CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA.

Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar
Method of accounting [Sec. 145]: (viii) Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such
Income under the heads "Profits and gains of business or profession" shall be computed in accordance with method of policy.
accounting regularly employed by the assessee. There are two methods of accounting as follows: (ix) Fair market value of inventory on the date of its conversion or treatment as capital asset.
Mercantile system Cash system (x) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or
Income & expenses are recognised in the books of Income is recognised in the books on receipt basis goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the
account on accrual basis. whereas expenses are recognised on payment basis. expenditure on such capital asset has been allowed as a deduction under section 35AD.
Profit & Loss A/c or Income & Expenditure A/c will be Receipts & Payments A/c will be given in the question. Note: Speculation business should be treated as separate business.
given in the question. Indirect method is followed for Direct method is followed for computing business
computing business income. income. SECTIONS RELATING TO DEDUCTIONS
Section 30: Building used for Business / Profession – Deduction is allowed for Rent (when building is taken on rent),
Format for computing PGBP income in case of mercantile system of accounting: Revenue repairs, Rates & taxes and Insurance.
Particulars ` Section 31: Machinery / Plant / Furniture used for Business / Profession – Deduction is allowed for Revenue repairs
Net Profit as per P & L Account xxx & Insurance.
Add: Expenses debited to P&L A/c but disallowed or allowed under other heads xxx Section 38 – Building / Plant / Machinery / furniture not exclusively used for business or profession: Where
Add: Taxable business Income not credited to Profit & Loss A/c xxx any building, plant, machinery, furniture is used partly for the purpose of business or profession and partly for
Less: Incomes credited to P&L A/c but non-taxable or taxable under different heads xxx personal purpose, then deduction for repairs and maintenance, rent, rates and taxes, depreciation will be allowed
Less: Expenses allowable but not debited to Profit & Loss A/c xxx only to the extent assets are used for business / profession.
Taxable PGBP xxx
Section 32: Depreciation on assets: Following 3 conditions are required to be fulfilled for claiming deduction:
Format for computing PGBP income in case of Cash system of accounting: 1) The assets in respect of which depreciation is claimed must belong to either of the following categories, namely
Particulars ` (i) Tangible assets being buildings, machinery, plant or furniture;
(ii) Intangible assets being know-how, patents, copyrights, trademarks, licences, franchises or any other business
Income of a business or profession, actually received during the previous year. or commercial rights of similar nature.
(Irrespective of whether such income relates to the previous year or some other year.) xxx
2) Assessee must be the owner of the asset. Fractional ownership is also recognised for the claim of depreciation.
Less: Expenditure of business or profession actually paid during the previous year. Exception to the conditions that assessee must be owner of the asset:
(Irrespective of whether such expense relates to the previous year or some other year.). xxx i) If the assessee is occupying any building as a tenant then capital expenditure incurred towards renovation,
extension or improvement of such building can be capitalised and depreciation can be claimed on such
Taxable Income from Business / Profession (a – b) xxx
amount. [Explanation 1 to Section 32]
SECTION 28 - CHARGING SECTION: Following incomes are taxable under the head "PGBP": ii) If an asset is purchased under hire purchase system - Depreciation can be claimed on cash price of the
(i) Profits and gains of any business or profession carried on by the assessee during the previous year. asset.
(ii) Any compensation or other payment due to or received by: 3) Asset must be actually used by the assessee for the purpose of carrying on the business or profession during the
(a) any person managing the whole / substantially whole of the affairs of the Indian company, or any other relevant previous year.
company in India for modification / termination of the terms and conditions of such management contract. (i) Use includes active use as well as passive use.
(b) any person being agent, for termination or modification of the terms and conditions of such agency (ii) Proviso to section 32(1): if the asset is put to use for < 180 days in the year of acquisition then Depreciation
contract. deduction will be half of normal depreciation. [Refer example 2]
(c) any person, for, in connection with the vesting in the Government, or in any corporation owned or Life of asset can be divided into 3 phases:
controlled by the Government under any law for the time being in force, of the management of any a) Year of acquisition
property or business. (Nationalisation of a business) i) If an asset is put to use for > 180 days. (Means asset is put to use during the period from 1.4.2020 to
(d) any person, by whatever name called at or in connection with the termination or modification of the terms 3.10.2020) – Full Depreciation.
and conditions of any contract relating to his business. ii) If an asset is put to use for < 180 days. (Means asset is put to use on or after 4.10.2020) – Half
Depreciation
(iii) Income derived by any trade, professional or similar associations from specific services rendered by them to
b) Intermittent years – Full Depreciation
their members.
c) Year of Sale – No Depreciation.
(iv) In the case of an assessee carrying on export business, the following export incentives:
(a) Profit on sale of import-entitlements. Illustration to understand the Concept of Half depreciation:
(b) Cash assistance (Cash Compensatory Support - CCS) Cases Date of Date of Dep. u/s 32 from which year…?
(c) Excise or customs duty repaid (Duty Drawback) acquisition Installation Half or Full depreciation…?
(d) Profit on transfer of Duty entitlement pass book scheme or duty free replenishment certificate. 1. 1.7.2020 1.7.2020 Full Depreciation.
(v) The value of any benefit or perquisite (whether in cash or in kind) earned during the course of any business or 2. 1.1.2021 1.1.2021 Half Depreciation.
profession (the nexus between the business or profession and the receipt should be taken into consideration.) 3. 1.7.2020 1.1.2021 Half Depreciation.
(vi) Any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm from such PY 2020-21 (No Depreciation)
4. 1.7.2020 1.7.2021
firm. Where any such interest, salary, etc. has been disallowed u/s 40(b), in the case of the firm, the same PY 2021-22 (Full Depreciation)
shall not be taxed in the case of the partner. (This provision intends to avoid double taxation.) However, share PY 2020-21 (No Depreciation)
5. 1.7.2020 1.1.2022
of profit received by a partner from the firm is exempt as per Section 10(2A). PY 2021-22 (Full Depreciation)
(vii) Any sum whether received or receivable, in cash or kind, under an agreement : As per Section 32, Depreciation shall be computed on the “written down value” of “block of assets” as shown below:
(a) for not carrying out any activity in relation to any Business / Profession, or Opening value of the block of assets at the beginning of the previous year. xxx
(b) for not to share any know-how, patent, copyright, trade-mark, license, franchise or any other business or Add: Actual cost of assets acquired during the previous year and put to use. xxx
commercial right of similar nature. (Non-compete fees) Total (1) + (2) xxx
Exception: The aforesaid (a) is not applicable in respect of the following: Less: Money receivable in respect of any asset sold, discarded, demolished or destroyed. (xxx)
(a) Any sum received on account of transfer of the right to manufacture, produce or process any article or WDV for the purpose of depreciation xxx
thing to carry on any Business / Profession which is chargeable as capital gains; (x) Rate of Depreciation xx %
(b) Any sum received on account of transfer of a right to carry on any business, which is chargeable as
Depreciation u/s 32 xxx
capital gains;
As a consequence, the aforesaid receipt shall not be taxable as business income u/s 28.
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CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar
Determination of “actual cost” in certain specific circumstances Example 1: For Understanding of Section 32 Vs Section 50
Exp. to Sec. 43 (1) Mode of Acquisition Actual Cost Case I Case II Case III Case IV
Exp. 1 Asset acquired for scientific research Actual cost less deduction availed u/s 35. Particulars
Value Qty Value Qty Value Qty Value Qty
subsequently brought into business use.
Exp. 2 Asset acquired by way of gift or inheritance. WDV to the previous owner. Opening WDV of Block of Assets 100,000 2 100,000 2 100,000 2 100,000 2
Exp. 5 Building used for private purpose Cost of purchase / construction minus notional Add: Assets purchased (Put to use
subsequently brought into business use. depreciation calculated upto the year of for > 180 days) 80,000 2 80,000 2 80,000 2 80,000 2
bringing the asset to business use.
Total 180,000 4 180,000 4 180,000 4 180,000 4
Note: If payment or aggregate payment for acquiring asset is > 10,000 per person per day and payment is made by
any mode other than A/c payee cheque or A/c payee bank draft or ECS through bank or through such other Less: Assets sold. (Old Assets) (90,000) (1) (190,000) (1) (90,000) (4) (190,000) (4)
electronic mode (Rule 6ABBA) as may be prescribed, then such amount shall not be allowed to be added to the Closing WDV of Block of Assets 90,000 3 (10,000) 3 90,000 0 (10,000) 0
Block of asset. Consequently, no depreciation / amortisation shall be allowed on such amount. Whether closing WDV is
Yes No Yes No
positive……?
TABLE OF RATES AT WHICH DEPRECIATION IS ADMISSIBLE
Whether assets exist in the
BLOCK OF ASSETS Rate % Yes Yes No No
block……?
TANGIBLE ASSETS Depreciation
Consequence STCG u/s 50 STCL u/s 50 STCG u/s 50
(I) BUILDING : u/s 32(1)(ii)
(1) Buildings which are used mainly for residential purposes except hotel and boarding houses 5% Example 2: For understanding of "Half Rule" of Depreciation:
Case I Case II Case III Case IV
(2) Buildings which are not used mainly for residential purposes [i.e. office, factory, godown, hotels, 10%
boarding houses but other than (1) above and (3) below] Particulars Value Nos. Value Nos. Value Nos. Value Nos.
Opening WDV of Block
(3) (i) Buildings for installing plant and machinery forming part of water supply project or water 40%
of Assets 100,000 2 100,000 2 100,000 2 100,000 2
treatment system meant for infrastructure facilities
(ii) Purely temporary erections such as wooden structures 40% Add: Assets
purchased (Put to use
(II) FURNITURE AND FITTINGS : for < 180 days) 80,000 2 80,000 2 80,000 2 80,000 2
(4) Furniture and Fittings including electrical fittings (“Electrical fittings” include electrical wiring, 10% Total 180,000 4 180,000 4 180,000 4 180,000 4
switches, sockets, other fittings and fans, etc.) Less: Assets sold
(III) PLANT AND MACHINERY : (which asset is Old Old New New
sold…..?). (90,000) (1) (110,000) (1) (90,000) (1) (90,000) (2)
(5) Oil wells 15%
Closing WDV of Block
(6) Windmills and any specially designed devices running on windmills installed on or before 15% of Assets 90,000 3 70,000 3 90,000 3 90,000 2
31.3.2014 and any special devices including electric generators and pumps running on wind
Depreciation Calculation u/s 32(1)(ii):
energy installed on or before 31.3.2014.
Half Half Full Half Full Half
(7) Windmills and any specially designed devices which run on windmills installed on or after 40%
Particulars Rule Full Rule Rule Rule Rule Rule Rule Full Rule
1.4.2014.
Closing WDV 80,000 10,000 70,000 - 40,000 50,000 - 90,000
(8) Motor cars other than those used in a business of running them on hire. 15%
(x) Rate of Dep. 15% 15% 15% - 15% 15% - 15%
Note: 30% in case purchased from 23.08.2019 till 31.3.2020.
(9) Motor buses, lorries and taxis used in business of running on hire 30% Depreciation u/s 32 6,000 1,500 5,250 - 3,000 7,500 -
13,500
(including motor Lorries used in business of transportation of goods on hire.) (40,000
Note: 45% in case purchased from 23.08.2019 till 31.3.2020. Calculation of (80,000 x (10,000 (70,000 x x 15% x (50,000 (90,000
(10) Ocean going ships, speed boats operating on inland water, vessels other than speed boats 20% depreciation. 15% x ½) x 15%) 15% x ½) - ½) x 15%) - x 15%)
ordinarily operating on inland waters. Total Depreciation. 7,500/- 5,250/- 10,500/- 13,500/-
(11) Moulds used in rubber and plastic goods factories. 30% Note: Half rule is applicable in computation of “Normal depreciation” as well as “Additional depreciation”.
(12) Plant & Machinery used in semi-conductor industry covering all Integrated Circuits (ICs) 30% ADDITIONAL DEPRECIATION SECTION 32(1)(iia): Additional depreciation is allowed in following cases:
(13) Aero-plane and Aero-engines 40% 1. Additional depreciation is allowed on new machinery or plant acquired and installed after 31.3.2005,
2. Assessee is engaged in the business of manufacture / production of any articlele or thing or in the business of
(14) Specified air pollution control equipments, water pollution control equipments, soild waste 40%
Generation, transmission or distribution of power.
control equipment and soil waste recycling and resource recovery systems.
3. Additional depreciation = Actual cost x 20%.
(15) Energy Saving Devices (as specified) 40%
4. If the asset is put to use for less than 180 days then only half additional depreciation is allowed in such year. The
(16) Computer including computer software 40%
remaining half additional depreciation shall be allowed in the succeeding year.
(17) Books owned by professionals 40%
5. Additional depreciation will not be available in respect of:
(18) Books owned by assessee carrying on business in running lending libraries 40%
(i) Plant / machinery used earlier by any person either in India or any other country. (Second hand plant /
(19) Life saving medical equipments 40%
machinery – Additional depreciation not allowed)
(20) General Rate for Plant & Machinery (other than above) 15% (ii) It should not be Ship, aircraft or road transport vehicle.
INTANGIBLE ASSETS (iii) Plant / Machinery installed in any Office premises, residence or guest house.
(21) Know-how, patents, copyrights, trademarks, licences, franchises, or any other business or 25% (iv) It should not be any Office appliance.
commercial rights of similar nature.
(v) It should not be entitled to deduction at 100% as depreciation or otherwise.
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CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar

Note: Additional depreciation for manufacturing business set up in backward area of Andhra Pradesh, Bihar, (2) Eligible Investment: “New asset” is acquired and installed during the period from 1-04-2015 to 31-03-2020.
Telangana or West Bengal from 1st April 2015 to 31st March 2020 shall be 35% instead of 20%. “New Asset” for the purpose of section 32AD means new plant or machinery, but does not include following:
Note: Business of printing or printing & publishing = Manufacture, hence additional depreciation allowed. (i) any plant or machinery which before its installation by the assessee was used either within or outside
Distinction between Normal Depreciation & Additional Depreciation: India by any other person; (Second hand plant / machinery – Deduction not allowed)
(ii) any plant or machinery installed in any Office premises or any residential accommodation, including
Normal Depreciation Additional Depreciation
accommodation in the nature of a guest house;
To all Assessees To Manufacturers or power generation / transmission / distribution units. (iii) any Office appliances including computers or computer software;
On entire block (allowed Only on new assets (allowed only in the year in which asset is put to use and (iv) any Ship, aircraft or vehicle; or
every year) in the subsequent year) (v) any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of
For all types of assets Only for Plant & Machinery depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of
business or profession” of any previous year.
On WDV basis On actual cost
(3) Withdrawal of deduction if P&M is transferred within 5 years: if new plant / machinery is sold or otherwise
Different rates At 20% (35% in certain states) transferred within 5 years, then Deduction allowed earlier will be withdrawn and tax will be levied u/h PGBP.
Special provisions for depreciation for power generating & distribution unit Section 32(1)(i) This will be in addition to the taxable capital gains arising on the transfer of the asset.
(4) No withdrawal of deduction in case of business restructuring: Any transfer on account of amalgamation,
Depreciation computation for power generating and distributing unit. demerger or re-organisation of business of the assessee, shall not be treated as a violation of the above condition.
The above condition will then be applicable to the amalgamated company / resulting company / successor, as it
would have applied to the amalgamating company / demerged company / predecessor as if amalgamation /
OPTION – I Block of asset & WDV Method OPTION – II Individual asset & SLM Method demerger / succession had not taken place.
Consequences if the above assets are sold: SECTION 35AD - EXPENDITURE ON SPECIFIED BUSINESS
If Assessee had opted for block Computation of profit / loss If Assessee had opted for 1) Deduction for capital expenditure incurred for specified business: An assessee shall, if he opts (W.e.f AY
of asset & WDV method, for on sale of asset by power Individual asset & SLM method
2021-22), be allowed a deduction in respect of any capital expenditure incurred (excluding goodwill, land and
computing depreciation. generating & distribution unit. for computing depreciation.
financial instruments) wholly and exclusively for the purposes of below mentioned business carried on by the
assessee:
Profit / loss on sale of
asset will be computed Commencing
SP < WDV SP > WDV Specified business
as discussed in Case I, business on or after
Case II, Case III & i. Setting up & operating a cold chain facility 1.4.2009
Case IV in Example 1
Loss on sale = WDV – SP (It will be allowed as deduction as ii Setting up & operating a warehousing facility for storage of agricultural 1.4.2009
above.
terminal depreciation u/s 32 u/h PGBP in the year of sale. produce
iii Laying and operating a cross-country natural gas / crude / petroleum oil 1.4.2007
pipeline network for distribution, including storage facilities being an integral
SP > WDV but SP < OC SP > WDV & SP > OC
part of such network.
iv Building and operating, anywhere in India, a hotel of two-star or above category 1.4.2010
Profit on sale = SP – WDV as classified by the Central Government
OC – WDV SP – OC Note: Where the assessee builds a hotel of two-star or above category as
classified by the Central Government and subsequently, while continuing
It will be taxable as “Balancing charge”
u/s 41(2) u/h PGBP in the year of sale. to own the hotel, transfers the operation thereof to another person, the
It will be taxable u/s 50A u/h Income from
Capital Gains in the year of sale. assessee shall be deemed to be carrying on the specified business and
shall consequently, be entitled to deduction under this section.
DEPRECIATION IN CASE OF SUCCESSION, AMALGAMATION OR DEMERGER [PROVISO TO SECTION 32(1)] v. Building & operating in India, a hospital with at least 100 beds for patients. 1.4.2010
1) Depreciation on Common Assets (Assets which are used by pre-decessor / amalgamating company / vi Developing and building a housing project under a slum redevelopment or 1.4.2010
Demerged company as well as successor / Amalgamated company / resulting company): Depreciation shall rehabilitation scheme framed by the government and notified by the Board
be calculated as if succession / amalgamation / demerger has not taken place thereafter such depreciation should be vii Developing and building a housing project under a scheme for affordable 1.4.2011
apportioned between the predecessor / amalgamating company / demerged company and the successor / housing framed by the Central government or a State government and
amalgamated company / resulting company in the ratio of the number of days for which the assets were used by notified by the Board in accordance with the prescribed guidelines.
them. viii Production of fertilizer in India. (New plant or newly installed capacity in 1.4.2011
2) Depreciation on uncommon assets (assets which are acquired by successor / Amalgamated company /
an existing plant)
resulting company): Depreciation deduction in case of such assets will be allowed only to successor /
ix Setting up and operating an inland container depot or a container freight 1.4.2012
Amalgamated company / resulting company.
station notified or approved under the Customs Act, 1962
SECTION 32AD - DEDUCTION FOR ADDITIONAL INVESTMENT ALLOWANCE
x Bee-keeping and production of honey & beeswax 1.4.2012
An additional investment allowance shall be allowed, of an amount equal to 15% of the cost of new asset acquired
xi Setting up and operating a warehousing facility for storage of sugar 1.4.2012
and installed by an assessee, if:
xii laying and operating a slurry pipeline for the transportation of iron ore 1.4.2014
(1) Eligible assessee: Assessee should sets-up an undertaking or enterprise for manufacture or production of any
article or thing, in any notified backward areas in the State of Andhra Pradesh, Bihar, Telangana or West xiii Setting up and operating a semi-conductor wafer fabrication 1.4.2014
Bengal. manufacturing unit in accordance with guidelines as may be prescribed.

