PROFITS AND GAINS FROM BUSINESS OR PROFESSION (PGBP)

Charging Section: Section 28 of Income Tax Act

Items of income chargeable to tax as income under the head PGBP are as
under:
a. Income from business or profession
b. Any compensation or other payment due to or received
c. Income from specific services performed for its members by a trade,
profession or business.
d. Incentives received or receivable by assessee carrying on export
business:
- Profit on sale of import entitlement.
- Cash assistance against exports under any scheme of Government
of India
- Customs duty or excise re-paid or repayable as drawback
- Profit on transfer of Duty Entitlement Pass Book Scheme or Duty-
Free Replenishment Certificate.
e. Value of any benefit or perquisite.
f. Sum due to, or received by, a partner of a firm.
g. Any sum received or receivable, in cash or kind, under an agreement
h. Any sum received under a keyman insurance policy.
i. Fair Market Value of inventory on its conversion/ treatment as
capital asset.
j. Sum received on account of capital asset referred under section
35AD.

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FORMAT FOR COMPUTATION OF PGBP:
PARTICULARS Amount Amount
(₹) (₹)
a. Net Profit as per Profit and Loss Account Xxxxx
b. Add: Expenses debited but not allowed as
deductions/ Specific disallowances / Deemed
Income i.e. income chargeable under this
head
- Depreciation debited (Allowed separately) xxxx
- Income Tax {Disallowed u/s 40(a)(ii)} xxxx
- Amounts towards expenses payable to
residents on which tax was deductible at
source but not deducted during the P.Y. or
deducted but not deposited upto due date
of filing Income Tax Return u/s 139(1):
30% of the such expense is disallowed
(The same is allowed in the Previous Year
in which the tax is deducted and remitted) xxxx
{Section 40(a)(ia)}
- Any expenditure incurred, in respect of
which payment is made for goods, services
or facilities to a related person, to the
extent same is excessive or unreasonable
{Section 40A(2)} xxxx
- Any expenditure incurred in respect of
which payment or aggregate of payments
to a person exceeding ₹10,000 in a single
day is made otherwise than by an Account
Payee Cheque/ Bank Draft/ECS
{Section 40(A)(3)} xxxx
- Certain sums payable by the assessee
which have not been paid on or before
due date of filing of ITR {Section 43B} xxxx
- Personal Expenses
{Not allowed as per Section 37} xxxx
- Capital expenditure
{Not allowed as per Section 37} xxxx
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 - Repairs of capital nature
{Not allowable as per section 30 & 31} xxxx
- Amortization of Preliminary expenditure
u/s 35D/ Expenditure incurred under
Voluntary Retirement scheme u/s 35DDA
{4/5th of such expenditure to be added
back} xxxx
- Fine or Penalty for infringement or breach
of law {However, penalty in nature of
damages for delay in completion of a
contract, being compensatory in nature, is
allowable.} xxxx
- All expenses related to income which is
not taxable under this head
{e.g. Municipal taxes in respect of
residential house property} xxxx
- Any sum paid by the assessee as an
employer by way of contribution to
pension scheme u/s 80CCD exceeding 10%
of salary xxxx
- Salary, remuneration, interest received by
a partner from the firm to the extent the
same is deductible in the hands of firm as
per section 40(b) xxxx
- Bad Debts allowed as deduction u/s 36(1)
in an earlier P.Y., now recovered.
{Deemed Income as per section 41(4)} xxxx
- Remission or Cessation of a trading liability
{Deemed as income u/s 41(1)} xxxx Xxxxx
c. Sub Total {a + b} Xxxxx
d. Less: Expenditure allowable as deduction but
not debited to statement of Profit and Loss
i.e. Specific deductions/ Items credited but
not taxable under this head:
- Depreciation as per Income Tax Rules
including Additional depreciation xxxx

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 - Balance additional depreciation @ 10% of
actual cost of Plant and Machinery
acquired and installed during preceding P.Y
i.e. P.Y 2021-22 in this case and put to use
for less than 180 days in that year xxxx
- Dividend Income {Taxable u/h IFOS} xxxx
- Agricultural Income xxxx
- Interest on Securities/ Savings Bank
Account/ FD {Taxable under the head IFOS} xxxx
- Profits on sale of Capital assets taxable u/h
Capital Gains xxxx
- Rental Income from House Property
{Taxable u/s Income from HP} xxxx
- Winnings from Lotteries, Horse Races,
games, etc {Taxable u/s IFOS} xxxx
- Gifts {As they are either not taxable or;
Taxable u/s IFOS} xxxx
- Income Tax Refund {Not Taxable} xxx
- Interest on Income Tax Refund
{Taxable u/h IFOS} xxxx (xxxx)
e. Therefore, PGBP. Xxxx

Illustration 1:
Compute Profits and Gains from Business or Profession of Mr.A for the
Assessment Year 2024-25 from the Profit and Loss Account and additional
information given for the Financial Year 2023-24:
Dr. Cr.
PARTICULARS Amount PARTICULARS Amount
(₹) (₹)
To Salaries 18,00,000 By Gross Profit 80,00,000
To Electricity Expenses 1,20,000 By Rent received for
Residential House 4,20,000
To Municipal Taxes for By Interest on Fixed
residential House 20,000 Deposit 12,000

