PROFITSANDGAINSOFBUSINESSANDPROFESSION

INCOMESCHARGEABLETOTAXUNDERTHEHEADPROFITSANDGAINSOFBUSINESSORPROFESSION[SECTION28]

(1) Profits and gains of any business or profession carried on by assessee at any time during
previousyear.
(2) Compensationorotherpaymentduetoorreceivedbyanyperson;
(a) managing whole or substantially whole of affairs of an Indian company or any other
company in India at or in connection with the termination of his management or
modificationofthetermsandconditionsrelatingthereto;
(b) onterminationormodificationofcontractofhisagencyinIndia;
(c) For vesting the management of any property or business in Government or any
corporationownedorcontrolledbytheGovernment.
(3)

(4)

(5)

(6)

(7)

(8)

Income derived by trade, professional or other similar association from specific services
renderedtoitsmembers.
Profitsonsaleofimportlicence;orProfitsontransferofDutyEntitlementPassBook(DEPB)
orDutyFreeReplenishmentCertificate(DFRC)underEXIMPolicy.
CashassistanceagainstexportsfromGovernmentofIndiaandDutyDrawback;
Value of any benefit or perquisite, whether convertible into money or not arising from
exerciseofbusinessorprofession;
Interest,salary,bonus,commissionorremunerationduetoorreceivedbypartnerfromthe
firm.Suchincomeistaxableinhandsofpartnerstotheextentitisallowedasdeductionin
hands of firm. Any amount not allowed as deduction to firm under Section 40(b), is not
taxableinthehandsofpartner.
Anysumreceivedorreceivable,incashorinkind,underanagreementfor
(a) Noncompetitioni.e.notcarryingoutanyactivityinrelationtoanybusiness;or
(b) Exclusivity i.e. not sharing any knowhow, patent, copyright, trademark, licence,
franchiseoranyotherbusinessorcommercialrightofsimilarnatureorinformationor
technique likely to assist in the manufacture or processing of goods or provision of
services.Exceptions:However,sumreceivedfortransferofbusiness,ortransferofright
tomanufacture,produceorprocessanyarticle/thing,whichischargeableunderCapital
GainsisnottaxableunderthisSection.

(9) Anysum(includingbonus)receivedunderKeymanInsurancePolicy:

(10) Anysumreceivedorreceivable,incashorkind,onaccountofanycapitalasset(inrespectof
which deduction has been allowed under section 35AD being demolished, destroyed,
discardedortransferred.

CA PINKY AGARWAL

MODEOF COMPUTATIONOF INCOMEUNDERTHEHEAD PROFITSAND GAINSOF BUSINESSOR PROFESSION [SEC.

29]

Particulars
Amount(Rs.)
***
NetProfitasperProfit&LossA/c
***
Add: NonAllowable expenses debited to Profit & Loss A/c [Sec. 37(2B), 38,

40,40A,43B; expenses allowable under any other head or capital

expenditure]
***
Less: Expenses Allowable under this head but not debited to Profit & Loss

A/c[Sec.30to37(1)]
***
Less: Incomes credited to P&L A/c but not taxable under this head [Section

15,22,45and56orincomesexemptu/s10]
***
Add: Incomes not credited to P&L A/c but chargeable under this head

[Section28,41]
ProfitandGainsofBusinessorProfession
****

GENERAL CONDITIONS TOBE FULFILLED FOR CHARGING AN INCOME UNDER THE HEAD PROFITS AND GAINS OF
BUSINESSORPROFESSION

(1) ThereshouldbeProfitsandGainsOnlyrealprofitsandgainsareliabletoincometaxand
notmeregrossreceipts.
(2) Profits and gains may be of any Business or Profession Profits & gains from an illegal
businessarealsochargeabletotaxunderthishead.Incomeistaxableeveniftheassesseeis
carrying on the business or profession without any profit motive. However, the following
incomesarenottaxableunderthishead;
(a) RentofhousepropertyistaxableunderSection22evenifpropertyconstitutesstockin
trade of recipient of rent or the recipient of rent is engaged in the business of letting
propertiesonrent.
(b) DividendsaretaxableundertheheadIncomefromOtherSourcesevenifsecuritiesare
heldasstockintradeorassesseeisadealerinshares.
(3) BusinessorProfessionmustbecarriedonbyAssesseeTheprofitsandgainsfrombusiness
or profession are taxable in the hands of the person who has the right to carry on the
business.
Acompanybecomesalegalentityintheeyeoflawonlywhenitisincorporated.Therefore,
the preincorporation profits cannot be included in the assessment of the assessee
company.Forsuchprofits,onlythepromoterscanbeheldliable.
(4) BusinessorProfessionshouldbecarriedonatanytimeduringPreviousYearThebusiness
orprofessionmusthavebeencarriedonforsometimeduringthepreviousyear.However,a
temporary suspension of activities of the business does not necessarily amount to
discontinuanceofthebusiness.
(5) Profits may be realised in money or in money's worth, i.e., in cash or in kind. But capital
receiptsarenotgenerallytobetakenintoaccountwhilecomputingprofitsunderthishead
(6) Application of the gains of trade is immaterial. Gains made even for the benefit of the
communitybyapublicbodywouldbeliabletotax.
(7) The profits of each distinct business must be computed separately but the tax chargeable
under this section is not on the separate income of every distinct business but on the
aggregateprofitsofallthebusinesscarriedonbytheassessee

CA PINKY AGARWAL

METHODOFACCOUNTINGFORCOMPUTINGBUSINESSINCOME(SECTION145)

Incomeunderthehead,profitsandgainsofbusinessorprofessioniscomputedasperthemethod
ofaccountingregularlyemployedbytheassessed.

SPECULATIVETRANSACTIONSANDTAXABILITYOFSPECULATIONBUSINESS

(1) Speculative Transaction [Section 43(5)]: Speculative Business means a transaction in

which a contract for purchase/sale of any commodity/stocks/ shares is settled otherwise
thanbytheactualdeliveryortransferofthecommodityorscrips.
(2) TaxabilityofSpeculationBusiness[Expl.2toSection28]: The profits and gains arising
fromsuchbusinessshallbeshownseparately.Thelossofaspeculationbusinesscannotbe
setoffagainstanyotherincomearisingunderanyothersourceorheadbutcanbesetoff
onlyagainstspeculationincome.Thislosscanbecarriedforwardfor4years.

DEDUCTIONIN RESPECT OF RENT, RATES, TAXES, REPAIRS AND INSURANCE, ETC. FOR BUILDINGS, PLANT AND
MACHINERYANDFURNITURE[SECTION30AND31]

(1) Rent paid for premises occupied by assessee as tenant and used for his Business or
Profession.
(2) Expenditureonrepairsofpremisespaidbyownerthereofortenant.
(3) Landrevenue,localratesormunicipaltaxespaidforpremises,subjecttotheprovisionsof
Section43B.
(4) Insurance premium paid for premises, plant and machinery or furniture against risk of
damageordestructionthereof.
(5) Current repairs (excluding capital expenditure) paid for plant and machinery or furniture,
Building, etc. The term 'repairs' will include renewal or renovation of an asset but not
renewalorreplacementorreconstruction.Also,thedeductionallowableunderthissection
isonlyofcurrentrepairsandnotarrearsofrepairsforearlieryearseventhoughtheymay
stillrankforadeductionundersection37(1).

