PGBP

Chapter 6 - PGBP

Basics
Charging Section - 28
The profits and gains of any business or profession carried on by the assessee at any time during the previous year
shall be chargeable under the head PGBP (This is not the complete charging section. Complete charging section is
given at the end of the chapter)

Method of accounting – Section 145(1)

Income chargeable under this head shall be computed in accordance with the method of accounting regularly
employed by the assessee either cash or mercantile basis.

General Notes
● Under head PGBP we have to calculate the income/profit from business and profession.
● Profit/Income depends upon two variables, Revenue or Receipts and Expenses.
● The PGBP has its own law in regard to expenses and receipts.
● The basic principle of calculating profit is to say (Revenue – Expenses) will be the same but what has to be
taken as revenue and what expenses are to be allowed as deduction has to be checked as per the law
(Income-tax Act, 1961, PGBP Chapter).
● The Main focus is on Expenses.

General deduction - Section 37

● It should have been incurred wholly and exclusively for business or profession.
● The expenditure should not be capital in nature
● It should have been incurred during the previous year.
● It should not be covered by section 30 to 36.
● Reserves/provisions for contingencies cannot be claimed as a deduction.

Explanation 1 to Section 37
➔ Any expenditure for any activity
➔ which is an offence or which is prohibited under any law
➔ Shall not be allowed as deduction.
➔ Therefore, penalties paid under any Act shall not be allowed deduction.
➔ But penalty for breach of contract shall be allowed deduction because that is not imposed under Act.

Explanation 2 CSR expenditure - Not Deductible

Any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in
section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the
purposes of the business or profession.

Explanation 3.
For the removal of doubts, it is hereby clarified that the expression "expenditure incurred by an assessee for any
purpose which is an offence or which is prohibited by law" under Explanation 1, shall include and shall be deemed
to have always included the expenditure incurred by an assessee,—
● for any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in
India or outside India; or

Neeraj Arora | www.edu91.org 6.1

 PGBP

● to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business
or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of
any law or rule or regulation or guideline, as the case may be, for the time being in force, governing the
conduct of such person; or (Expenditure incurred by assessee to provide benefit to a person and
acceptance of such benefit by person was in violation of any law etc )
● to compound an offence under any law for the time being in force, in India or outside India

Advertisement expenditure in magazine etc published by political party - Not deductible Section 37(2B)
No allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir,
brochure, tract, pamphlet or the like published by a political party.

Income from illegal business is chargeable to tax? (Answered in video)

Revenue v. Capital Expenditure- HOMEWORK (For Knowledge Purpose Only)

No definition is there in the Act. The distinction depends on the facts of each case. Following points are generally
kept in mind:-
1. Purchase of asset or routine expenditure: - If an expenditure is incurred for acquiring, improving or extending
a fixed asset it is capital. While revenue expenditures are incurred the normal course of business.
2. Benefits of expenditure in one year or several years. Normally revenue expenditure is consumed within one
year, whereas capital expenditure produces benefit over several years.
3. Recurring or non-recurring: - generally the same revenue expenditure has to be incurred again while capital
expenditures are incurred for once.

Distinction between capital expenditure and revenue expenditure – Do it yourself

Capital expenditure Revenue expenditure
1. No deduction shall be allowed for capital Deduction shall be allowed for revenue expenditure
expenditure while computing taxable income, while computing the taxable income, unless specifically
unless expressly specified in the law. disallowed under the law.
2. Expenditure incurred on acquisition, extension or Expenditure incurred in the ordinary course of business
improvement of fixed assets amounts to capital amounts to revenue expenditure.
expenditure.
3. The benefits from capital expenditure extends to The benefits from revenue expenditure are normally
more than one year. consumed within a year.
4. Capital expenditure improves the earning Revenue expenditure maintains the earning capacity of
capacity of the business. the business.
5. Usually, capital expenditure is non-recurring. Revenue expenditure is recurring in nature.
The facts and circumstances of each case judge the nature of an expenditure, whether it is capital or revenue,
lump sum or periodic payment has no relevance.

Rent, Rates, Taxes, Repairs and Insurance for Buildings - Section 30

If the premises are owned by the assessee himself, he will be allowed to debit the following amounts–
● Current repairs.
● Municipal tax or local tax or land revenue (but on payment basis as per section 43B)
● Premium for insurance of building
● If the building is owned by the assessee, he is not allowed to debit rent on notional basis (No income shall
be computed with regard to this house property under the head house property).

Neeraj Arora | www.edu91.org 6.2

 PGBP

If the building has been taken on rent, the assessee shall be allowed to debit the following expenses –
● Rent for the premises
● If he has undertaken to bear the cost of repairs, the amount of such repairs
● Municipal tax or local tax or land revenue (but on payment basis as per section 43B), if borne by the lessee.
● Premium for insurance of house, if borne by the lessee.
● If any capital expenditure has been incurred he can claim depreciation on the same.

Where the premises are used partly for business and partly for other purposes, only a proportionate part of the
expenses for that part of the premises used for purposes of business will be allowed as a deduction.

Repairs and insurance of machinery, plant and furniture - Section 31

In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or
profession, the following deductions shall be allowed—
1. The amount paid on account of current repairs.
2. Any premium paid for insurance.

Section 36
Payment of premium for the insurance of stocks
The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores
used for the purposes of the business or profession, shall be allowed to be debited.

Payment of premium in connection with Mediclaim policy

The amount of any premium paid by any mode of payment other than cash by the assessee as an employer for an
insurance on the health of his employees under a scheme framed in this behalf by the General Insurance
Corporation of India or any other insurer approved by IRDA i.e. payment towards medi-claim policy is allowed.

Bonus and Commission

Any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been
payable to him as profits or dividend if it had not been paid as bonus or commission shall be allowed.

Example - ABC Pvt. Ltd. has paid a bonus of ₹ 1 lakh to each of its shareholders Mr. A, Mr. B and Mr. C and this bonus would
have been otherwise paid to them as dividend if it has not been distributed as bonus, in this case, bonus is not allowed.
As per section 43B, payment of bonus or commission is allowed only on actual payment basis.

Payment of Interest
The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession shall
be allowed. Further assessee is allowed to borrow to any extent and also he can pay interest at any rate.

Loan can be taken either to incur revenue expenditure or to incur capital expenditure.

Loan for acquiring capital asset

➔ Any amount of the interest paid,
➔ in respect of capital borrowed any tangible and intangible asset
➔ for any period beginning from the date on which the capital was borrowed for acquisition of the asset
➔ till the date on which such asset was first put to use,
➔ shall not be allowed as deduction,

Neeraj Arora | www.edu91.org 6.3

 PGBP

➔ rather interest has to be capitalised

➔ but interest subsequent to the date of putting the asset to use shall be allowed as deduction.

Example - ABC Ltd. is an existing company and it has borrowed Rs. 20 lakhs @ 10% on 01.07.20XX for purchase of one plant
and machinery which was put to use on 01.01.20YY, in this case, interest for the period 01.07.20XX to 31.12.20XX shall be
capitalised and any interest subsequent to 31.12.20YY shall be debited to the profit and loss account.

Discount on Zero Coupon Bonds - Section 36(1)(iiia)

The pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond calculated
in the manner as may be prescribed shall be allowed to be debited.
● Zero Coupon Bond means a bond
● Issued by any infrastructure capital company or infrastructure capital fund or public sector company.
● In respect of which no payment and benefit is received or receivable before maturity or redemption.
● The pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond
calculated in the manner as may be prescribed shall be allowed to be debited.
● “Discount” means the difference between the amount received by the infrastructure capital company
or infrastructure capital fund or public sector company or scheduled bank issuing the bond and the
amount payable by such company or fund or public sector company or scheduled bank on maturity.
● Period of life of the bond” means the period commencing from the date of issue of the bond and
ending on the date of the maturity.
● The minimum period shall be 10 years and maximum period shall be 20 years.

Contributions to provident and other funds

● Any sum paid by the assessee
● as an employer by way of contribution towards a
● recognized provident fund or an approved superannuation fund,

What is superannuation fund (Not for exams)

The Income-tax law prescribes that an employer should enter into a scheme of insurance and purchase an annuity
(from the superannuation fund pool) for ensuring regular pension payment to its retired employee. The employer
may also give part of the superannuation benefit in lump-sum up to a certain prescribed limit. So it’s a fund made
for giving retirement benefits.

Employer’s contribution towards a Pension Scheme.

● Any sum paid by the assessee as an employer by way of contribution towards
● a pension scheme, as referred to in section 80CCD,
● on account of an employee
● to the extent it does not exceed ten percent of the salary of the employee in the previous year.
In other words deduction shall be allowed of the amount deposited or 10% of the salary whichever is lower.

Employer’s contribution towards approved Gratuity Fund

Any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by
him for the exclusive benefit of his employees.

Employee’s contribution received by the employer

● If the employer has received contribution from the employee towards provident fund or Superannuation
Fund or Employees State Insurance or towards any other welfare scheme of employees,

Neeraj Arora | www.edu91.org 6.4

 PGBP

● It will be considered to be income of the employer under the head business/profession

● But if the employer has credited the amount to the relevant account within the time allowed in the relevant
Act (Provident Fund Act etc),
● Employers can debit the amount to the profit and loss account otherwise expenditure is disallowed.
As per the Employees Provident Funds Scheme, 1952, the amounts under consideration in respect of wages of the
employees for any particular month shall be paid within 15 days of the close of every month.

EXAMPLE
Employee Contribution Towards Recognised Provident Fund - ₹ 1,00,000
Deposited by Due Date - ₹ 60,000
₹ 40,000 not deposited by the due date will be added in the income of the employer. Deduction will not be allowed for this
even if it is deposited later on.

Amount of debt taken into account in computing the income of the assessee as per income tax to be allowed as
deduction in the previous year in which such debt or part thereof becomes irrecoverable
The amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for
the previous year shall be allowed as deduction
● If any assessee has written off bad debts as irrecoverable in the books of accounts
● The debt has been taken into account as per income tax while computing the income of the assessee or it
should represent the money lent in the ordinary course of business of banking or money lending carried on
by the assessee.

Recovery of Bad-debts.
If any amount was debited as bad debts with regard to particular debt and subsequently some amount was
received in final settlement of the debt, in this case any deficiency shall be allowed as bad debt and any excess
shall be considered to be deemed income under section 41(4).

For more detailed information please see video

Example
During the previous year PK sold Goods worth ₹ 5,00,000 to Miss V. Amount received during the previous year = ₹ 50,000. On
31st March of the previous year ₹ 1,60,000 was written off in books of accounts. In the next year PK recovers the following
amounts as full and final payments.
Case 1 - ₹ 75,000
Case 2 - ₹ 2,00,000
Case 3 - ₹ 3,50,000
Discuss the tax consequences in the previous year and the next year.

