Profits or gains of business or profession

Overview

Sec 43A &43B Sec 44AD,

Sec 28 Sec 30 to 37 Sec 40 and 40A Sec. 44AA &
Actual cost & 44ADA & 44AE
Charging Allowable Disallowed 44AB -
Expense on - Presumptive
section deductions expenditure Compliances
cash basis income

General provisions
 Business [Sec. 2(13)]
➢ Business includes –
● any trade, commerce, or manufacture; or
● any adventure or concern in the nature of trade, commerce, or manufacture.

 Profession[Sec. 2(36)]
➢ Profession includes vocation. Profession requires purely intellectual skill or manual skill
on the basis of some special learning and qualification gathered through past training or
experience e.g., CA, doctor, lawyer etc
➢ Vocation implies natural ability of a person to do some particular work e.g., singing,
dancing, etc.

 Following elements shall be considered to judge a transaction as business transaction:

● Nature of commodity ● Intention of the party ● Efforts applied in transaction
● Periodicity of transaction ● Nature of transaction (whether incidental to a
business or not)
 Meaning of profits:
➢ Profits may be realised in cash or in kind
➢ Capital receipts are generally not considered as income.
➢ Voluntary receipts are also considered as income.
➢ Gains made by providing service to community by public body
➢ Income from illegal business is also subject to tax
➢ The profits of each distinct business should be computed separately
➢ The charge is not on gross receipts but on income/gain.
➢ Income is computed in Cash or Mercantile system other than.
Interest by way of compensation or enhanced compensation Income from other sources
Subsidy or grant or cash incentive or duty drawback ow Income of the previous year
waiver or concession or reimbursement by CG, SG or any in which received
authority or local body in cash or kind

Sec 28 – Income chargeable under the head profits & gains of business or profession
➢ Profits & gains of any business or profession

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 ➢ Income of trade or professional association’s - from rendering specific services to its
members shall be taxable under this head.
➢ An export incentive in form of profit on sale of import license or duty entitlement
passbook, cash assistance, duty drawback etc.
➢ Perquisite from business or profession - the value of which is whether convertible into
money or not.
➢ Compensation to Management agency: Any compensation/other payment due to or
received –
By In connection with
Any person managing the affairs of an Termination or modification of terms and
Indian Company conditions of his appointment.
Any person managing the affairs of any
company in India
Any person holding an agency in India Termination of agency or the modification
for any part of the activities relating to of terms and conditions in relation thereto
the business of any other person.
Any person 1. The vesting in the Government or in any
corporation owned/controlled by the
Government, of the management of any
property or business.
2. The termination or the modification of
the terms and conditions, of any contract
relating to his business

➢ Remuneration to partner – Includes any interest salary, bonus, commission etc.

➢ Non-compete fees – Fees for
• not carrying out any activity in relation to any business or profession; or
• not sharing any know-how, patent, copyright, trademark, licence, franchise or any
other business or commercial right.
➢ Keyman Insurance Policy [Sec. 28(vi)]: - including bonus on such policy.
➢ Conversion of stock into capital asset - The fair market value of inventory as on the date
on which it is converted into, or treated as, a capital asset.
➢ Recovery against certain capital assets covered u/s 35AD
➢ Speculation business

Sec 43(5) – Speculation business

➢ Speculation business - Speculative transaction means a transaction in which contract for
purchase and sale of any commodity including stock and shares, is periodically or ultimately
settled otherwise than by the actual delivery or transfer of the commodity or scripts. Sec.
43(5)
➢ As per explanation to sec. 73, where any part of the business of a company consists of purchase
and sale of shares of other companies, such company shall be deemed to be carrying on
speculation business to the extent of purchase and sale of shares. However, this rule is not
applicable in case of companies -

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 a) of which gross total income mainly consists of income which is chargeable under the head
“House property”, “Capital gains”, and “Other sources”; or
b) of which principal business is the business of trading in shares or banking or granting of
loans and advances.
➢ Notes: Above explanation covers only transactions of purchase and sale of shares. Debentures,
units of UTI or of Mutual Funds are not covered by this explanation.
➢ Following transactions are not deemed to speculative transactions:
• Hedging contract in respect of raw material and merchandise to safeguard loss through
future price fluctuations
• Hedging contract in respect of stocks and shares
• Forward contract to guard against loss arising in the ordinary course of business
• Trading in derivatives
• Trading in commodities derivatives carried out in a recognised stock exchange– on which
commodity transaction tax is paid
Note – The requirement of chargeability of commodity transaction tax is not applicable in
respect of trading in agriculture commodity derivatives from AY 2019-20.

Sec 145 – Method of accounting

➢ Income chargeable under the head “Profits & gains of business or profession” or “Income from
other sources”, is to be computed in accordance with the method of accounting (i.e., either on
cash or on accrual basis) regularly followed by the assessee.
➢ However, there are certain expenditures specified u/s 43B, which shall be deductible only on
cash basis.

Admissible deductions – Sec.30 to 37

Sec 30 - Rent, Rates, Taxes, Repairs & Insurance for Building

➢ Premises are occupied by assessee as tenant.
➢ If the building is partly used for the purpose of business or profession and partly for other
purpose, then deduction shall be restricted to a fair proportion of the expenditure which is
attributable to the use for the purpose of business.
➢ Rent paid to proprietor is disallowed but rent paid by firm to its partner for using his
premises is an allowed expenditure.
➢ The income from sub-letting is netted off with the expenditure.
➢ Only current repairs are allowed as deduction.
➢ Cost of repairs and current repairs other than capital nature is allowed as deduction
➢ Municipal taxes: Rates & taxes (for e.g., land revenue, municipal tax, etc) are deductible on
cash basis [Sec. 30 read with sec. 43B],
➢ Taxes levied by foreign government is also allowed.

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Sec 31 - Repairs & Insurance of machinery, plant & furniture
➢ Only current repairs are allowed as deduction.
➢ Only repairs & insurance is covered under this section. Rent paid for use of such assets is
deductible u/s 37(1)
➢ If the building is partly used for the purpose of business or profession and partly for other
purpose, then deduction shall be restricted to a fair proportion of the expenditure which is
attributable to the use for the purpose of business.
➢ Repairs and insurance of discarded asset is not allowed as deduction.
➢ Repairs excludes replacement and reconstruction.

Sec.32 – Depreciation
 Mandatory provision
➢ Depreciation is a deduction for diminution in the value of asset.
➢ It shall be made compulsorily whether or not the assessee has claimed the deduction in
computing his total income.

 Sec. 32 provides for depreciation on –

Tangible assets Building, Machinery, Plant and Furniture.
Intangible assets Know-how, patents, copyrights, trademarks, licences,
franchises or any other business or commercial rights of
similar nature, being intangible assets acquired on or after the
1st day of April 1998, not being goodwill of a business or
profession

➢ Plant includes ships, vehicles, books, scientific apparatus and surgical equipment & does
not include warehouses for storage purposes, tea bushes, Horses, livestock, Cinema
theatres, Hotel Building, Human body. P&M is residuary block.
➢ Buildings includes within its scope roads, bridges, culverts, wells, and tube wells.
➢ No depreciation on cost of land.

 Conditions to claim depreciation

➢ Asset must be owned by the assessee.
• Assessee need not be a registered owner, even a beneficial owner can claim
depreciation.
• In case of joint ownership, depreciation is allowed in proportion to the cost contributed
by each owner.
• Possessor of an immovable property u/s 53A of Transfer of Property Act can claim
depreciation even though he is not the owner.
• In case of hire purchase, the buyer can claim depreciation
• Where an assessee being a lessee of a property incurs any capital expenditure by way
of improvement, extension, super construction, etc. on a building being used for his
business or profession, he is entitled to depreciation in respect of such capital
expenditure.
➢ Asset must be used for the purpose of business or profession during the previous year.

