Profit and Gains From Business or Profession PDF

Income from PGBP FCA R anjeet K unwar
Profit and gains from business or profession

SECTIONS CONTENTS
28 Income chargeable as PGBP

29 Computation sheet of PGBP
30 Deduction for expenses in relation to Building
31 Deduction for expenses in relation to Plant, Machine and furniture
32(1)(i) Depreciation by SLM for Electricity Company
32(1)(ii) Depreciation by WDV for Other assessee
32(1)(iia) Deduction for Additional Depreciation for Manufacturing concern
32(1)(iii) Deduction for Terminal Depreciation (under SLM)
32(2) Deduction for unabsorbed depreciation
33AB Special Deduction for Tea Growing and Manufacturing Concern
33ABA Deduction for Site Restoration Fund
35 Deduction for the activities of Scientific Research
35A Deduction for Expenses on Patent and copy right (Old provision)
35ABB Deduction for acquisition of Tele communication license
35AC Deduction in respect of eligible project
35AD Deduction in respect of expenditure on specified business
35CCA Deduction in respect of donation to RDP or NUEF
35D Deduction for preliminary expenditure
35DD Deduction for expenses on Amalgamation and demarger
35DDA Deduction for payment on VRS to employee
36(1) Other (Revenue) deduction
37(1) General deduction
37(2B) Disallowance of payment to political party

38 Disallowance of expense on assets not wholly for business
40(a) Certain Expenditure disallowed
40(b) Remuneration and Interest allowed to Partner from Firm
40A(2) Disallowance of payment made to related party
40A(3) Disallowance @ 20% on Certain Cash payment
40A(7) Disallowance of provision for Gratuity
41(1)/(2)/(3)/(4) Certain income chargeable to tax as PGBP
43(1) with its Actual cost of Depreciable asset under different situation
Explanation
43(6) Meaning of WDV for charging depreciation on WDV method
43B Certain expenses allowed on payment basis only
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44AA Requirement of Maintenance of Books of Accounts
44AB Requirement of Tax Audit
44AD/AE/AF Presumptive Taxations
50 Capital Gains on Depreciable Asset (WDV method)
50A Capital Gains on Depreciable Asset (SLM method)
145 Method of Accounting (Cash or Mercantile system)
SEC 28
Chargeability
The following incomes shall be chargeable to tax under the head Profit & Gains from Business or
Profession
1) Profit and gains of any business or profession carried on by the assessee during the previous
year.
2) Income of any trade or professional association from specific services performed to its
members.
3) Profit on sale of import entitlements license or EXIM scrip.
4) Cash assistance [CCS]
5) Duty drawback
6) The value of any benefit or perquisite arising from any business or profession.
7) Any interest, salary, bonus, commission or remuneration received/due to a partner from
partnership firm.
8) Any sum received under an agreement for
(a) not carrying out any activity in relation to any business or
(b) not sharing any Know-how, patent, copyright, trade-mark, license, franchise or any other
business or commercial right of similar nature or information or technique likely to assist in
the manufacture or processing of goods or provision for services.
Note: Where above receipts are chargeable to tax under the head Capital Gain would not be
taxable as profits and gains of business or profession.
9) Any sum receives under Key man insurance policy.

10) Profits and gains derived from any Speculation business are also chargeable to tax under the
head PGBP. But as per explanation 2 to section 28, the speculation business shall be
deemed to be transaction in which the following conditions are satisfied: -
(a) The Transaction should be a contract for the purchase or sale of stocks, shares or
commodities,
(b) This contract is periodically or ultimately settled ; and
(c) The settlement would not be by actual delivery or transaction or commodities or
script, generally, it is settled through exchanging the difference in prices on the date
of delivery.
11) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than
land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the
whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD;
[Sec 28(vii)]
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Keyman Insurance Policy:
Keyman insurance policy is taken by a business concern on the life of an employee(keyman) whose services
contribute substantially to the success of the business. The object of the keyman insurance is to indemnify a
business concern from the loss of earning resulting from the death of a valuable employee. The amount of
keyman insurance can be estimated as the monetary value of the likely setback to profits of the concern due to
the death of the keyman.
Any sum received under a keyman insurance policy including the sum allocated by way of bonus is also
taxable. The exemption under section 10(10D) is not available in respect of such policy. The sum received
from such policy will be taxable as under:
a) If Nominee is Employer:- taxable for employer as PGBP

b) If Nominee is Employee:- Taxable for employee as Salary
c) If Nominee is Family of the Employee:- Taxable as IFOS
SEC 29
Method of calculating taxable profit:
Preparing a statement of profit or loss or income-expenditure adjustment:-

The profit and loss account or income and expenditure account as prepared by an assessee is adjusted as per
previous of the Income-tax Act, Profits or losses as shown by any of these accounts are adjusted as follows:-
Balance as per profit and loss or Income - expenditure account
Add:
(i) Expenses expressly disallowed but debited to P& A/c

(ii) Expenses not allowed but debited to P&L A/c
(iii) Incomes or receipts taxable under this head but not credited to P& L A/c
(iv) Capital expenses debited to P & L A/c
(v) Personal expenses debited to P & L A/c
(vi) Expenses in excess of the allowed amount, debited to P & L A/c
(vii) Losses not allowed but debited to P & L A/c
(viii) Expenses not relating to the previous year but debited to P & L A./c
(ix) Under-valuation of closing stock or over-valuation of opening stock
Less:
(i) Expenses expressly allowed but not debited to P & L A/c
(ii) Expenses relating to the previous year but not debited to P & L A/c
(iii) Losses allowed but not debited to P & L A/c
(iv) Incomes or receipts not taxable under this head but credited to P & L A/c
(v) Capital receipts credited to P & L A/c
(vi) Incomes or receipts taxable under other head but credited to P & L A/c
(vii) Over-valuation of closing stock or under-valuation of opening stock
(viii) Profits taxable under the head incomes from business or profession.
Income taxable under the head PGBP XXX
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SEC 30
Rent, Rates, Taxes, Repairs and insurance for building
In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or
profession, the following deductions shall be allowed
(a) where the premises are occupied by the assessee
(i) as a tenant, the rent paid for such premises ; and further if he has undertaken to bear the cost of
revenue repairs to the premises, the amount paid on account of such repairs ;
(ii) otherwise than as a tenant, the amount paid by him on account of current repairs to the
premises ;
(b) any sums paid on account of land revenue, local rates or municipal taxes ;
(c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the
premises.
Expenditure incurred by
Tenant Rent, Revenue Repairs Taxes, Rates

&
Insurance
Owner Revenue Repairs
SEC 30
Repairs and insurance of machinery, plant and furniture.
In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or
profession, the following deductions shall be allowed
(i) the amount paid on account of current repairs thereto;
(ii) the amount of any premium paid in respect of insurance against risk of damage or destruction
thereof.
Depreciation
SEC 32(1)(ii)
Depreciation on WDV Method
In respect of
Tangible [Building, plant & machinery & furniture]
Intangible [Know-how, copyright, trademark, franchises etc.]
Assets owned wholly or partly by the assessee

And used for the purpose of business
Depreciation shall be allowed on WDV
Of the Block Of Assets
At the prescribed percentage.
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Rate of depreciation
Types of Assets A.Y. 2006-07 onwards
Buildings
Residential 5%
General / Hotel 10%
100%
Temporary structure
Furniture and Fittings 10%
Machinery and Plant
General 15%
Motor cars 15%
Motor buses/lorries/taxies used in the business of running on hire 30%
Gas cylinders including valves and regulators 60%
Plant used in filled operations by mineral oil concerns 60%
Ships 20%
Computers including computer software 60%
Aeroplanes 40%
Air pollution control equipment 100%
Water pollution control equipment 100%
Lifesaving medical equipment
40%
Books owned by professional
Annual publications 100%
others 60%
Books owned by assessee carrying on business in running lending 100%
libraries
Intangible Assets 25%
SEC 32(1)(iia)
Additional Depreciation
In the case of any new machinery or plant,

which has been acquired and installed,
by an assessee engaged in the business of manufacture or production of any article or thing,
a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed a s
deduction u/s 32(1)(ii).
Note :- Additional depreciation will not be available on the following plant & machinery.
(i) Any P&M the whole of the actual cost of which is allowed as a deduction (by way of depreciation or
otherwise) in computing income under the head PGBP.
(ii) Ships and aircrafts,
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(iii) P & M which was used by any other person before its installation.
(iv) Any P&M installed in office premises or residential accommodation (including guest house),
(v) Any office appliances or road transport vehicles.
SEC 43(6)
Written down value [WDV]
Opening WDV of the block XXX
Add : Actual cost of assets acquired and put to use XXX

during the previous year.
Less: Money payable in respect of any assets

which is sold, discarded or destroyed (XXX)
WDV for the purpose of depreciation XXX
Less: depreciation at the prescribed percentage (XXX)
Closing WDV of the block XXX
Note: - Money payable means only cash/cheque/bank overdraft etc.

[CIT Vs. Kasturi & Sons Ltd. (1999)]
SEC 50
Special Provision for Computation of Capital Gains in case of Depreciable Assets.
where the capital asset is an asset forming part of a block of assets in respect o f which depreciation
has been allowed the capital gain shall be computed as under :-
(1) Where the sales consideration arising from the transfer of the any capital asset falling within the
block of assets exceeds the aggregate of the following amounts: -
(a) the WDV of the block of assets at the beginning of the previous year and
(b) the actual cost of any assets falling within the block of assets acquired during the previous
year,
(c) cost of transfer; then
such excess shall be deemed to be the short term capital gains (profit)
(2) Where any block of assets does not exist for the reason that all the assets in that block are
transferred during the previous year,
Short term capital gains shall be computed as under:-
Sales Consideration XXX
Less:
(a) the WDV of the block of assets at the (XXX)
beginning of the previous year
(b) the actual cost of any asset falling within the (XXX)
block of assets acquired during the previous year
(c) cost of transfer (XXX)
Short term capital gain (profit/loss)
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Notes regarding Depreciation:-
1. The lesser who is the legal owner of the assets shall be eligible to claim depreciation for tax purpose. The
accounting treatment will have no implication on the allowance of depreciation under the Income Tax Act.
2. In case of Lease Agreement, Lessor can claim depreciation.
3. Plant includes ships, vehicles, books; scientific equipments used for business purpose, but dont include
tea bushes or livestock.
4. Theatre building and hotel building are treated as building and cannot be treated as plant for the purpose
of claiming depreciation. [CIT Vs. Anand Theatres (2000)](SC.)]
5. Where the assessee has taken the possession of a house in pursuance of an agreement to sell and it is
not registered in his name, then he is deemed as owner of the house for claiming depreciation. [Mysore
Minerals Ltd. 239 ITR 775 (SC.)]
6. Depreciation on newly acquired assets
Any assets which is acquired by assessee during the PY and is put to use for business for a period of
less than 180 days in that PY, then the assessee shall be entitled to claim 50% of the normal
depreciation allowed.
7. In respect of assets acquired under instalment payment system, the depreciation will be allowed on the
entire purchase price as per the agreement.
8. In case of hire purchase transactions,
the depreciation will be allowed on amount of cost of the asset; and
amount of interest shall be allowed as revenue expenditure.
9. Where the building is specifically designed to function a nursing home with equipments fitted to the wall in
operation theatre, then that portion or the building can be regarded as plant. [CIT Vs. Dr. B. Venkata Rao
(1999) 243 ITR 81 (SC.)]
10. Actual Cost includes Expenses on test runs of machinery prior to production are part of the actual cost of
plant and machinery. [Food Specialties Ltd.]
11. Actual Cost includes Salaries, expenses of guest house maintained for erection staff, travelling, vehicle
and general expenses pertaining to setting up of the Plant and Machinery. [Hindustan Polymers Ltd.]
12. Where any depreciable assets are not exclusively used for the business or profession then depreciation
u/s32 or expenditure mentioned in sec.30, 31, shall be restricted to a fair proportionate amount which the
A.O may determine. [sec.38(2)]
13. Explanation 1 to Sec. 32(1)

