Profits and gains of business or

profession

1
 Business / Profession

Section 2(13)
• “Business” includes –
- any trade or
- commerce or
- manufacture or
- any adventure or concern in the nature of trade, commerce or manufacture.
• For the purpose of computing business income, speculation business, if any, carried on by an
assessee will be treated as distinct and separate from any other business carried on by him
[Explanation 2 to Section 28]
• The term “commerce” covers rendering of services like insurance, brokerage, transport etc.

Section 2(36)
• “Profession" includes vocation.
• The term “profession” has not been defined in the Act. It means an occupation requiring
some degree of learning e.g. Lawyer, doctor, architectect.
• Profits from business or profession are treated and taxed alike.

2
 …Business / Profession

General principles

1. Business necessarily means a continuous exercise of an activity. However, profit

from a single venture in the nature of trade would also be assessable under this
head.
2. Profits may be realised in cash or in kind. Payment voluntarily made by persons
who were under no obligation to pay anything at all would be income in the hands
of the recepient, if they were received in the course of business or by the exercise
of a profession or vocation.
3. To attract the provisions of Section 28, it is necessary that the business, profession
or vocation should be carried on at least for some time during the accounting year,
not necessarily throughout the year.
4. The business, profession or vocation need not necessarily be carried on by the
assessee-owner personally, but it should be under his direction and control.

3
 …Business / Profession

…General principles

5. According to Section 145, income has to be computed in accordance with the

method of accounting regularly and consistently employed by the assessee – cash
basis or mercantile basis.
6. The illegality of a business, profession or vocation does not exempt its profits from
tax.
7. The profits of each distinct business must be computed separately but the tax
chargeable is on the aggregate profits of all the businesses carried on by the
assessee.

4
 Computation of profits and gains of business
or profession
Pre-computation steps

Find out whether business / profession income is taxable u/s 28

Computation steps

Find out net profit as per P&L A/c

Add –
• expenses which have been debited to the P&L A/c but are not allowable as deduction
under Sections 40, 40A and 43B
• Incomes which are not credited to the P&L A/c but are taxable u/s 28

Deduct –
• expenses which are not claimed but are allowable as deduction under Sections 30 to 37
• Incomes which have been credited to the P&L A/c but are not taxable u/s 28

5
 Computation of income from business

Section 29
• Profits and gains of any business or profession are to be computed in accordance with the
provisions contained in Sections 30 to 43D.
• In addition to the specific allowances and deductions stated in sections 30 to 36, the Act
further permits allowance of items of expenses under the residuary Section 37(1), if it is
deductible on the basis of common principles of commercial expediency.
Example – Loss due to embezzlement or theft by an employee during the course of
business is allowable as a deduction in computing business profit, even though not
covered by any specific provision of the Act.

Loss caused by embezzlement is allowable as a deduction not necessarily in which the

embezzlement takes place, but when there is no reasonable chance of recovering the
amount.

If stolen money which has been allowed as a deduction, is subsequently recovered, it

should be brought to tax as a revenue receipt from the business in the year of recovery.

6
 Deductions from business or professional income –
Rent, rates, taxes, repairs & insurance - premises
• Business expenditure is allowable only when any business or profession was
carried on by the assessee at any time during the previous year.

• No deduction is admissible where the business or profession has been

discontinued and has not been carried on at any time during the previous year.

Rent, rates, taxes, repairs & insurance for business or professional premises

Section 30 read with Section 38

Nature of asset Expenses allowable

Business premises Rent
Current repairs
Land revenue, local rates & municipal taxes
Insurance premium

7
 …Deductions from business or professional income –
Rent, rates, taxes, repairs & insurance - premises
Notes
• Where the hired / owned premises are occupied by the assessee partly for
business or professional purposes and partly as dwelling house, the deduction in
respect of rent etc. will be allowed only in proportion to the part used for the
purposes of business or profession.

• Where the assessee himself is the owner of the premises and occupies them for
his business purposes, no notional rent would be allowed under this section.

• However, where a firm runs its business in the premises owned by one of its
partners, the rent payable to the partner will be an allowable deduction to the
extent it is reasonable and not excessive.

8
 …Deductions from business or professional income –
Repairs & insurance – Machinery, plant, furniture

Section 31

Nature of asset Expenses allowable

Machinery, plant or Current repairs
Furniture Insurance premium
used for the purposes of the
business or profession

Note :
• The word “used” has to be read in a wide sense so as to include passive as well as
active user.
• Even if the asset is used for a part of the previous year, deduction of the full amount
of expenses on repairs and insurance is allowable and not merely a pro-rated amount.

9
 Depreciation - Sec. 32

Depreciation is allowed on Details

Specified assets
Tangible Intangible assets (acquired on or
assets after April 1, 1998)
Building Knowhow
Machinery Patent
Plant Copyright
Furniture Trademark
License
Franchise
Any other business or commercial
rights of similar nature.