CONDITIONSTOBEFULFILLEDINORDERTOCLAIMDEPRECIATIONUNDERSECTION32

In order to claim depreciation under Section 32, the following conditions are required to be
fulfilled:

(1) Depreciation is available on assets and block of assets The assets may be tangible
(Buildings, Machinery, Plant and Furniture) or intangible (knowhow, patents, copyrights,
trademarks, licences, franchises, etc.) in nature. Block of Assets means group of assets
comprisingoftangibleorintangibleassetsinrespectofwhichthesamerateofdepreciation
isprescribed.Nodepreciationisallowableonthecostofthelandonwhichthebuildingis
erectedbecausetheterm'building'refersonlytosuperstructurebutnotthelandonwhich
ithasbeenerected.
Plant[Section43(3)]:Plantincludesships,vehicles,books,scientificapparatusandsurgical
equipment used for business and profession but does not include tea bushes or livestock,
humanbodyorstockintrade.
(2) AssetmustbeownedwhollyorpartlybytheAssesseeDepreciationisallowableonlyto
theowneroftheasset.Otherpointstobenotedinthisregardareasfollows;
(a) Depreciationisallowedonfractionalownershipandcoownershipalsoinrespectofpart
orfractionofassetownedbytheassessee.

CA PINKY AGARWAL

(3)
(4)

(b) Depreciationonleasedassetisavailabletolessor.Lesseeisentitledtodepreciationon
construction of any superstructure on land taken on lease; or on
renovation/extension/improvementofbuilding.
(c) Incaseofpurchaseofassetsunderinstalmentpaymentsystem,thedeductionshouldbe
allowedtothepurchaseronentirepurchasepriceaspertheagreement.
AssetmustbeusedforthepurposeofBusinessorProfessionoftheAssessee
Asset should be used during the relevant Previous Year Degree of utilization is
immaterial.
However,iftheassetisacquiredbytheassesseeduringthepreviousyearandputtousefor
less than 180 days during that previous year (i.e. in the year of acquisition), then
depreciationthereonwillberestrictedto50%ofthedepreciationallowableaspertherate
prescribedforsuchasset.Ifassetisusedforlessthan180daysinanysubsequentprevious
year,depreciationisfullyallowable.

Depreciationclaimismandatory[Explanation5toSec.32(1)]TheprovisionsofSection32(1)
relating to claim of depreciation shall apply whether or not the assessee has claimed it in
computinghistotalincome.

In case of succession of business : In case of succession of firm or proprietary concern by a

company as referred to in Section 47(xiii)/(xiv); or succession u/s 170; or amalgamation or
demerger of company, the deduction on account of depreciation, calculated as per prescribed
rates,shallbe apportioned between predecessor and successor, or amalgamatingcompany and
amalgamatedcompany,ordemergedcompanyandresultingcompany,intheratioofthenumber
ofdaysforwhichtheassetswereusedbythem.

RATESOFDEPRECIATIONINCASEOFBLOCKOFASSETS[RULE5ANDAPPENDIXITOTHEINCOMETAXRULES,1962]

TANGIBLEASSETS
RATE
(I)
BUILDINGS

(1) ResidentialBuildingsexcepthotelandboardinghouses
10
(2) Nonresidential Buildings [office, factory, godown, hotels, boarding

housesbutotherthan(1)aboveand(3)(i)below]

100
Buildings for installing Plant and Machinery forming part of
(3) (i)
watersupplyor
water treatment system for infrastructure

businessu/s80IndiaIA(4)(i).
(ii) Purelytemporaryerectionssuchaswoodenstructures
(II)
FURNITUREANDFITTINGS

10

(4) Furniture and Fittings including electrical fittings (Electrical Fittings

includeelectricalwiring,switches,sockets,otherfittingsandfans,etc.
(III) PLANTANDMACHINERY

15

(5) MotorCarsnotusedinbusinessofrunningthemonhire;andPlant&

MachineryotherthanthosecoveredinotherBlocks

Shipsandvessels

20
Motor buses, lorries and taxis used in business of running on hire;

(6) Mouldsusedinrubberandplasticgoodsfactories;Plant&Machinery
30
(7) usedinsemiconductorindustryincludingcircuits;

AeroplaneAeroengines;LifesavingMedicalEquipments

GlassandPlasticcontainersusedasrefills
40
(8) (i)
Computerincludingcomputersoftware

(ii) Booksotherthanthosecoveredin(12)(i)below
CA PINKY AGARWAL

50
(9) (iii) GasCylindersincludingvalvesandregulators
60
(10) (iv) GlassManufactureMeltingFurnaces,MineralOilConcerns;

FlourMillsRollers,RollingMillrollsinIronandSteelIndustry;Energy

renewalandenergysavingdevices;RollersinSugarWorks

80
(i)
(a)Books(annualpublications)ownedbyassesseecarryingon

(11) profession; (b) Books owned by assessee carrying on business in

lendinglibraries

100
(12) (ii) PlantandMachineryinwatersupplyandtreatmentsystemfor

infrastructure u/s 80IA(4)(i); Wooden part in artificial silk

manufacturing
Plant & Machinery; Cinematograph filmsBulbs
ofstudiolights;Wooden
MatchframesinMatchfactories;Mines
andQuarriesrubs,ropes,lamps, pipes; Salt works Clay and salt
pans, etc.; Airpollution, Waterpollution, Solid waste control
equipmentsandSolidwasterecyclingsystem.
INTANGIBLEASSETS
RATE
Knowhow,patents,copyrights,trademarks,licences,franchises,oranyotherbusiness
25
orcommercialrightsofsimilarnature

DEPRECIATIONINCASEOFPOWERGENERATINGUNITS[SECTION32(1)(I)]

(a.1) Applicability This section is applicable to undertakings engaged in the generation of

power;orundertakingsengagedinthegenerationanddistributionofpower.
Note:Notapplicabletoundertakingengagedonlyindistributionofpower.
(a.2) OptionavailableandwhencanitbeexercisedSuchundertakingshaveanoptiontoclaim
depreciation under the Straight Line Method on individual assets, which option should be
exercisedbeforeduedateoffurnishingreturnofincomeu/s139(1)fortheassessmentyear
relevant to the previous year in which undertaking begins to generate power. The option
onceexercisedshallbefinal.TheratesofdepreciationaregiveninAppendixIAtoIncome
TaxRules,1962.

CONCEPTOFWRITTENDOWNVALUE(WDV)[SECTION43(6)]

(1) WDV in General In case of assets acquired in previous year, WDV = Actual cost to the
assessee.Incaseofassetsacquiredbeforepreviousyear,WDV=Actualcosttoassesseeless
depreciationactuallyallowed(includingunabsorbeddepreciation,ifany)totheassessee.

