PGBP CA AARISH KHAN

CHAPTER 1
PROFITS & GAINS FROM BUSINESS & PROFESSION

PART 1
(1) General Chargeability:
As per Sec 28(i) “Profits and gains from business & profession which was carried
on by the assessee at any time during the P.Y” is charged under PGBP”.
This is the general chargeability under the head B & P. Further there are certain
special charging Secs as well which do not fulfill the conditions of general
chargeability, to widen the scope of taxability.
(2) Whether a particular income will come under the head B & P will be dependent upon
the facts & circumstances of each case.
(3) The term “Business” is defined u/s 2(13) in an inclusive manner to include trade,
commerce, manufacture or any adventure in the nature of trade, commerce,
manufacture. However, this definition does not give any substantial test to
identify whether an activity amounts to business or not. We need to rely on the
judgements given by the Court to understand the term business.

Definition of Profession:
Sec 2(36): Profession includes ‘Vocation’. Vocation means occupation requiring skills.

S.N PARTICULARS HEAD REMARKS

(i) Interest income on PGBP K & CO (Delhi): The interest so earned is
deposits made in the bank, not an independent Investment Activity.
which has furnished bank Such deposit so placed are inextricably
guarantee on the behalf of linked with the activity of business.
Assessees for a tender. Therefore,chargeable under the head B & P.
(ii) The Assessee let out the P PGBP Where the facilities cannot be used by the
& M during the course of owner himself on account of some problems
lockout in the factory. in the Company and it is temporarily let out
Whether the rental income to generate some revenue, then it would
chargeable under IFOS or amount to business expediency. Therefore,
PGBP? such income shall be come under the head .

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(iii) Letting out of godowns and PGBP NDR Warehousing P. Ltd (Mad)
provision of warehousing Activity was not merely letting out of
services be subject to tax warehouses but storage of goods with
- “IFHP” or “PGBP”? provision of several auxiliary services such
as pest control, rodent control and
fumigation service to prevent the goods
stored from being affected by vagaries of
moisture and temperature. Further, service
of security and protection was also provided.
(iv) Whether let out of PGBP Chennai Properties & Investment Ltd (SC)/
immovable property will be Rayala Corporation (P) Ltd. (SC)
chargeable under Income If it is written in the MOA that the main
from House Property or object of the company is to acquire & let
PGBP ? out immovable property and income from
such activity is substantial, then income
from such activity shall be taxable under
PGBP instead of IFHP.

It is hereby clarified that any income from letting out of a residential house or a part
of the house by the owner shall not be chargeable under the head “PGBP” and shall be
chargeable under the head “Income from house property. Therefore if commercial
property is let out then the case law of Chennai Properties & Investment Ltd shall apply.
(Amendment by Finance Act (No.2) 2024)

(4) What do you mean by the term “PROFITS AND GAINS”?

Ans.The profits and gains must be revenue in nature i.e. all revenue receipts are
chargeable to tax. Any trading receipt incidental to business will be chargeable u/s
28(i). Any capital receipt, like damages for not supplying machinery on time will not be
taxable, as it is capital receipt [Saurashtra Cement Ltd (SC)]
• Profits & gains may arise from legal or illegal business.
• Profits may arise in cash or kind.
• Profits u/s 28(i) must be Real Profits i.e. not notional, not anticipated (There are
some exceptions eg:- Secs 44AD/44ADA/44AE/44B/44BB/44BBB/44BBA etc)
(5) The term carried on by the assessee means the assessee controls the business and
need not do all the activities himself. A NR appoints an agent in India, then this
agent will carry on the business, but the control of the business is with NR.

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(6) The term anytime during the P.Y.” means business or profession must be conducted
at least sometime during the P.Y, if not for the entire year. Further it is not
necessary business should be in existence in A.Y.

Sec 29: How to Compute PGBP Income?

In accordance with Sec 30 to Sec 43D.
But before computing PGBP as per Income Tax Act one has to follow Sec 145.
As per Sec 145(1) every assesse covered under the head B & P or IFOS can maintain
BOA on Mercantile or Cash basis regularly followed by the assessee.
As per Sec 145(2) for the purpose of maintaining BOA’s on Mercantile basis, Assessee
has to follow Accounting standards notified by the Central Govt. CBDT has notified
its own standards known as “INCOME COMPUTATION & DISCLOSURE
STANDARDS”. (However, only few ICDS have been notified so far).
Sec 145(3): If an assessee is not complying with sub sec (1) or (2) then A.O. has the
power to invoke Best Judgement Assessment u/s 144 [Refer Assessment Procedure].

Sec 30 – 37 ® Deduction of Expenses & Allowances

Sec 30 – 36 Sec 37
Specific Dedn Sector wise Deductions General Dedn (+)
Available to All 35ABB, 35ABA, 35AD,33AB, 33ABA, 2 Explanations
Sec 30, Sec 31, 36(1)(viia), 36(1)(viii), 35CCA, 35D, 35DD, (+)
Sec 32, Sec 36(1) 35E, 35DDA, 35CCC, 35CCD. Case laws

Special Charging Sections (See Later)

1. As per Sec 28(va), any amount received or receivable in cash or kind under an
agreement for not carrying out any activity in relation to any business or profession
shall be chargeable under the head PGBP.
The payer will get the deduction of such fees if TDS is deducted @ 10% u/s 194J.
2. As per Sec 28(iv), the value of any benefit or perquisite arising from business or the
exercise of a profession, whether—
(a) convertible into money or not; or
(b) in cash or in kind or partly in cash and partly in kind; (TDS u/s 194R).

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3. Treatment of amount received from Keyman Insurance Policy

1. 2. 3.
If received by Employer If received by Employee If received by Nominees
¯ ¯ of Employee¯
Taxed u/s 28- as PGBP Taxed u/s 17 – as Salary Taxed u/s 56 – as IFOS

Sec 28: Special Charging Sec relating to Export Assesses

4. Profit on sale of Import Licence under an import & export scheme.
5. Any amount of duty of customs repaid or repayable as drawback.
6. Cash assistance received against exports under any scheme of government.

Sec 28: Special Charging Sec relating to Compensation received in Business

7. Compensation received by any person in connection with termination or modification
of terms & conditions of any contract relating to business (not profession).
If the compensation is received by employee for termination or modification of terms
& conditions of any contract relating to employment, then taxable under IFOS.

PART 2: DEPRECIATION
Sec 32 ® DEPRECIATION
Sec 32(1)(ii) Sec 32(1)(iia) Sec 32(1)(i) Sec 32(1)(iii)
Normal dep - Additional dep - Dep on SLM for Power Terminal dep
Block Scheme Block Scheme Generating Units (PGU) for PGU

Sec 32(1)(ii): - Normal Depreciation under Block Scheme

(1) What do you mean by the term “Ownership”?

It was held by SC in the case of Mysore Minerals ltd the term ‘owner’ means
beneficial owner and not legal owner. Registration, title is irrelevant for ownership.

(2) Who shall claim Depreciation in case of Lease & Hire Purchase Transactions?
In case of lease, depreciation to be claimed by lessor [Cir. No. 9/2001].
In case of Hire purchase, dep to be claimed by Hire purchaser [Circular of 1943].

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ICDS Ltd V/S CIT (SC)

Depreciation shall be allowed to lessor even though the asset is registered in the name
of the lessee. As per lease agreements-
⁃ The lessor is the exclusive owner of the vehicle at all points of time.
⁃ The lessor is empowered to repossess the vehicle, in case of payment default.
⁃ The lessor had a right of inspection of the vehicle at all times.
⁃ At the end of the lease period, the lessee was obliged to return the vehicle.
It can be seen that the proof of ownership lies in the lease agreement itself, which
clearly points in favour of the lessor.

(3) What do you mean by term “Use” for the purpose of Depreciation?
The term ‘use’ means both active as well as passive use i.e. ready for use.
If P&M got ready for the use but could not be put to use due to some extraneous
reasons [Example shortage of RM] then dep would be allowable u/s 32.