Owned by the assessee Whether wholly or partly

Used for business or Active use
profession Intended use (standby equipment)
For full year or part of the year

10
 …Depreciation – Sec. 32

Depreciation is Details
allowed on
On written down
value Ascertaining written down value (WDV)
Opening WDV Value as on April 1 of PY
Add : Actual cost of purchase or construction
Assets added to the Add :
block of assets (BOA) Pre-production interest on borrowed capital
during the PY Incidental expenses to put the asset in working
condition
Less :
Grant or subsidy received
Reimbursement
CENVAT credit of excise claimed
Less : Sale price
Assets removed Scrap / salvage value
from BOA during PY Insurance claims
Closing WDV Value as on March 31 of PY

11
 …Depreciation

Depreciation is allowed on Details

WDV of the block of assets A group of assets in respect of which
same rate of depreciation is prescribed
At the rates prescribed by Income tax Act

Section 43(1) has been amended w.e.f. AY 2018-19. The amended provisions provide
that where an assessee incurs any expenditure for acquisition of any asset in respect
of which a payment (or aggregate of payments made to a person in a day), otherwise
than by an account payee cheque / draft / use of electronic clearing system through
a bank account exceeds Rs.10,000, such payment shall be ignored for the purposes
of determination of “actual cost”.

12
 …Depreciation

Notes :

• Revaluation of assets is to be ignored. Only “actual cost” is relevant.

• Depreciation will be allowed, if due, whether it is claimed or not by the assessee.

• Depreciation would be allowable to the owner (lessor) even in respect of assets

which are actually worked or utilised by another person e.g. lessee or licensee.

• Where an assessee carries on business or profession in a building not owned by

him but taken on lease, he is entitled to depreciation in respect of the capital
expenditure incurred by him after March 31, 1970 on the construction of any
structure or any work in relation to the building by way of improvement,
renovation or extension.

13
 …Depreciation

Definition of “Plant” – Section 43(3)

Plant has been defined to include –
- ships
- vehicles
- books
- scientific apparatus
- surgical equipment
used for the purpose of business or profession
but does not include –
- tea bushes
- livestock
- buildings
- furniture and fittings
The expression “plant” includes part of a plant e.g. engine of a vehicle.

“Buildings” includes within its scope roads bridges, culverts, wells and tube wells.

14
 …Depreciation

Disallowance of depreciation on land

• Depreciation is not allowable on the cost of the land on which the building is
erected but only on the superstructure.

• As for buildings, legal ownership through registered conveyance deed is not

required. It is enough if the building is occupied and used for business.
[Mysore Minerals Ltd. v/s CIT [1999] 239 ITR 775 (SC)]

15
 …Depreciation

Depreciation is admissible on the written down value of block of assets at the

prescribed rates of depreciation.

Exceptions to the above rule :

1. If the written down value of assets is reduced to zero though the block is not
empty.

2. If the block of assets is empty or ceases to exist on the last day of the previous
year, though the written down value is not zero.

3. In the case of succession or amalgamation or business re-organisation.

4. If in the first year in which an asset is acquired, it is put to use for < 180 days.

16
 …Depreciation

1. If the written down value of assets is reduced to zero though the block is not
empty

No depreciation is admissible where the WDV has been reduced to zero, though
the block of assets does not cease to exist on the last day of the previous year.

Illustration
On April 1, 2018, WDV of block of assets (rate of deprn. 15%) is Rs. 80,000. It consists
of Plant A and Plant B. Assessee purchases an old plant C (rate of deprn. 15%) during
the previous year 2018-19 for Rs.30,000 and sells Plant A on May 3, 2018 for
Rs.1,80,000. Compute depreciation available for AY 2019-20.

17
 …Depreciation

Solution

WDV of block consisting of Plants A & B Rs. 80,000

Add : Actual cost of Plant C Rs. 30,000
Rs.1,10,000
Less : Sale consideration of Plant A Rs.1,80,000
WDV as on 31-3-2019 Rs. (70,000)

The excess of sale consideration over the opening WDV + additions during the year
(Rs.70,000) = short term capital gain u/s 50.

Since the written down value is reduced to zero, no depreciation will be allowable
though Plants B and C continue to exist.

18
 …Depreciation

2. If the block of assets is empty or ceases to exist on the last day of the previous
year, though the written down value is not zero

No depreciation is admissible if the block of assets is empty or ceases to exist on

the last day of the previous year, though the written down value is not zero.

Illustration

X Ltd. owns 2 plants - Plant A and Plant B on April 1, 2018 (WDV Rs.2,37,000; rate of
depreciation 15%). Plant C purchased on May 31, 2018 for Rs.20,000 and Plant A sold
on April 10, 2018 for Rs.10,000, Plant B sold on December 12, 2018 for Rs.15,000 and
Plant C sold on March 1, 2019 for Rs. 24,000. Compute the depreciation admissible for
AY 2019-20.

19
 …Depreciation

Solution

WDV of block consisting of Plants A & B Rs. 2,37,000

Add : Actual cost of Plant C Rs. 30,000
Rs.2,67,000
Less : Sale consideration of Plants A, B & C Rs. 49,000
WDV as on 31-3-2019 Rs.2,18,000

Since the block ceases to exist, no depreciation will be allowable though written down
value is not zero.

The shortfall of sale consideration over the opening WDV + additions during the year
(Rs.70,000) = short term capital loss u/s 50.

20
 …Depreciation

3. In the case of succession or amalgamation or business re-organisation

In the following situations, compute the depreciation allowance for the year and
apportion the allowance in the ratio of the number of days for which assets were
used by the respective assessee :

a. amalgamation of companies
b. demerger of companies
c. firm / proprietory concern is succeeded by a company
d. conversion of private company or unlisted public company into limited
liability partnership.