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CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar

xiv Developing or maintaining and operating or developing, maintaining and 1.4.2017 7) Section 35AD(7A): Any asset in respect of which a deduction is claimed and allowed under section 35AD, shall
operating a new infrastructure facility be used only for the specified business for a period of 8 years beginning with the previous year in which such
Notes: "Infrastructure facility" means: asset is acquired or constructed.
a) a road including toll road, a bridge or a rail system; 8) Section 35AD(7B): If asset in respect of which deduction is claimed and allowed u/s 35AD is used for any
b) a highway project including housing or other activities being an business other than specified business before expiry of 8 years as explained in Section 35AD(7A), then amount
integral part of the highway project; calculated as shown below will be taxable in the year in which asset acquired for specified business is used for
c) a water supply project, water treatment system, irrigation project, any other purpose.
sanitation and sewerage system or solid waste management system; Particulars `
d) a port, airport, inland waterway, inland port or navigational channel in Actual cost of asset to the assessee. xxx
the sea Less: Notional Depreciation eligible on such asset u/s 32
2) Quantum of deduction: An amount equal to 100% of capital expenditure incurred wholly and exclusively for such (Normal Depreciation + Additional Depreciation) (xxx)
aforesaid business is allowed as deduction as follows: Profit chargeable to tax in accordance with section 35AD(7B) xxx
Period during which capital Year in which deduction is allowed Note: Above amount can be added to block of asset and depreciation can be claimed on it. [Proviso to
expenditure is incurred Explanation 13 to Section 43(1) – (W.e.f AY 2018-19)]
a) Capital expenditure is incurred after Deduction is allowed in the year in which capital expenditure is 9) Section 35AD(7C): Section 35AD(7B) shall not apply to a company which has become a sick industrial company
commencement of business. incurred. u/s 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 within 8 years from the previous year in
b) Capital expenditure incurred prior to Deduction is allowed in the year in which operations of which such asset is acquired or constructed.
the commencement of business business are commenced, provided such expenditure is 10) Carry forward and set off of losses of Specified Business [Section 73A]: Provisions are as follows:
operations. capitalised in the books of accounts on the date of (i) Set-off only against gain of any specified business: Business Loss from a Business specified u/s 35AD
commencement of operations. from one Specified Business can be set off only against profits from another Specified Business and against
Note: If payment or aggregate payment for acquiring asset is > 10,000 per person per day and payment is no other income.
made by any mode other than A/c payee cheque or A/c payee bank draft or ECS through bank or through such (ii) Carry forward of loss for indefinite period: Balance loss remaining unabsorbed if any from Specified
other electronic mode (Rule 6ABBA) as may be prescribed, then such amount shall not be allowed as Business u/s 35AD, can be carried forward for an unlimited period (as against 8 years and 4 years). Such
deduction. loss can be carried forward only by filing Return of Income within the time limit given in section 139(3) /
3) Conditions to be satisfied for availing deduction: 139(1) read with Section 80.
(i) No deduction in case of restructuring of existing business: The business should not set up by splitting (iii) In subsequent years also, Set-off only against gain of any specified business: In the subsequent
up, or the reconstruction, of a business already in existence. years also, such loss can be set off only against profit from the same Specified Business or any other
(ii) Business should not be set-up by transfer of Second hand P&M: Business is not set up by the transfer Specified Business.
to the specified business of machinery or plant previously used for any business. (New plant and machinery
should be used). Section 35 - Expenditure on Scientific Research: Expenditure on scientific research can be classified as follows:
(iii) Second hand P&M upto 20% to total P&M is allowed: However, if the value of the machinery or plant so a) Expenditure incurred on carrying out in-house scientific research relating to the business carried on by the
transferred does not exceed 20% of the total value of the machinery or plant, this condition is not violated. assessee.
(iv) Second hand imported P&M allowed: For this purpose, imported machinery or plant which was used b) Expenditure by way of contribution or donation to outside agencies engaged in scientific research.
outside India by any person other than the assessee and for which no depreciation has been allowed under
Example for understanding unabsorbed expenditure on Scientific research.
the Act, shall not be regarded as machinery or plant previously used.
(v) Audit of books: Books of accounts should be audited. Particulars Case I Case II Case III
(vi) Audit report: The deduction under 35AD is available only if the accounts of the undertaking have been Net Profit as per P&L Account 100 100 100
audited by a chartered accountant and the audit report is furnished along with the return of income. Add: 100 100 100
(vii) Usage of pipeline capacity by person other than assessee and associated person: Assessee will have a) Expenses debited to P&L A/c but disallowed or allowed under other
rd th
to make 1/3 of its total Natural Gas Pipeline Network capacity, or 1/4 of its total Petroleum Oil Pipeline
heads or considered separately.
Network capacity available for use on a common carrier basis by any person other than assessee or an
b) Taxable business Income not credited to Profit & Loss A/c.
‘Associated Person’ [‘Associated Person’ means a person who (1) Participates in the management of the
assessee, (2) Holds > 26% voting power in the assessee, (3) Appoints > 50% of the Board of Directors of Less: (50) (50) (250)
the Assessee, or (4) Guarantees > 10% of the total borrowings of the assessee. a) Incomes credited to P&L A/c but non-taxable or taxable under different
4) No deduction for depreciation u/s 32: once a deduction is claimed u/s 35AD in respect of acquisition of any heads.
capital asset for specified business, then no deduction for depreciation u/s 32 will be allowable on the same asset. b) Expenses allowable but not debited to Profit & Loss A/c
5) No deduction u/s 10AA or Chapter VIA under the heading “Deduction in respect of certain incomes”: PGBP income before deduction u/s 35 150 150 (50)
(W.e.f AY 2021-22) If the deduction has been claimed or opted by the assessee and allowed to him under this
Less: Deduction u/s 35 for scientific research (100) (200) (100)
section in respect of a particular specified business, then no deduction will be allowed in respect of that specified
business under Chapter VIA or u/s 10AA (SEZ) or under any other provision of the Income Tax Act, 1961. PGBP income after deduction u/s 35 50 (50) (150)
6) Tax treatment of Asset destroyed, demolished, discarded, transferred: Any Capital Asset in respect of which Analysis of above amount
a deduction was allowed u/s 35AD, is destroyed, demolished, discarded, transferred, then the cost of acquisition Taxable PGBP income 50 Nil Nil
or purchase price of such asset will be considered to be ‘NIL’ [as per Explanation 13 to Section 43(1)] and Business Loss Nil Nil (50)
accordingly, any sum received or receivable on account of transfer of such asset will entirely be chargeable to tax, Unabsorbed expenditure on scientific research Nil (50) (100)
but under the head ‘Profits and Gains of Business and Profession’ and not under the head ‘Capital Gains’ –
Section 28.
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 CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar

Scientific Contribution (Donations) to the third party Social or Statistical

Research (Outsourced Research expenses) Research

1. Amount contributed to approved scientific research Amount contributed to:

association, university, college or other institution. a) Approved research association.
Section 35(1)(ii): Deduction = 100% b) Approved college.
c) Approved university.
2. Amount contributed to approved Indian Company d) Approved institutions.
Section 35(1)(iia): Deduction = 100% Section 35(1)(ii): Deduction = 100%

3. Amount contributed to:

a) National Laboratory. b) University.
c) Indian Institute of Technology.
CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar
d) Approved research institution
Sec. 35 (2AA): Deduction = 100%
Pre-commencement EXPENDITURE ON SCIENTIFIC RESEARCH (SECTION. 35) Post commencement
research expenses (In house Research expenses i.e. expense incurred by assessee himself) Research expenses
Sold after using for Sale of an asset used for Sold without using
incurred during 3 years immediately preceding other purpose scientific Research for other purpose
the date of commencement of business. Revenue expenditure Capital expenditure

Deduction Step 1 : Add value of asset to Block of Asset

Revenue expenditure Capital expenditure @ 100% Cost of Other capital (Unabsorbed capital expenditure on scientific research)
Land expenditure

Salary and material Perquisites Cost of Other capital Deduction

Step 2 : On sale of asset Profit / Loss on sale will be calculated as discussed under
if approved by and Other Land expenditure i) Entire cost allowed as case I, II, III or IV of Example 1 on depreciation.
Not Allowed deduction.
Prescribed authority expenses
ii) Depreciation cannot be
Deduction claimed as deduction.
a) Entire cost allowed as deduction.
Deduction Deduction Not Allowed b) Depreciation cannot be claimed
@ 100% Not Allowed as deduction. SP < WDV (Note) SP > WDV (Note)

Note: Normally in case of in-house research 100% deduction is allowed. However in case of post commencement research expenditure if following Loss on sale = WDV – SP (It will be allowed as
conditions are satisfied then instead of 100%, higher deduction is allowed: (Weighted deduction is discontinued W.e.f PY 2020-21) deduction u/h PGBP in the year of sale).
a) Assessee should be company.
b) Assessee should be involved in business of bio-technology or in the business of manufacture or production of any article or thing except those
specified in eleventh schedule.
c) Research and development facility is approved by prescribed authority.
If abovementioned conditions are satisfied, then deduction will be allowed as shown below SP > WDV but SP < OC SP > WDV & SP > OC

Expense
s Profit on sale = SP – WDV
OC – WDV SP – OC
Land Building Other Revenue / Capital
expenditure
It will be taxable as u/s 41(3)
Not allowed 100% 100% [Reduced from 150% to 100% W.e.f PY 2020-21] under the head PGBP in the It will be taxable u/s 45 u/h
year of sale. Income from Capital Gains in
Chapter 5 - Profit & Gains of Business or Profession [Summary notes] 42
the year of sale.