Sec 2(11): - Block of Assets (Same Category + Rate)

Tangible Assets Intangible Assets
(Other than Goodwill)
Plant & Machinery Furniture Building 25%
15% 10% 10% ¯
@ prescribed rates {Rule 5(1)} Half dep. is also
If Assets are used for > If Assets are used for <180 applicable here
180 days days
¯ ¯
Then dep. @ full Rate Then dep. @ half Rate

Notes: -
(1) Residential buildings = 5%, temporary structures = 40%.
(2) Motor cars = 15%, If it is used in business of running them on hire then 30%.
Note: If a Motor Car is purchased & used between 23.08.2019 to 31.03.2020 then
the rate would increase by 15% for both motor cars. Electric Vehicle = 40%.
(3) Mobile phones and EPBAX will be depreciable at 15%.
(4) Computer & its peripherals like scanner, printer etc/Windmills/ Professional
Books/ Aircraft/ Pollution Control Equipment will be depreciated at 40%.
(5) Ships will be depreciated at 20%.

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When Dep rate u/s 32(1) becomes half?

• It becomes half when an asset is acquired & put to use in that P.Y. for < 180 days.
• Therefore, if an asset is acquired in one year, but put to use for less than 180 days
in next year, then it won’t become half in next year.
• This provision is applicable to dep u/s 32(1)(ii)(iia)(i) & not 32(1)(iii).

Sec 43(3) Definition of plant

Plant includes ships, vehicles, books, scientific apparatus and surgical equipment’s but
does not include tea bushes, livestock or building, furniture and fittings.

When depreciation can be claimed under Block Scheme?

(1) The block must be positive on & (2) The Block must not cease to exist on last
the last day. {Amount column} day. {Quantity column}

Is it mandatory to claim depreciation?

® Yes, as per Explanation 5 to Sec 32(1) it is mandatory to claim depreciation.

Sec 43(6): How to arrive at WDV for next year?

WDV means Actual Cost as reduced by “depreciation Actually allowed”
Exception:
In case the Income is partially from Agriculture & Partially from Business, then it is
deemed that it is wholly from Business & the entire depreciation is deemed to be
allowed for Business. In short reduce entire depreciation from Block.

Sec 32(1)(iia) : Additional Depreciation @ 20% acquires & Install & Use New
Machinery or Plant
Eligible Assessee: engaged in the business of Manufacture any article or thing
Generation (OR) Generation & Distribution of power or Transmission of Power.
Note:
(1) It is not allowed in case of P & M which is 2nd Hand or any office premises or
residential accommodation, ships, aircrafts, road transport vehicle, any P & M which
is already allowed as 100% deduction.

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(2) Additional depreciation is also subject to 50% if an asset is acquired & put to use
for less than 180 days. However, remaining 50% would be allowable in the next year.
(3) Like normal depreciation additional depreciation is also reduced from the Block.
(4) Additional Depreciation is one-time benefit for that Plant & Machinery.
(5) Printing or printing & publishing amounts to manufacture, therefore eligible for
additional depreciation.
(6) Forklift Truck used in factory is not treated as transport vehicle so it is eligible for
Add. dep.
(7) If a power generating assessee opts for SLM then no additional dep is allowed.

Sec 43(1): Meaning of Actual Cost:

The term Actual Cost means actual cost of asset to the assesse, as reduced by that
portion which is met directly or indirectly by any person or authority.
Where an assessee incurs any expenditure for acquisition of any asset i.r.o which a
payment is made to a person in a day, otherwise than by account payee cheque or
account payee draft, ECS or such other prescribed electronic mode, exceeds Rs.
10,000, such expenditure shall not form part of AC of the asset.
Note:
Till the time fixed asset is not put to use capitalize the interest expense and once the
asset is put to use then claim as revenue expense u/s 36(1)(iii).

ICDS – V ® Tangible Fixed Asset

Admin and General OH’s expenses Expenses which are specifically attributable
are to be excluded from cost, if to construction of a project on acquisition of
they do not relate to a specific T.A. or bringing it to its working condition, shall
Tangible Fixed Asset. be included as a part of cost.

ICDS – V ® Tangible Fixed Asset

Expense incurred on startup & Exp. incurred after the plant has begun
commissioning of the project, incl commercial prodn i.e. prodn for sale or
test run expenses shall be capitalized captive consumption, shall be revenue exp.

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I.C.D.S – IX BORROWING COSTS

If the funds are borrowed specifically for If the funds are borrowed generally
“Qualifying Asset” (Q.A) for “Qualifying Asset” (Q.A)
then the actual borrowing cost incurred then Borrowing cost shall be computed
during the period for which funds are in accordance with following formula:
borrowed for that asset must be B
A´
C
Capitalized.
Where;
A = Borrowing costs incurred during the P.Y, except borrowing directly relatable to
specific purpose
B = (i) Average of cost of ‘QA’ as appearing in the B/S on 1st & last day of P.Y (OR);
(ii) in case the Q.A does not appear in B/S on 1st day or both then half of the cost
of ‘Q.A’ (OR)
(iii) in case the Q.A does not appear in B/S on last day, then average of cost of
Q.A appearing on 1st day and date of put to use
C = Average of the amount of total assets as appearing in B/S on 1st day and last day
The Capitalization of borrowing cost shall cease in case of the Qualifying Asset, when
such Asset is first put to use i.e. it will be available as a rev expense as per Sec 36(1)(iii)

Explanations to Sec 43(1): Actual Cost in Special Cases

S.N MODE OF ACQUISITION ACTUAL COST
1 Asset acquired for scientific research NIL (To be done with Sec 35)
subsequently brought into business use
1A SIT converted into Capital Asset FMV on date of Conversion.

2 Asset acquired by way of Actual Cost to the previous owner less

gift/will/inheritance dep actually allowed to previous owner.
3 Asset acquired with an intention to claim Amt. determined by A.O., with the
approval of Joint Commissioner (JC)
higher depreciation
(Normally AO take FMV of such asset)
4 Re-acquisition of asset sold The WDV at original transfer or the
price paid for reacquiring the asset;
whichever is less.
4A Asset purchased and leased back to the The WDV of Previous Owner (Lessee)
same person

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5 Building used for private purpose Original Cost Less Notional Dep as per
subsequently brought into business use. current year rate.
Note: For Plant, Machinery & Furniture the
Actual Cost will remain Actual Cost.
6 Capital asset transferred by holding Co. to Cost/ WDV to the transferor
100% subsidiary Co. or 100% Subsidiary Co.
to holding Co.
7 Transferred by Amalgamating Co to Cost/WDV to Amalgamating Co.
Amalgamated Co.
7A Transferred by Demerged Co. to Resulting Cost/WDV to demerged Co.
Co.
8 Asset acquired out of borrowed funds Int after the asset is first put to use
shall not form part of actual cost.
9 Asset acquired subject to levy of GST in If input credit is claimed then GST
respect of which input credit is availed. etc shall not form part of Actual Cost
10 Govt Grant, Subsidy or Reimbursement If related to asset, then reduce from
Actual Cost.
11 Asset brought into India by NR for use in his Actual cost minus dep calculated at
Business or Profession. the rate as if the asset was used in
India since the date of acquisition.

Sec 2(24)(xviii): Taxation of Grants/Subsidies from Govt.

Any subsidy, grants, cash incentive, duty drawback, waiver etc. by CG or SG or any
Authority or Body [other than expl. 10] shall be treated as Income under PGBP.
(i) If subsidy received for acq. an asset, it shall be deducted from Actual cost of asset.
(ii) Any subsidy/grant received by trust or institution (established by CG/SG) as a
Corpus fund from Central Govt shall not be treated as income.
(iii) Not applicable on LPG subsidy or any other welfare subsidy of the individual.

(A) ICDS – VII Government Grant Recognition of Government Grant

(1) (2)
Government Grant should not be Recognition shall not be postponed
recognized until, there is a reasonable beyond the date of actual receipt
assurance

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That the person shall comply AND that grants shall be received.
with the conditions attached.