21
 …Depreciation

4. If in the first year in which an asset is acquired, it is put to use for < 180 days
If the following 2 conditions are satisfied, depreciation shall be restricted to 50% of
the amount calculated at the percentage prescribed :
• The asset is acquired during the previous year.
• It is put to use for a period of less than 180 days.

Notes :
1. The aforesaid restriction is applicable only in the year in which an asset is acquired
and not in subsequent years.
2. Since in the case of partition of HUF, dissolution of firm, conversion of firm into a
company, no asset is “acquired” by the successor, the aforesaid provision is not
applicable.
3. If the asset is kept ready for use for > 180 days before the end of the previous year
but actually used for less than 180 days, the aforesaid restriction would not apply.

22
 …Depreciation

Additional depreciation - Section32(1)(iia)

Conditions :

1. The assessee should be engaged in the manufacture or production or any article or

thing (may be priority sector item or even non-priority sector item)
2. Additional depreciation available only in respect of new plant and machinery
acquired and installed after March 31, 2005.
3. Additional depreciation is not available in respect of building or furniture even if
the other conditions are satisfied.
4. Additional depreciation is not available in respect of old plant and machinery.

23
 …Depreciation

…Additional depreciation – Section32(1)(iia)

However, no deduction shall be allowed in respect of—

1. Ships and aircrafts.
2. Any machinery or plant which, before its installation by the assessee, was used
either within or outside India by any other person.
3. Any machinery or plant installed in any office premises or any residential
accommodation, including accommodation in the nature of a guest-house.
4. Any office appliances or road transport vehicles; or
5. Any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the
income chargeable under the head "Profits and gains of business or profession"
of any one previous year.

24
 …Depreciation

…Additional depreciation – Section32(1)(iia)

Rate of additional depreciation :

• 20% of the actual cost of new plant and machinery acquired and installed after
March 31, 2005.
• 10% if the asset is put to use for < 180 days in the year in which it is acquired.
• If the asset is put to use for less than 180 days in the year of acquisition, then
additional depreciation would be 10% of the cost of acquisition in the first year
and the balance 10% would be available in the immediately succeeding previous
year.

25
 …Depreciation

Unabsorbed depreciation – Section 32(2)

Set off available in the following sequence

1. For the year in which absorbed depreciation arises
• Any income of any business or profession
• Any income of any other head of income
• Balance if any, will be carried forward to the next year and treated as
depreciation of that year

2. For the subsequent year (same as in (1) above)

• Any income of any business or profession
• Any income of any other head of income
• Balance if any, will be carried forward to the next year and treated as
depreciation of that year

26
 …Depreciation

Unabsorbed depreciation – Section 32(2)

• Unabsorbed depreciation can be carried forward for indefinite number of previous
years.

• Set off will be allowed even if the same business to which it relates is no longer in
existence in the year in which the set off takes place.

• In the matter of set off, the following order of priority is followed in the subsequent
year(s)
 Current depreciation
 Brought forward business loss
 Unabsorbed depreciation

 If in the subsequent year(s), there is no b/f business loss, unabsorbed depreciation

can be added to current depreciation for the purpose of claiming deduction.

27
 Expenditure on scientific research – Sec. 35

The term “scientific research” as defined in Section 43(4)(i) means –

any activities for the extension of knowledge
- in the fields of natural or applied science
- Including agriculture, animal husbandry (including dairy or poultry farm) or
fisheries.
The following expenditure on scientific research is allowed as deduction :
1. 100% of expenditure incurred by the assessee for its own business (in-house
research) towards scientific research incurred during the year.
This covers both revenue and capital expenditure (other than cost of acquisition
of any land).
Any expenditure incurred during the 3 years immediately preceding the year of
commencement of business, being salary to an employee or purchase of materials
used in such scientific research or any capital expenditure (except cost of
acquisition of land) shall be deemed to have been incurred during the previous
year in which the business is commenced and allowed as a deduction in that year.

28
 …Expenditure on scientific research – Sec. 35

2. Weighted deduction of 175% of payment made to a notified/approved

• research association
• university/college or
• other institution
• to be used for scientific research
• related or unrelated to assessee’s business.

3. Weighted deduction of 125% of payment to –

• an approved company
• registered in India,
• with the object of scientific research and development,
• related or unrelated to assessee’s business.

29
 …Expenditure on scientific research – Sec. 35
4. Statistical or social Science Research :
Weighted deduction of 125% of payment made to
• an approved / notified research association
• having its object of undertaking research in social science or statistical research
• or to any university, college, or other institution
• to be used for research in social science or statistical research,
• related or unrelated to assessee’s business.

5. Weighted deduction of 200% of payment to approved–

• National Laboratory or
• University or
• Indian Institute of Technology or
• specified person
• with the specified direction that the sum shall be used for scientific research
undertaken under a programme approved by the prescribed authority.

30
 …Expenditure on scientific research – Sec. 35
6. Weighted deduction of 200% of any expenditure
• incurred by a company
• engaged in any business of
 biotechnology or
 of manufacture or production of any article or thing, other than those
specified in the list of Eleventh Schedule,
• including capital expenditure (other than on land and building)
• on in-house scientific research and development facilities
• as approved by the prescribed authorities(Rule 6).

Company should enter into an agreement with the prescribed authority for co
operation in such research and development and audit of accounts maintained for
such facilities.