(2) WDVincaseofBlockofAssets

***
WrittenDownValueoftheblockofassetsason1stdayofpreviousyear
***
Add: ActualCostofassetfallingwithintheblock,acquiredduringpreviousyear
***
Less: Moneys payable (including scrap) for asset falling within block which is
sold, discarded,demolished,destroyedduringthepreviousyear
WDVofBlockofAssetseligibleforDepreciation
***

(3) WDVinSpecialCases
Incaseoftransferofblockinsuccessionofbusinessorprofessioninfollowingcases;
(a) WDVinhandsofsuccessoru/s170=WDVinhandsofthepredecessor;
(b) WDV in hands of transferee company (being holding/subsidiary co., where transfer is
madebyonetotheotherfulfillingconditionsu/s47(iv)/(v))=WDVinhandsoftransferor
company;
(c) WDV in hands of amalgamated Indian company = WDV in hands of amalgamating
company
CA PINKY AGARWAL

(d) WDVofassetstransferredtoresultingcompany=WDVinhandsofdemergedcompany
Note:TheWDVoftheassetssotransferredtoresultingcompanyshallbereducedfrom
theWDVofdemergedcompanyonthe1stdayofthepreviousyear.
(e) WDV in hands of company formed by corporatisation of recognized stock exchange =
WDV in hands of such recognized stock exchange immediately before such
corporatisation.

Whenblockexists,butthereisnopositiveWDVduetomoneyspayablebeinghigher,then,
therewillbenodepreciationandtherewillbeshorttermcapitalgainstotheextentofsuch
excess.
However,whereblockceasestoexist,butthereispositiveWDV,theWDVwillbeshortterm
capitallossandnodepreciationwillbeallowed.

ACTUALCOST[SECTION43(1)]

ActualCost=ActualcostoftheassetstotheassesseelessPortionofsuchcostashasbeenmet
directlyorindirectlybyanyotherpersonorauthority.

ModeofComputationofActualCostOncombinedreadingofSection43(1),Explanations8to
10giventhereunderandSection43A,theactualcostoftheassetcanbecomputedasfollows;

***
Purchasepriceoftheasset
Add:Costsdirectlyattributabletobringassettoitsworkingconditionforintendeduse ***
(i.e. Expenses incurred for acquiring the asset like freight, insurance, loading and

unloading, etc. and expenses incurred in connection with the installation of the

asset)

Add:Interest on capital borrowed for acquisition of asset till it is first put to use ***

(Interestfor period after asset is first put to use is not included in actual cost)

[Explanation8]
Less:Amountofexciseorcustomsdutyleviedonitandincludedinitscost,forwhich ***

claimof
credit has been made and allowed under Cenvat Credit Rules, 2004

[Explanation9]
Less:Portion of cost of asset, met directly/indirectly by Govt or any authority/other ***

personin
form of subsidy / grant / reimbursement. However, if

subsidy/grant/reimbursementcannot
be directly related to the asset acquired,

followingshallbededucted[Explanation10]

Amttobededucted=Totalamt.ofsubsidy/grant/reimbursementXCostofthatAsset

Totalcostoftheassetsforwhichsubsidy/grant/reimbursementisgiven
***
Add/Less:Increaseordecreaseincostduetoexchangeratefluctuation[Section43A]
ActualcostoftheassetforthepurposesofSection43(1)
***

CIRCUMSTANCES WHENACTUAL COST OF ANASSET IS TAKENAT NOTIONAL FIGURES [EXPLANATION TO SECTION

43(1)]

Expl ModeofAcquisition
ActualCost
(1)
Assetactuallyacquiredforscientific ActualcostlessdeductionavailedunderSection35
research related to business and (i.e.NIL)
subsequently used for business
purposes.
(2)
Asset acquired by way of gift or WDVtothepreviousowner.
CA PINKY AGARWAL

(3)

(4)

(4A)

(5)

(6)

(7)

(7A)

(11)

(12)

inheritance.
Where assessee purchases second
hand business assets and Assessing
Officer is satisfied that main
purpose of such transfer was to
claimdepreciationonenhancedcost
andtherebyreducetaxliability.
Where assessee had transferred
business asset owned by him and
now,thesameisreacquiredbyhim.
Sale and lease back : Assessee X
purchases the asset belonging to Y,
who
had
earlier
claimed
depreciation on such asset,
subsequently,leases/hiresthesame
toY.
Building previously used for private
purposes, now brought into use for
thebusinessoftheassessee.
Note: Rate of depreciation
applicable in previous year of
bringing the asset into business use
isapplied.
Capital asset transferred by holding
company to its subsidiary company
or vice versa satisfying conditions
u/s47(iv)/47(v).
Transfer of capital asset by
amalgamating
company
to
amalgamated Indian company in a
schemeofamalgamation
Transfer of capital asset by a
demerged company to the resulting
Indian company in a scheme of
demerger
AnassetacquiredoutsideIndiabya
nonresident, subsequently brought
to India and used for his business
andprofessioninIndia.
Note: Depreciation is computed at
rates that would have been
allowable had the asset been used
in India for his business and
profession since the date of its
acquisition.
Capital asset acquired in scheme of
corporatisation of Recognised Stock
ExchangeapprovedbySEBI.

Actual cost as determined by Assessing Officer

with prior approval of Joint Commissioner, having
regardtoallcircumstancesofthecase.

Lower of WDV at the time of original transfer or

pricepaidforreacquiringit.
CosttoXshallbetheWDVoftheassetstoYatthe
timeoftransfer.

Actual cost of building less notional depreciation

calculatedatrateapplicabletothatyearuptoyear
ofbringingittobusinessuse.

Costtotransfereecompany=WDVinthehandsof
transferorcompany.

Cost to amalgamated company = WDV to the

amalgamatingcompany.
Incaseoftransferofstockintrade,theprovisions
ofSection43Cshallapply.
Costtoresultingcompany=WDVoftheassetsto
thedemergedcompany

Purchase price less notional depreciation

computed at respective rates from the date of its
acquisition.

WDV of asset to such stock exchange had there

beennosuchcorporatisation.

CA PINKY AGARWAL

TREATMENTOFEXCHANGERATEFLUCTUATIONSINCASEOFPURCHASEOFANASSETFROMOUTSIDEINDIA[SEC43]
The amount by which the liability is so increased or decreased (along with increase/decrease in
interest)atthetimeofmakingpayment,shallbeaddedtoorreducedfromthefollowing;
(a)
Actual cost of asset, or capital expenditure incurred on scientific research of family
planning;or
(b)
Cost of acquisition of capital asset (other then depreciable asset), in computing capital
gainsu/s48.

PROVISIONSINRESPECTOFADDITIONALDEPRECIATION[SECTION32(1)(iia)]
(1) Applicability Additional depreciation is available on new machinery or plant (other than
ships and aircraft) which has been acquired and installed after 31.3.2005, to an assessee
engaged in business of manufacture or production of any article or thing only if he claims
dep.onblockofassetsu/s32(1)(ii).

(2) Deduction A further deduction of 20% of actual cost of such plant and machinery is
allowed.However,incasetheassetacquiredduringpreviousyearisputtouseforaperiod
oflessthan180days,thenadditionaldepreciationonsuchassetwillbecalculated@10%of
actualcost.
(3) W.e.fApril1,2015toMarch31,2020,ifnewplantandmachineryisacquiredforsettingup
anundertaking/enterpriseinanotifiedbackwardareaofAndhraPradesh,Bihar,Telangana
andWestBengal,therateofadditionaldepreciationwillbe35%.

(4) NoDeductionAdditionaldepreciationisnotallowedinrespectof(a)Secondhandplant
andmachinery;(b)Anyofficeappliancesorroadtransportvehicles;(c)PlantandMachinery
installedinofficepremisesorresidentialaccommodation (includingguesthouses);and(d)
Plant & Machinery whose whole of actual cost is deductible (by way of depreciation or
otherwise)inanyonepreviousyearincomputingincomeundertheheadProfitsandGains
ofBusinessorProfession.