Expenditure on Family Planning - Section 36(1)(ix)

● Any expenditure incurred by a company for the purpose of promoting family planning among its employees
is allowable as deduction.
● If, however, such expenditure is of a capital nature, One –fifth of such expenditure is allowable as deduction
for the previous year in which it was incurred and the balance is deductible in equal instalments in the next
four years.
● Any family planning expenditure which is not allowed as deduction due to inadequacy of profit, shall be
carried forward and set off in the same manner as unabsorbed depreciation. i.e. expenditure can be set off
from any income under any head except casual income and carry forward is allowed for unlimited periods.
(This topic will be auto covered with unabsorbed depreciation.)

Neeraj Arora | www.edu91.org 6.5

 PGBP

● If any capital asset has been purchased for the purpose of promotion of family planning norms among the
employees and subsequently the asset was sold, the sale proceeds shall be considered to be income under
the head business/profession as per section 41(3). but maximum to the extent of the amount debited to the
profit and loss account. If the business is not in existence at that time, even then it will be considered to be
income under the head business/profession.If subsequently there is any amalgamation or demerger, the
above provisions shall apply in case of amalgamated company or the resulting company as they would have
applied to the amalgamating company or the parent company. (This topic will be auto covered with Sale of
Scientific Research Asset)

Securities Transaction Tax - Section 36(1)(xv)

If the assessee has paid securities transaction tax in connection with taxable securities transactions which are part
of his business, STT shall be allowed to be debited to the profit and loss account.

Deduction for commodities transaction tax paid in respect of taxable commodities transactions - Section
36(1)(xvi)
● An amount
● equal to the CTT
● paid by the assessee in respect of the taxable commodities transactions
● entered into in the course of his business during the previous year shall be allowable as deduction,
● if the income arising from such taxable commodities transactions is included in the income computed
under the head "Profits and gains of business or profession".

Section 43B - Certain Deductions to be made only on actual payment

Deduction of the following will be allowed in the previous year in which they are incurred only when paid by the
assessee on or before the due date for furnishing the return of income under section 139(1) in respect of the
previous year in which the liability to pay such sum was incurred, otherwise deduction will be allowed in the year in
which it is paid.

(a) Any sum payable by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in
force, or
(b) Any sum payable by the assessee as an employer by way of contribution to any provident fund or
superannuation fund or gratuity fund or any other fund for the welfare of employees, or
(c) Bonus or Commission for services rendered payable to employees, or
(d) Any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or
a State Financial Corporation or a State Industrial Investment Corporation, or
(da) Any sum payable by the assessee as interest on any loan or borrowing from notified class of non-banking
financial companies, in accordance with the terms and conditions of the agreement governing such loan or
borrowing.
(e) Interest on any loan or advance from a scheduled bank or co-operative bank other than a primary agricultural
credit society or a primary cooperative agricultural and rural development bank, in accordance with the terms
and conditions of the agreement governing such loan or borrowing, or
(f) Any sum paid by the assessee as an employer in lieu of earned leave of his employee, (Leave encashment - will be
covered with salary chapter)or
(g) Any sum payable by the assessee to the Indian Railways for use of Railway assets.

Example
An assessee may collect GST from custome₹ during the month of March, 2024. However, in respect of such collections he

Neeraj Arora | www.edu91.org 6.6

 PGBP

may have to discharge the liability only within say 20th April, 2024 under the GST law. The Explanation cove₹ this type of
liability also. Consequently, if an assessee following accrual method of accounting has created a provision in respect of
such a liability the same is not deductible unless remitted within the due date specified in this section.

Conversion of interest into a loan or borrowing or debenture or any other instrument

If any sum payable by the assessee as interest on any such loan or borrowing or advance above, is converted into a
loan or borrowing or advance or debenture or any other instrument by which the liability to pay is deferred to a
future date, the interest so converted and not “actually paid” shall not be deemed as actual payment, and hence
would not be allowed as deduction. The deduction will be allowed in the previous year in which the converted
interest is actually paid.

Clarification on non-applicability of section 43B on employee's Contribution to welfare funds [Explanation 5 to

section 43B]
● As per section 2(24)(x), any sum received by an assessee, being an employer from his employee as
contribution to any provident fund or superannuation fund or any fund set up under Employee’s State
Insurance Act, 1948 or any other fund for the welfare of employees would be considered as the income of
an employer.
● The deduction in respect of above sum will be allowed to the assessee under section 36(1)(va) only if such
sum is credited by the assessee to the employee’s account in the relevant fund on or before the due date,
being the date specified under the relevant Act, Rule, order or notification issued thereunder.
● Provisions of section 43B, does not apply to employee’s contribution received by employer towards any
welfare fund.

Section 43B - Clause (h) - Amendment

Any sum payable by assessee to a micro or small enterprise
If the sum payable by the assessee to a micro or small enterprise is not paid as per written agreement (maximum
within 45 days) or within 15 days in case of no agreement, the deduction would be allowed in the previous year in
which it is actually paid.

Example
Mr. A has purchased goods of ₹ 10,000 from A & Co., a micro enterprise on 1.3.2024. As per the written agreement between
them, the payment has to be made by 5.4.2024. Mr. A follows mercantile method of accounting.

(i) If Mr. A paid the sum on 2.4.2024

Since Mr. A paid the sum on or before 5.4.2024, the deduction would be allowed in the P.Y. 2023-24.

(ii) If Mr. A paid the sum on 20.4.2024

Since Mr. A paid the sum beyond the time limit, the deduction would be allowed in the year of actual payment i.e., P.Y.
2024-25.

Meaning of Micro and Small Enterprise

S.No. Meaning

(1) In case of enterprise engaged in the manufacture or production of goods pertaining to specified
industries

Micro Enterprise Small Enterprise

Where the investment is plant & machinery ≤ ₹ 25 Where the investment is plant & machinery > ₹ 25
lakhs lakhs ≤ ₹ 5 crores

Neeraj Arora | www.edu91.org 6.7

 PGBP

Note : For calculating investment is plant & machinery, cost of pollution control, research and
development, indusrtrial safety devices and such notified items shall be excluded.

(2) In case of enterprises engaged in providing or rendering services

Micro Enterprise Small Enterprise

Where the investment is equipment ≤ ₹ 10 lakhs Where the investment is equipment > ₹ 10 lakhs ≤
₹ 2 crores

INADMISSIBLE DEDUCTIONS - Section 40

As per Section 40(a), notwithstanding anything to the contrary in Sections 30 - 38, the following amounts shall not
be deducted in computing the income chargeable under the head "Profits and gains of business or profession" —

40(a)(i) - Payments outside India or to non-residents on which tax has not been deducted/paid: (Not applicable on
salary)
● Any interest, royalty, fees for technical services or other sum chargeable in the hands of recipient under this
Act and payable -
○ outside India; or
○ in India to a non-resident, not being a company or to a foreign company, (In Short NR)
■ on which tax is deductible at source and such tax has not been deducted, (जिस पर टै क्स
DEDUCT होना था और नहीं हुआ) OR
■ after such deduction, has not been paid on or before the due date of furnishing return of
income specified under section 139(1). (Deduct तो हो गया पर 139(1) की Due Date से पहले
Deposit नहीं हुआ )
● However, where in respect of any sum -
○ tax has been deducted in any subsequent year; or
○ has been deducted during the previous year but paid after the due date specified in section 139(1),
○ then, such sum shall be allowed as a deduction in computing the income of the subsequent previous
year in which the TDS has been so paid.
● Where an assessee fails to deduct the whole or any part of the tax on any such sum
● but is not deemed to be an assessee in default under section 201,
● then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the
tax on such sum on
● the date of furnishing of return of income by the payee
■ When assessee is not deemed to be assessee in default
● ROI - The payee recipient has furnished his return of income.
● Taken in account - The payee recipient has taken into account the amount received
as income is his return of income
● Paid Tax - The payee recipient has paid the tax due on the income declared in such
return of income
● Certificate - The payer furnishes a certificate to this effect from a chartered
accountant in form no. 26A

40(a)(ia) - Payments to residents on which tax has not been deducted/paid - 30% of such sum shall not be
allowed as a deduction. (Applicable to all payments on including salary)
Following amount will be disallowed
● 30% of any sum payable to a resident on which -

Neeraj Arora | www.edu91.org 6.8

 PGBP

○tax is deductible at source and such tax has not been deducted; or (Tax Deduct होना था, Deduct नहीं
हुआ)
○ after such deduction, has not been paid on or before the due date of furnishing return of income
specified under section 139(1). (Deduct होने के बाद 139(1) तक pay नहीं हुआ)
● However, where in respect of any sum -
○ tax has been deducted in any subsequent year; or
○ has been deducted during the previous year but paid after the due date specified in section 139(1),
○ then, 30% of such sum shall be allowed as a deduction in computing the income of the subsequent
previous year in which the TDS has been so paid.
■ For example: The tax amounting to ₹ 10,000 was deductible in YEAR 1 in respect of interest
of ₹ 1 lakh payable to a resident Such interest of ₹ 1,00,000 will be allowed as deduction
during the YEAR only if the TDS of ₹ 10,000 is deducted in YEAR 1 and is paid on or before
due date specified u/s 139(1).
■ However, if such TDS is deducted in YEAR 1 and is paid in YEAR 2 after due date specified
u/s 139(1), then, 30% of such interest (i.e. Rs. 30,000) will not be allowed as deduction in
YEAR 1 but the same will be allowed as deduction in YEAR 2.
■ Further, if the TDS relating to such interest payment is not deducted in YEAR 1, then, 30% of
such interest shall not be allowed only in the YEAR 1, even if the same is paid on or before
due date specified in section 139(1) for furnishing return of Income for YEAR 1.
■ Deduction of such an expenditure will be allowed in the year in which the amount is deducted
and paid.

● Exception
■ Where an assessee fails to deduct the whole or any part of the tax on any such sum but is
not deemed to be an assessee in default (i.e. payee has deposited self-assessment tax
directly), then,
■ it shall be deemed that the assessee has deducted and paid the tax on such sum on the date
of furnishing of return of income by the resident payee.
■ When assessee is not deemed to be assessee in default
● The payee recipient has furnished his return of income.
● The payee recipient has taken into account the amount received as income is his
return of income
● The payee recipient has paid the tax due on the income declared in such return of
income
● The payer furnishes a certificate to this effect from a chartered accountant in form
no. 26A)

40(a)(ii) - Income-tax
Any sum paid on account of tax or cess levied on profits on the basis of or in proportion to the profits and gains of
any business or profession.

For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term "tax" shall include
and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.'.