31
 …Expenditure on scientific research – Sec. 35
Note :

Where deduction is allowed under Section 35 for expenditure incurred on any capital
asset, no deduction for depreciation under Section 32 shall be allowed to the
assessee.

32
 Amortisation of certain preliminary expenses
– Sec. 35D
Who is entitled to deduction under Section 35D
• An Indian Company and
• any Resident assessee
• are allowed to write off the preliminary expenses incurred by them
• in setting up of a new industrial unit
• or extension of an existing industrial unit.

Time and purpose of expenditure

Expenses incurred in two situations qualify for deduction

When expenses are incurred Purpose of expenses

1 Before commencement of business For setting up of any undertaking or
business
2 After commencement of business For setting up of a new industrial unit or
for extension of an industial undertaking
33
 …Amortisation of certain preliminary
expenses – Sec. 35D
Expenses eligible for deduction
1. Expenses incurred for –
a. Preparation of feasibility report
b. Preparation of Project report
c. Conducting market survey or any other survey necessary for business
d. Engineering service relating to the business of assessee
2. Legal charges for drafting any agreement between the assessee and any other person for
setting up or conduct of the business
3. In the case of a company assessee, following additional expenses-
a. Legal charges for drafting of Memorandum of Association (M/A), Articles of Association
(A/A)
b. Printing expenses of M/A, A/A
c. Company registration fee under Companies Act
d. Underwriting commission, brokerage
e. Charges for drafting, typing, printing and advertisement of prospectus for public issue
of shares or debentures
4. Any other prescribed expenditure
34
 …Amortisation of certain preliminary
expenses – Sec. 35D
Amount of deduction

Step 1 : Calculate qualifying amount

Step 2 : Calculate deduction

Step 1 : Calculation of qualifying amount

Qualifying amount Deduction

Aggregate of eligible expenses or 5% of Qualifying amount is allowed 5 equal
cost of project, whichever is lower instalments.
The first instalment shall be allowed in
A Company can opt for 5% of “capital the year in which business is
employed” in place of “cost of project.” commenced or
the year in which the extension of the
industrial undertaking is completed or
the year in which the new industrial
undertaking commences production.
35
 …Amortisation of certain preliminary
expenses – Sec. 35D
Meaning of “Cost of Project”

Situation Cost of Project

Expenses are incurred before Land, Building, Plant, Machinery, furniture,
commencement of business fittings, railway sidings, development of land or
building -
shown in the books
as on the last day of the year
in which business is commenced
Expenses are incurred after Cost of above assets acquired in connection with
commencement of business extension of business or setting up new industrial
unit –
shown in the books
as on the last day of the year
in which extension is completed or the new unit
commences production

36
 …Amortisation of certain preliminary
expenses – Sec. 35D
Meaning of “Capital employed”
Situation Capital employed
Expenses are incurred before Issued share capital + Debentures + Long term
commencement of business borrowings -
shown in the books
as on the last day of the year
in which business is commenced
Expenses are incurred after Issued share capital + Debentures + Long term
commencement of business borrowings
in connection with extension of business or
setting up new industrial unit –
shown in the books
as on the last day of the year
in which extension is completed or the new unit
commences production

37
 Other deductions – Section 36(1)(i), 36(1)(ia)
(1) The deductions provided for in the following clauses shall be allowed in
computing the income referred to in section 28 i.e. Profits and Gains of Business
or Profession —

(i) Insurance premia paid

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.
The premium should be paid by cheque, through electronic mode, credit card etc.
other than cash.

38
 ...Other deductions – Section 36(1)(ib)

(ib)  Premia paid by employer for health insurance of employees

The amount of any premium paid –
- by any mode of payment other than cash
- by the assessee as an employer
- to effect or to keep in force an insurance on the health of his employees
- under a scheme framed in this behalf by—
 the General Insurance Corporation of India and approved by the Central
Government; or
 any other insurer and approved by the Insurance Regulatory and
Development Authority
The premium should be paid by cheque, through electronic mode, credit card etc.
other than cash.

39
 ...Other deductions – Section 36(1)(ii)

(ii) 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.

• Safeguard against a private company or an association escaping tax by

distributing a part of its profits by way of bonus amongst members or employees
of their own concern, instead of distributing the money as dividends or share of
profits.
• However, u/s 43B, bonus or commission to employee will be allowed as a
deduction only in the year in which it is actually paid.

40
 ...Other deductions – Section 36(1)(iii)

(iii)  Interest on borrowed capital

The amount of the interest paid –
- in respect of capital borrowed
- for the purposes of the business or profession.
• Any amount of the interest paid, -
- in respect of capital borrowed
- for acquisition of an asset whether for extension of existing business or profession or
for a new business or for an existing business where there is no extension -whether
capitalised in the books of account or not
- for any period beginning from the date on which the capital was borrowed for
acquisition of the asset till the date on which such asset was first put to use,
- shall not be allowed as deduction.
[Proviso to Section 36(1)(iii)]
• The aforesaid interest will be added to the cost of acquisition of the said asset and
admissible depreciation will be allowed thereon.
[Explanation 8 to Section 43(1)]

41
 ...Other deductions – Section 36(1)(iii) contd.

• The interest, after the said asset is first put to use will be allowed as deduction
u/s 36(1)(iii).
• Interest paid by a firm to its partners is allowable as deduction u/s 40(b) provided
such interest payment is authorised by the partnership deed.
• The scope of the expression “for the purposes of business” is very wide”. Capital
may be borrowed for several purposes e.g. for acquiring a capital asset, or to pay
off a trading debt or loss. Capital may be borrowed in the course of the existing
business as well as for acquiring assets for extension of existing business.