CARRYFORWARDANDSETOFFOFUNABSORBEDDEPRECIATION[SECTION32(2)]
(1) Amount of depreciation remaining unabsorbed shall be allowed to be carried forward
whether or not the business/asset to which it relates exists. It shall be treated as part of
currentyeardepreciation.

(2) Returnoflossisnotrequiredtobesubmittedtocarryforwardunabsorbeddepreciation.

(3) Brought forward business losses (speculative or nonspeculative) under Section 72(2) and
73(3)shallbegivenpriorityofsetoffoverunabsorbeddepreciation.

(4) Theunabsorbeddepreciationcanbesetofffromanyheadofincome.

INCENTIVE FOR ACQUISITION AND INSTALLATION OF NEW PLANT OR MACHINERY BY

MANUFACTURINGCOMPANY[SECTION32AC]
Ifacompanyengagedinthebusinessofmanufacturingofanarticleorthing,acquiresandinstalls
new assets from 1.4.2013 to 31.03.2015 and the aggregate amount of actual cost of such new
assetsexceedsRs.100crores,thenadeductionof15%oftheaggregateamountofactualcostof
newassetsacquiredandinstalledduring142013to3132015willbeallowed.
W.e.f assessment year 201516 to 201718, investment allowance is available if the aggregate
amountofactualcostofnewassetacquiredandinstalledbythecompanyduringanyprevious
yearexceedsRs.25crore.

CA PINKY AGARWAL

Additional investment allowance will be available from the assessment year 201617 under
section32AD,ifanundertakingissetupinthenotifiedbackwardareasinAndhraPradesh,Bihar,
TelanganaandWestBengalandfulfillstheconditionsspecifiedinsection32AC
Note;Ifsuchnewassetistransferredwithinaperiodof5yearsfromthedateofitsinstallation
thentheamountofdeductionearlierallowedshallbedeemedtobetheincomechargeableunder
theheadprofitsandgainsofbusinessandprofessionofthepreviousyearinwhichnewassetis
soldorotherwisetransferred.

DEDUCTIONINRELATIONTOTEA,COFFEEANDRUBBERDEVELOPMENTA/C[SECTION33AB]
Lowerofthefollowing
(a)amountdepositedindeposita/cor
(b) 40% of income under head business or profession (as computed before allowing deduction
underthissectionandbeforesettingoffb/fbusinesslossu/s72)
subjecttothefulfillmentoftheconditionsspecifiedinsection33AB

DEDUCTIONINRELATIONTOSITERESTORATIONFUND[SECTION33ABA]
Lowerofthefollowing
(a)Amountdepositedindeposita/c;or
(b)20% of income under head business or profession (as computed before allowing deduction
underthissectionandbeforesettingoffb/fbusinesslossu/s72)
subjecttothefulfillmentoftheconditionsspecifiedinsection33AB

SCIENTIFICRESEARCHANDDEDUCTIONINRELATIONTHERETO[SECTION35]

Scientific Research: As per Section 43(4), scientific research means activities carried for the
extension of knowledge in the fields of natural or applied science including agriculture, animal
husbandryorfisheries.

Deductioninrelationtoexpenditureincurredonscientificresearch[Sec.35]

Sec.35 Expenditureincurred
Amountof
Conditions/Remarks
deduction
Expenditure incurred within 3
(1)(i)

Revenue expenditure Amountof

years immediately preceding
on scientific research expenditure
commencement of business is
incurred
relatedtobusiness
allowed as deduction in year of

Expenditure
on
commencementofbusinesstothe
scientific research before
extent certified by prescribed
commencement
of
business, by way of (a)
authority.
Purchase of materials; or
(b) salary (other than
perquisite)ofemployees
(1)(ii)

Sum paid to approved 1.75Sum

Such
association,

scientific
research Paid
university,
college
or
association,
university,
institution must be approved
college
or
other
in accordance with prescribed
institutionwhoseobjectis
guidelines and must be
undertaking of scientific
notified
by
Central
research.
Government
(1)(iia)
Sum paid to a 1.25Sum

Such college or other

CA PINKY AGARWAL

(1)(iii)

company having as its

main object scientific
research
and
development to be used
byitforscientificresearch

Sum paid to research

association, college, or
other institution to be
usedforresearchinsocial
science or statistical
research(SeeNote1)
(1)(iv)/(
Capital expenditure
2)
(except expenditure on
the purchase of land) on
scientific research related
tobusiness

Capital expenditure
(except expenditure on
the purchase of land)
incurred before the
commencement
of
business
(2AA)
Sumpaidto
(a)
ANationalLaboratory;
or
(b)
Auniversity;or
(c)
An Indian Institute of
Technology;or
(d)
Aspecifiedperson
(SeeNote1)

(2AB)

Paid

Amountof
expenditure
incurred

2.00Sum
Paid

Expenditure(notbeing 2.00
in nature of cost of any Expenditure
land or buildings) on in Incurred
house research and
development
facility
incurred by a company
engaged in the business
of
biotechnology,
manufacture
or
production of any drugs,
pharmaceuticals,
electronic equipments,
computers,
telecommunication
equipments, chemicals or
anyothernotifiedarticles.

institution must be approved

in accordance with prescribed
guidelines and must be
notified
by
Central
Government
Suchcompanyisregistered
in India, is approved by
prescribedauthority.
Deduction is allowed even
if research is not related to
business.
Expenditure
incurred
within 3 years immediately
precedingthecommencement
of business is allowed in the
yearofthecommencementof
thebusiness
No
depreciation
is
allowable.

Sum is paid with a specific

direction that it shall be used
for
scientific
research
undertaken
under
a
programme approved in this
behalfbyPrescribedauthority

No deduction shall be
allowedinrespectofsuchsum
under any other provisions of
theAct.

Such
Research
and
Development
facility
is
approved by prescribed
authority

Suchassesseeshouldenter
into an agreement with
prescribed authority for co
operation in such Research
and Development facility and
audit of accounts maintained
forthatfacility

CA PINKY AGARWAL

10

TAXTREATMENTINCASEOFSALEOFSCIENTIFICRESEARCHASSETS
(A) Salewithoutbeingusedforanyotherpurpose[Section41(3)]:

Treatment
Taxableamount
Deemed business profit arise under Deemedprofitisthelowerofthefollowing
[Moneys payable + Total deductions allowed
Section 41(3) in the previous year in (a)
underSection35(2)]Costoftheasset;or
whichsaletookplacewhetherornot
businessisinexistenceinthatyear.
(b)
TotaldeductionsallowedunderSection35(2).
Capital gains or losses arise in this Capitalgains=Saleproceeds[Expenditureontransfer
casewhicharetobecomputedu/s45 +Costofacquisition(normalorindexed)]
intheyearoftransfer
Moneyspayableincludesaleprice,insurance,salvageandcompensation,etc.inrespectof
suchasset.
Saleincludesexchangeorcompulsoryacquisitionunderanylawbutdoesnotincludea
transfer,inaschemeofamalgamation,ifamalgamatedcompanyisanIndiancompany.
(B)

Sale after being used for business purposes: At the time when scientific research is
convertedintobusinessasset,theactualcostthereof(i.e.NIL)willbeaddedtotheblockof
assets.Thereafter,atthetimeofsaleofsuchasset,treatmentisdoneasifanassetforming
partofblockissold.CapitalgainsarisewhicharetobecomputedunderSection50.