Capital expenditure incurred on tenanted building:-
Where any capital expenditure has been incurred by assessee on leasehold building used by the assessee
for the business purpose, then such capital expenditure will be treated as the building owned by the
assessee.
Example:- Mr. RAM is a tenant in a building in which he carries on his business. On 31 -10-07 he
incurred an expenditure of Rs. 4 lakh on constructing 3 room set to be used as office on 05 -08-09
he vacated the building and received from the land lord :-
Case I :- Nil Case II :- 2,50,000 Case III :- 3,50,000
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SEC 43(1)
Actual Cost
Actual cost means the actual cost of assets to the assessee, reduced by that portion of cost
thereof, if any as has been met directly or indirectly by any other person or authority.
Explanation 1 to Section 43(1) :-
Where an asset is used in the business after it ceases to be used for scientific research the actual
cost of the asset will be reduced by the amount of deduction u/s 3 5(1). In other words, actual cost of
assets for the purpose of depreciation after the end of use in scientific research shall be taken nil.
Explanation 2 to Section 43(1):-
Assets acquired by gift or inheritance:--
Cost of the assets to the assessee :-
Actual cost to previous owner XXX

Less: Depreciation allowed to previous owner (XXX)
XXX
Explanation 3 to Section 43(1):- Second Hand Assets
Assessee Previous Owner

Assets Transfer
Assets used in Business
and
the A.O. is satisfied that the main purpose of
transfer was the reduction of tax liability;
then,
Actual cost to the assessee shall be an amount as the A.O. may de termine with the previous approval
of joint commissioner.
Explanation 4 to Section 43(1):- Re - acquisition of assets

Assets Transfer / Gift
Assessee Previous Owner
Assets used in business Assets re-acquired
Actual cost to the assesse shall be A or B whichever is lower
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st
Actual cost of assessee when he 1 acquired XXX
Less: Dep. allowed to assessee (XXX)

A XXX
B = Actual price for which the asset is re-acquired
Explanation 5 :- Building brought into use for business purposes subsequent to its acquisition .
Actual cost to the assessee shall be .
The actual cost of building to the XXX
Less: An amount equal to NOTIONAL depreciation (XXX)

XXX
Explanation 9 to Section 43(1):- Actual cost where CENVAT is availed.
Actual cost of asset shall be reduced by :
The amount of excise duty availed as CENVAT credit.
Explanation 10 to Section 43(1):- Actual cost of subsidized goods
Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by
CG/SG, any authority or by any person, in the form or a subsidy or grant or reimbursement, THEN such
subsidy/grant/reimbursement shall not be included in the actual cost of the asset to the assessee.
Explanation 11 to Section 43(1):-
Where any asset which was acquired by NR outside India is brought by him to India and used for the purpose
of his business,
then the actual cost of the asset to the assessee (NR) shall be the actual cost as reduced by the amount of
depreciation notionally calculated at the rate in force as if the asset was used in India since the date of
acquisition.
Explanation 13 to Section 43(1):
Where any assets is acquired by assessee covered by section 35AD and deduction has been claimed in
respect of whole cost of such asset in the year of acquisition u/s 35AD; the actual cost of such asset in the
block of assets shall be taken nil.
CBDT Circular Explaining provisions of Finance Act, 2008
Section 32 provides that depreciation shall be allowed on the written down value (WDV) of any block of assets. Section
43(6) provides that written down value means the actual cost less all depreciation actually allowed to him under the
Income-tax Act.
Some persons were exempt from tax and, therefore, not required to compute their income under the head profits and gains
of business or profession. Upon withdrawal of exemption, such persons became liable to income-tax and hence were
required to compute their income for income-tax purposes.
In this context, dispute has arisen regarding the basis for allowing depreciation under the Income-tax Act in respect of
assets acquired during the years when such persons enjoyed tax exemption.
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The Income-tax Appellate Tribunal in the case of Kandla Port Trust v. Asstt. CIT 104 ITD 01 (Rajkot) has held that in
the case of such a previously exempt entity, since there was no liability to tax, there was no occasion to compute the
income of such person under the provisions of the Income-tax Act. Hence, the depreciation provided in the books in the
years when the income was exempt cannot be treated as the depreciation actually allowed.
the written down value (WDV) for the purpose of assessment would be the original cost less nil, i.e., the original cost.
This interpretation is not in conformity with the intent and purpose of the provisions of depreciation. Accordingly,
Explanation 6 has been inserted in sub-section (6) of section 43 to clarify the concerned saturation.
Explanation 6 to Section 43(6)
Where an assessee was not required to compute his total income for the purposes of this Act for any previous
year or years preceding the previous year relevant to the assessment year under consideration,
(a) the actual cost of an asset shall be adjusted by the amount attributable to the revaluation of such
asset, if any, in the books of account;
(b) the total amount of depreciation on such asset, provided in the books of account of the assessee in
respect of such previous year or years preceding the previous year relevant to the assessment
year under consideration shall be deemed to be the depreciation actually allowed under this Act for
the purposes of this clause; and
(c) the depreciation actually allowed under clause (b) shall be adjusted by the amount of depreciation
attributable to such revaluation of the asset..
SEC 32(1)(i)
Depreciation for Power Generating undertakings:-
1) The undertaking engaged in the business of generation or generation and distribution of power, have the
option to claim depreciation on
SLM on each asset or

WDV on block assets.
2) Provision in respect of assets put to use less than 180 days shall be the same as block of assets.
3) The aggregate amount of depreciation allowed shall not exceed the actual cost of the asset.
4) It is open to such an undertaking to opt the depreciation under WDV method.
5) Where the option is not exercised, the depreciation shall be allowed on the basis of SLM.
SEC 32(1)(iii)
Terminal Depreciation
Where an asset on which depreciation has been claimed u/s 32(1)(i) and which is sold, destroyed or
discarded; and
If [Sales Consideration] < [Actual cost - Depreciation allowed]
then, difference between above two factors shall be allowed as terminal depreciation in the previous
year in which it is sold; destroyed or discarded.
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SEC 41(2)
Balancing Charge
Where an asset on which depreciation has been claimed u/s 32(1)(i) and which is sold, destroyed or
discarded; and
If [Sales Consideration] > [Actual cost - Depreciation allowed]

Then, least of following will be treated as income from PGBP as Balancing Charge.
Cost less WDV
Sales considerations less WDV
SEC 50A
Capital Gain on the transfer of Capital Asset on which SLM depreciation charged
Where the sales consideration in respect of assets mentioned above, exceeds the actual Cost of such assets,
then Capital gain shall be arise on the above transaction.
Capital Gains = Sales Consideration less Actual cost of asset
SEC 32(2)
Set off and carry forward of Unabsorbed depreciation
The current year depreciation shall be set off against the income from PGBP and the balance, if
any, against the income under any head for that P.Y.
Depreciation which cannot set off shall be carried forward to the next AY and set off against the
income from PGBP and the balance if any against the income under any heads of income.
Note: - The unabsorbed depreciation can be C/F for indefinite period.
SEC 35
Expenditure on Scientific Research
In respect of expenditure on scientific research, the following deductions shall be allowed.
Sec. 35(1)
1. Revenue expenditure related to business, however, any revenue expenditure has been incurred before the
commencement of the business within the 3 years immediately preceding the date of commencement of
business, shall be allowed as deduction in P/Y in which business is commenced, to the extent certified by
the prescribed authority.
2. Capital expenditure on S/R related to business. However, no deduction is admissible in respect of

expenditure incurred on acquisition of any land.
3. Where any capital expenditure is incurred before the commencement of the business, within the 3 years
immediately preceding the commencement of business shall be allowed as deduction in the P/Y in which
the business is commenced.
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4. an amount equal to 175% of any sum paid to a Research Association which has as its object the
undertaking of scientific research or to a university, college or other institution to be used for scientific
research :
Provided that such association, university, college or other institution for the purposes of this clause
(A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such
conditions as may be prescribed; and
(B) such association, university, college or other institution is specified as such, by notification61 in the
Official Gazette, by the Central Government;
5. An amount equal to 125% of any sum paid to Company to be used by it for research:
Provided that such company
(a) is registered in India,
(b) has as its main object the scientific research and development,
(c) is, for the purposes of this clause, for the time being approved by the
prescribed authority in the prescribed manner, and
(d) fulfils such other conditions as may be prescribed;
6. An amount equal to 125% of any sum paid to a research assoc iation which has as its object the
undertaking of research in social science or statistical research or to a university, college, or
other institution to be used for research in social science or statistical research .
Provided that such association, university, college or other institution for the purposes of this
clause-
(A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such
conditions as may be prescribed; and
(B) such association, university, college or other institution is specified as such, by notification is the
official gazette, by the Central Government.
SEC. 35(2AA):-
An amount equal to 175% of sum paid to any NATIONAL LABORATORY or University for a programme
approved in this behalf by the prescribed authority.
SEC 35 (2AB):-
In the case of a company engaged in any business of manufacture or production of any article or thing, not
being an article or thing specified in the list of the Eleventh Schedule, deduction equal to 200% of the
expenditure incurred on research related to business shall be allowed.
However Capital expenditure being Land or Building is not covered U/S 35(2AB); but in respect of
Building the assessee can claim 100% deduction in section 35(1).
No company shall be entitled for deduction under this section unless it enters into an agreement with
the prescribed authority for co-operation in such research and development facility and for audit of the
accounts maintained for that facility.
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THE ELEVENTH SCHEDULE
LIST OF ARTICLES OR THINGS
1. Beer, wine and other alcoholic spirits.