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To Travelling Expenses 4,00,000 By Gift received from
Father-in-Law 68,000
To Income Tax 2,25,000 By Dividend from
Indian Companies 15,000
To Bad Debts 75,000 By Gains on sale of
Shares 1,25,000
To Provision for Bad By Income Tax
Debts 65,000 Refund (includes
interest of ₹2,000) 12,000
To Penalty – GST 88,000 By Winnings from
Lotteries 2,50,000
To Bonus to staff 1,50,000
To Printing and
Stationary 1,22,000
To Donation to National
Defence Fund 60,000
To Office Expenses 42,000
To Depreciation 1,62,000
To Professional Fees 6,00,000
To Purchase of Land 3,50,000
To Net Profit 46,23,000
TOTAL 89,02,000 TOTAL 89,02,000

Additional Information:
1. Depreciation as per provisions of Income Tax Rules is ₹2,00,000.
2. Out of Salaries of ₹18,00,000, ₹6,00,000 are paid to Mr.A.
3. Out of total travelling expenses, ₹1,00,000 relates to vacation taken
by Mr. A along with his family at Singapore.
4. Out of Bonus of ₹1,50,000 to staff, ₹20,000 has been paid on 1st
November, 2024.
5. Out of the Printing and Stationary Expenses, ₹40,000 are paid in cash
to Millennium Stationers on 14th January, 2024.
6. Out of Professional Fees of ₹6,00,000, ₹2,00,000 has been paid to
Mrs. A. The Fair Value of Services provided by her is ₹1,20,000.

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Further, on other fees of ₹1,00,000 paid to Mr.X, tax has not been
deducted at source.
SOLUTION:
Computation of Profits and Gains from Business or Profession of
Mr. A for the Assessment Year 2024-25
(Relevant to Previous Year 2023-24):
PARTICULARS Amount (₹) Amount (₹)
a. Net Profit as per Profit and Loss
Account 46,23,000
b. Add: Expenses debited but not
allowed as deductions/ Specific
disallowances
- Salaries debited for Sole
Proprietor 6,00,000
- Municipal Taxes for
residential House 20,000
- Traveling Expenses (Personal
Element) 1,00,000
- Income Tax 2,25,000
- Provision for Bad Debts 65,000
- GST Penalty 88,000
- Bonus to Staff {Section 43B} 20,000
- Printing and Stationery paid in
cash {Section 40(A)(3)} 40,000
- Donation {Not related to 60,000
business}
- Depreciation debited
{Allowed separately} 1,62,000
- Excessive amount of
Professional fees paid to
relative {Section 40(A)(2)}
₹2,00,000 (-) ₹1,80,000 20,000
- Amount paid towards 30,000
expenses to a resident

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 without TDS {Section
40(a)(ia)} 30% of ₹1,00,000
- Purchase of Land {Capital
Expenses} 3,50,000 17,80,000
c. Sub Total 64,03,000
d. Less: Items Credited but not
taxable under this head/ specific
allowances
- By Rent received from House
Property {Considered u/h
Income from House Property} 4,20,000
- Interest on Fixed deposit
{Taxable u/h IFOS} 12,000
- Gift received from Father-in-
law {Not Taxable, being from
relative} 68,000
- Dividend from Indian
Companies {Taxable u/h IFOS} 15,000
- Gains on Sale of Shares
{Taxable u/h Capital Gains} 1,25,000
- Income Tax Refund
(Not Taxable) 10,000
- Interest on Income Tax
Refund (Taxable u/h IFOS) 2,000
- Winnings from lotteries
(Taxable u/h IFOS) 2,50,000
- Depreciation as per Income
Tax Rules 2,00,000 (11,02,000)
e. Therefore, Profits and Gains
from Business or Profession 53,01,000

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IMPORTANT DEDUCTIONS/ ALLOWANCES:
1. Section 32: Depreciation

- Conditions to be satisfied:
a. The assessee must own the assets, wholly or partly.
b. The assets should be actually used by the assessee for the purpose of
his business during the Previous Year.
Note:
- If assets are not used exclusively for the business or profession
of the assessee but for other purposes as well, the depreciation
allowable would be a proportionate part of depreciation
allowance to which the assessee would be otherwise entitled.
- Use includes passive use in certain circumstances. Courts have
held that in certain circumstances, an asset can said to be in use
even when it is “kept ready for use”. E.g.: Depreciation can also
be claimed on stand by equipment and fire extinguishers if they
are ready for use. Therefore, use includes passive use as well.