DEDUCTIONINRELATION TOEXPENDITURE ONOBTAININGLICENCE TO OPERATE TELECOMMUNICATION SERVICES

[SECTION35ABB]
ExtentofDeduction
Deductionsforeachoftherelevant =Expenditureforacquiringsuchrightspreviousyears

Numberofrelevantpreviousyears

DEDUCTIONINRELATIONTOEXPENDITUREONELIGIBLEPROJECTS/SCHEMES[SECTION35AC]
100%ofsuchpaymentmade

INVESTMENTLINKEDTAXINCENTIVESFORSPECIFIEDBUSINESSES[SECTION35AD]
100%ofthecapitalexpenditureincurredduringthepreviousyear,whollyandexclusivelyforthe
specifiedbusinesseswouldbeallowedasdeductionfromthebusinessincome.

DEDUCTION IN RESPECT OF PAYMENT TO ASSOCIATION & INSTITUTION FOR CARRYING OUT RURAL DEVELOPMENT
PROGRAMME[SECTION35CCA]
100%oftheamountpaidbyanassessee

DEDUCTIONINRESPECTOFEXPENDITUREINCURREDONAGRICULTURALEXTENSIONPROJECT[SECTION35CCC]
150%ofsuchexpenditure

DEDUCTIONINRESPECTOFEXPENDITUREINCURREDONSKILLDEVELOPMENTPROJECT[SECTION35CCD]
150%ofsuchexpenditure

DEDUCTIONINRELATIONTOPRELIMINARYEXPENSES[SECTION35D]
(1) EligibleAssesseeIndiancompanyoranoncorporateassesseeresidentinIndia.

CA PINKY AGARWAL

11

(2)

(3)

(4)

(5)

(6)

Eligible Expenditure Expenditure eligible fordeduction should be incurred in connection

withcommencementofbusinessorextensionoftheindustrialundertakingoftheassessee
orsettingupanewindustrialunit.Thefollowingexpensesareeligiblefordeduction:
(a) Expenditureonpreparationoffeasibility/projectreport,conductingmarketoranyother
survey necessary for business or engineering services carried out by assessee or an
approvedconcern.
(b) Legal charges for drafting any agreement at the time of setting up or conduct of
business.
(c) Incaseofcompanyassessee
LegalchargesfordraftingandprintingitsMemorandumandArticlesofAssociation;
or
RegistrationFeesforitsregistrationundertheCompaniesAct,1956;or
Underwriting commission, brokerage/charges for preparation/advertisement of
prospectus,etc.incurredinconnectionwithissueofsharesordebenturesforpublic
subscription.
(d) AnyotherprescribedexpenditureifnotallowedunderanyotherprovisionsoftheAct.
QualifyingExpenditureLowerofthefollowingqualifiesfordeduction
(a) Aggregateamountofeligibleexpenditure;or
(b) 5%ofCostoftheproject**
**IncaseofIndiancompany,5%ofcostofprojector5%ofcapitalemployed,whichever
ishigher,willbetaken.
Cost of project means actual cost of fixed assets acquired or developed in relation to
such commencement, extension or set up, and which are shown as on 31st March of
relevantpreviousyear.
Capital employed in the business of company = [Issued share capital + Debentures +
Longterm borrowings] in relation to such commencement, extension or set up and
whichareshownason31stMarchoftherelevantpreviousyear.
Relevant previous year means the year in which the business is commenced; or the
extensionofsuchindustrialundertakingiscompleted;orthenewindustrialunitcommences
productionoroperation.
DeductionandPeriod1/5thofqualifyingexpenditureisallowedasdeductionforeachof
thefivesuccessivepreviousyearsstartingwiththerelevantpreviousyear.
Audit In case of an assessee other than company/cooperative society, the accounts for
year(s)inwhichtheexpenditureisincurredmustbeauditedbyaCharteredAccountantand
a report thereof in prescribed form must be furnished with return of income for the first
yearinwhichdeductionisclaimed.
Ifadeductionisallowedunderthissectionforanyassessmentyear,nodeductionshallbe
allowedinrespectofsuchexpenditureunderanyotherprovisionforthesameoranyother
assessmentyear.

DEDUCTIONSFOR EXPENDITUREINCURREDON AMALGAMATION/ DEMERGER [SECTION 35DD] & DEDUCTIONFOR

EXPENDITUREINCURREDONVOLUNTARYRETIREMENT[SECTION35DDA]:

Eligible
100%ofexpenditureincurredwhollyorexclusivelyforamalgamationor
Expenditure
demergerofanundertaking
Deduction
1/5th of eligible expenditure starting with the previous year in which
andperiod
amalgamationordemergertakesplace.
CA PINKY AGARWAL

12

DEDUCTIONFOREXPENDITUREONPROSPECTING,ETC.FORMINERALS[SECTION35E]
Deductionisallowedforeachof10successivepreviousyears

OTHERDEDUCTIONSALLOWABLEUNDERSECTION36(1)

36(1) DeductibleExpenditure
Conditions/Remarks
(i)
Insurance premium of stock or Such stock or stores are used for business or
stores against damage or profession
destructionthereof
(ia)
Insurance premium paid by Suchprimarysocietyshouldbeengagedinsupplying
Federal Milk Cooperative milk raised by its members to such federal milk co
Society on life of cattle owned operativesociety
by a member of a Primary Co
operativeSociety
(ib)
Healthinsurancepremiumpaid Such scheme must be (a) framed by GIC and
otherwise than by cash by an approved by Central Government, or (b) framed by
employer on the health of his anyotherinsurerandapprovedbyIRDA
employeesunderascheme.
(ii)
Bonusorcommissionpaidtoan Voluntarypaymentsaredeductibleifitisforservices
employee for services rendered rendered.
(not otherwise have been Any bonus exceeding the statutory amount is
payable to him as profit or allowed if such excess payment has been made on
dividend)
accountofcommercialexpediency.
Deduction is subject to the
provisions of Section 43B and
Section40A(2).
(iii)
Interestoncapitalborrowedfor Capitalmeansmoney,notanyotherasset.
the purposes of business or DeductionsubjecttoSection43Band40(a)(i).
profession. However, interest Interestonowncapitalisnotdeductible.
paid on capital borrowed for Interestonmoneyborrowedforpaymentoftaxor
acquisition of a new asset for interestonlatepaymentofadvancetaxorforlate
extension of existing business filingofreturnisnotdeductible.
or profession pertaining to In order to decide whether interest on funds
period upto the date on which borrowed by the assessee to give an interestfree
such asset is first put to use, loan to a sister concern (e.g., a subsidiary to the
shall be capitalized and shall assessee) should be allowed as a deduction under
section 36 (1) (iii) of the incometax act, 1961 one
notbeallowed.
has to enquire whether the loan was given by the

assesseeasameasureofcommercialexpediency.
(iiia)
Discount on zero coupon bond Lifeofbond=Periodstartingfromthedateofissue
calculated in pro rata manner of the bond and ending on the date of maturity or
overthelifeofsuchbond.
redemptionofsuchbond.
Discount = Amount payable by Forcomputinglifeofthebond,ifthemonthinwhich
issuer on maturity/redemption bond is issued or is redeemed/matured is a part of
of such bond Less Amount themonth,thensuchmonthshallberoundedoffto
received or receivable on issue thenearestonei.e.ifsuchpartis15daysormore,it
ofthebond.
will be taken as one month, otherwise it will be
Zero coupon bonds means a ignored.
notified bond issued by any
CA PINKY AGARWAL

13

(iv)

(iva)
(v)

(va)

(vi)

(vii)/
(viia)
(viii)

infrastructurecapitalcompany/
fund or public sector company,
inrespectofwhichnopayment
and benefit is received or
receivable before maturity or
redemption.
Contributionmadebyemployer
to recognized provident fund/
approvedsuperannuationfund
Contributiontowardsapension
scheme
Sum paid by employer towards
an approved gratuity fund set
upforbenefitofhisemployees.
Sum received by assessee from
his employees as contributions
to certain welfare schemes like
Provident Fund or Employee
State Insurance Fund or
Superannuation Fund or any
otheremployeewelfarefund.

