such sum shall be allowed as deduction in
computing the income of the previous year in which such tax is
paid.
40(a)(ii) Any sum paid on account of income-tax
40(a)(iib) Any amount paid by way of royalty, licence fee, service fee,
privilege fee, service charge, or any other fee or charge, which
is levied exclusively on, or any amount appropriated, directly or
indirectly, from a State Government undertaking, by the State
Government.
40(a)(iii) Any payment chargeable under the head “Salaries”, if it is
payable outside India or to a non-resident, if tax has not been
paid thereon nor deducted therefrom
40(a)(v) Tax paid by the employer on non-monetary perquisites
provided to its employees, which is exempt under section
10(10CC) in the hands of the employee.
In case of partnership firms or LLPs -
40(b) (i) Salary, bonus, commission or remuneration, by whatever
name called, paid to any partner who is not a working
partner;
(ii) Payment of remuneration or interest to a working
partner, which is not –
• authorized by the partnership deed; or
• in accordance with the terms of the partnership deed.
(iii) Payment of remuneration or interest to a working partner
authorized by and in accordance with the terms of the
partnership deed, but relates to a period falling prior to

the date of such partnership and is not authorized by the

earlier partnership deed.
(iv) Payment of interest to any partner authorised by and in
accordance with the terms of the partnership deed and
falling after the date of the partnership deed to the
extent of the excess of the amount calculated at 12%
simple interest per annum.
(v) Payment of remuneration to a working partner which is
authorized by and in accordance with the partnership
deed to the extent the aggregate of such payment to
working partners exceed the following limits -
(a) On the first ` 3,00,000 ` 1,50,000 or 90% of the
of the book-profit or in book-profit, whichever is
case of a loss more.
(b) On the balance of 60%
book-profit
Expenses or payments not deductible in certain circumstances
Section Particulars
40A(2) Any expenditure incurred in respect of which a payment is made to a

related person or entity, to the extent it is excessive or unreasonable
by the Assessing Officer.
Few examples of related persons are as under:
Assessee Related Person
Individual Any relative of the individual

Firm Any partner of the firm or relative of such partner
and the member of the family or association
HUF or AOP Any member of the AOP or HUF or any relative of
such member
Company Director of the company or any relative of the
director
Any assessee Any individual who has a substantial interest (20%
or more voting power or beneficial entitlement to
20% of profits) in the business or profession of the

assessee; or
A relative of such individual.
40A(3) Any expenditure, in respect of which a payment or aggregate of

payments made to a person in a single day otherwise than by
account payee cheque or account payee bank draft or ECS through
bank account or through such other prescribed electronic modes
exceeds ` 10,000.
In case of payments made to transport operator for plying, hiring or
leasing goods carriages, an enhanced limit of ` 35,000 shall apply.
If the payment/payments exceed this limit, the entire expenditure
would be disallowed.
However, disallowance would not be attracted if the cases and
circumstances in which payment is made otherwise than by way of an
account payee cheque or bank draft are covered in Rule 6DD.
40A(3A) Where an expenditure has been allowed as deduction on accrual basis
in any previous year, and payment is made in a subsequent previous
year otherwise than by account payee cheque or account payee bank
draft or ECS through bank account or through such other prescribed
electronic modes and such payment (or aggregate of payments made
to a person in a day is made in a subsequent previous year) is in excess
of the limits of ` 10,000/ ` 35,000 specified above, the
payment/aggregate of payments so made shall be deemed as profits
and gains of the business or profession and charged to tax as income of
the subsequent previous year.
However, the deeming provision will not apply in the cases and
circumstances covered in Rule 6DD.
40A(7) Provision for payment of gratuity to employees.
However, disallowance would not be attracted if provision is made
for contribution to approved gratuity fund or for payment of gratuity
that has become payable during the year.
Profits chargeable to tax [Section 41]
41(1) Where deduction was allowed in respect of loss, expenditure or
trading liability for any year and subsequently, during any previous
year, the assessee or successor of the business has obtained any
amount in respect of such loss or expenditure or some benefit in