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 • Both active and passive use are included. Passive use includes ‘ready to use’. Thus,
stand by equipment and fire extinguishers can be capitalized.
• If the building is partly used for the purpose of business or profession and partly for
other purpose, then deduction shall be restricted to a fair proportion of the expenditure
which is attributable to the use for the purpose of business.

 Method of Depreciation
➢ Depreciation shall be allowed on written down value method at the rates prescribed.

 Significance of Date of purchase -

➢ Where,
(a) an asset is acquired by the assessee during the previous year; and
(b) is put to use in the same previous year for less than 180 days,
the depreciation in respect of such asset is restricted to 50% of the normal depreciation.
➢ This applies only in the year of acquisition and not in subsequent years.

 Block of assets
➢ "Block of assets" means 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, licences,
franchises or any other business or commercial rights of similar nature, not being
goodwill of a business or profession

 Calculation of depreciation (at a glance)

Particulars Amount
1. W.D.V of the block at the beginning of the current previous year Xxx
2. Add: Assets (falling within the block) acquired during the previous Xxx
year (Not being on account of acquisition of goodwill of a business or
profession)
3. Total (1+2) Xxx
Less:
4. Full value of consideration received or accruing i.r.o any asset falling Xxx
within the block, which is sold, discarded, demolished, destroyed
during the year.
(Such amount cannot exceed 3)
If Goodwill was part of block on which depreciation was allowed up Xxx
to P.Y. 2019-20,

5. Actual cost of goodwill

Less: Depreciation allowable to the assessee for goodwill as if
goodwill was the only asset
(Amount cannot exceed WDV)
6. WDV at the end of the year (3- 4- 5) Xxx
7. Depreciation at prescribed rate Xxx
(WDV x Rate of Depreciation)

➢ If the full value of consideration received or accruing as a result of transfer of assets in the
same block exceeds the aggregate of

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 (i) Transfer expenses
(ii) WDV at the beginning of the PY
(iii) Actual cost of any asset acquired during the P.Y.
Such excess hall be deemed to be the capital gains arising from the transfer of short-term
capital assets.
➢ When value of block before depreciation is positive but the block does not have any asset.
In such case, such positive value shall be treated as short term capital loss.
➢ Depreciation in case of succession of firm/ sole proprietary concern by a company or
business reorganization or amalgamation or demerger of companies’ depreciation
calculated at the prescribed rates as if the succession, business reorganization,
amalgamation or demerger had not taken place.
➢ Depreciation shall be apportioned between the two entities in the ratio of the number of
days for which the assets were used by them.

 Rule 5(2) - Increased rate of depreciation for certain assets

➢ The below asset qualifies for depreciation @40%.
➢ 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
➢ Conditions to satisfy:
• 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.
• The return filed 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
• 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.

Sec 43(1) - Actual cost of assets

Cost price (Purchase price) of the asset xxx
Add: Expenses directly related to acquisition e.g., travelling expenditure xxx
Add: Expenses necessary to bring the asset to site, installation, and to xxx
make it ready to use, e.g., carriage inward, loading and unloading charges,
installation cost, trial run cost, etc.
Add: Expenses incurred to increase the capacity of the asset or to make it xxx
fit prior to its use.
Add: Interest on borrowed capital up to the date the asset is put to use Xxx
Less: portion of cost which has has been met directly or indirectly by any Xxx
other person or authority (e.g., Government subsidy)
Less: Taxes & Duties (if Cenvat / Input credit is availed) xxx
Less / Add – Forex Gain or loss xxx

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 Actual cost of the asset on which depreciation is computed xxx

➢ If any payment as mentioned above, exceeding Rs. 10,000 is paid in cash to any person in
a day, then such amount is ignored in computing actual cost.

➢ Further, actual cost in various situations in mentioned below:

S.N Mode acquisition Actual cost
1 Assets acquired for scientific research Actual cost (-) deduction availed u/s 35
subsequently bought into business use
2 Conversion of inventory into capital asset FMV on the date of conversion
3 Asset acquired by way of gift or inheritance Actual cost to the previous owner (-)
depreciation allowable to him.
4 Asset acquired from any person using the Actual cost to be determined by the AO
asset for his business or profession with a with the prior permission of Joint
view to avoid tax Commissioner
5 Reacquisition of transferred asset WDV at the time of first transfer or the
price paid for reacquisition, whichever is
lower
6 Asset acquired by an assessee from WDV of the asset to the transferor
another person and given on lease to the
same person who had earlier claimed
depreciation
7 Building used for personal purpose Cost of purchase or construction
subsequently brought into business (-)notional depreciation by applying the
rate applicable on the date of such
conversion
8 Asset, which was acquired outside India, Actual cost to the assessee,(-) depreciation
brought by a non-resident assessee to India calculated at the rate in force that would
and used for the purposes of his business or have been allowable had the asset been
profession used in India for the said purposes
since the date of its acquisition.
9 Any capital asset transferred by a holding Actual cost to the transferee company shall
company to its 100% subsidiary company be taken to be the same as it would have
or vice versa where transferee company is been if the transferor company had
an Indian company. continued to hold the capital asset for the
purpose of its business
10 Any capital asset transferred by the Actual cost to the amalgamated company
amalgamating company to the shall be same as it is for the amalgamating
amalgamated company where the company.
amalgamated company is an Indian
company
11 Any capital asset transferred by the Actual cost to the resulting company shall
demerged company to the resulting be same as it is for the demerged company
company where the resulting company is
an Indian company
12 Capital asset is acquired by the assessee Actual cost of the asset shall be deemed to
under a scheme for corporatisation of a be the amount which would have been
recognised stock exchange in India

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 regarded as actual cost had there been no
such corporatisation
13 The actual cost of any capital asset on Actual cost of the asset shall be taken as
which deduction is allowable u/s 35AD NIL.
14 Where an assessee was not required to Actual cost shall be reduced by the total
compute his total income under Income tax amount of depreciation on such asset,
Act for any previous year(s) preceding the provided in the books of account (as
relevant PY. adjusted by amount attributable to the
revaluation of assets) in respect of such PY
15 Composite income * The total amount of depreciation shall be
computed as if the entire composite income
is chargeable under the head PGBP. The
total depreciation is allowed to arrive at the
WDV.

Rule * Composite income Business income Agriculture

(taxable) income(exempt)
7A Income from manufacture of Rubber 35% 65%
7B Income from manufacture of Coffee
Sale of coffee grown and cured 25% 75%
Sale of coffee grown, cured, roasted, and 40% 60%
grounded
8 Income from manufacture of Tea 40% 60%
Sec 32(1)(i) - Depreciation in case of power units
 Applicable to -
➢ An undertaking engaged in the business of generation or generation and distribution of
power

 Condition to satisfy-
➢ Such unit may charge depreciation (in respect of asset acquired after 31/3/1997) at its
choice under –
• Written-down value method as followed by all other assessee (usual); or
• Straight-line method at the prescribed rate in ‘Appendix IA’ of the Income Tax Rules on
actual cost of asset (not the block value of asset)
➢ Such option shall be exercised before the due date of furnishing return of income.
➢ Once the option is exercised, it shall be applicable for all subsequent assessment years.