Treatment of Government Grants

Where G/G Where G/G Where G/G Where G/G For other
relates to a relates to Non Cannot be directly is recievable than
Depreciable Depreciable attributed to an as a (1)(2)(3)(4)
Asset Asset Asset compensation
Then, deduct Recognized as Then, deduct Shall be Shall be
from Actual income over proportionately recognized as recognized as
Cost the same from Actual income of the income based
period during cost period in on principle
which the cost which it is of matching
of obligation is receivable. concept.
charged to
income

Refund of Government Grants

Refund in case of (2) / (4) & (5) Refund in case of Dep Asset
(a) Refundable amount should be first applied (a) Refundable Amt shall be
against unamortized deferred credit remaining. recorded by increasing the
(b) Excess can be charged to P & L. Actual cost or WDV of Block.

Sec 32(2): Set off and Carry Forward of Unabsorbed Depreciation

Set off against any B & P OR C/F to next years and set off against subsequent
income of any other head year PGBP income (OR) any other income except
except Salaries. Salaries.
Time limit = Infinite years i.e. No time limit.
Priority of Set off:- Current year’s depreciation, Business Loss & last UAD.

Proviso to Sec 32(1): - Depreciation in case of Amalgamation, etc.

In case of amalgamation, succession, demerger, compute depreciation as if no
amalgamation, succession, demerger has taken place, then apportion such depreciation
between both of them on the basis of no. of days assets were used by them.

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Sec 32(1)(i): -SLM Depreciation for Power Generating Assessee

Original Cost 1,00,000 Rate = 10% (SLM)
(-) Dep for 3 yrs (30,000)
W.D.V. 70,000

(a) S.P.= 50,000 (b) S.P. = 80,000 (c) S.P. = 1,20,000

Terminal = 20,000 Balancing charge Balancing Charge OR Deemed
dep u/s 32(1)(iii) OR Deemed income u/s Income u/s 41(2) = 30,000
41(2) = 10,000 [1,00,000 – 70,000]
COA = 50,000 COA = 80,000 COA = 1,00,000 (70,000 +
No. Cap Gains (70,000 – No Cap Gains (70,000 + 30,000)
20,000) 10,000) CG = 20,000 (120,000 – 20,000)

Sec 50A: CG in case of Sale of Power Generating Asset

Sale consideration XX
(-) Cost of Asset = Adj WDV** (XX)
Capital Gains XX
Note: - Adjusted WDV: -
WDV XX
(+) Balancing charge u/s 41(2) XX
(-) T/D u/s 32(1)(iii) (XX)
Adj WDV = COA XX

COMPARISON OF SEC 43A V/S SEC 43AA

Sec 43A Sec 43AA
1. Fixed Asset purchased from 1. Any Gain/Loss other than sec 43A on
outside India + Loan in foreign account of change in foreign exchange rates
currency/Foreign Suppliers Credit. shall be income or loss as per ICDS VI.
2. Gain/ Loss shall be adjusted in the 2. Record the transaction as per the rate on
WDV of the Block of Asset on the date of transaction. Then on 31st March it
date of payment. No adjustment shall has to be reinstated as per the rate
be made on 31st March. prevailing on that date.

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3. Examples of Gain/loss under this sec:

a. Monetary and non monetary items;
b. Translation of Fin Statement of
foreign Operations;
c. Forward Contracts;
d. Foreign Currency Translation Reserves.

ICDS – VI EFFECTS OF CHARGES IN FOREIGN EXCHANGES RATES

Initial recognition
(1) (2)
Should be recorded (i) An average rate for a week or a month may be used for
as per the rate on the all transaction during that period.
date of transaction. (ii) If Exchange rate fluctuates significantly then take rate
on the date of transaction.

Conversion on last date of Previous Year

Monetary limit Non-Monetary limit
(1) (2) Record as per the rate prevailing
Shall be converted If closing rate is unrealistic on the date of transaction & then
based on cl Rate. revalue on Closing Date.
Then report at an amt which
is likely to be realised or
disburse, such item on the
last day of P.Y.

PART 3: SPECIFIC DEDUCTIONS

Sec 30: - Rent, Rates & Taxes, Repairs and Insurance of Building
Owner Tenant
Rates, Taxes, Revenue Repairs and Rent, Rates, taxes, Revenue Repairs and
Insurance ¯ Insurance ¯
Capital Repair, then cost of Capital For Capital repair, Tenant will be Deemed
repair should be added to cost of owner of the Building and he can also claim dep
Bldg & then claim dep on it. on Capital repair {Expln 1 to Sec 32(1)}

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Notes:
1. Rates & Taxes will be allowed on actual payment basis as per Sec 43B.

Sec 31: - Repairs and Insurance of Plant, Machinery and Furniture

1. Repairs must not be capital in nature.
2. Rent not deductible here. It is deductible u/s 37(1).

Other Deductions u/s 36(1)

(i)Insurance premium (ib)Health Insurance (ii)Bonus / Comm. Paid to
paid against risk of premium paid by employers employees. (Sec 43B). However,
damage of stocks. for employees (other than where sum represents profits,
cash) then not allowed.

Sec 36(1)(iii): - Interest on Borrowed Capital

Borrowed money Money must be used for B & P Interest is paid or payable.
Notes for Sec 36(1)(iii):
1. Interest on borrowed capital which is used for the payment of Income Tax is not
allowed as deduction. However, if it is to pay GST then it is allowed.
2. What is the meaning of Interest?
As per Sec 2(28A), interest means interest payable in any manner in respect of any
money borrowed or debt incurred & includes any service fee or other charge in
respect of money borrowed or debt incurred. {Also Refer Sec 9(1)(v)}
3. S.A. Builders (SC) / Reebok India Company (Delhi): The Expression commercial
expediency is of wide import and includes such expenditure as a prudent businessman
incurs for the purpose of his business. If advance is given to the sister concern on
account of commercial expediency, then it should be allowed as deduction.
4. Certain Interest payments are subject to Sec 43B.

Sec 36(1)(iiia): Discount on Zero Coupon Bonds.

Discount = Reedemable Value – Issue Value.
Such discount will be allowed as deduction over the life of zero coupon bond. Life should
be counted in months and not years. If the bonds are issued for 15 days or more by the
company, then take it as a complete month.

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Sec 36(1)(iv): Employer Contribution to Recognised Provident fund/ Superannuation

Fund is allowed as deduction {Subject to Sec 43B}.
Sec 36(1)(iva): ER Contribution to Approved Pension Fund is allowed as deduction
{Subject to Sec 43B}. {Contribution < 14% of Salary, Salary = Basic +DA in terms}
Sec 36(1)(v): ER Contribution to Approved Gratuity Fund is allowed as deduction
{Subject to Sec 43B}.

Sec 36(1)(va): Employees Contribution to RPF etc is allowed as deduction to employer

if paid on or before the due date of the Relevant Fund
Notes:
â It is pertinent to note that Employees Contribution is considered as Income of
Employer as per sec 2(24)(x) when it is deducted from the salary of Employee.
Thereafter when it is paid before the funds due date then it is allowed as
deduction to Employer. Therefore, it gets nullified.
â Employees contribution has to be paid on or before 15th of following month.

Sec 36(1)(vi): Allowance for Animals used for B or P (other than SIT)
Deduction = Cost – Sale Value
Note: The deduction is available in the year in which the animals have become useless
or they are dead.

Sec 36(1)(vii): - Deduction of Actual Bad Debts

The Debt must be written & The debt must be taken into income of assessee of
off as irrecoverable in year of deduction or earlier P.Y.
BOA “for the P.Y.” EXCEPTION: For Banking and money lending business
this condition not applicable for loan amt.
1. No need to prove debt has become bad.
2. Bad Debts w/off shall not include RDD. {Also refer Sec 36(1)(viia) later}
3. It was held in the case of T. Veerbhadra Rao K. Koteshwara Rao that where the
goods, are sold by predecessor on credit basis & subsequently, it has become bad in
the hands of successor, then deduction is allowed to successor.
4. Any income which is offered for tax as per ICDS without recording the same in the
BOA, if it becomes bad then it shall be DEEMED that such debt is written off as
irrecoverable and deduction will be allowed.

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Sec 36(1)(ix): - Expenditure on promotion of Family Planning amongst Employees

only by Companies
Revenue ® Fully Allowed Capital ® 1/5th in 5 Equal Installment
Note: Unabsorbed Capital Expense shall be treated as UAD.