- Computation of depreciation:
a. Depreciation is claimed on the BLOCK OF ASSETS.
b. It is claimed on Written Down Value (WDV) basis.
Written Down Value of block of asset is computed as follows:
PARTICULARS Amount (₹)
a. Opening Written Down Value of the Block of
Asset as on 01.04 of the P.Y. (01.04.2023) XXXXX
b. Add: Additions at Actual Cost during the P.Y. XXXXX
c. Sub Total XXXXX
d. Less: Sale Proceeds of Assets from the block
sold during the P.Y. (XXXX)
e. Therefore, WDV for claiming Depreciation XXXX
f. Depreciation for the P.Y. at the rate
prescribed in Rule 5 (XXXX)
g. Therefore, WDV at the end of the P.Y. i.e.
opening WDV for next P.Y.
{as on 01.04.2024} XXXXX

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c. In case of purchase of assets during the Previous Year, if it is put to
use for less than 180 days, then depreciation is allowed at half of
normal.
d. Meaning of ACTUAL COST of asset:
- It means actual cost of the asset to the assessee as reduced by
that portion of cost thereof, if any, as has been met directly or
indirectly by any other person or authority.
- However, if any payment or aggregate of payment is made to a
supplier of a asset in a day amount exceeding ₹10,000 in mode
other than Account Payee Cheque, Bank Draft or ECS (Now it also
includes RTGS, IMP, Net Banking, Debit Card, credit Card, UPI,
NEFT, BHIM, Adhaar Pay) then such amount shall not form part of
Actual Cost.
- Also refer Explanation to section 43(1) of Income Tax Act.
e. Rates of Depreciation for important block of assets:
a. Buildings – mainly used for residential purposes except hotels: 5%
b. Building not used for residential purposes: 10%
c. Purely Temporary erections such as wooden structures: 40%
d. Furniture and fittings including electrical fittings: 10%
e. Motor Car (other than those used in business of running them on
hire): 15%
f. Motor Buses, Motor Lorries, Motor Taxis used in business of
running them on hire: 30%
g. Aeroplanes, Aeroengines: 40%
h. Pollution Control Equipments: 40%
i. Live Saving Medical Equipment: 40%
j. Computers: 40%
k. Books (Annual publication or other than annual publications)
owned by assessee carrying on profession: 40%
l. Books owned by assessee carrying on business in running lending
libraries: 40%
m. Plant and Machine (General Rate): 15%
n. Know How, Patents, Copy rights, trademarks, licenses, franchises
or any other business or commercial rights of similar nature, NOT
BEING GOODWILL: 25%
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 - Additional Depreciation:
a. It is allowed on NEW PLANT AND MACHINERY @ 20%
b. of ACTUAL COST
c. to any assessee who is engaged in business of manufacture or
production of any article or thing.
d. In case, the plant and machinery is put to use for less than 180
days in the P.Y. in which it is purchased, then it is allowed @
10% in that P.Y. and balance 10% in subsequent P.Y.
e. Such additional depreciation is NOT AVAILABLE in respect of:
1. Second Hand Plant and Machinery
2. Any machine or plant installed in office premises, residential
accommodation or in any guest house.
3. Office appliances or road transport vehicles.
4. Any machine or plant, the whole or part of the actual cost
of which is allowed as deduction (whether by way of
depreciation or otherwise) in computing PGBP of any one
P.Y.
Illustration 2:
Mr. X, a Proprietor engaged in manufacture business furnishes the
following particulars:
PARTICULARS Amount (₹)
a. Opening balance of Plant and Machinery as on
01.04.2023 i.e. WDV as on 31.03.2023 after
reducing depreciation for P.Y. 2022-23. 30,00,000
b. New Plant and Machine purchased and put to use
on 08.06.2023 20,00,000
c. New Plant and Machine acquired and put to use on
15.12.2023 8,00,000
d. Computer acquired and installed in office premises
on 02.01.2024 3,00,000

Compute the amount of depreciation and additional depreciation as per

the Income Tax Act, 1961 for the Assessment Year 2024-25. Assume that
all the assets were purchased by way of Account Payee Cheque.

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Solution:
Computation of Depreciation and Additional Depreciation for the
Assessment Year 2024-25 (Relevant to Previous Year 2023-24):
Figures in ₹
PARTICULARS Plant and Computer
Machinery (40%)
(15%)
a. Opening WDV as on 01.04.2023 30,00,000 -
b. Add: Additions at Actual Cost
during the Previous Year 28,00,000 3,00,000
c. Therefore, Sub Total 58,00,000 3,00,000
d. Less: Depreciation for the Previous (12,90,000) (60,000)
Year (₹3,00,000 *
(NOTE) 40% * ½)
e. Therefore, WDV as on 01.04.2024 45,10,000 2,40,000

NOTE:
Computation of Depreciation on Plant and Machine:
PARTICULARS Amount (₹) Amount (₹)
Normal Depreciation:
On Plant and Machine purchased
during the P.Y. and put to use for less
than 180 days
(₹8,00,000 * 15% * 1/2) 60,000
On Balance WDV (₹50,00,000 * 15%) 7,50,000 8,10,000
Additional Depreciation:
On New Plant and Machine put to
use for less than 180 days
(₹8,00,000 * 10%) 80,000
On New Plant and Machine put to
use for 180 days and more
(₹20,00,000 * 20%) 4,00,000 4,80,000
Total Depreciation 12,90,000