Lossinrespectofanimals,used
for business or profession
(otherwise than as stockin
trade) which have died or
becomepermanentlyuseless.
Bad Debts and Provision for
BadandDoubtfulDebts
Special reserve created and
maintainedby
(a) (i) financial corporations
specified u/s 4A of the
companies act, 1956, or (ii)
financial corporations which is
apublicsectorcompany,or(iii)
Abankingcompanyor(iv)aco
operative bank other than
primary agricultural credit
society or primary cooperative
agricultural
and
rural
development bank, in respect
of eligible business being
providing longterm finance for
industrial or agricultural or
development of infrastructure
facility in India or for
construction or purchase of

DeductionissubjecttotheprovisionsofSection43B.

Totheextentitdoesnotexceed10%ofthesalaryof
theemployeeinthepreviousyear.
DeductionissubjecttotheprovisionsofSection43B.

Suchsumshouldbecreditedbytheassesseetothe
employees account in the relevant fund(s) on or
beforetheduedate.
Due date means date by which the assessee is
required as an employer to credit an employees
contribution to his account in the relevant fund(s)
under any law, standing order, award, contract of
serviceorotherwise.
Deductionallowed=[ActualcostoftheanimalSale
proceedsofcarcassesor
animals]

Discussedlater.
Theleastofthefollowinghisdeductible:
(a) 20% of profit from such eligible business
computed under the head profits and gains of
business or profession before making deduction
underthisclause;or
(b)profittransferredtospecialreservea/cor
(c)[2(paidupsharecapital+Generalreserveson
last day of previous year)][balance of special
reservea/con1stdayofpreviousyear]
Taxabilityofwithdrawalsfromspecialreserve
a/c [section 41 (4A)] :anyamountwithdrawnfrom
reserve a/c, for which deduction has been allowed
here, is taxable as deemed business profit in the
yearofwithdrawalwhetherornotthebusinessisin
existenceinthatpreviousyear.
Longterm finance means any loan or advance,
which is a repayable along with interest during a
periodof5yearsormore;
Infrastructure facility means business referred to in
CA PINKY AGARWAL

14

(ix)

(xv)

(xiv)
(xvii)

section80IAorhousingprojectbusinessreferredto
residentialhousesinIndia;or
(b) housing finance company insection80IB.
formed and registered in India
withmainobjectofcarryingon
the eligible business of
providing longterm finance for
construction of purchase of
residentialhousesinIndia;
(c) any other financial
Corporation including a public
company, in respect of eligible
businessofprovidinglongterm
finance for development of
infrastructurefacilityinIndia
Expenditure incurred bonafide Any unabsorbed family planning expenditure is
by a company for promoting carried forward and set off in the same manner as
family planning amongst its unabsorbeddepreciation
No depreciation allowable under Section 32 if
employees
Extentofdeductionandperiod: deductionhasbeenclaimedhere.
(a) Where expenditure is of Taxtreatmentincaseofsaleofsuchasset:Sameas
revenuenature:
inSection35
100% in the previous year in
whichitisincurred.
(b)Whereexpenditureiscapital
innature:
1/5th of such expenditure
deductible in 5 consecutive
previous years beginning with
the previous year in which the
expenditureisincurred
securitytransactiontax(STT)paidbytheassesseeinrespectofthetaxablesecurities
transactions entered into in the course of his business during the previous year.
Commodities transaction tax paid by the assessee in respect of the taxable
commodities transactions entered into in the course of his business during the
previousyear.
Contribution to credit guarantee trust fund by a public financial institution for Micro
andSmallEnterpr
Expenditueincurredbyacooperativesociety(engagedinthebusinessofmanufacture
ofsugar)forpurchaseofsugarcaneatapricewhichisequalto(orlessthan)theprice
fixedorapprovedbytheGovernment.

DEDUCTIONSINRELATIONTOBAD DEBTSAND PROVISIONFOR BADAND DOUBTFUL DEBTS [SECTION 36(1) (vii)/

(viiA)ANDSECTION36(2)]

Thesecanbedeductedsubjecttothefollowingconditions:
(a) Thedebtsorloansshouldbeinrespectofabusinesswhichwasearnedonbytheassessee
duringtherelevantpreviousyear.
(b) The debt should have been takeninto account in computing the income of theassessee of
the previous year in which such debt is written off or of an earlier previous year or should
CA PINKY AGARWAL

15

represent money lent by the assessee in the ordinary course of his business of banking or
moneylending.

Forthepurposeofclause(vii),ithasbeenclarifiedintheActthatanybaddebtorpartthereof
writtenoffasirrecoverableintheaccountsshallnotincludeanyprovisionforbadanddoubtful
debts.

Further,ifonthefinalsettlementtheamountrecoveredinrespectofanydebt,wherededuction
hadalreadybeenallowed,fallsshortofthedifferencebetweenthedebtdueandtheamountof
debtallowed,thedeficiencycanbeclaimedasadeductionfromtheincomeofthepreviousyearin
whichtheultimaterecoveryoutofthedebtismade.ItispermissiblefortheAssessingOfficerto
allowdeductioninrespectofabaddebtoranypartthereofintheassessmentofaparticularyear
and subsequently to allow the balance of the amount, if any, in the year in which the ultimate
recovery is made, that is to say, when the final result of the process of recovery comes to be
known.

Recoveryofabaddebtsubsequently(Section41(4)]Ifadeductionhasbeenallowedinrespect
ofabaddebtundersection36,andsubsequentlytheamountrecoveredinrespectofsuchdebtis
morethantheamountdueaftertheallowancehadbeenmade,theexcessshallbedeemedtobe
the profitsand gains of business or profession and will be chargeable as incomeof the previous
year in which it is recovered, whether or not the business or profession in respect of which the
deductionhasbeenallowedisinexistenceatthetime.

GENERALDEDUCTION[SECTION37]
(1) Conditions Deduction under this Section is permissible only if following conditions are
satisfied:
(a) TheexpenditureshouldnotbeofthenaturedescribedunderSection30to36.
(b) Itshouldnotbepersonalexpenditureoftheassessee.
(c) Itshouldnotbeinthenatureofcapitalexpenditure.
(d) Itshouldhavebeenincurredinthepreviousyear.
(e) Itshouldbeinrespectofthebusinesscarriedonbytheassessee.
(f) It should have been expended wholly or exclusively for purpose of such business or
profession.