36(1)(xv) – Securities transaction tax {provided the assesse is trader in securities}

(In Capital Gains STT is not allowed as deduction as per 7th Proviso to Sec 48)
36(1)(xvi) – CTT {provided the assesse is trader in commodities}

Sec 36(1)(xvii): Deduction for Cooperative Society:

Expenditure incurred by a co-operative society engaged in the business of
manufacture of sugar for purchase of sugarcane at a price equal to or less than the
price fixed or approved by the Government.

Sec 36(1)(xviii): Deduction for Mark to Market Loss:

Deduction in respect of mark to market loss shall be allowed only if such loss is
computed in accordance with ICDS. Further, as per Sec 40A(13), no deduction shall be
allowed in respect of M-M loss, if it is not determined as per Sec 36(1)(xviii).

PART 4: SECTORWISE DEDUCTIONS

Sec 33AB - Growing & Manufacturing Tea, Coffee and Rubber in India
Particulars Time Limit Quantum
(a) Deposit any (a) within 6 months from (a) Amount deposited OR
amt in the end of F.Y OR
NABARD (b) Before due date of (b) 40% of PGBP income (Before this
return; dedn (+) setting off of Losses);
Whichever is earlier Whichever is lower
Notes:-
(1) The above amount can be withdrawn in the following circumstances:
(a) Closure of business, Dissolution of a firm (Taxable).
(b) Death of an assesse, Partition of HUF, Liquidation of a company (Exempt).
(2) The amount withdrawn from NABARD / Deposit A/c must be utilized for the
purpose specified in the scheme in the same P.Y.

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If it is not utilized in the year in which it is withdrawn then, it is deemed to be

income in that year. {Only 40%/35%/25% will be taxable}
(3) If an amount withdrawn from NABARD is utilized in the same FY for the specified
purpose, then no deduction shall be allowed again in the year of actual expenditure
as it is already allowed u/s 33AB when it was deposited in NABARD.
(4) The amount withdrawn from NABARD should not be utilized for purchasing any
prohibited assets like P & M installed in office or Residential Accommodation or
office appliances (Not Being computer).
(5) Any asset acquired under scheme should not be transferred or sold for 8 years.
Exceptions: If sold to Govt or Local Authority or Succession of Firm to Company.

Income Tax Rules

Rule 8 Rule 7A Rule 7B

Income from growing & Income from growing & Income from growing & Grown, cured &
Mfg of TEA Mfg of Rubber mfg of Normal Coffee Roasted &
mixed etc
40% 60% 35% 65% 25% 75% 40% 60%
Busi Agri Busi Agri Busi Agri Busi Agri

Sec 33ABA: Site Restoration Fund

(Prospecting or Extraction OR production of petrol or natural gas in India)
deposit Time Limit: Quantum Lower of:
any amount Before the end (a) Amount deposited OR;
with SBI of the P.Y. (b) 20% of PGBP (Before this ded (+) set off of loss)
Note :- Rest all the provisions are same as Sec 33AB

Sec 35: Expenditure on Scientific Research:

Research related to Assessee’s Business
Sec 35(1)(i): Rev. Exp ® 100% Sec 35(1)(iv): Capital Expenditure
(only last 3 years) ® @ 100%

Pre-Comm. Post-Comm. Pre-Comm. Post-Comm.

Salary(excl Perk) Any Revenue

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Purchase of Exp @ 100% Any Asset except Land

Any asset except Land @
material-@ 100% only. Last 3 years - 100%
@ 100%
â No deduction of depreciation shall be allowed.
â Unabsorbed CAPEX will be treated like UAD.

Sec 35(2AB) ®100% of Revenue & Capital Exp, but only Post Commencement
Research related to Assessee’s Business:
Company Mfg of any article / On In house Research Not Available for Building
thing (other than & Approved by pres. & Land.
XIth Sch. Items) Authority (+) But for Bldg claim 100%
OR Biotechnology Agreement u/s 35(1)(iv)

Contribution to Outsiders
{Applicable to both Research & Non Research assessee)
Sec 35(1)(ii) Sec 35(1)(iii) Sec 35(2AA) Sec 35(1)(iia)
Cont to Research Contribution to Contribution to Contribution to
Association / college / R.A. / college / National Indian Co indulged in
university etc university etc Laboratory or IIT Scientific Research.
Scientific Research Statistical/social 100% 100%
100% science 100%
All 4 must be Approved.
Note: -
1. The deduction shall not be denied merely on the ground that subsequent to payment
by assessee the approval granted is withdrawn.
2. The deduction u/s sec 35(1)(ii)/(iia)/(iii) shall be disallowed if donee fails to file
the statement of donation to the prescribed authority or fails to furnish certificate
of donation to donor.

Sec 234G/Sec 271K: Fee/Penalty for Default Relating to Statement or Certificate

Where,—
(a) the assessee referred to in sec 35(1)(ii)(iii)(iia) fails to deliver a statement within
the time prescribed or furnish a certificate prescribed u/s 35(1A);or

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(b) the institution fails to deliver a statement within the time prescribed u/s 80G, or
furnish a certificate prescribed u/s 80G,
it shall be liable to pay, by way of fee, a sum of Rs. 2,000/- for every day during which
the failure continues. Further as per sec 271K AO may direct that a sum not less than
Rs. 10,000 but which may extend to Rs. 1,00,000 shall be paid by way of penalty.

When Scientific Research Asset ceases to be used for Scientific Research.

Sold after using for Business Purpose Sold without using for Business purpose
a) Expln 1 to Sec 43(1) shall apply and a) Sec 41(3): Deemed Income will be
actual cost to be taken as NIL. applicable and lower of:
b) Sec 50 i.e. CG for Depreciable Asset i) Sale proceeds OR;
& Sec 43(6) i.e. WDV of asset will be ii) Deduction allowed;
applicable and STCG will be will be taxable.
chargeable to tax. b) CG as per Sec 48.

Sec 35ABB/35ABA: Amortisation of Telecom License Fees/Spectrum Fees paid

Pre-commencement Deduction Post-Commencement Deduction
In the year in which business commences From the year in which the fees is
for the amount actually paid over the actually paid over the unexpired period of
unexpired period of license. the license.
â No deduction u/s 32 will be allowed.
â In case the License is transferred later on, then deduction claimed earlier will
be deemed Income along with Capital Gains implications.

Sec 35D: Amortisation of Preliminary Expenses

Indian Companies Incurs expenditure on “Specified
Or Resident Non Corporate Assessee purpose”.

Before (OR) After commencement of business in connection with

Commencement extension of undertaking (OR) setting up a new unit

Amount of deduction:
(1) 5% of Cost of project (FA) (2) 5% of Capital employed [Share cap +
Debenture + long Term Borrowings] as on last

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as on last day of PY in which day of PY in which business commences (OR)

business commences (OR) extension extension of business is completed.
of business is completed.
WHICHEVER IS HIGHER
(2) Actual Amt of Expenditure on Specified Purpose.
Note: Deductible Amt = (1) or (2) lower.
Deduction will be allowed in 5 equal installments
Notes:
1. For Non-Corporate Assessee’s ignore 5% of Capital Employed and directly compare
Actual Preliminary Expense with 5% of COP.
2. Berger Paints India Ltd (SC) : Share premium could not be part of “capital
employed in the business of the company”.
3. Meaning of Preliminary Expenses:
a) Preparation of feasibility study/project report b) Market Survey Expenses c)
Engineering services d) Drafting & printing of MOA/AOA e) Legal fees f) Expenses
related to public issue of shares & debentures g) Other expenses notified by CBDT.
In case of expenses mentioned in point (a) to (c) assessee has to furnish a statement
of above expenditure within 1 month prior to the due date for furnishing the return of
income u/s 139(1) to the PDGIT (Systems) or DGIT (Systems) or any person authorised
by the PDGIT (Systems) or DGIT (Systems) in the Form No. 3AF.

Investment Linked Deduction [Sec 35AD]

1) Cold chain facility for certain products.
2) Warehousing facility for agriculture products.
3) Hospital ³ 100 beds.
4) Housing project for affordable Housing.
5) Production of fertilizer.
6) Cross country natural gas or crude or petroleum oil pipeline.
7) Building &n Operating a Hotel ³ 2 stars.
8) Housing project for slum Redevelopment.
9) Inland container Depot / container freight station.
10) Bee – keeping and production of honey and beeswax.
11) Warehousing facility for sugar.
(12) Laying and operating a slurry pipeline for transportation of iron ore.
(13) Setting up and operating a semi-conductor wafer fabrication manufacturing unit.