 Consequence of opting for SLM method-

➢ Additional depreciation is not available to the assessee who claims depreciation as per
SLM.
➢ Loss on transfer of any asset is treated as terminal depreciation.
• Terminal depreciation = + ve value of [WDV of assets – (Sale value or Scrap value)]
• Terminal depreciation is written off in the books of accounts.
➢ Profit on transfer of such asset to the maximum of accumulated depreciation shall be
treated as balancing charge.
• The difference between sale price and actual cost shall be treated as capital gain.
• Balancing Charge = - ve value of [WDV of assets – (Sale value + Scrap value)]

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 • As per sec. 41(2), balancing charge is fully taxable as business income

Sec. 32(1) (iia) - Additional depreciation

 Applicability
➢ Additional depreciation is applicable on all 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 And
➢ Who has acquired and installed after 31st March 2005, a new plant or machinery.
➢ Following is not included in P&M –
1. Ships and Aircrafts
2. P&M which was used either within or outside India by any other person before such
installation; or
3. P&M which is installed in office premises or any residential accommodation or guest
house; or
4. Any office appliances or road transport vehicle; or
5. P&M which is allowed for 100% deduction (whether by way of depreciation or
otherwise) in the PY.

 Rate of additional depreciation

Additional If the asset is acquired
rate and put to use for less
than 180 days
Normal undertaking 20% 10%
Undertaking set up in the notified 35% 17.5%
backward area of Andhra Pradesh or Bihar
or Telangana or West Bengal during the
period 1-4-2015 to 31-3-2020

➢ Note - additional depreciation shall be available only on plant and machinery and not on
other asset like furniture, building, etc.
➢ New plant and machinery acquired and installed in such notified backward areas on or
after 1.04.2020, Sec 32AD deduction is not allowed.

Sec 32(2) – Unabsorbed depreciation

 Meaning
➢ Depreciation which could not be fully deducted from profits and gains of current year of
business or profession (due to insufficient profit), is termed as unabsorbed depreciation.

 Treatment:
➢ The unabsorbed depreciation can be deducted from income under any other head (except
with Casual income and Salaries) of the same assessment year.
➢ If depreciation still remains unabsorbed, it can be carried forward for indefinite period
and can be set off against any income (except with Casual income and Salaries) of the
assessee.
 Order of set off
➢ For set-off purpose following order is to be followed:

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 Current year Brought forward Unabsorbed
depreciation business loss depreciation

 Additional points
➢ Unabsorbed depreciation can be carried forward even if return of income has not been
filed.
➢ It is not necessary that the same business should be continued.

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Sec. 35 - Scientific research
Scientific research -
Deductions

Inhouse Donations
research

2 conditions - Need not be

related to
1. Related to business
business
2. Scientific in nature

Scientific in Social and

Revenue exp. Capital exp. nature statistical in
nature

1. Donation to a company
1.Incurred after which
1.Incurred after
commencement of commencement a. is registered in India Donation to
busin. - 100% is of busin. - b. has as its main object University,
allowed 100% is scientific research and college or other
allowed (except development approved
2. Incurred within 3 on land) institution -
years immediately c. Approved by
2. Incurred prescribed authority Where such
preceeding the year of college/universi
commencement of within 3 years
immediately d. fulfill conditions as ty/institution is
busi.. - The following prescribed - approved by
exp is allowed if preceeding the
year of 100% is allowed. Central
certified by government -
prescribed authority commencement 2. Donation to any
of busi. - 100% 100% allowed.
a. Salaries (excluding scientif. research asso.
Allowed in the which has as its object
perquisities) year of the undertaking of scient.
b. Purchase of commencement research -
material.
100% allowed.
3. Donation to University,
college or other approved
institution - Where such
college/ university /
institution is approved by
Central government -
150% allowed.
4.Donation to national
laboratory, IIT or any
university - Approved by
prescb. autho. -
100% allowed

➢ Deduction allowed on contribution which qualifies under this act, will not be entitled to
any deductions under any other provisions of the act.
➢ Where deduction is allowed in any previous year in respect of any capital expenditure
under this section, then no deduction u/s 32 shall be allowed on such asset.

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 ➢ Withdrawal of approval: Deduction shall not be denied merely on the ground that
subsequent to the payment made by the assessee, the approval granted to the association,
university, IIT, etc. has been withdrawn.
➢ Carry forward of unabsorbed scientific research expenditure: Unabsorbed capital
expenditure can be carried forward for unlimited years and set off in any subsequent
assessment year(s) like unabsorbed depreciation.
➢ Effect of amalgamation [Sec. 35(5)]: Provisions of sec. 35 shall apply to the amalgamated
company, as it would have been applied to the amalgamating company if the latter had not
transferred such asset.
➢ Sale of asset used for scientific research [Sec. 41(3)]
Without having Sale consideration to the extent of cost of such asset shall be taxable as
been used for business income in the year of sale. The excess of sale consideration over
other purpose original cost (or indexed cost of acquisition) is taxable as capital gain u/s
45. This is applicable even if the business is not in existence in that year)
After being Sale consideration shall be subtracted from relevant block of assets. It is
used for other to be noted that at the time of conversion of scientific research asset into
purposes normal business asset, the cost of acquisition shall be taken as nil in the
relevant block.

Sec. 35(2AB) - In-house research & development expenses incurred by certain companies
 Applicable to
➢ Company engaged in the business of biotechnology or any business of manufacture or
production of any article or thing (other than those specified in the 11th Schedule)

 Conditions to be satisfied
➢ The expenditure shall be incurred on in-house scientific research and development facility
including capital expenditure (other than cost of any land or building).
➢ In-house research and development facility shall be approved by the Secretary,
Department of Scientific and Industrial Research.
➢ The assessee must enter into an agreement with the prescribed authority
• for co-operation in such research and development facility; and
• fulfils such conditions with regard to maintenance of accounts and audit thereof and
• furnishing of reports in such manner as may be prescribed.

 Quantum of deduction
➢ 100% of expenditure
➢ Such expenditure should not be in the nature of cost of Land and Building.
➢ Where deduction is allowed in any previous year in respect of any capital expenditure
under this section, then no deduction u/s 32 shall be allowed on such asset.

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Sec. 35AD - Deduction in respect of expenditure on specified business
 Applicable to
➢ Specified assessee engaged in the business of:
1. Setting up and operating a cold chain facility for specified products.
2. Setting up and operating a warehousing facility for storage of agricultural produce; or
3. 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.
Note: The project has been approved by the Petroleum and Natural Gas Regulatory Board
and being notified by the Central Government.
4. Building and operating, anywhere in India, a hotel of two-star or above category as
classified by the Central Government.
5. Building and operating, anywhere in India, a hospital with at least 100 beds for patients.
6. Developing and building a notified housing project under a scheme for slum
redevelopment or rehabilitation framed by the Central Government (or a State
Government)
7. Developing and building a notified housing project under a scheme for affordable housing
framed by the Central Government (or a State Government)
8. Production of fertilizer in India.
9. Setting up and operating an inland container depot or a container freight station notified
or approved under the Customs Act, 1962;
10. Beekeeping and production of honey and beeswax.
11. Setting up and operating a warehousing facility for storage of sugar.
12. Laying and operating a slurry pipeline for the transportation of iron ore
13. Setting up and operating a semi-conductor wafer fabrication manufacturing unit, and
which is notified by the Board in accordance with such guidelines as may be prescribed.
14. Developing or maintaining and operating or developing, maintaining, and operating a new
infrastructure facility.

 Quantum of deductions
➢ 100% of capital expenditure incurred during the previous year.
➢ Pre-commencement expenditure: - Allowed as deduction in the PY in which business
commences
➢ Capital Expenditure shall not include:
• Acquisition of any land or goodwill or financial instrument
• Any expenditure in respect of which the payment or aggregate of payments made to a
person in a day, in cash exceeds Rs.10,000

 Conditions to satisfy –
➢ The assessee should opt for deduction under Section 35AD.
➢ Splitting of existing business - Such business should not be set up by splitting up, or the
reconstruction, of a business already in existence.
➢ 2nd Hand Machinery - Such business should not be set up by the transfer to the specified
business of machinery or plant previously used for any purpose.