42
 ...Other deductions – Section 36(1)(iiia)

(iiia)  Discount on Zero coupon bonds

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.
Explanation—For the purposes of this clause, the expressions—
(i)  "discount" means –
- the difference between the amount received or receivable 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 or redemption of such bond;
(ii)  "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 or redemption of such bond.
Note : Tax is not deductible at source u/s 194A by the payer company.

43
 Zero coupon bonds

Zero coupon bond means –

• A bond issued by –
 any infrastructure capital company or
 infrastructure capital fund or
 a public sector company
 or a scheduled bank
• on or after 1st June, 2005
• in respect of which no payment and benefit is received or receivable before
maturity or redemption from such issuing entity and
• which the Central Government may notify in this behalf.

44
 ...Other deductions – Section 36(1)(iv)

(iv)  Contributions to provident and superannuation fund

Any sum paid by the assessee –
- as an employer
- by way of contribution towards a recognised provident fund or an approved
superannuation fund,
- subject to such limits as may be prescribed (Part A and B of the Fourth
Schedule to the Income Tax Act)
- and subject to such conditions as the Board may think fit to specify in cases
where the contributions are not in the nature of annual contributions of fixed
amounts.
• This contribution is allowed as a deduction to the extent it is actually paid -
Section 43B.

45
 ...Other deductions – Section 36(1)(iva)

(iva) Contribution to Pension Scheme referred to in Section 80CCD

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 per cent of the salary of the employee in
the previous year.

Explanation.—For the purposes of this clause, "salary" includes dearness allowance, if

the terms of employment so provide, but excludes all other allowances and
perquisites.

46
 ...Other deductions – Section 36(1)(v)

(v)  Contribution to 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 under an
irrevocable trust.

This deduction is subject to the provisions of Section 43B.

47
 ...Other deductions – Section 36(1)(va)

(va)  Amount received by assessee as contribution from his employees

Any sum received by the assessee –
- from any of his employees
- to which the provisions of section 2(24)(x) apply, i.e. Provident Fund, Superannuation
Fund or any fund set up under Employees’ State Insurance Act or any other fund for the
welfare of such employees,
- if such sum is credited by the assessee to the employee's account in the relevant fund or
funds
- on or before the due date.

Explanation.—For the purposes of this clause, "due date" means the date by which the
assessee is required as an employer to credit an employee's contribution to the employee's
account in the relevant fund under any Act, rule, order or notification issued thereunder or
under any standing order, award, contract of service or otherwise.

• Under the Employees Provident Funds Scheme, 1952, the due date for payment is within 15
days of the close of every month. A further grace period of 5 days is allowed.

48
 ...Other deductions – Section 36(1)(vi)

(vi)  Allowance for animals

In respect of animals which have been used for the purposes of the business or
profession –
- otherwise than as stock-in-trade and
- have died or become permanently useless for such purposes,
- the difference between
 the actual cost to the assessee of the animals and
 the amount, if any, realised in respect of the carcasses or animals.

• The allowance under the clause would thus recoup to the assessee the entire
capital expenditure in respect of the animal.

49
 ...Other deductions – Section 36(1)(vii)

(vii)  Bad debts

Subject to the provisions of section 36(2), -
- the amount of any bad debt or part thereof (other than any provision for bad
and doubtful debts)
- which is written off as irrecoverable in the accounts of the assessee for the
previous year.

• As per Section 36(2) (i) –

(a) The debt must have been taken into account in the computation of the
income of the previous year or of an earlier previous year and
(b) The amount of such debt or part thereof is written off during the previous
year.
(c) In the case of a banking company or money lending business carried on by the
assessee, the debt represents money lent in the ordinary course of such
business.

50
 ...Other deductions – Section 36(1)(vii) contd.

• As per Section 36(2)(ii) –

If the amount ultimately recovered on any debt –
- is less than
- the difference between
- the debt and the deduction allowed in respect thereof,
- the deficiency shall be deductible
- in the previous year in which the ultimate recovery is made.

• As per Section 41(4) –

If a deduction has been allowed in respect of a bad debt u/s 36, and subsequently,
- the amount recovered in respect of such debt
- is more than the amount due after the allowance has been made,
- the excess shall be deemed to be profits and gains of business or profession and
- chargeable as income of the previous year in which it is recovered,
- whether or not the relevant business is in existence at that time.

51
 ...Other deductions – Section 36(1)(xv)

(xv)  Securities Transaction Tax

An amount equal to the securities transaction tax –
- paid by the assessee
- in respect of the taxable securities transactions entered into in the course of
his business during the previous year,
- if the income arising from such taxable securities transactions is included in
the income computed under the head "Profits and gains of business or
profession".

Explanation.—For the purposes of this clause, the expressions "securities

transaction tax" and "taxable securities transaction" shall have the meanings
respectively assigned to them under Chapter VII of the Finance (No. 2) Act, 2004.

52
 ...Other deductions – Section 36(1)(xvi)

(xv)  Commodities Transaction Tax

W.e.f. AY 2014-15, commodities transaction tax –
- paid by the assessee
- in respect of the taxable commodities transactions entered into in the
course of his business during the previous year,
- if the income arising from such taxable commodities transactions is included
in the income computed under the head "Profits and gains of business or
profession".