respect of such trading liability by way of remission or cessation

thereof, the amount obtained or the value of benefit accrued shall be
deemed to be income.
41(3) Amount realized on transfer of an asset used for scientific research is
taxable as business income to the extent of deduction allowed under
section 35 in the year in which transfer takes place.
41(4) Any amount recovered by the assessee against bad debt earlier
allowed as deduction shall be taxed as income in the year in which it
is received.
Certain Deductions to be allowed only on Actual Payment [Section 43B]
In respect of the following sums payable by an assessee, deduction is allowable
only if the sum is actually paid on or before the due date of filing of return
under section 139(1).
(i) Tax, duty, cess or fee, under any law for the time being in force; or
(ii) Contribution to any provident fund or superannuation fund or
gratuity fund or any other fund for the welfare of employees; or
(iii) Bonus or commission for services rendered by employees, where
such sum would not have been payable to him as profits or dividend
if it had not been paid as bonus or commission; or
(iv) Interest on any loan or borrowing from any public financial institution
or a State Financial Corporation or a State Industrial Investment
Corporation, in accordance with the terms and conditions of the
agreement governing such loan or borrowing; or
(v) interest on any loan or borrowing from a deposit taking non-
banking financial company or systemically important non-
deposit taking non-banking financial company, in accordance
with the terms and conditions of the agreement governing such
loan or borrowing
(vi) Interest on any loan or advance from a scheduled bank or co-
operative bank other than a primary agricultural credit society or a
primary co-operative agricultural and rural development bank in
accordance with the terms and conditions of the agreement
governing such loan or advances; or
(vii) Payment in lieu of any leave at the credit of his employee.
(viii) Any sum payable to the Indian Railways for use of Railway assets.

Other Provisions
Section Particulars
43CA Where the consideration for the transfer of an asset (other than
capital asset), being land or building or both, is less than the
stamp duty value, the value so adopted or assessed or
assessable (i.e., the stamp duty value) shall be deemed to be
the full value of the consideration for the purposes of
computing income under the head “Profits and gains of
business or profession”.
However, if the stamp duty value does not exceed 105% of the
consideration received or accruing then, such consideration shall
be deemed to be the full value of consideration for the purpose of
computing profits and gains from transfer of such asset.
Further, where the date of an agreement fixing the value of
consideration for the transfer of the asset and the date of
registration of the transfer of the asset are not same, the stamp
duty value may be taken as on the date of the agreement for
transfer instead of on the date of registration for such transfer,
provided at least a part of the consideration has been received
by way of an account payee cheque/ account payee bank draft
or use of ECS through a bank account or through such other
prescribed electronic modes on or before the date of the
agreement.
44AB Mandatory audit of accounts of certain persons
Category of person Condition for applicability of section
44AB
Every person Total sales, turnover or gross receipts in
carrying on business business > ` 1 crore in any previous year
Every person Gross receipts in profession > ` 50 lakh
carrying on in any previous year
profession
Every person Income is claimed to be lower than the
carrying on a deemed profits under the respective
business, where sections
deemed profits are

taxed on
presumptive basis
under section 44AE
or 44BB or 44BBB
Every person carrying Income is claimed to be lower than the
on a profession, deemed profits and such income
where 50% of the exceeds the basic exemption limit.
gross receipts are
deemed to be the
profits under section
44ADA.
Every person who Income cannot be computed on the
declared profit on basis of presumptive tax provisions
presumptive basis under section 44AD for five assessment
under section 44AD years subsequent to the assessment year
for any previous year relevant to the previous year in which
and thereafter, profits have not been declared under
declares profits for section 44AD(1) and whose income
any five consecutive exceeds the basic exemption limit in that
assessment years year.
relevant to the
previous year
succeeding such
previous year not in
accordance with
presumptive tax
provisions of section
44AD(1).
The requirement of audit under section 44AB does not apply to
a person who declares profits and gains on a presumptive basis
under section 44AD and his total sales, turnover or gross
receipts does not exceed ` 2 crore.
Presumptive taxation provisions
Section Particulars Deemed profits and gains
44AD Any individual, HUF or firm who is 8% of gross receipts or total
a resident (other than LLP) who

has not claimed deduction under turnover

section 10AA or Chapter VI-A However, the presumptive
under the heading “C –Deductions rate of 6% of total turnover
in respect of certain incomes” or gross receipts will be
engaged in any business (except applicable in respect of
the business of plying, hiring or amount which is received
leasing goods carriages referred to
• by an account payee
in section 44AE) and whose total
cheque or
turnover or gross receipts in the
• by an account payee
previous year does not exceed ` 2
bank draft or
crore. However, this section will
not apply to – • by use of electronic
clearing system through
(i) a person carrying on
a bank account or
specified professions
through such other
referred to in section
prescribed electronic
44AA(1),
modes
(ii) a person earning income in
the nature of commission during the previous year or
before the due date of filing
or brokerage;
of return under section
(iii) a person carrying on
139(1) in respect of that
agency business.
previous year.
44ADA An assessee, being a resident in 50% of the gross receipts.
India, who is engaged –
in any profession referred to in
section 44AA(1) such as legal,
medical, engineering or
architectural profession or the
profession of accountancy or
technical consultancy or interior
decoration or any other
profession as is notified by the
Board in the Official Gazette;
and whose total gross receipts
does not exceed ` 50 lakhs in a
previous year.
44AE Any assessee who owns not For each heavy goods vehicle,