40(a)(iib) - Certain fees, Royalty, service charges etc. payable by State Government undertaking to the State
Government
Any amount

Neeraj Arora | www.edu91.org 6.9

 PGBP

○ paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge,
by whatever name called, which is levied exclusively on; or
○ which is appropriated, directly or indirectly, from, a State Government undertaking by the State
Government.

40(a)(iii) - Payment of Salaries outside India or to non-residents on which tax has not been deducted and paid
Any payment which is chargeable under the head "Salaries", if it is payable
● outside India; or
● to a non-resident,
and if the tax has not been paid thereon nor deducted there from under Chapter XVII-B.

Language not clear - The section provides that a disallowance will be made 'if the tax has not been paid thereon nor deducted therefrom under
Chapter XVII-B'. On a plain reading, a sum can be disallowed only if both the conditions are fulfilled, that is, tax has not been paid nor deducted.
In other words if one of the two conditions is fulfilled, a disallowance cannot be made under section 40(a)(iii) of the Act. Thus, if tax has been
paid without deduction of tax at source, no disallowance can be made. Likewise, if tax has been deducted, then no disallowance can be made
even if the tax has not been paid. This interpretation is further supported by the fact that unlike the amended section 40(a)(i), there is no
provision under this section that provides for allowance in respect of deduction or payment of tax in a subsequent year. If a view is taken that
deduction is not allowed for salaries in respect of which tax has been deducted but not paid in the same year, it would result in a complete
disallowance of all such year-end salaries whose payment is made in the subsequent year (e.g. tax on salaries for March paid in April).
Obviously, such an absurd interpretation cannot be upheld.

40(a)(iv) - Contribution towards Employees welfare fund

Any payment by the employer to provident fund or other fund established for the benefit of the employees of the
assessee, unless he has made effective arrangements to secure that tax shall be deducted at source from any
payments made from the fund which are taxable under the head "Salaries"

40(a)(v) - Tax paid by employer on non-monetary perquisites

Any tax actually paid by an employer on non-monetary perquisites, as referred to in Section 10(10CC).

Miscellaneous
Particulars Income Tax GST
(Direct Taxes)

Interest for delayed payment NA A

Interest on loan taken for payment of tax liability NA A

Penalty NA NA

Refund Not Taxable Taxable

Interest on Refund Taxable u/h OS Taxable PGBP

Litigation expenses A A

Compliance Expenses (Professional Fees etc paid for filing returns etc) A A

Interest on delayed payment - Refunded NT Taxable

Payments to relatives and associates - Section 40A(2)

If the

Neeraj Arora | www.edu91.org 6.10

 PGBP

● assessee incurs any expenditure in respect of which payment has been or is to be made to 'specified
persons'; and
● the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to-
○ the fair market value of goods, services or facilities for which the payment is made; or
○ the legitimate needs of the business or profession of the assessee; or
the benefit derived by or accruing to assessee there from;
then, so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable
shall not be allowed as deduction.
Thus, amount to be disallowed = Expenditure incurred - FMV of goods/services/facilities/benefit etc. received by
the assessee.

Specified Person
Assessee Specified Person

Individual

"Relative" in relation to an individual, means the husband, wife, brother or sister or any lineal
ascendant or descendant of that individual.
NOTE - A lineal descendant, in legal usage, is a blood relative in the direct line of descent - the
children, grandchildren, great-grandchildren, etc. of a person.

Company,
Firm, HUF or
AOP

Neeraj Arora | www.edu91.org 6.11

 PGBP

Any assessee Any individual who has a substantial interest (20% or more voting power or beneficial
entitlement to 20% of profits) in the business or profession of the assessee; or A relative of such
individual.

Substantial interest
A person is deemed to have substantial interest in the business or profession, if such person is the beneficial owner
of at least 20 percent of equity capital (in the case of a company) or if such person is entitled to 20 per cent profits
of a concern (in any other case) at any time during the previous year.
Consider the following cases -
● X is a trader. He purchases goods from his brother. Market value is Rs. 1,30,000 whereas amount charged by his
brother is Rs. 1,40,000. The excess payment will be disallowed.
● A, B and C are three directors of X Ltd. X Ltd. employs Mrs. A or Mrs. B is paid by X Ltd. for her tax advice. Any
excess payment to these persons will be disallowed.
● X holds 20 per cent equity share capital in X Ltd. X Ltd. takes on hire trucks owned by the brother of X and pays rent.
Any excess payment of rent can be disallowed. (Relative of the person having substantial interest)
● Mrs. X holds 20 per cent equity share capital in Y Ltd. X purchases goods from Y Ltd. Any excess payment by X will
be disallowed.
● X is a trader. He sells his goods to his brother. Amount of bill is Rs. 1,00,000 whereas market value is Rs. 1,40,000. In
this case, X has not incurred any expenditure. Section 40A(2) would not be attracted. Business income of X will be
calculated by taking into consideration the amount of bill of Rs. 1,00,000.

Expenditure paid in aggregate exceeding Rs. 10,000 in a day, otherwise than by account payee cheque
or account payee bank draft Section 40A(3)
Where –
● assessee incurs an expenditure, which is allowable and claimed as deduction; and
● the payment or aggregate of payments made to a person in a day in respect of such expenditure, otherwise
than by an account payee cheque drawn on a bank or account payee bank draft or electronic clearing
system or through such other electronic mode as may be prescribed, exceeds Rs. 10,000;
then, no deduction shall be allowed in respect of such expenditure.

The prescribed electronic modes are credit card, debit card, net banking, IMPS (Immediate payment Service), UPI
(Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and
BHIM (Bharat Interface for Money) Aadhar Pay

Enhanced limit to Rs. 35,000

Enhanced limit to Rs. 35,000 in case of goods transport agencies: In the case of payment made for plying, hiring or
leasing goods carriages, the aforesaid limit shall be Rs. 35,000 instead of Rs. 10,000.

Examples-
1. 3 Payments of Rs. 10,000 made in a single day for a single expenditure in cash. No deduction will be allowed. Entire
Rs. 30,000 will be disallowed.
2. 3 Payments of Rs. 10,000 made in a single day for3 different expenses of Rs. 10,000 each. Rs. 30,000 will be
allowed as deduction.
3. Expenditure Rs. 30,000 - Rs. 20,000 Paid in cash on Day 1 and Rs. 10,000 paid in cash on Day 2. - Rs. 20,000 paid on
day 1 will be disallowed.

Neeraj Arora | www.edu91.org 6.12

 PGBP

Dis-allowance to be made in the year of payment for expenditure incurred in earlier years Section 40A(3A)
Where-
● an allowance has been made in the assessment for any year in respect of any liability incurred by the
assessee for any expenditure; and (Assessee was following mercantile system of accounting)
● subsequently, during any subsequent year, the assessee makes payment in respect thereof, otherwise than
by an account payee cheque drawn on a bank or account payee bank draft or electronic clearing system or
through such other electronic mode as may be prescribed; and
● the payment or aggregate of payments so made to a person in a day exceeds Rs. 10,000;
then, the payment made shall be deemed to be the profits and gains of business or profession and accordingly
chargeable to income-tax as income of the subsequent year.

Cases where disallowances would not be attracted

● Loan transactions: It does not apply to loan transactions because advancing of loans or repayments of the
principal amount of loan does not constitute an expenditure deductible in computing the taxable income.
Interest disallowance will be applicable as discussed above.
● Payment made by commission agents for goods received by them for sale on commission or consignment
basis because such a payment is not an expenditure deductible in computing the taxable income of the
commission agent.

Rule 6DD Payments

● Where the payment is made to
○ RBI, any banking company,
○ State Bank of India or its subsidiary banks,
○ any co-operative bank or land mortgage bank,
○ any primary agricultural credit society or any primary credit society or
○ the Life Insurance Corporation of India;
● Where the payment is made to the Government and under the rules framed by it.
● Where the payment is made through any bank, including foreign bank, by any of these modes -
○ any letter of credit arrangements;
○ a mail or telegraphic transfer;
○ a bill of exchange made payable only to a bank;
○ Electronic clearing system;
○ a credit card;
○ a debit card;
● Where 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; (simply speaking payee was liable
to pay an amount the payer and the payment was adjusted against that amount)
● Where payment is made to the cultivator, grower or producer of the following for purchase thereof
○ agricultural or forest produce;
○ or produce of animal husbandry (including livestock, meat, hides and skins) or
○ dairy or poultry farming;
○ fish or fish products;
○ Products of horticulture etc.

The expression ‘fish or fish products’ above would include ‘other marine products such as shrimp, prawn,
cuttlefish, squid, crab, lobster etc.’.

Neeraj Arora | www.edu91.org 6.13

 PGBP

The 'producers' of fish or fish products for the purpose of Rule 6DD(e) would include, besides the fishermen,
any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea shore
itself and then sells the fish or fish products to traders, exporters etc.

However, the above exception will not be available on the payment for the purchase of fish or fish products
from a person who is not proved to be a 'producer' of these goods and is only a trader, broker or any other
middleman, by whatever name called.
● Where the payment is made for the purchase of the products manufactured or processed without the aid of
power in a cottage industry, to the producer of such products;
● Where the payment is made in a village or town, which on the date of such payment is not served by any
bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any
such village or town;
● Where any payment is made to on employee of assessee or the heir of any such employee, on or in
connection with the retirement, retrenchment, resignation, discharge or death of such employee, on
account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums
payable to employee or his heir does not exceed Rs. 50,000;
● Where the payment is made by an assessee by way of salary to his employee after deducting the
income-tax at source, when such employee is temporarily posted for a continuous period of 15 days or
more in a place other than his normal place of duty or on a ship, and does not maintain any account in any
bank at such place or ship;
● Where the payment is made by any person to his agent who is required to make payment in cash for goods
or services on behalf of such person;
● Where the payment is made by an authorized dealer or money changer against purchase of foreign currency
or travelers cheques in the normal course of his business.

40A(4)
● Notwithstanding anything contained in any other law for the time being in force or in any contract,
● where any payment in respect of any expenditure has to be made by an account payee cheque drawn on a
bank or account payee bank draft or through such other electronic mode as may be prescribed in order that
such expenditure may not be disallowed as a deduction under sub-section (3),
● then the payment may be made by cheque or draft or through such other electronic mode as may be
prescribed; and where the payment is made or tendered, no person shall be allowed to raise, in any suit or
other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any
other manner.

Neeraj Arora | www.edu91.org 6.14

 PGBP

Provision made for Gratuity Section 40A(7)

Payment made to Non-Statutory Funds - Not deductible Section 40A(9)

● No deduction shall be allowed in respect of any sum paid by an employer towards the setting up or
formation of, or as a contribution to any fund, trust, company, association of persons, body of individuals,
registered society, or other institution for any purpose.
● However, deduction shall be allowed in case such sum is paid as per provisions under section 36(1)
(iv)/(iva)/(v) or under any other law for the time being in force. (Funds etc. must be approved)

Depreciation
In order to claim depreciation following conditions must be satisfied. Deduction of depreciation is compulsory. If
the below mention conditions are satisfied, depreciation will be deducted.