2. Tobacco and tobacco preparations, such as, cigars and cheroots, cigarettes, biris, smoking mixtures
for pipes and cigarettes, chewing tobacco and snuff.
3. Cosmetics and toilet preparations.
4. Tooth paste, dental cream, tooth powder and soap.
5. Aerated waters in the manufacture of which blended flavouring concentrates in any form are used.
Explanation.Blended flavouring concentrates shall include, and shall be deemed always to have
included, synthetic essences in any form.
6. . Confectionery and chocolates.
7. Gramophones, including record-players and gramophone records.
8. Projectors.
9. Photographic apparatus and goods.
10. Office machines and apparatus such as typewriters, calculating machines, cash registering
machines, cheque writing machines, intercom machines and teleprinters.
Explanation.The expression office machines and apparatus includes all machines and
apparatus used in offices, shops, factories, workshops, educational institutions, railway stations,
hotels and restaurants for doing office work 16[and for data processing (not being computers within
the meaning of section 32AB
11. Steel furniture, whether made partly or wholly of steel.
12. Safes, strong boxes, cash and deed boxes and strong room doors.
13. Latex foam sponge and polyurethane foam.
14. Crown corks, or other fittings of cork, rubber, polyethylene or any other material.
15. Pilfer-proof caps for packaging or other fittings of cork, rubber, polyethylene or any other material.
SEC 41(3)
Capital Gain on the Transfer of Scientific Asset
Where the scientific research asset has been sold without having been used for other purposes, then
least of following shall be charged under PGBP in the year of sale.
(i) Sale proceeds
(ii) Deductions u/s 35
This shall apply even if the business is not in existence.
Notes:-
1. If the scientific research asset sold without having been used for other purpose, AND
Sales Proceeds more than Actual Cost

Then; sales proceeds Less Indexed COA/COA = Capital Gains
2. In respect of the unabsorbed capital expenditure on scientific research, the provisions of set off and
carry forward will be applied in the same manner as that of unabsorbed depreciation. [Sec 35(4)]
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1. Radheshayam Ltd. commenced production of paper on 01-10-2010. The following expenditure
has been incurred on scientific research up to the year ending on 31 -03-2011.
(I) On 13-10-2010, the company pays Rs. 90,000 to the Indian Agricultural Research
Institute, New Delhi, being an approved scientific research institution.
(II) On 15-11-2010, the company pays Rs. 60,000 to the Indian Institute on Management,
Ahmedabad, being an approved institute u/s 35(1)(iii).
(III) On 05-01-2011, the company pays Rs. 55,000 to an National Laboratory f or carrying out
programmes of scientific research.
(IV) On 22-11-2010, the company purchases a plot of land for Rs. 8,00,000. Later on a
laboratory building is constructed (cost of construction Rs. 6,20,000, date of completion of
construction 01-02-2011) to start an in house research.
(V) Before the commencement of Business, the company had made the following revenue
expenditure and Capital expenditure for its research laboratory: -
Expenditure on salary (Rs. 50,000) and perquisite( Value Rs. 20,000) to research
personnel and research material during the 12 months ending on 30 -09-2007.
Expenditure on salary of research professional from 01-10-2007 to 30-09-2010 Rs.
96,000 (out of which amount certified by the prescribed authority is Rs. 55,000).
Expenditure on providing rent free flat and club facility to research personnel form 01 -
10-2007 to 30-9-2010 Rs. 28,000.
Expenditure on research material from 01-10-2007 to 30-09-2010 Rs. 90,000 (out of
which amount certified by the prescribed authority is Rs. 45,000).
Capital expenditure on scientific research (not certified by the prescribed authority).
Expenditure incurred Expenditure incurred

up to 30-09-2007 between 01-10-2007
and 30-09-2010
Purchase of land for growing herbals for research 2,70,000 2,50,000
Purchase of equipments for research 2,50,000 2,50,000
Cost of cultivation of herbals 25,000 45,000
Determine the amount of deduction available to Radheshyam Ltd. u/s 35(1) for the A.Y. 2011 -12,
if the scientific research is:-
(a) Related to the business of the assessee; and

(b) Not related to the business of the assessee.
2. Sita tel Ltd. is engaged in the business of manufacture of telecommunication equipments.

During the P.Y. 2010-11, it incurs the following expenditure on in-house research and
development facility:-
Rs.
a. Purchase of land 25,00,000
b. Construction of building 15,90,000
c. Purchase of plant and equipment 6,80,000
d. Research material etc. 5,10,000
Find out the amount of deduction u/s 35 if (a) the research and development facility is approved
by the prescribed authority for the purpose of sec 35(2AB); (b) it is not approved by the
prescribed authority.
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SEC 35ABB
Expenditure for Obtaining license to Operate Telecommunication Services.
In respect of any capital expenditure incurred for acquiring any right to operate telecommunication
services and for which payment has actually been made to obtain a license, shall be allowed as
deduction in equal instalments during the number of years for which the license is in force.
Note:- If the payment is made before the commencement of business, the deduction shall be allowed
commencing from the year of commencement of business; and in any other case, the deduction shall be
allowed commencing from the year of payment.
SEC 35AC
Expenditure on eligible projects or schemes
(1) Where an assessee incurs any expenditure by way of payment to Public Sector Company or a
local authority or to an association or institution approved by the National committee for carrying
out any eligible project or scheme, the assessee shall be allowed a deduction of the amou nt of
such expenditure.
(2) The company may, for claiming the deduction, incur expenditure either by way of contribution as
aforesaid or directly on the eligible project or scheme.
Note:- eligible project or scheme means such project or scheme for promoting the social and economic
welfare of, or the uplift of, the public as the central Government may, by notification in the Official Gazette,
specify in this behalf on the recommendations of the National Committee.
(3) The deduction u/s 35AC shall not be allowed unless the assessee furnishes along with his ROI a
certificate-
in Form no. 58A from the entity in respect of contribution made.

In case where the expenditure is directly incurred (only for co.), a certificate from the
Chartered Accountant.
SEC 35CCA
Expenditure by way of payment to associations and institutions for carrying out rural development
program where an assessee incurs any expenditure by way of contribution made to approved
association/institution for implementation of rural development program and contribution to:-
(i) National fund for Rural Development
(ii) National Urban poverty Eradication fund,
The assessee shall be allowed a deduction of the amount of such expenditure incurred during the
previous year.
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SEC 35D
Deduction for Preliminary Expenditure
Where an Indian company or resident non corporate assessee incurs any expenditure on SPECIFIED
PURPOSES,
(i) before commencement of his business, or
(ii) after commencement of his business ,IN CONNECTION WITH EXTENSION OF HIS
INDUSTRIAL UNDERTAKING OR IN CONNECTION WITH SETTING UP NEW INDUSTRIAL
UNIT.
the deduction shall be allowed in respect of preliminary expenditure as under : -
1/5 th of the least of following will be allowed for each 5 years
Actual amount incurred on Specified Purpose
5% of Cost of Project*(in case of Co. COP or Capital Employed whichever is higher)
Cost of Project means: actual cost of fixed assets on the last day of P/Y in which business is
commenced.
Capital Employed means: Share capital + Debentures + Long term borrowings as on the last day of
P/Y in which the business is commenced.
Specified Purposes for Sec. 35D
The expenditure on specified purposes means the following expenditure incurred on:-
(i) Preparation of Feasibility report / Project report.

(ii) Conducting Market survey or any other survey necessary for the business.
(iii) Legal charges for drafting any agreement/registering the co.
(iv) Legal charges of drafting MOA/AOA
(v) Printing of MOA/AOA
(vi) In connection with the issue, for public subscription of shares or debenture, underwriting
commission.
(vi) Engineering services relating to the business of the assessee.
Provided that the work in connection with the preparation of the feasibility report or the project report or the
conducting of market survey or of any other survey or the engineering services referred to in this clause is
carried out by the assessee himself or by a concern which is for the time being approved53 in this behalf by
the Board;
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Example on Section 35D:
Ramdeen Ltd. is an Indian company. It commences production on 01-02-2011. The following

expenses are incurred by the company before commencement of business:-
1. Expenses on incorporation, issue of shares, etc Rs. 95,000.

2. Preparation of feasibility report, project report and conducting ma rket survey (the work is
completed by the assessee itself) Rs. 1,50,000.
3. Engineering services (work is carried on by a concern which is not approved by the Board) Rs.
1,20,000.
Determine the amount of deduction u/s 35D assuming the following figures of fi xed assets and
capital on 31-03-2011 (i.e. the last day of the year in which the assessee starts production) : -
Rs. in lakh
Cost of fixed asset 50
Share capital 44
Debentures 11
Long term borrowing from a financial institution 18
SEC 35 DD
Expenditure on Amalgamation / Demerger
Where an Indian company, incurs any expenditure for the purpose of amalgamation or demerger of an
undertaking, the assessee shall be allowed a deduction of an amount equal to 1/5th of such expenditure for
five years.
SEC 35DDA
Expenditure incurred on compensation under VRS
Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an
employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary
retirement, one-fifth of the amount so paid shall be deducted in computing the profits and gains of the business
for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately
succeeding previous years.
SEC. 35E
Deduction for expenditure on prospecting etc. for certain minerals
If an Indian company or a resident non-corporate assessee incurs some expenditure, wholly and exclusively in
prospecting for any mineral specified in the seventh schedule (Part A or Part B) or on development of a mine
or other natural deposit of any such mineral, such expenditure shall be allowed as deduction in 10 equal
annual instalments beginning with the previous year in which commercial production of mineral begins. The
expenditure eligible for the deduction must be incurred during 5 years period ending with the year of
commercially production.
But if any portion of such expenditure is met directly or indirectly by any other person or authority and any sale,
salvage, compensation of insurance money is realised by the assessee in respect of any property or right
brought into existence as a result of such expenditure, the amount of expenditure so met or so realised shall
not be allowed as deduction. Thus, deductible expenditure shall be the total expenditure incurred minus the
expenditure so met or so realised.
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SEC 36(1)
Other Deduction
The following deductions shall be allowed u/s 36 :-