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(14) Setting up & Operating an infrastructure facility in India.

The term infrastructure facility means the following:
(i) A Road including toll road, bridge or rail system.
(ii) A highway project including housing or other activities being integral part of
the highway project.
(iii) A water supply project, water treatment system, irrigation project sanitation
and sewerage system or solid waste management system.
(iv) A port, airport, inland waterway or inland port.
Notes:
1. Inland Container Depots can be treated as Infrastructure Facility and hence
deduction u/s 35AD allowed - CIT v/s CONCOR Ltd
2. In case of a hotel, assessee is entitled to claim deduction u/s 35AD from the PY in
which the operations were commenced even though the application was accepted in
the next PY - Ceebros Hotels Pvt Ltd
3. The deduction mentioned in 6th & 14th business is available only to Indian Company or
Consortium of Indian Companies.

Capital Expenditure Eligible for 100% deduction.

Post Commencement Pre-commencement
Capital Exp incurred wholly Capital Exp incurred wholly and exclusively during the
or exclusively during the preceding yrs will be allowed, if the amount is
P.Y. in which it is incurred. capitalized in the BOA on the date of Commencement.
Notes:
1. No deduction for acquisition of LAND, GOODWILL & FINANCIAL
INSTRUMENTS in pre as well as post.
2. Where an asset is acquired for which payment is made by other than 4 modes to a
person in a day exceeding Rs.10,000 then deduction u/s 35AD is not allowed.

Conditions to be satisfied (Also there in Sec 10AA/115BAB/115BAE)

(i) (ii) (iii)
It is not set up by splitting It is not setup 2 Exceptions to point (ii)
up (OR) reconstruction of a by transfer of (1) 2nd hand P&M upto 20% is allowed.
Business already in IInd hand P & (2) Imported 2nd hand P & M is allowed
existence. M. provided no dep is allowed earlier.

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No Deduction under any other provisions of the Act

No deduction u/s 10AA (OR) CH VI A AND No deduction u/s - 32

Special Benefits for Hotel Industry

Hotel will get deduction if it transfers the operations but continue to own the hotel.

Sec 73A: Set off & Carry forward of Loss

Losses of any specified business u/s 35AD can be set off and c/f against any other
specified business. Time limit: Infinite period.

DEEMED INCOME
Asset is Demolished / If an asset is used for non specified purpose before
Destroyed / Discarded / expiry of 8 years then deemed Income is :
Transferred. Deduction allowed earlier xx
Then, Sale price will (–) Depreciation u/s 32(1)(ii)/(iia) (xx)
Deemed income u/s PGBP (Deemed Income)* xx
Sec 28 Sub sec (7A) & (7B) introduced by FA, 2014
(No Time Limit) Note: Deemed Income not Applicable to “Sick Unit”

Note: * Later on this amount will become the Actual Cost if the assessee uses such
asset for other business or profession.

Taxation of Mining of Coal, Limestone, Iron, Etc. [Sec 35E]

Only Indian Company or Resident Non-Corporate assessee.
1. Eligible Assessee: Engaged in prospecting/extraction/production of minerals like
coal, limestone, iron, gold,zinc etc.
2. Deduction allowed for expenses incurred on-
⁃ Any operation of prospecting for any minerals;
⁃ Development of mine or other natural deposit of any mineral.
3. Such expenditure should be incurred during the year of commercial production and
4 years immediately preceding that year.
4. Deduction allowed over a period of 10 years from the year in which commercial
production started. Any Unabsorbed expenditure can be carried forward and be
allowed along with instalment of next year (upto 10 years).
5. This deduction is restricted to income from PGBP of mines.
6. Deduction not allowed on expenses incurred for acquisition of mines/sites or building,
P&M, furniture on which depreciation is allowed.

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Sec 36(i)(viia): - Prov for Bad debts for Banks/ NBFC

In case of Scheduled Banks Other Non- In case of public, State Financial, State
Scheduled Banks including Coop Banks Industrial Corp./ Foreign Banks/NBFC
1. 8.5% of Total Income before this 5% of Total Income before this deduction
deduction and deduction under CH VIA. and deduction under Chapter VI-A.
AND
2. 10% of Aggregate Average Advances NIL
made by Rural Branches
Notes :-
1. No deduction u/s 36(i)(vii) unless actual bad debts exceeds provision for Bad Debts.
2. The provision for Bad Debts must be debited to P & L A/c.
3. The actual bad debts must be debited to Provision for Bad Debts A/c.

Sec 36(1)(viii): -Transfer to Special Reserves

Applicability: Available for Banks & Public Financial Institutions engaged in providing
Long Term Finance for Industrial, Agriculture, Housing & Infrastructure Purpose.
Amount of Deduction [Lower of (1), (2) & (3)]
(1) Amount transferred during the P.Y. to special Reserve A/c u/s 36(1)(viii) OR;
(2) 20% of profits from Above Business (Before this deduction) OR;
(3) 200% of (Paid up capital & General Reserve) as on the last day of the P.Y.
(-) the Balance of S/R A/c on the 1st day of P.Y.

Sec 41(4A): - Any amount withdrawn from the S/R A/C will be chargeable to the tax.

Miscellaneous deductions:
Sec 35CCA: - Expenditure by way of making payment for Rural Development to
Associations or Institutions.
Sec 35DD:- Amortisation of Amalgamation / Demerger Expenses
Only to Indian Companies (+) 5 equal Installments.
Sec 35DDA:- Amortisation of expenditure under VRS i.e. 5 equal installments.
Sec 35CCC:- Expense on Agriculture Extension project.
Sec 35CCD: Expense on Skill Development project (By Companies excl. Land & Building].

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PART 5: GENERAL DEDUCTIONS

Trading losses which are incidental to the operations of the business must be allowed
even if it is not specially coded anywhere in the Act.

Sec 37(1): - General Deduction of Expenses

Not specified Not personal Not capital in Incurred wholly and exclusively
u/s 30 to 36. in nature. nature. for the purpose of B & P.

Explanation 1 to Sec 37(1)

Explanation - Following expenses treated as illegal and not allowed as deduction,
(i) For any purpose which is an offence or prohibited by any law in or outside India; or
(ii) To provide any benefit or perquisite, whether or not carrying on a business or
profession, and acceptance of such benefit or perquisite is in violation of any law
or rule or regulation or guideline governing the conduct of such person; or
(iii) To compound an offence under any law, in India or outside India.
(iv) To settle proceedings initiated in relation to contravention under such law as may
be notified by the Central Government in the Official Gazette in this behalf.

Circular No. 5/2012/APEX Laboratories (Supreme Court)

Any freebies provided by pharmaceutical sector to doctors shall not be allowed.
Further such amount would be taxable in the hands of recipient.

CIT v. Kap Scan and Diagnostic Centre P. Ltd. (P&H): The demanding as well as paying
of commission by Medical Practitioner is bad in law. It is not a fair practice and is
opposed to public policy and should be discouraged. Thus, commission paid to doctors
for referring patients for diagnosis is not allowable as a business expenditure.

Explanation 2 to Sec 37(1)

Any expenditure incurred on the activities relating to CSR referred in Sec 135 of
Companies Act, 2013 shall not be allowed as deduction u/s 37(1).

Notes:
èDonation to PM CARES FUND or PM Relief Fund etc is allowed u/s 80G even if it is
CSR. However, donation for Clean Ganga or Swach Bharat Kosh not allowed if it is
spend as CSR.

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èExpenditure on certain activities which is otherwise allowable under any other Sec
will not be disallowed u/s 37(1). Ex: Donation to 35(1)(ii)/(iii) etc. will be allowed.

Treatment of various Penalties:

Compensatory Penal
Allowed Disallowed
Notes:
1. Interest and penalties under Income tax is not allowed.
2. Interest on GST is allowed.
3. Penalties under Direct & Indirect Tax both will not be allowed.
4. Secret Commission shall not be allowed as deduction.