Assets must be owned by the assessee.

● Where an assessee carries business and profession in a building not owned by him and he has incurred any
capital expenditure on that building he is entitled to claim depreciation on that capital expenditure.
● In case of Hire-Purchase, the hirer (Purchaser, NOT THE VENDOR) is entitled to claim depreciation.
● In case of lease (whether operating or financial) Lessor shall be entitled to claim depreciation.
● In case of building it is sufficient if the assessee is the owner of the building and not of the land.
● Part ownership will also be considered as ownership.
●

It must be used for the purpose of business or profession.

● It should be used during the relevant previous year. Used means put to use.
● Even if an asset is put to use for trial production still depreciation will be allowed.
● Put to use means ready to use not actually used.
● If the assets are not used exclusively for the business or profession of the assessee but for other purposes
as well, the depreciation allowable would be a proportionate part of the depreciation allowance to which the
assessee would be otherwise entitled. This is provided in section 38

Neeraj Arora | www.edu91.org 6.15

 PGBP

Methods
There are two main methods of calculating depreciation under income tax .
● One is calculating depreciation on the closing WDV of Block of Asset and
● Another is the Straight Line method . - Used exclusively in case of power generating undertakings.

WDV - Block of Asset Method.

On what amount/value depreciation shall be allowed?
Depreciation shall be allowed on closing WDV of Block of Assets. Now we need to learn 2 concepts.
1. Block of assets
2. Closing WDV (Written down value)

Block of assets
"Block of assets" means a group of assets falling within a class of assets in respect of which the same percentage
of depreciation is prescribed. – Section 2(11)

Class of assets
There are mainly 5 classes of assets in Income tax
● Buildings
● Plant & Machinery
● Ships
● Furniture & Fittings
● Intangible Assets

Further following are the rates prescribed for different assets

Buildings
1. Buildings which are used mainly for residential purposes except hotels and boarding houses 5%
Buildings which are not used mainly for residential purposes and not covered by Block (1)
2. above and (3) below 10%
Buildings acquired on or after 1st September, 2002
for installing machinery and plant forming part of water supply project or water treatment
system and which is put to use for the purpose of business of providing infrastructure
3. facilities 40%
4. Purely temporary erections such as wooden structures 40%
Furniture and Fittings
1. Furniture and fittings including electrical fittings 10%
Plant and Machinery
1. Motors buses, motor lorries, motor taxis used in the business of running them on hire 30%
2. Motor cars other than those used in business of running them in hire 15%
3. Moulds used in rubber and plastic goods factories
4. Aeroplanes, Aero engines 40%
Specified air pollution control equipments, water pollution control equipments, solid waste
5. control equipment and solid waste recycling and resource recovery systems 40%
6. Plant & Machinery used in semiconductor industry covering all Integrated Circuits 30%
7. Life saving medical equipment 40%
Machinery and plant, acquired and installed on or after the 1 st day of September, 2002 in a
water supply project or a water treatment system and which is put to use for the purpose of
8. business of providing infrastructure facility 40%
9. Oil wells 15%
10. Renewable Energy Saving Devices

Neeraj Arora | www.edu91.org 6.16

 PGBP

● Windmills and any specially designed devices which run on windmills installed on or 40%
after 1.4.2014
● Any special devices including electric generators and pumps running on wind energy 40%
installed on or after 1.4.2014 would be eligible for depreciation
● Windmills and any specially designed devices running on windmills installed on or 15%
before 31.3.2014 and any special devices including electric generators and pumps
running on wind energy installed on or before 31.3.2014
11. Computers including computer software 40%
Books (Annual Publications or other than annual publication owned by assessees carrying on
12. a profession 40%
13. Books owned by assessees carrying on business in running lending libraries 40%
14. Plan & machinery general rate 15%
Motor cars other than those used in a business of running them on hire, acquired during the
15 period from 23.8.2019 to 31.03.2020 and put to use on or before 31.03.2020 30%
Motors buses, motor lorries, motor taxis used in a business of running them on hire,
acquired during the period from 23.8.2019 to 31.03.2020 and put to use on or before
16 31.03.2020 45%
Ships
1. Ocean-going ships 20%
2. Vessels ordinarily operating on inland waters not covered by Block (3) below 20%
3. Speed boats operating on inland water 20%
Intangible assets
Know-how, patents, copyrights, trademarks, licenses, franchises or any other business or
1. commercial rights of similar nature, not being goodwill of a business or profession 25%
The depreciation in the value of any other capital assets cannot be claimed as a deduction from the business income.

Miscellaneous Points
1. Printers, scanners, UPS etc. are part of computers and eligible for depreciation at the rate of 40 percent.
Alternative view is possible.
2. Mobile phones are not computers.
3. There are different views on tablets etc.
4. Assets given by the employer to the employees are considered as being used in business of the assessee
and therefore depreciation will be allowed on such assets, irrespective of the fact that these assets are used
by the employees as their personal assets for personal purpose.
a. Example – Employer gave Fridge to his employee which is used by employee for his personal
purpose. Employer can claim depreciation on the same

NOTE: There is no depreciation on land.

How to form blocks

The following are the assets owned by X as on 1.4.20XX
Asset WDV Rate of Depreciation (%)
Building A 2,40,000 10
Building B 3.60,000 10
Building C 1,20,000 5
Building D 5,20,000 10
Machinery A 40,000 15
Machinery B 1,00,000 15

Neeraj Arora | www.edu91.org 6.17

 PGBP

Machinery C 1,60,000 30
Machinery D 80,000 15
Car X 2,20,000 15
Furniture & Fixture 2,40,000 10
Furniture & Fixture used in Meeting hall 3,00,000 10
Classify the above assets into different block of assets

How to find Closing WDV

WDV of block of assets shall be computed as follows
Aggregate of Written Down Value of all the assets falling within that block of
assets as at the beginning of the previous year

ADD Actual cost of any asset falling within that block, acquired during the previous
year

Value of Block

LESS Moneys payable (including scrap) in respect of any asset falling within that block
which is sold, discarded, demolished or destroyed during the previous year, to
the extent it does not exceed the sum of the above two

WDV at the end of the year

Less Depreciation at block rate

Opening WDV for next year

Points to be noted
1. Opening + Acquired during the year is also known as Value of block.
2. Revaluation of assets is of no importance under Income Tax Act. It should be completely ignored

Depreciation special case – Put to Use for less than 180 days
If an asset is acquired by the assessee during the previous year and the same is put to use for less than 180 days
during that previous year, then the depreciation will be limited to 50% of the depreciation allowable on such asset -
2nd Proviso to section 32(1).

Note: If the asset is used for less than 180 days in any subsequent previous year (i.e. year subsequent to the year of
acquisition), then the depreciation is fully allowable.

If asset is purchased in a year (20XX-YY) and put to use on or before 3rd October 20XX (same year) then during year
XX-YY assessee used it from 3rd October 20XX to 31-3-20YY (exactly 180 days, date of purchase shall be included,
in February 20YY 28 days). Therefore full depreciation shall be allowed on such asset or any asset put to use
before that date.

If any asset purchased in 20XX-YY is put to use on 4th October 20XX or after that then half depreciation shall be
allowed on that.

Neeraj Arora | www.edu91.org 6.18

 PGBP

In case of leap year, the cut -off date shall be 4th October . Assets purchased and put to use till 4th October – Full
depreciation shall be allowed.

Example
Mr. X purchased machinery eligible for depreciation of 30% on 1.4.XX calculate the depreciation allowed to him if he put to
use the machine on the following dates

Put to use For Rate of depreciation

1. 1.4. _ _ P/Y _ _ - _ _
2. 31.3. _ _ P/Y _ _ - _ _
3. 1.4.._ _ P/Y _ _ - _ _
P/Y _ _ - _ _
4. 31.3. _ _ P/Y _ _ - _ _
P/Y _ _ - _ _

Additional depreciation Section 32(1)(iia)

● Additional depreciation is available on new machinery or plant (other than ships and aircraft), which has
been acquired and installed.
● This provision is applicable only in case of an assessee engaged in the business of manufacture or
production of any article or thing as well as assessees engaged in the business of generation, transmission
or distribution of power
● It is applicable to only those assessees who claim depreciation on block of assets u/s 32(l)(ii). (Not applicable in
case of assessee claiming depreciation on the basis of SLM – Power Generating Undertakings – To Be Studied Later)

● Deduction: A further deduction of 20% of actual cost of such plant and machinery is allowed.

Asset put to use for less than 180 days

● Additional depreciation @ 10% (i.e., 50% of additional depreciation of 20%) to be allowed, where the plant or
machinery is put to use for less than 180 days during the previous year in which such asset is acquired.
● Further, the balance additional depreciation@10% (i.e., remaining 50% of the additional depreciation of
20%) on new plant or machinery acquired and used for less than 180 days, which has not been allowed in
the year of acquisition and installation of such plant or machinery, shall be allowed in the immediately
succeeding previous year if the assessee exercises the option of shifting out of the default tax regime
provided under section 115BAC(1A) in the immediately succeeding previous year.

Additional depreciation is not allowed

Additional depreciation is not allowed in respect of the following
○ Plant and machinery which, before its installation by assessee, was used whether in India or outside
India by any other person;
○ Any office appliances or road transport vehicles.
○ Plant or machinery installed in the office premises or the residential accommodation (including the
guest houses).
○ Plant and machinery whose whole of the actual cost is deductible (by way of depreciation or
otherwise) in computing income under this head of any one previous year.

NOTE: Furniture & Buildings are not eligible for additional depreciation.

Neeraj Arora | www.edu91.org 6.19

 PGBP

Business of printing or printing and publishing amounts to manufacture or production of an article or thing and is,
therefore, eligible for additional depreciation.

Additional Depreciation would be available to an assessee only if he exercises the option of shifting out of the
default tax regime provided under section 115BAC.

Amount to be ignored while calculating actual cost.

Where the assessee incurs any expenditure for acquisition of any asset or part thereof in respect of which
● a payment or aggregate of payments made to a person
● in a day,
● otherwise than by
● an account payee cheque drawn on a bank or
● an account payee bank draft or
● use of electronic clearing system through a bank account,
● exceeds ten thousand rupees,
such expenditure shall be ignored for the purposes of determination of actual cost.

Example - From the following data, calculate the depreciation admissible to an individual carrying on business.
Particulars Amount (Rs.)