(i) Fire insurance premium against the risk of damage of stocks;
(ii) Any insurance premium paid by paid by any mode of payment other than cash by an employer on the
health of employees;
Note 1:- Insurance paid on the life of partners is not allowed. It is a personal expenditure.
Note 2:- Insurance premium paid under the KEYMAN INSURANCE POLICY will be allowed u/s 37(1).
(iii) Any sum paid to an employee as bonus or commission;
Note: - There is no restriction on the amount of bonus. It may exceed the paymen t under bonus
Act.
(iv) The amount of interest paid in respect of capital borrowed for the purposes of business or profession;
(v) Discount on ZERO COUPON BOND will be deductible on pro rata basis.
(vi) Employers contribution to RPF or approved superannuation fund.
(vii) Employers contribution to approved gratuity fund.
(viii) Any sum received by the assessee u/s 2(24)(x) will be allowed as deduction only if such amount is
credited to the employee account in relevant fund on or before the date prescribed under such fund.
Employees contribution to Provident Fund, Superannuation fund and other fund for the welfare of
Employees.
Sec 2(24)(x) :- Income includes any sum received by the assessee from him employee as contributions to any PF or
SAF or any fund set up under the provisions of Employees State Insurance Act or any other fund for the welfare of the
employee.
(ix) In respect of animals, which are used for the purpose of business or profession and have died, the actual
cost less amount realised on the sale of animal is allowable as deduction.
(x) The amount of any bad debt which is written off as irrecoverable in the accounts of the assessee for the
previous year;
Conditions:-
a. Particular debtor should be write off; and
b. Amount of debts has been treated as income in the year of written off or earlier year.
Note 1:- condition no. (b) is not applicable for Banking Co. or Financial institution.
Note 2:- Provisions for bad debts is not allowed.
(xi) Any expenditure bona fide incurred by a company for the purpose of promoting family planning
amongst its employees
Provided that where such expenditure or any part thereof is of a capital nature, one-fifth of such
expenditure shall be deducted for the previous year in which it was incurred; and the balance thereof
shall be deducted in equal instalments for each of the four immediately succeeding previous years
(xii) Securities Transaction Tax in respect of the taxable securities transactions entered into in the course of
his business will be allowed.
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SEC 37(1)
General Deduction
Any expenditure other than specifically mentioned in Sec. 30 to 36 shall allowed as deduction, if the following
conditions are satisfied.
a) It is not in the nature of capital expenditure;

b) It is not in the nature of personal expenses of the assessee, and
c) It is laid out wholly and exclusively for the purpose of the business of the assessee;
d) It should not have been incurred for any purposes, which is an offence or is prohibited under any law.
SEC 37 (2B) :-
According to this section, any expenditure incurred by an assessee on advertisement in any souvenir,
broacher, tract, pamphlet or the like, published by a political party is not allowed.
Note : - Donation to political party is not allowed as deduction.
Amount Not Deductible

SEC 40(a)
Expenses Expressly Disallowed
The following amounts shall not be deducted in computing the income chargeable under the head Profits and
gains of business or profession,
(i) in the case of any assessee, any interest, royalty, fees for technical services or other sum chargeable
under this Act, which is payable,
(A) outside India; or
(B) in India to a non-resident,
on which TDS is deductible and such TDS has not been deducted or, after deduction, has not been paid
within time allowed in TDS chapter.
Provided that where in respect of any such sum, TDS has been deducted in any subsequent year or, has
been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed,
such sum shall be allowed as a deduction in computing the income of the previous year in which such tax
has been paid.
(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical
services payable to a resident, or amounts payable to a contractor or subcontractor, being resident, for
carrying out any work (including supply of labour for carrying out any work), on which TDS is deductible
and
such TDS has not been deducted or, after deduction, has not been paid on or before the due date of ITR;
or
Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has
been deducted during the previous year but paid after the due date specified in sub-section (1) of section
139, such sum shall be allowed as a deduction in computing the income of the previous year in which such
tax has been paid.
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(ii) Income tax paid or Provision thereof is not allowable;
(iia) Wealth tax paid is not allowable;
Note1:- Valuation fees paid for getting the valuation of assets for the purpose of Wealth tax/Income tax is
ALLOWABLE as revenue expenses u/s 37(1).
Note2:- Litigation exp. in relation to income tax cases and tax audit fees is allowable expenditure u/s 37(1).
(iii) any payment which is chargeable under the head Salaries, if it is payable
(A) outside India; or
(B) to a non-resident,
and if the TDS has not been paid thereon nor deducted therefrom.
(v) Any tax paid by an employer referred to in section 10(10CC) will not be allowed.
Sec 10(10CC):
Exemption of tax paid by employer under the head Salary
In the case of an employee deriving income in the nature of a non -monetary perquisite u/s 17(2), the tax
on such income actually paid by his employer, at the option of the employ er, on behalf of such employee,
will be exempt in hand of employee under the Salary.
SEC 40 (b)
Interest and Remuneration to partners
(1) Payment of salary, bonus, commission (called as remuneration) is to a working partner, will be
allowed as under,
(a) on the first Rs. 3,00,000 of the book- Rs. 1,50,000 or at the rate of 90 per cent of the
profit or in case of a loss book-profit, whichever is more;
(b) on the balance of the book-profit at the rate of 60 per cent :
Conditions for allowance of remuneration:-
(a) The payment should be authorised by partnership deed.
(b) It should be for the period falling after the date of the partnership deed.
(c) The payment should be made to working partners
(2) The payment of interest to a partner (whether working or non-working) will be allowed to the extent
of 12% per annum simple interest.
Conditions for allowance of Interest
(i) The payment should be authorized by the partnership deed
(ii) The payment of interest should relate to a period falling after the date of partnership deed.
Phone 47665555 (30Lines), 9811136987, 9811042458
Explanation 1 to sec. 40 (b):-
Where an individual is a partner in a firm on behalf of any other person as a representative capacity,
then,
The interest paid to such individual as representative capacity will be allowed to the extent
specified in sec.40 (b)
The interest paid to such individual as otherwise than representative capacity will not be
taken into consideration for sec.40 (b).
Explanation 2 to sec. 40 (b):-
Where an individual is a partner in a firm as otherwise than representative capacity, the interest paid to such
individual by firm to such individual shall not be taken into consideration for sec. 40 (b), if such interest is
received by such individual on behalf of any other person.
Computation of Book Profit
Net Profit or the firm as per P & L A/c xxx
Add/Less: Adjustment u/s 28 to 44D xxx

[Except u/s 40(b)]
Add : Interest and salary debited xxx

to P & L A/c
Less : Interest allowed u/s 40(b) xxx

Book Profit xxx
SEC 40(ba):- Any payment of interest, salary, bonus, commission made by AOPs/BOIs to its
members is disallowed.
Expenditure Not Deductible Under Certain Circumstances
SEC 40A (2)

Payment to Specified Persons
Where the assessee incurs any expenses in respect of which,
Payment had been made to certain specified person

the A.O. may disallow so much of the expenses,
as he considers to be unreasonable having regard to the,
FMV of goods or services.
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Specified Persons:-
Assessee Specified Persons
Individual * Relatives
*Any person in whose business the individual
or his relative has substantial interest.
Company * Director
* Relatives of director
* Person in whose business the company or director
or any relative of such director has substantial interest
Firm * Partner
* Relatives of Partner
*Person in whose business the firm or Partner
or any relative of such partner has substantial interest
AOPs * Member
* Relative of the member
* Person in whose business the AOPs or any member
or any relative of such member has substantial
interest.
HUF * Member
* Relative of the member
* Person in whose business the HUF or any member or
any relatives of such member Has substantial
interest.
Any other Assessee * Individual or HUF or AOPs or firm or co. having

Substantial interest in the assessees business or
profession.
SEC40A (3)
Cash expenditure exceeding Rs. 20,000
Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to
a person in a day, otherwise than by an account payeee cheque or account payeee bank draft, exceeds Rs.
20,000, no deduction shall be allowed in respect of such expenditure.
SEC 40A (3A):-
Where an allowance has been made in the assessment for any year in respect of any liability incurred by the
assessee for any expenditure and subsequently during any previous year, the assessee makes payment in
respect thereof, otherwise than by an account payee cheque or account payee bank draft, the payment so
made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to
income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a
day, exceeds twenty Rs. 20,000:
Provided that no disallowance shall be made under sub-section (3) and (3A), in such cases and under such
circumstances as may be prescribed (Rule 6DD).
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Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions
of sub-sections (3) and (3A) shall have effect as if for the words twenty thousand rupees, the words thirty-
five thousand rupees had been substituted.
RULE 6DD
Exceptional Circumstances for Section 40(A)(3)/(3A)
(a) Where the payment is made to

(i) the Reserve Bank of India or any banking company as defined in section 5(c) of the Banking
Regulation Act, 1949;
(ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India
(Subsidiary Banks) Act, 1959;
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit society as defined under section 56 of
the Banking Regulation Act, 1949 ;
(v) the Life Insurance Corporation of India established under section 3 of the Life Insurance
Corporation Act, 1956:
(b) Where the payment is made to the Government and, under the rules framed by it, such payment is
required to be made in legal tender;
(c) Where the payment is made by
(i) any letter of credit arrangements through a bank,
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other account in that or any other bank;
(iv) a bill of exchange made payable only to a bank;
(v) the use of electronic clearing system through a bank account;
(vi) a credit card;
(vii) a debit card.
Explanation.For the purposes of this clause and clause (g), the term "bank" means any bank,
banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank
[not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act,
1949, whether incorporated or not, which is established outside India;
(d) Where the payment is made by way of adjustment against the amount of any liability incurred by the
payee for any goods supplied or services rendered by the assessee to such payee;
(e) Where the payment is made for the purchase of
(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry
farming; or
(iii) fish or fish products; or
(iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles,
produce or products;
(f) Where the payment is made for the purchase of the products manufactured or processed without the
aid of power in a cottage industry, to the producer of such products;
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(g) Where the payment is made in a village or town, which on the date of such payment is not served by
any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation,
in any such village or town;
(h) Where any payment is made to an employee of the assessee or the heir of any such employee, on or
in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on
account of gratuity,' retrenchment compensation or similar terminal benefit and the aggregate of such
sums payable to the employee or his heir does not exceed fifty thousand rupees;
(i) Where the payment is made by an assessee by way of salary to his employee after deducting the
income-tax from salary in accordance with the provisions of section 192 of the Act, and when such
employee
(i) is temporarily posted for a continuous period of fifteen days or more in a place other than his
normal place of duty or on a ship and
(ii) does not maintain any account in any bank at such place or ship;
(j) Where the payment was required to be made on a day on which the banks were closed either on
account of holiday or strike;
(k) Where the payment is made by any person to his agent who is required to make payment in cash for
goods or services on behalf of such person;
(l) Where the payment is made by an authorised dealer or a money changer against purchase of foreign
currency or travellers cheques in the normal course of his business.
Explanation.For the purposes of this clause, the expressions "authorised dealer" or "money changer"
means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign
exchange under any law for the time being in force.
SEC 40A (7)