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 ➢ However, it is not a violation if the used P&M,
• Is less than 20% of the total P&M used in such business.
• Is imported into India from a foreign country.
➢ Deduction u/s Chapter VI A and sec 10AA - Once the assessee has claimed the benefit of
deduction under section 35AD for a particular year, 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.
➢ Set off & carry forward of losses - The loss from 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.
➢ Transactions to be in Market value – In case of any transfer of goods or services between
specified business and any other business carried on by the assessee, the profits and gains
of the specified business shall be computed as if the transfer was made at market value.
➢ Compulsory audit and furnishing of report with return on income - 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.
➢ Use of such asset for 8 years - Section 35AD(7A) provides that 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.
➢ Transfer of such asset taxed as PGBP income - If such asset is demolished, destroyed,
discarded, or transferred, the sum received or receivable for the same is chargeable to tax
u/s 28(vii).
➢ PGBP income is asset is used otherwise – If the asset is used for any purpose other than
the specified business during such 8 years, then –
Total deduction claimed u/s 35AD in one or more PYs xxx
Less – Depreciation allowable u/s 32 (as if no deduction claimed u/s 35AD) (xx)
Deemed income (Chargeable under PGBP) xxx

➢ 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).
➢ Transfer of operations - The assessee shall be deemed to be carrying on the specified
business of building and operating hotel if
• He builds a hotel of two-star or above category
• Thereafter, he transfers the operation of the hotel to another person;
• He, however, continues to own the hotel

Sec. 35D - Amortisation of preliminary expenses

 Preliminary expenses -
➢ Expenses in connection with –
● Preparation of project report.

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 ● Preparation of feasibility report.
● Conducting market survey or any other survey necessary for the business.
● Engineering services related to the business.
Note: Above work must be carried on by the assessee himself or by a concern, which is
approved by the Board.
➢ Legal charges for drafting any agreement between the assessee and any other person for
any purpose related to the setting up or conduct of business.
➢ Legal charges for drafting & printing of Memorandum of Association & Articles of
Association (in case of company-assessee only).
➢ Registration fees under provisions of the Companies Act, 1956 (in case of company-
assessee only).
➢ Expenses in connection with public issue of shares in or debentures of the company being
underwriting commission, brokerage & charges for drafting, typing, printing &
advertisement of the prospectus (in case of company-assessee only).
➢ Any other prescribed expenditure.

 Applicability
➢ In case of new business - Preliminary expense is incurred before commencement of
business for setting up a new undertaking or business.
➢ In case of existing business - Preliminary expense is incurred in connection with extension
of any undertaking or in connection with setting up a new unit.

 Eligibility

Applicable to

Indian company Non-corporate resident assessee

Qualifying amount Qualifying amount

Minimum of Minimum of
a. Actual expenditure & a. Actual expenditure &
b. 5% of cost of project or 5% of b. 5% of cost of project
capital employed which is higher

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 Cost of project Cost of capital

In case of new business: In case of new business:

Actual cost of fixed assets per Issued share capital + Debentures
books as on the last day of + Long-term borrowings
the PY in which the business
commences. as on the last day of the PY in
which the business commences.

In case of an existing business:

Actual cost of fixed assets per tthe In case of existing business:
books as on the last day of the PY in Issued share capital + Debentures +
which the extension of industrial Long term borrowings
undertaking is completed or new
industrial undertaking commences as on the last day of the PY in which the
production or operation, Cost of capital extension is completed.

 Quantum of deduction
➢ 1/5th of the total eligible preliminary expense is allowed in 5 equal annual installments
starting from the year in which the business commences, or unit expanded, or the new unit
commences production or operation. (ie. 20% of expense allowed every year)

 Conditions to satisfy
➢ Report of a chartered accountant: In the case of a non-corporate assessee, an audit report
from a chartered accountant should be submitted along with the return of income before
the date specified in Section 44AB i.e., 1 month prior to the due date for furnishing return
of income u/s 139(1).
➢ And the assessee has by then should have furnish, report of audit for the first year in which
deduction is claimed.

 Points to remember
➢ A foreign company, which is resident in India, is not covered under this section.
➢ Effect of amalgamation or demerger
In case of transfer of undertaking under the scheme of amalgamation or demerger, the
amalgamated company or resulting company (being Indian company) entitled to claim
deduction u/s 35D for the residual period
Note: In the year of amalgamation or demerger, deduction shall be available
amalgamated company or resulting company as the case may be.

Sec. 35DDA - Amortisation of expenditure incurred under VRS

 Applicable to:
➢ All assessee

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 Conditions to satisfy
➢ Assessee has incurred any expenditure, by way of compensation to employees in
connection with their voluntary retirement.

 Quantum of deduction:
➢ 1/5th of expenditure so paid for a period of 5 years commencing from the year in which
such expenditure was paid.

 Points to remember
➢ Effect of amalgamation or demerger: In case of transfer of undertaking under the scheme
of amalgamation or demerger, the amalgamated company or resulting company (being
Indian company) as the case may be, shall be entitled to claim deduction u/s 35DDA for
the residual period.

➢ Effect of succession of business: Where there has been reorganisation of business,

• whereby a firm or proprietary concern is succeeded by a company fulfilling the
conditions laid down in sec. 47 (xiii) & (xiv) or
• A private company or unlisted public company is succeeded by a limited liability
partnership fulfilling the conditions laid down in sec. 47 (xiiib),
The provisions of this section shall apply to the successor concern, as they would have
applied to the predecessor, if reorganisation of business had not taken place.
➢ No deduction shall be allowed to amalgamating company, demerged company, a firm,
proprietary or other concern in the previous year in which amalgamation, demerger, or
succession, as the case may be, takes place.
➢ No deduction shall be allowed in respect of such expenditure under any other provisions
of the Act.
➢ Sec. 10(10C) {under the head “Salaries”} and Sec. 35DDA {under the head “Profits & gains
of business or profession”}
● Exemption u/s 10(10C) is not available to employee of the partnership firm, HUF,
proprietorship firm, etc. Deduction u/s 35DDA can be claimed by all assessee.
● Exemption u/s 10(10C is available only if the scheme is approved by the Board.
Deduction can be claimed u/s 35DDA even if the scheme is not approved by the Board.

Sec Further deductions allowed in full

Sec. 36(1)(i) Insurance Premium
Insurance premium paid against risk of damage or destruction of stocks &
stores, used for the purpose of business or profession is allowable as deduction
in full.
Sec. 36(1)(ia) Any amount paid as insurance premium by a federal milk co-operative society
on the lives of cattle owned by the members of a primary milk co-operative
society affiliated to it, is allowed as deduction in full.
Sec.36(1)(ib) Any premium paid (other than by cash) by the assessee as an employer to effect
or to keep in force an insurance on the health of his employees under a scheme
framed in this behalf by—

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 ● the General Insurance Corporation of India & approved by the Central
Government
● any other insurer and approved by the Insurance Regulatory and
Development Authority
- shall be allowed as deduction.
Sec. 36(1)(ii) Any bonus or commission (other than in lieu of profit or dividend) paid to
employees shall be allowed as deduction.
Such amount must have been actually paid before the due date of furnishing
return [Sec. 43B]
Sec.36(1)(iii) Amount of interest paid in respect of capital borrowed for the purposes of
business or profession shall be allowed as deduction.
Other points to remember
1. Interest paid to another person: Interest should be paid to another person.
Hence, interest on capital to proprietor is disallowed expenditure. However,
interest on capital to partners is allowed u/s 40(b).
2. Interest paid to relative is allowed as deduction subject to sec. 40A(2) i.e., if
the interest paid is in excess of market rate then excess portion shall be
disallowed.
3. If borrowed money is utilised in earning non assessable income, interest on
such borrowing shall not be allowed as deduction.
4. Interest on money borrowed to pay income tax is not allowed
Note: Interest on money borrowed for payment of sales tax is allowed as
deduction.
5. Interest paid outside India without deducting tax at source is not allowed.
6. Amount borrowed may be applied for the purpose of revenue expenditure
or capital expenditure.
7. Other interest: Interest other than interest on borrowed capital e.g., interest
on deferred payment for purchased of asset, interest on delayed payment of
electricity charges, interest on purchase price of raw material, etc. shall not be
allowed under this section but can be claimed u/s 37(1)
8. Interest on borrowings made for acquiring & installing assets:
Prior to commencement of business Interest is to be added to actual cost
After commencement of business but of the asset
before asset is put to use
After asset is put to use Interest is allowed u/s 36(1)(iii)
.
Sec.36(1) Discount on issue of zero-coupon bonds
(iiia) “Zero Coupon Bond” means a bond—
• issued by any infrastructure capital company or infrastructure capital fund
or public sector company or scheduled bank on or after 1/6/2005.
• in respect of which no payment and benefit is received or receivable before
maturity or redemption from the issuer; and
• which the Central Government may, by notification in the Official Gazette,
specify in this behalf.
Treatment: Discount on issue of Zero-Coupon Bonds shall be allowed on pro
rata basis having regard to the period of life of such bond.