53
 Residuary expenses – Section 37

(1) Any expenditure –

- not being
 expenditure described in Sections 30 to 36
 expenditure of capital expenditure
 expenditure of personal expenses of the assessee
 expenditure for any purpose which is an offence or prohibited by law
- laid out or expended wholly and exclusively for the purposes of the business
or profession
- incurred after the business was set up
- shall be allowed in computing the income chargeable under the head
“Profits and gains of business or profession”.

54
 …Residuary expenses – Section 37

(2B) No allowance shall be made in respect of expenditure incurred by an assessee

on advertisement in any souvenir, brochure, pamphlet or the like published by a
political party.

55
 …Residuary expenses – Section 37

• Illustrations of allowable expenses

1. Entertainment expenditure
2. Advertisement expenditure (other than those mentioned u/s 37(2B))
3. Travelling expenditure
4. Expenditure on maintenance of guest house
5. Audit fees
6. Legal charges
7. Commission paid for securing business
8. Subscription to a business chamber of commerce or other business associations
9. Pension paid to employees on retirement
10. Insurance premium
11. Expenditure incurred by employer on training of apprentices covered under the
Apprentices Act, 1961

56
 …Residuary expenses – Section 37

12. Professional tax paid by a person carrying on a business or profession

13. Compensation paid by an employer to his employee for terminating the latter’s
services
14. Deposit under “Own Your Telephone Scheme”, “Tatkal Telephone Deposit
Scheme”, Security deposit for telex connection. If telephone not installed and
money paid back, or If amount refunded on surrender of telephone or
otherwise, or telex connection finally closed, refund taxable u/s 41(1)
15. Expenses in connection with local festivals if not of a personal nature

Note : Business losses are not allowable u/s 37 but u/s 29 e.g. loss arising out of theft,
embezzlement etc.

57
 …Residuary expenses – Section 37

Illustrations of expenses which are not deductible

1. Donations
2. Income tax, advance income tax
3. Legal expenses incurred to defend criminal liability
4. Fines, penalty resulting from contravention of any law
5. Drawings by the proprietor
6. Expenses of capital nature

58
 …Residuary expenses – Section 37

Amendment vide Finance (No. 2) Act, 2014

Corporate social responsibility (CSR) :

• A new explanation has been inserted in Sec. 37(1) whereby any expenditure
incurred by an assessee on the activities relating to corporate social responsibility
referred to in Sec. 135 of the Companies Act, 2013 shall not be deemed to be an
expenditure incurred for the purpose of business or profession and hence, not
deductible u/s 37.

• However, deduction may be claimed under any other section (if otherwise
possible).

59
 …Residuary expenses – Section 37

Distinction between capital and revenue expenditure

1. If the expenditure is for the initial outlay or for acquiring or bringing into existence any
asset or advantage of an enduring nature to the business of the assessee or for
extension of the business which is already in existence or for substantial replacement of
any existing business asset, it must be treated as capital expenditure.

2. If, however, the expenditure is for running the business or for working out the asset with
a view to producing profits, it would be a revenue expenditure.

3. The quantum of the expenditure does not determine whether the expenditure is capital
or revenue in nature.

4. Expenditure incurred to obtain an enduring benefit is capital in nature. Enduring benefit

need not be of an everlasting character. However, it should not be so transitory that it
may be terminated at any time at the volition of any of the parties.

60
 …Residuary expenses – Section 37

…Distinction between capital and revenue expenditure

5. Payment for use and exploitation for a limited period of patent, know-how or
trademark and the acquisition is not of an asset of an enduring nature and at the
end of the stipulated period the asset reverts back to the owner, it would
constitute an expenditure of revenue nature.

6. Payment made to ward off competition would constitute a capital expenditure if

the object of making that payment is to derive an advantage by eliminating
competition over some length of time.

7. Expenditure incurred for the termination of a trading relationship in order to avoid

losses occuring in future, is a revenue expenditure.

61
 …Residuary expenses – Section 37

8. If the expenditure is recurring and is incurred during the ordinary course of the
business, it would normally constitute a revenue expenditure.

9. In case of acquisition of capital asset, it is immaterial whether the price is paid in

lumpsum or periodically and also whether it is paid out of capital or income or is
linked with the total sales or turnover of the business.

10. Expenditure incurred for the initial starting of business before its setting up or for
substantial expansion as also expenditure incurred after the discontinuance of the
business would be of capital nature.

11. Entries made in the books of account would not always be indicative or conclusive
as to what is the actual nature of the transaction.

62
 Expenditure not deductible – Section 40(a)

Notwithstanding anything to the contrary in sections 30 to 38, the following amounts

shall not be deducted in computing the income chargeable under the head "Profits
and gains of business or profession",—
Section 40(a)(i) : Interest, royalty, fees for technical services payable outside India :
• If the following 3 conditions are satisfied, the assessee (i.e. the payer) is supposed to
deduct tax at source u/s 195 :
1. The amount paid is interest, royalty, fees for technical services or other sum
(but not salary).
2. The aforesaid amount is chargeable to tax in the hands of the recipient.
3. The aforesaid amount is paid / payable –
- outside India to any person or
- in India to a non-resident.
• The tax deducted from the above payments, is to be deposited with the Government
within the time limit specified u/s 200(1).