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 DEPRECIATION (Section 32) v/s SHORT TERM CAPITAL GAINS on SALE of
DEPRECIABLE ASSET (Section 50):

- Where Sale Proceeds exceeds the “Opening WDV + Additions “of

the block, it gives rise to Short Term Capital Gains. {There cannot
be negative WDV}. (Demonstrated in case 2 in illustration 3)
- Further, where, the block of asset ceases to exist as all the assets
in the block are sold, there shall either be STCG or STCL depending
on the Sale Proceeds. If Sale Proceeds exceeds “Opening WDV +
Additions” of the block, it gives rise to STCG (Demonstrated in
case 3 in illustration 3). However, if it is lower, it gives rise to STCL.
(Demonstrated in case 4 in illustration 3).
Illustration 3:
Following is the BLOCK of Asset of Computers (40%) in 4 cases:
FIGURES IN ₹
PARTICULARS Nos. Case 1 Nos. Case 2 Nos. Case 3 Nos. Case 4
Opening WDV 20 10,00,000 20 10,00,000 20 10,00,000 20 10,00,000
(+) Purchases 10 10,00,000 10 10,00,000 10 10,00,000 10 10,00,000
Sub Total 30 20,00,000 30 20,00,000 30 20,00,000 30 20,00,000
Less: Sales 25 17,00,000 26 21,00,000 30 22,00,000 30 17,50,000
WDV 5 3,00,000 (1,00,000) NIL (2,00,000) NIL 2,50,000
i.e.N.A. BUT N.A.
Depreciation 1,20,000 N.A. N.A. N.A.
Sec 32/ Sec 50 32 50 50 50
STCG/(STCL) N.A. 1,00,000 2,00,000 (2,50,000)

Notes:
- Nos. indicates number of assets.
- All new purchases of computer were put to use for 180 days or
more during the P.Y.

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Computation of Short-Term Capital Gains/ (Short Term Capital Loss) in
case 2, 3 & 4: Figures in ₹
PARTICULARS Case 2 Case 3 Case 4
a. Full Value of
Consideration/ Net
Sale Consideration 21,00,000 22,00,000 17,50,000
b. Less: Cost of
Acquisition/ Cost of
Improvement
(Opening WDV +
Additions) (20,00,000) (20,00,000) (20,00,000)
c. Therefore,
STCG/(STCL) 1,00,000 2,00,000 (2,50,000)

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PGBP {Continued} …..

EXPENDITURE ON SCIENTIFIC RESEARCH: {Section 35}

- It means activities for extension of knowledge in fields of natural or
applied science including agriculture, animal husbandry or fisheries.
- Broadly, Deduction is allowed to the extent of 100% in following
cases:
A. Expenditure made by Company engaged in business of bio-
technology or any business of manufacture or production of any
article.
B. Expenditure incurred by any assessee on scientific research
related to business {Revenue Expenditure or Capital expenditure
– Other than on land}.
C. Amount paid to Notified approved university/College/Research
Association/ Other institution for Social Sciences or Statistical
research, Approved National Laboratory/ University/ IIT.

INVESTMENT LINKED TAX INCENTIVES FOR SPECIFIED BUSINESS

(Section 35AD):
- Deduction is allowed to the extent of 100% for Capital Expenditure
in case of specified businesses.
- Following are SPECIFIED BUSINESSES: -
1. Setting up and Operating Cold Chain facilities for specified
products.
2. Setting up and Operating warehousing facilities for storing
agricultural produce.
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.
4. Building and operating a hotel of two star or above category,
anywhere in India.
5. Building and operating a hospital, anywhere in India, with at least
100 beds for patients.
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 6. Developing and building a housing project under a notified
scheme for slum redevelopment or rehabilitation framed by
Central Government or a State Government.
7. Developing and building a housing project under a notified
scheme for affordable housing framed by Central Government or
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.
10. Bee-keeping 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 transportation of iron
ore.
13. Setting up and operating a semiconductor wafer fabrication
manufacturing unit.
14. Developing or maintaining and operating or developing,
maintaining and operating a new infrastructure facility.
- The above businesses should not be set up by splitting up or
reconstruction of business already in existence. Also, it should not be
set up by transfer to a specified business of machinery or plant
previously used for any purpose.
- It should be noted that deduction is NOT ALLOWED for Capital
Expenditure incurred on acquisition of GOODWILL, LAND or
FINANCIAL INSTRUMENT.
- Also, any expenditure incurred in respect of which payment or
aggregate of payment made to a person of amount exceeding
₹10,000 in a day otherwise than by an Account Payee Cheque, Bank
Draft, ECS would not be eligible for deduction.
- Expenditure incurred prior to commencement of business would be
allowed as deduction in that Previous Year in which the assessee
commences the business. Only condition to be satisfied is that
amount incurred prior to commencement of business should be
capitalized in the books of account on date of commencement of
operations.