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 Discount – Difference between amount received/receivable on issue of the bond
and the amount payable on redemption/maturity.
Life of the bond – From the date of issue to the date of redemption.
Sec.36(1)(iv) Contribution towards RPF & Superannuation fund
Any sum paid , by the employer towards recognised provident fund or an
approved superannuation fund is allowed as deduction in full.
Points to remember
Contribution towards unrecognised provident fund is not allowed as deduction.
Contribution towards statutory provident fund is allowed u/s 37(1).
Sec. Contribution towards notified pension scheme u/s 80CCD
36(1)(iva) Any sum paid by the assessee, as an employer, by way of contribution towards
a pension scheme, as referred to in section 80CCD, on account of an employee is
allowed as deduction.
Maximum Limit: Such contribution should not exceed 10% of the salary of the
employee in the previous year.
“Salary” includes dearness allowance, if the terms of employment so provide,
but excludes all other allowances and perquisites.
Sec. 36(1)(v) Contribution towards approved gratuity fund
Any sum paid as employer’s contribution towards an approved gratuity fund
created by him exclusively for the benefit of his employees under an irrevocable
trust is allowed as deduction.
Such amount must have been actually paid before the due date of furnishing
return [Sec. 43B]
Sec.36(1)(va) Employee’s contribution towards staff welfare scheme
Any sum received by an employer from his employees as contribution towards
● Provident Fund; or
● Superannuation Fund; or
● Any other fund set up under the provision of the Employee’s State Insurance
Act, 1948; or
● Any other fund for the welfare of such employees
- is treated as an income of the employer. Subsequently, when such sum is
credited by the employer to the employee’s account in the relevant fund on or
before the due date of crediting such contribution prescribed under the relevant
Act, then deduction is allowed.
Example: As per the provisions Employee State Insurance Act, 1948 (ESI), all
the contributions under this Act are to be deposited within 21 days of the
following month. Similarly, all contributions under the Employees’ Provident
Fund and Miscellaneous Provisions Act, 1952 must be deposited within 15 days
of the following month.
Provisions of section 43B shall not apply and shall be deemed never to have
been applied for the purposes of determining the "due date" under this clause
Sec. 36(1)(vi) Allowance in respect of dead or useless animals
Conditions
(a) Animals are used for the purpose of business or profession.
(b) Such animals are not held as stock-in-trade.
(c) Such animals have died or become permanently useless for such purpose.
Quantum of deduction

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 Difference between actual cost of the animals to the assessee and the amounts
realised, if any, in respect of carcasses or sale of animals is allowed as deduction.
Sec.36(1)(vii) Bad debts
Any debt or part thereof, which becomes bad shall be allowed as deduction.

Conditions
1. Debt must be incidental to the business or profession of the assessee. There
must be a close nexus between the debt and the business of the assessee.
2. The debt has been considered as income of the assessee of that previous year
or of earlier previous years.
Debt taken into account in the computing the income of the assessee on the
basis of notified ICDS to be allowed as deduction in the PY in which such debt
or part thereof becomes irrecoverable.
3. It must have been written off in the accounts of the assessee.
(Provision for bad debt is not allowed as deduction.)
4. Business must be carried on during the previous year or any part of the PY.
Bad debt of a discontinued business is not allowed as deduction even though
the assessee has any other business continued.
5. It must be of a revenue nature.
Bad debt arising due to insolvency of a debtor for sale of an asset (not goods) is
not allowed as deduction.
Notes:
a. Bad debts are also allowed in the hands of successor of the business.
Recovery of bad debts [Sec. 41(4)]
Amount recovered xxx
Less: Bad debt claimed – Bad debt allowed as deduction (xx)
Taxable bad debt recovery xxx
Such recovery shall be taxable irrespective of the fact whether the business is
continued or not.
Sec.36(1)(ix) Expenditure on promotion of family planning among employees Applicable
to: Company only
Purpose of such expenditure: Such expenditure must have been incurred for
promotion of family planning among its employees.
Quantum of Deduction
● Revenue expenditure is fully allowed as deduction.
● Capital expenditure shall be allowed in 5 equal installments commencing
from the previous year in which it is incurred.
Note: Where deduction is allowed in respect of any expenditure under this
section then no deduction shall be allowed u/s 32 or any other provisions of this
Act.
Treatment of unabsorbed capital expenditure: As in case of unabsorbed
depreciation.
Sale of assets acquired for family planning: Treated in the same manner as in
case of sale of assets used for scientific research.
Sec.36(1)(xiv) Credit guarantee fund trust
Any sum paid by a public financial institution by way of contribution to specified
credit guarantee fund trust for small industries shall be allowed as deduction.

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Sec.36(1)(xv) Securities transaction tax
Any amount of Securities Transaction Tax (STT) is allowed as deduction
provided income arising from such transactions is included in the income
computed under the head PGBP.
Sec.36(1)(xvi) Commodities transaction tax
Any amount of Commodities Transaction Tax (CTT) paid in respect of the
taxable commodities transactions entered into in the course of his business
during the PY shall be allowed as deduction provided income arising from such
transactions is included in the income computed under the head PGBP
➢ Taxable Commodities Transaction means; transaction of Sale of commodity
derivatives or Sale of commodity derivatives based on
− price or indices of price of commodity or
− option on commodity derivatives/in goods in respect of commodities
other than agricultural commodities, traded in Recognised Stock
exchange.

Sec. 37(1) - General deductions – Residuary section

Any expenditure which is not specifically provided in any provisions (discussed earlier) of the Act
is allowed under this section. For e.g., theft, embezzlement, destruction of asset etc. However, it
should fulfil following conditions-
1. It must be real and not notional, fictitious, or in lieu of distribution of profit.
2. It must be expended wholly & exclusively for the purpose of business or profession carried on
by the assessee.
3. It must have been incurred in the previous year.
4. It must not be a personal expenditure.
5. It must not be a capital expenditure.
6. It must be lawful and not have been incurred for any purpose, which is an offence or prohibited,
under any law.
However, the following expenditure are specifically not allowed.
➢ Corporate Social Responsibility: Any expenditure incurred on the activities relating to
corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not
be deemed to be an expenditure incurred for the purposes of the business or profession.
➢ Expenditure prohibited under law : The claim of any expense incurred in providing any Gift,
Travel facility, Hospitality, Cash or monetary grant or similar freebees in violation of the
provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations,
2002 shall be inadmissible being an expense prohibited by the law.

Sec. 37(2B) - Advertisement in souvenir etc. of a political party

➢ Expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract,
pamphlet or like, published by a political party is disallowed.