Plant and Machinery (Block Rate 15%) (WDV of Plant A and Plant B on 01-04-20_ _ ) 25,00,000

Additions - Plant C on 30-06-20_ _ (Rs. 5,00,000 is paid in cash and balance Rs. 10,00,000 is paid
15,00,000
through account payee cheque)

Plant D on 31-12-20 _ _ (Rs. 4,80,000 is paid in cash and balance Rs. 7,20,000 through RTGS
12,00,000
transfer)

Sales - Plant A on 01-12-2018 6,00,000

Solution

Opening WDV 25,00,000

Add Actual Cost of the assets acquired during the year

Plant C

Plant D

Value of Block

Moneys Payable (Sales Proceeds) 6,00,000

Closing WDV For Depreciation

Depreciation

For Assets Put To Use Less than 180 Days

Others

Neeraj Arora | www.edu91.org 6.20

 PGBP

Closing WDV After Depreciation

Sale of Depreciable assets

When entire block is not sold
● If sale consideration on transfer of one or more capital asset in the block exceeds the value of the block the
excess shall be STCG.
● If sale consideration of one or more capital assets in the block does not exceed the value of the block, no
special treatment. Calculate the closing WDV and charge depreciation on it.

When entire block is sold

● If entire block is transferred, then following shall be STCG/STCL
○ Sale consideration
○ Less: value of the block
○ Less: expenditure on transfer
■ Where the value of the block is
■ Opening WDV
■ Add: cost of assets acquired during the year.

Notes
● WDV at the end of the year can never be negative. If Sales price is greater than Value of Block then refer to
Section 50, sale of depreciable assets.
● If Entire block is sold then irrespective of WDV at the end of the year/Closing WDV we will consider it as
Zero.

Section 43A – Change in rate of exchange of foreign currency

As per section 43A, the gain, arising at the time of making payment in respect of an imported machinery, due to
change in rate of exchange of foreign currency, has to be reduced from the actual cost of machinery, and
depreciation would be computed on such reduced cost. In case of loss such loss shall be added in the cost of the
machinery.

Miscellaneous Points – Related To Depreciation

Actual Cost – Section 43(1) & Explanations thereof. (only relevant portion for CA Inter)
● It means actual cost of asset to the assessee, reduced by cost met by any other person.
● Any interest for the period starting from the date of loan till the date on which such asset is first put to use
shall not be allowed deduction u / s 36.
● (Will be covered automatically with the sale of scientific research). If an asset is used in business after it
ceases to be used for scientific research, the actual cost shall be nil.
● If a building is used for personal purpose and subsequently brought in to use for business purpose, in that
case actual cost of building minus all depreciation that would have been allowable had the building been
used for the business since its acquisition.

Example
A car purchased by Dr. Milind on 10.08.2019 for Rs. 15,25,000 for personal use was brought into professional use on
1.07.2022 by him, when its market value was Rs. 7,50,000.

Neeraj Arora | www.edu91.org 6.21

 PGBP

Compute the actual cost of the car and the amount of depreciation for the assessment year 2024-25 assuming the
rate of depreciation to be 15%.

As per section 43(1), the expression “actual cost” would mean the actual cost of asset to the assessee.
The purchase price of Rs 15,25,000 is, therefore, the actual cost of the car to Dr. Milind. Market value (i.e. Rs
7,50,000) on the date when the asset is brought into professional use is not relevant.
Therefore, amount of depreciation on car as per section 32 for the A.Y.2024-25 would be Rs 2,28,750, being Rs.
15,25,000 x 15%

● If credit is taken on taxes paid on capital goods, no depreciation shall be charged on such tax portion, but if
no credit is available then charge depreciation on such taxes as they will form part of the cost.
● Inventory converted into capital asset and used for business or profession: Where inventory is converted or
treated as a capital asset and is used for the purpose of business or profession, the fair market value of
such inventory as on the date of its conversion into capital asset determined in the prescribed manner, shall
be the actual cost of such capital asset to the assessee.
● Where an asset is acquired by way of gift or inheritance, its actual cost shall be the actual cost to the
previous owner minus depreciation allowable to the assessee as if asset was the only asset in the relevant
block of assets.

● Second hand asset: Where, before the date of its acquisition by the assessee, the asset was at any time
used by any other person for the purposes of his business or profession, and the Assessing Officer is
satisfied that the main purpose of the transfer of the asset directly or indirectly to the assessee was the
reduction of liability of income-tax directly or indirectly to the assessee (by claiming depreciation with
reference to an enhanced cost) the actual cost to the assessee shall be taken to be such an amount which
the Assessing Officer may, with the previous approval of the Joint Commissioner, determine, having regard
to all the circumstances of the case.

● Where any asset which had once belonged to the assessee and had been used by him for the purposes of
his business or profession and thereafter ceased to be his property by reason of transfer or otherwise, is
re-acquired by him, the actual cost to the assessee shall be least of the following —
○ the actual cost when he first acquired the asset minus depreciation allowable to the assessee as if
asset was the only asset in the relevant block of assets; or
○ the actual price for which the asset is re-acquired by him
● A person (say “A”) owns an asset and uses it for the purposes of his business or profession. A has
claimed depreciation in respect of such assets. The said asset is transferred by A to another person
(say “B”). A then acquires the same asset back from B on lease, hire or otherwise. B being the new
owner will be entitled to depreciation. In the above situation, the cost of acquisition of the transferred
assets in the hands of B shall be the same as the written down value of the said assets at the time of
transfer.
● Subsidy or grant or reimbursement: Where a portion of the cost of an asset acquired by the assessee has
been met directly or indirectly by the Central Government or a State Government or any authority established
under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name
called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be
included in the actual cost of the asset to the assessee.
● However, where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable
to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant
the same proportion as such asset bears to all the assets in respect of or with reference to which the
subsidy or grant.

Neeraj Arora | www.edu91.org 6.22

 PGBP

● Where an asset is acquired outside India by an assessee, being a non-resident and such asset is brought by
him to India and used for the purposes of his business or profession, the actual cost of asset to the
assessee shall be the actual cost the asset to the assessee, as reduced by an amount equal to the amount
of depreciation calculated at the rate in force that would have been allowable had the asset been used in
India for the said purposes since the date of its acquisition by the assessee.

Power generating Undertaking Depreciation on SLM Basis

● Undertaking engaged in generation and distribution of power has option to claim depreciation:
a. On the basis of WDV method for each block of asset or
b. On the basis of straight line method on the actual cost of each asset separately.
● The option will be an irrevocable option. If no option has been exercised, depreciation shall be allowed on
the basis of SLM.
● If the asset is sold in the previous year in which it was acquired, then there will be short-term capital
gain/(loss) on sale of such asset.
Terminal depreciation
→ If any asset, on which depreciation is claimed on basis of SLM,
→ is sold and
→ sale price is less than WDV of such asset,
→ Depreciation shall be allowed equal to WDV minus sale price
→ In the year of sale.
→ Such Depreciation shall be known as terminal depreciation and
→ Will be allowed as expenditure for calculating income under the head PGBP.

Balancing charge Section 41(2)

→ If any asset, on which depreciation is claimed on basis of SLM,
→ is sold and
→ the sale price exceeds WDV of such asset,
→ then following shall be taxable under the head PGBP:
→ Difference between aggregate of money payable and WDV.
→ This shall be taxable u/h PGBP even if business is not in existence.
→ But in case Moneys payable exceed Actual Cost
→ then Any amount received in excess of Actual cost
→ shall be taxable under the head capital gains,
→ such capital gains can be short term or long term.

Neeraj Arora | www.edu91.org 6.23

 PGBP

Expenditure on Scientific Research - Section 35

NOTES-
● No depreciation will be admissible on any capital asset represented by expenditure which has been allowed
as a deduction under section 35.
● Unabsorbed capital expenditure on scientific research can be carried forward indefinitely for set-off against
any income of the assessee other than Salaries.

Examples
Mr A engaged in has incurred Rs.3 lakhs on scientific research, in this case, expenditure is allowed, but if the research is not
related to the business of the assessee, expenditure is not allowed.

ABC Ltd. has purchased one plant and machinery on 01.07.20XX for the purpose of scientific research for Rs. 30 lakhs, in
this case, the entire amount is allowed to be debited to the profit and loss account in the year 20XX-YY. But if the company
has purchased land for the purpose of scientific research, expenditure is not allowed.

Similarly if a building has been purchased for Rs. 40,00,000 and cost of land is Rs.25,00,000, expenditure allowed shall be
Rs.15,00,000.

Neeraj Arora | www.edu91.org 6.24

 PGBP

Deduction for Donation

Notes
● No contribution which qualifies for deduction under this clause will be entitled to deduction under any other
provision of the Act.
● Deduction to which an assessee is entitled on account of payment of any sum by him to an approved
National Laboratory, University, Indian Institute of Technology or a specified person for the approved
programme shall not be denied to the donor-assessee merely on the ground that after payment of such sum
by him, the approval granted to any of the aforesaid donee-entities or the programme has been withdrawn.

Amendment - Contribution to outsiders for scientific/ social science/ statistical research is not allowable under
default tax regime u/s 115BAC.

Sale of scientific research asset Section 41(3)

If a scientific research asset is sold
● Without using for any purpose other than research
● The following amount shall be charged under PGBP in the year of sale.
○ Sale proceeds
○ Deduction under section 35 (Most important)
Whichever is less.
● This shall apply even if business is not in existence.
● If sale price is more than actual cost, then excess shall be taxable u/h capital gain which can be
short term or long term.
● If such asset is used for business then such asset shall form part of the respective block of asset
and in that case its WDV shall be taken to be NIL.

Neeraj Arora | www.edu91.org 6.25

 PGBP

Deduction in respect of expenditure on Specified Business - Section 35AD

This section provides for investment-linked tax deduction in respect of the following specified businesses
commencing operations on or after the dates specified thereto, if the assessee exercises the option of shifting out
of the default tax regime provided under section 115BAC(1A)
Meaning of Specified business
Specified business means any one or more of the following business namely
● Cold chain facilities: Setting up and operating cold chain facilities for specified products.
● Warehousing Facilities-Agricultural produce: Setting up and operating warehousing facilities for storing
agricultural produce.
● Hospitals: Building and operating, anywhere in India, a hospital with at least one hundred beds for patients.
● Housing Projects: Developing and building a housing project under a notified scheme for affordable housing
framed by the Central Government or a State Government, as the case may be, and notified by the CBDT in
this behalf.
● Fertilizer plant: Production of fertilizer in India in a new plant or in a newly installed capacity in an existing
plant.
● Cross-country natural gas pipeline network: Laying & operating a cross-country natural gas pipeline network
for distribution, including storage facilities being an integral part of such network.
● Cross-country crude or petroleum oil pipeline network: Laying and operating a cross-country crude or
petroleum oil pipeline network for distribution, including storage facilities being an integral part of such
network.
● Hotel: Building and operating, anywhere in India, a hotel of two star or above category as classified by
Central government.
● Slum redevelopment housing project: Developing and building a housing project under a scheme for slum
redevelopment or rehabilitation framed by the Central Government or a State Government, as the case may
be, and notified by the CBDT.
● ICD/CFS : Setting up and operating an inland container depot or a container freight station notified or
approved under the Customs Act, 1962,
● Bee-keeping and production of honey and beeswax: Bee-keeping and production of honey and beeswax.
● Warehousing facilities-Sugar: Setting up and operating a warehousing facility for storage of sugar.
● Slurry pipe line: Laying and operating a slurry pipeline for the transportation of iron ore.
● Semiconductor wafer fabrication manufacturing unit; Setting up and operating a semiconductor wafer
fabrication manufacturing unit.
● developing or maintaining and operating or developing, maintaining and operating a new infrastructure
facility

Eligible deduction
Deduction for Capital Expenditure:
● 100% of the capital expenditure incurred during the previous year, wholly and exclusively for the above
businesses would be allowed as deduction from the business income.
● However, expenditure incurred on acquisition of any land, goodwill or financial instrument would not be
eligible for deduction.
● Further, any expenditure in respect of which payment or aggregate of payment made to a person of an
amount exceeding ₹ 10,000 in a day otherwise than by account payee cheque drawn on a bank or an
account payee bank draft or use of electronic clearing system through a bank account would not be eligible
for deduction.