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 - No deduction u/s 10AA or Chapter VI-A under the heading C-
deductions in respect of certain incomes should have been claimed.
(Once the assessee has claimed benefit of deduction u/s 35AD for a
particular year in respect of specified business, he cannot claim the
benefit u/ch VI-A or section 10AA for the same or any other year and
vice-versa)
- No deduction under any other section for expenditure for which
deduction is allowed under this section.
- Any loss from specified business can be set off only against the
profit of another specified business.

ILLUSTRATION 4:
MNP Ltd. commenced operations of the business of a new four-star hotel
in Chennai on 01.04.2023. The company incurred capital expenditure of
₹40 lakhs during the period January 2023 to March 2023 exclusively for the
above business and capitalized the same in its books of account as on 1st
April, 2023.
Further, during the Previous Year 2023-24, it incurred capital expenditure
of ₹2.5 crore (out of which ₹1 crore was for acquisition of land) exclusively
for above business.
Compute the income under the head PGBP for the Assessment Year 2024-
25 assuming that MNP Ltd. has fulfilled all the conditions specified for claim
of deduction under section 35AD and has not claimed any deduction under
chapter VI-A under the heading C- Deductions in respect of certain
incomes.”
The profits from the business of running this hotel (before claiming
deduction under section 35AD) for the Assessment Year 2024-25 is ₹80
lakhs.
Assume that the company also has another existing business of running a
four star hotel in Kanpur which commenced operations 6 years back, the
profits from which was ₹130 lakhs for the Assessment Year 2024-25.

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SOLUTION:
Computation of Income from Business or Profession for the Assessment
Year 2024-25 (Relevant to Previous Year 2023-24):
PARTICULARS Amount Amount
(₹ in lakhs) (₹ in lakhs)
Income from Four Star Hotel in Chennai 80
Less: Eligible deduction under section
35AD
(a) Expenditure prior to
commencement 40
(b) Capital expenditure incurred in P.Y.
2023-24 (250 lakh – 100 lakh) 150 (190)
Total Loss from Four-star hotel in
Chennai (110)
Income from Four-star hotel in 130
Kanpur
Therefore, Income from business or
profession 20

Notes:
1. As per section 73A of Income Tax Act, loss from specified business
can be set off only against income from specified business.
2. Expenditure relating to acquisition of land is not allowed as
deduction under section 35AD.

AMORTISATION OF PRELIMINARY EXPENDITURE {SECTION 35D}

- It is allowed for Indian Companies and other resident non-corporate
taxpayers for the establishment of business concerns of the
expansion of business of existing concerns.
- Preliminary expenditure incurred shall be amortized over a period of
5 years. In short, 1/5th of such expenditure shall be allowed for each
of the 5 successive previous years beginning with the previous year
in which the business commences or the previous year in which the
extension of undertaking is completed.
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 - Eligible expenses – Expenditure in connection with –
a. The preparation of feasibility report.
b. The preparation of project report
c. Conducting market survey or any other survey necessary for the
business of the assessee.
d. Engineering services relating to the assessee’s business.
e. Legal charges for drafting any agreement between the assessee
and any other person for any purpose relating to the setting up to
conduct business of assessee.
f. Further, if the assessee is company – then also – expenditure
incurred by way of legal charges for drafting the Memorandum
and Articles of Association of Company; on printing of MOA, AOA,
fees for registering the company under the Companies Act and in
connection with issue for public subscription of shares or
debentures of the company like underwriting commission,
brokerage.
- Overall limits:
In case of Indian companies:
5% of cost of project or; 5% of Capital employed (whichever is higher)
In case of resident non-corporate assessee:
5% of the cost of project.
- No other deduction under any other provision of the Act

AMORTISATION OF EXPENDITURE INCURRED under VOLUNTARY

RETIREMENT SCHEME {Section 35DDA}:
- It is allowed to any assessee to the extent of 1/5th of the amount paid
for that P.Y. and the balance in 4 equal installments in the four
immediately succeeding previous years.
- No deduction under any provisions of this Act.

Other Deductions - Section 36

6
GENERAL DEDUCTIONS/ RESIDUARY EXPENSES – Section 37
- Revenue expenditure incurred for purpose of carrying in business,
profession but not allowable specifically in any of the above sections.
- It should be incurred by the assessee during the previous year.
- It must have been incurred after the business was set up.
- It should not be in the nature of any personal expenses of the
assessee.
- It should not be in nature of capital expenditure.
- It should not have been incurred by the assessee for any purpose
which is an offence or is prohibited by law.
- It should be noted that CSR Expenditure is disallowed under this
section. {As it is an application of income. But, if CSR expenditure
satisfied the conditions of deductions in section 30-36, it will be
allowed in that respective section}.
- Advertisement in souvenir of political parties: Not allowed as
deduction while computing PGBP. {But, it will be allowed u/s 80GGB
& 80GGC, as the case may be from Gross Total Income while
computing Total Income.}

INADMISSIBLE EXPENSES:

- 40(a)(i): Non compliance of TDS provisions w.r.t. payment to Non-

Residents

- 40(a)(ia): Non compliance of TDS provisions w.r.t. payment to

Residents : 30% of the such expenses are disallowed.