Sec. 40a - Disallowed expenditure

Sec.40(a)(i) - Interest, royalty, fees for technical services payable to a non-resident or
outside India
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➢ Any interest, royalty, fees for technical services or other sum chargeable under this Act, which
is payable ,—
● outside India; or
● in India to a non-resident (not being a company) 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 to the credit of Central government within the due date of
submission of return of income u/s 139(1).
➢ Where, in respect of any such sum,
●tax has been deducted in any subsequent year, or
● has been deducted during the previous year but paid after the due date of submission of return
of income u/s 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.
➢ Where an assessee fails to deduct the whole or any part of the tax but is not deemed to be an
assessee in default under the first proviso to section 201(1), then, it shall be deemed that the
assessee has deducted and paid the tax on such sum on the date of furnishing of return of
income by the payee.

Sec. 40(a)(ia) – Any sum payable to a resident on which TDS provision is applicable
➢ 30% of any sum payable to a resident on which tax is deductible at source under Chapter XVII-
B is disallowed if such tax:
● has not been deducted; or
● after deduction, tax has not been paid on or before the due date of furnishing return of income
➢ The amount disallowed earlier (i.e., 30% portion) shall be allowed as deduction in the
following assessment year if
● such tax has been deducted in any subsequent year, or
● tax has been paid after the due date of furnishing return of relevant assessment year,
➢ Where an assessee fails to deduct the whole or any part of the tax but is not deemed to be an
assessee in default under the first proviso to section 201(1), then, it shall be deemed that the
assessee has deducted and paid the tax on such sum on the date of furnishing of return of
income by the payee.
➢ This relaxation is not available where the payer has deducted tax but fails to deposit such tax
to the credit of the Central Government.

Sec. 40(a)(ib) - Consideration on which Equalisation Levy is applicable

➢ Any consideration paid or payable to a non-resident for a specified service on which
equalisation levy is deductible and such levy:
● has not been deducted or
●after deduction, has not been paid on or before the due date of furnishing return of income.
➢ Where in respect of any such consideration, the equalisation levy has been deducted in any
subsequent year or has been deducted during the previous year but paid after the due date of
furnishing return of income, such sum shall be allowed as a deduction in computing the
income of the previous year in which such levy has been paid.

Sec. 40(a)(ii) - Income tax

Even, income tax paid by the assessee on income of predecessor is not deductible.

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Professional tax is an allowed expenditure

Sec. 40(a)(iib) - Royalty, licence fees, etc. payable by State Government Undertaking
➢ Any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge or any
other fee or charge, by whatever name called, which is levied exclusively on; or
➢ which is appropriated, directly or indirectly, from, a State Government undertaking by the
State Government.

Sec. 40(a)(iii) – Salaries for non-resident

Any payment which is chargeable under the head “Salaries” if it is payable—
(i) outside India; or (ii) to a non-resident,
and if the tax has not been paid in India thereon nor deducted therefrom under chapter XVII-B.

Sec. 40(a)(iv) – Payment from provident fund or any other fund without deducting tax
Any payment to a provident fund or any other fund established for the benefit of employees of
the assessee in respect of whom the assessee has not made effective arrangement to secure that
tax shall be deducted at source from any payment made from the fund, which are taxable under
the head ‘Salaries’.

Sec. 40(a)(v) – Tax on non-monetary perquisite paid by employer

Any tax on non-monetary perquisite [which is exempt in the hands of employee u/s 10(10CC)]
actually paid by employer on behalf of employee is disallowed.

Sec 40(b) – Deductions disallowed in the hands of firm and LLP

The following amounts are not deducted while computing business income in case of a firm
assessable as such or an LLP.
1. Remuneration (salary, commission or by whatever name called) paid to a non-working partner.
2. Remuneration to a working partner or Interest on capital to any partner which is not
authorised by the deed.
3. Remuneration or interest to a partner authorised by deed but relates to an earlier period. Ie.
The remuneration or interest pertains to the period prior to the date of current deed.
4. Interest to any partner in excess of 12% simple interest per annum.
5. Remuneration to a working partner in excess of the below mentioned prescribed limits
Book profits Quantum of deduction
On the first 3 lacs of the book profits or in case Rs. 1,50,000 or 90% of book profits whichever
of loss is higher
On the balance of books profits 60% of book profits

Computation of book profit

Step 1 Find out the net profit as per P&L account
Step 2 Make adjustment as per sec 28 to 44DB (including the adjustment of interest on
partner’s capital)
Step 3 Add partner’s remuneration (if debited to P&L a/c)

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 Step 4 Subtract unabsorbed depreciation but do not subtract brought forward losses.
Note – Due to subtraction of unabsorbed depreciation the residual profit should not
be less than the brought forward losses which are to be set off in the current year
Step 5 The resultant figure is the book profit.

Sec 40A (2) - Payment made to relatives in excess of requirement

Any payment made by an assessee to a related person or to a person having substantial interest
shall be disallowed to the extent it is excess or unreasonable as per the Assessing Officer.
Relative Spouse, brother, sister or any lineal ascendant or descendant of that
individual.
substantial ●In case of company - beneficial owner of equity share carrying not less than
interest 20% of voting power
●In any other case - beneficially entitled to not less than 20% of the profits
Excessive or Decided after considering –
unreasonable ●The FMV of the goods, services or facilities for which payment is made.
●The legitimate need of the business or profession
●The benefit arising to the assessee there from

Assessee Related Person means

An Individual ●Relative
●A person in whose business or profession the individual has substantial
interest.

A Company ●Director of the company or any relative of the director

●A person in whose business or profession the company or any of its director
or relative of such director has substantial interest.
●Any other company carrying on business or profession in which the
aforesaid company has substantial interest.
A Firm ●Partner of the firm or relative of partner
●A person in whose business or profession the firm or any of its partner or
relative of such partner has substantial interest.
An AOP ●A member of the Association or a relative of the member.
●A person in whose business or profession the AOP or any of its member or
relative of such member has substantial interest.
An HUF ●A member of the family or relative of such person
●A person in whose business or profession the HUF or any of its member or
relative of such member has substantial interest.
➢ Where an assessee sells his goods at a lower rate, there is no expenditure incurred by him,
hence sec. 40A(2) shall not be invoked.

Sec. 40A(3)/(3A) - Consequences of payment exceeding Rs. 10,000/- otherwise than by

account payee cheque or demand draft
 Applicability:

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 ➢ 100% of any expenditure in respect of which payment has been made in excess of specified
amount in a day otherwise than by an account payee cheque or account payee bank draft
or use of electronic clearing system through a bank account is disallowed.
Case specified amount
Payment made for plying, hiring, or Rs. 35,000
leasing goods carriages
Payment made for other expenses Rs.10,000

➢ Cash payment made in excess of above limits shall be deemed to be income of the
subsequent year if expense has been allowed as deduction in any PY on due basis.

 This provision is not applicable in the following cases ;

➢ If an assessee makes payment of two different bills (none of them exceeds Rs 10,000 /Rs.
35,000) at the same time in cash to the same person.
➢ If an assessee makes payment of a single bill (exceeding Rs. 10,000 / Rs. 35,000) on
different days to the same person in cash, this provision is not attracted, provided any of
the payment does not exceed the limit.
➢ Where payment is made over Rs. 10,000 (or Rs. 35,000) at a time, partly by account payee
cheque & partly in cash but the payment in cash alone at one time does not exceed
Rs.10,000 (or Rs. 35,000).
➢ Loan transactions – Because advancing of loan and repayment of principal amount is not
an expenditure
➢ Payment to a commission agent – because cost of goods received on consignment basis is
not an expenditure.
➢ The provision of sec. 40A(3) is attracted only when such expenditure is claimed as
deduction u/s 30 to 37.