(2) DisallowanceThefollowingexpensesareexpresslydisallowedunderSection37
(a) Expenditure incurred by an assessee for any purpose, which is an offence, or which is
prohibitedbylaw[ExplanationtoSection37(1)]
(b) Expenditureincurredbyanassesseeonadvertisementinanysouvenir,brochure,tract,
pamphletorthelikepublishedbyapoliticalparty.[Section37(2B)].

AMOUNTS NOT DEDUCTIBLE IN COMPUTINGINCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS AND
PROFESSION[Section40(a)]
ThefollowingshallnotbeallowedasdeductionwhilecomputingIncomeundertheheadBusiness
orProfession
(1) PaymentsOutsideIndiaortoNonResidentsonwhichTDSnotmade/paidAnyinterest,
royalty,feesfortechnicalservicesorothersumchargeableinthehandsofrecipientunder
thisactandpayable
(a) outsideIndia,or
(b) inIndiatononresident(notbeingacompany)ortoaforeigncompany,onwhich
(i) Taxrequiredtobedeductedatsourcehasnotbeensodeductedatsource;or
CA PINKY AGARWAL

16

(2)

(3)
(4)

(ii) After such deduction, has not been paid during the previous year, or in the
subsequentyearbeforetheexpiryofthetimeprescribedundersection200(1).
However, such sums shall be allowed as a deduction in computing the income of the
subsequentpreviousyearinwhichithasbeensodeductedandpaid.

Payments to Residents on which TDS is not made/paid Any interest, a commission of

brokerage,rent,royalty,feesforprofessionalortechnicalservicespayabletoaresident,or
amountspayabletocontractororsubcontractor,beingaresident,forcarryingoutanywork
(includingsupplyoflabourforcarryingoutanywork),onwhich
(i)
Taxrequiredtobedeductedatsourcehasnotbeensodeductedatsource;or
(ii)
After such deduction, has not been paid on or before the expiry of the time
prescribedundersection200(1).
However, such sums shall be allowed as a deduction in computing the income of the
subsequentpreviousyearinwhichithasbeensodeductedandpaid.

WealthTax.

Taxonperquisites,asreferredtoinSection10(10CC)actuallypaidbytheemployer.

(5)

Income Tax Any rate/tax levied or assessed on the basis of profits or gains of any
business/profession. Foreign income tax also not deductible: Any income tax paid outside
Indiaandeligibleforreliefoftaxu/s90or90Aor91shallnotbedeductible.

(6)

Salariespayable(a)outsideIndiaor(b)toanonresident,iftaxhasnotbeendeductedat
sourceand,ifdeducted,notpaid.[Note:Eveniftaxisdeductedonsuchsalaryinsubsequent
previousyear,suchsalarywillnotbeallowedasdeductioninthatpreviousyear]

(7)

Anypaymentbytheassesseeemployertoprovidentfundorotheremployeewelfarefund
unlesshehasmadeeffectivearrangementstosecure thattaxshall bedeductedatsource
fromanypaymentsmadefromthefundwhicharetaxableundertheheadSalaries.

DISALLOWANCEINTHECASEOFPARTNERSHIPFIRMS/LLPSection40(b)
(i) Interest paid to a partner by a firm is not deductible unless the following conditions are
fulfilled:
(1) Itshouldbeauthorizedbyandinaccordancewiththepartnershipdeed.
(2) Itshouldrelatetoaperiodfallingafterthedateofthepartnershipdeed.
(3) Itshouldbenotexceeding12%p.a.simplerateofinterest.
Further,thedisallowanceofinterestissubjecttothefollowingexplanations:
Explanation 1: If a person is a partner in his representative capacity in the firm and if he
receives interest in his individual capacity from the firm, such interest should not be
disallowed.
Explanation2:Ifapersonwhoisapartnerinhisindividualcapacityreceivesinterestforand
onbehalfofsomeoneelsefromthefirminwhichheisapartner,suchinterestshouldnot
bedisallowed.

(ii) Any amount paid by way of salary, bonus, commission or remuneration by a firm to a
partner is not deductible in the computation of income of the firm unless the following
conditionsarefulfilled:
(1) Itshouldbeauthorizedbyandinaccordancewithpartnershipdeed.
(2) Itshouldrelatetoaperiodfallingafterthedateofpartnershipdeed.
(3) Itshouldbewithintheprescribedlimits.Theprescribedlimitsareasfollows:

CA PINKY AGARWAL

17

BookProfit
Remunerationasa%ofbookProfits
OnthefirstRs.3lakhorin Rs.1,50,000or90%whicheverishigher
caseofaloss
Onthebalance
60%
(4)

It should be paid to a working partner. For the purpose of remuneration paid to a

workingpartnerbyafirm,thefollowingexplanationsarerelevant:
Book profit means the Net Profit, as shown in the Profit & Loss A/c for the relevant
previous year, computed in the manner laid down in Chapter IVD as increased by the
aggregateamountoftheremunerationpaidorpayabletoallthepartnersofthefirmifsuch
amounthasbeendeductedwhilecomputingthenetprofit.
Disallowanceofsalarytopartnersshallbemadeinthecaseofafirmifthepartnershipdeed
doesnotspecifytheamountofremunerationpayabletoeachindividualworkingpartneror
itdoesnotlaydownthemannerofquantifyingsuchremuneration.
It is to be noted that the deductible amount of interest and salary shall be the amount
payableasperpartnershipdeedoramountcalculatedu/s40(b),whicheverisless.Further,
rentpaidtoapartnerbythefirminrespectofassetsbelongingtothepartnerandusedby
thefirmisnotcoveredbySection40(b)andtherefore,deductible.

DISALLOWANCEINTHECASEOFASSOCIATIONOFPERSONSANDBODYOFINDIVIDUALSSection40(ba):
Anypaymentbywayofinterest,salary,bonus,commissionorremunerationpaidbyanassociation
ofpersonsorbodyofindividualstoanyofitsmembersshallbedisallowed.

EXPENSESORPAYMENTSNOTDEDUCTIBLEINCERTAINCIRCUMSTANCES[Section40A]
(1) Paymenttorelativesinexcessoffairvaluenotdeductible[Section40A(2)]If
(a) the assessee incurs any expenditure for which payment is made to specified persons
(relativesorcloseassociatesoftheassessee;and
(b) the Assessing Officer is of opinion that such expenditure is excessive or unreasonable
having regard to (i) the fair market value of goods, services or facilities for which
paymenthasbeenmade;or(ii)thelegitimateneedsofthebusinessorprofessionofthe
assessee;or(iii)thebenefitderivedbyoraccruingtoassesseetherefrom,

Then,suchexcessive/unreasonablepartoftheexpenditurewillnotbeallowedasdeduction.
Disallowance = Expenditure incurred FMV of goods/services/facilities/benefit, etc.
receivedbytheassessee.

(2) CashPaymentsinexcessofRs.20,000ExpenditureinexcessofRs20,000inaggregateina
daypaidotherwisethanbyaccountpayeechequedrawnonabankoraccountpayeebank
draftisnotallowable[section40A(3)&40A(3A)].