- 40(A)(2): Excessive payments to relatives

- 40(A)(3): Payment of expenses in excess of ₹10,000/₹35,000 in

mode other than Account Payee Cheque, Bank Draft, ECS, UPI,
BHIM, Adhaar Pay, NEFT, RTGS.

43B: Certain deductions to be made only on actual payment basis

-
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 {In short, if the amounts as mentioned in section 43B remains unpaid
upto due date of filing of ITR u/s 139(1), then such amount shall be
disallowed while computing PGBP.}

SECTION 40(b)

Allowability of Partner’s Remuneration and Interest on Partner’s

Capital to a Partnership Firm:

PARTNER’S REMUNERATION:

- It is allowed only if it is as per the partnership deed.

- It is allowed to the extent of lower of 2:

a. Remuneration as debited towards working partners

Or;
b. Ceiling Limit as follows:
BOOK PROFITS Amount (₹)
a. NEGATIVE i.e. Loss 3,00,000
b. POSITIVE
90% of Book Profits or;
Upto ₹3,00,000 ₹1,50,000, whichever is
higher
Above ₹3,00,00
On first ₹3,00,000 90% of Books Profits
On Book Profits exceeding
₹3,00,000 60% of Book Profits.

Here, Book Profits are computed as follows:

a. Net Profit as per P&L A/C xxxxx

b. Add: Expenses debited but not allowed as deduction xxxxx
c. Less: Items credited but not taxable under this head xxxxx
d. Add: Partner’s Remuneration debited xxxxx
e. Therefore, Book Profits xxxxx

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Interest on Partner’s Capital:

- It is allowed only if it is as per the deed.

- It is allowed to the extent of 12% of partner’s capital.

PGBP of the Firm:

Book Profits of the firm (-) Allowable Partner’s Remuneration
Notes:
1. It should be noted that whatever amount of remuneration and
interest on partner’s capital is allowed as deduction to the firm is
taxable in hands of partners under the head PGBP.
2. Share of profit of firm given to partners is exempt in the hands of
partner u/s 10(2A) of Income Tax Act.

Illustration 5:
Rao and Jain, a partnership firm consisting of two partners reports a net
profit of ₹7,00,000 before deduction of following items:
1. Salary of ₹20,000 each per month payable to two working partners
of the firm (as authorized by the deed of partnership firm).
2. Depreciation on Plant and Machine under section 32 (computed):
₹1,50,000.
3. Interest on Capital at 15% per annum (as per the deed of
partnership), the amount of capital eligible for interest: ₹5,00,000.
Compute:
1. Book Profit of the firm under section 40(b) of Income Tax Act.
2. Allowable working partner salary for Assessment Year 2024-25 as per
section 40(b) of Income Tax Act.
3. Profits and Gains from Business or profession of the firm.

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SOLUTION:
Computation of Book Profits, allowable partner’s remuneration and
PGBP of the firm for the Assessment Year 2024-25
(Relevant to Previous Year 2023-24):

PARTICULARS Amount (₹) Amount (₹)

a. Net Profit of the firm before deduction
of depreciation and interest on
partner's capital 7,00,000
b. Less: Depreciation as per Income Tax
Act (1,50,000)
c. Less: Interest on Partner’s Capital as
allowed {₹5,00,000 * 12%} (60,000)
d. BOOK PROFITS 4,90,000
e. Less: Remuneration
(Lower of following 2)
As per deed {₹20,000 * 2 * 12} 4,80,000
Or;
Ceiling limit u/s 40(b)
On first ₹3,00,000 @ 90% = ₹2,70,000
On balance in excess of
₹3,00,000 @ 60% = ₹1,14,000 3,84,000
(₹1,90,000 * 60%)
Therefore, allowable remuneration (3,84,000)
f. Therefore, PGBP 1,06,000

COMPULSARY MAINTENANCE OF ACCOUNTS: {Section 44AA}

TAX AUDIT: {Section 44AB}

APPLICABILITY:

- In case of person carrying on business:

a. If Turnover/Sales exceed ₹1 crore in relevant PY.
b. In case of Individual/HUF/Partnership Firm carrying on business
whose sales/turnover during PY exceed ₹2 crore.
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 c. For person whose aggregate cash receipts is not exceeding 5% of
total receipts and; aggregate cash payments are not exceeding 5%
of total payments then the threshold turnover limit for
applicability of tax audit shall be ₹10 crore.
- In case of person carrying on profession:
a. If the Gross receipts of assessee exceeds ₹50 lakh.
b. In case, the Gross Receipts is not exceeding ₹50 lakh and assessee
declares income less than presumed income of 50% and his
income exceeds basic exemption limit in that P.Y.
- In case of assessee covered u/s 44AE i.e. assessee engaged in
transport business:
Applicable if assessee declares income less than presumed income.