Premium of Keyman Insurance Policy

CBDT has clarified that premium paid by firm for a Keyman Insurance Policy of a
partner, to safeguard the firm against disruption of business is allowable u/s 37(1).

Dr. T.A. Qureshi v/s CIT(SC)

Losses of illegal business will be allowed as deduction to compute the real profits and
gains as expln 1 to Sec 37(1) has nothing to do with case of loss. It only covers expense.

Sec 37(2B): Any expenditure incurred by an assessee on advertisement in any brochure

or pamphlet of a political party shall be disallowed. However, the same shall be allowed
as donation u/s 80GGB to Indian Company.

Clarification on Build, Operate and transfer projects:

Expenditure incurred for development of roads/highways in Build-Operate-Transfer
(BOT) agreement - Allowed over life of agreement.

Shanti Bhushan v. CIT (Delhi): Amount paid for heart surgery can neither be allowed
u/s 31 nor u/s 37(1).

Millennia Developers (P) Ltd. (Karnataka): Amount paid to compound an offence is

obviously a penalty and hence, does not qualify for deduction u/s 37.

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CIT v/s Neelavathi & Others (Kar): Since the payment has been made to police and
gundas to keep them away from the business premises, such a payment is illegal and
not allowable as deduction.

Orient Ceramics & Industries Ltd (Delhi H.C.): Expenditure incurred on glow sign
boards displayed at dealers outlets shall be treated as revenue expenditure as the life
of the asset is very short, there is replacement expenses recurring almost every year
and these boards do not bring into existence any asset or advantage of enduring benefit.

Sree Rama Multitech ltd (SC): Interest accrued on deposit of share application money
with bank is eligible for set off against the public issue expenses; such interest is not
taxable as “IFOS”.

CIT v. Priya Village Roadshows Ltd. (Delhi): The expenditure incurred on feasibility
study conducted for examining proposals for technological advancement relating to the
existing business can be classified as a revenue expenditure, where the project was
abandoned without creating a new asset.

National Co-operative Development Corporation (SC): The source of funds from which
expenditure is incurred for the purpose of business is not relevant for the purpose of
allowability of deduction u/s 37(1).
Allowability or not of Certain Expenses
1. Dividend paid is not allowed as deduction.
2. Income tax, wealth tax, surcharge & H&E cess is not allowable as deduction.
3. Provision for loss of subsidiary company is not allowable as deduction.
4. Provision for deferred tax as per IND AS 12 is not allowable as deduction.
5. Provision for diminution in the value of investment is not allowable as deduction.
6. Provision for unascertained liability is not allowable as deduction.
7. Prior period expenses are not allowable as deduction, but they are allowable if
liability to pay crystallized during the PY.
8. Retrenchment Compensation –On Closure of entire business – Capital Expense
-On Closure of part of business–Revenue Expense
9. Share/Debentures issue expenses:
a. IPO/FPO/Right Shares – Capex (Change in Capital) – Not Allowed.
b. Buy Back/Bonus/Deb & Loan Expense (No Change in Capital) – Allowed.

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10. Registration fees incurred on increase of authorised capital of Co. - Not allowed.

PART 6: DISALLOWANCES

Sec 40A(2): Excess Payment to Specified Person:

Assessee (+) made payment to Specified (+) A.O. may disallow
Incurs person
Expenditure If AO considers to be Having regard to FMV &
unreasonable and Excessive Legitimate needs of business.
If Co. sells goods of Rs 1 lac to director whereby the FMV of goods sold is Rs 1.5 lacs
then, A.O. can’t invoke Sec 40A(2) as it is applicable only to expense and not income

Specified Person (Related Party) means the following:

Sr No Assessee Relative
1. Individual Spouse, Brothers, Sisters, Lineal Ascendant or Lineal descendant
2. HUF Member & their relatives
3. Firm/LLP Partner & their relatives
4. Company Director & their relatives
5. AOP/BOI Member & their relatives
6. Assessee having substantial interest in any entity. Substantial interest means holding
20% or more at anytime during the PY.
7. Holding subsidiary are also relatives.

Sec 40A(3): Disallowance for Cash Payment

Assessee Payment OR To a person in a By other than “Account payee

incurs a Aggregate single day of a crossed cheque OR Bank Draft OR
expenditure of Payments sum exceeding Rs ECS or such other electronic
(Revenue) 10,000 mode as may be prescribed
1. Such other Electronic Mode would include Credit Card/Debit Card/Net
Banking/IMPS/UPI/RTGS/NEFT/BHIM. {Rule 6ABBA}
2. For payment made to road transporters the Limit is Rs 35,000.
3. If the expenditure is claimed as deduction in earlier year on accrual basis & if such
expenses is subsequently paid in cash or bearer cheque then deduction allowed
earlier shall be withdrawn & taxable as PGBP [40A(3A)].

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4. Even Depreciation u/s 43(1) and capital Expenditure u/s 35AD would be disallowed
on payment by other than 4 modes (Done earlier while doing Sec 43(1) & Sec 35AD.)

Rule 6DD: Exception to Sec 40A(3)

1. Payment made to RBI/LIC/Banks or Government.
2. Payments by Book entries.
3. Payment to Producers of agriculture produce, forest produce, poultry products,
dairy products, fish products, live stock etc.
4. Payment of retirement benefits where such payments is up to Rs. 50,000/-
5. Payment of Salary to an employee who is posted to any other place or ship for 15
days or more other than his normal place of duty + TDS is deducted u/s 192.
6. Payment in a town or village made where banking facility is not available.
7. 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.
8. Payment is made by an authorized dealer or a money changer against purchase of
foreign currency or travellers cheques in the normal course of his business.
9. Payment for purchase of product manufactured or processed without the aid of
power in a cottage industry, to the producer of such product.

CBDT Circular
“Fish or Fish Products” “Producer of Fish / Fish Products
Would include other marine products Would include fishermen or headmen of
such as prawns, crabs, lobsters, etc. fishermen who sought the catch of Fish.

40A(2) vs 40A(3) the Interlinking:

In case where both the above secs are applicable, then first disallow the excess u/s
40A(2) and if the balance is more than Rs. 10,000, then disallow u/s 40A(3).

Sec 40A(4): Where any payment i.r.o any expenditure is required to be made by an a/c
payee cheque/DD etc. in order that such expenditure may not be disallowed u/s 40A(3),
then the payment may be made by such mode. No person is allowed to raise, in any suit
or other proceeding, a plea based on the ground that the payment was not made in cash.

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Sec 40A(7) :- Provision for Payment of Gratuity is Disallowed

Provision is disallowed u/s 40A(7). However, when actually paid to employee, it will be
allowed as deduction.

Sec 40A(9) :- Contribution to Unrecognized Provident Fund etc. is Disallowed

Sec 40(a)(i): Disallowances on non-deduction or non-payment of TDS w.r.t NR:

(i) Payments to N.R. or Foreign Company of any sum chargeable to tax in India, then
deduct tax and deposit till the due date u/s 139(1).
(ii) 100% expenditure will be disallowed if the tax is not deducted during the PY OR
after deducting is not paid till the due date specified u/s 139(1).
(iii) Where in respect of any such sum, where tax has been deducted in any
subsequent year, or has been deducted in the PY but paid after the due date of
filing of return, then it will be allowed in the P.Y. in which payment is made.
(iv) All the aforesaid sums must be taxable in the hands of the recipient under IT Act.
(v) Circular No. 3/2015 dated 12/02/2015: Doubts have been raised about
interpretation of the term “other sum chargeable” i.e. whether this term refers to
the whole sum being remitted abroad or only the portion representing the sum
chargeable to IT under relevant provision of the Act. CBDT clarifies that for the
purpose of making disallowance u/s 40(a)(i) the appropriate portion of the sum
which is chargeable to tax under the Act shall form the basis of such disallowances
& it has to be determined by A.O. considering facts & circumstances.

Sec 40(a)(ia): Disallowances on non-deduction or payment of TDS w.r.t Resident:

Deduct & Deposit till time specified u/s 139(1) i.e.Due Date of filing of Return.
(i) If tax is not deducted or after deducting it is not paid then 30% will be disallowed.
(ii) Where in respect of any such sum, where tax has been deducted in any
subsequent year, or has been deducted in the PY but paid after the due date of
filing of return, then 30% will be allowed in the P.Y. in which payment is made.