Neeraj Arora | www.edu91.org 6.26

 PGBP

Expenditure prior to commencement of operation

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

The amount incurred prior to commencement should be capitalized in the books of account of the assessee on the
date of commencement of its operations.

Conditions to be fulfilled in respect of specified business in order to claim deduction

The specified business must fulfill the following conditions namely –
(a) it is not set up by splitting up, or the reconstruction, of a business already in existence; or
(b) it should not be set up by the transfer to the specified business of machinery or plant previously
used for any purpose; In order to satisfy this condition, the total value of the plant or machinery so
transferred should not exceed 20% of the value of the total plant or machinery used in such specified
business

For the purpose of this condition, machinery or plant would not be regarded as previously used if it had been used
outside India by any person other than the assessee provided the following conditions are satisfied:
● such plant or machinery was not, at any time prior to the date of its installation by the assessee, used in
India;
● the plant or machinery was imported into India from a foreign Country; and
● no deduction on account of depreciation in respect of such plant or machinery has been allowed to any
person at any time prior to the date of installation by the assessee.

Minimum holding period of capital asset - 8 years

Any asset in respect of which a deduction is claimed and allowed under this section shall be used only for the
specified business, for a period of eight years beginning with the previous year in which such asset is acquired or
constructed.

Assets used for purposes other than specified business - Consequences thereof
Where any asset, in respect of which a deduction is claimed and allowed under this section, is used for a purpose
other than the specified business during the period of 8 years,
● the total amount of deduction so claimed and allowed in one or more previous years,
● as reduced by the amount of depreciation allowable in accordance with the provisions of section 32, as if no
deduction under this section was allowed,
● shall be deemed to be the income of the assessee chargeable under the head "Profits and gains of business or
profession" of the previous year in which the asset is so used.
However, above provision shall not apply to a company which has become a sick industrial company during the
period of 8 years as specified above.

Sale proceeds of assets of specified business

Any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or
goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the
expenditure on such capital asset has been allowed as a deduction under section 35AD is chargeable to tax as
income under the head PGBP. – Section 28 (It is the charging section of PGBP)

Neeraj Arora | www.edu91.org 6.27

 PGBP

Owner of a hotel eligible for deduction even if he transfers the operation of the hotel to another person
The assessee shall be deemed to be carrying on the specified business of building and operating hotel if -
● the assessee builds a hotel of two-star or above category;
● thereafter, he transfers the operation of the hotel to another person;
● he, however, should continue to own the hotel.

Deduction allowed under this section, not to be claimed under any other provision
● Where a deduction under this section is claimed and allowed in respect of the specified business for any
assessment year,
● no deduction shall be allowed under the provisions of Chapter VI-A i.e. section 80-IA to 80- RRB or
● Section 10AA in relation to such specified business for the same or any other assessment year.

Carry forward and set off loss from specified business

As per Section 73A, loss from specified business can be carried forward and set off only from profits of specified
business. Further, it can be carried forward for an indefinite period. (To be covered with chapter of Set off & Carry
Forward)

Amortisation of Preliminary Expenditure Section 35D

Types of assessee
The deduction is available to Indian company or non corporate resident assessee.

Eligible expenditure
● Incurred before the commencement of business or
● Incurred after the commencement for
○ Extension of existing undertaking or
○ For setting up new unit

Such expenditure may be for (i) feasibility report (ii) project report (iii) survey (iv) drafting of agreement between the
assessee and any other person (v) expenditure of Memorandum of association, Articles of association registration
or issue of share or debenture (vi) other expenditure as may be prescribed.

Maximum Deduction
● For non-corporate assessee it cannot exceed 5% of cost of project. Or actual expenditure whichever is lower
● For a company it cannot exceed
○ 5% of (a) cost of project or (b) capital employed whichever is higher will be compared with actual
expenditure, whichever is lower
● Deduction is allowed in 5 equal instalments.

NOTES: -
1. Cost of project: means actual cost of fixed asset on the last day of P/Y in which the business is
commenced or extension is completed or new unit commences operation, as the case may be.
2. Capital employed: means issued share capital + debentures + long terms borrowing on the last day
of the same P/Y as referred above.
3. Amount must be audited by CA and report should be furnished along with return.

Neeraj Arora | www.edu91.org 6.28

 PGBP

Example ABC Ltd. has incurred expenditure of Rs. 30,00,000 and its project cost is Rs. 1,00,00,000 and capital
employed is Rs. 1,20,00,000, amount allowed to the company shall be Rs. 30,00,000 but subject to a maximum of
(120,00,000 x 5%) i.e. Rs. 6,00,000 Instalment allowed shall be = 6,00,000 / 5 = Rs. 1,20,000.

Expenditure incurred under voluntary retirement scheme Section 35DDA

● Expenditure on payment to employee in connection with his voluntary retirement as per with voluntary
retirement scheme. shall be allowed deduction in five equal instalments for five years.starting from the year
of payment.
● Deduction shall start only from the year in which amount has actually been paid
● If payment is made by the employer in more than one year, then deduction shall be allowed in five
instalments starting from the year of every payment
● No deduction shall be allowed of such expenditure under any other provision.

Maintenance of accounts by certain persons carrying on profession or business. Section 44AA Rule 6F
Specified Professionals

Such Books of Accounts …

Every person carrying on the
● legal,
● medical,
● engineering or
● architectural profession or
● accountancy or
● technical consultancy or
● interior decoration or
● authorised representative
● film artist
● profession of company secretary
● information technology professionals
must maintain such books of accounts and other documents as may enable the assessing officer to compute his
total income in accordance with the provisions of the Income-tax Act, 1961.

When PRESCRIBED books of accounts are required to be maintained

● Rule 6F of the Income-tax Rules contains the details relating to the books of account and other documents
to be maintained by certain professionals.
● As per Rule 6F, every person carrying on any profession specified above shall keep and maintain the books
of account and other documents specified in Rule 6F(2) in the following cases.
○ if his gross receipts exceed ₹ 1,50,000 in all the 3 years immediately preceding the previous year.
○ if, where the profession has been newly set up in the previous year, his gross receipts are likely to
exceed ₹ 1,50,000 in that year.

NOTE: - Even if the specified professional is not falling in the above situation, they are required to maintain such
books of accounts as may enable the Assessing Officer to compute the total income in accordance with the
provisions of this Act.

What are prescribed books of accounts

Prescribed books of accounts and other documents [Sub-rule (2) of Rule 6F]:

Neeraj Arora | www.edu91.org 6.29

 PGBP

The following books of account and other documents are required to be maintained.
● a cash book;
● a journal, if accounts are maintained on mercantile basis ;
● a ledger;
● Carbon copies of bills and receipts issued by the person whether machine numbered or otherwise serially
numbered, in relation to sums exceeding ₹ 25;
● Original bills and receipts issued to the person in respect of expenditure incurred by the person,
○ or where such bills and receipts are not issued, payment vouchers prepared and signed by the
person,
○ provided the amount does not exceed ₹ 50.
○ Where the cash book contains adequate particulars, the preparation and signing of payment
vouchers is not required.
In case of a person carrying on medical profession, he will be required to maintain the following in addition to the
list given above:
● a daily case register in Form 3C.
● an inventory under broad heads of the stock of drugs, medicines and other consumable accessories as on
the first and last day of the previous year used for his profession

Place at which books to be kept and maintained

The books and documents shall be kept and maintained at the place where the person is carrying on the
profession, or where there is more than one place, at the principal place of his profession. However, if he maintains
a separate set of books for each place of his profession, such books and documents may be kept and maintained
at the respective places.

Period of Maintenance
The above books of account and documents shall be kept and maintained for a minimum of 6 years from the end
of the relevant assessment year.

Persons other than specified professionals

In case of Individual or HUF
An Individual or HUF carrying on any business or profession other than notified / specified professions must
maintain such books of account and other documents as may enable the Assessing Officer to compute his total
income in accordance the provisions of the Income-tax Act, 1961 in the following circumstances

Neeraj Arora | www.edu91.org 6.30

 PGBP

Existing business or profession

In cases where the
● income from the existing business or profession exceeds ₹ 2,50,000 or
● the total sales, turnover or gross receipts, as the case may be, in the business or profession exceed ₹
25,00,000
● in any one of three years immediately preceding the accounting year.
Newly set up business or profession
In cases where the business or profession is newly set up in any previous year,
● if his income from business or profession is likely to exceed ₹ 2,50,000 or
● his total sales, turnover or gross receipts, as the case may be, in the business or profession are likely to
exceed ₹ 25,00,000 during the previous year.
Person (other than individual or HUF)
Every person (other than individual or HUF) carrying on any business or profession (other than the notified
professions referred to in section 44AA(1)) must maintain such books of account and other documents as may
enable the Assessing Officer to compute his total income in accordance the provisions of the Income-tax Act, 1961
in the following circumstances

Existing business or profession

In cases where the
● income from the business or profession exceeds ₹ 1,20,000 or
● the total sales, turnover or gross receipts, as the case may be, in the business or profession exceed ₹
10,00,000 in any one of three years immediately preceding the accounting year; or

Newly set up business or profession

In cases where the business or profession is newly set up in any previous year,
● if his income from business or profession is likely to exceed ₹ 1,20,000 or
● his total sales, turnover or gross receipts, as the case may be, in the business or profession are likely to
exceed ₹ 10,00,000 during the previous year

Showing lower income as compared to income computed on presumptive basis under section 44AE (or section
44BB or section 44BBB)
Where profits and gains from the business are calculated on a presumptive basis under section 44AE (or section
44BB or section 44BBB) and the assessee has claimed that his income is lower than the profits or gains so deemed
to be the profits and gains of his business.