63
…Expenditure not deductible – Section 40(a)

TDS defaults pertaining to Law applicable

any sum (other than
salary) payable to any from AY 2015-16
person outside India or to
a non-resident in India

Tax is deductible but not Entire expenditure is not deductible.

deducted
If, however, TDS is deposited in a subsequent year, the
expenditure will be allowed as a deduction in that
year.

64
 …Expenditure not deductible – Section 40(a)

…Amendment to Section 40(a)(i) vide Finance (No. 2) Act, 2014:

TDS defaults pertaining to any sum Law applicable
(other than salary) payable to any from AY 2015-16
person outside India or to a non-
resident in India

Tax is deductible and it is so No disallowance if TDS is deposited upto the due date
deducted during April to of submission of Return u/s 139(1).
March but it is not
If, however, TDS is deposited after this date, the
deposited upto March 31 of
expenditure will be allowed as a deduction in the year
the financial year.
in which TDS is deposited.

65
 …Expenditure not deductible – Section 40(a)

Section 40(a)(ia) – Compliance of TDS provisions in case of a resident

Conditions :

1. Disallowance u/s 40(a)(ia) covers any amount payable to a resident which is

subject to TDS.

2. In the above cases, payee is resident in India.

66
 …Expenditure not deductible – Section 40(a)

…Section 40(a)(ia) – Compliance of TDS provisions in case of a resident

TDS defaults : TDS defaults may be broadly grouped in the following categories :

Default No. Nature of default

Default one Tax is deductible at source but the assessee has
not deducted it.
Default two Tax is deducted during the current year but the
assessee has not deposited it before the due
date of filing the Return.

67
 …Expenditure not deductible – Section 40(a)

…Section 40(a)(ia) – Compliance of TDS provisions in case of a resident

• Consequences in the case of above defaults :

30% of the expenditure is not deductible while calculating income of the assessee
(i.e. payer) u/s 40(a)(ia).

• Consequences if tax is subsequently deposited :

If 30% of the above expenditure is not allowed in the current year, 30% deduction
will be available while computing the business income of a subsequent previous year
in which such tax will be paid.

68
 …Expenditure not deductible – Section 40(a)

…Section 40(a)(ia) – Compliance of TDS provisions in case of a resident

• W.e.f. AY 2013-14, a relaxation is given if –

1. Tax is deductible on the aforesaid payments but is not deducted by the payer.
2. Despite the default under (1) above, the payer is not deemed to be an assessee in
default if –
a. the resident recipient has included such income in the Return submitted u/s
139
b. the resident recipient has taken into account the above income in such Return
c. the resident recipient has paid tax on such income.
d. The payer submits a certificate to this effect from a Chartered Accountant.
If the above conditions are satisfied, it shall be deemed that the payer has deducted
and paid tax on the date of furnishing the Return of Income by the resident recipient.

69
 …Expenditure not deductible – Section 40(a)

Section 40(a)(ii) : Income tax

• Any sum paid on account of income tax (i.e. any rate or tax levied on profits on the
profits and gains of any business or profession) is not deductible.

• Similarly, any interest / penalty / fine for non-payment or late payment of income
tax is not deductible.

• This rule is applicable whether income tax is payable in India or outside India.

70
 …Expenditure not deductible – Section 40(a)

Section 40(a)(iii) : Salary payable outside India without tax deduction

Conditions :

1. The payment is chargeable under the head "Salaries” in the hands of the
recipient.
2. It is payable –
(a)  outside India (to any person resident or non-resident); or
(b)  in India to a non-resident.
3. Tax has not been paid to the Government nor deducted at source under the
Income tax Act.

Consequence : If the above conditions are satisfied, then the payment is not allowed
as deduction.

71
 …Expenditure not deductible – Section 40(a)

Section 40(a)(iv) : Provident fund payment without tax deduction at source

Any payment to a provident or other fund established for the benefit of employees of
the assessee, is not deductible -
- if the assessee has not made effective arrangements to secure that tax shall
be deducted at source
- from any payments made from the fund
- which are chargeable to tax under the head "Salaries“.

72
 …Expenditure not deductible – Section 40(a)

Section 40(a)(v) : Tax on perquisite paid by the employer

Conditions :
1. The employer provides non-monetary perquisites to employees.
2. Tax on non-monetary perquisites is paid by the employer.
3. The tax so paid by the employer is not taxable in the hands of the employee by
virtue of Section 10(10CC).

Consequences :
While calculating the income of the employer, tax paid by the employer on non-
monetary perquisites is not deductible in the hands of the employer.

73
 Expenses or payments not deductible in
certain circumstances – 40A(2)
Amounts not deductible in respect of payment to relatives :
(2)(a) Any expenditure for goods, services or facilities incurred by an assessee –
- in respect of which payment has been or is to be made
- to any person referred to in clause (b) of this sub-section,
- is liable to be disallowed in computing business profits
- to the extent such expenditure is considered to be excessive or
unreasonable having regard
 to the fair market value of the 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 him therefrom.

74
 ...Expenses or payments not deductible in
certain circumstances – Sec. 40A(2)

(2)(b) The persons referred to in clause (a) are “relatives” or “associate

concerns”. The word “relative” has been defined in section 2(41) to
mean, in relation to an individual –
- the spouse
- brother or sister
- any lineal ascendant or descendant of that individual.
Where the assessee is a firm, HUF or an AOP, the relationship will have to
be reckoned for the purpose, with reference to the partners of the firm
and the members of the HUF or AOP.
Where the assessee is a company, the relationship will have to be
reckoned with reference to the directors or persons having substantial
interest in the company.