Exception to Sec 40(a)(i)/Sec 40(a)(ia)

If any amount paid/credited to payee without deduction of TDS but such PAYEE
- Furnishes his Income Tax Return
- Takes such income in his Total Income calculations

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- Has paid the tax on such income

- Payer furnishes a certificate from CA, then it shall be deemed that the payer has
deducted TDS & paid to Govt on date of furnishing of return by payee & deduction
of such expenditure shall be allowed accordingly (30%/100% disallowed in the
current year and will be allowed in the year in which payee files his ROI)
However, payer has to pay interest u/s 201(1A) @ 1% p.m. or part of the month on the
amount of TDS not deducted from the date on which the TDS was deductible till the
date on which payee furnishes his ROI.

Palam Gas Service [2017](SC): The word payable used in sec 40(a) includes actually
paid also. Accordingly, disallowance u/s 40(a)(ia) shall be triggered on both sums payable
at the end of PY or paid during the PY. Further sec 40(a)(ia) is attracted for both
mercantile as well as cash system of accounting.

As per Sec 40(a)(iii) 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 therefrom under CH XVII-B then the salary expenditure is disallowed.

Other Disallowances:
Sec 40(a)(ii): Income tax (including surcharge, cess) is disallowed.
Sec 40(a)(iia): Wealth tax is disallowed.
Sec 40(a)(iib): Royalty, fees, service charges etc. paid by State Govt. undertaking to
State Govt is disallowed if it is exclusively charged on SG Undertaking.
Sec 40(a)(v): ER paying tax on Non-monetary perquisites of Employees is disallowed.

Sec 43B: Certain Deductions Allowed only on Actual Payment

Following deductions [except point (g)] will be allowed only when it is actually paid on or
before the due date of filing of return u/s 139(1):
(a) Tax, duty, cess or fees under any other law OR;
(b) Employer’s contribution to any provident fund or superannuation fund or gratuity
fund or any fund for the welfare of Employees OR;
(c) Bonus or commission payable to Employees OR;
(d) Interest on any loan or borrowing from public Financial Institutions or state Finance
Corp. or State Industrial Investment Corporation or scheduled Bank or Cooperative
Banks or notified NBFC OR;

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(e) Any Leave Salary OR;

(f) Any expenditure which is payable to Indian Railways for use of Railway Assets OR;
(g) Any sum payable by the assessee to a micro or small enterprise beyond the time
limit specified in sec. 15 of the MSMED Act, 2006. (Refer note 7 & 8)

Notes:
1) If the payment is not made till due date of filling of return, then it will be allowed in
the year of actual payment.
2) A bank guarantee given by a company towards disputed tax liabilities does not
amount to actual payment and hence it is not allowed as deduction.
3) ER Contribution to RPF etc is covered u/s 43B. However, employees contribution shall
be paid by 15th of following month.
4)Deduction of interest is available only if it is actually paid & not if it is just
converted into new Loan or debenture (or any other instrument by which liability
to pay is deferred to a future date).
5) Any O/S interest which is converted into a loan or debenture (or any other
instrument) will be allowed as deduction in the year in which such converted loan etc
is actually paid irrespective of nomenclature being loan etc.
6) Shasun Chemicals & Drugs Ltd (SC): Where payment of bonus due to employees is
paid to a trust and such amount is subsequently paid to the employees before the
stipulated due date, the same would be allowable under sec 36(1)(ii) .
7) Any payment made to Micro & Small enterprise allowed as deduction in current year
if payment made within time allowed u/s 15 of MSMED Act otherwise allowed in the
year of Actual Payment.
8) Time Limit as per Sec 15 of MSMED Act: Where any person purchases goods/
services, from a micro/small enterprise, the payment shall be made before the date
agreed upon between him and supplier in writing. In no case the period agreed upon
between the supplier and the buyer in writing shall be more than 45 days. If,
however, there is no such agreement, the payment shall be made within 15 days of
acceptance or deemed acceptance of goods/services.
Fulfil both conditions: Micro Ent Small Ent
Investment in P&M or equipment’s Up to Rs. 1 crore & Up to Rs 10 crore &
AND Turnover Up to Rs. 5 crore Up to Rs. 50 crore

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PART 7: DEEMED INCOME

Sec 41(1) Recovery of deductions already claimed

If Assessee was allowed a deduction in earlier P.Y. by way of expenditure, loss, trading
liability & now in the current P.Y. assessee has obtained a refund of such expense or
there is remission/cessation of such trading liability, then such refund /remission shall
be taxable as deemed income under PGBP.
Example:
- Refund of Indirect Tax like GST, VAT etc
- SIT destroyed by fire & allowed as trading loss & later on insurance compensation is
received by assessee.
Notes:
1.Remission by Assessee has written-off the liability without getting approval
unilateral act of creditor - deemed to be income.
2. Waiver of Loan:
(i) Waiver of Loan by Government: It is included in the definition of Income u/s
2(24)(xviii) – Always taxable.
(ii) Waiver of Loan by Others:
(a) Working Capital Loan: Principal Part taxable & Interest part not taxable as
deduction was not allowed earlier as per sec 43B.
(b) Capital loan: Not Taxable.

Sec 41(4): Recovery of Bad Debts

Recovery of Bad Debts which was allowed a deduction will be deemed to be business
income irrespective of whether the business exists or not.
Further it was held by Supreme Court in the case of P.K. Kaimal that bad debts claimed
by Predecessor and recovered by successor is not chargeable to tax.
Note:
1. We have already done discussion of Secs 41(2) , 41(3) & 41(4A) in the chapter of
depreciation, Sectorwise deductions (Scientific Research) & Sectorwise deductions
(Transfer to Special Reserve) respectively.
2. We will do the discussion of Secs 41(5) in the Chapter of Set off & Carry Forward.

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PART 8: MISCELLANEOUS PROVISIONS

Sec 14A: Exp Incurred Disallowed in Respect of Exempt Income under this Act
® No deduction shall be allowed in the respect of expenditure incurred for earning
exempt income under this ACT.
® A.O. shall determine the amt of expense disallowed in prescribed manner (Rule 8D)

Rule 8D:Method for determining amt of expenditure disallowed i.r.t exempt Income
(i) Amount of Expenditure directly relating to exempt income AND;
(ii) An amount equal to one percent of the annual average of the monthly averages of
the opening and closing balances of the exempt investment.

Notes:
1. Disallowance can be made even in those cases where no exempt income has been
earned by the assessee during the FY.
2. CIT vs Kribhco (2012) (Delhi): The High Court held that Sec 14A is not applicable
for deductions, which are permissible and allowed under Chapter VIA.

Sec 43D: - Interest Income on Bad & Doubtful Debts

In case of public Financial Institutions OR State Financial Corporation OR State
Industrial Investment Corp OR Scheduled Bank 0r COOPERATIVE BANKS or notified
NBFC, the Interest on Bad & Doubtful Debts shall be taxable in the year in which the
Int is recovered or credited to BOA whichever is earlier.

Sec 44AA: Maintenance of Books of Accounts

Specified Profession
Existing: New:
Keep & maintain BOA if Gross Keep & maintain BOA, if Gross Receipts is
Receipts > 1.5L in All 3 preceding PY’s likely to be greater than 1.5 lakhs
All the above BOA should be maintained for 6 PY’s from the end of Relevant AY’s.
Specified Professions for Sec 44AA & 44ADA includes:
1. Medical 2. Legal 3. Accountancy 4. Film Artist 5. Technical Consultancy
6. Engineering 7. Architectural 8. Interior Decorator 9. Company Secretary
10. IT Professional 11. Authorised Representative.