- Submission of Audit Report:

Due date of filing of Income Tax Return in case of assessee who are
required to get their accounts audited is 31st October of the relevant
assessment year.
The specified date for Tax Audit Report is one month prior to the due
date of furnishing of ITR i.e. 30th September of the relevant A.Y.

Illustration 6:

Comment on applicability of Tax Audit under section 44AB of the

Income Tax Act in the following cases for PY 2024-25:

1. Company assessee having turnover in business ₹120 lakhs, PGBP

declared: ₹20 lakhs.

Solution:
Here, as Turnover of Company assessee engaged in business
exceeds ₹1 crore, Tax Audit is applicable irrespective of PGBP
declared.
It should be noted that provisions of presumptive taxation of
section 44AD are NOT APPLICABLE in this case as assessee is not
individual, HUF or Firm. Hence, Section 44AD is N.A. even if T/O is
not exceeding ₹2 crore.
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2. What would be your answer in the above case, if the assessee is
not Company but an individual assessee?

Solution:
Here, provisions of section 44AD are applicable assessee being
INDIVIDUAL engaged in business, turnover NOT exceeding ₹2
crore. PGBP declared by the assessee is equal to or more than 8%
of ₹120 lakhs i.e. ₹9.6 lakhs. Hence, no need to maintain books of
accounts and no need of audit u/s 44AB.

3. A Partnership Firm (Not being LLP) has turnover in business of

₹3 crores, PGBP declared is ₹30 lakhs.

Solution:
Here, provisions of section 44AB w.r.t. Tax Audit shall apply as
Turnover in business exceeds ₹1 crore.
Note that provisions of section 44AD shall not apply in this case as
Turnover of assessee in business exceeds ₹2 crore.

4. Mr.A, a Chartered Accountant, engaged in Practice of

Accountancy has Gross Receipts of ₹60,00,000. He declares
PGBP of ₹32,00,000.
Solution:
Here Tax Audit u/s 44AB is mandatory as Gross Receipts in case of
assessee engaged in Profession exceeds ₹50,00,000 during the
P.Y.

5. What would be your answer in the above case, if the Gross

Receipts were ₹48,00,000 and PGBP declared is ₹20,00,000.

Solution:
Here section 44ADA is applicable as Gross receipts for assessee
engaged in profession is not exceeding ₹50,00,000.

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 PGBP declared by such assessee from profession is not at least
50% of the Gross Receipts & therefore, it is mandatory to maintain
books of Accounts as per section 44AA and get them audited u/s
44AB.

6. What would be your answer in Question 5, if PGBP declared is

₹25,00,000 instead of ₹20,00,000?

Here, section 44ADA provisions are applicable as Gross Receipts

in case of assessee engaged in profession is not exceeding
₹50,00,000. Further, he has declared PGBP of 50% or more of the
Gross Receipts & therefore, there is no need to maintain books of
accounts and also no need for audit u/s 44AB.

7. What would be your answer in Q.1, if the amount of ₹118 lakhs

was received via banking mode out of turnover of ₹120 lakhs?
Given also that out of expenses incurred, about 98% were
incurred via banking mode.

Solution:
Here, the limit applicable for tax audit shall be ₹10 crore as 95%
or more of the turnover is received by way other than cash and
also 95% or more of expenses are by way of other than cash.
Hence, provisions of section 44AB w.r.t. Tax Audit shall not apply.

8. An individual engaged in business is having turnover of ₹12

crores, declared PGBP of ₹2 crores.

Solution:
Here, TAX AUDIT is applicable as Turnover in business exceeds ₹1
crore. It should be noted that how much of turnover is received in
Bank / how much of expenses is done via bank does not matter as
Turnover exceeds ₹10 crore.
Note: Provisions of section 44AD do not apply as Turnover in
business exceeds ₹2 crores.

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PRESUMPTIVE TAXATION:

SECTION 44AD:

- Applicable for Resident individual, HUF or Partnership Firm (not

being LLP) engaged in business.
- Turnover in this business should be not exceeding ₹200 lakhs during
the P.Y.
- Further, w.e.f. A.Y 2024-25, if Turnover/Gross Receipts in the P.Y
does not exceed ₹300 lakhs and; aggregate cash receipts in the P.Y.
should not exceed 5% of total turnover/gross receipts.
- Presumptive Income:
Minimum income to be declared:
8% of Gross Receipts
6% of Gross Receipts in respect of Turnover which is received by way
of Account Payee cheque, Bank Draft, ECS, Credit Card, Debit Card,
NEFT, RTGS, UPI, Aadhaar Pay during the P.Y. or before due date of
filing of ITR.
- No need to maintain books of Accounts and get them audited if
income is declared as per section 44AD. However, if after declaring
profits on presumptive basis u/s 44AD, say, for A.Y. 2023-24, non-
declaration of profits on presumptive basis for any of 5 successive
A.Y.s thereafter (i.e. from A.Y. 2024-25 to A.Y. 2028-29), say, for A.Y.
2025-26, would disentitle the assessee from claiming profits on
presumptive basis for 5 successive A.Y. relevant to P.Y. of such non
declaration (i.e. from A.Y. 2026-27 – 2030-21). In such a case,
assessee would have to maintain books of accounts and get them
audited u/s 44AB if the total income exceeds basic exemption limit
in those years.