Note : WDV = Unabsorbed capital expenditure on Scientific research.

Carry forward and set-off of deficiency in subsequent years: If on account of inadequacy or absence of profits of
the business, deduction on account of capital expenditure on scientific research cannot be allowed, fully or partly, the
deficiency so arising is to be carried forward as if it is unabsorbed depreciation.
Amortisation of Preliminary Expenses – Section 35D:
1) Eligible Assessee: Indian companies and resident non-corporate assesses are eligible for deduction. (Foreign
company cannot claim deduction even if it becomes resident in India)
2) Purpose: Preliminary expenditure incurred for the following purposes can qualify for amortisation:
(i) commencement of new business
(ii) after the commencement of business, in connection with the:
(a) extension of existing undertaking; or
(b) setting-up of new undertaking.
Chapter 5 - Profit & Gains of Business or Profession [Summary notes] 43
CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar

3) Preliminary Expenditure: It includes following: 4) Manner of claiming deduction: Every payment will be given a fresh period of 5 years. In other words, if one
(i) Legal expenditure for preparation of an agreement for the setting up of business. employee has been paid his VRS Compensation in three annual instalments of 25% , 45% and 30%, then each
(ii) Cost of preparation of feasibility report, project report & expenditure incurred for conducting any survey such annual instalment will get fresh five years, as the deduction under this section shall be in respect of amount
including market survey & engineering services related to the business provided the work is carried on by actually paid to the employee spread over five years.
the assessee or a concern notified by CBDT. 5) No Double deduction: No deduction shall be allowed in respect of the above expenditure under any other
(iii) Legal expenditure incurred for preparation of Memorandum & Articles of Association. provision of the Act.
(iv) Cost of printing Memorandum and Articles of Association. 6) Audit Report: Audit of accounts is necessary for claiming deduction where accounts are not audited under any
(v) Registration fees paid for incorporation. other law. Deduction under section 35DDA, will not be allowed unless assessee (other than a person being a
(vi) Expenses incurred in connection with public issue of shares and debentures being underwriting Company or a Co-Operative Society) furnishes an Audit Report of a Chartered Accountant in a prescribed form.
commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus. 7) Consequences in case of Amalgamation / Demerger: In case of amalgamation or demerger before the expiry
4) Ceiling Prescribed: Deduction can be claimed as per limits prescribed below: of the specified period of 5 years, the deduction shall continue to be available to the amalgamated or resulting
(i) Non-Company assessee: 5% of cost of project (cost of Fixed Assets) as on the last day of the relevant company, from the year of amalgamation or demerger, as if the amalgamation or demerger had not taken place.
previous year. 8) Consequences in case of Business re-organisation: Similar are the provisions in case of business
(ii) Company assesses: 5% of cost of project or 5% of capital employed at the option of the company. "Capital reorganisation whereby a firm or a proprietary concern is succeeded by a company, or a private company or
employed" means the aggregate of issued capital, debentures and long term borrowings as on the last day unlisted public company is succeeded by a LLP, fulfilling the conditions of 47. i.e., the deduction shall continue to
of relevant previous year. be available to the successor company or LLP from the year of conversion.
5) Deduction period = 5 years: The qualifying amount of the preliminary expenditure can be claimed as deduction
SECTION 36 - OTHER DEDUCTIONS
over a period of 5 years in equal instalments.
6) If Assessee is other than Company or Co-op society, then Audit of Books & submission of report is Section No. Deduction is allowed for
mandatory before due date given u/s 44AB: Where the assessee is a person other than a company or a co- 36(1)(i) Insurance premium for insuring stocks or stores.
operative society, no deduction shall be admissible under this section unless the accounts of the year in which 36(1)(ia) Insurance premium paid by federal milk co-operative society for insurance on the life of cattle owned
expenditure is incurred have been audited by a Chartered Accountant, before the specified date referred to in by a member of primary co-operative society.
section 44AB (W.e.f AY 2021-22) and the assessee furnishes the report of such audit by that date in the 36(1)(ib) Health Insurance premium paid for employees by any mode other than cash.
prescribed form duly signed and verified by such accountant and setting forth such particulars as may be 36(1)(ii) Bonus or commission paid to employees. (subject to 43B).
prescribed. Specified date referred to in section 44AB is one month prior to the due date of furnishing Return of
36(1)(iii) Interest on capital borrowed for the purpose of business or profession. However, interest on loans
Income u/s 139(1) (W.e.f 2021-22).
borrowed from public financial institutions or state financial institutions and interest on term loans
7) In case of business restructuring, deduction will be allowed to the new entity: Where the undertaking of an
Indian company, which is entitled to the deduction under this provision is transferred within the specified period for borrowed from scheduled banks shall be allowed on payment basis as per Section 43B.
which deduction is available in a scheme of amalgamation / demerger, deduction will be allowed to the Loan taken for acquiring asset: Interest from date of loan till the date asset is put to use should be
amalgamated company or resulting company in the same manner as allowable to the amalgamating / demerged capitalised.
company. No deduction shall be allowed to the amalgamating / demerged company for the previous year in which 36(1)(iiia) Discount on zero coupon bonds will be allowed as deduction on pro-rata basis.
amalgamation / demerger takes place. 36(1)(iv) "Contribution to recognised provident fund or approved superannuation fund (subject to section 43B).
8) Pictorial presentation of deduction u/s 35D: Summarised below: 36(1)(iva) Contribution made to an employee’s account, towards a pension scheme referred to in section
Assessee = Company Maximum Limit Assessee = Other than company 80CCD, to the extent it does not exceed 10% of the salary of the employee in the previous year.
Salary = Basic Salary + DA (Recognised) + Turnover commission.
36(1)(v) Contribution to an approved gratuity fund (subject to section 43B)
36(1)(va) Employee’s contribution to staff welfare schemes, if such sum is remitted on or before the relevant
Assessee = Indian Assessee ≠ Indian Assessee = Assessee =
Company Company Non-resident Resident due date to the concerned fund account. [The amount so received from employees is treated as
income u/s 2(24) and it is allowed as deduction only if it is paid within the stipulated due date].
36(1)(vii) Bad debt written off as irrecoverable is allowed as deduction subject to following conditions:
Amount eligible for deduction: Deduction Amount eligible for a) Debt should be incidental to the business.
Deduction
Lower of: NOT allowed deduction: Lower of:
NOT allowed b) It should have been taken into account in computing the income of the assessee or it should
1) Actual preliminary expenses. 1) Actual preliminary
represent money lent in the ordinary course of banking or money lending business.
2) Maximum limit: higher of: expenses.
a) 5% of cost of project. 2) Maximum limit: 5% c) It should be written off in the books of accounts.
b) 5% of capital employed of cost of project. d) Business in respect of which the debt is incurred should be continued during the previous year.
Note: The successor can claim deduction in respect of debt created by the predecessor.
Note: Deduction is allowed in 5 equal Annual Installments.
Section 41(4): Bad debts recovered are taxable to the assessee if the deduction for bad-debts was
Section 35DDA – Amortisation of expenditure incurred under voluntary retirement scheme: allowed to the assessee in the past. However if deduction for bad-debts was allowed as deduction to
1) Eligible assessee: This deduction is available to all assessee, whether Individual / HUF / Company / AOP / BOI / the pre-decessor and bad-debts are recovered by successor then it is not taxable in the hands of
Firm / LLP. successor.
2) Nature of expenditure: Deduction u/s 35DDA is allowed in respect of payment of any sum to an employee in 36(1)(ix) Company can claim deduction for expenditure incurred for promoting family planning among
employees. Revenue expenditure – allowed as deduction in the year in which it is incurred. Capital
connection with his voluntary retirement under any scheme of voluntary retirement. [whether framed in accordance with
expenditure – allowed as deduction in 5 equal annual installments. The provisions relating to carry
guidelines prescribed under 10(10C) or not.] forward of depreciation equally apply to unabsorbed capital expenditure on family planning.
3) Period of deduction: The total amount paid is deductible in 5 equal annual instalments, commencing from the 36(1)(xv) Securities Transaction Tax if the income is taxable under the head PGBP.
year of payment. 36(1)(xvi) Commodities Transaction Tax if the income is taxable under the head PGBP.
Chapter 5 - Profit & Gains of Business or Profession [Summary notes] 44 Chapter 5 - Profit & Gains of Business or Profession [Summary notes] 45
CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar

SECTION 37- General Deduction: Deduction is allowed subject to following conditions: Specific disallowances
i) Expenditure covered in sections 30 to 36 – Deduction cannot be claimed u/s 37(1). Section Provision
ii) Expense related to Business / Profession - Deduction allowed; Personal expense – Deduction not allowed. 40(a)(ii) Any sum paid on account of tax or cess levied on profits on the basis of or in proportion to the
iii) Revenue expenditure – Deduction allowed; Capital expenditure – Deduction not allowed. profits and gains of any business or profession i.e. Income Tax (including foreign taxes eligible
iv) Legal expenditure – Deduction allowed; illegal expense (expenditure incurred by an assessee for any purpose, for relief u/s 90 / 90A / 91)
which is an offence or which is prohibited by law) – Deduction not allowed. Explanation 1 to Section 37(1). 40(a)(iib) any amount paid by way of royalty, license fee, service fee, privilege fee, service charge or any
v) Corporate social responsibility expenses – Deduction not allowed. Explanation 2 to section 37(1). other fee or charge, by whatever name called, which is levied exclusively on; or which is
Section 40(a) - Specific Disallowances under this act (in the case of all assessees) appropriated, directly or indirectly, from, a State Government undertaking by the State
Government.
Section 40(a)(i) Section 40(a)(ia) Section 40(a)(iii)
40(a)(iv) Any payment to provident fund or other fund established for the benefit of employees of the
Place of payment & Nature of Payee assessee unless the assessee has made effective arrangements to secure that tax shall be
Payments made outside India or in Payments made in India to any Payment made outside India or in deducted at source from any payments made from the funds which are chargeable to tax under
India to a foreign company or non- resident person. India to a or non-resident person. the head salaries.
resident person. 40(a)(v) Tax liability paid by employer (on non-monetary perquisites), which is referred to in 10(10CC).
Nature of Payment
Due date mentioned u/s 139(1) for filling of return of Income:
Interest, Royalty, Fees for Technical Any sum payable to a resident on Salary
Sr. No. Nature of Assessee Due date u/s 139 (1)
Services or any other sum (except which tax is deductible at source under
1 Company (or) Assessee whose books of accounts 30th October of the assessment
salary). chapter XVII-B
are required to audited as per Sec 44AB. year.
Requirement of the section 2. Other cases 31st July of the assessment year.
TDS should be deducted upto the end TDS should be deducted upto the end TDS should be deducted upto the
SECTION 37(2B): Expenditure incurred by an assessee on advertisement in any souvenir, brochure, pamphlet or the like
of the year and TDS amount should of the year and TDS amount should be end of the year or TDS amount
be paid upto the due date of filing paid upto the due date of filing return should be paid upto the due date published by a political party cannot be claimed as deduction.
return of income u/s 139(1). of income u/s 139(1). of filing return of income u/s SECTION 40A(2) - Excessive payments to relatives
139(1). 1. Excess payment to Specified person (relative) is disallowed to the extent it is excess or unreasonable.
When disallowance shall apply? 2. The extent to which the expenditure is excessive or unreasonable shall be determined having regard to the fair
i) TDS is not deducted; OR i) TDS is not deducted; OR Neither tax is deducted nor it is market value of the goods, services or facilities for which the payment is made or the legitimate needs of the
ii) TDS is deducted but not paid upto ii) TDS is deducted but not paid paid. business or profession of the assessee or the benefit derived by or accruing to him there from.
the due date of filing returns of upto the due date of filing returns 3. For the purpose of this section, specified person includes relatives of the assessee, directors of the company,
income u/s 139(1). of income u/s 139(1). partners of firms, their relatives, persons having substantial interest in assessee’s business and person in
Quantum of Disallowance whose business assessee has substantial interest.
100% of the expenditure will be dis- 30% of the expenditure will be dis- 100% of the expenditure will be
Substantial Interest: Means beneficial owner of at least 20% of equity capital (in the case of a company) or 20%
allowed. allowed. dis-allowed. profits of a concern (in any other case) at any time during the previous year.
Nature of Disallowance (What if tax is subsequently deducted / paid?) Relative includes:
Deduction of 100% of expenditure Deduction of 30% of expenditure shall No deduction in future. (1) Individual – Spouse, Brother, Sister, Lineal ascendant, Lineal descendent.
shall be allowed in the year in which be allowed in the year in which tax is [Permanent disallowance] (2) Partnership firm – Partner & their relatives.
tax is deducted (if not deducted deducted (if not deducted earlier) and (3) Company – Director & their relatives.
earlier) and paid. paid.
SECTION 40A(3) - Disallowance out of cash expenditure exceeding ` 10,000
[Temporary disallowance] [Temporary disallowance]
i) Payment is made by A/c payee cheque, a/c payee bank draft / ECS / Such other electronic (Rule 6ABBA)
Relief if payee has paid the tax
mode as may be prescribed – Deduction is allowed for the expense irrespective of the amount.
if the assessee has failed to deduct if the assessee has failed to deduct No Relief.
tax and if the payee has: tax and if the payee has: ii) Payment is made by any mode other than A/c payee cheque, a/c payee bank draft / ECS / Such other
i) furnished his return of income i) furnished his return of income u/s electronic mode (Rule 6ABBA) as may be prescribed:
u/s 139; 139; a) Per expense / Per payment / Per day / Per person ≤ 10,000 (35,000 in case of payments made to
ii) has taken into account such ii) has taken into account such sum transporters) – Deduction is allowed for the expense.
sum for computing income in for computing income in such b) Per expense / Per payment / Per day / Per person > 10,000 (35,000 in case of payments made to
such return of income; and return of income; and transporters) – Deduction is disallowed for the expense.
iii) has paid the tax due on the iii) has paid the tax due on the Note: Where a deduction is allowed for any liability incurred in respect of any expenditure and subsequently payment for
income declared by him in such income declared by him in such such expense is made in any other year in violation of above provision, the payment made shall be considered as PGBP
return of income. return of income. income of the year of payment.
then it shall be deemed that the then it shall be deemed that the RULE 6 DD – EXCEPTIONS
assessee has deducted and paid the assessee has deducted and paid the In the following cases, no disallowance shall be made u/s 40A(3):
tax on such sum on the date of tax on such sum on the date of (a) Where payments are made to banks or primary agricultural credit society or primary credit society or LIC.
furnishing of return of income by the furnishing of return of income by the (b) Where the payment is made to government and where such payment is required to be made in legal tender.
payee. payee. E.g. payment of taxes.

Chapter 5 - Profit & Gains of Business or Profession [Summary notes] 46 Chapter 5 - Profit & Gains of Business or Profession [Summary notes] 47
CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar

(c) Where the payment is made by letter of credit arrangements through a bank; mail or telegraphic transfer SECTION 44AA - MAINTENANCE OF ACCOUNTS BY CERTAIN PERSONS
through a bank; Book adjustment from any account in a bank to any other account in that or any other bank; Bill
Assessees carrying Section 44AA: Maintenance Assessees carrying on Business /
of exchange made payable only to a bank; ECS through a Bank A/c; Credit Card; Debit Card. on Notified Profession of books of accounts Non-notified Profession.
(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 Agricultural or forest produce; produce of animal husbandry Check Gross Receipts Check Gross Receipts or PGBP Income:
(including livestock, meat, hides and skins) or dairy or poultry farming; Fish or fish products; products of Gross Receipts PGBP Income
Existing Profession Existing Business / Profession Existing Business / Profession
horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products. Gross Receipts > 1,50,000 during Gross Receipts > 10,00,000* in PGBP Income > 1,20,000** in
(f) Where the payment is made for the purchase of the products manufactured or processed without the aid of power in a ALL 3 years immediately preceding ANY OF 3 years immediately ANY OF 3 years immediately
cottage industry, to the producer of such products. the previous year. preceding the previous year preceding the previous year.
New Profession New Business/ profession New Business/ profession
(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
Expected Gross Receipts > Expected Gross Receipts > Expected PGBP Income >
person who ordinarily resides or is carrying on any business, profession or vocation in any such village or town; 1,50,000 during the current year 10,00,000* in the current year. 1,20,000** in the current year.
(h) Where any payment by way of gratuity compensation, etc. is paid to an employee or his legal heirs if such
payment does not exceed 50,000.
(i) Where the payment is made by an assessee by way of salary to his employee after TDS and when such Yes No Yes No
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. Maintain such Books as may enable
Maintain Specified Need not maintain
(j) Where the payment was required to be made on a day on which the banks were closed either on account of books of accounts. Assessing officer to compute total Income. books of accounts
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 * Incase of Individual and HUF carrying on business or profession limit of Gross receipts is increased from
10,00,000 to 25,00,000
services on behalf of such person.
** Incase of Individual and HUF carrying on business or profession limit of PGBP income is increased from
(l) Payment made by an authorised dealer or money changer against purchase of foreign currency or travellers
1,20,000 to 2,50,000
cheque in the normal course of his business.
SECTION 40A(7) - Disallowance in respect of provision for gratuity Notified Professions includes profession of law, medicine, engineering, accountancy, architecture, technical
Provision made towards contribution towards an approved gratuity fund. (Subject to S. 43B.) Deduction allowed. consultancy, interior decoration, authorised representative, film artist, company secretary or any other notified,
Provision for Gratuity which has become payable to employee (because employee is retired) Deduction allowed. profession like information technology.
Provision for gratuity payable to employees in future (employees are not retired) Deduction not allowed. Specified Books include Cash Book; Ledger; Journal (if mercantile system is adopted); Bills and vouchers in respect
of expenses incurred; Copies of bills issued for amounts exceeding ` 25.
SECTION 40A(9) – Employers contribution to unapproved / unrecognised / non-statutory funds is not allowed as deduction. In the case of a medical practitioner, in addition to above Daily case register (Form 3C) & Inventory register
SECTION 43B - Certain deductions allowed based on actual payment showing the stock of medicines (where drugs and medicines are dispensed during the course of practice) should be
maintained.
1. Tax, duty, cess or fee payable to government.
Number of years of maintenance: The books of accounts are required to be maintained & kept for 6 years, at the
2. Bonus / commission / Leave Salary payable to an employees.
place of business, and if there is more than one place of business, at the principal place of business.
3. Employers contribution to Provident Fund / Superannuation fund / Gratuity fund / any other fund.
SECTION 44AB - AUDIT OF ACCOUNTS OF CERTAIN PERSONS
4. Interest on any loan or borrowing from any public financial institution or State Financial Corporation or State
In following cases assessee is required to get their books of accounts compulsorily audited by a chartered accountant:
Industrial Investment Corporation like IDBI, IFCI, UPSIDC, Delhi Financial Corporation, Housing Finance Assessee When they are covered by the provisions of compulsory audit under section 44AB
Companies, Deposit taking NBFC and systematically important Non-deposit taking NBFC, etc.
Person carrying If the total Sales, Turnover or Gross receipt from such business for the relevant previous year
5. Interest on any loan or advance from a scheduled bank or a scheduled co-operative bank or Co-operative bank,
on business. exceeds 1 crore.
other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.
Important points to be noted:
6. Any sum payable by the assessee to the Indian Railways for the use of railway assets.
(i) 2 crores for assessee covered u/s 44AD: In case of person who declares income in
a) If above payments are made upto due date of furnishing return of income u/s 139(1) – Deduction is allowed.
accordance with the provisions of Section 44AD(1) and his total sales, turnover or gross
b) If above payments are made after due date of furnishing return of income u/s 139(1) – Deduction is not allowed
receipt from the business for the relevant previous year does not exceed 2 crores, then he is
while computing income of current year. However, deduction can be claimed in the year of payment.
not required to get the books of accounts audited.
SECTION 41(1) - Benefit received against any deduction allowed earlier respect of any loss, expenditure or (ii) 5 Crores if Cash receipt & Cash payments does not exceed 5% of total receipts & total
trading liability payments (W.e.f AY 2021-22): In the case of a person whose aggregate of all amounts
a) Where deduction has been allowed in respect of loss or expenditure and subsequently, the assessee or successor of received including amount received for sales, turnover or gross receipts during the previous
the business has obtained any amount in respect of such loss or expenditure the amount obtained shall be deemed to year, in cash, does not exceed 5% of the said amount; (And) aggregate of all payments made
be income. including amount incurred for expenditure, in cash, during the previous year does not exceed
b) Where deduction has been allowed in respect of trading liability and subsequently there is a remission or cessation of 5% of the said payment, them the limit for getting the books of account audited will be 5
a trading liability, amount written off is chargeable to tax irrespective of whether such remission / cessation is crores instead of 1 crore.
unilateral act or bilateral act.
Person carrying If the gross receipts from the profession for the relevant previous year exceeds 50 lakhs.
c) The provisions are applicable even to the successor who receives the amount / benefit.
on Profession.
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CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar

Person covered If such person claims that profits & gains from the business are lower than the profits & gains b) Maintenance of books of account and audit of books of account: An eligible assessee to whom the
u/s 44AE. computed on presumptive basis. In such case, the normal monetary limits for tax audit in provisions of section 44AD(4) are applicable and whose total income exceeds the basic exemption limit, shall
respect of business would not apply. be required to keep and maintain such books of account and other documents as required u/s 44AA(2) and
Person covered If a person carrying on Notified profession claims that profits & gains from such profession are get them audited and furnish a report of such audit as required under section 44AB.
u/s 44ADA. lower than the profits & gains computed on presumptive basis u/s 44ADA and his income 12) Payment of advance tax: Assessees opting for Section 44AD can pay advance tax pertaining to his business
exceeds the basic exemption limit. income in one instalment (i.e., on or before March 15 of the previous year).
Person covered If such person carrying on business is covered by the provisions of section 44AD(4) and his Special provision for computing Income from Profession on presumptive basis [Section 44ADA]: The
u/s 44AD(4). income exceeds the basic exemption limit. provisions of section 44ADA are given below:
Due date for obtaining audit report: Audit report should be obtained on or before the due date of filing return u/s 1) Eligible assessee: The assessee is resident and engaged in a Notified profession referred to in section 44AA(1)
139(1) and should be submitted electronically alongwith the return of income. (i.e., Profession of Law, Medicine, Accountancy, Architecture, Interior decoration, Authorised Representative,
Special provision for computing profits and gains of eligible business on presumptive basis [Section 44AD] Film Artist, Engineering, Company Secretary, Technical Consultancy, Information Technology or any other
The provisions of section 44AD are explained hereunder: profession as is notified by the Board).
1) Eligible assessee: Eligible Assessee means a Resident Individual, HUF or a Partnership firm (excluding LLP) 2) Limit of Gross receipt: Provisions of this section applies only when gross receipts of the assessee from the
and who has not claimed deduction u/s 10A, 10AA, 10B, 10BA or under chapter VI-A under the heading “C” – profession does not exceed ` 50 lakhs.
“Deduction in respect of certain incomes”, in the relevant assessment year. 3) Relief from maintenance of books of accounts and audit: The eligible assessee opting for presumptive
2) Eligible business: The provisions of this section shall not apply to - taxation scheme will not be required to maintain books of account under section 44AA(1) and get the accounts
(i) a person carrying on Notified profession as referred to in 44AA(1); audited under section 44AB in respect of such income.
(ii) a person earning income in the nature of commission or brokerage; or 4) Quantum of deemed income: If the above two conditions are satisfied then assessee need not maintain the
(iii) a person carrying on any agency business. books of accounts and his shall be calculated on estimated basis at a sum equal to 50% of the total gross
(iv) a person who is in the business of plying, hiring or leasing goods carriages. receipts. Gross receipts shall not include any payment received in the form of reimbursement of any expense.
3) Limit of Gross receipt: In the case of an eligible assessee carrying on eligible business whose gross receipts 5) Declaring higher income or Lower income: Provisions are as follows:
from such business does not exceed ` 2 crores. (a) Actual Income > Presumptive Income: If actual income of the assessee from such profession is higher
4) Relief from requirement of maintenance of Books of Accounts: Assessee covered by section 44AD, will be than 50% of Gross Receipts, then assessee may declare such higher income.
exempted from the requirement of maintenance of Books of Accounts as required by section 44AA. (b) Actual Income ≤ Presumptive Income: If actual income from such profession is less than 50% of Gross
5) Quantum of deemed income [Section 44AD(1)]: If the above three conditions are satisfied then assessee need Receipts, then also assessee shall be required to declare his income to be 50% of Gross Receipts.
not maintain the books of accounts and his profits shall be calculated on estimated basis as follows: However, if assessee wants to declare his income from such profession to be lower than 50% of Gross
(a) 6% of gross turnover or gross receipts which is received by account payee cheque or bank draft or by use of Receipts, then he can, but for such benefit he has to compulsorily maintain Books of Accounts and get them
electronic clearing system through a bank account or through such other electronic mode as may be audited by a Chartered Accountant, though he was not required to do so otherwise, (provided his total
prescribed, either during the relevant previous year or before the due date for filing the return of income as income exceeds the Basic Exemption Limit) – Section 44ADA(4)
prescribed under section 139(1). 6) Deductions deemed to have been allowed: All deductions under sections 30 to 38 are deemed to have been
(b) 8% of Gross turnover or gross receipts in any other case other than (a) above. already allowed and no further deduction is allowed under these sections – Section 44ADA(2).
Note: Assessee has the option to declare in his return of income, an amount higher than the presumptive income 7) Remuneration and Interest to partners deemed to have been allowed: Even Remuneration and Interest to
so calculated, claimed to have been actually earned by him. partners shall be deemed to have been allowed and a separate deduction cannot be claimed for it while
6) Set-off of Brought forward loss against presumptive income: Set-off of brought forward loss is not prohibited computing deemed income under this section.
against such income. Therefore, brought forward loss of earlier years can be set-off against such presumed 8) Computation of WDV of Block of assets: Even though no depreciation is allowed for assets used in such
income. Even losses of other heads of the current year will also be allowed to be set-off. profession, then also written down value of block of assets should be computed as if depreciation as applicable
7) Deductions deemed to have been allowed: All deductions u/s 30 to 38 including depreciation is deemed to has been allowed – Section 44ADA(3).
have been allowed. 9) Disallowance deemed to have been done: It will be assumed that disallowance, if any, under sections 40, 40A
8) Remuneration and Interest to partners deemed to have been allowed: Even Remuneration and Interest to and 43B has been considered while calculating the estimated income @ 50%.
partners shall be deemed to have been allowed and a separate deduction cannot be claimed for it while 10) Payment of advance tax: Assessees opting for Section 44AD can pay advance tax pertaining to his business
computing deemed income under this section.
income in one instalment (i.e., on or before March 15 of the previous year).
9) Computation of WDV of Block of assets: WDV of the assets used for the purposes of such business shall be
Business of Plying, Hiring or Leasing Goods Carriages [Section 44AE]
calculated as if the depreciation has been actually allowed.
1) Eligible assessee: Any assessee (whether Resident or Non-resident) who carries on the business of plying,
10) Disallowance deemed to have been done: It will be assumed that disallowance, if any, under sections 40, 40A
hiring or leasing goods carriages.
and 43B has been considered while calculating the estimated income @ 8% / 6%.
2) Limit on number of goods carriages: Assessee does not own more than 10 goods carriages, at any time
11) Consequences of not declaring income as per Section 44AD in subsequent years:
during the previous year.
a) Section 44AD(4): Where an eligible assessee declares his profits in accordance with the provisions of
3) Goods carriages taken on hire purchase / Instalment basis: If any goods carriage is acquired by assessee
Section 44AD(1) in any Previous Year, but then he does not declare his profits to be in accordance with the
provisions of Section 44AD(1) in any of the subsequent 5 Previous Years, then as per Section 44AD(4), he under a Hire Purchase / Installment Scheme, then for the purpose of section 44AE, assessee will be deemed to
will not be allowed to claim the benefit of Section 44AD(1) for the next 5 succeeding Previous Years following be the owner of such goods carriage, even if some instalments are still due. However, vehicles taken on rent
the Previous Year in which the income was not computed as per the provisions of Section 44AD(1). should not be considered as vehicle owned by the assessee.