Provision for Gratuity will not allowed
No deduction shall be allowed in respect of any provision made for gratuity.
Exceptions:-
1. Payment towards an approved gratuity fund is allowed subject to Sec. 43B.
2. Provision for gratuity actually became payable during the P/Y.
Note:1- Contribution to unapproved gratuity fund is not allowed.
Note:2- If a policy is taken from LIC to provide for gratuity of employees, the actual premium paid is allowed
as revenue expenditure u/s 37 (1).
SEC. 145:- Method of Accounting
Income chargeable under the head PGBP or Income from Other Sources shall be computed in
accordance with either CASH or ACCRUL system of accounting regularly employed by the assesee.
Note 1:- The assessee can adopt cash system for one business and accrual system for another business
[Same is applicable for IFOS].
Note 2:- An assessee can change the method of accounting followed by him provided that the change is for a
BONAFIDE REASON and the changed method is followed consistently by the assessee.
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Accounting Standards Notified u/s 145
The following accounting standards are notified to be followed by all assessee following mercantile system of
accounting namely:-
1. Accounting standard I relating to disclosure of accounting policies.
2. Accounting standard II relating to disclosure of prior period and extraordinary items and changes in
accounting policies.
SEC 43B
Certain Deductions to be Only on Actual Payment.
The following expenses shall be allowed only in that previous year in which such sum is actually paid
by assessee.
(a) any tax, duty, or fee under any law for the time being in force, or
(b) employer to any provident fund or superannuation fund or gratuity fund or any ot her fund for
the welfare of employees, or
(c) any sum payable to an employee as bonus or commission, or
(d) any interest on any loan from any public financial institution or a State financial corporation
or a State industrial investment corporation, or
(e) any interest on any loan and advance from a scheduled bank, or
(f) any sum in respect of any leave encashment,
Note:- If any sum referred above is actually paid by the assessee on or before the due date for furnishing the
return of income under section 139(1) in respect of the previous year in which the liability and the evidence of
such payment is furnished by the assessee along with such return, then it shall be allowed in that P.Y. in which
such liability incurred.
Note:- Where any interest covered under section 43B is covered into fresh loan, it will not be treated as
payment of interest and therefore interest will not be allowed as deduction.
SEC 41(1)
Profit Chargeable to Tax
(a) Where any loss or expenditure has been allowed as deduction and subsequently any amount is received,
then the amount so received shall be deemed to be the Income of the P/Y in which such amount is
received.
(b) Where a deduction has been allowed in respect of a trading liability and subsequently there is a remission
or cessation of the trading liability then the amount of trading liability so ceased shall be deemed to be the
income of the P/Y in which such remission or cessation took place.
The above provisions shall apply even if the business is not in existence
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SEC 41 (4)
Recovery of bad debts
Where a deduction has been allowed in respect of bad debts and the bad debts is subsequently recovered,
then the amount so recovered shall be deemed to be the income of P/Y in which the amount is recovered.
This shall apply even if business is not in existence.
SEC 44A
Special provisions regarding Mutual Concern
Mutual Concern
Trade/Professional Other
Specific General General/ Specific General/ Specific General/ Specific

services services services to services to services to
to members to members non-members members non- members
taxable exempt taxable exempt taxable
Note : - The tax rate applicable to a mutual concern shall be the same as applicable to an individual (except
where the Mutual Concern is incorporated as a company).
SEC 44AA
Maintenance of Accounts by certain persons carrying on profession or business.
(1) Any assessee carrying on business or profession other than the profession notified under Rule 6F, the
books of accounts are required to be maintained, If,
(a) Where income from business or profession exceed Rs.120000 in any of the 3 preceding previous year
or likely to exceed during current year,
OR
(b) Where the turnover or sales or gross receipts exceed Rs.10 lacs in any of the preceding 3 year or
likely to exceed during the current year,
OR
(c) Where the assessee has claimed lower income than as prescribed u/s 44AE/44BB/44BBB.
OR
(d) where the assessee has claimed such income to be lower than as prescribed u/s 44AD and his income
exceeds the maximum amount which is not chargeable to income-tax during such previous year..
Note:- The assessee whose covered above are required to maintain such books of account and documents as
may enable the A.O. to compute the total income in accordance with the provisions of the Income Tax Act,
1961.
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(2) Any assessee carrying on the profession of law, medicine, accountancy, architecture, interior decoration,
authorised representative, film artist, engineering, technical consultancy or IT,
the specified books of account are required to be maintained,
If,
the gross receipts have exceeds Rs.1,50,000 in all the 3 P.Y. immediately preceding the PY or is
likely to exceed Rs.1,50,000 during the current previous year (where the profession is newly
setup)
Specified Books to be maintained:-
(a) Cash book

(b) Ledger
(c) Journal
(d) Bills and vouchers in respect of expenses incurred
(e) Copies of bills issued exceeding Rs.25
(f) For medical practitioner, the following additional books are to be maintained:-
Daily case register (Form 3C)
Medicine Inventory Register
Note:- The above books of account are required to be kept at the principal place of business and for a period
of 6 years from the end of the relevant A.Y.
SEC 271A
Failure to keep, maintain or retain books of account, documents, etc.
If any person fails to keep and maintain any such books of account and other documents as required by
section 44AA or the rules made thereunder, in respect of any previous year or to retain such books of account
and other documents for the period specified in the said rules, the Assessing] Officer or Commissioner
(Appeals) may direct that such person shall pay, by way of penalty, a sum of ` 25,000.
SEC 44AB
Tax Audit
Every person,
(a) Carrying on business shall, if his total sales, turnover or gross receipts as case may be, in business
exceeds Rs.60 lakhs in any P.Y. OR
(b) Carrying on profession shall, if his gross receipts in profession exceeds Rs.15 lakhs in any P.Y. OR
(c) Carrying on the business referred to in Sec. 44AE and claiming his income from any such business to
be lower than the income computed in accordance with relevant section;
(d) Where the assessee has claimed such income to be lower than as prescribed u/s 44AD and his
income exceeds the maximum amount which is not chargeable to income-tax during such previous
year.
get his accounts of such relevant previous year audited by a chartered accountant before the specified date
and the audit report obtained under this provision is required to be furnished by that date.
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Notes:-
(1) Specified date means 30th September of the relevant A.Y.
(2) This section does not apply to persons who derived income referred u/s 44B or 44BBA.
(3) In case of an agent who earns only commission income, the audit of account is required only if the
gross commission exceeds Rs. 60 lakhs.
(4) Consequence of non-compliance of sec. 44AB.
(i) Defective return: - where the audit report obtained u/s 44AB is not filed along with the return of
income then the A.O. may treat the return as defective return.
(ii) Penalty u/s 271B:-

@ 0.5% of the gross turnover or Rs.1,50,000, whichever is less.
(5) The audit report shall be submitted in the following forms:-
(i) In case of a person who carries on business or profession and who is required by or under any
law to get his accounts audited
* Audit Report Form No. 3CA
* Statement particulars Form No. 3CD
(ii) In case of person who carries on business or profession but not being a person referred to point
no. (i)
* Audit Report Form No. 3CB
* Statement particulars Form No. 3CD
SEC 44AD
Deemed income from Eligible business
(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible
assessee engaged in an eligible business, a sum equal to 8% of the total turnover or gross receipts of the
assessee in the previous year on account of such business or, as the case may be, a sum higher than the
aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits
and gains of such business chargeable to tax under the head Profits and gains of business or profession.
Provided further that the provisions of section 44BB shall not apply in respect of the income referred to in this
section.
(2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1),
be deemed to have been already given full effect to and no further deduction under those sections shall be
allowed;
Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be
deducted from the income computed under sub-section (1) subject to the conditions and limits specified in
section 40(b).
(3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if
the eligible assessee had claimed and had been actually allowed the deduction in respect of the
depreciation for each of the relevant assessment years.
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(4) The provisions of Chapter XVII-C (Advance Tax) shall not apply to an eligible assessee in so far as they
relate to the eligible business.
(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who
claims that his profits and gains from the eligible business are lower than the profits and gains specified in
sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-
tax, shall be required to keep and maintain such books of account and other documents as required under
section 44AA(2) and get them audited and furnish a report of such audit as required under section 44AB.
Explanation.For the purposes of this section,
(a) eligible assessee means,

(i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability
partnership firm as defined under section 2(1)(n) of the Limited Liability Partnership Act, 2008; and
(ii )who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under
any provisions of Chapter VIA under the heading C Deductions in respect of certain incomes in the
relevant assessment year;
(b) eligible business means,

(i) any business except the business of plying, hiring or leasing goods carriages referred to in section
44AE; and
(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of Rs. 60
lakhs.
SEC 44AE
Deemed income from Transport operation business
(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee, who
owns not more than ten goods carriages at any time during the previous year and who is engaged in the
business of plying, hiring or leasing such goods carriages, the income of such business chargeable to tax
under the head Profits and gains of business or profession shall be deemed to be the aggregate of the
profits and gains, from all the goods carriages owned by him in the previous year, computed in
accordance with the provisions of sub-section (2).
(2) For the purposes of sub-section (1), the profits and gains from each goods carriage,
(i) being a heavy goods vehicle, shall be an amount equal to five thousand rupees for every month
or part of a month during which the heavy goods vehicle is owned by the assessee in the
previous year or an amount claimed to have been actually earned from such vehicle, whichever
is higher;
(ii) other than a heavy goods vehicle, shall be an amount equal to four thousand five hundred rupees
for every month or part of a month during which the goods carriage is owned by the assessee in
the previous year or an amount claimed to have been actually earned from such vehicle,
whichever is higher.
(3) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section
(1), be deemed to have been already given full effect to and no further deduction under those sections
shall be allowed:
Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from
the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of
section 40.
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(4) The written down value of any asset used for the purpose of the business referred to in sub-section (1)
shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed
the deduction in respect of the depreciation for each of the relevant assessment years.
(5) The provisions of sections 44AA and 44AB shall not apply in so far as they relate to the business
referred to in sub-section (1) and in computing the monetary limits under those sections, the gross
receipts or, as the case may be, the income from the said business shall be excluded.
(6) Nothing contained in the foregoing provisions of this section shall apply, where the assessee claims and
produces evidence to prove that the profits and gains from the aforesaid business during the previous
year relevant to the assessment year commencing on the 1st day of April, 1997 or any earlier
assessment year, are lower than the profits and gains specified in sub-sections (1) and (2), and
thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the
assessee and determine the sum payable by the assessee on the basis of assessment made under
sub-section (3) of section 143.
(7) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim
lower profits and gains than the profits and gains specified in sub-sections (1) and (2), if he keeps and
maintains such books of account and other documents as required under sub-section (2) of section
44AA and gets his accounts audited and furnishes a report of such audit as required under section
44AB.
Explanation.For the purposes of this section,