more than ten goods carriages ` 1,000 per ton of gross vehicle
at any time during the previous weight or unladen weight, as
year and who is engaged in the the case may be, for every
business of plying, hiring and month or part of a month and
leasing goods carriages. for other than heavy goods
vehicle, ` 7,500 per month or
part of a month during which
such vehicle is owned by the
assessee or an amount claimed
to have been actually earned
from such vehicle, whichever is
higher.
Taxability in case of composite income
In cases where income is derived from the sale of rubber manufactured or
processed from rubber plants grown by the seller in India, coffee (grown and
cured/grown, cured, roasted and grounded) or tea grown and manufactured in
India, the income shall be computed as if it were income derived from business,
and a specified percentage of such income, as given in the table below, shall
be deemed to be income liable to tax -
Rule Nature of composite income Business Agricultural Income
income (Exempt)
(Taxable)
7A Income from the manufacture of 35% 65%
rubber
7B Income from the manufacture of
coffee
- sale of coffee grown and 25% 75%
cured
- sale of coffee grown, cured,
40% 60%
roasted and grounded
8 Income from the manufacture of 40% 60%
tea

TEST YOUR KNOWLEDGE

1. An assessee uses plant and machinery for the purpose of carrying on his
business. Under section 31, he shall be eligible for deduction on account of-
(a) both capital and revenue expenditure on repairs
(b) current repairs
(c) current repairs plus 1/5th of capital expenditure on repairs.
(d) both (a) & (b)
2. An electricity company charging depreciation on straight line method on each
asset separately, sells one of its machinery in April, 2019 at ` 1,20,000. The
WDV of the machinery at the beginning of the year i.e. on 1st April, 2019 is
` 1,35,000. No new machinery was purchased during the year. The shortfall
of ` 15,000 is treated as -
(a) Terminal depreciation
(b) Short-term capital loss
(c) Normal depreciation.
(d) Any of the above, at the option of the assessee
3. Mr. X, acquires an asset which was previously used for scientific research for
` 2,75,000. Deduction under section 35(1)(iv) was claimed in the previous year
2015-16. The asset was brought into use for the business of Mr. X, after the
research was completed. The actual cost of the asset to be included in the
block of assets is -
(a) Nil
(b) Market value of the asset on the date of transfer to business
(c) ` 2,75,000 less notional depreciation under section 32 upto the date of
transfer.
(d) Actual cost of the asset i.e., ` 2,75,000
4. A Ltd. has unabsorbed depreciation of ` 4,50,000 for the P.Y.2019-20. This
can be carried forward -
(a) for a maximum period of 8 years and set-off against business income.
(b) Indefinitely and set-off against business income.

(c) Indefinitely and set-off against any head of income

(d) Indefinitely and set-off against any head of income except salary.
5. Mr. X, a retailer acquired furniture on 10th May 2019 for ` 10,000 in cash and
on 15th May 2019, for ` 15,000 and ` 20,000 by a bearer cheque and account
payee cheque, respectively. Depreciation allowable for A.Y. 2020-21 would be –
(a) ` 2,000
(b) ` 3,000
(c) ` 3,500
(d) ` 4,500
6. XYZ Ltd. incurred capital expenditure of ` 1,50,000 on 1.4.2019 for acquisition
of patents and copyrights. Such expenditure is -
(a) Eligible for deduction in 14 years from A.Y.2020-21
(b) Eligible for deduction in 5 years from A.Y.2020-21
(c) Subject to depreciation @ 25% under section 32
(d) Subject to depreciation @ 15% under section 32
7. Under section 44AE, presumptive taxation is applicable at a particular rate
provided the assessee is the owner of a maximum of certain number of goods
carriages. The rate per month or part of the month relevant for A.Y.2020-21
and the maximum number specified under the section are -
(a) ` 7,500 for each goods carriage in the case of an assessee owning not
more than 10 goods carriages at any time during the year
(b) ` 7,500 for each goods carriage in the case of an assessee owning less
than 10 goods carriages at any time during the year
(c) ` 1,000 per ton of gross vehicle weight for per month or part of a month
for a goods carriage for an assessee owning not more than 10 goods
carriages at the end of the previous year
(d) ` 1,000 per ton of gross vehicle weight or unladen weight, as the case
may be, for per month or part of a month for a heavy goods carriage
and ` 7,500 per month or part of a month for other goods carriages in
the case of an assessee owning not more than 10 goods carriages at
any time during the previous year