Where the provisions of section 44AD(4) are applicable in his case and his income exceeds the basic exemption
limit in any previous year:
In cases, where an assessee not eligible to claim the benefit of the provisions of section 44AD(1) for five
assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been
declared in accordance with the provisions of 44AD(1) and his income exceeds the basic exemption limit during the
previous year.

Penalty for failure to maintain books of accounts u/s 44AA [Section 271A]
If a person fails to keep and maintain any such books of account and other documents as required by section 44AA
in respect of any previous year or to retain such books of accounts and other documents for the specified period,
penalty of Rs 25,000 would be leviable u/s 271A.

Neeraj Arora | www.edu91.org 6.31

 PGBP

Audit of accounts of certain persons carrying on business or profession. - 44AB

It is mandatory for the persons falling in the below category to get his accounts audited before the “specified date”
by a Chartered Accountant

Business
Business in General
In case of a person carrying on business
● If his total sales, turnover or gross receipts in business > ₹ 1 crore in the relevant PY.

But in case of such person carrying on business

● Aggregate cash receipts in the relevant PY ≤ 5% of total receipts (incl. receipts for sales, turnover, gross
receipts); and
● Aggregate cash payments in the relevant PY ≤ 5% of total payments (incl. amount incurred for expenditure)
○ If his total sales, turnover or gross receipts in business > ₹ 10 crore in the relevant PY.

Payment or receipt by NON-ACCOUNT Payee Cheque or Draft

For this purpose, the payment or receipt, as the case may be, by a cheque drawn on a bank or by a bank draft, which
is not account payee, would be deemed to be the payment or receipt, as the case may be, in cash.

44AE
In case of an assessee covered u/s 44AE i.e., an assessee engaged in the business of plying, hiring or leasing
goods carriages who owns not more than 10 goods carriages at any time during the P.Y.

● If such assessee claims that the profits and gains from business in the relevant P.Y. are lower than the
profits and gains computed on a presumptive basis u/s 44AE [i.e., ₹ 1000 per ton of gross vehicle weight or
unladen weight in case of each heavy goods vehicle and ₹ 7,500 for each vehicle, other than heavy goods
vehicle, for every month or part of the month for which the vehicle is owned by the assessee

44AD
In case of an eligible assessee carrying on business, whose total turnover, sales, gross receipts ≤ ₹ 200 lakhs, and
who has opted for section 44AD in any earlier PY (say, P.Y.2020 -21)
● If he declares profit for any of the five successive PYs (say, P.Y.2021-22) not in accordance with section
44AD (i.e., he declares profits lower than 8% or 6% of total turnover, sales or gross receipts, as the case may
be, in that year), then, he cannot opt for section 44AD for five successive PYs after the year of such default
(i.e., from P.Y.2022-23 to P.Y.2026-27). For the year of default (i.e., P.Y.2021-22) and five successive previous
years (i.e., P.Y.2022-23 to P.Y.2026-27), he has to maintain books of account u/s 44AA and get them audited
u/s 44AB, if his income exceeds the basic exemption limit.

Profession
Profession in general
In case of persons carrying on profession
● If his gross receipts in profession > ₹ 50 lakh in the relevant PY

44ADA
● In case of an assessee carrying on a notified profession under section 44AA(1) i.e., legal medical,
engineering, accountancy, architecture, interior decoration, technical consultancy, whose gross receipts ≤ ₹
50 lakhs

Neeraj Arora | www.edu91.org 6.32

 PGBP

○ If such resident assessee claims that the profits and gains from such profession in the relevant PY
are lower than the profits and gains computed on a presumptive basis u/s 44ADA (50% of gross
receipts) and his income exceeds the basic exemption limit in that PY.
Audit Report
The persons mentioned above would have to furnish by the specified date a report of the audit in the prescribed
forms. For this purpose, the Board has prescribed under Rule 6G, Forms 3CA/ 3CB/ 3CD containing forms of audit
report and particulars to be furnished therewith.

Accounts audited under other statutes are considered

In cases where the accounts of a person are required to be audited by or under any other law before the specified
date, it will be sufficient if the person gets his accounts audited under such other law before the specified date and
also furnish by the said date the report of audit in the prescribed form in addition to the report of audit required
under such other law.

Thus, for example, the provision regarding compulsory audit does not imply a second or separate audit of accounts
of companies whose accounts are already required to be audited under the Companies Act, 2013. The provision
only requires that companies should get their accounts audited under the Companies Act, 2013 before the
specified date and in addition to the report required to be given by the auditor under the Companies Act, 2013
furnish a report for tax purposes in the form to be prescribed in this behalf by the CBDT.

Specified date
The expression “specified date” in relation to the accounts of the previous year or years relevant to any assessment
year means the date one month prior to the due date for furnishing the return of income under section 139(1).

The due date for filing return of income in case of assessees (other than companies) who are required to get their
accounts audited is 31 st October of the relevant assessment year. Hence, the specified date for tax audit would be
30 thSeptember of the relevant assessment year

Penalty for failure to get books of accounts audited u/s 44AB [Section 271B]
Lower of
(a) ½% of total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in
profession, in such previous year; or
(b) Rs 1,50,000

Special provision for computing profits and gains of business on presumptive basis. Section 44AD
1. This scheme overrules full chapter of PGBP (Section 28 to 43C)
2. Under this income will be 8% of the total turnover or a higher amount claimed by the assessee.
3. Available only for eligible business
a. any business except the business of plying, hiring or leasing goods carriages referred to in section
44AE; and
b. Whose total turnover or gross receipts in the relevant previous year does not exceed an amount of 2
crores.
i. If aggregate cash receipts in the relevant PY ≤ 5% of total turnover or gross receipts of the
assessee, higher turnover threshold of Rs 3 crore would be applicable.
4. Available only to eligible assessee (R-I/HUF/PF - NOT LLP – No Ded. u/s 10 or Part C of C-VI-A)
a. An individual, Hindu Undivided Family or a partnership firm,
i. who is a resident,

Neeraj Arora | www.edu91.org 6.33

 PGBP

ii. but not a limited liability partnership firm.

b. who has not claimed deduction under any of the
i. Sections 10A, 10AA, 10B, 10BA or
ii. Deduction under any provisions of Chapter VIA under the heading “C. - Deductions in respect
of certain incomes” in the relevant assessment year i.e. the following deductions should not
be taken.-Section 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80QQB, 80RRB.
c. Companies, AOP, BOI are also not eligible for 44AD.

5. This scheme cannot be availed by (Specified Profession – Com/Brokerage – Agency Business)

a. a person carrying on specified profession as referred to in section 44AA;
b. a person earning income in the nature of commission or brokerage; or
c. a person carrying on any agency business.
6. Any deduction allowable under the provisions of section 30 to 38 shall be deemed to have been already
given full effect to and no further deduction under those sections shall be allowed.
7. The written down value of any asset of an eligible business shall be deemed to have been calculated as if
the eligible assessee had claimed and had been actually allowed the deduction in respect of the
depreciation for each of the relevant assessment years.
8. Deduction under chapter VI-A shall be allowed from Income computed under this section.
9. Set off, carry forward & set –off of losses are allowed.
10. Deduction of unabsorbed depreciation is not allowed.

44AD (4)
● Where an eligible assessee declares profit for any previous year
● in accordance with the provisions of this section and he declares profit for any of the five assessment years
relevant to the previous year succeeding such previous year
● not in accordance with the provisions of this section,
● he shall not be eligible to claim the benefit of the provisions of this section for five assessment years
subsequent to the assessment year relevant to the previous year in which the profit has not been declared
in accordance with the provisions of this section.

44AD(5)
● Notwithstanding anything contained in the foregoing provisions of this section,
● an eligible assessee to whom the provisions of sub-section (4) are applicable
● and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be
required to keep and maintain such books of account and other documents as required under sub-section
(2) of section 44AA and get them audited and furnish a report of such audit as required under section
44AB. (irrespective of turnover)

Income to be 6% of Total Turnover

the presumptive rate of 6% of total turnover or gross receipts will be applicable in respect of amount which is
received
• by an account payee cheque or
• by an account payee bank draft or
• by use of an electronic clearing system through a bank account, including the prescribed
modes.
during the previous year or before the due date of filing of return under section 139(1) in respect of that previous
year.

Neeraj Arora | www.edu91.org 6.34

 PGBP

However, the existing rate of 8% for computation of business profit would continue to apply in respect of the total
turnover or gross receipts received in any other mode.

Illustration - M/s ABC, an eligible assessee carrying out eligible business under section 44AD provides following details

● Total turnover for the financial year 20XX-YY is Rs. 150 lakh
● Out of the above:
▪ Rs. 25 lakh received by cheque
▪ Rs. 50 lakh received by cash
▪ Rs. 25 lakh received by cheque before the due date of filing of return;

Rs. 50 lakh not received till due date of filing of return.

Computation of presumptive income under section 44AD(1) for assessment year 20YY-ZZ:
Mode of receipt of turnover Taxable @ 8% Taxable @ 6%
by cheque during the financial year 25

by cash during the financial year 50

by cheque before the due date of filing of return 25
Not received till due date of filing of return 50
Total turnover 100 50

Deemed business profit 8 (8 % of 100) 3 (6% of 50)

Therefore, in view of the amendment, in the above case, total business profit would be Rs. 11 lakhs (8 lakhs + 3 lakhs).

A Discussion on Applicability of Tax Audit

● Turnover above 1 crore conditions of cash receipt and payment not satisfied, generally speaking tax audit is
required, but if assessee is taking benefit of 44AD, then tax audit will not be required till his turnover is upto
Rs. 2 Crores.
● Mr A, Turnover Rs. 1.5 Crore, Cash Receipt or Payments Exceeds 5 % of Total receipts or Payments
○ Check whether he is taking benefit of 44AD
■ Yes (Tax Audit Not Required)
■ No (Tax audit is required)
● Turnover less than 1 Crore, no question of Tax Audit
● Turnover above 1 crore upto 2 crore, check applicability of 44AD, if not applicable, check Cash Conditions
and then decide.
● If Turnover exceeds 2 Crore, check cash conditions only and decide.
● Exceptional case - Turnover Less than 1 Crore, Still Audit will be required
○ Assesee falling in 44AD(4),
○ Turnover 80 Lakhs
○ Income shown 4%
○ Income exceeds the maximum amount not chargeable to tax.
○ Nothing to be checked, Tax audit will be conducted.