SECTION 44ADA:
- Applicable to Resident individual or partnership firm (but not LLP)
engaged in any profession.
- Gross receipts should not be exceeding ₹50 lakhs during a P.Y.

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- Also, w.e.f. A.Y 2024-25, if the gross receipts during a P.Y. does not
exceed ₹75 lakhs and the aggregate cash receipts in the relevant
P.Y. does not exceed 5% of total/gross receipts.

- Presumptive Income:
Minimum Income to be declared in 50% of Gross Receipts.
- No need to maintain books of accounts if profits declared is as per
44ADA. However, if profits declared is lower than 44ADA & total
income exceeds basic exemption limit, then maintain books of
Accounts and get them audited as per section 44AB.
Common notes for section 44AD & 44ADA:
- Deductions u/s 30 – 38 shall be deemed to have been given full effect
to and no further deduction shall be allowed. {Even Interest on
Partner’s Capital and Partner’s Remuneration of section 40(b) will
not be allowed}.
- Eligible assessee opting for provisions of these presumptive taxation
shall pay advance tax only in one instalment i.e. 100% of the advance
tax is payable by 15th March of the Previous Year.

SECTION 44AE:
- An assessee engaged in business of leasing, hiring, plying of goods
carriages and owning NOT MORE THAN 10 goods carriages at any
point of time during the Previous Year is eligible for section 44AE.
- Presumed Income to be declared:
For other than heavy goods vehicle: ₹7,500 per month or part
thereof during which such vehicle is owned.
For heavy goods vehicle: {Such vehicle of which gross weight
exceeds 12,000 kgs}: ₹1,000 per ton per month or part thereof.
- Deductions u/s 30 – 38 shall be deemed to have been given full effect
to and no further deduction shall be allowed. However, Interest on
Partner’s Capital and Partner’s Remuneration of section 40(b) will
be allowed.
- No need to maintain books of accounts if profits declared is as per
44AE. However, if profits declared is lower than 44AE & total income
15
 exceeds basic exemption limit, then maintain books of Accounts and
get them audited as per section 44AB.
- Eligible assessee has to pay advance tax in 4 installments.
Illustration 7:
A Partnership Firm not being LLP engaged in business having Turnover of
₹150 lakhs has received amount of ₹110 lakhs by way of Account payee
cheque upto 31.03.2024. Further ₹20 lakhs is received by way of Account
Payee cheque upto 31.07.2023. What is the deemed income to be declared
as per section 44AD?
Solution:
Deemed Income u/s 44AD is at 8% of turnover and in case of amount
received by way of Account Payee cheque/ Bank Draft/ ECS upto due date
of filing of ITR shall be at 6% of the amount so received from the turnover.
Computation of deemed income under section 44AD for A.Y. 2023-24
(Relevant to P.Y. 2023-24):
PARTICULARS Amount
(₹ in Lakhs)
a. Turnover amount received by way of account payee
cheque upto due date of filing of ITR
(110 lakh + 20 lakh) = 130 lakh
b. Deemed Income/ Presumed Income/ PGBP as per
section 44AD @ 6% on above 7.8
c. Balance Turnover {150 lakhs (-) 130 lakhs} = 20 lakhs
d. Deemed Income @ 8% of turnover 1.6
e. Therefore, Total Deemed Income/ Presumed
Income 9.4

Note:
If such amount or more than this is declared as income then no need to
maintain books of accounts and even no need for tax audit u/s 44AB.

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ILLUSTRATION 8:
Mr. Prakash is in the business of operating goods vehicle. As on 01.04.2023,
he had the following vehicles:
Vehicle Weight Date of Put to use
purchase during FY 2023-
24
A 8,500 02.04.2022 Yes
B 13,000 15.05.2022 Yes
C 12,000 04.08.2022 No. Under
Repair

During Previous Year 2023-24 he purchased the following vehicles:

Vehicle Weight Date of Put to use
purchase during FY 2023-
24
D 11,000 30.04.2023 10.05.2023
E 15,000 15.05.2023 18.05.2023

Compute his income under section 44AE of Income Tax Act for
Assessment Year 2024-25.
SOLUTION:
Computation of deemed/presumed income of Mr. Prakash for the
Assessment Year 2024-25 (Relevant to Previous Year 2023-24):
Vehicle Period Computation Amount (₹)
(Months)
A 12 ₹7,500 * 12 90,000
B 12 ₹1,000 * 13 * 12 1,56,000
C 12 ₹7,500 * 12 90,000
D 12 ₹7,500 * 12 90,000
E 11 ₹1,000 * 15 * 11 1,65,000
Total Income u/s 44AE 5,91,000

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INCOME OF BUSINESS INCOME IN CASES WHERE INCOME IS PARTLY
AGRICULTURAL AND PARTLY BUSINESS IN NATURE {It will be covered as
part of Agricultural income topic}

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