8. Where the total turnover of an assessee, eligible for presumptive taxation u/s
44AD, is received entirely by account payee cheque during the previous year
2019-20, the specified rate of presumptive business income is -
(a) 5% of total turnover
(b) 6% of total turnover
(c) 7% of total turnover
(d) 8% of total turnover
9. The W.D.V. of a block (Plant and Machinery, rate of depreciation 15%) as on
1.4.2019 is ` 3,20,000. A second hand ‘machinery costing ` 50,000 was
acquired on 1.9.2019 through account payee cheque but put to use on
1.11.2019. During Jan 2020, part of this block was sold for ` 2,00,000. The
depreciation for A.Y.2020-21 would be -
(a) ` 21,750
(b) ` 25,500
(c) ` 21,125
(d) ` 12,750
10. Employer’s contribution to provident fund/superannuation fund/gratuity fund
is allowed as deduction in computing income under the head “Profits and
gains of business or profession”, provided it has been paid -
(a) before the end of the previous year
(b) on or before the due date by which the employer is required to credit an
employee’s contribution to the employee’s account in the relevant fund.
(c) on or before the due date for filing the return of income under section
139(1).
(d) before the end of the relevant assessment year
Answers
1. (b); 2. (a); 3. (a); 4. (d); 5. (b); 6. (c);
7. (d); 8. (b); 9. (a); 10. (c).

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PROFITS AND GAINS OF BUSINESS OR PROFESSION 4.

UNIT – 3 : PROFITS AND GAINS OF BUSINESS OR

© The Institute of Chartered Accountants of India

Particulars Amount Amount

© The Institute of Chartered Accountants of India

• Amortization of preliminary expenditure u/s 35D/ xxx

© The Institute of Chartered Accountants of India

• Investment-linked deduction in respect of specified

3.1 MEANING OF ‘BUSINESS’ AND ‘PROFESSION’

© The Institute of Chartered Accountants of India

• Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an

© The Institute of Chartered Accountants of India

3.2 METHOD OF ACCOUNTING

© The Institute of Chartered Accountants of India

ICDS I : Accounting Policies

Note: ICDS would be dealt with in detail at Final Level.

3.3 INCOME CHARGEABLE UNDER THIS HEAD

© The Institute of Chartered Accountants of India

(ii) Any compensation or other payment due to or received by:

(a) Profit on sale of import entitlements: Profits on sale of a licence

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

However, the following sums received or receivable would not be

© The Institute of Chartered Accountants of India

(B) whether or not such arrangement, understanding or

3.4 SPECULATION BUSINESS

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(ii) Hedging contract in respect of stocks and shares: A contract in respect of

(v) Trading in commodity derivatives: An eligible transaction in respect of

© The Institute of Chartered Accountants of India

However, the requirement of chargeability of commodities transaction tax is

3.5 COMPUTATION OF PROFITS AND GAINS

© The Institute of Chartered Accountants of India

Computation of profits and

3.6 ADMISSIBLE DEDUCTIONS [SECTION 30 TO 37]

© The Institute of Chartered Accountants of India

♦ Even if the assessee occupies the premises otherwise than as a tenant or

The word ‘used’ has to be read in a wide sense so as to include a passive as

© The Institute of Chartered Accountants of India

• Insurance premium: The deduction allowable in respect of premia paid for

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(2) Conditions to be satisfied for allowance of depreciation: The allowance

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allowance is not proportionate to the period of use during the

Depreciation would be allowable to the owner even in respect of

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However, in this connection, students may note that the Explanation 1

Depreciation is allowable not only in respect of assets “wholly” owned

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Block of Assets: A “block of assets” is defined in section 2(11), as a

Know-how - In this context, ‘know-how’ means any industrial

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Eligibility for grant of additional depreciation under section

(iv) Terminal depreciation: In case of a power concern as covered under

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Meaning of certain terms

PART A TANGIBLE ASSETS

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II Furniture and Fittings