Neeraj Arora | www.edu91.org 6.35

 PGBP

Special provision for computing profits and gains of profession on presumptive basis. 44ADA
44ADA. (1)
Notwithstanding anything contained in sections 28 to 43C,
● in case of an assessee, being an individual or a partnership firm other than a limited liability partnership
● who is a resident in India, and
○ is engaged in a profession referred to in sub-section (1) of section 44AA and
○ whose total gross receipts do not exceed fifty lakh rupees in a previous year,
■ a sum equal to fifty per cent of the total gross receipts of the assessee in the previous year
on account of such profession or, as the case may be,
■ a sum higher than the aforesaid sum claimed to have been earned by the assessee,
○ shall be deemed to be the profits and gains of such profession chargeable to tax under the head
"Profits and gains of business or profession.
○ If aggregate cash receipts in the relevant PY ≤ 5% of total turnover or gross receipts of the
assessee, higher turnover threshold of Rs 75 lakhs would be applicable.

44ADA. (2)
Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be
deemed to have been already given full effect to and no further deduction under those sections shall be allowed.

44ADA. (3)
The written down value of any asset used for the purposes of profession shall be deemed to have been calculated
as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each
of the relevant assessment years.

44ADA. (4)
Notwithstanding anything contained in the foregoing provisions of this section, an assessee who claims that his
profits and gains from the profession are lower than the profits and gains specified in sub-section (1) and whose
total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and
maintain such books of account and other documents as required under sub-section (1) of section 44AAand get
them audited and furnish a report of such audit as required under section 44AB.

44AE - Special provision for computing profits and gains of business of plying, hiring or leasing goods
carriages.
Applicability
● Any assessee
● Who owns not more than ten goods carriage at any time during the previous year
● Who is engaged in the business of plying, hiring or leasing such goods carriages

Income
● Heavy Goods Vehicle
○ one thousand rupees per ton of gross vehicle weight or unladen weight, as the case may be, for
every month or part of a month during which the heavy goods vehicle is owned by the assessee in
the previous year or
○ an amount claimed to have been actually earned from such vehicle,
■ whichever is higher.

Neeraj Arora | www.edu91.org 6.36

 PGBP

○ Heavy Goods Vehicle - It means any goods carriage, the gross vehicle weight of which exceeds
12000 kilograms.

● Other than heavy goods vehicle,

○ shall be an amount equal to seven thousand five hundred rupees for every month or part of a month
during which the goods carriage is owned by the assessee in the previous year
○ or an amount claimed to have been actually earned from such goods carriage, whichever is higher.

Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of this section, be
deemed to have been already given full effect to and no further deduction under those sections shall be allowed

The written down value of any asset used for the purpose of the business referred to in this section shall be
deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in
respect of the depreciation for each of the relevant assessment years.

Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower
profits and gains than the profits and gains specified above, if he keeps and maintains such books of account and
other documents as required under section 44AA and gets his accounts audited and furnishes a report of such
audit as required under section 44AB.

In case of a firm, salary and interest paid to partners is deductible subject to the conditions and limits specified in
section 40(b)

Computation Of Business Income In Cases Where Income Is Partly Agricultural And Partly Business In
Nature
Rule Nature of Composite Income Business Income (Taxable Agricultural Income
Part) (Exempt)

7A Income from the manufacture of rubber 35% 65%

7B Income from the manufacture of coffee

- sale of coffee grown and cured 25% 75%
- sale of coffee grown, cured, roasted and 40% 60%
grounded

8 Income from the manufacture of tea 40% 60%

Miss Savitha B., a resident and ordinarily resident in India, has derived the following income from various operations (relating
to plantations and estates owned by her) during the year ended 31-3-20YY.

S.No. Particulars ₹

1. Income from manufacture of rubber in west-bengal 6,00,000

2. Income from the sale of coffee grown and cured in Telangana 3,00,000

Neeraj Arora | www.edu91.org 6.37

 PGBP

3. Income from the sale of coffee grown, cured, roasted and grounded, in australia. Sale 2,50,000
consideration was received in Delhi.

4. Income from tea grown and manufactured in assam 5,00,000

5. Income from sapling and seedlings grown in a nursery 1,00,000

Compute the agricultural and non-agricultural income of Savitha B. for the year ended 31.03.20YY.

Section 28 (Related to Partnership Firm and Partners only)

● Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a
partner of a firm from such firm will be taxable under the head PGBP.
● Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or
any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this
clause shall be adjusted to the extent of the amount not so allowed to be deducted.

Section 40(b)
In the case of any firm assessable as such or a limited liability partnership (LLP) the following amounts shall not be
deducted in computing the business income
● Remuneration to non-working partners - Any salary, bonus, commission, remuneration by whatever name
called, to any partner who is not a working partner. (In the following discussion, the term ‘remuneration’ is
applied to denote payments in the nature of salary, bonus, commission)
● Remuneration to a working partner not authorized by deed - Any remuneration paid to the working partner or
interest to any partner which is not authorised by or which is inconsistent with the terms of the partnership
deed.
● Interest to any partner in excess of 12% p.a.- Any interest payment authorised by the partnership deed
falling after the date of such deed to the extent such interest exceeds 12% simple interest p.a.
● Remuneration to a working partner in excess of prescribed limits - Any remuneration paid to a working
partner, authorised by a partnership deed and falling after the date of the deed in excess of the following
limits.
Book Profits Quantum of deduction

On the first ₹ 3 lakh of book profit or in case of loss ₹ 1,50,000 or 90% whichever is higher of book profit,

On the balance of book profit 60% of book profit

Book Profit
● The net profit as shown in the profit and loss account for the relevant previous year computed in
accordance with the provisions for computing income from profits and gains.
● The above amount should be increased by the remuneration paid or payable to all the partners of the firm if
the same has been deducted while computing the net profit.

A firm has paid ₹ 9,50,000 as remuneration to its partners for the P.Y.20XX-YY, in accordance with its partnership deed, and it
has a book profit of ₹ 12 lakh. What is the remuneration allowable as a deduction?

Neeraj Arora | www.edu91.org 6.38

 PGBP

Mehta & Gupta, a partnership firm consisting of two partners, reports a net profit of ₹ 8,00,000 before deduction of the
following items:
1. Salary of ₹ 25,000 each per month payable to two working partners of the firm (as authorized by the deed of
partnership).
2. Depreciation on plant and machinery under section 32 (computed) ₹ 2,50,000.
3. Interest on capital at 16% per annum (as per the deed of partnership). The amount of capital eligible for interest is ₹
5,00,000.
Compute
● Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
● Allowable working partner salary for the assessment year 20YY-ZZ as per section 40(b).

Section 28 - Relevant Portion for CA Intermediate

The various items of income chargeable to tax as income under the head ‘profits and gains of business or
profession’ are as under:
● Income from business or profession
○ Income arising to any person by way of profits and gains from the business or profession carried on
by him at any time during the previous year.
● Sum for termination of contract
○ any person, by whatever name called, at or in connection with the termination or modification of the
terms and conditions of any contract relating to his business.
● Income from specific services performed for its members by a trade or professional association
○ Specific services means some benefits which would not be available to the members unless they
pay a specific fee or charge for them.
● Exporters are given export incentives by way of
○ Cash assistance against exports under any scheme of GoI
○ Duty drawback
■ In case of re-exports of imported goods, an exporter is eligible to claim 98% of the duty paid
by him as drawback. (This is subject to relevant section of Customs Law in India)
○ Import entitlement license. (Profit)
○ ETC.
■ Such export incentives are taxable under the head PGBP.
● Value of any benefit or perquisite
○ The value of any benefit or perquisite whether convertible into money or not, arising from business
or the exercise of any profession.
● Sum due to, or received by, a partner of a firm
○ Any interest, salary, bonus, commission or remuneration, by whatever name called, due to or
received by a partner of a firm from such firm will be deemed to be income from business. However,
where any interest, salary, bonus, commission or remuneration by whatever name called, or any part
thereof has not been allowed to be deducted under section 40(b), in the computation of the income
of the firm the income to be taxed (In the hands of the partner ) shall be adjusted to the extent of the
amount disallowed.
● Any sum whether received or receivable, in cash or kind, under an agreement
○ for not carrying out any activity in relation to any business or profession;
○ for not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other business
or commercial right of similar nature or information or technique likely to assist in the manufacture
or processing of goods or provision of services.
■ However, the following sums received or receivable would not be chargeable to tax under the
head “profits and gains from business or profession”:

Neeraj Arora | www.edu91.org 6.39

 PGBP

● any sum, whether received or receivable, in cash or kind, on account of transfer of the
right to manufacture, produce or process any article or thing or right to carry on any
business or profession, which is chargeable under the head “Capital gains”.
● any sum received as compensation, from the multilateral fund of the Montreal
Protocol on Substances that Deplete the Ozone layer under the United Nations
Environment Programme, in accordance with the terms of agreement entered into
with the Government of India.
● Any sum received under a Keyman insurance policy
○ Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on
such policy will be taxable as income from business.
● Fair market value of inventory on its conversion as capital asset
○ Fair market value of inventory on the date of its conversion or treatment as a capital asset,
determined in the prescribed manner, would be chargeable to tax as business income.
● Sum received on account of capital asset referred under section 35AD
○ Any sum received or receivable, in cash or kind, on account of any capital asset (in respect of which
whole of the expenditure on such capital asset has been allowed as a deduction under section
35AD) being demolished, destroyed, discarded or transferred.

Profits chargeable to tax [Section 41]

41(1)
Where deduction was allowed in respect of loss, expenditure or trading liability for any year and subsequently,
during any previous year, the assessee or successor of the business has obtained any amount in respect of such
loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the
amount obtained or the value of benefit accrued shall be deemed to be income of the P.Y. in which such benefit was
obtained.

41(3)
Amount realized on transfer of an asset used for scientific research without being used for other purposes is
taxable as business income in the year of sale to the extent of lower of –
● deduction allowed under section 35(1)(iv); and
● sale proceeds

41(4)
Any amount recovered by the assessee against bad debt earlier allowed as deduction shall be taxed as income in
the year in which it is received.

SPECULATION BUSINESS
Where an assessee carries on speculative business, that business of the assessee must be deemed as distinct and
separate from any other business.

Profits and losses resulting from speculative transactions must therefore be treated as separate and distinct from
profits and gains of business and profession from any other business.

Meaning of Speculative Transaction “Speculative transaction” means a transaction in which a contract for the
purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than
by the actual delivery or transfer of the commodity or scripts.

Neeraj Arora | www.edu91.org 6.40

 PGBP

Transactions not deemed to be speculative transactions

1. Hedging contract in respect of raw materials or merchandise:
2. Hedging contract in respect of stocks and shares.
3. Forward contract.
4. Trading in derivatives.
5. Trading in commodity derivatives

PLEASE NOTE - However, the requirement of chargeability of commodities transaction tax is not applicable in
respect of trading in agricultural commodity derivatives.

Neeraj Arora | www.edu91.org 6.41