75
 ...Expenses or payments not deductible in
certain circumstances – Sec. 40A(2)
• A person shall be deemed to have a substantial interest in a business or
profession if –
(a) in a case where the business or profession is carried on by a company, such
person is, at any time during the previous year, the beneficial owner of equity
shares carrying not less than twenty per cent of the voting power; and
(b) in any other case, such person is, at any time during the previous year,
beneficially entitled to not less than twenty per cent of the profits of such
business or profession.

76
 ...Expenses or payments not deductible in
certain circumstances – Sec. 40A(3)

(3) Where the assessee incurs any expenditure –

- in respect of which a payment or aggregate of payments
- made to a person in a day,
- otherwise than by an account payee cheque drawn on a bank or account
payee bank draft or use of electronic clearing system through a bank
account,
- exceeds Rs.10,000 (w.e.f. AY 2018-19),
- no deduction shall be allowed in respect of such expenditure under Sections
30 to 37.

77
 ...Expenses or payments not deductible in
certain circumstances – Sec. 40A(3)
• Rule 6DD enumerates the circumstances in which no disallowance shall be made
u/s 40A(3) even if aggregate payments made to a person in a day otherwise than
by an account payee cheque or account payee bank draft exceed Rs.10,000.
[Proviso 1 to Section 40A(3)]
• This limit of Rs.20,000 has been raised to Rs.35,000 w.e.f. 1-10-2009, in case of
payment made for plying, hiring or leasing goods carriages.
[Proviso 2 to Section 40A(3)]

Note :
• The above provisions apply to all categories of expenditure involving payments for
goods or services which are deductible in computing taxable income.
• The above provisions do 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.

78
 …Expenses not deductible in certain
circumstances – Sec. 40A(7)
Provision for payment of gratuity – Sec. 40A(7)

Nature of entry Allowable / disallowable

Provision for contribution to an Allowable u/s 36(1)(v)
approved gratuity fund
Payment of gratuity Allowable u/s 37
Provision for payment of gratuity to Disallowable u/s 40A(7)
employees on retirement, termination or
for any other reason

79
 …Expenses not deductible in certain
circumstances – Sec. 40A(9)
Contributions to non-statutory funds – Sec. 40A(9)

Expenditure - disallowable Expenditure - allowable

Sum paid by the assessee as an employer Contribution to –
for –
- setting up - recognised PF
- formation - approved gratuity fund
- contribution - approved superannuation fund
- new pension scheme (NPS)
to –
- any fund, trust, company, AOP, BOI,
society registered under Societies
Regn. Act, other institutions

80
Section 40A(10)

Where no deduction has been allowed u/s 40A(9) and where the Income tax
officer is satisfied that the fund, trust, company, association of persons, society or
institution laid out or expended any expenditure wholly and exclusively for the
welfare of the employees of the assessee, then the amount of such expenditure
shall be allowed as deduction while computing the business income of the
assessee of the previous year in which such expenditure is laid out or expended.

81
 Certain deductions permissible only on actual
payment – Sec. 43B

Following sums allowed as deduction only on the basis of actual payment within
time limit specified u/s 43B:
a. Any sum payable by way of tax, duty, cess or fee, by whatever name called, under
any law for the time being in force.

b. Any sum payable by way of employer’s contribution to PF, Superannuation Fund,

gratuity fund or any other fund for the welfare of employees.

c. Bonus or commission payable to employees for services rendered.

d. Any sum payable by way of interest on any loan or borrowing from any public
financial institution (i.e. ICICI, IFCI, IDBI, LIC, UTI) or State Financial Institution or
State Industrial Invesment Corporation.

82
 …Certain deductions permissible only on actual
payment – Sec. 43B

e. Interest on any loan or advance from a scheduled bank.

f. Any sum payable by an assessee as an employer in lieu of earned leave of his

employees.

g. Any sum payable by the assessee to Indian railways for the use of railway assets.

h. W.e.f. AY 2018-19, any sum payable by an assessee as interest on any loan or

advances from a co-op. bank (other than a primary agricultural credit society or a
primary co-op. agricultural and rural development bank)

83
 …Certain deductions permissible only on
actual payment – Sec. 43B
Time limit for payment prescribed u/s 43B :

1. During the previous year or

2. after the end of the previous year but before the due date of filing the Return of
Income.

Conditions :

• Evidence of payment to be furnished alongwith the Return of Income.

However, no annexure is possible with the new Income tax Return Forms. Hence,
such evidence should be kept by the taxpayer himself and produced before the
AO, when required.

84
 …Certain deductions permissible only on actual
payment – Sec. 43B
Explanation 3C and 3D : If interest on loans referred to in (d) and (e) is converted into
a loan or borrowing or advance, the interest so converted and not actually paid, shall
not be allowed as a deduction.

Circular No. 7 / 2006 dt. 17-7-2006 explains the manner in which the converted
interest will be allowed as deduction.
The unpaid interest, whenever actually paid to the bank or financial institution will be
in the nature of revenue expenditure, deductible in the computation of income.
Irrespective of the nomenclature, deduction will be allowed in the previous year in
which the converted interest is actually paid.

85