 Exceptions [Rule 6DD]

Under the following circumstances, provision of Sec.40A(3) is not attracted even if the payment
is in excess of Rs.10,000 (or Rs.35,000) has been made through cash
(a) Where the payment is made to—
● The RBI or any banking company
● The SBI or any subsidiary bank
● Any co-operative bank or land mortgage bank.
● Any primary agricultural credit society or any primary credit society
● 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—
● Any letter of credit arrangements through a bank.
● A mail or telegraphic transfer through a bank.
● A book adjustment from any account in a bank to any other account in that or any other
bank.
● A bill of exchange made payable only to a bank.
● The use of electronic clearing system through a bank account.
● A credit card or debit card

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(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 i.e., Book
Adjustment.
(e) Where the payment is made for the purchase of the following to the cultivator, grower, or
producer of such articles, produce or products;
● Agricultural or forest produce; or
● The produce of animal husbandry (including livestock, meat, hides and skins) or dairy or
poultry farming; or
● Fish or fish products; or
● The products of horticulture or apiculture,
(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 Rs. 50,000.
(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 -
●is temporarily posted for a continuous period of 15 days or more in a place other than his
normal place of duty or on a ship: and
●does not maintain any account in any bank at such place or ship.
(j) Omitted
(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 travellers’ cheques in the normal course of his business.

Sec. 40A(7)- Provision for gratuity

No deduction shall be allowed in respect of any provision (by whatever name called) made by the
assessee for the payment of gratuity to his employees.
Exceptions: Any provision made by the assessee for the purpose of payment of a sum
● by way of any contribution towards an approved gratuity fund; or
● for the purpose of payment of any gratuity, that has become payable during the previous year.
- shall be allowed as deduction.

Sec. 40A(9) - Certain contributions not deductible

No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards
setting up or formation of, or as contribution to, any fund, trust, company, AOP, BOI, society or
other institution for any purpose.
Exception:
●Where such sum is paid by way of contribution towards approved superannuation fund,
recognised provident fund, approved gratuity fund, NPS as per the requirements under any law,
then such sum is allowed.

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●Contribution to unrecognized provident fund is disallowed.

Sec 41 - Deemed profit chargeable to tax as business income

The following receipts are chargeable to tax as business income even if the business to which such
receipt is related is not in existence during the previous year.
Section Contents
41(1) Recovery against any deduction
41(2) Balancing charge
41(3) Sale of asset used for scientific research
41(4) Recovery of Bad debts
41(5) Brought forward losses of defunct business

41(1) - The pre-requisite for the application of this section is that an allowance or deduction must
have been made previously while computing the taxable income . Later where such expense is
recovered or any benefit is accrued due to the liability, it shall be taxed in such PY.
Where benefit has been obtained by the successor in business, such benefit shall be taxable in
hands of successor.

41(5) – In cases where a receipt is deemed to be profit of business u/s 41, relating to a business
which ceased to exist and there are unabsorbed losses (not being speculation loss) which arouse
in that business during the PY in which it ceases to exist, it would be set off against income which
is chargeable under this section.

Sec. 43A- Consequence of changes in rate of exchange of currency

 Conditions
1. Assessee has imported an asset.
2. In consequence of a change in the rate of exchange during any PY after the acquisition of such
asset, there is an increase or reduction in the liability (as compared to the liability existing at the
time of acquisition of the asset) at the time of making payment -
a. towards the whole or a part of the cost of the asset; or
b. towards repayment of the whole or a part of the moneys borrowed by him from any person,
directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset
along with interest.

 Tax Treatment
The amount by which such liability is increased or reduced at the time of making the payment
(irrespective of the method of accounting adopted by the assessee) shall be added to or deducted
from the actual cost (as reduced by depreciation already claimed) of the asset.

 Points to remember
● If such increase or decrease arises after the depreciable asset is transferred (but block
exists), then such increase or decrease shall be adjusted in the WDV. If, however block cease to
exist, then such amount shall be treated as capital receipt or expense.
● Where the whole or any part of the liability aforesaid is met, 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.

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Sec. 43B - Expenditures allowed on cash basis
 Applicability
Deduction in respect of following expenses are allowed
● only if payment is made
● on or before the due date for furnishing return of income u/s 139(1) of the PY in which such
liability is incurred
1. Any tax, duty, cess, fee, by whatever name called, under any law for the time being in force.
2. Bonus or commission to employees.
3. Interest on loan or borrowing from any
➢ Public financial institutions (i.e., IFCI, LIC, etc.); or
➢ State financial corporation; or
➢ State industrial investment corporation.
➢ deposit taking non-banking financial company or
➢ systemically important non-deposit taking non-banking financial company (NBFC not
accepting/holding public deposits and having total assets of ≮ Rs. 500 crores as per last
audited Balance sheet and is also registered with RBI)

4. Interest on any loans and advances from a scheduled bank or a co-operative bank other than
a primary agricultural credit society or a primary co-operative agricultural and rural
development bank.
5. Salary in lieu of any leave (i.e., leave encashment).
6. Employer’s Contribution to any provident fund, superannuation fund, gratuity fund or any
other fund for the welfare of employees.
7. Any sum payable to the Indian Railways for the use of railway assets.

 Points to remember :
1. Deduction can, however, be claimed in the year of payment.
2. Where outstanding interest on loan (taken from Banks, PFIs, etc.) is converted into loan then
such interest is not deemed as interest paid.
3. As per sec. 36(1)(va), any sum received by an employer from his employees as contribution
towards provident fund, superannuation fund, any other fund set up under the provision of the
ESI Act, 1948 or any other fund for the welfare of such employees, is treated as an income of the
employer. Subsequently, when such sum is credited by the employer to the employee’s account
in the relevant fund on or before the due date of crediting such contribution prescribed under the
relevant Act, then deduction is allowed. If such contribution is not deposited within time allowed
as per the provisions of the relevant Act, the deduction shall never be allowed.

Sec 43CA – 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.
 Applicability
➢ where in respect of transfer of an asset (other than capital asset), being land or building or
both,
The stamp duty value > 110% of the consideration, then,
Full value of the consideration = the stamp duty value for the purposes of computing income

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 under the head PGBP.
➢ In case of transfer of an asset, being a residential unit,
The stamp duty value > 120% of the consideration, then,
Full value of the consideration = the stamp duty value for the purposes of computing income

Conditions for 120% of

consideration

The consideration
Transfer of residential Such transfer is by way of
unit takes place during received or
first time allotment of the accruing as a
the period between residential unit to any
12.11.2020 and result of such
person
30.06.2021 transfer ≤ Rs. 2
crores

"Residential unit" means an independent housing unit with separate facilities for living,
cooking, and sanitary requirement, distinctly separated from other residential units within
the building, which is directly accessible from an outer door or through an interior door in a
shared hallway and not by walking through the living space of another household

 Date of stamp duty value:

➢ Where the date of the agreement and the date of registration are not the same -
➢ Full value consideration = Stamp duty value on the date of agreement if following
conditions are satisfied:
• Whole or part of consideration is paid
• By any mode other than cash
• On or before the date of agreement.
 Reference to Valuation Officer
➢ The Assessing Officer can refer the case to the Valuation Officer if following conditions are
satisfied:
• Assessee claims that the value adopted or assessed by Stamp Valuation authority
exceeds the FMV of the property as on the date of transfer; &
• The value so adopted or assessed or has not been disputed in any appeal or revision or
no reference has been made before any other authority, court, or the High Court.
 Consequences where the value is determined by the Valuation Officer
➢ sale consideration of the asset shall be taken as minimum of the following –
• Value adopted or assessed or assessable for the purpose of stamp duty;
• Value determined by the Valuation Officer.