(a) The expression Heavy goods vehicle means any goods carriage the gross vehicle weight of which
exceeds 12000 kgs.
(b) an assessee, who is in possession of a goods carriage, whether taken on hire purchase or on
instalments and for which the whole or part of the amount payable is still due, shall be deemed to be the
owner of such goods carriage.
Memorandum Explaining Finance Bill, 2009
Special provision for computing profits and gains of business on presumptive basis
The existing provisions of the Income-tax Act, provide for taxation of income on presumptive basis in the case of construction
business, income from goods carriages and business of retail trade.
Section 44AD prescribes a method of presumptive taxation for assessees engaged in the business of civil construction
or supply of labour for civil construction in which a sum equal to eight percent of the gross receipts is deemed to be the
profits and gains from business. Section 44AE provides presumptive provisions for the assessees engaged in the business of
plying, hiring or leasing upto ten goods carriages in which a prescribed sum per vehicle is deemed to be the presumptive
income of the assessee. Section 44AF prescribes a method of presumptive taxation for retail trade, under which the
presumptive income is computed at the rate of a sum equal to five per cent of the total turnover.
There has been a substantial increase in small businesses with the growth of transport and communication and general
growth of the economy. A large number of businesses and service providers in rural and urban areas who earn substantial
income are outside the tax-net. Introduction of presumptive tax provisions in respect of small businesses would help a
number of small businesses to comply with the taxation provisions without consuming their time and resources. A
presumptive income scheme for small taxpayers lowers the compliance cost for such taxpayers and also reduces the
administrative burden on the tax machinery.
In view of the above, it is proposed to expand the scope of presumptive taxation to all businesses by substituting a new section
44AD. The salient features of the proposed presumptive taxation scheme are as under:
(a) The scheme shall be applicable to individuals, HUFs and partnership firms excluding Limited liability partnership
firms. It shall also not be applicable to an assessee who is availing deductions under sections 10A, 10AA, 10B, 10BA or
deduction under any provisions of Chapter VIA under the heading "C.Deductions in respect of certain incomes" in
the relevant assessment year.
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(b) The scheme is applicable for any business (excluding a business already covered under Sec. 44AE) which has a
maximum gross turnover /gross receipts of 40 lakhs.
(c) The presumptive rate of income is prescribed at 8% of gross turnover /gross receipts.
(d) An assessee opting for the above scheme shall be exempted from payment of advance tax related to such business
under the current provisions of the Income-tax Act.
(e) An assessee opting for the above scheme shall be exempted from maintenance of books of accounts related to such
business as required under section 44AAof the Income-tax Act.
(g) An assessee with turnover below Rs 40 lakhs, who shows an income below the presumptive rate prescribed
under these provisions, will, in case his total income exceeds the taxable limit, be required to maintain books of
accounts and also get them audited.
(h) The existing section 44AF is proposed to be made inoperative for the assessment year beginning on or after 1st
day of April, 2011.
The proposed amendment will take effect from 1 st April, 2011 and will, accordingly, apply in relation to the assessment
year 2011-12 and subsequent years. [Clauses 18,19,20,21,22]
Presumptive income for truck owners under section 44AE
Under the existing provisions of section 44AE, a presumptive scheme is available to assessees engaged in business of
plying, hiring or leasing goods carriages. The scheme applies to an assessee, who owns not more than 10 goods
carriages at any time during the previous year.
Under this scheme, which is optional to the assessee, a fixed amount of income per vehicle is taken at the rate of
Rs.3,500/ - per month per vehicle for owners of heavy goods vehicle, and Rs.3,150/- per month per vehicle for the owners of
light goods vehicles. An assessee opting for this scheme is exempted from maintaining books of account to substantiate
the income.
It is proposed to enhance the presumed income per vehicle for the owners of-(i)
heavy goods vehicle to Rs.5,000/- per month; and
(ii) other than heavy goods vehicles to Rs.4,500/- per month.
It is further proposed to provide an anti-avoidance clause stating that a prescribed fixed sum or a sum higher than
the aforesaid sum claimed to have been earned by the assessee shall be deemed to be profits and gains of such business.
The proposed amendment will take effect from the 1 st April, 2011 and will, accordingly, apply in relation to assessment
year 2011-12 and subsequent years. [Clause 21]
SEC 44B
Special provisions for computing profits and gains of
Shipping Business in the case of Non-Residents
Notwithstanding anything contained in sec.28 to 43A

in the case of an assessee being a non-resident
engaged in the business of operation of ships,
a sum equal to 7% of the aggregate of the
(i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his
behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in
India; and
(ii) the amount received or deemed to be received in India by or on behalf of the assessee on
account of the carriage of passengers, livestock, mail or goods shipped at any port outside
India.
shall be deemed to be the profits and gains of such business.
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SEC 44BBA
Special provision for computing profits and gains of the business of
operation of aircraft in the case of non-residents.
Notwithstanding anything contained in sec. 28 to 43A,
in the case of an assessee being a non-resident. ,
engaged in the business of operation of aircraft,

a sum equal to 5% of
(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his
behalf on account of the carriage of goods, passengers, livestock, mail from any place in India; and
(b) the amount received or deemed to be received in India by or on behalf of the assessee on account
of the carriage of passengers, livestock, mail or goods from any place outside India.
shall be deemed to be the profits and gains of such business.
SEC 44BBB
Special provision for computing profits and gains of foreign companies engaged in the
business of civil construction, etc. in certain turnkey power projects.
Notwithstanding anything contained in sec. 28 to 44AA
in the case of an assessee, being a foreign company,
engaged in the business of civil construction or the business of erection of plant or machinery, or
testing and commissioning thereof
in connection with a turnkey power project approved by the Central Government in this behalf and
financed under international aid programme,
a sum equal to 10% of the amount paid or payable to the assessee or any person on his behalf in this
connection whether in India or outside India.
shall be deemed to be profits and gains of business or profession.
SEC 33AB
Tea Development Account, coffee development account and
rubber development account .
(1)
If an assessee who is carrying on the business of growing and manufacturing tea or coffee or rubber in
India
has deposited any amount with National Bank ( special account ) under a scheme approved by Tea
Board or the Coffee Board or the Rubber Board ; or
deposited any amount in Tea Deposit Account opened under the scheme approved by Tea Board (
deposit scheme ) with previous approval of Central Government.
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before the expiry of 6 months from the end of the previous year or before the due date of furnishing the
return of his income, whichever is earlier.
then he shall be liable to allowed a deduction of amount, equal to:-
Amount Deposited
or
40% of PGBP before allowing 33AB whichever is lower
(2) The account should be audited by a Chartered Accountant and certificate should be filed along with
return of income.
(3) Any amount standing in the special account or the Deposit Account shall not be allowed to be withdrawn
except for the purposes specified in the scheme or, in the circumstances specified below:-
(a) Closure of the business.
(b) Death of assessee.
(c) Dissolution of partnership firm.
(d) Partition of HUF.
(e) Liquidation of company.
(4) where any amount standing to the credit of the assessee in the special account or in the Deposit Account
is released during any previous year by the National Bank or withdrawn by the assessee from the Deposit
Account and such amount is utilised for the purchase of
(a) any machinery or plant to be installed in any office premises or residential accommodation;
(b) any office appliances (not being computers);
(c) any machinery or plant, the whole of the actual cost of which is allowed as a deduction;
the whole of such amount so utilised shall be deemed to be the profits and gains of business of that previous
year and shall accordingly be chargeable to income-tax as the income of that previous year.
(5) Where any amount, standing in the special account or in the Deposit Account, is withdrawn during any
previous year by the assessee in the circumstance specified in clause (a) or clause (c) of sub-section
(3),
the whole of such amount shall be deemed to be the profits and gains of business or profession of that
previous year.
(6) Where any amount, standing in the special account or in the Deposit Account, which is released during
any previous year is not so utilised, within that previous year, such amount which is not so utilised shall
be deemed to be profits and gains of business of that previous year.
(7) If any asset acquired in accordance with the scheme is transferred in any previous year before the expiry
of 8 years from the end of the previous year such part of the cost of asset shall be deemed to be the
PGBP of the previous year in which asset is transferred except in the following cases:-
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(i) Where assets is transferred to Government or Govt. Company or Local Authority.
(ii) Where assets is transferred at the time of takeover of a firm by a company.
Explanation 7 to Section 43(6)
For the purposes of this clause, where the income of an assessee is derived, in part from agriculture and in
part from business chargeable to income-tax under the head Profits and gains of business or profession, for
computing the written down value of assets acquired before the previous year, the total amount of depreciation
shall be computed as if the entire income is derived from the business of the assessee under the head Profits
and gains of business or profession and the depreciation so computed shall be deemed to be the depreciation
actually allowed under this Act..
Memorandum Explaining Finance bill 2009,
Definition of written down value under section 43(6)
Clause (ii) of sub-section (1) of section 32 provides that depreciation is to be allowed and computed at the prescribed
percentage on the written down value (WDV) of any block of assets. Sub-clause (b) of clause (6) of section 43 provides that
WDV in the case of assets acquired before the previous year shall be computed by taking the actual cost to the assessee less
all depreciation "actually allowed" to him under the Income-tax Act.
Rules 7A, 7B and 8 of the Income tax Rules, 1962, deal with the computation of composite income where income is
derived in part from agricultural operations and in part from business chargeable to tax under the Income tax Act, 1961
under the head "Profits & Gains of Business". These rules prescribe the method of computation in the case of
manufacture of rubber, coffee and tea. In such cases, the income which is brought to tax as "business income" is a prescribed
fixed percentage of the composite income.
The Hon'ble Supreme Court in the case of CIT Vs. DoomDooma India Ltd (222 CTR 105) has held that in view of the
language employed in sub-clause (b) of clause (6) of section 43 regarding depreciation "actually allowed", where any
income is partially agricultural and partially chargeable to tax under the Income tax Act, 1961 under the head "Profits &
Gains of Business", the depreciation deducted in arriving at the taxable income alone can betaken into account for computing
the WDV in the subsequent year.
For instance, Rule 8 prescribes the taxability of income from the manufacture of tea. Under the said rule, income
derived from the sale of tea grown and manufactured by seller shall be computed as if it were income derived from
business, and 40% of such income shall be deemed to be income liable to tax. Asa result of the Court decision on depreciation
to be "actually allowed" for computing WDV, the resultant computation of depreciation is as per the following
illustration:
Rs.
Sale proceeds of made tea - 1,000
Less : Expenses -
Depreciation -(10% of Rs. 1,000) (100)
Others expenses- (300)
Composite income - 600
Income subject to charge under the IT. Act,
1961 by application of Rule 8 (40% of 600) - 240
Income not chargeable to income-tax