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CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar

4) Exemption from requirement of maintenance of books of account and audit of books of account: SECTION 40(b) - DISALLOWANCE IN THE CASE OF PARTNERSHIP FIRM
Provisions of section 44AA and 44AB shall not apply to these businesses and while computing the monetary (i) Interest paid to a partner by a firm is not deductible unless the following conditions are fulfilled:
limits for these sections with reference to other business carried on by the assessee, the gross receipts or the (1) It should be authorised by and in accordance with the partnership deed.
income from the businesses covered by section 44AE shall be excluded. (2) It should relate to a period falling after the date of the partnership deed.
5) Quantum of deemed income: If the above two conditions are satisfied then assessee need not maintain the (3) It should not be exceeding 12% p.a. simple rate of interest
Further, the disallowance of interest is subject to the following explanations:
books of accounts and his profits shall be calculated as follows:
(ii) Any amount paid by way of salary, bonus, commission or remuneration by a firm to a partner is not deductible in
Goods Carriage Presumptive Income
the computation of income of the firm unless the following conditions are fulfilled :
Heavy goods vehicle Vehicle whose unladen weight is > 12,000 kgs
(1) It should be authorised by and in accordance with partnership deed.
Higher of: (2) It should relate to a period falling after the date of the partnership deed.
(a) ` 1,000 per ton per month or part of the month for the period for which (3) It should be within the prescribed limits, The prescribed limits are as follows:
vehicle was owned by the assessee for the previous year. Book Profit Remuneration (as a % of Book Profits)
(b) Income claimed to have been actually earned from such vehicle. On the first 3 lakhs or in case of a loss `1,50,000 or 90% whichever is higher
Other than heavy goods Vehicle whose unladen weight is ≤ 12,000 kgs On the balance book profit 60%
vehicle Higher of: (4) It should be paid to a working partner.
(a) ` 7,500 per month or part of a month per vehicle for the period for Note: "Book Profit" means profits after giving effect to all the provisions of this chapter but before deduction of
which vehicle was owned by the assessee for the previous year. remuneration.
(b) Income claimed to have been actually earned from such vehicle. Rule 6ABBA: Other electronic modes of payment shall include payment by Credit Card; Debit Card; Net Banking;
IMPS (Immediate Payment Service); UPI (Unified Payment Interface); RTGS (Real Time Gross Settlement); NEFT
Important points to be noted: (National Electronic Funds Transfer); and BHIM (Bharat Interface for Money).
(i) Presumptive income based on number of months for which vehicle is owned: Calculation of
PRACTICAL PROBLEMS FOR SELF STUDY
presumed income as above, is to be made at a particular amount for each month for which the
Q 1. WDV of 5 machineries at the beginning of the previous year 2020-21, forming part of a block of assets
vehicle was owned by the assessee, irrespective of the number of months for which the vehicle was
carrying 15% rate of depreciation was ` 5,00,000. The following 5 machines of the same block were bought.
actually used / operated by the assessee.
Machinery Date of Purchase Date when put to use Cost (`)
(ii) Meaning of ‘Goods Carriage’: Term ‘Goods Carriage’ shall have a meaning assigned to it Section
P 5.1.2020 14.1.2021 50,000
2 of Motor Vehicles Act, 1988.
Q 5.4.2020 15.5.2020 1,00,000
6) Declaring higher income, Lower income or loss: Following points should be noted in this regard:
R 15.5.2020 31.1.2021 2,00,000
(a) Actual Income > Presumptive Income: If actual income of the assessee is higher than the deemed
S 15.11.2020 27.3.2021 1,50,000
income, then assessee will have to declare such higher income. (W.e.f 1.4.2014).
T 15.5.2020 3.4.2021 2,00,000
(b) Actual Income < Presumptive Income: if actual income from such business is less than the presumed
Four machineries of this block were sold for ` 4,00,000. Expenses for effecting the sale were ` 25,000.
income, then also assessee shall be required to declare presumed income as above, to be his income from
Calculate the depreciation for the assessment year 2021-22. What will be the answer if four machineries
such business. However, if assessee wants to declare his income from such business to be lower than
were sold for ` 7,00,000 instead of ` 4,00,000 ?
presumed income (specially in a case where such actual income is negative), then he can, but for such
benefit he has to compulsorily maintain Books of Accounts and get them audited by a Chartered Q 2. Mr. Praveen Kumar has furnished the following particulars relating to payments made towards scientific
Accountant, though he was not required to do so otherwise. research for the year ended 31.3.2021:
(c) Negative income: If actual income from such business is negative (i.e. ‘Loss’), then such loss shall lapse. Particulars `
7) Deductions deemed to have been allowed: All deductions under sections 30 to 38 are deemed to have been
i) Payments made to K Research Ltd. 20,00,000
already allowed and no further deduction is allowed under these sections.
8) Deduction for salary and interest to partners will be allowed from such income subject to Section 40(b): ii) Payment made to LMN College. 15,00,000
In the case of an assessee which is a firm to which the provisions of section 44AE are applied, the salary and iii) Payment made to OPQ College. 10,00,000
interest paid to its partners shall be deducted from the income computed under these provisions. The allowance Note: K Research Ltd. and LMN College are approved research institutions
of the salary and interest shall be subject to the conditions and limits specified in section 40(b). and these payments are to be used for the purposes of scientific research.
9) Computation of WDV of Block of assets: Even though no depreciation is allowed for assets used in such
iv) Payment made to National Laboratory. 8,00,000
business, then also written down value of block of assets should be computed as if depreciation as applicable
v) Machinery purchased for in-house scientific research. 25,00,000
has been allowed.
10) Disallowance deemed to have been done: It will be assumed that disallowance, if any, under sections 40, vi) Salaries to research staff engaged in in-house scientific research. 12,00,000
40A and 43B has been considered while calculating the deemed income. Compute the amount of deduction available under section 35 of the Income-tax Act, 1961 while arriving at the
business income of the assessee.
“The harder you work for something, the greater you'll feel when you achieve it”

Chapter 5 - Profit & Gains of Business or Profession [Summary notes] 52 Chapter 5 - Profit & Gains of Business or Profession [Summary notes] 53
CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar

Q 3. Mr. Inder Kumar Vasudeva furnishes the following Manufacturing, Profit & Loss A/c for the previous year Q 4. Dr. J.L. Gupta is a renowned medical practitioner who maintains books of accounts on cash basis. The
st
ending 31 March, 2021: following is the Receipts and Payments Account for the financial year 2020-2021:
Particulars ` Particulars ` Particulars ` Particulars `
To Stock 11,000 By Sales 2,84,500 Balance b/f 44,000 Rent of clinic :
Consultation Fees : 2019-2020 1,200
To Purchases 80,000 By Stocks 26,400
2019-2020 5,000 2020-2021 24,800
To Manufacturing Wages 65,000
2020-2021 1,35,000 Water and Electricity Bills 2,000
To Factory Rent, Rates & Taxes 30,000
Visiting fees 30,000 Purchase of professional books 40,000
To Depreciation 15,000 Loan from Bank for Household Expenses 47,800
To Gross Profit 1,09,900 purchase of car 1,25,000 Collection charges for dividend
3,10,900 3,10,900 Sale of medicines 60,000 income 100
Profit & Loss A/c Gifts and presents 5,000 Motor car purchased 1,30,000
Particulars ` Particulars ` Royalties for articles Surgical equipment purchased 24,800
To Office Salaries 27,000 By Gross Profit b/d 1,09,900 published in Various journals 6,000 Income Tax 10,000
To Establishment Expenses 6,100 By Rent of staff quarters 19,000 Dividend (Gross) 10,000 Salary to staff 15,000
To Interest on Capital 3,300 built in 2001 Interest on Government Life Insurance Premium 15,000
Securities 7,000 Gift to son 5,000
To Fire Insurance 200 By Refund of Income 2,000
Interest on loan 11,000
To Bad Debts 7,000 Tax Penalty
Car expenses 15,000
To Income Tax 6,000 By Sale proceeds of a 25,000
Purchase of medicines 40,000
To Expenses on Sales Machinery Balance c/d 45,300
Tax proceedings 2,000 By Recovery of Bad 4,27,000 4,27,000
To Expenses of Income Debts, not allowed Compute his income from profession for the assessment year 2021-22 after taking into account the following
Tax proceedings 13,000 to be deducted in 6,000 information:
To Diwali Expenses 4,000 earlier years (1) Books worth ` 25,000 were purchased on 15.5.2020 and the balance on 5.2.2021.
To Legal Expenses 7,000 By Sundry Receipts 35,000 (2) Car was purchased on 1.7.2020 and the surgical equipment on 4.9.2020.
rd
To Medical Expenses of (3) It is estimated that 1/3 of the time car was used for personal purpose.
the proprietor 3,000 (4) Gifts and presents include ` 2,000 from patients in appreciation of his medical service and ` 3,000
To Staff Welfare Expenses 2,000 received as birthday gifts.
To Repair of Staff Quarters 4,000 (5) Opening and Closing Stock of medicines amounted to ` 10,000 and ` 6,000 respectively.
To Security Deposit for (6) O/s consultation Fees ` 15,000 as on 31.03.2020 & ` 40,000 as on 31.03.2021.
telex connection 10,000 (7) O/s Rent as on 31.03.2020 ` 2,000 & 31.3.2021 ` 15,000.
To Bonus payable to Q.5. Mr. X commenced the business of operating goods vehicles on 1.4.2020. He purchased the following vehicles
Employees 20,000
during the PY 2020-21. Compute his income under section 44AE for AY 2021-22.
To Provision for Tax :
Sr. No. Gross Vehicle weight in Kgs Number Date of Purchase
Sales Tax & Excise Duty 25,000
(1) 7,000 2 10.04.2020
To Municipal Taxes for staff
Quarters 4,000 (2) 6,500 1 15.03.2021
To General Reserve 26,000 (3) 10,000 3 16.07.2020
To Entertainment Expenses 16,000 (4) 11,000 1 02.01.2021
To Net Profit 11,300 (5) 15,000 2 29.08.2020
1,96,900 1,96,900 (6) 15,000 1 23.02.2021
You are required to compute the taxable profits from business after taking the following into consideration: Would your answer change if the two light goods vehicles purchased in April, 2020 were put to use only in July, 2020?
(i) Purchases include a petty purchase of ` 21,000. Its payment was made by a bearer cheque. Q.6. X Ltd. contributes 20% of basic salary to the account of each employee under a pension scheme referred to in
(ii) Assessee has always valued the stock at cost price but since P.Y. 2020-21, he has valued it at market section 80CCD. Dearness Allowance is 40% of basic salary and it forms part of pay of the employees.
price, which was in excess of the cost price by 10%. Compute the amount of deduction allowable under section 36(1)(iva), if the basic salary of the employees aggregate
(iii) Office salaries paid include ` 10,400 to the proprietor of the business. to ` 10 lakh. Would disallowance under section 40A(9) be attracted, and if so, to what extent?
(iv) Diwali expenses include gift of ` 1,000 made to the relatives.
(v) The written down value (WDV) of the block consisting of Machinery as on 1.4.2020 is ` 59,000.
Q.7. A firm has paid ` 7,50,000 as remuneration to its partners for the P.Y. 2020-21, in accordance with its partnership
Machinery, whose WDV as on 1.4.2020 was ` 5,000 was sold during the year. deed, and it has a book profit of ` 10 lakh. What is the remuneration allowable as deduction?
(vi) The written down value (WDV) of the block consisting of factory buildings as on 1.4.2020 is ` 90,000.
(vii) Sales tax and excise duties amounting to only ` 20,000 were paid on or before 31.7.2021.
(viii) Sales include goods withdrawn by Mr. Inder during the year for ` 10,000. The cost of these goods was
` 12,000. However, on the date of drawing, its market value was ` 9,000.
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CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar
Notes: It is mentioned that K Research Ltd. & LMN College are approved research institutions. We are therefore
SOLUTIONS assuming that OPQ College is not approved and hence amount contributed to OPQ College will not be eligible for any
deduction
Ans 1. Statement showing depreciation for PY 2020 – 21.
Case A: If four machineries were sold for 4,00,000: Ans 3. Statement showing taxable Business Income
Particulars Amount Amount Particulars ` `
Opening WDV of block of assets as on 1.4.2020 5,00,000 Net Profit as per P&L A/c 11,300
Add: Assets purchased during the year & put to use: Add: Expenses debited to P&L A/c but disallowed or considered
a) Machinery P (Full Depreciation) 50,000 separately:
b) Machinery Q (Full Depreciation) 1,00,000 Purchases exceeding ` 10,000 paid by bearer cheque [S. 40A(3)] 21,000
c) Machinery R (Half Depreciation) 2,00,000 Depreciation considered separately 15,000
d) Machinery S (Half Depreciation) 1,50,000 5,00,000 Salary to proprietor 10,400
Total 10,00,000 Interest on Capital 3,300
Less: Assets sold. [4,00,000 – 25,000] (3,75,000) Income Tax [S. 40(a)] 6,000
Closing WDV 6,25,000 Gift to relative 1,000
Calculation of Depreciation: Medical expenses of proprietor 3,000
a) Normal Depreciation: Bonus not paid till the due date of filing return of income 20,000
i) 3,50,000 x 15% x ½ 26,250 Sales tax & excise duty not paid till the due date of filing return of income
ii) 2,75,000 x 15% 41,250 67,500 [Section 43B] 5,000
b) Additional Depreciation: General Reserve 26,000
i) Machinery P (50,000 x 20%) 10,000 Drawings (12 – 10) 2,000 1,12,700
ii) Machinery Q (1,00,000 x 20%) 20,000 Less: Amount credited to P&L A/c but not taxable or taxable under other heads:
iii) Machinery R (2,00,000 x 20% x ½) 20,000 Overvaluation of closing stock (26,400 × 10 ÷ 110) 2,400
iv) Machinery S (1,50,000 x 20% x ½) 15,000 65,000 Refund of Income tax penalty 2,000
Total Depreciation 1,32,500 Sale of machinery 25,000
Case B: If four machineries were sold for 7,00,000: Bad debts recovered (earlier disallowed) 6,000 (35,400)
Particulars Amount Less: Allowable expenses not debited to Profit and Loss A/c:
Opening WDV of block of assets as on 1.4.2020 5,00,000 Depreciation allowable u/s 32 (W.N. 1) (14,100)
Add: Assets purchased during the year & put to use: Taxable Business Income 74,500
(As calculated in case A) 5,00,000 Working Note: For calculation of depreciation u/s 32.
Total 10,00,000 Particulars ` `
Less: Assets sold. [7,00,000 – 25,000] (6,75,000) Opening W.D.V as on 1.4.2020 59,000 90,000
Closing WDV 3,25,000 Add: Actual cost of asset acquired Nil Nil
Calculation of Depreciation: Less: Moneys payable in respect of asset sold etc. (25,000) -
a) Normal Depreciation: 3,25,000 x 15% x ½ 24,375 W.D.V. for Charging Depreciation 34,000 90,000
b) Additional Depreciation: (As calculated in case A) 65,000 Normal Depreciation u/s 32(1)(ii) 5,100 9,000
Total Depreciation 89,375 (34,000 × 15%) (90,000 × 10%)
Ans 2. Name of the assessee: Mr. Praveen Kumar Aggregate Depreciation u/s.32 = ` 14,100
Statement showing computation of deductions u/s 35 Notes:
Sr. Category of Amount of Section Amount of 1) Rent received from Staff quarters is an income incidental to the business. Consequently, expenditure incurred for
staff quarters is also allowable as deduction.
No. Expenses Expense Calculation Deduction
2) Any penalty paid is disallowable as per Explanation to Sec. 37(1). Therefore, refund of such penalty is not taxable.
1. Payment to K. Research Ltd. 20,00,000 35 (1)(iia) 20,00,000 x 100% 20,00,000 3) General Reserve is an appropriation of profit and not an expense.
2. Payment to LMN College 15,00,000 35(1)(ii) 15,00,000 x 150% 15,00,000 4) As per Sec. 41(4), recovery of bad debts is taxable only if they were earlier allowed as deduction.
100% w.e.f AY 2021-22. Ans 4. Statement showing taxable PGBP
3. Payment to OPQ 10,00,000 N.A. N.A. N.A. Particulars ` `
4. Payment to National 8,00,000 35(2AA) 8,00,000 x 150% 8,00,000 Taxable Professional Receipts:
Laboratory 100% w.e.f AY 2021-22. Consultation fees
2019 – 20 5,000 5,000
5. Machinery Purchased 25,00,000 35(1)(2) 25,00,000 x 100% 25,00,000
2020 – 21 1,35,000 1,40,000 1,35,000
6. Salary to Research Staff 12,00,000 35(1)(i) 12,00,000 x 100% 12,00,000 Visiting fees 30,000
AGGREGATE DEDUCTION u/s 35 80,00,000 Sale of Medicines 60,000
Gift & presents from patients 2,000 2,32,000
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CA INTERMEDIATE – INCOME TAX [May 2021] Compiled by Prof. CA. Jignesh Thakkar

Less: Allowable professional expenses:

Rent of clinic
2019 – 20 1,200 1,200
2020 – 21 24,800 26,000 24,800
Water & Electricity Bills 2,000
Salary to Staff 15,000
Interest on loan for purchase of car (11,000 x 2/3) 7,333
Car Expenses (15,000 x 2/3) 10,000
Cost of Medicines sold 44,000
[10,000 + 40,000 – 6,000]
Depreciation allowable u/s 32:
On books: (assumed annual publication) 13,000
[(25,000 x 40%) + (15,000 x 40% x ½)]
On Motor Car (1,30,000 x 15% x 2 ÷ 3) 13,000
On surgical equipments (24,800 x 15%) 3,720 (1,34,053)
Taxable PGBP 97,947
1. Opening and closing stock must be considered even under cash system of accounting.
2. The charge of deprecation does not depend upon the method of accounting. In other words, it is allowable
even under cash system of accounting.
Ans.5.
Date of Gross Nature of Vehicle No. of Calculation `
Purchase Vehicle Vehicle
weight
10.04.2020 7,000 Other than HGV 2 7,500 x 2 vehicles x 12 months 1,80,000
15.03.2021 6,500 Other than HGV 1 7,500 x 1 vehicle x 1 month 7,500
16.07.2020 10,000 Other than HGV 3 7,500 x 3 vehicles x 9 months 2,02,500
02.01.2021 11,000 Other than HGV 1 7,500 x 1 vehicle x 3 months 22,500
29.08.2020 15,000 HGV 2 15,000 x 2 vehicle x 8 months 2,40,000
23.02.2021 15,000 HGV 1 15,000 x 1 vehicle x 2 months 30,000
Total 6,82,500
Ans.6. Computation of deduction u/s 36(1)(iva) and disallowance u/s 40A(9) Particulars
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 + DA) 14,00,000
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 (1,40,000 )
plus dearness pay = 10% of ` 14,00,000 = ` 1,40,000)
Excess contribution disallowed under section 40A(9) 60,000

Ans.7. 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
Total 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).

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Chapter 5 - Profit & Gains of Business or Profession [Summary notes] 58