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Sec 44AA – Maintenance of books of accounts

Maintenance of books of accounts

(Sec 44AA)

Who should Where should How long

What books
maintain they be should they be
should be
maintained retained
maintained

1.Assessees carrying
on specified Place where the
professions assessee is carrying on Should be
Mentioned in business or maintained for a
2. Assessees carrying profession. minimum of 6
on business or other below chart
years from the
professions If there is more than
end of relevant
one place then he can
(both are subject to AY
maintain either at
threshold limits each such place or the
mentioned below) principal place of
3. Presumptive income business
cases (if income
declared lesser -
discussed below)

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 Who should maintain
books of accounts

Persons carrying Others (ie. assessees Assessees following

on Specified carrying on any business Presemptive income
professions as or any other profession)
defined u/s 44AA

Individuals / Others
If Gross HUF
receipts Gross
exceeds receipts
1,50,000 in does not Assesse
ALL of the exceed An assessee who
1,50,000 in If profits from declares
3 years If profits from (covered
any one of such exceeds profit u/s
immediately such busin./ u/s 44ADA,
the 3 years Rs. 2,50,000 44AE, 44BB 44AD but
immediately Or profes. exceeds
preceding Rs. 1,20,000 Or or 44BBB) declares
the PY. preceding Turnover/ who claims lower
Turnover/
the PY gross receipts gross receipts income to profit
exceeds Rs. exceeds Rs. 10 be lower (than the
25 lacs lacs in ANY of than the specified
in any of the the 3 years deemed limit) in
Maintain income any 5
such books 3 years immeidately
immeidately preceeding the computed succeeding
of accounts in AYs
and other preceeding PY
the PY accordance
documents with
as may be
prescribed the
in rule 6F respective
Maintain such books sections.
of accounts and
couments as may
enable to AO to
compute total income

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 Books to be maintained as per Rule 6F

• Cash book; Ledger

• Journal, if mercantile system of accounting is followed
• Carbon copies of machine numbered bills, exceeding Rs.25, issued by the
person and
• Original bills wherever issued to the person and receipts in respect of
expenditure incurred by the person or, where such bills and receipts are
not issued, and expenditure incurred does not exceed Rs. 50, payment
vouchers prepared and signed by the person.
Assessee engaged in medical profession are required to maintain two more
books
• Daily Case Register in Form 3C.
• Inventory records of drugs, medicines and other consumable accessories
used in the profession.

Specified profession -

1. Legal 2. Medical, 3.Engineering, 4. Architectural profession

5. Profession of accountancy, 6. Technical consultancy, 7. Interior decoration, 8.
Information technology, 9. Company secretary, 10. Authorised representative, 11.
Film artist OR
• Any other profession as is notified by the Board in the Official Gazette

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Sec 44AB – Tax audit

Assessees required to get their accounts audited by a CA

and to furnish audit report in a specified form
(3CA/3CD/3CB) on or before due date of furnishing return

An assessee An assessee An assessee

carrying on An assessee
carrying on covered u/s
business covered u/s
profession 44ADA and
44AE
44AD (4)

Total sales,
Gross receipts Assessee has Assessee has
turnover or
of profession claimed that claimed that
gross-receipts
for the his income his income is
of business for
previous year from such lower than the
the previous
exceeds Rs. 50 business is presumptive
year exceeds
lacs. lower than the income and his
Rs.1 crore.
deemed income exceeds
income Basic
computed in exemption
accordance limit
with the
respective
section.
➢ In case of person carrying business [aggregate cash receipts (incl. sales, turnover, gross
receipts)/payments (incl. amount incurred for expenditure) in the relevant P.Y does not exceed
5% of total receipt or payments respectively] => Total sales, turnover or gross receipts of
exceeds Rs. 10 crores for relevant P.Y.
➢ Where the accounts are required to be audited under any other law before the specified date, it
would be sufficient if such audit is carried on and the said report is furnished within the due
date.
➢ This section does not apply to persons who declare income on presumptive basis u/s 44AD and
his total sales or gross receipts does not exceed 2 crores.
➢ In case of 44AD, books of accounts are required to be maintained if the assessee opts out of the
scheme and declares a lower income.
➢ In case of any violation, provisions of sec 271B applies.

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Particulars Sec 44AD Sec 44ADA Sec 44AE
Eligible ➢ Resident individual, HUF or Assessee being An assessee owning
assessee Partnership firm engaged in individual or a not more than 10
eligible business and who partnership firm goods carriages at any
has not claimed deduction other than LLP is time during the
under section 10AA or engaged in profession P.Y.
Chapter VIA under “C– referred u/s 44AA(1),
Deductions in respect of namely, legal,
certain incomes” medical, engineering,
➢ Non-applicability of section architecture or
44AD in respect of the Profession of
following persons: accountancy or
1. LLP technical consultancy
2. A person carrying on or interior decoration
profession specified u/s or notified profession
44AA(1) (authorized
3. A person earning income in representative, film
the nature of Commision or artist, company
brokerage secretary, profession
4. A person carrying on any of information
agency business. technology)
Eligible Any business, other than Any profession Business of plying,
business/ business referred to in section specified under sec. hiring or leasing
profession 44AE, whose total turnover/ 44AA(1), whose Goods carriage
gross receipts in the P.Y. ≤ Rs. total gross receipts
200 lakhs ≤ Rs. 50 lacs in the
relevant P.Y.
Presumptive ➢ 8% of total turnover/ 50% of total gross For each heavy goods
income sales/ gross receipts or a receipts of such vehicle
sum higher than the profession or a sum Rs. 1,000 per ton of
aforesaid sum claimed to higher than the gross vehicle weight
have been earned by the aforesaid sum or unladen weight, as
assessee. claimed to have the case may be, for
➢ 6% of total turnover/ gross been earned by the every month or part
receipts in respect of the assessee. of a month and
amount of total turnover/ For other than heavy
sales/ gross receipts goods vehicle,
received by A/c payee Rs. 7,500 per month
cheque/ bank draft/ ECS / or part of a month
prescribed electronic mode during which such
during the P.Y. or before due vehicle is owned by
date of filing of return u/s the assessee or an
139(1) in respect of that amount claimed to
P.Y. have been actually
earned from such
vehicle, whichever is
higher.

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Relief from maintenance of books of accounts and audit : - Assessees opting for presumptive
scheme are not required to maintain books of accounts under 44AA and get it audited u/s 44AB.
This relives them from compliance and administrative burden.
Requirement After declaring profits on If the assessee claims If the assessee claims
of presumptive basis u/s 44AD, his profits to be lower his profits to be lower
maintenance say, for A.Y.2019-20, non- than profits than profits computed
of books u/s declaration of profits on computed by by applying
44AA and presumptive basis for any of applying presumptive rate, he
audit u/s the 5 successive A.Y.s presumptive rate, he has to comply with sec
44AB thereafter (i.e., from A.Y.2020- has to comply with 44AA and 44AB .
21 to A.Y.2024-25), say, for sec 44AA and 44AB if
A.Y. 2021-22, would disentitle his total income
the assessee from claiming exceeds basic
profits on presumptive basis exemption limit.
for 5 successive AYs
subsequent to the AY relevant
to the PY of such non
declaration (ie from AY 2022-
23 to 2026-27). In such a case
the assessee is subject to both
Sec.44AA and 44AB if his total
income exceeds basic
exemption limit.
Declaration of The assessee can declare a higher amount than the presumptive income in his
higher income return.
Deduction u/s ➢ Deduction allowed u/s 30 to 38 shall be deemed to have been given full
30 to 38 effect to and no further deduction shall be allowed.
➢ Even in case of firm, salary and interest paid to partners is not deductible.
However, in case of sec 40AE, it is subject to limit specified in sec 40(b)
WDV of asset WDV of any asset of an eligible business/ profession shall be deemed to have
been calculated as if the eligible assessee had claimed and had been actually
allowed depreciation for each of the relevant assessment years
Advance tax Such assesses are required to pay advance tax by 15th March of the financial year.
(i.e., only one instalment)

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