Incaseofpaymentmadetotransportoperatorsforplying,hiringorleasinggoodscarriages
thelimitofRs.20,000hasbeenraisedtoRs.35,000.
Exception[Rule6DD]:Section40A(3)doesnotapplyunderfollowingcircumstances:
(a) Paymenttobanking/otherfinancialinstitutions,orpaymentthroughbankingsystemlike
letters of credit, mail/telegraphic transfers, book adjustment and bills of exchange
includinghundies.
(b) PaymentmadetoGovernment(ifsuchpaymentisrequiredtobemadeincash).
(c) Paymentforgoodsorservicesbybookadjustment.
(d) Payment to cultivator, grower or producer in respect of agricultural or forest products,
animalhusbandry,poultryfarmingorfishproducts,etc.

CA PINKY AGARWAL

18

(e) Paymenttocottageindustryforpurchaseofproductsmanufacturedbyitwithoutaidof
power.
(f) Payment to person residing or carrying on Business and Profession in place not served
withbankingfacility.
(g) Paymentsmadewhenbankisclosedduetobankholidaysorstrikes,etc.
(h) Paymenttoagentsforpurchaseofgoodsandservicesonhisbehalf.
(i) Paymentsbyauthorizeddealerormoneychangeragainstpurchaseofforeigncurrency.
(j) Payment of gratuity, retrenchment compensation or other terminal benefits in year of
retirementorprecedingyeartoanemployeedrawingsalarynotexceedingRs.50,000.
(k) Salarypaidafterdeductingtaxatsourcetotheemployeewhoistemporarilypostedfora
continuousperiodof15daysormoreinplaceotherthantheworkingplaceoronaship
andhedoesnotmaintainanybankaccountthere.

(3) ProvisionforGratuitytobedisallowed[sec.40A(7)]Provisionforpaymentofgratuityto
employeesisnotdeductible.However,anyprovisionforcontributiontowardsanapproved
gratuityfund,orforpaymentofanygratuityactuallypayableduringthepreviousyearshall
beallowed.
Note: Although provision for contribution to be approved gratuity fund is allowed as
deductionunderthis,section,however,itshallbesubjecttotheprovisionofsection43B.

(4) Disallowanceinrespectofcontributiontononstatutoryfunds(sec.40A(9)&(11))Any
sum (including contribution) paid to non statutory/unrecognized welfare funds is not
deductibleexceptwheresuchsumispaidasperprovisionu/s36(1)(iv)/(iva)/(v)orunder
anyotherlawforthetimebeinginforce.

DEEMEDPROFITSCHARGEABLETOTAX[Section41]
(1) Recovery or excess recovery against a deduction [Section 41(1)] This Section aims at
taxinganysubsequentbenefitaccruedoutofthedeductionorallowancemadeearlier.
(A) ConditionsThefollowingconditionsmustbesatisfiedbeforethisSectionisapplied:
(a) Anallowanceordeductionhasbeenmadeforanyassessmentyear.
(b) Such allowance or deduction has been made in respect of loss, expenditure or a
tradingliabilityincurredbytheassessee.
(c) Subsequently, during any previous year, the assessee or successor in business has
obtained,whetherincashorinanyothermannerwhatsoever,
Anyamountinrespectofsuchlossorexpenditure;or
Somebenefitinrespectofsuchtradingliabilitybywayofitsremissionorcessation
(Remission or cessation of any liability by a unilateral act by the assessee or
successor in business by way of writing off such liability in his accounts is also
included).
(B) ChargeabilitytoTaxTheamountsoobtainedorthebenefitaccruingtosuchassessee
orsuccessorshallbedeemedtobeprofitsandgainsofbusinessorprofessionandshall
be chargeable to tax in the year of receipt irrespective of whether the business or
profession, in respect of which the allowance or deduction had been made, is in
existenceinthatyearornot.
(2) BalancingCharge[Section41(2)].

(3) SaleofanAssetusedforScientificResearch[Section41(3)]

(4) RecoveryagainstBadDebts[Section41(4)]

(5) AmountwithdrawnfromSpecialReserve[Section41(4A)]

CA PINKY AGARWAL

19

(6)

SetoffofLossagainstaforementionedIncomes[Section41(5)]Ifthebusinessnolonger
existsandtherearedeemedprofitsasreferredtounderSection41(1)or41(3)or41(4A)in
respectofthatbusiness,anyloss(notbeingspeculation loss)whicharoseinthatbusiness
andprofessionduringthepreviousyearinwhichitceasedtoexistandwhichcouldnotbe
setoffagainstanyotherincomeofthatpreviousyearshallbesetoffagainstsuchdeemed
profitstotheextentofsuchprofits.

CERTAINDEDUCTIONSTOBEALLOWEDONACTUALPAYMENT[Section43B]
The following sums shall be allowed as deduction only on actual payment irrespective of the
previousyearinwhichtheliabilityarose:
(a) Anytax,duty,cessorfee,forwhichassesseeincurredliabilityinthepreviousyear,underany
law;or
(b) Contribution by assesseeemployer to any Provident Fund or Superannuation or gratuity or
otheremployeewelfarefund;or
(c) Bonusorcommissiontoemployeesforservicesrendered,asreferredunderSection36(1)(ii);
or
(d) Suminlieuofanyleaveatthecreditofhisemployee(LeaveEncashment);or
(e) Interestonanyloanorborrowingoradvancesfrom
(i)Any Public Financial Institution (e.g. ICICI, IFCI, IDBI, LIC, UTI, etc.); or (ii) State Financial
Corporation,orStateIndustrialInvestmentCorporation;or(iii)ScheduledBank
No deductionforinterestconvertedintoloan/borrowing/advance: Anyinterestfallingunder(e)
above, which has beenconverted into a loanor borrowing oradvanceshall notbe regarded as
actuallypaidandshallnotbeallowedasdeduction.

AUDITOFACCOUNTSOFCERTAINPERSONSCARRYINGONBUSINESSORPROFESSION[SECTION44AB]

Incaseofpersoncarrying If his total sales, turnover or gross receipts exceed Rs 1 crore in

onbusiness
anypreviousyear
Incaseofpersoncarrying
onprofession

IfhisgrossreceiptsexceedRs.25,00,000inanypreviousyear.

SPECIALPROVISIONSFORCOMPUTINGPROFITSANDGAINSOFBUSINESSONPRESUMPTIVEBASIS[SECTION44AD)
A resident individual, HUF or partnership firm engaged in any business and whose total
turnover/grossreceiptsinthepreviousyeardonotexceedRs.1crorecanclaimasumequalto
8%ofthetotalturnoverorgrossreceiptsasthedeemedprofitsandgainsofsuchbusiness.
Note:(1) No further deduction under section 30 to 38 will be allowed. (2)The assessee will be
exemptedfromthemaintenanceofbooksofaccountsasrequiredundersection44AA.

SPECIAL PROVISIONS FOR COMPUTING PROFITS AND GAINS OF BUSINESS OF PLYING, HIRING OR LEASING GOODS
CARRIAGES[SECTION44AE]

Anassesseewhoownsnotmorethan10goodscarriagesatanytimeduringthepreviousyearand
is engaged in the business of plying, hiring or leasing of such good carriages can estimate his
income on estimated basis at the rate of Rs.7,500 for every month (or part of a month) during
whichthegoodscarriageisownedbythetaxpayer.

****
CA PINKY AGARWAL

20