(60% of 600) - 360
According to the interpretation of the Court, the W.D.V. of the fixed asset forthe immediately succeeding year is to
betaken at Rs.960/- (Rs.1,000 minus Rs.40 being depreciation allocated for business income) and not Rs.900/- (Rs.1,000
minus depreciation of Rs.100/- allowed for determining composite income). Thus the depreciation for which deduction is
allowed to the assessee while computing its agricultural income is to be ignored for computing the W.D.V. of the asset
according to the Court ruling.
The above interpretation is not in accordance with the legislative intent. WDV is required to be computed by
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deducting the full depreciation attributable to composite income. Hence in the above illustration, the WDV of the fixed asset
forthe immediately succeeding year is to be taken at Rs.900/- and not 960/- as held by the Supreme court. The ambiguity
in this case has arisen on account of the interpretation of the meaning of the phrase "actually allowed" in sub-clause (b)
of clause (6) of section 43.
It is therefore proposed to provide that in the cases of 'composite income', notwithstanding that the assessee was not
required to compute a part of his income for the purposes of Income-tax Act for any previous year, depreciation shall be
computed as if the total composite income of the assessee is chargeable under the Income-tax Act and such depreciation
shall be deemed to have been "actually allowed" to the assessee.
This amendment will take effect from the 1st April, 2010 and will, accordingly, apply in relation to assessment year
2010-11 and subsequent years. [Clause 17]
SEC 33ABA
Site Restoration Fund
(1)
If an assessee who is carrying on business, consisting of prospecting or extracting or production of
petroleum or natural gas in India,
and in respect of which the Central Government has entered into an agreement with the assessee.
and the assessee has before the end of the previous year deposited with
(a) State Bank of India in a scheme approved by Ministry of Petroleum and Natural Gas ;or
(b) Site Restoration Fund account.
then, the assessee shall be liable to allowed a deduction of amount equal to
Amount Deposited
Or
20% of current year profit of such business Whichever is lower
(2) Rest provisions are same as section 33AB
35AD.
Deduction in respect of expenditure on specified business
1. Section 35AD provides 100% deduction in respect of the any capital expenditure (excluding Land,
Goodwill and Financial Instruments) incurred by assessee engaged in specified business, during the
previous year in which such expenditure is incurred.
Specified Business:
(a) setting up and operating cold chain facilities for specified products;
(b) setting up and operating warehousing facilities for storage of agricultural produce;
(c)
laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for
distribution, including storage facilities being an integral part of such network.
2. The benefit will be available
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(a) in a case where the business relates to laying and operating a cross country natural gas pipeline
network for distribution, if such business commences its operations on or after the 1st day of April,
2007 and
(b) in any other case, if such business commences its operation on or after the 1st day of April, 2009.
3. This section applies to the specified business which fulfills all the following conditions, namely :
(i) it is not set up by splitting up, or the reconstruction, of a business already in existence;
(ii) it is not set up by the transfer to the specified business of machinery or plant previously used for any
purpose;
(iii) where the specified business is of the nature of poin (c),
(a) it is owned by a Indian company;
(b) It has been approved by the Petroleum and Natural Gas Regulatory Board;
(c) It has made not less than such proportion of its total pipeline capacity as specified by regulations
made by the Petroleum and Natural Gas Regulatory Board established under sub-section (1) of section 3
of the Petroleum and Natural Gas Regulatory Board Act, 2006 available for use on common carrier
basis by any person other than the assessee or an associated person; and
4. The assessee shall not be allowed any deduction in respect of the specified business under the provisions
of Chapter VIA;
5. No deduction in respect of the expenditure in respect of which deduction has been claimed shall be
allowed to the assessee under any other provisions of the Income-tax Act.
6. Any sum received or receivable on account of any capital asset, in respect of which deduction has been
allowed under section 35AD, being demolished, destroyed, discarded or transferred shall be treated as
income of the assessee and chargeable to income tax under the head Profits and gains of business or
profession.
7. Any loss computed in respect of the specified business shall not be set off except against profits and gains,
if any, of any other specified business. To the extent the loss is unabsorbed the same will be carried
forward for set off against profits and gains from any specified business in the following assessment year
and so on.
cold chain facility means a chain of facilities for storage or transportation of agricultural and forest produce,
meat and meat products, poultry, marine and dairy products, products of horticulture, floriculture and apiculture
and processed food items under scientifically controlled conditions including refrigeration and other facilities
necessary for the preservation of such produce;
SEC 36(1)(viii)
Deduction of special reserve for certain financial institutions or company
Where any Specified entity creates and maintain any special reserve, the deduction not exceeding 20% of
PGBP from eligible business will be allowed as deduction from computing PGBP.
Where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the
amount of the paid up share capital and of the general reserves of the specified entity, no allowance under
this clause shall be made in respect of such excess.
Explanation.in this section Specified entity and eligible business means,
(a) Financial Corporation, banking company and any co-operative bank (other than a primary agricultural
credit society) or primary co-operative agricultural and rural development bank.
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Eligible business: the business of providing long-term finance for:-
(i) Industrial or agricultural development;
(ii) development of infrastructure facility in India; or
(iii) development of housing in India;
(b) Housing finance company;
Eligible business: - the business of providing long-term finance for the construction or purchase of
houses in India for residential purposes
(c) Any other financial corporation including a public company;
Eligible business: - the business of providing long-term finance for development of infrastructure facility in
India.
long-term finance means any loan or advance where the terms under which moneys are loaned or advanced
provide for repayment along with interest thereof during a period of not less than five years;
Deduction: According to Different Judicial Judgements:
The following expenses are covered under Sec 37(1) as per general commercial and accounting principles and
decisions in different leading cases:-
(1) Expenses incurred for purchasing the raw materials and manufacturing the goods.
(2) Expenses in connection with safe and distribution of manufactured goods.
(3) Labour welfare expenses.
(4) Pension, gratuity and other payment to the employee.
(5) Expenditure incurred by an assessee on the hospitality of any person whether underage terms of a
contract or otherwise or under the ordinary customs or usage of business or profession. It includes the
provision for food provided by the assessee to his employees in office, factory or other place of their
work.
(6) Advertisement expenditure incurred in connection with the business or on the maintenance of Glow sign
board, Neon sign board and Hoardings are allowable deduction as per the provisions of this section.
(7) Loss due to embezzlement will be admitted u/s 37 (1) as it is incurred in carrying out the business and is
incidental to the Operation of business, It is a loss of revenue nature, incurred during previous year. It is
not a notional or fictitious loss.
(8) Compensation paid due to negligence of the assessee or his employee during the course of business.
(9) Compensation paid to a customer for injuries caused due to defective goods.
(10) Loss incurred due to theft or burglary in factory premises during or after working hours.
(11) Cash shortage found in business at the end of a day.
(12) Compensation paid for termination of selling agency agreement.
(13) Compensation paid to an agent for termination of the agency agreement.
(14) Sales-tax and expenses in connection with the appeal against Sales tax.
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(15) Any other compensation or damages in connection with the business or profession.
(16) Royalty or Minimum rent payable in connection with mines, copyrights or patent rights.
(17) Legal and other expenses in connection with Income-tax assessment.
(18) Legal and other expenses in connection with appeal against income-tax.
(19) Compensation payable on the breach of a business contract.
(20) Damages paid for breach of forwarding contracts.
(21) Damages paid for failure to fulfil the contract in time.
(22) Loss of stock-in-trade by enemy bombing.
(23) Loss of stock by fire.
(24) Litigation expenses incurred by a director in order to defend the validity of his election to the directorship
(25) Payment made to secure extension of time for performing a trading contract.
(26) Payment made in pursuant to a decree a against the company for misfeasance committed by its directors.
(27) Insurance premium against loss of profit or stoppage of output caused by strike.
(28) Expenditure incurred to secure overdraft facilities for business purposes.
(29) LoSS due to forfeiture of security deposit for non-performance of a trading contract.
(30) Interest paid on unpaid balance of purchase consideration.
(31) Expenditure incurred by a professional man to study the advancement made in the country or to attend a
professional conference abroad.
(32) Expenditure incurred for improvement of leasehold assets.
(33) Money paid to competitors to prevent them to bid at auction sale to enable the assessee to secure goods at
lower price.
(34) Initial payment under 'Own Your Telephone Scheme' [Circular No 204 dated 10-5-1976]. The refund of the said
amount, if any will be taxed as deemed income u/s 41 (1) [Circular No. 671, dated 27-10-1993].
(35) Payment of retrenched employee in lieu of notice.
(36) Payment of excise duty.
(37) Payment made to remove a director when his removal is beneficial for the company.
(38) Reasonable expenses of gifts and presents in connection with Dewali and Muhurta subject to satisfaction of
the ITO that the expenses are not for personal, social or religious nature [Circular dated 3-10-1968].
(39) Pension paid to the widow of an employee murdered while on surety out of human consideration, though such
payment was never made on similar occasions previously.
(40) Damages due to non-acceptance of the delivery of goods by the assessee.
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(41) Expenses on registration of trade mark [CIT. v. Finlay Mills Ltd. (1951)].
(42) Interest on deferred payments for purchase of machinery is allowable as revenue expenditure.
(43) Loss arising as a result of fluctuations in the rates of exchange arising in the course of repayment of
loans or repaying installments of foreign loan should be allowed as a revenue deduction
DISALLOWED EXPENSES/ DAMAGES/LOSSES:
The following expenses, damages or losses shall not be deducted in computing the taxable profits from
business or profession:-
(1) Loss due to destruction of a capital asset and capital expenditure.
(2) Any such loss or damage which is not related to the business or profession,
(3) Loss on sale of shares and other securities which are kept as investment,
(4) Notional future losses.
(5) Loss, on account of change in the exchange rate to the amount kept for purchasing a capital asset,
(6) Personal expenses and drawings of the owner/partner,
(7) Every reserve or provision except the reserve specially dealt within this chapter,
(8) Any amount paid as donation or charity or subscriptions and any gifts or presents etc are disallowed. But
if gifts and presents (not being donation or subscription) are made in kinds for advertisement purpose,
such gifts and presents shall be allowed accordingly as advertise went expenses,
(9) Penalty Paid for illegal acts,
(10) Income tax, wealth tax and any other tax on income.
(11) Interest payable on delayed payment of income-tax,
(12) Interest paid on money borrowed for payment of Income-tax.
(13) Damages paid to Government authorities on account of infraction of law are not allowable business
expenditure.
(14) Fines paid for traffic offences are not deductible
Income from Undisclosed Sources
Following shall be treated as income of business or profession from undisclosed sources:-
(1) Unexplained cash credit [Sec. 68] :- If any sum is found credited in the books of account of an
assessee maintained for any previous year, and the assessee does not give any explanation about the
nature and source thereof or the explanation given by him is not, in the opinion of the Assessing
Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee
for that previous year.
(2) Unexplained Investments [Sec. 69]:- If in the financial year immediately preceding the assessment year
the assessee has made investments which are recorded in the books of account, if any, maintained
by him for any source of income, and the assessee offers no explanation about the nature and source
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of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer,
satisfactory the value of investments may be deemed to be the income of the assessee of such
financial year.
(3) Unexplained money [Sec. 69A]:- If in any financial year the assessee is found to be the owner of any
money, bullion, jewellery or other valuable articles and such money, bullion, jewellery or valuable
article is not recorded in the books of account, if any, maintained by him for any source of income,
and the assessee offers no explanation about the nature and source of acquisition of the money,
bullion, jewellery or other valuable articles, or the explanation offered by him is not, in the opinion of the
Assessing Officer, satisfactory the money and the value of the bullion, jewellery, or other valuable
articles may be deemed to be the income of the assessee for such financial year.
(4) Investments not fully disclosed [Sec. 69B] :- If in any financial year the assessee has made
investments or is found to be the owner of any bullion, jewellery or other valuable articles, and the
Assessing Officer finds that the amount expended on making such investments or in acquiring such
bullion, jewellery or other valuable article exceeds the amount recorded in the books of account
maintained by the assessee for any source of income, and the assessee offers on explanation about
such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer,
satisfactory, the excess amount may be deemed to be the income of the assessee for such financial
year.
(5) Unexplained expenditure [Sec. 69C] :- If in any financial year an assessee has incurred any
expenditure and he offers no explanation about the source of such expenditure or part thereof, or the
explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory the
amount of such expenditure or part thereof may be deemed to be the income of the assessee for such
financial year.
Provided that such unexplained expenditure which is deemed to be the income of the assessee
shall not be allowed as a deduction under any head of income.
(6) Amount borrowed or repaid on hundi [Sec. 69D]:- If any amount is borrowed on a hundi from,
or any amount due thereon is repaid to, any person otherwise than through an account payee cheque,
the amount so borrowed or repaid shall be deemed to be the-income of the person borrowing or
repaying such amount for the previous year in which the amount was borrowed or repaid, as the case
may be. But it must be noted that if any amount borrowed on a hundi has been deemed as income,
it shall not be deemed as income again when such amount is repaid.
Valuation of Closing Stock
The valuation of closing stocks plays a very important role in computing the profits of a business. Excess
value of closing stock increases the profits whereas undervaluation will certainly decrease the profits. It is
therefore, essential that a proper and correct valuation of stock be done in order to arrive at the correct profits.
The assessee will never like to overvalue it, and the Assessing Officer will never accept a undervaluation.
Thus, it should be valued correctly.
An assessee may adopt any of the following methods for valuation of closing stocks:-
(i) at cost price
(ii) at marke price,
(iii) at cost or market price whichever is less.
The businessmen are free to adopt any method, but once one method is adopted, the same is to be continued
from year to year and the assessee cannot change the method of valuation to suit his own purposes. If can
only be changed with the prior approval of the Assessing Officer. Another point to be noted in this case is that
the value of closing stock must be the value of opening stock in the succeeding year.
Phone 47665555 (30Lines), 9811136987, 9811042458
Under or over-valuation of stock: Generally the opening and closing stocks are not valued at cost price.
They are either under-valued or over-valued. In such cases the profit of the year is affected by such under-
valuation or over-valuation. To remove the effect of such valuation we adopt the following method:-
Get the stock to real value in the following manner:
In case of Under-valuation = v Value of stock x 100