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All Business and other Non-Specified Professions

Co, Firm etc Individual & HUF
In case of existing business or profession
1. If PGBP exceeds in any of the last 3 PYs (OR) 1,20,000 2,50,000
2. If Turnover exceeds in any of the last 3 PYs 10,00,000 25,00,000
If business or profession is newly set up
1. If PGBP is likely to exceed (OR) 1,20,000 2,50,000
2. If Turnover is likely to exceed 10,00,000 25,00,000

Sec 271A :- Penalty for failure to keep & maintain BOA is Rs. 25,000/-

Sec 44AB: Tax Audit

1. In Case of Business the Turnover > Rs. 1 Crore.
However, limit shall be Rs. 10 crores instead of Rs. 1 crore in cases where, -
(i) Cash receipts during the PY does not exceed 5% of total receipt; AND
(ii) Cash payments during the PY does not exceed 5% of total payment.
Cheque/draft, which is not account payee, shall be treated as cash.
2. In Case of Profession the Turnover/Gross Receipts > Rs. 50 Lacs
3. If an assessee opts for Sec 44AD, then he should not get his BOA audited unless
the T/O exceeds Rs. 2cr/3cr in some cases.
Due Date: One month prior to Due Date of filing of return u/s 139(1).

Sec 271B:- Penalty for failure to get Accounts Audited:

It is 0.5% of Turnover or Rs. 1,50,000 whichever is lower.

Sec 43CB: Income from construction contract and service contract

Construction contract Contract for providing Service
[Sec 43CB + ICDS-III] [Sec 43CB + ICDS-IV]

Any revenue or cost Any profit or gain from service contract shall be computed as follows:
If duration of contract is upto 90
associated with construction Project completion method
days
contact shall be recognized as If contract involves indeterminate no.
Straight line method over
of acts over a specific period of time
per: POCM (percentage of
period
completion method)
Otherwise РОСМ

For the purpose of POCM, PCM & SLM,

(i) Contract revenue shall include retention money

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(Retention money are amt of progress billing which are not paid until the satisfaction of a
condition specified in the contract for payment or until defects have been rectified).
(ii) Contract cost shall not be reduced by any incidental income in the nature of interest,
dividend or capital gain.

PART 9: PRESUMPTIVE INCOMES

Sec 44AD: - Notwithstanding anything Contained in Sec 28 to Sec 43C.

a. “Eligible Assessee” b. “Eligible Business”
® Resident Individuals, HUF Any Business except Sec 44AE &
® Resident Partnership Firm but not an LLP. T/O, Gross Receipts, Sales < 2 Cr.
Then Deemed profits = 8% of T/O.
Note: Where the aggregate of the amt received during the PY, in cash, does not exceed
5% of the total turnover or gross receipts then limit of T/O would be Rs. 3 crores.
Cheque/draft, which is not account payee, shall be treated as cash.
Note: Deemed profits would be 6% instead of 8% of Total T/O received during the FY
OR received before D/D of return u/s 139(1), if it is received by any of the four modes.
Conditions to get covered u/s 44AD:-
1. Assessee should not claim any Profit Linked Deductions u/s 10AA or CH VIA.
2. Sec 44AD is not applicable for certain assessees:-
® Any profession {Refer 44ADA}
® Any person earning any income in the nature of commission or brokerage.
® Any person carrying on any agency business.
Notes :-
1. No PGBP Disallowances applicable (Same for Sec 44ADA & 44AE).
2. No PGBP Deductions allowed (Same for Sec 44ADA & 44AE).
3. The WDV should be calculated normally (Same for Sec 44ADA & 44AE).
4. Deduction u/s 80C to Sec 80GGC can be claimed (Same for Sec 44ADA & 44AE).
5. UAD is not allowed but business loss is allowed (Same for Sec 44ADA & 44AE).
6. Salary, remuneration, interest etc paid to the partner as per Sec 40(b) shall not be
deductible. (Not allowed for 44ADA also but allowed for 44AE).
7. Where an assessee declares profit for any PY in accordance with sec 44AD and he
declares profit for any of the five consecutive AY’s not in accordance with 44AD,
then he shall not be eligible to claim the benefit of this Sec for 5 AY’s subsequent

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to the AY relevant to the PY in which the profits have not been declared in accordance
with the provisions of Sec 44AD. (Same provision also there in Sec 115BBF – Refer
MAT Chapter). (Not applicable for Sec 44ADA & 44AE)
8. The eligible assessee shall be required to pay Advance tax once by 15th March of
the Financial year. (Same in sec 44ADA but u/s 44AE pay 4 times)

Sec 44ADA: Presumptive Income for Professionals (Override 28 to 43C)

(i) Applicable to assessee engaged in any specified profession u/s Sec 44AA(1).
(ii) Whose gross Receipts does not exceeds Rs. 50 lacs in a PY. Then Deemed profits
are 50% of Gross Receipt.
Where the aggregate of the amt received during the PY, in cash, does not exceed
5% of the gross receipts then limit would be Rs. 75 lacs instead of Rs. 50 lacs.
Cheque/draft, which is not account payee, shall be treated as cash.
(iii) Applicable to resident individual or resident firm (not for HUF and LLP).
(iv) The restriction of 5 yrs as applicable in 44AD is not applicable here.
(v) Rest all provisions same as Sec 44AD.

Sec 44AE:- Deemed income for Goods Carriage Business (Overrides 28 to 43C)
(i) This Sec is applicable if the assessee not own more than 10 Goods Carriage at any
time during the PY. (Also Refer Sec 194C later on)
(ii) Light Motor Vehicle: Deemed Income = Rs. 7,500 per month or part of the month
per vehicle for no. of months vehicles are owned by the assessee.
(iii) Heavy Motor Vehicle: Deemed Income = Rs. 1,000 per ton, per month or part of
the month, per vehicle for no. of months vehicles are owned by the assessee.
(iv) Heavy Motor Vehicle = Gross Vehicle weight > 12000 kgs.
(v) Deduction of remuneration & interest paid to partner by Firm is allowed as per sec
40(b). (Not allowed in sec 44AD/ADA).
(vi) Pay Advance Tax 4 Times (In Sec 44AD/ADA it is only once).
(vii) If an assessee claims that his actual profits are lower than deemed profits u/s 44AE, then
Keep and maintain BOA u/s 44AA Conduct Tax Audit u/s 44AB

PART 10: INTERLINKING OF PGBP PROVISIONS

Sections where Manufacturing or Production is mentioned:
1. Sec 32(1)(iia) - Additional Depreciation.

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2. Sec 35(2AB) – In house Scientific Research.

3. Sec 35AD - Investment Linked Deductions (3 Business).
Sections where Company is mentioned:
1. Sec 36(1)(ix) - Expenditure on Promotion of Family Planning.
2. Sec 35(2AB) - In house Scientific Research.
3. Sec 35AD - Investment Linked Deductions (2 Business).
4. Sec 35CCD - Expenditure on Notified Skill Development.
Sections where Indian Company is mentioned:
1. Sec 35D - Amortisation of Preliminary Expenses.
2. Sec 35E – Amortisation of Exploration Expenses.
3. Sec 35DD – Amortisation of Amalgamation or Demerger Expenses.
4. Sec 35AD - Investment Linked Deductions. (2 Business).
Sections where Amortisation is mentioned:
1. Sec 36(1)(ix)/35D/35DD/35DDA - 1/5th of Capital Expenditure
2. Sec 35E - 1/10th.
3. Sec 35ABB/ABA - Over the life of License.
Sections where deduction is based on percentage:
1. Sec 33AB – 40% PGBP (before 33AB & b/f losses).
2. Sec 33ABA - 20% PGBP (before 33ABA & b/f losses).
3. Sec 36(1)(viia) – 8.5%/5 % of GTI & 10% Aggregate Rural Advances.
4. Sec 36(1)(viii) – 20 % of PGBP from 36(1)(viii) Activities OR
200% of (Paid up Capital + GR) on last day – SR A/c on 1st day.
5. Sec 35D - Higher of (5% of COP or 5% of CE). Compare with Actual
Exp and then whichever is lower.
Sections where Lock in is mentioned:
1. Sec 33AB/ABA - 8 years from the end of the PY in which asset was
Purchased.
2. Sec 35AD - Do not use for Non-Specified Purpose for a period of 8 Years
from the beginning of the PY in which asset was installed.
Sections where New Plant & Machinery is mentioned:
1. Sec 32(1)(iia) - Additional Depreciation.
2. Sec 35AD - Investment Linked Deductions (2 Exceptions).

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