(100- rate of under valuation)
In case of Over-valuation = v Value of stock x 100

(100 + rate of Over valuation)
According to Section 145 A, the valuation of purchase and sale of goods and inventory, for determining the profits
and gains of business or profession, shall be :-
(a) in accordance with the method of accounting regularly employed by the assessee; and
(b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or
incurred by the assessee to bring the goods to the place of its location and condition as on the date of
valuation. For the purposes of this Section, any tax, duty cess or fee (by whatever name called) under any law,
for the time being in force, shall include all such payments notwithstanding any right arising as a consequence to
such payments.
Phone 47665555 (30Lines), 9811136987, 9811042458
Section 10AA
Deduction for Undertakings Established in SEZ
Eligible Assessee: Any enterprises which has begun to manufacture / produce articles or things or provided
any services on or after 01-04-2006, in any Special Economic Zone;
Amount of Deduction (only in respect of export profits)
During first 5 years = 100% of export profit

Next 5 years = 50% of export profit
Next 5 years = Amount profit transferred to SEZ
re-investment allowance reserve A/c
or 50% of export profit; whichever is lower
Calculation of Export profits for computing deduction:-
Profits from Business Export Turnover of the unit

Total Turnover of the business carried on by the assessee
Notes:
1. export in relation to the Special Economic Zones means taking goods or providing services out of
India from a Special Economic Zone by land, sea, air, or by any other mode.;
2. export turnover means the consideration in respect of export of articles or things or services
received in, or brought into, India by the assessee but does not include freight, telecommunication
charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any,
incurred in foreign exchange in rendering of services outside India;
3. Export turnover shall be taken only to the extent of Sale proceeds are receive in, or brought into, India
in convertible foreign exchange, within a period of 6 months from the end of the previous year or, within
such further period as the competent authority (RBI) may allow in this behalf.
4. The deduction during the last 5 years shall be allowed only if the following conditions are fulfilled:
(a) the amount credited to the SEZ Re-investment Reserve Account shall be utilized only for the
following purposes:
(i) for acquiring machinery or plant which is first put to use before the expiry of a period of
three years following the previous year in which the reserve was created; and
(ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business
of the undertaking other than for distribution by way of dividends or for the creation of any
asset outside India;
(b) Assessee shall furnish the particulars of machinery during the assessment year in which it was
first put to use.
(3) Where the assessee does not comply with above conditions the following consequences shall be done;
If SEZ Re-investment Reserve Account is utilized for any purpose other than the specified
above;
The amount so utilized shall be chargeable to tax in the year of such utilization.
If SEZ Re-investment Reserve Account is not utilized before the expiry of 3 years from the end
of the previous year in which reserve is created;
The amount of unutilised reserve shall be deemed to be the profits in the year immediately followings the
period of 3 years.
Phone 47665555 (30Lines), 9811136987, 9811042458

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Income from PGBP FCA R anjeet K unwar

Profit and gains from business or profession

28 Income chargeable as PGBP

37(2B) Disallowance of payment to political party

9) Any sum receives under Key man insurance policy.

a) If Nominee is Employer:- taxable for employer as PGBP

Preparing a statement of profit or loss or income-expenditure adjustment:-

Balance as per profit and loss or Income - expenditure account

(i) Expenses expressly disallowed but debited to P& A/c

Income taxable under the head PGBP XXX

Tenant Rent, Revenue Repairs Taxes, Rates

(i) the amount paid on account of current repairs thereto;

Intangible [Know-how, copyright, trademark, franchises etc.]

Assets owned wholly or partly by the assessee

Types of Assets A.Y. 2006-07 onwards

In the case of any new machinery or plant,

Opening WDV of the block XXX

Add : Actual cost of assets acquired and put to use XXX

Less: Money payable in respect of any assets

Less: depreciation at the prescribed percentage (XXX)

Closing WDV of the block XXX

Note: - Money payable means only cash/cheque/bank overdraft etc.

Short term capital gain (profit/loss)

2. In case of Lease Agreement, Lessor can claim depreciation.

the depreciation will be allowed on amount of cost of the asset; and

amount of interest shall be allowed as revenue expenditure.

13. Explanation 1 to Sec. 32(1)

Explanation 1 to Section 43(1) :-

Explanation 2 to Section 43(1):-

Assets acquired by gift or inheritance:--

Cost of the assets to the assessee :-

Actual cost to previous owner XXX

Assessee Previous Owner

Assets used in Business

Explanation 4 to Section 43(1):- Re - acquisition of assets

Assets used in business Assets re-acquired

Actual cost to the assesse shall be A or B whichever is lower

Less: Dep. allowed to assessee (XXX)

Actual cost to the assessee shall be .

The actual cost of building to the XXX

Less: An amount equal to NOTIONAL depreciation (XXX)

Explanation 9 to Section 43(1):- Actual cost where CENVAT is availed.

Actual cost of asset shall be reduced by :

The amount of excise duty availed as CENVAT credit.

Explanation 10 to Section 43(1):- Actual cost of subsidized goods

Explanation 11 to Section 43(1):-

Explanation 13 to Section 43(1):

CBDT Circular Explaining provisions of Finance Act, 2008

Explanation 6 to Section 43(6)

SLM on each asset or

4) It is open to such an undertaking to opt the depreciation under WDV method.

If [Sales Consideration] < [Actual cost - Depreciation allowed]

If [Sales Consideration] > [Actual cost - Depreciation allowed]

Cost less WDV

Sales considerations less WDV

Capital Gains = Sales Consideration less Actual cost of asset

Note: - The unabsorbed depreciation can be C/F for indefinite period.

In respect of expenditure on scientific research, the following deductions shall be allowed.

2. Capital expenditure on S/R related to business. However, no deduction is admissible in respect of

Provided that such company

(a) is registered in India,

(d) fulfils such other conditions as may be prescribed;

1. Beer, wine and other alcoholic spirits.